Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. 1972-PH PHILIPPINES STAFF APPRAISAL REPORT ON THE DEVELOPMENT BANK OF THE PHILIPPINES April 21, 1978 Projects Department East Asia and Pacific Regional Office 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 US$1.00 = P 7.40 P 1.00 = US$0.135 P 1 million = US$135,135 P 1 billion = US$135 million ABBREVIATIONS ADB - Asian Development Bank BAAD - Branches and Agencies Department CB - Central Bank of the Philippines COA - Commission on Audit CPD - Control and Planning Department CSMI - Commission on Small and Medium Industries DBI - Development Banking Institute DBP - Development Bank of the Philippines DCP - Design Center of the Philippines DDRB - Department of Development and Rural Banks DOI - Department of Industry ERR - Economic Rate of Return FCDUs - Foreign Currency Deposit Units FRR - Financial Rate of Return FTI - Food Terminal Incorporated IGLF - Industrial Guarantee and Loan Fund IPD - Industrial Projects Department IPG - Industrial Promotion Group LBP - Land Bank of the Philippines MASICAP - Medium and Small Industry Coordinated Action Program NACIDA - National Cottage Industries Development Authority NBFI - Non-Bank Financial Intermediaries NCSO - National Census and Statistical Office NEDA - National Economic Development Authority NHC - National Housing Corporation NSC - National Steel Corporation OBUs - Off-Shore Banking Units PDBs - Private Development Banks PD - Presidential Decree PDCP - Private Development Corporation of the Philippines PEG Project Evaluation Group PID - Project Investment Department PISO - Philippine Investments Systems Organization PNB - Philippine National Bank PSG - Project Supervision Group SBAC - Small Business Advisory Center SMI - Small and Medium Industries SSE - Small Scale Enterprise TAC - Trade Assistance Center UPISSI - University of the Philippines Institute for Small Scale Industries FOR OFFICIAL USE ONLY -2- FISCAL YEAR July 1 - June 30 (up to June 30, 1976) July 1, 1976 - December 31, 1976 (interim) January 1 - December 31 (from January 1, 1977) This document hs 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. PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES STAFF APPRAISAL REPORT TABLE Of CONTENTS Page No. BASIC DATA (i)-(ii) 1. THE INDUSTRIAL SECTOR ..1 Recent Developments. 1 Structure of Manufacturing Industry . . . . . . . . . . . . 1 Industrial Investment 3. . . ...3 Industrial Sector Issues and Policies . . . . . . . . . . . 4 Prospects.. 6 2. THE SMALL AND MEDIUM INDUSTRIES (SMI) SECTOR . . . . . . . . 6 The Role of SMI in the Manufacturing Sector . . . . . . . . 6 Institutional Framework for Assistance to SMI . . . . . . . 10 Prospects for SMI ..12 3. THE FINANCIAL SECTOR . . . . . .. ..13 Overview . . . . . . . . . . . . . . . . . . . . . . . . . 13 Profile of Financial Institutions . . . . . . . . . . . . . 14 Financial Markets . . . . . . . . . . . . . . . . . . . . . 15 Recent Developments . .. . . . . . . . . 16 Financial Sector Issues ..18 4. THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) . . . . . . . . 19 A. Institutional Aspects. . . . 19 Legal Framework and Ownership . . . . . . . . . . . . 19 Organization, Management and Staff . . . . . . . . . . 19 Operating Policies and Development Strategy .... 23 Project Appraisal and Supervision . . . . . . . . . . 24 Procurement and Disbursements. . . . . . . . . . . . . 26 Internal Reporting . ... . . 27 B. DBP's Role in the Economy . . . . . . . . . . . . . . . 27 DBP in Perspective .. ..27 Economic Impact ...28 This report was prepared by Messrs. Khalid Siraj, Benjamin Cu Kok, Maurice Joyce and Aswin Kongsiri (Consultant) following their visit to the Philippines in October 1977. -2- Page No. C. Operations .... . . . . . . . . . ... ... . . . . . 31 Overall Financing Operations . . . . . . . . . . . . . 31 Industrial Lending Operations . . . . . . . . . . . . 32 Features of Industrial Loans . . . . . . ... . . 33 SMI Lending Operations . . . ..34 Agricultural Lending Operations . . . . . . . . . . . 36 Real Estate and Community Development Lending . . . . 36 Private Development Banks Financing Program . . . . . 36 Equity and Securities Investments . . . . . . . . . . 37 Guarantee Operations ..38 Other Operations . . . . . . . . . . . . . . . . . . . 38 D. Financial Condition, Financial Performance and Quality of Portfolio . . . . . . . . . . . . . . . . . . . . . . . 38 Financial Condition .38 Financial Performance .40 Audit .41 Reserves Policy and Position . . . . . . . . . . . . . 41 Portfolio Quality ... . . . . . . . . . . . . . . . 42 E. Prospects .... . . . . . ..... . . . . . . . . . 45 Business Prospects and Projected Operations . .45 Resource Requirements. . . . . . . . . . . . . . . . . 46 Financial Projections ..47 5. CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . 48 Objectives of the Proposed Loan . . . . . . . . . . . . . . 48 Justificaton of the Loan . . . . . . . . . . . . . . . . . . 49 Features of the Loan .49 Agreements and Understandings Reached at Negotiations . . . 52 Recommendations . . . . . . ..53 LIST OF ANNEXES 1. Board of Governors as of September 30, 1977 2. Statement of Operating Policies and Procedures for Medium and Large-Scale Industrial Financing 3. Outline of Industrial Development Strategy for 1978/79 4. Supporting Tables and Charts T-1 Comparative Data on Manufacturing Sector by Size of Establishment, 1971 and 1974 T-2 Present and Projected Staffing Position T-3 Characteristics of Subprojects Financed Under IBRD Loan No. 998-PH T-4 Characteristics of Subprojects Financed Under IBRD Loan No. 1190-PH T-5 Features of SMI Subprojects Financed Under IBRD Loan No. 1120-PH by Regions T-6 Features of SMI Subproject Financed Under IBRD Loan No. 1190-PH by Regions T-7 Summary of Operations, January 1, 1947-June 30, 1977 T-8 Characteristics of Loans Approved January 1, 1947 to June 30, 1977 T-9 Characteristics of Industrial Loans Approved, FY73 to FY77 T-10 Distribution of Industrial Loans Approved by Purpose, FY73 to FY77 T-11 Summary of Home Industry and SMI Loan Approvals, FY74-77 T-12 Characteristics of SMI Loans by Regions, Size of Loans, and Purpose, FY74-77 T-13 Characteristics of SMI Loans by Industry, FY74-77 T-14 Characteristics of SMI Loans Approved in FY1976 and FY1977 by Nature, Size of Borrowers' Assets and Duration of Loans T-15 Summarized Balance Sheets, June 30, 1973-1977 T-16 Summarized Income Statements, FY73-FY77 T-17 Analysis of Loan Portfolio as of June 30, 1977 T-18 Analysis of Home Industry and SMI Loan Portfolio as of June 30, 1977 T-19 Projected Approvals, Commitments, and Disbursements, CY1977-82 T-20 Past and Projected SMI Loan Approvals, CY1976-82 T-21 Long-Term Resource Position as of June 30, 1977 T-22 Projected Income Statements, CY1977-82 T-23 Projected Balance Sheets, CY1977-82 T-24 Projected Cash-flows, CY1977-82 T-25 Schedule of Projected Draw-Downs from the Proposed Bank Loan of $80 million C-1 Organization Chart, October 1, 1977 (No. 18362) 5. Selected Data and Documents Available in the Project File MAP No. 13448 Map Showing Location of DBP's Offices PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Basic Data 1. Year of establishment: 1958 /a 2. Ownership: 100% owned by the Government of the Philippines 3. Status of IBRD loans (as of February 28, 1978): Date Rate of Loan Out- Project Loan No. signed interest amount Committed Disbursed standing (%) -------------US$ million-------------- Grain processing I 720-PH 02/04/71 7.25 14.3 14.3 9.9 8.1 Livestock I 823-PH 05/25/72 7.25 7.5 7.5 7.5 7.5 Fisheries I 891-PH 05/21/73 7.25 11.6 11.6 10.5 10.5 Industrial development and tree farming 998-PH 06/12/74 7.25 50.0 48.5 42.6 42.6 Interisland shipping 1048-PH 10/29/74 8.0 20.0 13.8 4.9 4.9 SMI 1120-PH 06/05/75 8.5 15.0/b 15.0 15.0 15.0 Industrial development 1190-PH 01/28/76 8.5 75.0 48.8 18.7 18.7 Livestock II 1225-PH 04/08/76 8.5 20.5 16.2 8.1 8.1 Grain processing II 1269-PH 07/02/76 8.5 11.5 - - - Fisheries II 1270-PH 07/02/76 8.5 12.0 1.8 1.8 1.8 Tree farming II /c 1506-PH 01/23/78 7.9 8.0 - - - 4. Operations (P million): Cumulative Jan. 1, 1947- FY74 FY75 FY76 FY77 June 30, 1977 Loans Approvals Agricultural loans 120.4 550.5 840.9 510.3 3,142.5 Industrial loans 94.9 750.0 1,080.4 1,079.4 5,614.8 Real estate loans 33.7 1,057.4 448.0 294.6 2,509.5 Others 44.0 72.9 107.9 129.3 755.2 Total approvals 293.0 2,430.8 2,477.2 2,013.6 12,022.0 Disbursements 330.5 940.0 2,768.8 2,497.9 n.a. Investments 58.8 147.9 120.3 92.3 n.a. Guarantees Approved 2,760.0 811.2 1,354.2 978.9 14,371.5 Issued 1,754.2 925.9 1,205.0 931.6 13,460.1 /a DBP is a successor to the post-war Rehabilitation Finance Corporation, set up in 1947. /b Amount of DBP component of the loan; the total amount of the loan was $30 million. /c Not yet effective. ( ii) 5. Interest Rates and Charges: Interest Rates /a (a) Loans of P 5,000 and below 12% p.a. (b) Loans above P 5,000 12% p.a. on loans secured by land 14% p.a. on loans not secured by land (c) Loans to PDBs 10% p.a. (d) Government loans 12% p.a. (e) Sale contracts 14% p.a. Service Fee 2% p.a. on loans above P 150,000 Commitment Charge 0.25% per month on the undisbursed amount Penalty Charge 3% per month Guarantee Fees (a) Issuance letter fee 1.5% of the guaranteed amount (b) Commitment charge 1.5% p.a. on amount not availed of (c) Rate on guarantees availed of and outstanding 3.0% p.a. Preferred Shares 14% p.a. 6. Financial Position (P million): June 30 _ 1974 1975 1976 1977 Total assets 5,279.4 7,837.9 11,087.7 14,291.3 Long-term portfolio 3,214.3 4,198.7 6,980.9 8,985.9 Total liabilities 3,304.1 5,762.1 8,815.3 11,421.6 Long-term liabilities 2,400.8 4,303.8 6,525.0 8,879.5 Shareholder's equity 1,975.3 2,075.8 2,272.4 2,869.7 Current ratio 1.2:1 1.4:1 1.0:1 1.2:1 Debt /b/equity ratio 3.2:1 4.5:1 5.6:1 5.5:1 Reserves and provisions as % of portfolio 7.5% 7.4% 5.2% 5.0% 7. Financial Performance (P million): FY74 FY75 FY76 FY77 Gross income 443.8 580.9 813.7 999.2 Interest income 280.5 267.6 401.3 620.2 Financial expenses 254.2 339.4 540.8 727.5 Income before taxes and provisions 126.0 112.1 128.9 94.8 Net income 90.8 71.4 84.7 82.3 Income before tax and provisions as % of average total assets 2.5% 1.7% 1.4% 0.8% Net income as % of average equity 4.8% 3.5% 3.9% 3.2% Financial expenses as % of average total assets 5.2% 5.2% 5.7% 5.7% Administrative expenses as % of average total assets 1.3% 2.0% 1.5% 1.4% /a Foreign currency loans are made at the same rates, but they carry foreign exchange risk. /b Including guarantees outstanding. PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES STAFF APPRAISAL REPORT 1. THE INDUSTRIAL SECTOR Recent Developments 1.01 The industrial sector /1 grew rapidly in the fifties as the Government's import substitution policy led to a significant replacement of imports by domestic production. This was followed by a period of slower growth until the economy started picking up again in 1972. As a conse- quence of the 1974 recession industrial growth rates plummetted; the growth rate of gross value added at constant prices in the manufacturing sector dropped from 13.9% in 1973 to 4.8%, 3.5% and 5.8% in 1974, 1975 and 1976 respectively. 1.02 The manufacturing sector is the second largest sector in the economy accounting for 24.6% of GDP in 1976, absorbing about 30% of fixed investment and contributing 10.9% of the total employment. The mining sector was stagnant over the period 1973-76, and comprised only 1.4% of GDP in 1976 mainly because of the low world market price of copper. Several new mining projects based on chromite, copper, nickel and gold are being undertaken. These are projected to raise the annual growth rate of the mining sector to 9% over the five years between 1978 and 1982. The construction sector has grown rapidly in the recent past, with construction GDP doubling between 1974 and 1976. The Government's five-year plan projects construction GDP to increase further by 60% by 1982. 1.03 Preliminary estimates for the first half of 1977 indicate that manufacturing output in physical terms grew by 4.7% as against 4.4% during the same period in 1976. The major growth industries in 1977 were: textiles and wearing apparel, chemicals, petroleum, base metals, fabricated metal products and machinery and equipment. Structure of Manufacturing Industry 1.04 Sectoral Composition. The sectoral composition of manufacturing since 1970 is shown below: /1 The industrial sector includes mining, manufacturing, construction and utilities. - 2 - SECTORAL COMPOSITION OF MANUFACTURING (Value added in P million at constant 1972 prices) 1970 1973 1976 Value Value Value Added % Added % Added % Consumer Goods 6,379 53.9 7,669 50.3 9,184 52.5 Food 3,552 30.0 3,871 25.4 4,558 26.0 Beverages and tobacco 1,393 11.8 2,049 13.4 2,415 13.8 Textiles, apparel and leather 1,172 9.9 1,410 9.3 1,756 10.1 Printing and publishing 262 2.2 339 2.2 455 2.6 Intermediate Goods 4,159 35.2 6,174 40.4 6,577 37.6 Paper and paper products 341 2.9 420 2.8 538 3.1 Wood and cork products 497 4.2 627 4.1 558 3.2 Chemicals and rubber products 1,096 9.3 2,232 14.6 2,694 15.4 Petroleum 858 7.3 1,358 8.9 1,134 6.5 Non metallic mineral products 495 4.2 597 3.9 613 3.5 Basic metals and metal products 872 7.3 940 6.1 1,040 5.9 Durable and capital goods 1,029 8.7 1,143 7.6 1,443 8.2 Machinery 532 4.5 582 3.9 589 3.3 Transport equipment 497 4.2 561 3.7 854 4.9 Miscellaneous 256 2.2 266 1.7 297 1.7 Total 11,823 100.0 15,252 100.0 17,501 100.0 Although manufacturing value added grew by an average annual rate of 6.8% over the period 1970-1976 the relative sectoral share did not change significantly. During the first half of the period intermediate goods increased their share of total value added at the expense of consumer goods, but this trend was soon reversed. The major growth industries were chemicals and rubber products (16.5%), beverages and tobacco (9.6%), printing and publishing (9.6%), and transport equipment (9.6%). 1.05 Export Performance. After slow growth in the 1960's, manufactured exports grew rapidly in the early 1970's partly as a result: of several export promotion measures adopted by the Government. The share of manufactured exports to total exports grew from 49% in 1973 to 59% by 1976. While tradi- tional exports such as sugar, coconut products, plywood and veneer faced slack export demand and low prices, there was a rapid increase in nontraditional manufactured exports such as garments, handicrafts and electronic products, which grew at an annual average growth rate of 33% over the period 1973-77./i 1.06 Ownership Size and Value Added. The industrial sector is predomi- nantly privately owned and concentrated in large capital intensive units. In 1974, organized manufacturing units with over 200 employees represented only 4% of the total number of registered enterprises but accounted for over 60% of total manufacturing employment and 78% of value added (Annex 4, T-1). An estimated one million workers operate in unregistered enterprises employing less than five people. 1.07 Employment Performance. Except for the last two years, the indus- trialization process has done little in terms of employment creation. Between 1960 and 1971, employment in manufacturing grew at an annual rate of about 2.5%, fell to zero growth between 1971 and 1974 but rose sharply in 1975 (7.6%) and 1976 (8.4%). The greater employment generation in 1975-76 resulted, in part, from the high priority given by the Government to the development of labor intensive small and medium scale industries./2 1.08 Regional Distribution. Manufacturing enterprises tend to be concentrated in Metro-Manila and adjoining provinces. In 1974, Metro- Manila accounted for 39% of all manufacturing establishments employing more than 5 people; 59% of total industrial employment; 49% of gross value added, and 43% of total fixed assets. If adjoining provinces are also included, these percentages would rise by a further 20-30%. The concentra- tion of industry in and around Manila has lessened in recent years; 42% of total BOI projects approved before December 1975 were located in the Metro Manila area /3 while the comparable figure for 1976 was 32%. DBP lending has followed the same trend with the share of industrial lending in Manila decreasing from 35.2% in FY74 to 23.4% in FY77 (para. 4.39). Industrial Investment 1.09 Capital expenditures in the manufacturing sector in 1975 increased by 27% reflecting decisions to expand capacity taken in 1973 and 1974. From 1975 onwards, however, the level of new investment declined as a consequence of the 1974 recession. This was reflected in a drop in new projects registered with the BOI from 217 in 1974 to 152 in 1975 and 86 in 1976. Simultaneously, the number of newly registered business organizations fell from 49,367 in 1974 to 31,136 in 1975 and 30,813 in 1976. For a brief period between March and May 1976, /1 For a detailed discussion of nontraditional exports see IBRD Report No. 1765-PH, The Philippines Country Economic Memorandum, October 26, 1977, Annex A. /2 Philippine small and medium industries sector is reveiwed in paras. 2.01-2.15. /3 In the districts of Batangas, Cavite, Laguna, Quezon and Rizal. - 4 - investment expectations rose as the business community perceived signs of recovery in the U.S. and Japanese economies (based on economic data released in the first quarter). However, it later became clear that the World wide recovery would be slower than expected. GrowthL of expenditures on durable equipment in the manufacturing sector fell to 5% in 1976 (from 27% in 1975) and is not expected to have grown significantly in 1977. Industrial Sector Issues and Policies 1.10 Development Objectives. In its five-year plan, the Philippine Government has set as objectives for industrial growth, employment generation, increased net foreign exchange earnings and greater self-reliance in commodity supply. The generation of employment opportunities is probably the highest priority./l The estimated growth in the labor force over the next decade is 3% p.a., and this means that the economy will have to employ annually almost 500,000 new entrants into the labor force over this period. Because the agricultural sector is likely to provide fewer new jobs annually than in the past, the provision of more work opportunities in the manufacturing sector is crucial. This employment growth can be fostered through developing further exports of labor-intensive nontraditional manufactures, reviving and sustaining growth in the labor-intensive modern small and medium-industries sector, and expanding the domestic production of intermediate goods through import susbtitution. At the same time as employment generation is pursued, there is also a need for investment in a few large capital intensive projects to deepen the industrial structure and to develop further the country's natural resources. An example of such a project is the planned construction of a copper smelter to process copper concentrates that are currently exported. 1.11 Investment Incentives and Employment Creation. Until recently the incentive system has favored capital rather than labor intensive technology. Over the period 1970-1971, 80% of the total estimated amount of tax relief enjoyed by 301 BOI approved projects was on account of capital-favoring incentives. These incentives include: exemption from import duties on imported capital equipment, double depreciation allowances on capital investment, and the provision of investment funds at low or even negative real rates of interest. Recently, there have been attempits to counteract this bias by introducing incentives to encourage labor intensive technology. A review of the entire incentive framework is currently being undertaken by the Government. 1.12 Export Potential and Promotional Policies. Historically, the export of primary goods has been the major source of foreign exchange for the Philippines. Manufactured exports (except the traditional agriculture- based exports), on the other hand, did poorly until 1970 because of an over- valued exchange rate and protectionist fiscal policies. To encourage exports the Government established a realistic (flexible) foreign exchange /1 A broad growth strategy for Philippine industry is described in the I.B.R.D. Economic Report, The Philippines: Priorities and Prospects for Development, June 1976. -5- rate, fiscal incentives /1 for export promotion and an export processing zone. As a consequence, nontraditional manufactured exports grew from a low $94 million in 1970 to $545 million in 1976. 1.13 To maintain the rapid growth of nontraditional manufactured exports, credit agencies have been asked to give particular attention to financing export industries. The Government has also set up an Export Council, comprising both public and private representatives, to consider other ways of promoting exports. In addition to these incentives the Government will have to review its tariff policies if exports are to be further encouraged. 1.14 Import Substitution and Tariff Reform. The present tariff structure provides relatively high protection for import substituting consumer goods industries and little or no assistance to producer goods and export industries. Hence few intermediate goods and industries have been developed and those that have often produce low quality output. The Government recognizes the importance of consistency between the tariff structure and other investment incentives, for balanced industrial development. Consequently, NEDA has commissioned a comprehensive study, financed by the Bank,/2 to quantify the effects of tariffs, quantitative restrictions, and other tax incentives, and to recommend appropriate policy changes. 1.15 Regional Dispersion of Industry. As outlined earlier, manufac- turing activity in the Philippines is heavily concentrated in the Metro- Manila area and its surrounding provinces. Recently the Government has undertaken several steps to create conditions for more geographically balanced growth of industry. These measures have probably contributed to the increasing dispersal of industry outside Manila as reflected in the figures given in para. 1.08. However, their exact impact cannot be readily quantified. 1.16 An absolute condition for investments to be directed into desired locations is the provision of adequate supporting infrastructure and the availability of qualified labor. Fiscal incentives without such infra- structure are unlikely to induce many new investments in the outer provinces and, with such infrastructure, may not be needed to a large extent. The Government has launched several programs designed to improve the basic infra- structure in areas outside Manila (such as substantial electricity generation projects in Mindanao and the Visayas, road construction, and a 10-year shipping and shipbuilding program). These efforts should be continued and extended to other types of infrastructure as well as to other regions. To promote the creation of other areas of industrial concentration away from Manila, the Government in recent years has put considerable emphasis on planning and promoting the establishment of industrial estates and export processing zones in a few selected growth centers. Eight estates are planned by the Government to be operating or to have feasibility studies carried out by 1982. There may also be additional privately operated estates. /1 Export Incentives Act (1970). /2 Under Loan No. 1374-PH for the Third Education Project. -6- Prospects 1.17 The manufacturing sector is estimated to have grown by 4.6% in 1977. The increase in consumption and investment projected for 1978 is likely to provide the manufacturing sector with a further impetus. Over the medium- term the Government will be encouraging labor intensive export industries. Capital intensive projects will also have to be undertaken to bring about greater vertical integration and increase the domestic value added in processing the country's raw materials. According to the recently published "Five-Year Philippine Development Plan 1978-1982," manufacturing is expected to grow at an annual rate of 9% over this period. To achieve this target, investment over the five year period will have to grow by 15.5% p.a. for a total P 86 billion; approximately 65% of this investment will go to larger industries. NEDA has projected that nontraditional exports will grow by 26.8% p.a. over the next ten years as compared to a growth rate for total exports of 18.8%. Industries with significant export potential include textiles, apparel, leather goods, handicrafts, electronics, chemicals, and goods manufactured from nickel, copper and aluminum. 2. THE SMALL AND MEDIUM INDUSTRIES (SMI) SECTOR The Role of SMI in the Manufacturing Sector 2.01 Cottage Industries. The latest Annual Survey of Manufacturers (ASM) /1 covered 10,742 manufacturing establishments in 1974. Most (73%) establishments surveyed were cottage industries (5-19 workers /2) and were engaged in food processing, clothing, footwear, furniture and handicrafts. They employed about 13% of the manufacturing labor force but contributed only 2.5% to gross value added. However, as the ASM data do not cover establishments with fewer than five workers the share of cottage industries in manufacturing employment and value added is likely to be considerably understated by the above figures. In 1975, 71,000 cottage industries were registered with the National Cottage Industries Development /1 ASM is a nationwide sample survey undertaken by the National Census and Statistical Office (NCSO) in every year except 1967, 1972 and 1975 when the Census of Establishments was undertaken. The report on 1975 census of establishments is not yet ready. /2 The NCSO has classified the size of industrial establishments according to the number of employees. For purposes of this report establishments employing 20-99 workers are classified as small industry, those employing 100-199 workers as medium industry, and those employing more than 200 workers as large industry. This classification has been found to corres- pond fairly well with the "official" classification based on fixed assets whereby enterprises with assets of P 100,000 to P 1.0 million are termed as small industries and those with assets of over P 1.0 million to P 4.0 million as medium industries. Authority (NACIDA). It is estimated that they provided direct employment for over 230,000 workers and indirect employment for a further about 890,000 workers. Based on these figures, the share of cottage industries in manufac- turing employment would rise to about 75%, and in manufacturing value added to about 8%, or close to the unofficial estimate of 75% and 10% respectively made in 1973./l 2.02 Size of SMI Sector. Establishments with more than 20 workers accounted for 27% of the units covered by the 1974 ASM and these establish- ments comprise the modern manufacturing sector (Annex 4, T-1). In 1974 small-scale firms accounted for 70% of the total number of firms in the modern manufacturing sector, 10% of total employment and 10% of value added. Similarly, small and medium industries together accounted for 84% of modern manufacturing firms, employed 31% of the labor force and contributed 20% to gross value added. 2.03 Pattern of SMI Growth. In the mid-1960s there was a rapid growth in SMI measured in terms of employment and value added. From 1968-71 the employment and value added generated by small scale industry actually declined at an average annual rate of 6.5% and 2.7% respectively. During this period, however, medium-scale industries experienced a modest growth. From 1971-74 a more balanced growth was achieved between SMI and large industry resulting in an overall average annual growth rate for the manu- facturing sector of 7.9% as shown in the following table. AVERAGE ANNUAL RATES OF GROWTH IN MANUFACTURING, 1962-68, 1968-71 and 1971-74 (Based on 1965 constant prices) Establishments Employment Gross Value Added Scale 62-68 68-71 71-74 62-68 68-71 71-74 62-68 68-71 71-74 Small 0.5 -8.0 14.2 2.2 -6.5 15.0 4.2 -2.7 7.1 Medium 3.0 1.5 10.8 2.9 1.6 10.2 10.0 1.1 4.7 Large 1.0 3.3 6.0 -0.7 5.6 7.3 0.7 10.8 8.9 Total 0.8 -5.0 12.3 0.2 2.8 8.9 2.0 7.8 7.9 2.04 Regional Distribution of SMI. Manufacturing activity has always been concentrated in the Metro-Manila area and the adjoining provinces of Central and Southern Luzon (para. 1.08). SMI tend to concentrate in or near urban areas, where they are close to sources of supply of raw materials, /1 This estimate was made by the ILO employment mission in the report (the Ranis mission) Sharing in Development: a Program of Employment, Equity and Growth for the Philippines, (1974). - 8 - spare parts and marketing outlets. In 1974 an estimated 70% of SMI estab- lishments were located in the Central Luzon and Southern Tagalog regions compared with about 74% in 1971. Unlike SMI, cottage industries tend to be much more widely dispersed. Based on the results of the 1972 Census of Establishments, about 41% of cottage industries, by number, accounting for about 45% of employment and 51% of value added, were located in Central Luzon and Southern Tagalog regions. Cottage industries are estimated to employ on average about four contractual workers for each permanent employee and are thus an important source of off-season employment in the rural areas. These industries also provide an important source of entrepreneurs and semiskilled and skilled labor for the development of regional SMIs. 2.05 Role of SMI by Major Industry Groups. Whereas the modern manufac- turing sector in terms of employment and value added concentrates on the production of consumer goods (para. 1.04), the impact of SMI is greatest in the production of intermediate goods. In 1974, SMI accounted for 40% of employment generated in the production of intermediate goods and 29% of the value added; comparable figures for the consumer goods inclustry were 24% and 13% respectively. The industries in which SMI accounted for over 50% of employment in 1974 were: furniture, leather products, metal products, machinery and miscellaneous industries. In addition, SMI accounted for 49% of employment in the footwear and apparel industry. - 9 - SHARE OF TOTAL MODERN MANUFACTURING EMPLOYMENT AND GROSS VALUE ADDED IN SMI BY MAJOR PRODUCT GROUP, 1968-74 /a (percentages) Employment Gross value added 1968 1971 1974 1968 1971 1974 Consumer Goods 27 20 24 17 12 13 Food 25 17 25 16 9 14 Beverages 17 13 15 12 9 7 Tobacco 10 8 11 2 2 4 Textiles 10 11 13 10 12 13 Footwear and apparel 55 39 49 54 35 n.a. Furniture 73 67 75 77 60 68 Printing 56 54 62 41 44 46 Leather 100 100 84 100 100 n.a. Intermediate Goods 39 35 40 34 32 30 Wood and cork 35 24 35 36 25 39 Paper 50 44 36 45 46 17 Rubber 27 33 32 16 19 16 Chemicals 41 42 38 34 36 33 Petroleum and coal 30 37 39 20 34 25 Nonmetallic minerals 26 15 18 16 7 9 Basic metals 42 35 32 35 30 28 Metal prodcuts 41 48 70 42 40 75 Miscellaneous 91 77 74 91 84 64 Capital Goods 49 39 33 36 26 25 Machinery 80 72 53 76 54 26 Electrical machinery 43 34 28 36 23 29 Transport equipment 45 35 26 37 24 12 /a Where the data available are only partially broken down by size of establishment estimates have been made. 2.06 Factor Proportions and Productivity in SMI. Between 1971 and 1974 SMI have become more labor-intensive relative to large industries. The amount of capital employed per unit of labor in small firms (P 11,800 per worker) was about 45% of that for large firms (P 26,200 per worker) in 1974 compared with 51% in 1971./i The share of SMI contribution to value added declined slightly between 1971 and 1974 while the manufacturing employment generated by SMI rose from 27% to 31%. Consequently, the labor productivity /1 The figure used for capital, fixed assets at book value, is likely to underestimate the real value of inventories; however, the ratios used give a reasonable estimate of trend between years and the relative position of the various size groups. - 10 - growth in small firms was slower than in the large firms. In 1971 and 1974 SMI had lower average wage rates but a higher percentage of wages to gross value added than large scale industry. However the share of wages in value added declined quite sharply for all sizes of industry, owing to a general increase in the capital-intensity of the manufacturing sector. FACTOR INTENSITY AND PRODUCTIVITY IN MANUFACTURING, 1971 and 1974 Capital Output Output Labor Capital Ratio Labor Scale 1971 1974 1971 1974 1971 1974 (P 000/worker) (P 000/worker) Small 11.4 11.8 1.1 1.4 12.3 16.6 Medium 14.0 19.8 1.4 1.4 19.6 28.6 Large 22.3 26.2 1.0 1.5 22.0 38.2 All firms 19.6 22.7 1.0 1.5 20.2 33.0 Capital = fixed assets at book value (current prices) Output gross value added (current prices) Labor = total number of workers employed 2.07 In 1971 it was observed that SMI used capital more efficiently than large industry; medium sized firms being the most efficient. The situation has changed with the output/capital ratio of large firms increasing from 1.0 (1971) to 1.5 (1974); small firms from 1.1 to 1.4; and of medium firms remaining constant at 1.4. The improved capital efficiency of small firms might indicate that they have tended to develop in areas where they have the maximum comparative advantage. Institutional Framework for Assistance to SMI 2.08 A Commission on Small and Medium Industries (CSMI) has been created in the Department of Industry (DOI) to promote and assist the growth of SMI and to coordinate the programs of both Government agencies and Government- supported institutions for assisting small entrepreneurs. Twelve agencies are currently represented on the CSMI. However, the member agencies continue to operate under their own budgets which are often subject to other constraints. This has prevented the CSMI from playing a more active role in program formu- lation and implementation. In late 1977, the CSMI was attempting to get a - 11 - budget allocation for a number of multi-agency programs related to SMI assistance. The CSMI has emphasized the importance of establishing links with large industries in order to encourage subcontracting and also the transfer of technology and management skills. 2.09 Technical Assistance for SMI. As part of the overall program of assistance for SMI, various Government agencies have programs to train entrepreneurs to assist in project development and to provide consultancy services. The University of the Philippines' Institute for Small-Scale Industries (UPISSI) has an entrepreneurship development program which focuses primarily on entrepreneurs in the rural areas. UPISSI is also working with the Department of Education to introduce entrepreneurial training into the schools curricula. The Medium and Small Industry Coordinated Action Program (MASICAP) of the Department of Industry assists small entrepreneurs in preparing project feasibility studies and applying to financial institutions for loans. MASICAP currently has 50 field teams (118 staff) operating throughout the Philippines. Since its establishment in November 1973 and until June 1977 MASICAP has assisted 3,783 projects of which 3,079 have been accepted by financial institutions and 1,247 projects had funds disbursed to them. To provide operational assistance to SMI, the Department of Industry with the Bank's assistance /1 set up the Small Business Advisory Centers (SBACs). The SBACs, which were set up in 1975, provide managerial and technical consul- tancy services to small business enterprises. Twelve SBACs, one in each administrative region, are to be set up. As of June 1977, nine SBACs had been established with 45 consultants, and increased by three more by the end of 1977. As of March 31, 1977, the SBACs had assisted a total of 645 clients of which 488 were manufacturing establishments. In addition, the Department of Trade has organized the establishment of Trade Assistance Centers (TACs) to work in coordination with the SBACs in providing marketing assistance to small business enterprises. As of June 1977, 12 TACs had been set up, staffed by 45 marketing coordinators. The Design Center of the Philippines (DCP) and the Food Terminal Inc. (FTI) also provide marketing-related assist- ance to SMI for product design and development, storage and distribution. 2.10 Financial Assistance for SMI. The two major sources of medium- and long-term credit for SMI in the Philippines are DBP and Industrial Guarantee and Loan Fund (IGLF), of which DBP is the more important. The volume of term credit provided by both DBP and IGLF increased substantially in 1975 when the Banks first loan (No. 1120-PH) for SMI in the Philippines became available. The organization, operations and lending policies of DBP's SMI lending are described in the latter part of this report. IGLF, a long-term rediscount and guarantee fund owned by NEDA but administered by the Central Bank (CB), pro- vides credit to small industries through a network of intermediary financing institutions. Priority is given to small businesses which do not possess sufficient collateral to borrow from other sources. IGLF's approvals amounted to 50% of DBP's SMI approvals in FY75 and 13% in FY77. This decline in IGLF operations does not indicate a slackening of demand for credit, but weak- nesses in IGLF's set up and management which the Government is attempting to correct. Private Development Banks (PDBs) also provide term funds for SMI. However, the PDBs' resource shortage leads them to concentrate on loans /1 Under Loan No. 1120-PH. - 12 - to cottage industries. Although loans (over P 50,000) by PDBs to SMI have grown by 18% per annum over the period 1973-77, this financing covers only a small fraction of the SMI demand for term credit. Other financial institu- tions, such as the Private Development Corporation of the Philippines (PDCP), and Philippine Investments Systems Organization (PISO) which operate small business programs have now been accredited by IGLF. 2.11 Short-term financing for SMI remains relatively undeveloped. At the end of 1974 CB introduced a preferential credit scheme under which commercial banks and thrift institutions could rediscount up to 80% of short-term loans to SMI with CB at a preferential rate of interest (5%) for onlending to SMI at 12%. However, use of this facility has been limited, because of the commercial banks' requiring first mortgages on real estate collateral. Most SMI borrowers have already mortgaged their collateral to the term lending institution. Moreover the commercial banks tend to prefer to deal with larger clients. As the availability of short-term credit for working capital is particularly important for SMI enterprises, CB is undertaking a study to devise ways to induce the commercial banking sector to lend for SMI. Meanwhile, DBP and IGLF have increased their working capital finance to both new and existing clients. 2.12 Other Programs of Assistance for SMI. As part of its work program for 1977 the CSMI undertook several promotional programs through its member agencies. These included a collective marketing scheme by the Depart- ment of Trade to enable SMI to take advantage of economies of scale in marketing and distribution, a subcontracting promotion program by DOI and an industrial estate development program by NEDA. In line with its increased business orientation the CSMI has initiated two programs to encou- rage more private sector involvement in SMI development. One program is aimed at encouraging successful Manila-based business groups to invest equity and technical resources in rural SMI projects, while the other plans to find experts in management and industry to volunteer to assist SMI as sponsor- advisers. 2.13 Research on the SMI Sector. One of the projects for which the CSMI is trying to obtain budget funds (para. 2.08) is a naLtional study on Philippine SMI. Phase I of the study, which is based on existing sources of data, has already been completed. Phase II, which will be the substantive part of the study and will be based on a nationwide survey, has been delayed owing to insufficient resources. This study, which will be the first in-depth study of the SMI sector since the ILO mission of 1973, will form the basis for SMI policy formulation. The Bank is planning to undertake a study of small-scale enterprises (SSEs) in the Philippines in 1978 as part of a research project on the role of SSEs in improving employment and earnings opportunities in urban and rural areas in developing countries. Prospects for SMI 2.14 The data available from the Annual Survey of Manufactures permit an analysis of the performance of the SMI sector to be undertaken only - 13 - up to 1974. As the Government's program of assistance for SMI started in 1974 and began to have an impact in 1975 it would not be reflected in available data. However, one indicator of the success of the program is the rapid increase in DBP's lending for SMI projects in FY75 through FY77 (para. 4.41) and to some extent in IGLF's lending (para. 2.10). Judging from the types of SMI projects financed by DBP and IGLF during the 1975-77 period, SMI are playing an increasingly important role in consumer goods industries (especially food processing) serving localized markets. The export performance of SMI particularly in goods such as footwear, garments, furniture and handicrafts has been disappointing. The program of the Department of Trade started somewhat later than the other components of the Government's program, and has been less effective in stimulating SMI exports. The TACs have concentrated their efforts on improving the market acceptability of SMI in domestic markets, particularly in the high-density urban areas of Metro-Manila and Cebu. But given the increasing emphasis on exports of nontraditional goods, the TACs are likely to move to encourage exports. The provision of adequate infrastructure and support services for SMI has proceeded less rapidly than other components of the SMI assistance program. The costs to SMI in the regions arising from power shortages, inadequacy of repair and maintenance services, delays in obtaining financial assistance, and problems in communicating with suppliers and receiving orders appear substantial though unquantifiable. The NEDA program to develop industrial estates for SMI is aimed at addressing these infrastructure problems. With regard to the distortions resulting from (the Government's) industrial incentives and protection policy, the CSMI is initiating a study of measures which might be introduced to reduce the inequity between large industries and SMI. 2.15 On balance, the Government's assistance program is having the desired effect of directing SMI into areas in which they have a comparative advantage. The future prospects for SMI appear to be good given the improved policy and institutional framework which now discriminates less against them. 3. THE FINANCIAL SECTOR Overview 3.01 The Philippines has a relatively well developed financial system. The core of the system is the large commercial banking sector comprising both local and foreign banks. Long-term finance is provided principally by two development finance institutions although several other types of insti- tutions also provide this type of financing to a limited extent. In late 1976 Offshore Banking Units (OBUs) were established and the Government relaxed some of the regulations regarding Foreign Currency Deposit Units (FCDUs). Although three stock exchanges exist, the volume traded is small and is concentrated in a few issues. The Land Bank of the Philippines (LBP) was revitalized by the Government in 1973 to help implement the agrarian reform program. The Government has also played a major role in the develop- ment of the rural banking system. - 14 - Profile of Financial Institutions 3.02 Commercial Banks. As of December 31, 1976, the commercial banking sector comprised 25 privately owned domestic banks, 2 Goverrment-owned banks and 4 foreign banks. Over the last five years the assets of the commercial banking sector have increased fourfold. The Government-owned Philippine National Bank (PNB) is the largest commercial bank and accounted for over 36% of the banking system's total assets in 1976. The commercial banks provide industry with working capital and trade credits: domestic credit provided by commercial banks during the first six months of 1977 amounted to P 40 billion. 3.03 Development Finance Institutions. The Government-owned Development Bank of the Philippines (DBP) and the privately owned Private Development Corporation of the Philippines (PDCP) are the major providers of long-term finance. As of June 1977, the total assets of DBP and PDCP were P 14.3 bil- lion and P 857 million respectively. 3.04 DBP's funds come from equity contributions by the Government, borrowings from CB, foreign exchange borrowings guaranteed by the Government, deposits primarily from the Government, internal cash generation and the sale of DBP bonds. In general, DBP securities carry low rates of interest. However, special features such as tax exemption and eligibility for reserve requirements enable them to compete with other securities. 3.05 Although PDCP is defined as an investment bank under Philippine law, its main business is the provision of long-term loans which accounted for 81% of its total assets as of June 30, 1977. In addition, PDCP makes equity investments, provides guarantees, goes in for underwriting, placement of equity and debt instruments and loan syndication. PDCP's operations are mainly geared towards assisting private manufacturing enterprises. Loans from the Bank /1 and ADB (88%) and equity contributions (8%) are the major sources of PDCP's funds. 3.06 The Philippine Investments Systems Organization (PISO) is a privately owned development bank established in 1973. PISO's shares are held by domestic investors (66%) and the Private Investment Corporation for Asia (34%). Until recently PISO was engaged in short-term money market operations, loan syndication and underwriting. However, if the proposed Bank loan ($15 million) is made, PISO will also be providing long-term finance. 3.07 Private Development Banks (PDBs). The 34 PDBs have been promoted by DBP (para. 4.44) in various regions to engage in the mobilization and allocation of long-term resources for small local ventures. As of December 31, 1976, the total assets of PDBs amounted to about P 476 million with a savings and time deposit base of P 271 million. As a proportion of total lending /1 The Bank has to date made five loans to PDCP aggregating $125 million. -15 - amounting to P 174 million, agricultural loans accounted for about 43%, industrial loans for 33%, miscellaneous loans /1 for 24%. 3.08 Rural Banks. Rural banks are unit banks which are municipality- specific and provide short-term loans primarily to agriculture. The rural banking system comprises around 800 privately owned banks. At the end of 1976 their total assets and deposits amounted to P 3 billion and P 850 million respectively. Of the loans made in 1976 by rural banks 93% were for agricul- ture, most of which were seasonal production credits. The Government has actively encouraged the growth of rural banks by providing equity contributions, loans and technical assistance from CB, tax exemptions and special rediscount- ing schemes. As a result, the assets of rural banks have increased four-fold over the past five years. 3.09 Investment Houses. As of 1976 there were 12 licensed investment houses each with a minimum paid-in capital of P 20 million. Most of the investment houses are linked to major international financial institutions and large local commercial banks. Currently about 80% of their revenues accrue from money market operations with only a small proportion coming from secur- ity trading or the provision of merchant banking services. 3.10 Finance Companies. The Securities Exchange Commission has 194 finance companies registered with it. Of these, the 42 largest account for 80% of the turnover. At the end of 1976, the finance companies had a capital base of P 713 million while assets and loans outstanding amounted to P 4.6 billion and P 3.6 billion respectively. Most of the finance companies are subsidiaries of major commercial banks and are engaged in financing the purchase of consumer durables, providing short and medium-term credit to local manufacturers and traders and in financing inventory, receivables and transport equipment. 3.11 Other Institutions. The 10 Savings Banks and 200 Savings and Loan Associations together control less than 2% of financial assets. Financial Markets 3.12 The Money Market. The money market provides the mechanism through which commercal banks and corporations keep their liquidity position in balance. There are basically three sub-markets: (a) government securities; (b) interbank and (c) inter-company. The government securities market is the principal segment, with the Government being the largest trader. The main securities traded are short-term Treasury Bills, medium-term Central Bank Certificates of Indebtedness (CBCI's) and Treasury Notes, and long-term Bonds issued by DBP. While direct trading in Treasury Bills is heavy, trading in longer term securities is mainly "indirect," i.e., the securities /L Includes loans for commercial working capital, personal consumption, and real estate. - 16 - themelves are not traded, they serve as collateral for "repurchase" agreements. Participation in the intercompany market is restricted to firms with prime credit ratings. 3.13 Until January 1976, money market rates were not subject to the statutory ceilings imposed on bank deposits. Hence there was a rapid growth in deposit substitutes at the expense of traditional bank deposits. In an attempt to mobilize savings through the banking institutions, the CB raised the interest rate on savings and time deposits and regulated yields on money market instruments. Simultaneously, the minimum denomination of deposit substitutes was raised from P 50,000 to P 200,000 for instruments with less than two years maturity and P 100,000 for instruments with longer maturities. In June 1977, a withholding tax of 35% on interest paid on short-term financial instruments and 15% on savings and time deposits was introduced. 3.14 The Securities Market. An important and obvious gap in the private financial system is the absence of an active equity market which results in little capital expansion being financed through the Stock Exchange. A supply constraint appears to exist in the case of equity issues as private owners are unwilling to share control over their enterprises. In 1977, a 5% development tax was levied on closely held corporations to encourage dilution of ownership. However, the tax may not be a sufficient i ncentive for firms to "go public" and other measures may have to be considered to strengthen the stock markets. Recent Developments 3.15 Interest Rate Reform. Until January 1976, the interest rates charged by the banking system were governed by the Usury Laws which allowed a maximum nominal rate of 12% p.a. for loans secured by real estate mortages and 14% p.a. for unsecured loans. As the discounting of interest due for up to a maximum of a year was usually applied, the banks in fact realized an effective yield of 13.6% and 16.3% depending on the security offered. In addition, the CB allowed financial institutions to charge service fees ranging from 0.75% p.a. to 2% p.a. on a graduated scale. In 1974, in response to tight money market conditions, interest rates on savings and time deposits which ranged from 5-9.5% p.a. were increased to 6% and 11.5% p.a. In spite of the increase in the nominal rate of interest, the real rate of interest continued to be negative. While the banking sector was subject to the regulations referred to in para. 3.16, the same was not true of the non-bank financial intermediaries (NBFI). The weighted average rates paid to investors on comparable money market instruments were often twice as high or higher during 1974-75. As a result, there was a considerable flow of funds from deposits to deposit substitutes issued by both banks and NBFIs. 3.16 At the beginning of 1976, the CB enacted a series of changes in interest rates and reserve requirements aimed at both the banking sector and NBFIs. Maximum deposit rates were increased and, for the first time, a distinction was made between short and long-term lending rates. The major changes enacted were: (a) ceilings on loans with maturities of more - 17 - than 2 years were raised to 19% p.a.; (b) secured and unsecured loans of less than 2 years continued to have a ceiling of 12% and 14% p.a. respectively although a service charge of 2-3% p.a. could be added; (c) the maximum yield on money market instruments with maturities of up to 2 years, including all charges, was set at 17% p.a.; and (d) all ceilings on yields of instru- ments with maturities of over 2 years were removed. 3.17 In December 1977 further interest rate legislation was introduced. The major changes were: (a) the imposition of an effective interest rate ceiling, exclusive of bank charges, of 12% and 14% p.a. for secured and unsecured loans with maturities of under 2 years; (b) the imposition of an effective interest rate ceiling, inclusive of bank charges, of 19% for loans with maturities exceeding two years; and (c) a reduction of the effective maximum yield, inclusive of the 35% transaction tax and bank charges, from 17% to 16% on deposit substitutes with a maturity of two years or less, with a further reduction in the yield to 15% effective July 1, 1978. 3.18 As a consequence of the above legislation, the yield on deposit substitutes has been brought more in line with that of traditional bank deposits. This may result in a shift of resources from non-banking financial institutions to the banking sector. In addition, there has been an attempt to encourage investment by reducing the cost of borrowing. While the cost of borrowing has been reduced there has been no corresponding adjustment in the deposit rates paid. Consequently, the commercial banks will now be operating on smaller spreads. The Government claims that the reduction in spreads will compel the banking sector to be more competitive. 3.19 Offshore Banking Units (OBUs) and Foreign Currency Deposit Units (FCDUs). A significant development in the Philippine banking system was the establishment of offshore banking facilities in September 1976. The purpose was to develop Metro-Manila as a regional financial center. Presidential Decree No. 1034 authorizes a branch, subsidiary or affiliate of a foreign banking corporation to conduct banking transactions in foreign currencies involving the receipt of funds, primarily from external sources, and the subsequent utilization of these resources for undertakings inside or outside the country. The directly participating foreign banking institutions are referred to as OBUs. As of October 31, 1977, the CB had approved of 16 foreign banks operating as OBUs in the country. While offshore transac- tions are subject to few restrictions, offshore to onshore transactions have to be licensed by CB. 3.20 A FCDU is defined as an accounting unit or department in a local bank or in the local branch of a foreign bank authorized to operate under the expanded foreign currency deposit system. As of October 31, 1977, four branches of foreign banks and 13 domestic commercial banks had been author- ized to operate as FCDUs. While performing similar functions some crucial differences exist between OBUs and FCDUs. First, FCDUs may enter into foreign currency-peso swap transactions with CB which OBUs are not permitted to do. Second, FCDUs are subject to a 100% foreign currency cover requirement which is not the case with OBUs. 3.21 Mortgage Banking. While some form of home mortgage lending is provided by most existing private financial institutions, there is an absence - 18 - of specialized private sector housing intermediaries. Savings and mortgage banks which were to perform this function are unable to do so owing to their limited capacity to mobilize savings. This has resulted in relatively small annual home mortgage flows and little liberalization of mortgage lending terms. The establishment of a mortgage bank which would mobilize resources for mortgage loans through the issuance of long-term mortgage bonds has long been advocated. Although the Government has recently responded by establish- ing the National Home Mortgage Finance Corporation, little is currently known about its role in resource mobilization or the precise scope of its operations. Financial Sector Issues 3.22 Aggregate savings performance in the Philippines has improved generally during the last decade and is comparable to that of other countries at a similar stage of economic development. Since 1975, gross domestic savings have been at a level of 25% of GNP and financed approximately 80% of total investment. However, in order to reach a gross investment level of more than 31% of GNP by 1982 and reduce the country's dependence on foreign savings, the Five Year Development Plan (1978-82) calls for an increase in gross domestic savings to a level of more than 28% of GNP at the end of the Plan period. To achieve this objective, the savings of the household sector, which is expected to contribute approximately 40% of the total domestic savings requirement, will need to increase by more than 17% per annum during the next five years. 3.23 In addition to raising the level of savings, there is also a need to increase the maturity of financial assets. While the gross acquisition of financial assets by the private sector rose from approximately 7% of GDP in 1965 to over 12% in 1974, the relative share of short-term assets increased from only 17% to more than 40% during the same period. This was mainly due to statutory limits on deposit rates of credit institutions while no ceilings existed for money market rates. Given the long-term finance needs of the investment program, the present preference for financial assets with shorter maturities represents an important issue for the Government's financial policy. With a view to lengthening the average maturity of financial instru- ments and to encouraging the mobilization of savings through banking institu- tions, a series of measures have been taken (paras. 3.16 and 3.17). These measures have resulted in a 36% increase in real terms in savings and time deposits in 1977. However, a 19% ceiling on loans and debt instruments with a maturity of over two years still effectively limits the rate on long-term deposits. 3.24 The Philippine financial system has not yet developed an effective stocks/bonds market mainly because longer term interest rates have been statutorily controlled. An additional constraint is the dominance of the term market by Government financial institutions because of the preferential treatment given to their debt instruments. Only very limited capital expansion is being financed through the stock exchange partly due to the fact that private owners are reluctant to share control over their enterprises and prefer financing through borrowing. Recently, however, a 5% development tax was introduced on closely held corporations to encourage them to go public. - 19 - 3.25 Financial institutions and credit programs in the Philippines have experienced deterioration of loan recovery rates during recent years which has seriously affected their financial performance. This is due in part to the rapid expansion of credit programs to the productive sectors and to international economic conditions which have had adverse effect on some domestic enterprises. The Government is devoting increased attention to the problem of arrears, so that loan recovery can be expected to improve. 3.26 The Bank attaches considerable importance to a systematic long-term plan to develop the Philippine financial sector along rational lines. An aide-memoire focusing on the issues relating to the Philippine financial sector is being prepared which would form the basis of the Bank's continuing dialogue with the Government of the Philippines on financial sector issues. 4. THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) A. Institutional Aspects Legal Framework and Ownership 4.01 Charter and Ownership. DBP was set up in 1958 under Republic Act No. 2081 (RA 2081) as an autonomous Government-owned development bank with a mandate to supply credit for reconstruction and for the development of the agricultural and industrial /1 sectors. In 1964 it was also given the responsibility for assisting in the establishment of smaller PDBs throughout the Philippines. DBP's authorized capital is P 3.0 billion of which P 2.6 bil- lion was paid in as of October 1, 1977. PD No. 811 issued in 1975 calls for its authorized capital of P 3.0 billion to be fully subscribed by 1981. 4.02 Board of Governors. Under its Charter (RA 2081) the overall control and direction of DBP rests with a Board of Governors comprising nine members, appointed by the President of the Philippines. RA 2081 requires five board members including the Chairman and the chief executive officer, to constitute DBP's top management team. In FY77, two new board members, one full-time and one part-time, were appointed, raising the Board membership to the full statutory strength of nine as shown in Annex 1. The present Board includes the Secretary of Industry and the Special Assistant to the President for Economic Affairs. The Board meets weekly and besides directing the general affairs of DBP approves all new investment commitments exceeding P 150,000. Organization, Management and Staff 4.03 Organization. DBP's present organization (Annex 4, C-1) consists of Head Office at Manila and a network of branches (Map No. 13448). At Head /1 Industrial sector here is broadly defined to include manufacturing, transportation, tourism, public utilities and professional services. - 20 - Office the operating departments are divided into four groups each headed by one supervising Governor. A fifth group of central support departments is under the direct control of the Chairman. In addition three other offices, Legal, Audit and the Civil Service, are linked loosely to the organization although these offices are under the jurisdictional control of respec- tive independent bodies, i.e. Department of Justice, Commission on Audit (COA) and the Civil Service Commission. In the past two years a number of organizational changes were made to handle more efficiently the growing volume and complexities of DBP's operations. The most significant of these changes was the creation of two new departments, Agriculture Plans and Programs Department (APPD) for identifying, developing and monitoring DBP's agricultural financing programs; and Control and Planning Department (CPD) to strengthen further DBP's financial control, operational and financial pl4nning and information system. These organizational changes have yielded naciceable improvement in the functioning of departments and in interdepart- mental coordination. 4.04 Organization for Industrial Lending. DBP's industrial lending and guarantee operations are handled by three Industrial Projects Departments (IPD I, II, and III). IPD I and II handle essentially loans to the manufac- turing sector, with IPD I handling large industry loans (above P 3.0 million) and IPD II dealing specifically with home industry (cottage industry) and SMI loans. IPD III concentrates on the financing of transportation, tourism, public utilities and industrial services sectors. All these three depart- ments are known to the Bank as they have been used as conduits for two DFC loans (IPD I), two SMI loans (IPD II) and a shipping loan (IPD III). The proposed loan will be handled by IPD I (large industry component) and IPD II (SMI component). In addition, DBP branches will also process SMI projects under the loan although the overall responsibility for the implementation of the SMI component of the loan will rest with IPD II. 4.05 The organization of IPD I has remained more or less unchanged since 1973. An understanding has been reached between the Bank and DBP to the effect that the Project Supervision Group (PSG) which carries the dual responsibility of project supervision and accounts servicing (disbursements and billing) will be split into two separate groups, one each for these functions; at present most of the staff time is taken by accounts servicing (para. 4.18). In the past two years a number of organizational changes have been made in the set-up of IPD II. The latest reorganization effected in August 1977 resulted in the setting up of three Project Evaluation Groups (PEGs), each responsible for evaluating projects of specific industry groups./l Besides leading to greater efficiency resulting from industry specialization in PEGs, the new organization provides enhanced flexibility to IPD II in handling the branch cases./2 Subsequently, in November 1977, /1 This reorganization incorporated almost exactly the recommendation of the Bank made at the time of the appraisal of the first SMI project in 1975 (Loan No. 1120-PH). /2 Prior to the August 1977 reorganization, all branch cases involving DBP loans of over P 150,000 were handled by one PEG which was also respon- sible for processing all applications received in Head Office for loans up to P 150,000. - 21 - the loan implementation function was transferred from the PSG to the PEGs to have more efficient loan disbursement and to release manpower in PSG for substantive project supervision work. In addition, DBP has agreed to set up a separate unit in the PSG to monitor the supervision of SMI projects in the Branches; up to now IPD II has not been given any direct role in improving the quality of Branch supervision of SMI projects. During negotiations DBP's plans to enlarge the scope of functions of the Industry Promotion Group (IPG) in IPD II were reviewed and found satisfactory. DBP has planned to assign to IPG responsibility and adequate manpower to undertake such broader functions as planning of DBP's SMI lending program, formulating guidelines for SMI project promotion, establishing investment priorities for SMI financing and assessing the effect of DBP's SMI lending policies. 4.06 At present, the operating core of Branch organization consists of an Investment and Project Development Division responsible for evaluation of projects of all sectors and a Project Supervision and Acquired Assets Division responsible for supervision of all projects and acquired assets. This set-up, based on functional lines is not conducive to optimum utilization of specialized staff expertise. To address these problems, DBP is reorga- nizing its Branches. The new organization would lead to a better utilization of staff expertise. DBP assured the Bank that sectoral specialization, both in terms of manpower allocation and staff qualifications, would be introduced in the PID responsible for large projects. The administrative control of the branches is generally satisfactory, and has become closer since the single Branches and Agencies Department (BAAD) was bifurcated in 1976, BAAD I for Luzon branches and BAAD II for Visayas and Mindanao branches. 4.07 Management. Dr. Placido L. Mapa, Jr./l succeeded the late Mr. Leonides S. Virata in October 1976 /2 as Chairman and chief executive officer of DBP. The appointment of Dr. Mapa, who has considerable experience in banking and economic management, is a clear indication of the Government's commitment to pursue vigorously the ambitious institution building tasks intitiated by the late Mr. Virata. Dr. Mapa's performance in his first year in office indicates that he will press ahead with these tasks as rapidly as broader constraints permit. Dr. Mapa's leadership will be an important factor in DBP's attaining further improvements expected during the progress of the proposed loan. Management at the department level has remained stable; increasing experience of department managers has mostly resulted in gradual but discernible improvements in control over operations. The second layer of management of IPD I which showed signs of weak supervision capabi- lity was replaced in 1977, considerably strengthening the management of this department. The department level management both in IPD II and BAAD contin- ues to remain sound. While quality of branch management continues to improve generally, it has been constrained by manpower shortages and the lack of clear lines of communications with Head Office especially with respect to SMI. DBP's management is aware of these problems and is taking appropriate corrective steps. /1 Dr. Mapa, Jr. is a former Alternate Executive Director of the Bank and its present Alternate Governor for the Philippines. /2 Mr. Leonides Virata took leave from active service in February 1976. During the intervening period DBP was headed by its Vice-Chairman, Mr. J.V. de Ocampo. - 22 - 4.08 Staffing. As of August 31, 1977, DBP's total staff numbered 3,501, distributed in a 48:52 ratio between Head Office and Branches and a 60:40 ratio between professional and non-professional staff (Annex 4, T-2). DBP's staff increased rather rapidly by 12.1% between October 1976 and August 1977; the staff turnover rate during the same period was low (2.6% of the average staff). This increase notwithstanding, DBP continues to experience staff shortages, particularly in respect of the specialized technical staff. DBP's management is taking a number of measures to resolve the staffing problems. It has budgeted for an increase of 971 staff /1 (or an increase of 27.8% over the present staff) who are expected to be recruited within the next 12 months. Until recently, the main reason for DBP's inability to attract suitable professional staff, especially technical staff, was that its salary scales were below even those of some of the Government financial institutions. In December 1977, the Government prescribed a uniform and substantially upgraded salary scale for Government financial institutions which should greatly enhance DBP's ability in the future to recruit and retain high calibre staff. Other actions being taken by DBP are: (a) streamlining of procedures and the organization which would make possible more efficient deployment of the existing staff; (b) improved and intensified staff training (para. 4.12); and (c) provision of greater career advancement opportunities by making it easier for the technical staff to be consiLdered for supervisory positions. These steps should ease DBP's staffing situation but will take some time. 4.09 Staffing for Industrial Lending. Plans for augmenting IPD I staff, discussed at negotiations in October 1975, are nlow being translated into action. Total department staff strength has been increased to 109 (as of September 30, 1977). With its present staff, IPD I is adequately equipped to cope with all aspects of project evaluation and supervision and should be able to handle the growing workload over the foreseeable future through improvements in productivity. While generally the quality of staff in IPD I is satisfactory, most of them are relatively inexperienced. This is partly due to the transfer of more experienced staff to strengthen other and new departments. However, the staff is gradually learning through experience and by attending various training programs. 4.10 As of September 1977, total staff in IPD II was 123, of whom 101 were professionals; between September 1976 and September 1977 the number of professional staff increased by 33%. DBP's plans for increasing staff in IPD II were reviewed during negotiations and satisfactory understandings reached. IPD II plans to increase the number of its professional staff by 40% (or 40 more staff) by September 1978. The actual members will, however, be limited to the number of new staff that it can train and absorb without impairing the quality of its operations. Furthermore, IPD II is giving priority to the recruitment of additional manpower for PSG and the IPG, whose functions have become of greater importance, engineers and economists. 4.11 In the Branches the staffing problem is more acute. Several Branches have not been able to recruit or retain engineers for their SMI operations and have had to resort to temporary stop-gap arrangements. DBP's /1 Of these 971 positions, 685 or 70.5% are accounted for by professional staff slots. - 23 - management is aware of this problem and is formulating measures to make it more attractive for engineers to work in the branches. The recent Government decision to upgrade DBP's salary scales (para. 4.08) would facilitate DBP's efforts in this direction. Nevertheless in the Branches where there is a high level of SMI lending (such as Cebu, Davao, Dagupan and Iloilo), DBP has maintained an adequate engineering staff for SMI. The overall quality of the staff in the Branches appears to be satisfactory, although there are consi- derable variations from Branch to Branch. This has necessitated extensive training programs, discussed in para. 4.12. 4.12 Training. DBP now provides extensive on- and off-the-job training programs (internal and external) for almost all cadres of its staff. In FY77 in all 26 different kinds of training programs were conducted/arranged, for 971 staff members. In addition, 16 staff members attended different specialized training courses held abroad. Special attention was paid to the training needs of: (a) staff working on SMI projects; (b) staff in the Branches; and (c) staff working on livestock and fisheries projects. DBP's future training plans call for: (a) continuation of most of the existing programs; (b) some new sophisticated special training for agricultural and industrial projects staff; and (c) collaboration with Development Academy of the Philippines with a view to organizing advanced training courses for its own staff as well as of other development institutions in the country. This training strategy is quite satisfactory. Operating Policies and Development Strategy 4.13 Operating Policies. There have been no amendments to DBP's Charter in the past three years nor to its Statement of Operating Policies and Proce- dures for Medium/Large Scale Industrial Financing (adopted under the conditions for Loan No. 998-PH), attached as Annex 2. The guidelines established in its Charter and Policy Statement are augmented by specific Board resolutions. In the past two years, several major policy changes were introduced and were aimed at: (a) streamlining internal operating procedures; (b) strengthening DBP's financial management; (c) standardizing and rationalizing lending terms for industry; and (d) liberalizing terms and conditions of DBP's small loan programs for industry and agriculture. To a very large extent these changes have achieved the objectives for which they were made. DBP's policy framework governing SMI operations represents a radical improvement over the set of policies which were operative in late 1974 when the first SMI project (Loan No. 1120-PH) was appraised. The new policies have significantly relaxed the requirement for collateral and debt/equity ratio, have liberalized working capital financing, set realistic guidelines for repayment terms including grace period and provided for cost overrun financing. During negotiations, DBP confirmed that henceforth it would extend its working capital financing, in cases where fixed asset financing is not involved, to all SMI projects and would not confine it to export-oriented projects and that the SMI borrowers will benefit fully from the liberalized policies within the limits of prudent loan evaluation criteria. 4.14 Development Strategy. DBP has formulated a statement of strategy for industrial development in 1978-79 which was reviewed during negotiations. The agreed version of the strategy statement (Annex 3) highlights development objectives that DBP hopes to achieve in the next two years. The objectives - 24 - in respect of DBP's large industry financing operations include inter alia: (a) greater emphasis on relatively smaller and medium size industrial enter- prises; (b) intensified promotional role designed to encourage new entrepre- neurs; (c) adoption of an investment priority plan for large industries and within this plan selection of projects on the basis of their contribution towards development of the country's natural resources, favorable impact on the balance of payment position, geographical decentralization of industry and creation of new jobs at a relatively lower investment cost; (d) compre- hensive appraisal of projects seeking DBP's guarantee assistance; (e) mobili- zation of additional resources both from internal and external sources; and (f) development of staff. The main features of DBP's development strategy for SMI are: (a) constant efforts to improve DBP's institutional set-up to make it fully responsive to the needs of SMI projects; (b) relaxation in its working capital financing policy (para. 4.13); (c) adoption of an investment priorities plan to serve as a rational basis for project screening and selection; and (d) specific strategies aimed at achieving geographical dispersal of SMI, optimum utilization of local raw materials, conservation of energy, and encouragement to export and promotion of labor-intensive industries. Finally, DBP's development strategy also aims at increasing its technical assistance to the country's smaller development finance institutions such as PDBs. Project Appraisal and Supervision 4.15 Project Appraisal. Since the appraisal of the most recent DFC loan (No. 1190-PH) the improvement in the quality of DBP's industrial appraisals has been slow but steady. The training and development of new and relatively inexperienced professional staff /1 recruited after IPD I lost its experienced staff to other new departments has entailed more time than was originally expected. Besides, the former weakness at the supervisory level, which has since been eliminated, also contributed to the slowness oiE improvement in the quality of appraisals. Generally, the appraisal reports are comprehensive and the methodology used is appropriate. The reports, however, are sometimes excessively descriptive and not sufficiently analytical especially in DBP's market analysis. Until recently, the market work was undertaken by the Business Research Department, and concentrated too heavily at times on the broader aspects of the overall market, rather than on the prospects of market- ing the output of the project under review. In an effort to improve the quality of its marketing analysis, IPD I has set up its own Marketing and Economic Analysis Section, and this should lead to more relevant and project- oriented market evaluation. IPD I is currently giving high priority to staffing this Section. The quality of technical analysis of projects has suffered to some extent because of DBP's difficulty in recruiting suitably qualified and experienced engineers. For upgrading the quality of technical evaluation, DBP has agreed to use the services of outside independent consultants on a selec- tive basis for large and/or complicated projects, when it feels that its in-house capability is limited. At present, DBP calculates economic rates of return for projects of US$2 million and over using Bank funds; it has now agreed to calculate ERRs for all projects with DBP's involvement of over US$500,000 /1 Alout 50% of the professional staff has less than three years experience oT project appraisal; about 20% have experience of one year or less. - 25 - irrespective of the source of financing. DBP has also agreed that its appraisal reports will bring out more explicitly the employment impact in terms of jobs created and, in that context, it will discuss the aspects of choice of technology and cost per job. DBP carefully examines the environ- mental impact of its projects and takes due precautions to ensure that each project complies with the Government's antipollution regulations. As a matter of policy, where necessary, DBP insists that its subborrowers include antipollution equipment and facilities under its financing. 4.16 There has been a steady improvement in the quality of SMI appraisals done in IPD II. Analytical techniques, such as break even and sensitivity analysis introduced about a year ago, are now standard practice for loans over P 500,000 and the internal financial rate of return is now calculated for all loans over P 1.0 million. The quality of appraisals done in the Branches (usually for loans below P 500,000) varies widely from Branch to Branch. In January 1978, DBP set up SMI Assistance Units comprising two experienced staff members (division chief level) for each of the three major regions (Luzon, Visayas and Mindanao) to assist the Branches among other things, in upgrading the quality of their SMI appraisal work. The recently completed project eva- luation manual would complement these efforts. In addition, an understanding was reached between the Bank and DBP on other specific steps to upgrade further the quality of appraisals, including a more thorough treatment of working capital requirements, and the calculation of ERR for all SMI loans over P 1.5 million. 4.17 DBP's management has taken a number of steps /1 to streamline the appraisal procedures in IPD II and the Branches with a view to shortening the processing time. These measures notwithstanding, the average processing time for SMI loans has tended to increase on account of a rapid increase in the volume of SMI operations and emphasis on higher standards of appraisal quality. DBP's management recognizes that loan processing time is unsatis- factory and is endeavoring to reduce it to 60 days in both IPD II and Branches and to 30 days for IPD II to review branch cases. Reduction of SMI loan processing time now forms a part of DBP's development strategy. Average processing time for large industry loans is reasonable. 4.18 Project Supervision. As discussed during negotiations for the second DFC loan, in November 1975, IPD I took steps to improve project super- vision by introducing work scheduling for systematic project visits and reviews of periodic submissions by clients. However, these measures could not be adhered to. Consequently, supervision of large industrial loans is often not carried out regularly, and the objective of identifying and overcoming project problems as they arise has not been reached. The problems with supervision in IPD I are to some extent a function of the workload on the staff; supervision staff are also responsible for loan servicing (disbursements, billing), limiting the time they can spend on supervision (para. 4.05). /1 The most significant step was increase in the discretionary authority of Branch and Department managers from P 20,000 to P 150,000. - 26 - However, DBP's management has decided to separate the servicing and supervision functions within IPD I, which, coupled with the recent clLange in the management of Project Supervision Group (para. 4.07) would considerably ease the situation. IPD I has also prepared a supervision manual, which includes a complete work program for project visits, reporting, follow-up action and feedback system. 4.19 An important element of DBP's industrial loan supervision system is its representation on the Boards of client companies. Besides serving as a means of protecting DBP's interests, this representation has the potential of working as an effective means of feedback. Unfortunately this mechanism has not fully served its latter objective on account of: (a) nomination of non-DBP personnel; and (b) inadequate liaison between IPD I and the appointed representatives. DBP management has now adopted a new policy which ensures its representation through its own staff members. Steps are also being taken to improve coordination between IPD I and DBP's representatives. 4.20 On account of the pressing urgency for DBP to deal with a rapidly growing backlog of loan applications in FY75 and FY76, progress in designing and implementing appropriate systems for supervision of SMI projects was very slow in those years. However, in late 1976, DBP's management, recognizing the seriousness and magnitude of the problem, started taking a series of corrective measures. IPD II was reorganized in 1977 and is being further reorganized (para. 4.05) with one of the objectives being a strengthening of project supervision. IPD II has recently finalized an SMI project supervision manual which has been adopted and circulated to all the Branches. The manual is adequately detailed and comprehensively covers all aspects of project supervision. IPD II is also well advanced in its plans to engage the services of outside collection agencies to handle small accounts of up to P 2,000 (over 1,100 accounts) where cost of supervision is not commensurate with expected benefits. These efforts will improve supervision of SMI projects, but to further strengthen and intensify such efforts DBP has decided to launch a special supervision program which inter alia includes: (a) a schedule of periodic project visits, reporting and follow-up action; (b) greater use of outside agencies for handling smaller accounts; (c) special diagnostic reports on larger SMI loans in default; (d) enforcement with greater intensity of reporting requirement for all clients; (e) monitoring by IPD II of the SMI project supervision done in Branches; and (f) regular reports to the Bank on the progress of SMI supervision. This program was reviewed during negotiations and is satisfactory. Procurement and Disbursements 4.21 DBP's procurement and disbursement procedures for large industrial loans as well as for SMI continue to be satisfactory. DBP's procurement procedures adequately ensure that purchases from its subloans are made with - 27 - due regard for economy and efficiency. Subborrowers are required to submit at least three (normally more) proforma contracts/or quotations for the equipment being procured from two or more member countries of the Bank. An evaluation is carried out by DBP's engineers as to whether equipment finally selected by the project sponsor is suitable and competitively priced. Funds are disbursed against supporting documentary evidence of purchase and/or physical inspection by DBP staff of project's progress. DBP's procurement and disbursement performance in respect of previous industrial and SMI loans (Nos. 998-PH, 1120-PH and 1190-PH) has been satisfactory so far. Internal Reporting 4.22 DBP's internal reporting system and quality of reports is gradually improving. The most impressive improvement has been shown in DBP's arrearages reporting with recent arrears reports being increasingly comprehensive and analytical. The recently created Control and Planning Department (CPD) is currently reviewing various internal reports with a view to consolidating them and making them more meaningful and comprehensive. Constant improvements in the record keeping both at Head Office and the Branches are being made by using better data processing equipment. Whereas DBP's reporting on its totality of financial affairs and operations is very satisfactory, it needs better repor- ting on its individual financing programs. Suggestions made by the Bank to address this problem have been accepted by DBP's management. B. DBP's Role in the Economy DBP in Perspective 4.23 DBP plays an important role in the Philippine economy, being the largest supplier of long-term credit. Over the period FY73-77, DBP's opera- tions amounted to P 15.4 billion; at the end of 1976, DBP held 11% of the assets of the Philippine financial system and was responsible for financing 13% of gross fixed capital expenditure. The major proportion of DBP's activities are in industry where it is involved in both large undertakings such as mining, textiles and chemicals, and also in the financing of small- scale industry. DBP also provides loans to small farmers and its agricultural activities include the financing of cereals, feedgrains, food crops, live- stock, poultry and fisheries. In addition, it is engaged in financing real estate, hospitals, shipping, transport, rural banks and PDB. 4.24 As of June 30, 1977, DBP's accumulated approvals of loans, guaran- tees, and equity investments amounted to P 27.6 billion (436,000 projects). The sectoral allocation was as follows: industry (66%); agriculture (20%), real estate (10%), and other (4%). DBP plans to invest P 7.7 billion in industry over the next five years which is equivalent to about 9% of the total as projected in the five year plan (1978-82). - 28 - Economic Impact 4.25 Impact of Large Industry Financing. The sheer magnitude and diversity of DBP's operations make it a vitally important institution in the Philippines. The absence of reliable and comprehensive data makes it impossible to quantify this impact adequately. However, some indication can be had by considering the loans made over the last two years by IPD I. Eighty- five large projects were financed with a total capital out'Lay of P 2,319.4 mil- lion /1 of which DBP's financing amounted to 37%. An estimated 15,000 jobs were created /2 at an average cost per job of $18,000, which is lower than the average for BOI approved projects /3. An estimated $252 million will be generated in exports as 35 of these projects plan to export at least a part of their output. The ex-ante internal financial rate of return, weighted by project cost, was 27%. 4.26 Economic Impact of IBRD Industrial Financing. The Bank has had an important influence on DBP's industrial lending. DBP has received two IBRD loans for large industrial projects./4 Details of 47 subprojects financed so far under these loans are shown in Annex 4, T-3 and T-4. The textile industry /5 has received 34% ($28.1 million) of Bank financing. The remaining loans were evenly distributed over a range of industries. Thirty- two of the 47 projects financed estimate that at least a part of their pro- duction will be for export resulting in foreign exchange earnings of about $217 million annually. Bank-financed projects are expecte,d to generate 9,500 jobs /6 at an estimated average capital cost/job of $27,1()0. The cost/job varies from $80-90,000 for two synthetic yarn projects,/7 to $1,500-2,000 for garment manufacture. The average cost/job has declined from $30,000 for the first loan to $24,500 for the second loan./8 In terms of regional /1 Excluding a large mining project, Marinduque Mining. /2 This excludes refinancing where no employment is generated. /3 The average cost per job of BOI approved projects in 1976 was $22,700. /4 Loan No. 998-PH for $48 million was fully committed by September 1976. Loan No. 1190-PH was for $50 million of which $35.5 million was committed as of mid-April 1978. This loan should be fully committed by June 1978. /5 These projects covered the whole range of textile industry and included nylon filament yarn, polyster yarn, and both woven and knitted textiles. /6 Plus another 5,000 seasonal jobs in a tobacco redryirLg project. /7 Appraised in 1974. /8 The cost per job of projects in the pipeline of the balance of Loan No. 1190-PH is around $15,000. - 29 - distribution, 17 projects were based in Metro-Manila, 21 in Central and southern Luzon and Mindanao and 7 in the Visayas, Bicol and Northern Luzon. (The remaining two projects were for overseas shipping). The economic rates of return on subprojects ranged from 10% (sucro-chemical plant and textile mill) to 79% (footwear) with a weighted average of 29%. 4.27 Responsibility for industrial promotion rests with the BOI; DBP operates as a financing agent within the incentive framework provided by the BOI. DBP does, however, carry out its own project appraisals using the economic rate of return as an indicator of the project's economic viability. Consequently, DBP's project analysis should result in a better allocation of resources. At present DBP does not calculate the economic rate of return for all projects it finances, but it has now decided that it would do so for all projects in excess of $500,000 (para. 4.15). This should result in an even more efficient allocation of resources in the future. 4.28 Impact of SMI Financing Program. In 1970, DBP launched its first program to develop SMI. Between FY72 and FY77 this program financed 1,116 SMI units to the extent of P 452 million./l Bank-financed SMI projects have generated an estimated investment of P 410 million (Annex 4, T-5 and T-6). A total of 410 /2 SMI projects were financed under Loan No. 1120-PH or about 14% more than the 360 predicted at appraisal. So far, 389 SMI projects have been financed by DBP under the SMI component of Loan No. 1190-PH;/3 at this rate, DBP will probably exceed the appraisal target number of subprojects (500) under this loan too. The average loan size for subloans under Loan No. 1120-PH was P 369,000 or about 6% less than the average of P 393,000 estimated at appraisal. Under Loan 1190-PH, the average loan size declined slightly to P 363,000 resulting in a better distribution than expected at loan reallocation. Of the loans made under the two IBRD loans, 92% and 91%, respectively, went to small entrepreneurs whose assets at the time of loan application were under P 1.0 million. However, a slightly higher propor- tion of DBP financing (29%) has gone to borrowers with assets of over P 1.0 million under Loan No. 1190-PH than under Loan No. 1120-PH (25%). Under Loan No. 1120-PH DBP's SMI loans were fairly evenly distributed among industries: mechanical/electrical machinery and equipment industry (14%); ice plants and cold storage (12%); and extractive industries (10%). Projects /1 Approximately P 292 million or 65% of the assistance provided came from loans 1120-PH and 1190-PH. /2 This is updated figure based on the finally disbursed amount. It is different from the figure (336) reported in the President's Memorandum (R77-29) on the proposed Amendment to the Loan Agreement No 1190-PH, because of reallocation of some projects. /3 Of the allocation of $25 million, $14.1 million was committed as of August 31, 1977; the balance is expected to be committed by April 1978. - 30 - so far financed under Loan No. 1190-PH have been more labor intensive than in the past, but not to the extent hoped for at loan reallocation. Regarding regional distribution of investment, expectations have, to a large extent, been realized by project performance. Under Loan No. 1120-PH Metro-Manila accounted for about 42% of SMI investment and a similar proportion of DBP financing which was somewhat lower than the 51% share expected at appraisal. Under Loan No. 1190-PH, the comparable figures were 43% and 36%. The rest of Luzon accounted for a smaller share of SMI investment under Loan No. 1190-PH (28%) than under Loan No. 1120-PH (30%) and a larger share of DBP financing. The share of the Visayas increased under Loan No. 1190-PH for both investment (20% vs. 17%) and DBP financing (21% vs. 18%), most of the gain accruing to the less-developed region of Eastern Vrisayas. The resources going to Mindanao have remained approximately the same under both loans. However, within Mindanao the share of the Northern and Western regions doubled while that of the Central and Southern regions declined by a third. 4.29 A study of the economic impact of a sample /1 of SMI projects financed under the two IBRD loans was conducted by DBP's Business Research Department and showed that the projects' ERR ranged from 13.7%-116% with a weighted average ERR of 49.5%. These projects are estimated to have a value added component of P 175 million (over 20% of sales) comprising: wages (44%),/2 profit (37%); and financial expenses (19%). It is estimated that 15% of the sales, amounting to E 127 million, will be for export. 4.30 Employment Generation Impact of SMI Financing. The 799 SMI projects financed under the Bank loans are expected to generate about 13,941 new jobs /3. The average cost per job is P 27,024 ($3,654) under Loan No. 1120-PH and P 48,600 ($6,920) under Loan No. 1190-PH. The higher average cost per job under Loan No. 1190-PH occurs because of a few large capital intensive projects (22 out of 389) approved in FY77. If these were excluded, the average cost per job would fall to P 29,241 ($3,954)./4 About 31% of the loans made under /1 This sample covered 49 SMI projects approved during April 1976 - June 1977 for which economic rates of return were calculated and 445 projects for which partial economic indicators based on appraisal estimates were aggregated. /2 At appraisal ratio of wages to value added was estimated at 32%. /3 7,536 jobs under Loan No. 1120-PH and 6,405 jobs under Loan No. 1190-PH. /4 The average cost per job for an SMI project is approx:Lmately 25% of that of larger projects. - 31 - these two Bank loans would qualify as urban poverty lending. /1 In terms of size of the sub-borrowers, over 90% of the loan amount went to sub- borrowers with fixed assets below $250,000 /2 at the time of application to DBP. The average wage per worker ranges between P 5,400 and 6,700 which is 50% higher than the minimum wage rates. 4.31 Resource Mobilization. DBP has played an important role in mobil- izing long-term resources both internally and externally. Over the period July 1975-September 1977, DBP raised P 847 million through the sale of its Countryside bills. DBP has also on its own raised substantial long-term foreign exchange resources from the international commercial sources; since its first borrowing of $50 million in 1972, DBP has raised $315 million (6 loans) from foreign commercial banks./3 DBP also operates as a tax receiving agency for the Government; taxes collected by DBP average E 40 billion per annum. 4.32 Other Activities. Besides its SMI financing programs, DBP has established special programs to finance cottage industries and help lower income groups through participation in such programs as the Manila Urban Development Project which provides term credit for improving housing and establishing small businesses in the region. Its real estate financing program also provides resources for construction and low cost housing improve- ment; in FY76 and FY77 alone DBP made 8,446 such loans amounting to P 94 mil- lion. DBP has also helped to establish and provide financial and technical assistance to 34 PDBs. In their turn these institutions mobilize local savings and utilize them to meet medium-term credit needs of the economy. C. Operations Overall Financing Operations 4.33 Overall Operations. DBP's operations include loans, guarantees and equity investments. A summary of its operations is shown in Annex 4, T-7. Since 1947 until June 30, 1977 DBP's cumulative approvals amounted to P 27.6 billion, of which 51% occured in the 27-year period, FY47-73 and 49% over the four years, FY74-77. Since FY75 loans have replaced guarantees as the most important type /1 The urban poverty threshold figure for 1977 being US$3,600. /2 This is the ceiling suggested in the recent Bank report, "Employment Creation and Small-Scale Enterprise Development" (No. 1543 dated March 22, 1977). /3 This excludes DBP's borrowings from international lending institutions and under bilateral agreements. - 32 - of operation owing to the increased availability of resources for onlending/L; equity investments have not been particularly significant. Over the period 1972-76 DBP's total approvals rose from P 1.8 billion to P 3.9 billion. This secular increase came to a halt in FY77 when approvals dropped to P 3.1 billion as a consequence of decreased agricultural lending, a fall in guarantees, and a reduction in hotel financing. 4.34 In terms of sectoral allocation, as of June 30, 1977, industry, agriculture and real estate had received 66%, 20% and 12% respectively of total approvals /2 (Annex 4, T-8). The balance comprises credit extended to local governments (1.3%) and the banking industry (0.7%) principally to PDBs. 4.35 The size of DBP's investments vary from small loans (minimum P 5,000) for handicrafts, tricycles /3 and water pumps to large investments in manufacturing, mining and infrastructure. The number of small loans in DBP's portfolio fell in FY77 owing to the phasing out of small "social loans" (para. 4.36) and the decrease in agricultural lending (para. 4.45) In general, DBP's guarantees pertain to large projects since only these have access to suppliers' credits. Industrial Lending Operations 4.36 Over the period FY47-77 DBP's cumulative industrial lending amounted to P 5.61 billion for 30,780 accounts (Annex 4, T-9). Over the period FY73-76 the volume of industrial lending rose from P 55 million to P 1,080 million and stood at P 1,079 million for FY77. The slight reduction in the volume of lending reflected the slowdown in the growth of some Philippine industries and the consequent fall in loan applications. Over the period FY76-77 the number of loans dropped from 5,895 to 3,791 because of the sharp fall in small loan applications for tricycle financing./4 /1 In the three-year period FY75-77 the proportion of loans in DBP's total assistance approved was 66% as compared to an average of 10% for the preceding three years. /2 The financing of several large hotels in Manila in 1975 and 1976 had raised the proportion of DBP resources going into real estate financing. /3 Tricycles are a popular form of low cost transportation in the Philippines. 14 In FY76, 3,950 loans for P 181 million were made for tricycle financing. The comparable figures for FY77 were 1,762 loans for P 52 million. - 33 - Features of Industrial Loans 4.37 Size of Loans. Twenty-five projects,/L each over P 5 million accounted for P 873 million or 75% of the value of loans approved in FY77. DBP's position as virtually the largest source of long-term capital explains the number of large-scale projects in its portfolio. The smallest loan size category (below P 50,000) accounted for 87% of the number of loans approved in FY77 (81% on a cumulative basis) but only 3.6% of the value of approvals./2 A structural change has occured in the size distribution of loans. Loans below P 50,000, after increasing more than twofold between FY75 and FY76, fell by 40% in number and 20% in value as a consequence of a fall in the tricycle financing program. Simultaneously, there was a shift away from the P 2.0-5.0 million loan category to the P 1.0-2.0 million category. The overall average size of industrial loans, however, increased from P 183,000 in FY76 to P 285,000 in FY77. 4.38 Industry Distribution. During the recent past, DBP's industrial lending has covered a wide range of industries: mining (27% of lending in FY75-77); transport (23%); and textiles (12%). The mining figure reflects DBP's significant exposure in Marinduque Mining. DBP's operations in medium- sized, labor-intensive industries /3 declined from 22.9% in FY75 to 11.0% in FY76, but rose again to 25.7% in FY77. Of the manufacturing projects approved during FY75-77, 61% were for the manufacture of consumer goods, 29% for intermediate goods and 10% for capital goods. DBP's industrial lending is influenced to a large extent by the BOI. While DBP can accept a project not registered with the BOI, in practice projects would often not be commer- cially viable without Board registration. Hence BOI decisions on incentives, location, export targets and industry type are prime factors in determining DBP's industrial loans. 4.39 Geographical Distribution. Attempts to move industry out of Metro-Manila are reflected in DBP's lending operations in FY77; the share of DBP's industrial lending in Metro-Manila fell from 37% in FY75 to 31% in FY76 and 23% in FY77 (Annex 4, T-9). However, the amount of lending going to areas near Manila such as Central and Southern Luzon, varied from year to year. The most encouraging trend, however, is the increasing amount of /1 This includes an exceptionally large loan of P 355 million to the Marinduque Mining and Industrial Corporation, to finance the copper mining and refining project. /2 The average small loan size was P 12,000. /3 Includes industries such as food processing, wood, leather, rubber and nonmetallic products, cottage industries, extractive industries (excluding large mining projects) and garments. - 34 - resources going to Mindanao, a relatively underdeveloped region, whose share increased from 14% in FY75 to 41% in FY76 and 48% in FY77. While much of this lending was for mining projects, other industries are also being developed. DBP's industrial investment in the undeveloped regions of the Bicol, the Cagayan Valley and Ilocos is still small. 4.40 Utilization of Industrial Loans. The utilization of industrial loans for the past five years is shown in Annex 4, T-10. The most striking aspect of loan utilization is the volume of resources being used for refinanc- ing of existing debts; P 324 million in FY76 and P 417 million in FY77. Most of this refinancing affects two large accounts: Marinduque Mining, P 300 mil- lion and P 299 million in FY76 and FY77 respectively; and Manila Brickworks, P 118 million in FY77. The large increase in loans for working capital reflects both the more liberal attitude of DBP's management towards working capital funding and the concurrent need of many businesses for more working capital owing to a slackening of demand. Loans for the purchase of machinery and equipment fell considerably in FY76 but increased again in FY77. SMI Lending Operations 4.41 Overall SMI Operations. The Bank became involved with DBP's SMI lending program in FY75. Over the two-year period, DBP's, SMI lending recorded a twofold increase raising DBP's SMI portfolio from P 132 million (776 accounts) as of June 30, 1975 to P 384 million (1,588 accounts) as of June 30, 1977 (Annex 4, T-11). The rapid growth can be explained both in terms of the increased availability of resources for SMI financing and the organizational and policy changes put into effect. The table below shows the trend of DBP's SMI operations: DBP: TREND OF SMI LOAN APPROVALS (P million) FY74 FY75 FY76 FY77 No. Amount No. Amount No. Amount No. Amount Small industry loans (P 50,000-800,000) 98 27.2 212 44.9 235 58.9 331 55.5 Medium industry loans (over P 800,000) 12 15.2 42 57.9 54 85.6 48 86.7 Total SMI loans 110 42.4 254 102.8 289 144.5 379 142.2 - 35 - 4.42 Despite a marginal reduction in the value of loans approved in FY77 there was a sharp increase in the number indicating a smaller average loan size. When compared to previous years, a significantly higher proportion of the loans approved in FY77 were from the Branches since Head Office staff were more invol.ed in loan collection and establishing a supervision system than in project evaluation. 4.43 Features of SMI Loans. The majority of SMI loans fall within P 100,000 - 500,000 range (Annex 4, T-12). While the average size of the small industry loans fell from P 251,000 in FY76 to P 168,000 in FY77 the average size of the medium industry loan continued its rising trend and stood at P 1,807,000 for FY77. Few loans are approved in the F 500,000 - P 1.5 million range. The SMI loans are fairly evenly distributed among industries (Annex 4, T-13). The growth industries in FY77 were food manufacturing (14.2% in FY77 v 7.2% in FY76) metal work (12.6% in FY77 v 4.6% in FY76) and nonmetallic industries (7.0% in FY77 v 3.3% in FY76). The trend towards the financing of capital intensive industries discernible in FY76 was reversed in FY77 when DBP reduced its financing of ice plants, cold storage and extractive industries. While the share of Metro-Manila in the total number of loans approved dropped from 41.9% in FY76 to 29.5% in FY77, it increased from 35.5% to 49.2% in value terms reflecting the larger average size loans approved by Head Office (Annex 4, T-12). This increase in the share of Metro-Manila was at the expense of the Visayas which experienced a decline from 23.6% in FY76 to 13.3% in FY77. The underdeveloped regions of Northern Luzon and Mindanao gained marginally. The proportion of DBP's SMI loans for working capital increased from 9.6% in FY76 to 18.1% in FY77 while fixed asset loans declined from 90% to 81.8%, reflecting DBP's increased awareness of clients' needs for working capital finance (Annex 4, T-12). DBP permits a maximum term of five years for its working capital loans and ten years for fixed assets loans. The average maturity of loans both in FY76 and FY77 was 7.7 years (Annex 4, T-14). The majority of DBP's SMI borrowers continued to be small entrepreneurs; in FY77, 82.6% of the recipients of SMI loans had assets, at the time of application, of less than P 500,000; however, because of their low average size such loans accounted for only 41.4% of approvals. In contrast to FY76 most of the SMI loans approved in FY77 were for expansion projects (72% of the number of projects), mainly due to growing opportunities for small and medium indutries to expand. 4.44 In FY77 when considering loan applications, DBP changed its approach from a "first-come, first served" to a more selective one based on a study of the economic conditions prevailing within different industries. This was supplemented by adopting in early 1978 of an SMI investment priorities plan aiming at SMI promotion in less developed regions and subsectors. DBP's short-term SMI development strategy also calls for selection of projects based on projects economic contribution (para. 4.14). These efforts should lead to a much deeper economic impact of DBP's SMI operations. - 36 - Agricultural Lending Operations 4.45 DBP is the main source of medium- and long-term institutional credit for agriculture. DBP's agriculture portfolio, with over 21,700 accounts, stood at P 2.1 billion which represents 80% of DBP's portfolio by number and 26% by amount. DBP finances almost all sub-sectors of agriculture including food and commercial crops, grain storage and processing, fisheries, livestock and poultry. In FY77 DBP approved about 2,400 agricultural loans for P 510 mil- lion, a decline of 63% by number and 39% by amount over approvals in FY76 owing to slowing down of DBP's "social loan"/1 programs which were facing mounting arrears. The size of the average agricultural loan has increased and was P 21,000 in FY77. Real Estate and Community Development Lending 4.46 DBP's real estate lending, covering low-cost housing, hotels/ motels, resorts, and private hospitals amounted to P 295 million in FY77, P 448 million in FY76 and P 1,057 million in FY75. The drop in real estate financing occured as a result of a decline in hotel financing which had been undertaken by DBP in FY75 and FY76 at the request of the Government. In FY77, no financing was provided for new hotels in Manila as there is a glut of luxury hotel rooms and most of the new DBP-financed hotels are facing low occupancy rates and are consequently unable to service their debts. DBP is permitting debt restructuring on a case-by-case basis. Under the Agreement for Loan No. 1190-PH the Government undertook to make good these arrears and cover any losses resulting from foreclosure. DBP has financed resorts outside Manila to the extent of P 262 million in FY75 and FY77. 4.47 With the emergence of the SSS, GSIS and NHC to provide finance for residential construction, DBP's exposure in this activity has declined and is now concentrated on the provision of low-cost housing. In FY75-77, DBP made 13,600 loans averaging P 11,000 for cheap housing, and financed a low-cost cooperative housing project of 250 units for P 2.5 million. Private Development Banks Financing Program 4.48 DBP is actively involved in the establishmen,t and promotion of PDBs. These banks, located in the provinces, have been established to provide finance to small scale entrepreneurs and farmers. To date, DBP has assisted in the establishment of 36 PDBs whose total resources at the end of 1976 amounted to P 476 million with loans outstanding of P 361 million. /1 Social loan programs are implemented by DBP at the Government's request. While these programs are deemed to be socially and economically desirable they are invariably not financially viable. As there are few other institutions capable of handling these programs, the Government has been using DBP as a conduit. - 37 - Their portfolio comprised agricultural (46.9%), industrial (35.2%) and miscellaneous (17.9%) loans. DBP's financial involvement in these banks consists of equity investments in preferred shares; rediscounting facilities, and savings and time deposits resulting from the sale of DBP Countryside Bonds. At the end of 1977, DBP's total outstanding financial as.-.stance to the PDBs was P 94.1 million, comprising P 88.3 million in rediscounted loans, P 2.7 million savings and time deposits; and P 3.1 million in equity participa- tion. Owing to its substantial shareholding, DBP is represented on the boards of the PDBs; DBP provides some technical assistance but is not otherwise engaged in their management. 4.49 The major problems faced by PDB are lack of professional management, inadequate appraisal and supervision techniques, poor portfolio performance, and a weak financial position. In addition, DBP's own Department of Develop- ment and Rural Banks (DDRB) dealing with PDBs needs to formulate its strategy vis-a-vis PDBs, increase and upgrade the quality of its staff, and rationalize its procedures. Despite the problems, PDBs could be an effective way of channeling development funds to the rural areas and complementing DBP's own lending to SSEs. Considering this potential and to increase significantly its assistance to SSEs, DBP has contemplated a significant increase in its financial and technical assistance to PDB in the next 2-3 years. An important component of DBP's technical assistance would be the setting up in DBP of a Development Banking Institute (DBI) (para. 5.04) to upgrade the expertise of PDB management and staff. Morever, DBP is also currently reviewing the present organization structure, policies and procedures pertaining to its PDB operations handled by DDRB. Equity and Securities Investments 4.50 DBP's equity investments comprise holdings acquired through exercise of conversion options; investments in public enterprises under the Government's equity financing programs; and equity investments in PDBs. During FY77, DBP approved six equity investments totaling P 75.4 million. As of June 30, 1977, its equity investment portfolio stood at p 798.2 million of which 56% was in 8 Government-controlled companies and 44% in privately owned companies. DBP and the Goverment are currently considering the possibi- lity of DBP's divesting itself of three of these investments, totaling P 397.6 million./l DBP has also an active securities portfolio which stood at P 1,614 million as of June 30, 1977; most of the investments are in Government-owned institutions. /1 The three investments are Food Terminal Inc., National Steel Corporation (NSC) and National Housing Corporation. DBP has provided 100% of the paid in capital for the first two institutions and 25% for the third. In March 1978 DBP entered into a lease/sale agreement with Philippine Export and Foreign Loan Guarantee Corporation for sale of its total equity investments (P 183 million) in NSC for P 222 million. - 38 - Guarantee Operations 4.51 DBP provides guarantees to cover: (a) foreign suppliers' credits for the import of capital goods; (b) commodity credit financing;/l and (c) peso credits extended by local commercial banks to DBP clients, especially for short-term working capital. While guarantees still account for the largest share of DBP's cumulative financing operations, guarantee approvals have declined since 1974. A significant proportion of the value of the foreign currency guarantees is concentrated in a few large accounts: in FY76, 5 accounts were responsible for 80% of guarantees; in FY77, 4 accounts accounted for 70%. If the large guarantees are excluded, the average guarantee size for FY76 and FY77 would be $1.6 million. As of June 30, 1977 DBP's outstanding contingent liabilities for guarantees amounted to the equivalent of P 4.4 billion. Previously DBP provided guarantees for projects even if they could borrow directly from DBP on the grounds that supplier credit terms were more favorable than those offered by DBP. In addition, the size of the suppliers' credit was often larger than DBP could have offered. DBP's management has recently decided to offer a loan/guarantee package rather than guarantees only. Other Operations 4.52 To provide capital assistance for the establishment and development of rural banks, the Central Bank established a trust fund administered by DBP. Capital assistance is extended to rural banks in the form of subscrip- tions to their preferred shares. For FY77, DBP invested a total of P 6.5 mil- lion in 38 rural banks. As of June 30, 1977, total equity investments of DBP in rural banks amounted to P 45.2 million. DBP loans to local governments increased from P 57.9 million in FY76 to P 73.1 million in FY77. D. Financial Condition, Financial Performance and Quality of Portfolio Financial Condition 4.53 DBP's balance sheets are summarized in Annex 4, T-15. During the past two years (FY76 and 77), DBP's total assets grew at an average rate of 35% and reached P 14.3 billion as of June 30, 1977. During the same period DBP's long term portfolio grew at the faster rate of 46%. The structure of assets and liabilities has remained stable over the past two years. Long-term portfolo accounted for the largest share (63%) of total assets as of June 30, 1977, followed by current assets (21%) and other assets, (16%). As of the same date about 62% of total assets were financed through long term debts, 20% through equity funds, and 18% through current and other liabilities. /1 From the US Commodity Credit Corporation (CCC) and the Canadian Wheat Board (CWB) for the import of new cotton, tobacco, and flour. - 39 - 4.54 In the past two years (FY76-77) a number of measures were taken to bolster DBP's long term resource position. As agreed under conditions for Loan No. 1190-PH the Government: (a) made an additional contribution of P 883 million /1 to DBP's share capital;(b) converted P 940 million /2 of its deposits from -hort-term into medium- and long-term. DBP, on its own, raised additional long-term resources of P 1,916 million by issuing its Countryside Bills amounting to P 728 million and raising P 1,188 million in foreign exchange from international commercial sources. The net impact of these measures was that DBP's total debt (including guarantees) to equity ratio which had been showing a rising trend up to FY76 actually declined, albeit marginally, to 5.5:1,/3 while current ratio, a measure of liquidity, after deteriorating in FY76 to 1:1 improved marginally to 1.2:1. Despite these favorable developments DBP's liquidity is still dependent on the roll-over of short-term Government deposits, a consequence of the persistent imbalance between maturity structure of DBP's assets and liabilities. This makes DBP's liquidity position vulnerable to any heavy withdrawals by the Government of its deposits, even though such withdrawals are highly unlikely. 4.55 DBP's management recognizes this problem and is committed to bolstering DBP's cash position through: (a) seeking a further increase in its share capital by P 1.5 billion to P 4.0 billion by 1981; (b) selling DBP's investments amounting to P 693.4 million /4 in its two subsidiaries and one affiliate company; (c) improving loan collections; (d) obtaining compensation from the Government for arrears on "social loans" made at the Government'a behest; (e) accelerated sale of acquired assets; and (f) raising additional long-term resources from the domestic as well as international markets. These plans were discussed during negotiations when the Government agreed in respect of (a) and (d) above, and also assured the Bank that with any with- drawal of its deposits maintained with DBP, due consideration would be given to DBP's liquidity position vis-a-vis its resource requirement and that the Government would continue to assist DBP in arranging adequate long-term resources. 4.56 Based on its present reasonably sound capital structure, its plans for raising additional long-term resources, and its projected financial position, DBP does not need any relaxation in its present debt to equity ratio limitation of 10:1. /1 This includes P 200 million contributed in September 1977 and P 28 million capitalized profits. /2 This compares with P 400 million which the Government had agreed to convert No. 1190-PH. /3 This is well within the limit of 10:1 specified in the Loan Agreement No. 1190-PH. /4 This consists of equity investment, P 397.6 million, and advances against guarantees, P 295.8 million. - 40 - 4.57 Foreign Exchange Risk. During negotiations for Loan No. 1190-PH, the Government and DBP undertook to reduce DBP's foreign excchange risk exposure on its commercial borrowings. Consequently, DBP set up for the first time in FY76 a "Reserve for Foreign Exchange Risk" and passed on foreign exchange risk to all borrowers under its new foreign exchange borrowings. However, contrary to expectations, the level of DBP's foreiLgn exchange risk exposure rose from US$107 million in 1975 to US$267 million as of December 31, 1977, principally because of the use of the proceeds of its commercial foreign exchange borrowings for repayments of maturing other obligations. This was inevitable due to DBP's liquidity problems particularly in 1976. DBP's management is endeavoring to reduce DBP's foreign exchange risk exposure. Negotiations are under way with the CB to obtain year-to-year cover against DBP's debt repayments. Currently DBP is in the process of identifying borro- wers, particularly Government projects, that had in earlier years received foreign exchange funds from DBP, with a view to persuading them to assume the exchange risk on these funds. Moreover, DBP has decided to use its foreign exchange borrowings in future only for lending in foreign exchange and for meeting foreign exchange debt maturities. The progress made on these matters were reviewed at negotiations when it was ascertained that the measures currently being taken by DBP would not only arrest any further increase in DBP's exposure in foreign exchange risk, but would also considerably reduce it in the near future./l Financial Performance 4.58 DBP's summarized income statements are shown in Annex 4, T-16. DBP's net income rose from P 71.4 million in FY75 to P 84.7 million (3.9% return on equity) in FY76, but declined to P 82.3 million (3.2% return on equity) in FY77. DBP's profitability remains low, mainly because of its low lending rates in the past and its inadequate collection performance. Measures for enhancing DBP's income earning capability, discussed and agreed at negotiations for Loan No. 1190-PH, are now being implemented with varying degrees of effect on its financial performance. First the upward revision of interest rates, which became effective in January 1976 resulted in the increase of DBP's interest spread (on accrual basis) from 2.5% in FY75 to 3.3% in FY76 and 3.7% in FY77. The interest spread on an accrual basis will further increase as high interest yielding loans assume a larger share of DBP's portfolio. Second, along with changes in interest rates, DBP revised upward its penalty charges. Third, since September 1976, DBP has begun charging an annual service fee of 2% on new loan approvals exceeding P 150,000. However, these measures have not yet been reflected in the financial statements, since DBP reports income on a cash basis and financial expenses on an accrual basis. 4.59 Being a Government-owned development oriented institution, the character of which is manifested in a number of low income yielding social lending programs undertaken at the behest of the Government, DBP's financial performance should not be compared with the private, profit-oriented development banks. Nontheless, DBP's management recognizes that its low profitability increases its dependence on Government funds which are becoming increasingly /1 DBP estimates foreign exchange exposure to reduce- to $124 million before the end of 1978. - 41 - difficult to obtain due to budgetary constraints. Massive efforts are therefore being undertaken to increase DBP's profitability by improving DBP's collection performance (para. 4.65). Profitability targets on a departmental basis have been set up and are being vigorously pursued. The proposed liqui- dation of DBP's low income yielding investments (para. 4.55) and acceleration of efforts to dispose of acquired assets would also improve DBP's return on total investment. In addition, DBP's profitability needs to be insulated against any losses it may suffer on the social lending programs. This can be achieved if DBP has the freedom to finance only those programs which it finds, based on its evaluation, financially viable; if on social considerations the Government requires DBP to undertake programs not financially viable, DBP should undertake them on an agency basis against back-to-back Government funding. During negotiations, the Government agreed to this arrangement. Audit 4.60 DBP's accounts are audited by the Commission on Audit (COA), a Government body. The progress made by COA auditors since 1975, has been mixed. COA auditors have prepared long form reports on FY75 and FY76 in line with the Bank's "Illustrative Form of Audit for DFCs". These reports for the first time contained some analysis of DBP's portfolio. Satisfactory progress has been made in expanding the coverage of audit reports and streamlining the audit procedures. However, there are still some shortcomings in reporting standards and auditing procedures especially in the portfolio analysis. Following its further discussions with the Bank, COA established in November 1976 a " Special Audit Study Team for DBP". In order to implement the recommendations of this Team, DBP's COA auditors have formulated a "Program of Action" and reached an agreement with DBP's management on the "Scope of 1977 Audit." These plans are somewhat ambitious but represent a genuine comprehensive effort aimed at upgrading COA's audit coverage and practices. During negotiations progress in implementing the "Program of Action" and "Scope of 1977 Audit" was reviewed was found generally satisfactory. An understanding was also reached with DBP and the Government with regard to the submission of audit reports within the time limit of four months after the close of the accounting year. Reserves Policy and Position 4.61 As agreed during negotiations for Loan No. 1190-PH, DBP adopted a Statement of Reserves Policy on January 21, 1976 and started making provisions for doubtful accounts which as of December 31, 1976 stood at P 66.1 million. These provisions were made on the basis of only a partial review of DBP's portfolio and therefore are not adequate. The agreed "Scope of 1977 Audit" (para. 4.60), calls for a comprehensive review of DBP's port- folio. Progress on the proposed portfolio review and the provisions for doubtful accounts will be discussed at negotiations. In accordance with - 42 - DBP's reserves policy, /1 20% of the profits for FY76 and July-December 1976 were appropriated to a foreign exchange risk reserve amounting to P 29.2 mil- lion (about 2% of actual foreign exchange risk exposure) as of December 31, 1976 as of the same date the accumulated appropriations for contingencies stood at P 129.8 million. Portfolio Quality 4.62 Loan Portfolio. Arrearages on DBP's loan portfolio, while having been reduced over the past four years, continue to remain unsatisfactorily high and constitute one major cause of DBP's tight liquidity situation. An analysis of DBP's loan portfolio is given in Annex 4, T-17, while the follow- ing summary shows the trend of arrears over the past three years: DBP: ARREARAGES ON TOTAL LOAN PORTFOLIO (As Percent of Total Outstanding) No. of Accounts Principal (As % of Total) Actual Arrears Affected June 30, 1974 56.6% 23.5% 58.7% (of which industrial loans) (82.2%) (21.6%) (59.9%) June 30, 1975 60.0% 15.5% 46.8% (of which industrial loans) (72.5%) (12.7%) (44.1%) June 30, 1976 71.6% 10.2% 40.7% (of which industrial loans) (71.1%) (7.5%) (41.4%) June 30, 1977 77.7% 10. 5% 44.3% (of which industrial loans) (77.3%) (6.5%) (34.9%) 4.63 The improvement (in relative terms) in the overall arrears position reflects the immediate impact of a major rescheduling effort coupled with a rapid increase in the outstanding portfolio base. However, in the past two /1 DBP's Reserves Policy requires it to appropriate its annual net income after provisions for doubtful accounts as under: (a) 20% to a reserve for foreign exchange risk up to a minimum of at least 15% of DBP foreign exchange liabilities on which it carries foreign exchange risk; (b) 20% to share capital; and (c) the remaining balance to a reserve for contingencies until such time as this reserve is built up to at least 15% of DBP's outstanding contingent liabilities. - 43 - years the number of accounts (especially small loans) in arrears has actually been rising, shifting the structure of DBP's arrearages. Formerly, a large share of arrearages was accounted for by a small number of very large accounts. Now, an increasing share of arrearages is attributable to a very large number of small accounts mostly relating to small industry, agriculture and "social"' loans. To some extent the arrears position is exaggerated by inclusion of "technical" arrears arising from remittance delays and delayed commencement of initial repayments due to either project completion delays or insufficient grace period allowed./l On a sectoral basis, agricultural loans continue to experience the highest default rate with arrears amounting to 1 527 million or 24.8% of total agricultural loan portfolio. Industrial loan portfolio has the lowest arrears ratio of 6.5% having declined from 12.7% in the past two years. The delinquency rate on cottage industry and SMI loans is much higher than on the large industry loans. Arrears on large industry portfolio carried by IPD I amounted to only 4% with only 29.4% of this portfolio "infected" by defaults. SMI loan arrearages declined from 27.2% in FY75 to 24.0% in FY77, but the ratio of portfolio in default slightly increased (Annex 4, T-18)./2 4.64 Various diverse factors are responsible for the continued high delinquency rate on DBP's loan portfolio. Because DBP is the most important source of term credit for almost all sectors, its portfolio is naturally susceptible to any adverse downturn in business and economic conditions. DBP's portfolio was severely hit first by the massive devaluation of 1972 and then by slack business conditions in recent years. Agricultural loans were additionally hit in some areas, by natural calamities, floods, earth- quakes and drought. In fact, in the past couple of years most of the financial institutions in the Philippines, particularly those Government- owned, experienced a deterioration of their loan portfolios (para. 3.25). DBP's weak appraisals in the past and inadequate supervision efforts coupled with DBP's stringent loan conditions especially for small loans /3 have also contributed towards low loan recoveries. 4.65 DBP's management is committed to improving DBP's arrears situation. As agreed during negotiations for Loan No. 1190-PH, DBP radically raised its penalty charges and the reporting of arrears and billing of accounts were greatly improved. Stringent conditions for small loans were relaxed (para. 4.13) and some major steps are being taken to upgrade standards of appraisal and to set up an effective supervision system. Furthermore, in mid-1977 DBP launched a massive and generally well organized collection drive. Although it is too early to expect the recent collection drive effort to radically transform /1 About 12% of arrears (47% of delinquent portfolio) were overdue for 6 months as of June 30, 1977. /2 During negotiations for the first SMI loan to the Philippines (Loan No. 1120-PH) DBP had committed to reduce its ratio fo SMI arrears to 25% of outstanding SMI portfolio by August 31, 1979. Thus, DBP achieved this target two years in advance. /3 Such as high loan collateral and debt equity ratio requirement, shorter loan maturities, too short grace periods and limited working capital financing. - 44 - the arrears picture, the collection data for the July-December 1977 period indicated that the collection performance at least for industrial loans is improving. DBP's collection drive is concentrated on loan collecting on an individual account basis. Whereas this may be an effective approach for large accounts, for small accounts, which account for 98% by number of accounts in arrears and over 44% of actual total arrears, a sub-sector approach would be more appropriate and manageable. DBP has, agreed to adopt this approach. DBP's management has also agreed to make its collection drive a permanent feature so as to achieve the following targets of reductions in arrears: June 30, 1979 SMI Portfolio Total Portfolio Arrears Ratio 16% 7.5% Rate of Portfolio Affected 40% 35% 4.66 Given the magnitude of the arrears involved and ithe diversity of problems of the various sectors and subsectors served by DBP, an overnight change in its arrears situation cannot be expected. The above targets are therefore, considered realistic. During negotiations, the Government agreed to reimburse to DBP the amount of the arrears on loans made at its behest. 4.67 Other Portfolio. Arrears relating to DBP's guarantees have declined quite substantially in the past two years; advances on guarantees as a percentage of total outstanding guarantees declined from 13.5% in FY75 to 8% in FY77. This reduction was mainly achieved through conversion of advances into loans or equity investments. DBP is upgrading the standard of its appraisal of guarantee requests so as to ensure that only viable projects are entertained. About 56% of DBP's total equity investment as of June 30, 1977 was in companies which were either operating at a profit or were still in the construction stage. Twelve companies in which DBP held investments of P 345.4 million (43% of total) were operating at a loss, but DBP does not consider its investments in jeopardy. Investments in companies in liquidation amounted to P 3.0 million, fully covered by provisions for possible losses. DBP's acquired assets portfolio has remained almost stagnant since June 30, 1976. Two largest accounts (Iligan Steel and Bay View Hotel) account for 90% of the book value of total acquired assets. The appraisal value of acquired assets as of June 30, 1977 exceeded their book value. - 45 - E. Prospects Business Prospects and Projected Operations 4.68 The uncertain business climate generated by the worldwide recession of 1974-76 has resulted in a much lower volume of DBP's financing for new capacity creation in the industrial sector. However, over the next year, the indications are that investment will pick up gradually. These expectations are reflected in DBP's business forecasts which show that its overall level of new loan approvals, after declining in aggregate terms in CY78, would maintain a steady trend during CY79-82 /1 as detailed in Annex 4, T-19 and summarized below: DBP - PROJECTED NEW LOAN APPROVALS (P millions) 1977 1978 1979 1980 1981 1982 Industrial loans /a 1,670.3 1,402.4 1,488.6 1,611.2 1,785.0 1,980.7 Foreign exchange loans (947.5) (706.9) (795.5) (849.6) (934.5) (1,028.0) Agricultural loans 608.6 711.3 752.1 885.8 1,043.0 1,230.2 Real estate and Government loans 457.3 257.2 254.0 255.1 274.3 298.0 Private development banks 44.6 65.6 105.0 167.9 170.0 170.0 Total approvals 2,780.8 2,436.5 2,599.7 2,920.0 3,272.3 3,678.9 /a Inclusive of loans for transportation and public utilities. 4.69 Projections of approvals for CY77 are based on actual approvals in the first half of the year and projects in the pipeline which are expected to materialize. Approvals for CY78-82 are based on the anticipated investment climate for each sector. Projected loan approvals assume that exceptionally large industrial loans which characterized DBP's 1977 approvals would not be repeated in future. This explains the 18% fall expected in approvals in CY78. A lower volume of approvals for transportation and public utilities projects have also contributed to this reduction. 4.70 DBP's projected SMI loan approvals are shown in Annex 4, T-20. DBP expects its SMI loan approvals to grow at 10% per annum except in CY79 when, due to backlog demand, a 15% growth is expected. DBP's branches will be playing a greater role in the future than in the past in financing new /1 Effective January 1, 1977, DBP shifted from fiscal year to calendar year. - 46 - SMI loans; their share in new approvals is expected to be around 60% by number of approvals (vs. 50% in FY76/77) and 38% by amount. (vs. 30% in FY76/77). The bulk (86%) of the loans would be in the size range of P 50,000-800,000 absorbing about 46% of the total amount of approvals, an increase from 41% in FY77, with a corresponding fall in the share of medium industry loans. Resource Requirements 4.71 As of June 30, 1977, DBP's net long-term resources stood at P 547.5 million as detailed in Annex 4, T-21. Between July 1977 and June 30, 1980, a three-year period, DBP's total commitments for loans and investments are estimated at P 7,808 million, the financing of which is projected as follows: P million Net resources as of June 30, 1977 547 Additional capital subscriptions 1,055 Countryside Bills - (net of redemptions) 1,882 Net recoveries and cash generations 569 Divestment of investments in subsidiaries 693 Borrowings from CB /a 407 Borrowings from foreign commercial sources 1,650 New borrowings from international institutions (IBRD and ADB) 1,005 Total 7,808 /a Drawdown on funds for specific types of projects (hotels, gold mining projects, high priority agriculture projects, and banks' capitalization.) 4.72 During negotiations, DBP's plans for raising the requisite currency resources were reviewed while the Government's agreement was obtained in respect of (a) proposed additional contribution to DBP's share capital; and (b) help to DBP in raising the requisite resources. 4.73 The new borrowings from IBRD and ADB shown in the above table, inter alia, include the proposed Bank loan of $80 million (P 592 million). This loan will have the following three components: - 47 - US$ million (a) for large industrial projects - 50.0 (b) for SMI projects - 29.7 (c) for technical assistance to PDBs - 0.3 Total 80.0 4.74 The large industry loan component ($50 million) would finance about 41% of total new foreign currency commitments of IPD I in the two-year period after June 30, 1978; DBP's existing foreign exchange lines of credit for industrial loans are estimated to be fully exhausted in the third quarter of 1978. Loans from ADB and foreign commercial sources would meet the remaining 59% of the commitments. The SMI loan component ($29.7 million) would finance 75% of DBP's SMI loans to be approved from May 1978 to June 1980./I DBP would finance the remaining 25% of SMI loans from its own funds. Financial Projections 4.75 Projected Financial Performance. Based on its business forecast (para. 4.68) and the assumed availability of resources, DBP's net income is projected to rise rapidly from P 118 million in CY77 to P 336 million in CY78, P 515 million in CY80, and P 979 million in CY82. This rather excep- tionally high growth is due to: (a) rising weighted lending rate of DBP as share of high interest yielding loans in total portfolio would increase; (b) assumption of constantly improving collection performance of DBP /2; (c) rapidly rising portfolio; and (d) conversion of accumulated interest on hotel loans /3 into preference shares shown as income in CY78-82. If the non-cash income from the hotels is ignored, the net income projected for CY78-82 would decline by 35%. The projected level of net income would result in increasing the gross return on average assets from 8.2% in CY76 to 9.7% in CY78, 10.1% in CY80 and 11.6% in CY82. Over the same period the ratio of administrative expenses to average assets is estimated to decline from 1.4% in CY76 to 1.0% in CY82. DBP's projected income statements are given in Annex 4, T-22. 4.76 Projected Financial Position. DBP's projected balance sheets are given in Annex 4, T-23 Total assets which stood at P 14.3 billion as of June 30, 1977 are estimated to increase to P 18.6 billion in CY78, P 23.6 billion in CY80 and P 29.2 billion in CY82 showing an average annual growth rate of 15%. This growth rate is slower than the 35% growth achieved in FY77 and the 22% /1 The SMI component of the proposed loan is expected to finance about 855 projects generating a total investment of P 405 million and about 13,700 jobs at an average investment cost ot $4,000 per job. /2 On an average a collection ratio of 60% is assumed. The actual collection ratio in CY77 was 57%. /3 It is a part of DBP's rescheduling package for new hotels in Manila facing low occupancy rates. - 48 - growth projected for DBP in the five year plan. The largest growth is shown in the loan portfolio which over the same period shows a more than two-fold increase. A large proportion of the additional investment is proposed to be financed through borrowings, but the planned increase in paid-in capital, coupled with a rapid increase in retained earnings, would enable DBP to maintain a satisfactory long-term financial position; the ratio of total debts (including guarantees) to equity is estimated to decline from 5.5:1 in FY77 to 4.9:1 in CY78, 4.1:1 in CY80 and 3.3:1 in CY82. Similarly the short-term financial position is strong with a constantly improving current ratio of 1.2:1 in FY77, 2.1:1 in CY78, and 2.4:1 in CY80 and CY82. The estimated debt service cover is less than unity in the second half of 1977 but improves gradually thereafter to a satisfactory level (Annex 4, T-24). 5. CONCLUSIONS AND RECOMMENDATIONS Objectives of the Proposed Loan 5.01 The objectives of the proposed loan are: (a) resource transfer; (b) a further contribution towards achievement of the Philippine Government's objectives in SMI development; and (c) continuation of the Bank's institution building effort with DBP. The proposed loan would continue the Bank's efforts to effect resource transfers for Philippine industrialization. Funds under the proposed loan would be used both for large-scale industries and for modern SMI. Investment in the large industry projects would aim at further diversification of the country's industrial base by promoting investments in nontraditional export industries, downstream domestic proces- sing of traditional exports and creation of basic capital goods industries. A wider geographical spread of new industrial investment than has been usual in the past is also expected, thus contributing to the Government's efforts to alleviate income disparities in the country. The SMI loan component would promote additional investment in this sector, help maintain the flow of institutional credit availability to SMI, achieve further regional dispersal of SMI investment, contribute to optimum utilization of existing SMI capacity by increasing availability of funds for working capital finan- cing and create additional job opportunities at a low cost. Through these means, the SMI project will contribute towards easing the urban poverty problem in the Philippines. 5.02 Since the Bank made its first DFC-type loan in 1974, DBP has made satisfactory progress in strengthening its institutional set-up, capability, and performance, especially in respect of organizational structure, manage- ment, quality of staff, procedures, operational policies, quality of apprai- sals, and capital structure. DBP's multi-sectoral involvement and the magnitude of its operations, make its institution-building task long and arduous. Against this background the progress DBP has made in the past three years is commendable. The proposed loan would afford the Bank an opportunity to continue its association with the institution building process. The specific areas where further improvements are expected are: - 49 - (a) quality of industrial and SMI appraisals and supervision; (b) a reduction in loan arrears and improvement in loan portfolio; (c) strengthen- ing of DBP's long-term resource position; (d) upgrading the quality of audit; (e) more efficient resource allocation by setting investment priori- ties; and (f) significantly enhanced impact of DBP's developmental role by adopting a clearly defined development strategy. DBP's management is fully cognizant of the need and importance of introducing further institutional improvements and is making constant efforts to achieve them in close coopera- tion and consultation with the Bank. Justification of the Loan 5.03 For implementation of its development program for the next five years, the Philippines would depend on a large net inflow of resources /1. The proposed loan would result in a net resource transfer of $80 million, not counting the net beneficial impact that the subprojects financed under the loan would have on the country's balance of payment position. The loan would be used for economically viable and sound large industry and SMI projects thereby contributing to a balanced growth of the industrial sector. Since the individual projects to be financed under the proposed loan cannot be identified, at this stage, an ex-ante analysis of the economic impact is not possible. However, it is expected that the sub- projects financed will yield about the same level of economic and finan- cial returns as projects financed under the previous three loans. Features of the Loan 5.04 Purpose. The large industry component of the loan would be used to finance direct capital goods import requirement of eligible industrial enterprises and the direct and indirect foreign exchange component of domes- tically manufactured capital goods estimated at 50% and that of civil works estimated at 45%. The SMI loan component would be used to finance fixed assets and permanent working capital requirements of SMI subprojects. The proceeds of the proposed loan would finance 75% of each SMI loan represen- ting the direct and indirect foreign exchange component of these projects /2. As in the previous industrial loan, the proposed loan would not be used for financing of subsectors already covered by other IBRD loans through DBP and the rural credit loans through CB. In order to ensure an even geographical dispersion of SMI subprojects and financing of a larger number of small industry subprojects a limit of 10% of the SMI comDonent of the loan is proposed for /1 According to the Five-Year Philippine Development Plan the total foreign exchange requirement in 1978-82 period would be $43.4 billion. /2 Based on a study of a sample of SMI projects, DBP has estimated that on an average the direct and indirect foreign exchange component of SMI projects, financed under Loan No. 1120-PH, was 58% and that DBP financed 75% of the project cost. Thus, about 75% of DBP's financing represented foreign exchange component, the same as was estimated for SMI projects at appraisal. - 50 - loans over P 1.5 million in Metro-Manila area. The PDB conmponent of the loan ($300,000) would help finance the establishing of the proposed Development Banking Institute (DBI). To assist PDBs in overcoming their structural weak- nesses and achieve their potential as retail development institutions, DBP has proposed to establish DBI to be the focus of training programs to motivate, transform, and develop PDB management as well as to upgrade staff capabilities in project appraisal and supervision and in bank management: and systems. The proposed establishment of DBI coupled with the anticipated improvements in DDRB (para. 4.49) would hopefully justify in the future the Bank's participa- tion in PDB financing, at least on a selective basis. 5.05 In the long run, the proposed DBI would also be able to offer its training assistance to other smaller institutions such as rural banks. The administration of DBI will be the responsibility of DBP's ]DDRB. DBI will eventually be provided with complete facilities, vehicles, equipment, and supplies to facilitate the discharge of its training functions. DBP, in addition to a core group of 12 DDRB staff assigned to DBI, plans to engage an experienced consultant to help it plan and implement DBI. The proposed Bank loan component would finance 100% of the consultant's cost and direct and indirect foreign exchange component in capital costs and operating costs of DBI in its initial two years of operation. 5.06 Component for Financing Projects Conforming with the Bank's Urban Poverty Program. As noted in para. 4.30, DBP has achieved satisfactory results in terms of allocating the proceeds of the two SMI Bank loans to small entrepreneurs and labor-intensive projects. It is important under the proposed loan that DBP should continue to endeavor to reach smaller enterprises and finance labor-intensive projects. Toward this objective, it is expected that about 90% of the SMI loan component would be used for financing: (a) projects which create employment at a gross capital cost per job of not higher than $3,600 /1 the threshold figure for the Philippines as determined by the Bank; or (b) enterprises with fixed assets not exceeding $250,000. 5.07 Form of Lending. As for all earlier Bank loans to DBP and in accordance with the Philippine Government's wishes the prcoposed loan would be made to the Government and re-lent to DBP. 5.08 Currencies and Foreign Exchange Risk. The Government would bear the entire exchange risk on the loan component utilized for SMI financing and the proposed DBI. The exchange risk on the loan component used for large industry would be borne by the subborrowers. 5.09 Amortization Schedule. As is normal for the Bank's DFC projects the large industry component of the proposed loan would have a flexible /1 This refers to 1977 prices. An allowance for inflatiLon factor would be made while reviewing the actual performance under the loan. - 51 - amortization schedule which would correspond roughly with the expected aggre- gate amortization schedules of subloans financed. The maximum terms of such subloans would be 15 years including a grace period. Since the number of subloans under the SMI loan component would be much larger (over 850), for the sake of administrative convenience a fixed amortization schedule stretching over 20 years including a 5-year period of grace is recommended for the SMI loan component as also for the PDB component. The maximum maturity of SMI loans would be 12 years including the grace period. It is expected that the proceeds of the entire proposed loan would be committed in two years and disbursed within four years of the signing of the loan (Annex 4, T-25). 5.10 Free Limits. For large industry subloans, a free limit of $1.5 mil- lion is recommended; no aggregate free limit is proposed as free limit projects accounted for less than 10% of commitments so far under Loan Nos. 998-PH and 1190-PH. It is expected that under the proposed free limit the Bank would get an opportunity to review about 40% of subloans representing about 75% of the loan component. For the two SMI loans made by the Bank to DBP no free limit mechanism was used as this was considered an inappropriate mechanism for influencing the quality of appraisals. Instead DBP was required to submit to the Bank monthly summary statements of SMI loans approved, together with appraisal reports on all loans above P 500,000. Reviews of these reports and regular supervision missions were considered sufficient to ensure adequate supervision of the quality of appraisals. The experience over the last three years has proved that the approach taken was a sound one. The improvements made by DBP in its SMI loan appraisals could not have been better or faster if subprojects had been subject to a prior review by the Bank. No change in this approach is recommended for the SMI component of the proposed loan. 5.11 Subloan Sizes. DBP has assured the Bank that it would finance a reasonably large number of projects under the proposed loan. It is recommended, therefore, that the maximum size of the large industrial subloan be fixed at $6.0 million. The average size of subloans under this component is, however, expected to be about $1.8 million. The maximum size of SMI loans would be P 2.5 million and minimum size P 50,000, which size range falls within the definition of SMI. 5.12 Debt/Equity. As noted in para. 4.56, DBP is not expected to need, in the near future, any increase in its present borrowing capability which is ten times its equity. 5.13 Relending and On-Lending Rates. As for all previous Bank loans to DBP, the Government would re-lend the loan to DBP at the prevailing Bank rate, currently 7.5%. DBP would on-lend the loan at 12% p.a. to subloans secured by land mortgage and at 14% p.a. secured otherwise. In addition, a service fee of 2% would be charged on subloans over P 150,000 ($20,300). However, considering the foreign exchange risk, the effective interest rate on the foreign currency subloans, as past experience shows, would be in the range of 20-22% which would mean a real interest rate of 12-14%; the effective interest rate on SMI loans would, however, be in the range of 4-8%. In the event that DBP decides to modify its relending rates, the Bank would be consulted on the rates to be charged to subborrowers. - 52 - Agreement and Understandings Reached at Negotiations 5.14 During negotiations the Bank reached agreement: (a) with the Government (recorded in the Loan Agreement) on: (i) raising of DBP's paid-in capital to P 4.0 billion by 1981 (paras. 4.55 and 4.72); (ii) liquidation of DBP's investments in FTI, NS'C and NHC (paras. 4.55, 4.59 and 4.71); (iii) arrangements for DBP's handling of Government behest projects (para. 4.59); (iv) compensation to DBP for liquidity loss caused by defaults on loans made at the Government's behest (para. 4.66); (v) help to DBP in raising additional long-term resources (para. 4.72); and (b) with DBP (recorded in the Project Agreement) on: (i) maintenance of the present debt (including guarantees) to equity ratio limit of 10:1 (paras. 4.56 and 5.12); (ii) measures to avoid foreign exchange risk exposure (para. 4.57); (iii) submission of audit reports on its accounts within four months of the close of its accounting year (para. 4.60). (iv) efforts to be exerted to reduce arrears on its portfolio (para. 4.65); (v) limitation on the use of not more than 10% of the SMI loan component for subloans exceeding P 1.5 milLion in Metro-Manila (para. 5.04); (vi) the free limit for larger industry subprojects at $1.5 million (Dara. 5.10); (vii) submission to the Bank of monthly reports on SMI loan approvals, with appraisal reports on all SMI loans over P 500,000 (para. 5.10); and (viii) size of SMI loans in the range of P 50,000-2.5 mil- lion (para. 5.11); (ix) maximum individual subloans size limit of $6.0 million for large industry subloans (para. 5.11); - 53 - 5.15 In addition, during negotiations the Bank reached understanding: (a) with the Government on the conduct of its deposits with DBP in a manner that would not jeopardize DBP's liquidity; (b) with DBP on: (i) DBP's working capital financing policy for SMI and efforts to ensure that relevant SMI loan conditions are translated into action (para. 4.13). (ii) its development strategy (para. 4.14); (iii) measures to improve the quality of DBP's appraisals including calculation of ERR for all industrial loans over $ 500,000 and all SMI loans exceeding P 1.5 million and greater in-depth analysis of the employment impact in its industrial loan appraisals (paras. 4.15 and 4.16); (iv) reduction in processing time of SMI loan application in DBP's Head Office and Branches (para. 4.17); (v) adoption of a program for improving supervision of industrial and SMI loans (paras. 4.19 and 4.20); (vi) use of at least 90% of the SMI loan component for financing small, labor-intensive enterprises which create employment at a cost per job lower than the Bank's urban poverty guidelines ($3600/job); or have fixed assets not exceeding $250,000 at the time of application, the ceiling suggested in the recent Bank report "Employment Creation and Small Scale Enterprise Development" (para. 5.06); and Recommendation 5.16 A loan of $80 million is recommended for use by DBP in financing small, medium and large productive industrial enterprises in the Philippines. ANNEX 1 Page 1 PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Board of Governors as of September 30, 1977 Name Position and Background Dr. Placido L. Mapa, Jr. Chairman of the Board and Chief Executive Officer (CEO). Appointed in October 1976. Former Vice-Chairman and CEO of the Philippine Commercial and Industrial Bank, 1974-76; Alternate Executive Director, IBRD, 1970-74; Executive Director, IMF, 1972; Director-General of the Presidential Economic Staff, 1966-70; Undersecre- tary, Department of Finance, 1965/66. Dr. Mapa is also currently Alternate Governor, Philippines, of the IBRD. Jose V. de Ocampo Vice-Chairman and full-time Governor in charge of supervising the Industrial Projects Department I and III and Controller's Office. With DPB since 1959, as Special Assistant to the Chairman, Manager of Investment Banking and Economic Research Department, and Treasurer prior to being appointed Governor; Legal Assistant, Evaluation Officer and Chief of Special Studies, Central Bank, 1955-59. Jose R. Tengco, Jr. Full-time Governor, supervising the Agricultural Projects II, Agricultural Plans and Programs, Public Affairs, Information and Special Services, and Branches and Agencies Departments. Former Assistant Vice-President of the Philippine Bank of Commerce. Recio M. Garcia Full-time Governor, supervising the Acquired Assets Management and Community Development Projects Departments. Former Chairman and President, Quezon City Development Bank. Rafael A. Sison Full-time Governor, supervising Industrial Projects II, Agricultural Projects I and Development and Rural Banks Departments. Regular staff member of the World Bank presently on leave of absence. Alejandro Melchor Part-time Governor. Executive Director, Asian Development Bank. ANNEX 1 Page 2 Vicente T. Paterno Part-time Governor. Secretary of Industry; Chairman of the Board of Investments; Chairman, National Development Corporation. Leon 0. Ty Part-time Governor. Member of the Philippine Bar. Ruben B. Ancheta Part-time Governor. Presidential Assistant for Economic Affairs. AEP Projects Department February 2, 1978 ANNEX 2 Page 1 PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Statement of Operating Policies and Procedures for Medium- and Large-Scale Industrial Financing /1 1. The policies, criteria and procedures set forth below will guide DBP's medium- and large-scale industrial operations - particularly those undertaken by Industrial Projects Department I and irrespective of the sources of funds for financing these operations. 2. Objectives of Industrial Financing. To assist the development of the country by providing financial and technical assistance for the estab- lishment of new industries as well as for the balancing, modernization and expansion of existing industries. 3. Basis for Investment Decisions. DBP will make investment decisions on the basis of sound investment criteria and standards, and after careful project evaluation. Financial assistance will be provided to those projects which are financially and economically viable and technically feasible, and for the implementation of which saitsfactory organizational and managerial arrangements have been made. 4. Method of Financing. DBP will provide finance according to the requirements of each project, in one or several of the following forms: (a) direct loans in local currency, for financing local expenditures on fixed assets and where appropriate for working capital; (b) direct loans in foreign currencies, for financing imports of equipment and/or new materials; (c) guarantees of domestic currency and/or foreign currency credits made on suitable terms; (d) loans fully or partly convertible into stock; (e) in exceptional and highly meritorious cases, direct equity invest- ments and underwriting of share issues. 5. General Investment Policies (a) Financing will be provided to projects which are in line with the investment priorities of the Government; preference being given to projects registered with the Board of Investments (BOI) under the Investment Incentives Act or the Export Incentives Act, or with other pertinent Government regulatory agencies. /1 Approved by the Board of Governors on May 29, 1974, under Resolution No. 1571-A. ANNEX 2 Page 2 (b) In accordance with normal banking practice, adequate security will be required to cover the loans and guarantees, but the main con- siderations will be the merits of proposed projects, their repay- ment prospects and the soundness of management of the enterprise. (c) DBP will not seek a controlling interest in any enterprise in which it has invested, or any other interest which would give it responsi- bility for management, except when in its judgement its investment is in jeopardy, in which case DBP reserves the option of taking such action as may be necessary to protect its interests. 6. Project Appraisal Guidelines (a) Each investment decision will be made on the basis of a thorough project evaluation, reflected in an appraisal report, which will be a self-contained and comprehensive document outlining facts, analyses and judments on the essential aspects (including tech- nical, marketing, management, financial and economic) of the project as well as recommendations on special contractual arrange- ments. In appropriate instances, the report will incorporate essential complementary elements of the BOI's appraisal work, in particular its ecomic evaluation and marketing analysis. These inclusions notwithstanding, DBP's appraisal reports will in any event include DBP's own judgments on these matters as well. (b) Project appraisal will generally include the calculation of the internal, financial and economic rates of return for projects of which the total project cost exceeds US$2 million equivalent. If the economic rate of return is below 10%, speciLal justification will be required in the appraisal report which recommends a deci- sion to finance the project. (c) Each appraisal report will provide in detail the estimated cost of the project, including working capital requirements and ade- quate contingencies. Prior to committing its own funds DBP will satisfy itself that funds expected from sources other than DBP (i.e., borrower's own contribution, plus borrowings from other lending institutions) will be available in sufficient amounts when needed to cover the total financing requirements of the project. 7. Lending Terms (a) Each industrial loan will be made on a term and with a grace period consistent with the repayment capacity of the enterprise based on projected cash flows, and related to the useful life of the asets financed by the loan. (b) Each investment project financed by DBP will normally have an equity capital equivalent to 25% of total project cost. In the case of an expansion project of an existing enterprise, funds generated inter- nally are considered as equity for this purpose. ANNEX 2 Page 3 (c) DBP will take steps adequate to protect itself against the foreign exchange risk on its lending operations and guarantees. 8. Project Supervision Guidelines. It is the policy of DBP to: (a) undertake systematic follow-up on the progress and operation of the projects financed by it, in order to establish whether the actual develop- ments correspond with the expectations and projections on the basis of which the investment decision was made, and to keep DBP's management currently informed of the project status so that it may take timely and appropriate action. Accordingly, DBP requires its borrowers to submit regular period- ical reports on the physical and financial progress of the project, and on its operational and financial performance. Furthermore, projects are visited at appropriate intervals to confirm the state of progress, to check on the efficiency, organization and management of the project, and to discuss problems of mutual concern with the borrower's management; and (b) maintain close scrutiny of its accounts in arrears. Each individual account in arrears is analyzed in detail at least once annually in order to identify the causes for arrears and to determine the repayment capacity of the enterprise. On the basis of this analysis, DBP's management takes appropriate measures (including legal action), for collection, rescheduling, or restructuring of the account. AEP Projects Department March 1, 1978 ANNEX 3 Page 1 PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Outline of Industrial Development Strategy for 1978-79 A. Large Industry Financing 1. DBP will continue to endeavor to enhance both its qualitative and quantitative contribution to the Philippine economy. During the Five-Year Plan Period, 1978-82, DBP plans to provide financial assistance to industry for P 7.7 billion, of which P 2.7 billion including P 1.2 billion in foreign exchange, will be provided in 1978-79. DBP's industry development activities in the two-year period, 1978-79, will be concentrated in the specific areas outlined below. Project Promotion and Resource Allocation 2. DBP's industrial financing will cover a broad spectrum of the sizes of enterprises with emphasis on relatively smaller and mnedium size enterprises. 3. DBP will intensify its promotional role by providing maximum possible encouragement to new entrepreneurs especially those located in the economically disadvantaged regions of the country. Towards this end, DBP will provide technical assistance in identification and development of new investment opportunities in subsectors and regions not fully developed so far. 4. DBP will follow the industrial priorities plan for large projects approved by the DBP Board on April 5, 1978, which dovetails with the develop- ment program of the National Government. DBP would therefore focus on Board of Investments and Philippine Overseas Construction Board approved projects as the principal target market for DBP's financial assistance. Generally, within these priorities those industries will be assisted which meet any or all of the following economic criteria: (a) Further development of the country's natural resources, including the further processing of these resources. (b) Beneficial impact on the balance of payment position of the country either through exports of manufactured goods or substitution of domestic production for imports in an efficient way. (c) Decentralization of industry out of the Metro-Manila Area by increasing gradually the amount of loans outside Metro-Manila. ANNEX 3 Page 2 (d) Additional employment opportunities to the country's labor force at a relatively lower capital investment cost. 5. In its appraisal of projects, DBP will bring out the employment impact of new projects and will consider the choice of labor-intensive technology wherever possible. To the extent possible, DBP will finance projects with capital investment per job created not exceeding $15,000. Through its increased use of economic rates of return it will increase the efficiency of resource use in industrial development. DBP will also maintain close liaison with the Office of the President, the Central Bank, NEDA, the Board of Investments, Philippine Overseas Construction Board, and other government agencies, in ensuring that DBP's investments take place in line with the overall Government strategy for the development of Philippine industry. Government Loans 6. DBP will continue to make loans or investment at the Government's behest when it considers such loans to be financially and economically justified, according to its accepted investment criteria. Behest loans that do not meet these criteria will have to be funded by the National Government and handled by DBP on an agency basis. Guarantees 7. DBP will continue to issue guarantees where it considers this method of financing to be appropriate. However, it will normally provide guarantees as part of a loan/guarantee package rather than as a separate means of assistance. In future, guarantees will be issued only on projects that have been fully appraised by DBP, and meet its normal investment criteria for project acceptance. Resource Mobilization 8. DBP will strongly endeavor to raise adequate resources from external sources to meet the demand for such funds. Such sources will include the IBRD and ADB, with additional amounts from commercial foreign exchange borrowings. Projected borrowings from commercial sources over the two years (1978-79) are about $400 million. DBP plans to mobilize domestic currency resources amounting to P 1,440 million through issuance of its Countryside Bills. In addition, to the extent possible, DBP will explore new sources of mobilizing peso resources so as to reduce its dependence on Government funds. ANNEX 3 Page 3 Staff Development 9. DBP will continue to improve its program for its staff handling large industrial loans. This will be done by continuing to send senior staff to courses both overseas and in the Philippines and by instituting its own Industrial Evaluation Course, which will be available to appraisal and supervision staff handling industrial loans. B. Small and Medium Industries (SMI) Development Program 10. Cognizant of the high economic merits of its SMI development program, DBP plans to provide financing amounting to E 344 million to about 1,000 SMI projects over the next two years, 1978-79. The following strategy will be followed while implementing the SMI financing target so as to achieve a maximum development target. Improvement in Institutional Set-Up 11. DBP will constantly review the organization set up and staff resources of IPD II and the Branches and will take necessary measures to make them fully responsive to the needs of the SMI sector and more efficient in handling SMI projects. To the extent possible efforts will be made to keep the SMI loan processing time within 60 days in the Branches and IPD II. 12. With a view to encouraging maximum utilization of existing SMI productive capacity, DBP will enhance its working capital financing. Applica- tions for only working capital loans will be entertained not only from export- oriented projects but also from domestic market-oriented projects. DBP will also ensure that benefits of its liberal policies concerning repayment term, grace period, collateral requirement and sponsors' equity contributions are passed on to its SMI clients within the limits of prudent: financial and banking practices. 13. In order to ensure that DBP's SMI investment will generate the expected economic benefits, DBP will upgrade and intensiEy loan supervision efforts of IPD II as well as the Branches with emphasis on preventive rather than problem solving approach. IPD II will closely monitor the performance of the Branches in this regard and whenever needed will provide necessary assistance/guidance through its Regional Assistance Units. Investment Priorities 14. For its SMI financing program DBP will devise and closely follow an Investment Priorities Plan which would provide it a rational basis for screening and selection of investment projects. In every case project selection would be determined by the relative impact of investments in the economy and the project's commercial profitability. ANNEX 3 Page 4 Resource Allocation Criteria 15. In order to ensure optimum economic benefits accrued to the economy from its SMI financing, DBP shall follow closely the following strategies: (a) Industry Dispersal. DBP's SMI financing in regions outside Southern Tagalog and Central Luzon would account for at least 50% of DBP's total SMI financing. DBP shall adopt a two-fold approach for the attainment of this objective, enumerated as follows: (i) DBP has identified its key Branches which due to potentialities of their regions, may provide the lead for an accelerated regional growth of the SMI sector. IPD II shall thus utilize its SMI Assistance Unit to upgrade the capability and competence of these branches to handle appraisal and supervision of these projects to a reasonable level. (ii) IPD II considers industrial dispersal to be the long term output of the Nationwide Industrial Estate Program (NIEP) of the Government. It is for this reason that for the current year, IPD II will identify areas of cooperation and involvement with other Govern- ment agencies relative to the setting up of industrial estates in the various regions of the country as a key element in the promotion of small and medium industries. NIEP has to date identified thirty-seven (37) industrial parks (exclusive of the mini-industrial estate now under construction in Dagat-dagatan, Tondo). Based on the implementation schedule to be set up by the Government, DBP perceives to be involved in the program by (a) active promotion of vacant industrial sites to IPD loan appli- cants, coordination with the agency in charge of the estate and continuing liaisons with both parties; and (b) extension of loan facilities to colonizers of industrial estates. (b) Utilization of Local Raw Materials and Energy Conservation. These are twin approaches linking areas of vital national concern to the DBP's SMI programs. Adaptability to use of indigenous raw materials, as a logistical consequence of regional dispersal, will remain a criterion for qualifying as an SMI project within the purview of the DBP's SMI programs. Energy conservation, while not previously given due emphasis, is now believed worthy of inclusion among the main thrusts of DBP's SMI programs. Staff studies are presently underway and will be completed towards the formulation of lending programs which should provide due cognizance and incentives for the attainment of these objectives within the context of DBP's existing lending programs. For this purpose, IPD II will consider a package of incentives for projects which are either users of indigenous raw materials and projects associated with energy conservation. ANNEX 3 Page 5 (c) Export Promotions, DBP intends to adopt a more assertive role in promoting export consciousness and undertaking export liaison work in 1978-79. As the joint responsibility of the supervision group and plans and programs unit, the Bank's persuasive influence shall be used to promote membership of mortgagor projects in export confederations or chambers. Other promotional efforts include provision of export directives and liaison between the small producers and the prominent export trading concerns. Under the program, DBP shall also promote subcontracting arrangements among exporters and entrepreneur producers whenever feasible. Subcontrac- ting scheme is envisioned to be strategy for the creation of job opportunities at a lower capital investment per job. Indirectly, this will assist the DBP's SMI projects by providing them with the necessary marketing support. The concept of the program revolves around DBP granting financial support as well as indirect marketing assistance to SMI projects financed. A comprehensive policy for DBP's Board approval for the special financing program to export traders will be submitted in the first half of 1978. (d) Promotion of Labor-Intensive Industries. With DBP's SMI lending program veering away from capital intensive industries, generation of about 15,000 jobs at a capital to labor ratio of P 27,000:1 is considered to be one of DBP's targets for 1978-79. To be guided by an Investment Priorities Listing of projects to be set up, IPD II anticipates to be more selective in making investments in 1978-79. Towards this end, efforts have been already initiated by DBP to encourage some of the DBP-financed contracting basis to promising entrepreneurs. The Dagat-dagatan mini-industrial estate in Tondo was initially identified to provide the base to support the subcontracting scheme. Projects which are basically labor-intensive, such as garments or handicrafts manufacturing for export, shall be the principal target in the strategy. DBP shall then provide the necessary financial support both to the DBP-borrower and the subcontractor. C. Technical Assistance to Smaller Financial Institutions 16. DBP will accelerate its efforts to upgrade thes operational capability of smaller development finance institutions in the country (such as private development banks). As a first step in this direction ]DBP will set up a Development Training Institute to impart professional training to the management and staff of the said development finance institutions. Simultaneously, DBP will increase its financial assistance for PDBs and will continue to help promote and set up new PDBs in the country especially in regions outside Luzon. AEP Projects Department April 14, 1978 PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Structure of Manufacturing Sector by Size of Establishments, 1971 and 1974 (in current prices) Establishments Employment Gross Value Added Labor Productivity 1971 1974 1971 1974 1971 1974 1971 1974 Scale No. of workers No. % No. X No. % No. X P million X P million X --- p Cottage 5-19 8,203 80.1 7,849 73.1 68,209 16.2 67,995 13.0 324 4.4 384 2.5 4,750 5,647 Small 20-99 1,363 13.3 2,031 18.9 56,489 13.4 85,829 16.4 693 9.3 1,424 9.2 12,270 16,591 Medium 100-199 291 2.8 396 3.7 40,222 9.5 53,741 10.2 790 10.6 1,538 10.0 19,640 28,619 Large 200 and above 391 3.8 466 4.3 256,297 60.9 316,279 60.4 5,641 75.7 12,084 78.3 22,010 38,207 Total 10.248 100.0 10.742 100.0 421.217 100.0 523.844 100.0 7.448 100.0 15.430 100.0 17,680 29.455 Source: NCSO. AEP Projects Department March 1, 1978 zS PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Present and Projected Staffing Position Staffing position Changes in professional staff Staffing position Projected staffing position as of September 30, 1976 Increase Decrease as of August 31. 1977 as of August 31, 1978 Prof. Nonprof. Total New Trans. Dept. Trans. Prnf. Nonprof. Total Prof. Nonprof. Total Increase Office of the Chairman 29 14 43 6 - 3 - 34 15 49 34 15 49 - Legal Department 39 10 49 1 - - - 39 11 50 54 26 80 30 Civil Service Office 2 - 2 1 - - - 2 1 3 2 2 4 1 Provident Fund 14 4 1S 1 - 2 - 15 4 19 126 4 20 1 Auditing Department 79 17 96 - - I - 79 17 96 79 17 96 - Office of the Treasurer 4 3 7 2 - - - 5 A 9 6 5 11 2 Securities Management Dept. 37 15 52 7 - 6 - 39 20 59 53 20 73 14 Cash & Collateral Mgmt. Dept. 44 25 69 15 - 4 - 50 34 84 54 54 108 24 Planning & Control Dept. - - - 6 - - - 3 3 6 5 5 10 4 Office of the Comptroller 14 1 15 - - - - 14 1 15 66 4 70 55 Accounting Department 26 11 37 3 - - 1 26 14 40 35 25 60 20 Electronic Data Processing Dept. 21 27 48 - - 4 - 21 27 48 46 24 70 22 Personnel Administration Dept. 44 26 70 14 - 2 - 47 37 84 61 56 117 33 General Services Dept. 38 127 165 21 - 8 2 42 144 186 46 161 207 21 Medical/Dental Dept 17 3 20 4 - 1 - 20 4 24 23 5 28 4 Secretarial Dept. 3 49 52 6 - - - 3 55 58 8 65 73 15 Subtotal Support Staff 411 332 743 87 - 31 3 439 391 830 588 488 1,076 246 Dept. of Dev. & Rural Banks 24 7 31 6 - - 1 26 11 37 67 19 86 49 Community Dev. Projs. Dept. 54 12 66 5 - 3 - 56 15 71 106 21 127 56 Acquired Assets Mgmt. Dept. 21 20 41 1 - I - 21 21 42 42 28 70 28 Agric. Plans & Programs Staff 21 1 22 3 - - 1 22 3 25 33 9 42 17 Agricultural Projs. Dept. 1 62 20 82 10 - 4 - 65 27 92 80 29 109 17 Agricultural Projs. Dept. II 76 16 92 14 _ 8 - 85 21 106 118 60 178 72 Branches & Agencies Dept. I 39 25 64 18 - 3 1 46 29 75 53 33 86 11 Branches & Agencies Dept. II - - - 10 - - 1 36 23 59 46 33 79 20 Industrial Projs. Dept. 1 79 16 95 4 - 5 1 81 18 99 102 23 125 26 Industrial Projs. Dept. II 61 17 78 18 - 3 - 74 22 96 149 28 177 81 Industrial Projs. Dept. III 52 11 63 7 - 2 1 57 13 70 134 22 156 86 Business Research Dept 18 9 27 6 - 1 - 22 11 33 78 11 89 56 Credit Department 25 8 33 3 - i - 25 11 36 42 19 61 25 Subtotal Operation Staff 532 162 694 105 - 31 6 615 225 841 1,050 335 1.385 544 Subtotal Support Staff 411 332 743 87 - 31 3 439 391 830 588 488 1,076 246 Grand Total - Read Office 943 494 1,437 192 _ 62 9 1.055 616 1,671 1.638 823 2,461 790 All Branches 965 722 1,687 66 - 25 - 1,031 799 1.830 1,133 878 2,011 181 Total 1.908 1,216 3.124 258 - 87 9 2.086 1.415 3.501 2,771 1.701 4,472 971 AEP Projects Department March 1, 1978 PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Characteristics of Subprojects Financed Under IBRD Loan No. 998-PH (As of August 31, 1977) Annual Foreign Total DBP financina expected exchange project Local Rates of return /a Incremental export earnings/ Actual project Name of subproject Industry (project) Location cost IBRD resources Total Financial Economic employment sales savings completion (P M) ($ N) (P M) (P M) (Z) (Z) (9 M) ($ M) A. Subpro1ecte above the free limit /b Al Lotus Export Specialists, Inc. Leather goods (shoes) Central Luzon 19.9 1.9 12.9 40 79 400 9.3 3.9 March 1976 A2 Pil-Mosaic Corporation Ceramics (mosaic tile) Central Luzon 24.0 1.2 8.2 16.6 14 34 380 3.0 2.5 September 1976 A3 Philippine Polyamide Industrial Textiles (nylon filament Corp. yarn) Southern Luzon 144.1 5.0 35.1 50 58 246 8.8 July 1976 A4 Sta. Ines Plywood Corporation Wood products (plywood) Northern Mindanao 30.3 2.6 18.3 35 41 313 6.0 5.8 July 1976 A5 Filipinas Synthetic Fiber Corp. Textiles (polyester yarn) Southern Luzon 138.5 5.0 25.0 62.2 40 49 200 7.5 February 1976 A6 Golden River Mining Corp. Mining (gold) Bicol 38.2 2.8 18.9 15 27 81 1.8 1.3 NYC* A7 Universal Robina Corp. Textiles (polyester cloth) Metropolitan Manila 100.3 5.0 35.1 22 39 510 10.6 NYC A8 Surigao Coconut Dev. Corp. Food products (coconut oil) Northern Mindanao 50.1 3.1 5.7 27.5 28 14 137 34.9 34.7 NYC A9 Emperor Textile Mills, Inc. Textiles (woven fabrics) Metropolitan Manila 39.3 2.3 16.1 25 12 212 4.6 March 1976 AIO Regal Textile Ind., Inc. Textiles (woven fabrics) Southern Luzon 54.5 4.8 33.7 24 11 438 4.0 2.7 NYC All Mabuhay Vinyl Corp. Petrochemical products Northern Mindanao 219.3 5.0 19.0 65.5 19 17 220 33.3 NYC A12 Ledesma Overseas Shipping Corp. Overseas shipping Metropolitan Manila 56.4 5.0 37.5 13 12 56 2.8 1.5 September 1976 Subtotal 914.9 43.7 57.9 379.4 3_193 61.8 117.2 B. Subproiects below the free limit E1 OESCO International, Inc. Wood products (furniture) Metropolitan Manila 9.5 0.6 4.2 39 136 1.5 1.4 July 1975 B2 Machine Tools MEfg. Co. of the Philippines Machinery (lathes) Metropolitan Manila 10.1 0.4 2.7 5.5 28 187 4.8 June 1976 B3 Montilla Manufacturing Corp. Garments Central Luzon 4.6 0.3 0.6 2.5 40 266 3.3 1.2 August 1976 B4 Fortunoff (Phil.), Inc. Garments Metropolitan Manila 3.5 0.2 1.0 2.4 50 360 2.6 2.5 June 1976 B5 Cancelled B6 Wearever Textile Mills, Inc. Textiles (knitted fabrics) Metropolitan Manila 11.5 0.6 2.7 6.9 15 95 1.0 0.4 July 1976 B7 Cancelled 88 Mariano Azana (Macy Metal Mfg.) Car parts & accessories Metropolitan Manila 5.4 0.3 1.2 3.4 30 8O NYC B9 Ricor Mills Corporation Rice bran oil mill Eastern Visayas 14.6 0.9 0.7 7.0 12 69 1.4 1.2 NYC Subtotal 59.2 3.3 8.9 31.9 1.193 9.8 11.5 Total 974.1 47.0 66.8 411.3 4,386 71.6 128.7 /a Economic rate of return is calculated for projects with total project cost of over $2 million. /b The free limit under this loan is set at US$1 million. * Not yet completed. f N; AEP Projects Department December 8, 1977 PHILIPPINES DEVELOPMENT BANK OF TIHE PHILIPPINES Characteristics of Subprojects Financed under IBRD Loan No. 1190-PH (As of April 19, 1978) Total DBP Financing Annual project Local Rates of return la Incremental expected Foreign exchange Name of Subproject Industry (Product) Location cost IB8D ADB resources Total Financial Economic employment export sales earnings/savings (P M) (9 M) (08) (PM) (PM) (X) (X) ($M) ($ 1) A. Subprojecta Above the Free Limit /b Al FC Agro-Development, Inc. Food products (sucro Southern Hindanao 31.4 1.6 4.0 16.0 22 10 258 4.1 3.6 chemical) A2 Wearever Textile Mills Textiles (knitted fabrics) Metropolitan Manila 66.1 2.4 2.4 36.0 16 27 262 6.6 4.3 A3 Emperor Textile Mills Textiles (woven fabrics) Metropolitan Manila 62.5 2.7 1.9 34.5 27 10 264 8.1 6.8 A4 Businessday Information Printing and publishing Metropolitan Manila 19.1 1.2 1.2 10.2 30 21 71 3.1 2.9 Systems and Services, Inc. A5 Sabena Mining Copper mining Mindanao 226.0 5.0 2.5 55.5 19 17 529 20.4 17.6 A6 Hi-Standard Manufacturing. Inc. Synthetic leather Southern Luzon 31.4 1.4 3.4 13.9 35 63 156 8.1 5.9 A7 Loadstar Shipping, Inc. Ship 16.0 1.6 12.0 20 26 28 AR Refractories Corp. Refractory bricks Northern Luzon 70.9 2.5 2.5 4.8 41.1 25 31 229 1.0 7.5 A9 Noroil Mills, Inc. Coconut oil Central Visayas 66.3 2.0 2.5 33.8 23 16 111 23.2 22.7 AID Santa Clara Lumber, Inc. Timber Mindanao 49.0 1.9 IB.5/d 33.0 44 51 50R 29.0 29.0 All Davao Timber Corp. Particle board Southern Mindanao 80.2 5.0 1.5 48.0 22 13 211 12.9 12.3 A12 Republic Cement Plant rehabilitation Central Luzon 20.2 1.0 6.7/d 14.4 A13 Mindanao Steel Corp. Galvanized iroc Northern Mindanao 15.1 1.0 7.5 45 11.7 A14 Sugarland Agri-Industrial Corp. Cattle feed Western Visaya. 20.1 1.1 4.0/d 12.0 58 77 366 5.7 5.4 Subtotal 774.2 30.4 13.3 42.6 367.9 3.038 122.2 129.7 B. Subprojects Below the Free Limit B1 Mackay Machinery, Inc. Foundry (cast iron) Metropolitan Manila 19.2 0.8 4.0 10.0 18 34 128 3.9 3.9 B2 Selectra Electronics Corp. Electronics (radio) Central Luzon 7.9 0.4 0.7 3.7 50 290 5.9 1.3 B3 Surigao Development Corp. Wood products Northern Mindanao 12.4 0.5 1.0 4.7 43 167 2.2 2.2 B4 Palacio Shipping, lac. Ship Central Visayas 1.9 0.2 1.3 19 B5 Machine Tools Mfg. Co. of Industrial machinery Metropolitan Manila 17.7 0.2 7.2 8.7 27 187 1.7 1.7 the Philippines (lathe machines) B6 INGaSCO, Inc. Industrial gas (compressed Metropolitan Manila 5.4 0.3 0.2 2.4 50 13 gases) B7 Philippine Knitting Mills, Inc. Textile (knitted fabrics) Southern Luzon 13.5 0.3 3.7 5.9 15 197 5.2 2.9 B8 Central Fermentation Alcohol Central Luzon 5.8 0.2 0.5 2.2 29 30 0.6 Industrial Corporation B9 IGRI Industries, Inc. Industrial/agricultural Metropolitan Manila 6.1 0.2 0.8 2.6 21 120 2.0 machinery B10 La Union Tobacco Redrying Corp. Tobacco redrying Northern Loaon 26.7 0.1 6.3 7.0 56 600/c 1.5 1.4 Bl Navotas Industrial Corp. Shipbuilding and repair Metropolitan Manila 9.8 0.9 6.8 22 57 B12 Manara Cassava Flour Food products (cassava Western Visayas 12.4 0.6 2.8 7.1 65 151 1.8 1.5 Hill Corp. processing) B13 Philippine Pigment and Chemicals (resins and Southern Luzon 26.1 0.3 10.0 12.0 91 38 Resin Corp. pigments) B14 International Components Polyurethane footwear Metropolitan Manila 12.7 0.1 5.5/d 6.4 30 106 1.8 1.8 Processing Corp. soles Subtotal 177.6 5.1 42.7 80.8 2.084 24.0 19.3 Total 951.B 35.5 13.3 85.3 448.7 5.122 146.2 149.0 /a Economic rate of return is calculated for projects with total project cost of over $2 million. /b The free limit under this loan is set at US$1 million. /c Plus 5,000 seasonal jobs. /d Parc of $75 million syndicated loan secured by DBP, February 1977. AEP Projects Department April 20, 1978 lM PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES Features of SMI Subprojects Financed Under IBRD Loan No. 1120-PH by Geographical Distribution (As of August 31, 1977) DBP financing Average Incremertal employsment Projects Total cost DBP re- return Investment Incremental sales Average approved of project IBTD funds sources on assets cost Export sales Domestic sales Total sales borrower's No. Z Amount % Amount % Amount Total per project Total per worker Amount Z Amount Z Amount % assets /a ($(000) (P 000) X ) ($) --- ------- (P'000) - - ------
Groupe de la Banque mondiale · Staff Appraisal Report
Philippines - Third Industrial Investment Credit (Development Bank) Project
Voir le document original
Le texte intégral est hébergé par l’organisation qui le publie. lawenc.com indexe les métadonnées et renvoie vers la source officielle.
Texte intégral
Informations clés
Organisation
Groupe de la Banque mondiale
Type de document
Staff Appraisal Report
Pays
Philippines
Source
Banque mondiale