Ecuador - Second Small-scale Enterprise Credit Project

Document of g. 4 r The World Bank FOR OFFICIAL USE ONLY Report No. 3941-EC STAFF APPRAISAL REPORT ECUADOR SECOND SMALL SCALE ENTERPRISE CREDIT PROJECT November 5, 1982 Projects Department Latin America and the Caribbean 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 Currency Unit = Sucre (S/) Calendar 1981 May 30, 1982 US$1 = S/25 S/33 S/.1 = US$ 0.04 US$ 0.03 S/.l,000 = US$40.00 US$30.30 FISCAL YEAR January 1 to December 31 LIST OF ACRONYMS BEDE - Banco Ecuatoriano de Desarrollo - (Ecuadorian Development Bank) BNF - Banco Nacional de Fomento - (National Development Bank) CBE - Banco Central del Ecuador - (Central Bank of Ecuador) CBS - Commercial Banks CENAPIA - Centro Nacional de Promocion de la Pequena Industria y Artesania (National Center for Small Industry and Artisan Promotion) CENDES - Centro de Desarrollo Industrial del Ecuador - (Center for Industrial Development) CFN - Corporacion Financiera Nacional - (National Finance Corporation) DFC - Private Development Finance Company FCPI - Federacion de Camaras de la Pequena Industria - (Federation of Small Industry Associations) FOPINAR - Fondo Para Pequena Industria y Artesania - (CFN's Small Scale Enterprise Loan Discount Facility) JM - Junta Monetaria del Ecuador - (Monetary Council of Ecuador) MICEI - Ministerio de Industrias, Comercio e Integracion - (Ministry of Industry, Commerce and Integration) MFF - Mecanismo de Fondos Financieros - (Financial Funds Mechanism) PFI - Participating Financial Intermediary SSE - Small Scale Enterprise TA - Technical Assistance TCC - Technical Cooperation Committee  ECUADOR FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT SECOND SMALL SCALE ENTERPRISE CREDIT PROJECT TABLE OF CONTENTS Page No. I. THE INDUSTRIAL SECTOR ................... ....... . 1........... A. The Economic Setting ............................... .. .. ... . 1 B. Manufacturing and the Small Scale Enterprise Sector ........ 2 Growth and Structure of Manufacturing ........ .............. 2 Small Scale Enterprise and Sector Development ............ .. 2 Location of Manufacturing ...... .......................... . 3 W.age Rates .............................................................. 4 Financing .................................................. 4 Industrial Policy .......... ...................................... 5 Government Support of SSE ......................... ............... . 5 Industrial Policy Outlook ......... o ............ ........ . 5 Technical Assistance to Small Scale Enterprise .......o ...... 7 C. Outlook and Prospects for SSE ..........* .................. 9 II. THE FINANCIAL SYSTEM ............. o.. ........................ ... . . 9 Backgroundt..o..o......................................................... 9 A. Resource Mobilization and Allocation .................... ... 10 CBE's Role in Credit Allocation........................... 10 B. Structure of the Financial System.......O*................. 11 Central Bank of Ecuador (CBE) ........................ ........ 11 The Private Banking System. .. ........... . ...... ....o... . 12 Commercial Banks ........ o .......................... ........................ 12 Private Financieras (DFCs) ......... ......... ........ 13 National Development Bank (BNF) .............* ............ 13 Corporacion Financiera Nacional (CFN) ....................... 14 Financial Condition . . ... ......... ....... . 15 Organization ...o.o... ......................... ........ .* ......... 16 Outlook for CFN ....... .. ............... .. . 16 This report is based on the findings of an appraisal mission which visited Ecuador in March/April 1982. The mission comprised Messrs. M. Stoller, H. Jones and Ms. S. El Baroudy of the Industrial Development and Finance Division 1, LAC 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.  Page No. C. Interest Rate Policy .... .............. 17 Interest Rate Structure ................................... . 17 D. Financing of Industry ......................... .... .. ... .. 20 Financing of SSE ......... ............. .............. ... .. . 20 II. THE PROJECT. .................. * ...................................... 22 A. Institutional Structure and Project Objectives .........-... 22 Background .... .. ........ .................. ..... . 22 Commitment and Disbursement ............ ........... o....... 22 Project Objectives ......... . ..................... ... . 25 B. Fondo de Fomento Para la Pequena Industria y Artesania (FOPINAR) ...................................... ........................ 26 Establishment, Organization and Management . ....... 26 Disbursement and Collection ..........*...... ..................... 27 Policies and Operating Regulations.... .. ........... 28 Policies .......................... *--.................................. 28 Operating Regulations.- ....... . . . .. . 28 Subprojects to be Financed. .. . . .. ............ . 28 Terms and Limits of Financing .......o ..... o ..... ....... ... 28 Subproject Appraisal and Supervision.o... .......... 30 Training ............ ...... 30 Interest Rates ........... ...............0.4-....... .................... 31 Financial Position- ...... ...o..o...oo...................................... 32 C. Financial Intermediaries ...... ..........................o. 33 D. Technical Assistance .......... ....... ............. . 34 IV. THE PROPOSED LOAN.N......... o. .o.o. . .. . 37 A. Project Costs and Financing Plan ....ts n........Fn......ngn.... 37 B. Proposed Loan.......... ............................ ..... 38 Amount and Terms. .... ..... 38 Relending Terms and Conditions ............................ 39 Technical Assistance to CFN............................... 39 Procurement ............................... ............... ......... 39 Commitment and Disbursemento ................. ............ 40 Working Fundo ...................... ..4............... ............ 0.0 ...... 40 Accounting, Auditing and Reports....... .... ......... .. 41 Audit of the Special Account..........................o.... .. 41 C. Project Benefits and Risks .........................oo 41 V. AGREEMENTS AND RECOMMENDATIONS .. 43  LIST OF ANNEXES ANNEX I Table 1 - Manufacturing Value Added 1972-1981 Table 2 - List of Measures Taken on March 4, 1982 by Junta Monetaria ANNEX 2 Table 1 - Financial Assets of Bank and Non-Bank Financial Intermediaries Table 2 - Assets and Portfolio of Financial Institutions - 1978-1980 Table 3 - Distribution of Credit by Sector, 1980 Table 4 - Sources of Total Credit Table 5 - Credit Through Financial Funds Mechanism (MFF) Table 6 - Credit to SSE through Financial Funds Mechanism (MFF Table 7 - CFN: Categories of Operations (Mecanismos) Table 8 - CFN: Comparative Balance Sheets as of December 31, 1981 Table 9 - CFN: Income Statements Table 10 - CFN: Comparative Financial Operating Ratios for the Years 1979, 1980 and 1981 Table 11 - CFN: Analysis of 1981 Operating Results Table 12 - CFN: Forecast Income Statements Table 13 - CFN: Forecast of Balance Sheets as of December 31 ANNEX 3 Table 1 - FOPINAR Operations: Participating Financial Intermediaries Table 2 - FOPINAR Operations: Geographic Location of Projects as of December 31, 1981 Table 3 - Distribution of Loans by Size of Enterprise - April 1981 - January 1982 Table 4 - Distribution of Jobs Created and Cost Per Job by Size of Enterprise - April 1981 - January 1982 Table 5 - Estimated New Jobs Created in Expansion and Total Projects - April 1981 - January 1982 Table 6 - Estimated Jobs Created in New Firms Established Table 7 - FOPINAR: Financial Projections, Main Assumptions Table 8 - FOPINAR: Forecast Balance Sheets Table 9 - FOPINAR: Forecast Income Statement Table 10 - FOPINAR: Statement of Estimated Sources and Uses of Funds Table 11 - FOPINAR: Forecast of Financial Rations Table 12 - FOPINAR: Forecast of Operating Ratios ANNEX 4 Table I - Commitments and Disbursements Table 2 - SSE Fund: Estimated Schedule of Disbursements for the Proposed Loan  ANNEX 5 Draft Terms of Reference for Technical Assistance Services to the Corporaci6n Financiera Nacional ANNEX 6 FOPINAR Organizational Chart ANNEX 7 Selected Documents and Data Available in the Project File MAP  1. THE INDUSTRIAL SECTOR A. The Economic Setting 1/ 1.01 The Ecuadorian economy has changed since 1960 from a predominantly agricultural society in which about 70% of the population lived in rural areas to a society in which about one-half of the estimated 8.4 million cur- rent population live in urban centers. A high percentage of urban growth has occured in the coastal regions 2/ where the hard pressed small farmers mi- grated from the sierra in search of job opportunities. The traditional mar- ket centers of Ambato, Riobamba and Tulcan in the sierra have been growing at slower rates along with slower growth in economic opportunities. 1.02 The transformation of the economy from 1972 to 1980 was fueled by a 7.6% p.a. growth in real GDP. Under the stimulus of the growing petroleum exports and, to a lesser extent, industrial sector growth, per capita income rose from US$320 to US$1,270. Ecuador underwent a major transformation that dramatically improved the quality of life for many of its inhabitants. Nevertheless, owing to the low levels from which it started only a decade ago at the beginning of the oil boom and the extreme degree of poverty of the indigenous population in the isolated mountain villages, social conditions are not as good as in other countries with similar levels of per capita income. 1.03 While Ecuador's oil induced boom has been coming to a close, econo- mic growth in 1979-81 still averaged 4.5% p.a. despite the widespread drought which adversely affected agriculture and the political uncertainty which dis- couraged investment. Growth prospects in the medium term are modest since a short-term stabilization program is required and the Government has begun to take austerity actions. Once this program is in place, future growth could accelerate if constraints on rational agricultural and industrial sector growth are removed and incentives to use resources more efficiently are introduced. Ecuador's strategy for rapid growth through import substitution was supported by its now declining petroleum resources. Petroleum revenues were also used to finance food imports for its growing urban population but 1/ This section is based in large part on the Ecuador Economic Development Issues Report N