Philippines - Third Small and Medium Industries Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3319-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT May 11, 1982 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$1.0 = P 8.10 P 1.00 = US$0.123 P 1 million = US$123,457 P 1 billion = US$123 million ABBREVIATIONS BAAD - Branches and Agencies Department (of DBP) BOI - Board of Investments BSMI - Bureau of Small and Medium Industries (of MTI) GB - Central Bank of the Philippines DBP - Development Bank of the Philippines DDRB - Department of Development and Rural Banks (of DBP) IGLF - Industrial Guarantee and Loan Fund (of CB) KKK - Kilusang Kabuhayan at Kaunlaran (National Livelihood Program) MTI - Ministry of Trade and Industry NACIDA - National Cottage Industries Development Authority PDBs - Private Development Banks SAL - Structural Adjustment Loan SBAC/MASICAP - Small Business Advisory Centers/Medium and Small Industries Coordinated Action Program SMI - Small and Medium Industries (including cottage industries) SMILE - Small and Medium Industries Lending Department (of DBP) t FISCAL YEAR Government: January 1 to December 31 DBP: January 1 to December 31 IGLF: January 1 to December 31  FOR OFFICIAL USE ONLY PHILIPPINES THIRD SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of the Philippines 14 Beneficiaries: The Development Bank of the Philippines (DBP), the Industrial Guarantee and Loan Fund (IGLF) and the Ministry of Trade and Industry (MTI). Amount: $132.0 million equivalent. Terms: Repayable over 20 years, including five years of grace, with interest at 11.6% per annum. The loan includes a capitalized front-end fee of $1,950,739. Relending Terms: The equivalent in pesos of $48.0 million of the loan proceeds would be onlent by the Government to DBP on terms and conditions similar to the proposed Bank loan, of which $27.0 million would be for DBP's direct small and medium industry lending and $21.0 million for relending to private development banks (PDBs). The equivalent of $63.0 million would be made available to IGLF, essentially on the same terms and conditions as the proposed Bank loan. An unallocated portion equivalent to 10% (i.e. about $12.0 million) of the credit component of the loan would initially be held back and allocated later to those financial institutions making the most effective use of Bank funds. $7.0 million of the loan proceeds would be allocated by the Government to the Ministry of Trade and Industry (MTI) to finance the technical assistance component. The Government would bear the foreign exchange risk on the entire Bank loan. DBP and IGLF would pay the standard 0.75% commitment fee and the front-end fee of 1.5% on their portions. The end-user rates under * the project (18% p.a. and 21% p.a.) are in line with market rates and are substantially positive in real terms given projected (under 10%) rates of inflation for the life of the project. 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.  - ii - Projec. Description: The credit component of the proDosed project would assist the Government in financing cottage, small- and medium-scale industries (SMI) and developing the key financing institutions servicing the sector while the technical assistance component would help to alleviate key constraints facing priority SMI subsectors. The credit component of the project would support financially and economi- cally viable SMI enterprises. The technical assistance component would be used to: (a) expand the network and scope of the Small Business Advisory Centers/Medium and Small Industries Coordinated Action Program (SBAC/MASICAP); (b) esta- blish a fund to provide SBAC/MASICAP with the necessary resources to implement pilot projects in priority subsectors; and (c) finance studies on major issues relevant to the development of the SalI sector. The project faces moderate risks. With respect to the credit component, thte relatively high end-user interest rates could result in a lower demand than currently estimated. However, the appropriateness of interest rates would continue to be reviewed. In the case of DBP, institutional problems asso- ciated with its direct S'MI lending would be addressed through a mutually agreed Action Program. With regard to the techrLical assistance component, SBAC/MASICAP might be required to promote other SMI technical assistance programs wlhich would limit their ability to fulfill their responsibilities under the project. Thle Government has, however, agreed to provide SBAC/MASICAP with the necessary staff and budgetary resources to carry out its work program effectively under the project.  - iii - Estimated Cost./a Local Foreign Total