Colombia - Fourth Small-scale Industry Project

l~~~~~I 5 X~~~~~~~~~~~~~~~I ' g S ,| llt Z l i| !  CURRENCY EQ}VALETS Currency Unit - Peso -CoS Average Calendar 1982 Average Calendar 1983 US$1 - Col$64.102 UJSl - Col$78.861 CoISI - US$0.0156 ColSI - USSO.0127 Exchange Rate Effective May 31. 1984 USS1.00 - Col$98.47 Col$1_00 - US$0.0102 Weights and Measurer Metric System GLOSSARY OF ABBREVIhflOLIS BR Banco de la Republica (The Central Bank) CFP Corporacion cra Popul DFC Development Flnance Company FFI Fondo Fiianciero Industrial (Industrial Financing Fund) IDB Intererican Development Bank PROEXPO Fondo de Procion de Exportaciomes (Export Promotion Fund) SEA Servicio Nacional de Aprendizaje (National Vocational Training Organization) UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development FISCAL TEAR January 1 to December 31  FOR OMCIAL USE ONLY COLOMBIA FOURTH SMALL-SCAIE INDUSTRY PROJECT LOAN AND PROJECT SUMWARY Borrower: Banco de la Republica (BR) CGuarantor: Republic of Colombia Beneficiary: Corporacion Financiera Popular (CFP) Amount: US$40 million equivalent, including capitalized front-end fee of US$99,751. Terms: 17 years, including four years nf grace, at the standard variable interest rate. Relending Banoo de la Republica would relend the proceeds of the loan Terms: to CFP in pesos, and CFP would make serwice payments to Banco de la Republica whenever this shall be required to meet service payments on the Bank's loan. Any net losses to Banco de la Republica as a result of covering the foreign exchange risk would be charged by Banco de la Republica to the Govern- ment's Foreign Exchange Special Account administered by Banco de la Republica. Banco de la R.'epublica would charge interest: (i) on the credit component of the project, at rates 4.5 or 5 percentage points lower than the interest rates on subloans made by CFP for investment projects located, respectively, in the major metropolitan areas or outside these areas; and (ii) on the technical assistance component of the project, at 12Z per annum. CFP would on-lend the proceeds of the loan for 4 to 10 years, including 1 to 3 years of grace, at a rate representing the weighted average of a variable and a fixed interest rate as follows: for each sub-loan, 15Z of the principal would bear interest at the rate payable on 90-day certificates of deposit plus 3 percentage points, and 85% of the principal would bear interest at a fixed rate to be agreed semiannually with the Bank (initially 26% p.a. for subprojects in the metropolitan areas and 24% p.a. outside the larger centres) and established by Banco de la Republica. At the end of the first full year of operation of the line (December 1985) BR, CFP and the Bank would review the variable/fixed proportions of the interest rates with a view to increasing to 302 the portion of the principal of each sub-loan subject to variable Thi document ha a restrited distribution and may be used by recipients only in the performance of their ofci dutics, Its contents may not otherwise be disclosed without World Bank authorizion.  - ii - interest rates. thus reducing commensurately the portion tinder fixed rates. The new percentages would apply to sub-loans approved after January 1, 1986. A similar review 12 months thereafter would seek to increase further the proportion of market-determined rates in the weighted average interest rates of the sub-loans. Project The proposed project would consist of the provision of: Ca) Description: medium- and long-tern credit through CFP to small and medium-scale industries for fixed investment and permanent working capital; and (b) technical assistance to CFP and - small scale industrialists. Project Risks: Even though the project involves no special risks, insufficient Government equity contributions to CFP, delays in strenthening CFP's regional offices, slower than expected recovery of small-scale industrv, and fluctuations in availability of local working capital Light affect project implementation. However, agreements reached with the Government regarding increases to CFP's equity base, together with the Action Program to be carried out by CFP in close collaboration with the Bank, should help ensure achievement of project objectives. Estimated Cost:_I CUS$ million equivalent) Local Foreign Total Construction and installation 8.9 2.2 11.1 Imported machinery (CIF) - 7.5 7.5 Imported machinery acquired locally 10.6 13.7 24.3 Locally manufactured machinery 13.2 6.1 19.3 Woreing capital 45.6 5.0 50.6 Technical assistance 0.7 0.4 1.1 Front-end fee - 0.1 0.1 79.0 35.0 114.0 Financing Plan: (USS million equivalent) Local Foreign Total _ CFP 4.5 _ 4.5 4 Fnterprises 30.5 - 30.5 27 Other local sources 39.0 - 39.0 34 IBRD 5.0 35.0 40.0 a/ 35 79.0 35.0 114.0 100 a/ Includes capitalized front-end fee of US$99,751. 1/ Taking account of Bank estimates of inflation and peso depreciation, as of January 1984.  - iii - Estimated Disbursements: (USS millions) IBRD FY85 FY86 FY87 FY88 FYP9 Annual 2.0 7.2 18.0 8.4 4.4 Cumulative 2.0 9.2 27.2 35.6 40.0 Rate of Return: The financial rates of return on the subprojects are expected to average about 15% and be no less than 12Z. The economic rates of return are, bowever, likely to be higher, primarily because prices of input materials are somevhat inflated as a result of the protection involved while, on the other hand, most small-scale industry products are openly traded so that market prices reflect eoconomic values. As a norm, therefore, the typical products of small-scale industries have lower protection rates than the corresponding inputs. Appraisal Report: Report No. 4929b-CD, dated June 14, l984.  INTERNATIO1NAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT A19D RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$40 MILLION TO BANCD lE IA REPUBLICA FOR A FOURTH SMALL-SCALE INDUSTRY PROJECT 1. *I submit the following report and reconmendation on a proposed loan to Banco de la Republica with the guarantee of the Republic of Colombia for the equivalent of US$40 million. including a capitalized Eront-end fee of US$99,751. to help finance a fourth small-scale industry project. The loan would have a term of 17 years, including 4 years of grace, with interest at the Bank's standard variable rate. BR would bear the interest risk on the loan and the responsibility for the foreign exchange risk, including the cross-currency risk_ Any net losses to BR as a result of covering the foreign exchange risk would be charged by BR to the Government's Foreign Exchange Special Account administered by BR_ BR would relend the loan proceeds in Colombian pesos to CFP under terms and conditions discussed in paragraphs 47 to 50. PART I - TEE ECONOKYl/ 2. An economic mission visited Colombia in July 1982 and its report (4444-CO) was distributed to the Executive Directors in August 1983. This mission was followed by a small updating mission which visited the country in February 1984. Also, a mission to review the external sector and agriculture visited Colombia during April/May 1983, and its report (4981-CO) was distributed to the Executive Directors in April 1984. This section reflects both missions' major findings. Country data sheets are presented in Annex I. Background 3. The Colombian economy has become more resilient to external shocks as a result of the structural changes that have occurred over the past thirty years. Rapid economic growth has resulted in a substantial structural trans- formation of the country from a predominantly rural and self-contained eco- nomy to a more diversified urban, industrial, services and open economy. Colombia has reached a point where population pressure on land no longer increases much, if at all. Public sector investment and output now play a greater role, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, non-coffee exports, particularly exports of manufactured gMods, expanded rapidly and the range of products sold abroad widened considerably. The growing urban-industrial- services oriented economic activity and a rapid expansion of surplus labor in rural areas attracted by higher wages and better services in the cities has given rise to rapid rural-urban migration. This phenomenon, together with the increased participation of women in the labor force, has been instru- mental in reducing poverty and improving income distribution over time. Financial and capital markets have evolved pari-passu with the growing needs of the economy, and Colombia has become an active participant in interna- tional capital markets. 1/ This section substantially unchanged Erom Part I of the report for the Rio Grande Multipurpose Project (No. P-384