Philippines - Fifth Development Corporation Project

.~~~~~~~~~~~~~~~~~~~~~~~~~~~ Document of The World Bank FOR OFFICL USE ONLY Report No. 7997 PROJECT COMPLETION REPORT PHILIPPINES FIFTH PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES PROJECT (WLAN 1514-PH) JULY 28, 1989 Industry and Energy Operations Division Country Department II Asia 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 - Pesos (P) 1978 US$1 = P 7.38 1979 US$1 - P 7.38 1980 s US$1 - P 7.51 1981 s US$1 - P 7.90 1982 US$1 - P 9.17 1983 US$1 - P 14.25 1984 US$1 - P 20.35 1985 US$1 - P 19.41 1986 US$1 - P 20.84 1987 US$1 - P 20.80 1988 US$1 - P 21.08 ABBREVIATIONS AMU - Acquired Assets Unit ALF - Agriculture Loan Fund ADB - Asian Develuipment Bank CB - Central Bank of the Philippines DBP - Development Bank of the Philippines ERR - Economic Rate of Return FEBTC - Far East Bank and Trust Company FRR - Financial Rate of Return GDP - Gross Domestic Product GFSME - Guarantee Fund for Small and Medium Scale Enterprises IGLF - Industrial Guarantee Loan Fund PDCP - Private Development Corporation of the Philippines PHB - Project Management Group PMSD - Project Monitoring and Supervision Department PNB - Philippine National Bank SEC - Securities and Exchange Commission SPD - Special Projects Department FISCAL YEAR January 1 - December 31  THE WORD BANKFOR OVFIICA US ONLY THE WOOLO OAN Wahmgton. D.C. Z0431 Olltti d O,wcorCw'b Opst.at'on Ivalwfsul' July 28, 1989 HMORANDUM TO THE EXECUTIVE DIRECTORS AND TBE PRESIDENT SUBJECT: Project Completion Report on Philippines Fifth Private Development Corporation of the Philippines Project (Loan 1514-PU) Attached, for information, is a copy of a report entitled 'Project Completion Report on Philippines - Fifth Private Development Corporation of the Philippines Project (Loan 1514-PU)' prepared by the Asia Regional Office. No audit of this project has been made bv the operations Evaluation Department at this time. Yves Rovani by Alexander Nowicki Attachment This document has a mvstrcted disibufion and may be used bY rcipients only in the perofrmsne of their official duties. Its contents may not otherwise be diselosed without World Bak authorittion.  FOR OMCIL USE ONLY PROJECT COMPLETION REPORT PHILIPPINES FIFTH PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES PROJECT (LOAN 1514-PH) TABLE OF CONTENTS Page No. PREFACE ... . . ... ..... i BASIC DAT SHEET ....................................... 0X ..*+*.....- ................................... *-., EVALUATION SUMMARY . .................. ......... . .. ...... v PROJECT COMPLETION REPORT I. INTRODUCTION ..................................... ................1 II. PROJECT OBJECTIVES AND DESCRIPTION ........................ 2 Objectives . ..... .... . . .,. 2 Description ................................................ 2 1II. UTILIZATION OF THE BANK LOAN ........................ ...... 2 Operational and Economic Performance of Subprojects ..... 3 Effective Cost of Bank Funds to Subborrowers ............ 4 IV. INSTITUTIONAL DEVELOPMENT ................ . ... .... 5 Standards and Procedures .... ......... ................... 6 V. OPERATIONAL AND FINANCIAL PERFORMANCE OF PDCP ............. 6 Operational Performance ........ . ........... . 6 Financial Performance ............... . .. . 8 Resource Mobilization .... * ..... . ....................... 10 VI. DEVELOPMENT ROLE OF PDCP ....... ........................... 12 VII. CONCLUSIONS ......................... ...................... 12 1. List of Stockholders as of December 31, 1987 ......... ........ 17 2. Schedule of Actual Disbursements ........ .................... 18 3. List of Subprojects, Commitment Date and Amount of Disbursement ....9........................................... 1 4. Characteristics of Subprojects Financed Under Loan 1514-PH ... 20 5. Reasons for Delay in Completion of Subprojects ........... * ... 21 6. Pinancial Performance of Subprojects ........................ 22 7. Economic Performance of Subprojects ..... ..................... 24 8. Effective Interest Rate for Loan 1514-PH ..... ................ 25 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.  TABLE OF CONTENTS (cont'd) Page No. ANNXS (cont'd) 9. Current Status of Subloans as of September 30, 1988 ........ 26 10. Projected and Actual Lending Operations. 1978-#5 .............. 27 11. Summary of Operations, 1982-87 ............................... 28 12. Equity Investments, December 31. 1987 ......................... 29 13. Summary of Guarantee Operations, 1978-87 ..................... 30 14. Audited Balance Sheets, 1978-87 ......................... 31 15. Audited Income Statements, 1978-87 ............................ 32 16. Summarized Stsrements of Income and Unapp:opriated Retained Earnings, 1982-87 ....... ..... . . . . . .. .. ......... . . 33 17. Actual Financisl Ratios, 1978-87 ........ ..................... 34 18. Collection Performance, 1978-87 ...... ........................ 35 19. Analysis of Loaas In Arrears, 1978-87 ........................ 36 20. Domestic Resource Mobilization, 1978-87 ...................... 37 21. Foreign Currency Resource Mobilization, 1963-83 .............. 39 22. Borrower's Comments on the Project Completion Report ......... 41  - i - PROJECT COMPLETION REPORT PHILIPPINES FIFTH PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES PROJECT (LOAN 1514-PH) PREFACE 1. This repcrt presents an evaluation of the results achieved under the Bank's Fifth Private Development Corporation of the Philippines (PDCP) Project. The US$30.0 million loan in support of industrial sector objectives was made to PDCP to support PDCP's program of lending for economically desirable and financially viable enterprises, mainly in manufacturing. The loan was appraised in August 1977, approved by the Board in January 1978 and signed in February 1978. The loan became effective in June 1978. 2. The Project Completion Report (PCR) was prepared by the Bank's Industry and Energy Operations Division, Country Department II, Asia Regional Office. The PCR draws on the Staff Appraisal and President's Reports, loan documents and the project files. It presents a factual review of the opera- tions of the project, the extent to which the main objectives were achieved and the results of the investments made. A draft PCR, which included a sub- stantial data base on project performance and status, was received from the Borrower. 3. This PCR was read by the Operations Evaluation Department COED). The draft PCR was sent to the Borrower for comments, and they are attached to the Report (Annex 22).  - iii - PROJECT COMPLETION REPORT PHILIPPINES FIFTH PRIVATE DEVELOPMENT CORPORTION OF THE PHIIPPINES PROJECT (LOAN 1514-PH) BASIC DATA SHEET LOAN POSXTN (Amunts in USII Milion) As o March 81. 19890 Orlginal D1abursad Canel led Rimald Outetandina Loan 1614-P J0.00 29.2 0.60 16.16 12.78 CUULATIE ESTIMAT AND ACUAL DSUSMES FY79 FY00 FY81 FY82 FY88 FYf4 Apprsalul Estimate (US$1) 6.9 28.6 29.9 80.0 80.0 80.0 Actual (US$1) 5.0 17.6 28.0 28.1 29.1 29.8 Actual as X of Appraisal (S) 72.5 74.2 76.9 98.7 97.0 97.7 DOa of Final Dls4urment: April 24, 1984 PROJECT DATES Orilinal Revided/Actual Bo0rd Approval n.*. 01/81/78 Loan Agrme nt n.r. 02/09/78 Effeet velnos 06/10/78 06/28/78 Complotion of Cosmitents 08/81/00 12/31/81 Loan Closing 08/81/82 08/81/84 Em~ai fiZ fil fin ETM E E ETi a fiR Es E ElM ril fiB fill TlL Pigppraial 0.6 1.1 - - - - - - - - - 1.7 Apprat"la - 20.9 - - - - - - - - - - 20.9 Nsu.tistim - 8.2 - - - - - - - - - - - 8.2 Sup.rv.)mie _... .L . Li AA 2 L LA A A LI M L2 dL.Z abo.l 0.6 SS.O - 21.8 1.4 1.4 0.8 7.8 4.5 1.S 0.4 0.1 4.2 76.5  -iv MISSION DATA La No. of No. of St? Dat* of MonthiVear Poon Weeks Rpo Appraisal 0177 2 2 4 107 Supervision 1 11/79 2 2 4 04/81 Supervision II 0/81 J 2 6 11/79 Supervision III 06/82 s 2 6 04/81 Supervision IV 01/84 2 1 2 08/84 Supervision V 00/86 2 1 2 08/65 Completion 02/08 2 1 2 12/68 OTHER PROJECT DATA Borrower: Philippine National Bank (PNB) Executing Agency: Private Development Corporation of tho Philippine (PDCP) Follow-on Projects Although there were no additional loans grant directly to PDCP, It Is one of the Porticipating Financial Institutlons (PFIl) undmr the Apex Program (Loan 1984-PH), approved May 7, 1081. /a Being one of the PFIs under the Apex Progra, PDCP to directly supervised by the Apex Development Finance Unit (DFU) of the Central Bank at lest once a yer. In line with the objective of the Apex Program, the Bank rolied on the nomal super- vision of PDCP by the Apex Unit. The Bank reviewed the supervision reports prepared by DFU on a quarterly basis and condced adjoc direct superviston periodically.  -V PROJECT CQMPLETION REPORT PH, PPTlES FIFTH PRIVATE DEVBLOPENBM CORPORATION OF TEE PHILIPPINES PROJECT (LOAN 1514-PH) EVALUATION SUHHAMY 1. Loan 1514-PH, the fifth loan made to the Private Development Corporation of the Philippines (PDCP) aimed at providing term finance to et-.nomically desirable and financially viable industrial enterprises, especially in manufacturing (para 2.1). 2. Fund utilization of the loan was satisfactory: with funds disbursed to 28 subDrojects (one was cancelled), the objective of helping PDCP finance industrial enterprises was achieved (paras. 3.1-3.3). The project was alao successful in generating employment, foreign exchange earnings/savings and value added that compared favorably with what was projected (para. 3.9). 3. Unfortunately, because of the depressed economic conditions that characterired the Philippines during 1983 to 1986, the operational performance of the subprojects was mixed in terms of sales and substantially below appraisal expectations as regards financial and economic rates of return (paras 3.6-3.7). Massive peso devaluations during that period compounded the problems of the subborrowers by increasing their debt service obligations which were denominated in foreign currency. This led to a high level of arrears which in turn contributed to PDCP's incurring losses (para. 3.11). Given the severity of the economic crisis and accompanying large devaluations, it is remarkable that the subprojects financed under Loan 1514-PH did not perform worse than what the actual results show. 4. As for PDCP itself, with most of its loan portfolio denominated in foreign currency, the magnitude of its bad and doubtful debts and the shortfall, in foreign currency terms, of collections and collateral assets reached such a level as to erode substantially its capital base, profitability and liquidity (paras 5.9-S.11). Despite high standards in project appraisal and reforms in project supervision to enable more effective response to subborrowers' increasing inability to meet their obligations (paras 4.3-4.6), PDCP was saddled with a loan portfolio marked by low collection levels, high arrears ratios and deficiencies in collateral values (paras. 5.13-5.14). The accompanying write-offs and loss provisions coupled with the decline in profitability led to the gradual shrinkage of its equity, with its high leverage suggesting the need for a substantial injection of new capital. 5. PDCP's poor financial performance mirrored its inadequate operational performance, itself a reflection of the general deterioration of the economy. Loan volume as well as equity investments declined (paras 5.2- 5.6). Its domestic resource mobilization efforts were hampered by the  - vi - limited capital market, escalating interest rates and restrictions on its taking deposits from the public (para. 5.17). As for foreign funds, the reluctance of subborrowers to assume the foreign exchange risk following the peso devaluations dissuaded PDCP from borrowing foreign currency since 1983 (paras. 5.14-5.20). 6. To cope with its problems, PDCP took the following measures in the last four years: (a) To improve liquidity adversely affected by decreasing collections, it undertook a rehabilitation plan involving cash support from Far East Bank and the Government (para. 5.18). This, however, provided only a short-term solution enabling PDCP to meet its amortization payments on IBRD and African Development Bank (ADB) loans; (b) To reduce the impact of foreign exchange movements on its subborrowers an4 itself, it proposed possible solutions to the Government, notably a redenomination (or conversion) of its multiple-currency loans into single-currency (dollar) loans. This would involve the Government assuming the cross-currency foreign exchange risk and the subborrowers bearing the exchange risk on the dollar (para. 7.3). The Bank supported this request but the Government has not yet responded. 7. More important is the need for PDCP to articulate a longer term strategy that takes into account the now changed financial system where PDCP no longer enjoys a quasi-monopoly, with the Development Bank of the Philippines (DBP), of access to foreign exchange funds. This entails identification of its comparative advantage in a more competitive environment where other financial institutions also can tap long term funds such as the Industrial Guarantee Loan Fund (IGLF) and Agricultural Loan Fund (ALF). A strategic framework wherein investment banking would have synergistic linkages with what has been PDCP's acknowledged area of expertise, namely project finance, appears to offer possibilities. Recognizing this, PDCP has resumed its investment house activities and is expanding its mutual fund operations. Nonetheless, this new strategic orientation will require a sound financial base to help its investment banking business grow to the required "critical mass' (paras 7.5-7.6). 8. Experience in executing the project suggests the following lessons: (i) PDCP is directly and profoundly affected by changes in its environment over which it has no control. As its subborrowers assumed the foreign exchange risk, they suffered heavy losses as a result of the major devaluations from 1983 to 1986. This led to severe repayment problems which were translated into high arrears and low collection levels for PDCP, thus undermining the institution's financial position. (ii) In retrospect, it is clear that it is difficult for private enterprises which do not earn foreign exchange to bear the foreign exchange risk. In an environment of market-oriented domestic interest rates and free capital movements, a better approach would be for the government to assume the foreign exchange risk for a market-related fee.  - vii - (Ili) At the tiLe of appraising Loan 1514-PB, emphasis was placed on the mobilization of commercial foreign currency resources but not on domestic resource mobilization by PDCP. Excessive reliance on forei8n currency funds on the liability side and foreign currency loans on the asset side contributed significantly to PDCP's losses and poor performance. In the future, more effort should be spent on addressing constraints on domestic resource mobilization such as limited capital markets, and implementation of strategies for raising funds in the domestic market.  PROJECT COMPLITION REPORT PHILIPPINES FIFTH PRIVATE DEVELOPMENT CORPORATION OF TEM PHILIPPINES PROJECT (LOAN 1514-PH) __,,_,._____________ I. INTRODUCTION 1.1 Heavily dependent on imports and foreign capital, the Philippine economy did not adjust well to the severe external shocks of the post-1979 period--high oil prices and interest rates, and declining export prices. The economy.experienced declining growth rates, a deteriorating balance of payments, and the accumulat4on of a large external debt. The period was also marked by a money market crisis iii 1981, followed by economic contraction from 1983 until the end of 1985, during which time inflation surged. This period was characterized by an active monetary and exchange rate policy, with large devaluations and extremely high nominal interest rates. It should also be noted that a political crisis in 1983, combined with a world-wide debt crisis, led to a cessation of foreign credits, and forced the Government to embark on a major stabilization effort. The most recent phase, starting in 1986, and still continuing, is one of gradual economic recovery, supported by an IMF Standby Arrangement in 1986 and an Economic Recovery Loan approved by the IBRD Board in March 1987. The economic decline has been reverseds GDP grew by 1.5t in 1986, 4.72 in 1987 and 6.6? in 1988. 1.2 The Private Development Corporation of the Philippines (PDCP) was established in 1963 with the active support and financial assistance of the Bank and IFC in response to the Government's desire for a privately owned and managed development finance institution. PDCP's main objectives were and continue to be: assist in the creation, expansion and modernization of private production enterprises in the Philippines; encourage private capital participation in enterprises from local and foreign sources; and develop local technical, financial and managerial capabilities. To help accomplish these aims, PDCP's Articles of Incorporation empower it to extend medium and long term loans, invest in equity capital, underwrite or take up equity and debt security issues, guarantee loans and provide rumagerial and technical assistance to its borrowers. A list of shareholders as of December 31, 1987 is provided in Annex 1. PDCP's initial share capital in 1963 of P 25.0 million has been periodically increased and as of December 31, 1987, paid up capital amounted to P 110.0 million. IFC which subscribed P 800,000 of PDCP's initial capital stock sold its shares at a profit in 1987. 1.3 The Bank has continued its association with PDCP by supporting it with five loans totalling US$125 million: Ln. 0331-PH approved in 1962; Ln. 0467-PH approved in 1966; Ln. 0630-PH approved in 1969; Ln. 1052-PH approved in 1974 and Ln. 1514-PH approved in 1978. The last loan is the subject of this Project Completion Report.  II. PROJECT OBJRCTIVES AND DESCRIPTION Objectives 2.1 The objective of the project was to support PDCP's program of lending for economically desirable and financially viable enterprises, mainly in manufacturing. A special feature of the loan was its use as a catalyst for the mobilization of complementary external medium term funds from private financial institutions. More specifically, PDCP secured a loan of US$10 million from the Bank of Tokyo simultaneously and in conjunction with the Bank loan. Description 2.2 As with the four previous loans to PDCP, Loan 1514-PH was made to the Philippine National Bank (PNB) because by virtue of Philippine law, the Government can only guarantee the obligations of government institutions. PNB then channelled the loan to PDCP for a service fee of 0.75? p.a. on the outstanding loan amount. 2.3 The loan proceeds were to be used to finance the foreign exchange needs of PDCP's subprojects. Disbursements wonld normally be to finance 100? of foreign currency expenditures for direct imports. PDCP could also use the proceeds for financing indirect imports, i.e. the foreign exchange component in off-the-shelf purchases of machinery and equipment. The maturity of subloans was to range from five to twelve years, with a maximum grace period of five years. When the project was approved, PDCP was expected to charge interest rates of 12.5? to 14? for its foreign currency loans, with the subborrowers assuming the foreign exchange risk. This would provide PDCP with a maximum gross spread of 52 on IBRD funds. As in the case of the fourth PDCP Loan, there was a limit of US$2.5 million on the maximum size of each subloan. 2.4 The project was appraised in August 1977 and approved by the Board on January 31, 1978. The Loan Agreement was signed on February 9, 1978 and the loan became effective on June 23, 1978. III. UTILIZATION OF THE BANK LOAN 3.1 Rate of Utilization. The project was successful in disbursing funds to industrial enterprises. The loan was utilized over a five year period -- 1979 up to the first quarter of 1984--with the bulk disbursed by the end of the third year. Though the original closing date of March 31, 1982 had to be extended twice, to March 31, 1984 in order to allow full utilization of the loan, the rate of utilization was much faster than that of the prior PDCP Loan (1052-PH) because of more favorable economic conditions during the initial years of disbursement and the larger average loan size. Details on the rate of disbursement for Loan 1514-PH are in Annex 2.  -3- Operational and Economic Performance of SubProjects 3.2 Operational Results and Subprolect Characteristics. Data on the subprojects financed under Loan 1514-PH are summarized in Table 1, with details in Annexes 3 to 7. Table 1: SUMMARIZED DATA ON SUBPROJECTS PDCP's Estimates Actual No. of Subprojects n.a. 29 Average Subloan Size (T thousand) n.a. $1,011 Nature of Subproject New n.a. 4 Expansion or Modernization n.a. 25 Total Project Cost (P Million) 2,208.9 2,315.8 IBRD Funds ($ Million) 30.02 29.5 IBRD Financing as 2 of Total Cost n.s. 9.92 Total Incremental Employment 4,286 3,302 Investment CostlJob (P'QO0) /a 19,528 20,130 Total Profits/Loss (Sth yr.) (in P Million) 8S.9 44.6 Total Exports (5th yr.) (in P Million) 144.5 74.7 Total Value Added (in P Million) 419.0 432.0 La Actual figure based on 18 projects for which data were available; estimates based on 23 projects. 3.3 As evident from Annex 3, Loan 1514-PH was used to finance 29 subprojects. The average loan size was $1,011,104 and the average unweighted term of the loans was 10.35 years while the weighted average was 7.37 years. Expansion/modernization projects accounted for the major portion of PDCP's Loan 1514-PH. Compared with the previous TBRD Loan 1052-PH, IBRD's share in total project cost declined from 342 to 102 due to the increased funding of projects from otter local and foreign sources. 3.4 Cost Overruns. A comparison of actual and estimated project costs (Annex 4) indicates that overall there was a cost overrun of 4.8Z. Further breakdown of the data reveals that there were 19 subprojects (73? of the total) with cost overruns ranging from .04Z to 43.62 and seven subprojects with cost savings from 0.2X to 29.32. One project was discontinued. The cost overruns were due primarily to increased equipment costs arising from price increases and foreign exchange differentials, as well as costs attributed to changes in design, specifications, or layout. 3.5 Proiect Completion. As regards timeliness of actual project implementation (Annex 4), one project was completed ahead of schedule, three were on time, while the majority (22 representing 79? of the total) were delayed by periods ranging from 2 to 28 months. The delays were caused mostly  - 4 - by project modifications such as changes in the equipment type/design or supplier. Problems related to clients' compliance with the disbursement documentation requirements also caused some delays. 3.6 Operating and Financial Performance. PDCP's decisions to finance the subprojects were taken between 1979-1981, a period when economic conditions in the Philippines were good. The operating and financial performance of the subprojects, as depicted in Annex 6, reflects the depressed economic conditions encountered subsequently, following the economic downturn that started in 1983. Aggregate sales figures indicate that performance was consistently below expectations and reveal stagnation between the third and fourth year followed by a significant decline between the fourth and fifth year. At a disaggregated level, however, the record was mixed, with the number of subprojects performing better than projected ranging from 6 to 14 in each year and averaging 10 during the first five years of commercial operations; the corresponding numbers for subprojects performing worse than expected were 7 to 15, averaging 12. As regards profitability during the first five years of operations, the number of enterprises showing positive profits has remained fairly constant each year, ranging from 14 to 15, with those showing losses numbering between 11 and 12. Earnings as a percentage of average net worth was below 102 for most of the profitable subprojects, with only 4 or 5 consistently earning above 102. 3.7 As a result of the deteriorating economic environment, actual financial results were considerably below appraisal estimates. Weighted average financial rates of return (FRR) for the subprojects was only 7.82, as compared with the estimated 17.32 FRR at the time of subproject appraisal. Seventy-nine percent of the projects generated PRR; the rest generated negative returns or losses. 3.8 Economic Performance. Of the 28 subprojects, 23 yielded positive economic returns while the rest generated negative returns. The subprojects, actual weighted average economic rate of return (ERR) was 12.41, substantially lower than the estimated weighted average ERR of 22.12 but still laud -le in view of the severe economic problems facing the country during the project implementation period. 3.9 The goals of the project as regards employment, foreign exchange earnings and value-added were achieved. On the basis of data for 18 subprojects on which data were available, a total of 3,302 jobs were created, at an average investment cost per job of P 20.1 million; this compares favorably with projections of 4,286 jobs for 23 subprojects at an average investment cost of P 19.5 million. PDCP estimates that the subprojects financed through Loan 1514 earn around $20 million of foreign exchange annually. Value-added for 23 subprojects with available data amounted to P 432.0 million compared to an estimated level of P 419.0 million for 25 subprojects. Detailed data on the economic performance of subprojects are presented in Annex 7. Effective Cost of Bank Funds to Subborrowers 3.10 With the subborrowers bearing the foreign exchange risk, the devaluations of the peso from 1983-1986 significantly increased their  borrowing costs. Taking into account the adverse exchange rate movements and using a discounted cash flow analysis (Annex 8), the effective cost of Loan 1514 funds to subborrowers was estimated by PDCP to be 34.42 in 1987. This represents a financing cost substantially higher than the weighted average FRR of 8? on the profitable projects. This high cost made it difficult for many of the borrowers to service their obligations during the 1982-86 period and led to a number of restructurings and reschedulings of the accounts. The subborrowers' increased debt servicing requirements arose from the rapid deterioration of the peso against the US dollar, yen, DM and Swiss Francs the magnitude involved can be gauged from the fact that by 1987 the dollar had appreciated to 2.5 times its value in peso terms relative to 1981 and the yen had increased to 4.5 times its value in peso terms in the same period. The only clients able to weather these difficulties were those with a relatively low debt-equity structure, those able to maintain or increase their sales and profit levels, or those with substantial export earnings. 3.11 Quality of Subloan Portfolio. The arrears in the subloan portfolio show the commulative impact of the foreign exchange losses and the downturn in the economy. Total loans outstanding in respect of the 28 projects amounted to P 347.9 million as of September 30, 1988 (see Annex 9). Of these, 13 were in current status and 15 were in arrears of more than three months. Eleven loans had been rescheduled of which seven were again past due. IV. INSTITUTIONAL DEVELOPMENT 4.1 Management/Ornanization. In 1986, PDCP underwent significant changes in its capital structure (see para. 5.7) and implemented a reorganization which involved formation of a new Board of Directors and the establishment of an Advisory Board to provide guidance and direction to senior management. PDCP's Board of Directors now consists of 11 members, four of whom are incumbent PDCP officers representing the PDCP Provident Fund, the main shareholder. PDCP's senior management consists of the Chairman, President and Treasurer, with the President being effectively the Chief Executive Officer. In an effort to decentralize and strengthen middle management, 6 Vice Presidents and 6 Assistant Vice Presidents head the operations of the 15 departments which form 3 groups: Operations, Project Management, and Administration/Accounting/Finance. 4.2 Staffing. Since PDCP's professional staff is an important resource, its high turnover rate over the years is alarming: from 292 in 1974, the rate went down to 13? in 1978, but rose again to 24Z by 1986 following the "freeze hire' policy instituted in 1983. Average annual turnover among professionals during 1979-88 was 18t. The turnover can be attributed to the strong demand for PDCP-trained professionals from other financial institutions offering higher financial emoluments and better perceived security of employment. Nonetheless, such turnover adversely affects the morale of remaining staff, undermines continuity, drains orientation and training resources, and makes it more difficult for PDCP to develop the organizational cohesion necessary for effective implementation of strategy. PDCP's upgrading of its managerial and non-managerial salary structure in January 1987 did not enhance its competitiveness as expectedt the professional turnover rate was 19.8X and 25.61 in 1987 and 1988 respectively.  -6- Standards and Procedures 4.3 Proiect Appraisal. PDCP's appraisal procedures are sound. Criteria related to fitancial, market, technical, managerial and economic viability are applied, including the adequacy of financial and economic rates of returns on investment. Various improvements, however, are being implemented in PDCP's project appraisal in light of PDCP's past experience. The most notable new feature is the inclusion of competitive analysis, which involves examination of project proposals in the context of likely strategic countermoves by competitors within the industry, and maturity of the product line(s). 4.4 Proiect Supervision. PDCP's many attempts at improving project supervision failed to stem the deterioration in the arrears situation which vas due to more basic forces at work - the economic crises coupled with the continuing depreciation of the peso. Following the Bank's emphasis during supervision missions on the need to strengthen the staffing and management of the Project Management Group (PMG), which was in charge of project supervision, changes in project supervision were initiated in early 1983s specialized units were formed out of the existing supervision group. The Special Projects Department (SPD) was organized to handle problem projects and the Acquired Assets Unit (AMU) was formed to take on the responsibility for disposing assets foreclosed by or conveyed to PDCP in partial or full payment of loan obligations. The balance of the portfolio was handled by the Project Monitoring and Supervision Department (PMSD). SPD, during its 3-year existence, formulated and implemented rehabilitation plans for problem projects and initiated legal action vhere necessary. AAtD took on the function of liquefying the acquired assets and attending to the logistical requirements for administration, maintenance, repair, and upkeap of the assets to avoid asset deterioration and at the same time accelerate recoveries. 4.5 In 1985, a Bank Mission reviewing project supervision Dy SPD found that its 'analysis did not delve into the depth and analytical assessments normally considered necessary to justify rescheduling actions given the deteriorating economic conditions,' and concluded that projections made at the time of loan reschedulings were overly optimistic. 4.6 By mid-1986, after the rehabilitation plans for the problem accounts had been developed and implemented and considering the reduced level of its lending operation and the need to consolidate its manpower resources, PDCP again decided to merge PMSD and SPD into one, reverting to the original set up. The rationale for this action was the need for the institutional structure for supervision to be relatively flexible, adjusting to the requirements of particular situations. V. OPERATIONAL AND FINANCIAL PERFORMANCE OF PDCP Operational Performance 5.1 As one might expect under the adverse economic conditions, PDCP'a operational and financial performance in the eighties was lackluster.  -7 Declining loan volume, unimpressive syndications and underwriting operntions and reduction of its equity portfolio were accompanied by a shrinking equity base, vanishing liquidity and decreased profitability. A loan portfolio marked by high arrears and collateral deficiencies led to increased loan loss provisions which undermined PDCP's financial position. The large extent to which foreign exchange losses contributed to these arrears and, thus, to PDCP's financial predicament calls for a reassessment of the policy whereby subborrowers were made to assume the foreign exchange risk. 5.2 Overall Loan Operations. As evident in Annex 10, PDCP met the overall targetted approvals for the years 1978-79, exceeding them in 1980 with the highest level in its history of P 1.3 billion. After 1980 however, there was a sharp drop in approvals in most lending categories, particularly foreign currency lending due, initially, to the unfavorable economic conditions and, later on, increasing aversion of enterprises to bear the foreign exchange risk as tki peso began to decline steadily. 5.3 PDCP's lending operations for the 1982-87 period are detailed in Annex 11. Approvals continued to decline in the period from P 418.0 million in 1982 to P 261.9 million in 1986, except for a temporary increase to P 736.3 million in 1984 due to the peso-denominated loans made available through the Central Bank/IBRD Apex Fund (Loan 1984-PH) with the foreign exchange risk being shouldered by the Central Bank. In 1987, approvals amounted to P 406.9 million, largely accounted for by external fund management activities and peso lending funded through the Industrial Guarantee Loan Fund (IGLF) and Guarantee Fund For Small and Medium Scale Enterprises (GFSHE). More availments from IGLF may be limited as PDCP already accounts for 25? of IGLF lending and as IGLF could limit available credit to 150? of PDCP's equity. 5.4 Foreign currency lending has almost disappeared as a PDCP product line. In 1987, only 27S of total approvals were in foreign currency, compared to a previous high of 92? in 1976 and 65? in 1977. During the first quarter of 1988, no foreign currency loans were approved. Although the Bank has been discouraging PDCP from an excessive reliance on foreign currency lending since 1976, the decline in foreign currency denominated loans has unfortunately not been offset by increased local currency lending. 5.5 Syndications and Underwriting Operations. To complement its direct lending activities and assist viable clients with large financial requirements without violating its prescribed single borrower limits, PDCP also provides loan syndications and underwriting services, thus helping mobilize additional financial resources for its clients. PDCP's syndications and underwriting operations, which reached P 160.7 million in 1986 and P85 million in 1987, are not characterized by any pattern owing to shifts in economic conditions. 5.6 Equity Investments. In the seventies, PDCP invested in enterprises in line with its goals of becoming more active in equity investment operations and helping develop a secondary market for the issues it intended to underwrite. However, in more recent years, PDCP has followed a strategy of unloading its equity investments: as of December 1987, its equity investments (Annex 12) in 15 companies including those in its eight subsidiaries, amounted to P 15.9 million at acquisition cost, a substantial decline from the P 28.4 million level as of December, 1986. Estimated realizable value of the  -8- investments amounted to P 13.7 million, thus showing a potential net capital loss of about P 2.8 million as against the portfolio carv.ying value of P 16.5 million. Portfolio impairment was due partly to write-downs of PDCP's investment of about P 2.1 million in a bank and a securities broker. 5.7 Guarantee Operations. Given the minor role of guarantee operations in PDCP's strategy, marketing efforts were not directed at actively seeking out this business. Consequently, PDCP's guarantee operations (Anner 13) have been erratic, reaching a peak of P 68.7 million in 1979, then tapering off to zero starting 1983. These guarantees, which supplemented PDCP's direct lending, were issued against suppliers' credits or peso loans of local financial institutions. Financial Performance 5.8 Changes in Shareholder Structure. In May 1981 PDCP's stockholders approved a stock swap with Par East Bank and Trust Company (Far East Bank) through which the latter became the major shareholder (87Z) in PDCP. This has had its advantages and disadvantages: (a) the association with Far East Bank, a prominent and profitable commercial bank, has htlped maintain depositors' confidence in PDCP; (b) PDCP gained the ability to offer a full-service financing package with Par East Sank supplying short-term working capital funds; but (c) on the other hand, legal restrictions on Far East Bank investing more than 152 of its net worth in PDCP prevented it from supplying the needed cash equity to PDCP. In October 1986, Far East Bank sold its equity holdings in PDCP to the PDCP Provident Fund, ostensibly to enable Far East Bank to pursue its universal banking strategy and allow PDCP freedom tc focus on its role as a development finance institution. A likely motive force behind the divestment by Far East may well have been the apprehension caused by the increased debt servicing requirements of PDCP following the successive devaluations of the peso. 5.9 Equity and Capital Structure. PDCP's audited balance sheets for the years 1978-87 are presented in Annex 14. From a high of P 207 million in 1985 PDCP's equity base has shrunk to P 143.2 million in June 1988 because of write-offs and provisions (para. 5.15) which exceeded its modest profits. After remaining within the covenanted 8:1 limit from 1978-82, the long-term debt/equity ratio rose above the limit in 1983-85 as a result of the peso depreciation vis-a-vis the dollar. In 1984, PDCP requested a loosening of the convenanted 8:1 long-term debt/equity ratio but the Bank disagreed, recommending that PDCP seek additional equity funding from its majority stockholder, Par East Bank. PDCP's efforts to raise additional equity capital from Far East as well as IFC and ADB failed. Its gearing improved in 1986 when, with the infusion of the P 150.0 million Far East Bank subordinated loan and the Monetary Board's approval of its treatment as quasi-equity, the long- term debt/equity ratio fell to 7.3:l. However, as a result of a P 65 million net loss incurred in 1987 (para. 5,.ll) which adversely affected PDCP's capital structure, the ratio deteriorated again to 9.0:1. There was some improvement in 1988 following the P2.1 million net income realized during the first semester of 1988s the long-term debt/equity ratio fell to 8.18sl, though still marginally above the covenanted limit. The high leverage suggests the need for a substantial infusion of equity capital.  -9- 5.10 Liquidity. In conformity with an IFC Loan Agreement, PDCP's net liquid assets as a percentage of total assets (net liquidity ratio) exceeded the covenanted 42 in the years 1982 and 1986 but failed to remain above that minimum in the years 1983-85, an indication of PDCP's financial difficulties in those years. The minimum current liquidity ratio of 1.15tl agreed under Loan 1514-PR was met only in 1986. Both liquidity ratios were below the covenanted limits in December 1987, indicating an acute liquidity problem. The situation has improved, however, in 1988 as a result of its profitable operations during the first semester of 1988: the current liquidity and net liquidity ratios of 1.34:1 and 12.141 as of June 30, 1988 were both above the minimum limits of 1.15:1 and 4.02 respectively. Details of the pertinent financial statements and ratios are in Annexes 14 and 17. 5.11 Profitability. PDCP's performance during the period of project implementation was characterized by declining profitability. Net income decreased from P 22 million in 1978 (182 of gross income) to P 3 million in 1986 (12 of gross income). In 1987, for the first time in 24 years, PDCP suffered a P 65 million net loss, principally because of substantial provisions for possible losses on loans in foreign exchange. Financial expenses ranged from 74t to 602 of gross income from 1982-86 and posted their highest level of 1052 in 1987, due in part to the cost of short-term borrowings which was not adequately offset by interest income from PDCP's short-term lendings. Details are in Annexes 15-16. 5.12 Profitability after tax as a percentage of average equity has also declined. From an average of 162 irn 1975-1980, it fell to 9.52 in 1981. Subsequently, the figures for 1982, 1983, 1984, 1985, 1986 and 1987 have been, respectively, 5.42, 2.9X, 2.32, 1.32, and 1.5. Return on average net worth for the first six months of 1988 was 1.48X. 5.13 Quality of Portfolio. The quality of its loan portfolio, assessed by collections and arrears levels as well as deficiencies in collateral values, remains a major concern for PDCP. In the period 1979-87, PDCP's cash collection ratio (percentage of principal and interest due actually collected) has hovered between 60 and 702, (see Annex 18), a low level that indicates a cash flow problem and raises doubts about PDCP's viability. Its cash collection performance is even bleaker with regard to past due principal and interest, ranging from 232 to 48Z in 1986 and 1987. PDCP's poor collection performance has affected PDCP's liquidity position. With the inadequate collections, total loan arrears as a percentage of principal outstanding remained rather high, staying between 82 and 92 during most of 1978-1987 (Annex 19) and shooting up to 14t as of June 30, 1988. As regards principal affected by arrears as a percentage of total principal outstanding, the figures have remained high: an increase from 252 in 1978 to 392 in 1980; a decline in 1981, 1982 and 1983 only to be followed by increases to 36Z in 1985, 422 in 1986, then down to 342 in 1987. (Annex 19). If the arrears taken into consideration are limited to those over three months, the same basic trends are discernible. The apparent improvement in 1987 may be due to reschedulings and the transfer of several past due and non-performing accounts to Far East Bank.  - 10 - 5.14 There is also a gap between the peso value of loan collateral and the rising value in peso terms of the foreign currency obligations secured by the collateral. Total collateral deficiencies resulting from the peso depreciation, estimated at P 368 million as of May 31, 1988, decrease the quality of PDCP's portfolio and lead to foreclosure losses. 5.15 Provisions. Provisions for doubtful accounts amounted to P 93.5 million on June 30, 1988 or 30.42 of total arrears and 4.31 of total loan portfolio. As of December 1987, PDCP's external auditors had determined that the provisions were inadequate and required an additional allowance for doubtful accounts of P 79 million. The Central Bank, however, allowed PDCP to spread the additional provisions necessary over a 5 year period at the rate of P 1.3 millionM per month starting January 1988. Had this additional provision been booked in 1987, PDCP would have posted a net loss of P 144 million. 5.16 PDCP's financial performance, as depicted in paras. 5.9 to 5.15 shows that it suffered as a result of macro-economic developments beyond its control. The foreign exchange losses borne by its subborrowers contributed significantly to PDCP's arrears, low collections and, ultimately, poor financial results. With the benefit of hindsight, one may conclude that, by and large, subborrowers are in no position to assume the foreign exchange risk. Mechanisms have to be found for the government to bear the foreign exchange risk for a market related fee. Resource Mobilization 5.17 Domestic Currency. Classified as a Non-Bank Quasi-Bank under Central Bank regulations, PDCP is not allowed to accept retail deposits, an important potential source of local funds. It is allowed to tap institutional investors. However, some financing sources have either been inappropriate (e.g. the short term money market) or they have been difficult to attract (e.g. private placements from institutional lenders, as these could earn higher returns elsewhere, for only a 3light increase in perceived risk). The total amount of P323.1 million raised in the 1978-1987 period (Annex 20) were principally back-to-back deposits by PDCP's own borrowers, as cash collateral. Moreover, the lack of a developed capital market has prevented it from mobilizing domestic term funds through the issuance of bonds, even though it has SEC authorization to issue its own long term commercial paper up to a maximum of P 300 million. PDCP's domestic resource mobilization efforts were also impeded by the political and economic crisis which burdened the financial markets with prohibitive interest rates and very limited credit resources. As a consequence, PDCP has faced shortages of term peso resources. 5.18 A financial assistance package obtained from Far East Bank in 1986 and complemented by a parallel assistance agreement with the National Government did not constitute normal mobilization of domestic funds as it was designed mainly to bridge major shortfalls in PDCP's cash collections from borrowers and enable PDCP to retire short term obligations and meet its debt service obligations. The package, amounting to P 280.0 million, payable in tranches and completely remitted to PDCP by May 1988, consisted of the following: (1) Subordinated Loan from Far East Bank of P 150.0 million; (2)  - 11 - Assignment to Far East Bank, without recourse, of restructured and past due receivables for P 127.1 million; and (3) Purchase by Par East Bank of residential condominium and PDCP'V board seat at the Manila Stock Exchange for P 2.9 million. The Subordinated Loan carried soft temsss maturity of up to 10 years with 5 years grace on principal; 1S p.a. interest during the first 3 years, 122 p.a. interest the fourth year, 15Z p.a. the fifth year and market rates thereafter. Far East Bank also agreed to waive PDCP's repayment obligations if and when such repayment would violate PDCP's covenanted financial ratios with its creditors and bring its debt service cover below the lsl level. As part of its latest rehabilitation strategy, PDCP is seeking to soften further and stretch out these terms. 5.19 Foreign Currency. Since the time PDCP availed of Loan 1514-PH, it secured three other foreign currency loans to fund its lending requirements (Annex 21); the Bank of Tokyo. $10.0 million cofinancing for Loan 1514-PH, secured in 1978; the Commonwealth Development Corporation, Pounds sterling 9.5 million in 1979; and ADB ($45.0 million in 1983). It also availed of US$39.1 million under the IBRDICB Industrial Finance Project (Apex) as a participating financial institution. Owing to business uncertainties and the sharp devaluation of the peso during the period, the ADB loan had few takers and 94Z of it was eventually cancelled. Given the increasing reluctance of business enterprises to incur foreign currency obligations in view of peso devaluations and PDCP's problems of arrears, reschedulings and inadequate asset realization arising from these devaluations, PDCP has not sought additional foreign credit lines since 1983. 5.20 In 1987 PDCP entered into an arrangement with PNB and the Government Whereby the Government shall pay amortizations of PDCP loans to IBRD and ADB from August 1986 to April 1987 amounting to P 261 million. This amount, representing Government assistance to PDCP, would be restructured by PYB into a five year loan to PDPC, with semi-annual installments. The Memorandum of Agreement, amongst PNB, the Department of Finance and PDCP, runains unsigned. This is due to a disagreement between PNB and the National Government as to who will bear the loss in case PDCP fails to pay the amortization due. To date, PDCP has remained current in its payment of principal and interest amortization falling due to the Government and Far East Bank. 5.21 Audit. PDCP's annual audited reports have been received regularly by the Bank. The reports of its external auditors, Sycip, Gorres and Velayo on PDCP's financial statements were without qualifications from 1978 to 1981. Their opinion on the 1982 to 1985 financial statements were, however, qualified as to the effects on the statements of deferring foreign exchange losses of P 10.2 million incurred in 1982 and previous years, and amortizing these losses over five years starting in 1983, in accordance with a practice allowed by the Central Bank. Since in 1986, PDCP restated its 1985 financial statements to effect the retroactive charge of these foreign exchange losses against 1982 operations, the auditors' report on the 1986 accounts were unqualified. The 1987 financial statements were qualified by the auditors to the effect that at December 31, 1987, an additional allowance for doubtful accounts of P 79 million should be charged to 1987 operations; the Central Bank permitted PDCP to provide for this allowance over a five-year period starting in 1988 in equal monthly amounts.  - 12 - V1. DEVELOPMENT ROLE OF PDCP 6.1 Economic Impact. As a private development finance institution in the Philippines, PDCP has played an important role in the financial system by extending financial assistance to the various sectors of the economy. In recent years, however, this role has been in decline, as evident in the preceding paragrapns. Although PDCP's overall impact on the economy as a financial institution has been small, total PDCP financial assistance from 1963 to 1986 amounted to P 6.7 billion benefitting some 1,537 projects. 6.2 PDCP's figures indicate that the projects which received direct PDCP financial assistance have provided employment to 71,522 individuals for the past 23 years with a corresponding annual payroll of P 709 million. These projects bave contributed P 48 billion in net sales and some P 6 billion to the country's net domestic product since 1963. PDCP estimates that these projects have generated about $587 million in net foreign exchange earnings/savings as of year-end 1986. 6.3 Manpower Training. PDCP has also served as a valuable training and consulting institution, providing programs in term lending and executive development for the local market as well as for foreign development finance companies. VII. CONCLUSIONS 7.1 PDCP's record in meeting its objectives, established under Loan 1514-PH, of assisting enterprises in the industrial sector througz lending to economically desirable and financially viable projects has been mixed. On the one hand, PDCP met the objective of resource transfer by disbursing loan proceeds much faster than in previous loans. Moreover, the project was successful in job creation and generation of foreign exchange earnings/savings. On the other hand, a large number of subprojects faced problems which were reflected in a high level of arrears, a situation which necessitated restructurings and reschedulings. Their operational performance was substantially below appraisal estimates in terms of financial and economic rates of return. The overall performance, however, is not that grim if viewed in the light of (a) the political and economic uncertainties and severe recessionary conditions that plagued the country in the 1983-86 period and (b) the subborrowers' increasing debt service obligations as a result of massive peso devaluations in that period. 7.2 The inability of many subborrowers to service payments of interest and repayments of principal that increased in peso terms led to losses being sustained by PDCP. However, the problem now facing PDCP is caused by non- performing assets which provide no cash-flow to finance PDCP's increased liability in peso terms. With more than 70 percent of its long term debt liabilities denominated in foreign currency, PDCP's major problem is its direct exposure to foreign currency fluctuations. Its calculations show that in spite of prompt debt repayments (as evidenced by reductions of its various  - 13 - foreign currency obligations), PDCP's foreign currency obligations of P 1.478 billion equivalent as of 1983 increased to the equivalent of P 2.030 billion by year-end 1987 because of adverse exchange rate movements. A ten percent annual depreciation of the peso vis-a-vis the yen, DM and SwF would increase the debt servicing requirements of PDCP and its subborrowers by P 1 billion for 1988-1992. PDCP needs a major financial restructuring which should include a long-term solution of the exchange risk it and its clients are carrying. 7.3 To relieve its borrowers of a portion of their foreign currency risk exposure, PDCP is exploring the possibility with the Government of redenominating its IBRD and ADB accounts which are in Japanese yen, German marks and Swiss francs into one currency, the US dollar, which would limit PDCP's and its subborrowers' foreign exchange risk to one currency. The Bank has supported PDCP's efforts to obtain a conversion (or redenomination) of its existing h- currency subloans into US dollar subloans, pointing out to the Department .,- Finance that such an arrangement would entail a sharing of the components of the foreign exchange risk between the Government and the subborrowers, with the former assuming the cross-currency risk between the US dollar and the other currencies in IBRD's pool of funds, and the latter assuming only the foreign exchange risk on the dollar. Such a redenomination would also lessen the complexity and open-ended uncertainty of the foreign exchange risk to PDCP's clients. 7.4 Nonetheless, even with resolution of the foreign exchange risk issue, the magnitude of bad and doubtful debts and the shortfall, in foreign currency terms, of collections and collateral assets has reached such proportions that it has adversely affected PDCP's capital base, profitability and liquidity to a degree that raises questions about the institution's viability and survival. The severe collection shortfall that has nlagued it since 1974, leading to arrears accumulation and subloan rescheduaings drained PDCP's cash resources. The financial assistance thus far provided by Far East Bank and the Government were short-term and ad-hoc solutions that did not address the essence of the liquidity problem; the financial restructuring plan implemented in late 1986 assisted PDCP only in meeting its immediate liquidity needs, including maturing amortizations on IIRD and ADB loans. As for its equity, it has shrunk because of write-offs and provisions which exceeded its modest profits. New equity investors would be required to inject new funds and/or capitalize existing debt. However, its low levels of profitability make it difficult to attract new equity, as the yield to new investors on such capital would be low. There is also a lack of market funded medium to long term peso resources available at a cost and in volumes sufficient to enable PDCP to build a peso- denominated term loan portfolio; the main funding sources now being tapped are credit lines aimed at smail and medium enterprises--IGLF, CFSME and ALF--a fact that limits PDCP's new clientele. 7.5 PDCP's past financial difficulties can be explained by circumstances largely outside its control--the adverse economic and political environment, the accompanying peso devaluations and the resulting portfolio deterioration. As regards the future, developments in the domestic financial system and in the policies of multilateral and bilateral sources of funds have deprived PDCP of its comparative advantage derived from enjoying special access to foreign exchange funds: programs such as IGLP and ALF can now be tapped by a broad  - 14 - range of financial institutions. In the liberalized and more competitive environment, PDCP needs to redefine its comparative advantdge. This Involves identifying its core business and "subsidiary" ones which can have synergistic linkages with the core activity. This would mean that PDCP will have to develop synergies between its core area of project finance and its *subsidiary" investment banking operations. Such a strategy offers the possibility of (a) developing a pool of expertise in finans;-al packaging; and (b) participation in syndications led by PDCP or by other institutions. 7.6 PDCP has recognized the potential benefits of such a new strategic orientation. While maintaining a presence in conventional forms of development financing, it has taken steps to enter into or expand non- traditional activities to make up, as far as possible, for its declining operations, particularly those involving foreign currency exposure. It has expanded its trust and mutual fund operations and resumed its investment house activities. Efforts are currently being exerted to take advantage of the Government's privatization program and the conversion of foreign currency loans into equity in Philippines enterprises. However, the investment banking business has yet to grow to a 'critical" mass and other fee-related activities such as insurance broking, trading and management consultancy do not appear to fit into a coherent strategic framework where they would have a synergistic relationship with PDCP's financing business. 7.7 The future is unclear. Whether PDCP can develop a sound financial base for its new orientation remains to be seen. This would depend on its ability to raise long-term funds. Given the country's interest rate structure and the preemption of the market in peso funds by the Government to finance its budgetary deficits, it would be difficult, at this stage, for PDCP to raise the needed funds in appropriate maturities at an acceptable price. Raising foreign funds would be even more difficult given PDCP's current financial picture. PDCP has initiated a dialogue with the Government on possible solutions to these problems, with the Government indicating willingness to give assistance provided (a) it be allowable within the framework of existing laws and regulations; (b) it be at least cost (not zero cost) to the Government; (c) other creditors, notably Far East Bank make a commensurate contribution; and (d) PDCP strengthen its capital base by building up its equity position. 7.8 Lessons. Experience in executing the project suggests the following lessons: (i) PDCP is directly and profoundly affected by changes in its environment over which it has no control. As its subborrowers assumed the foreign exchange risk, they suffered heavy losses as a result of the major devaluations from 1983 to 1986. This led to severe repayment problems which were translated into high arrears and low collection levels for PDCP, thus undermining the institution's financial position.  - 15 - (ii) In retrospect, it is clear that it is difficult for private enterprises which do not eamn foreign exchange to bear the foreign exchange risk. In an environment of market-oriented domestic interest rates and free capital movements, a better approach would be for the government to assuwe the foreign exchange risk for a market-related fee. (iii) At the time of appraising Loan 1514-PH, emphasis was placed on the mobilization of commercial foreign curreucy resources but not on domestic resource mobilization by PDCP. Excessive reliance on foreign currency funds on the liability side and foreign currency loans on the asset side contributed significantly to PDCP's losses and poor performance. In the future. more effort should be spent on addressing constraints on domestic resource mobilization such as limited capital markets, and implementation of strategies for raising funds in the domestic market. February 1989 Revised: May 1989  - 17 - AMN 1 PHILIPPINES PRIVATE DEVELoPuENT CoRpbRATION OF THE PHILIPPINES (LOAN 1514-PH) PROJECT COMPLETION REPORT Llst of Stockholders as of December 31. 1987 Percentage Class A Class B Total shares ownership PDCP Provldent Fund 6,278,030.0 2,864,345.0 9,142,375.0 83.1125 Deutsche Gesellschaft Fur Wirtschaftliche - 201,270.0 201,270.0 1.829727 Manila Electric Company 164,608.0 - 164,608.0 1.496436 Rose Marie de Tode 110,306.0 - 110,306.0 1.002781 Shoemart, Inc. 104,390.0 - 134,390.0 0.949 Boston Overseas Fitancial Corporation - 85,736.0 85,136.0 0.779418 Banca Nazionale del Lavoro - 69,143.0 69,142.0 0.628563 Henry Sy 42,518.0 13,499.0 56,017.0 0.590245 Gerardo Roxas 43,992.0 - 43,992.0 0.399927 Acacia Mutual Aid Society 41,962.0 - 41,962.0 0.381472 J.A. Delgado Memorial Foundation 29,999.0 - 29,999.0 0.272718 Homero de los Reyes 28,834.0 - 28,834.0 0.262127 Nellie Delgado 24,680.0 - 24,680.0 0.224363 Nagin San Juan 19,627.0 - 19,627.0 0.178427 Luis V. Z. Sison 19,242.0 - 19,242.0 0.174927 Cifra & Co., Inc. 17,284.0 - 17,284.0 0.157127 Luzon Stevedoring Corporation 13,828.0 - 13,828.0 0.125709 Elena Uichico 13,828.0 - 13,828.0 0.125709 Private Investment Co. for Asia - 12,453.0 12,453.0 0.113209 Trusteeship, Inc. 10,991.0 - 10,991.0 0.099918 Liberty Insurance Corporation 10,991.0 - 10,991.0 0.099918 Bonifacio Regalado 9,859.0 - 9,859.0 0.089627 Subtotal 6.994,828.0 3,246,445.0 10.241,273.0 93.10248 Others 705,172.0 53,555.0 758,727.0 6.897518 TOTAL SHARES 7,700.000.0 3,300.000.0 11,000,000.0 100.000000  - 18 - PHILIPPINES PRIVATE DEVELOPMeNT CORPORATION OF THE PHILIPPINES (LOAN 1514-PH) PROJECT COMPLETION REPORT Schedule of Actual Disbursements (USS million) Actual Cumulative X of amount/ actual total quarter disbursements loan 1979 Third Quarter 0.1 0.1 0.3 Fourth Quarter 4.9 5.0 17.1 1980 First Quarter 1.7 6.7 22.9 Second Quarter 2.0 8.7 29.7 Third Quarter 4.6 13.3 45.4 Fourth Quarter 4.2 17.5 59.7 1981 First Quarter 1.8 19.3 65.9 Second Quarter 1.0 20.3 69.3 Third Quarter 0.5 20.8 71.0 Fourth Quarter 2.2 23.0 78.4 1982 First Quarter 2.0 25.0 85.3 Second Quarter 1.3 26.3 89.8 Third Quarter 1.3 27.6 94.2 Fourth Quarter 0.5 28.1 95.9 1983 First Quarter 1.0 29.1 99.3 1984 First Quarter 0.2 29.3 100.0  - 19- ANNEX 3 PHILIPPINES PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES (LOAN 1514-PH) PROJECT COMPLETION REPORT Liset of SubproJects, Commitment Date and Amount of Disbursement Disbursement Sub-loan Disbursement in equiv. P'O0O nob Borrower Commitent date US$ /a A-001 Hydro Resources January 18, 1979 4,484,889.85 33,085 A-002 Fine Chemicals October 03, 1979 1,750,000.00 12,899 A-003 Filipinas Cement March 07, 1980 3,852,075.34 28,615 A-004 Republic Glass Nay 02, 1980 2,407,489.86 18,104 A-005 PILTEL May 29, 1980 1,538,452.35 11,569 A-006 RPM Corporation May 20, 1980 2,074,930.49 15,603 A-008 NENACO June 26,1981 1,700,037.57 13,580 A-009 Structural Foam October 29, 1981 1,342,293.46 10,849 Subtotal of A projects 19,150,168.92 144.304 B-001 Matling Industrial January 04, 1979 42,148.07 311 R-002 HR Lopez January 16, 1979 603,159.54 4,450 B-004 MC-CEI July 05, 1979 110,000.00 811 B-005 Supreme Packaging August 25, 1979 119,364.00 880 B-(07 Loreuxo Shipping November 08, 1979 90,000.00 65 B-008 Suricon December 19, 1979 1,000,000.00 7,415 -1-00, RRM Corporatlon December 27, 1979 1,493,990.92 11,978 B-010 RC Gonzalez December 27, 1979 295,447.98 2,1-; B-011 Unton Industries January 04, 1980 1,476,750.00 10,952 3-012 Transpacific Towage February 14, 1