Document of The World Bank FOR OFFICLAL USE ONLY Repeat No. 7791 PROJECT COMPLETION REPORT COSTA RICA INDUSTRIAL CREDIT PROJECT (LOAN 1599-CR) MAY 24, 1989 Trade, Finance & Industry Operations Division Country Operations Department II Latin America and the Caribbean Region This document has a resictel distribution and may be used by recipiens only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Costa Rica Colon 1984: US$1 a 047.50 1985: US$1 - 03.45 Average Exchange Rata for the Project 1982-1986: US$1 -A42.05 ABBREVIATIONS AID - United States Agency for International Development BCR - Banco de Costa Rica BNCR - Banco Nacional de Costa Rica V UEI - Central American Bank for Economic Integration CACM - Central American Common Market CAT - Tax Credit Certificate CBCR - Central Bank of Costa Rica CODESA - Corporacion Costarricense de Desarrollo (Costa Rican Development Corporation) COFISA - Corporacion Costarricense de Financiamento Industrial (Costa Rican Industrial Finance Corporation) FODEIN - Fondo de Desarrollo Industrial (Industrial Development Fund) IDB - Interamerican Development Bank PFI - Pa.ticipating Financial intermediaries FISCAL YEAR Government/PODEIN - January 1 to December 31 FOR OMCIL USE ONLY THE WORLD BANK Washington. O.C. 20433 U.S.A MIhc 41 OwtiCe'taIl flinqaho.I lvaIugnm May 24, 1989 MENORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Completion Report on Costa Rica Industrial Credit Project (Loan 1599-CR) Attached, for information, is a copy of a report entitled 'Project Completion Report on Costa Rica - Industrial C;edit Project (Loan 1599-CR)' prepared by tLe Latin American and the Caribbean Regional Office. No audit of thL3 project has been made by the Operations Evaluation Department at thAis time. Attachment This document has a restricted distribution and may be used by recipients only in the performance I of their official duties. Its contents may not otherwise be disclosed without World Bn authorization.ce ..~~~~~~~~~~ wihu wol akatoiain FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT CPSTA RICA INDUSTRIA. CREDIT PROJECT (LOAN 1599-CR) TABLE OF CONTENTS Page No. PREFACE .... . . . i BASIC DATA SHEmT ......... ..... . iii EVALUATION SUMMURY . v I. BACKGROUND.AND HISTORY 1. Industrial Sector Lending Activity 1 Macroeconomic Setting and Sector Performance .1 Finacial Institutions ..... - 2 II. PROJECT OBJECTIVES AND LOAN EFFECTIVENESS ... 3 Bacground . . ... 3 Loan Objectives . . .sA .. . ... .. .3 Loan Effectivenesc ;... Creating Term Lendfnp Facilities. 6 III UTILIZATION OF LOAN .RESOURCES. 7 Participating Financial Institutions. 7 Project Financial Plan .. . 8 Distribution of Subloans .. 9 Number and Size of Subprojects and Enterprises 9 Employment Generated and Cost Per Job. 9 Small Scale Enterprise Lending . .10 Type of Enterprise and Term of Subloans .. . 10 Financial and Economic Rates of Return . .11 Current Status of Investment Projects . .11 Status of Loan Portfolio .... ...................... 13 IV. INSTITUTIONAL DEVELOPMENT .1S Institution Building ..15 Technical Assistance -S.. Financial Sector Policy Development .. 17 FODEIN's Financial Position . .18 Auditing and Financial Reporting .. 19 V. SUMHARY AND CONCLUSIONS .19 Project Objectives . 19 Economic and Financial Results .22 Tt -t * r ; Ig1 d * iF *inn I . vF h v *i ' rtv i n TABLE OF CONTENTS (cont'd.) Page No. 1: (1 Financial Plan for Investment Project ................ 23 (2) Distribution of Total Project Invev'tment by Subsector ...................... 24 (3) Basic Interest Rates ................................. 25 (4) Characteristics of Projects Financed (Part I) ........ 26 (5) Characteristics of Projects Financed (Part II) ....... 27 (6) "etailed Subloan Analysis of Exceptional - Subprojects ....................... ...... ......... 28 (7) Status of Loan Portfolios Loans in Arrears Analysis - Bank-Financed Projects .................. 29 (8) Analysis of Loan Portfolio - FODEIN Total Projects ... 30 (9) Total FODEIN Project Financing 1981-1987 ............. 31 (10) Lending by Sector ..................... 32 (11) FODEIN Balance Sheet ................................. 33 (12) Industrial Development Fund (FODEIN) Results of Financial Operation ............................. 34 (13) FODEINs Selected Financial Ratios .. ................. 35 2s Financial Spreads, Leverage Ratios and Profitability ...... 37 3s Comments Received from the Borrower ....................... 41 0 PROJECT COMPLETION REPORT COSTA RICA INDUSTRIAL CREDIT PROJECT (LOAN 1599-CR) PREFACE This report presents an evaluation of the results achieved under the Bank's first Industrial Credit Project in Costa Rica (Loan 1599-CR). The US$15 million loan in support of a number of institutional and industrial sector objectives was made to the Central Bank of Costa Rica (CBCR) which established a second tier facility, Fondo de Desarrollo Industrial (FODEIN), to channel Bank and counterpart resources to small and medium scale industrial, agro-industrial and export projects presented by participating financial intermediaries. The loan was appraised in February 1978, approved and signed in July 1978. However, it became effective only in September 1980 and the first authorizations of subloans were finally granted by the Bank in July 1981 (three years after loan signing) after interest rate issues were resolved. The loan was fully committed in October 1984 and fully disbursed in February 1986 some four years behind the original schedule. While the Bank did not make a follow up loan for FODEIN, its operations continue to benefit from the use of the US$15 million (equivalent) in counterpart funds and reflows. The Interamerican Development Bank (IDB) expects to grant a loan to the Government of Costa Rica in mid-1988 to support FODEIN's institutional development and financing for the industrial sector. The Project Completion Report (PCR) was prepared by the Bank's Latin American and Caribbean Country Department II following a country visit in January 1988. The PCR draws on the staff Appraisal and Presidents Reports, loan documents and the project files. The report presents a factual review of the operations of the project, the extent to which the main objectives of the program were achieved, the uses to which FODEIN's loan resources were put and the results of the investments made. A Project Completion Report, which included a substantial data base on project performance and status, was received from the Borrower. The assistance and cooperation received from the Government, the CBCR, FODEIN, participating financial intermediaries and other agencies and enterprises during the project completion mission is greatly appreciated. The Borrower's comments have been received and included in t_e report and are attached as Annex 3. This project has not jeen audited by the Operations Evaluation Department. - iii - PROJECT COMPLETION REPORT COSTA RICA INDUSTRIAL CREDIT PROJECT (LOAN 1599-CR) BASIC DATA SHEST (Amounts in US$ million) LOAN POSITION As of 12131188 Original Disbursed Cancelled Repaid Outstanding Loan 1599-CR 15.0 15.0 0.0 6.9 8.1 la CUMULATIVE LOAN DISBURSEMENT FY79 FY80 FY8i FY82 FY83 FY84 FY85 FY86 ti) Planned 0.4 5.8 12.2 15.0 15.0 15.0 15.0 15.0 (ii) Actual - - - 2.2 3.8 8.0 13.8 15.0 (iii) (ii) as X of (i) 0 0 0 14.72 25.3Z 53.31 92.2Z 100.6 PROJECT DATA Original Date Actual Board Approval 06/17/78 06/17/78 Loan Agreement Signed lb 07/12/78 07/12/78 Effectiveness /c 11/17/78 09/12/80 Submission Deadline 12131/80 12/31/80 Loan Closing 06/30/82 06/30/85 Final Disbursement 06/30/82 02/18/86 La In addition, the borrower's outstanding balance to the Bank includes US$6.5 million in accrued exchange risk adjustments. Thus, the total outstanding balance on Lean 1599-CR currently is US$15.9 million. Lb The Board approved an amendment to the loan agreement on August 3, 1982 under which up to US$5 million of the US$15 million loan could be used for pre-export financing. US$3 million were ultimately used for such purposes. /c While conditions of effectiveness were met in 09180, outstanding interest rate issues were not resolved until 06/81. The Loan did therefore not become operational until mid-July 1981 when a new structure of interest rates was put in place for FODEIN and the Bank agreed to authorize initial withdrawals from the Loan Account. - iv - MISSION DATA No. of No. of Nan Report Date Days Persons Days Date Identification 06/20/77 10 2 20 Preparation 09/26/77 12 2 24 10119/77 Appraisal 01/30/78 12 2 24 05/25/78 Supervision I 07/61178 5 2 10 07/17/78 Supervision II 12/07/78 1 1 1 12/21178 Supervision III 10/03/79 3 1 3 10115/79 Supervision IV 08/18/80 12 /a 3 25 10109/80 Supervision V 08/01/81 5 1 5 11/11/81 Supervision VI 06/01/82 lb 2 1 2 06/10/82 Supervision VII 04/04/83 lb 1 3 3 05/10/83 Supervision VIII 06/15/83 Lb 2 1 2 06/30/83 Supervision IX lv/10183 :b 2 1 2 11104/83 Supervision X 04/04/84 lb 2 1 2 04/11/84 Supervision XI 11/04/84 lb 1 3 3 12/05/84 Supervision XII 01/13186 lb 1 1 1 02/03/86 TOTAL 19 127 Total Mission Manveeks: 25 STAFF US (Statf wek) FY78 FY79 F800 FYl FY62 FY88 FY84 FY86 FY86 FY67 FY88 TOTAL Preappraisol 15.5 - - - - - - - 16.5 Appralal 28.9 - - - - - - - - - 28.9 Negotiations 8.1 - - - - - - - - - - 8.1 Supervision 0.1 9.2 4.6 18.9 10.7 6.2 5.1 4.6 6.6 2.0 0.7 W8.8 Other _ _ 0.1 0.1 -_ _ 0. TOTAL 42.6 9.2 4.8 18.9 10.8 6.3 5.1 4.6 6.6 2.0 0.7 111.6 OTHER PROJECT DATA Borrower: Central Bank of Costa Rica Executing Agency: Central Bank of Costa Rica follow-uM Projects Export Development (Lu. 2274-CR) la Represents total length of mission iisit. /b Supervision in conjunction with Loan 2274-CR (Export Development Loan) preparation or supervision activity. - v - PROJECT COMPLETION REPORT COSTA RICA INDUSTRIAL CREDIT PROJECT (LOAN 1599-CR) EVALUATION SUMMARY 1. Soon after the Loan became effective in 1980, Costa Rica's economy faltsred and plunged for a range of reasons includings deepening foreign trade imbalances, foreign exchange constraints, declining domestic demand, high public sector expenditures, credit restraints to the private sector and interest and exchange rate policie. that hampered resource mobilization and encouraged capital flight. By 1982-83 Costa Rica was in the midst of a deep recession, exasperated by hyper-inflation and the deep foreign exchange and political problems e5Tertenced by CACM trading partners (paras. 1.03-1.04). By late 1983 Costa Rica had brought inflation under control and with the assistance or substantial external aid had reduced its short term foreign exchange problems to what appeared to be manageable proportions. It was in this general environment of uncertainty, change and disruption of traditional CACM relationships that the subprojects financed under the Loan were appraised and implemented. 2. After a three-year delay in project start-up and an amendment to the loan agreement which provided for short term working capital financing for pre-export operations, Bank funds were committed and disbursed, under this initial industrial credit project, for 34 investment subprojects and 26 pre-export credits. Investment subprojects varied considerably from the expected with respect to: size of enterprises and subprojects, employment effects and geographic location of subprojects (paras. 3.05-3.07). Beyond that, several unpredicted political and economic events affected b-oth the financial outcome of many subprojects and the achievements of key institutional objectives. These events, however, also enablea the Bank to provide an important input to national deliberations and decisions regarding interest rate policy under the Loan which in turn had broader positive effects on financial sector policy (para. 2.08). 3. A relatively high 30? of the Bank financed investment subprojects have experienced serious operational and financial difficulties. Half of these projects are in liquidation or have closed down their operations. The other half are operating but with difficulties and at low capacity utilization. Ten percent of total companies financed are operating adequately but below forecast. Ultimately some of these subprojects may fail (para. 3.12). This high failure rate occurred despite the detailed subproject appraisal procedures in place and the high percentage (60Z), of total subprojects revieved by the Bank. The major shortfall in subproject preparation and analysis was in the areas of marketing and distribution research and analysis (para 3.14). The mechanics of analysis and estimation of production costs, macro-demand, economic rate of return or financial rates of return were adequate, reflecting the Bank's contribution - vi - by establishing technical assistanceltraining programs and carrying out a large number of free limit subproject reviews (paras. 4.03-4.04). 4. The portfolio losses experienced by the participating financial intermediaries (PFI) were lower than would be expected given the high percentage of subprojects that closed or are classified as operating with difficulty as borrowers have been striving to repay their obligations (para. 3.12). Currentl1 252 of loans (equal to 281 of the unpaid loan amc(mt) are in arrears. However, most arrears are short term delinquencies as only 6Z of loans are in arrears for over 180 days. Two failed subprojects have fully repaid their obligations. One operation in difficulty has totally refinanced its debt using AID resources and has cancelled FODEIN debt. Others have increased their capital contributions and are striving to work their way out of difficulty. Many entrepreneurs are struggling, and with some success, to work their way out of trouble. Many of the companies hard hit by CACM's problems have begun to seek export oppertunities in the USA and elsewhere. 5. The project, as appraised, provided PFI with a gross financial spread of 3 points for all loans except for SSE2 credits on which one additional point was added. The basic spread was raised to 4.5 points for all loans in August 1981 when the higher interest rate schedules were approved. Even with the higher spread basis, all but the most efficient financial intermediary would lose money on the operation, given the low 7 to 1 DIE leverage ratio required by the project (Annex 2). PFI participation was restricted and highly concentrated in one PFI that accounted for 802 of investment projects. 6. Institutional development objectives were clearly met for FODEIN, the apex institution, which has emerged from the project as a sound, well managed, staffed and financed facility, that is now able to attract external resources. institutional development objectives were not achieved for PFI as few provisions were made to help P1I to upgrade their capacity to assist clients prepare projects or to appraise or supervise projects in line with standards set for the project (para. 4.04). Slow disbursement after mid 1981, when the final interest rate issue was resolved, and the bias toward large projects were a direct outcome of the low financial spreads and the excessively bureaucratic procedures established for the project. An intrusive role was assigned to FODEIN under the project (para. 4.04) and three of the four possible PFI would not actively participate until 1986-87 when procedures were simplified. 1/ As of June 1987, only 81 of portfolio was in arrears. Since then arrears expanded dramatically to 202 as credit conditions have tightened sharply and many borrowers are paying interest but not principal on their loans. 2/ An SSE was defined as an enterprise with not more than US$150,000 in capital (equal to US$450,000 in total assets besed on a 2 to 1 D/E ratio which would be an ample definition of SSE in the Costa Rica context in 1978). The appraisal did not anticipate financing micro- enterprise and anticipated a minimum SSE loan size of US$25,000. - vii - 7. An SSE subloen Guarantee Facility was established, as a condition of loan effectiveness, to compensate PFI for up to 30S of the outstanding principal amount of the PFI's subloan. This facility, which was to be a main institutional feature of the loan, vas not used by the PFI for the 3 subprojects that could have met the ample definition of SSE. An AID financed Credit Guarantee Scheme was instrumented by an AID Project Agreement signed on February 26, 1979. It offered 75Z coverage on loan defaults (compared with the Bank's 30Z).3 It was, however, geared to service a target group of micro and very small urban and agricultural enterprise not expected to be reached under the Bank loan. 8. FODEIN established an AID financed SSE credit facility (based upon three AID credit line equal to US$10.8 million) which were disbursed during 1980-86 for about 6,525 small credits averaging about $1,750 (para. 3.08). The AID project was not in competition for the larger scale SSE and medium size subprojects the Bank hoped to finance. The Bank project's failure to reach the SSE and medium scale projects resulted in higher average costs of job created and substantially fewer jobs created than were expected (paras. 3.06-3.07). The average size investment subproject under Loan 1599-CR was US$1,331,000 and the loan proved to be mainly a large scale industry credit project. FODEIN did not act to aggressively promote smaller, more labor intensive projects as they were not alerted to such requirements. 3/ The AID Guarantee Scheme initiated in 1980 proved to be difficult to efficiently manage and AID refinanced the project in 1983 and strengthened the administration and provided technica) assistance in project preparation. A detailed audit of the AID Guarantee Program indicated that most projects failed to achieve intended results (e.g. 30S of borrower had disappeared, 302 used funds for purposes other than intended). The technical assistance process, that was a feature of the loan, generally resulted in larger loans than initially contemplated. PROJECT COMPLETION REPORT COSTA RICA INDUSTRIAL CREDIT PROJECT (LOAN 1599-CR) I. BACKGROUND AND HISTORY Industrial Sector Lending Activity 1.01 Loan 1599-CR represented a renewal of Bank support for Costa Rica's industrial sector which it had not assisted since the early 1960's when the Bank made two loans designed to help finance imports of industrial machinery and equipment (Loan 254-CR for US$2 million in May 1960 and Loan 296-CR for US$3 million in September 1961). Both loans were fully and quickly disbursed for their limited objectives. Bank financing under Loan 1599-CR was intended to complement ongoing or planned lending programs of the Interamerican Development Bank (IDB) and the United e Ates Agency for International Development (AID). In 1976 the IDB made a Industrial loan of US$8 million to the Banco de Costa Rica. While tbe U .5 million com- ponent reserved for larger enterprise was fully committed by early 1978, the small scale industry component moved slowly. In early 1978, AID prepared a San Jose Urban Development Credit that included financial and technical assistance to small craftsmen. In February 1979, AID signed an agreement with the Central Bank of Costa Rica (CBCR) and four major finan- cial institutions to establish a production credit guarantee program (PCGP) designed to encourage lending to small scal' enterprise. AID also provided US$10.8 million from 1980 through 1984 to bapport SSE operations through on SSE lending facility in FODEIN. Macroeconomic Setting and Sector Performance 1.02 In the years prior to the appraisal of the Industrial Credit Project in 1978, Costa Rica had achieved a sound balance between high per capita GNP growth and social development. Real growth in agriculture was an impressive 5.4? during the preceding decade and a half. Industry, which accounted for 202 of GDP, 12? of employment and 27? of total exports was the fastest growing sector with an average annual real growth rate of 8.12 in 1972-1976 and 112 in 1977. Manufacturing exports lead overall sector growth mainly because of sharply increasing exports to the Central American Common Market (CACM), generous fiscal incentives, tax credit certificates (CAT) for non-traditional exports and absence of restrictions on private foreign investment. Industrial enterprises were mainly small (702 of the registered 2,867 enterprises had less than 10 workers, only 10? had more than 50 workers) and mainly located around San Jose. The composition of industrial production had been essentially static for a decade. Food, beverages and tobacco accounted for about half of industrial value added (Annex 1, Table 2). Industrial employment had been growing at 6.52 I a. in the decade peior to the loan which was expected to help support an even higher planned 7.5Z p.a. employment growth rate. 1.03 Starting in late 1980, as Loan 1599-CR became effective, Costa Rica's economy deteriorated as prices for its main agricultural exports fell and the price of its main impirt, petroleum, continued to increase sharply. GDP increased only 1? in 1980. Balance of payments and debt service problems emerged for almost all CACM countries in 1981-82 and ex- ports to CACM dropped below their 1980 levels. Foreign credit problems increased e"d wide variations in foreign exchange rates (in the range of 08.6 and M2s.0 per dollar) prevailed during the year and fostered uncertainty in the import sensitive industrial sector. Foreign exchange reserves and credit declined sharply and import compression and sharp devaluation fueled inflation which rose from 18.1Z in 1980 to over 90? in 1982. 1.04 Industrial output fell by more than lOX in 1981-82 and total employment dropped below the 1980 level. Reflecting credit restraints, uncertainty and excess capacity, industrial investment in 1980 fell 15Z below the previous year's level. This was followed by further reductions of 28Z in 1981 and at least 20? in 1982. In 1983, the Government launched an economic recovery and stabilization effort centered around a reduction of the public deficit and the rate of growth of credit to the private sec- tor and foreign debt restructuring. Owing in part to the recovery of com- modity export prices, this effort succeeded.1 During 1983-83, the economy recovered further as domestic demand expanded at an average rate of almost 24Z. With low inflation, interest rates had historically not been a major issue in Costa Rica. Starting in 1981, however, the CBCR's administered interest rates turned sharply negative (Annex 1, Table 3) and recovered only in mid-i983. Finacial Institutions 1.05 At the time of appraisal, Costa Rica's financial sector consisted of (i) the national banking system, which included the CBCR, four nation- alized, Government owned commercial banks and CODESA, a public development bank, and (ii) institutions outside the nati.onal bankitg system, including 4 private foreign banks and 30 private financieras that accounted for only 24Z of industrial lending. Currently, the banking system consists of the regulated sector--four Government-owned commercial banks, CODESA, and 17 private commercial banks--and the unregulated components, wh-ich include 56 financieras, 50 financial co-operative associations, 7 savings and loan associations and a public insurance company. In 1978, only the national banks could discount, rediscount or borrow from CBCR. Private banks were granted access to international lending agency credit facilities only in late 1985. Then, as now, only government-owned banks have the right to mobilize resources at maturities shorter than six months. This barrier to short-term, lower cost, deposit seeking was designed to suppress pr.vate sector banking growth and it has helped the Government banks to maintain 1/ Currently Costa Rica's rate of inflation is about 15? and its trade deficit at 1.52 of GDP is among the lowest in LAC. - 3 - their resource base.2 Government policy has not helped public banks to become efficient. The Goverament has forced public banks on several occasions, since 1982, to absorb the costs and obligations of restructuring distressed sectors through extended loan maturities at unrealistic rates. Recently, Government banks were forced to reschedule all agricultural loans overdue more than 180 days at negative real interest rates and maturities of up to 16 years. The banking system was and is highly politicized and inadequately regulated and there remains ample scope for strengthening institutional facilities for upgrading the efficieacy and the skills of bank management and professional staffs. The Bank is addressing these issues through a financial sector review and a proposed Second Structural Adjustment Loan, SAL II. II. PROJECT OBJECTIVES AND LOAN EFFECTIVENESS Backlround 2.01 The project was identified by the Bank in 1975-76 in discussions with the Government, prepared by the CBCR with Bank assistance in June 1977 and appraised in February 1978. As approved by the Board in June 1978, the project provided for the establishment in the CBCR of a permanent, finan- cially independent industrial development fund, Fondo de Desarrollo Indus- trial (FODEIN). This fund would operate as a second tier lending facility that would mobilize and lend term resources to the qualified financial intermediaries (which were till recently the four publicly owned banks).3 Loan Obiectives 2.02 The Industrial Credit project sought to: ti) Give technical and financial support to the industrial develop- ment program proposed in the National Plan for 1978-82 by providing term resources and technical assistance; (ii) Create the institutional capability to promote and finance efficient export and import substitution subprojects and super- vise their satisfactory execution; 21 The Costa Rican banking systems has historically been substantially repressed. The CBCR played a major role in allocating and rationing resources and restricting competition for deposits. The ratio of M2 - Ml was only 42 in mid-1970's, which is about 30Z of what would be expected given Costa Rica's relatively high level of per capita GNP. 31 Direct lending to a single financial intermediary, following the pattern of IDB's earlier industrial lending through the Banco de Costa Rica, was examined by the mission and rejected on the grounds that multiple institution lending would reach a larger number of beneficiaries and introduce an element of competition into the project. The mission also indicated that the second-tier facility could strengthen the technical capability of participating financial institutions. - 4 - (iii) Support especially labor-intensive activities and industries with comparative advantage; and (iv) Facilitate participation of smaller enterprises believed to be more efficient at employment creation at lower cost. 2.03 The extent to which these Loan Objectives were achieved is analyzed in para. 2.09 and in Chapters 3 and 4. Loan Effectiveness 2.04 Major conditions of Loan Effectiveness were that: (i) FODEIN adopt detailed operating policies and regulations acceptable to the Bank; (ii) provisions be made to set up a scheme to guarantee loans for smaller enterprises for up to 30Z of the loan amount; (iii) the CBCR make a US$15 million (equivalent) capital contribution to FODEIN to be maintained there- after in real terms; (iv) at least two participating financial inter- mediaries (PFI) be declared eligible to participate in the project; and (v) two consultants be contracted to develop appropriate operational manuals and guidelines, provide on-the-job training in project appraisal for FODEIN's staff and organize short-term training seminars for profes- sional staff of PODEIN and PFI in project appraisal. As a method for increasing FODEIN's independent capital structure over the 15-year repay- ment period of the project, the CBCR assumed the obligation to repay interest and principal on the Loan as well as FODEIN's operating expenses. 2.05 Effectiveness was scheduled for November 1978 but was not achieved until September 1980.4 The initial problem in advancing the project was the slow pace of discussions witi the new Government on organizational arrangements for FODEIN (para 2.07), solved only in September 1979 when the bill to ratify the Bank loan was sent to the Legislative Assembly and then into committee. Thereafter, the pace of legislative activity was slower than expected. Part of the slow pace was due to the new Government's lack of enthusiasm for a key feature of the project i.e., setting up FODEIN as a second tier facility within the CBCR. Soon after Board approval of the Loan, the new Minister of Finance (MF) raised some issues about the Project at a CBCR Board meeting. At subsequent discussions with Bank missions it became clear that the Government wanted to minimize CBCR's role in finan- cial management as one necessary step in reducing the financial repression that resulted from the CBCR's excessive control over credit allocation, interest rates, portfolio restrictions and disincentives to increased banking system competition and resource mobilization (para. 1.04). MF's preference was to limit CBCR to traditional monetary functions and to explore other alternatives for loan management. 4/ Other Effective dates set by Bank management action were 4/30/79, 11/30179, 4/1/80, 6/6/80, 7/31/80, 9/12/80. The multiple delays mainly resulted from under-estimations of the time needed for congressional ratification of the Loan. - 5 - 2.06 In response to the Government's expressed concern regarding the establishment of FODEIN within the CBCR, a Bank mission returned to Costa Rica to examine two possible alternatives: (i) undertaking the Loan as a single tier operation, and (ii) establishing FODEIN as an independent agency or as an independent unit within an existing public sector bank. Option ti) was rejected on the grounds that its adoption would restrict Bank lending to one intermediary, thus, potentially eliminating com- petition.5 Option (ii) was rejected because it posed a number of difficult institutional and legal problems and legislative hurdles. There is little, if any, evidence that the MF's proposal was seriously reviewed as a basis for a possible opening to a dialogue on financial sector reform, including the possible reduction of financial market repression. Nor is it clear that this loan could have become an appropriate vehicle for this. In any event, it was not raised as an issue. At that time, the MF's concerns were viewed as a possible stumbling block to advancing a loan that had already been signed. The Bank agreed to modify the composition of the Board of Director's of FODEIN to reduce high level Government participation and, on that basis, the Government moved the Loan to the Congress for its ultimate ratification in August 1980. After Congressional action was taken to ratify the Loan, the CBCR acted to establish FODEIN and to provide the US$15 million (equivalent) as a capital contributions. 2.07 Conditions of Effectiveness were fully met and the Loan went into operations on September 12, 1980 (para. 2.04). During negotiations, the onlending rate to sub-borrowers as fixed at 12.5Z with agreement that rates would be reviewed annually. As inflation rates averaged 24? in 1980, the Bank initiated interest rate discussions in line with the Loan Agree- ment. Pending agreement, the Bank suspended subloan approvals (commit- ments). An acceptable interest rate of 22.75Z p.a. was proposed by CBCR in April 1981, and agreed to by the Bank in June 1981. Interest rate policy was reviewed and modified annually over the life of the loan and with the exception of a brief period in 1982 Bank loans have been channeled at posi- tive interest rates (Annex 1, Table 3). Because only 7? of the total loan amount was committed during 1980-81, and because it was expected that high unfulfilled demand existed for pre-export working capital financing, an amendment to the Loan Agreement was signed in August 1982 which authorized the use of up to US$5 million for pre-export financing.6 5/ The evaluation did not mention that the Bank does deal directly with multiple financial institutions often for many years until they gained adequate institutional and technical strength and maturity and could be served by a second tier facility. 6/ Demand for pre-export financing proved to be slower than expected and industrial borrowing accelerated; thus, as of July 1984, only US$3 million on pre-export financing had been disbursed when Loan 2274-CR the Export Finance Project (FOPEX), became effective and became a source of export financing. Creating Term Lending Facilities 2.08 To participate in the credit, PFI would have tot (i) establish a separate project unit specializing in term lending; (ii) capitalize the unit with *equity type resourcesw and maintain a total debt to permanent resources (equity) ratio of at least 7 to 1 within the unit; and (iii) maintain separate books of accounts and support a separate independent audit of the unit. On that basis, participation in the project was mainly limited to the Banco Nacional de Costa Rica (BNCR) which used about 85Z of the investment program's resources. The Banco de Costa Rica, which used about 91, and CODESA which disbursed almost 72 of funds, participated only nominally in the earlier stages of the project (para. 3.01). The PCR mission was told that the nominal participants were not prepared to support separate project units for a low volume project or maintain separate books of account and capitalize these operations with 7 to 1 D/E ratios. The conditions for PFI project participation proved to be excessive for three of the four eligible participants given the 4.5 point spreads offered and the high incremental costs that participation imposed. Because of the relatively low leverage ratio and high costs of setting up a special unit to handle few loan operations, this project was not financially attractive for P1I (Annex 2). The intended objectives might have been achieved in a more conventional way without sacrifice to project quality. The conditions for participation in the project were excessively complex for reasons that were never closely examined during project design and preparation.7 2.09 FODEIN was vested with many subproject control and supervision responsibilities that would normally reside with the first tier banking institutions. FODEIN was an active participant in the initial preparation of subprojects as well as subproject reviews and often insisted that a consultant be hired to prepare subprojects as a condition for its accep- tance of projects for review. It inspected and held copies of all dis- bursement documents and supporting invoices. Thus, FODEIN maintained files that would duplicate the key records normally kept in the credit and project files of the commercial banks. In line with project requirements, FODEIN maintained an active supervision capability and gathered data on the performance and loan repayment status of each subproject. Most of these tasks are (or should be) a part of the normal routine of commercial banking 7/ In place of the conditions imposed on PFIs under this project the following conditions are more often applied. PFI would be expected to: (i) finance 52 to 151 of the loan, depending on country conditions. The Costa Rica project might have provided for cofinancing of about 10.OZ of subloans (equal to an explicit DIE of 10 to 1); (ii) appoint one official as liaison to the second tier facility and train at least one professional to be qualified to appraise terms credits; (iii) adopt appropriate policies and procedures regarding supervision of projects and maintenance of contracts, vouchers and records where such did not exist; and (iv) include in its annual independent audit an audit of the use of Bank funds and the adequacy of procurement control and records keeping. The Bank is usually also concerned about the financial soundness of the PFI and could establish appropriate tests to be administered by the Central Bank or other regulatory authorities. operations and are not appropriate to the efficient operations of a central bank based apex institution. There was no indication in the appraisal that PFI controls and record keeping functions were inadequate. Had PPI's record keeping, supervision or credit control been inadequate then TA could have been provided for under the project to ensure that problems were solved and that FODEIN's intervention in many aspects of normal commercial banking activity could be reduced. III. UTILIZATION OF LOAN RESOURCES ParticiDatina Finan,.ial Institutions 3.01 CBCR regulations limited banking system access to external devel- opment resources to the five public sector banks. The Banco Nacional de Costa Rica (BNCR), the country's largest commercial bank, used 792 of the Bank's total loan resources (US$15 million) and 851 of the investment project component (US$12 million) (Annex 1, Table 14). Banco de Costa Rica (BCR), the second largest commercial bank, used 142 of the total loan while CODESA used only 5Z. The Banco Anglo-Costarricensea (BAC) used a mere 22 of total funds, all of which was for pre-export (non-project) short term financing. By comparison, under the AID financed SSE project FODEIN operated in a more agile and less concentrated fashion. Thus, in 1984 only about 48Z of SSE loans were channeled by BNCR. BCR used almost 301 of resources and the balance was channeled by the other public banks. In the end, Loan 1599-CR turned out to be a highly concentrated, large scale lending operation. About US$12 million of the Bank loan was used to finance only 34 FODEIN industrial investment projects. US$3 million of the US$5 million initially allocated were used to finance 26 mainly short term, smaller sized, pre-export projects.8 3.02 After the Bank's loan was fully committed in late 1984, FODEIN's project financing operations switched to the use of its own resources, its procedures for lending were simplified and lending accelerated. During 1985-87 FODEIN approved 69 investment projects amounting to C1,577 million (about US$25 million equivalent), compared to 34 Bank financed projects amounting to 0509.2 million (US$12 million equivalent) during 1981 to 1985 under Loan 1599-CR. FODEIN's lending operations surged for several reasons. First, the economic outlook improved. Second, private sector banks were given access to CBCR's development credit lines. Third, after the Bank project closed, FODEIN prepared and issued simplified partici- pation guidelines that reduced the time and cost of PFI lending to medium 8/ Special procedures were established for an evaluation of the possible national benefits to be derived from the pre-export financing of each firm. The financing proposals for these non-investment projects were not reviewed in detail by the Bank and special procedures were adopted for their approval. As FODEIN has not been actively involved with pre- export financing since the initiation of Loan 2274-CR in early 1984 (when a US$25 million Bank loan was made effective to provide for an export financing fund through pOPEX), the mission focused on the status of 34 investment projects. A PPAR on Loan 2274-CR whici covers initial FODEIN export operations has been issued. size enterprise. As a result, the cost of operating with FODEIN credit lines were lowered and the time frame for lending was reduced. Finally, financial margins for PFI were improved as they began to charge special fees for preparation of projects and to receive revenues from loan- related activities such as letter of credit operations. By the end of 1987, FODEIN had made a total of 103 loans of which 25 loans were disbursed in 1987 by six participating public and private banks. BNCR had only 322 of 1987 lending operations, BCR had 28Z and INTERFIN 202. This was a very different distribution than that which had prevailed during 1982-85. 3.03 Currently, the major impediment's to FODEIN lending of its ample resources (paras. 4.07-4.08) are: (i) CBCR's law that limits CBCR's total lending to any financial institution to an amount equal to 502 of the PFI's recoverable assets,9 and (ii) the CBCR's lack of foreign exchange to finance the import requirements of investment projects in a timely fashion. Regarding foreign exchange constraints, the Interamerican Development Bank (IDB) is currently preparing a US$30 million industrial credit to be chan- neled through FODEIN. Regarding the impact of CBCR's lending limits, the private banks that have been mainly affected have been discounting (with recourse) their FODEIN eligible industrial term credits with the larger public banks which still have scope for increasing their CBCR financial lending operations. Proiect Financial Plan 3.04 The Project Financial Plan for Loan 1599-CR differs substantially from appraisal estimates (Annex 1, Table 1). First, the Bank financed a smaller percentage of total project costs than was contemplated (26.42 vs 30.72). Second, PFI's lending operations were more conservative than expected. Subproject financing was made on a realistic 1 to 1 DIE basis (FODEIN's lending policy permitted highly leveraged loan: 4 to 1 for SSE and 2 to 1 for new larger projects). The appraisal report forecast that a highly leveraged, 3.5 to 1, financial program would prevail. Suppliers credits, which were not anticipated, provided 112 of total financial requirements, further reducing FODEIN's need to provide counterpart financing. As a result of these factors, FODEIN's estimated 312 share of project financing was reduced to only 92 of total project cost and FODEIN used less than 252 of the US$15 million in counterpart resources that the CBCR had provided as a condition of effectiveness. PFI met the requirement that they finance at least 12.52 of each subloan. Retrospectively PFI's conservative leveraging of subproject financial plans was well considered. Had the PFI taken advantage of the higher leveraged lending provided for under the project, it is likely that their loan portfolios would be even weaker than they currently are. Had the Bank and FODEIN more closely supervised and managed the percentage of Bank financing of subprojects during 1982-84, the Bank's share of subproject financing could have been increased, thus accelerating disbursement of the Loan. As of December 1983 the Bank was only financing 27.3Z of total project costs; with appropriate actions the Bank's disbursements could have doubled. 9/ Article 63 de Ley Organico del Banco Central -9- Distribution of Subloans 3.05 Total investment by industry under the project was US$45.5 million equivalent (Annex 1, Table 2). Almost 322 of total investment (US$15.5 million equivalent) were made in the Food, Beverage and Tobacco Subsectors. The Paper and Printing Industry invested US$12.4 million equivalent and accounted for a surprisingly high 27.22 of total, mainly because of a very large investment project to expand paper box production and large invest- ments by Costa Rica's publishing industry. The distribution of lending and total investment by Industrial Sectors was substantially different from the national industrial value added mix that had served as a basis for the appraisal report's projections (Annex 1, Table 2). Investments by the industries that historically account for a high percentage of domestic value added was lower than expected. Thus, the Food and Beverage sector that accounted for almost 452 of industrial value added had 31.92 of investment while Paper, Products and Printing with a low 5.22 of total value added accounted for 27.2T of investment. The project unit did not aggressively promote direct investment in natural resource based and other priority enterprises that were the stated focus of development under the National Plan. There was little focused promotion activity because (1) it was not incorporated into FODEIN's performance goals or reflected in FODEIN's operational or supervisory concerns and (2) FODEIN's management was fully engaged in organizing a new enterprise and had little time or staff to devote to intense promotional activity. Number and Size of Subproiects and Enterprises 3.06 It was estimated, during appraisal, that 229 investment sub- projects would be financed under the Loan and that small subprojects of less than US$50,000 would account for 26Z of the total (Annex 1, Table 4). Only 34 investzent subprojects were financed under the Loan and 412 of these subprojects were larger than US$1,000,000 (equivalent). There were no micro-enterprise subprojects (assets of less than US$25,000) and few medium scale enterprise subprojects (Annex 1, Table 4). The average asset size of enterprises being financed was in the US$1,000,000 range. The outcome of the Loan, with respect to size of enterprise participating and loan size financed, was very different than expected and the Loan objective to facilitate SSE lending was not achieved (para. 2.02). There appear to be three main reasons why: (1) the narrow margins on lending (para. 2.11) did not cover costs or offer adequate incentives for SSE or medium scale lending (para 3.08); (2) FODEIN management had not been alerted to the need to direct project promotion toward achievement of SSE and other lending targets and goals; and (3) the three smaller public sector banks, that dealt with medium scale clients, did not fully participate in the project. Employment Generated and Cost Per Job 3.07 The appraisal estimated that 4,105 jobs would be created at an average cost per job of US$11,890 (Annex 1, Table 2). Because of the of smaller investment projects (para. 3.08) and the higher investment than contemplated in capital intensive re-equipment projects (para 3.06), only 983 new jobs were reported as actually created. The average cost per job - 10 - created was US$46,236. almost 4 times higher than the appraisal estimate.-I The employment generation results of the loan were lower than anticipated. Experience showed that the project was not designed to promote, facilitate or administer SSE and medium scale lending. Lending margins proved to be too small (Annex 2) and procedures too difficult to attract PFI toward smaller projects. Only limited supervisory time was available and Bank staff could not address these issues. After the Bank's loan was fully committed in 1985, FODEIN simplified and improved lending operations, higher margins were available and all four public commercial banks joined the project and smaller and medium size lending accelerated. Small Scale Enterprise Lending 3.08 Starting in 1980, the CBCR launched a small scale credit program financed with a US$5.8 million AID grant that was followed by additional US$5 million in grants. The program, which was implemented by an SSE lending unit within FODEIN, was successful. Some 6,525 credits were financed through five public sector banks from 1980 through 1986. Average loan size was about US$1,750 equivalent. The AID project reached a micro- enterprise group that the Bank Loan had not planned to reach under its SSE component. The AID program was supported by a guarantee fund with an initial contribution of US$3 million. The fund insured up to 75Z of the outstanding balance of qualified SSE. The development of the AID SSE facility in 1979-80 and its subsequent operations were not reflected in Bank supervision reports. The fact that the Bank loan was not designed to promote SSE lending should have been apparent by 1982, but this was also not reflected in supervision reports. An appropriate point for a full review of project objectives and goals of Loan 1599-CR was reached in late 1981/early 1982, when the Bank and FODEIN sought to establish mechanisms to speed-up loan disbursement and Loan 1599-CR was amended to include the financing of up to US$5 million in pre-export working capital loans for industry. It was envisaged that demand would be high for pre-export financing, and problems of slow loan disbursement would be resolved. This did not prove to be the case, disbursement of the pre-export component was slow and in the end only 602 of the allocation was disbursed. The pre- export fund effort appeared to divnrt supervisory attention away from the operational and design problems affecting the FODEIN project. By 1982-83 it was clear that the limited technical assistance effort-under the Loan would not be adequate to positively affect the public banks' term lending activities, in support of Loan objectives (para. 4.05). Type of Enterprise and Terms of Subloans 3.09 Consistent with the difficult economic environment that prevailed during 1980-85, about 82Z of subprojects financed were for the expansion of existing enterprises while only 6 loans were to support new projects (Annex 1, Table 5). Fifteen subprojects were to finance import substitu- tion activity, 3 projects were designed to increase export operations and 101 This cost per job created is in line with experience in other DFC loans in Latin America that specialized in larger scale lending operations in food processing or printing and chemicals industry and the like. - 11 - 16 projects were to help increase both domestic and export sales. Unfortunately most expert expansion plans were directed toward the shrinking CACH. Forty percent of FODEIN loans were granted for terms of from 8 to 15 years. An additional 382 of loans had 6 and 7 year maturities (Annex 1, Table 5). The need for such extended terms was not always sup- ported by the project cash flow analysis. Financial and Economic Rates of Return 3.10 Financial rates of return calculated for the subprojects financed were high in nominal terms, averaging almost 401 (Annex 1, Table 5). How- ever, with average rates of inflation ranging around 25Z during project implementation, real financial rates of return calculated for subprojects do not differ widely from appraisal estimates of about 152 in real terms. Because of the difficult economic environment, the problems encountered by exporters to the CACM, and the large number of projects that have encountered unforeseen problems (para. 3.13), the financial and economic returns for at least 352 of the project are expected to be substantially lower than estimated. Five projects have failed, five project are operating with difficulty and may remain "evergreen projects' and three others will operate below expectations (Table I below). While financial and economic returns have not been prepare by FODEIN on an ex-post basis, it is clear that with 352 of project operating at zero or negative returns, the financial and economic returns for the project that were expected can- not be achieved. The overall economic returns of the project for Costa Rica could be further diminished as the carrying costs of the project had increased by about US$6.5 million due to foreign exchange cross currency risk adjustment losses (as of May 1988). 3.11 The technical capability of FODEIN to do financial and economic analysis was considered to be acceptable. In line with the procedures established under Loan 1599-CR, many subprojects were prepared by consul- tants selected by FODEIN. These reports were then reviewed by FODEIN staff prior to their presentation in support of an application for Bank author- ization of a subloan. Because of the early involvement of FODEIN in the PFI's process, subloan preparation and appraisal tended to be lengthy and FODEIN's slow review process tended to further discourage potential indus- trial users. In line with the requirements of the Loan, after an appraised subproject (supported by a consultant study) was presented by the PFI to FODEIN, the Apex institution prepared a formal appraisal report on the subloan application. This process tended to add an additional month or more to the internal approval process. Under the Loan Agreement, FODEIN was to play an excessively large role in the process of subproject prepara- tion and appraisal. This was in part due to the fact that FODEIN's staff was better prepared by the technical assistance program to undertake Bank style appraisal reports than were PFI's staffs, as the TA program was directed mainly at FODEIN. Current Status of Investment Prolects 3.12 Many of the projects financed under Loan 1599-CR were launched as Costa Rica's economy slid into a broad recessionary trough that was deepened by hyper-inflation and devaluation of the currency (paras. 1.02-1.03). Externalities like reduced prices and demand for coffee, cocoa and other major export co-modities seriously affected the viability of - 12 - projects that depended upon exports of processed coffee, cocoa or textiles. These developments also depressed national income, affecting domestic consumption and consumer sales and the profitability of a number of subprojects. As shown in Table I below, five of the 34 investments projects financed under the loan (representing 152 of the projects financed and 6.3Z of the loan funds) did not achieve adequate operating levels and have closed or are in judicial collection. Five firms representing 152 of loan funds are operating with difficulty and two are operating below expectations. Some of these problem loans are currently being repaid to PFI from the proceeds of sales of plant and equipment of the company or by the parent company. Jn economic terms, however, about 352 of the Bank Loan amount may have been lost or put at risk. Table I PROJECT COMPLETION REPORT COSTA RICA INDJSTRIAL CREDIT PROJECT (Loan 1699-CR) SUtPROJECT FINANCIAL PERFORMANCE Number of Percentae9 of Percentage of Total Projects Projects Loan Funds Meet or exceeded Financial Forecant /a 21 62X 57.9 Currently meeting objectives with delays 1 8 11.0 Operating below objectives 2 6 10.8 Operating with difficulty 6 1S 14.5 Entorpris failed 6 15 6.8 Total 84 100 100.0 /b /a Includes 8 projects (2 companies) that were sold after completion of expansion programs These companies paid off their loans in full and are reported to be operating normally. They accounted for 18.61 of total loan funds ard are included among the successful projects. /b Total loans for 84 proJect amounted t^ 770.2 miIlion (US19.8 m IIlIon equivalent), to which tho rank Loan contributed 503. m illion (USSl.999 mlIlion equivalent). Source: FOCEIN and mission Interviews. - 13 - Status of Loan Portfolio 3.13 As of December 31, 1987 ten subprojects representing 20Z of loan funds had been fully repaid; sixteen subprojects representing 522 of loan funds have made payments on due date or were under 2 months in arrears; five larger projects representing almost 222 of funds were in arrears under 180 days and considered by the PFI as good credit risks that were operating in a financially constrained environment. Three subprojects were more deeply in arrears and six are in Judicial Action. Together these represent 6.32 of loan funds (Annex 1, Table 7). The PFI optimistically expected that they would not take financial losses on these projects. Until recently, FODEIN financed subprojects had performed in a much better fashion. As of March 1986, only 82 of all subprojects financed by FODEIN (of which Loan 1599-CR accounted for about 50) were in arrears over 91 days. By September 1987 about 23Z of total loan portfolio was reported by PFI to be in arrears. This major deterioration in portfolio quality reflected: (1) very tight bank credit ceilings imposed by the CBCR in mid- 1986 and continued under agreements with the IMF; and (2) sharply rising short-term interest- rates that are currently 312 higher than the rates prevailing in FODEIN's loan portfolio. Poor loan portfolio performance in late 1987 may thus reflect credit restraints and interest rate disequi- libria which reduces incentives to repay cheaper debt, and not a sudden massive deterioration in portfolio quality. 3.14 The status and condition of each subprojects was reviewed with PFI officials and FODEIN. In addition, a detailed review was made of the project documents of 10 firms that had failed or are operating with diffi- culty. These reviews were supported by field visits to 5 project sites where management was interviewed and conditions of operations observed. This research effort revealed that, while the recession played an important role in reducing project profitability, it turned out not to be the major cause of project failure. The major controllable internal reasons why subprojects did not perform as expected were few in number: (a) Inadequate Marketing and Distribution Research. About 502 of problem subprojects suffered from an inadequate understanding of the markets in which they had hoped to compete. Many of these new investment sub- projects were based on only a limited knowledge of product require- ments, especially for foreign markets, where product quality, style, size and pricing realities were not well understood. Few if any of the subprojects invested in systematic marketing or distribution research or tested products and market concepts and programs and iientified problems. None of the PFI insisted that such research be undertaken. FODEIN did not employ marketing experts. (b) Inadeguate Evaluation of Management Capability to Operate Comples Proiect. In about 252 of the problem cases, the entrepreneur or the management team was unable to plan for and successfully execute a project start-up or efficiently run an expanded enterprise after the projects became operational. Loan appraisals totally lacked a serious evaluation of management's capability to effectively operate new or expansion projects financed under the Loan. - 14 - 3.15 The major external events affecting the project outcome includeds (a) the continued deterioration of the CACM and the sharp reduction of Costa Rican exports to this market; (b) continued inflation and devaluation and the rising costs of debt service and imports; and (c) reduced private construction and public works activity. About one-half of the projects financed under the Loan depended upon increased export sales to the CACM, which was a declining market that had been under growing financial and political stress since 1980. The failure of CACM export oriented invest- ments to produce satisfactory export sales and revenues was the key factor affecting subproject financial performance. The failure of FODEIN and/or the Bank to flag the higb risks involved in excessive dependance on a failing CACM represents a breakdown in the project appraisal review process. 3.16 Based upon a review of subproject files, it is not clear that the Bank subproject review processes contributed substantially toward iden- tifying problem subprojects, raising key issues regarding the adequacy of the technical assistance to PPI and FODEIN, or the needs for additional assistance to further improve subproject appraisal or preparation (para. 4.02-4.04). The Bank subproject review process appeared to be pro-forma, in line with the original intent of the project; i.e., to reduce the Bank's involvement in the labor intensive si.bproject review process.11 The Bank received 17 "Al subprojects (projects exceeding the US$250,000 free limit) for its review. Of these subprojects, 10 are currently operating with difficulty or have failed. None of these subprojects were identified by the Bank review as potential problems,12 nor did the subproject reviews lead to any judgements about the overall appraisal capability of PFI or FODEIN or the need for further training of Loan participants. Such findings raise questions about the meaning and/or the adequacy of the Bank's subproject review process as it could have counterproductive aspects. Inexperienced PFI may excessively depend upon the Bank's review and approval of subprojects, without having an adequate understanding of the amount of time, or the professional skills mix that was actually devoted to the review task. They may not know that these may vary substantially depending on Bank staff experience and availability. It is also possible that the high focus on the review of the financial and economic rates of return methodology may send the wrong signals to PFI about other central issues of the subproject preparation and review processes (e.g. development of a strong marketing plan and test of the plan, assurances that adequate management is in place). 3.17 In approving a subproject for disbursement which has gone through the A subproject review process, the Bank implicitly places its imprimatur on the subproject and, in the absence of specific comments to the contrary, seems to confirm the general quality of appraisal work presented by the I1/ Recent experience has shown that up to three man days of Bank staff time can be required to carefully review an A subproject. 12/ There is, as an example, no record of any Bank's suggestions that borrowers invest in market research to validate key assumptions regarding market acceptance of new products and foreign or domestic sales projections. - 15 - PFI. In that context, the Bank places itself in the position of author- izing for disbursement a subproject that may not have been technically well prepared. Consideration should be given to the option that the Bank's *no objection, telex designating approval to withdraw be sent to the PFI with a clear statement that sets out the linitations (if any) of the Bank review process to reduce the possibility that the PFI does excessively rely upon the Bank to flag potential problems or significantly reduce project risks. This procedure could (i) assist Bank managers to carefully assess staffing and time allocation priorities, as they relate to the subproject review and the linked institutional building efforts, and (ii) place PFIs on notice that the Bank's review is limited to selected areas and offers no implicit conment on the adequacy of others. IV. INSTITUTIOL4AL DEVELOPMENT Institution Building 4.01 The institutional development objective of Loan 1599-CR was 'to assist Costa Rica in building up an institutional set-up for financing efficient subprojects.' The appraisal report dealt at length with the development of an apex institution, but discussed only briefly the needs of the PFI to Improve overal. term lending capability. The specific institu- tional building tasks needed to help ethieve the above objectives would includes (A) Establishing FODEIN with the technical capability to: (i) review subprojects presented to it by PFI; (ii) identify areas of strengths and weaknesses in subproject preparation and appraisal; and (iii) help PFI to improve their appraisal and credit supervision skills. (B) Assisting PFI to develop: (i) effective lending policies that would include expanded mediti and long term project lending; (ii) appropriate procedures for project promotion to ensure an expanding supply of efficient subprojects for funding; and (iii) professionally adequate subproject preparation and appraisal facilities, sound credit management and appropriate policies and procedures for project supervision. Technical Assistance 4.02 The above stated broad institution building objectives proved to be an overly ambitious undertaking given: (i) the public banking sector environment and its relatively low state of development; (ii) the rela- tively short time frame involved in this initial operatj.ons; and finally (iii) the small amount of funds allocated for technical assistance (TA) and the modest scope of the TA program when compared with the broad range of needs for assistance that the PFI would have (para 4.03). In reality the project narrowly focussed its institution building efforts on improving FODEIN's appraisal skills and on the development of its procedures and methods manaals. This effort was supported by US$120,000 in loan funds (para. 4.04). - 16 - 4.03 During loan preparation, it would be expected that the l3ank achieve an understanding ofs (i) the availability of financial sector training facilities (e.S. banking association operated training facili- ties); (ii) the skills mix and level of sophistication of tra!ning facilities at local universities or other centers; and (iii) the measures that would need to be taken, in the short term, to prepare existing PFI staff to better handle subproject appraisals and in the longer term to upgrade professionalism and the quality of banking operations. During appraisal, the Bank would normally assess the financial and technical capa- bility of the major prospective PFIs and visit the other smaller operations to discuss their capability and needs for assistance. On that basis, an appropriate short and medium term training/institutional building program could be designed. Under Loan 1599-CR, these measures were ne%t fully taken as it was expected that FODEIN would take the initiative to help define sector training and institutional development needs and upgrade PFI profes- sional capability. Given FODEIN's inexperience, staff limitations and funding constraints, this did not happen. There was little, if any, time spent on follow-up on these institutional and technical assistance issues during supervision. 4.04 In line with the Loan Agreement, almost US$120,000 was borrowed by the CBCR to finance a training program in subproject appraisal and super- vision and for the preparation of a subproject appraisal manual and rele- vant procedures for operating the facility. Two contractors initiated the program in late 1980. During 1981-82, they trained mainly FODEIN staff in subproject appraisal. No institutional memory of this training effort exists among the PFI. As a result of the training program's focus of tech- nical ass: nce on the apex institution, the less well prepared PFI depended upon FODEIN to review and reappraise many of the subprojects presented to it for financing, which was costly to the CBCR.13 PFI con- tinued to depend upon FODSIN's staff intervention to help them to advance subproject appraisal and conduct supervision during the life of the Loan. 4.05 Retrospectively, in the project design, provisions for the training of PFI were clearly inadequate. What made matters worse was that subsequent Loan supervision did not deal with this problem and the need for a mid-term correction in the project's institution building efforts. Had PFI appraisal and supervision capability been brought to acceptable levels, then FODEIN might have processed loan applications and supervised overall program activity with fewer full time professionals, thus reducing project cost. In November 1987, the Interamerican Development Bank (IDB) initiated preparation of an industrial sector credit, amounting to US$30 million equivalent using the FODEIN facility. It is likely that the IDB, in cooperation with AID, will then concentrate technical assistance resources on building the professional capabilities of PFI, and FODEIN could reduce its participation in the project preparation process and in the appraisal function. It is expected to increase project promotion and relevant super- vision functions. 131 In line with Project requirements, FODEIN prepared its own complete appraisal report for each of the 34 subprojects, a feat that consumed about 90 man weeks of staff time. - 17 - 4.06 FODEIN is currently soundly organized, well managed and supported by an effective staff of five professionals which may be appropriate for its current higher volume of lending. FODEIN performed its heavy burden of assigned tasks with acceptable efficiency. The heavy iandate for this apex in-stitution, in line with approved Policy and Procedu,es Statements, was to serve as a financial agent with loan review/approval responsibilities. FODEIN was responsible for procurement review and the maintenance of pro- curement and expenditure records. FODEIN also followed up on and super- vised all outstanding accounts and received current information on the status of repayment of each subproject. In fact, FODEIN was given first tier level operational responsibility to deal directly with commercial bank clients to help them, as an example, to engage consulting services for purposes of preparing subprojects. In line with Bank requirements, FODEIN also directly reviewed procurement decisions with the borrower and the PFI and received copies of receipts and other procurement documents which it checked against lists of goods prepared for each subproject. 4.07 Many of the responsibilities assigned to FODEIN under Loan 1599-CR would normally be expected to be part of the operating responsibilities of a qualified financial intermediary. FODEIN's efforts did indeed duplicate PFI's normal procurement review and record keeping activities. In that regard, there existed, during Loan preparation, an incomplete understanding of standard commercial banking operations and the securities and checks that au adequately efficient financial institution would normally have in place. Very little weight was given to the role that the PFI's external auditors could play in assuring the Bank that a PFI had adequate policy and procedures in place to control disbursements and procurements and to main- tain mportant documents. Thus, an excessive number of tasks were assigned to FODEIN, as a direct result of which FODEIN operated more slowly than necessary, requiring between 3 to 6 months to complete a subproject re- view/approval cycle. Shifting responsibility from PPI to FODEIN did have the effect of reducing Bank project supervision activity as only 15 man days of supervision time were reported in the period from 1982 through 1986 (Page iii). A high percentage of Bank supervision dealt with the need to raise the level of project supervision efforts. Financial Sectoz Policy Development 4.08 Interest rate policy related issues became the focus of staff concern during project appraisal. Costa Rica's administratively estab- lished fixed interest rate policy was inconsistent with efficient term lending operations. At negotiations, it was agreed that the adequacy of subloan interest rates (initially set at 12.52) would be reviewed annually. In September 1980, as the Loan became effective, inflation had risen to almost 242 p.a. and interest rates had became highly negative. As this was not acceptable, the Bank suspended operations (informally) pending an agreement on interest rates. By mid 1981, agreement was reached on a final lending interest rate of almost 23Z. Interest rates have remained positive since then (Annex 1, Table 3). The initial interest rate discussions did lead to broader agreements by the Government on interest rate policy. It is reasonable to say that a positive result of 'oan 1599-CR was that it - 18 - pioneered progress and helped to change interest rate policy in Costa Rica. However, it is also reasonable to speculate that, as pointed out before and in para. 4.09, the Bank's supervisory commitment may have been inadequate over the life of the project to influence other aspects of financial sector activity that might have benefited from greater project involvement. 4.09 Reducing Bank involvement with PFI by using an apex facility was an important, implicit, objective of the project. The appraisal did not directly address the trade-offs or the costs that could be involved in the proposed sharp reduction in the Bank's work with financial intermediaries and banking supervisory and monetary authorities. Under Loan 1599-CR, the Bank's direct involvement with the financial sector proved to be episodic rather than continuous and the Bank failed to build a strong sectoral data base and detailed expertise on the financial sector and the condition and problems of key financial institutions (e.g. there is no evidence that issues of accounting policy or banking supervisory practice were ad- dressed). The ongoing project did not serve as a vehicle for building a basis for a policy dialogue that has frequently been woven through ID? operations.14 A possible cost of initial excessive reliance upon an apex institution to substantially reduce Bsank staff involvement in IDF lending operations was that professional staff's direct involvement with financial sector issues was limited over the life of the project and prospects for an ongoing dialogue on sectoral issues were reduced. PODI'. FiPnancial Position 4.10 PODEIN was established as a permanent institution with an initial capital structure consisting of the proceeds of the US$15 million Bank Loan and US$15 million (equivalent) that the CBCR provided as counterpart resources. The Loan Agreement also provided that the CBCR would: (i) main- tain counterpart funds in real terms; (ii) meet all the direct and indirect costs of FODEIN operations; and (iii) would repay the interest, principal and comuitment fee under the loan. Thus, all interest payments by inter- mediaries have served to increased FODIZN's permanent resources while its high initial capital base and adequate reflows from loans to PFI provide for ample local currency liquidity to meet: current and projected future 14/ There are successful models of how the Bank's DFI lending operations managed to handle the mixture of project and financial sector issues to advance: (i) major financial policy goals; (ii) capital market reformation; and (iii) improvements in bank regulatory and supervisory practice. The need for financial sector reform activity was recognized in Costa Rica but never integrated into the project's reduced supervision processes during 1983-1985. Such .discussions were being conducted in several LAC countries in the context of existing or future DFC projects. The use of an Apex facility reduces Bank staff supervision effort. The trade-offs in the form of reduced Bank staff involvement in the details of financial sector operations and reduced prospects for devel` 4- the expertise and creditability to influence macro-p 'icy or PFI performance was not addressed in the a,praisal report's "project risksf section. - 19 - operations. As of December 31, 1986, FODEIN had assets equal to US$30.3 million and no liabilities. (Annex 1, Table 11 shows the growth of FODEIN asset structure during 1981-1987). 4.11 As the CBCR provided FODEIN with US$15 million equivalent in capital and paid for its costs of operations, Loan 1599-CR clearly suc- ceeded in its objective of establishing FODEIN on a solid financial footing. Based upon its highly liquid position amounting to US$10 million in cash on deposit in the CBCR, its recent annual operating profits equal to about US$1.5 million (Annex 1, Table 12) and its annual reflows of about US$2.5 million, FODEIN is firmly positioned to meet the term lending needs of the industrial sector in the foreseeable future. (See Annex 1, Table 13 for favorable financial ratios). Thus, further lending to Costa Rica to support industrial sector investment would, inter alia, be based upon reducing the Government's shortage of foreign exchange resources to expedite imports for investment projects financed by FODBIN. The DEB's prospective US$30 million industrial sector loan is expected to provide the CBCR with the foreign exchange needed to support the imports of equipment and services by the industrial investment projects financed through FODEIN. Auditla and Financial Reporting 4.12 The appraisal report for Loan 1599-CR did not include an analysis of the auditing and financial reporting requirements of the project and the special accounting problems that could result from the method used to ensure thats (i) FODEIN's counterpart funds would be maintained in real terms; and (ii) its operating costs would be fully covered by the Central Bank. The Loan Agreement provided that an annual independent audit of FODF- would be conducted by the CBCRI'S Auditor General (AGB). The absence of a clear cut definition of requirements has not proven to be satisfactory as unresolved accounting presentation problems continued to be vexing through the life of the project. As of February 1985, problems associated with the form and content of the audit for the year ending December 31, 1982 had still not been resolved. The audit for 1986 was reviewed by the PCR mission. This audit report successfully dealt with some of the Bank's prior objections regarding context and presentation and it did provide additional information and comparative financial data for prior years. The audit report also provided estimates of what FODEIN'S direct and indirect operating costs would have been had CBCR not absorbed the total costs of FODEIN operations. 4.13 The 1986 audit report represented a substantial improvement over prior efforts. However, balance sheet errors in adjustment accounts for 1985 were carried forward to 1986 and are currently being reviewed by the AGB. Thus, a final n.adit report for the project was not available to the PCR mission. Nevertheless, FODEIN'S loan portfolio and cash accounts have been audited in detail and the outstanding balance on each loan confirmed in line with the comments made by the Bank in its February 1985 review of FODEIN's 1982 audit report. - 20 - V. SUMMARY AND CONCLUSIONS Proiect Obiectives 5.01 The four major objectives of the project were only partially achieved: 1. The Loan succeeded in creating FODEIN as an organizationally and financially strong and well managed apex facility within the CBCR. Since the closing of the Bank Loan, FODEIN has been reorganized and it adopted new procedures which have increased its efficiency, reduced lending delays, returned respon- sibility for Loan preparation and appraisal to the PFI and sharply expanded the number of public banks participating in the program. Private banks were permitted to participate, starting in 1987. 2. The Loan provided only very limited amounts of lending to the larger SSE that the Loan had hoped to target through the establishment of a guarantee facility. At the same time the AID-sponsored micro-enterprise program through FODEIN granted 5,525 loans to micro-enterprises that were made by the public commercial banks, at subsidized interest rates. 3. Reflecting the project's limited success in promoting and attracting smaller and medium scale borrowers, the Loan failed to finance employment generation at low cost. Less than 25Z of the jobs estimated were actually created and the average cost per job was a high US$46,236, four times higher than expected. 4. The Loan attracted less than the expected volume of natural resource intensive investment and it did nothing to advance diversification of PFI borrowers.15 However, it led to a much higher than anticipated level of resource mobilization by investment enterprises and suppliers. 5.02 Loan 1599-CR did not fully achieve its lending objectives as aspects of the design of the project proved to be inappropriate and super- vision was constrained and inadequate to provide corrective measures: a) financial incentives were thin as the maximum permitted finan- cial spreads of initially 32 and then 4.52 were inadequate to: (a) compensate PFIs for the costs of establishing and operating a special term lending unit and assuming the risks of lending to smaller and medium enterprise; and (b) provide 15/ In its comments on the PCR the CBCR noted that industrial development policy highly favored import substitution. See Annex 3, Page 1 for full text of comment. - 21 - PFIs with a real return on their capital given the required, restrictive 7 to 1 DI ) leverage ratio (see Annex 2 for tech- nical discussion).1 b) the policies and procedures created for the apez institution were incompatible with efficient outward-reaching operations. FODEIN's procedures resulted in lengthy and costly loan processing, slow disbursement and low project participation. FODEIN was not fully aware of the Bank's project objectives. thus, they were not embodied in its organizational and opera- tional arrangements which did not provide for activities or incentives to steer the project toward achieving the objec- tives set by the Bank. c) the conditions for participation of financial intermediaries in the project proved to be unnecessarily stringent and restrictive. Simpler and more realistic conditions could have been applied and broader participation sougs&. As a result, the project became virtually a one institution loan as BNCR used 802 of total loan funds to finance large size loans and 85Z of investment project resources. The other public insti- tutions backed away from the conditions imposed. d) technical assistance efforts were limited given the rather broad objective of the project, i.e. to create institutional capability within a new ape-tunit and technically inadequate PFI. In the end, TA efforts were focused on FODEIN, which did not have the staff available to perform the task of helping PFI to improve project appraisal and term portfolio manage- ment. The project set excessively ambitious institutional targets for the financial and Bank staff resources applied. e) periodic reviews of the adequacy of policy, procedure or product pricing were not made. There was little if any mana- gerial or Bank response to the data that indicated that the project was not achieving its lending objective with respect to employment generation, loan size, cost per job created and finally quality of loan portfolio. Since project promotion and marketing functions were not included in FODEIN's opera- tions, corrective actions were not taken during the life of the project. 16/ The CBCR commented, in support of the low financial spreads provided under the loan, that spreads were adequate because the operating costs of financial intermediaries were only increased marginally (see Annex 3). Staff does not agree for reasons cited in Annex 2. It is unsound banking practice to price a new banking product line at marginal cost. For a financial product line to be sustainable within a bank it must bear its fair share of direct, indirect and overhead costs plus provisions and earn a real return on capital in line with the opportunity costs of funds. On that basis it ie sound practice to price any financial product at average cost, in the absence of a cost accounting system. - 22 - 1 5.03 It is not clear why problems in project design were not addressed in 1982-83 by expanded supervision as it became evident that the project outcome would be very different from that expected. Solutions to slow disbursement were sought by modifying the loan to finance pre-export requirements. But the basic problems of low spreads and cumbersome pro- cedu.es that restricted participation were never addressed and reviewed until FODEIN unilaterally altered and streamlined operations - after Bank funds were committed and the project closed. Economic and Financial Results 5.04 About one quarter of the subprojects financed are operating with difficulty and 62 have failed. The financial rates of return and the eco- nomic results will be less than expected and delayed. Part of the reason for the somewhat high subproject distress rate results from the fact that during project implementation the Costa Rican economy was staggering through a five-year recession including hyper-inflation, major exchange rate adjustments and the unraveling of the CACM, a major market for many industries. Another important reason for high subproject failure was the evident lack of skill in addressing the market and distribution analysis aspects of subproject preparation, especially in export related project. A large number of these subprojects were over the free limit and, thus, subject to prospective detailed review by the Bank prior to its approval and authorization to withdraw from the Loan Account. The Bank's review process did not identify or flag the lack of adequate marketing analysis in the failed subprojects. 5.05 It is not clear that the Bank can make a meaningful contribution to the evaluation of the adequacy or inadequacy of subproject appraisal methodology without a higher 1 vel of involvement in the process. This would imply, especially for first projects like Loan 1599-CR, that the Bank would give more weight to a process designed to prevent economic loss (failed subprojects) than it does to other aspects of Bank operations. It would imply (i) the use of qualified experts experienced, as an example, in areas of marketing and distribution and (ii) the provision of technical assistance over a longer period of time, including not only pre-operatioaal training programs but also programs that were designed to address the problems identified during project operations. This Loan provided for early training but nothing to correct the actual problems that emerged during the life of the project. August 1988 Revised: May 1989 - 23 - Annex 1 Table 1 PRCSCT CIMYEIZION REPORT COSTA RIC INDUSTRIAL CREDIT PROJECT (Loan 1599-CR) 1!hCTAL PLAN FOR INSTH PROJECTS ACTSAL VS. ESTMTZD (millions of Colons) Invstmut Actual Estimted Project Percentage Percentage Financing Finauc g Financ4ng- Financial Pla - Invest3et Projects World Blank Loan 0*03.8 */ 26.4 30.7 CMCI Equity -6 iSa.- 8.8 30.5 ODOQZE Loin 671.8 35.2 61.2 Fancial Intermediary 9.4 5.1 8.8 Total Loan 770.2 40.3 70.0 Enterprise Contributioz 934.s5 48.9. 30.0 Suppliers & Other Sources 205.1 10.7 O -Total ?nvestmJnt Cost *l,909.8 100.0 100.0 11 Total CUM equity contribution to PODCB amouted to 0723.974.496 (US$14 .6 Million equwalentl as of Dec 31. 1986. *I Equal to US$11,988,511. Sources FODI. World Bank _24 - Annex 1 Table 2 INDUSTRIAL CREDIT PROJWC (Loan 1699-CR) OISTRISUTON OF TOTAL PROJECT INESThUJT By SUSSECTOW EXPCTED VS. ACTUAL UbEslt,ed Actual Aatus l Estiested Dltrlbutlon Dlbtubles A_mt Amount (Per_)s..1 (Percent)ge) (Million (Ml1I too) Food, Beysransd Tobao 48.0 U.9 US 34.498 US523.S Teati too, loater 13.2 12.8 5.818 6.5 wood product 5.7 1.8 .691 2.8 Pow, pwisting 8.6 27.2 12.862 1.9 ChmicasI 12.6 17.3 ?.868 6.2 Nso-1u Ieloele 3.8 4.4 2.0 4.3 Miels, _sboer 7.5 5.1 2.81 3.7 Ote 0.4 - 0.2 Tots 100.0 100.0 USM48.450 US849.0 Sources Cm rm usma am maE ZNMXIKM aMrr PROJ - WLOvIIN mEAM - COST P Jo WICTW VS. ACTUAL Etit_mated Act I Job Estimated Co"o Act I Cot Jobs Crested Crested pop Jo Pop Job foed, beverege A tebee 1,4W 46 1181,200 U11U,173 T,sti Iee, l1ebter 54 64 12,18 15,988 Weed products in 2 5,53 21,n Paper, printlig 16 IS90 U1,087 65,068 Ch_mile 648 25 9,611 80,83 b__11te IIIa ml oweI 241 27 14,761 74,074 Mot1, mosiesy a oter $97 0 I.584 28.594 Total 4,105 968 US8I1,890 US 8 46,238 Soes CB:C - 25 - Annex 1 Table 3 PROJEC! COHNPLEON REPOtT C08Th Rick INDUSTRIAL CREDIT PROJECT (Loan 1599-CR) ASIC INTRST RATES 1978 - 1986 (Annual Averages) PODEIN Nominal Real Basic Interast Basic Inflation Interest Rats Rate 11 Rate 21 Rate 31 1978 - S 9.042 7.24Z 1.71Z 1979 - 12.78 15.97 (2.61) 1980 - 18.55 23.92 (4.25) 1981 22.75 20.83 64.15 (19.04) 1982 25.00 21.73 110.35 (41.76) 1983 41 28.50 23.00 29.64 2.82 1984 25.50 18.83 7.64 10.44 1985 23.00 20.00 10.44 8.68 1985 23.00 20.00 8.97 10,15 Source: CBCR 11 Means the annualized average of the 6 mnath basis rate set by CUCR. *ZI Means the annualized average holesale price indez. 3/ Annual average based on 12 mnmth woing average. 41 Th. real interest rate was positive starting in July 1983. - 26 - Annex 1 Table 4 PROJECT COIGllO RORT COSTA UMC. INDUSTRIa CREDIT PROJECT (Loan 1599-CR) CHKIACTERISTICS OF ROJECTS FINCSD (Frequency Distribution) Numher Percent Size of Proiects Financed Estimate-Actual Estimate-Actual Less Than USS 50,000 1/ 60 0 26.2 0 us$ 50,000 - US$ 100,000 60 1 26.2 2.9 US$100,000 - US$ 250,000 63 3 27.5 8.8 US$150,000 - US$ 500,000 36 10 18.7 29.4 US$500,000 - US$1,000.,000 8 2 3.5 17.7 Larger than US$1,000,000 2 14 0.9 41.2 Total Projects 229 34 100.0 100.0 Size of Loans Granted Less than US$ 25,000 k& 0 0 US$ 25.000 - US$ 100,000 6 17.6 US$100,000 . US$ 250,000 7 20.6 US$250,000 - US$ 500,000 9 26.5 US$500,000 - US$1,000,000 7 20.6 Larger than US$1,000,000 5 14.7 Total Loans 34 100.0 Size of Enterorise (Total Assets Before the Loan) Less tha VS$ 100,000 NA 0 0 US$ 100,000 - wS$ 210,000 - 41.8 1S$ 250,000 - 1S$ 500,000 7 20.6 1S$ 500,000 - 1S$ 750,000 0 - WS$ 750,000 - USS 1.000,000 3 8.8 US$1,000,000 - US$ 2,500,000 6 - 17.6 US$2,500,000 - 1S$ 5,000,000 7 20.6 us$5,000,000 - US$10,000,000 6 17.6 Larger than US$10,000,000 1 2.9 Total Enterprise 34 100.0 Sources FODEIN 1/ PODE N disbursed US$12.5 million (equivalent) from 1981 through 1986 for about 6,540. -27 - Annex 1 Table 5 COS? UC, INDUSTRIAL CREDIT PROJECT (Loan 1599-CR) CIIAACSTRSSISCS OF PROJECTS FINANCED (Frequency Distribution) Number Percent Terms of Loans Granted Less than 3 yeazs 0 3 - 5 years 7 20.6 *6 - 7 years -. . 13 _ 3. . .. a - 9 years 10 29.4 10 years or longer 4 11.8 Total Loas 34 100.0 * Economic Rates of Return Less than 152 0 - 13Z ----- 20 2 u1S - - - - - 2'0 - 0 - - 261 - 3OZ 1 2.9 311 --.-- 50S 16 47.1 More than 501 1 44.1. Total Projects 34 100.0 Financial Rates of Return Less than 15S 1 2.9 * 162 ----- 201 6 17.6 212 ----- 252 3 8.6 251 ----- 301 7 7 20.6 311 ----- 501 15 44.1 More than SO 2 5.9 Total Projects 34 100.0 Sales Destination Import Substitution 15 44.0 Export 3 6.9 Both 16 47.1 Total Projects 34 100.0 T7De of Enterprise new 6 17.0 Expansion 28 81.4 Total Enterprise - 34 .100.0 -28- Annex 1 Table 6 MUT arWJ A amxc coaex RU INPUSTIAL CDIT PROECT (Loan 1699-CR) DETAIl! ~UOAN ANALYSIS OF II }/ .~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~5 mile. I"oJf His" #P"j"GAl -/Loe a 1. Sold & CAuel hht (He Prble_ Mee Obie-1tves1) a ; teufaehlae (2 ProJeeC) ft.4 i ses, lii do co (I Project) Total 9I9. 2. IM=lew Failed (JdicilO Colleotieo or Close) jA rialil ISt .a (In liquidation) IO.? !olae ra Cm _treiana (in liqulidtion) 26.4 AI radw La Mass lIla (sold a paid o) 6.0 Industrias Malo ("rafet aesumud debt A paid Off 7.7 Metelic Sergi (prent aseumed & Paid off) 3 _l Total 46.7 S. Ente Ories gartion With Difflculty Cermico ld. de CA Ust reaching p"oitlvw ash flew) 17.L Zed1atria Teti low (Iate. SA) (Operng at low Ow"lty) U.S CI O Nsoial ye Ind de c_~lec (Operating at lew essitp) 17.6 ILI aremd (esaitaflis heavwly to per Of de") 4o.t J_sqla Vied". Fewrite (Opeatig at lew eapedtty) * Tota 1. 4. Omer-tino d lv but below ferecetos Nertifreti S.A. 3.7 Arreces Lee Sevee S.A. 2 Totl 79.4 t. With dela. no _mtino obectivee led OlcSagoo Ameri0inow S.A. 1 JLl Total 45.1 The above data desribe the ftleasial ettuatione of coas_ee as of 122/S1l. Thfe -wr have changd to the Interml. Seercee: Boom Naconal de Ceet Rise, Sauce de Ceets Nice, fPOO. - 29 - Annex 1 Table 7 PROJECT COCPLETION REPORT COSSA XriC INDUSTRIAL CREDIT "'ROJECT (Loan 1599-CR) STATUS OF LOAN PORTFOLIO LOANS IN ARREARS ANALYSIS - BANK FnACED PROJECTS (As of Dec. 31, 1987) *l -Number Percentage Percentage of of of Loan Status of Portfolio Projects Projects Funds fully Repayed Loans 11 10 29Z 20.0S Pay mnts on due date 12 35 48.8 Arrears undr 60 days 4 12 3.2 An.ars 60 to 180 days 5 15 21.7 .marsia ovtr 180 days- 1 3 2.0 Projects In Judicial Action 2 6 .3 Total 34 1002 looz al Includas repaymmts from proceeds of sales of 2 projects that failed to mnst objectives ad one company that refinanced from proceeds of IJSAID flunead R.constution Crett.8 *It- nding ititutionsae active In both collection and rescheduling processes so that dates will vary from month to moth. Arrears data may va7y as betwme paymaets of interest and pricipal. The arrears data rflect the mest delinquent component of total debt repaymnt. tnmiA m atI4T It ,oea 1N3) ANLYlS OW LON PORTFOLIO - FIIDI TOTAL PRJECTS ; arch Jime Septembr December March June Septebr LOSS 103 1360 1OS lt? 19U 137 v/ 1. Total Loas Portfolio 1,117. 1,14U 1,1t 1.t27 1,270 1,247 1,104 2. Loan Portfollo within Period of P apmet 514 U57 042 7 *10 1109 772 S. Portfolio Is Arreart Ovr 91 day 40 77 119 In 170 160 173 4. Percetage of tortfol Io h" I arrare (l-2) JO 3 1tU 255 U. Nume of AccoAt In A1r"re u overO days 40 1 ' 09 71 71 0 0 Sorces PODlIN p/ Exciwdes COUEsA lest portfolio - September 137 0 26040 A.&4 atTU S" 4K --3Im - MinioN F .WUti - 5000 - 1 - DUtl ibho. 143.., 3u3l _ bw. _ o U."4_. IOkul do Coo .was -AU _ W -ML .. 3i. .9 iMA _Lp otal .4 no8 166.8 il.A 8 11.4 6L6. u.8 4.0i 51.6 6l.6 61.8 t.S i.". bi-O.s do Coot. ". 6.1tJ 46.8 4.6 0.6i h W.ft .6 8.3 "6.- 0.15 4.8 4.66 am"& do Coee tik. 4 . 66 U.8 14 .8 . l 4.8 * .t 0-.8 0.6 ao. (mA .L.~~~~~~~~~A -44 _3 4 "A4 ILl .44.1 .4 MA 34 .4 Votes
World Bank Group · Project Completion Report
Costa Rica - Industrial Credit Project
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