Colombia - Seventh and Eighth Development Finance Companies Projects

- - Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9049 PROJECT COMPLETION REPORT COLOMBIA SEVENTH AND EIGHTH DEVELOPMENT FINANCE COMPANIES PROJECTS (LOANS 1598-CO AND 1857-CO) OCTOBER 9 , 1990 Trade, Finance and Industry Operations Division Country Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  LIST OF ABBREVIATIONS BR - Banco de la Republica (Central Bank) DFCs - Development Finance Companies SMEs - Small- and Medium-Scale Enterprises ERR - Economic Rate of Return CURRENCY EQUIVALENTS Currency: Colombian Peso (COL$) US$1 - COL$ 100 (June 1984) COL$1 - US$0.01 FISCAL YEAR January 1 - December 31  FOR OFFICIAL US ONLY THE WORLD BANK Washington, D.C 20433 U.S.A O4hc* of 01recoCw-Gma Opevetmm fv.kglmnn October 9, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Colombia - Seventh and Eighth Development Finance Companies Projects (Loans 1598-CO and 1857-CO) Attached, for information, is a copy of a report entitled "Project Completion Report on Colombia - Seventh and Eighth Development Finance Com- panies Projects (Loans 1598-CO and 1857-CO)" prepared by the Latin America and the Caribbean Regional Office. No audit of these projects has been made by the Operations Evaluation Department at this time. Attachment I This document has restricted distrbution and may be used by recipients only in the petfomoce | of their official duties. Its contents may not otherwise be disclosed without World Bantk uthorietioo  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT COLOMBIA SEVENTH AND EIGHTH DEVELOPMENT FINANCE COMPANIES PROJECTS (LOANS 1598-CO AND 1857-CO) TABLE OF CONTENTS Page No. PREFACE .................... .. ........................... i EVALUATION SUMMARY. . so...................iii PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .1 Project Identity .......... ... ..... .....1 Macroeconomic and Sector Environment 1. . Project Objectives .. .4 Project Design and Organization ..4 Project Implementation 5. ....... ... 5 Implementation of Investment Projects.. 7 Performance of DFCs ................... ............................. 10 Bank Performance ......................................... 11 Sustair.ability ... . ................ 12 Lessons Learned ....... ....12 Conclusions . . .. . ..... ..... . ..... . ... 13 PART I Annexes: A - Distribution of Loans by Industrial Sector and Data on the Sector's Internal and External Competitiveness .15 B - Details of Sample Projects . .16 C - Investment Project Evaluation . .17 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE .18 INTRODUCTION ............... . .18 I. GENERAL FEATURES OF IBRD LOANS 1598 AND 1857 .19 II. TREND OF LOAN APPROVALS. BY PROJECT CATEGORY ......22 A. Gene-ral Trend. ....... .... 22 1. Loan 1598. .......... .......... 22 2. Loan 1857 .....22 B. Sectoral and Geographic Distribution .....23 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (cont'd) Page No. III. INTERMEDIATION OF THE RESOURCES ........ ..... 30 A. Rlules Governing the Finance Corporations .30 B. Evolution of the Finance Corporations (1977-85) .33 1. Capitalization . ........ . .. . . 33 2. Portfolio quality .. . ........ .33 3. Profitability ...... ....... . .34 C. Evaluation of New IBRD Corporations ....34 IV. RESOURCE MOBILIZATION ...43 A. Industrial Investment ..43 B. Finance Corporations....... 43 C. Cofinancing ..... ...... 44 CONCLUSIONS . ......... .. ..... .. .. ..49 Tables: 1. IBRD Loan 1598: Eligible Project Categories anLd Allocations 24 2. IBRD Loan 1857: Eligible Project Categories and Allocations 25 3. IBRD Loan 1598: Placement of Loan Resources, by Project Category .26 4. IBRD Loan 1857: Placement of Loan Resources, by Project Category ......... .27 5. IBRD Loans 1598 and 1857: Total Approvals, by Economic Sector ......... .28 6. IBRD Loans 1598 and 1857: Geographic Distribution of Approvals ...........29 7. Finance Corporations: Funds Raised by Term Certificates of Deposit .......36 8. Finance Corporations: Paid-up Capital + Legal Reserve/Total Assets ...37 9. Finance Corporations: Doubtful Debts/Total Portfolio .38 10. Finance Corporations: Net Profit/Capital + Reserves .39 11. Finance Corporations: Gross Financial Margin .40 12. Finance Corporations: GFM + Investment Return .41 13. Operating Profit/Loss. 42 14. IBRD Loans 1598 and 1857: Industrial Investment .46 15. Finance Corporations: Resource Mobilization, IBRD Loans 1598 and 1857 .47 16. Approvals Under Cofinancing and IBRD Loans 1598 and 1857 48 PART II Annex: 1 IBRD Loans i598 and 1857: Project Components and Categories 52 PART III: STATISTICAL INFORMATION ..........53 1. Related Bank Loans .. . . ...... 53 2. Project Timetable - Loan 1598-CO .. ...54 3. Disbursements Loan 1598-CO . ...... 54 4. Project Timetable - Loan 1857-CO .. ... 55 5. Disbursements Loan 1857-CO. ... 55  PROJECT COMPLETION REPORT COLOMBIA SEVENTH AND EIGHTH DEVELOPMENT 'INANCE COMPANIES PROJECTS (LOANS 1598-CO AuD 1857-CO) PREFACE The following is a combined Project Completion Report on the Seventh and Eighth Development Finance Companies Projects (Loans 1598-CO and 1857-CO) to the Banco de la Republica with the Guarantee of the Republic of Colombia. Loan 1598-CO was approved by the Executive Directors on June 15, 1978 and closed on October 14, 1983 after cancellation of $9.36 million. Loan 1857-CO was approved by the Executive Directors on May 27, 1980 and closed on December 31, 1987 after cancellation of $11.32 million. Parts I and III of this Project Completion Report were prepared by the Bank's Latin America and the Caribbean Regional Office, based upon information obtained from the LAC Information Center, the Borrower's archives and field visits to some of the loan beneficiaries. Part II was prepared by the Banco de la Republica, the borrower under these two operations. The draft PCR was sent to the Borrower for comments, but none were received.  - iii - PROJECT COMPLETION REPORT COLOMBIA SEVENTH AND EIGHTH DEVELOPMENT FINANCE COMPANIES PROJECTS (LOANS 1598-CO AND 1857-CO) EVALUATION SUMMARY Introduction These projects constitute the seventh and eighth lines of credit directed to the industrial sector in Colombia. The loans have been made to BR, operating as a second-tier institution for selected DFCs which have the principal responsibility for project evaluation and supervision and undertake the credit risk. Including the two operations under review, a total of $492.5 million equivalent have been made available by the Bank for DFCs' credit operations in Colombia. Projects obiectives The main objectives pursued by the projects are: (i) complementing the resources required for financing investment requirements in the industrial sector; (ii) supporting the development of DFCs as sound and predominantly term financing institutions with an adequate project appraisal and supervision capability; (iii) supporting the Government's priorities in the industrial sector in the areas of export development, industrial decentrali- zation, improved capitalization of industrial companies, promo- tion of medium- and small-scale enterprises, reduction of ownership and market concentration, containment of industrial pollution and adaptation of local and foreign technology; and (iv) supporting the Government's policy priorities related to DFCs development by improving their profitability and portfolio management, increase their risk capital operations and increase their domestic and external resource mobilization capability. The various project objectives were incorporated as specific condi- tions and features in the on-lending terms for the various types of invest- ment projects, eligibility criteria for the access of enterprises to the loans and financial and operational conditions to be met by the DFCs to become eligible to channel bank resources. Implementation experience There were significant differences in implementation performance in the two projects as a result mainly of the different economic conditions  - iv - prevailing during their respective bx-'4cution period. In the case of Loan 1598-CO, the loan was fully committed on schedule and there was a one-year delay in disbursements. The main departures from appraisal estimates was the low utilization of the equity financing component and the cancellation of $9.2 million of the loan (para. 14). In the case of Loan 1857-CO, there were significant delays in committing and disbursing the loan amount and some of the objectives originally pursued by the Bank were modified to accommodate deteriorating eccnomic conditions. As in the case of the previous loan, there was reallocation of funds from the equity to the debt financing component and a total of $11.2 million were cancelled from the loan (para. 15). The implementation of investment projects by industrial firms was done in an efficient manner, creating additional productive capacity with acceptable cost effectiveness. Initial financial performance of investment projects is mixed as a result mainly of the prevailing economic conditions (paras. 22-24). Performance of DFCs regarding the appraisal and supervision of investment projects, administrative efficiency and portfolio management was satisfactory. DFCs performance is below standard in calculating the ERR for sizable investment projects. This is mainly related to DFCs' reluctance to use economic evaluation as a relevant factor in making lending decisions (para. 29). Main findings and conclusions The operation was successful in achieving the general objectives of providing the resources required by the industrial sector to finance its expansion, ensuring an appropriate appraisal and efficient execution of the investment projects financed by the loans (despite the shortcomings in their economic evaluation) and in further developing the DFCs capacity as term financing institutions (paras. 23-24, 31-32). However, the loans had a very limited impact in promoting the declared Government objectives in the indus- trial and financial sectors. This is a result mainly of the lack of effec- tiveness of project conditionality in neutralizing the distortions derived from the Government's macroeconomic and sector policies (paras. 6-8) and the incentive framework for the industrial and financial sectors (paras. 16-19 and 29-30). Moreover, given the level of maturity reached by DFCs in Colombia, continued support by the Bank of directed credit lending should be phased-out and substituted by improving incentives for mobilization of domes- tic resources (para. 35). The main conclusion is that the stage of development financing in Colombia has reached a mature stage in terms of the appraisal capability and financial soundness of DFCs. In order to seek further progress in the development of a domestic capital market in Colombia and an efficient alloca- tion of industrial credit, the emphasis should be shifted towards removing the distortions in the financial and industrial sector, namely, reduction of directed credit lines and forced investment and of the anti-export bias pre- vailing in Colombia's trade regime. Without a clear understanding with the Government on these areas continuing financing of directed credit operations with external resources may militate against the objectives these operations are expected to pursue (paras. 35-40).  PROJECT COMPLETION REPORT COLOMBIA SEVENTH AND EIGHTH DEVELOPMENT FINANCE COMPANIES PROJECTS (LOANS 1598-CO AND 1857-CO) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE Proiect Identity 1. Project Names: Seventh and Eighth Development Finance Companies Projects Loan Numbers : 1598-CO & 1857-CO RVP Unit : Trade, Finance and Industry Operations Country Department III, Latin America and the Caribbean Sectore : Finance and Industry Including the two referenced lines, a total of $492.5 million equivalent has been made available by the Bank to finance development finance companies in Colombia. This report will present a combined evaluation of these two projects. Macroeconomic and Sector Environment 2. The two projects were executed under very different macroeconomic scenarios in terms of sources and economic growth pace, however, they share a continuously deteriorating trend in exchange rate and fiscal management and in the incentive framework for industrial sector growth and financial sector development. In the case of the Seventh DFC Project a significant expansion of the economy was taking place, mainly as a result of the coffee boom that started in end 1975. Macroeconomic policies were focused on sterilizing accumulated reserves and smoothing the increase in aggregate expenditures resulting from the incremental inflows of foreign exchange. Coffee, illegal export earnings and foreign borrowings had expanded domestic liquidity and increased inflation to unacceptable levels. 3. During the first half of the seventies economic management had focused on export promotion and manufacturing had been the main source of growth. During the second half, the services sector became the main source of growth. Manufacturing sector growth slowed from an average 7.8% per annum during the 1970-75 period to 3.4% during the 1975-1980 period. Overall export expansion and diversification into non-traditional exports slowed. There was a significant expansion of Government consumption and a strcng surge in fixed investment as a result of an aggressive public sector invest- ment program that masked a decline in private sector investment activity. Thus, the swift pace of loan commitments under the Seventh DFC project and the overall satisfactory project execution can be traced back to a transitory  - 2 - surge in domestic demand brought about by expanded domestic liquidity and Government consumption which in turn created a strong but short-lived indus- trial reactivation during the years 1978-79. 4. The period of execution of the Eighth DFC Project coincided with the end of the coffee boom in 1980 and the failure to put in place adjustment policies adjusting the economy to reduced export earnings and aggregate demand levels. GDP growth fell from an average 5.5 Z p.a. during the 19PS-80 period to an average 1.32 during the 1981-83 period. The manufactu.ing sector's performance was drastically affected, generating negative growth ratee (-0.7% growth average during the 1981-83 period as compared with an average 3.4% growth during the 1975-80 period) and a diminishing share in GDP (from 23.8% in the 1975-80 period to 21.7% in the 1981-83 period). As a subst4tuge to adjustment, the Government underpinned demand growth through higher nublic expenditure, domestic credit creation and foreign borrowings. This 1,ought about inflationary pressures. In order to check inflation (running at an average 25% during 1981-83), chete was a slowdown in the pace of devaluation of the peso that led to real appreciation of the peso of 26.4% by 1983 in relation to the exchange parity prevailing in 1975. This resulted in a significant loss of competitiveness and further reduction in the rate of growth of non-traditional exports. 5^ The attempt to maintain aggregate demand through public sector expenditures brought about a sizable growth of the fiscal deficit and a widening current account deficit at a time when the ensuing Latin American debt crisis drastically curtailed the possibilities of external financing. The Government's response to a drastic fall in reserve levels during 1983 and most of 1984 was the imposition of steeper import controls and a timid acceleration of the crawling peg. These measures were not sufficient to redress the domestic and external imbalances faced by the Colombian economy while further distorted the incentive framework for the productive sectors. The poor performance of the economy and particularly of the industrial sector during this period was reflected in the very slow pace of loan commitments under the Eighth DFC Project. 6. The basic trends described in terms of the macroeconomy and the manufacturing sector had significant repercussions in the financial sector which was utilized by the Government as the main instrument to sterilize incremental foreign exchange earnings. Sterilization measures included - drastic increase in reserve requirements and open market operations by BR at rates substantially above the deposit rate ceilings set for financial insti- tutions. These measures limited the financial sector's ability to raise resources in the domeetic market and encouraged the emergence of an informal financial market. 7. In addition, the Government increased forced investment requirements on financial institutions as it emphasized the role of direct credit lines as the manner of smoothing the crowding-out effects of the sterilization measures. These developments had serious effects on the profitable of the formal financial sector and their ability to strengthen their equity base. The restrictions on the sector were partially eased in early 1980 with the elimination of rate ceilings on certificates of deposit and a reduction in reserve requirements. However, as a result of the slowdown in economic  growth, the weakening of the capital structure of financial institutions and the prevalence of unorthodox banking practices by economic conglomerates controlling the main financial entities, a major crisis erupted in the sector in 1982 which led to the liquidation, temporary intervention and nationali- zation of some of the major banks. Thereafter, the Government has initiated a gradual process of liberaliztotion aimed at improving the profitability of the sector and strengthening its capital base. It is now contemplating the reprivatization of the banks and greater foreign ownership of financial instiLutions. In relation to directed credit lines, there has been a consis- tent policy towards reducing the weight oi forced investmenits, increasing tbe profitability of diracted credit operation and allowing financial interme- diaries freedom in setting their deposit and lending rates. This policy has had some positive effects on the financial performance of DFCs, as will be discussed below. 8. The performance of the industrial sector in Colombia during the 1978-85 period is characterized by low or negative growth rates that are a result of demand management policies and the reliance of the sector on the domestic market as its principal source of growth. Aside from the effect of macroeconomic policies, the sector's development has been undermined by the prevalence of a poor internal and external competitive environment. Internal competition has been impaired by market concentration. Over 65% of four digit industrial sectors show a high or moderate market concentration struc- ture. External competition has bee.n limited by a protectionist trade regime. Quantitative restrictions cover 83Z of 1988 industrial domestic production. The anti-export bias and dependence on the domestic is reflected in the deteriorating performance of manufactured exports which fell from 7.5% of domestic production in 1975 to only 4.8% in 1984. The lack of competitive- ness is reflected, in the negative productivity growth in the sector. Recent studies show that during the 1977-80 period, factor productivity declined by 1.3% of total output despite a real output growth of 7.9%. As a resilt, manufacturing sector contribution to the economy has remained practically stagnant since the late 60' (about 21% of GDP) and the industrial sector share of GDP in Colombia remains substantially below the industrial sector performance in Latin America and in newly industrialized countries. 9. The loans under review did not include specific conditionality linking loan disbursements to the maintenance of an acceptable sector policy framework, despite its relevance in ensuring the attainment of the projects' objectives. There was a marginal link requiring lending interest rates on peso denominated loans to be maintained at positive levels including a spread of at least two percentage points for the DFCs. The two projects provided for mechanisms to review periodically compliance with this objective. The Bank and the Colombian authorities had no difficulties in agreeing on the appropriate level of peso denominated interest rates since they applied exclusively to Bank financed operations. In addition, there were discussions with the Government on the mechanisms and arrangements to enable DFCs to carry out the term transformation of resources raised in the domestic markets on a short-term basis. The actual implementation of the term transformation mechanism resulting from these discussions was implemented under the Ninth DFC project.  -4- Proiect Obiectives 10. The project pursued the traditional objectives of DFC lending of complementing the resources required to finance investment in the industrial sector and supporting the development of DFCs as sound and predominantly term financing institutions. In addition the projects pursued a number of specific objectives related to the industrial and financial sectors. With respect to industrial policy, the projects supported the Government's priori- tias in terms of export development, industrial decentralization, improved capitalization of industrial companies, promotion of small and medium scale ente-prises, reduction of concentration in the industrial sector, containment of industrial pollution and adaptation of local and foreign technology. 1l. In terms of financial sector policies, the projects supported measures to improve DFC's profitability and portfolio quality, increase their risk capitalist role and their capacity to mobilize domestic and external resources. In addition, the projects sought to encourage lending to a larger number of enterprises and an increase in the number of DFCs eligible to intermediate Bank funds. The various project objectives were reflected as specific conditions and features in the on-lending terms for the various types of investment projects, lending criteria for enterprises, and financial and operational criteria for DFCs to become eligible to channel Bank resources. Proiects Design and Organization 12. The design of the two projects under review followed the conceptual framework, definition of roles and responsibilities and the conditionality that was applied in previous DFCs operations in Colombia and which has proved successful in transferring resources to the industrial sector and strengthening DFCs as specialized term financing entities. 13. In the case of the Seventh DFC project some new features were intro- duced to deal with some of the secondary objectives pursued: (i) to Increase support for the Government's export promotion and decentralization strategies, aggregate loan ceilings by group of related companies was increased from $4 to $8 million provided the incremental portion would be applied for financing of export or decentralization projects; (ii) the incentives for DFCs to invest in industrial companies were enhanced by an increase in the amount of the loan allocated for equity investments (from $5 million in the Sixth Line to $10 million in the Seventh Line) and by expanding the type of projects eligible for investment from solely decentralization projects under the Sixth Line to export and small- and medium- scale enterprises projects in the Seventh Line; (iii) to increase DFC's profitability the overall debt equity ratio was increased from 6:1 to 9:1;  - 5 - (iv) to provide additional incentives to DFCs to fund medium-and long-term loans with short-term resources, the current debt to equity ratio was replaced by a current assets to equity ratio; (v) Domestic resource mobilization targets were increased substan- tially in nominal terms, and a target for mobilizing external resources of about $ 20 million was set under this loan to introduce mature DeCs to international capital markets; and (vi) to provide incentives for new DFCs to participate in the inter- mediation of loan funds, flexible eligibility rules were established (mainly increasing the debt/equity limit) which allowed new DFCs limited access to intermediate loan resources while moving towards full eligibility under the Bank credit lines. 14. In the case of the Eighth DFC Project, the following innovative features were introduced: (i) to ensure wider access to loan funds, enterprises or groups of enterprises with total assets exceeding Col$1.5 billion became ineligible for Bank loans and lending limits from the previous line were maintained in nominal terms; and (ii) the role of BR was expanded from review and approval of sub- projects and supervision of new DFCs to include the supervision of all DFCs participating in the loan. Proiect Implementation 15. There were significant differences in implementation of the two two projects. In the case of the Seventh DFC Project, the signing took place in mid-1978 when the economy was booming, including a strong domestic demand for manufactured goods. The loan was fully committed by end 1980, as expected at the time of appraisal. Disbursements were delayed by one year from the original closing date of December 31, 1982. There were, however, some sig- nificant departures from original appraisal estimates: (a) the low utiliza- tion of the $10 million risk capital component led to a $7.4 million reallo- cation to finance regular sub-loans; (b) the cancellation of $9.2 million of the loan, corresponding mainly to amounts committed by the DFCs which were cancelled by industrial firms; and (c) the financing of only 148 investment projects of which 17% were decentralized projects, against an ini.ial expec- tation of 200 projects and 40% of the loan, respectively. The initial target that about 30Z of the loan would be utilized by small- and medium size firms was substantially met. Over 45% of the loan was utilized to finance regular investment projects and 29% of the loan applied towards financing export promotion projects. The domestic and external resource mobilization targets set for DFCs were also met. 16. The Eijhth DFC Project was initially affected by a seven-month delay in loan signing because the Government had temporarily run out of borrowing authority from Congress. Thereafter, a permanent source of implementation problems was the deteriorating economic situation that had a serious impact  - 6 - on the investment climate. The Bank was generally responsive to requests by the Colombians to make the terms and eligibility requirements for the project more flexible. Despite this flexibility there was a one and a half year delay in the commitment of the loan and about a three and a half year delay in disbursements (to August 1988). As with the Seventh DFC Project there was a $ 7.0 million reallocation from equity investment financing to the regular investment sub-loan component. Also, $11.32 million of the loan were cancelled, corresponding to loan commitments which were not utilized by the borrowing companies. The newly established objective of ensuring a wider access to the loan by benefiting small and medium enterprises was only partially achieved since there was not sufficient demand from these companies and the big industrial groups were cut-off from direct access to the inter- national capital markets due to the debt crisis. As a result, only 27Z of ,he loan amount was utilized by small and medium firms and about 50% of the loan benefitted large enterprises. Moreover, reversing the achie-ements in previous loans towards supporting the Government's export promotion and decentralization strategies, over 80% of the loan was utilized to finance regular industrial investment projects and only 11% was committed for export and decentralization projects. As with the Seventh DFC Project, the tech- nology development and pollution control projects represented just over 4Z of the total loan amount. 17. Despite the policy objectives pursued by the two operations under review, they had a very limited impact on developments in the industrial and financial sectors. In the first place, the export promotion objectives were compromised by the Government's exchange rate and import policies. These led to negative growth rates of industrial exports during the period 1978-1984 and a steady decline in the use of loan funds for export development projects from 54% in the Sixth DFC loan, to 29% in the Seventh and 9% in the Eighth. The figures on the projects' contribution to export development are highly unreliable since DFCs did not monitor export performance by companies that obtained financing for export development projects. 18. In the second place, the objectives of reducing market and geo- graphical concentration in the industrial sector fell short of expectations. The percentage of loan funds lent to small- and medium-scale enterprises remained constant at about 27% for the two operations. A number of companies classified as small-and medium companies are related to big industrial groups which established new firms with a low asset base to make them eligible for the concessional terms granted to SMEs under these lines. The checks carried out by the DFCs and BR to probe firm linkages to industrial groups were mostly of a legal and formal nature. Recent studies on industrial sector development in Colombia show that market concentration in the industrial sector has grown significantly during the 1968-84 period. Annex A shows the level of internal and external competitiveness of the various industrial sectors based on the proportion of production accounted for by the top four firms and the level of quantitative restrictions covering imports and the distribution of loans resources among them. There seems to be no established pattern between the percentage of loan proceeds allocated to a specific sector and its level of internal and external competitiveness, except that about 70% of loan resources were committed to those sectors that show a moderate to low level of market concentration and a high level of quantita- tive import protection. It may be concluded that these operations did not  - 7 - directly contribute to the increased market concentration in the industrial sector vut have gone to highly protected sectors, presvmably with relatively high levels of profitability. 19. In the same way, efforts to promote decentralization of industrial development have not shown any significant re&ults. The amount of the loans allocated to firms located in areas outside the main industrial centers remained constant at about 33% as had been the experience with the previous two DFC operations. This diatribution reflects the normal pattern of geo- graphic distribution of industrial sector output. 20. Finally, the efforts to strengthen the capital base of industrial firms through equity financing by DFCs did not prove effective. Over 70% of the equity component of the loans had to be reallocated to the debt financing component of the loans. Industrial firms in Colombia show high indebtedness levels. By 1984 the median indebtedness of industrial firms in Colombia was 68% of total assets. The incentives towards increased leverage of industrial firms are explained by the preferential tax treatment of debt financing under Colombialk Law, the weakness of stock markets and the highly concentrated ownership structure of industrial firms. This incentive structure was partially neutralized by the 1986 Tax Reform Law that reduced tax incentives on debt financing. Implementation of Investment Projects 21. An analysis of the efficiency in implementation of investment projects financed by the two loans and their financial impact was carried out based on a sample of 23 projects (7 financed by Loan 1598 and 16 by Loan 1857) representing about 24% of total loan amounts (See Annex B). This analysis utilized data presented by the DFCs and borrowers for loan applica- tions, the project evaluation performed by BR staff and the periodic reports regarding project execution and operation presented by the DFCs and invest- ment enterprises to BR pursuant to the respective lending agreements. These reports are reviewed by BR staff on a regular basis and utilized as a basis for BR's selective project supervision. The analysis included visits to four of the enterprises included in the sample to obtain first-hand information on the execution of investments, financial performance and experience of entre- preneurs in operating these lines. In addition, DFCs provided up to date information on debt service performance of each of the companies included in the sample. 22. A basic conclusion coming out from the analysis is that by and large, industrial firms participating in both lines of credit carried out their investment projects in an efficient manner, creating additional produc- tive capacity with acceptable cost effectiveness. Initial financial perfor- mance of investment projects is mixed, as a result of the prevailing macro- economic environment, specific industry circumstances and market conditions. 23. In the case of Loan 1598, investment projects were completed with an average cost overrun of 5.8% and created on average 71.2% of the capacity that had been originally estimated, thus, the actual cost overrun per unit investment generated was 46% of the appraisal estimate (Annex C). The average delay in project execution was 3.2 months. The lower generated  - 8 - capacity was compensated for three companies that had over 100Z capacity utilization (average capacity utilization was 120.6%). To determine the preliminary financial performance of these projects, the financial rate of return estimated at appraisal was recalculated for the first two years of project operation and compared with the actual first two-yiars return achieved by these projects. Four projects had better than expected initial financial performance, two of them (Minipak SA and Gases de Bucaramanga Ltda) having fully recovered the investment after two years of project operations, while in the other two cases a substantial portion of the investment had been recovered. In all these cases, the projects had significant positive impact in the overall companies' finances although at an early stage of project operation. Of the three projects with poorer actual performance, there is one case (Lanera del Pacifico) achieved a positive, although lower, return and faced overall financial distress as reflected in its poor debt servicing record. The other two projects do not show comparatively lower capacity generated per unit investment (77% in the case of Industria e Inversiones Samper SA and 582 in the case of Tubos de Vinilo de Soledad Ltda) than the other projects and have good capacity utilization. However, they show very low investment pay back (14.48% and 23.6% of investment costs respectively), confirming the projects' low profitability. Tubos de Vinilo de Soledad Ltda. was a new company at the time and the loan financed its initial capital investments. Its good debt servicing performance during the recent yea-s seems to indicate that it was thereafter able to overcome its iritial finan- cial difficulties. In the case of Samper SA the project consisted in the expansion and modernization of the company's cement plant. There were sig- nificant cost overruns resulting from delays in land acquisition and the unforeseen need to expand existing roads to transport the new equipment to the plant site. As a result, project operations were postponed for almost one year. These difficulties in project execution, plus Governm-nt controlled prices on cement and weak cement demand, started creating some signs of financial distress in 1983. These difficulties were compounded by the accelerated devaluation of the peso in 1985, which forced the company to file for receivership in early 1986. As a result of the debt relief provided by creditors (45% of total indebtedness), a strong demand during the years 87-88 and increases in cement prices, the company has been recently generating an operational surplus. 24. In the case of Loan 1857 the average cost overrun was 35% with an average delay of 12.4 months (See Annex C). The newly generated capacity of these projects was 12% above what had been originally estimated. As a result, the actual cost overrun per unit investment was 45% over the appraisal estimate. In the case of this loan the results are heavily affected by the very low performance of the firm Pasteurizadora Santanderiana de Leches that shows a 343% cost overrun. If an average is calculated without accounting for this firm, the cost overrun per unit investment is improved to 25%, that is below the cost overrun per unit in Loan 1598. The rate of utilization of that capacity was 80%. The recalculation of the initial two years financial rate of return shows that seven of the projects financed had a substantially better than expected financial performance, one project (Cementos Rio Claro) was within the expected performance range and the remaining eight projects were well below their expected financial perfor- mance. As in the case with projects under Loan 1598 there is no strong cor- relation between cost effectiveness in project execution and financial  - 9 - performance. While six of the good performing projects have low cost overrua per unit investment, the two remaining good performing projects (Ingeser de Colombia and Ingenio Rio Paila) had significant cost overruns. Of the eight low financial performance projects, only three (Pelex Ltda, Pasteurizadora Santandereana and Empresa Rio San Alberto) show a very high cost per unit investment, while the remaining five show average cost effectiveness. More- over, only two of these companies (Cementos del Norte and Frigorificos Colombianos) have faced overall financial distress and sought informal relief from their creditors. 25. The main differences in terms of efficiency in project implementa- tion and financial performance seem to be related to the different economic conditions prevailing during the periods of disbursement of the two opera- tions and specific industry conditions. The longer delays in project imple- mentation experienced under Loan 1857 are explained mainly by the stringent import restrictions imposed in the early eighties when even capital goods import licences financed with long-term official credit lines were issued after substantial delays. The differences in actual generated capacity and rate of utilization are related to the economic agents' expectations on future economic developments at the time of loan application. In the case of Loan 1598 that was committed during a period of economic expansion, indus- trial firms took a conservative approach towards expanding their productive capacity and carried out only 71% of the investments originally applied for. As a result, they had 120% average capacity utilization and may have foregone some additional expansion. In the case of Loan 1857 industrial firms seem to have misread the depth and duration of the recession that prevailed during the disbursement period of this operation. In this case the firms expanded capacity by 12Z more than their initial loan applications and ended up utilizing only 80% of their increased capacity. The different reactions to expected economic developments in terms of expanding productive capacity did not have a definite effect on the initial financial performance of investment projects. Those financed by Loan 1598 show overall acceptable financial results, while investment projects under Loan 1857 show very mixed financial performances resulting mainly from the prevailing recessionary market condi- tions. Independently from the projects' financial performance most firms show a prompt debt service record. As mentioned above, there are three cases in which firms have sought debt rescheduling, adversely affecting the DFCs portfolio, and only one loan was declared non-performing. The good repayment record reflects the careful portfolio management that has characterized DFCs performance, as will be discussed later. 26. Preliminary calculations done to determine cost of job created in the sample investment projects reflect a substantial increase from the cost per employment under the two previous DFC operations, which was already considered on the high side. While there may be plausible explanations for this significant increase,i.e., a trend towards financing increasingly capital intensive projects, the figures reported by firms as permanent employment creation may significantly understate actual employment generation since the current labor regulatory environment has induced firms to hire mainly temporary labor. Due to the unreliability of the employment figures reported no judgement as to the job creation costs under these two operations will be made.  - 10 - 27. It can be concluded that due to the maturity achieved by both BR and the DFCs in the evaluation and supervision of investment projects, and, on the other hand, that the main beneficiaries of these lines of credit are the bigger and more mature industrial firms in Colombia, the technical and finan- cial risks undertaken are reasonable and there is an efficient utilization, within the cost effectiveness parameters discussed above, of the Bank loans in meeting the investment needs of those industrial firms. Performance of DFCs 28. The DFC system in Colombia has evolved into two basic groups: those DFCs that are predominantly term financing entities, i.e., the eight DFCs that bave access to the Bank lines of credit, and those DFCs that have taken advantage of the domestic resource mobilization authority provided to DFCs to intermediate funds on a short term basis. There are radical differences between these two groups in terms of financial and operational structure. This report will focus exclusively on the first group. 29. As discussed above, one of the basic objectives pursued by these projects was to strengthen the role of the DFCs as term financing institu- tions. The performance of the DFCs in terms of appraisal and supervision of investment projects, administrative efficiency and portfolio management has continued to evolve satisfactorily over the years. The only limitation in terms of appraisal capability is related to the requirement that sizable projects should be subject to an economic evaluation to account for the project's return to the economy as a whole and to eventually eliminate projects that show a satisfactory financial return as a result of distortions prevailing in the economy. DFCs regularly conducted the ERR calculations for these projects. However, there have been inconsistencies in defining the relevant data for purposes of international price comparisons and a generalized practice among DFCs to disregard economic evaluation as a relevant factor in their decision to finance an operation. Consequently, it may be concluded that the economic efficiency of some projects may not be as high as the ex-ante ERR calculations suggest and that lending decisions by DFCs and BR are taken mainly on the financial merits of the project and the creditworthiness of the firm. 30. In terms of portfolio management, the critical period for the indus- trial sector did imply a significant increase in the share of non-performing debt on the total portfolio from an average 0.742 during the period 1974-80 to an average 3% during the period 1981-85. However, it was still kept within manageable levels. 31. In terms of profitability, performance by DFCs was quite reasonable during the period 1978-80 averaging a 39.6% return on equity in nominal terms. Thereafter earnings fell and remained negative in real terms until 1986. Th.s was as a result of higher average funding costs from an increased proportion of resources raised from the public and the requirement that a higher share of own resources be used in funding direct credit operation which were lent at mandatory low or negative interest rates. DFCs took some measures to protect their profitability consisting mainly of a significant increase in their leverage (from an average debt to equity ratio of 4.7 in  - 11 - 1976 to 9.0 in 1982) and the liquidation of profitable equity investments. These measures were not sustainable in the medium-term. The monetary authorities eventually introduced measures to improve the DFCs' profitability on term financing operations. The downturn in profitability had a signifi- cant effect in the capitalization level of DFCs. From an average growth of 24.2Z during the period 1974-80, the growth of capital and reserves slowed to 15.5Z during the period 1981-86. This implied a decapitalization of these entities in real terms. Despite the rather dismal performance of the DFCs participating in Bank loans in terms of profitability and capital growth, they did outperform all other segments of the financial sector, namely, DFCs operating in the short term market, and the banking sector which faced a much more drastic deterioration of their financial position during the period. In the case of Bank financed DFCs, only Occidente and Colombiana incurred in temporary non-compliance with the financial conditionality set in the loan, mainly in terms of exceeding indebtedness limits. Remedial action was taken by both DFCs in due course. The overall superior performance of the Bank financed DFCs during the crisis has led the Government to set the basic financial and operational policies governing these DFCs as the standard for all DFCs in Colombia. This decision will force all other DFCs to carry out a radical adjustment and widen the scope of the institutions specialized in term financing within the Colombian financial sector. Bank Performance 32. The process of preparation and supervision of these two projects reflects the level of maturity achieved in the relations between the Bank, BR and the participating DFCs. The Bank's role is increasingly perceived as focusing on the up-stream policy and institutional aspects of the development banking system. BR has evolved into assuming the main responsibilities in the supervision of the financial and investment banking performance of the DFCs and the latter have gained increased autonomy in the evaluation of investment projects and the approval of loans to industrial firms. While the Seventh DFC Project worked out as planned, in the case of the Eighth DFC Project there was a need for a more intensive involvement of Bank supervision in order to deal with the problems in the financial and industrial sectors and their adverse effects on loan commitments and disbursements. The Bank responded with openness and flexibility to the various requests made by BR to modify the original terms of the loan. The Bank agreed, inter alia, to sub- stantially increase the eligibility ceiling that had been -et for large enterprises, enabled the financing of public works firms and authorized the participation of the Corporacion Financiera Popular to increase the share of small- and medium-scale enterprise financing under the loan. The only misgiving that arises from this flexible approach is that the changes agreed focused more on expediting loan commitments and disbursements instead of dealing with the macro and sectoral policies that were generating the adverse results in project execution. This approach was conducive to a compromise of the project objectives, as has been discussed above. 33. The Bank has required under this type of operation that the amounts committed by DFCs should not exceed the amount of the loan. Although this practice may seem appropriate to avoid overextending the financing capacity of DFCs, it does not take into account the significant '-evel of loan commit- ments that are cancelled or not utilized by industrial firms in the process  - 12 - of project implementation as a consequence of iiiaccurate price estimates or the decision to scale down or cancel the investment plans due to changes in market conditions. As a result, over $20 million of the two loans that had been originally committed by the DFCs had to be cancelled because of the changing plans of industrial firms, increasing the financial costs for BR and the DFCs. In the future the Bank should consider allowing overcommitment of the loan by, say 15%, to allow for subsequent cancallations by industrial firms. BR would undertake to meet any financing needs that would result from this overcommitment. Sustainability 34. Sustainability of DFCs as term financing institutions was not improved during the period under review. There has been a significant increase in the level of resources mobilized in the domestic market from only 2% of total assets in 1975 to an average 21% during the period 1978-86. This was due mainly to the authorization granted to DFCs in 1975 to accept deposits. However, these domestic resource mobilization efforts represent an average nominal growth of 34.55% during the period 1978-86 and compare unfavorably with the average 66.8% growth of the banking sector during the same period and implies a very modest ilLcrease in real terms given the average increase in inflation for the period of 22.4%. Moreover, since most domestic resources are raised on a short term basis and the DFCs have been reluctant to assume term transformation risks (aside from the counterpart requirements posed by the officia'l rediscounting mechanisms referred to below), this increased ability of DFCs to raise resources has increased DFCs short-term lending rather than strengthen their role as term financing entities. However, in recent years, and as a result of the introduction of variable rates in their lending operations under the Bank's Ninth DFC opera- tion, DFCs have increased their term transformation role and average asset maturity structure. Lessons Learned 35. The analysis of these two projects leads to the conclusion that this form of investment lending is successful in achieving some traditional but limited objectives, namely, providing the term resources required by the industrial sector to finance its expansion and develop the capacity in the financial sector to allocate those resources efficiently by developing an adequate evaluation and supervision capacity. The maturity DFCs ha- 3 reached in the appraisal and supervision of industrial projects and their good management record constitutes a significant achievement resulting from these DFC operations which may constitute an invaluable base from which the Govern- ment could continue to build a domestic capital market. 36. There are however shortcomings to this type of lending, namely, its lack of effectiveness in deaLing with the distortions generated by an inadequate macroeconomic and/or sector environment and the eventual con- straint to further growth of domestic capital markets that may result from financing investment mainly through directed credit. 37. In the case of the industrial sector in Colombia, these projects made only a limited contribution to the declared export oriented strategy, to  - 13 - reducing the geographic and market concentration that has characterized sector development and to reducing the high level of indebtedness that has prevailad in industrial firms. This was mainly because the incentives provided by these loans in terms of concessional credit terms or favorable eligibility requirements could not effectively neutralize the distort~.2 incentive framework derived from the Government's macroeconomic and sector policies. A clear example of this situation is reflected in the stated export promotion objectives of these operations, where the export development incentives included in the projects (a concessional lending rate and the possibility to borrow in pesos) were offset by policies aimed at revaluing the peso and at significantly strengthening the anti-export bias prevailing in the trade regime. 38. In terms of financial sector objectives, the DFCs possibilities to develop as self-sustainable financial institutions that can raise a substan- tial portion of their term resource needs in the domestic markets and allo- cate them in accordance with market-based criteria was adversely affected by the decision of the economic authorities to utilize the financial sector as the principal instrument to control monetary expansion and to compensate for the diminished flow of resources to thi real sectors by increasing resources allocated to directed credit lines. Moreover, the significant increase in reserve requirements and the interest rate ceilings imposed on directed credit lines had drastic effects on DFCs' profitability, casting doubts on the financial viability of DFCs that have subsequently been overcome. 39. A basic lesson to be derived from this is that for these loans to achieve their declared sector policy objectives, an adequate policy framework should be in place or clear understandings should have been reached with the Government on the reforms needed to eliminate distortions in the relevant sectors and in an appropriate macroeconomic framework. Conclusions 40. It can be concluded therefore that in order for these projects to achieve their main objectives (development of a domestic capital market and efficient allocation of industrial credit) it may have been justified in the initial stages to provide directed credit lines. However, when DFCs reach a maturity level as the one achieved by DFCs in Colombia, the emphasis should be shifted towards creating the framework for increased mobilization of domestic financial resources which may be contradictory with maintaining foreign directed credit lines available. The introduction under the Ninth DFC operation of variable market-based lending rates was an important step in that direction. Further actions towards reducing directed credit lines and increasing competition in the financial sector constitute the appropriate way to approach the development of a term credit market in Colombia. In the same line, further actions should be agreed with the Government to remove distor- tions in the incentive structure prevailing in the industrial sector that may prevent an efficient allocation of resources. At thia stage, a clear under- standing should be reached as to the basic policies and strategies the Government should pursue to ensure further development of the financial sector and to allow an efficient allocation of resources in the economy. The Bank could assist in the implementation of those policies and strategies through lending instruments that would promote the liberalization and deepening of the domestic financial market.  - 15 ANNEX A DISTRIBUTION OF LOANS BY INDUSTRIAL SECTOR AND DATA ON THE SECTOR'S INTERNAL AND EXTERNAL COMPETITIVENESS LOAN LOAN CR4* QR 5 COVERAGE INDUSTRIAL SECTOR CIIU 1598 1857 Food Production 311 12.13Z 17.65 36.3 94.7 Food processing 312 2.24 2.07 33.3 91.6 Beverage 313 7.63 1.46 92.4 100.0 Tobacco 314 0.62 1.70 83.1 100.0 Textiles 321 6.81 8.61 61.6 92.8 Apparel 322 0.38 .36 17.7 97.8 Leather Product 323 0.25 .40 68.7 40.7 Footwear 324 .16 Wood Products 331 .50 57.4 92.5 Wood Furniture 332 .25 25.8 100 Pilep., Paper 341 3.51 4.37 Printing 342 6.27 3.70 45.2 76.9 Industrial Chemical 351 14.05 9.9 57.8 57.4 Drugs, Cosmetics 352 0.45 2.5 46.5 66.2 Petroleum 354 2.05 78.5 87.5 Rubber Products 355 0.46 0.27 86.6 87.3 Plastic Products 356 10.06 6.98 95.5 Pottery, Ceramics 361 2.24 2.46 71.9 85.7 Glass Products 362 0.97 0.37 94.4 78.1 Nonmetal Products 369 12.65 17.34 45 86.8 Iron, Steel and Basic 371 1.46 1.69 61.7 84.4 Metal Non Ferrous Metals 372 .77 93.4 38.3 Fabricated Metal Prod. 381 4.07 3.95 46 91 Non Electric Mach 382 1.55 0.9 41.9 68.8 Electric Machinery 383 3.75 1.17 55.7 70.2 * An indicator of internal competition, measures the proportion of subsector production accounted for by the four top firms in each sub-sector. Value closer to 100 indicate greater level of concentrations.  DETAILS OF SAMPLE PROJECTS (Thousands of Col3) FIRM'S NAME PROJECT ECONOMIC LOAN FINANCIAL PROJECT COSTS WORLOD BANK LOAN (USI) EDCXANCE ITITIINC OPERATIONS LOCATION SECTOR INTERMEDIARY PROPOSED ACTUAL PROPOSED DISB1uRSEMtNT RATE OJECTED REAL TEMPRO LTDA. CIA.SCA. BOCOTA 321 1857 00 COF.SANTANDER 8452,771 S472,927 83,520,109 82.960,184 155 00 SEPT/81 SEPT/82 ORSA EDITORIAL EL TIEMPO BOCOTA 342 1857 00 COF.COLOMBIANA 1674/069 1798.828 13,500,107 13,150,009 159.00 JUN/82 JUL/83 CEMeNTOS RIO CLARO SA. RIOCLARO 369 1857 00 COF.NACIONAL 16,936,000 510,347.200 19,600.000 *2,032,932 168.00 o JU/86 MAY/86 PRGOO'XTORA TABACALERtA DE COLOMBIA S.A. BOSA 314 1857 00 COF.VALLE 8565.459 S909.6ri6 S3,125,000 13,030,298 166.00 JAN/83 NOV/83 ARIDOS Y MINERA DEL TLUJELO LTD. TUNJUELITO 290 1857 00 COF.COLOMBIANA *137.751 S200.192 81,376,751 11.301.345 165.00 JAN/83 FEB/84 COMESA, INOUSTRIA METALMECANICA SA SOACHA 331 1857 00 COF.COLOMBIANA 1193,800 U426,818 11,311,533 81.311,533 168.00 FEB/84 JUN/87 PELICULAS EXTRUIDAS LT PEMEX BOGOTA 356 1857 00 COF.COLOMBIANA S212,920 1593,312 11,753,000 81,753,000 170.00 JUL.83 JUL/S4 PRMDUCTOS ALIMEWrTICIOS MARGARITA BOGOTA 312 1857 00 COF.COLOMBIANA 8147,815 S332,315 31,166,325 11,166,325 170.00 JUL/83 JUN/84 INCESER DE COLOMBIA B.BERMEJA 220 1657 00 COF.SANTANDER S578,984 11.077.960 13.880,042 S3,879,820 1104.00 AUC/84 SEPT/84 CONCRETOS Y ACRECADOS LTD CALI 369 1857 Do COFPVALLE *205,987 U428,910 81,385,000 81,385.000 155.00 JAN/82 OcT/83 PASTEURIZADORA SANTAN- DEREANA 06 LEIH N BOCOTA 311 1857 00 COF.SANTANDER 3111,998 S215,241 *960,000 5925.111 S65.00 JAN/83 OCT/84 CEMENTOS DEL NORTE CUCUTA 369 1857 00 COF.COLOM8IANA 11,993,695 13,272,531 39,200,000 47,639,778 163.26 JUN/84 SEPT/84 PRIGORIFICOS COLOM- BIANOS SA 80OTA 311 1aS7 00 COF.COLOMBIANA 8589,494 S029.251 1,.984,186 11,968,035 180.93 JAN/82 AUG/84 INCENIO RIO PAILA CALI 311 1857 00 COF. VALLE 8412,000 1642,822 12,186,000 82,184,176 170.00 DIC/86 FEB/84 PIMO CEMENTO MANIZALES LTD MANIZALES 369 1857 00 COF.CALDAS *228,877 S430,643 1980,309 1936.773 167.72 FEB/83 SEPT/84 EMPRESA RIO SAN ALBERTO SA CESAR 311 1857 00 COF.COLOMBIANA 1121,258 1396,542 *985,560 8985,588 170.00 JAN;a4 AUC/84 FABRICA DE ALAMBRES TECNICOS SA BOGOTA 381 1598 00 COF.SANTANDER t164,816 S506,10S 11,759,536 81,716,536 142.00 aJNlo OCTISO MINIPAK SA BOCOTA 356 1598 00 COF.SANTANDER 886,032 191,264 *910,419 S883,442 843.00 JAN/79 JUL/79 CASES DE sUCARAKANCA BUCARAMANGA 354 1598 00 COF.SANTANDER 1118,366 1100,942 t1,270,149 11,154.615 142.50 DIC/s8 MAY/81 INDUSTRIA E IWMVSIONES SAMPSR SA LA CALERA 369 1593 00 COF.COLOMBIAMN 14,565,000 S8,920.000 s3,800,000 13,727,397 148.00 AL/Bi APR/82 TUOOS DE INILO DE SOLEDAD LTD BA8RRANQUILLA 356 1598 00 COF.COLOMBIANA S566,111 1646,643 83.847,000 13,696,151 145.00 AUG/80 DIC/so ALUMINIO REYNOLDS SANTO DOMINGO SA BARRANQUILLA 381 1598 00 COF.NORTE 1131,275 8139,245 31,451,250 81,449,144 10.00 JAN/80 NOV/80 LANERA DEL PACIFICO YUM80 321 1598 00 COF.SANTANDER 154,233 154,233 1628,342 1628,342 13.00 OCT/79 SEPT/79 COMESTIBLES LA ROSA RISARALDA 311 1598 00 COF.OCCIDENTE 1309,817 1309.817 83,376,183 12,865,274 844. 00 oIc/o FEBte  INVESTMENT PROJECT EVALUATION Project Cost Project Cost overrun/ Two year operation overrun CX) execution Calacity CX) savinfs per Financial Rate of Return (actual/appraisal delays Generated Utilized capacity Appraisat Firm Name estimate) (months) (Actual/proiected) (Actual/orojected) senerated % estimate Actuat Loan 1857 Texpro Ltda. -16 12 111 110 -24 5.8 20.5 Casa Editorial El Tiempo -5 12 83 80 14 -9.0 29.0 Cementos Rio Claro SA. 22 11 100 88 22 -66.4 -58.7 Product. Tabacalera de Col SA. 37 10 146 74 -06 -13.0 5.5 Aridos y Minerales del Tunjuelo Ltda. 24 12 100 99 24 -44.0 -6.6 Comesa Industria Netalmecanica 20 40 100 45 20 -5.0 43.5 Pelex Ltda. 37 12 75 45 83 0.1 -11.8 Pro. Alimenticios Margarita 43 12 289 106 -50 -14.3 -26.2 Ingeser de Colombia 86 2 125 100 48 -10.0 51.8 Concretos y Agregados Ltda. 74 21 160 26 8 -3.7 7.9 Pasterizadora Santanderiana de Leches 64 21 37 102 343 -77.0 -485.5 Cementos del Norte 37 3 100 68 37 -21.4 -37.7 Frigorificos Colombianos SA. 6 31 100 ltl 06 -8.7 -51.2 Ingenio Rio Paila 52 -12 86 89 77 7.3 57.2 Fibro Cementos Manizales Ltda. 39 5 94 115 47 22.1 -4.4 Empresa Rio San Alberto SA. 43 7 87 22 64 -89.6 -212.4 Average TKZ 1112.0 Loan 1598 Minipak SA. 6 6 72 80 - 47 9.3 17.9 Gases de Bucaramanga -15 -7 - - - -10.0 34.4 Industria e Inversiones Samper SA. 30 9 100 117 30 5.7 -15.5 Tubos de Vinilo de Soledad Ltda. 14 4 66 109 72 -41.0 -48.6 Aluinio Reynolds Santo Domingo S.A. 6 10 68 86 55 -75.4 -15.1 Lanera del Pacifico 0 -1 50 211 25 6.8 1.8 Comestibles La Rosa 0 2 - - - -192.0 -126.0 Average 5.83.2 71.2 120. 49 X c:  - 18 - PART II: PROJECT REVIEW? FROM THE BORROWER'S PERSPECTIVE INTRODUCTION Performance under the 7th and 8th World Bank lines of credit (loans 1598 anid 1857) to finance ind-<R- ;I-sector investment will be evaluated using the following procedure. We shall first rev>.. nte characteristics and purposes of each credit line and the changes madie, <analyzing the latter in light of the macroeconomic environment. Next, we shall examine the performance of the Finance Corporations that channeled these resources during the effectiveness of the credit lines (1978-85), indicating the principal measures pertaining to their performance and evaluating the principal indicators against those of the Corporations that had access to these credit lines. Finally, we shall analyze achievement of the resource mobilization targets projected when the external loans were designed, in light of industrial-sector investment during the analysis period and the contribution of the Finance Corporations to its financing.  - 19 - I. GENERAL FEATURES OF IBRD LOANS 1598 and 1857 In July 1978 and December 1980 the World Bank and the Banco de la epCiblica concluded agreements under which IBRD granted loans of US$100 million Loan 1598) and US$130 million (Loan 1857), respectively, to be channeled through he Finance Corporations to the financing of industrial development projects. Since both credit lines pursued many different objectives, prior esource allocations were made in accordance with the various project ategories or components eligible for financing and the specific purposes of ach credit line. 1/ As will be seen from tables 1 and 2, there were assigned to each roject component or category a specific amount, a size limit for eligible nterprises and a set of different interest rates in accordance with the timulus it was desired to give to specific types of project. In the case of loan 1598, US$85 million was initially allocated to he ordinary investment component, both with and without exchange risk. 2/ reference was given to smaller enterprises by limiting the peso resources of ach component to enterprises with assets of less than Col$150 million. In [dition, as an exception to this rule, enterprises carrying out -centralization and export projects (defined in Annex 1) with assets above .1at limit could have access to resources without bearing the exchange risk. In addition, with the aim of supporting small enterprises the apital investment component was restricted to those with assets of less than 31$150 million. With a similar purpose, pollution control and technology projects are assigned the lowest interest rate (20%) and no asset limit was imposed. In 1980 US$7.4 million was transferred from the capital investment 3 the ordinary investment component. The purpose was to make effective use E the resources allocated to the latter component and attend to the greater inancing needs of ordinary investment projects. As will be seen from table , in 1979 total approvals for ordinary investment and decentralization and port accounted for about 87% of the quota (US$85.0 million) while the amount pproved for capital investment was only US$2.6 million or 26%. / The specific components are defined in Annex 1. I The term "without exchange risk" refers to user loans denominated in pesos and the term "with exchange risk" to those denominated in dollars.  - 20 - 8. At the end of 1979 the Banco de la Reputblica asked IBRD to raise the interest rates for the ordinary investment peso subloans from 25% to 27% p.a., and this took effect in 1980. This change arose out of the need to maintain positive interest rates in real terms for the peso subloans; this was not being obtained with the 25% rate owing to the increase in the cost 'f living index at that time and the expectations concerning both inflation and the cost of money. 9. However, because loan 1598 resources were placed quickly, very few loans were approved at the 27% interest rate. 10. The agreement concerning the 8th credit line (loan 1857) included a series of changes in relation to loan 1598 designed to optimize resource allocation (table 2). 11. With the object of avoiding further build-up of devaluation losses, it was decided that 60% of the 8th credit line would be transferred with exchange risk to the user. This portion was intended to finance investment projects with assets of over Col$150 million but not over Col$1,500 million, which constituted the upper limit of eligibility for loans out of its funds. The purpose of this restriction was to help only those enterprises that had no alternative sources of external financing and, in addition, to stimulate the cofinancing mechanism (combination of resources of various foreign exchange sources for execution of the same program) which had been quite successful in the previous credit line. At the beginning of 1981 a new quota of US$15 million (10% of the credit line) was created for loans to public works contractors; this was deducted from the amount originally allocated to the financing of ordinary investment projects. 12. The 40% transferred without exchange risk was subdivided as follows: 20% for investment projects of enterprises with assets of up to Col$150 million; 5% for decentralized or export projects of enterprises with assets of up to Col$1,500 million; 10% for investment of the Corporations in new capital of enterprises up to Col$250 million and up to Col$1,500 million for decentralized and export enterprises; and finally, 5% for research and development, pollution control and tachnological improvement projects, limited in the case of the latter component to enterprises with assets not exceeding Col$1,500 million. 13. For this "without exchange risk" portion, interest rates were set of 27% for investment projects and 24% for technology, research and pollution. For the portion allocated in dollars a rate of 15% was set. 14. Under this allocation both loan 1598 and loan 1857 sought to orient the development credit resources toward small and medium manufacturing-sector enterprises. 15. However, the original division was changed several times during the life of the credit line in response to the economic situation prevailing during the first half of the 1980s; as we shall see later, this departed from the original objective to some degree. 16. At the end of 1981 the demand for 8th credit line resources had been low: up to September 1981, 10 months after signature of the agreement, about  - 21 - US$22 million had been approved, equal to 15% of the total amount. This pointed to a need to amend some of the conditions of the credit line. 17. For 1982 access was allowed to enterprises with total assets of over Col$1,500 million but not more than Col$3,000 million at December 31, 1979. The reasons for this change were as follows. First, Monetary Board Resolution 25/1981 widened access to the resources of the PriVate Investment Fund (Fondo para Inversiones Privadas--FIP) to include enterprises with assets exceeding Col$1,500 million; it was then appropriate to follow a uniform policy with respect to the development credit beneficiaries and extend this measure to loan 1857. Second, the Finance Corporations were receiving many applications from enterprises with assets in excess of the limit and, in view of the incipient stagnationi in 1980-81, it was appropriate to include them as possible credit line beneficiaries. 18. Later, in 1983, the assets limit was raised to Col$6,000 million at December 31, 1982 for allocation of resources with exchange risk. 19. In March 1983 US$20 million was transferred from the dollar subloans portion to the pesos subloans portion for small and medium enterprises. Under the latter component the Corporaci6n Financiera Popular (CFP) and other finance companies were allowed access for lending to enterprises with fixed assets of up to Col$60 million (with 27% p.a. interest). 20. In 1984 further amendments were made to the agreement, including the following: (a) introduction of flexible dollar interest rates; (b) extension of the deadline for authorization of disbursements to December 31, 1983; (c) formalizing of the entry of the CFP as the eighth Corporation channeling resources of this credit line. 21. Finally, the capital investment component was reduced twice: US$1 million was transferred to the technology component in 1984 and US$7 million to ordinary investment in 1985. 22. As a result of all these changes, the agreement concerning the 9th credit line was made less complicated, with greater access for both final users and intermediaries. Thus, it was decided to include all enterprises of eligible sectors in the 9th credit line, without no limit on assets, the investment category quotas were eliminated, and a simplified procedure was introduced both for granting loans--with and without exchange risk--and for setting interest rate levels. 23. In summary, the complexity of the regulations governing the previous credit lines, due basically to the many different objectives pursued in granting the credit, in practice hampered and delayed placement of the resources and led to frequent requests for changes in the agreements. This problem was largely eliminated in the 9th credit line agreement.  - 22 - Ir. TREND OF LOAN APPROVALS, BY PROJECT CATEGORY A. General Trend 1. Loan 1598 24. Table 3 depicts the placement of loan 1598 resources, by project component or category, in terms of number and amount of final approved applications, taking into account reductions and increases of approved loans. 25. Of the US$100 million in loan 1598 resources, approvals totaled US$98 million, which was reduced to US$89 million through various cancellations, giving net utilization of 89%. 26. Against the amount allocated to ordinary investment, in both dollars and pesos, including decentralization and export, approvals were made of US$91.7 million, equal to 108% of the original quota. Approvals were also made of US$3.9 million for technology and pollution control and US$2.6 million for capital investment, equal to 78% and 26%, respectively of the amount allocated in the original agreement. 27. In general, except for capital investment, the amounts utilized per component approximately equaled the corresponding quotas. 28. The loan resources were placed expeditiously, in just over two years, with the peak demand in 1979. This is explained by the economic boom at that time, when the real GDP growth of 8% in 1978 stimulated favorable expectations. In addition, the controls imposed on the financial sector had stimulated the growth of an extra-banking sector whose long-term lending interest rates were considerably higher than those set by the Corporations for their World Bank operations. 29. Capital investment recorded the lowest demand, with approvals of only US$2.6 million out of an initial quota of US$10 million. The reason lies in the fact that the World Bank lends only for shares of new issues that involve high risk and not for transactions in shares already listed on the stock exchange. 30. Under the ordinary investment component, decentralization and export enterprises accounted for nearly 50% of approvals, owing to the attractiveness both of the resources granted without exchange risk and of the interest rate. In contrast, small enterprises with assets not exceeding Col$150 million accounted for 28% of the ordinary investment quota. 2. Loan 1857 31. Unlike the 7th credit line, the total amount of approvals under loan 1857 (table 4) exceeded the loan amount of US$150 million, though only 92% of the line was actually used.  - 23 - 32. The changes agreed upon between Banco de la Republica and IBRD to redefine each component led to fairly wide discrepancies between utilizations and quotas. Thus, in the case of ordinary investment, dollar investment approvals totaled US$78 million against an allocation of US$55 million (+ 42%), while peso investment approvals reached only 61% of the allocation of US$57 million. 33. It is noteworthy that total approvals for decentralization and export (US$22.3 million) amounted to nearly three times the initial budget of US$7.5 million. 34. The capital investment and technology, research and pollution components were progressively adjusted in light of the existing demand. 35. In the case of public works contractors, a very low volume of resources was used, owing to the creation of a credit quota for that activity in 1982 on more advantageous terms. 36. Placement of this credit line was thus divided very unequally among its many components and was particularly slow. This is expiained by several factors: first, the reduced performance of manufacturing, which posted negative real production growth rates in 1981 and 1982, reflected also in low levels of investment; second, the decline in world interest rates, which made the terms offered by the credit line less competitive. 37. The fact that financing was based on the enterprises' asset levels encouraged large enterprises to set up, fictitiously, "new" companies whose size allowed them to obtain financing without assuming the exchange risk. 38. Generally speaking, it can be concluded that the pace of placement of 7th and 8th credit line resources reflected the prevailing economic conditions. It is stressed also that neither credit line fully achieved the goal of support for small enterprises. B. Sectoral and Geographic Distribution 39. Loans 1598 and 1857 exhibit very similar sectoral and geographic distribution (tables 5 and 6). Chemicals (14.3%), non-metal minerals (13.7%) and food products (11.6%) absorbed 40% of 7th line and 43% of 8th line resources. 40. Geographic distribution was the same in both cases, with 66% and 67X, respectively, of the resources concentrated in the Antioquia, Bogota and Valle regions. 1/ This demonstrates the ineffectiveness of decentralization mechanisms based solely on more favorable terms of some loans without regard to other factors such as remoteness from markets, deficient infrastructure, etc. 1/ Although in the case of loan 1857 decentralization and export approvals greatly exceeded the quota, this does not signify a contribution to decentralization but rather a positive impact on export projects.  Table 1 IBRO LOAN 1598 (US$100 MILLION) ELIGIBLE PROJECT CATEGORIES AND ALLOCATIONS With RiSK Without Risk Technology Ordinary Ordinary Capital & pollutioi investment investment investment control Original 1978 85.0 10.0 5.0 Quota (US$ million) Change 1980 92.4 BENEFICIARIES Original 19t8 to 150 Ordinary Enterprises per Dec. 1977 to 150 to 150 No limit with total balance sheet to 150 Decentr. assets of: and Export (Col$ million) 22 Ordinary INTEREST RATE Original 1978 10.75 25 20 (% p.a.) 21 Decentr. 8 Export Chaniqe 1980 27 SoQurc.e Agreement and amendmetnts. Date: June 15, 1989 ADH/efg.  Table 2 IBRO LOAN 1857 (USS150 MILLION) ELIGIBLE PROJECT CATEGORIES AND ALLOCATIONS With Risk Without Risk Public Oecentr. Technolo- Research Ordinary works Ordinary & Capital gical ,,an- and Pollution investment contractors investment export investment provement development control QUOTA Original 1980 75.0 30.0 7.5 15.0 7.5 (USS million) Change 1981 15.0 Change 1983 55.0 50.0 Change 1984 14.0 8.5 Change 1985 57.0 7.0 BENEFICIARIES Original 1980 250 Ordin. (enterprises per bdlance 1,500 1,500 150 1,500 1,500 1,500 No limit No limit with total sheet at Decentr. & assets not 12/31/79 export exceeding Change 1982 (Col$ mill.) per balance i,000 3.000 150 3,000 3,000 3,000 sheet at Oecentr. & 12/31/79 export r' Change 1983 per balance b,000 6,000 300 sheet at 12/31/82 INTEREST Original 1980 IS 15 27 27 24 24 24 24 RATE (% p.a.) Change 1984 Libor + 2 Libor + 2 24 and 27 assets of (Min 12.5 (Min. 12.5 Col $250-3.000 million Max. 15) Max 15) SOurce: Agreement and amendments. Date: June 15, 1989 AOH/efg.  Table IBRD LOAN 1598: PLACEMENT OF LOAN RESOURCES BY PROJECT CATEGORY (US$ 000) 1 9 7 8 1 9 7 9 1 9 8 0 T O T A L Project Category Amount Amount Amount Amount No. Approved Final No. Approved Final No. Approved Final No. Approved Final Ordinary Investment in dollars 1 84 79 16 15,592 12,370 4 4,680 3,832 21 20,356 16,281 in pesos 14 3,611 3,336 48 17,556 16,068 11 5,082 4,700 7' 'b,241) 24,104 Decentr. and Export h 7,703 7,589 23 29,476 28,125 8 7,985 7,574 37 15,164 43,288 Capital Investment I 211 211 3 2,381 2,247 2,'',)! 2,458 Technological Improvement and Pollution Control 2 115 62 4 1,187 949 9 2,595 2,260 15 3,d9 s,271 TOTAL 24 11,724 11,277 94 66,192 59,759 32 20,342 18,366 150 98,25B 89,402 a' Source: DCI 9isbursements Sertion d,ita. Date: June IS, 1989  Table 4 IBRO LOAN 1857: PLACEMENT OF LOAN RESOURCES BY PROJECT CATEGORY WUSS 000) 1 9 8 1 9 8 1 9 8 3 1 9 8 4 1 9 5 T O A L Project Category Amount Aunt mount AAmount Amount_ Amount No. Approved final No. Approved Final No. Approved Final No. Approved Final No. Approved final No. Approved final Ordinary Investment in dollars 18 17,175 14.399 20 12,131 10,684 17 26,890 21,499 17 20,492 19,628 1 1,755 1,293 73 78.443 67,503 in pesos 19 5,978 5,791 19 11,012 10,733 32 9,598 9,105 36 8,913 8,593 1 56 55 107 35,557 34,277 Oecentr, and Export 5 4,554 4,489 7 3,271 3,076 7 4,219 3,007 9 10,329 9,954 28 22.373 20.526 (apital Investment 2 1,469 1,317 2 1,071 1,012 1 2,400 2,400 2 2.086 2,058 7 7.026 6.787 rechnological Improvement and Pollution Control 7 3.216 2,260 3 1,686 1,461 8 2,893 3,168 2 505 446 20 8,300 7,335 Public Works Eontractors 4 1,372 1.483 1 260 214 1 400 367 6 2,132 2.064 b TOTAL 51 32.392 28,256 55 30,543 28,449 66 46,260 39,393 67 42,825 41,046 2 1,811 1,348 241 153,831 138,492 Sourcem OCI Disbursements Section Data (late: June 15. 1989  - 28 - Table 5 IBRD LOANS 1598 AND 1857: TOTAL APPROVALS, BY ECONOMIC SECTOR (percentages) CIIU 7th 8th Sector Loan Loan 130 1.7 210 0.4 220 0.3 3.2 230 1.1 290 1.0 311 11.6 17.5 312 1.9 2.0 313 7.9 1.4 314 0.6 1.7 321 7.2 8.3 322 0.4 0.4 323 0.2 0.6 324 0.2 331 0.5 332 0.2 341 2.9 4.3 342 6.0 3.6 351 14.3 8.9 352 0.5 2.7 354 2.1 355 0.5 0.3 356 10.3 6.8 361 2.0 2.4 362 0.9 0.4 369 13.7 17.0 371 1.3 1.7 372 0.8 381 4.2 3.9 382 1.6 0.1 383 3.9 1.1 384 0.8 385 0.5 500 0.7 1.8 632 2.6 4.9 719 0.2 TOTAL 100.0 100.0 Source: DCI Statistics Date: June 15, 1989 ADH.efg.  - 29 - Table 6 IBRD LOANS 1598 AND 1857: GEOGRAPHIC DISTRIBUTION OF APPROVALS (percentages) Geographic 7th 8th Area Loan Loan Antioquia 27.4 18.2 Atlantico 14.3 6.9 Bogota 21.0 24.3 Bolivar 5.7 3.8 Caldas 1.0 1.0 Cundinamarca 4.6 3.6 Santander 2.9 5.5 Valle 17.6 24.5 Others 5.5 12.2 TOTAL 100.0 100.0  - 30 - III. INTERMEDIATION OF THE RESOURCES 41. During the 1970s the financial sector posted acreleratcd growth in terms not only of volume of resources raised but also m .mcer :t institutions and diversification of intermediation instrumelits. 42. The sector's vibrancy in that period is explained by Lhe ~n'2r,2ased liquidity due to the 1975-78 coffee boom and the substantial impro%'ement in the real sector of the economy. 43. However, these same factors were largely responsible for the various problems that the financial sector faced during the first half of the 1980s. 44. The need to control monetary expansion and ensure the availability of cheap resources to certain sectors to which the authorities assigned social priority led to the imposition on the financial sector of high cash reserve and compulsory low-return investment levels. Added to the controls imposed on lending interest rates, these led many financial institutions to try to evade these measures by resorting to unorthodox banking practices. Moreover, owing to high credit demand fueled by favorable expectations, "the financial institutions concentrated their lending, did not study the risks with sufficient care and failed to ensure that their foreign-currency loans were placed at amortization terms similar to those applicable to the resources out of which they were making them. At the same time, they allowed their overhead to grow too fast." 1/ 45. In general, the enterprises took on excessive debt because of the tax advantages offered by greater leverage and also applied resources to speculative purposes. Moreover, equity increases took the form of asset revaluation, giving the appearance of sound financial structures. When the growth of the economy slowed, producing fiscal disequilibria and suspension of external credit, the high debt levels had disastrous consequences for the enterprises. 46. The effects of all these practices were reflected in the :i- an:ral system, with high delinquent portfolio levels which generated : uilily problems, low rates of return, defaults and decapitalizatior. 47. The Finance Corporations, as resources channeling .t;-::!tS. escape these effects, although the impact was smaller for them, particularly (for a number of reasons which will be referred to later) those handling resources of the international agencies. A. Rules Governing the Finance Corporations 48. As part of development credit policy during the analysis period (1977-85), certain measures were taken to facilitate accomplishment of the purposes for which the Finance Corporations had been set up. 1/ Editorial Notes, Revista Banco de la Republica, July 1985.  - 31 - 49. First of all, with a view to active intervention by the Corporations in the capital market, in 1977 the Monetary Board imposed a requirement that at least 102 of assets be held in capital investments in enterprises. Later, by decrees 2461 and 3277 of 1980, this requirement was replaced by an obligation to hold enterprise investments equivalent to 60% of their equity (raised to 80% on December 31, 1982). These investments would be represented by shares, quotas or social-interest participations in manufacturing, agricultural or mining enterprises, acquired on both the primary alid secondary markets. As will be -een later, this decision had a positive impact on the Corporations' profits during the financial-sector crisis. 50. Although these measures increased the percentage of share securities in the Corporations' total assets, their role as development banks continued to be very limited. Moreover, due to the flexibility of the rules governing the operations of the Finance Corporations, during the second half of the 1970s a large number of institutions were set up that specialized more in short-term operations than in true development activities. This compelled the authorities to adopt a number of reforms tightening the requirements for creating such institutions, strengthening their equity structure and reorienting them toward their original objectives. These reforms were set forth in Decree 2461 of 1980. 51. The rules contained in Decree 2461 attenuated, for the Corporations, the impact of the 1981-84 crisis on the financial system, specifically in the strengthening of their capital. Thus, Decree 2461 prescribed that each Corporation's total obligations to the public could not exceed 15 times its paid-up capital and legal reserve; this reduced their debt capacity (the ratio was previously 1:20) and compelled them to capitalize. 52. In response to the financial problems of mid-1982, the Finance Corporations were provided with resources to meet transitory liquidity needs. To that end, Monetary Board Resolution 72 of 1982 set an ordinary quota of up to 102 of each entity's paid-up capital and legal reserve and prescribed utilization periods of 30 days, extendable to 45 days, on each occasion, subject to a limit of 90 days a year. Later, by Resolution 55 of 1984, these rules were amended to introduce a variable quota, also linked to caiUal and reserve, whose amount depended on the Corporation's portfolio amortizationl terms. The amount of each Corporation's ordinary quota would be determined as follows: - up to 502 of its paid-up capital and legal reserve when at least 10% of its portfolio is amortized in not less than one year; - iup to 75% of its paid-up capital and legal reserve when at least 25% of its portfolio is amortized in not less than one year; - up to 1002 of its paid-up capital and legal reserve when at least 50% of its portfolio is to be amortized in not less than one year; - up to 1502 of its paid-up capital and legal reserve when more than 502 of its portfolio is to be amortized in not less than three years.  - 32 - 53. The introduction of this credit quota at the Banco de la Republica, increasing in step with the length of term for which the Corporations' resources are committed, has helped to enhance their degree of specialization in medium- and long-term operations. 54. Major importance has been assigned in development credit policy to the principle that the financial intermediaries shall supplement the rediscount resources by funds of their own so as to ensure that the limited resources available benefit the maximum number of enterprises and avoid total and undesirable dependence on Banco de la Republica funds to finance priority sectors. 55. However, owing to the lack of a developed capital market, the financial intermediaries, particularly the Finance Corporations, capture a very large proportion of their remunerated resources through short-term instruments, especially 90- and 180-day Certificates of Deposit. In addition to the scarcity of long-term resources, Decree 399 of 1975 allowed the Finance Corporations to receive funds in money as 90-, 180- and 270-day term deposits. This led to great growth in the resource mobilization--at short term--particularly during the period 1975-80 (table 7). 56. The intermediaries would consequently have to grant development loans at medium and long term out of resources raised on the money market, without any suitable term-conversion mechanisms. As a result they sometimes encountered serious liquidity difficulties and uncertainty concerning the intermediation margin on their development operations, since these resources were placed at fixed rates whereas their cost depended on market conditions. 57. To resolve this problem a mechanism was set up that allowed a fixed differential to be maintained between the intermediaries' income and fund-raising costs in development operations. Resolution 109 of 1983 authorized the lending institutions to charge, on the resources contributed by them in development operations, a variable interest rate that would have a margin of up to 3 points above the "average cost of mobilization through term certificates of deposit" (DTF indicator), to be announced weekly by the Banco de la Repdblica. This mechanism links the interest rate on own resources to a market mobilization indicator so that the intermediary's margins are (a) on the rediscounted portion of the loan, the difference between the rate set by the monetary authority for development loans and the corresponding rediscount rate, and (b) on the non-rediscounted portion (this margin also constant over the life of the loan) the difterence between the loan interest rate and the cost of raising the resources. 58. This measure raised the profitability of the more development-oriented Corporations by guaranteeing a stable margin on those operations and allowing a suitable term-conversion mechanism. 59. The introduction of the "DTF" indicator to permit flexible development-loan interest rates was widely accepted by the financial intermediaries, to the point that it came to be applied generally for ordinary placement and mobilization operations.  - 33 - B. Evolution of the Finance Corporations (1977-85) 60. In order to determine the financial performance of the Corporations that channeled IBRD resources during the life of loans 1598 and 1857, we propose to analyze their situation, comparing it with that of the other Corporations. 1. Capitalization 61. Table 8 depicts the evolution of the ratio capital + legal reserve/total assets for the Private Finance Corporations, divided into two groups on the basis of their access to the external loans. This ratio is indicative of the Corporations' financial soundness, since the higher it is, the sounder the backing for the intermediation function. 62. For all Finance Corporations together, the ratio declined during the analysis period from 9.7% in 1977 to 7.9% in 1985, with a sharp fall from the beginning of the 1980s. It should be noted that the Corporations channeling international agency resources posted a slightly rising and relatively stable performance, while the "Other Corporations" exhibited wider fluctuations and a declining trend for the period 1980-83. 63. For the last two years of the first half of the 1980s the figures appear in principle to show that the "Other Corporations" posted greater underlying financial strength. However, share of equity in total assets for 1984 and 1985 was 12.6% and 13.1%, respectively, for the Corporations channeling external resources against 6% and 4.6% for the others. This is explained by the losses posted by "Other Corporations", as a result of which equity is lower than the sum of paid-up capital and legal reserve. 64. In conclusion, the Finance Corporations exhibit a declining ratio of paid-up capital + legal reserve to total assets during the period 1977-85, while the Corporations handl..-.g IBRD loan resources show more appropriate capitalization, with positive profits, than the Other Corporations. 2. Portfolio quality 65. This indicatoi is measured as the share of doubtful loan debts in total portfolio. The figures in table 9 indicate a substantial increase in doubtful loan debt during the analysis period, particularly during 1981-85. In the case of the Corporations with access to external resources, this indicator rises from 0.8% in 1977 to 4.4% in 1985, with 1982-85 the peak period. This growth is far below that for Other Finance Corporations (from 0.7% in 1977 to 15.81 in 1985); this is due in part to their specialization in investment project financing, which allowed them to set up suitable project appraisal and supervision mechanisms, plus the requirement of real security in support of the loans, additional to that required by IBRD and the Banco de la RepuLblica to maintain an appraisal team. 66. The rise in the ratio of doubtful debts to total portfolio also implies a growth of non-productive assets, indirectly impairing the capacity to generate profit. In addition, it increases the institutions' risk since doubtful loan debts is a potential source of losses, with a high probability that they will become charges to Profit and Loss.  - 34 - 3. Profitability 67. Tables 10 through 13 show the major profitability indicators for the Finance Corporations. The figures for the group as a whole show a positive trend for nearly all indicators until 1981, from which year they fall sharply, with negative results in 1984. 68. The Corporations handling World Bank resources show a markedly better profitability trend than the others. Thus, while the latter posted losses from 1983 onward, the former have consistently shown profits, with a slackening in the years 1982-84 but a recovery from 1985. 69. A factor in raising these Corporations' profits or reducing their losses during the financial-sector crisis (1982-84) was the appreciation in value on the sale of shares and participations in real-sector enterprises in which they had made investments, chiefly in compliance with the rules contained in decrees 2461 and 3277 of 1980. In addition, the profitability of the more development-oriented Finance Corporations was boosted by the measures taken by the Monetary Board with the object of guaranteeing a stable margin on those operations (Resolution 109 of 1983). 70. In analyzing the indicators for the Finance Corporations channeling external resources it should be noted that in 1984 interest and commission income would have fallen short of expenditure under those headings, including administrative costs and portfolio protection, but for investment income. Thus, the financial margin for that year was Col$1,190 million, against overhead and portfolio costs of Col$1,595 million. C. Evaluation of New IBRD Corporations 71. The requirement of a tighter debt/equity ratio, the attractiveness of the more profitable short-term operations and the relatively small allocation of loan funds meant that only one new Finance Corporation (Aliadas) participated, on a limited basis, in the 7th and 8th lines of credit. 72. During the analysis period the Corporation's financial situation was badly aftected, specifically from the year 1981, by risky operations that did not produce the expected results. 73. In the 1981 evaluation the Corporation had exceeded the limit set in the cases of debt/equity ratio (6:1) and current assets/equity ratio (4.5:1). Moreover, it showed slow utilization of the various Banco de la Repulblica rediscount lines and World Bank loan funds. 74. As of December 31, 1983, though it was complying with the limits set by the World Bank for these two ratios, its net profit had fallen by 91% in relation to 1982. The main reasons for this deterioration in profits were the reduction in equity capital, due basically to the reduction in retained earnings that do not have a direct cost; the increase in capital stock investments, which operationally had an appreciably lower annual return than other operations, and finally the increase in doubtful loan debtors.  - 35 - 75. As of June 1984 the Corporation's financial situation was beset by problems of over-investment in low-yield shares, a reduced intermediation margin and a high level of unproductive assets and consequent negative impact on operating profit (with the result that it did not show an operating profit at the close of fiscal 1984). Owing to the drawdown of its reserves through losses of previous fiscal years it had to resort to substantial capitalization. 76. The first talks between the Suramericana Finance Corporation and Aliadas concerning a possible merger took place in August 1984, and the absorption of Aliadas by Suramericana was made official in November 1985. Suramericana benefited from the merger because it strengthened its equity, its leverage and its productive assets with the acquisition of Aliadas' investments in the Companiia Nacional de Chocolates and Enka de Colombia. 77 The assets were reviewed to determine in which cases provisions needed to be made to avoid burdening Suramericana's Profit and Loss account. An agreement was reached under which Aliadas would use the profit on the sale of Enka and La Nacional de Chocolates shares to Suramericana to set up the appropriate provisions so as to compensate Suramericana satisfactorily for its take-over of the remaining assets. 78. With the accomplishment of the merger the quality of Suramericana's assets deteriorated a little even though they had been taken over with the necessary provisions to maintain its soundness. However, from 1986 to 1987 the value of the assets almost doubled, equity value rose and operating account and profits improved, evidence of the positive impact of the merger. 79, In summary, analysis of the major financial indicators for the Finance Corporations for the period 1977-85 brings out the negative impact on them of the recessive economic climate combined with the financial crisis in the first half of the 1980s. 80. It also reveals that, in the same situation, the Corporations with access to external resources performed favorably in comparison with the other Corporations, specifically in terms of profitability and portfolio quality. 81. In addition, the measures taken during the analysis period made a positive contribution to the Corporations' performance during that period in spite of economic stagnation.  - 36 - Table 7 FINANCE CORPORATIONS: FUNDS RAISED BY TERM CERTIFICATES OF DEPOSIT (Col$ million) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1974 162 45 207 1975 316 246 562 1976 1,189 2,387 3,576 1977 2,245 6,139 8,384 1978 5,631 8,511 14,142 1979 4,248 7,299 11,547 1980 6,848 10,109 16,957 1981 8,101 14,682 22,783 1982 8,754 16,449 25,203 1983 17,648 17,727 35,375 1984* 21,455 9,472 30,927 1985 30,353 13,237 43,590 Source: Revista Banco de la Reptiblica, October 1987, Department of Credit to the Financial Sector. A From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989  - 37 - Table 8 FINANCE CORPORATIONS: PAID-UP CAPITAL + LEGAL RESERVE/TOTAL ASSETS (percentages) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1977 4.8 11.9 9.7 1978 6.4 11.2 9.7 1979 6.7 11.4 9.8 1980 6.7 10.2 9.1 1981 7.5 9.1 8.5 1982 7.5 8.8 8.3 1983 7.1 8.1 7.8 1984* 7.3 12.2 8.3 1985 6.5 13.5 7.9 Source: "Estado y evoluci6n de la capitalizati6n de Bancos y Corporaciones Financieras", Francisco Ortega and Rudolf Hommes R., November 1984, Banco de la Republica, Department of Credit to the Financial Sector. * From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989 ADH/Jhr  - 38 - Table 9 FINANCE CORPORATIONS: DOUBTFUL DEBTS/TOTAL PORTFOLIO (percentages) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1977 0.8 0.7 0.8 1978 0.5 0.5 0.5 1979 0.5 1.2 0.6 1980 0.4 0.7 0.5 1981 0.9 1.5 1.0 1982 2.9 1.7 2.6 1983 2.6 5.6 3.1 1984* 4.1 16.1 6.4 1985 4.4 15.8 6.4 Source: "Estado y evolucion de la capitalization de Bancos y Corporaciones Financieras", Francisco Ortega and Rudolf Hommes R., November 1984, Banco de la Reputblica, Department of Credit to the Financial Sector. * From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989 ADH/Jhr  - 39 - Table 10 FINANCE CORPORATIONS: NET PROFIT/CAPITAL + RESERVES (percentages) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1977 37.5 15.4 32.1 1978 40.2 14.4 24.8 1979 45.5 13.0 39.5 1980 33.3 13.9 29.9 1981 _ _ - _ 1982 18.5 1.9 13.3 1983 11.5 -0.4 7.8 1984* 9.5 -46.0 -6.4 1985 14.4 -30.2 0.3 Source: Revista Banco de la Repuiblica, October 1987, Department of Credit to the Financial Sector. A From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989  - 40 - Table 11 FINANCE CORPORATIONS: GROSS FINANCIAL MARGIN 1/ (Col$ million) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1977 655.5 309.7 965.2 1978 912.2 319.4 1,231.6 1979 1,015.5 146.1 1,161.6 1980 1,792.8 1,304.1 3,096.9 1981 2,288.6 4,746.2 7,034.8 1982 2,863.4 7,298.4 10,161.8 1983 2,704.8 4,872.8 7,577.6 1984* 1,190.0 -229.0 961.0 1985 1,004.0 -171.0 833.0 Source: Banco de la Republica, Department of Credit to the Financial Sector. '/ GFM = Difference between interest and commission received and interest and commission paid. * From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989.  - 41 - Table 12 FINANCE CORPORATIONS: GFM + INVESTMENT RETURN (Col$ million) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1977 841.1 340.3 1,181.4 1978 1,212.6 481.7 1,694.3 1979 1,814.8 632.0 2,466.8 1980 2,487.2 1,708.0 4,195.2 1981 3,366.6 5,121.2 8,487.8 1982 4,027.2 7,697.5 11,724.7 1983 3,802.4 5,533.6 9,336.0 1984* 2,481.0 167.0 2,648.0 1985 3,116.0 179.0 3,513.0 Source: Department of Credit to the Financial Sector. * From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989.  - 42 - Table 13 FINANCE CORPORATIONS: OPERATING PROFIT/LOSS 1/ (Col$ million) IBRD Finance Other Total for Year Corporations Corporations Private FCs 1977 671.8 265.5 937.3 1978 962.8 380.9 1,343.7 1979 1,428.9 478.9 1,907.8 1980 2,024.1 1,469.2 3,493.3 1981 2,563.3 4,725.0 7,288.3 1982 2,960.6 7,111.1 10,071.7 1983 2,316.1 4,537.9 6,854.0 1984* 886.0 -856.0 30.0 1985 1,072.0 -511.0 561.0 Source: Department of Credit to the Financial Sector. 1/ Includes: Gross Financial Margin + Investment Return - Overhead - Portfolio Protection. * From 1984 the Aliadas and Grancolombiana Finance Corporations are excluded. Date: August 24, 1989  - 43 - IV. RESOURCE MOBILIZATION A. Industrial Investment 82. On the basis of the outlook for industrial growth, investment in industry was projected at US$1 billion a year during the life of loan 1598 (1978-80) and US$1.9-2.1 billion during the life of loan 1857 (1981-83). The Finance Corporations participating in IBRD loans would have to finance 10-12% of this projected industrial investment during the 7th and 10-152 during the 8th credit line. 83. As will be seen from table 14, in 1978-80 actual industrial investment was very close to projected volume. Following a severe crisis in 1975, industry recovered substantially owing to the improvement in domestic demand capacity generated by the coffee boom, creating favorable economic expectations. This stimulated entrepreneurs to invest substantial amounts, particularly in productive capacity expansion and working capital to meet the growing demand. 84. A factor in this iucremental investment was the low real interest rates, which lowered the cost of borrowing, enabling entrepreneurs to obtain resources at low cost with promissory sales and stimulating investment. 85. The situation was different in the 8th credit line period, which as mentioned in the section evaluating the placement of these resources lasted two years longer than originally expected. Industrial investment in 1981-85 was lower than projected (1981-83), reflecting the recessive economic problems. The enterprises' high debt levels, declining domestic and external demand, rising interest rates and accelerating devaluation were reflected in lower investment during the analysis period, with the beginnings of recovery only in 1984. 86. These conditions are clearly reflected in the industrial investment figure for the period 1981-85 (table 14), which fell short even of the Arinimum amount estimated for 1981-83. B. Finance Corporations 87. The Finance Corporations accounted for 27% of industrial investment financing in the period 1978-80 and 19X in 1981-85, which exceeds the projected contribution. It should be noted, however, that the data cover both the Finance Corporations with and those without access to the external loan resources, and the percentage contribution of the former group is actually lower, although still close to the projection. 88. Table 15 shows the Finance Corporations' principal sources of funds during the analysis periods. The IBRD loans accounted for 137 (7th line) and 17% (8th line) of resource requirements, against original estimates of 30-40% and 25-30%. Also, cofinancing resources accounted for a significant share until 1983, when the supply of international resources slowed as a result of the Latin American debt crisis.  - 44 - 89. Own resources of the Finance Corporations account for a high share of the resources mobilized. Here again, however, it has to be borne in mind that the amount is for all Finance Corporations together and, moreover, includes resources of other international agencies and ot the Industrial Development Institute (Instituto de Fomento Industrial). C. Cofinancihg 90. In view of the importance of cofinancing in channeling assistance to Finance Corporations and as a requirement of the IBRD loans in trying to meet the industrial sector's long-term external resource needs, we propose to evaluate its performance in comparison with that of loans 1598 and 1857. 91. Cofinancing approvals were generally much more expeditious than had been expected. In 1980 (table 16) the total amount of cofinancing approvals was practically four times those made against loan 1598 resources. Although this was a year of low activity of the loan due to its depletion, the immediately previous year marked the peak in terms of both number and amount of the IBRD loans, and both were exceeded by cofinancing, which confirms the importance this financing alternative is acquiring for Colombian industry. 92. In 1981 and 1982 the volume of cofinancing credit was very similar to that of loan 1857, which it complemented. Because of slow placement of the 8th credit line, for 1982 one of the restrictions was lifted to allow access by enterprises with assets of between Col$1,500 and Col$3,000 million as of December 1979. 93. Financing for projects of these enterprises had to include cofinancing resources equal to at least the amount received from IBRD. 94. This measure helped to strengthen cofinancing in view of its advantages of long amortization term and ease of processing. At the same time its cost tended to decline, particularly in the second half of 1982, when it was even below the rate for the 8th credit line. This created a new obstacle to placement of the latter and led to further amendments to its regulations. 95. The cofinancing interest rates were flexible, tied to the prime rate or Libor. The margins on these rates fluctuated between 2 and 3 points and were generally higher in 1979 and 1980, intermediate in 1981 and lower in 1982. 96. Generally speaking, the volume of cofinancing resources approved by the Finance Corporations exceeded the minima imposed by the World Bank--amply in the case of the 7th credit line (US$91.7 million, against the required US$30 million) and satisfactorily in the case of the 8th line (US$75.6 million, against US$60 million). 97. Despite this successful performance, for the second half of 1982 the readiness of the international banks to supply resources to Colombia changed negatively as a consequence of the difficulties some Latin American countries were having in repaying their external debts.  - 45 - 98. Banks abroad began to cancel the quotas agreed upon informally di` the Colombian Finance Corporations or, where more solid commitments existed, set financing terms that made the operations unprofitable for the Colombian intermediaries. 99. In order to protect the interests of enterprises that were counting on such resources to complete ongoing projects, a study was undertaken of applications of this kind. It was found that some projects fell within the regulations governing loan 1857 but the expenditures eligible for financing were outside the "age limit" set by IBRD. Later the World Bank authorized an exception to this rule, and using the funds then available under the 8th line (US$10 million) the quotas was divided among the five Finance Corporations pro rata to their outstanding approvals. In addition, the Banco de la Repuiblica requested and obtained the authorization of the CAF to apply the outstanding balance (US$6.5 million) of the second CAF line of credit to financing of these operations. 100. Generally speaking, during the life of loans 1598 and 1857 the resource mobilization by the Finance Corporations was satisfactory, despite the adverse economic conditions that prevailed during the first half of the 1980s.  - 46 - Table 14 IBRD LOANS 1598 AND 1857: INDUSTRIAL INVESTMENT Indubtrial Investment Proportion Financed by FCs Period Projected Actual Proiected Actual US$million US$ million US$ million % US$ million X 1978-80 3,000 2,774 300-360 10-12 741 27 1981-83 5,700 to 6,300 4,748 1/ 570-855 10-15 889 1/ 19 to 630-945 Source: Financial Accounts, Banco de la Republica and DANE. DCI calculations. 1/ Data for the period 1981-85 (period of placement of loan 1857). Date: June 15, 1989.  - 47 - Table 15 FINANCE CORPORATIONS: RESOURCE MOBILIZATION, IBRD LOANS 1598 AND 1857 1978-80 1981-85 USS million % US$ million % Own resources 413 57 592 67 Cofinancing resources 92 12 75 8 IBRD loan 100 13 150 17 Financial funds, Banco de la Republica 136 18 72 8 Total Resources 741 100 889 100 Source: Financial Accounts, Banco de la Repablica and DANE. DCI calculations. Date: June 15, 1989. ADH/Lmcp.  - 48 - Table 16 APPROVALS UNDER COFINANCING AND IBRD LOANS 1598 AND 1857 (US$ 000) Cofinancing IBRD 1598 IBRD 1857 Year No. Amount No. Amount No. Amount 1978 24 11,724 1978 14 5,957 94 66,192 1980 114 85,735 32 20,342 1981 56 30,824 51 32,392 1982 60 32,465 55 30,543 1983 20 12,326 66 46,260 1984 67 42,825 1985 2 1,811 Source: DCI statistics. Date: June 15, 1989. ADH/Lmcp.  - 49 - CONCLUSIONS 101. The placement performance of World Bank loans 1598 and 1857 differed, as a consequence both of the prevailing economic situation and of the rules specific to each. 102. However, neither credit line achieved the hoped-for result of development of small and medium industry, and their contribution to credit deconcentration and decentralization was very small. The quotas set for each credit line component were altered a number of times to adapt them to the demand for resources. The restrictions imposed on access to the peso resources led many enterprises to set up small subsidiaries, thereby defeating the objective of channeling funds to small industrial firms. 103. Moreover, utilization of the capital investment component was fairly low, owing to the Finance Corporations' lack of incentive to acquire new, high-risk share issues. 104. Although the two credit lines were very similar in design, the resources of the 7th line (loan 1598) were placed particularly expeditiously and with few changes. This was due more to the favorable economic climate during the life of the loan than to prior appropriate allocation. 105. As a result of the difficulties encountered in allocating the resources of the 8th credit line, the ninth World Bank loan (2477), signed in November 1984 for US$90 million, included a number of important new features designed in general to simplify the rules governing access for both onlender and end-user. 106. First of all, it was decided to include all enterprises in eligible sectors, without asset limits, since the international capital market restrictions meant it was no longer true that the larger enterprises had access to that market for their foreign exchange financing needs. 107. Moreover, in view of the need that had arisen during the previous two credit lines to amend the terms of the agreement with respect to user terms, for this credit line the investment category quotas were eliminated and simplified procedures were instituted both for approving loans with and without exchange risk and for setting interest rate levels (flexible rates). 108. Like the complicated system of resource allocation, the requirements imposed on the Finance Corporations in relending these credit resources restricted access to them and meant that only one new Finance Corporation participated, on a limited basis. 109. In light of this, for the 9th credit line the rules were simplified to allow a larger number of intermediaries to participate.  - 50 - 110. Similarly, although the 7th and 8th loan agreements prescribed that the Finance Corporations could approve loans for a spe~cified amount without the prior authorization of the Banco de la Republica, that measure was only really executed in the case of the 9th credit line, for which a free limit was set of US$250,000 for autonomous approval by each intermediary Finance Corporation. 111. Concerning the development of the Finance Corporations, during the effectiveness of the 7th and 8th credit lines, particularly the latter, their major indicators deteriorated and they lost dynamism as a result both of the general economic situation and of the financial system crisis-developments that affected the Corporations channeling World Bank resources to a smaller degree. This is evidence of the beneficial effect on these Corporations of the requirements imposed by both the IBRD and the Banco de la Republica concerning minimum compliance with certain indicators (debt/equity and current assets/equity) and the quality of project appraisal and supervision. 112. In light of these considerations, in 1987 the National Government issued Decree 2041 introducing important changes in the legal system governing the Finance Corporations. With the primary aim of reorienting them toward full performance of the functions of a promotion and development bank, a number of measures were taken, including the following. 113. First of all, the objective assigned to these intermediary institutions was unified on the basis of their specialization, introducing the concept of "definition factor" (coefficiente de definici6n), which measures the percentage share in total lending of medium- and long-term operations using own and Banco de la Repablica rediscount resources. A Finance Corporation is considered to comply with its corporate purpose if it presents a definition factor of over 50%, prior to June 30, 1989; otherwise it must convert to a Commercial Financing Company or liquidate itself. 114. To strengthen the Corporations' equity position, a minimum capital requirement was prescribed of Col$1,000 million for newly established Corporations and Col$700 million in 1989 and Col$1,000 million in 1990 for existing Corporations. 115. In addition, with the object of reducing risk exposure, the decree laid down a new leverage limit, prescribing a debt ratio of 10 times net equity, 1/ compared with the previous rule of 15 times paid-up capital + legal reserve. l/ Comprising paid-up capital, reserves, current-year and retained profits, bonds obligatorily convertible into shares (Bonos Obligatoriamente Convertibles en Acciones--BOCEAS), exchange adjustment and investment revaluation up to 502 of the sum of paid-up capital, current and retained profits, reserves and BOCEAS.  - 51 - 116. To guarantee suitable profit levels, the Corporations were given new income sources such as medium- and long-term factoring services, secondary-market brokerage operations, advisory services to enterprises, and so on. 117. It should be noted that before Decree 2041 was enacted a number of measures had been taken that helped to improve the profitability of the more development-oriented Corporations. Thus, Monetary Board Resolutions 24 and 25 of April 1987 altered the terms of lending out of financial funds administered by the Banco de la Repuiblica to che effect that the interest and rediscount rate would be determined on the basis of the most recent average cost of CD funds (Tasa de Costo Promedio de Captacion a Traves de Certificados de Deposito a T6rmino" (DTF). This measure significantly improved the Finance Corporations' intermediation margin. 118. It is hoped that this package of measures will enable the Finance Corporations to reorient and consolidate their objectives. 119. In summary, it can be stated that although some of the objectives of these credit lines were achieved more slowly than originally expected, the lessons learned during one credit line unquestionably served to improve the channeling of the resources to industrial operators. 120. Thus, the achievemients of the programs financed by IBRD loans 1598 and 1857 include: lower interest rate subsidy, greater exchange risk borne by the industrial enterprises, greater simplification of rules, and increased autonomy of the Finance Corporations.  - 52 - Annex 1 IBRD LOANS 1598 AND 1857: PROJECT COMPONENTS AND CATEGORIES Ordinary Investment Projects: Specific development projects to be carried out by an enterprise. Capital Investment Projects: Minority investment, different from a subloan, that a Finance Corporation proposes to make, out of the loan resources, in the capital of eligible enterprises. Export Investment Projects: Investments for installing new facilities to produce export goods or foreign tourism services, or to increase the capacity of existing facilities, that are expected to generate net foreign exchange receipts attributable to the export investment project over a period of five years calculated from the date on which it enters into execution. Such exports had to represent not less than 25Z per annum of the value of the incremental production due to the project. Industrial Decentralization Investment Projects: Investment projects to be executed outside the metropolitan areas and zones of influence of the cities of Bogota, Cali and Medellin. Pollution Control Projects: Projects to be carried out by an investment enterprise, using the resources of a subloan, to purchase and install equipment for control of pollution caused by machinery and equipment. Research and Development Projects: Projects to be carried out by an investment enterprise in order to improve the design of its products or production processes through research and development programs. Technological Improvement Projects: Projects to be carried out by an investment enterprise in order to acquire new technology or to adapt product designs or processes to existing production techniques.  * - 53 - PART III: STATISTICAL INFORMATION COLOMBIA SEVENTH AND EIGHT DEVELOPMENT FINANCE COMPANIES PROJECTS Loans 1598-CO and 1857-CO 1. Related Bank Loans Loan Title Loan Year of Status Amount Approval 1. Development Finance 250 1966 Fully disbursed Companies Project and repaid. 2. Second DFC Project 12.5 1968 Fully disbursed and repaid. 3. Third DFC Project 25.0 1969 Fully disbursed and repaid. 4. Fourth DFC Project 40.0 1971 Fully disbursed. 5. Fifth DFC Project 60.0 1973 Fully disbursed and repaid. 6. Small-scale Industry 5.50 1975 Fully disbursed and repaid. 7. Sixth DFC Project 80.0 1976 Fully disbursed. 8. Second Small-scale 15.0 1977 Industry fully disbursed. 9. Third Small-Scale Industry 32.0 1980 Fully disbursed. 10. Fourth Small Scale 40.0 1984 Disbursements pending. Industry 11. Development Banking 90.0 1984 Disbursements pending. 12. Fifth Small-Scale 80.0 1989 Pending signing. Industry.  - 54 - 2. Project Timetable-Loan 1598-CO Date planned Date Revised Date Actual Identification 9/77 Preparation 11/77 Appraisal 12/77 Negotiations 5/78 Board Approval 6/15/78 Signing 7/27/78 Loan effectiveness 9/78 11/78 11/28/78 Loan closing 12/31/82 3/31/83 3/31/83 Loan completion 10/14/83 3. Disbursements Loan 1598-CO. Total amount loan: $ 100.00 million. Total disbursements: $ 90.64 million. Cancellations: $ 9.36 million. Estimated date final disbursement: June, 1983 Actual date final disbursement: October, 1983  - 55 - 4. Project Timetetable - Loan 1857-CO Date planned Date Revised Date Actual Identification 12/78 Preparation 5/79 Appraisal 11/79 Negotiations 4/80 Board approval 5/27/80 Signing 12/10/80 Loan effectiveness 9/80 9/81 7/9/81 Loan closing 12/84 12/31/87 Loan completion 9/9/88 5. Disbursements - Loan 1857-CO Total amount loan: $ 150.00 million. Total disbursements: $ 138.68 million. Cancellations: $ 11.32 million. Estimated date final disbursement: June, 1985 Actual date final disbursement: September, 1988