Portugal - Third Industrial Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15236 PROJECT COMPLETION REPORT PORTUGAL THIRD INDUSTRIAL DEVELOPMENT PROJECT (LOAN 2903-PO) December 29, 1995 Industry, Trade and Finance Operations Division Country Department I Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.SA Office of the Director-General Operations Evaluation December 29. 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Note on Portugal - Third Industrial Development Project (Loan 2903-PO) Attached is the Project Completion Note (PCN) on the Portugal Third Industrial Development project (Ln. 2903-PO, approved in FY88). prepared by the Europe and Central Asia Regional Office, with Part II contributed by the Borrower. The project's goal was to enhance Portugal's industrial competitiveness following entry into the European Community in 1986. Its specific objectives were to: (a) support industrial restructuring; (b) promote a more market-oriented approach by mixed and private enterprises; (c) expand the capacity of the state-owned development bank. Banco de Fomento Nacional (BFN), to rehabilitate industrial enterprises; and (d) strengthen BFN's management and operations. Like its two predecessors, the loan provided a line of credit for investments in mixed and private sector industries and technical assistance for BEN, as well as funds for subsector studies. Effectiveness was delayed 18 months by disagreements between the Government and BFN about arrangements for taking the foreign exchange risk. Once this issue was settled. 90 percent of the loan was disbursed within a year, and the project was fully disbursed two years ahead of schedule. The loan finnnced about 80 subprojects, mostly for restructuring and expansion, and largely export oriented. The ex ante financial and economic rates of return on the subprojects are satisfactory. Thle technical assistance xvas effectively implemented. The Bank's contribution to implementation was minimal, due to internal reorganization and staff turnover, but this did not result in any major deviations from the original project objectives. This PCN was prepared in lieu of a PCR because of the quick disbursement, the absence of significant implementation issues, and the fact that the project has already been audited, along with the First and Second Banco de Fomento Nacional projects (Lns. 1432 and 1942). The project outcome is rated as highly satisfactory, the institutional development impact as substantial and sustainability as likely. The PCN is of satisfactory quality. The major lesson from this project is the critical need to ensure th Borrower's commitment to key conditioniality, in this case Government assumption of the foreign exchange risk, before Board presentationi. Attachment 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 Bat authorization.  ?%  PART I PROJECT COMPLETION NOTE PORTUGA THIRD INDUSTRIAL DEVELOPMENT PROTECT (LOAN 2903-PO) Project Identity Project Name : Third Industrial Development Project Loan Number 2903-PO RVP Unit Europe & Central Asia Country Portugal Sector : Industry Background 1. This Project Completion Note (PCN) is for the Third Industrial Development Project TIDP) for which a loan (Ln. 2903-PO) in the amount of US$60.0 million equivalent was made to the Government of Portugal, with Banco de Fomento Nacionall', as the Executing Agency. The loan was approved by the Board on January 26, 1988, signed on April 10, 1989 and made effective on July 6, 1989. The loan was fully disbursed by June 30, 1991, three years before the closing date of June 30, 1994. 2. The PCN has been prepared in lieu of aProject Completion Report, because: firstly, the loan was disbursed very fast (three years ahead of schedule) and that no significant implementation issues were encountered; and secondly, this project was basically similar to the first and second IDPs for which a full PCR was prepared. It is based on a review of the Staff Appraisal Report, internal Bank memoranda, minutes of the Board discussions, supervision reports and interview with Bank staff who were associated with the project. 3. This project is a continuation of the first and second lines of credit that were approved by the Bank to provide the Gove-nment of Portugal with continued support in the development of mixed and private sector industries in Portugal and in the promotion of restructuring and institutional development. Objective and Description Banco de Fomento Nacional (BFN) became a "public limited company with state majority ownership " on December 7, 1989, and its name was changed to Banco de Fomento e Exterior (BFE).  - 2 - 4. The project was part of an overall effort by Portugal to improve the competitive position of its industry during the crucial phase of transition as a member of the EC. The specific objectives of the project were to continue supporting the Govemment's policies and programs to restructure industry; help develop a more market-oriented approach at the enterprise-level, encourage private investment based on strategic planning; expand capacity of Banco de Fomento Nacional (BFN) to rehabilitate industrial enterprises; and strengthen further BFN's internal management and operational capability, by developing an integrated Management Information System (MIS) and by building up BFN's internal audit functions. The loan was to support investments in the private and mixed sector industry, including industrial restructuring activities to be identified by pilot studies of the white clay ceramics and wood furniture industries to be undertaken by BFN. BFN's appraisals would include an assessment of the environmental impact of the projects financed. An amount of US$5.0 million of the loan was earmarked for the financing of the studies and the design and implementation of the MIS. Furthermore, to deal with the lingering arrears problem, the government would maintain its policy of timely and satisfactory settlement of outstanding public enterprise arrears to BFN, while BFN undertook to eliminate by December 31, 1991, all arrears in principal and interest outstanding as of December 31, 1986, in its loan portfolio, and to ensure that arrears in the future operations would not exceed 6% of its outstanding loan portfolio. Implementation 5. The loan became effective 18 months after approval, following protracted discussions on arrangements regarding the assumption of the foreign exchange risk. Specifically, while the Guarantee Agreement provided that the Government would bear the foreign exchange risk with the sub-borrowers paying a fee for the risk coverage, unexpectedly the Government decided to reconsider its commitment. As the Government would not sign the Guarantee Agreement, BFN could not sign the Loan Agreement because, in the absence of a scheme covering foreign exchange risk, signature of the Loan Agreement and utilization of the loan proceeds not only would have forced BFN to incur an imprudent business risk, but would also place it in violation of the terms of the Agreement, which stipulated that BFN should protect itself against foreign exchange risks in its operations. However, in anticipation of an early signing of the loan and to save time, BFN kept forwarding subprojects for the Bank's review, with formal authorization to take place when the Loan Agreement would become effective. 6. After protracted delays, the Government finally reached a decision to assume the risk as was originally envisaged. But in view of the unduly long delay in signing the Agreement, BFN faced the dilemma that a considerable portion of the expenditures for many of these subprojects that were to be financed out of the loan proceeds fell in the period prior to the date of signature. BFN therefore requested that the amount of retroactive financing be increased from the normal 10% to 34% of the loan to enable it to finance otherwise eligible expenditures. In light of the progress already achieved in implementing the project (BFN had also proceeded to implementing other aspects of the project, including the industrial sector restructuring studies and institutional development components), and appreciating the reasonableness of BFN's request, the Bank acceded on an exceptional basis. Once it became effective, 90% of the loan was disbursed within a year -- well ahead of forecast levels.  -3 - 7. The loan has financed some 80 subprojects, virtually all for restructuring/expansion and almost 90% export-oriented, which augurs well for their competitiveness and longer term sustainability. The size, sectoral and regional distribution of the subprojects financed is satisfactory, as are their ex ante financial and economic rates of return and prospective return on equity. BFN's appraisals included an environmental impact assessment of the projects financed. The management information system (MIS) and the automated banking operations system were implemented. Electronic (on-line) link between the headquarters and branches as well as the bank and clearing system has been fully established. Training of Operational staff was carried out. The number of new jobs created is limited in view of the nature of the subprojects. An interesting feature in most of BFN's loans is the substantial contribution of the borrower's own funds to the project cost and consequent stake in the success of the venture. The Bank misjudged slightly the effect of exchange rate fluctuations on the amounts committed, which resulted in an over-commitment (US$36,000) of the loan, for which the Bank was reimbursed later. Findings and Lessons Learned 8. The loan was fully committed and disbursed two years ahead of schedule. After the initial problems with the foreign exchange risk coverage were overcome, no other implementation issues arose. However, it must be noted that as a result of the various internal reorganizations within the Bank, staff that were initially involved in the preparation and appraisal of the project were repeatedly replaced by other staff who were less familiar with the project and there has been no continuity in the supervision effort. As a result, it is difficult to trace a complete history of the project from the scanty paper trail on project implementation, and it appears that the Bank's involvement in project implementation, other than in the review of subprojects, has been marginal. The main lessons to be learned from the project are, therefore, that: (a) it is critical to ascertain the full commitment of the Borrower and the guarantor to key conditionalities before plojects are presented to the Board; and (b) that staff continuity during implementation is essential to ensuring Bank control over the achievement of project objectives. Fortunately, in this case, there appear to have been no major deviations from the objectives presented in the SAR.  -4- PORTUGAL THIRD INDUSTRIAL DEVELOPMENT PROJECT (LN. 2903-PO) PROJECT COMPLETION NOTE A. Key Project Data Total Project Cost (US$ million) 143.50 Total Project Cost (Portuguese ESc. Mill.) 18,655.00 Loan Amount (US$ million) 60.00 B. Staffweek Input FY86 FY87 FY88 FY829 EX2Q EXD I1 t1i Identification/Preparation 31.6 31.6 Appraisal 3.3 10.7 14.0 Negotiation - 12.3 12.3 Supervision - 1.4 11.6 9.7 0.3 23.0 Others 0.1 4-5 4.5 - _ _ 1. Total 0.1 39.4 28.9 11.6 9.7 0.3 90.9 C. Mission Data Month/Yr. No.of Wks. No.ersons Staffweeks Appraisal 05/87 3.0 4 12.0 Supervision I 05/88 1.0 1 1.0 Supervision II 08/89 1.5 2 3.0 Supervision III 01/90 3.5 1 3.0 D. Other Project Borrower : Government of Portugal Executing Agency Banco de Fomento Nacional (BFN)  PART II  Banco de Fomento e Exterior GRUPO ,51BFi THE WORLD BANK INTERNATIONAL FINANCE CORPORATION Att. Mr. F. Batzella. ECIIT Washinmton. D.C. 20433 U.S.A. S [CfrreCOL., S comunicaa 3o de N: Refermncia Data DEPT..DIV.NO. 273.'30 DAC (CFE) n