Philippines - Fourth Small and Medium Industries Development Project

Docunent of The World Bank FOR OMCIAL USE ONLY Repot No. 14055 PROJECT COMPLETION REPORT PHILIPPINES FOURTH SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT (LOAN 3038-PH) MARCH 15, 1995 Country Operations I Division Country Department I East Asia and Pacific Regional Office This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Peso P US$1.00 - P 21.3 (at Appraisal, November 1988 US$1.00 - P 21.2 (Average 1988) US$1.00 - P 21.7 (Average 1989) US$1.00 - P 24.3 (Average 1990) US$1.00 - P 26.7 (Average 1991) US$1.00 - P 24.7 (Average September 1992) ABBREVIATIONS ADB - Asian Development Bank CBP - Central Bank of the Philippines DBP - Development Bank of the Philippines DTI - Department of Trade and Industry GOP - Government of the Philippines IGLF - Industrial Guarantee and Loan Fund PFI - Participating financial Institution SMI - Small and Medium Industry TTA - Training and Technical Assistance FISCAL YEAR GOP - January 1 to December 31 DBP - January 1 to December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation March 15, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Philippines - Fourth Small and Medium Industry Project (Loan 3038-PH) Attached is the Project Completion Report (PCR) on Philippines - Fourth Small and Medium Industry (SMI) Project (Loan 3038-PH), prepared by the East Asia and Pacific Regional Office, with Part II prepared by the Borrower. This US$60 million loan was approved in April 1989 and fully disbursed in October 1992. It was part of a long series of Bank loans aimed at providing long-term industrial credit. This particular project also aimed at facilitating the growth of SMI exports through institutional improvements. The loan was cofinanced by the Asian Development Bank (US$100 million) and by Japanese Government technical assistance and training (TTA) grants in the amount of US$3 million. The PCR indicates that the project achieved its main objective of providing investment finance to SMIs. Bank and Borrower processed the project expeditiously, disbursements were made rapidly, the subprojects financed seem to be successful and the repayment experience was good. But the funds went to a small number of larger firms. Instead of the 3,000 subprojects planned, with a total employment creation of 60,000, the operation only resulted in 406 subprojects and 12,359 new jobs. The investment cost per job created was US$28,700 rather than the US$6,400 planned. Cottage entrepreneurs received less than 1 percent of the funds. This disappointing outcome, similar to the experience of the Third SMI Project, was due in part to lack of targeting instruments in the project design. Exports represented less than 8 percent of the industrial output generated by the project. Progress in achieving planned institutional improvements was minimal, owing to wavering government support and to lack of focus in the complex ITA arrangements. Despite these serious weaknesses, the performances of the Bank and the Borrower were competent, and the subprojects are said to be performing well. Therefore, although the project failed to achieve some of its more relevant objectives, its outcome is rated as marginally satisfactory. Its institutional development impact is rated as negligible. Sustainability of project benefits, which consist mainly of the investments financed, is rated as likely. The PCR offers a balanced assessment. The Borrower's contribution is particularly thorough. No audit is planned. Attachment Thnis 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.   FOR OFCIAL USE ONLY PHILIPPINES FOURTH SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT (LOAN 3038-PH) PROJECT COMPLETION REPORT TABLE OF CONTENTS Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evaluation Summary ... . . . . . . . . . . . . . . iii Part I: Project Reviews from Bank's Perspective Project Identity . . . . . . . . . . . . . . . . . . . . . . . . . .1 Project Background .1... . . . . . . . . . . . . . . . . . . . . . Project Objectives and Description . . . . . . . . . . . . . . . . . 2 Project Organization and Design ... . . . . . . . . . . . . . . . . 2 Project Implementation .... . . . . . . . . . . . . . . . . . . . 3 Project Results .......................... . 4 Project Sustainability .... . . . . . . . . . . . . . . . . . . . 6 Bank Performance .... . . . . . . . . . . . . . . . . . . . . . . 7 Borrower Performance .... . . . . . . . . . . . . . . . . . . . . 7 Project Documentation and Data ... . . . . . . . . . . . . . . . . 8 Main Lessons .... . . . . . . . . . . . . . . . . . . . . . . . . 8 Proiect II: Prolect Reviews from Borrower's Perspective . . . . . . 9 Part III: Statistical Information Table 1 Related Bank Loans . . . . . . . . . . . . . . . . . . . . 91 Table 2 Project Time Table .92 Table 3 Loan Disbursements ............ ..... .. . 93 Table 4 Total Project Costs .......... .... ... . . 94 Table 5 Financing Plan ................. 95 Table 6 Participating Financial Institutions . . . . . . . . . . . 96 Table 7 SMI IV TTA Component ................. 97 Table 8A DBP - Income Statements 1989 - 1993 . . . . . . . . . . . 99 Table 8B DBP - Balance Sheets 1989 - 1993 . . . . . . . . . . . . 100 Table 9 Use of Bank Resources . . . . . . . . . . . . . . . . . 101 Table 10 Loan Covenants . . . . . . . . . . . . . . . . . . . . . 102 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.   - i - PHILIPPINES FOURTH SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT (LOAN 3038-PH) PROJECT COMPLETION REPORT Preface The Fourth Small and Medium Industries Development Project (Loan 3038-PH), was approved by the Board on April 25, 1989. This US$60.0 Million Loan was a folow-up to the Third Small and Medium Industries Development Project (Loan 2169-PH), thereby providing continued financial support to these subsectors of industry. The proceeds of Loan 3038-PH were channelled through the Development Bank of the Philippines (DBP), for relending to participating financial institutions. The Loan was closed on October 22, 1992, more than two years before the stipulated closing date of December 31, 1994, as the Loan was drawn down more rapidly than anticipated. The Loan is guaranteed by the Government and repayments are current in accordance with the amortization schedule. The last disbursement was made on October 22,1992. The training and technical assistance component of the Project was financed through a grant of Yen 470 million (equivalent US$3.6 million) from the Japan Grant Facility. It remains active, and has an undisbursed balance of US$0.58 million equivalent as of April 14, 1994. The Project Completion Report (Preface, Evaluation Summary, Parts I and III) was prepared by the (then) Industry and Energy Operations Division of Country Department I, East Asia and Pacific Regional Office. DBP, the borrower, provided Part II and data for Part III. The PCR draws on the Staff Appraisal Report; the Loan, Guarantee, and Japanese Grant Agreements; supervision reports, correspondence between the Bank and DBP, internal Bank memoranda and economic/sector reports, supplemented by staff interviews; DBP's financial and audit reports; and subproject data provided by DBP.   - iii - PHILIPPINES FOURTH SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT (LOAN 3038-PH) PROJECT COMPLETION REPORT Evaluation Summary 1. The objectives of the Fourth Small and Medium Industry (SMI) Development Project were: (a) to ensure availability of long-term resources for SMIs' long-term financing requirements; (b) to improve SMI access to finance by strengthening IGLF loan guarantees; (c) to offer a wide array of pre-shipment export finance and accompanying guarantee for direct and indirect SMI exporters; (d) to assure a more efficient duty drawback and exemption systems and better access to bonded warehouses; (e) to provide more effective technical assistance, delivered by the Department of Trade and Industry (DTI); and (f) to identify and design institutional and policy reforms applicable to SMI exporters (para 3.1) 2. The Project had three components: (a) a credit line to IGLF, comprising 99% of total project cost, to support its long-term project finance and short-term export finance for SMIs during 1989-91; (b) an export component, providing equipment and services, training and administrative costs, credit and consultancy assistance to improve access of SMI exporters to duty drawback/exemption, export finance/guarantee and marketing assistance and trade information services; and (c) a DTI support component, providing training and equipment, to strengthen DTI's regional offices, and technical assistance for policy formulation and program design in export and industrial development (para 4.1). 3. Of the foreign currency allocation of the IGLF Credit Component, the entire Bank Loan of $60 million and a further $100 million from ADB were used to meet subprojects' foreign exchange requirements. Of the Export Component's total estimated cost of $3.0 million, $2.9 million equivalent was financed by the Japan Grant Facility. In the case of the DTI Support Component, the Japan Grant Facility provided the entire amount of $0.7 million equivalent (para 4.4). 4. Due to heavy demand for term SMI financing, the Project was fully disbursed ahead of schedule and was closed on October 22, 1992, 28 months before the expected closing date of December 31, 1994. The Project was designed in a way that interest rates would be fully market-determined and it established a formula that was fully market-based. As volatile interest rate conditions prevailed in 1990-91 when the Project was prepared, the Loan provided that the specific elements of the formula (especially the deposit rates on which the formula was based) be frequently reviewed during the course of the Loan and adjustments be made appropriately. Thus, the project design provided for both initial market orientation and for fine-tuning the formula as market conditions developed. The TTA components required constant and careful monitoring from Bank headquarters and during supervision in the field (paras 5.1-5.5).  - iv - 5. The Project achieved its main objective of providing project finance to SMIs during the period. Total credit provided to the SMI amounted to P1.8 billion. IGLF has implemented the credit component well. However, of the 3,000 subprojects planned for the period, only 406 were realized, and total investment fell below the targeted level of P7.7 billion to P2.7 billion. During project appraisal, it was envisioned that a larger number of smaller projects would have produced a larger investment amount. But the PFIs' selective approach showed their clear preference for subprojects with adequate collateral and management (paras 6.1-6.2). 6. Although the guarantee schemes for SMI lending remained in place, with the collateral short guarantee coverage being improved markedly, the claims settlement procedures were not revised. DBP maintains that since approval of the Magna Carta for SMIs was pending at that time, undertaking improvements in this area would be useless, and has therefore left the scheme unchanged. When the Magna Carta was enacted, it established a new institution that provided large- scale guarantees for SMIs. As a result, PFI demand for the relatively insignificant IGLF guarantees remained low, with only 3.8% of IGLF loan approvals covered. The Pre-Shipment Export Finance facility was also virtually unused as the guarantee support, provided by Philguarantee, remained generally unacceptable to PFIs (para 6.4). 7. The programs under the TTA components had mixed results: (a) the duty drawback and duty exemption schemes did not consistently enjoy Government support, hence SMI's access to these schemes was delayed; (b) utilization of the pre-shipment export guarantee scheme, for accredited banks and exporters, put in place by Philguarantee, has been insignificant, as Philguarantee lacked financial credibility; (c) trade information services proceeded slowly as the Government had difficulty locating sufficiently broad-based supplier of library materials; (d) project specialist and trade fairs are proceeding successfully; and (e) the DTI support component is just currently underway (paras 6.5-6.9). 8. The financial performance of the 170 subprojects, on which preliminary actual data are available, shows profits at a satisfactory 12% of assets and 23% of equity. The PFIs, using funds under the Project, were able to offer long term loans to SMIs and, in the process, earned an average interest rate spread of 4.89%. As IGLF discontinued discounting more than 90% of the funds provided through the Project, the PFIs have effectively contributed about P163 million in term loans to the 406 subprojects, consolidating the PFIs' linkage with them. DBP has handled the line of credit competently contributing to its sustainabilty. The accreditation procedures for PFIs are well established, and carried out satisfactorily (para 7.1). 9. The main lessons learned are: (a) substantial discrepancies between planned and actual subproject targets have shown that the ultimate credit decision in operations involving an apex arrangement, is made by the PFIs on the basis of their perception of risks and rewards; (b) a more effective approach in the design of a TTA component should focus on key issues, rather than on a multiplicity of TTA items; and (c) to ensure loan utilization, interest rates of Bank loans should be competitive with prevailing market rates (paras 11.1-11.3).  PHILIPPINES FOURTH SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT (LOAN 3038-PH) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Project Name: Fourth Small and Medium Industries Development Project (SMI IV) Loan No: 3038-PH RVP Unit: East Asia and Pacific Country: Philippines Sector: Industry Subsector: Private Investment 2. Proiect Background 2.1 As with many developing countries, industrial development thrived under the then prevalent import substitution regime where, in addition to high protective tariffs, foreign and domestic credits were facilitated by the Government of the Philippines (GOP) to industry. This led to an industrial structure that was fragile, frequently inefficient and uncompetitive. The economic crises experienced by the Philippines in the first half of the 1980s severely affected industry; output declined by 25%, and many firms went into bankruptcy. Although sector reforms had started since 1980, the financial crises of 1983-85 brought these to a halt. In 1987 as growth started to pick up with the change in government, the pace of reforms accelerated. As a result, tariffs and incentives were rationalized, financial policy reforms were introduced, and foreign exchange and exchange rate management were achieved. 2.2 Term financing for small and medium industries (SMI) has largely been provided by the Development Bank of the Philippines (DBP) and the Industrial Guarantee and Loan Fund (IGLF), a rediscount guarantee mechanism originally implemented by the Central Bank of the Philippines (CBP), and through which Bank loans were accordingly channeled. At the time of loan appraisal, certain significant deficiencies were noted in the operation of the IGLF particularly in its interest rates, which did not follow the largely market determined rates, and in its guarantee scheme, which proved to be ineffective, constraining further SMI's access to credit. In addition, the GOP was concerned that insufficient funds were being invested outside Metro Manila: of the 12 regions, only 7% of IGLF loans went to the nine less active regions. An improved IGLF guarantee scheme was therefore envisioned, focusing on dispersal of investments to other areas, and providing additional loans at a discount, earmarked for specified depressed areas, to compensate participating financial  institutions (PFIs) for their higher intermediation costs outside the active regions. The actual lending rates to SMIs within the active region remained unaffected. 3. Project Obiectives and Description 3.1 The Fourth Small and Medium Industry Development Project (SMI IV) was a follow-up to three earlier Bank projects (Part III). The basic objectives of the Project, focusing on the development of SMIs, were: (a) to ensure availability of long-term resources for SMIs' long-term financing requirements; (b) to improve SMI access to finance by strengthening IGLF loan guarantees; (c) to offer a wide array of pre- shipment export finance and accompanying guarantee for direct and indirect SMI exporters; (d) to assure a more efficient duty drawback and exemption systems and better access to bonded warehouses; (e) to provide more effective technical assistance, delivered by the Department of Trade and Industry (DTI), by focusing on SMI growth and export orientation; and (f) to identify and design institutional and policy reforms applicable to SMI exporters. 4. Project Orqanization and Design 4.1 The Project was designed with three components: (a) a credit line to IGLF, comprising 99% of total project cost, to support its long- term project finance and short-term export finance for SMIs during 1989- 91; (b) an export component, providing equipment and services, training and administrative costs, credit and consultancy assistance to improve access of SMI exporters to duty drawback/exemption, export finance/guarantee and marketing assistance and trade information services; and (c) a DTI support component, providing training and equipment, to strengthen DTI's regional offices, and technical assistance for policy formulation and program design in export and industrial development. 4.2 Credit Line IGLF is an entity owned by the National Economic Development Authority and administered originally by the CBP, and later was transferred to DBP as envisioned under the Financial Sector Adjustment Loan (FSAL, Loan 3049-PH). Under the FSAL, the CBP agreed to reduce sharply, and ultimately eliminate completely, its direct involvement in the management of government-sponsored credit allocation programs. The administrative responsibility for industrial sector programs (IGLF and Apex loans) was assigned to a rehabilitated DBP so that the lending terms and conditions, including interest rates, would be uniformly applied (except to account for the degree of risk), and that better coordination and more effective monitoring of the credit programs would be achieved. 4.3 IGLF is operated as an apex unit, providing PFIs with resources for onlending to SMIs. IGLF's function is to accredit and monitor PFIs while accredited PFIs select their own subprojects and are provided with IGLF financing if the eligibility criteria are met. PFIs include accredited commercial banks, private development banks, non-bank intermediaries and other financial institutions (Part III). Due to the  PFIs' extensive branch network, IGLF has a wide geographical reach. PFIs are responsible to repay IGLF, while subborrowers are responsible to repay the respective PFIs. IGLF's risk is thus contained to potential non- repayment by PFIs. 4.4 Export and DTI Support Components These technical assistance and training (TTA) components were designed to strengthen the export framework, particularly for SMI exporters, by providing equipment, technical assistance, loan financing, training and administrative expenses, to ensure: (a) ready access to a strengthened pre-shipment guarantee facility; (b) enhanced usage of a strengthened duty drawback/exemption scheme; and (c) improved export marketing by continuing marketing assistance programs and improving DTI's trade information services (Part III). 4.5 Of the foreign currency allocation of the IGLF Credit Component, the entire Bank Loan of $60 million and a further $100 million from ADB were used to meet subprojects' foreign exchange requirements. Of the Export Component's total estimated cost of $3.0 million, $2.9 million equivalent was financed by the Japan Grant Facility. In the case of the DTI Support Component, the Japan Grant Facility provided the entire amount of $0.7 million equivalent. The project costs and financing plan are set out in Part III. - 5. Proiect Implementation 5.1 Due to heavy demand for investment credit by the SMIs, the Project was fully disbursed ahead of schedule and was closed on October 22, 1992, 28 months before the expected closing date of December 31, 1994. Part III details the actual implementation performance as compared to original plans for the Project. 5.2 The Project was designed in a way that interest rates would be fully market-determined and it established a formula that was fully market-based. As volatile interest rate conditions prevailed in 1990-91 when the Project was prepared, the Loan provided that the specific elements of the formula (especially the deposit rates on which the formula was based) be frequently reviewed during the course of the Loan and adjustments be made appropriately. Thus, the project design provided for both initial market orientation and for fine-tuning the formula as market conditions developed. A small adjustment in the formula was undertaken midway through the Project in order to make it consistent with other projects being developed at that time. Under the Loan, GOP carries the foreign exchange risk in exchange for a market-related fee payable by DBP. Because of the rapid changes in interest rates, the fixed rate option for 283 subloans proved more popular than the variable rate for 123 subloans. The subsidized interest rates for less active regions were phased out over a two year period in mid-1991. 5.3 IGLF operated through four divisions, has a staff trained in project evaluation and follow-up, and accreditation and monitoring of PFIs. Subproject supervision was substantially undertaken by the PFIs  - 4 - with IGLF visiting 20% of the subprojects to verify proper utilization of funds. 5.4 After transferring the implementing role of IGLF from CBP to DBP, the supervision of IGLF was merged with the supervision of DBP. The transfer was a condition of the FSAL, and was also discussed and approved during appraisal of the Project. 5.5 The TTA components required constant and careful monitoring from Bank headquarters and during supervision in the field. Supervision, which is still on-going as disbursements have not yet been completed, has been staff-intensive and time consuming. 6. Proiect Results Credit Component 6.1 The Project achieved its main objective of providing project finance to SMIs during the period. Total credit provided to the SMI amounted to P1.8 billion. IGLF has implemented the credit component well. Comparative subproject data as planned at appraisal and actual results are given below: Comparative Subproject Data Actual Planned Total no. of subprojects 406 3,000 Total Cost P 2.7 billion P 7.7 billion Average size P 6.7 million P 2.5 million Employment 12,359 60,000 Incremental cost per job US$ 28,700 USS 6,400 Employment per project 30 20 Debt equity ratio 34:66 80:20 6.2 Of the 3,000 subprojects planned for the period, only 406 were realized, and total investment fell below the targeted level of P7.7 billion to P2.7 billion. During project appraisal, it was envisioned that a larger number of smaller projects would have produced a larger investment amount. The PFIs' selective approach, however, showed their clear preference for subprojects with adequate collateral and management. With arrears over three months at a low 0.7% of net disbursements as of December 31, 1992, the PFIs have demonstrated the soundness of their subproject selection methodology. Had a large number of small projects  - 5 - been financed, it is likely that their management and balance sheet would have been weaker and their arrears position higher. Return on assets and equity, based on data available for 170 approved subprojects, although somewhat lower than projected, are still satisfactory at 12% and 23%, respectively. Economic rates of return calculations were not required under the Project. 6.3 The interest rate incentive, provided at GOP's request, had no ir;.nact on the geographical dispersion of loans; a mere 7.3% by number and 4.7% by project investment went to the nine industrially least active areas. The outcome reaffirms the Bank's experience with other similar loans, that without adequate industrial and social infrastructure, and frequently, related markets, entrepreneurs will not locate in underdeveloped regions. Of the total approved subprojects, over 90% of the number and over 80% of investment financed expansion projects. 6.4 Although the guarantee schemes for SMI lending remained in place, with the collateral short guarantee coverage being improved markedly, the claims settlement procedures were not revised. DBP maintains that since approval of the Magna Carta for SMIs was pending at that time, undertaking improvements in this area would be useless, and has therefore left the scheme unchanged. When the Magna Carta was enacted, it established a new institution that provided large-scale guarantees for SMIs. As a result, PFI demand for the relatively insignificant IGLF guarantees remained low, with only 3.8% of IGLF loan approvals covered. The Pre-Shipment Export Finance facility was also virtually unused as the guarantee support, provided by Philguarantee, remained generally unacceptable to PFIs (para 6.7). TTA Components 6.5 The status and results of the various programs under the TTA are described below: 6.6 Initially, the Duty Drawback and Duty Exemption Schemes enjoyed firm GOP support, but later the latter scheme was withdrawn, on the grounds that it was being misused while the GOP's interest in the former lagged. It was only in 1994 that GOP's support and interest were revived. The hardware and software, financed under the Project, are now in place, and work on the main portion of this program is expected to commence soon. The move by GOP represents an important breakthrough and should greatly facilitate SMIs' access to these schemes. 6.7 Utilization of the Pre-Shipment Export Guarantee Scheme, for accredited banks and exporters, put in place by Philguarantee, has been insignificant, as Philguarantee lacked financial credibility. The Bank needs to look at alternative schemes and discuss its findings with GOP. The technical assistance goals for Philguarantee, however, were achieved with hardware and software provided and staff trained by consultants. 6.8 Trade Information Services proceeded slowly as GOP had difficulty locating a sufficiently broad-based supplier of library  - 6 - materials. Currently the service is operational; information materials are received and a computer equipment is used to prepare the library catalogue. The two ongoing programs for market development (Proiect Specialist and Trade Fairs) are proceedi.g successfully. Appointment of additional consultants and further studies are yet to be undertaken. 6.9 The DTI Support component, consisting of assistance to regional offices and preparation of studies in the context of the omnibus legislation, is currently underway. Staff training for the regional offices has now been completed while the supply of equipment still continues. One-stop documentation centers are operating successfully and have proved popular with SMIs. The report on GOP's export processing zones pointed to deficiencies in the operation of these zones and recommended their possible privatization. Effort is now being made to improve operations of the zones, and GOP has reconsidered their privatization. The study on new measures for export finance has led to the establishment of a new public sector institution, tne Small Business Guarantee and Finance Corporation, which became operational in September, 1992. This institution supplements GOP's existing Guarantee Fund for Small and Medium Enterprises. Although one part of the omnibus legislation concerning this institution has been enacted, the larger part is still under consideration. 7. Proiect Sustainability 7.1 The financial performance of the 170 subprojects, on which preliminary actual data are available, shows profits at a satisfactory 12% of assets and 23% of equity. Subproject assets grew from P3.1 billion prior to project execution to P5.8 billion after project completion. The PFIs, using funds under the Project, were able to offer long term loans to SMIs and, in the process, earned an average interest rate spread of 4.89%. As IGLF discontinued discounting more than 90% of the funds provided through the Project, the PFIs have effectively contributed about P163 million in term loans to the 406 subprojects, consolidating the PFIs' linkage with them. DBP has handled the line of credit competently contributing to its sustainabilty. The accreditation procedures for PFIs are well established, and carried out satisfactorily. 7.2 DBP's financial situation remains stable. Between 1989 and 1993 asset growth has been exceptionally strong and has increased fivefold on account of: (a) the inflow of multilateral and bilateral funds, which accounted for the increase in DBP's long-term lending from P4.3 billion in 1989 to P28.1 billion in 1993; (b) the P12 billion GOP deposit invested by DBP in Treasury bills; and (c) the $175 million successful Eurobond floatation in 1993 of P4.7 billion. DBP's long-term debt equity ratio stood at 2.88:1 at end 1993, well below the 5.00:1 ceiling fixed under the Industrial Restructuring Project (Loan 3287-PH). On the strength of an increased and healthy wholesale portfolio, DBP's overall financial position is sound. 7.3 Although DBP's financial performance is satisfactory, its profitability shows a declining trend. Return on average assets has  fallen steadily from 9.4% in 1989 to 2.4% in 1993. Return on average equity also declined from the level of 18.8% in 1989, to about 16-17% in 1990-92, to 13.7% in 1993. To stem the tide, DBP has begun to focus on merchant banking and other activities to improve profitability through fee-based income. Due to rapid asset growth, DBP's administrative expenses diminished from 5.4% to 2.2% of average total assets during 1989- 92. Total administrative expenses doubled although the operating ratio dropped to 2.5% in 1993; this is still high considering that the larger portion (54%) of DBP's portfolio is in low cost wholesale loans (Part III). 7.4 As the disbursement of grant funds under the TTA components of the Project is still on-going, it is too early at this stage to determine whether the TTA components would have achieved their objectives. 8. Bank Performance 8.1 While the project design was sound, the subproject indicators, particularly as it relates to subproject cost, average size, and employment generation, were overly optimistic. However, these deviations do not reflect poor project management performance as the Bank or DBP had no control over subproject selection. As a wholesale institution, DBP's role is to accredit the PFIs, who in turn will determine the subprojects. The subprojects approved by the PFIs have so far performed satisfactorily. 8.2 Overall, the TTA component was a first step in improving export administration, and was meant to be followed-up with an export development project. The TTA provided under the Project consisted of about 20 discreet programs relevant to the export sector. Each of these required considerable amount of Bank staff time, supervision and broad-based monitoring. In view of this complex TTA arrangements and the lack of prioritizing, implementation has been diffused with each program receiving the same qualitative attention and resources. The impact of the TTA would have been far more meaningful had it been more focussed on key issues. 9. Borrower Performance 9.1 Project execution by IGLF and DBP was undertaken with remarkable efficiency. Subloans were processed on time and disbursements were made rapidly. While all indications suggest that approved subprojects will be successful, neither IGLF nor DBP had raised the issue of substantively larger than defined size of subproject approvals. 9.2 DBP's future role and operations is a subject of ongoing discussion with the Bank. The Bank, through its supervision of active projects, will be actively involved in developing DBP's future business plans. DBP sought and the Bank provided its input in the design of DBP's revised institutional development plan, as provided in the Loan Agreement. 9.3 DBP and DTI's overall implementation of the TTA components, although uneven in some aspects, has been satisfactory, considering the magnitude and scope of the TTA. The system of one-stop documentation  - 8 - centers, for example, is working successfully and proved to be popular with SMIs while the duty drawback scheme, one of the more important part of the TTA, has been delayed; only in early 1994 was some meaningful impetus been given to it. 10. Proiect Documentation and Data 10.1 DBP has complied satisfactorily with the reporting requirements under the Project, although submission of audit reports were slow. Audits of the financial statements, statement of expenditures (SOE) and the special account conducted by the Commission on Audit (COA) on IGLF and DBP have been satisfactory and all the auditor's opinion were clean. However, the 1991 audit of the SOE and the Special Account conducted by COA on DTI's implementation of the TTA component were qualified audits. The Bank-required reports were sufficient in terms of frequency and adequacy, however, the format of the reports could have been improved, enabling comparison of planned against actual subproject indicators. DBP's contribution, in the preparation of Part II of the PCR, was useful and timely. 10.2 The submission of the required audit reports for DTI's use of the SOE and the special account was problematic. The 1991 audits were 14 months overdue and the i992 and 1993 audits were not received at all. 11. Main Lessons 11.1 The substantial discrepancies between planned and actual subproject targets have shown that the ultimate credit decision in operations involving an apex arrangement, is made by the PFIs on the basis of their perception of risks and rewards. The PFIs' selective approach and clear preference for collateralized loans, and borrowers with good management, and track record, in the medium (as opposed to the small) industry, have resulted in quick disbursement of the loan and satisfactory subproject performance. 11.2 A more effective approach in the design of a TTA component should focus on key issues, rather than on a multiplicity of TTA items. The supervision and broad-based monitoring requirements of the complex TTA arrangement under the Project have dispersed staff resources and attention, and may have weakened the impact of the TTA. 11.3 To ensure loan utilization, interest rates of Bank loans should be competitive with prevailing market rates. The Project's interest rate approach, which was fully market-oriented and flexible, set a new standard for establishing interest rates based on market conditions and has been widely emulated in other Bank projects.  - 9 - PHILIPPINES FOURTH SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT (LOAN 3038-PH) PROJECT COMPLETION REPORT PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE  I  11 FOURT S~&L AD EDIT US TIES DEv ELOP~N PROJECT PROJECT COMPLETION REPORT LOAN 3038-PHI  I  13 PHIUPPINES INDUSTRIAL GUARANTEE & LOAN FUND PROJECT COMPLETION REPORT Loan No. 3038-PHI SUMMARY A. Loan Summary 1. Loan Amnount : US $ 60 million 2. Effectivity Date : May 31, 1989 3. Estimated Closing Date : December 31, 1994 Actual Closing Date October 22, 1992 4. Approvals: Total Loan Granted : 1.81 billion IGLF Portion : P1.58 billion PFI Portion : .16 billion 5. Disbursements : US $ 60.0 million equivalent to 121.58 billion in actual releases or peso generation rate of P26.32 to US $1 6. Repayment Schedule: IGLF to WS : September 1, 1994 to March 1, 2009 PFI to IGLF : September 24, 1990 to July 8, 2003 IE to PFI : September 24, 1990 to July 8, 2003 Term : Average maturity of 5.86 years inclusive of average grace period of 1.15 yrs. 7. Interest Rates: WB to IGLF : 1/2 of 1% over cost of qualified borrowings IGLF to PFI : 16.02% ave. PFI to IE : 21.11% ave.  14 PART II B. Project Summary 1. Objectives: i) To continue the provision of long term resources for long term financing needs of the SMI sector. ii) To ensure that the access of SMI firms to finance is improved by strengthening the IGLF guarantee. iii) To finance short-term pre-shipment export. 2. Credit Component : The total financing requirement of P12.81 billion was shared with the PFIs to distribute the risk. Total PFI participation amounted to R163 million or 9% of total loans instead of 10% due to 100% rediscounting of loans pertaining to retroactive financing and export credits. Since Loan No. 3038-PHI is a follow-up of three previous World Bank loans, utilizaton was skewed in favor of expansion projects. The bulk of the loan approvals representing 85% or equivalent to P12.537 billion for 370 projects were related to expansion of plant capacities. As to loan purposes, the ratio of fixed assets acquisition to working capital stood at 1:2.15. While loans extended under the export packing/production credits to exporters accumulated to only P26.5 million for 6 projects. This is only about 1.5% of total loans granted. In terms of industry size, the market niche is the medium size category with an availment of 11.44 billion against total loans granted of 11.81 billion. In short, Loan No. 3038-PHI provided funds that sustained the growth of the medium-size enterprises. 3. Guarantee Coverage : In addition to the credit facility, the guarantee scheme available, covered loans with peso value of R68.4 million representing 3.8% of total approved loans. Guarantees extended to 27 projects under the credit risk guarantee is 3 times higher than collateral short which was availed of only by 9 subloans.  15 PART 11 Measures adopted to strengthen the guarantee mechanisms were the expansion of guarantee coverage and the annual provision of an amount equivalent to the guarantee fees collected during the year plus reserve for loan losses of P5 million a year. 4. General Characteristics of Approvals: a) Preloan asset size - Average preloan size of all lEs financed under the loan was Q7.6 million. b) Loan size - Average loan size of P4.5 million. c) Employment generated - Additional 12,359 workers. d) Regional dispersal - Volumewise, 63% of the projects financed are located in NCR. Valuewise, it accounted 70 %. Projects financed outside the National Capital Region are thinly scattered all over the countryside except Regions VIII and XII. e) Industry sector - Top three availees are: appareVfootwear subsector with 18%, chemical and chemical products with 13% and metal industry with 10%. C. Project Implementation 1. Relending : As of December 31, 1992, there were 42 accredited PFIs as follows: Commercial Banks 17 Private Development Banks 7 Non-Bank Financial Inst. 9 Specialized Govemment Banks 2 Thrift/Rural Banks 7 42  16 PART II 2. Onlending : The commercial banks originated 50% of the number of subprojects and 58% of the total loan granted. Private development banks followed with 24% of the number and 29% of the total loan. Other banks ranked third with 15% of the number and 14% of the amount. Participation of rural banks is very minimal at Q41 0 thousand under the sponsorship scheme. The sponsorship program is not funded under the loan component of the credit project. 3. Project supervision Under the IGLF accrediation scheme, DBP delegated all subloan appraisal and supervision responsibilities to the PFls. Since the credit risk remained with PFIs, they were free to select their own projects for financing under the eligibility criteria. Processing time of DPP on approved PFl's subloan application was 2 to 5 working days, while PFI releases to IE averaged 6 to 7 working days. End-use verifications were conducted from representative sample equal to 20% of the projects to ensure proper utilization of loan proceeds. Priority in the conduct of project verification was guided by PFI's arrears level and renewal of accreditation statustannual reviews. 4. Status of Accounts Financed Under Loan 3038 (As of 12-31-92): PFI to DBP - Up-to-date inclusive of prepayments IE to PFI - 10% fully paid primarily due to pretermination 83% in current status 7% in arrears status  17 PART 11 5. Organization/Management Structure: The policy making authority rests on the Review Committee composed of a representative each from NEDA, DOF, UP- ISSI, DTI, CBP and DBP. The NEDA representative acts as the Chairman while the DBP representative who is the incumbent head of FIG acts as the CEO for IGLF. The two basic operational groupings are marketing and support services within DEP. Marketing includes general administration and mobilization of the fund which are handled by the Financial Institutions Group. The activities includes the institutional appraisal of accredited financial institutions and processing of loan applications. Support services consisting of servicing receivables from loan accounts and payables to the funders which is handled by the Transaction Processing Department, preparation of financial statements rendered by Accounting Dept. in coordination with Cash Dept. 6. Training: The Human Resource Center of DBP conducts training/seminars to develop the managerial skills of staff. Resource speakers come from leading business schools and well-known personalities in the business community. Account officers of FIG attended six (6) month course on packaging of loans based on the financial requirements of the business enterprise. In addition to courses on lending skills, seminars on management tools, client relationship, development banking principles, economic development and cultural value formation were also attended by FIG staff. D. Comments i) The loan proceeds ensured the continued supply of funds that assisted the growth of the SMI sector primarily those located in Metro Manila area.  18 PART 11 ii) Despite the credit support in terms of guarantee facility - sponsorship scheme and preferential rates in selected areas - availments of credit by cottage and small enterprises from the countryside were still at low levels. iii) Recent developments that will improve the marketability/eligibility features of IGLF lending program are the following: - redefinition of CSMI, issued by the Small and Medium Enterprise Development Council under Department of Trade and Industry - complementation with GFSME (Guarantee Fund for Small and Medium Enterprise) iv) On the other hand, access to credit by cottage and small entrepreneurs at R367 million against total approvals of 1i1.81 billion is insignificant considering the relaxation of interest rates, credit support from guarantee features and sponsorship scheme. The gap between the PFIs and the lEs is not only due to the availability of affordable funds in the banking sector but also to other factors related to creditworthiness of lEs and viability of projects. v) The introduction of a market-determined interest rate formulation created a destabilizing shift over the periods and invited exploitation by IEs of interest rate differences as rates vary every quarter. As a consequence, prepayment of loans granted when rates were higher are rampant from lEs with high liquidity position. Re-availments are requested when the need arises usually when interest rates are low. Similarly, the availability of OECF funds for SMEs at 2% lower than market also encourages the pretemmination of IGLF- funded loans to take advantage of interest rate variance.  19 PART II II. DETAILS A. The World Bank granted to IGLF Loan 3038-PHI under the credit component of the Fourth Small and Medium Industries Development Project. This project completion report (PCR) is undertaken in view of the full utilization of the loan. The last disbursement was made on August 31, 1992. 1/ B. Methodology. The PCR describes the utilization of the loan proceeds, accomplishment of the purposes of the loan, costing, performance by borrowers and DBP of their obligations under the loan agreement. The following steps and procedures were accomplished: 1. Prepared a listing of the 406 subprojects approved for financing together with the data on the loan, project and borrower. 2. Evaluated the actual releases to the investment enterprises against the purposes of the loan; and 3. Assessed the financial performance of a representative sample of the beneficiaries (42% of the total loans released) based on the data available after the loan release to the investment enterprises. C. Loan Evaluation 1. Availment. Withdrawal of loan proceeds was estimated to last up to December 1993. In addition, subioan releases for the 6-month period prior to the effectivity date of May 31, 1989 were allowed as retroactive financing under the loan. Actual availment period from IGLF to PFls ran a period of 3.5 years. On the other hand, the disbursement of loan from WB to the Philippine Govemment of 3.5 years matched actual availment of the loan by the PFIs. The rate of mobilization of funds almost approximated the planned disbursement although full utilization was achieved a year ahead of schedule due to the retroactive financing. The graph in Exhibit 1 showed that actual disbursement follows the slope of the planned rate. It likewise illustrated that disbursement is faster during the second semester of the year which coincides with the need of funds of the manufacturing sector to sustain investory build-up for the Christmas season. Actual withdrawal of loan proceeds from WB to Philippine Govemment and IGLF to PFls almost leveled off on two points, which were year-end 1990 and 1991. 1/ Per Bank records, the last disbursement was made October 22, 1992.  20 PART II 2. Disbursement of Funds From IGLF to PFlsIIEs Retroactive financing of up to US $6 million under the terms and standards of SMI Ill (Loan No. 2169-PHI) within six months prior to effectivity date of SMI IV (Loan No. 3038-PHI) propelled rapid disbursement to PFIs/lEs and sustained the financial assistance given to the SMI sector. Releases of IGLF funds from DBP to PFis was maintained at two to five working days, while disbursement of funds from PFIs to the lEs took six to seven days. 3. Interest rates: The pricing of loan focused on market-oriented interest rate policy. The pass- on rates to PFls were based on time deposit rates. Starting 1989 up to the first semester of 1992, interest rate formulation was based on WAIR of 6- months TOs of preceding period. It was observed that the determination of rates using historical basis did not result to responsive market rates. Effective the second semester of 1992 up to the full utilization of the loan, interest rate basis was changed to WAiR of 61-90 day TD prevailing during the 2nd week of month-end of quarter as published by CBP. Based on the above formulation, pass on rates to PRs ranged from 10% to 19.9% during the drawdown period. Spread charged by PFIs to end users ranged from 3% to 1 1%. Annex 3 gives a comparison of IGLF rates prevaifing during the implementation to selected domestic interest rates. Profiles of spreads charged by the PFis to the end users can be found in Annex 1. Generally, private development banks and thrift bank/rural banks charge higher spread to clients. From DSP side, the remaining balance of Loan No. 3038 PH transferred from C8P are direct borrowings of DBP from IGLF. Interest rates were also based on market determined pass-on rates to PFI and the withholding tax. Borrowings are documented through the Certificate of Time Deposits (CTD) instead of a Promissory Note (PN). D. Project Evaluation 1. Thrusts / Objectives The strategic mission of the credit project deals with the promotion/growth of SME sector to generate employment, enhance income distribution to alleviate poverty. The tactical approach includes the provision of loanable funds for long term needs for the acquisition of fixed assets and permanent working capital, short term needs inclusive of export packing credit, and credi support through the access of guarantee facilities built in the program. 2. Cost of Credit Project The aggregate cost of the 406 projects that availed of the loan proceeds was R2.69 billion. The cost is shared by the proponents' equity of P950 million and from borrowings of P11.81 billion. The actual debt equity ratio of 65:35 compared with the required 80:20 ratio showed higher participation of the IEs.  21 PART II The loan portion of the project cost of 1i1.81 billion is co-financed by the PFI originating the loan corresponding to a matching ratio of 9:1. About R163 million was loaned out by the PFR intended to stimulate the PFls continued interest on the project over the life of the loan. The details of the availments can be found in the list of the investment enterprises benefited by Loan 3038- PHI. Expansion projects gamered R12.54 billion of the loans granted for 370 subprojects consisting of R1.51 billion for 364 term loans, P2.07 million for 2 export packing credit loans and 124.2 million for production credit loans. Start- up projects accounted for 1494 million for 36 terrn loans. Exhibit 2 shows the distribution of the loan approvals by nature and purpose of the loans. Rediscounting at 100% from IGLF funds includes those approved under the retroactive financing, export packing credit and production credit for exporters. 3. Guarantee Facilities The guarantee support built in the credit project is available upon the request of the PFI . The salient features includes 2% guarantee fee to cover collateral deficiency, insufficient historical track record and administrative costs of credit evaluation. To strengthen the guarantee scheme, the level of coverage for the collateral short guarantee for cottage and srmall-sized firms was further improve from 25% of loan amount to 60% or 100% of the unsecured portion of the loan whichever is lower. Loans enrolled under guarantee cover represented 3.8% of total loan approvals amounting to e68.4 million. There were 27 projects admitted under the credit risk guarantee scheme while 9 projects were covered under the collateral short guarantee. Subprojects with guarantee cover can be found in Annex 1. The issue against the guarantee features is the claim procedure. Assessment made to introduce a change in the claim procedure would entail major structural adjustments in the allocation of funds, organization and legal documentation which are too costly for the lending program. 4. General characteristics of loan approvals. The loan approvals were biased to the medium size industry with a total availment of P12.44 billion versus total loan granted of R1.81 billion. Percentage-wise, this sector accounted 78% in terms of amount and 57% in relation to number of projects granted. On the other hand, small and cottage industry availed 1368 million only for 174 projects, despite the back-up credit mechanism on guarantee coverage, sponsorship scheme and preferential interest rates in selected areas. Exhibit 3 shows graphically the distribution of availments to each subsector. Preloan total asset of P3.09 billion increased to P5.78 billion after financing or 87% growth rate. Average preloan asset size of P7.6 million expanded to P14.2 million after financing. The expansion in asset size is also duplicated  22 PART II by the corresponding increase in employment from preloan level of 32,890 workers to 55,339 after financing. Average loan amounts extended were in the conservative figures of 14.5 million per loan. Due to volatile interest rates, 283 [Es preferred fixed rate as against 123 who opted for the variable rate. Spreads by PFIs ranged from 3% to 11 % with the private development banks and thrift banks in the countryside generally charging higher spreads on their clients. Average interest rate of all approvals is 16.02% from IGLF to PFI and 21.11% from PFI to IE. Processing of applications received from PFIs is prescribed for two working days if documents are in order. Including those approved by CBP processing time ranged from 2 to 5 working days while releases to PFIs averaged 6.27 calendar days. Regional Dispersal In terms of value and volume of loans, the trend is biased for NCR that availed 70% or R12.3 billion of the loanable funds. The pattem continued to favor urbanized regions such as Region l1l, IV, VII, XI, and VI. All together these regions accumulated 25% of the total approvals. The remaining 5% was absorbed by the other six regions since no project was financed in Region Vill and XII. Details of geographical distribution of loan approval can be found in Exhibit 4. - The regional distribution of loans is closely related to the economy of the locality. There appears a strong correlation in the presence of banks and loan origination. Location of banks is top heavy in the regions that actively generated SMI loans as compared to areas with no or insignificant number of SMI projects. There are 1,450 banks/branches (76% of total branches) located in top five urbanized centers and only 208 (11%) in the places with no SMI loans (last five regions). Equally important in the branching network is the focus on fund generation rather than lending which are concentrated in the head office. The behavior on regional lending is also affected by the market forces of supply and demand of projects financed. Top availees belong to the appareVfootwear, chemical products, metal industry, textiles/cordage.twine, food items, paper products which represents 68% of total approvals whose operations are heavily dependent on the availability of raw materials and market served, both of which are in the metropolis of Metro Manila, except for food products that accounts 8% only. Another disadvantaged position of the SMI sector as compared with the large industries is the access to the basic infrastnictures such as water, gas, power, telephones. These are easily integrated to the operational set-up of the large industries. These are in addition to the availability of roads and transport facilities. Sectoral Distribution Consumer goods led by the appareVfootwear subsector ranked first in the list of subprojects financed in number and amount. Intermediate goods bannered by the chemical and chemical products is second. Capital goods headed by  23 PART II the metal industry followed as third. The miscellaneous industries and other services is last. Distribution of loan approvals by industry sector is found in Exhibit 5. E. Prolect Implementation 1. Relending of IGLF DBP as a wholesale bank and administrator of IGLF does not lend directly to end-users but channels project funds through PFIs. a. Accreditation Scheme: For PFls to be able to avail of IGLF financing, they have to apply and pass DBP's accreditation criteria. Accreditation involves a detailed quantitative and qualiative evaluation of the applicant-institutions' performance. As of December 31, 1992, there were forty two (42) accredited PFIs qualified to avail of IGLF fund consisting of 17 commercial banks (KBs), 7 private development banks (PDSs), 9 non- bank financial intermnediaries (NBFls), 2 specialized govemment bank (SGBs) and 7 thrift/rural banks (RBs). List of accredited PFIs active in IGLF lending is in Annex 6. After the conduct of institutional review of PFls annually, an omnibus credit line is determined based on the rating obtained above and capital position. The credit line is good for all of the wholesale facilities available wherein IGLF is one of them. The approved credit line and number of branches of each PFI can also be found in Annex 6. The bulk of releases under loan 3038-PHI were coursed through the commercial banks which originated 58% of the amount released and 50% of the subprojects financed. In tum the non-bank financial intermediaries were at the bottom position originating only 1%. Private development banks/rural banks accounted for 24% of the total cost of subprojects and 28% of the number. The details of the loan origination can be found in Exhibit 6. Though 1,000 branches/banks are operating in the countryside, the level of lending activity is limited to identification of projects and packaging of credits are handled by the head office account management group. Some big banks have started to decentralize their special lending units. b. Sponsorship Scheme: As of December 31, 1992, there are five (5) rural banks accredied under the sponsorship scheme with total exposure of 13.89 million. Under the sponsorship scheme, accredited rural banks solicit loan applications in their territories. The loan applications are evaluated in accordance with their respective credh policies and IGLF documentary requirements. The rural banks upon approval of the applications, submit them to IGLF for evaluation and validation. IGLF then  24 PART II conducts project verification prior to approval and release of the loan. Funds released to rural banks under this scheme were funded under the counterpart component of the credit project. Credit risk under this scheme remained with the IGLF. 2. On-lending Under the accreditation status, DBP delegates all subloan appraisal and supervision responsibilities to the PFls. Since credit risk remains with the PFls, they are free to choose which projects to finance under the broad eligibility criteria. The PFI is responsible for the evaluation of the project, the financing package based on the real needs of the borrower, and the overall feasibility of the project. The appraisal follows various stages involving scanning of the industry where the project belongs. It includes marketing, technical management and financial analysis of the proposed project. A plant visit is conducted to have a first-hand view of the operation. A project evaluation report is then prepared for the approval of the Ex-Com/Board of the PFi. The project evaluation report is submitted to D8P-IGLF together with subloan application. DBP conducts a cursory review of the subloan application and do not duplicate the evaluation undertaken by the PFI. 3. Performance Representative Sample - Based on available data from 170 projects that were granted loans worth R688 million representing 38% in number and 42% in amount of total approvals, estimated sales of R3.52 billion fell short by 8% versus actual sales of P3.28 billion. Likewise, projected profit of P337 million against actual profit of 1263 million reflected 21% shortage. Estimated total sales of R3.92 billion includes projected export sales of P258 million, but actual sales figure reported totalling 23.28 billion combined the export and domestic sales generated. Recovery rate in relation to assets was down by 3% from 15% to 12%, while return on equity diminished by 7% from 30% to 23%. However, the actual rates of return were above the market rates of alternative investments in TDs and T-Bills. The list of the representative sample can be found in Annex 2. Equity grew from preloan level of 1858 million to 1.14 billion or an increase of 33%. Repayment performance of the IEs financed under Loan 3038-PHI was satisfactory despite the shortfall in estimated profits. As of December 31, 1992 only 42 accounts with total loan amount of P130 million are in arrears with 90 % of the arrearages below three months. There are 323 accounts which are in current status while the rest have paid/prepaid their account.  25 PART II F. Organizational Structure 1. Management - The Fund is owned by the National Government represented by NEDA. It is currently administered by the DSP since August 1, 1990 when its administration was transferred from CBP. A Review Committee (RC) created under the terms of the Counterpart Project Agreement No. 32. as amended, oversees the operations of the Program. This committee is composed of a representative each from NEDA, CBP, DBP, DOF, UP-ISSI with the NEDA representative as Chairman. The Head of the Financial Institutions Group of DBP acts as CEO for IGLF and ex-officio member of the Review Committee. A Technical Advisory Group (TAG) composed of selected technical personnel from the member-agencies of the RC provides staff support to the committee. The TAG is under the supervision of the CEO of IGLF. 2. Administration - The Project Management Department II, FIG-DBP directly handles the administration of IGLF, monitoring the overall profitability, efficiency and effectiveness of the Fund. The department has a personnel complement of fourteen (14) regular employees as of December 31, 1992. These regular employees are supported by eight (8) casual employees. It markets the credit and guarantee facilities of the IGLF to banks and non-bank financial institutions. They receive and process loan applications from PFis for funding and prepare and submit reports to the Review Committee and the Funders. Annex 6 is the organizational chart of PMD II -FIG showing the distribution of the personnel among the three (3) groups comprising the department. Groups 1 & 2 handle the IGLF accounts and directly liaise with PFIs availing from the Fund. Group 3 is assigned the Cottage Enterprise Finance Projects (CEFP). 3. Operation - Other units of DBP doing IGLF related functions in support of FIG- PMD II are the foilowing: a. Accreditation and Management Information Department - FIG: A department within FIG that accredits PFIs for eligibility as conduits for all wholesale lending programs. This unit also controls line availments of PFls. b. Loan Processing II - Transaction Processing Department (LP II - TPD): This unit is in charge of the liabilities servicing of IGLF with the Funders. It initiates and records the various payments to funders through the Bureau of Treasury (BT). c. LP IlIl - TPD: This unit is in charge of the accounts servicing of all funds placed with the PFls. It handles billing, receipt and application of payment to each account. d. Cash Department: This unit handles all the deposit accounts and investments of free cash resources of IGLF. It releases actual money placement to the PFIs. e. Accounting Department: This unit is primarily responsible for the general ledger of IGLF.  26 PART II G. Summary and Remarks 1. Relending of funds through the PFis was largely to medium-sized industries which gobbled 80% of the loanable funds and 57% of the projects financed. Understandably, the industry mix favoring the larger firms in the sector reaffirmed the utilization of the of the majority of the funds to expansion purposes. The loan package continued to assist the growth of manufacturing outfits which have established creditworthiness among PFRs, while access of 21 cottage entrepreneurs represented less than 1% of total amount approved. 2. The IGLF is one of the oldest special lending program in the market available to PFis through the wholesale banking mechanism. Accordingly, the performance of Loan No. 3038-PHI in matters of accreditation, availment and disbursement of funds, collection and repayment of loans were already in place. 3. Improvements of the strategies for relending of the second generation funds are as follows: a. Studied the issue of adopting a guarantee scheme to pay past due loans upon notice of default. Since a govemment sponsored guarantee institution, Guarantee Fund for Small and Medium Enterprises (GFSME) serves the same clientele of IGLF, a complementation work program was devised. A PFI can avail of a loan under IGLF and guarantee cover from GFSME under a one-stop- shop evaluation at FIG-DEP. b. The existing eligibility criteria on asset size and loan size were last redefined in 1987. To align IGLF operations with the market, Small and Medium Enterprise Development Council under DTI approved on November 26, 1992 the redefinition of cottage, small, and medium industries as follows: Micro - 1 00,000 and below Cottage - above 2100,000 - 21,000,000 Small - above R1,000,000 - R10,000,000 Medium - above R1O,000,000 - R40,000,000 IGLF promptly upgraded maximum subloan size allowable to R40 million under the accreditation scheme and R500 thousand under the sponsorship scheme subject to PFI's single borrowers limit and debttequity ratio of 80:20. c. Starting July 1993, a new formula to determine pass-on rate was implemented. The new formula used as basis WAIR of 61-90 day T-BilIs rather than TDs. The formula was revised to cover break- even cost of the fund and provide a premium for the foreign exchange risks of the longer maturity loans.  27 Page 1 Exhibit I INDUSTRIAL LOAN AND GUARANTEE FUND CUMULATIVE DISBURSEMENT OF LOAN 3038-PHI ESTIMATED VS. ACTUAL ESTIMATED ACTUAL ACTUAL BANK FISCAL WB-IGLF WB-IGLF IGLF-PFI YEAR/SEMESTER (USS MM) % (US S MM) % (PI MM) % 1988 FIRST SECOND 50 3.16% 1989 FIRST 182 11.52% SECOND 6.0 10.00% 274 17.33% 1990 FIRST 7.5 12.50% 10.0 16.59% 419 26.54% SECOND 12.3 20.50% 32.1 53.53% 872 5523% 1991 FIRST 21.5 35.83% 36.0 63.28% 1,162 73.61% SECOND 31.6 52.67% 54.4 90.71% 1,440 91.21% 1992 FIRST 42.1 70.17% 54.4 90.71% 1575 99.72% SECOND 54.6 91.00% 60.0 100.00% 1579 100.00% 1993 FIRST 57.3 95.50% SECOND 60.0 100.00% NOTE. Estimated cumulative disbursement taken from Staff Appraisal Report, SMI IV, 3115189 CUMULATIVE DISBURSEMENT ESnIMATED VERSUS ACTUAL RATE z