Colombia - Third Development Finance Companies Project

RESTRICTED Report No. P-71 1 RLE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO DE LA REPUBLICA IN COLOMBIA FOR THE THIRD DEVELOPMENT FINANCE COMPANIES PROJECT June 5, 1969  INTERNUTIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMNENDATION OF THE PRESIDENT TO THE EKECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE LA REPUBLICA IN COLOMBIA FOR THE THIRD DEVELOPMENT FINANCE COMAPNIES PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $25.0 million to Banco de la Republica, the proceeds of which are to be made available to five Colombian Private Development Finance Companies (Financieras). PART I - HISTORICAL 2. The five Financieras are the same companies that are partici- pating in Loans 451 CO and 534 CO, which were made in May 1966 and May 1968. The two larger and older of the five, Corporacion Financiera Colombiana (Colombiana) and Corporacion Financiera Nacional (Nacional) were established in Bogota in 1959 and in Medellin in 1960, respectively. The three others, Corporacion Financiera de Caldas (Caldas), Corporacion Financiera del Valle (Valle) and Corporacion Financiera del Norte (Norte) were established in Manizales in 1961, in Cali in 1962 and in Barranquilla in 1964, respectively. IFC has invested in three of the companies as follows: A $2 million convertible loan to Nacional made in 1961 and lat- er converted into commcn stock during 1961-63, a $2 million convertible loan to Colombiana made in 1961 and converted into commoni stock during 1961-62, and a $700,000 equity investment in Caldas made in 1964. IFC is currently considering an investment in Valle and in Norte of up to Col.$7.5 million each (approximately $435,ooo). IFC has also been re- quested to exercise its preemptive right in a proposed capital increase in Caldas (amounting to the equivalent of about $125,000) which it in- tends to do contingent upon Caldas raising the balance of the increase from other sources. Proposals on the investments in Valle and Norte are being submitted to IFCts Directors at the same time as this loan. 3. The private sector has suffered for many years from a short- age of medium- and long-term financing facilities. To help alleviate this situation, the Bank supported the creation of a Private Investment Fund (PIF) in 1963 within the Banco de la Republica (BR), the central bank, which was conceived as a means of inducing and facilitating a sub- stantial flow of external credits for medium- and long-term financing of productive investments in industry and agriculture. More recently, the Government has added to the flow of long-term funds for industrial deve/  -2- opment by reviving the Instituto de Fomento Industrial (IFI), a public- ly owned development finance company established in 1940, but hitherto somewhat quiescent. PIF attracted support from members of the Consult- ative Group, namely the United States, Germany, Holland and the Inter- American Bank. In May 1966, the Bank in turn participated in this effort by making a loan of $25 million (Loan 451 C0) to Banco de la Republica, to be relent to the five Financieras and to be used by them to finance the direct foreign exchange costs of investment projects in the private sector. The loan was committed in about 18 months. In May 1968, the Bank made a second loan of $12.5 million (Loan 534 CO) for the same purpose. About 40 percent of this loan was committed within six months of effectiveness, and the Financieras have approved or under study proj- ects exceeding the balance of the loan. 4. To av6id a gap in the availability of this type of financing, the Government asked the Bank to make a third loan on a basis similar to the first two loans, but adding IFI as a beneficiary along with the five Financieras. However, it was not possible to include IFI in the schedule of appraisal work already planned without delaying the loan to the five Financieras. I am therefore proposing at this time a third loan for the benefit of the five Financieras in the amount of $25 million; an appraisal of a request from IFI for a loan of about $5 million is sched- uled for the near future. Missions to Colombia appraised the proposed loan during July-December 1968, and negotiations were held in Washington during April 14-16, 1969. The Government was represented by Dr. Misael Pastrana Borrero (Ambassador in Washington), and BR by Dr. Antonio Jose Gutierrez (Assistant Manager) and Dr. Guillermo Villaveces (Director, Private Investment Fund). The Financieras were represented by Dr. Ignacio Copete (President, Colombiana), Dr. Jose Gutierrez Gomez (President, Nacional), Dr. Roberto Ocampo and Dr. Guillermo Sanint (President and Vice-President, respectively, Caldas), Dr. Benjamin Martinez (President, Valle) and Dr. Alvaro Jaramillo (President, Norte). 5. The proposed loan, which would be the thirty-seventh made to Colombia, would increase the total amount of Bank loans to Colombia to $583 million (net of cancellations). IDA has made one credit of $19.5 million for highways to Colombia. The following is a summary statement of Bank loans and IDA credits to Colombia as at April 30, 1969:  -3- Amount (US$ million) Loan Undis- No. Year Borrower Purpose Bank IDA bursed Fully disbursed 19.5 Total (less cancellations) 313.8 345 1963 Acerias Paz del Rio, S.A. Steel 30.0 2.8 369 1964 Empresas Publicas de Medellin Power 42.0 17.5 448 1966 Government Agriculture 16.7 8.4 451 1966 Banco de la Republica Industry 25.0 4.7 499 1967 Empresa Nacional de Tele- Communica- comunicaciones tions 16.0 12.2 502 1967 Instituto Colombiano de la Reforma Agraria Irrigation 9.0 8.8 534 1968 Banco de la Republica Industry 12.5 12.1 536 1968 Empresa de Acueducto y Water Alcantarillado de Bogota Supply 14.0 11.4 537 1968 Empresa de Energia Elec- Power 18.0 11.7 trica de Bogota 550 1969 Government Roads 17.2 15.3 551 1969 Ferrocarriles Nacionales Railways 18.3 18.2 552 1969 Government Education 7.6 7.6 575 1969 Interconexion Electrica, Power 18.0 18.0 S.A. Total (less cancellations) 558.1 19.5 148.7 of which has been repaid to Bank and others 114.4 Total now outstanding 443.7 Amount sold: 17.5 of which has been repaid 14.2 3.3 Total now held by Bank and IDA 440.4 19.5 Total undisbursed 148.7 148.7 6. Twenty-three loans have been completely disbursed. On the remainder, disbursements are now proceeding normally. The Executive Directors previously approved an amendment to the Loan Agreement for Loan 369 CO, under which the Loan was split into two tranches and the Closing Date was extended by two years to December 31, 1970 (R67-136). Effective January 1969, $3 million of the undisbursed balance was can- celled, and on present indications a further $4-5 million will be can- celled prior to the new Closing Date. With respect to Loan 345 CO, the Executive Directors also approved on a no-objection basis a further one- yesr extension of the Closing Date to October 31, 1969 (R68-80).  7. Together with this loan, I am submitting to the Executive Directors a proposed loan of $17 million to the Government for use by the Instituto Colombiano de la Reforma Agraria. 8. In the next few months I expect to present to the Executive Directors for approval also a loan of about $18 million to the Govern- ment for a second livestock project. 9. IFC has made twenty-seven investments and underwriting commit- ments in fourteen enterprises in Colombia totalling $14.9 million (net of cancellations). PART II - DESCRIPTION OF THE PROPO6ED LOAN 10. The main features of the proposed loan are as follows: Borrower: Banco de la Republica (Central Bank of Colombia). Guarantor: Republic of Colombia. Beneficiaries: The five Private Development Finance Companies which participated in Loans 451 CO and 534 CO (Colombiana, N4acional, Caldas, Norte, Valle). Amount: The equivalent in various currencies of $25.0 million. Purpose: The financing of development in Colombia through credits and other investments for productive purposes to privately controlled enterprises, for specific projects in ac- cordance with the Estatutos of the Finan- cieras. The Bank loan would cover the direct foreign exchange cost of the proj- ects. Amortization: In semi-annual installments, expected to begin on June 15, 1970 and end on June 15, ( 1986. Payments will be based on a com- posite amortization schedule made up of schedules of the investment projects. Terms for individual investment projects will be up to 15 years and grace periods are not expected to exceed three years. Interest Rate: 6