Document of The World Bank RETURN TO SP - REPORTS D SKI FUR OFFICIAL USE UNLY WITHIN ONE WEEK Da---- * m- I 7AA PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: THIRD AND FOURTH DFC LOANS (LOANS 625-CO and 742-CO) October 6, 1977 Operations Evaluation Department 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 Rank juatharltinn FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: THIRD AND FOURTH DFC LOANS (LOANS 625-CO and 742-CO) TABLE OF CONTENTS Pave No. Preface Basic Data Sheet Highlights PRO.TECT PERFORMANFE AIDTT MEMORANTDUM 1 Characteristics off Sub-prOjectS Financed I'- Operations of the Financieras 3 Institutional Objectives 3- 5 Design of the Loans 6 T Tt.. T2. - II. Objectives and Expectations of the Bank A.2 - A.3 III. Utilization of the Loan Proceeds A.3 - Commitment and Disbursement A-3 - A.4 Subprojects Financed Under the Loans A.4 - A.9 IV. Institution Building A.9 - A.11 Financial Performance A.11- A.15 The Role of Banco de la Republica (BR) A.15- A.16 V. Resource Mobilization and Capital Market Development A.16- A.ZU VT_ rnnl iminn A_qn_ A-99 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. Page No. An e e : T. r IT . =nu i') t'c m I1' e ts'T_f_ A '3) _L. '~1, i L L UU-1. LAJd.IL UL J .o% ad /L-+ ti4 . U II. Projected and Actual Disbursements - Loan 742-CO and 625-CO A.24 III. Summary of Operations as of December 31, 1975 A.25 IV. Analysis of Subloans Extended by the Five Financieras from the Proceeds of Loan 625-CO and 742-CO A.26 V. Sectoral Distribution of the Financieras Lending Under Loan 625-GO and 742-CO Compared to Total Financiera's Loan Portfolio (1974) and Gross Value Added in Manufacturing (1969) (in percentages) A.27 VI. Subprojects Financed Under Loans 625-GO and 7/4)9 '01 I"oIo.bia- A. )W - Nacional A.29 - Valle A.30 - Norte A.31 VII. Projected and Actual Rates of Growth of Five Financieras A.33 17YTTY * . - A 11 I * 1 L - - a VII. Comparison of Amounts Actually Committed by Each Financiera After Pooling Arrangements with Amounts initiated by Each Financiera as Leader A.34 IX. Colombian Financieras and Banco Republica: Growth of Professional Personnel A.35 X. Source of Resources Utilized by the Five Financieras as a Group, 1970-1975 A.36 XI. Source of Resources Utilized by the Financieras, 1970-1975 A. 37 XII. Financial Statement - CF Colombiana A.38 - CF Nacional A.39 - CF del Valle A.40 01 CF de Norte A."1 - CF de Caldas A.42 XIII. Reconstruction of Caldas A.43 - A.48 PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: THIRD AND FOURTH DFC LOANS (TA()ANT C 625 - CA and 79-CO) PREFACE The Bank approved two loans, one of US$25 million in June 1969 and one of US$40 million in May 1971, to Banco de la Republica (bR) for on-lending to five private financieras in Colombia. The present report is the second OED report on DFC loans to Colombia, the first (becM/4-/US) having dealt with the first two DFC loans to BR. It is based on file research, discussions with the Bank statt and on the attached Project Completion Report, prepared by the Latin America and the Caribbean Regional Office, which is comprehensive and competent. The Audit Memo- randum limits itself mainly to supplementary comment on the problem of mobilizing resources in an inflationary situation and suggests an extension of the system of DFC lending initiated in Colombia. PROJECT PERTORMANCE AUDIT REPORT COLOMBIA: THIRD AND FOURTH DFC LOANS (LOANS 625-CO and 742-CO) BASIC DATA SHEET Amounts (in US$ m1) As of 8/31/77 Original Disbursed Cancelled Repaid Outstanding -a1n 625=CO 25.0 24.9 0*1 94 15.5 Loan 742-CO 40.0 39.5 0.5 9.2 30.3 Project Data OrAgiual ial E__u___ust_o. Actual Loan b25-CO Loan 172-CO Loan 625-Co Loan 742-CO Conception in Bank 7/68 6/70 7/68 6/70 Board Approval 6/69 4171 6/19/69 l?/2/71 Loan Agreement 6/27/69 5/28/71 Effectiveness 9/26/69 8/26/71 9/26/69 10/27/71 Loan Cning 9130/72 12/31/74 9174 6/76 Mission Data No. of Month, Year Persons Manweeks Date of Report Loan 625 Loan 742 625 742 625 742 Loan 625 Loan 742 Appraisal 10/6-12/8 71/- A 2 * 1 o.v J .l Supervision I 9/70-/ 6/73 3 1 18.0 2.0 4/30/71 6/22/73 Supervision II 7/713-/ 12/73-1/74 1 2 2.0 2.0 - 1/11/74 Supervision TTT 6173 5/74 1 9 0 M /99173 5/17/74 Supervision IV 12/73-1/74 11/74 2 2 2.0 5.0 1/11/74 12/27/74 Supervision V 5/74 5/75--' 1 6 0.5 15.0 5/17/74 1/23/76 Sunervisinn VT 11174 R/76 4/ 9 4 5.0 8.0 12/27/74 12120/76 3/ Supervision VII 5/75- 6 15.0 1/23/76 AI Supervision VIII 8/76-' 4 8.0 12/20/76 Follow-on Project Loan 903-CO of US$60.0 million, signed 6/11/73 for Fifth Dev. Finance Company Project. 1/ With appraisal of 742-CO, and supervision of other financiera loans 2/ Caldas only 3/ With appraisal of 903-CO, and supervision of other financiera loans 4/ Final Project Completion Mission with 742-CO and 842-CO 5/ With supervision of all financiers loans PROJECT PERFORMANCE AUDIT REPORT COLOMBIA: THIRD AND FOURTH DFC LOANS (LOANS 625-CO and 742-CO) HIGHLIGHTS This audit of performance relates to Loan 625-CO for US$25 million and Loan 742-CO for US$40 million to Banco de la Republica for on-lending to private financieras in Colombia. The audit finds that the two loans helped to finance a divtr.P arniin nf mpediiim and medium-anrge inAstrial nrniets in CnlnmbIa The Bank's objectives of transferring resources for Colombia's indus- trial growth and of imprnriu cy theo -ntiuioa 41p4ilt4- o f-the financieras for appraisal and supervision were reached. The loan helped evolve a- design for such operations whichL prmie to--- be usefu in other DFC lending in similar country situations. The Bank had less success in its effort to encourage mobiliza- tion of resources on the market by the financieras ana promoting develop- ment of the capital market through bond issues to the public and equity investment in companies. The reasons lay primarily in the highly restrictive financial environment in which the DFCs functioned. Sub- sequent reforms in the system nave consideraDly improved the prospects for the financieras. Another noteworthy point is: - the Bank's role in helping re-organize one of the financie- ras (para. 8 of the PPAM and para. 417 and Annex XIII of the PCR). PROJECT PERFORMANCE AUDIT MEMORANDUM CULUMIA; THIRU ANU FUURT' UFC LUAN (LOANS 625-CO and 742-CO) 1. This is an audit of performance under two loans, Loan 625-CO for US$25 million approved in June 1969 and Loan 742-CO for US$40 million approved in May 1971, to Banco de la Republica (BR), for five private development finance companies (financieras) in Colombia. Since then, the Bank has approved to BR four further loans. Loan 903-CO for US$60 million in May 1973 and Loan 1223-CO for US$80 million in March 1976 were made for the same five and several other financieras. The other two, Loan 1071-CO for US$5.5 million in January 1975 and a second loan for US$15 million in June 1977, were both made for use by Corporacion Financiera Popular (CFP), an institution specializing in lending to small-scale industry. 2. An audit report on the first two loans (SecM74-709) was pre- pared and distributed to the Board in October 1974. The present Memo- randum, besides examining the use of funds under the two loans, deals with the Bank strategy for DFC lending in Colombia. 3. The period covered by the review was marked by unusual changes in currency values in Colombia, as part of world-wide trends in inflation and exchange rate fluctuations. Over the period 1970-75, the rate of inflation in Colombia was 16.5% per annum, and the Colombian peso depre- ciated li per annum in relation to the US dollar (and more in relation to some other currencies like the DM and the yen). As a result, it is difficult to rplate meaninafully nrtiial nnprntinnn (YnrPqQd in r11rrPnt peso terms) to projections made at the time of loans. An attempt has been made to deflate the figurpn (by reference to a aneral price index) to arrive at operations in constant terms. However, it is necessary, in internretina the ficyurpq qnd thsir imnliqtinn, te hanr in mind th. changing value of the Colombian peso and the fact that any deflator used cannot fully account fo%r suc h changes inluep wIthin the snpcfic co^ntext of the operations being interpreted and analyzed. Characteristics of Sub-projects,Financed 4. In all, 118 sub-projects were financed out of the Bank funds, under. the~ two lons 48 u,nder Lan 6-25-0-0 andu 70 une loaU n 742OL "l ~. .1Ie characteristics of the sub-loans (vide paras. 3.03 - 3.24 of the PCR) are 'a/ I[te average size of tne sub-loan was about uLa 7,Vu, with the sub-loans being marginally smaller under Loan OLD-UU. U the 110 suD-loans, 72 sub-loans were above - 2 - tue free 1imit, requIring prior Bank appurval. Lmlil y- five sub-loans were for expansion and modernization, 13 for new product lines, ana Lo ror new enterprises. Seventy-three of the 118 firms receiving Bank funds had more than 200 employees each; a3 or tne 110 11rms had assets exceeding Col$100 million. (b) About 73% of Bank funds disbursed went to three industry- groups: textiles and apparel (40.57.), non-metallic minerals (18.9%) and food and tobacco (13.4%). About 92% of Bank funds were disbursed for sub-projects in four provinces: Antioquia (38.2%), Valle (27.2%), Atlantico (14.7%) and Cundinamarca (12.4%). (c) The appraisal report on Loan 625-CO (Report No. DB-48a) had referred to the fact that the financieras had been "stretch- ing the duration of loans made with Bank funds towards the maximum allowed term of 15 years" (para. 33). In response, the financieras, after substantial prodding by BR, reduced the maturities of sub-loans, only 62.3% of the amount under Loan 625-CO and 37.7% under Loan 742-CO having maturities of 12 years or more (para. 3.12 of the PCR). (d) Of 108 sub-projects which had commenced operations at the time of the PCR, those accounting for half the Bank lendina earned a return on equity above 20% and 9 made losses in 1975. Though the financieras were not required to calculate the economic rate of return on the sub-projects and no sophisticated economic tests were applied, ex ante, to determine the choice of sub-nroiects for financing. ex post analysis showed good economic merits for the sub- nrnipertq!a qncial Rtudv (Bank Renort 1037-CO) showed that a sample of sub-projects financed out of the two loans had an average economic rate of return of 38 (as against an opportunity cost of capital variously estimated t h 10 to 18R' in rn1%mbin_ Tn 1979 Pynorts of 48 firms financed out of the two Bank loans amounted to two- sector. The average fixed investment per direct job created under the loans was of a medium/medium-large size, located in a developed region, ana was unuertaken, as an expansiun, by an exIs e p n a traditional industry. It had a satisfactory financial return and a high economic return. it, therefore, made an important cUntiutUn tV the efficient expansion of the industrial sector in Colombia. Operations of the Financieras 6. The two loans were made available to the financieras for their individual projects and for projects jointly financed by them. An examina- tion of data in Annex VIII of the PCR shows that under Loan 625-CO Nacional alone initiated projects as leader for joint financing, while under Loan 742-CO Nacional, Norte and Valle initiated projects for financing under joint financing arrangements. On balance, pooling was a positive develop- ment, enabling joint financing of large projects and introducing flexi- bility in such financing. One impact of joint financing was to even out the final distribution of Bank funds among the financieras, as Annex VIII shows. At the same time, by raising the level of their loan operations, the arrangement has tended to push the smaller financieras, Norte in particular, against their debt-equity limits agreed upon with the Bank. 7. The growth of the financieras' portfolio, at 20.5% per annum in nominal terms, exceeded projected growth, but was, in real terms, 4.5% per annum lower. So also, while profitability was satisfactory in nominal terms for all the financieras except Caldas, the return on their equity was marginal when allowance is made for inflation. 8. Caldas was the only financiera which ran into financial diffi- culties. Its financial position was shaky at the time of the appraisal of the fourth loan (Loan 742-CO) by the Bank, mainly because of a poor port- folio and over-exposure in equity. As a result, the Bank did not provide any free limit to Caldas, made its access to Bank funds subject to comoliance with a series of stringent conditions. and suggested arrange- ments be made to reorganize Caldas, its management changed, losses writtpn nff- and nrnviqinn tM indiet Additional Pniiitv intrnduticpd. Whilp several of these changes will take time to produce their full impact, the progress made ton date (a ranrta in Annalriva YTTT nf the PrR) has hen substantial. Institutional Objectives 9. The Bank's institutional objectives and expectations relating to the financiera8 .re at thr 14ffa-rnt lvals* (a) The Rank xrected to fill the gap in foreign exchange resources for the industrial sector. (I,) The Bnk set modest local curnc1-4Ia1o bectives for the financieras. (c) The Bank expected to improve the capabilities of the . LLCLL & 0 jJC & L L. L &f Lt .* SAo 'J. appraisaQ lt n- 1JC su e vison~ of projects, their staff, management and organization, thus building them up LU / .UHH J W LUlf LUillLLLCU Uy VLLUL 1%/L, L U is, within 39 months of approval, and Loan 742-CO by June 1973, that is, within ZJ MonUs 01 ILS appLovil. IU L loan met a L.L ne1u 01 I L LInUuL I1 sector. 1i. (b) The performance of the financieras in mobilization of resources has to be appreciated in the context of the inflationary situation which prevailed in Colombia during the period under review. The financieras are engaged in short, medium and long-term financing. Their main sources of finance, besides their own equity, have been short-term deposits and borrowing from foreign commercial banks, BR and the World Bank. 12. When Loans 625-CO and 742-CO were made, real rates of interest were high in Colombia. However, during the latter part of the period covered by this report, particularly in and after 1972, inflation surged in Colombia. With a rate of interest which was lagging behind the rate of inflation in the early seventies, the ability of borrowers, including financial intermediaries, to raise resources on the market was limited. In this context, the Bank sought to introduce into the institutional ststem prevailing in Colombia, particularly in connection with the Program Loan (Loan 842-CO) and the fifth loan (Loan 903-CO) to the financieras. some techniques of inflation accounting. by encouraging linking of interest rates to movements in prices and by inducing financial intermediaries to seek a real return on their opera- tions and equity. 13. An effort was made in 1972 and 1973, at the time Loan 903-CO was under discussion, to enable the financieran to rais thpir own medium-term resources on the market (para. 5.09 of the PCR). This effort hnd the Aiunort of BR And tha ArrAnnapment Involved catting up a stabilization fund, to increase confidence among the buyers of the hondq hv naaurinc tham lintiity thraeh vahhaa he tlhe f,snfq. Thi. experiment was an initial success in the sense that the bonds were aiiharriharl fitll1y at the time of 4-su. Hoee,soon after the issues were made, the rate of inflation accelerated, and the fixed interest offered onthe bonsA wasnotl.JL adequteU L o cove t-h&=eLIU priC i tac. A- result, not only was there pressure from the buyers to sell off their I,n UoA~ ng Ilu the njea were- -- --- v ut vuL Lu L L WLLLUL aUIC LU I LCCKt LILC CAL illilL in subsequent years. 14. The Bank has been engaged in a dialogue on the rate of interest adlu Lile 11Hanidl system in Colombia in an inflationary situaton. now- ever, this had had little impact on the resources mobilization efforts of tne financieras during the period covered by this memorandum. The main sources of funds for the financieras remained their own equity, short-term deposits, and borrowings from BR, foreign commercial banks and the Bank. The five financieras raised equity of a larger amount, in money terms, than projected under the two loans; however, the rate of growth of equity (14.5% per annum) was lower than the rate of inflation. 15. The financieras' overall investment in equity, as a proportion of their total portfolio declined, though the relative performance of the financieras in this field varied (para. 4.05 of the PCR). The financieras, with Bank persuasion, had agreed under the second loan (Loan 534-CO), to add an equity feature to their loans. The appraisal of Loan 6Z-CO (para. 9) had referred to limited resort to equity by corporate enter- prises. The Bank's advice to the financieras to attach equity features to their loans, appears to have been given both as a means of developing the capital market and as a hedge against inflation. This advice appears not to have been taken by the financieras; the return on equity, even allowing for capital gains, was lower than the rate of inflation (or the rate of interest the financieras could have earned by direct lending), and in the case of Caldas, investment in equity proved hazardous (for this, among other reasons) to its viability. 16. Overall, therefore, the Bank's efforts in encouraging mobilization of resources on the market by the financieras and promoting development of capital market through bond issues to the public and equity investment in companies did not meet with success. The main impact of these Bank efforts appears to have been to initiate a dialogue on these issues, particularly on interest rate and taxation problems, in the context of rapidly rising price levels, and thus to induce the Colombian authorities to recognize the problem and take measures to meet the situation. 17. (c) The appraisal report on the Fourth loan (para. 5.13) had rpferred tn the inAdpnuAev of follow-un and the need. narticularly for Caldas, to improve its supervision effort. Progress was made in under- taking mor avtematic nunervision - and relying Inan on informal svtems of obtaining follow-up information. Instead of a comprehensive supervision syste, t-he fi,v.onancea appaenotly, cared-,ou t f-linw-iitin.,v ne-tiviriane-in A selective basis, concentrating their supervision effort either on large up effort was not comprehensive nor geared to the composition of the ;_ PL L.L A. t.J .5 . ight. L US h ve bee anOfl O I %LS . I55. U0 s . t*, fn . . . . . case of Caldas, in its not being forewarned about its portfolio difficulties. .L appea s ViU, par. V L..J OL LAs e ICE/ Lat tun tUvcmIuL Ass ssf m reflected more an effort on the part of the financieras to meet Bank comments anu was relateu preuomuantly to Bank anu 0MRfiuanced uperatons, anU represented much smaller financiera-wide impact in their other operations. Iue Banka Impact in tuis area was varieu as etween fianciera, Ue-in the least in the case of Nacional. The financieras also recorded an limpr-ovemuent inf their internal reportinlg and control proceures. 18. Overall, the Bank was generally successful in reaching the objectives and expectations it had in making the two loans to the finan- cieras. Where it did not appear to be successful, as in mobilizing long- term resources and in developing the capital market, it was for reasons beyond the control of the Bank and the financieras. The association of the financieras with the Bank was beneficial to them in their institutional development. - 6 - Design of the Loans to Colombia and new to DFC lending, and it deserves further comment. Lale main avantag U L UCtLsgn - Using a centLLa aULULA. LU aLtUhOiyo funds to DFCs in a country - lay in the fact that it enabled the Bank to reach a Larger numuer eL ur%1U WILL a given aMounL UL LLIMUnGLaL resources and to create a (more) competitive environment for DFC opera- tions. 2u. Under the system the Bank itself appraised the individual financieras to be made aligible under the loans, defined its objectives in relation to them and had to approve sub-projects above the free limits. BR acted only as a conduit for Bank funds. 21. The Bank began examining the possibility of extending the system. Under the fifth loan (Loan 903-CO) approved in may 1973, two more finan- cieras were given access to Bank funds and BR was empowered to appraise additional financieras and approve their sub-projects above the free limit (para. 4.03, Report 9.Ola-CO) under its overall guidance. 22. The design, adopted in Colombia, has, in terms of institution- building among DFCs and for utilizing Bank staff capability for innovative industrial financing, great potential in countries which are large and have a substantial and competitive industrial and financial sector. The Bank can consider generalizing the use of the design in other DFC lending. Summing_Up 23. Overall, within the restricted horizon set by the Bank and the context in which these operations were undertaken, the loans succeeded in reaching most of the objectives and expectations set at the time of their approval. The financieras' failure to mobilize resources for their long- term operations stemmed from a relationship between the interest rate structure and the price situation, over which they had little control. The Bank's efforts in dealing with this problem were of an experimental. innovative character which needed time to work out. The design of the Bank's DFC lending to Colombia- whinh initiillv cvrn d fiv-p nrivatelv- owned financieras, remained the same in respect of the two loans under review- onwevePr, mnr innncie ra have, ben mnAe eligile for acnes to- Bank funds under the two subsequent private financiera loans in Colombia. Tlip M7Prn&1l A-~c-fan nf lo jin tn- TYPra i- rnl n1v-%ih a ins t- ,-4 4-o institutional and innovative implications, has now evolved satisfactorily. Operations Evaluation Department - A.1 - PROJECT COMPLETION REPORT ON MUTUn AKjn WnTTD'rH CATAMBTAN nPC T.OANS (LOANS 625-CO AND 742-CO) SrmnlnrrlImlTal I. RL"UUUULLULT 1.01 The Bank Group has been associated with the Colombian private 1959 and the early 1960s, and has developed close working relationships wL ULL LLl 1. -L.VLv .oldest ani L argest L .L iLLL_.CLC 0 OUt. .LCL UI~C .-. ~ 5..-L.LLUL-1= V have participated in six Bank DFC loans totaling US$242.5 million. This c CpiLLUll LtULL L=V±tWb L11C LLILLU LUei1 LULJUU} UL U0qLJ LUiLJ..LUIL, LPPLUVMu in June 1969, and the fourth loan (742-CO) of US$40 million, approved in May 17/1. Because the impact and effectiveness of the financieras operations have been influenced by the prior and subsequent loans, this report does not focuss only on the results of the two loans under review, but rather examines the developments that have taken place in the operations of the financieras and in the strategy of the Bank during the disbursement period of the two loans, i.e., 1970-1975. 1.02 The Colombian private financieras were established to provide longer- term financing, both debt and equity, to private productive enter- prises--mainly in the industrial sector. The oldest and largest financiera, Colombiana, came into operation in Bogot& in 1959. Between 1959 and 1964 four other financieras Nacional, Valle, Caldas and Norte, were set up in each of Colombia's main industrial-commercial regions. If Since then, ten more financieras have been established of which two participated for the first time in the Fifth Bank Loan, and a further four are expected to participate in the Sixth Loan. 1.03 Bank Group assistance to the financieras started with IFC equity investments in Colombiana and Nacional in 1961, and in each of the other three older financieras shortly thereafter. The first Bank DFC loan of US$25 million to Colombia was signed in 1966. The loan was made to Banco de la Rep5blica (BR), Colombia's Central Bank, for on lending to the five older financieras, with each of which the Bank maintained a direct supervisory relationship. BR's role was primarily administrative, but its Department of Development Credit had the responsibility for vetting the economic priority of the financiera's investment proposals. In addition, BR was prepared to cover, for a fee, the foreign exchange risk on Bank financed sub- loans, for any subborrower wishing to exercise this option. 1.04 Since the mid-sixties the operations of the five financieras have grown rapidly and they are now the most important source of term credit for private industry. Overall it is estimated that the projects they help to finance represent about one quarter of total investment in fixed assets by private industrial corporations. In addition, they provide working capital loans to their clients, promote and provide seed capital to new ventures, and fnRtr Pfficipnt rePnqurce a11ncation thronh their involvement in Droiect preparation, appraisal and implementation. 1/ The shares of the five older financieras are fairly widely held, but local and foreign commercial banks, insurance companies, and, to a lesser extent, industrial companies are their more important shareholders. - A.2 - 1.05 The operations of the financieras have been examined in the past in two OED studies, both of which were carried out too late to significantly influence the design of the third and fourth financiera loans. The 1971 OED study of overall Bank lending to Colombia pointed out that a high proportion of financiera lending had gone to a relatively small number of large manufacturing enterprises and raised some doubts about the economic efficiency of this heavy concentration of lending. The OED Performance Audit of the first and second financiera loans, produced in 1974, examined the operations of the financieras in more detail. It concluded that the financieras had been an effective mechanism for allocating and channeling resources to medium-sized and large enterprises, but questioned the cost-effectiveness of the Bank's approach, which under these two loans focussed heavily on institutional building in each of the five financieras. The report suggested that it might have been more effective in the lone run for the Bank to have devoted less attention to the individual financieras and to have devoted a grepater propo,rtin of its~ efforts~ to broader isqueiip of idiiqfrinl nnlirv and capital market development. In practice, the Bank had already started to modify its annroach under the fourth loan, and in suheont financirn loans has carried this process much further. T ARBTETTIVc ANTD YXPECTATTON OF THE BANY 2.01 The Bank's main objectives in making the third and fourth loans were basically similar and reflected the normal objectives and concerns of Bank lending to DFCs at that time. Primarily the Bank sought to fill a gap in the availability of foreign exchange resources to the financieras, and to continue building the financieras into sound and effective term-lending institutions that could make progressively greater contributions to the development of the industrial sector and financial system in Colombia. 2.02 The Bank expected to achieve some improvements in the financial policies and portfolio management of the financieras, particularly Caldas and Colombiana whose financial situations were causing some concern. The financieras were also expected to continue to improve their appraisal techniques particularly with regard to the technical, marketing and economic aspects. In addition, it was expected that the financieras would take steps to strengthen their managements and Rtaffq and to iinqradp and achipve a greater uniformity in their internal procedures. 2.03 The Bank's expectations regarding the mobilization of local resources the heavy governmental control and regulation of the financial system. It waso pe th2JCL iatI., as a resu....lLt of 26C suggestio bing mLL adeC Liy th- V-Sa,r., L.IC L Colombian Government that assumed office in 1970, would adopt policies more LUv LU LIL LJLLaOLLLCC, L I-U h resurce. miilizLation efts. 2.4 Loan o_)-C0 containea tne type of conditions relating to free imis, debt-equity ratios, etc., that were standard for DFC loans made at that time. In addition, understandings were reached with the financieras on tne detaileU steps that each would take to address particular shortcomings identified by the Bank. Lcan 742-CO contained three important additions. Virst, access to the loan by Caldas, which had experienced a severe financial crisis in 1970, was made contingent upon the results or a special review, tO De UndertaKen aL - A.3 - or about the time of loan effectiveness, of the progress made by the financiera in carrying out a number of steps designed to improve its short term liquidity and protect its longer term solvency. Second, an upper limit of US$4 million was set for the amount of Bank financing that could be used in any one sub- project in order to avoid an excessive concentration of Bank resources and to encourage those sponsoring large subprojects to seek alternative sources of finance, such as IFC, Third, in line with the Government's increased emphasis on the expansion of manufactured exports, the financieras were asked to analyze more fully the international competitiveness of the projects they were financing, and to calculate the effective rate of protection for all proiects requiring more than US$250,000 of Bank financine. 2.05 As will he shown in the following, these ohiectives and ernrations have, to a large extent, been achieved. The financieras have grown into stronger and more mature finnnnial inctit-iit-ion with whih the Bank 1nl work in a more flexible and sophisticated manner in later loans to achieve more specific Pr'nnmir nhiaitrac- rninmMm"n ina7~ am-.-d%ccf2i1 i, t-n-nonliitinc and improving its portfolio quality and reserves which had concerned the Bank durng he ate196s,and Caldas had slowly, bu F-5&es~l ----d its_F- financial soundness, and is no longer in danger of financial collapse. III. UTILIZATION OF THE LOAY PRCCEEDS Commitment and Disbursement 3.01 Both the third and fourth Financiera Loans were committed rapidly. Loan 625-CO for US$25 million was approved in June 1969 and became effective in September of that year. By September of the following year almost 80% of the loan proceeds had been committed to subprojects. Due to some cancellations and delays in loan processing durine the followine year the loan was not fully committed by September 1971, the original terminal date for submission of sub- proiects (Annex I). This date was extended in two qenaq to nrroher 1q7? rn allow full commitment. Disbursements also proceeded rapidly, and almost 90% of disbursements were, in fact, made prior to Sentember 1972 the initial closing date. However, due to the late commitment of Bank funds to a few subDroiects and unexnected delays in the imnlAmentartion of four larve guh- projects, the closing date was extended until July 1974 to complete disburse- ments (Anner TT) 3.02 he fnanceras pplid foa fourth loan- in mnid-0,niem th following effectiveness of the third loan. This US$40 million loan was ~nnrniTa~7A 4n Mni 1Q71 nd A ,,O,-.n. 07 T,.,..t-; 4. r- me in _j 19,1 n - eae efc i- n O tb r 9 1. Durin th frs three months after effectiveness, nearly 54% of the loan proceeds were o-_ i t eUJL d.* ..4 Nine mon+-' _-4et4- _ -.vLuO - ca - t -U~ -t -L ui-u CIMu _1P C_ _O committed (Annex I). The main reasons were a large backlog of subprojects unu GLuan CA%CALCU UCMdUy LU U.LHI LI LL LLUI £HLLUtabe -I LLO cost of capital in Colombia, which made the 18.75% relending rate, although pusitive n real terms, relatively attractive. Also.the mechanism proposeu for allocating the loan proceeds between the different financieras may have encouraged accelerated commitment. Of the proposed USz4U million loan, USS20 million would be automatically allocated to the five financieras (US$4 million each). The remaining US$20 million would be used for joint projects or by individual financieras on a first-come-first-served basis, - A.4 - after its initial US$4 million allocation was exhausted. Given the relative attractiveness of Bank funds the financieras rushed to present subprojects attempting to channel to their clients the largest possible share of the loan proceeds. The loan was almost fully committed by the target date of June 30, 1973. Nearly 91% of the funds were disbursed by December 31, 1974, the initially agreed closing date. However, because of delivery delays for some equipment, the closing date was extended twice and the loan was finally closed on June 30, 1976 (Annex II). Subprojects Financed Under the Loans 3.03 The US$65.3 million disbursed under the two loans under review (after cancellations of IS80.7 million) were snread in amounts ranging between about US$30,000 and US$4 million, among a total of 118 subprojects, 48 under lnan 629-rO nnd 70 undpr 1nAn 749-C (Annex TTT)- Tnapthpr- these nrniprtq accounted probably for 20 to 25% of the total fixed investment in manufacturing h cornporations (Sociedade Annnimas) in Colnmia during 1970-1973 with TRRD funds accounting for about 8% and the remainder being financed from other sources, most 4,,portantl-r retaine -4-,g ndA other UP lines 1/ nee IV and V provide details on each of the subporjects, the major characteristics 3o0Size ofa Companies Financed. lost of the companies financed weLr large or medium sized in the Colombian context. About 62% of the firms icuivngDanu, funus 1auA more LUa- n aucn e ate ^ ^rm ULAvn -- vv L~L ~ " r, L U6.I £U L L~a U RL L116CLI %% --LU'.%)U= CL ILI1 L.LLLL JL .. Ll ajJjL%.JVa.L, 14% had between 100-200 employees; 17% less than 100; about 7% were new enterprises. NearLy OL/ U IDE Lunu were uLbuurseu to firms witL 2u employees or more at the time of loan application, compared to 78% under the 1 . - 1 ^ - - -- I - -- - If~ A I I - - - - - irst two loans. Enterprises witn uu or more employees in 1i1/ilizL accounRed for only 7% of the total number of manufacturing establishments, but were responsioe ror uuf or total manufacturing employment, o3k or value added and nearly 80% of gross investment. 3.05 A similar situation is apparent if firm sizes are classified according to assets rather than employment. About 55.5% of the total funds disbursed under loan 625-CO and 72.1% under loan 742-CO were borrowed by firms with total assets in excess of Col$100 million at the time of loan approval (approximately US$5 million). About 37.7% of funds under loan 625-CO and 17.6% under loan 742-CO were disbursed to firms with total assets of Col$20 million to 100 million. Only 7.2% of loan 625-CO and 10.3% of loan 742-CO were borrowed by smaller enterprises with total assets of less than Col$20 million (approximately US$1 million) (Annex IV). 3.06 The predominance of large enterprises among borrowers was also a characteristic of the first two financiera loans. This concentration in financing the larger enterprises also characterized the financieras' overall lending activities. The financieras have access to the IFF 2/ funds which are utilized for extending loans to small and medium scale industries. However, as of December 1974, those funds represented only about 2.5% of the financieras total loan portfolio, partly because commercial banks and Corporaci6n Financiera 1/ Mission estimates based on information from National Accounts and Study by S. 1. Perez de Brigard, Analysis del Financiamiento Industrial, Universidad de los Andes, 1975. 2/ anc deltrial Financing Fund ( F)o s sas ecial purpose fund admini ered ry ! anco de la Repdiblica that rediscounts loans TnaLc-c to snall industrial enterprises bll rimmo%rf'1 1 binnlc n finnnr-ier., - A.5 - PopuJJIlLar .1 a puli seto jJU± C institLution specializ.ing JinL fcingL s1Jalil industry, have competed for the limited resources of the IFF. 3.07 The reasons for the financieras concentration on larger companiei are several. The financieras, unlike the commercial banks, do not have extensive branch networks, and thus have less opportunities to enter into direct contact with smaller firms. In addition they do not have the institutional infrastructure to deal with a large number of clients. Fixrd spreads between borrowing and lending rates for most of their funds have encouraged them to orient their lending activities towards the larger firms where credit risks are considered to be lower. In addition, dealing with larger clients and relatively large loans has enabled the financieras to maintain relatively low administrative costs and to benefit in their appraisal and supervision activities from the managerial competence and technical know- how of their clients. Moreover, the larger firms find it easier to supply and compile the detailed information required by the financieras for their evaluation of subprojects. 3.08 After 1970, the Bank became increasingly concerned with the relatively high proportion of Bank lending that was going to large firms. The fourth loan included a (US$4 million) limitation on the amount of Bank funds that could be utilized to finance any single project. The main objective of this limitation was to spread the utilization of Bank funds and encourage private firms with large projects to investigate alternative source of finance, particularly IFC. In practice, the inclusion of this limit does not seem to have changed significantly the size distribution of financiera lending. The extent to which borrowing applications for more than US$4 million would have teen presented without this maximum limitation is difficult to determine, however. The financieras, operating as a pool, have financed projects above this limit on several occasions. TFC did not finanrp nroiPntR in Cnlm+i; during 1971-1973- when the 742-CO funds were committed, but has become more active since. 3.09 Under the subsequent fifth and sixth loans, additional arrangements were included to ensure agreater dispersion of Bank funds anda to ne 1g the financieras to lend to smaller firms. In the fifth loan, an upper limit of US$4 million wa sRt hnth for thP Qi7p of any _ihlnnn (lik iindpr 742-C0) and for the aggregate amount of Bank funds that could be outstanding to any one firm or group of fj-Ma. T ic limit 0 anonraod fi-rms thatnf had already reciveid Bnkl finnnring to utilize other sources of finance. However, the size distribution of financiera lending did not change significantly.* Under the slxth loan, the option for enterprises to borrow Bank funds in pesos was restricted to firms with total assets of less than Col$10Q0 million. or to those financing expor orinutr- decentralization projects. In addition, the financieras could increase their administrative costs or higher risk. A separate Bank project was prepared .9 vUVLLL6 UrE WhiLUii~C 11 bF_U_aL. LL h:LU.Li1r LU "hLLL LL wJ WiLI 1 IIL Coi$35 million in total assets. A first loan for CFP was approved in late 1974 cnuU a VoLLOW-Up upeUaLiLon is IUW Deug cULSIUeLU.x 3.1U Sectoral GistrlDution. 18e Gistriution Dy 1UGUStrial sUsecLUL of the subprojects financed under both loans is shown in Annexes IV and V. nle subprojects in many different subsectors were financed, textile and apparel (42 subprojects and 41% of disbursements), non-metallic minerals (15 subprojects and 19% of disbursements), and food, beverages and tobacco (106 subprojects and * Approved in June 1977. - A6 - 14%- ofP A4acLounted forNthree--uarters of total 1 t/o LU.L A UMLLa=L1= L0Df, OL_U LLLLU LUA. LLCC 44tCL.LD0 UK -LL.L U.L0UUL0U1=CLL0 The textile subsector was the most important user of Bank funds under both loaun. EUL, UCVCLC16e CLLU tuaC w Lua- te secunu mUtt imputant suosector under loan 625-CO while the non-metallic mineral subsector (particularly cement) 3.11 Annex V compares the percentage of financing which went to each industry with the contribution of that industry to total gross value added in manufacturing in 1969, the year in which the first loan was approved. This comparison indicates that Bank financed subprojects were nearly three times as concentrated in textiles and twice in non-metallic minerals, as were those industries in the Colombian industrial gross value added. The concentration -.s not entirely surlprisig since textiles is an efficient, traditional sector that grew rapidly during the early 1970s through a very successful export drive. In CUIUoL10n, the construction Doom of 19/1-19/4 required a major expansion in the production of cement and other construction materials. 3.12 Subloan terms. A matter which concerned the Bank at the time of the third loan was that the financieras were stretching the terms of their subloans beyond the needs of the enterprises they were financing. This situation was rectified under the fourth loan. Subloans with terms of 12 years or more accounted for 62.3% of amounts disbursed under loan 625-CO but only for 37.7% under loan 742-CO. This shortening of average maturities resulted mostly from BR's more detailed screening of subloans terms to match loan terms with the expected project cash flows and reduce its own potential foreign exchange losses. Interest rates to final borrowers, 18% on peso denominated subloans under 625-CO and 18.75% under 742-CO, included an 8% fee to BR to cover the foreign exchange risk. While this fee will probably prove inadequate because inflation rates have been much higher than anticipated since 1972 (see para 60), the interest rates paid by final borrowers were significantly positive in real terms throughout the period 1970 to 1972 when the bulk of the two Bank loans was committed. Based on present projections of the rates of inflation for the 1976-1985 period, subloan interest rates under these two loans will be marginally positive in real terms over the remaining lives of the subloans. Grace periods of subloans have varied considerably between a few months and a maximum of three years. A total of 78 subloans (75% of disbursements) had grace periods varying between 1 and 3 years, 40 subloans (25% of disbursements) had grace period of less than 1 year. (Annex IV) 3.13 Location of Subproiects. Overall, the geographical distribution of the proceeds of loans 625-CO and 742-CO reflects the existing concentration of industry in th four main iirhqn Pntr. of rn1nmhin_ However_ the Antinuia region (Medellin), which in 1969 accounted for about a fourth of manufacturing valuep addd, -rrcived abouit 38% oNf Hen lonsn n~-rnt-afl Tlo Ualle region (r.nli) which accounted for about a fifth of manufacturing value added, received 27.2% of totai loan pro,acds At t-he other extrem,n 10C,Aonr. r,o, which accounted for nearly 27% OF manufacturing value added, received 12.4% of U.U~. .LJaL .i .LC~I0. l . V CW ... LiIL 5 ULa.ILLaJ. L d_ L L _LU tion of L tLeI fin..kani erast0 total loan portfolio as of December 31, 1974 confirms, although in a less CALA C1C Way4 L.L LIVC LLhAHULCid AVC LUIltLLLCU LILCL ALIU-Lug L1H L11% Antioquia (29% of total portfolio) and Valle (30% of total portfolio) regions while Cunuinamarca kLo/o oL LOLaI portfolio) anu Lne Coast L1lJA 01 Lual portfolio) received a smaller share (See Annex IV). To date, the financieras have repond1 maily to the heavy demand for Unustrial credit in the regional centers where they are located, and have not made a very substantial contribution to promotng the development of the less industrialized regions of the country. In line with the increased emphasis being placed on industrial decentralization -A. 7 in Colombia, several features have been incorporated in the sixth financiera loan that are aimed at broadening the geogrAphical focus of their lending. 3.14 Subproject types. The financieras concentrated their financing in expansion and modernization type subproiects (95 out of 118 subproiects). Financing of new enterprises (10 subprojects) and new product lines (13 sub- proiects) accounted for 19% of the total number of projects and 11% of total funds disbursed under the two loans (Annex V). This preference to finance the expansion of existine firms reflects the financieras' conservative lending criteria and their desire for establishing sound portfolios. but the most important factor was the ranid growth and additional demands for funds by the existing firms. Although the Bank pressed the financieras to beome more nrnmotinn-minded_ the rather nonr nprformance of Colombiana and Caldas, the more promotional of the financieras, tended to digrniraoP rialcs taking by tHp nfhr finnni-rna_ 'ho lilint-a~ offarlC n the Colombian industrial sector of following this rather cautious approach ar dinlff- iltf to evaluat 1-41 Howevenr, from anhre empopcIe iacn the expansion and modernization of existing facilities was perhaps the cheapes,tand su-estway to deeo industry ~~OLflLLO . L .FJJJ %LO \ 'JLIJ A..LLCLLL.=L UUU=L LA1=0= two loans are now operational and earning profits, and are technically and AJaLL4..L O.UU inJ_VLUa~L.LVLL ~ aaLLU.L alVUL L11C 5PULLbUL.LL16 LJ.LLU5 kDU Annex VI) shows that firms with pre-tax returns to equity in excess of 20% in 1; accounted ur about .140o u Lotal Bank lenaing. Although 19i was a severe recessionary year in Colombia, only 9 firms operated at a loss, and most companies in ne lowest return group (Delow 10% return on equity Dbeore taxes), and particularly the textile firms (22 out of a total of 41) should be able to Improve their performance in the near future. The pre-tax return to equity information should be cautiously interpreted. First, it relates to companies rather than specific projects. Second, net worth may not be representative of the real value of a firm since full revaluation of assets for tax purposes is not permitted in Colombia despite rapid rates of inflation. Third, pre-tax returns do not always reflect the true profitability of firms; this is particularly true of the medium-sized family-controlled firms and firms where the preference of owners may be to take profits in other companies of the same group. 3.16 Subproject investment costs. The average total investment cost of the subprojects financed under both loans was approximately US$1.75 million. Annex VI compares the estimated investment costs at the time the subprojects were approved, with the actual investment costs at the time of subproject completion. Overall it can be concluded that cost estimates were well prepared by the financieras. In Colombian pesos, the actual investment costs, including fixed assets and working capital (Col$4.5 billion) were on the average some 25% higher than the original forecast (Col$3.7 billion). Although the financieras did include price contingencies in their capital cost estimates, these often proved inadequate since inflation accelerated after 1972 and actual inflation (average compounded rate of 16.5%) was always ahead of expectations (6-7% range in the appraisal report). The financieras projections for the foreign exchange cost of projects were for the most part accurate. Out of a total of 118 subprojects, only 23 experienced delays in their implementation exceeding one year and only 6 suffered delays of more than two years. - A.8 - 3.17 The Bank subloans ended up financing an average of about 31.7% of total investment Costs. Th eane was financed by the spn-rs own resources (39.6%); by BR and the financieras own funds (5.1%) and from otherL sources (23J.3%) inlCuding~ supp.liers creditL fA__ ITT ItV. LJ LL± L1 proportion of Bank funds used to finance the actual investment costs was somewhat Delow tue estimates maue when subprujects were approveU d u. to, the sponsors equity contribution was slightly lower than initially estimated (41.5%) whle BR, the financleras and other sources were somewhat above (22.1%). 3.18 Economic merits. Adequate data are not available to permit a clear judgment about the economic soundness of subprojects. At the time the third and fourth loans were made financieras were not required to calculate internal economic rates of return (ERR) on subprojects. BR was responsible for checking the economic priority of investment proposals and had developed a point system for this purpose. The system was based on a list of partial indicators with weights attached, which were varied to reflect changing government priorities. The Bank-financed subprojects were almost always ranked high. Only 3 subprojects were rejected by BR on economic grounds. Two of the subprojects were highly capital intensive, substituting capital for labor and would have resulted in an absolute decrease in direct employment. The third subproject was rejected on the grounds that it was excessively import intensive, that it substituted a local input by an imported raw material, and negatively affected the balance of payments. 3.19 The 1975 Special Study on the Development Impact of the Financieras carried out an in-depth "ex-post" analysis of the economic merits of 29 financiera-assisted subprojects. About half of the total sample of sub- projects analyzed had been financed with the proceeds of loans 625-CO and 742-CO. The average ERR for the sample subprojects financed under loans 625-CO and 742-CO was 38%. This amount compares favorably with the 32% average ERR calculated for all the firms included in the study and with estimates of economic opportunity cost of capital in Colombia (18%). 3.20 During 1975, 48 firms assisted under the two loans were exporting at least a part of their production (about US$166 million) representing nearly 65% of total exnorts by the Colombian manufacturing sector during that year. However, the real export impact of the Bank-assisted firms is probably higher, since many nroduce intermediate goods. such a. textile_ that are further processed and then exported. Among the largest exporters are textiles (UAR millinn)_ food nropcing (Tj$29 million) nanpr nnd nrinting (TT09 Til- lion) and sugar (US$19 million). Exports are heavily concentrated in a few fi-rmo 4in fnei- can f4rmc nna nrr -ranaihl fnr o-rnr%rt-incy T l97 millinn or about 61% of the total exports by firms assisted under both loans (Annex VI). Under- the -ixth loan special. arranLgem-n-tS were included4- to channel Btank assistance preferentially to firms sponsoring export oriented projects. 3.21 In total, the subprojects financed under these two loans have given Lise LU alUUL -,-.7U 11ew JUv., _L J L t avqiL6e LLCL1V - Umout _ L U t- aU L US$14,000 per new job, but individual subprojects had widely divergent impacts on employment generation (annex V1). uOveral, the capital tntensLtyouf tese 1/ Financiera's estimate as of December 31, 1975. - A.9 - subprojects appears L be broadly in line witn tne tvDes of investments beine made by medium sized and larger companies in Colombia during this period, of which the cement projects and synthetic fibre projects were by nature fairly capital intensive. During the early 1970s the modern manufacturing sector in Colombia was growing rapidly and competition and greater opportunities were encouraging firms to use more capital intensive technology. The total employment effect of Bank-asssisted subprojects is probably higher than indicated by the direct employment generation since indirect employment effects (through backward and forward linkages) had not been included. The Special Study on the Development Impact of the Financieras estimated quantifiable indirect employment to be about 50% of the direct employment impact of the subprojects it reviewed. 3.22 The financieras agreed in loan 742-CO to upgrade the economic analysis of investment projects, and especially to calculate the effective rate of protection for all projects above US$250,000. The effective rate of protection was calculated for 26 subprojects. The results which, varied between -QQ anA +77 (see Annex VI), do not permit any general inferences about resource allocation by the financieras or about the efficiency of the subprojects. In fact. seven out of a total of ten firmQ whirh prnnted nrnirec with a naoitive effective protection were also exporters. Nevertheless, the calculation of the effec'tive rat of prtetinan atusefuil device for indicati4ng ton the fivitranc the need for more careful analysis of the economic efficiency of subprojects in sectors enjoying a hirh llel f "protetion 3.23 Nearly 77% of the subloans were extended to firms controlled by Colombian shareholders, 20% to firms controlled by foreigners and 3% to 50/50 Joint ventures. _-24 The Rank annrnved 79 suh1ann which were ahove the free limit. OUPr- all, it seems that the financieras appreciated Bank's comments on subprojects. The Bank --as helpful i-n naeting t-he fi,nncr- a O"A 0-nonc tr nntin problems. However, Bank's comments seem to have had a greater influence on the thoroug,-hness-- .A coeag-f +- - -- 4-1f ----n.~rA 1,k- +-I,- - o e- e - the aprr - - aF-F- - by~JO~ ~ rather than on the design of the subprojects themselves. IV. INSTITUTION BUILDING 4.0l T.. the third .-A fourt~h 1- s -, th Ban cotiue to fou its efforts on building the institutional capabilities of each of the financieras a,. U C L U LLO L %1 LU A.IpcLa LJ.aL aMLLU A. .LM,LLaj. C...Jr ac LLL.L section reviews the institutional developments that have taken place during .L7/U J7I.J, cUHncHLeLnrag mainly UHI LLIUr &d6PUL CUUUL WHIH LL9C DIIuLA expressed concern in the appraisal reports or during the course of project -LU1Y.LLLLUL.Lo. ILU mostL 56L.i1±LL1L t-Vt:!LL UUL±IL ; LLI-Lb puL-LUU, LLM: iLLanc.LaL crisis experienced by Caldas in 1970, is reviewed in this section, but treated more fully in Annex XIII. O.u Overall portfolio growth. Although the Bank, at the time, dlG not rely heavily on the projections contained in the appraisal reports, these provide a useful point of reference for evaluating the financieras' operational performance (Annex VII). The financieras' total portfolio grew rapidly in nominal terms between 1968 and 1975, averaging about 20.5% p.a., or slighly above the nominal growth rate projected (18-20%). But actual inflation for the period far exceeded expectations and portfolio growth in real terms (4.5% p.a.) - A.10 - between the performances of individual financieras. Valle and Norte's total Caldas grew less rapidly at 16-17% p.a.1/ Total annual disbursements by the i a Iave Untu..ouoL).y -u-----u A L__m av.JU L oi gn.. m411A-- AS- 1970 to nearly Col$4,000 million during 1975 at an average rate of about 28% p.a. on ominl LULW5-. ILLU Ltal LuWLHI WcLUUUL Ll/o P.t,] UL LuLUZ chanLeu by the financierasto their clients has somewhat exceeded the rapid real growth or manufacturing output in Colombia over the same period (97% p.a.). 4.03 The financieras activities can be broken down for analytical purposes into medium and long-term lending, equity investments and short-term export-import financing extended in cooperation with foreign commercial banks (Annexes VII and XII). These activities did not all grow at the same pace. In accordance with the Bank orientation and the financieras' increased access to long-term funds, the relative importance of term lending increased gradually during the period and became by tar the most important activity of the financieras. Loans with terms of 5 years or more have risen from about 38% of total loan portfolios in 1969 to nearly 47% in 1974. Nevertheless, there are considerable variations between the financieras. Nacional and Caldas extended in 1974 about 70% of their term loans for more than 5 years, while Norte allocated 45% of its funds to loans with 1 to 2 year terms and only 24% to loans with more than 5 year terms. Norte had a comparatively small equity portfolio and preferred to lend:its own equity resources at shorter terms because of accelerating inflation. 4.04 At the time of appraising loan 625-CO, it was expected that the import- export financing operations of Colombiana, Nacional and Caldas would decline in importance since local commercial banks, which were represented on their boards. were becoming increasingly involved in this type of financing. On the other hand, Valle and Norte were thought to be well placed to expand import-export financing because competitors in this line of business were not heavily represented on their Boards. In practice, these expectations were not entirely fulfilled. Overall, export-import financing increased from 7.4% of the financieras' total portfolio in 1969 to 14.2% in 1975 after growing at an average rate of 307 D.a. throughout the period. The fastest erowth was achieved bv Valle (41-5% n-P) and Caldas (38.5% p.a.). In volume terms, Valle and Colombiana were the most active, accountine for almost 80% of the total financing- The financiera' rnid exnansion in this area was facilitated by the dynamic growth of manufactured exports, which grew from US58 million in 1978 to USA$380 million in 1q74- nd hv thPir inrPnQino use of short-term letters of credit for temporary financing of equipment imports in 4.5The en-uftY portfolios of thei financnio-ra hkiavmow less rapidly thnn their loan portfolios. The total equity portfolio of all five financieras grew in n0mi.-M -e-= -n..- Wn anveraags of about 7.1% f :ro.m C'14Z'A1 7 m,41 14rn" 4n 1969 to Col$627 million in 1975. Equity investments as a percentage of the L_LLLM_LM~L%Z o.verL-~L FULLLL_LU U -tLLaO=U aUUaLa.-# aLLY fro..m ao utSJ.. in..'/ 1969 to about 8.7% in 1975. However, these averages do not reflect the HLniVidual LiL1LiCLILai LLULuiuiz. 1ULLt Z PqUtLLY puLLLu LLY r,tZW LajJLU_LY (33% p.a.), while Valle (16.6% p.a.) and Nacional (12.5% p.a.) experienced moderate rates of growth. Columbiana and Caldas maintained LheiL equiLy portfolios at about the same nominal levels as in 1970. Colombiana concentrated on consolidating a portfolio, which had grown excessively during the I/ The growth rates of the in dividual financiera wefare influePnced byV thPir nracticP of "pooling" large sualoans between all five financieras, usually on an equal shares bansis. Thu, the nnrtfolinq of tHe smaller financieras tended to grow more rapidly than those of the larger ones, Colombiana and Nacional (Annex VIII). - A.11 - ~ w~ ~.j~±± L~ULAJ~ dL ~L I1 LIV %.LLM.M ULU .LU.L_LVW_LL6 DUIMN aUV.LUC reviewed in detail the valuation of each of its equity investments and suusequently wrote off a significant portion of its investment portfolio. This cautious attitude of the financieras is understandable given the rather thin market for equities and the progressive decline in stock market share prices since 1968 (See paras. 45-48). Financial Performance 4.06 Profitability. The financieras' net earnings in relation to net worth increased throughout the period from 11.7% in 1969 to 20.2% in 1975 in nominal terms (Annex 12). Overall, the financieras with the exception of Caldas, have shown, in nominal terms, a satisfactory record of profitability. However, in real terms, their profitability results have been rather disappointing. 4.07 The nominal rates of return on equity of the five financieras over the 1969-1975 period are shown below: 1/ 2/ Colombiana Nacional Valle Caldas- Norte Inflation- 1969 10.9 16.0 14.7 8.6 12.9 9.2 1970 11.3 17.4 17.0 3.8 13.4 9.8 1971 9.1 17.5 14.9 0.2 14.7 10.4 1972 10.4 18.1 15.2 5.2 12.7 13.4 1973 13.6 19.4 17.6 3.4 21.3 22.0 1974 25.6 18.0 19.2 9.7 20.8 27.2 1975 25.7 23.6 23.6 4.8 1R- 1R.0 1/ In auditor's opinion overstated by under-provision for expected portfolio losses. 2/ As reflected on the GDP price deflator, Banco de la Repiblica. 4.08 Because of inflation, nominal rates of return substantially overstate the real return to domestic shareholders. Foreign shareholders have, in addition, suffered from the declines in the parity of the peso with respect to the dollar and other major convertible currencies (average devaluation rate of 11% p.a. during 1970-1975). 4.09 Between 1969 and 1972 all the financieras except Caldas achieved returns on equity that exceeded, by a small margin, the rate of inflation. In 1973 and 1974 inflation accelerated sharply but earnings, which were to a large extent determined by outstanding loans at fixed margins did not grow as rapidly as inflation. With declining inflation in 1975 the relative performance of the financieras improved. Increased leverage, reduced administrative costs in relation to total assets, and higher profits in some lines of business (e.g., export-import financing) have enabled the financieras to maintain a reasonable level of profitability despite a decreasing real spread on Bank and other BR lines and an overall low yielding equity portfolio. Generally, Nacional and Valle have been the most profitable of the financieras and Caldas the least profitable. 4.10 As the Bank expected, the financieras' administrative costs declined as a proportion of averaae total aqqptR (ATA) from 1_95% in 1968 to 1.65% in 1975. This was mainly the result of operational growth without the need for romnanrap ancrh e sin nrfnnnt1 Ulle nd nrte, the monst rapidly growing financieras, achieved significant reductions. Valle's administrative expenses - A.12 - declined from 1.9% of ATA in 1968 to 1.6% in 1975. Norte's expenses dropped f-m -8 in 18 to 2% in 1 . CalUaO, after the 170V LuAncia± crisis, streamlined its operations and following Bank advice reduced its administrative expenses ubstantialy, maly by staLL reducLLURS, from more than 3% in the late 1960s to 2.2% of ATA in 1971 (Annex XII). 4.11 During negotiations for the third loan, the Bank was still advising in equity and attaching convertability features to their loans. The financieras, LiWCVEL, WLlE L LUlly cUVinceU L C UuncDe UK Lof- hi auvice anu continuu to maintain a fairly cautious attitude towards equity investments. Their attLtuuLe a LU have been JustiLieu LL VeW UL L[ue puuL pLLuLWmLLce" UL. LL Colombian equity market during the 1970s (between 1968 and 1975 share prices dropped by 70% in real terms) and the disappointing performance of the financiera own equity portfolios. In 1969 the financieras were earning only 3.6% in dividend income on their equity portfolios. While their average dividend return gradually increased to 13.5% in 1975, it has continued to be below the return on their loan portfolios even after the different impact of taxation on interest and dividends received is taken into account. Furthermore, part of the improvement in dividend income in 1975 can be attributed to certain large investments of Colombiana and Nacional, which paid exceptionally high dividends that will probably not be maintained in 1976. 4.12 Realized capital gains (which are taxed as income) have been small and/or largely offset by realized losses, particularly in the case of Caldas and Colombiana. Unrealized capital gains are difficult to estimate, but do not seem significant except maybe for Nacional and Colombiana which have in their portfolio some large investments which seem to have matured during recent years. 4.13 The low return on the financieras' equity portfolio can be explained by: (a) thinness of the Colombian equity market because of competition from high yielding debt instruments; (b) taxation of inflation related profits because of the absence of a provision for revaluation of assets; and (c) poor investment decisions taken in the mid and late 1960s by Caldas and Colombiana. The gradual improvement since 1972 reflects the maturing of some early investments, a more cautious and selective policy by all financieras for new investment, and the successful consolidation and cleaning-up of Colombiana's and Caldas' portfolios. 4.14 Debt/eauity ratios. At the time of AnnrAinA Af Ian S67-M tha debt/equity ratios of Colombiana (3.5:1), Nacional (2.4:1), and Caldas (2.5:1) were well within thp limitq arod unde-r Ha carnnA .an (5:1 for rainmh.an and Nacional and 4:1 for Caldas). Norte and Valle, however, which were growing rapidly haa almnQt rannhat tha4v na-ranA l4m4ta nf A*1, n-A of their portfolios and debt-service coverage position the Bank agreed to relax their limnitsc ton 5:1 uinder loan 62AC 1) 9;rf M- in-- these limits were made until the fifth loan when the limits were adjusted to 4.5:1 for Caldas ndA 6:1 for thek oterFour financieras. 4.15. The deteuiylmit. imn^poAe by the Bank were fairly4 cosevtie b do not seen to have constrained the operational growth of the financieras. The limits have been relaxed gradually, in line with hU improving quaity of the financieras portfolios and the growing experience of their management. The AL Ln L LuLLC L.Mt.LLLC Ha FLUVLUCu CHLI CLCtL.LVe tLUUL4eLtMeUL LU Te financieras to mobilize fresh share capital and to reinvest a significant proportion of their earnings L order LU UppuiLL LULUr grUWLn. Norte, in particular, has had to make strenuous efforts at raising equity to stay within the limits agreed, 4.16 quality of portfolio and reserves. Throughout the period 1970-1975, Nacional, Valle and Norte have had sound loan and equity portfolios and arrears have remained at reasonable levels. Generally, loans have been adequately - A.13 - secured and reserves and provisions satisfactory to cover likely losses, although the Bank suggested to Norte on several occasions that it should try to progressively strengthen its reserves in view of its rapid growth. At the time of appraising loan 625-CO, the Bank expressed concern with the arrears and portfolio quality of Colombiana and Caldas. The total amounts outstanding with clients in arrears for more than 3 months amounted to about 15% of total loan portfolio for Colombiana and 5% for Caldas, which had raphchAul cueveral pnat due loans. Both financieras' equity portfolios contained substantial elements of risk and were overvalued. 4.17 In 1970 Caldas' liquidity situation deteriorated dramatically basically hecange of the noor qnality of its nnrtfnlin. As of the end of 1970, as much as 40% of the value of Caldas' loan and equity portfolio was in coinpan4peePvpriant-incy t1f4-ttia -in Tna-1t thaiv debht- obligationso Likely losses in companies already in liquidation were estimated at that time to be rr%14 9$ mll14--, -4.,-+- ^f ^_,1_, o 4ii4nn Following Bank's advice, Caldas carried an in-depth review of its portfolio. it-a cls l asited~t .in~sIlLOo thi as-b its auAL4 t%o wh crienuta%pcia audit and by a consultant who conducted an investigation into its present position.JL aILU future pros~pects. BIased o tJIis A_-_1___AWa LLL~y to help Caldas overcome its difficulties. Since 1970 Caldas has made UUsLaLtial WLL-ULLs kUUUL Uo9JL .milliUn uetween 1711 anU 17/J}j aU gradually but continuously irproved the quality of its portfolio. In auuLtion, Le Linanciera s provision of management ana technical assisance succeeded in turning around some of its problem companies. By the end of 1975 the proportion of Caldas' equity and loan portfolio invested in companies with problematical or uncertain prospects had dropped to 17%. Annex XIII reviews in more detail the origins of the Caldas crisis and the strategy adopted by the Bank. This strategy has been quite successful and the financiera is no longer in any serious danger of financial collapse. 4.18 Colombiana, which had been active in promoting new enterprises during the 1960s, followed, during 1968-1975, a sound policy of consolidating its portfolio. It slowly succeeded in selling or reorganizing most of its problem investments thereby decreasing its exposure. In addition, it made substantial write-offs (about Col$30 million during the 1970-1975 period) and the quality of its portfolio is now very much improved. The Bank had some doubts about the adequacy of Colombiana's existing reserves to cover the inherent risks in its portfolio. During the negotiations of loans 742-CO, the reserve policy was reviewed and the financiera agreed in a side letter to set aside 30% of each year's net profit to a special reserve for portfolio protection. A rather similar undertaking had been agreed in the second loan. Technically, the financiera did not fully comply with this commitment, except in years 1970 and 1971. However, the total allocation by the financiera to all reserves and retained earnings exceeded 40% of net profits from 1969 to 1973. Total reserves and retained earnings as a percentage of total portfolio (including guarantees) have continusously increased from 8.6% in 1970 to 11% in 1975. Given the..improvements in Colombiana's portfolio, the 30% reinvestment commitment was waived in connection with the fifth loan. 4.19 Financial accounting - internal reporting and planning. The Bank felt that greater uniformity was needed in the preparation and presentation of the financieras' financial statements, which used different formats and were - A.14 - not always comparable. Significant improvements have taken place in this reSnnpof inrp 1QAQ qnd iiniformitv in tha nracont-ion nf -ha finnn-inl statements has been gradually achieved. In addition, as a result of Bank advice, the auditors begun in 19072 to separate short-te-t- assets and liabilities and to distinguish reserves for portfolio protection from the audited financial statements now present the situation of each financiera in clearer~ aniu more mueaingf~l way. .n Luternal repurting adu COntru procauUreS U aii liluancieras nave improved significantly since 1969. Caldas, which had the weakest reporting and control mechanisms in 1969-1970, has introduced substantial improvements, and its internal procedures are now comparable to those of the other four financieras. Since 1969, the BanK has been encouraging the financieras to make more effective use of financial and operational projections, but progress in this area has been slow. The projections seem to be a good reflection of management intentions, but are not fully utilized for planning purposes, partly because of the heavy manual effort involved in performing sensitivity analyses. The financieras have expressed strong interest in utilizing the Bank's computer model for preparing DFC financial projections and are currently working with the Bank on this matter. The utilization of this model on a regular basis should improve the projections and enhance their usefulness as a management planning tool. 4.21 Appraisal. A continuing objective of the Bank has been to encourage the financieras to improve their appraisal of subprojects. Analysis carried by the Bank appraisal teams and the Bank's review of subprojects revealed a number of areas for improvement. These included: (a) a need to include more detailed financial projections in subproject appraisals; (b) a need by Caldas to increase both the coverage and depth of its appraisals; (c) a need to cover marketing and engineering aspects in greater depth; this was particularly applicable to Nacional and Norte; and (d) a need for all financieras to upgrade the economic analysis of subprojects. Over the last 5 years, the Bank has successfully helped the financieras to improve their subproject appraisals which are now more thorough and soundly based. Detailed financial projections are now regularly included in the appraisals. Caldas' subproject evaluations improved significantly after 1972 when a Technical Vice President and additional trained staff were recruited. Engineering evaluation has gained in depth and coverage. Marketine analysis has improved but remains an area where further improvements can be made. Economic analysis has received special attention in more recent loans. Under the Fifth Loan- the financieras began to use economic rate of return analyses for projects whenever the effective rate of nrotection wnq foind rn wrcppa 92S Under the qirth T.nnn an economic rate of return is being calculated for all projects requiring subloanq in Prpq- of TTqqsn_000 -----------. Te sp isicon acti - ties- of t-he fi a-i a ha- also improved somewhat since 1969. At the time of Loan 625-CO, follow-up aclvs-ac t.a~ 1,mi - 1. 4,, _- s,4- _ __ - _ 4 A e-+I- +.- -4o clients or projects utilizing Bank funds or other long term resources provided co cn t ith fthea floal wbsns wad finA cia comm-ni,fe oAinA close contacts with the local business and financial community, often obtained - A.15 - useful information about their clients on an informal basis. However, as the Caldas caseexempli 14ens thoe informal channels was unreliable and sometimes resulted in unnecessary delays in taking remedial action. 4.23 Since 1969, all the financieras have set up more efficient systems fo nlzn perodially1x t-he poition of thi-hr r1iPnfR_. Most clients are visited at least once per year. Visits are now programmed in advance, bnsed n the irencv of the nrnhTms facing the comoanies, the size of the financiera's exposure and the financiera's previous knowledge of the companies. The numhr of unpervision visits of all financieras has increased since 1969, but staff constraints and the lesser priority assigned to this activity, have nperin-dir-anly limitPd thp extent and aualitv of the supervision efforts and the overall pace of progress has been slower than the Bank expected. The financiras still give priority to supervision of Bank and BR financed projects over projects financed from their own resources. This can be partly explained by the larger size of these proiects and the discipline imposed by the Bank and BR reporting requirements. In addition, the extent and quality of follow-up work has varied among the financieras, with Colombiana's and Norte's being the most thorough. The Role of Banco de la Repiblica (BR) 4.24 Under the third and fourth loans, the Bank maintained a close relationship with the individual financieras and directly monitored their performance. BR's role was limited to administering the loan account and reviewing the financieras subprojects from an economic point of view. In practice, BR's involvement increased somewhat under loan 742-CO. Because of the relative attractiveness of Bank funds at the time, the financieras presented subloans for approval to BR well in excess of the US$40 million that were available under the 742-CO loan. As a consequence BR exerted a greater influence than expected in the selection and ranking of subloans that were presented for Bank financing. 4.25 It was not until the fifth and sixth loans that the Bank began to delegate significantly greater responsibilities to BR. The approach followed by the Bank under the first four loans had succeeded in creating autonomous and mature financial institutions but had placed heavy demands on Bank manpower and inhibited the participation of additional financieras (seven more financieras had been established by 1973). Institutional arrangements were modified under the fifth and sixth loans with the objective of developing within BR the capability to eventually take over many of the Bank's tunctions vis-a-vis the financieras. BR's involvement in reviewing the financiera's investment proposals was progressively increased. BR was made responsible for appraising and supervising any new financieras that were eligible for participating in Bank lending, and a program was agreed with BK to upgrade its capabilities for reviewing subprojects and providing assistance to the financieras. Since 1974 Bank supervision efforts have focussed more heavily on BR and less on the individual financieras. 4.26 Under the third and fourth loans subborrowers had the option to borrow in foreign exchange or in local currency with BR covering the foreign exchange risk against an annual fee of 8%. In the event, virtually all subloans under both loans were denominated in domestic currency. Overall, the 8% foreign exchange risk fee agreed for both loans seemed reasonable to BR and the Bank at the time of negotiations (inflationary expectations were in tne 0-o8% range) - A.16 - but has proved inadequate so far since the rates of inflatioin and the peso devaluation exceeded expectations by a wide marein. Over the period 1970- 1975 the peso was devalued against the US dollar at an average rate of 11% p.a. 4.27 Because the fee for exchange rate coverage has been inadequate, there will be a substantial deficit between BR's receipts in pesos from the financieras and the peso amounts it will need in order to purchase foreign exchange to pay interest and amortization to the Bank. A cash flow projection of BR's sources and uses of funds 1/ regarding loan 625-CO shows that BR will have to begin making contributions from other resources from the second semester of 1977 onwards in order to renav the Bank loan. BR will incur a net accounting loss of about US$6.7 million (about Col$473 million) over the period 1970-1986. In 1976 dollars. the loss of BR can be estimated. utilizing a 6% discount rate, 2/ at about US$4 million. These calculations depend on forecasts of the future annual rate of devaluation of the neso against the dollar, for which the Bank's latest projections have been used. Based on these proiections BR's losses under loan 742-CO should be somewhat lower- but if more rapid adjustments of the peso exchange rate occur the deficit in both accounting and net present value terms would increase for hoth loanq_ Also these calculations do not take into account the currency composition of disbursements and the actual and forecasted changes in the rates of Prchanop between currencies disbursed. Under both loans, currencies that revalued during the early 1970s against the dollar (Yen, German Marks, and Swiss Francs) accounted for about 66% of the currencies disbursed. The losses of BR could thus be greater. but the final outcome will danend on the future changes in the rates of exchange of these currencies vis-a-vis the dollar and on the actual currency comnosition of the amnorti7Atinn qr1h1Ail TTnder the fifth and sixth loans BR is receiving higher fees for covering the foreign exchange risk. and on the basis of current nroiections should hP ahlP to offqet part of the losses made on previous Bank loans. In addition, the larger companies no lon2er have the option to borrow in pesos unless they are mounting export or induntrial decentraliTation nroiects. V. RFSOURCE MOBILIZATION AND CAPITAL MARKET DEVELOPMENT 5.01 Under the first two financiera loans, the Bank's primary concerns were the sound institutional development of the,Colombian financieras and the efficient allocation of resources provided to them. With the third and fourth loans, and particularly the more recent loans, the Bank devoted more attention to domestic resource mobilization by the financieras because of concerns about the availability of local currency resources to complement Bank funds. However, it was recognized that the role of the financieras would remain limited unless major reforms in the financial system were enacted. 5.02 Resource mobilization expectations under the third and fourth loans were rather modest. Under the third loan, the expectation of the Bank was that the financieras would be able to increase their equity base, broaden the market for their bonds which were being sold to insurance companies on a pre-arranged 1/ Based on actual disbursement schedule (Annex II of this report), latest amortization schedule (May 1975), and actual devaluation for the Colombian peso during 1969-1975 and an estimated devaluation of 12% in 1976, 10% in 1977 and 8% thereafter (LAC 2 forecasts). 2/ A net present value calculation utilizing a 6% discount rate that takes into account the net dollar cash flows received and paid by BR at different points - A.17 - basis, and avail themselves of additional funds from BR to satisfy the local currency requirements of their clients. 1/ Under the fourth loan the concerns of the Bank had advanced somewhat to include an understanding with the financieras, particularly Colombiana and Nacional, on detailed measures to mobilize domestic resources, although specific targets were not set. It was only under the fifth and sixth loan that both the manner and the amount of resources to be mobilized were agreed and linked to specific loan conditions. 5.03 Measured in terms of the expectations contained in the appraisal reports for the third and fourth loans, the financieras satisfied the resource mobilization expectations of the Bank over the disbursement period of the two loans (1970-1975). Nevertheless, since 1970 the financieras have become slightly more dependent on official resources of funds provided by the Bank and BR. Resources of the Five Financieras (Col$ million) 107In 5 170 -7 IBRD 622 20 2,342 30 BR lines 892 29 1,742 22 Foreign Commercial Banks 282 9 922 12 Bonds 241 8 561 7 Equity 731 24 1,462 19 Term-deposits and other liabilities 291 10 790 10 -3 A~d IcA 1 fk 0'f I An j ,VVV .V I P Ut-J L%JV 5.04 Resources provided by the Bank increased substantially from 20% of total assets in 1970 to 30% in 1975. However, because of a relative scarcity of funds in other credit lines administered by BR, reliance on BR finance decreased so that the combined proportion of resources provided by the Bank and BR only increased from 49% to 52% of total assets. Temporary import financing utilizing lines of credit offered by foreign correspondent banks also increased in importance in line with the growth of Bank financed operations which these temporary financing activities partly support. Resources raised by the financieras via equity, bond issues, fixed-term deposits, etc. have not increased as rapidly as the overall lending operations of the financieras, declining in importance from 42% to 36% of total resources (Annexes X and XI). 5.05 The financieras satisfied, in nominal terms, the expectations for equity and share capital growth contained in their financial projections at the time 625-CO and 742-Co loans were made. 1/ BR also operates the Private investment Fund (PIF) and the industrial Financing Fund (IFF), both of which can finance domestic equipment procurement and working capital. The financieras, together with commercial banks, have access to these funds, which have been used to supplement Bank subloans. - A.18 - Compounded Annual Projections 625-CO Projections 742-CO Actual Growth Rate (1968 -1975) (1970-1975) (1960-1975) of Equity In Percent Colombiana 9.1 11.2 9.9 Nacional 14.2 13.8 16.0 Valle 19.7 i03 _1 1 Norte 22.0 23.4 21.4 Caldas 18.8 1/ 11.2 13.4 1/ Period 1968 to 1970. 5.06 However, in real terms their performance has been disappointing. Between 1969 and 1975 inflation accelerated and exceeded by a wide margin the inflationary expectations at the time of appraising the third and fourth loans. The combined equity of the five financieras increased from Col$648 million in 1969 to Col$1,462 million in 1975 at an average rate of 14.5% p.a. somewhat below the average inflation rate over the same period (16.5% p.a.). 5.07 The financieras' inability to mobilize larger amounts of fresh share capital was related to their problems of attaining positive real rates of return on equity and a system of taxation which does not distinguish inflation related profits. Other investment alternatives, in particular tax exempt government securities offering immediate liquidity were more attractive to investors. Due to the competition of high yielding debt instruments. the financieras had to maintain a relatively high dividend nay- out ratio ranging from about 50% to 80% of after-tax profits over the period. Even these high pay-out ratioR were hardly suffirient tn mkp hpir chr generally attractive, and increased share subscriptions came mainly from existing shareholders who wprp nftpn nPriinded fn reinvest part nf their dividends. 5.08 Total bond resources raised by the financieras have provided a rplAtivPly minnr navoo-ntman nf i-ntnl vamanr%i na. A r thl- ___-;-A 1 07r- 107 1 the amounts increased from Col$241 million to Col$561 million, but dropped scDh4-117 fvnm 7. 0'!T 7.')'/ total, resources. Pr.4 or o 107') th financieras I'L LO _J - ,*,- , I L.ILaJ JL tflX LJ U LLL did not issue bonds directly to the public. However, they had developed a ~ ~ £~~L1U U LLU L. _ UJ...L~ L I L..LU L I41 L U t U_LCU[ LU with insurance companies on a pre-arranged basis. The insurance companies u ua uax 4uvL1ng WilU LIUy puLRaseu Lne financieraS DOnGS. However, this mechanism was never utilized on a large-scale by the financieras, except olomuiana, au some of its tax auvantages have disappeared after the 1974 tax reform. 5.09 During 1972 and 1973, the financieras were able to mobilize long term resources aiountLng Lo %.,OLyjvv MU.LLLrL LL%LUU6LL PUULJA. -- - -8-1 bonds. Detailed arrangements for this issue started during the appraisal of Loan 903-CO iLn early 1972. To enable these bonds to compete with public sector issues, a stabilization fund was set up by BR, providing immediate liquidity at guaranteed prices to bond holders. As the inflation rate incre-oSed, t 1 yield became uncompetitive and the fund has had to repurchase almost one third - A.19 - of the bonds in circulation. Although this risk was foreseen during appraisal, the Bank accepted the rather poor design of this fund expecting that this initial effort would break the ground for more substantial bond issues in the future. Unfortunately, continuing high inflation still represents an obstacle to further financiera long term bond issues since if new issues were made carrying a higher interest rate, remaining holders of the previous issue would be likely to redeem their bonds with the stabilization fund in order to purchase the more attractive new bonds, and the financieras in turn would be required to use the proceeds of the new issue to buy back the old bonds held by the stabilization fund. 5.10 The financieras also raised some resources via one-vear time deposits. but prior to 1975, competition from Certificates of Deposits offered by commercial banks severely restricted the amount of resources the financieras could raise through this mechanism. 5.11 The inability of the financieras to mobilize considerable amounts of Incl rPRniirrPq nnd hPln dpulnn thp n1nmbinn rnnitnl mrkt in n substantial way is not surprising in view of the environment under which they were operting Fo seerl -eas resource mob ilization- by, the private sector in Colombia was hampered by competition from high yielding and highly 1 -mu-iA ~ r ~~n- ",,1l 4,, on^trr 4 ,.A +-U-~ ;-A 1i-qui-AIt n.--X-a r- rJ... db i secL tor in t r , andfl Lthe indexed'. ins . ftumets (UPACS) of the savings and loan system offering full monetary correction. Th e se I.nsa.tru ments we re u s ed -to f in La n ce pri or ity secto _rs ssSu ch a s u rban houSing construction, and to supplement deficient public sector savings. The -- - - J - U W . L %_ .L J. L=O=L V= L=~4UL LL =LLL_L CLL%ai interest rate regulations on both the lending and borrowing side which kept tes atificialiy LUW OHU W1IIH WUt hL mLde U±11xrUmL LUL LHt fL0VrLE sector to compete for funds. As a consequence, a large and active extra- banking market developed which became an important recourse for firms in need of scarce working capital financing. Under these conditions, it is doubtful whether auudUunaL &nk pressures on tne rinancieras would nave made a significant difference to their success in resource mobilization. 5.12 After 1970, Bank economic and sector work in Colombia began to place increased emphasis on the need for fundamental reforms in the financial system. Economic missions and special DFC/IFC missions undertook detailed studies of the problems that were impeding the growth of a more efficient ana Droader- based financial market, and a continuing dialogue on these matters was maintained with the Colombian authorities. Progress was rather slow initially, but shortly after the present government took office in August 1974 it enacted a series of major fiscal and financial reforms broadly along the lines advocated by the Bank. Interest rates were raised in successive stages and differentials between rates were narrowed. -The degree of monetary correction and tax exemption allowed on the UPACs instruments was reduced to bring their yields more into line with competing instruments. Forced investment requirements of financial institutions were relaxed somewhat, and new issues of public sector instruments no longer have tax-exempt status and immediate liquidity. Overall these changes are helping to remove some of the distortions that have handicapped the system of financial intermediation in the past, and should improve the financieras' future resource mobilization prospects. 1A-o 5.13 Despite the above reforms, investor interest in medium- and long- term securities is likely to remain somewhat limited until inflation is brought more firmly under control and the uncertainties following the recent economic recession have receded. Consequently, the Government has placed its present emphasis on strengthening the market for short-term savings instruments. Early in 1975 the financieras were authorized, under Presidential Decree 399, to engage in a wide variety of short-term borrowing and lending activities. To encourage the financieras to take full advantage of the new opportunities afforded by this decree and the gradually improving prospects in the capital market in general, the Sixth Financiera Loan contained specific targets requiring them to raise each year volumes of domestic resources of a similar magnitude to the volumes of Bank funds utilized by them. Since late 1975, their rate of resource mobilization has been approximately in line with these targets. VI. CONCLUSIONS 6.01 With the third and fourth financiera loans, the Bank consolidated a strategy initiated at theni 'kaynic of the IQ60s of helping tn P.tAh1iQk Ana~ build a group of private sector oriented financial institutions that could serve as effective channels foyr trawnsfer-ring resourc tn thp r.n1nmhiqn industrial sector. The Bank's institution building efforts have resulted 4- concrete 4-provements.* All five~n4r~ f;~ rannnll1 nnn-ii l in..cer--s-r now re-'.-..---., - efficiently run DFCs . The subprojects they financed under the third and louUL LoansLJII are genLrallJy soJund in a LLIIJ...J.aL. all are now operating profitably. 6.02 During 1970-1975, when the third and fourth loans were disbursed. manufacturing was a "Lea A ing gro- -" riihnn---mv bt financing activities of the financieras made an important contribution to that -1 - - - - I 1- 1-2 - 1f_fl-,- -- growth and to tne nighly successrul export arive of Lne eaL-y 17/US. ecause of their locations in each of Colombia's main industrial regions, the financieras have also helped to maintain a Dalanced regiOnal growtL Ul industry, although their contribution to the development of the more backward regions of the country has been fairly marginal. They have helped to develop managerial talents and to mobilize resources in their respective regions and have raised investment standards through their assistance in project formulation and appraisal, the discipline of subloan covenants and, in some cases, through direct technical assistance to their clients. 6.03 On the other hand, the financieras have not yet proved a very effective mechanism for supporting the growth of small enterprises. The bulk of their loans and investments have been directed towards medium sized and large companies in the Colombian context. Under the fifth and sixth loans special features were included to encourage the financieras to increase their lending to smaller firms. However, it was recognized that the basic style of operations of the financieras, the mix of resources available to them, and their lack of an extensive network of branch offices, would limit the assistance they could provide to the small scale sector. Consequently, a separate Bank project was prepared in 1973/1974 involving Corporaci6n Financiera Popular (CFP), a government owned institution that specializes in financing small enterprises. - A.21 - This project, the first Bank project in Latin America specifically designed to assist the small qralt -.ctor. has nroved tirePqful and a second loan is now being prepared. 6.04 Although the Bank's main institution building objectives were attained, accelerin inflation and reouc mobiliztion con,s tra-.nt- cad the financieras real growth and profitability to lag behind Bank expectations. returns on their equity investments, the financieras managed to maintain a reasonable level . pitalityL±L by contrllUingI duinJ'_L__4LiV_Z___ 5 increasing leverage and by increased-activity in profitable areas such as _LLUJJUILL--_PUL L L.LIRCing. u.uJ ine financieras were aDie to sarisry tne ratner modest expectations of the Bank with regard to domestic resource mobilization. However, between 1-9o ana i75 they have become somewhat more dependent on official sources or funds provided by the Bank and BR. Resources mobilized by the financieras in the form of share capital increases, retained earnings, bond issues and term deposits declined from 42% to 36% of their total resources. It is doubtful whether greater Bank pressure on the financieras would have produced more satisfactory results, since their resource mobilization potential was severely restricted by the conditions prevailing in the capital market and the tight government regulation of the financial system. The Bank maintained a dialogue with the Colombian authorities through the 1970-1975 period on the need for fundamental reforms, but little progress was achieved until late 1974. Subsequent reforms have improved the prospects for the financieras and recently they have succeeded in mobilizing considerably greater volumes of savings. 6.06 A major event that occurred during these two loans was the financial crisis experienced by Caldas in 1970. A full diagnosis of Caldas problems had already been elaborated by the Bank by the end of 1968. The third loan appraisal report analyzed Caldas' problems in depth but conveyed the overall impression that the situation would gradually improve. The appraisal report estimate of the quality of Caldas' portfolio was optimistic. The Bank's over-optimistic view of the situation, which was not warranted by the following sequence of events, led to the Bank not utilizing the third loan to pressure Caldas into introducing necessary changes. While the Bank appears to have been rather slow to appreciate the seriousness of the impending crisis, the strategy pursued by the Bank after 1970 proved reasonably successful. Caldas' recovery has taken rather longer than expected, but its financial position has continuously improved. It is now earning reasonable profits, the quality of its loan and equity portfolio is considerably better, and its financial management and investment policies are now much sounder. 6.07 With the growing institutional strength of the individual financieras, the Bank felt able to modify its lending approach under the fifth and sixth loans. Greater responsibilities have been delegated to Banco de la Rep5blica for the review of financiera investment proposals and for the appraisal and supervision of additional financieras. Bank supervisory activities began to focus more heavily on strengthening BR's capability to discharge these increased responsibilities, and on broader issues of industrial policy and capital market development. Direct Bank contacts with the five older financieras continued but are now more concerned with their overall developmental impact and less concerned with the fine details of their onerations- nrocedures and management. The Bank's approach has been, and continues to be, fairly labor intensive, but - A.22 - Colombian government officials, Banco de la Replblica and the managements of the financieras aaree that considerable worthwhile results have been achieved. As the capabilities of Banco de la Repiblica increase, the snr%ianry dAman"dA nn thp Rtnk should nrnorPzivPlv diminish. Latin America and Caribbean Projects Department neember 'An, 1Q7A ANNEX I Colormia: Lon 625..CO nd 742-CO - Compnrlegnr P~Rnr- Commitments U1nder loain 62C and 742-.Co (in US$ millions) Per Cumula- % Per Cumula- % gr. tive 2E. tive 1969 4th quarter 0.4 1.6 1970 1st quarter 2.8 3.2 12.8 2nd quarter 10.0 13.2 32.8 3rd quarter 6.1 19.3 77.2 4th quarter 1.9 21.2 84.8 191 1st quarter 0.2 21.4 83.6 2nd quarter 0.3 21.7 86.8 3rd quarter 0.4 22.1 88.4 4th quarter - 22.1 88.4 21.5 21.5 53.6 1972 1st quarter - 22.1 88.4 7.5 29.0 72.5 2nd quarter 1.2 23.3 93.2 6.6 35.6 89.0 3rd quarter 1.0 24.3 97.2 1.9 37.5 93.8 4th quarter 0.6 24.9 99.6 1.3 38.8 97.0 Cancelled 0.1 25.0 100.0 1973 1st auarter 0e2 390 97.5 2nd quarter - 39.0 97.5 3rd quarter 0 5 3965 980 4th quarter - 39.5 98.8 Cancelled 0.5 40.0 100.0 COLOM1Ah Loan 625-CO and 742-Co Completion_Reprt Projected and Actual Disbursements - Loan 742-CO and 625-CO Loan 625-CO( S ed on 5/27/69) Lon gned 5 EST) (US $ Million) Actual Forecast Actual Amount Cumula- 7 of Total Amount Cumula- % of Total Amount Cumula- % of Total - Et" . - tive Loan Per gr. tve - Loan Per tive Loan 1970 First quarter 0.1 0.1 0.4 Seconad quarter 0.5 0.6 2.4 Third quarter 2.6 3.2 12.8 Fourth quarter 5.7 8.9 35.6 1971 First quarter 3.1 12.0 48.0 Second quarter 3.3 15.3 61.2 Third quarter 2.5 17.8 71.2 Fourth quarter 2.6 20.4 81.6 0.4 0.4 1.0 0.3 0.3 0.8 1972 First quarter 0.7 21.1 84.4 1.3 1.7 4.3 4.3 4.6 11.5 Second quarter 0.1 21.2 84.8 3.0 4.7 11.8 3.2 7.8 19.5 Third quarter 0.4 21.6 86.4 5.1 9.8 24.5 10.1 17.9 44.8 Fourth quarter 0.4 22.0 88.0 5.8 15.6 39.0 4.3 22.2 55.5 1973 First quarter 0.3 22.3 89.2 6.2 21.8 54.5 4.0 26.2 65.5 Second quarter 0.6 22.9 91.6 4.8 26.6 66.5 2.3 28.5 71.3 Third quarter 0.2 23.1 92.4 3.6 30.2 75.5 1.5 30.0 75.0 Fourth quarter 0.4 23.5 94.0 3.0 33.2 83.0 1.4 31.4 78.5 1974 First quarter 0.9 24.8 97.6 2.6 35.8 89.5 1.0 32.4 81.0 Second quarter 0.4 24.8 99.2 2.0 37.8 94.5 2.1 34.5 86.3 Third quarter 0.1 24.9 99.6 1.5 39.3 98.3 1.3 35.8 89.5 Fourth quarter - 24.9 99.6 0.7 40.0 100.0 0.3 36.1 90.3 1975 First quarter 0.1* 25.0 100.0 0.8 36.9 92.3 Second quarter 1.2 38.1 95.3 Third quarter 1.0 39.1 97.8 Fourth quarter 0.2 39.3 98.3 1976 First quarter 0.1 39.4 98.5 Second quarter 0.6* 40,0 100.0 * Amounts cancelled in March 1975 (Loan 625-CO) and in June (Loan 742-CO) ANNEX III COWLMBA: Loan 62-C and 742-CO' - Copletio Rport SJummary of Operations~ as of Decmber 31, 97 Loan OL-UU Loaun 1742- No. Amount (US$ mill.) No. Amount (US$ mill.) Total applications 56 29.2 117 65.9 Applications11 withdrawn -' 39 18.3 Applications rejected 2 0.1 2 0.8 Applications reduced in amount 0.5 4.7 Total approved 54 28.6 76 42.1 Total cancellations 6 3.7 6 2.3 Net commitments 48 24.9 70 39.8 1/ The withdrawal of applications under loan 742-CO was mostly the result of demand for financing exceeding the resources available. Some of these applications were later approved under the fifth loan. - A.26 - ANNEX IV COLDYBLA: Loan 625-CO and 742-CO - Comoletion Report Analysis of Subloans Extended by the Five Financieras from the Proceeds of Loans 625-CO and 742-CO (in US$ millions) Lan 625-CO Loan 742-CO A. ByAotmoun uS$ 200,000 and below 20 2.2 8.8 34 3.3 8.3 US 0001- S 0000 8 2.0 8.1 6 1.5 3.8 US$ 300,001 US$ 500,000 6 2.4 9.b ö J.3 0.0 US$ 500,001 - USS 700,000 2 1.2 4.8 5 3.0 7.5 USS 700,001 - US$ 900,000 3 2.3 9.2 5 9.5 USS 900,001 - US$ 1,000,000 2 1.9 /.0 z 1.9 4.o uSS 1,000,001 - USS 2,000,000 6 8.5 34.2 6 9.8 24.6 Above USS 2,000,000 1 4.4 17.7 4 13.0 32.7 48ö 24. 9 1M0. 70 39.8 100.o0 B. By Loan 5 years or less 2 0.3 1.2 6 0.2 0.5 5-9 years 4 1.1 4.4 13 2.1 5.3 10 years 21 8.0 32.1 37 22.5 56.5 12 years 15 5.3 21.3 8 4.7 11.8 10-15 years 6 10.2 41.0 6 10.3 25.9 48 24.9 1000 70 39.8 C By Grace Period 0 - 1 year 17 8.1. 32.6 23 8.3 20.9 1 - 2 years 23 7.5 30.1 41 21.2 53.3 2 - 3 years 8 93 37.3 6 10.3 25.8 4ý8 24.9 100.0 70 39.8 100.0 3. By Economic Activity F-od beveraees and tobacco 8 7.1 28.5 8 1.6 4.0 Textiles and apparel 22 12.2 49.0 20 14.0 35.2 Wood 2 0.9 3.6 3 0.9 2.3 Printin1 1 0.6 2.4 6 3.8 9.5 Chemicals 3 0.3 1.2 9 3.5 8.8 Non-metallic minerals 3 1.8 7.3 11 9.8 24.6 Metals and metal produets 5 1.4 5.6 4 1.2 3.0 Other manufacturing 2 0.3 1.2 5 0.9 2.3 Kuboer goods 2 3.1 7.8 Other sector _2 0.3 1,2 _2 1.0 2.5 _48 24.9l100 7 39.8 100.0 E. By 5sz of Spounsoring Firm (Total assets in milt. of col 5) es thanr, . .0 1 . . 7-210 1.3 5.2 14 26 6. 20 - 60 10 3.1 12.4 12 4.0 10.1 60101 6.2 24.9~ 7 3.0 7.5 100-300 6 3.4 13.7 16 13.2 33.2 More than 300 7 10.4 41.8 10 15.5 38.9 24.9 1000 _ 398 10W.O F. By GeographLcal Location Antloquia 15 13.5 54.3 18 11.1 27.9 Atlantico 5 2.5 10.0 9 7.0 17.6 Boyaca 1 0.1 0.4 Cauca 1 0.1 0.4 0.2 0.5 Cundinamarca 11 2.5 10.0 17 5.5 13.8 Santander 1 0.4 1.6 2 0.1 0.3 Valle 14 5.8 23.3 14 11.8 29.6 Caldas 2 1,4 3.5 6 1,2 ,0 Tolima 1 1.5 3.8 G. By Sponsoring Financiera Corporacion Financiera de Caldas 4 1.8 727.8 Corporacion Financiera 8 . Colombiana 1 12 1.7 16.8 13 4.6 11.6 Corporacion Financiera NaIonal 4 3.0 12,0 10 3.2 8.1 Corporacion Financiera del Norte 8 2.7 10,9 13 2.9 7.1 Corporacion FLnanciera Gel Valle 13 4.7 18.9 12 2.1 5.3 Consorcio de Corporaciones 7 11.0 44.2 14 23.9 60.1 48 24.9 100.0 70 39.8 100.0 - A.27 - ANNEX V Colombia! Loan 625-CO and 742-CO - Completion Report Sectoral Distribution of the Financieras Lending Under Loan 625-CO and 742-CO Comnared to Total Financipra's T.nan Pnrtfnlin (1974) and Gross Value Added in Manufacturing (1969) (in narcenages Diabura- Toann Gross Unlue ment under Port- Added in Manu- ~~_ *JC..J UJJ LF.L a.LL LLA and Dec. (1969) / -tL 'IOU .4.*. 1 1 _r Food and Tobacco 13.4 10.5 27.4 Textiles and apparel 40.5 26.9 13.9 Wood 2.8 1.4 1.0 Paper and printing 6.8 7.1 5.9 Chemicals 5.9 10.9 10.0 Non-metallic minerals 18.9 7.5 10.4 Metal and Metal products 4.0 9.2 4.4 Rubber goods 4.8 2.1 0.5 Other manufacturing 1.0 3.2 26.5 Other sectors 2.0 21.2 - 100.0 100.0 100.0 Colombia: Lean 625-CO and 742-C0 - Completion Report Subpo 0ects rinanced lnder Loar625-CO and 742-CO COlMBI ANA. __Con_ninar-ngf ojåcr Bank Len Tota Proceang Time ronth.) /oIan Erl Cos t Oec- Book ine- Pro ecto7.) .e Grace Aount Finan h.- Cl.n Company, Company's Eploy- Capitl/ Effectiva Produco Cs- E -A or- Bank R era- phmrCom- S. (tS) 000) cLra Eortal1975 Pre-tan ment Cr.- Labor Bie of ¯¯o f P ro- .a.ed1 run % ~:eras. p'any orå .(. s 00 -----Aon euno ted by .9_.'g P ttin? -- noen-t 7. -f Return o tlb zU4nL ject -fu Salan Equity Sub-Proect - (1975_ 1. Companie with Good Financial Prformonnce (over 20% return on equity befor taxes) Artificial and synthetic fibers 625-Co E 39600 45130 140 64 - - - 36 10 2 709 6 Les @t 1 4 3 5 2064 5.6 21.7 137 329 Cahle and tael aires " E 5935 5935 - 67 - - 17 16 12 - 218.7 3 1 3 1910 40 3 29.J 17 349 ts/screws " E 7470 9509 27 32 16 - 5 47 10 2 149.0 2 4 2.5 - - 33.9 35 272 - Nyten fiber E 83400 83209 - 34 - - 48 18 10 2 1556.1 2 2 5 - - 28.9 171 487 - Clothing mte~rial/ nylon lac e 10:700 12950 10 40 - 26 4 30 10 - 229.9 Lenn thaa 1 8 2 -- - 21.1 53 207 Carbon paper, ink, etc 742-CO E 2250 2533 13 42 - - - 58 5 1 49 4 2 2 5 1 277 21 2 32.7 31 82 - Cosructionmaertal " 6500 10700 65 63 - 14 - 23 10 1.5 329 7 tess non: 1 4.5 Leen than 1 - - 15A 35 306 CEomern " 17530 13671 (221 6 35 - 59 - 10 1 38.4 L.o :r«ni 4.5 Les than 1 - - 34.9 50 273 Wearng apparel E 3198 3983 25 28 17 - - 55 10 1 50.1 1 6.5 Less than 1 -- - 60.0 2 1991 - Cotton nylon cloting material " E 2280 3027 33 52 16 - - 32 12 2 69 1 - 3.5 LeSS than 1 - - 26.3 51 59 - Brirks " r 44B91 60595 34 24 - - 50 26 10 1 721.6 1 3.5 3 - - 29.0 86 205 - t. Conpan, es uith odest Finanecil Prfeorance (10-20 retore on equtyl bafeo taen) Rosr.y (ladis) 625-CO E 4387 1916 (56) 72 - - 28 10 1 73.6 1.5 2 2 - - 12.3 - - Soap E 16432 7200 (56) 24 - 28 - 48 12 3 93.9 Less thau 1 10 4 - - 19,9 29 248 - Clot,Hng marertal " E 13550 15150 12 23 - 20 24 33 9 1.5 194.7 3 2 5 1 - - 17.2. 85 178 - Txturlation of Pol.fiber" NE 9516 7096 (25) (6 - - - 34 12 2 250 8 2 IeNs than 1 4 - - 19.1 1 7096 Roller bnd NP 2264 5996 165 36 - - 32 32 7 - 114.8 Lea thar 1 1,5 Lena than 1 - 18.1 45 133 Cereal processing E 1436 1470 2 63 - - - 37 10 - 48.7 Leno than 1 1 5 Les than 1 - 13.2 - - losaery/wearing apparat 11561 9090 (21) 56 28 22 - 14 12 2 170,7 2 9 1 - - 14.7 104 87 Aircrafe 742-CO E 27396 21138 23 76 - - 24 - 10 2.5 781.1 1.5 2 3.5 - - 11.9 61 347 Coecrero min " E 20000 25795 29 44 - - 33 23 7 - 499,0 Lena than 1 3.5 2 - - 14 3 1 25795 - Food (Chocolate) E 6600 4585 (31) 06 - - - 4 10 1 196.6 2 5 1 815.6 35 5 13.3 - - t1. ':ompanies with Poor Financial Pertormance (below 10% return on equity before taxes) Exploration and enploi- 625-Co E 5211 5201 ( 2) 36 - 28 26 2 98 0 Lesa than 1 4.5 Lest than 1 - - 8.2 51 102 - tationnfomae (cmerac) Polysrer fikar 742-CO E 100739 101866 1 10 - - 54 36 10 0.5 469.5 2 3 1 119(1212)0.7 5.8 187 545 PIastic prodecta NE 4622 8146 76 t8 6 - 41 35 8 2 65.0 1 3 5 Laan than 1 - - 2.9 (1974) 125 65 (11.4) Te>r ilo 0 E 9500 9833 4 29 - 16 55 10 1.5 131.1 1.5 3.5 Lena than 1 - - 8-4 130 76 - Brake fluid and cesseaorie" NP 16284 12316 (24) 32 - 46 22 10 1 180.9 1 4 Lean than 1 - 8.7 8 1540 7extle E 44198 83315 89 34 - 35 31 15 2 5 1059.8 2,5 2 2 3442(4589)33 3 4.0 180 463 (15.3) Tt -rEatioe of yar E 4704 7095 51 66 - - - 34 12 2 145.9 1 3 Les than 1 - - 2.8 21 338 - Yarn and cloth dyeng " NP 47922 17471 83 19 - % 25 10 2 902.5 LO.S thrn 1 5,5 Less than 1 - - 7 6 128 683 · Ce-en " E 66035 106845 62 32 - - 37 31 12 2 1497.0 4 8.5 3 5 -4.4 26 4109 -1 1/ Expnon~ (E); ew Perodut (NP), -New Enrerpr se eE) colombian Loan 625-CO and742-' - eompletion Repot Subprojects Financed Under Leans 625-CO and 742-_CO NACIONAL Grodäner Ian Glas- Cost of Project F,inncig nf Projeot (g) Bank Lo5n Total Proce.sing Tine '~onthel Copany's CGmany's Employ- Cital/ gLLnejr O of Pro- Esti-ated Acual a- g-k DR Prnn- OtIer Compat- T- Gra.e nunt Flnan- BR Bank Epgrts(1975) Pne-tax ment nr.- _Labor Rate o ject unnra Dy_funds Lfrl IYr) (USV000) ciar Amount % of Return on aed by Co.a $000) Protact- (0 _._ !quity Subro- iont) (1975) lect CompansN with Good Financial Perfotmance (Over 20. eturn on equity befre taxas) Tobacco 625-Go E 165160 167746 2 50 2 - 2 46 15 3 4370.9 A NA 5 1264 1 3 28.0 175 958 - Eo-a'.- 8rerals " 64615 81356 (4) 38 - - 45 17 15 2 1562 2 Len. than 1 2 3 - 31 2 13 6258 - Mtallurgcal pnodoc1.s 742-Co E 1165 1541 32 69 - - - 31 5 - 44,7 Lass than 1 7 tass . han 1 2400 42.8 34.0 3 514 - -n-metalliomneral " E 14144 18923 34 54 - - - 46 10 1.5 409 7 2 Less than 1 4 380 7 9 30.9 100 189 '11 0) rditorial " E 7662 1847 11 35 - 11 43 11 10 0.5 26 9 Less than 1 6 3 . 55 5 8 16.1 3 616 - Food " ' 313%7 35079 12 14 - - 20 66 12 1 207 5 Less than 1 5 5 Less than 1 - - 29 9 - - (83 0) 11. Companin with Modest Financial Performance (10-20% reurn on aqity before taxes Textiles 742-CO E 212120 207507 (2) 42 5 - 26 27 10 - 3722.9 2.5 Less than 1 Less than 1 27000 28 b 10 7 801 259 (43) Plastic" E 12911 15221 18 41 - 8 - 51 10 - 290.5 12 5 - Less than 1 - 18 5 53 287 20 Waing apparel " 9304 5202 (44) 20 - - 58 22 7 6 46 5 Less than 1 5,5 Lass than 1 3685 47.7 14.4 40 130 - 111, Companies with Poor FlnancaL Perfonance (below 10% return on aqulty before taxes) Textiles 25-CO E 84804 59214 5 36 - - 34 30 15 2 561 7 NA NÅ NÅ 17200 24.4 8 4 118 756 - Textiles and wearing apparel " F 38526 57150 48 40 - 42 18 12 2 094 6 2 4 7 - (Lass) 144 397 - Textilt and wearing appar-1625-CO E 144041 211118 46 35 65 - 15 2 1.00 0 Less than 1 15 1 5400 28 3 4 169 1249 (23.0) Textilea and wearing apparel 742-CO E 144401 211118 46 35 - - 65 - 15 2 1910 0 Less than 1 11 5 4 5 f-e 27 1 Textiles and wemnno appare1625-CO Np 11797 10953 (7) 45 25 - - 30 12 2 257 9 Less than 1 6 2 5 764 R.1 (Loss) - - - Textiles 742-C E 45500 38976 (14) 45 - - t 29 12 1 8(61 NÅ 8 5 1.5 17200 24.4 8.4 23 1695 13 0 Textila E 25000 31940 28 38 - 26 - 36 10 1 5747 NA 2 2.5 - . 5.0 156 205 (7 0) Textils " E 59690 81387 36 37 - - 63 - 12 2 13418 Less than 1 10 2.0 3202 20,2 9 2 - - '36 0) Graphic arts E 6300 6155 (2) 65 - - - 25 10 - 1879 3 3 1 93 2.5 9,2 26 257 - const r..ction sieter-at NE 7200 6987 (3) 30 - 1 ,5 115 1 96 9 Leså than 1 3 Lss th,,n 1 - - (Lo-O) 11 635- Non-metalli~ ,nerals E 582 463 (20) 79 - - - 21 5 - 16.3 4 2 1 5 - - (Lss) . 1/ Espannmon pF) a, eOro~dutNP)¯, Nasw Fnerprisa (8E) olombia LIan '25-cO and 742-C2 -._cmp1ec_on Renort subprletsO Financed lider Loani 625-LO and 742-2(7 c-, ,ii U ~ Co f P-j-c tiFr.. VALLE (UsS' 000).21 E -__y sbprog.et I.Gpanteo with Good Flnancial Peornc (ovey 20% ratum n equnity before taxes) Text41n 525-co E 17465 47746 1 3 10 11 79 10 3 250 7 Leos than 1 7 4 2064 5 6 21.7 57 838 Metal product 41 3500 2366 (32) St - - - 49 10 2 64.2 6 5 Leas than 1 9 1.0 34.6 69 34 Textile " , 4 530 66076 63 42 - - 12 46 10 1 1430 1 Lnss than 1 2 - - - 57.6 188 351 Plasic prdn roIn[enenT( NE 5654 bs5;8 I6 4 - - 25 33 10 2 143.6 Less than 1 6 - - 36 0 81 81 Steel .nd tro> E 30150 34343 14 42 - - 18 42 10 2 i09 i Vens than I 2 3 5 n 3 40 6 176 Metal eha.u" ' E 4000 4134 3 43 - - - 57 10 2 94.3 2.5 7 Leni thaI 1 - - 23 3 72 57 Mining NP 3119 3152 1 50 - - 12 38 10 2 84 8 4 0 3 Lee than 1 - - 56.6 28 113 Food " r 21000 265(10 26 41 - 29 30 12 3 558.7 teas than 1 3 2.5 13800 54.7 28.0 10 204 Antem fond 742-Co INE 11200 13810 23 7 - 27 26 40 6 1 39 9 Less than 1 1 5 Leas than I - - 36.0 83 166 Flectrical cn,duerrsn" E 13116 14993 14 24 - - - 76 10 2 147 9 Lens than 1 2 5 Loe1 tan 1 86 0 7 36.2 22 682 Soap " E 14000 16825 20 29 - - 26 45 10 2 192 4 8 5 3 5 Leon than 1 - - 26.0 35 481 Steel " E 69201 102270 48 18 24 - 28 30 10 2 780.3 Lion than 1 5 5 1 385 3.5 21.7 83 1232 Paper E 54400 55113 1 20 - - - 80 8 2 548 2 Leen than 1 6 Leon than 1 445 1.3 41.0 34 1621 16 5) Cem8en " 0 05110 101896 20 45 - - - 55 10 2 1996.8 Len. than 1 2 5 3 805 7.2 31 0 156 653 (17 0) Rubber products " 1i7166 163890 4 32 29 39 10 2 2528.3 Les than 1 5 Lene than 1 388 4.2 47 0 Metal roducts " E 5004 5485 10 56 - - - 44 7 2 135.0 Leon than 1 8 Leon that 1 9 0.9 34 6 32 171 - II. Copan.sit e innial Perfrnatoi Fne (10-23% return on óquitv béfore tmes) Textiles 625-CO NP 12300 14500 18 36 - - - 64 10 2 272,9 2 2 5 4 5 174 1 5 17.6 1189 12 Fapet pulp E 36724 b3531 73 27 6 - 65 10 2 965 7 - 3 5 3 l- 1 9 1 63531 Sugar 742-CO E 9500 15972 68 20 28 29 23 7 - 114.6 Lens ihen 1 6.5 1.5 3782 34 6 10.8 79 202 censtrucon- n m,teial " 3945 4156 5 41 24 - 10 25 10 1 74 4 5 5 11 5 Lene than 1 - - 14.8 NA IL c inoLn wih inr Financia. Performance (bel,, 10% return on equity before taxes) letiles 625-cO E 18445 159279 763 7 2 57 34 12 2 106.1 Leon than 1 4.5 4 119 0,7 5 8 601 265 Sugar E 15101 21659 43 9 22 - 33 36 10 2 97.5 Lene than 1 5.3 Leon than 1. 280 55,1 (1 3) 934 23 Ttlites "tE &(NP) 47553 73400 55 24 - 5 5 66 12 2 940 1 NA 1 4 - - 7.7 312 236 Antibior%ceøntainers & ToIeItry 0 &(N ) 1566 1609 3 63 - - - 37 10 1 53 9 Lena than 1 Lene thn I - - 4 9 100 16 - ceramic 742-CO E 12000 13394 12 41 11 - 40 8 10 2 247.7 Les. that 1 6 5 Less than 1 352 31 2 (28 7) 365 37 - con.trntuctn interal i 0 11741 11566 (1) 17 22 22 - 39 10 2 84.6 Lene than 1 6 Leon than 1 202 10,3 9 6 18 609 - Chem[calS 742-CO 91 12R554 1569 22 27 - - 7 54 10 2 1646 $ Lesa than 1 3 L 5 513 20.1 (4 3) 161 974 95.0 Textien 1NP 23200 2431, 4 27 - 10 13 50 10 2 268 0 Lene than 1 2 2 - - 4 8 16 1501 - Ceramics 4 50387 1057 - 34 14 - 19 33 10 2 145.0 1 52 394 8 5 8.7 97 107 1/ Expaniln (F), Nin Product /NP), New FnterprLe 7NE) CooiaO: tean 62_5-C0 and 742Co - Ceopletin Renert jýSbP;ojets Financed Under lane 65-CO Oad 742-CØ Pr:duct Loan £14_84 C....o2t 47 POntinng of Pir (0L tftrnse o eocbl Cneye Cses427P: £æ.J LL ep Pro- jesl_od Acrte Over- n t gl,1e Othe: -_.- _ _ t c_- reo, e;:;e -g¿as a v n (Yr ( cmi r)0 8 ---k £onrts/1975) Prv-td mert cres- Labior Rat_e ef 5.1 Lolf. Retunn ted by (Col $00) PoTct- (USS'000)$ales EtUItl suoroieect IoSt I, cmpne with Good FLnnial Performance (Oer 200 rtum en .qity befora taxes) Pae?r 625-C0 E 58994 65376 7 19 - - 37 44 8 - 568.0 1 1.3 2.5 6736 12 8 23 0 300 211 - Pap.r E 25I000 454447 81 18 9 - - 73 12 2 2500.0 2 5 5.5 14478 20.7 28.0 120 3787 - Veed " E 8h03 9031 7 87 - - - 13 10 3 369.4 Lese than 1 6 2.5 - - 23 5 NÅ - - No-metallIc minrale's " 1782 1752 (2) 1100 - - - - 10 - 92.9 NÅ 8 Lea than I 10801 67.3 27.0 - - N1n-etallic mifnrals 742-c0 E 152636 210638 38 46 - - - 54 15 3.5 4130.0 Lecs than 1 4 2 1080 67 3 27 0 74 2846 55.2 V.etalIc minerls 625-,M E 9682 10246 6 42 7 - 20 31 10 2 207.5 1.5 2 2 26 1.1 38 0 NÅ - - Fed 742-CO E 1227 1565 20 ilo - - - 7 65.6 2 5 3 5 211 32.3 23 7 10 156 - II. Copanles with Modest Fnancial ,rfermane (10-20 roeren on equ.ty bafoe taes) -eatle 625-CO E 13105 13858 6 54 - - 10 36 12 2 397.5 Lee ehan I Le. e chan h 2 - - 11.8 45 308 - SynEhetic fiber. " 1400 13652 (2) 63 - - 22 15 10 2 399.3 1 2.5 2 - - 11.5 45 303 - Beverage" E 9992 10812 8 35 - 17 - 48 8 175.7 3.5 3.5 2.3 -- - 16.0 - - Metal Kechanic 742-co E 4498 4846 8 59 10 - - 31 8 2 114.4 Lese than 1 3 Teas than 1 96.9 13.2 18.0 9 538 - i3 chelcals " 5740 5886 3 66 - - 25 9 12 2 164.1 7 4 Lana thanl - - 16.0 15 392 - Tetilen " NP * 8930 9518 7 58 - - - 42 12 2 250.0 2 6 Len than1 - - l 51 187 - plastlee NE 8505 8722 5 26 - - 42 32 8 2.5 97.0 6.5 NA NÅ 31 4.9 12.0 101 86 - TIT. Compents with Poor i.nanclal Perftornce (belo 10% retun en nequity befoe taxes) Polyeter fiben 625-:0 E 19S08 23553 19 37 9 - - 54 14 3 440.0 Les. thae i NÅ a - -- 7.9 1O 236 - Plagtins 742-Co NP 30136 35523 1$ 31 - - 46 25 10 2 440.4 2 1.5 2 (1544) T4 (Lo.e) 46 772 (14.0) Fóód n NE 2)16 2265 12 63 - - 4 33 10 1.5 63.0 2 5.3 Leo# tha- I - - 3.5'40) 7 324 - Metal »echanic " E 10104 10876 8 55 - - 18 27 13 3 268.2 la.. Lhan 1 9 1 2 - 84 41 265 - Textilne and warL.ng apparel ' NP 45463 27217 (40) 41 - - 59 - 10 2 438.2 Leca %ban 1 6 2.5 - - 7.0 10 2722 61.8 Woo " 1756 1510 (14) 65 - - - 35 8 2 42.3 2 3 3 10 h.4 4.5 21 72 - Wool and Wool producte " E 351328 38048 6 46 9 5 37 3 10 3 770.0 Leca chan 1 3 3 270 12,8 9,0 - - ".0 NoA-metallit nineral " 582 463 (20) 79 - - - 21 5 16.4 4 2 1.5 - (Loen) - - Proces,ed fond r23-CO E 18822 21634 16 17 51 - 12 12 2 402.6 2 Les tho I 5 6400 f9.0 4.6 330 66 - nEp.ionn. Nn- .du (NP) NE Enerlprile (NE) CgW~IA; AN 625-CO AND 742-CO - COMPLETLON REPORT UB?R3ECTS FiACE.D Um,R iåJ)4_s 625-co AND) 742-LO Product Loen Clia. / Cast of Proleet Financing of Pro r(i) Bank tlv _(otal Proteeøing Time( onths) Ekoortl (1975 s a- Jab[ hatf ofP EsLted Acrtual Over- Bank B Lhnn- CmIR- G_ah z_ont_in_-BK an munt %r ft ££ er ___tyl.- C lam;k QMP un £i15f- JR Str Anýuot V rSJo "!X.L rieras .r funde (Yr) <Yr) (US$'000) dere (S5'00) s) s §Al£ i sg t 41o(1) . C aies vith ood Financiel Performane. (over 20% return on equity beTore taes) Suger production 625-CO E 85900 101830 19 25 24 - - 51 10 2,5 1041.0 Le.e ~ua 1 3 Ll. 68 . I 10443 45.5 23.0 425 240 46.0 Tire. 742-CO E 121107 104213 (14) 11 33 - 13 43 10 2 475.3 , 256. - - (48 2M 24.2) Paper and printing KP 35331 34705 (2) 30 - - 48 22 12 2 469.6 5.5 2.5 1 - - .6 - 0) Tobao " E 165160 167746 2 St - - 3 45 13 2 240.0 . 4 0 -- - 21. , - Texttrtion and *ynthetic fber 625-CO NE 6763 8459 25 45 - - 25 30 5 1 198.7 Lese than 1 I 4.0 5 17.3 21.1 & 264 11. ~o9anes ri Modeat Financil Performnce (10-20% return on equity before tame) Agricultural tooe 742-CO E 2854 2767 (3) 38 - - 29 33 5 - 47,48 Le. than 1 2.5 1 129.7 9.3 15.6 7 395 Soe.. " E 30851 33450 0 28 - - 51 21 12 1 409.3 6 1.5 6 - - 14.7 161 208 77.0 Food (Candy) " E 25100 42300 69 37 - - 24 39 10 2 629.7 1.5 Laos tan I 1 5291.1 37.1 10.9 151 280 18.8 II1. Cowpanies with Poor Financial Perfarnçe (below 10% return on equity before taxes) Non-etall.c oinerais 625-CO I 7473 9116 22 71 - - - 29 12 1 260.) Lese then 1 4.9 Le then 1 - :1,3 8 1140 - (COSI ) Pat1r producte 742-CO NE 4622 8146 76 34 6 - 41 35 8 2 65.0 1 3.5 Les then 1 - 1 2.9 (1974) 125 65 11.4 Texttiles " 14050 14985 7 94 16 - - - 15 2 318.0) 3 12 2 3532 35.7 3.8 34 441 (15.3) Textiles E 65644 67580 6 25 7 9 18 42 10 2 737.3 Le.s than I Leø tban 1 1,5 - - 8.3 349 194 (23.0) 1/ Expevion (E); NeW' Product <NP); New Enterprise (NE). Colombia: Loan 625-CO and 742-CO - CompLetion Report Projected and Actual Rates of Growth of Five Financieras Pro jections Actual Loan 625-CO _ Lo__ 742-CO -Current Ad justed for InfLatio-7 Dec 68-Dee. 1973 Dec.197-ec, 197 Dec. 1968-Dec. 1975 LDc. 1968-Dec. 1975 Coloiabiena Loan Portfolo 17.5 4.5 19.0 3.6 Equity Portfolio (at cost) 6.5 1.9 2.0 (13.6) Total Assets 15.4 3.5 16.2 0.8 Share Capital 8.6 7.8 4.4 - Nacional (1970-1974 Loan Portfolio 19.4 19.1 19.0 3.6 Equity Portfolio (at cost) 13.3 13.0 10.1 (5.3) Total Assets 18.2 18.0 18.0 2.6 Share Capital 10.1 8.6 10.9 - Valle (1970-1974) Loan Portfolio 24.5 25.0 29.9 14.5 Equity Portfolio (at cost) 18.4 21.5 16.6 1.2 Total Assets 23.5 24.1 28.8 13.4 O Share Capital 13.1 1.0 17.2 - Norte Loan Portfolio 26.7 25.0 28.9 13.5 Equity Portfolio (at cost) 27.8 21.0 32.8 17.4 Total Assets 25.8 22.5 29.5 14.2 Share Capital 14.6 17.7 18.8 - 2/ 2/ Caldas (1968-1970) (1970-_1975) (L968-LO) (1970-75) (1968-70) (1970-75) Loan Portfolio 22.0 25.1 11.5 23.0 2.0 4.9 Equity Portfolio (at cost) 23.8 (7.1) 24.0 2.6 14.5 (15.5) Total Assets 24.8 15.1- 16.5 17.3 7.0 (0.8) Share Capital 22.5 3.8 10.5 8.7 - - 1/ GDP deflator was utilized for adjustment. Average annual rate of inflation for December 1968 to December 1975 is close to 15.4%. The nominal rate adjusted for inflation is an inaccurate representation of the "real" ar9wth rate of the financiera. However, it represents a reasonable approximation since increases in real value arling from capital gains on fixed assets and equity investments and unrealized foreign exchange gains seem relatively small. 2/ GDP deflator average annual inflation for Dec.68-Dec.70 estimated at 9.5%. For the period Dec.70-Dec.75 it is estimated at 18.1%. - A.34 - ANNEX VIII Colombia: Loan 625-CO and 742-CO - Comoletion Report Comparison of Amounts Actually Committed by Each Financiera After Pooling Arrangements with Amounts Initiated by Each Financiera as T.ader (in US$ million) Loan/Finanera ~. Before Poolk- After. Poo,lin.- No. Amount % No. Amount % Loan 625-Co Caldas 4 1.7 6.80 7 3.0 12.0 Colombiana 14 3.6 14.40 16 4.4. 17.6 Nacional 8 10.9 43.60 8 6.5 26.00 Norte 9 3.0 12.00 11 3.8 15.20 Valle 17 5.7 22.80 19 7.2 28.80 (Cancelled) - 0.1 00.40 _ 0.1 00.40 Total 52 25.0 100.00 61 25.0 100.00 Loan 742-CO Caldas 10 4.6 11.50 19 6.9 17.25 Colombiana 15 6.4 16.00 23 10.8 27.00 Nacional 13 9.6 24.00 17 7.5 18.75 Norte 15 9.4 23.50 20 6.4 16.00 Valle 17 9.5 23.75 22 7.9 19.75 (Cancelled) 0.5 125 _05 1.25 Total 70 40s0 100*00 i01 40.*00 100.00 - A.35 - ANNY TX Colombial Loan 625-CO and 742-CO - Completion Report Colombian Financieras and Banco Republica: Growth of Professional Personnel 1969 1971 1973 1975 Colombiana La8-more R 7 7 7 Economists 5 11 12 11 Bus. Admin. 1 3 2 3 Accountants 3 3 3 - Engineers 7 6 7 8 Total 24 30 31 29 Nacional Lawyers Economists 5 7 7 6 Bus. Admin. - - 1 1 Accountants 2 2 2 2 Engineers 1 1 1 1 Total 13 15 17 15 Valle Lawyers 2 2 4 5 Economists 9 10 13 10 Rn Admin - 1 7 1 Accountants 4 3 3 6 Engineers 2 7 9 6 Total 17 23 31 28 Norte Lawyers 2 5 4 2 Economists 6 6 7 BusP. AdinL. - - N I Accountants 1 2 3 ( Engineers 2 2 2 3 Total 11 15 20 21 Caldas Lawyers 7 5 5 5 Economists 6 3 4 3 Bus.. Adm... 5 Accountants 1 1 2 2 Engineers 6 2 4 4 Total 23 11 16 15 Banco Republico (Development Credit Dept.) Management 8 7 7 Analysts 17 21 16 Engineers 3 4 4 Economists/and Statisticians 2 4 5 Accountants 2 2 1 1/ Total 32 38 33 1/ datUa availablp Frm 1077 Colombia: Loan 625-CO and 742-CO - Completion eport Source of Resources Utilized by the Five Financieras as a Group, 1970-1975 (in Col$ Million) 1970 1971 1972 1973 1974 1975 Amount Aoun L Amount % Amount 7 Amount %/ Amount % IBRD 621.5 20.3 845.7 23.7 1,306.2 30.4 1,542.8 26.4 1,862.9 28.9 2,342.1 29.9 Own Equity 731.4 23.9 808.6 22.6 911.9 21.4 1,103.2 18.8 1,274.6 19.7 1,46ý2.4 18.7 BR Lines 1/ 892.3 29.2 1,000.7 28.0 1,068.5 24.8 1,297.2 22.2 1,304.7 20.2 1,742.3 22.3 Foreign Conner- cial Bank 281.8 9.2 344.8 9.7 301.8 7.0 494.1 8.4 844.5 13.1 92:2.2 11.8 > ON Bonds 241.3 7.9 :288.5 8.1 421.8 9.8 518.6 8.9 552.8 8.6 560.9 7.2 Other Liabilities 291.4 9,5 _281.0 _7.9 291,1 6.8 894.8 15.3 615.8 9.5 790.2 10.1 Total 3,059.7 100.0 3569.3 100.0 4,301.3 100.0 550.7 100.0 6,45.3 100.0 7,820.1 100.0 1/ Includeý: other official entities. - A.37 - ANNEX XI COLOMBIA: Loan 625-CO and 742-CO - Completion Report Source of Resources Utilized by the Financieras, 1970-1975 (in ODl$ million) COLOMBIANA 1970 1971 1972 1973 1974 1975 Amounti l Amount % Amount _ _ Amount , Amount % Amount IBRD 188.11 17.1 213.1 18.0 335.1 25.7 382.1.4./ 24.32 u.u Own Equity 234.0 21.2 241.6 20.4 255.5 19.4 285.6 17.8 351.2 16.9 405.8 117.2 BR Lines 338.5 30.7 355.6 30.0 385.7 29.3 407.6 25.5 446.0 21.5 571.8 24.2 Foreign Commercial Banks 73.61 6.6 119.7 10.1 45.6 13.5j 166.0 10.3 297.6 14.3 242 10. Bonds 141.9 12.9 161.8 13.6 191.7 14.6 228.6 14.3 250.2 12.1 254.6 1 10.8 Other Liabilities 126.7 11.5 94.6 __7.1 98.1 7.51 _131.21 8.2 218.2 _10.5 258.0 _ 10.9 Total 11102.8 100.0 l1186.4 1100.0 1314.7 1100.01 1601.81 100.0 2075.4 100.0 1 2360.4 1100.0 NACIONAL 19 01971 1 972 197194)75 Amount| % Amountl % Amount % Amount _ Amount tAmount . IBRD 1 208.3 31.3 263.7 32.51 366.2 36.0 385.5 33.2 1 42.0 32. b 1 3.9 1 0.4 1 _un 192.6 28.9 221.2 27.2 262.0 25.7 316. 334.7 25.5 371.1 25.2 BR Lines 179.7 27.0 233.2 28.7 247.9 24.3l 282.71 24.4 274.9 21.0 255.0 17.3 Foreign Commercial Banks 20.9 3.1 31.7 3.9 36.8 3.6 1 37.3 3.2 193.3 7.1 133.8 9.1 Bonds 14.5 2.2 22.1 2.7 69.3 6.8 105.8 9.1 100.0 7.6 94.2 6.4 Other Liabilities 50.3 7.5 40.9 5.0 36.6 _3.6 32.91 2.8 __81.8 6.2 85.5 5.8 Total i 666.3100.0 812.8 [100.0 1018.8 1100.0 1160.91 100.0 1312.71 100.001 1473.5 100.0 1 VALLE 170 % 1971 1972 1973 1974 19]1975 Aj_t, Au % Amount ( A. un Amount % l Amount 1 1BD 1,03 I6,71 l l 91 9 971 7 96 7 31671 23.91 352.8 21.4l 40.91 21.7 Own Equity 149.5 24.0 179.4 22.3 212.2 20.9 264.2 19.9 319.8 19.4 375.5 18 .4 " w 11 1 ~ 1 1 - i ^ ~ i _ 1 ~ _ 1 - BR Lines 200.41 32.21 216.5 1 26.91 231.5 22.81 349.3 26.41 354.5 21.5 1 532.9 1 26.1 F ein Con-ercial Bankl 110.3 17.71 195 .8 R 15.7 141. 172.5 13.0 309.2 18.8 382.5 18.8 Bonds 12.2 3.1 27.1 3.4 1 64.5 6,3 94.01 7.1 115.1) 7.0 110.5 5.4 Other Liabilities _389 68.5 8.5 95.5 9.4 9 11.9 .8 . Total 622.1 100.01 804.1 100 .0 1016.8 100.01 1324._ 100.1 _1648.4 1100 .0 2038. 1 100.0 CA LDAS 1970 1971 1972 1973 1974 1975 .... l A..., ..,.r ¾ Ammm T 1 Amant 1 % I Amount _ __ 5 5 25.2 042 31.41 276.9 38.5 361.5¯ 38.6 i.L Lquity 90.4 21.4 9.9 22.5 100,7 19.7 126.3 19.4 139.2 166.9 17.8 SR Lines ¯109.11 25.81 126.81 30.1) 114.71 22.41 135.8) 20.9) 111.9 15.6 136.2) 14.51 BUnd 16.4 3.9 10.1 2. 4 8 9.2 61.7 8.6 74.3 8.0 F a Cfeteros 1'3511.4 65.3 15.51 73.4 14.3 58.3 9.0 58.4 8.1 55.6 6.0 1 ~.... ~ /. 9111 49.01 11.6 28.1 5.51 29.8 4.61 37.4 15.2 1 79.5 _8.5 Tota14 .7 100? 0 4 1 100.01 512.41100.01 649.91100.01 718.3 I00.0 935.6 [100.01 NORTE J O_ 1. '__ _T 17 1971 19 1973 1 974 619 AmunR7Omont / Amount i£ A 1ount /, aount / Amount 2 wEuy 64.9 24.1 71.5 20.2 81.5 16.9 110.4 17.7 129.7 17.0 143.1 14.1 06. 1 24. 8 19.0 88.7 12.4 11.81 1219 117.4 15.4 246.4 24.3 BR Lines-l 1 ~ 1 l l l Foreign Commercial Banks 31.01 11.5 1 44.8 12.7 56.2 1 11.6 82.4 13.2 111.6 14.7 101.6 10.0 1 Bondsin.4 1 1.1 3.4 2 1 5.1 29,1 3.8 27.3 2.7 ullus Nac -. le C8eeo 65. 15. 653 1.5 7, 14. 58. 9. 584 1 5. 6.0 OLiabilities 128.3 10.5 28.0 17.81 32.8 [6.8 54.2[87 81.4 1 .7 9115.8 11.5 Total _ TO8 42 . ~ ~ l 5 2._~~ TO¯ 100.0 5 100.0 A Includes other X Hfficial entitAes. ANNEX0 XII Page I COLOMBLA APPRAISAL OF SX'111 DEVELOPMENT FINANCE COMPANIES PROJECT Financial Statemene - CF Colombiana (Bogota. estalsised n 1959) Audited Acontn (an ei December 31) -Iin alS milin) 1970 1971 1972 1973 1974 1975 alance Sheet sh, receiableand olher shor,-ten asneis 45.7 40.4 82 9 94 4 130 3 140.3 Export-Lnpori f nancing 93.2 164 2 71.7 202.3 410 7 370 2 lans dueithin ene year 170.9 201.7 195.0 273 3 407.5 517 2 Curreat Asett 309.8 406 3 349 6 570 0 948 2 1,027 7 Lane des Pter ene year <i3.4 561.9 793.4 838 0 829 6 1,300 D i nens,nr,a iner 159 9 168.3 140 9 168.6 166.4 175 4 P-ed and tber ast naet) 49.7 -S-9 .8 75 li1.? 157.3 rotal Ansenn 1102 8 1186.4 1314 16l -4 2,360 4 Liabliis and Equt_y Lass psable <nuren) 46 5 75.1 166.1 210 6 275 2 328 3 ine to banka 79 6 121.0 45.6 166.9 237 4 742 7 Acounatn payable ai ether ehe-tern liabilitie 126.1 i18 3 77 7 120.2 Lurreit Liablit[es 252 2 314.4 2d9.4 496 7 799.2 816.1 Bn.I pavaLe 161.8 144 5 177.3 190 2 20, 6 BR 1. 227 5 218.4 307.7 293 4 294 1 360 7 IBRD 168.2 19G.4 307 1 337 6 448 9 360.( Other 79 1 59.8 10 5 _11 __82 13 7 Medium-and L,ng-Term Liabilite 616 n 630.4 769.8 819 5 ' i I thare capitaL 137.8 139 8 144 0 154 1 156 9 172 , eened earnin and reserves 96,2 101 8 _111.5 131 5 194 3 233 2 Net Worth 234.0 241.6 255.5 285 6 351 2 5 Total Liabilitien nd Equity 1102.8 1186 4 1314_7 1601. 2075 4 2.26_ 4 Lenngent LinbInn cen 97.7 84 3 134.2 162.6 130 7 h6t 5 Rat io- (uren r 2 1.3 1 2 1 I I 2 1 3 Total debt/quiy 4 1 4.3 7 5,2 5 3 5 2 Reneves end retained .enings an < ef total portfl21 (nncutiing guaranees; fl.9 9 9.9 3.4 [i 0 Equiy portfolio enn/ei nei worth 68.3 70.0 55 1 59.0 47 4 43 2 Percentage i as 24,2 7 6 10 8 21 8 29 6 13 7 113 b 136 3 Innl 5 207 7 324 3 411 7 69 747 9 1b8_3 174 8 243_3 'rons sprea5 61 6 64 7 79 4 149 5 167 7 -d nnstraive expensn 15.3 17 1 21 7 25 7 29 4 33 5 Provis<on far losen 2/ 2 3 9 6 9.8 7 3 1.5 - las., 13.8 13 2 7 4 9 5 37 4 37 1 <reP lt 25.5 21 6 25.8 36 9 81 2 97 1 Dvindends 16.5 16.8 ' t 23 1 50 2 60 1 Rat 1os <renn spread an 7 ef average tetae anneis (ATA) 5.7 5 -8 i 7 i Ad n.nntratn osts an % sf AA 1.5 1 5 1 7 1 8 1 6 1 5 ei proftas e fATA 2 6 1.9 21 2.5 4 4 4 4 lei pr".iLt se / oaerage eity 11.3 9 1 10.4 13 6 25.6 23 7 Daiensa <' fyear-<e3 d sie capital 12.0 12 0.1 2 .503.03 Dinidend psev-oun t ra/in 7) 65.5 77 8 73 6 62 6 61 7 61 9 l< .gM nther« of s i en ireý edm en ir ti frm rtaied ernien in Caolombnnnaeaudir repors 3 or ilai». iaud,, rep,rt diitake. - A.39 - A2mE1 XII Pae 2 APPE418AL OF SIXITI DEVE14PMENT FIANCE C0~Mim18M PROJECT Fina141 Sta t - Cp Nci-oal (M ael n, äslishe 1. 1959) A_d_.dAc_cout* 4ESof_Dece~b* 31) (1n Col$ .illion) 190 911 1972 1973 1974 1975 Assets Cash, receiable. and other short-term asst. 19.4 26.2 30.4 35.2 57.8 58.9 Export-loport financing 20.3 31.6 38.9 28.2 88.3 61.1 It.s du within on. year 155.4 167.4 199.9 239.5 3034 346.7 Crrent Assets 195.1 225.2 269.2 303.5 449.5 466.7 ~0.In d.. efter one yr 369.3 480.8 630.1 710.2 686.9 831.4 Equity iv-mk (e.. ) 96.8 102.1 112.4 139.2 164.4 159.6 Fixed and other »atg (nt) - 4.7 7.1 8.0 11.9 15.8 Total Aset. 666.3 812.8 1018.8 1160.9 1312.7 1.«3. 5 Liebilities and gmity Loa~. psya.1e (caat)- 55.6 79.9 120.8 152.0 175.9 184.0 Due to begks 20.9 31.6 36.8 27.2 86.0 58.9 Acoumnts'piyable and otteo shot-term tiabilittie _4* 56.9 81.8 85.3 Curenst Liblitieo 120.9 166.4 195.9 216.1 343.7 328 4 bo peycbl. 7.9 15.7 60.2 92.9 83.1 83.3 %c - . 150.9 172 7 173.3 177.5 163.2 137.4 IBRD 188.1 227.6 325.7 345.4 378.6 475.4 Other liebiltties . . ..j 9.2 13 _1_8! 9.4 77.g Mediu-.d-Long-Te-s Lia.5tl4t .t fl.8 425.2 560,9 628.1 634.3 774.0 Share cpital -. 115.8 129.7 147.0 169.3 169.6 169 6 Retained earnings a.,d resrv_. 115.0 147.4 It51 201 5 .et Wort 179 26.0u 1..7 L.1 371.1 Total L.altie and Equity 666.3 8128 1018.8 1160,9 1312,7 &473.5 Coninant .iailiies26.9 11.6 408 5.3 6. 169 7 Ration Current rato 1.6 1.4 1. 1 4 Total deht/eqjIty 2.6 2.7 3.0 2.9 3.1 3.4 Resrces and retainad sarnings a. of total portfolio (including 11.5 12.4 12.0 13.4 12.7 14 0 Buarantees) Equity portfolio s . of nat ~orth 50.3 46.2 42.9 44 9.A1 .. P-rcentage increase in total .asst 22.6 22.0 25.3 14. 3.1 12.2 Inco~ Statement Total Inmma 85.6 115.1 149.8 183.5 216.8 268.0 Financial coets .7 55.0 79,0 91.1 1211 143.5 Groas spread 47.9 60.1 70.9 84.4 95.7 124 5 Admtni.tatlvc costa 7.0 8.0 9.8 11.9 14.t 18 2 iortfolio loe 0.4 0.7 3. 1.4 1. Ta.s 1 2 14.._ 1. _20 23.0 Net profit 30.4 36.2 *63.6 56.2 58. 83 3 Dividende 22.4 29.7 . 362 .45 9 46.8 67 7 latijos Gros Ipread a~ . of average total asat (ATA) 7)9 8.1 7.7 7.7 9.7 8 9 Adinstrat iv cot. as 7 of ATA 1.2 1.1 1.1 1.1 2.2 1 1 Net profit as 7. of ATA 5.0 4.9 4.8 5.2 4.7 Net profit as % of -~«rage *quity 17.4 17.5 18.1 ' 19.4 18.0 23 6 DMvideLad.a % of year-end »h.re capital 19.3 22.9 23.3 97.1 27.6 39 9 Dividend pay-o.t ratto (1) 73.7 82.0 l. 78.4 81.7 . 80.0 81 0 other offitial entities. dividands pald out to aarh . -ubscrib«d during the yar. - A.40 - MhMhIAL OrStKl DVEPEIT 1 CE ~MIESjP3C FiancIl Btatn - CF del Vall (tet. estsblåehed In 1961) Audit.d Accoutts (ao_of Decemberj1) (in Col$ Million) 1970 1971 1972 1973 1974 1975 alanre Shost Assts Cash, rocetvbl.s and other short-tor. assets 27.5 38.8 51.8 48.8 105.3 67.7 Etport-Import ftnant8ng 111.3 126.0 139.3 170.2 298.4 434.8 Lone d.. eithi. onc yer 114.3 200.6 252.4 397.9 445.7 j 631.2 Current Asts 253.1 365.4 443.5 616.9 850.4 1.133.7 I.oann du. efter on ymer 327.0 393.2 520.0 644.5 724.1 812.0 Equity teveetoonts (et roat) 33.5 36.1 41.4 49.5 58.3 76.3 Hoo.d and other azset. (net) 8.5 9.4 11.9 13.9 15.5 16 1 Total Aseto 62,1 804.1 1016.8 1324.8 1648 3 2.038.1 Li.bilitie and Equity Lo.: p.yebi. (curreet) 48.0 80.9 88.3 191.0 173.6 317.6 Du to banko 110.3 125.8 141.4 172.5 309.2 382,5 Acco-t end orhar -4. 2.7 110.3 176.6 189.7 Curront Liabilitte. 208.1 259.3 312.4 473.8 659.4 889.9 Bonde,.eyebl. ii 191 27.1 &4, 94.0 ~j' 110 CR 189.5 226.0 231.5 349.3 354.5 532.9 IBD 103.9 186.8 271.7 316.7 352.8 ~.9 lo-s current csturities (49.1) (74.6) (75.5) (173.3) (153.2) 23. medito-od 1.ng-S-r Ltebilttis 264.5 365.4 492.2 586.8 669.2 790.7 Shoro -epIta 99.5 115.0 130.0 150 0 170.0 90.7 Retatned earntngs and rosens 50.0 64.4 aL2 im.2 149.8 Not Worth 149.5 179.4 212.2 264.2 319.8 357.5 Total_Ltsbit.I.tend Equitr 622,1 804.1 1016.8 13. 1648.4 2.038.1 Contingent Liabilltise 19.5 25.9 27.5 7.7 7.6 - 36.0 Ratios Current .rto 1.2 1.4 1.4 1.3 1.3 t3 Total debt/equity 3.3 3.6 3.9 4.0 4.2 4.7 Reserves nd retaload ceraings es 1 of tot&l portfolto (rinudn8 guratgoee.) 8.3 8.2 8.4 9.0 9.8 9.6 Equity portfolio as % of not rth 22.4 20.1 19.5 18.7 18.2 21 3 Perrentage incroase in total ssets 40.1 29.3 26.4 30.3 24.4 8 4 1n.oe Statement Total ircoo 78.7 105.5 144.7 190.2 260.9 357 1 Financial cot. 37.3 56.1 80.9 110.9 152 3 201.2 Groso preod 41 4 49.4 63.8 79.3 108.6 155.9 Administrativr cot 8.4 10.7 14.7 17.6 21 6 29.9 Prov.sion for 1o_so. -- 2 6 4/ 2.2' .- .. T<e A0-i 11.4 17.1 19.8 31.0 46.0 Net priftt 22.5 24.5 29.8 41.9 56 0 80. Divid.Ads- 14 4 16.4 25 2 34.7 54.8 lat. P-toäa a.eoAÅ Gruss epread an 7. of o.rage r..tal aont AoT) 7.8 6 9 7.0 6.8 7.3 .4 Adinistrativo costO as % of ÅTA 1.6 1.5 1.6 1.5 1.5 1.6 Net profIt a % of TA 4.2 3.4 3.3 3.6 3.8 4,3 Not profit as % of avteg* qutty 17.0 14.9 15.2 17.6 19.2 23.6 td:deod, as of year-ond share apttal 12.1 12.5 12.6 16 0 ,o ividend pay-out ratto (7) 5/ 53.' 70.6 58.7 62.3 66.4 81.0 1/ Exclodirg hood. isetsu to B. 2/ Includes other official entittoe. .3/ -cludirg ao . i, .n? hrn. disrounte, 4/ Actual portfol fr" . ; r n r nh it rport. t rr1.. ~ ' I... . . . - t - A.41 - 4NNEZ III C01,~3I APF~AL OF SIETRRIEVEID T FIMylCE CoWANIES PwJECT Finanial Stat ~ta - Cp del Narta (Ba quilla, e.tablihad in 1963) Audited Account. (ad of Deceb 31) (0n ColS million) 1970 1971 1972 1973 1974 1975 Balance Sheet Caol. recelvableo and other ehort-te as-eta 16.8 11.2 28.0 4.3 43.6 63.2 Export-nmport tnaning 1/ 14.7 37.8 83.7 62.3 113 8 96.1 Loen. d.. tthl. n. Y..¥ 1/ 64.4 73.8 84.1 136,8 152.3 269.6 Current Aset. 95 8 122.8 195.8 247.4 309 7 428.9 Loan. du- aftr ont n. (ot) 136.711 177.11 239.9 321.5 361.1 489.7 Equity Investm-n. /ne) 20.1-1 24.711 33.6 42.4 74.1 92.9 Fi-d and othar atopet. (not) 16.5 29,M6 13.,7 13.0 17.3 AL.0 'Total Anseta 269.2 354.2 483.0 624.3 762.8 1.012.5 I.bilittie and Equity Loan. pyabi. (currnt) 14.2 29.2 66.5 94.6 126.4 192.5 Due to bank. 31.3 44.8 56.2 82.4 111.6 101.6 Account. payable and other short-t.em liabilltie. 23,1 19.0 23.9 42.1 50.9 61.7 Current Liabilities 66.6 93.0 146.6 219.1 288.9 406.5 Band. payabl. 7.4 11.7 19.9 28 5 27.3 26.0 BR 51.2 43.1 49.2 52.7 50.1 104 0 IBRD 67.9 114.9 183.3 210.9 261.0 329.5 ,Ithe liabilitie. 9.5 14.0 2.6 3.0 5.2 3.4 SedCum-and Long-Torm Liabiliti.* 136.0 189.7 255.0 294.8 343 6 462.9 Share capit2l 46.4 48.7 56.4 75.0 81.6 85.7 Retalned earn1ng. nd reserv.. 18.5 22.8 25.0 35.4 48.1 57.4 oet Worb 641.5 81.4 110.4 129.7 143.1 Total LIbilitläa and Equity 269.2 354.2 433.0 624.3 762.2 1.012.5 Contingent Liabiliti~s 1.8 2.5 1.5 28 1 58.7 22.&2/ Raetios Current ratio 1.4 1. 1 A i 1 Total debt/equity 3.2 4.0 4.9 4,7 5.3 612 Reserves and retalned earninge az % of total portfolio (Including gu~ta @) 7.8 7.2 6.1 6.1 7 0 6.4 Equity portfolio a. % of net worth 31.0 34.6 41.3 38.4 57 1 57.9 Percentaga Increaoe in total a..t. 14,6 31.6 36.4 29.2 22 1 32.8 Income Statteent ooe 39.3 46.8 64.5 91.6 131.1 162.1 21.2 25.2 ».5 54.2 75 2 Gro. spread 18.1 21.6 96.0 37.4 55.9 56.2 Adminietrative ccte 6.0 7.2 8. 11.8 12.7 19.4 Provision for lo.. 2. (1.7)' 4.6 1.3 Tae. 3.9 4.4 4.7 6.9 9.1 MA Net profit 8.2 10.0 9.7 20.4 25.0 2W.I Dividend. 5.6 6.4 8.1 11.7 15.7 W5 Ratin. Grm.s apread of % of average total asseta (ÅTA) 7.2 6. 6.2 6.8 6 6 Adeeitrattivecot as I of ÅTA 2.4 2.3 -3. 2.1 2.5 2 Not profit as of ATA 3.2 3.2 2.3 3.7 .6 28 9ec profit no . of average 0quity 13.4 14.7 12.7 2.3 .g Dividende an % of year-and share capital 32.1 13.1 14.4 13.6 29.3 Dividend pay-out ratio () 68.3 64.0 83.5 57.4 65.7 1/ Approximat. breakdown. 2/ No provi.ion. made other th.n retalned earninge 3/ Optional rtock or ca.. 4/ Chareed directlv r r-rIn-A en nreport....,.-.. 1/ Col$1.9 million of 1972 provisina returned to retained earnings. - 4.42 - ANNF! XII ag. 5 MAPLRUSAL OF SiXTH .EEOMN ILMACE CMPANKE8 P-m3rC Financial Statements - CF de Calda. (Manizales, establlshed ta 1961) Audited Accounta_(as_of_Deceber_31) __. (in Col$ millton) 1970 1971 1972 1973 1974 1975 Bolance Sheet Aesets Caeh, recelvables and other short-term a.sats 37.4 18.4 26.7 2ó.7 33 1 38.8 Enport-inpert financig 24.2 24.1 2.9 38.7 34 1 63 2 Lnan. de w~thin one year 59.7 66.3 74.7 97.0 115 8 166.1 Total Current Asets 121.3 10 8 126.3 162.4 183.0 268 1 Loane duc alter one your (net) 139.7 143.5 237.5 330.2 370.8 493.6 ,q.ty Inosrmenes (not) 116,4 1184 105.5 115.3 131_0 132 5 Fixed and other alseta (ner) 43.7 51.2 43.1 42.0 33.5 41.4 Total Assets 421.1 421.9 512.4 649.9 718-3 935.6 Liabilit.s a,d Equty Loans payable (rurrent) 26.4 38.9 45.5 71.6 67.9 115.0 Due ro banks 65.9 2.1 21.8 35.8 32.8 61.6 Accounts payable and ither short-teom liaSilities 76.1 _69.4 28.9 31.4 36.1 64.1 Total Current LiabiLitlea 168.4 110.4 96.2 138 8 136.8 240.7 1/ 5ondn payabie 16 4 10.1 41.3 b0.7 56.2 65.2 BR 2/ 101.7 92 5 77.2 71.2 70.0 75.0 IBRD 45.8 48.7 123.1 193.7 256.5 330.6 Otbor liabililies -- 65.3 73.9 59.2 59.6 57.2 -edium-und Lng-Tero Lia.bilitie 163.9 216.6 315 5 384 8 442 3 526.0 Shar. capital 96 4 116.2 116 3 131 4 131 4 146.0 Ret.nd e n d reserves10.9 10.1 11.1 10.3 27.9 35.2 less under-provi.ion for expected portfollo loases / (17.2) (31.4) (26.7) (15 4) 20.1 (14.3) Nst Worth 88.8 94.9 100.7 126.3 139.2 166.9 Total Liabilities and Equity 421.1 421.9 D12.4 649.9 716 3 935.6 Contingent LiabilItie. 54.4 48.0 52.1 23.7 21.7 74.9 Current rtio 0.7 1 0 1.3 1 2 1 3 1.1 Total debt/equity, 14.3 3.9 4 6 4 3 4 3 5.1 quity p . et wth1 104 91.3 94 i 7 Percentage increase in total asets 13.4 -- 21.4 26.8 10 5 30 3 Income Statsment Totl inoe 46 9 48.9 63.4 77 6 108.3 142 0 Financial expenseri 30.9 36.3 40 0 53.5 70 8 95.5 Crss sread 16 0 12 6 23 4 24 1 37 5 46 5 Administrati vo expenses 12.4 9 3 9 4 11 0 13 1 17.2 provisi.ns for Inssena 3.1 8 9 9 3 9 9 21.1 Taxes -- -. -- 1.6 0.9 Not pr.fis 3.6 0 2 5 1 3 9 12 9 7.3 Dmnidendu -- -- -- -- -- 5.8 Ratios Crossapread as 1 of average total asets (ATA) 4.0 3 0 3 0 4 2 5 5 5.6 1/ ExcludIng bands isued ro BR _2/ Inclnde other official entities. 3/ Recomended by external auditor over and above the prvisions set aside by the Corporaion. 4/ Adjusted to reflect the transfer by Caldas in early 1975 of ColS8.1 from the reserves for portfolio torIes to retained eurnngs t.red > tr.....nr-ronn lr (i ,p-ted porifl1o intern - A43 - ANNEY YTTT Page 1 of 6 rlnlnmhi.q: Lons 125-CO andA 7429-Co - reomnpe-ion ponrt- RECONSTRUCTION OF CALDAS 1. During 1970 it became evident that Caldas was facing severe financial difficulties both in terms of short term liquidity and long term solvency. This annex discusses the origins of the crisis, the subsequent actions taken by the Bank. Banco de la Rep6blica and the management and shareholders of Caldas, and the progress to date in restoring the financial health of the financiera. 2. Background. Caldas was established in 1961 to aRRint in the industrial development of the.Manizales region and to help diversify a purely coffee-rowing regional economy. During the 1960. the finanripra grew rapidly (an average of 17% p.a. during the 1966-1970 period) and in 1970 itsz ta assets amouintedr to nearlu r~niu'Lao- m-;i1in-n- rniAnc' nrnmntinn,1 efforts were significant, and by 1969, more than half of its equity invest- ments weTareancmalsl a mi~ h4 1QA71oA. Cnadandeto four.successful underwriting operations. The financiera frequently extended loans to new ventures and provided m-anag-erial -A technical as4tne By 1970, nearly all the important companies in the Caldas region had received However, th financierra's~ -PO.-tLLe efot reule .AJ.fI..L. C1 LLCCLVY Je GUWCVCL) LHC~ £LLUGHLCLO 3 FLUmUUL±UUNA CALULLS LCult .LI a HCaVy concentration of its investment in an area lacking an industrial base and trdto. ! ----- ------- LLLUe 1Le UULLCbb LLbKb LIUPert- lu Sucn an approacn now se!eu eviuen1t. Many of the subsequent problems and difficulties might have been less severe had the Linanciera baSed itS promotional efforts on sounder investment analysis. But it attempted to do too much too soon, often with too little analysis. Many of the projects were poorly conceived from the beginning. Written appraisal reports were prepared only for projects to be financed with BR or Bank funds or for large investments. Other investment decisions were often based on management's and Board's first-hand knowledge of the business community. Follow-up activities were sporadic and focused mainly on ensuring that funds were used as originally agreed and in evaluating the quality and value of collaterals. Problems were not identified at an early stage and corrective actions were unnecessarily postponed. 4. Caldas' financial position weakened during the late 1960s with profitability declining and liquidity becoming increasingly tight. Net income after taxes as a percentage of average equity gradually declined from 12.6% in 1965 to 7.3% in 1968 and 3.4% in 1970. This situation can be attributed mainly to increasing administrative costs, low dividend income on a growing equity portfolio and growing financial expenses. In addition, some of the financiera's lending and investment policies were not conducive to sound liquidity and resource management. 5. - Equity investments increased -from Col$26 million 1965 (57% of net worth) to nearly Col$129 million -in 1970 (129% of net worth), immobilizing a large proportion of the financiera's own resources in relatively illiquid and low income producing assets. Many of these equity investments derived from the conversion into equity of loans made to companies experiencing financial difficulties and thus were of doubtful value. In addition, the quality of the financiera's loan portfolio deteriorated with an increasing proportion of Caldas' clients facing difficulties and unable to meet their interest and principal repayment obligations on schedule. Since the bulk of lending -A.44-- ANE xiii Page 2 of 6 operations were financed via borrowings whose maturities were the same as those of the loans extended by Caldas, the combination of overinvestment in equities and heavy loan arrears caused severe liquidity problems. For a period Caldas managed to cover its immediate liquidity needs through short- term borrowines from commercial banks and other sources, but this only served to postpone and increase the severity of the eventual crisis. 6. Bank Actions Before the 1970 Crisis. From the mid-1960s on, the Bank groupn wa aware nf alas' nortfolin difficulties- the lack of depth of its management and staff and its somewhat inadequate resource management poiis Th ~ 1^n nn-rnicl -rannrt- in mart,icilar i-S senarate annex on Caldas, analyzed Caldas' problems in depth, but conveyed the overall -mpress4on that the situation would gaulyimprove.0 The dereasning trend in profitability was expected to reverse in 1969 and additional share liquidity. The appraisal report's estimate of the quality of Caldas' portflUio was too optL±imistic.. WliLLJ- ~I-..Ii LtL. aWU - - losses existed, the report felt that the portfolio was intrinsically sound and that the major problems were likely to be overcome. I. 1/V CLLSiS WLLgL LIUVf Ue#H cVULUCU .L LIM DiuLm Lula stronger action in the context of the third loan. A full diagnosis of Caldas' -.~ , r Ineo _1_ n=_~ problems had already been elaDorated by the end 01 1700. nowever, LLe Daux t overoptimistic view of the situation, which was not warranted by the following sequence of events, led to the Bank not utilizing the third loan to pressure Caldas into introducing necessary changes. During the negotiations held in Washington (March 1969), several issues including portfolio quality and appropriateness of reserves were raised by the Bank with the President of the financiera. However, these points were not translated into specific loan conditions and do not seem to have been followed up closely during the months following the approval of Loan 625-CO. 8. In fact, during the second half of 1969 the Bank's expectations regarding Caldas improved. In November 1969, IFC approved in principle an increase in its investment in Caldas (the IFC proposed subscription lapsed in June 1970 when the financieras failed to fulfill its commitments to obtain additional subscriptions from other investors). Also in November 1969, a Bank supervision mission visited the financiera and concluded that: organization and procedures had improved substantially; the liquidity position and portfolio quality were improving although they required close watching; an upturn in profitability was expected for 1970. The mission drew its conclusions from what seems today to have been incomplete and possibly misleading information provided by Caldas management. 9. Caldas' Crisis. During 1970, the Bank became increasingly concerned with a possible decline in Caldas' situation as communications deteriorated. In May 1970, three Vice-Presidents resigned following disagreements over certain investments. Further, the auditors' report for 1969, which was not received until August 1970 after repeated requests had been made to the financiera, was aualified due to Caldas' failure to provide for apparent portfolio losses of Col$17.2 million. Despite its doubtful profitability, the financiera paid a dividend on its 1969 earnines. 7% in stock and 1% in cash. ANNEX XIII - A.45 - Page 3 of 6 10. The Bank's appraisal mission for the Fourth Loan visited Caldas in October 1970. The day after the mission arrivpd- thp PrARidPnt nf thp financiera, in response to a growing lack of confidence on the part of the Board- resigrned_ The v i ~cinl nnn1%ri z 4",A4^o,oj~ t-n!n- rni.4ac fn4 Me n0,1r- liquidity crisis and would have great difficulty in meeting its obligations in 1Q71 since many of its clients were failing to- rpay ther1 ebt4o schedule. A preliminary review of the financera's portfolio showed that many ~~JlM UJULIL6 FJLVUJ.L=UU aLIU UC%.LUCtZ reserves were inadequate to cover likely losses. The decision making process had LY L=.LiL%LV- CLLLU t=.Lc:1L_L.LLLtU YUJ__U.L_- aLLU PLUC~UULU5 WUJLU notL being implemented. 11. The new president who was appointed in November 1970, agreed to work in cUoe cuatzao±an witn tne Bank and to take all necessary actions to restore confidence in the financiera. He appointed a former Minister of riance to help him reorganize the company and asked the auditors (Frice Waterhouse) to undertake a special audit. In agreement with Banco de la Republica Mr. Garcia Rayneri, a tormer Bank group statt member, was engaged to conduct an independent investigation to determine: (a) Caldas' current financial position; (b) the causes of its difficulties; (c) the remedial actions needed to restore the financiera's health. The following main problems and solutions emerged from the in-depth reviews carried out late 1970 and early 1971. 12. Liquidity and financial structure. Price Waterhouse prepared a cash flow for the November 1970-December 1971 period, which indicated that Caldas would have a deficit cash flow of Col$108.4 million. Caldas met its November- December 1970 maturities by selling some public notes, by obtaining some additional deposits from the IFI 1/ and by rescheduling BR bond amortizations. To assist further in Caldas' recovery, BR agreed to extend, in cooperation with Federaci6n Nacional de Cafeteros (Federaci6n), a five year loan of US$4 million (Col$78 million) with one year grace, out of compensatory balances resulting from coffee sales -to Eastern European countries. Also Caldas' main share- holders, Banco Cafetero and Federaci6n, agreed to subscribe to equal portions of equity capital equivalent in total to US$1 million (about Col$19.5 million). Caldas also agreed to try to sell part of its equity holdings. These series of actions were expected to solve Caldas' immediate liquidity problems and to improve its financial structure, but the poor quality of the financiera's portfolio presented problems that could only be resolved in the medium-term. 13. Portfolio quality. As of December 31. 1970. almost a third of Caldas' loan portfolio (Col$228.9 million) consisted of loans granted to clients in arrears and to clients with loans rescheduled.- Many appeared to be doubtful debts and, according to Price Waterhouse, there was an apparent collateral deficiency of Col$85 million on the total loan portfolio. 14. A pattern emerges from Caldas' handline of its loan portfolio problems. Caldas' first reaction to loan repayment delays was to refinance loans as they matured. If the situation worsened, the financiera would reschedule a loan and, if necessary, accept a conversion. These devices enabled the financiera to postpone taking corrective actions and accounted for more than one half of the increase in the financiera's equity portfolio during 1970. 1/ Instituto de Fomento Industrial (TFT is a larqe, government nmp fi;VloPnment bank. - A.46 - ANNEX XIII Page 4 of 6 15. Caldas' equity portfolio was both excesssively large and of poor quality. The equity portfolio at the end of 1970 amounted to about Col$130 million and represented 129% of its own net worth. About 12.1% of the total equity portfolio was invested in firms under liquidation and an additional 31% in firms that were experiencing major operating or financial difficulties. Caldas had a total exposure in 9 firms in liquidation of Col$42.5 million. Ttq tntal exnsure in firms with difficulties. and in which there was considerable doubt as to their future prospects, was Col$86.7 million. Tikely 1nccc in Pniannnip in liniiidaion wrp PqtimataPd at that time to be about Col$28 million. 16. In late 1970, Caldas agreed to carry out a careful review of its reserves and provisions from 1970 onwards. In addition, the financiera agreed LI *Z1U1U_1LLLLaL.LVt_ Cla"JasLa.LLI a.4LU4 -Ut -,aL0LLV increased from Col$4 million in 1965 to Col$12.4 million in 1970, by which time they amountea to more than 3%o Of average LoLUL a15eb ktklti. tuii5ZLLLt_ expenses were drastically reduced during 1971. The Bogot5 office which had Ueen LaiU WiLLh 11 Lull Lime pLUessUialb Wab cLUseu U January 1, The Caldas Fiduciary Department and the Ibague Office were closed down and staff promotions were suspenuea. At a general snarenuers meeting in February 1971, Caldas' Board was reorganized. The number of principals was reduced and the president was made more accountable to the Board for nis actions. In addition, internal procedures were streamlined and accounting practices and controls improved. The new president shared fully the Bank s desire to see the appraisal and supervision activities increase in quahtity and quality. For 1971 as a whole administrative expenses declined to 2.2% of ATA and in absolute terms fell to Col$9.3 million in 1971. 18. Caldas' participation in Loan 742-CO. At the time of negotiations for the fourth loan, the financiera had already started to implement the various steps outlined above. However, the Bank decided that the financiera should not have access to Bank funds until it was able to meet a series of conditions specified in the Subsidiary Loan Agreement. The purpose of these conditions was to ensure that corrective actions were taken promptly and that Caldas' main shareholders and BR executed their agreed commitments. In summary, Caldas was expected to furnish satisfactory cash flow projections for 1971-1975; borrow at least the equivalent of US$4 million from BR through Federaci6n; protect itself against foreign exchange risks; increase its paid-in capital by Col$20 million; improve its internal operations and control of investments; and achieve a financial position satisfactory to the Bank. Based on the findings of a mission to Caldas in July 1971, the Bank determined that these requirements had been met and in September 1971 advised Caldas of its eliRibilitv to use the loan. 19. Conclusion. The rescue and reconstruction strategy pursued by the Bank since 1970 in collaboration with BR and Caldas' main shareholders has proved reasonably successful. The new management succeeded in gradually restoring confidence in Caldas, and has provided an effective leadership. - A.47 - ANNEX XIII Page5 of 6 20. The financiera has gradually improved the quality of its portfolio. Between 1971 and 1975 about Col$52.3 million of bad debts and investments were written off. The financiera has provided management, accounting and financial advice to many of its problem companies and has succeeded in turning some around. The enuitv nortfolio valued at cost as a percentage of net worth, decreased gradually from 129% in 1970 to 80% in 1975. 21. However, the financiera still has some loans and investments in its portfolio w-h i ch ul_ti4-matellY rwill haverA ton bea writtean-off- As nf tlip pnd of 1975 expected write-offs, almost entirely due to loans and investments made before 1971, could still reach C^itiq million to rnilqqg miii4nnl nidnqv total exposure in companies with uncertain prospects is estimated at evehrLL% L LL _0a4.L 1. L0L L L V0 .L ' L . ' ..s.4A'JJILL= L.L.LSJ L - k - * i'4~the'ess, tLLe overll± q4uality ofLLt ~ ~ LC improved since 1970. At the end of 1970, as much as 40% of the value of Caldas' total pULLLUiU WU- ilLVtLUU LL C1LUPaALL= W.LLI pLUUlematical L unctLLain prospects, by the end of 1975, this percentage had decreased to only 17%. However, write-offs will continue during tne next twU Ur three Y:aLb UnU the financiera needs to remain cautious in its investment policies and avoid taking high risks. 23. The financiera's financial position has strengthened. Profitability has greatly improved since 1970. Profits before taxes and write-offs increased from Col$3.3 million in 1971 to Col$29.9 million in 1975. As a percentage or average equity, profits before taxes and write-offs increased from about 3.5% in 1971 to 19.2% in 1975. After the crisis the financiera streamlined its operations and following Bank advice reduced its administrative expenses substantially from more than 3% of ATA in the late 1960s to around 2% of ATA after 1971. The return on its equity investments remains low but has continuously improved since 1970 (7.1% in 1975). Caldas now appears to have the profit earning capacity to absorb likely portfolio losses over the next few years and to strengthen its reserves. 24. The liquidity position of the financiera, as reflected in the current ratio, improved from 0.7 in 1970 to 1.3 in 1972. Monthly cash budgets are now prepared regularly. During 1975, the liquidity position although manageable -current ratio of 1.1-became tighter. Since Caldas still has a number of poor quality loans in its portfolio, its management will need to continue watching closely the financiera's liquidity position. Overall, the financial position of the financiera is protected by the decision in 1972 of the Federaci6n to reschedule its Col$78 million loan free of interest charges, and to convert it into equity if this became necessary to safeguard the financial position of the financiera and to permit it to remain within its agreed debt/equity limitations (4:1 in 1972). In connection with the fifth loan, the Federaci6n converted Col$15 million into equity. 25. The hirine of a technical vice-president and additional staff in early 1972 substantially enhanced Caldas' appraisal proficiency. The volume and quality of appraisals gradually but continuously improved during the 1971-1975 period. Follow up work is done in a more thorough and systematic manner hut has suffered on several occasions from staff shortages. Internal reporting and control procedures have also significantly improved since 1971 nnd are nw comnnrnh1 to noe of the other four financieras. - A.48 - ANNEX XIII rage 6 o 0 26. The reconstruction strategy followed has been successful although the recovery of Caldas has proceeded more slowly than expected initially. Caldas' financial position has gradually but continuously improved since 1970, confidence in it was restored and it became again an effective mechanism for channeling Bank funds. After five years of emphasis on consolidating its financial position, Caldas may now begin to look forward to increasing its developmental role, but will need to proceed with caution.
Groupe de la Banque mondiale · Project Performance Assessment Report
Colombia - Third and Fourth Development Finance Companies Projects
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