Colombia - Seventh Development Finance Companies Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2013b-CO FILE COPY COLOMBIA STAFF APPRAISAL REPORT SEVENTH DEVELOPMENT FINANCE COMPANIES PROJECT May 26, 1978 Projects Department Latin America and the Caribbean Regional Office 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.  CURRENCY EQUIVALENTS All currency amounts are expressed in Colombian Pesos (Col$) and US Dollars (US$) December 31, 1977 US$1.00 - Col$38.112 Col$1.00 = US$0.0262 GLOSSARY OF ABBREVIATIONS BR Banco de la Republica CAT Certificado de Abono Tributario (Tax Rebate Certificate) CD Certificate of Deposit CFP Corporacion Financiera Popular COFIAGRO Corporacion Financiera de Fomento Agropecuario y de Exportaciones DANE Departamento Administrativo Nacional de Estadistica (National Statistics Department) DDC Department of Development Credit of BR DFC Development Finance Company ERR Economic Rate of Return FEDESARROLLO Fundacion para la Educacion Superior y el Desarrollo (Institute for Economic Studies) IDB Inter-American Development Bank IFF Industrial Financing Fund IFI Instituto de Fomento Industrial (Industrial Development Institute) INCOMEX Instituto de Comercio Exterior (the Colombian Foreign Trade Agency) PIF Private Investment Fund PROEXPO Fondo de Promocion de Exportaciones (the Colombian Export Promotion and Financing Agency) UPAC Units of Constant Purchasing Power (Indexed Instruments Issued by the Savings and Loan Corporations)  FOR OFFICIAL USE ONLY C O L O M B I A APPRAISAL OF THE SEVENTH DEVELOPMENT FINANCE COMPANIES PROJECT Table of Contents Page No. I. THE MANUFACTURING SECTOR . ........................ 1 A. Structure and Performance 1.... I The Pre-1968 Period .................. . 1 The 1968-74 Period .. ................ I Recent Performance .3 .... ........... .3 B. Industrial Policies .. 3 Protection .......... * * ....... 3 Export Incentives . .. .. ..... .o. ... . 4 Decentralization ... . .o ........ 5 C. Industrial Employment and Wages ...... 6 D. Outlook for Industrial Growth and Investment 6 II. THE FINANCIAL SECTOR . ,.... 7 A. Structure and Policy Framework. 7 Institutional Structure . .7 Past Policies ...o. ... . .......7 Recent Developments and Prospects . 8 B. Industrial Financing . . .9 Sources of Industrial Finance . . 9 Equity Financing .. . . . .. .... ... 11 Industrial Credit ... ..... - .- .. 11 Other Sources . .. . .12 C. Need for the Proposed Loan .... ....... 14 This report is based on the findings of a mission to Colombia in November/ December 1977 composed of Messrs. N. Santiago, R. David, G. Gebhart, J. Nogales and J. Parker, all of the Bank, Mr. P. Knotter participated in final mission discussions. Messrs. D. Cook and T. Hutcheson assisted in preparing this report. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Cont'd) Page No. III. INSTITUTIONAL ARRANGEMENTS AND PARTICIPATING INSTITUTIONS .............................................. o...... 14 A. Background .................................... 14 B. Banco de la Republica ............. ............ 15 Division of Responsibilities ............... ... 15 BR's Performance ................. ............. 16 C. The Participating Financieras ................. 16 Background and Ownership ...................... 16 Organization and Staff ..... ................... 17 Appraisal and Supervision ..................... 18 Operations and Impact ..... .................... 19 Financial Position and Results .............. .. 23 Resource Structure and Needs .................. 27 D. Participation of Additional Financieras ....... 30 The Two-Stage System of Participation ......... 30 Aliadas ....... ................................ 31 IV. THE PROJECT ........................................ 32 A. Project Objectives ..... ....................... 32 B. The Proposed Loan ........ . . ............. ............. 32 General Description ..... ...................... 32 Standard Subloan Terms ..... ................... 33 Financing of Equity Investments .. ............. 33 Technology Improvement and Pollution Control Subloans ....... ............................. 34 Spreads and7 Foreign Exchange Risk ...... ....... 34 Participation in the Loan ..................... 34 Approval Limits ............................... 35 Procurement and Disbursement .................. 35 Review of Loan Conditions ..................... 35 C. Benefits and Risks ...... ...................... 36 Benefits ........... ........................... 36 Risks . ........................................ 37 V. AGREEMENTS REACHED AND RECOMMENDATIONS ...... ....... 37 A. Agreements and Understandings Reached ......... 37 B. Recommendations . .......... ... ................ . 38  Table of Contents (Cont'd) ANNEXES Annex 1 Banco de la Republica - Statement of Operating Policies and Procedures Annex 2 Additional Private Financieras that may Qualify for Participation Annex 3 Estimated Schedule of Disbursements Annex 4 Supplementary Tables T-1: Structure of Manufacturing Production 1968-75 T-2: Industrial Investments, Production, Sales and Foreign Exchange Availabilities T-3: Export Registrations by Main Products 1960-76 T-4: Effective Exchange Rate for Exports T-5: Indices of Activity on Colombia's Stock Exchanges T-6: Distribution of Financiera Lending as of September 30, 1977 T-7: Financial Statements - C.F Colombiana T-8: Financial Statements - C.F. del Valle T-9: Financial Statements - C.F. Nacional T-10: Financial Statements - C.F. de Caldas T-11: Financial Statements - C.F. del Norte T-12: Financial Statements - C.F. de Occidente T-13: Financial Statements - C.F. de Santander T-14: Financial Statements - C.F. Aliadas T-15: Financial Ratio Projections of the Eight Financieras Annex 5 Documents Available in the Project File MAP   I. THE MANUFACTURING SECTOR 1.01 During the past 10-15 years substantial structural transformation has taken place in the Colombian economy and the country is now well advanced in the transition from a predominantly rural, agricultural and largely self- contained economy to an urban industrial society, more interdependent with the world economy and with neighboring countries in the Andean region. Manu- facturing has made a major contribution to this transition, particularly since 1967. The rate of growth of manufacturing value added, averaging nearly 8% p.a. between 1968 and 1976, has consistently outpaced the annual rate of GDP growth which averaged 6.2% over the period. By 1976, the manufacturing sector contributed about one fifth of GDP, employed almost the same proportion of the labor force and supplied one quarter of merchandise exports. This performance was facilitated by an active and experienced entrepreneurial class, good human and physical resource endowments and important improvements in financial and industrial policies. A. Structure and Performance 1. The Pre-1968 Period 1.02 In common with many other developing countries, Colombia based its industrialization strategy on import substitution during the early post-war period. Until the early 1960s this strategy was successful in promoting a fairly high rate of industrial expansion, with growth of value added in manufacturing averaging about 8% p.a. in 1945-60. By 1960 almost 80% of demand for manufactures was met by local production. From this high plateau, further import substitution became more difficult, and the growth of the domestic economy became a constraining factor. From 1960-67 economic growth averaged 4.8% p.a. and was punctuated by periodic foreign exchange scarcity related to fluctuations in international prices of coffee, Colombia's main export earnings source. Manufacturing grew only slightly faster than the economy at 5.5% per annum, and little additional structural change took place. By 1967 Colombia had achieved a significant level of import independence with 98% of consumer goods, 68% of intermediates, and 51% of capital goods supplied domestically. However, exports accounted for only 2% of manufacturing output. 2. The 1968-74 Period 1.03 Recognizing that foreign exchange limitations had become the primary obstacle to faster economic growth, the authorities in 1967 implemented a set of reforms designed to deemphasize the import substitution strategy and to promote non-traditional exports (exports other than coffee and petroleum products), particularly of industrial products. The keystone of the reform was the introduction of a crawling peg exchange rate system. The results of this change in orientation were impressive. From 1968 to 1974 the value added of the industrial sector grew at 8.6% p.a. which in turn helped stimulate GDP growth of 6.8% p.a. During this period non-traditional exports became an important source of foreign exchange and in 1974 earned more than coffee exports. Manufactured exports grew by nearly 50% p.a. (in current US dollars) over this six-year period and in 1974 reached US$388 million, over one quarter of total merchandise exports that year.  - 2 - Table 1.1: MANUFACTURING PERFORMANCE INDICATORS % growth pga_ - 1960 1968 1974 1975 1976 60/68 68/74 74/16 Manufacturing Value Added (1970 Col$ billions) 11.7 18.1 29.7 30.8 32.7 5.5 8.6 4.9 Manufacturing Investment /a 44.0 59.3 137.0 114.0 122.0 4.1 14.7 -6.1 (Index 1970=100) Manufacturing Exports /b 0.3 39.8 388.5 303.3 392.1 84.2 46.2 0,4 (US$ millions) GDP at factor cost (1970 Col$ billions) 71.9 105.8 156.7 164.4 171.2 4.9 6.8 4.5 Total Merchandise Exports /b 382.0 508.0 1415.6 1444.6 1773.7 Manufacturing Value Added as % of GDP 16.3 17.1 19.0 18.7 19.1 Manufacturing Exports/Total Merchandise Exports 0.1 7.8 27.4 21.0 22.1 /a This index of industrial investment is based on surveys of 800 industrial companies carried out by FEDESARROLLO. It reflects mainly the level of investment in medium and large companies rather than in small ones, measured in constant 1970 prices. /b Based on export registrations. 1.04 During this six-year spurt of growth manufacturing increased its share of GDP from 17% to 19%. In 1974 the sector provided about 17% of total employment. The structure of the sector at the level of major aggregates-- consumer goods, intermediate goods and capital goods--changed little over the period; consumer goods continued to make up over half of the sector's output. On a subsector level, however, more change was visible. Within consumer goods, food and beverages declined in relative importance and, largely because of manufactured exports, textiles and garments increased. Chemicals and non-metallic minerals, also important exporting subsectors, expanded within the intermediate goods. Among capital goods items, production of mechanical machinery grew particularly rapidly during this period although from a rather low base (Annex 4, T-1). 1.05 To achieve the rapid increase in industrial output in 1968-74, firms sharply increased their previous annual levels of investment. Measured in constant prices, industrial investment, which had been growing at less than 5X p.a. in 1960-68, accelerated to almost 15% p.a. in 1968-74 (Annex 4, T-2). The rapid growth of investment, led by the exporting subsectors which were quite labor intensive, brought a corresponding increase in the rate of job creation in industry (para. 1.15).  -3- 3. Recent Performance 1.06 In 1975 some of the industrial dynamism of the 1968-74 period was lost as the economy was hit by the world recession. The slackening in export demand was transmitted from the exporting industries to the rest of the economy, which was also suffering from tight monetary policy, introduced to stem inflation that had reached 27% in 1974, and from some uncertainty surrounding the tax reform in late 1974. Industrial exports declined by 22% in value in comparison with 1974 and industrial production grew by only 3%. Industrial production recovered with a 6.8% growth rate in 1976, led by buoyant domestic demand resulting from the boom in coffee prices that began in 1975. Because of slow recovery of the world economy and due to a sharp reduction in incentives for non-traditional exports (para. 1.12), and the growing local demand, the 1976 recovery in manufacturing exports was barely sufficient to match the 1974 levels (page 2, Table 1.1). Preliminary indications are that the industrial sector in 1977 grew by another 6-7%, largely as a result of increased local demand on the strength of the coffee boom, with manufactured exports growing only slowly in US dollar terms. 1.07 Industrial investment, measured in constant prices, declined by 16.5% in 1975 as a result of the recessionary conditions prevailing, a signi- ficant decline in corporate profits, and, to some degree, the tight credit policies in effect. In 1976 investment recovered somewhat (7% growth over the previous year), as the economic outlook brightened due to continuing high coffee earnings, and appears to have grown by a further 15% in 1977. However, in real terms, the rate of investment in 1977 barely reached that of 1974 (Annex 4, T-2). Because of the 1974-76 investment lull many industries are now working close to full capacity. In textiles, garments, chemicals and cement, capacity utilization is estimated to be close to 90% and investment for modernization and expansion cannot be postponed much longer. For the manu- facturing sector as a whole, capacity utilization was estimated to average 78% in early 1977. B. Industrial Policies 1. Protection 1.08 Before the policy reform of 1967 Colombian industry enjoyed fairly high protection given by a combination of tariffs, import deposits, and import licensing. While ensuring comfortable margins on domestic sales, protection was accompanied by an erratically fluctuating real exchange rate which, more often than not, was overvalued. This severely limited industry's possibi- lity of exporting. The trend since 1967 has been towards lower and more uniform protection, a more realistic exchange rate and less discouragement of export sales. Nevertheless, some industries established during the earlier, import-substitution stage of industrialization (such as passenger car assembly and some electrical and household appliances), still receive high levels of protection. These continue to be produced on too small a scale to be effi- cient. Most capital goods, however, have generally received low levels of protection but have managed to compete effectively with imports and in export  - 4 - markets. The mechanical machinery sector, for example, showed one of the highest rates of growth after the 1967 reforms. Overall levels of protection were not excessive during 1967-74, with effective protection averaging around 30%. With certain exceptions the manufacturing sector has developed with reasonable efficiency, as shown by the sector's impressive export performance. 1.09 More recently the rapid rise in foreign exchange reserves has permitted tariffs to be sharply reduced on many items and licensing to be significantly liberalized. In 1976 and 1977 the exchange rate moved more slowly than the difference between domestic and foreign inflation, thus revaluing the peso in constant prices and further reducing industrial protec- tion. Some industrialists mistakenly interpreted the slack demand in 1975 as a result of reduced protection but the strong recovery since then has shown that industry can cope successfully with competition resulting from lower protectioa. 2. Export Incentives 1.10 Even before 1967 Colombia had experimented with several export- incentives--tax credits, multiple exchange rates and duty exemptions. With the 1967 reforms the authorities at last achieved an effective combination. Although modified in many details, the basic elements of the incentive pack- age have remained unchanged. Exporters receive a tax rebate certificate (Certificado de Abono Tributario, CAT), generally given as a percentage of the FOB export value. They may also import duty-free intermediate products and raw materials incorporated into exported goods under the Plan Vallejo program and receive low-interest credit to finance export production and sales. But the most important export incentive introduced in 1967 was the crawling peg exchange rate system. Between 1967 and 1975 this policy, with its ups and downs, raised the real exchange rate 1/ by about 30% by moving the official rate slightly faster on the average than the difference between domestic and foreign inflation. Over time industrialists saw the relative profitability of export sales improve and they were freed from the uncertainty of the previous unstable incentive systems. 1.11 Led by clothing and footwear, textiles, food products and chemicals, manufactured exports rose from US$39.8 million in 1968 to US$388.5 million in 1974. Both the number of exporting firms and the number and range of exported products increased enormously between 1968 and 1974. The share of exports in total industrial output rose from 2% to 7%. In relatively labor-intensive sectors such as clothing and footwear, wood products and furniture, leather products and mechanical machinery, the export share rose to over 20% of output (Annex 4, T-3). 1.12 In 1975 industrial exports were hit by both the world recession, and a reduction in the CAT from 15% to 5% for most products and its virtual 1/ As used here, in Annex 4, T-4, and elsewhere, the real exchange rate means the number of constant value pesos per constant value US dollar or other foreign currency.  elimination for others. The reduction became necessary because the CAT had become too great a fiscal burden (absorbing 8.0% of current revenues in 1974) and because of frictions with certain trading partners. When the CAT was reduced the authorities planned to replace it with a more rapid movement of the exchange rate and more generous export credit. While export credit expanded substantially and the crawl accelerated in 1975, exchange rate adjustments in 1976 and 1977 fell far behind the difference between domestic and foreign inflation as the exchange rate was held virtually constant from December 1976 to June 1977 as one of several measures aimed at curbing the inflationary pressures resulting from the build-up of foreign exchange reserves. Although the maximum CAT rate was raised first to 8% and more recently to 12%, to compensate in part for the slow movement of the exchange rate, total incentives for industrial exports are now considerably below their 1974 value (Annex 4, T-4). The volume of exports in 1976 and 1977 represented a recovery over 1975, but the bulk of the increase in output during these years was to supply the more profitable and booming domestic market. Consequently, the share of exports in industrial output fell from 7% in 1974 to 6% in 1976. This trend continued through the first half of 1977, but in the second half of the year the Colombian authorities began to increase the rate of peso devaluation. If this policy continues, manufactured exports should be able to regain the substantial momentum they had achieved up till 1974, particularly in view of the good prospects for exporting to neighboring Andean pact countries with oil surpluses. 3. Decentralization 1.13 Because of its difficult topography, Colombia has developed a strong regional character and, despite improvements in communications, is still composed of several semi-independent regional markets. Because of this, industrial activity is more decentralized in Colombia than any other Latin American country. Nevertheless, the three largest cities, Bogota, Medellin, and Cali, in that order, account for 60% of industrial value added and 64% of industrial employment. The continuing rapid growth of these cities has created problems of congestion and environmental pollution and strained the capacity of urban infrastructure. 1.14 Convinced that the economic and social costs of growth would be lower if secondary cities were stimulated, the Government in 1975 instituted a decentralization policy to encourage more rapid industrial growth outside of the three largest cities. The major instruments for deflecting growth to the secondary cities are: (a) restriction of foreign investment in new enterprises to cities other than Bogota, Medellin, and Cali, (b) better access to official development credit and at slightly more favorable terms; and (c) upgrading infrastructure in the secondary cities. The Bank has supported this policy by helping to finance improvements in water supply, telecommunications and other urban services in the secondary cities, and by allowing firms located in these cities to have access to Bank funds under the Sixth DFC Loan in pesos. Although the Government is still studying ways to better focus the decentralization effort 1/ (with assistance from the Bank), the present 1/ By limiting it to a smaller number of cities such as Barranquilla, Bucaramanga, Cartagena and the Cartago-Pereira-Armenia zone.  - 6 - structure of regional preferences would be continued under the proposed loan until specific changes in decentralization policy have been decided. C. Industrial Employment and Wages 1.15 The rapid industrial growth stimulated by the 1967 policy reforms was accompanied by a much faster growth of total employment in industry, which rose from about 700,000 in 1968 to about 1 million in 1974. The rate of growth of factory employment 1/ during this period, at more than 6% p.a., was considerably faster than the rates of 3.5% p.a. achieved from 1953-63 and of 1.6% p.a. for the period 1963-68. Faster growth during 1968-74 was largely the result of rapidly growing factory employment in labor-intensive subsectors, particularly those subsectors such as textiles, garments, footwear and mechanical engineering which were the most active in export markets (Annex 4, T-1). With the labor force growing at 3.2% p.a. industry was able to increase its share of total employment from 13% to 17% and contribute significantly to a reduction in urban unemployment. In 1975-76 manufacturing employment has grown by only 2-3% p.a. because of the slower growth of the economy as a whole and the weaker performance of the exporting subsectors. The ratio between output and employment growth has remained approximately the same, however, indicating no significant deterioration in the fundamental employment generating capacity of the manufacturing sector. 1.16 Industrial wages are fairly low in Colombia in comparison with other Latin American countries. With the slower rate of peso devaluation over the last few years, Colombia may have lost some of its comparative advantage in labor costs, but still remains highly competitive in the Latin American context. This is partly explained by the fact that during the period of rapid domestic inflation since 1973 prices have risen faster than wages, eroding the real value of wages in domestic terms. Non-wage benefits have increased over time and now make up a substantial proportion of firms' total labor costs, but the overall cost of wage and non-wage benefits has not risen in real terms. D. Outlook for Industrial Growth and Investment 1.17 With relatively high coffee earnings continuing to stimulate the economy, foreign exchange reserves at high levels, and signs that inflation is abating, the Colombian economy should be able to sustain a growth rate of 6-7% p.a. over the next few years. The prospects for the manufacturing sector in particular appear bright, with strong and rising domestic demand and indications that exports will respond favorably to the higher rate of peso devaluation and the recovery from the world recession of Colombia's 1/ Factory employment figures are based on surveys carried out by DANE, which are published more frequently than population census data on total employment in manufacturing. Factory employment excludes small companies with less than 10 workers and omits some non-production related jobs.  -7- major export markets. An 8-10% p.a. real rate of growth of manufactured output in 1978-80 appears feasible provided macroeconomic policies, including exchange rate policy, create an environment conducive to investment and capacity constraints do not become limiting. With the level of capacity utilization already quite high and a slowdown in investment in recent years, substantial investment in new productive capacity will be required to support the potential growth of output. In order to achieve the projected rate of growth, annual fixed industrial investment in the order of about US$1.0 billion equivalent would be required over the period 1978-80. This figure is consistent with the investment data derived from applications for import licenses processed by INCOMEX (The Colombian Foreign Trade Agency) during 1977, which indicate that commitments for industrial investments amounting to about US$800 million equivalent were made during the year. However, achieve- ment of this level of investment will depend on the availability of adequate long term finance, the bulk of which will have to be provided by the domestic financial system from locally mobilized resources or via borrowings from overseas sources, both official and commercial. II. THE FINANCIAL SECTOR A. Structure and Policy Framework 1. Institutional Structure 2.01 Colombia's relatively well-diversified financial system consists of Banco de la Republica (BR, Colombia's Central Bank), several commercial banks, investment banks (financieras), agricultural and mortgage banks, savings and loan corporations, insurance companies, mutual funds, and two stock exchanges (Bogota and Medellin). Its structure has been influenced by govern- ment policies favoring institutional specialization. Commercial banks dominate the regulated financial system, accounting for about 45% of credit in June 1977 (page 10, Table 2-1). The savings and loan corporations (18%) and the financieras (17%) rank next. Direct lending by banks is supplemented by rediscounting facilities operated by BR and funded in part out of the legal reserves of the banking system. For industry, the most important of these are the Industrial Financing Fund (IFF), which rediscounts loans made by commercial banks and financieras to small and medium sized industrial firms, and the Private Investment Fund (PIF) which mainly serves firms larger than those covered by the IFF. 2. Past Policies 2.02 Despite the relative sophistication of the financial system's institutional structure, the high degree of government regulation and control in effect until 1974 impeded the development of an effective capital market and constrained the allocative efficiency of the system by hampering market determination of the terms and conditions of financial intermediation.  -8- For many years the financial system had been subject to a very complex system of reserve requirements and forced investment regulations, and decreed interest rates were often artificially low, with wide differentials in rate applying to different categories of borrowers and savers. At the same time, unequal competition from tax exempt public sector issues providing immediate liquidity at guaranteed prices, and the introduction in 1972 of indexed instruments (UPACs) by the savings and loan system offering full monetary correction, caused sharp swings in the amount of resources captured through various financial instruments and introduced a substantial element of uncertainty to the mobilization and retention of resources by various financial institutions. The government securities were used to cover deficits, while the UPACs were used to finance urban housing construction. Constraints on resource mobi- lization by the regulated financial system led to the development of a large and active extra-banking market estimated to be roughly 10-15% of the size of the regulated system, which was outside the control of the monetary authorities. As a consequence of this pattern of development, Colombia's financial system has remained below its potential size in comparison with countries at a similar stage of development. Financial liabilities, other than demand deposits, of the regulated system were less than 7% of GDP in 1973, compared to 9% in Ecuador and Paraguay, countries with lower per capita incomes, or to 29% of GDP in Mexico. 2.03 After 1970 Bank economic and sector work focused on the problems impeding the growth of a more efficient and broader-based financial market, and a continuing dialogue on these issues was maintained with the Colombian authori- ties. Shortly after the present administration took office in 1974, it enacted a series of major financial reforms designed to encourage savings, integrate the fragmented market, promote more efficient allocation of resources, and reduce undue expansion of the monetary base from excessive rediscounting by BR. A parallel fiscal reform was undertaken to make the existing tax system more progressive and to strengthen the Government's fiscal base. Interest rates were raised in successive stages and differentials between rates were narrowed (page 10, Table 2-2). The degree of monetary correction and tax exemption allowed on UPACs were reduced to bring their yields more in line with competing instruments. Forced investment requirements of financial institutions were partly removed, and new issues of public sector instruments no longer had a tax exempt status nor immediate liquidity. In subsequent related measures, designed to increase the availability of working capital to industry, the financieras were authorized for the first time under Decree 399 of 1975 to engage in short-term operations, which entail capturing funds via 90-day Certificates of Deposit (CDs) and time deposits and relending the proceeds for similar terms for industrial production and sales financing. The effects f the financial reforms were positive. During 1975 financial savings increased by about 20% p.a. in real terms and a better balance was achieved between savings captured by competing instruments. Inflation dropped to 18% p.a. in 1975 from 27% in 1974, measured on a calendar year basis, and interest rates became increasingly positive in real terms. 3. Recent Developments and Prospects 2.04 Measures adopted since 1975 to cope with the increasingly complex economic situation resulting from the world trade recession, the extraordinary  rise in coffee prices and the major drought experienced in Colombia in 1976, have tended to undo some of the progress achieved by the 1974 and 1975 financial reforms. To reduce inflationary pressures resulting from the major inflow of coffee earnings and the shortage of basic foodstuffs, the monetary authorities imposed tighter credit controls and raised reserve requirements. In addition, in an attempt to avoid a slowdown of investment in key sectors, the system of directed credit and forced investment was extended and interest rates were not permitted to rise with inflation. Nevertheless, inflation on a calendar-year basis accelerated to 26% p.a. in 1976 and was more than 40% p.a. in the first half of 1977. Interest rates became increasingly out of line with the level of inflation and the differentials between rates applying to different savings instruments widened once more. The decision to slow down the rate of peso devaluation led to further distortions. While financial savings continued to grow quite rapidly in real terms (by 13% in 1976), part of the increase was the result of speculative foreign inflows. The increasing economic uncertainties led savers to invest almost exclusively in highly liquid short term instruments. Similarly, the maturities of credit granted by financial institutions have tended to shorten. Between June 1973 and June 1976 short term credit grew by 43% p.a. compared to about 20% p.a. for medium and long term credit. 2.05 Nevertheless, during the second half of 1977 there were encouraging signs that the economy was becoming more stable. As a result of the measures adopted in early 1977, a slowdown of foreign exchange inflows, the liberali- zation of imports and recovery of agricultural production, the cost of living index remained virtually constant during the last 6 months of 1977. Inflation in 1977 was 29% on a December-to-December basis 1/ and it continued to fall sharply to an annual rate of 16.5% during the first four months of 1978. Although the price rise for the full year will probably exceed this rate due to seasonal factors, inflation is not likely to exceed 23% for calendar year 1978 and is expected to decline gradually to about 18% by 1980. As inflation declines, interest rates on financial instruments should once more become positive in real terms and the term structure of financial system liabilities should lengthen. Thus the new administration that will take office in mid-1978 should have a good opportunity to resume the process of financial system reform initiated in 1974. The financiera resource mobilization study which was under- taken in connection with this project (para. 3.35) is intended to provide a basis also for an ongoing exchange of ideas between the Bank and the Colombian authorities on some major financial sector issues. B. Industrial Financing 1. Sources of Industrial Finance 2.06 Over the last decade Colombian industry has had to rely increasingly on borrowed funds to finance working capital and fixed investment. A study of industrial corporations has shown that between 1965 and 1972, debt financing rose from 37% to 58% of the sources of investment financing used by manu- facturing industry, with corresponding decreases in equity financing via internally generated funds and share capital increases. By 1975 debt financing 1/ The average annual rate of inflation in 1977 was 34.7%.  v 10 - Table 2-1: Major Financial Institutions-Credit Outstanding by Term (Billions of Col$) - June 1974 June 1975 June 1976 June 1977 Amount % Amount % Amount % Amount % Banks 22.5 39 31.0 43 37.7 44 54.6 45 Financieras 8.6 15 10.2 14 13.1 15 20.3 17 Savings & loan corp. 7.1 12 11.7 16 14.8 17 21.8 18 Mortgage bank 10.8 19 10.8 15 10.8 13 10.2 9 Agricultural bank 8.3 15 8.7 12 9.8 11 13.3 11 Total 57.3 100 72.4 100 86.2 100 120.2 100 Short term 1/ 24.7 43 33.4 46 41.2 48 59.9 50 Medium term 1/ 9.3 16 10.4 14 12.1 14 19.5 16 Long term 1/ 23.2 41 28.6 40 32.9 38 40.8 34 1/ Short-term up to one year, medium-term 1-5 years, long-term over five years original term. Table 2-2: Effective Rates of Interest on the Principal Financial Instruments, 1969-1977 1969 1971 1973 1974 1975 1976 1977 Savings Deposit 4.1 4.1 8.8 12.6 17.0 19.3 19.3 Certificates of Deposit-Banks - 13.6 13.6 26.2 25.6 25.6 25.6 Certificates of Deposit -Financieras - - - - 26.8 26.8 26.8 Savings and Loan Corporations UPAC - deposits - 26.2 26.2 24.5 22.7 22.7 UPAC - certificates - - 26.8 27.4 25.7 23.9 23.9 Ordinary deposits - -- - - 19.0 19.0 Central Mortgage Bank Cedulas-/ 11.5 11.5 15.3 15.3 15.3 15.3 15.3 Financiera Bonds - 17.3 19.7 19.7 19.7 19.7 Economic Development Bonds (Class B)- 12.1 12.1 16.7 16.7 16.7 16.7 16.7 Economic Development Bonds (Class F) - - - - 26.2 26.2 26.2. Coffee Saving Certificates -- - 18.8 18.8 Coffee Bonds - - - 20.7 20.7 22.0 22.0 Certificates of Exchange - - - - - - 32.3 3 Inflation Rate 2^/ 6.9 14.7 25.1 26.9 17.9 25.9 29.3 1/ Tax exempt instruments. 2/ Blue collar price index, calendar year basis. 3/ Compound annual rate based on end of December stock market quote for 90-day certificates and excluding any gains from peso devaluation.  - 11 - contributed about 65% of investment funds, of which 22% came from the financieras, about 20% from foreign banks, 15% from local commercial banks and the remaining 8% from miscellaneous sources including suppliers' credit and the extra-bank. market.l/ 2. Equity Financing 2.07 Funds generated internally through depreciation reserves and retained earnings, which in the 1960s were the major sources for financing manufacturing investment, have declined steadily in importance and by 1975 accounted for only 30% of investment funds. Despite the relatively high levels of inflation experienced throughout the 1970s (averaging 21% p.a. between 1971 and 1976), the tax system has not been modified to distinguish fully between real and inflation-related profits. Revaluation of assets is now permitted in determining capital gains, but depreciation allowances are based on historical costs and do not reflect replacement values. However, since late 1975 companies have been allowed to take into account a theoretical inflation rate of 8-12% in determining their tax liabilities. The decision of many companies to maintain high dividend payment rates (averaging 65-70% of after tax profits) to compensate investors for the effects of inflation has also limited the contribution of retained earnings to investment financing. 2.08 Despite the existence of two stock exchanges in Colombia, new issues of shares by industrial companies have not developed into a major source of investment financing. An industrial survey covering 1974 and 1975 1/ indi- cated that only 4-5% of industrial investment was financed via share capital increases. Between 1970 and 1975 the index of industrial stock prices fell by about 25% in nominal terms while consumer prices rose 140%. Thus there was little encouragement for investment in new share issues. During 1976 and 1977 stock prices rose significantly but remained below 1970 levels in real terms. (Annex 4, T-5). Outside the stock market, the financieras have also made direct equity investments in industrial firms but the level of their invest- ment activity has remained small in comparison with their lending operations, and has been declining in real terms. 2.09 The Government has taken some steps recently to alleviate the capitalization problems of industry by (i) reducing capital gains tax liabi- lities on the sale of fixed assets and equity investments; and (ii) requiring financieras to hold at least 10% of their assets in the equity of new or transformed companies (para. 3.23). While it is too early yet to assess the impact of these measures, they are not likely to be sufficient to fully resolve the problem. A more fundamental reform of corporate taxation may be needed to adequately reflect the effects of inflation on taxation of company profits. 3. Industrial Credit 2.10 Total credit to the industrial sector from the supervised financial system grew at an average annual rate of almost 40% from June 1974 to June 1977, 1/ Based on industrial surveys carried out by FEDESARROLLO, an independent Colombian institute for economic studies.  - 12 - substantially in excess of the 25.6% average annual increase in cost of living index over the period (page 13, Table 2-4). The proportion of the total credit going to the industrial sector also increased from 20% in 1974 to 26% in 1977. Commercial banks account for about 62% of domestic financial system credit outstanding to industry, but the bulk of their lending (over 75%) is short term and is used primarily to finance working capital. Financieras account for 36% of industrial credit, 80% of which is in the form of medium- and long-term loans. In the financing of fixed investment by the industrial sector, financieras are much more important than the commercial banks, providing more than double the volume of medium- and long- term funds. Reflecting trends in the term structure of their resources, the average term of financiera lending to industry was reduced over the period 1974-77, with long term lending growing by only 16% p.a. compared to 46% p.a. for medium-term lending and 94% p.a. for short-term lending. 2.11 There are now 21 financieras involved in industrial lending in Colombia, of which 18 are privately owned. The Government-owned Industrial Development Institute (IFI) is the largest financiera. It is primarily a holding company and financing agent for public sector industry, but also assists some private sector projects which, because of their size, complexity or lengthy gestation periods, are outside the scope of the private financieras. IFI and the two other public financieras, Corporacion Financiera Popular (CFP), which concentrates on lending to small-scale enterprises, and COFIAGRO, 1/ which deals primarily with agroindustry, account for about 40% of lending to industry by financieras. The eight private financieras that have participated in the previous Bank loan account for about three quarters of lending by private financieras and almost all long term lending--most of the remaining financieras being relatively small and newly established short-term lending institutions. 4. Other Sources 2.12 Direct foreign borrowings (including suppliers' credits) developed into an important source of funds for the larger industrial companies up till 1973, but have been restricted by the monetary authorities since then. As of June 30, 1977, outstanding direct foreign loans to the private sector registered by BR stood at US$437 million equivalent, slightly lower than the level reached at year-end 1972. Much of this foreign financing is for terms of less than 3 years, with relatively few large companies able to secure terms in excess of 5 years. Companies unable to meet their requirements by borrowing from the regulated financial system or from foreign sources have had to rely on the extra-bank market where terms are short and interest rates can be 3-4% per month. The recent improvement in short term resource mobilization by banks and financieras has reduced somewhat the need for firms to resort to the extra-bank market. 1/ Corporacion Financiera de Fomento Agropecuario y de Exportaciones (COFIAGRO) has participated in Bank lending for agriculture and agro- industry.  - 13 - Table 2-3: COLOMBIA: IsDUSTRIAL CREDIT OUTSTANDING BY MAJOR SOURCE, 1975-1977 (Billion of Coiombian Pesos) June June June 1O74 1Q7, 1q77 ,of x of Z of Amount Total Amount Total Amount Total Co.ercial Banks 10.7 63.3 13.5 62.8 19.9 61.6 Financieras 5.6 33.1 7.5 34.9 11.7 36.2 Caja Agraria 0.6 3.6 0.5 2.3 0.7 2.2 TOTAL 16.9 100.0 21.5 100.0 32.3 100.0 Table 2-4: COLOMBIA: CREDIT OUTSTANDING BY SECTOR (Billion of Col$) Average June X of June % of June Z of June 2 of Annual 1974 Total 1975 Total 1976 Total 1977 Total Grow.zth Rate Agriculture and Liyestock 12.0 (20.6) 15.7 (20.8) 17.9 (19.4) 23.8 (18.8) 25.6 Industry 11.8 (20.2) 16.9 (22.4) 21.5 (23.2) 32.3 (25.5) 39.9 Construction 19.8 (34.0) 25.0 (33.1) 30.5 (33.0) 37.3 (29.5) 23.5 Mining 0.9 ( 1.5) 0.8 C 1.1) 1'.0 ( 1.1) 1.2 ( 0.9) 10.1 Others 13.8 (23.7) 17.2 (22.8) 21.6 (23.4) 31.9 (25.2) 32.2 Total 58.3 (100.0) .75.6 (100.0) 92.5 (100.0) 126.5 (100.0) 29.5  - 14 - C. Need for the Proposed Loan 2.13 As explained in para. 1.17, a significant growth in investment in industry and related sectors is projected to occur over the 1978-80 period, with total investment averaging about US$1 billion equivalent each year. Since equity financing resources from internally generated funds or from new share issues are likely to remain restricted for at least the next 2-3 years, the financieras participating in Bank lending are likely -to be called upon to finance approximately the same proportion of industrial investment as in the recent past (i.e. 10-12%). This would imply long term resource needs of US$100-120 million per year for the financieras. The proposed Bank loan of US$100 million would meet 30-40% of the financieras' resource needs in the period up till year-end 1980. Resources provided by BR through the PIF and IFF will supply only part of the remainder, but several features would be incorporated in the proposed loan to help the financieras raise the additional term funds required. 2.14 In view of the limited prospects for the financieras to raise a significant volume of medium and long term resources in the domestic market under prevailing conditions and regulations, the Bank assisted the financieras in undertaking a study of (a) the establishment of a liquidity mechanism to enable the financieras to utilize a proportion of the short term funds they mobilize in medium term lending; (b) possible mechanisms to raise long term resources from the public; and (c) key financial system policy reforms that would facilitate the first two steps and encourage the development of a broader and more effective capital market. The preliminary results of the study were used as a basis for determining the resource mobilization goals of the financieras (para. 3.36). The full results of the study and policy issues arising from it would be discussed as part of the continuing dialogue on economic policy between the Bank and the Colombian authorities. 2.15 To further aid the financieras in meeting industry's need for long- term funds, the proposed loan could also be used as a vehicle for introducing the financieras to the international capital markets through possible co- financing arrangements with foreign commercial banks (para. 3.39). The five older financieras are currently exploring possible alternative borrowing arrangements to raise about US$20 million. III. INSTITUTIONAL ARRANGEMENTS AND PARTICIPATING INSTITUTIONS A. Background 3.01 Bank DFC lending to Colombia started in 1966 with a first loan of US$25 million to BR for onlending through five private financieras. To date six DFC Loans totalling US$242.5 million have been made to BR and the number of participating financieras has increased to eight. Although these loans were designed to assist efficient productive projects in general, the last three loans contained special features designed to encourage lending to smaller enterprises. However, it was also recognized that the nature of financiera operations--their detailed project appraisals, their lack of  - 15 - an extensive network of branch offices, and the relatively low margin on resources available to them--limited the assistance they could provide to smaller firms. Therefore, in 1975 and 1977 the DFC loans were complemented by two loans totalling US$20.5 million made to CFP, a government-owned DFC which specializes in financing small-scale enterprises. 3.02 Under the first four loans the Bank focused its efforts on assisting the institutional development of the five participating financieras--Colombiana in Bogota, Nacional in Medellin, Valle in Cali, Norte in Barranquilla and Caldas in Manizales--and closely monitored their operations. While this approach was successful in building these five older financieras into effective and mature term financing institutions, it placed heavy demands on Bank manpower and inhibited participation of the several additional finan- cieras which had been established since 1966. Institutional arrangements were progressively modified under the Fifth and Sixth Loans with the objective of developing within BR the capability to eventually take over most of the Bank's supervision functions. Since 1973 Bank supervision efforts have been focused on strengthening BR's capability to discharge increased responsibi- lities. Direct contact has been maintained with the five older financieras but attention is now directed more towards their overall development impact and less on the operational details. The modified arrangements enabled two new financieras to participate under the Fifth Loan--Occidente in Pereira, and Santander in Bucaramanga--and an additional financiera--Aliadas of Medellin-- to participate under the Sixth Loan on a limited basis. The process of delegating increased responsibilities to BR, and strengthening BR's capacity to discharge them, would be continued under the proposed loan. This is in line with past OED reports which concluded that the financieras had been an effective mechanism for allocating and channeling resources to medium-size and larger enterprises, but suggested that it might be more cost effective in the long run for the Bank to delegate greater responsibilities to BR and thus permit increased Bank attention to sectoral issues. The modified arrangements have allowed the Bank to concentrate more on the broader issues of industrial policy and capital market development in connection with the proposed loan (para. 4.01). B. Banco de la Republica 1. Division of Responsibilities 3.03 BR combines its central banking function with development banking activities involving the administration of various official lines of term credit, principally to industry and agriculture. BR's Department of Develop- ment Credit (DDC) handles most of the credit lines, including Bank DFC loans. DDC's original role under the first four loans was limited to screening sub- projects submitted by the financieras to ensure that scarce funds were allocated to economically sound projects that were consistent with Colombia's overall developmental priorities. BR's role now includes increased respon- sibility for the review and approval of subprojects, and the supervision of newly participating financieras.  - 16 - 2. BR's Performance 3.04 BR's performance with respect to subproject review has continued to develop satisfactorily. There has been little turnover among analysts involved in this activity, and the coverage of technical, financial and economic aspects has improved with the help of a training program carried out with Bank support. However, economic rate of return calculations could still be improved by utilizing in a more consistent fashion the concept of "border prices". 1/ This was agreed with BR during loan negotiations and has been incorporated into its revised Statement of Operating Policies and Proce- dures (Annex 1). 3.05 BR's capability to supervise and provide assistance to the newly participating financieras has not developed as rapidly as expected. High turnover among the analysts involved in financiera supervision, who have frequently been assigned other important tasks within BR, has resulted in lack of coordination and continuity. While the present supervision staff is still comparatively new and inexperienced, steps would be taken by BR to strengthen financiera supervision in connection with the proposed loan. Agreement was reached during negotiations on (i) the creation of an adequately staffed financiera supervision unit within DDC; (ii) the provision of additional staff training programs by BR; and (iii) the establishment of formal super- vision policies and procedures. To help in the implementation of these agree- ments which have been incorporated in BR's Statement of Operating Policies and Procedures, BR's coordinator of financiera supervision is being trained in the Bank. During supervision missions Bank staff members would continue to accompany BR's staff on visits to new financieras in order to provide on-the- job training and guidance. C. The Participating Financieras 3.06 The following sections review jointly the characteristics, operations and impact, financial performance, and resource needs of the group of seven financieras which participated under the Sixth Loan. The performance of the eighth financiera, Aliadas, which participated only on a limited basis, is discussed separately (paras. 3.44 and 3.45). 1. Background and Ownership 3.07 The Colombian financieras were established to provide longer term financing, both debt and equity, to private productive enterprises, principally in the industrial sector. Colombiana, Nacional, Valle, Caldas and Norte all came into existence between 1959 and 1964. Occidente and Santander were both established in 1966, and like Caldas are located in predominantly agricultural regions which they are helping to diversify by developing industry. 3.08 All seven financieras are predominantly Colombian owned. The shares of the five older financieras are relatively widely held among banks, insurance 1/ International prices for tradeable goods, CIF or FOB as appropriate.  - 17 - companies, and industrial enterprises, with the exception of Caldas, in which the National Coffee Federation and related entities hold about 70% of equity. IFC equity investments in each of the five older financieras, which were made from 1961 to 1967, now range from 2% of equity in the case of Valle to 7% in Norte. The shares of Occidente and Santander are more closely held. About 75% of Santander's equity is owned by the Santo Domingo group, a powerful industrial and financial services conglomerate. Occidente has two main share- holder groups: the National Coffee Federation with about 55% of share capital and the Kassin industrial group (37%). 3.09 A review of Santander's loan and equity portfolio indicates that the volume of operations with companies related to the majority shareholders equalled approximately 60-70% of the financiera's own equity or about a fifth of its total loan and equity portfolio. These loans also tended to have the least information on the projects and the enterprises, and in some cases, the decisions to undertake the operations appear to have been heavily in- fluenced by the shareholding companies. To correct this undesirable trend, an exposure limitation would be introduced with respect to each financiera's loans and investments in any single group of related companies so as to avoid excessive concentration of credit risks, to limit "insider" transactions, and to enhance the developmental impact of each financiera through an adequate dispersion of its lending and investment activities. During negotiations agreement was reached with BR and the financieras that the 25% total financial exposure limit 1/ per enterprise contained in the policy statements of all financieras would be complemented by a second provision limiting the exposure of each financiera to no more than 50% of equity in any group of related companies. 2/ This policy would be implemented over a period of one year to accommodate cases where present overexposures exist. In addition to Santander, Colombiana also exceeds the proposed limit at present in two promoted companies which are not large shareholders of the financiera. As part of its supervision of the newer financieras BR agreed at negotiations to monitor closely the influence of large shareholders on the loan and investment decision-making processes and to review carefully any subprojects they submit involving these large shareholders (Annex 1). 2. Organization and Staff 3.10 The group of five older financieras have capable and experienced management. Recently, Colombiana's long time president resigned to assume leadership of an important new banking institution and a new president with extensive experience in banking was appointed. This change in top management is not expected to have significant implications for Colombiana's organizational and operational effectiveness. Occidente has experienced substantial turnover at the senior management level and among its technical staff. Its president resigned recently and has been replaced by the financiera's former financial vice president, and new technical and financial vice presidents have just been 1/ Including loans, equity investments (valued at cost) and contingent liabilities. 2/ Including subsidiaries, parent companies, or subsidiaries of a common parent company.  - 18 - appointed. BR has reviewed this situation and its conclusions have been included in a plan of action for Occidente which involves the hiring of additional technical staff and training programs for professional staff at all levels. A condition of effectiveness of the proposed loan for Occidente would be to show satisfactory progress in implementing the plan of action. Santander's management has been more stable and its experience in project financing has increased substantially through its participation in the Fifth and Sixth Loans. 3.11 While the five older financieras have adequate staff at the senior levels, Norte and Colombiana have both suffered from a considerable turnover of the more junior analysts, due partly to their relatively low salary levels. This situation has been brought to the attention of both financieras which have begun to implement appropriate remedial steps. Santander's technical staff has grown in numbers and experience since the previous appraisal, and the financiera now relies less on consultants. Additional staff are being hired for project supervision and in preparation for future growth. Occidente's technical staff would be strengthened as part of the plan of action mentioned in para. 3.10. 3. Appraisal and Supervision 3.12 A continuing objective of the Bank has been to encourage the finan- cieras to improve their appraisal of subprojects, through which the financieras make an important contribution to efficient resource allocation in the country, Most project evaluations prepared by the five older financieras are thorough and soundly based, and their technical evaluation has gained in depth and coverage. Marketing analysis has improved but remains an area of relative weakness. Economic evaluation of projects has been strengthened substantially with the help of Bank-sponsored seminars to train BR and financiera staff in this important aspect of project work. Under the Sixth Loan economic rate of return calculations were required for all projects seeking subloans in excess of US$250,000, a requirement which would be continued under the proposed loan. Despite some improvements, appraisals submitted by Occidente and Santander have not yet reached the depth and quality of those prepared by the older finan- cieras; it will still be necessary for BR to continue to review closely all Bank subprojects submitted by Occidente and Santander and to assist them in upgrading their appraisal proficiency. 3.13 The five older financieras have efficient supervision and follow-up systems. Most clients are visited at least once per year, with the visits programmed on the basis of the risk exposure of the financieras and the finan- cial and operating situation of their clients. The financieras generally give priority to the supervision of Bank- and BR-financed projects over those financed with their own resources, due to the larger size of the former projects and the discipline imposed by Bank and BR reporting requirements. Improvement of supervision procedures of Occidente and Santander has been slower than expected due to staff constraints and the lower priority assigned to this activity. BR would continue to assist Occidente and Santander in upgrading their project supervision as well as their procurement and disbursement procedures.  - 19 - 4. Operations and Impact 3.14 Lending Operations. The loan portfolios of the seven financieras amounted to about Col$11.2 billion (almost US$300 million equivalent) at the end of September 1977, having increased at a 27% compounded annual rate since year-end 1974 or about 2% p.a. in real terms. The short term portfolio of the financieras (excluding the current portion of term loans) has increased rapidly since early 1975 when they were authorized by the Government to engage in short term borrowing and lending operations to help finance industrial working capital requirements. Thus, for the group of seven financieras, the percentage share of short term loans (loans with an original maturity not exceeding one year) rose from 9% of total loan portfolio at year-end 1974 to about 27% at September 1977. The shortening of the term structure of assets and liabilities of the financieras in recent years mirrors developments in the financial system as a whole, and also reflects the relatively low level of industrial investment in recent years. The proposed project includes several features designed to counteract this trend and to enable the financieras to increase the relative volume of medium and long term financing they can supply as investment activity recovers (paras. 3.35 and 3.36). 3.15 About 80% of the financieras' outstanding loans as of September 30, 1977 had gone to manufacturing enterprises, and the rest to tourism, mining and service industries (Annex 4, T-6). Their combined industrial loan port- folio accounts for about a quarter of total credit from the regulated financial system (i.e. excluding extrabanking sources) to the industrial sector. About three quarters of the financieras' loans by amount were made to enterprises located in the three principal cities--Bogota, Medellin and Cali--and their surrounding areas. This distribution, which is more concentrated than indus- trial value added originating from these regions (about 60%), is roughly the same as in 1974, indicating that there has been no significant overall change in the proportion of financiera lending to the less developed areas of the country. This is probably due to the increase in short term lending opera- tions which tend to be utilized for working capital needs of existing larger clients. Regarding Bank resources in particular, there has been a significant increase in the proportion loaned to subprojects outside of the three principal cities--from 34% under the Fifth Loan to 43% under the Sixth l/--indicating that the new features incorporated in the latter to support the Government's goal of industrial decentralization reoriented somewhat the project mix financed by the Bank. 2/ 3.16 The financieras have also been active in their support of the Government's export promotion policy. About 37% of their combined loan portfolio as of September 1977 (Annex 4, T-6) went to exporting (at least 10% 1/ On the basis of about US$55 million committed as of September 30, 1977 of the US$80 million Sixth Loan. 2/ Under the Sixth Loan, the option to borrow in pesos was limited to enterprises undertaking export oriented or industrial decentralization projects, and to medium size and small enterprises.  - 20 - of output exported) and tourism projects. Import substitution projects accounted for only 30% of portfolio, while projects involving services and other non-tradeables accounted for 33%. The financieras' export promotion efforts, which were encouraged under the Sixth Loan, appear to have had a significant export impact. On the basis of subloan commitments as of September 30, 1977, the total export contribution of subprojects financed under the Sixth Loan is projected to reach US$150 million per year when the subprojects are fully operational. This volume of exports would be equivalent to about one third of manufacturing exports of Colombia in 1977 in nominal terms. Most of the projected exports would come from chemicals (about 2/3 by amount) and from food and beverages (about 1/5). On a unit investment basis, total exports during the first five years of operation of Bank-financed projects under the Sixth Loan would be in the order of three dollars of exports per dollar of investment. 3.17 Features incorporated in three previous Bank loans have encouraged the financieras to widen their clientele and to devote more of their lending to medium size and small companies. A lending limit of US$4 million per subproject was introduced under the Fourth Loan in 1971, and under subsequent loans a cumulative lending limit of the same amount was established for the total funds committed and still outstanding from all Bank financiera loans per group of related companies. Under the Sixth Loan companies with total assets below Col$100 million 1/ were among those granted the option to borrow in pesos, with BR bearing the foreign exchange risk for a fee. As a result of these measures, subloans to medium size and smaller enterprises increased to about 30% by amount (59% by number) under the Sixth Loan compared to about 22% (57% by number) under the Fifth. Under the proposed loan the option to borrow Bank funds in pesos would be granted to enterprises with total assets of Col$150 million and less as of December 31, 1977. 2/ The US$4 million lending limit per subproject would also remain in force. However, maintaining the same cumulative limitation on Bank lending in the face of very substantial escalation in equipment costs since 1973 might exclude several enterprises sponsoring important export projects, as well as some decentralization projects. Accordingly, the US$4 million cumulative limit would be raised under the proposed loan, for export and decentralization projects only, to US$8 million per group of related companies. 3.18 Economic impact. The 1975 Special Study, which carried out an in- depth ex post analysis of a representative sample of 29 subprojects from the first four Bank DFC loans, confirmed the economic merits of investment projects financed by the Bank through the financieras. The average economic rate of return for the sample of projects was 32%, which compares favorably with the economic opportunity cost of capital in Colombia, estimated at 11%. The average financial rate of return for the sample was 18%. On an ex ante basis, 1/ As of December 31, 1975. 2/ The rough equivalent as of December 1977 of Col$100 million at year-end 1975.  - 21 - the economic rates of return for larger subprojects I/ financed to date under the Sixth Loan have all been above 15%, which is satisfactory. Preliminary estimates show the average cost per direct job created in the order of US$28,000, which is about the same as under the Fifth Loan. The relatively high estimated cost per job created may be due to some degree to the tendency on the part of the enterprises submitting subprojects to include only addi- tional workers directly involved in the operation of plant and machinery to be purchased, without taking into account increases in employment due to overhead and similar items. 2/ The results are also biased upward by a US$3.2 million subloan for a US$55 million natural gas pipeline subproject (about 6% of Sixth Loan proceeds and 25% of subproject investments to date) resulting in only a few direct jobs. However, this project is an important element in the indus- trial development of the economically depressed north coast of Colombia and is expected to have a substantial indirect employment creation impact. The cost per job created under the Sixth Loan on an ex ante basis without the gas pipeline subproject would be about US$22,500, which is reasonable compared to the results in DFC projects elsewhere. The considerable contribution of the subprojects financed under the Sixth Loan to Colombia's export earnings would also help provide foreign exchange for investment and growth over the medium term and would thus contribute indirectly to employment creation. 3.19 Technology improvement. With the encouragement of the Bank the financieras have begun to assist enterprises to undertake technology improve- ment programs designed to raise production efficiency and to make product quality internationally competitive. The Sixth Loan included a US$5.0 million pilot component to finance such subprojects, of which some US$1.4 million had been utilized as of year-end 1977 for a total of 15 subprojects. Funds have been utilized principally by enterprises in basic metals, chemicals, metallic products, and other industries for laboratory and quality control equipment, but recent subprojects include technology transfer from foreign sources as well. The experience to date shows that some worthwhile contributions to the operations of enterprises would be made, but that stronger promotion by the financieras of the component is required due to its novel nature. Funds would continue to be provided under the proposed loan for technology improve- ment programs at preferential terms, and an understanding has been reached with BR and the financieras during loan negotiations to increase promotion efforts for this type of subproject. 3.20 Environmental impact. The Bank and BR have asked the financieras to consider the environmental aspects of projects in their appraisals. However, the financieras found it difficult in the past to cover adequately these aspects due to the lack of official Colombian guidelines and regula- tions regarding the permitted levels of industrial emissions and effluents. Recently, however, on the basis of a code published in 1975 covering protection 1/ Only those requiring US$250,000 or more of Bank funds. 2/ The ex ante cost per job created under the first four Bank loans was estimated to average US$25,000. Ex post figures indicate a higher direct employment impact, with the cost per job created averaging about US$14,000 under these loans.  - 22 - of the environment and renewable natural resources, the Government took specific steps to solve the more pressing problems by focusing on a limited number of areas and industries and coordinating efforts of the various ministries involved. In order to complement these measures the technology financing component of the Sixth Loan was broadened at the time of the mid- term review to include financing of pollution control equipment. Due to its non-directly productive nature and in order to induce enterprises to undertake such investments as soon as possible, at the request of the Government the Bank funds were provided at a preferential rate in pesos. Two subprojects involving a cement firm and a steel plant have been submitted so far. The Bank would continue providing funds at preferential terms under the proposed loan to control pollution caused by machinery and equipment already installed as of December 31, 1977. Pollution control equipment for new or expansion projects may only be financed at the standard subloan interest rates. 3.21 Promotion and equity investments. The financieras have concentrated their lending in existing firms, reflecting a conservative lending policy in order to establish sound portfolios, as well as the rapid growth and great demand for funds of existing firms. As of September 1977 only 10% of the financieras' combined loan portfolio went to new enterprises and to projects involving new product lines (Annex 4, T-6). 3.22 The financieras have also taken a cautious approach to equity investments due to the risks involved, the long gestation period particularly for new enterprises, the relatively depressed yields on investments due to a tax system which does not distinguish sufficiently between nominal and real profits (para. 2.07), and the relative illiquidity of such investments given Colombia's thin stock market. In general, their return from equity invest- ments has been considerably lower than their return on lending operations. The combined equity portfolio of the financieras, valued at cost plus stock dividends, grew at only 13% p.a. in nominal terms from 1970 to 1974. Due in part to a pilot component of the Sixth Loan to finance equity investments of the financieras in new decentralized enterprises at a lower interest rate of 17-22% in Colombian pesos (compared to 22% for normal operations) and with longer grace periods, their combined equity portfolio increased at a 22% nominal rate from year-end 1974 to September 1977. To date US$2.4 million of the original US$5.0 million component of the Sixth Loan has been utilized for two important subprojects, a cement plant and a natural gas pipeline, both located in the economically depressed north coast of Colombia. The financieras played an important promotional role in both projects. More investments might have been forthcoming had it not been for the generally unfavorable climate for industrial investment over the 1975-77 period. It was also increasingly recognized that the original eligibility criteria were too restrictive and thus, during the mid-term review of the Sixth Loan, use of the component was broadened to include investments in existing decentralized enterprises undertaking expansion projects. However, inadequate capitaliza- tion continues to be a widespread problem of the Colombian industrial sector and would require more substantial measures than had been taken in the past. Therefore, under the proposed loan, up to US$10 million would be available for equity investments at a slightly lower cost to the financieras and with longer  - 23 - grace periods relative to standard subloans (para. 4.04). The criteria for eligible investments would be further broadened to include all enterprises undertaking priority projects (i.e. exporting or decentralization), and medium size and small enterprises undertaking investment projects. 3.23 Recent steps taken by the Government to address the capitalization problem of industrial firms included a Monetary Board resolution (Resolucion 65) which requires the financieras to hold at least 10% of their-assets in shares of new or transformed companies. Although this resolution is consistent with the raison d'etre of the financieras, it could have a significant adverse impact on their earnings mainly due to the short period of time (10 months) the financieras are allowed to raise their equity portfolio to the target percentage, and since any shortfall in meeting the target would have to be invested in bonds of the Industrial Financing Fund (IFF) of BR yielding only 12% p.a. In this context, the Bank has been informed that the Monetary Board would consider extending the present time limit for compliance with the resolution if called for. 3.24 Strategy papers. The financieras were asked to prepare brief statements outlining the strategies that they intended to adopt over the commitment period of the Sixth Loan to enhance the developmental impact of their operations. In line with the objectives of that loan, their statements focused mainly on steps to promote export and industrial decentralization projects and to increase their support for medium size and small firms. While the financieras made some progress in each of these areas, as described above, the strategy statements themselves were phrased in terms that often proved too general and broad in scope to provide a clear basis to measure progress. In connection with the negotiations of the proposed loan, the financieras prepared statements that are more selective in scope and with operational and institutional goals defined in more specific terms. These strategy statements incorporate understandings reached with individual financieras on institutional improvements, resource allocation and mobili- zation targets, promotional activities, and investment goals and limitations. 5. Financial Position and Results 3.25 Financial structure. The composite debt/equity ratio of the seven financieras rose from 4.3:1 at year-end 1974 to about 5.8:1 at year end 1977, a trend which is expected to continue in the future due to the difficulty experienced by the financieras in mobilizing share capital resources. However, in view of their sound and adequately protected portfolios, projected increased earnings capacity, and experienced management and staff, the financieras, with the exception of Occidente, still have the capacity to assume an increased debt burden while maintaining adequate debt-service ratios. All financieras except Occidente have stayed within their debt/equity limits, set under the Sixth Loan, of 7:1 for Colombiana, Valle, Nacional and Norte, and 6:1 for Caldas, Occidente and Santander. The five older financieras were allowed an additional 2:1 debt/equity limit (1:1 for Occidente and Santander) for short term operations which were authorized for the first time under Decree 399 of 1975 (para. 2.03). This dual system of debt/equity limits was implemented to provide the financieras with a reasonable scope for short term operations while ensuring that their traditional long-term operations did not suffer as  - 24 - a result. However, practical application of these limits has revealed some lack of precision because of differing interpretations of what specific activities were covered by Decree 399. Furthermore, the present limits would overly restrict the financieras' future efforts to mobilize short term resources that could be transformed into medium term lending. Consequently, the present set of debt/equity limits would be replaced by a new system comprising an overall debt/equity limit complemented by a current assets to equity limit which focuses on operations rather than on resources, similar to the system introduced in DFC lending in Ecuador under Loan 1359-EC. 3.26 Under the proposed project the debt/equity limitations would be consolidated into a single ratio, which, for the four older financieras, would be set at 9:1, for Occidente and Santander at 7:1, and for Aliadas and any other new participants at up to 6:1 (para. 3.42). In recognition of the improvement in the portfolio of Caldas and in its project appraisal and super- vision capabilities, its debt/equity limitation would also be raised to 9:1. The consolidated debt/equity limits would be complemented by a second limit of current assets/equity of 4.5:1 for all financieras. This has been set at a relatively high level since, for operational simplicity, the current portion of medium and long term loans and utilized letters of credit 1/ would be included in the definition of current assets. The current assets to equity and overall debt/equity ratios of the financieras are shown below: Financieras Estimated as of December 31, 1977 Current assets/equity Total debt/equity Colombiana 3.3 6.4 Valle 4.0 6.6 Nacional 2.1 4.5 Caldas 2.0 4.9 Norte 3.2 6.7 Occidente 4.9 7.4 Santander 2.9 4.4 The single debt/equity limit is also intended to be less restrictive for new participants which tend to be engaged mainly in short term operations. As these financieras mature, however, they are expected to devote a greater proportion of their increase in leverage for term lending and equity invest- ment purposes. This revised system of limitations, which was agreed at negotiations, forms part of several measures to be implemented under the proposed project to ensure that the financieras remain predominantly term lending institutions (paras. 3.29, 3.35 and 3.36). 3.27 The proposed debt/equity limitations would offer the financieras, with the exception of Occidente, adequate room for growth without the immediate need for share capital increases. Nevertheless, compared to other 1/ Excluding those issued for equipment to be utilized for Bank-financed subprojects.  - 25 - DFCs associated with the Bank, the proposed limits are relatively high, which emphasizes the need for them to strive to increase their equity base more in line with the growth of their operations. Occidente would increase its share capital in line with its plan of action (para. 3.10). In the past the Bank has required the financieras to value equity investments and fixed assets on the basis of historical cost or market, whichever is lower, which tends to understate the value of some of the financieras' assets which have been held for a considerable period of time (e.g. equity investments and office buildings). Under the proposed project the financieras would be allowed to revalue such assets for the purposes of determining their debt/ equity ratio, provided that any revaluations 1/ are certified by the external auditors as being reasonable and in line with market values. 3.28 The liquidity position of the financieras tightened as a conse- quence of their short term operations. However, their current ratios, with the exception of Occidente's, are still acceptable. Occidente has been using its short term liabilities to a significant degree for longer term lending without taking adequate steps to protect its liquidity. The financiera's plan of action includes a provision that Occidente would only engage in term transformation in the future with the support of standby liquidity mechanisms. Such mechanisms are being explored in connection with the proposed project in order to enable the financieras to engage in a prudent level of term transformation. Occidente is also trying to secure a separate standby credit line to protect its liquidity position. 3.29 Profitability. The nominal after tax rates of return on equity of the seven financieras over the past eight years are shown below: Inflation Colombiana Valle Nacional Caldas Norte Occidente Santander rate /b 1970 11.3 17.0 17.4 3.8 13.4 9.4 13.2 6.3 1971 9.1 14.9 17.5 0.2 14.7 10.1 14.6 14.7 1972 10.4 15.2 18.1 5.2 /a 12.7 16.6 /a 13.0 14.0 1973 13.6 17.6 19.4 3.4 /a 21.2 16.6 9.8 25.1 1974 25.9 19.2 17.9 9.7 Ia 20.8 15.2 14.1 26.9 1975 25.6 23.6 23.6 4.8 /a 17.4 17.2 15.6 17.9 1976 26.9 22.5 24.8 10.3 16.9 20.6 13.6 25.9 1977 /c 31.7 24.4 26.4 18.1 18.2 19.5 16.4 29.3 /a In the opinion of the external auditor, over-stated by under-provisions for expected portfolio losses. /b As reflected in the blue collar price index; calendar year basis. /c On the basis of unaudited financial statements, with the exception of Caldas. 1/ Covering only non-current assets.  - 26 - While most of the financieras were earning positive real rates of return on equity during the period of moderate inflation up to 1970, they have lost ground to inflation since then due to fixed loan margins which have become progressively lower in real terms and a system of taxation which does not distinguish adequately between real and nominal profits of financial inter- mediaries, which have few non-monetary assets. Two changes were implemented under the previous operation to help increase the level of the financieras' profitability--raising their debt/equity limits and permitting higher lending margins in peso subloans up to 4%. It is now clear that additional measures will have to be taken to enable the financieras to continue their primary function as term lending institutions. Efforts to increase spreads have had only a limited impact, since more than 80% of the amount of the Sixth Loan committed to date has been made in pesos with the same 3% spread 1/ as under previous loans, due principally to past government policies which focused on limiting interest rates as a means to reduce inflationary expectations. The profitability of the financieras has also been affected by spreads as low as 2% under official BR credit lines, the inadequacy of which has been brought to BR's attention. The financieras have been able to maintain their nominal profitability in several instances only by expanding significantly their higher margin short-term lending operations. Continuation of these trends could have an adverse impact on the ability and willingness of the financieras to concentrate their efforts mainly on longer term project financing. There- fore, under the proposed loan the Bank lending margin for subloans in pesos would be set at 4% for decentralization projects (which would account for about 40% or more of commitments) and be kept at 3% for all other projects. Margins for dollar-denominated subloans would be maintained at 2-3/4%. As a "market leader" in industrial development lending in Colombia, the steps to be taken by the Bank could also induce other multilateral and bilateral financing institutions to follow suit. Although these measures would only have a negligible impact on the profitability of the larger financieras (about 3% by 1980) they would lead to an increase in profits of about 8% by 1980 for the smaller and less profitable ones, particulary those located outside of the three principal cities. 3.30 Portfolio quality and reserves. The five older financieras have sound loan and equity portfolios overall. Arrears have remained at reason- able levels and only small write-offs are foreseen. Caldas has faced the most difficult problems related to poor portfolio quality and tight liquidity in the past. Substantial efforts by its management, however, have resulted in a significant improvement in its portfolio. While it now has the capacity to cover possible future losses out of increased annual earnings, Caldas still needs to increase its reserves for possible portfolio losses which were depleted by write-offs in the past, and prepare a plan for reduction of its equity investments in some promoted companies which tend to require excessive management attention. During negotiations, Caldas agreed to raise its reserves to an adequate level, and reduce its equity investments in some companies over a period of three years. 1/ Due to projected peso devaluation, a 3% margin in pesos would be equiva- lent to at most 2% in dollars over the average life of a subloan.  - 27 - 3.31 Colombiana's sound loan and equity portfolio took a turn for the worse recently when a chemical company, Abocol, in which Colombiana has a total exposure of about 50% of its equity (in violation of the 25% maximum under its policy statement), suffered a major accident. Colombiana's satis- factory analysis of the impact of Abocol's situation on the financiera's financial position and earnings, and an acceptable plan for reduction of its exposure in the enterprise were presented by the financiera at negotiations. 3.32 Santander has a sound portfolio and adequate reserves, with arrears and reschedulings remaining at low levels. The quality of Occidente's port- folio deteriorated somewhat during the past two years of rapid growth. A large proportion of Occidente's uncovered exposure in problem projects (including equity investments) is concentrated in a single project, in which the total exposure of Occidente is in excess of 25% of equity, the limit contained in the policy statements of all the financieras. Occidente's plan of action includes a program to reduce the financiera's high exposure in this particular enterprise. 6. Resource Structure and Needs 3.33 Resource structure and domestic resource mobilization. The combined resource structure of the seven financieras is shown below: ----------- (Col$ million) -------- December 1974 December 1977 /a Amount % Amount % IBRD 1,860 27 3,440 23 BR and other official sources 1,560 22 2,900 19 Foreign banks 890 13 1,450 10 Bonds, CDs and time deposits 730 10 2,940 20 Other liabilities 550 8 1,790 12 Equity 1,390 20 2,520 17 TOTAL 6,980 100 15,040 100 /a Based on unaudited figures. Despite a reduction in the percentage of funds provided by official sources from 49% at year-end 1974 to 42% at year-end 1977, the financieras rely principally on the Bank, BR and other official credit lines to provide them with project financing funds. Resources from foreign banks are used almost exclusively for short term import-export financing. Due to the financieras' success in raising short term funds in the domestic market, the percentage of resources mobilized locally through debt instruments doubled from 10% at year-end 1974 to 20% at year-end 1977, when they reached about Col$2.9 billion (about US$77 mil- lion). Total equity increased in nominal terms during this period, principally  - 28 - through retained earnings and dividend reinvestments of shareholders, but declined as a proportion of total resources from 20% to 17%. The financieras have had to maintain high dividend pay-out ratios (at least 60%) in order to qualify for tax exemption on their own dividend earnings. However, due to '.eir lc !-ic^l of profitability in real tc-ms, they have been unable to attract significant amounts of fresh share capital. The resource mobilization target set under the Sixth Loan requiring the financieras to raise domestic funds through debt instruments, share capital and retained earnings equivalent to disbursements under the loan has been exceeded. The financieras raised an amount over the period from year-end 1974 to year-end 1977 in excess of net Bank disbursements over that period of Col$1.6 billion. The interim target of Col$400 million for the year ending August 31, 1976 was also substantially exceeded. 3.34 In spite of the substantial increase in the financieras' total domestic resources, however, they have been unable to increase in real terms the supply of medium and long term credit for several reasons. The most important have been the uncertainty created by the high and fluctuating rate of inflation in recent years, the lack of an adequate term structure of interest rates resulting in insufficient yield on longer term instruments, and the competition from high yielding and liquid government and government- supported securities. Prospects for the financieras to raise significant amounts of resources via medium term bond issues appear limited under present market conditions. The financieras were able to raise almost Col$300 million in eight-year fixed interest rate bonds during 1972 and 1973 only with the help of a stabilization fund of BR providing primary liquidity at a fixed redemption price to bond holders. As inflation rose and the fixed interest rate of the bonds became non-competitive the fund had to repurchase a high proportion of the bonds in circulation. Discussions between the financieras, BR and the bond holders have produced some preliminary understandings as to how to solve the problems presented by these outstanding bonds. During negotiations agreement was reached that BR and the financieras would make further efforts to resolve the remaining issues within the next two to three years. 3.35 Future medium term issues would probably require an imaginative approach from the financieras involving new types of instruments. The study urdertaken by the financieras with Bank assistance focused on such possibili- ties and o- government policies and regulations that affect directly the ability of financieras to capture term resources. However, recommendations of the study to facilitate medium term resource mobilization are likely to be implemented only over a relatively extended period of time. As an inter- mediate possibility, the study proposes to consider alternative mechanisms to enable the financieras to term transform part of their short term resources for medium term permanent working capital financing of investment projects to complement long-term resources provided by the Bank and BR. Its findings and recommendations will be presented soon to the Colombian authorities for their consideration.  - 29 - 3.36 As was the case under the Sixth Loan, the financieras committed themselves to mobilizing in the local market and through retained earnings amounts substantially equal to net Bank disbursements under the proposed and prior loans. In line with this, during negotiations an interim target of Col$1.5 billion of domestic resources to be mobilized by all participating financieras between June 30, 1978 and December 31, 1979 was established. The progress made by the financieras in raising domestic resources, and the mechanisms for use of these resources in medium- and long-term lending to industrial enterprises would be reviewed and analyzed with the representatives of the Government, BR and the financieras at the time of the mandatory review of interest rates for subloans denominated in pesos to be carried out about a year after loan signing (para. 4.12). 3.37 In their financial projections (Annex 4, T-15) the financieras have estimated that they will be able to raise some Col$200-250 million annually in new share capital over the next 4-5 years. Given the measures being undertaken under the proposed loan to increase their profitability, and the projections for the inflation rate to decline over the next several years, they should be able to achieve this figure. Occidente and Norte will need to make particularly strong efforts to attract fresh share capital. 3.38 Foreign exchange needs and possible co-financing. The pace of gross industrial investment in Colombia is expected to quicken due to the continued growth of internal aggregate demand and the recovery from the world recession of Colombia's major export markets. In addition to the projected sharp increase in new investment, the long period of relatively low industrial investment over the past few years, combined with the relatively high and sustained levels of capacity utilization, have undoubtedly increased the need for modernization and replacement. Current project lists of the financieras indicate the need for about US$70 million to cover the foreign exchange component of some 120 prospective projects to be implemented over the next 12-18 months. This figure is net of a small amount still to be committed under the Sixth Loan, and under the US$30 million IDB loan associated with it. A large number of additional projects is expected to enter the pipeline during the 2-1/2 year commitment period of the proposed loan. The financieras project a growth rate in the order of 23% p.a. in nominal terms of their medium and long term portfolio over the next few years, which would indicate the need for some Col$8 billion in resources on a net basis over the loan commitment period, most of which would come from the Bank and BR. 3.39 Given the expected volume of investment demand over the next 2-3 years, a need exists to explore possible co-financing arrangements in the order of about US$20 million. This would serve as a good opportunity to introduce the financieras, particularly the more mature ones, to international capital markets. The five older financieras are having preliminary discussions to explore alternative borrowing arrangements. Should such a co-financing operation materialize, appropriate arrangements would be introduced under the proposed project which could include the following: (i) the Loan Agreement between the Bank and BR would include a cross-default clause specifically referring to the private co-financing loan; (ii) the Bank, if requested, would  - 30 - act as a channel for the service payment on the private bank loan; (iii) the Bank would agree to exchange information with the private lenders on the financieras' operations; and (iv) the amortization schedule of the proposed loan would be adjusted to allow BR to adjust principal payments on Bank subloans so that subborrowers utilizing funds from both the Bank loan and the private co-financing loan would be allowed approximately equal aggregate principal payments. The association with the Bank of the co-financing loan is expected to enable the financieras to obtain better terms, including a longer final maturity and grace period. D. Participation of Additional Financieras 1. The Two-Stage System of Participation 3.40 There are now a total of 18 private financieras operating in Colombia, of which 8 participated under the previous operation (Annex 2). Although several of the non-participants were established only recently and are small, short term lending institutions, several of them have the potential to become effective development banks. Some of them are also located in less developed regions of the country. However, the small financieras find it hard to comply with normal Bank institutional standards for DFCs particularly as regards financial ratios, and project appraisal and supervision capability. Among other reasons, they find it difficult to develop an experienced technical staff before having had access to substantial long term resources. 3.41 At the request of the Government, a two-stage system of participation was adopted under the previous operation to allow financieras which may not be able to meet immediately the rigorous standards for full participation to utilize up to US$750,000 of loan funds (per financiera) on presenting adequate project evaluations confirming the soundness of their projects. However, due to several factors, including the 4:1 debt/equity limit which was considered to be excessively low by several potential participants, the attraction of profitable short term operations, and the relatively small allocation of loan funds made, only one financiera, Aliadas, participated on a limited basis. Since most of the non-participants have gone heavily into short term opera- tions and are quite highly leveraged, it appears unlikely that many would be interested in qualifying for participation under the proposed loan. 3.42 To encourage those new financieras which have the potential and the corporate commitment to develop into effective long-term project financing institutions, under the proposed loan each financiera participating on a limited basis would be able to utilize up to US$2.0 million of Bank funds and would be allowed an overall debt/equity limitation of up to 6:1 based on the recommendation of BR. The other requirements, similar to those introduced under the Sixth Loan, would be: (a) Agreement with BR on a suitable plan of action to develop the financiera's organization, staff and procedures as required to undertake long term project financing; (b) A current assets/equity ratio not exceeding 4.5:1;  - 31 - (c) Compliance with laws, decrees and other provisions regulating financiera operations, to the satisfaction of the Superintendency of Banks; (d) Minimum equity of Col$25 million; (e) In operation for a minimum period of one year; (f) Total exposure in any firm not exceeding 25% of the finan- ciera's own equity, in any single group of related companies not exceeding 50% of equity; and total equity investments not exceeding the financiera's own equity; (g) Adoption of and adherence to a satisfactory policy statement and employment of satisfactory external auditors; and (h) Agreement to cooperate fully with BR regarding the provision of regular reporting information covering the financiera's continued eligibility under these criteria and the supervision of Bank-financed projects. 3.43 Once a financiera has satisfactorily participated in Bank lending on a limited basis for at least two years it would be entitled to apply for full participation. BR would be required to undertake a full appraisal of the financiera of a similar depth and scope as normally carried out by the Bank in connection with its DFC lending. The Bank would decide on the eligibility of a candidate for full participation based on BR's appraisal and recommendation. 2. Aliadas 3.44 Aliadas, which has been in existence for three years, is located in Medellin, and is almost wholly owned by Inversiones Aliadas, a holding company. To date it has submitted two subprojects under the Sixth Loan, a textile project located in Bogota and a rubber processing project in Medellin. Both projects would probably have been financed under the Sixth Loan without the participation of the financiera. In fact, one of them, the textile project, was originally appraised by Caldas. However, with the bigger allocation to be granted to Aliadas under the proposed loan, it may be able to submit some projects which otherwise might not be financed by the Bank. 3.45 Total operations of the financiera have grown very rapidly, parti- cularly in short term lending, and total assets have increased to Col$680 million by December 1977. However, organizational development and growth of professional staff have not kept pace with operational growth. Project appraisal and supervision as well as administrative and financial controls remain weak. The financiera also has about 20% of its total portfolio, about equal to its total equity, in companies related to its holding company, which is in excess of the limit of 50% of equity to be introduced under the proposed loan (para. 3.09). Given the need for substantial institutional improvements, it would be possible for Aliadas to participate only on a limited basis under the proposed loan for the time being. BR and Aliadas have agreed on a plan  - 32 - of action to overcome the weaknesses pointed out. Once Aliadas demonstrates sufficiei.. progress to the satisfaction of BR and the Bank, it would be allowed to participate without loan amount limitations at any time during the commitment period of the proposed loan. BR could recommend a possible revision of the debt/equity limit of Aliadas. IV. THE PROJECT A. Project Objectives 4.01 The proposed DFC project, which represents the seventh Bank operation with BR and the private Colombian financieras, is designed to: (a) support projects consistent with the Government's export promotion and industrial decentralization goals, and those sponsored by medium size and small enterprises; (b) encourage and assist the financieras in their domestic resource mobilization efforts to enable them to increase the availability of domestic funds for productive projects; (c) further strengthen BR's capability to supervise newly participating financieras and to review subprojects; and (d) maintain the financieras as sound and effective term lending institutions through measures to improve their profitability and capacity to mobilize additional share capital resources, as well as to introduce them to international capital markets through possible co-financing. It would also offer the opportunity for further discussion of financial and industrial sector issues with the Colombian Government. B. The Proposed Loan 1. General Description 4.02 The proposed loan of US$100 million would be made to BR for on- lending to the eight financieras which participated under the Sixth Loan, and to additional financieras which could meet the conditions for participation during the loan commitment period (para. 3.42). The proposed loan would be available to cover the foreign exchange costs of productive private sector projects, including manufacturing industry, tourism, mining and agroindustrial projects. Up to US$10 million of the proposed loan would be available to finance equity investments of financieras in enterprises undertaking priority projects, and up to US$5 million for technology improvement and pollution  - 33 - control subloans. 1/ The loan is expected to be committed by December 31, 1980 and disbursed by December 31, 1982 (Annex 3). The loan would be made at the prevailing Bank interest rate of 7.5% p.a. and the standard commitment fee of 0.75% would be charged. In view of the administrative complexities arising from the large number of subloans expected and the large number of participating financieras, the loan would be repaid according to a fixed 17-year amortization schedule including 4 years of grace. Since the amortization schedule would be based on the Bank's projection of the aggregate amortization schedule of the individual subloans and investments, no significant roll-over of Bank funds is expected. 2. Standard Subloan Terms 4.03 Subloans would have a maximum term of 15 years, including a grace period not exceeding 3 years. The funds would be available to final borrowers at 10.75% for dollar-denominated, and at 25% for peso-denominated, subloans. The option to borrow in pesos would be limited to borrowing firms whose total assets were less than Col$150 million at December 31, 1977, or whose projects qualify as export or decentralization projects. Export projects would be defined as under the Sixth DFC Loan. Thus a qualifying export project would need to generate net foreign exchange earnings within 5 years of the commence- ment of operations after taking into account the cost of imported raw materials, external payments (e.g. royalties) and the foreign exchange component of the initial investment, to be determined on an ex ante basis. BR would follow up on compliance with the minimum export projections which, if not met, could make companies liable for retroactive cancellation of the preferential treat- ment unless BR is satisfied that best efforts have been made. Decentralization projects would also be defined as under the Sixth Loan, i.e., projects located outside of Bogota, Medellin, Cali and their areas of influence. In order to spread loan funds over a satisfactory number of recipients, no single group of related enterprises may obtain more than US$4.0 million of the proceeds of the loan. Furthermore, no group of related enterprises may obtain more than US$4 million in the aggregate of total funds committed and still outstanding from the proposed and all past Bank financiera loans, with the exception of companies presenting export or decentralization projects in which case the aggregate limit would be US$8 million. 3. Financing of Equity Investments 4.04 Up to US$10 million of the proposed loan may be utilized by the financieras to make equity investments in enterprises undertaking export or decentralization projects, and in enterprises with total assets below Col$150 million as of December 31, 1977 undertaking investment projects. The funds would be available to the financieras in pesos at 20-22% (compared to 21-22% for subloans) on the basis of BR's recommendation taking into account perceived project risk and economic priority. Depending on the characteristics of the project and of the enterprise, the financieras have to repay Bank funds 1/ These two components would carry the special terms and conditions explained in paras. 4.04 and 4.05. Additional loan amounts used to finance equity investments or pollution control subloans would carry standard subloan terms.  - 34 - used for equity investments over a period not to exceed 15 years, including a grace period of no more than 5 years. Not more than US$2.0 million may be utilized for equity investments by the financieras per group of related enterprises out of the proceeds of the loan and in the aggregate for Bank financiera lending. 4. Technology Improvement and Pollution Control Subloans 4.05 Up to US$5.0 million of the proposed loan may be utilized to finance technology improvement and pollution control subloans. As under the Sixth Loan, technology improvement funds may be utilized to finance: (a) research and development programs subcontracted to an outside research institute aimed at improving product designs, production techniques, or exploring alternative raw materials; (b) training of technical staff overseas; (c) hiring foreign technicians or consultants for technology adaptation or quality control programs; (d) lump-sum payments to purchase the unrestricted rights to new production processes; and (e) purchase of industrial quality control and laboratory test equipment. Technology improvement subloans would have a maximum term of 5 years including a grace period not to exceed 2 years, and would be available to beneficiaries at 20% p.a. in pesos. They would be subject to a maximum amount of US$250,000 of Bank financing per enterprise. Subloans for pollution control would also be made available at 20% p.a. in pesos, and at a maximum term of 10 years, including a grace period not to exceed 2 years. Pollution control subloans would be restricted to controlling pollution by equipment already installed as of December 31, 1977. Pollution control equipment for new or expansion projects may be financed under the loan only as standard subloans. Not more than US$500,000 may be utilized for pollution control purposes at preferential rates per enterprise out of the proceeds of the loan. 5. Spreads and Foreign Exchange Risk 4.06 Financieras would have margins of 4% p.a. on peso-denominated subloans for decentralization projects and 3% for all other projects. Their margin would be 2-3/4% on dollar-denominated subloans. BR would on-lend the funds to the financieras from 16% to 22% in pesos and at 8% in US dollars, depending on purpose. The differential between these on-lending rates and the interest rate of the Bank loan would be BR's fee for assuming the full (peso versus currencies of disbursement) and cross foreign currency exchange risks (US dollar versus currencies of disbursement), respectively. 6. Participation in the Loan 4.07 The seven financieras which participated fully under the Sixth Loan would be eligible to participate in the proposed loan subject only to restric- tions of an institutional nature (e.g. debt/equity and exposure limits). Aliadas, and any additional private financieras which could meet minimum conditions for participation during the commitment period of the loan would be allowed to participate on a limited basis, i.e., only with standard subloans, and up to a cumulative maximum per financiera of US$2.0 million in loan funds. Individual subloans presented by the financieras would be subject to a maximum allocation of US$500,000. Participation of any additional financieras on a  - 35 - limited basis would be approved by the Bank based on BR's recommendations. Aliadas may be allowed to participate fully at any time during the commitment period of the proposed loan once it implements its plan of action to the satisfaction of BR and the Bank. 7. Approval Limits 4.08 Standard subloans. BR's limit for standard subloans not requiring prior Bank approval would be maintained at US$1.5 million for projects prepared and presented by the five older financieras, US$500,000 for those from Occidente and Santander, and US$250,000 for those from Aliadas and any newly participating financiera. Subprojects requiring subloans below US$500,000 submitted by the five older financieras would be approved by BR based on the evaluation of the financieras and would be subject only to a limited review of their economic priority by BR. Subprojects above US$500,000 from the five older financieras and all those submitted by other financieras would require BR's normal review and approval. In addition, Bank approval would be required for the first two subprojects submitted by each newly participating financiera. 4.09 Equity investments. Equity investment subloans to the financieras involving investments in a single enterprise exceeding US$500,000 would require prior Bank approval. 4.10 Technology improvement and pollution control subloans. All tech- nology improvement and pollution control subloans would be reviewed and approved by BR. The Bank would monitor closely the utilization of these funds on an ex post basis. 8. Procurement and Disbursement 4.11 Procurement for subprojects would be in accordance with standard practice for DFC loans. The financieras require their clients to obtain quotations from a reasonable sample of qualified suppliers for major pieces of equipment. BR also monitors closely the procurement of items to be financed under Bank loans in order to ensure that the items are reasonably priced and appropriate for their intended purpose. Disbursement of funds from the loan for subprojects would be on the following basis: (a) 100% of foreign expendi- tures for direct imports; (b) the CIF cost of foreign equipment purchased off-the-shelf, or 60% of expenditures for such goods where the CIF cost cannot be ascertained; (c) 35% of the ex-factory cost of locally manufactured produc- tion equipment, and of construction and civil works expenditures; and (d) 75% of technical assistance, technology transfer and overseas training expenditures for technology improvement programs. Percentages (b) through (d) represent average foreign exchange costs determined from a review mainly of past Bank DFC operations in Colombia and are in line with comparable figures elsewhere. 9. Review of Loan Conditions 4.12 In view of some uncertainties regarding the future course of infla- tion in Colombia, twelve months after the signing of the proposed loan, or after 40% of the loan has been committed for peso subloans and investments,  - 36 - whicheve;. ocCus earlier, commitments of peso subloans and investments would stop until the Government, the Bank, BR and the financieras have reviewed the appropriateness of the interest rate of 25% on peso-denominated subloans, and agreed on the peso rate of interest to be charged for future loan commit- ments. In addition, the Bank would monitor monthly the rate of inflation after loan signing and would stop further commitments and bring forward the date of review should the rate of inflation accelerate and exceed 23% p.a. To limit the impact of short-term fluctuations, the inflation rate would be computed by comparing the six-month moving average of the cost of living index for blue collar workers with the same average for the corresponding period of the previous year. C. Benefits and Risks 1. Benefits 4.13 The proposed project would contribute both directly and indirectly to fill a major gap in the financing of efficient productive projects in Colombia. The proposed loan is expected to finance some 200 projects involving total investments of about US$350 million in a wide range of industries which would increase employment and output, particularly exports. Based on the experience with past Bank DFC operations in Colombia, the projects financed by the proposed loan are expected to generate exports in the order of US$150 million annually and result in about 13,000 additional direct jobs at a cost per job created of about US$25,000-30,000. Based on the results of the Special Study (para. 3.18), the indirect employment impact of the project is also expected to be substantial, in the order of 50% of direct employment c:eated. A substantial portion of the loan is expected to be utilized for decentralization projects (about 40%) and for medium size and small enterprise subprojects (about 30% by amount, and more than 50% by number) as under the previous operation. The economic rate of return (ERR) would be calculated for subprojects requiring Bank subloans in excess of US$250,000, which would ensure the utilization of the loan for efficient projects. Most subprojects are expected to have ERRs in the range of 15-40%. The proposed loan would also help strengthen the capital structure of enterprises undertaking priority projects, help upgrade the competitiveness of firms through technology improve- ment programs, and help lessen pollution from existing industrial plant and eL ipment. 4.14 The proposed project would encourage and assist the financieras' domestic resource mobilization efforts, which should result in additional funds for the productive sector of Colombia. Possible co-financing arrange- ments c^--ld also provide additional term funds for the productive sector and help introduce the financieras to international capital markets. The project is expected to have a s.4-nificant positive institutional impact on the Depart- ment of Development Credit of BR, on the financieras through measures to improve their profitability and capacity to mobilize share capital resources, and on new participants to be developed by BR into effective term lending institutions.  - 37 - 2. Risks 4.15 The proposed project, as designed, does not involve unusual risks regarding the attainment of its major objectives. If, contrary to expectations, the rate of inflation should again accelerate the review mechanism proposed under the project would allow the Bank to stop further commitments of the loan in pesos until a more appropriate peso relending rate is agreed. Unforeseen circumstances such as adverse market conditions might prevent the financieras from mobilizing the target amounts of domestic resources set under the project. However, the previous experience of the financieras with short term resource mobilization, the study they have undertaken with Bank assistance, and the continuing sectoral discussions between the Bank and the Colombian Government reduce the risk that this would occur. V. AGREEMENTS REACHED AND RECOMMENDATIONS A. Agreements and Understandings Reached 5.01 During negotiations, agreement was reached on the following: (a) With the Government and BR regarding: (i) on-lending terms and conditions of the proposed loan including the new spreads for the financieras (paras. 4.02 to 4.11); (ii) review of the appropriateness of interest rates on peso-denominated subloans and resource mobilization efforts (paras. 3.36 and 4.12); and (iii) conditions for the participation of additional financieras (paras. 3.42 and 3.43). (b) With BR regarding: (i) the consistent use of "border prices" for tradeable goods in ERR calculations (para. 3.04). (ii) the upgrading of financiera supervision through the creation of an adequately staffed supervision unit, additional staff training programs, and establishment of formal supervision policies and procedures (para. 3.05); (iii) adoption of a revised policy statement incorporating points (i) and (ii) above (paras. 3.04 and 3.05); and (iv) plans of action and strategy papers of Occidente, Santander, and Aliadas (paras. 3.09, 3.10, 3.24, 3.27, 3.28, 3.32 and 3.45).  - 38 - (c) With BR and the five original financieras regarding: (i) resource mobilization targets including an undertaking to renew efforts to overcome the remaining obstacles to future medium term bond issues of the financieras (paras. 3.34 and 3.36); and (ii) revised debt/equity and current assets/equity limitations (para. 3.26). (d) With the five original financieras regarding their strategy papers (para. 3.24), including specific institutional points with Colombiana (paras. 3.11 and 3.31), Caldas (para. 3.30) and Norte (para. 3.11). 5.02 Understandings were reached: (a) With BR regarding the monitoring of the loan and investment decision-making process involving large shareholders of the new financieras (para. 3.09). (b) With BR and the financieras regarding: (i) promotion of technology improvement subloans (para. 3.19); and (ii) reduction by the financieras of their exposures per group of related companies over a period of one year (para. 3.09). 5.03 Possible co-financing arrangements were discussed with the finan- cieras and BR (para. 3.39). 5.04 A special condition of effectiveness of the Subsidiary Loan Agreement between BR and Occidente would be the financiera's demonstrating sufficient progress under its plan of action (para. 3.10). B. Recommendations 5.05 With the above agreements and understandings, the proposed project would constitute a suitable basis for a Bank loan of US$100 million to BR with the guarantee of the Republic of Colombia on the terms and conditions listed in Chapter IV.  ANNEX 1 Page 1 Banco de la Republica Statement of Operating Policies and Procedures Approved on June 1, 1978 This statement lays down the policies and procedures that Banco de la Republica (BR) will follow through the Department Credit (DDC) in discharging its responsibilities under the Seventh DFC Loan (the Loan) of the World Bank (the Bank). I. Utilization of Funds (a) The funds shall be used, in accordance with the terms of the relevant Loan and Subsidiary Loan Agreements, to finance the establishment or expansion (including technological upgrading and pollution control) of economically productive enterprises that are effectively controlled by the private sector. (b) The economic activities that may receive financing shall include manufacturing industry, tourism, mining, and agroindustry. (c) The proceeds of the loan shall be used only to finance the import content, as established in the Loan Agreement, of specific projects that are technically, financially, and economically sound. (d) Only the following types of expenditures, or such other expenditures as may be agreed by the Bank, would be eligible for financing as technology improvement subloans; (i) Research and development programs subcontracted to national or overseas technical research institutes or equivalent agencies, or carried out in cooperation with overseas collaborators. (ii) Training of Colombian technicians abroad for periods of up to one year, when not included as part of a normal licensing arrangement. (iii) Hiring of foreign technicians or consultants to work with a firm for up to one year. (iv) Establishment of a laboratory and/or purchase of equipment and instruments for quality control, materials testing or product research. (v) Lump sum payments to purchase outright, and without restriction, the rights to utilize some new production process or to produce some new product patented by a foreign concern.  ANNEX I Page 2 (e) Pollution control subloans at a preferential rate would be restricted to controlling pollution caused by equipment already installed as of December 31, 1977. Pollution control equipment tor new or expansion projects may be financed only under standard subloan terms. (f) Equity investments of the financieras in enterprises undertaking export or decentralization projects, and in enterprises with total assets below Col$150 million as of December 31, 1977 undertaking investment projects would be eligible for financing under the Loan at a preferential rate and with longer grace periods, based on BR's recommendations. II. Requirements for Participation of Financieras The seven financieras that participated without quantitative loan amount restrictions under the Sixth Loan are qualified to participate in the Seventh Loan on the same basis. Aliadas, and such other financieras as the Board of Directors of BR may authorize with the consent of the Bank, would be allowed to participate with loan amount limitations if they meet the conditions stated in Part (A) below, or without loan amount limitations if they meet the conditions established in Part (B). A. Limited Participation In order to participate under the Loan with standard subloans (i.e., excluding equity, technology improvement and pollution control subloans) not exceeding US$500,000, and subject to an aggregate maximum of US$2,000,000 per financiera, a financiera would have to meet the following conditions: (a) Agreement with BR on a suitable plan of action to develop the financiera's organization, staff and procedures as required to undertake long-term project financing. (b) A debt/equity ratio not greater than the limitation estab- lished by BR (but not to exceed 6:1) based on a review of the financiera's loan and equity portfolio and overall financial condition. (c) A current assets/equity ratio not exceeding 4.5:1. (d) Compliance with laws, decrees, and other provisions regulating financiera operations, to the satisfaction of the Superintendency of Banks. (e) Minimum equity of Col$25 million. (f) In operation for a minimum period of one year.  ANNEX I Page 3 (g) Total exposure in any firm not exceeding 25% of the financiera's own equity, in any single group of related companies not exceeding 50% of equity, and total equity investments not exceeding the financiera's own equity. (h) Adoption of and adherence to a satisfactory policy statement and employment of satisfactory external auditors. (i) Agreement to cooperate fully with BR regarding provision of regular reporting information covering the financiera's continued eligibility under the above criteria and the supervision of Bank-financed projects. B. Full Participation In order to qualify for full participation under the Loan (i.e., without loan amount limitations), a financiera should have participated satisfactorily for a minimum period of two years on a limited basis and, in addition, would have to undergo full appraisal by BR, which should demon- strate to the satisfaction of the Bank that the financiera has: (a) adequate management, satisfactory administrative procedures, and appropriate organization; (b) a sound investment and lending policy; (c) a technical staff capable of preparing, evaluating and supervising subprojects, and carrying out all other activities involved in lending Bank funds; (d) a sound financial condition and reasonable growth prospects. III. Supervision of Financieras The Bank would continue to supervise the activities of the five original participating financieras. BR would supervise Occidente, Santander and Aliadas, as well as any financiera which subsequently qualifies for either limited or full participation under the Loan. For this purpose BR will establish and maintain a full-time financiera supervision unit within DDC, will provide adequate training for its financiera supervision staff, and will establish formal supervision policies and procedures which will include the following: (a) It shall monitor the progress of financieras relative to their agreed plans of action and strategy papers, including their resource mobilization targets. (b) It shall require satisfactory external auditing. (c) It shall request and review periodical reports.  ANNEX I Page 4 (d) It shall visit each financiera at least once every six months. (e) It may examine the financiera books and any document it considers advisable. (f) It shall monitor the loan and investment decision-making process of the new financieras involving their large shareholders. (g) It would conform to other requirements set forth in the manual on supervision of the financieras. DDC would, as appropriate, grant technical assistance to any of the financieras under its supervision. IV. Subproject Review The participating financieras shall be exclusively responsible for the preparation and appraisal of subprojects. BR will review the subprojects they submit, and the Board of BR reserves the right to approve only those subprojects that are economically sound and are in accordance with the development priorities of the National Government. To this end, BR will require the financieras to submit evidence of the economic merit of all sub- projects involving Bank financing in the equivalent of more than US$250,000 (excluding pollution control subprojects). Such evidence will include a cal- culation of the internal economic rate of return of the subproject, using a methodology based on "border prices" and agreed by the Bank. In the case of subprojects involving a lesser amount of Bank financing financieras will be required to furnish a summary statement describing the basis on which the economic merit of the subproject was determined. In addition, BR will require financieras to include in their appraisals of subprojects a summary assessment of the likely environmental impact of such subproject taking into account the National Code for the Protection of the Environment and Renewable National Resources and regulations governing industrial emissions and effluents promulgated in pursuance to this code. The procedures that BR will use in reviewing subproject appraisals submitted by the financieras will vary, depending on the size and nature of the subproject as outlined below. Standard Subloans for Investment Projects Subprojects requiring subloans below US$500,000 submitted by the five original financieras would be approved by BR based on the evaluation of the financieras and would be subject only to a limited review by DDC covering economic priority, completeness of information and documentation provided, and appropriateness of subloan terms. Subprojects requiring more than US$500,000 in Bank funds and all those submitted by other financieras would require DDC's more detailed review to check the adequacy of the financiera's evaluation and to review the economic, financial and other  ANNEX I Page 5 important aspects of the subproject. BR's limit for standard subloans not requiring prior Bank approval shall be US$1.5 million in the case of subprojects submitted by the five original financieras, US$500,000 for those from Occidente and Santander, and US$250,000 for those from Aliadas and any newly participating financiera. In addition, prior Bank approval would be required for the first two subprojects submitted by each newly participating financiera. Equity Investment Financing All subprojects under this category of the Loan, which may only be submitted by fully participating financieras, would be reviewed in detail by the DDC. BR's limit for such subprojects not requiring prior Bank approval shall be US$500,000. Technology Improvement and Pollution Control Subloans Subprojects requiring not more than US$50,000 in Bank funds and presented by the five original financieras would be approved by BR on the basis of financiera evaluations, with the role of the DDC limited to checking that all required information and documentation have been provided. Subprojects requiring more than US$50,000 would require a more detailed review from the DDC which would, as appropriate, seek further technical advice on the more complex proposals. All technology and pollution control subloan proposals submitted by other fully participating financieras would be reviewed in detail by the DDC in accordance with guidelines acceptable to the Bank. Only fully participating financieras may submit this type of subproject. BR will encourage and assist the financieras' efforts to promote technology improve- ment subprojects. V. Subproject Supervision Each financiera would be responsible to BR for seeing that the funds of each subloan are properly utilized and that the borrowing enterprise uses the items financed for the purposes indicated in the respective loan appli- cation. Towards this end BR may require the financieras to submit progress reports, specifically to determine if subproject implementation is proceeding in accordance with the investment plan submitted. When deemed necessary, representatives of BR may visit enterprises, accompanied by representatives of the financieras concerned, in order to monitor the progress of specific subprojects. VI. Disbursements, Accounting and Auditing The procedure to be followed and documents required for authorizing disbursement of the approved subloans shall be the same as those utilized for previous DFC loans extended to BR by the Bank. The accounting procedures to be used for this line of credit shall be similar to those currently in use and operations shall be audited by the Audit Office of BR as agreed with the Bank on previous occasions.  ANNEX I Page 6 VII. Staff BR will take all the necessary steps to ensure that the staffing of the DDC remains both capable and sufficient in numbers to fulfill the obligations arising from this line of credit. VIII. Amendments and Clarifications Amendments to this policy statement may be made upon agreement between BR and the Bank. In addition, the procedures to be used by BR in dealing with any subloans or investments of a type not previously subject to agreements between the Bank and BR will be determined or clarified through an exchange of letters.  ANNEX 2 Additional Private Financieras that may Qualify for Participation As of December 31, 1977 Col$ millions Total Equity Invest- Current Assets/ Financiera Location Assets Equity Debt/Equity ments/Equity Equity Grancolombiana Bogota 7.863.0 368.0 21.6:1 0.74 12.1:1 Del Caribe Bogota 403.0 48.0 8.4:1 0.02 5.7:1 De los Andes Bogota 1.048.0 43.8 23.4:1 - N.A. Cofinatura Bogota 795.0 90.0 9.7:1 0.81 8.6:1 Agrofinanciera Bogota 256.0 29.0 7.9:1 0.08 3.0:1 Suramericana Bogota 182.3 56.0 2.4:1 0.43 7.2:1 Union Antioquia 1/ (founded in February 1978) De las Americas Cali 176.0 51.0 2.5:1 - 3.2:1 Del Oriente Cucuta 279.0 58.0 6.4:1 0.37 4.2:1 Del Tolima Ibague 424.0 64.0 5.9:1 0.37 6.5:1 1/ Outside of Medellin.  ANNEX 3 Estimated Schedule of Disbursements Cumulative Disbursements at end of Quarter IBRD Fiscal Year and Quarter (US$'000) FY79 september 30, 1978 - December 31, 1978 2,000 March 31, 1979 6,000 June 30, 1979 10,000 FY80 September 30, 1979 16,000 December 31, 1979 22,000 March 31, 1980 30,000 June 30, 1980 38,000 FY81 September 30, 1980 46,000 December 31, 1980 1/ 56,000 March 31, 1981 66,000 June 30, 1981 76,000 FY82 September 30, 1981 86,000 December 31, 1981 92,000 March 31, 1982 96,000 June 30, 1982 98,000 FY83 September 30, 1982 99,000 December 31, 1982 2/ 100,000 1/ Estimated end date for submission of subloans. 2/ Closing date.  ANNEX 4 SUPPLEMENTARY TABLES  Table t: STRUCTURE OF YlANUFACTURING PRODUCTION 1968-75 (P.oo values in current -arket prices) 1968 11974 1975 Cr000. 0u1-ot Value Added Employment No. of Firms Oulpot Val.r Added Eployoet No. of Fio. Output Valo. Added Rploy_rt No. of Fi-oa _____ (00)(fn Cel. $bUllo l) 11 (000) (in Col. $ billion) 1/ (000 Food 11.7 2.7 44.4 2958 37.4 9.1 60.7 1114 51.3 12.1 63.5 1176 B--erage. 3.7 2.5 16.0 219 12.1 7.9 19.7 122 16.2 10.1 21.0 127 -oobe.. 1.1 0.8 3.5 159 3.1 2.3 3.7 42 2.9 1.9 3.7 42 Textilet 5.2 2.5 48.7 456 23.8 10.0 74.9 432 23.8 10.2 76.6 493 Gar-eate, Clothirg 1.9 0.8 30.7 1823 4.8 1.8 39.4 598 5.9 2.3 38.5 617 Leo-h-r and pr-d-et. 0.5 0.2 4.6 270 1.8 0.5 6.4 88 2.1 0.7 7.7 97 Footrwe-r !/ of a/ A/ 0.8 0.3 7.3 187 1.3 0.5 8.9 204 Wood *od prod...o 0.3 9.1 6.3 414 1.3 0.6 8.6 250 1.4 0.6 8.0 257 Furoittro 0.2 0.1 5.4 398 0.8 0.3 7.4 218 0.8 0.4 7.3 216 Paper *nd prod-rto 1.4 0.5 6.3 115 7.8 2.5 11.9 142 8.4 2.5 10.9 147 Printed 1.0 0.5 12.6 488 3.5 1. 9 16.9 306 4.4 Z.2 17.7 324 IndM-tri-l reooical. 4.9 2.4 24.3 524 11.1 5.1 10.8 97 10.6 4.2 10.6 95 Other hebeiori prod-rto b/ b/ b/ b/ 10.7 4.8 23.8 271 12.7 5.9 23.0 279 Petrole-os refinery C/ 6/ 0/ of 8.1 3.1 3.9 10 7.5 3.9 4.1 11 Co.1 6 petrole,.- deriv-tca 1.8 0.7 2.2 18 0.3 -- 0.4 12 0.4 0.1 0.4 i3 Robber *od pad-odtb 1.0 0.5 6.6 71 3.6 1.5 9.2 74 3.9 1.6 8.1 73 Pluotlt prodast. d/ d/ d/ d/ 3.2 1.2 10.6 172 4.0 1.6 11.8 167 Non-o.etalltr oi-erals e/ of e/ _/ 0.6 0.3 5.1 38 0.7 0.4 5.Z 39 Gleo /e/ e/ 1.3 0.7 6.3 48 1.6 0.9 6.7 53 Other -o-m-t.llie pr-darta 1.9 1.0 25.3 988 4.8 2.6 19.3 347 5.5 3.2 19.1 342 Iron *od oteel ind..try 1.7 0.4 4.8 37 4.5 2.1 12.2 27 5.5 2.3 13.7 54 Noe-ferr-o- -etal f/ f/ f/ f/ 1.2 0.4 2.5 31 1.0 0.4 2.4 31 Metal prnduct- 1.8 0.9 21.5 710 7.0 2.9 30.4 580 8.0 3.8 29.1 587 Non-.electrtic .achinery 0.4 0.2 5.9 251 3.6 1.6 15.5 287 4.3 2.0 15.9 297 ElectriC n.lhi-ery 1.2 0.5 9.3 241 4.4 1.8 12.8 160 5.0 2.1 13.0 117 Tron-pert oq.ip.e.t 1.0 0.4 13.7 586 8.0 2.9 17.6 197 11.2 4.5 18.6 207 Other eqoip.e.t d/ d/ d/ d/ 0.3 0.1 2.2 55 0.6 0.3 2.6 56 Other ind..triea 1.1 0.6 10.3 336 1.3 0.6 8.3 169 1.5 0.7 8.1 167 Tmatl Homufarturioc 43.8 18.3 302.4 11062 169.2 69.0 447.9 6074 202.5 81.4 456.2 6288 a/ Cla..ified oed-r gaof-t-o *l.thing. 2/ Clsoified und-r ind.atrinl oh-efiale. c/ Cl..ifiod ander c..l and petr-oeo. der-v1r-t. d/ Cla.oifiod ueder ether 6anuftetr.s. e/ ClaI-ifi.d uoder on-mtallie mineral produ-to. f/ Cl..1iff.d under iron cod Stol imd.atry. So-r-e 060A and ANDI  Table 2: INDUSTRIAL INVESTMENTS, PRODUCTION, SALES AND FOREIGN EXCHANGE AVAILABILITIES (In million of Col. Pesos, unless otherwise indicated) Industrial Annual Public Annual Industrial Industrial Foreign Exchange Investment % Investment % Production Sales Index Availability b/ Nominal Real a/ Growth Nominal Real a/ Growth Real a/ % Growth (1970 = 100) 7, Change (US$ Million) (Index (1970-100) 1958 373 1360 - - - - 29210 - 44.3 - 643 53.2 1959 403 1531 12.6 - - - 31893 9.2 47.3 6.7 605 50.0 1960 499 1604 47 - c/ - c/ - 32839 3.0 45.1 -4.7 547 45.2 1961 623 1871 16.7 1237- 3716- - 34190 4.1 48.4 7.3 693 57.3 1962 920 2519 34.6 1243/ 3406-c -8.3 35699 4.4 50.4 4.1 655 54.1 1963 774 1668 -33.8 1237-/ 2667- -21.7 35319 -1.1 57.2 13.5 820 67.7 1964 1247 2508 50.4 1814 3651 23.0 39551 12.0 58.0 1.4 956 79.0 1965 1633 2821 12.5 2579 4454 22.0 41166 4.1 60.4 4.1 599 49.5 1966 2096 3021 7.1 3404 4905 10.1 45128 9.6 59.0 -2.3 770 63.7 1967 2365 3039 0.6 5338 6862 39.9 46869 3.9 59.6 1.0 905 74.8 1968 1830 2163 -28.8 7687 9086 32.4 52004 10.9 67.5 13.3 873 72.1 1969 2462 2664 23.2 7989 8646 -4.8 54715 5.2 71.5 5.9 980 81.0 1970 3643 3643 36.7 11439 11439 32.3 59316 8.4 100.0 40.0 1210 100.0 1971 4191 3732 2.4 16228 14450 26.3 60913 2.7 102.7 2.7 1341 110.8 1972 5915 4762 27.6 16966 13661 -5.5 68491 12.4 136.6 33.0 1637 135.3 1973 7612 5218 9.6 20866 14302 4.7 72851 6.4 164.9 20.7 2009 166.0 1974 9470 4971 -4.7 23683 12432 -13.1 77716 6.7 159.5 -3.3 2384 197.0 1975 9337 4150 -16.5 26577 11812 -5.0 76610 -1.4 153.8 -3.6 2758 227.9 1976 na 4441 7.0 - - - - - - - 3550 d/ 293.3 1977 5106 15.0 - - - - - - - 3136.2 _ a/ Deflated by implicit price deflators for gross fixed capital formation (1970 = 100) in the Natiocial Income Aecounts. h/ Total current foreign exchange receipts plus net reserves at the beginning of the year. c/ Includes national government investments only. 4/January - June data. Source: Fedesarrollo, Banco de la Republica and Mission's Estimates. 1<  Tahil A: EXPORT REGISTRATIONS BY MAIN PRODUCTS 1960-76 (In us$ Million) Structure of Exports 1960 1965 1967 1974 1975 1976 1960-65 'I. 1967-74 % 1976 % $ I;Illion Share y Million Share $ Million Share Coffee 348.7 346.7 312.4 623.1 680.5 996.0 2078.2 85.5 3530.0 56.8 996,0 56.2 New Exports: Other Agriculture 22.1 58.9 58.9 304.1 340.7 293.9 195.0 8.0 1109.0 17.8 293.9 16.6 Cotton 14.1 8.2 21.6 86.8 81.9 91.0 ,65.2 2.7 332.6 5.4 91.0 5.1 Coffee, beef - 12.4 1.9 42,6 88.1 64.4 12.4 0.5 211.2 3.4 64.4 3.6 Sugar - 8.0 12.0 96.1 82.5 22.4 28.6 1.2 232.3 3.7 22.4 1.3 Bananas 5,6 19.9 17.2 27.7 38.8 41.2 51.4 2.1 158.9 2.6 41.2 2.3 Tobacco 2.3 5.9 4.1 22.1 17.9 27.2 32.8 1.3 88.1 1.4 27.2 1.5 Shrimp, shellfish - - - 12.9 12.1 20.9 - - 48.6 0.8 20.9 1.2 Flowers - 4.5 2.1 15.9 19.5 26.9 4.6 0.2 37.3 0.6 26.9 1.5 Manufactures 0.3 20.0 25.3 388.5 303.3 392.1 43.3 1.8 1050.7 16.9 392.1 22.1 Clothing & textiles 0.2 8.8 3.0 184.1 104.7 134.5 16.7 0.7 409.4 6.6 134.5 7.6 Leather and hides 0.1 4.2 3.7 16.2 17.7 23.5 7.5 0.3 103.6 1.7 23.5 1.3 Chemicals - - 4.2 66.0 55.7 49.0 - - 149.0 2.4 49.0 2.8 Metallic products - - 3.1 32.5 21.0 26.9 96.1 1.5 26.9 1.5 Mech. and Elect. - - 2.7 25.4 24.9 39.3 - - 66.0 1.0 39.3 2.2 Timber 6 wood - 4.2 4.2 18.6 12.2 20.6 16.3 0.7 68.7 1.1 20.6 1.2 Paper, carton, books - - - 26.8 34.4 42.5 - - 83.0 1.3 42.5 2.4 Cement - 2.8 3.1 12.4 22.1 35.1 2.8 0.1 44.3 0.7 35.1 2.0 Glass - - 1.3 6.4 10.7 10.8 - - 30.6 0.5 10.8 0.6 Mineral Products - - - 8.8 15.3 21.8 - - 152.3 2.5 21.8 1.2 Other Products 10.9 17.7 38.6 174.9 197.2 161.8 113.5 4.7 562.3 9.0 161.8 9.1 Sub-total New Exports 1/ 33.3 96.7 122.9 876,3 856.4 869.7 351.8 14.5 2874.3 46.3 869.7 49.0 Adjustments _ _ -3.7 -83.8 -94.3 -92.0 - - 190.9 3.1 -92.0 5.2 Net New Exports 33.3 96.7 119.2 792.5 762.1 777.7 351.8 14.5 2683.4 43.2 777.7 43.8 Total Exports 382.0 443.3 431.6 1415.6 1442.6 1773.7 2430.0 100.0 6213.4 100.0 1172736 100.0 Source: Banco de la Republica 1/ Data are based on registration with Banco de la Republica and are therefore not consistent with data based on INCOMEX registrations. YlI  Table 4: EFFECTIVE EXCHANGE RATE FOR EXPORTS Nominal Domestic World Real Exchange PROEXPO Total Export End Year/Qtr. Rate Prices PriceslJ Rate CAT Credit Incentive % Change 1967 14.095 87.0 91.1 14.759 1.1816 17.439 -- 1968 16.038 87.1 90.6 16.682 1.1816 19.711 13.0 1969 17.227 92.9 94.0 17.431 1.1816 20.596 4.5 1970 18.352 100.0 100.0 18.352 1.1816 21.685 5.3 1971 20.080 111.5 105.2 18.945 1.1816 22.385 3.2 1972 22.720 141.6 113.6 18.227 1.1799 21.506 -3.9 1973 24.614 186.2 133.4 17.634 1.1756 20.731 -3.6 1974 II 25.667 223.8 n.a. -- 1.1748 -- -- IV 28.030 253.1 160.6 17.786 1.1748 20.895 0.8 1975 II 30.636 280.5 n.a. -- 1.0466 0.0288 -- -- IV 32.797 306.3 180.8 19.359 1.0466 0.0288 20.819 -0.4 1976 II 34.661 341.0 n.a. -- 1.0466 0.0288 -- -- IV 36.100 380.2 181.7 17.252 1.0466 0.0288 18.553 -10.9 1977 (Sept.) 34.990 405.4 193.5 16.701 1.0746 0.0288 18.428 -0.7 I/ Index of International Inflation, EPDIE, January 16, 1978. kZi  ANNEX 4 T-5 Table 5: INDICES OF ACTIVITY ON COLOMBIA'S STOCK EXCHANGES Indices of Activity on Bogota Stock Exchange (1970=100) AVERAGE SHARES BONDS OTHER TOTAL QUOTATION Financial Industries Number Number Value Value Value Value Value Total Industries 1972 70.8 52.7 68.9 54.6 82,2 274.1 107,8 72.5 73.8 1973 109.7 95.4 98.3 92.3 166.8 356.7 159.0 78.0 83.4 1974 138.5 113.9 107.9 89.1 331.3 516.9 237.8 77.6 81,6 1975 126.3 78.8 98.9 72.2 185.5 445.8 178,6 68.2 72.5 1976 192.7 118.1 98.8 93.6 358.0 1028.4 357.1 84.0 94.1 1977 209.8 176.2 136.8 175.5 520.1 1163.5 463.2 118.4 140.1 Indices of Activity on Medellin Stock Exchange (1970=100) AVERAGE SHARES BONDS OTHER TOTAL QUOTATION Financial Industries Number Number Value Value Value Value Value Total Industries 1972 68.4 53.0 69.6 59.5 122.7 263.1 110.1 76.1 76.1 1973 114.1 99.4 94.4 89.9 198.3 355.9 164.0 83.0 84.2 1974 180.5 124.2 113.2 93.3 420.4 528.6 247.2 84.1 83.6 1975 130.7 90.2 100.0 76.0 268.9 449.9 188.5 70.7 68.6 1976 213.4 130.4 101.7 99.0 377.7 978.1 328.0 88.2 90.8 1977 246.5 208.5 134.6 182.3 500.6 1093.5 422.0 121.5 134.3  Table 6: ANALYSIS OF FINANCIERA LOAN PORTFO.LOS AS OF SEPTLEMBER 30, 1977 CF del VO1le CF National CF celoubinn CF del Nor-e CF de C.1db. Nobser A-o,oo 2 Number A Atoont 2 Nober 7. A-nnnt 7. NNbr b Ausser 7. Nubeont (Million (Million (Million (Million (Millon cell) ColS) Coil) Coil) Cel$) BY -tieinl teen- Lnnn than one ye-r 245 13 389.9 18 218 15 383.0 24 325 19 1028.9 33 540 69 165.8 15 201 22 205.2 23 1-2 years 497 26 517.3 24 120 8 232.6 15 162 9 564.8 10 185 24 499.9 41 49 5 44.3 5 2-S ' 466 25 348.9 16 193 13 191.4 12 395 23 395.9 13 44 5 312.6 29 199 22 105.1 11 5-8 368 19 455.4 20 319 22 261.5 17 196 11 397.0 13 12 2 160.1 1; 83 9 115.5 13 8-10 247 13 362.0 17 315 22 255.6 16 429 25 425.9 14 - - - - 220 24 260.0 29 10-13 51 3 78.9 4 133 9 135.0 9 148 9 141.5 5 - - - - 79 9 121.6 13 13-15 15 1 19.2 1 167 11 112.3 7 64 4 140.1 4 - - - - 77 9 32 1 6 TOTAL 1889 100 2171.7 loo 1465 100 1571.5 100 1719 100 3094.1 100 781 180 1 100 908 100 i5 100 Bv orolect sIe- Col1.n willis and below 191 44 70.0 3 233 38 90.5 5 188 45 66.5 2 22 3 12.7 1 130 14 40.5 5 ColI.80-5.0 nIili.. 132 31 326.4 15 218 36 390.8 25 86 21 228.6 7 109 14 87.9 8 187 Z2 126.5 14 Col$5.0-10.0 40 9 287.0 13 49 8 196.9 13 53 13 388.6 13 108 14 155.9 14 63 7 90,4 10 Col)1l.0-25.0 47 11 702.8 33 38 6 181.9 12 55 13 824.7 27 116 15 203.0 19 165 18 135.2 15 C01l520-51 O 20 5 734.4 34 28 4 224.2 14 28 7 958.4 31 140 18 208.7 19 97 11 158.1 18 Col1$50.0-75.0 I - 51.1 2 15 2 122.4 8 4 1 236.2 8 73 9 92.1 8 77 9 64.3 7 Cc1$75.0-100 - - - - 8 1 69.9 4 1 - 78.6 2 33 4 30.3 3 29 3 34.8 4 Col$100.0-150.0" - - - - 12 2 102.6 7 1 - 105.5 3 63 8 152.3 14 77 9 102.8 11 Col$150.0-200.0" - - - - 3 1 30.3 2 - - - - 38 5 47.5 5 14 1 21.5 2 Col$200.0-400.0" - - - - 7 1 95.6 6 1 - 207.0 7 51 6 62.9 6 58 6 103.3 11 Csl$400.0 *illion and boe - - - - 3 1 66.4 4 - - _ - 28 4 34.9 3 11 1 26.2 _ 3 TOTAL 431 100 2171.7 100 614 100 1571.5 100 417 100 3094.1 100 781 100 1088.3 loj 908 100 903.7 100 Be Sources of feeds Finn-cinra' short-teen renoorcas 345 18 537.4 25 184 12 223.1 14 390 23 981.6 32 304 39 192.0 18 237 26 185.3 21 other fiuooci-cnrnnouccs 606 32 414.5 19 328 22 366.2 23 331 19 244.4 8 1 - .7 - 131 15 66. 7 bn.co dn Ia RBpoblico 495 26 494.2 23 252 17 173.9 11 315 18 325.1 11 45 6 55.3 5 104 11 92.4 10 Prnoepo 80 4 147.9 7 38 3 170.9 11 24 1 97.7 3 25 3 122.9 11 25 3 62.1 7 BID-IFI - - - I - - - 2 - .4 - 59 8 74.7 7 - _ _ _ Other local r.e. urceu - _ - 7 1 30.2 2 6 1 14.0 - - - - - 64 7 38.9 4 Ororsons corrnepsndeot bnnkn - - - - - - 124 7 753.0 24 10 1 55.6 5 - - - IBD 363 20 577.7 26 655 45 607.1 39 527 31 677.8 22 337 43 587.1 54 344 38 456.0 51 Other- - --- - - - - - - - - - - 3 - 3.0 TOTA;L 1889 100 2171.7 100 1465 100 Thl.5 100 1719 180 3094.1 100 781 108 1088.3 100 988 100 903.7 100 Be tvPe of orterertue Bow 24 1 26.5 1 105 7 102.5 7 13 1 189.2 6 80 10 116.7 11 37 4 49.7 6 EiLstig-Wockieg capital 1260 67 1408.1 65 554 38 771.9 49 916 53 2072.0 67 233 30 336.1 31 437 48 388.3 43 - EpP-n-ios 588 31 724.9 33 669 46 637.7 40 790 46 832.9 27 468 60 635.5 58 414 46 408.6 45 - Neproduct 17 1 12.2 1 137 9 59.5 4 - - _ - - - - 18 2 37.1 6 TOTAL 1889 100 2171.7 100 1465 100 1571.5 100 1719 100 3094.1 100 781 100 1088.3 loo 908 100 903.7 100 By ceonra-hit locatise Asttiqist 62 3 181.1 8 1055 72 1035.3 66 355 21 445.7 14 92 12 105.7 10 142 16 168.4 19 Atiantico 54 3 87.9 4 43 3 69.2 4 100 6 267.5 9 338 43 470.8 43 59 6 69.1 8 BoliNar 12 1 21.4 1 3 - 4.7 - 31 2 402.9 13 97 12 136.9 13 2 - 2.3 Bo.ynn 1 - .9 - 1 - 3.3 - 24 1 34.6 1 2 - .8 - 6 1 1.9 Ca1d.o 6 - 6.0 - 38 -3 19,6 1 57 3 57.5 7 1 - 4.4 - 348 38 238.5 26 CInur 22 1 32.3 2 - - - - - - - 2 - 1.2 - - - - - Chbce - - - - - - - - - - - - - 1.0 - - - - - ElCeser - - _ - _ _ _ - 10 1 14.4 1 1 - .3 Cundia -ro 154 a 200.6 10 156 11 284.4 13 887 52 1402.8 45 137 18 196.1 18 197 22 224.8 25 Buils - - - - - - 18 1/ 1 1/ 14.0 1/- 1/ - - - - - - - - MsRgdalen 3 - 14.1 1 1 - .7 - 6 - 1.0 - 5 1 21.4 2 1 - .4 N-rao - - - - - - 05 - QOindi- Ri-snldn 5 - 7.6 _ 15 1 29.5 2 18 1 48.4 2 1 - .4 - 24 3 29.2 3 Sn-t-nde- 3 - 6.4 - 1 4.0 - 35 2 80.8 3 7 1 8.9 1 3 - 10.5 1 Scrt 1 4.9 1 - - Tolu - - - - - - - - 3 5 .8 - - - _ - I - .3 Vallo 1567 83 1605,4 74 152 10 208.8 13 170 10 308.2 10 92 12 135.4 12 125 14 158.2 18 TOTAL 1889 100 2171.7 198 1465 100 1571.5 100 1719 100 3094.1 100 781 100 1088.3 100 908 100 903.7 100 1/ No ecpo-i/io:po-c f-lesci,n il9 lecture of credit s-e included.  Table 6: ANALYSIS OF FINANCIERA LOAN PORTFOLIOS AS OF SEPTEMBER 30, 1977 CF del Valle CF Nactonul CF Colombiana CF del Bere OP Calda Number 2 Amount 7. Number 7 Amount 7. Number 7 A-tunE 7. Number 7. A-ount % Number % Au-t % (Million (Million (millio. (Hillion (Million CotS) Col$) Colt) CotS) CutS) B, product type Coeemmer goods 741 39 920.1 42 474 32 599.4 38 250 14 496.6 16 205 26 378.3 35 198 22 228.6 25 Couse-er dorabler 402 21 391.5 18 137 9 95.6 6 740 43 882.7 28 92 12 133.2 12 153 17 61.6 7 IOt=e.odiute goodo 360 19 415.3 19 699 49 750.4 48 527 31 1355.1 44 409 52 518.2 47 510 56 544.5 60 Capital goode 225 12 213.3 10 59 4 52.1 3 117 7 153.4 5 55 7 6.0 1 2 - 15.1 2 Sertine. (intcI..oorioe) 161 N 231.4 11 96 6 74,0 5 85 _ 206.3 7 20 3 52.6 5 45 5 53.9 6 TOTAL 1889 100 2171.7 100 tM o 1571.5 100 1719 100 3094.1 100 781 100 1088.3 100 90 too 003.7 100 Bve nice nf client Up to Cot$1.9 million 73 17 17.7 1 34 2 6.7 - 89 21 7.6 - 2 - .4 - 31 3 4.8 - Col$2.0-3.0 " 10 2 7.5 - 14 1 U.1 1 14 3 4.6 - 8 1 2.7 - 19 2 6.4 1 Co1$4.0-7.0 " 32 7 21.9 1 32 I 27.9 2 23 6 17.0 1 23 3 9.1 1 43 5 17.0 2 C.ol$B.0-13.0 "47 11 75.3 4 39 3 20.2 1 24 6 31.6 22 3 16.9 2 27 3 17.5 2 COI$16.0-30.0 " 43 10 55.3 3 67 4 29.1. 2 29 7 64.9 3 70 9 82.1 9 66 7 480 5 Col$31.0-50.0 " 32 8 74.6 4 57 4 37.0 2 27 6 108.8 4 72 9 30.6 3 55 6 31.0 3 Col$51.0-75.0 " 30 7 180.0 8 92 6 54.4 3 23 6 124.7 4 15 2 51.7 5 26 3 17.3 2 Col$76.0-100,0 " 18 4 56.5 3 53 4 46.9 3 21 5 68.6 2 31 4 53.6 5 43 5 41.1 5 Col$101.0-200.0" 48 11 281.9 13 216 15 167.5 10 51 12 537.2 17 156 20 204.3 19 109 12 139.8 16 Cot$201.0-400.0" 42 10 376.5 17 323 22 355.6 23 54 13 675.9 22 70 9 139.1 12 90 10 106.9 12 Col$401.0-600,0" 23 5 302.5 14 154 11 214.0 14 26 6 346.4 11 78 10 124.5 11 80 9 130.7 14 C.ls601..-BOo.o' 9 2 196.9 9 97 6 86.9 6 8 2 286.6 9 31 4 112.2 10 70 8 64.3 7 Co$S801.0 and above 24 6 524.9 23 287 20 513.1 33 28 7 600.2 26 203 26 261.0 24 249 27 278 9 31 TOTAL 431 100 2i7l.? 100 165 100 1571.3 100 417 100 3094.1 100 781 100 1088.3 100 908 100 903.7 100 By e.noemio cmtivity Food and beverage 117 6 192.5 9 142 10 211.1 13 165 10 380.7 12 63 8 123.8 11 117 13 160.0 18 Teetiles 196 10 223.6 10 321 22 442.0 28 280 16 423.2 14 171 22 192.0 18 139 15 153.6 17 Apparel and footwear 31 2 24.9 1 64 4 05.9 5 66 4 95.0 3 - - - 35 4 65.3 7 _ood producte 19 1 18.9 1 10 1 2.4 - 25 1 52.9 2 19 2 25.8 2 5 1 12.8 1 Pap-er sod 173 9 211 1 10 95 6 87.5 6 150 9 244.7 B 37 5 53.1 5 63 7 68.2 8 Icotber goods ~~~25 1 27.3 1 14 1 6.1 1 26 1 9.7 - 15 2 17.1 2 - - - ftbbe- goode 13 1 17.0 1 16 1 23.9 2 41 2 118.4 4 12 2 18.5 2 25 3 22.6 3 Cbhai-la 131 7 169.4 8 117 8 127.4 8 201 12 696.9 23 91 12 162.3 15 80 9 78.8 9 Non_-etattit oeeralt 12 1 22.2 1 224 15 199.0 13 130 8 352.6 11 5 - 27.5 Z - . - fanitmmtal Indutiie 43 2 35.3 2 14 1 12.9 1 46 3 60.9 2 6 26 18.2 2 18 2 12.2 1 Metal prodnore 236 12 169.2 a 34 2 15.6 1 117 7 153.4 5 202 - 130.8 12 106 12 73.7 a (e-cept manblnory) Bee-electric macbhin,ry 11 1 9.3 - 47 3 50.5 3 - - _ - - _ _ iluctrioaleaoehiery 9 N 9.3 - 13 1 3.9 - 30 2 60.8 2 - - _ I - 1.2 - Tranepert eqoipeent 29 2 6.2 - 83 6 48.8 3 89 5 68.7 2 _ - _ 82 9 25.8 3 Other mngufantering 97 5 110.4 5 129 9 166.6 10 - - 4 11.8 1 21 2 28.4 3 Subtotal aauf-ct-ring 1142 60 1246.6 57 1325 90 1481.6 94 1366 80 2717.9 88 625 80 780.9 72 692 77 702.6 78 Touri-i 8 1 14.8 1 - - - - 5 - 13.0 - 20 3 38.1 3 7 1 19.9 2 Mining 35 2 61.3 3 - - - - - - 46 6 90.5 a 55 6 86.4 9 Fisbhig 16 1 24.6 1 - - - - - - - - - - I - 1.8 - Coootrurtioo 100 5 84.9 4 11 1 5.7 - 32 0 46.4 2 - - - 49 5 35.4 4 Trade 56 3 99.1 4 27 2 31.5 2 40 2 117.6 4 - - - 31 3 25.0 3 Service leduetrrip 21 1 14.4 1 20 2 27.1 2 276 16 199.2 6 2 - 29.8 3 Other 511 27 625.8 29 74 5 25.6 2 - _ - 88 11 149.0 14 73 a 32.5 4 TOTAL 1889 100 2171.7 100 1465 100 1571.5 100 1719 100 3094.1 100 781 100 1088.3 100 908 100 903.7 100 By doetination of output Enpotting end touremn 1030 55 1204.3 56 423 30 537.8 35 484 28 1111.4 36 174 k2 329.8 30 261 29 330.2 36 I-port eubetitotion 707 37 649.7 30 142 10 83.9 5 887 52 1619.5 52 48 6 64.1 6 182 20 160.3 18 Ser-icee and other 152 8 517 14 900 60 949.8 60 348 20 363.1 12 559 72 694.4 64 465 51 613.2 46 ToT4L 1.09 100 2171.7 100 1465 100 1571.5 1o0 1719 100 3094.1 100 781 100 1088.3 3 o0 908 109 900.7 10 1/ At lece. I0% of ountpnt i enported. 2/ Include- enporte of ie-- thrn 10%. Lie  Table 6: ANALYSIS OF FINANCIERA LOAN PORTFOLIOS AS OF SEPTEMBER 30, 1977 CF Occidente CF Sant-nder CF Aliadas Grand Total Number 7. Aount 7. Number 2 Avount 7. Number 7. A-ount % Numbetr % Mount 7. (Million (Million (Million (Million C0101 Coi$) Col$) Col$) By original torm Less than one yoar 179 28 226.3 29 27 13 61.8 14 262 88 311.5 78 1997 25 2772.4 27 1-2 yours 232 37 295.1 37 126 58 221.1 52 - - - - 1371 17 2325.1 22 2-5 ' 117 18 90.1 11 38 17 60.0 14 29 10 54.5 14 1481 19 1558.5 15 5-8 62 10 130.4 17 20 9 55.9 13 5 2 33.1 8 1065 14 1608.9 15 8-10 " 37 6 44.3 6 7 3 31.5 7 - - - - 1255 16 1379.3 13 10-13 - - - - - - - - - - - 411 5 477.0 5 13-15 8 1 1.3 - - - - -1 - - - 332 4 325.0 3 TOTAL 635 100 787.5 100 218 100 430.3 100 297 100 399.0 188 7912 100 10446.2 100 By Prolect Sire Col$1.0 illion and bolos 282 45 82.8 11 85 43 36.1 8 23 25 12.7 2 1154 28 411.8 3.9 Coll.0-5.0 million 223 35 317.4 40 78 40 204.8 48 42 46 110.9 28 1075 26 1793.1 17.2 C.l$5.0-10.0 " 59 9 141.3 18 15 7 61.3 14 12 13 89.7 22 399 10 1411.1 13.5 Co1Sl0.0-25.0 " 36 6 155.5 20 3 2 26.6 6 14 16 185.7 47 474 12 2415.4 23.1 Col$25.0-50.0 " 13 2 37.7 5 3 2 21.6 5 - - - - 329 8 2343.1 22.4 Col550.0-75,0 " 8 1 17.7 2 5 3 45.9 11 - - _ 183 5 629.7 6.0 Col$75.0-100.0" 2 - 3.4 - - - - - - - _ - 73 2 217.0 2.1 Co1$100.0-150.0" 2 - 13.9 2 3 2 19.3 5 - - - - 158 4 496.4 4.8 Col$150.0-200.0 - - - - - - - - - - - - 55 1 99.3 1.0 Co1$200.0-400.0" 5 1 3.8 - 2 1 14.7 3 _ - - _ 124 3 487.3 4.7 Col$400.0 million and above 5 1 14.0 2 - - - - _ - - - 47 1 142.0 1.4 TOTAL 635 100 787.5 100 194 1/100 430.3 1OO 91 100 399.0 100 4071 10O 10446.2 108.0 BY Sourcrs of Funds Finenciera's short-term resources 288 45 371.9 47 121 56 209.6 49 239 80 267.7 67 2108 27 2968.6 29 Other finnciera resources 45 7 21.4 3 - - - - - - - 1442 18 1113.2 11 Banco de 1 Republica 100 16 82.2 11 43 20 60.4 14 26 9 81.4 20 1380 17 1364.9 13 Proexpo 41 6 54.5 7 27 12 61.8 14 23 8 43.7 11 283 4 761.5 7 BID-IFI 19 3 8.2 1 - - - - 9 3 6.2 2 89 1 89.5 1 Other local resources 8 1 1.6 - - - - - - - - - 85 1 84.7 1 O-arcsra correspondent banks 99 16 137.1 17 - - - _ - - - - 233 3 945.7 9 IBRD 34 5 97.6 12 17 8 73.1 17 - - _ - 2277 29 3076.4 29 Other i - 13.0 2 10 4 25.4 6 - _ _ _ 14 - 41.4 - TOTAL 635 100 787.5 100 218 100 430.3 100 297 100 399.0 100 7911 100 10446.0 100 By Type of Enterprius Nes 4 - 9.7 1 11 5 25.9 6 262 89 298.2 75 536 7 818.4 8 Efistisg-Working capital 466 74 518.7 66 174 80 303.1 71 31 10 58.3 14 4073 51 5856.5 56 -linpansiom 144 23 206.9 26 27 12 74.0 17 1 - 3.0 1 3101 39 3523.5 34 -Ne- product 21 3 52.2 7 6 3 27.3 6 3 1 39.5 10 202 3 247.8 2 7OTAL 635 100 787.5 100 218 100 430.3 100 297 100 399.0 100 7912 100 10442 i7 By Geograthic location Antioquia 193 30 216.9 28 19 9 43.8 10 245 82 318.2 80 2163 28 2515.0 24 Atlantiro 7 1 34.6 4 14 7 39.6 9 2 1 1.6 - 617 8 1040.3 10 Bolivar - - - - - - - - - - - - 145 2 568.2 6 Boyara -- - - - _ - - _ - _ 34 1 41.5 1 Caldas 1 - 24.5 3 - - - - - - - - 450 6 350.5 3 Cauca - - _ _ - - - _ - _ - _ 24 - 33.5 - Ch.oo -1 - 1.0 - Bl Cleer - - 11 - 14.7 - Cundinemorra 200 32 29.93 38 55 25 151.9 35 50 17 79.2 20 1836 23 2767.1 27 H.uil 2 - 5.0 1 - - - - - - - - 20 - 190 - Magdalen - - - 9 16 - 37.6 N-riWo - - - _ _ - _ - - - 5 10.5 Qutndio 20 4 3.1 - 3 1 3.2 1 - - _ - 23 - 6. Risaralda 193 30 164.6 21 - - - - 256 3 279.7 3 Santandar - - - - 96 44 113.6 27 - - - - 145 2 224.2 2 uro - _ - - _ - - 5 - 4.9 - Tolira 1 - 5.0 1 - - - - - - - - 5 - 11.1 FIlSe 1$ 3 34.4 4 31 14 78.2 18- - - - 215 7 2206 4 Vnlle TOTAL 635 100 787.5 1OO 218 100 430.3 100 297 100 399.0 1OO 7912 100 10446.0 100 I1  Table 6: ANALYSIS OF FINANCIERA LOAN PORTFOLIOS AS OF SEPTEMBER 30, 1977 CF Occidente CF Santndr CF Aliadas Grand Total Nunber % Amount 7, Nunber % Amount % Number % Amount % Number h Amount 7 (Million (Million (Million (million Col$) CoL$) Col$) Call) By Product Typo Cnou=-er goode 246 39 282.9 36 88 41 177.7 41 175 59 222.5 56 2377 30 3306.1 32 Cooaoeer durablen 55 9 63.9 8 37 17 64.2 15 39 13 49.0 12 1655 21 1741.7 17 Intee ediate goode 230 36 297.6 38 79 36 162.3 38 55 19 49.9 12 2869 37 4093.3 39 Capital goodu 26 4 31.0 4 9 4 20.9 5 6 2 6.6 2 499 6 498.4 5 .ervice. (inc.l tou-itu) 78 12 112.0 14 5 2 5.3 1 22 7 71.0 18 512 6 806.5 7 TOTAL 632 100 787.5 100 218 100 430.4 100 297 100 399.0 100 7912 0 IOSUO 1OO By Sise of Client Up to Cill1.0 million 14 2 1.3 - 4 2 .7 - 5 5 8.3 2 252 5 47.5 0.5 Col$2.0-3.0 mIllion 12 2 2.7 - I - .2 - 7 8 7.7 2 85 2 43.9 0.4 Col$4.0-7.0 29 5 7.6 1 36 16 34,4 8 10 11 25.7 6 228 5 160.6 1.5 Col$8.0-15.0 " 58 9 39.9 5 28 13 26.1 6 10 11 17.2 4 255 5 245.4 2.3 Col$16.0-30.0 " 82 13 45.1 6 26 12 42.1 10 14 13 52.1 13 397 8 438.7 4.2 Col$31.0-50.0 " 57 9 57.9 7 21 10 29.0 7 8 9 20.8 5 329 6 389.7 3.7 Col$51.0-75.0 " 69 11 68.2 9 16 7 35.4 8 8 9 56.2 14 279 6 587.9 5.6 Col$76.0-10.0" 58 9 75.0 10 6 3 9.8 2 3 3 5.0 1 233 5 356.5 3.4 Col$101-200.0 " 85 13 159.7 20 17 B 39.0 9 6 7 47.5 12 688 14 1576.9 15.1 Col$201.0-400.0 " 91 14 184.6 24 30 14 86.4 20 8 9 67.6 17 711 14 1992.6 19.1 C.l$401.0-600.0 " 29 5 47.1 6 18 8 71.2 17 4 4 29.7 8 412 8 1266.1 12.1 Col$601.0-800.0 " 14 2 25.8 3 8 4 34.2 8 3 3 15.3 4 240 5 822.2 7.9 CoI$801.0 *nd above 37 6 72.5 9 7 3 21.9 5 5 5 45.9 12 840 17 2518.4 24.1 TOTAL 635 100 787.5 0 21 100 2430.4 1OO 91 1O0 399.0 100 4949 100 10446.4 lo"_ Bv Economic Activity Foed end beverage 61 10 124.1 16 46 21 99.0 23 15 5 18.2 5 726 9 1309.4 13 TetileS 61 10 93.1 12 33 15 62.2 15 47 17 124.1 31 1248 16 1713.8 16 Apparel end footu-ar 90 14 84.2 11 - - - - - - - 286 3 351.3 3 Wood products 6 1 1.1 - 5 2 .7 - - - - - 89 1 114.6 1 Paper end printing 43 7 26.3 3 17 8 17.1 4 11 4 12.7 3 589 7 720.7 7 Leather goode 28 4 18.1 2 8 4 5.3 1 10 4 10.6 3 126 2 96.2 1 Rubber goodo 10 2 14.0 2 2 1 5.4 1 13 5 10.0 2 132 2 229.8 2 Chbmicals 92 14 129.9 17 30 14 84.8 20 37 13 34.0 9 779 10 1483.5 14 Nom-metelic .imeralo 21 3 30.8 4 - - - - - - - - 392 5 632.1 6 Basin metal indootrlis I - 1.0 - 7 3 15.6 4 - - - - 135 2 156.1 2 Motel products (nocept 50 8 50.9 6 15 7 43.7 10 16 6 14.9 4 776 10 652.2 6 -achinery) Bon-elctrical m-chinery 23 4 24.6 3 - - - - - - - - 83 1 84.4 1 El..tri..l milchi.ety - - - - - - - - 2 1 20.1 5 55 1 95.3 1 TElcrilp-t mqcipbert 3 - 6.4 1 5 - _ _ 32 19 54.5 14 338 4 210.4 2 Othen manufadtunl 68 11 71.0 9 22 IO 47.8 11 _ _ _ _ 341 4 436.0 4 Subtotal anufartur-ig 557 88 675.5 86 185 85 381.6 89 203 73 229.0 75 6095 77 8285.7 79 Tour-im - 1 2.5 - - - - - - - - - 41 1 88.3 1 Mining - - - 2 1 1.1 - 138 2 239.3 2 Finhing - - - - - - - - - - - 17 - 26.4 - Conatruction 6 1 19.7 3 16 7 14.3 3 5 2 4.7 1 219 3 211.1 2 Trade - - - - - - 58 21 82.4 21 212 3 355.6 4 Seryico Induotriee 3 10.0 1 - _ _ - - - - - 330 4 280.5 3 Other 68 1 79.8 10 17 8 34.5 8 9 3 11.9 5 840 11 959.1 9 TOTAL 635 100 787.5 100 218 100 430.4 100 277 100 399.0 75 7892 100 10446.0 lOO BY DBetination of Outnut E.porting and to-rimo 149 23 180.6 23 36 17 91.1 21 45 15 49.5 12 2602 33 3834.7 56.7 Import nubatitution 32 5 40.2 5 33 15 107.9 25 230 77 278.6 70 2261 29 3004.2 28.8 Se-vices and other 454 72 566,7 72 149 68 231.4 54 22 8 70.9 18 3018 38 3607.2 34.5 TOTAL 635 100 787.5 100 218 100 430.4 1OO 297 100 399.0 IO 7881 10O 10446.1 1 a a I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  ANNEX 4 T-7 Table 7: FINANCIAL STATEMENTS - C.F. COLONBIANA (in Col$ millions) Audited Accounts (as of December 31) T973 1Y74 1975 1977 (unaudited) Balance Sheet Assets Cash, receivables and other 94.4 130.0 140.2 159.7 157.0 short-term assets Export-import financing 1/ 202.3 410.7 370.2 417.1 687.5 Loans due within one year 273.3 407.5 517.2 747.5 939.4 Current Assets 570.0 948.2 1027.6 1324.3 1783.9 Loans due after one year (net) S38.0 939.2 1127.9 1192.0 1514.2 Equity investments 168.6 166.4 175.4 184.6 286.3 Fixed and other assets (net) 25.2 21.6 29.5 26.4 180.0 Total Assets 1601.8 2075.4 2360.4 2727.3 3764.4 Liabilities and Equity Time deposits - 10.5 81.8 259.9 541.1 Loans payable (current) 210.6 264.7 328.5 341.0 277.0 Due to Banks 166.0 297.6 242.7 288.9 330.4 Accounts payable and other 120.1 206.4 163.0 168.2 151.2 short-term liabilities Current Liabilities 496.7 779.2 816.30 1058.0 1299.7 Bonds payable 177.3 225.3 227.4 226.4 279.7 BR I/ 293.4 252.5 337.8 357.0 623.1 IBRD 337.6 455.5 560.2 612.1 823.8 Other liabilities 11.2 11.7 13.2 16.0 199.2 Medium and long term liabilities 819.5 945.0 1138.6 1211.4 1925.8 Share capital paid in 154.1 156.9 172.6 172.6 198.4 Retained earnings and reserves 131.5 194.3 233.2 285.3 340.5 Net worth 285.6 351.2 405.8 457.9 538.9 Towal liabilities and equity 1601.8 2075.4 2360.4 2727.3 3764.4 CoiLtingent liabilities 162.6 130.7 166.5 200.6 232.0 Ratios !rqurItv investments as % of total assets 10.5 8.0 7.4 6.8 7.6 Current Ratio 1.1 1.2 1.3 1.3 1.4 Total Liabilities/Equity 5.2 5.3 5.2 5.4 6.4 Reserves and retained earning as % of total portfolio 8.9 10.! 10.6 11.2 9.9 Equity portfolio as % of net worth 59.0 47.4 43.2 40.3 53.1 Percentage increase in total assets 21.8 29.6 13.7 15.5 38.0 Current assets/Net worth 2.0 2.7 2.5 2.9 3.3 Income Statement Total income 207.7 322.2 411.0 464.7 705.0 Financial expenses 128.3 173.6 240.6 275.2 442.6 Gross spread 79.4 148.6 170.4 189.5 Administrative expenses 25.7 28.6 36.2 45.4 56.5 Provision for losses 7.3 - - - - Taxes 9.5 37.4 37.2 27.9 47.9 Net profit 36.9 82.6 97.0 116.2 158.0 Dividends 23.1 50.2 60.1 74.6 107.2 Ratios Gross spread as % of ATA 5.4 8.1 7.7 7.4 8.1 Administrative costs as % of ATA 1.8 1.6 1.6 1.8 1.7 Net profit as % of ATA 2.5 4.4 4.4 4.6 4.9 Net profit as % of average net worth 13.6 25.9 25.6 26.9 31.7 Dividends as % of year end share capital 15.0 32.0 34.8 43.2 54.0 Dividend pay out ratio (%) 62.6 61.2 62.0 64.2 67.8 1/ Includes other official entities.  ANNEX 4 T-8 Table 8: FINANCIAL STATEMENTS - C.F. DEL VALLE (in Col$ millions) Audited Accounts (as of December 31) Balance Sheet 1973 1974 1975 1976 1977 - - - (not audited) Assets Cash, receivables and other 48.8 106.3 67.7 91.1 104 short-term assets Export-import financing 170.2 298.4 434.8 525 4 709 Loanis due within one year 397.9 445.7 631.2 570.9 1103 Current Assets 616.9 850.4 1133.7 1187.4 1916 Loans due after one year (net) 11 644.5 724.1 812.0 1250.5 1161 Equity investments (at cost) 49.5 58.3 76.3 109.0 187 Fixed and other assets net 13.9 15.5 16.1 14.9 44 Total Assets 1324.8 1648.3 2038.1 2561.8 3308 Liabilities and Equity Time deposits 34.9 54.9 83.9 202.8 458 Loans payable (current) 191.0 173.6 317.6 358.1 430 Due to Banks 172.5 309.2 382.5 462.2 757 Accounts payable and other short-term liabilities 75.4 121.6 105.9 128.7 46 Current Liabilities 473.8 659.3 889.9 1151.8 1691 Bonds payable 94.0 115.1 123.9 101.1 123 BR and other liabilities 349.3 354.5 519.5 703.3 821 IBRD 316.7 352.8 440.9 327.0 621 Less current maturities (173.3) (153.2) (293.6) (356.6) (430) Medium and long-term liabilities 586.8 669.2 790.7 974.8 1135 Share capital paid in 150.0 170.0 170.0 200.0 200 Retained earnings and reserves 114.2 149.8 187.5 235.2 282 Net worth 264.2 319.8 357.5 435.2 482 Total liabilities and Equity 1324.8 1648.3 2038.1 2561.8 3308 Contingent liabilities 7.7 7.6 16.0 174.6 347 Ratios Equity investments as % of total assets 3.7 31. 137 Current Ratio 1.3 l. . * l.l Total liabilities/Equity 4.0 4.2 4.7 5.3 6.6 Reserves and retained earnings as % of total portfolio 9.0 9.8 9.6 9.6 8.9 Equity portfolio as Z of net worth 18.7 18.2 21.3 25.0 38.8 Percentage increase in total assets 30.3 24.4 23.6 25.7 29.1 Current assets/Net worth 2.3 2.7 3.2 2.7 4.0 Income Statement Total income 190.2 260.9 357.1 439.3 583.2 Financial expenses 110.9 152.3 201.2 259.9 371.5 Gross spread 79.3 108.6 155.9 179.4 211.7 Administrative expenses 17.6 21.6 29.9 36.7 49.1 Provision for losses - - - - _ Taxes 19.8 31.0 46.0 53.8 50.6 Net profit 41.9 56.0 80.0 89.0 112.0 Dividends 25.2 41.8 64.8 68.7 72.0 Ratios Gross spread as % of ATA 6.8 7.3 8.5 7.8 7.2 Administrative cost as % of ATA 1.5 1.5 1.6 1.6 1.7 Net profit as % of ATA 3.6 3.8 4.3 3.9 3.8 Net profit as % of average equity 17.6 19.2 23.6 22.5 24.4 Dividends as % of year end share capital 16.8 20.4 38.1 34.4 36.0 Dividend pay out ratio (7.) 2/ 62.5 66.4 81.0 77.0 64.3 1/ No provisions have been made other than in retained earnings. 2/ Including dividends on shares issued during calendar year.  ANNEX 4 Table 9: FINANCIAL STATEMENTS - C.F. NACIONAL T-9 (in ColS millions) Audited Accounts (as of December 31) 1973 1974 1975 1976 1977 (not audited) Balance Sheet Assets Cash, receivables and other short-term assets 35.2 57.8 58.8 77.3 42.4 Export-import financing 1/ 28.2 95.5 136.0 103.6 378.5 Loans due within one year 239.5 303.4 346.6 593.4 577.4 Current Assets 303.5 456.7 541.4 774.3 998.3 Loans due after one year (net) 710.2 679.7 756.6 859.9 1126.9 Equity Investments 139.2 164.4 159.7 175.7 247.7 Fixed and other assets (net) 8.0 11.9 15.8 12.3 101.2 Total Assets 1160.9 1312.7 1473.5 1822.2 2474.1 Liability and Equity Time Deposits 26.6 22.1 140.2 220.3 Loans payable (current) 152.0 175.9 184.0 290.5 308.3 Due to Banks 27.2 93.3 133.8 93.8 176.7 Accounts payable and other short-term liabilities 36.9 55.2 63.4 81.5 212.6 Current liabilities 216.1 351.0 403.3 606.0 917.9 Bonds payable 92.9 111.9 99.0 126.6 151.1 BR 2/ 177.5 134.5 121.6 142.7 233.9 IBRD 345.9 378.6 475.4 548.4 654.4 Other liabilities 11.8 2.2 3.0 3.9 48.5 Medium and long term liabilities 628.1 627.2 699.0 821.6 1087.9 Share capital paid in 169.3 169.5 169.6 169.6 188.4 Retained earnings and reserves 147.4 165.1 201.5 224.9 279.9 Profits on equity portfolio - - - _ Net worth 316.7 334.6 371.1 394.5 468.3 Total liabilities and equity 1160.9 1312.8 1473.5 1822.1 2474.1 Contingent liabilities 35.3 76.0 169.7 164.4 115.6 Ratios Equity investments as % of total assets 12.0 12.5 10.8 9.6 10.0 Current Ratio 1.4 1.3 1.3 1.3 1.1 Total Liabilities/Equity 2.8 3.2 3.4 4.0 4.5 Reserves and retained earning as % of total portfolio 13.2 13.3 14.4 13.0 12.0 Equity portfolio as % of net worth 44.0 49.0 43.0 45.0 52.9 Percentage increase in total assets 14.0 13.1 12.2 23.7 35.8 Current Assets/Net Vorth .96 1.4 1.5 2.0 2.1 Income Statement Total income 183.5 216.8 268.0 329.7 444.5 Financial expenses 99.1 121.1 144.3 187.7 265.2 * Gross spread 84.4 95.7 123.7 142.0 179.3 Administrative expenses 11.9 14.9 17.4 22.1 31.4 Provision for losses 1.8 1.8 - - - Taxes 14.5 20.5 23.0 24.8 33.9 Net profit 56.2 58.4 83.3 95.1 114.0 Dividends 45.9 46.8 67.7 71.2 102.2 Ratios Gross spread as % of ATA 7.7 7.7 8.8 8.6 8.3 Administrative costs as X of ATA 1.1 1.2 1.2 1.3 1.5 Net profit as % of ATA 5.2 4.7 6.0 5.8 5.3 Net profit as % of average net worth 19.4 17.9 23.6 24.8 26.4 Dividends as % of year end share capital 27.1 27.6 39.9 41.2 54.2 Dividend pay out ratio (%) 81.7 80.1 81.3 74.9 89.6 1/ All letters of credit are assumed to be under one year. 2/ Includes other official entities.  ANNEX 4 T-10 Table 10: FINANCIAL STATEMENTS - C.F. DE CALDAS Audited Balance Sheets, as of December 31 (in Col$ million) 1973 1974 1975 1976 1977 ASSETS Cash, receivables and Other Short-term Assets 26.7 33.3 38.8 50.8 105.1 Export-import financing /L 38.7 34.1 63.2 42.5 130.4 Loans due within one year 97.0 115.8 166.1 256.2 316.6 Current Assets 162.4 183.0 268.1 349.4 552.1 Loans due after one year (net) 330.2 270.8 493.6 571.7 752.0 Equity Investments 115.3 131.0 132.5 154.8 160.6 Fixed and other assets (net) 42.0 33.5 41.4 50.2 36.7 Total Assets 649.9 718.3 935.6 1,126.1 1501.4 LIABILITIES and EQUITY Time Deposits - 9.2 25.7 101.3 152.4 Loans Payable (current) ) ) ) 112.2 Due to Banks 138.8 ) 127.6 ) 215.0 ) 229.8 62.3 Accounts Payable and Other Short-term Liabilities ) ) ) 89.4 Current Liabilities 138.8 136.8 240.7 331.1 416.3 Bonds payable 2/ 60.7 56.2 65.2 62.9 75.8 BR 71.2 70.0 75.0 94.2 110.4 IBRD 193.7 256.5 330.6 392.9 467.4 Other Liabilities 59.2 59.6 57.2 48.4 159.8 Medium- and Long-term Liabilities 38. T2z.7 3___3 _ 98 813.4 Share capital paid in 131.4 131.4 146.0 151.6 TW27X Retained Earnings 10.3 27.9 35.2 48.0 79.7 less underprovision for expected portfolio losses (15.4) (20.1) (14.3) 3.0) Net Worth 126.3 139.2 166.9 196.6 271.7 Total Liabilities and Equity 649.9 718.3 935.6 1,126.1 1501.4 (Contingent Liabilities) (23.7) (21.7) (74.9' (47.5) (1060) Ratios Equity investments as % of total assets 17.7 18.2 14.2 13.7 10.7 Current Ratio 1.2 1.3 1.12 1.1 1.3 Total Liabilities/Equity 4.3 4.3 5.1 5.0 4.9 Reserves and Retained earnings as % of total port./3 1.8 4.3 4.1 4.7 5.9 Equity Portfolio as % of net worth 91.3 94.1 79.4 78.7 59.1 Percentage increase in total assets 26.8 10.5 30.3 20.3 33.3 Current Assets/Net Worth 1.3 1.3 1.6 1.8 2.0 INCOME STATEMENT Total Income 77.6 108.3 142.0 189.5 262.9 Financial expenses 53.5 70.8 95.5 135.8 173.3 Gtoss Spread 24.1 37.5 46.5 53.7 89.6 Administrative Expenses 11.0 13.1 17.2 22.8 31.1 Provision for losses 9.3 9.9 21.1 10.2 1.7 Taxes - 1.6 0.9 1.9 14.4 Net profit 3.9 12.9 7.3 18.7 42.4 Dividends - - 5.8 12.6 26.9 Ratioa Gross spread as x of ATA 4.2 5.5 5.6 5.2 6.8 Administrative costs as % of ATA 1.9 1.9 2.1 2.2 2.4 Net Profit as Z of ATA 0.7 1.9 0.9 1.8 3.2 Net profit as % of average net worth 3.4 9.7 4.8 10.3 18.1 Dividends as % of year end share capital - - 5.8 12.6 14.0 Dividend pay-out ratio (S) - - 79.4 67.4 63.4 1/ Excluding bonds issued to BR. 2/ Recommended by external auditor over the provision set aside by CFCA. 3/ Without deducting provisions for bad debts.  ANNEX 4 T-1l Table 1: FINANCIAL STATEMENTS - C. F. DEL NORTE Audited Balance Shetes, As of Dacber 31/a (in Col$ million) 1973 1974 1975 1976 1977 (not Zuited) ASSETS Cash, receivables and other short-term asets 48.3 43.6 63.2 67.6 45.5 Export-import financing 1/ 62.3 113.8 96.1 148.5 165.3 Loans due within one year 136.8 152.3 269.6 264.8 434.8 Current Assets 247.4 309 7 4lU9 4809 645.6 Loans due after one year (net) 321.5 361.1 489.7 535.6 564.1 Equity Inveatments 42.4 74.1 82.9 92.1 141.8 Fixed and/other assets (net) 13.0 17.3 .11