Document of The World Bank FOR OFFICIAL USE ONLY FILE CO0 PoY Report No.1900-PH PHILIPPINES STAFF APPRAISAL REPORT ON THE PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION April 11, 1978 Projects Department East Asia and Pacific 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 Currency Unit - Philippine Peso US$1 = P 7.50 /1 p 1 = US$0.133 P 1 million = US$133,300 P 1 billion = US$133 million ABBREVIATIONS ADB - Asian Development Bank BOI - Board of Investment CFF - Cooperative Financing Facility DBP - Development Bank of the Philippines DFI - Development Finance Insititute (PDCP) DNBFI - Department of Non-Bank Financial Intermediaries FCDUs - Foreign Currency Deposit Units IGLF - Industrial Guarantee and Loan Fund LIBOR - London Inter-Bank Offered Rate NBFIS - Non-Bank Financial Intermediaries NEDA - - National Economic Development Authority OBUs - Offshore Banking Units PDCP - Private Development Corporation of the Philippines PICA - Private Investment Company for Asia (PICA) S.A. PISO - Philippine Investments Systems Organization PNB - Philippine National Bank USAID - United States Agency for International Development FISCAL YEAR January 1-December 31 /1 The latest change in the exchange rate (US$1 = P 7.40) does not affect the project in any significant way. FOR OFFICIAL USE ONLY PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. BASIC DATA . . ..................... . ..... i-iv 1. THE MANUFACTURING SECTOR ... . . . . . . . . . . . . . ... 1 Recent Developments . . . . . . . ..... . .. . . . . .. 1 Structure of Manufacturing Industry . . . . . . . . . . . . 1 Industrial Investment . . . . . . . . . . . . . . . . . 3 Industrial Sector Issues and Policies . . . . . . . . 3 Rationalization of the Tariff System . . . . . . . . . . . . 4 Prospects . . . . . . . . . . . . .....7 2. THE FINANCIAL SECTOR . . . . . . . . . . . . . . . . . . . . . 8 Overview .... . . . . . . . . . . . . . . ......8. . B Institutional Structure ... . . . . . . . ..... . 9 Recent Developments . ...... . . ...... . 13 Financial Sector Issues . . . . . . . . . . . . . . . . . . 16 3. JUSTIFICATION FOR BANK LENDING TO PISO . . . . . . . . . . . . 17 Perspective ............... . .... . 17 Capital Requirements for the Industrial Sector . . . . . . . 17 Strengthening the Industrial Structure . . . . . . . 18 Development Orientation. . . . . . . . . . . . . . . .. . 18 4. PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION . . . . . . . . . 19 A. Institutional Aspects ... . . . ..... . . . . . . . 19 Background, Objectives and Charter . . . . . . . . . . . 19 Capitalization and Ownership . . . . . . . . . . . . . . 20 Board of Directors and Executive Committee . . . . . . . 21 Organization, Management and Staff . . . . . . . . . . . 22 Policies . . . . . . . . . . . . . . . . . . . . . . . . 25 Project Processing, Evaluation and Supervision . . . . . 26 Procurement and Disbursement Practices . . . . . . . . . 27 Operating Practices and Procedures . . . . . . . . . . . 27 B. Corporate Strategy and Development Orientation . . . . . . 27 This report is based on the findings of an appraisal mission comprising Messrs. Zamir Hasan and Hans Lesshafft that visited PISO in July 1977. 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. 2- Page No. C. Operations . . . . . . . . . . . . . . ... . . * *. . * * * * 29 D. Financial Position and Operational Performance . . . . . . . 31 Financial Position . . . . . . . . . . . . . . . . 31 Financial Performance. . . . . . . . . . . . . . . . . . . 32 Quality of Portfolio. . ..... . . . . . . . . . 33 Audit . . . .... .... .......... ... ....... .... ....... ... .. 33 5. PISO: BUSINESS PROSPECTS, RESOURCES AND PROJECTED FINANCES. . . 33 General Outlook .* * *...*..*..*.... . . . .. . . 33 Business Forecast . . . . . . . . . . . . . .. *...... 34 Resource Position and Requirements . . . . . . . 36 Projected Financial Position and Performance . . . . . 38 Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . 39 6. CONCLUSIONS AND RECOMMENDATION ... . . . . . . . . . . . . . . 40 Objectives of the Proposed Loan . . . . . . . . . . . . . . 40 Expected Utilization of the Proposed Loan . . . . . . . . . 40 Agreements and Understandings Reached During Negotiations .. . . . 41 Recommendation.... . 42 ANNEX 1 - SUPPORTING TABLES AND CHARTS T-1 List of Shareholders as of December 31, 1977 T-2 Board of Directors as of February 28, 1978 T-3 Staffing Position T-4 Summary of Operations, March 1, 1974-December 31, 1977 T-5 Details of Syndication Operations T-6 Audited Balance Sheets, December 31, 1974-77 T-7 Audited Income Statement for Years Ended December 31, 1974-77 T-8 Operational Forecasts, 1978-81 T-9 Resource Position as of December 31, 1977 T-1O Projected Balance Sheets, 1978-81 T-11 Projected Statement of Income and Expense 1978-81 T-12 Actual and Projected Indicators of Financial and Operational Performance, 1974-81 C-1 Organization Chart as of December 31, 1977 ANNEX 2 - POLICY STATEMENT ANNEX 3 - STATEMENT OF CORPORATE STRATEGY FOR 1978-80 ANNEX 4 - SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE PHILIPPINES PHILLIPINE INVESTMENTS SYSTEMS ORGANIZATION Basic Data 1. Year of establishment: 1974 2. Ownership (as of December 31, 1977): Percentage No. of shares /a of total Local shareholders (class "A" shares) Private institutions 586,498 24.9 Individuals 980,413 41.5 Subtotal 1,566,911 66.4 Foreign shareholders (class "B" shares) PICA 794,039 33.6 Total 2,360,950 100.0 3. Status of IBRD and IFC lendings:- No previous lending. /a Par value of one share: P 10.00. - ii - 4. Operations (P 1,000): (3/1-12/31) 1974 1975 1976 1977 Money market operations Short-term investments as of 12/31 29,465 101,571 95,334 93,110 Syndications Domestic currency - 10,000 - 193,500 Foreign component - 95,930 9,638 43,750 Total - 105,930 9,638 237,250 Guarantees - 2,300 - 5,200 Loans Approvals Domestic currency - 3,000 3,000 1,250 Foreign currency - - 7,500 7,500 Total - 3,000 10,500 8,750 Commitments Domestic currency - 3,000 3,000 1,250 Foreign currency - - 7,500 7,500 Total - 3,000 10,500 8,750 Disbursements - - 3,000 8,120 Equity investments 0,025 - - - Underwriting/private placements - 5,700 - 3,000 - iii - 5. Present interest rates and other charges: PISO's charge Underwriting (on amount underwritten) "best effort" basis 2-4% "firm" basis 3-5% Syndications (on amount syndicated) Local currency 1-3% Foreign currency 0.75-2% Guarantees Service charge on issue 1% of amount guaranteed Annual fee 1.5-3% on outstanding balance Loans (local currency) Term loans (2-5 years) 17-19% p.a. Small business loans /a 12% p.a. + 1% on undisbursed balances Loans (foreign currency) Term loans (6-12 years) 12-14% Commercial papers rates vary according to market conditions Consulting fee hourly basis (negotiated beforehand) /a IGLF program. - iv - 6. Financial position (amounts in P million): December 31, 1974 1975 1976 1977 Total assets 40,254 108,917 116,617 125,529 Short-term assets 39,872 108,082 114,279 118,967 Short-term investments 29,465 101,571 95,334 93,110 Long-term portfolio - - 1,920 7,096 Total portfolio 29,465 101,571 97,254 100,206 Total liabilities 19,438 84,943 91,466 97,727 Long-term liabilities - - - 5,405 Shareholders' equity 20,816 23,974 25,151 27,802 Current ratio 2.1 1.3 1.3 1.3 Total debt/equity ratio 0.9 3.5 3.7 3.8 Long-term debt/equity ratio - - - 0.4 Reserves and provisions as % of portfolio 2.8 4.0 6.7 6.7 7. Operational performance (amount in P million): 1974 1975 1976 1977 (10 months) Total income 3,185 12,258 13,809 12,978 Interest income on long-term loans - - 77 503 Syndication income 300 963 842 .2,432 Interest and trading income on short- term operations 2,866 11,038 11,425 9,197 Administrative expenses 651 1,972 2,011 3,242 Net profit 816 3,044 2,365 3,522 Net profit (after tax and provision) as % of average total assets 4.1 4.1 2.1 2.9 Net profit as % of average equity 4.0 13.6 9.6 13.3 Administrative expense as % of average total assets 3.2 2.6 1.8 2.7 Earnings per share 0.41 1.51 1.18 1.49 N Dividend as % of par value - 6 6 6 Dividend pay-out ratio - 31.2 51.1 40.2 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION STAFF APPRAISAL REPORT 1. THE MANUFACTURING SECTOR Recent Developments 1.01 The manufacturing sector developed rapidly up to the mid-fifties, the result of a highly sheltered import substitution drive, then entered into a prolonged period of slow growth. Although investment activities seemed to improve in late 1972 the sector was particularly affected by the. recession in the second half of 1974 and its growth rates dropped to below 5% in 1974 and 1975, while gross value added in the manufacturing sector grew by 4.8% in 1974 (13.9% in 1973), 3.5% in 1975 and 5.8% in 1976 (in constant prices). Sectors which have shown lower growth rates (at constant prices) over the past three years and which by the end of 1976 had not recovered to the high production levels of 1973, include wood and wood products, petroleum and coal products, metal production and nonelectrical machinery. Some other sectors, however, showed satisfactory annual growth rates including transport equipment (15.1%), publishing and printing (10.3%), textiles (8.8%), and paper and paper products. Food processing, the largest manufacturing sector accounting for 26% of the gross value added in manufacturing, grew by 5.6%. The manufacturing sector now represents the second largest sector in the Philippine economy accounting for 24% of GDP in 1976, absorbing about one-third of fixed investment and providing employment for around 11% of the total labor force./I 1.02 Preliminary estimates of production for the first half of 1977 indicate that the modest growth performance of 1976 continued in 1977. The physical volume of manufacturing production grew by an estimated 4.7% in the first half of 1977, compared to 4.4% during the same period of 1976. Growth leaders during the first half of 1977 include textiles, clothing, chemicals petroleum, base metals, fabricated metal products and machinery and equipment. Structure of Manufacturing Industry 1.03 The following table shows the changes in the sectoral composition of manufacturing since 1970. /I The contribution of the manufacturing sector to employment in the Philippines is discussed in more detail in paragraphs 1.13 and 1.14. -2- SECTORAL COMPOSITION OF MANUFACTURING (Value added in P million at constant 1972 prices) 1970 1973 1976 Value Value Value Added % Added % Added % Consumer Goods 6,379 53.9 7,169 50.3 9,184 52.5 Food 3,552 30.0 3,871 25.4 4,558 26.0 Beverages and tobacco 1,393 11.8 2,049 13.4 2,415 13.8 Textiles, clothing and leather 1,172 9.9 1,410 9.3 1,756 10.1 Printing and publishing 262 2.2 339 2.2 455 2.6 Intermediate Goods 4,159 35.2 6,174 40.5 6,577 37.6 Wood and paper 838 7.1 1,047 6.9 1,096 6.3 Chemicals and rubber 1,096 9.3 2,232 14.6 2,694 15.4 Petroleum 858 7.3 1,358 8.9 1,134 6.5 Nonmetallic minerals 495 4.2 597 3.9 613 3.5 Basic metals and metal products 872 7.3 940 6.1 1,040 5.9 Durable and capital goods 1,029 8.7 1,143 7.5 1,443 8.2 Machinery 537 4.5 582 3.9 589 3.4 Transport equipment 497 4.2 561 3.7 854 4.9 Miscellaneous 256 2.2 266 1.7 297 1.7 Total 11,823 100.0 15,252 100.0 17,501 100.0 While manufacturing value added grew at an average annual rate of 6.8% over the six-year period, the relative sectoral share did not change significantly. The first half of the period saw intermediate goods increase their share of total value added at the expense of consumer goods which subsequently regained some of the lost ground, and during 1976 accounted for 52.5% of total gross value added. The fastest growing sector was chemicals and rubber products (16.5%), followed by beverages and tobacco, printing and publishing and trans- port equipment (9.6% each). Exports may be classified in two categories: traditional manufactures (including sugar, coconut products, plywood, veneer, etc.) and nontraditional manufactures (including electrical machinery, electronics, garments, handicrafts, etc.). Traditional export products proved very vulnerable to slackening of demand in export markets and slumping world market prices. However, nontraditional manufactured exports have begun rising rapidly in recent years; the average annual growth rate has been 34% during 1970-76. 1.04 The manufacturing sector is predominantly privately owned and is generally concentrated in large-scale, relatively capital-intensive units. In 1973-74, medium and large-scale enterprises accounted for around 88% of -3- industrial value added. In terms of employment, however, the small-scale sector (establishments with 1-50 workers) is considerably more important, and in 1973-1974 employed close to 1 million people, or 68% of the total indus- trial labor force. Of the total share of the small-scale sector in gross industrial value added, roughly one half is accounted for by firms employing less than 5 workers, and the remaining half by establishments employing 5-49 workers. 1.05 Geographically, manufacturing enterprises are concentrated in the Greater Manila area and its adjoining provinces. Statistical data relating to industrial establishments employing five or more workers indicate that the Greater Manila area alone accounted for 39% of all such establishments, 59% of total industrial employment, 49% of gross value added, and 43% of total fixed assets. If the adjoining Luzon province is also included, these per- centages would rise by a further 20-30%. The geographic concentration of industrial enterprises in and around Manila has not lessened in recent years. Industrial Investment 1.06 Capital expenditures for durable equipment in the manufacturing sector in 1975 increased at the high rate of 27%, reflecting investment decisions made in 1973 and 1974 when the strong economy encouraged entre- preneurs to expand. From the beginning of 1975 onwards, the commitment rate for new investments steadily declined reflecting the slow investor response to the recession which had first begun to be felt in mid-1974. This was accompanied by a drop in the paid-in capital of new business organizations registered during 1975. The declining trend in investments was also confirmed by the Economic Development Foundation's survey of business expectations which showed a clear downward trend in investment plans through 1975 from the peak levels of 1973 and 1974. For a brief period between March-May 1976, investment plans rose sharply with the business community perceiving encouraging signs of recovery in the U.S. and Japan (based on economic data released in the first quarter). However, later indications that the worldwide recovery was slower than initially expected caused another sharp dip in investments from July 1976 onwards. Actual growth of expenditures on durable equipment in the manufacturing sector fell to 5% in 1976 (from 27% in 1975) and since overall economic recovery has been slow domestically as well as abroad, it is not expected to grow significantly in 1977. Industrial Sector Issues and Policies 1.07 As outlined in the World Bank Economic Report,/1 industrial growth in the Philippines will need to be based on balanced investment expansion in export industries coupled with the diversification of intermediate and consumer goods production for the domestic market. In terms of scale, the World Bank report suggests that the "only rational policy appears to be one that encourages the development of the most efficient industries regardless of size." However, the analysis indicates that traditional cottage-type /1 The Philippines: Priorities and Prospects for Development; The World Bank, June 1976. - 4 - industries are unlikely to play a significant role in future industrializa- tion although they will need to be relied upon to maintain their present employment levels over the next decade. It also stresses the importance of reviving and sustaining growth in the labor-intensive modern small and medium industries sector and orienting the output of this sector toward export products. Investment in a few large, capital-intensive projects is needed to strengthen the industrial structure and make greater use of the country's natural resources. 1.08 The following is an outline of some major industrial issues facing Philippine policy makers together with policy measures, some of which are already in effect, that would ensure industrialization in the Philippines moves in the right direction. Rationalization of the Tariff System 1.09 The Government is rationalizing the fiscal and tariff incentive system to ensure conformity with current development goals. The highly differentiated structure of tariff rates presently in effect has remained basically unchanged since 1973. In the near term, tariff reforms should aim at a reduction of excessive protective rates, while in the long term, nominal tariffs should be levelled at an average rate of 20-30%. Higher protective rates, justified by development plans for specific industries, should even- tually be phased out in accordance with time schedules set up in these plans. The Government has started correcting tariff distortions by reducing the number of items subject to the highest protective rates of 70% and 100% and limiting tariff exemptions. The Tariff Commission is holding hearings on the reduction of high tariffs that protect about 300 industries. As an export incentive a tax deferral for tariff duties on imported capital equipment was substituted in 1976 for the exemption previously granted. However, little progress on tariff reform has been made because of delays in the outcome of slow-moving international trade negotiations, the need for improvement in procedures for protection against dumping, and strong resistance to proposed changes in the industries affected. 1.10 Developments and Issues Related to Nontraditional Exports. During the 1950s and 1960s, the Philippines followed an industrialization strategy based upon import substitution under highly protectionistic policies. At the same time, the peso remained overvalued for long periods of time. The result was that exporters were not only discouraged but even penalized since they had to pay more for their intermediate goods and earned less domestic currency for their exports. It was realized that exports in general, and nontraditional exports in particular, needed to be encouraged to relieve what had become a serious balance of payments constraint on growth. Consequently, a series of corrective measures were taken such as fiscal incentives for investments and exports under the Investment Incentive Act (1967) and the Export Incentive Act (1970), devaluation of the peso in 1967 and 1970 which was subsequently allowed to float, import duty rebates granted to exporters, and the estab- lishment of an Export Processing Zone to facilitate access to imported materials. These measures resulted in an increase of nontraditional exports during 1968-72. During 1973-76 the export of nontraditional manufactured goods grew dramatically, increasing almost fivefold; the increase in volume was less dramatic but still impressive. The three leading product lines in this expansion were garments, handicrafts, and electrical and electronic components. This development was mainly attributable to the corrective measures, to export promotion, and to procedural improvements initiated by the Board of Investment. In addition, the strong demand pull from the international boom in 1972-73 probably played an important role in the initial export takeoff and the establishment of marketing contacts. 1.11 To maintain the recent momentum, further institutional support is now necessary to strengthen contacts with foreign markets, simplify export procedures, improve credit resources, and establish trading houses. To this end, a Philippine Export Council comprising both public and private represen- tatives has been established to study and make recommendations on various aspects of export promotion; a study for the establishment of large trading houses on the pattern of South Korea and Japan is under preparation; the Government has established a public sector trading corporation for trade with the socialist countries; various credit agencies are making an effort to expand credit to the export oriented industry; and a Presidential Decree has been issued to simplify export procedures. Implementation of these proposals should help maintain a 25-30% annual growth rate in nontraditional exports at least in the near future. Equally important, however, is access to markets in industrialized countries on favorable terms. 1.12 Most of the export promotion measures adopted so far have only compensated for the existing bias towards import substitution. Differ- ential rates of protection combined with selective export incentives to various industries are still producing less than optimal overall industrial and export growth and could lead to development of a dualistic industrial structure that might not be viable in the longer term. Therefore, to ratio- nalize the industrial structure and to provide a solid domestic base for future growth of industry and exports, it is necessary to move toward a freer trade regime by removing import restrictions and reducing tariffs. Such a regime would especially help the smaller and less organized firms which have not fully benefited from the facilities of bonded warehouses and tax and tariff incentives. 1.13 Employment Creation. Except for the past two years, Philippine industrialization has done little to alleviate unemployment and underemploy- ment. Between 1960 and 1971, employment in manufacturing grew at an annual rate of about 2.5%, while between 1971 and 1974 it did not grow at all. Employment growth rates in the manufacturing sector were, however, higher in 1975 (7.6%) and 1976 (8.4%). The share of manufacturing in total employment has actually dropped from 12.1% in 1960 to 10.4% in 1974 and is estimated to have reached 10.9% in 1976. Confronted with an estimated 3% growth in the labor force over the next decade, the economy will have to provide almost 500,000 new jobs annually over this period. Because the absorptive capacity in the agricultural sector is low, the provision of more work opportunities in the manufacturing sector will be crucial. 1.14 The industrial incentives system has been strongly biased in favor of the use of capital. For instance, over the period 1970-71, 80% of the total estimated amount of tax relief enjoyed by 301 BOI-approved projects was -6- due to capital-favoring incentives. Attempts to counterbalance this bias by introd&cing incentives for the use of labor in the modern sector have had limited success. But the overall industrial employment picture did not show any improvement because of an absolute decline of employment in the large traditional cottage sector and stagnant employment in mining. If the manufacturing sector is to provide a substantial share of the required job opportunities, then labor-intensive export industries and some inter- mediate and capital goods industries with a ready domestic market offer the best hope of achieving this objective. The Government has introduced some policy changes and is currently reviewing the entire incentive system to make it more conducive to employment, export and import substitution needs. 1.15 Promotion of Small-Scale Industry. As in many other countries, the small-scale sector faces many problems and artificial disadvantages usually stemming from incentives systems favoring the large-scale sector. Ineffi- ciencies caused by lack of expertise in organization, management and choice of technology, difficulties in penetrating the market, deficiencies in the quality and suitability of machinery and equipment employed, restricted access to institutional sources of finance and difficulties in formulating and implementing project concepts are some of the areas of concern. Recent government efforts have made some progress. The basic organizational framework has been set up to provide a wide range of technical services and expertise. A fairly widespread program (MASICAP) has existed since 1973 to help small businessmen formulate projects and this has led to financing of a substantial number of projects by various financial institutions. In 1975, with assistance from the Bank through a small component of Loan 1120-PH, the Department of Industry began to establish Small Business Advisory Centers (SBACs), of which there were 12 by July 1, 1977, which would form a broad network of technical assistance extension services to be provided to small and medium industries throughout the country. Various financial programs have been set up designed to provide easier access to institutional finance for small-scale industries. DBP's Small and Medium Industries Program (partly financed by the Bank), the Industrial Guarantee and Loan Fund (see para. 2.10) (also partly financed by the Bank), and PDCP's Small Business Program are some examples. 1.16 Despite the progress made so far, more could be done. Well-organized producers and traders cooperatives could perform many useful functions on behalf of small industrialists, particularly in such areas as loan mediation, organization of bulk purchases, joint marketing services, dissemination of technical advice, and training. The links between small and large-sized industries also need to be expanded, for instance by establishing information exchanges to provide supply and demand and technological information. The Government has successfully set up various organizations and mechanisms for the promotion of small industries, but there is little knowledge available on the existing cottage and other small-scale industries, and on potential growth areas. A comprehensive survey of the small-scale sector is needed, as are subsectoral and regional studies. As a result of the planned programs of rural electrification, the growth in rural incomes, the labor-intensive exports drive, and the policy of industrial decentralization, a fresh look into new opportunities for small producers is becoming increasingly necessary. Planning authorities might consider establishing a separate unit to study these issues on a permanent basis. -7- 1.17 Regional Dispersion of Industry. As outlined earlier, manufac- turing activity in the Philippines is heavily concentrated in the Greater Manila area and its surrounding provinces. The Government, well aware of the consequences of increasing regional imbalances, has undertaken several steps to check expansion in the Manila area and to create conditions for more balanced growth in the future. These steps include: fiscal incentives to encourage projects to locate in less developed areas (these, however, have had little impact); promotional measures by the BOI such as regional seminars and an experimental regional development pilot program in Northern Mindanao; BOI's practice of negotiating the location of a project before it is approved; a ban on the establishment of new plants within a 50 km radius of Manila, except for export industries; and the requirements that financial institutions in the provinces allocate 75% of their accumulated deposits for loans to projects in their respective areas. These measures may have had a positive impact but judging from the latest figures on BOI-sponsored projects in recent years, it is obvious that new and stronger efforts are needed to shift the balance of industrial investment in favor of other provinces. A real shift in the balance of industrial growth will take place only when it occurs in labor-intensive sectors, such as wood processing, textiles, and the production of other goods for mass consumption and export. 1.18 The provision of adequate supporting infrastructure, such as electricity, water, transportation and communications, financial and technical services, and the availability of qualified labor are essential to direct investment into desired locations. Fiscal incentives without such infra- structure are unlikely to induce many new investments in the outer provinces and with such infrastructure, are probably unnecessary. The Government has launched several programs to improve the basic infrastructure in areas outside Manila (such as substantial electricity generation projects in Mindanao and the Visayas, road construction, and a ten-year shipping and shipbuilding program). These efforts should be continued and extended to other types of infrastructure as well as to other regions. To promote the creation of areas of industrial concentration outside Manila, the Government in recent years has put considerable emphasis on planning and promoting the establishment of industrial estates and export-processing zones in a few selected growth centers. It is possible that many of these export-oriented projects would have been established anyway, even if the Manila area had been closed to them. Therefore, a modification of this policy, together with the establishment of more free trade zones and bonded factories and warehouses in the outer regions, could greatly contribute to an effective decentralization of industries. Prospects 1.19 The manufacturing sector has continued to grow at the modest historical rate of about 7%, with production rising by 6% in 1976 and an estimated 7% in 1977. In 1978, both exports and government expenditure should give increased stimulus to the economy. With incomes once again rising as fast as production due to the stabilization of the term of trade, consumption demand should also revive. The result should be increased manufacturing output followed by a revival of private investment. - 8 - 1.20 Over the medium to long term, the Government is committed to a strategy that includes emphasis on accelerated industrialization, both in capital-intensive basic industries and labor-intensive export indus- tries. The performance of the industrial sector will have to improve significantly if the Philippines is to be reasonably successful in easing the foreign exchange constraint and particularly in expanding productive employment, as at least 75,000 jobs a year will need to be provided by the industrial sector by the early 1980s. To achieve these targets the Philippines will need to expand investment in export industries and in a wide range of intermediate goods industries where domestic demand prospects are reasonably good. According to the Government's Five-Year Development Plan (1978-82), the manufacturing sector is expected to grow at an annual rate of 9% over the five-year period. To achieve this target, investments will have to grow at an annual rate of 15.5% (from $1.7 billion in 1977 to nearly $3 billion in 1982), of which about 65% would go to larger industries. 1.21 Finished consumer goods industries producing for the domestic market are generally labor-intensive; their accelerated growth would therefore be very beneficial in terms of employment generation and low-cost investment. While the prospects are not bright for further growth of the traditional cottage industry, which still employs over two-thirds of the industrial labor force, there is considerable potential for developing the modern small-scale sector in such areas as food processing, handicrafts and apparel. Domestic demand should rise in the future as a result of rising incomes. A large group of intermediate goods industries also offers room for accelerated growth and significant foreign exchange savings in the decade ahead. Domestic demand in these areas is likely to rise much faster than in most final demand categories. In addition to import replacement, industry will have to play a much greater role in the country's exports. After allowing for the probable increase in agricultural and mineral exports, some $4 bil- lion of nontraditional manufactured exports would be needed by 1985 (compared to $550 million in 1976) to finance the projected level of imports. Indus- tries with significant export potential include, clothing, leather goods., handicrafts, electronics, and nickel and copper goods. 2. THE FINANCIAL SECTOR Overview 2.01 The Philippines has a relatively well developed and increasingly sophisticated financial system. The core of the system is a large commercial banking sector, both local and foreign, regulated by the Central Bank of the Philippines. There are in addition two specialized development finance institutions providing long-term capital, and a variety of other financial institutions, e.g. investment houses, savings and loan associations, rural banks, regional development banks, etc. The Land Bank was recently revi- talized to finance the Government's agrarian reforms. The Government has also encouraged the rapid development of a network of small independently owned and operated rural banks and private development banks which concen- trate on providing financial resources in their localities. In late 1976 the Government allowed the establishment of Offshore Banking Units (OBUs) and - 9 - expanded Foreign Currency Deposit Units (FCDUs) to undertake foreign currency credit operations. There is also a well developed and very active short-term money market on which a variety of commercial and industrial issues are traded. Although three stock exchanges exist, activity on them is concen- trated on a few speculative issues. Lease financing and mortgage financing are also relatively less developed. Institutional Structure 2.02 Commercial Banks. As of December 31, 1976, there were 25 privately- owned domestic commercial banks, and two government-owned, plus four foreign banks with branches in the Philippines. Commercial banks operate under a branch banking system with over 1,100 branches and offices and are the main source of working capital and trading credits. The largest bank is the government-owned Philippine National Bank (PNB) with almost 200 branches, which accounted for over 36% of the banking system's total assets (P 80.0 bil- lion) at the end of 1976. The commercial banking system has grown rapidly over the past five years, increasing its assets almost fourfold. Domestic credit provided by commercial banks during the first seven months of 1976 amounted to P 72 billion, 28% of which went to the manufacturing sector, mainly for short-term working capital. To strengthen and rationalize the commercial banking system, the Central Bank instituted a program aimed at doubling the system's capital base to P 3 billion which by the end of 1975 was exceeded by almost 20%. The program also encouraged increased equity participation by foreign banks in commercial banks and other intermediaries (by the middle of 1977, 11 foreign banks and financial institutions held equity interests in 8 domestic banks) and provided a much needed plan of bank consolidation and merger which resulted in bringing the number of commercial banks down to 27 from 34 in 1973. 2.03 Development Finance Institutions. Two institutions, the Development Bank of the Philippines (DBP) and PDCP are the main providers of long-term finance with DBP by far the larger of the two (total assets of P 12.7 billion compared to PDCP's P 867 million at the end of 1976). During FY76 DBP extended a total of P 3.9 billion in financial assistance. As of June 30, 1976, DBP had over 247,000 loans outstanding, amounting to P 6.4 billion. Of these, industrial loans accounted for the greatest share (50%), while over 200,000 agricultural loans accounted for 82% of the total loans. DBP's resources come from government equity contributions, deposits (principally of the Government), borrowings from the Central Bank, sale of bonds, foreign borrowings guaranteed by the Government, and internal cash generation. Nearly all of DBP's resources come either directly from public funds or are raised with government support. Its securities carry relatively low interest rates that would make them unattractive except for such special features as exemption from taxation and eligibility for reserve requirements. Because of the sheer volume and diversity of its operations, DBP plays a prominent and unique role in Government financing of economic development. 2.04 Although PDCP is considered an investment bank under Philippine law, its main business is the extension of long-term loans which accounted for 81% - 10 - of its total assets as of June 30, 1977. PDCP also makes equity investments, provides guarantees, underwriting and private placement of equity and debt instruments and syndicates loans. Its operations are mainly geared towards assisting private manufacturing enterprises but it also assists all other productive sectors which are considered economically beneficial. Up to now, PDCP's main resources were loans from IBRD and ADB (88%) and equity contri- butions (8%). 2.05 Rural Banks. The rural banking system consists of approximately 800 privately-owned banks in rural areas with total assets at the end of 1976 of P 3 billion with a deposit base of P 850 million. Ninety-three percent of the loans made by rural banks during 1976 were for agricultural purposes, mostly seasonal production credits. The Government supports the growth of rural banks by providing counterpart equity contributions, loans and technical assistance from the Central Bank along with tax exemption privileges and special rediscounting schemes to supplement their credit extension abilities. Over the past five years rural banks have grown almost fourfold, slightly more rapidly than the banking system as a whole. 2.06 Private Development Banks (PDBs). These institutions, of which there are now 33, have been promoted by DBP in various regions (with assis- tance similar to that provided by the Central Bank to rural banks) to spe- cialize in the mobilization and lending of long-term resources for small local ventures. As of December 31, 1976, PDBs' total assets amounted to about P 482 million with a deposit base of P 139 million. Outstanding loans and investments of PDBs as of end-1976 totaled about P 382 million, three fourths of which were in the form of medium and long-term loans. During 1976, PDBs made loans totaling P 242 million. Agricultural loans accounted for about 49% of total lending while industrial loans accounted for 26%, the remainder being for trading/commercial firms (15%) and consumption (10%). 2.07 Savings Banks. There are 10 savings banks in the Philippines with a network of around 60 branches. Drawing funds mainly from households and industrial savers in the form of time deposits, these thrift institutions had aggregate total assets of P 2 billion and deposits of P 1.3 billion as of December 31, 1976. Savings banks lend mostly for housing and real estate, although in the past few years an increasing proportion of their resources have been channeled into government securities (24% of total portfolio in 1976). 2.08 Savings and Loan Associations (SLAs). SLAs, of which there are 200, can be either "stock" companies (132) i.e. they can engage in deposit and banking business with the public at large or "nonstock" companies (68) which means they are limited in their banking transactions to members only (credit union). Almost two thirds of all SLAs are located in the Greater Manila area. As of January 31, 1977 SLAs total assets were about P 511 mil- lion with a deposit base of P 371 million. Most of the business of "stock" SLAs concerns financing of home mortgages while nonstock associations - 11 - specialize in personal consumption loans. With the assistance of Central Bank, SLAs have begun diversifying their lending operations to finance agricultural and home-based cottage industries. 2.09 Other Term-financing Institutions. Several other institutions provide term finance, a very small proportion of which goes to industry. These include: private investment houses, insurance companies, and pension and trust funds including the Government Service Insurance System (GSIS) and the Social Security System (SSS), whose resources for industry are lent mainly through DBP. While the outstanding loan portfolios of GSIS and SSS totaled about P 6.1 billion at December 31, 1976, the bulk of their lending is for real estate (53%) and consumer loans (19%). 2.10 The Investment Guarantee and Loan Fund (IGLF). IGLF is a long-term compensatory financing and guarantee fund owned by NEDA and administered by the Central Bank. It was established with USAID assistance in 1952 to encourage private banking institutions to provide long-term financing to small entrepreneurs. Its compensatory financing function is discharged through a special time deposit provided to sponsoring banks at an interest rate of 7% (to be on-lent at 12%). IGLF also provides an automatic guarantee for 60% of the amount being loaned, at a cost to the borrower of 2% p.a. of the guaranteed amount. As of March 31, 1977, ten institutions, five commercial banks and five nonbank financial intermediaries (NBFIs), had been accredited to the IGLF. Since 1974 the IGLF approved 626 loans totaling P 114.8 million and at March 31, 1977 its total assets amounted to P 134.1 million. 2.11 Investment Houses. Defined as any enterprise which engages in the underwriting of corporate securities, an investment house is prohibited from engaging in deposit banking business. However, it can engage in "quasi-banking" operations by creating deposit substitutes. The minimum paid-in capital requirement for an investment house is P 20 million and the majority must be owned by Filipino nationals. There were 12 investment houses at the end of 1976 with 5 institutions dominating the industry. Most are linked with major international financial institutions or large local commercial banks. Their operations and revenues so far have been heavily based (about 80% on average) on money market operations rather than on development of the securities market or the provision of corporate merchant banking services. Total assets of the investment houses amounted to about P 4.3 billion at the end of 1976. The total capital base of the industry amounted to P 494 million, with paid-in capital stock amounting to P 335 million. Over a third of paid-in capital was contributed by foreign sources. For eight years until 1974, the assets of this segment of the financial sector grew at over 50% annually. However, growth over the last two years has been about 8% only, mainly due to government efforts to strengthen the commercial banking system and to curb the growth of the short-term money market (see para. 2.17) as a means to develop the long end of the market. The investment houses possess sophisticated financial skills and have great potential for further development. However, their development to date has not been in accordance with their aims at establish- ment, largely because of inappropriate policies. - 12 - 2.12 Finance Companies. There are 194 finance companies registered with the SEC, the 42 largest accounting for 80% of the total business. These companies, mostly subsidiaries of major commercial banks, are heavily engaged in financing consumer durables on installment payment plans, short and medium-term credits for local manufacturers or traders for financing inventory, receivables or transport equipment. A few such companies have diversified into equipment leasing. Such firms typically rely on paid-in capital and direct borrowings for cash generation; a few have successfully placed-medium-term debentures with the public. As at the end of 1976 total assets of these companies stood at P 4.6 billion with a total capital base of P 713 million and outstanding lending volume of P 3.6 billion. 2.13 Offshore Banking Units (OBUs) and Foreign Currency Deposit Units (FCDUs). A significant development in the Philippine banking system was the establishment in September 1976 of offshore banking facilities aimed at developing Metro-Manila as a regional financial center. In addition the Government has expanded the foreign currency lending authority of a number of commercial banks that had been already acting as FCDUs. 2.14 Presidential Decree 1034 issued in September 1976 authorizes a branch, subsidiary or affiliate of a foreign banking corporation, referred to as OBU, to conduct banking transactions in foreign currencies involving the receipt of funds, principally from external sources, and the subsequent utilization of these funds for borrowers inside or outside the country. Under the system, funds in foreign currencies which are accepted and held by an OBU in the course of its business, are considered as "deposits." The withdrawal of equivalent amounts of such funds including interest by owners of the "deposits" is not subject to restrictions. These transactions are primarily offshore operations. However, a certain amount of offshore-to- onshore operations are permitted, subject to prior licensing by the Central Bank. Presidential Decree 1035, also issued on September 1976, expands the functions of the FCDUs by exempting them from the 15% reserve requirement to be held in the form of foreign exchange deposits with the Central Bank and by allowing them to extend up to the amount of foreign currency deposits, foreign currency loans to any domestic enterprise. As a major incentive to encourage foreign banks to set up OBUs, exemptions are provided from all forms of local licenses, fees, dues, or any other local taxes or burdens. However, as with transactions of FCDUs, a tax of 5% on offshore income is imposed. For gross onshore income, a tax of 10% is imposed, based on the amount of gross interest income from loans granted to onshore borrowers. All regular commercial banking income is subject to the usual corporate tax. 2.15 As of July 30, 1977, the Central Bank had approved 16 foreign banks to operate OBUs in the country. As of the same date, 4 branches of foreign banks and 13 domestic commercial banks were authorized as expanded FCDUs. As of August 10, 1977 most FCDUs and OBUs were occupied with organizational matters with three OBUs having formally inaugurated their offices. 2.16 Suppliers' Credits. Foreign commercial borrowings guaranteed by domestic financial intermediaries (principally DBP) have in the past accounted for 30-35% of total investment in manufacturing. At the end of 1976, the private sector accounted for 43% of the outstanding external debt, just over - 13 - one half of which went to the manufacturing sector. Prior to 1970, such borrowings were obtained on relatively hard terms. As a result of the stringent debt management measures taken since 1970 by the Central Bank and the substantial increases in export earnings, the burden of servicing such debts has been reduced to a manageable level. 2.17 The Money Market. The money market provides the mechanism through which commercial banks and corporations keep their liquidity position in 4 balance. There are basically three submarkets: (a) government securities; (b) interbank; and (c) intercompany. The government securities market is the principal segment, with the Government being the largest trader. The main securities traded are short-term Treasury Bills, medium-term Central Bank Certificates of Indebtedness (CBCIs) and Treasury Notes, and long-term Progress Bonds issued by DBP. While direct trading in Treasury Bills is heavy, trading in longer term securities is mainly "indirect," i.e., the securities themselves are not traded but serve as collateral for "repurchase" agreements. Participation in the intercompany market is restricted to firms with prime credit ratings. Until January 1976, money market rates were not subject to the statutory ceilings imposed on bank deposits. Hence there was a rapid growth in deposit substitutes at the expense of traditional bank deposits. In an attempt to mobilize savings through the banking institutions, the Central Bank raised the interest rate on savings and time deposits and regulated yields on money market instruments. Simultaneously, the minimum denomination of deposit substitutes was raised from P 50,000 to P 200,000 for instruments with less than two years maturity and P 100,000 for instruments with longer maturities. In June 1977, a withholding tax of 35% on interest paid on short-term financial instruments and 15% on savings and time deposits was introduced. 2.18 The Securities Market. The Philippine financial system does not have an active stocks and bonds market. In recent years only a small propor- tion of the capital expansion of Philippine corporations has been financed through issues sold in the three stock exchanges which are located in Manila, Makati, and Quezon City. New firms have generally been unable to sell equities. The same applies to corporate bonds. Recent Developments 2.19 Since 1975 the principal objectives of selective monetary and credit policies have been to promote growth with stability, both in the external and internal sectors, and to improve the mobilization of financial resources and their allocation to priority sectors. In particular, monetary policy was aimed at containing inflation and improving the external balance, while selective credit policies were geared toward promoting growth through financing investment expenditures. Major areas of concern for the authorities included the shift of funds from commercial bank deposits to nonbank financial institutions and deposit substitutes with commercial banks, and the inadequate growth of facilities for medium and long-term financing. Both phenomena were the result of low interest rate ceilings on deposit rates, Usury Law limits on many lending rates and other administrative regulations. The problems were exacerbated by high inflation during 1973-74 when real interest rates became negative. - 14 - 2.20 Total liquidity rose by 24% in 1976 and a further 10% during the first six months of 1977 to P 39.6 billion as of June 30, 1977. Over the past 18 months money supply grew by 27%. Various government measures to check the growth of deposit substitutes seem to have been successful with deposit substitutes increasing only 16% over the 18-month period ending June 30, 1977, after having more than doubled over the preceding two years. In contrast, time and savings deposits which had grown only 30% during 1974/75 rose by 70% during the same period ending June 30, 1977. Outstanding domestic credit grew by 24% in 1976 (30% in 1975) and during the first six months of 1977 by only 5%, to reach P 50.5 billion. Through 1976 credit to the public sector rose by 51%, to P 9.3 billion, mainly because of unusually high credit demand by Philexco (the Government sugar marketing company). During the first half of 1977, net credit to the Government declined by P 0.2 billion, mainly for seasonal reasons and also Philexco's credit demand was 8% below the previous year's level because of a changed sugar pricing system and a sharp increase in sugar exports. Private sector credit grew much more slowly, 18% in 1976 and only 3% in the first half of 1977, reaching P 34.6 billion at June 30, 1977. The weak investment demand in the private sector was caused by various factors, inter alia, the unfavorable outlook of economic recovery, higher real cost of borrowing due to receding inflation, and excess capacities resulting from the 1974/75 investment boom. After having risen by 12% in 1973 and 40% in 1974, the growth of consumer prices slowed markedly to 7% in 1975 and 6% in 1976. The rate for the first half of 1977 was 7%, and for the next five years is expected to be between 7% and 8%. 2.21 During 1975/76, several measures were taken to strengthen and expand the financial system. The final phase of the capital build-up program for the banking system, which required every private domestic commercial bank to increase its paid-in capital to at least P 100 million, was completed in 1975. As of the end of that year, the aggregate paid-up capital of domestic commercial banks amounted to P 3.6 billion or P 400 million more than the Central Bank target. The program also encouraged: (a) increased equity participation by foreign banks in commercial banks and other intermediaries; and (b) a much needed program of bank consolidation and merger which resulted in reducing the number of commercial banks from 34 to 27 in 1973. In 1975, the Central Bank also embarked on a program of more systematic and stringent regulation of NBFIs and quasi-banking institutions. Other measures taken toward increasing effective intermediation included opening the Central Bank rediscounting window for thrift banks and encouraging the establishment of bank branch offices, savings agencies and pawn shops in areas inadequately served by commercial banks. At the beginning of 1976, the Central Bank issued a series of circulars aimed at improving the interest rate structure (see para. 2.23) and in September of that year issued two decrees on offshore banking operations (see para. 2.14). On June 3, 1977 the Government issued a decree instituting a 35% final transaction tax on interest earned on commercial papers issued in the money market and set a 15% withholding tax on interest paid on savings and time deposits. This measure was designed to improve tax - 15 - collection and increase borrowing rates on money market instruments, thus reducing yields so that financial savers could be induced to place their funds in medium and long-term deposits rather than in short-term money markets. 2.22 Interest Rate Reform. Until January 1976, the interest rates charged by the banking system were governed by the Usury Laws which allowed a maximum nominal rate of 12% p.a. As the discounting of interest due for up to a maximum of a year was usually applied, the banks in fact realized an effective yield of 13.6% and 16.3% depending on the security offered. In addition, the Central Bank allowed financial institutions to charge service fees ranging from 0.75% p.a. to 2% p.a. on a graduating scale. In 1974, in response to tight money market conditions, interest rates on savings and time deposits which ranged from 5-9% p.a. were increased to 6% and 11.% p.a. In spite of the increase in the nominal rate of interest, the real rate of interest continued to be negative. While the banking sector was subject to the following regulations, these did not apply to the nonbank financial intermediaries (NBFI). The weighted average rates paid to investors on comparable money market instruments were often twice as high or higher during 1974-75. As a result, there was a considerable flow of funds from deposits to deposit substitutes issued both by banks and NFFIs. 2.23 At the beginning of 1976, the Central Bank enacted a series of changes in interest rates and reserve requirements aimed at both the banking sector and NBFSs. Maximum deposit rates were increased and, for the first time, a distinction was made between short and long-term lending rates. The major changes enacted were: ceilings on loans with maturities of more than two years were raised to 19% p.a.; secured and unsecured loans of less than two years continued to have a ceiling of 12% and 14% p.a. respectively although a service charge of 2-3% p.a. could be added; the maximum yield on money market instruments with maturities of up to two years, including all charges, was set at 17% p.a.; all ceilings on yields of instruments with maturities of over two years were removed. In the absence of official statistics, it is not clear whether there has been a shift towards the long-term end in the structure of deposits, but deposits as a whole have risen quite fast since the beginning of 1976 at the expense of deposit substitutes. On the credit side, while some investment houses and commercial banks did arrange long-term peso loans, the market for medium and long-term peso finance remained unproductive (the decline in LIBOR and the ready availability of suppliers' credits to corporate clients at relatively low rates may have been contributing factors). It is important to note that with the unusual level of inflation in 1973-74 having been curbed, these measures have resulted in real or positive rates of interest on loans, and positive yields on savings; hence, they represent an important step toward rationa- lizing the level and structure of interest rates. 2.24 In December 1977 further interest rate legislation was introduced. The major changes were: the imposition of an effective interest rate ceiling, exclusive of bank charges, of 12% and 14% p.a. for secured and unsecured loans with maturities of under two years; the imposition of an effective interest rate ceiling, inclusive of bank charges, of 19% for loans with maturities exceeding two years; a reduction of the effective maximum yield, - 16 - inclusive of the 35% transaction tax and bank charges, from 17% to 16% on deposit substitutes with a maturity of two years or less with a further reduction in the yield to 15% effective July 1, 1978. 2.25 As a result of this legislation, the yield on deposit substitutes has been brought closer in line with that of traditional bank deposits. It is hoped that this will result in a shift of resources from nonbanking financial institutions to the banking sector. In addition, there has been an attempy to encourage investment by reducing the cost of borrowing. This reduction has been affected, however, with no corresponding adjustment in the deposit rates paid. Consequently, the commercial banks will now be operating on smaller spreads. The Government claims that the reduction in spreads will compel the banking sector to be more competitive. Financial Sector Issues 2.24 Aggregate savings performance in the Philippines has improved generally during the last decade and is comparable to that of other countries at a similar stage of economic development. Since 1975, gross domestic sav- ings have been at a level of 25% of GNP and financed approximately 80% of total investment. However, in order to reach a gross investment level of more than 31% of GNP by 1982 and reduce the country's dependence on foreign savings, the Five-Year Development Plan (1978-82) calls for an increase in gross domestic savings to a level of more than 28% of GNP at the end of the Plan period. To achieve this objective, the savings of the household sector which is expected to contribute approximately 40% of the total domestic sav- ings requirement, will need to increase by more than 17% p.a. during the next five years. 2.27 As more savings flow from households to Government and the corporate sector through financial intermediaries, interest rate and credit policies will become increasingly important. The Government's role will be a critical one in ensuring that the interest rate level and structure are in line with the opportunity cost of capital in the economy and satisfy both savers and investors with rates that reflect different maturities and risks. In addition, efforts will be needed to strengthen the institutional framework of the financial system in order to enable it to undertake its increasing responsibilities. The Government, through the Central Bank, has started this process with a program, already completed, to increase commercial banks' capital and attempts are being made through various government programs to increase allocation of institutional credit to small-scale industry. More needs to be done, however, to clarify the allocational role of each type of institution and to improve the quality and broaden the coverage of financial services. This would involve stimulating the growth of thrift banks, insurance institutions, and the rural banking system. It would also include encouraging the emergence and development of a stronger securities market which so far has been hampered by the limits on longer term interest rates and to some extent by the dominance of the term market by government finan- cial institutions because of the preferential treatment given to their debt instruments. The recent introduction of a 5% development tax on closely held corporations to encourage them to go public is a step in the right direction. Finally, financial institutions and credit programs in the Philippines have - 17 - experienced considerable deterioration of loan recovery rates during recent years which has seriously affected their financial performance. However, the Government is increasingly attentive to the problem of arrears so that recovery will be improved without closing the essential credit channels. 2.28 The Bank attaches considerable importance to a systematic long-term plan to develop the Philippine financial sector along rational lines. As a first step towards that end, a detailed discussion and review of the various issues facing the financial sector is presently under way within the Bank. Depending upon the outcome of these discussions, a special financial sector mission may then visit the Philippines to undertake a thorough first-hand study. The findings of this mission would provide the basis for a dialogue with the Government on the measures needed to be taken by the Government. 3. JUSTIFICATION FOR BANK LENDING TO PISO Perspective 3.01 The proposed Bank loan to PISO is justified because it addresses two basic objectives to which the Philippine Government attaches high priority, namely: (a) increasing the transfer of long-term financial resources to the industrial sector; and (b) assisting in strengthening the institutional structure of the financial sector, particularly those institutions which allocate term funds for productive capital investment and which are geared to mobilize resources as they develop. Capital Requirements for the Industrial Sector 3.02 For Philippine industry to grow at the rate projected in the World Bank's recent Basic Economic Report and to provide the needed increase in exports and employment, there is little doubt that the long-term resources available for industrial investment will need to be significantly increased (para. 1.20). At present the flow of such resources is constricted by the limited number of institutions capable of mobilizing and rationally allocating such resources. The Development Bank of the Philippines (DBP),/1 which is the single largest source of term funds, presently accounts for about 80% of long-term loans to the manufacturing sector. The Private Development Corpo- ration of the Philippines (PDCP) accounts for a further 15% and the balance of 5% is accounted for by commercial banks and other investment houses. However, such long-term loans provide less than 20% of the estimated total investment required by the industrial sector. The balance is provided by internally-generated funds, suppliers' credits and capital investments financed by short-term accommodations on a roll-over basis. Although no /1 The Bank has so far made 11 loans to DBP amounting to US$245.4 million. - 18 - reliable data are available, informed "guesstimates" are that short-term financing accounts for roughly 30-40% of total capital investment in the industrial sector. 3.03 While DBP and PDCP are expanding their own lending activities to the extent that long-term resources are available to them, they still con- front limits on institutional, processing and managerial capabilities. Given the likely rate of growth of industrial investment and the need to diversify sources of funds so as to establish a more competitive financial "market", the Philippine Government is encouraging the diversification of such sources in both the public and private sectors; these considerations suggest that to build PISO's capacity for long-term financing to industry is justified. Strengthening the Institutional Structure 3.04 As suggested in paras. 2.11 and 2.25 the Government has, for some time, also been concerned with the direction in which some of the recently established investment houses have developed. These institutions (of which there are now 12) were originally expected to specialize in long-term cor- porate financing and assisting in capital market development; they have, however, with the exception of PDCP, focused largely on money market opera- tions. A series of recent policy measures has been instituted to steer them towards their originally conceived functions (paras. 2.21 and 2.23). The impact of such measures would be reinforced by building up long-term deve- lopment financing capability in such institutions through the provision of long-term funds and institutional support. PDCP has so far been the sole private DFC to receive development assistance from either the Bank or ADB; the Government feels it now opportune for the Bank to assist an additional institution in the private sector. This view is based upon a strong feeling that the Bank's role in PDCP has been a constructive one. The Government's choice is based upon its assessment of: (a) PISO's willingness to develop its long-term financing capabilities further; (b) its ownership pattern, which does not reflect "captivity" to a single family dominated business group; (c) its present size and stage of growth; (d) capable management and staff; (e) institutional emphasis on corporate client services; and (f) PISO's generally good record of "responsible corporate behavior" and prudent financial management. A review of other similar institutions suggests that PISO is indeed a good choice for the Bank to work with at this stage. Development Orientation 3.05 PISO has realized the danger of relying too heavily on short-term operations, particularly in the light of the latest government regulations, which aim at a shift of resources from nonbanking financial institutions to the banking sector and the mobilization of long-term resources. Accordingly PISO has decided to shift its emphasis from predominantly short-term opera- tions to medium and long-term lending. In this context both its Policy and Corporate Strategy Statements call for the support of new entrepreneurs, of small-scale enterprises and of clients who do not enjoy ready access to financing elsewhere, but as a newcomer to long-term financing, PISO - 19 - will inevitably start with modest targets and will have to rely to a consi- derable extent on the financing of larger established companies. The Bank is satisfied that PISO's intent is to gradually become an institution financing a wide range of companies in terms of size, and stressing such development objectives as export-orientation, employment creation and regional dispersal. 4. PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION A. INSTITUTIONAL ASPECTS Background, Objectives and Charter 4.01 PISO was incorporated on March 1, 1974 as a privately-owned Philippine corporation. Along with PDCP it is one of the few private financial institutions which is not dominated by, or captive to the interests of, any particular shareholding group. Its shareholders have diverse back- grounds and interests in mining, construction, textiles, chemicals, shipping, electronics and considerable experience in the financial sphere. These attri- butes should favor objectivity in evaluating investment opportunities and open the doors to a wide range of business clients. 4.02 In November 1974, PISO's domestic shareholders invited the Private Investment Company for Asia (PICA) S.A. to participate in PISO's ownership. PICA, internationally owned by large multinational banks and industrial corporations, is a development oriented private sector institution. The association with PICA (which remains PISO's single largest and sole foreign shareholder) over the past three years has served PISO well. Apart from providing assistance in mobilizing foreign resources for PISO's syndications, PICA's participation in the Board has proved to be helpful and constructive. 4.03 PISO's corporate philosophy is best reflected in one of its original basic documents wherein it committed itself to: (a) the development of enterprises and financial markets; (b) the pursuit of the objective of broadening stock ownership (in the enterprises it finances); and (c) the evaluation of both the financial aspects of projects and their contribution to the economy. These broad objectives are reflected in the Policy Statement which has been reviewed during negotiations (para. 4.22). 4.04 Charter. PISO's charter, as embodied in its Articles, contains all the provisions normally associated with development financing/investment banking institutions. It allows the corporation, inter alia, to: (a) develop and promote projects in any business sector; to assist in corporate reorganization/restructuring and to provide corporate financial advice; - 20 - (b) assist capital market development through the issue, purchase, underwriting, syndicating or trading of various types of financial instruments and securities, and to engage in providing portfolio advice and management services; (c) engage in real estate investments and development; (d) undertake long and short-term lending, guaranteeing, leasing and direct primary equity investment functions to or for any type of enterprise; and (e) borrow funds from any sources without any general restric- tions as to types and sources of funds. Capitalization and Ownership 4.05 Under its Articles, PISO's authorized share capital is P 100 mil- lion: 10 million common shares with a par value of P 10.0 divided into 6 million Class A shares and 4 million Class B shares (Class A shares being restricted to Filipino ownership)./l As of December 31, 1977, the sub- scribed and paid-in share capital amounted to P 23.6 million (or about US$3.1 million); accumulated retained earnings amounted to a further P 4.2 million bringing total stockholders' equity to P 27.8 million (or about US$3.7 million). PISO's Class A share capital is presently held by six major Philippine shareholders including PISO's President, who holds 12.4%. They collectively own 63.8% of the outstanding stock, while several of PISO's officers hold another 2.6%, and PICA owns the balance of 33.6% (see Annex 1, T-1). 4.06 In discussions with PISO's management and the Government the desirability of diversifying PISO's ownership was raised and a consensus reached that PIS0 should, within the next three to five years, aim at having its shares publicly listed and traded. PISO would proceed with a listing of its shares as soon as practicable within that period. For the interim it was indicated that PISO would endeavor to attract more domestic shareholders on a private placement basis and that no single domestic shareholding would exceed 15%. This agreement has been confirmed at negotiations and recorded in the agreed minutes. 4.07 While its present equity base is sufficient to sustain its current volume of operations (in fact, PISO has the lowest debt/equity ratio in the Philippine investment banking community), PISO recognized the need to strengthen its equity base if it is to undertake an expanded program of /1 Corporations are classified as "Filipino" when 60% or more of the shares are owned by Filipino nationals. - 21 - long-term financing operations with the assistance of the proposed Bank loan, Accordingly, PISO's representatives have agreed during negotiations to increase its total net worth (share capital plus retained earnings) by no less than P 10 million or about 36% to a total of at least P 37.8 million (or about US$5 million). The agreed upon increase, which shall be a condi- tion of loan effectiveness, has subsequently been approved by PISO's Board at its meeting on March 29, 1978; the funds are expected to be paid in on April 3, 1978. 4.08 For PISO to be eligible to obtain a Government guarantee for foreign borrowings, the extent of foreign ownership cannot exceed 30%; this requires a reduction in PICA's present shareholding from 33.6% to 30% or less. PICA has already agreed that it would exercise its subscription rights only to the extent that its resulting holding would not exceed 30% of the total; this has been confirmed at negotiations. 4.09 In connection with the proposed share capital increase, PISO has elicited the interest of the Land Bank of the Philippines (LBP), which will subscribe 14.6% of PISO's capital. During negotiations, PISO's representa- tives confirmed that they had agreed in principle with LBP on the divestment of the latter's holdings within the next three to four years and the mecha- nism for such divestment. Board of Directors and Executive Committee 4.10 Composition of the Board of Directors. As prescribed by PISO's By-Laws, the Board of Directors comprises 11 seats of which 9 have presently been filled (see Annex 1, T-2). Domestic shareholder interests are repre- sented by five directors, all of whom are principal shareholders. The sole foreign shareholder has presently four seats, all filled by PICA officers; however, only one of them is "active" in any practical sense. Board members have shown a keen interest in PISO's affairs; absences from regular monthly /1 Board meetings are more the exception than the rule. All Board members are well qualified and complement each other in terms of their individual and collective experience, industrial interests, and links with financial/business groups. The Chairman of the Board is also PISO's President and Chief Executive Officer. 4.11 With the proposed reduction in PICA's holding (para. 4.08) and the entry of additional domestic shareholders, there will be a reconfiguration of PISO's Board. While PICA has agreed to relinquish one seat, the partici- pation of LBP and the provision of a Government guarantee for the proposed Bank loan will also result in one representative nominated by the Government and two by LBP sitting on PISO's Board. One of LBP's representatives is most likely to be an ex-officio /2 member. /1 The By-Laws call for Board meetings at least on a quarterly basis. /2 This term is commonly used in the Philippines to define Board representa- tives without voting power. - 22 - 4.12 Powers of the Board. In addition to the normal powers vested in the Board of Directors prescribed under Philippine corporation law,/I PISO's By-Laws /2 require that only the Board, with the affirmative vote of at least two-thirds of its total members, has the power to approve (and/or amend) inter alia, the following: (a) the annual business plan, budget and projected operations; (b) policies on money market activity and transactions; (c) the incurrence or guaranteeing of any debt with a maturity of over one year or to approve any long-term financial transaction with any one debtor/creditor exceeding P 3.5 million; (d) a (total) debt/equity ratio of more than 10:1; (e) capital expenditures of over P 1 million; and (f) dividend policies, changes in the nature of PISO's business or entry into any business not expressly provided for in the Annual Business Plan. 4.13 Executive Committee. PISO's By-Laws also provide for the establish- ment of an Executive Committee (Excom) of the Board comprising a maximum of five directors of whom three represent Class A shareholdings and two represent Class B shareholdings. Membership of the committee is based upon appointment by the full Board, which can also appoint alternates to designated committee members. The Chairman of the committee is elected by the members themselves; there is no provision requiring the Chairman of the Board to be either member or Chairman of the Excom. The Excom, which is presently chaired by the Chairman/President of PISO, comprises two other Directors (one of whom represents PICA) and is empowered to act for the full Board between its scheduled meetings and may carry out those functions delegated to it by the Board. Actions and decisions of the Excom are based upon agreement by a simple majority of its members, who constitute a quorum. Organization, Management and Staff 4.14 Organization. PISO's present activity mix is handled by five departments, Annex 1, C-1. Broadly, these departments cover the following functions: /1 These include the powers of appointment and dismissal of PISO's employees and officers and the powers to fix their compensation, terms of employ- ment and to exercise those powers and functions which are not expressly required to be done only by the stockholders (under the Articles and By-Laws). /2 Article III, Section 5 of the By-Laws. - 23 - (a) Corporate Services: including, inter alia, legal services, per- sonnel management, public relations, and general administration. (b) Corporate Planning and Development (CPD): including economic research, business development, mergers, acquisitions and corporate reconstruction, and primary equity investments. The present Senior Vice-President for CPD also manages (c). (c) Investment Management Office: responsible for investment analysis and research, portfolio management services, investment advisory services, and secondary equities trading and investment. (d) Resource Mobilization: covers project evaluation and supervision, clients' financial assistance packages, syndications, underwriting/ private placement, and guarantees. (e) Financial Market Operations: deals with short-term trading in commercial papers and government securities, credit rating services, wholesale securities marketing, and accounting/financial control. Within this departmental group also resides the responsibility for Small Business Financing operations and the Capital Markets division. 4.15 PISO's present organization results in some deliberately planned overlapping, intended to optimize the use of available staff resources and to expose officers to a greater variety of tasks. Management reviews the system constantly and considers the present setting desirable to foster mutual interdependence and cooperation among the managers. 4.16 The growth in the volume of PISO's operations may necessitate a reorganization which ought to include the following realignment of functions: (a) shifting the small business lending function from the Money Market Operations Department to a Term-Financing Operations Department,/l having the latter concentrate primarily on all project evaluation and supervision work and making it responsible for all term-lending operations; (b) transferring the syndication functions to the Term-Financing Operations Department; (c) embodying the underwriting/private placement and corporate services functions into the Investment Management Office which should also undergo reorganization to emerge as a full-fledged department; and (d) establishing a separate monitoring and follow-up unit as a division within the Term-Financing Operations Department. /1 This Department is presently called Resource Mobilization in PISO's terminology. - 24 - The suggested revamping of PISO's organization along functional lines as the volume of activities increases is likely to eliminate potential frictions and overlaps and would put due emphasis on the term-lending operations. 4.17 Management. PISO's top management team comprises its President, Mr. Victor S. Barrios, two Senior Vice-Presidents, and three Vice-Presidents. Of the two Senior VPs, one is a full time staff member of PICA and is under contract to spend 60 hours per month with PIS0. Mr. Barrios is a prominent member of, and among the leading spokesmen for, the Philippine financial community. He has had considerable experience in the development banking sphere (including working as a senior staff member with PDCP); his ability and commitment to development financing are respected in both the private and public sector. The "external" Senior Vice-President /1 plays a constructive and useful role in PISO's management team, particularly on its Management Investment Committee (MIC). While he has no full-time assignments or respon- sibility for any operating or support group in PISO, his availability for special assignments, general advice and as an objective, impartial sounding board for other members of the management team have proved to be in PISO's interest. Moreover, he has been instrumental in arranging participation by foreign financial institutions in PISO's syndications. 4.18 PISO's full-time Senior Vice President and the other three Vice- Presidents constitute a good management team whose individual members comple- ment each other well. These managers have demonstrated their competence in meeting the requirements of their present tasks. In sum, PISO's management team is well qualified and has the capability for gearing the organization up to cope with the task of efficiently allocating and monitoring a long-term line of credit for industrial project financing. 4.19 Staff. During the last six months of FY77, PISO recruited another 7 professionals, an increase of 23%; as of March 15, 1978 its staff totalled 55 compared to a total of 43 some 12 months earlier. With 38 officers, PISO's professional staff accounts for about 69% of the total and, discounting a slight predominance of accountants and financial analysts, is fairly evenly distributed among the various disciplines. As of now, there are eight engineers, two of whom are Vice-Presidents with backgrounds in chemical /2 and industrial engineering. PISO's present engineering team appears to be fully adequate for its long-term lending program, even though some may be still somewhat inexperienced. Twelve of PISO's professional staff have been involved in project appraisal so far. To gear up for the project evaluation/ supervision/administration workload likely to result from a Bank loan, PISO will strengthen its staff by approximately 9-10 additional employees by the end of FY78. /1 This arrangement was an integrated part of the Investment Agreement with PICA. /2 The chemical engineer has 12 years experience in various aspects of the operations of a major oil company. - 25 - 4.20 PISO's history of rapid staff turnover (Annex 1, T-3) is partly attributable to the general shortage of well trained and experienced staff in the Philippine financial sector. This development may have been aggravated by a tendency to recruit over-qualified people for essentially rather low level tasks and the limited opportunities for career development in a small organization such as PISO. In late 1976 PISO's management carried out an in-depth study of the causes of the relatively high staff turnover. It was determined that in more than 60% of the cases the turnover was accounted for by staff who werel offered salary levels and positions significantly better than those provided by PISO. Management has since taken several remedial steps including a periodic upward adjustment of salaries and the provision of more diversified work assignments to retain career interest. These measures have proved reasonably effective and since September 1976, turnover has slowed down perceptibly. 4.21 The quality of work produced by PISO's staff displays a high level of competence and an unusual degree of analytical ability in the assessment of long-term investment opportunities. Policies 4.22 Operating Policies. Since its incorporation, PISO has gradually been developing a coherent policy framework to guide its operations. With broad directional guidelines for corporate activity having been established at the outset by the Board, a series of specific policies governing day-to- day operations continue to be developed. These policies, however, are not embodied in PISO's present Policy Statement. PISO's management recognizes the usefulness of refining and expanding its Statement to incorporate and expand upon existing policies relating to the conduct of its operations and the regulation of its financial affairs. Accordingly the draft Statement has been discussed and finalized during negotiations; the agreed upon version (Annex 2), which has been formally adopted by PISO's Board in its meeting on March 29, 1978, constitutes one of PISO's "basic documents" and has been cross-referred to in the legal agreements between PISO and the Bank. 4.23 The Policy Statement incorporates the following key features: (a) Investment exposure limits which call for: total financial commit- ments to any single enterprise normally not to exceed 25% of PISO's net worth; investments in enterprises normally not to exceed 50% of the assets of those enterprises if established or 75% if new; no single equity investment normally to exceed 15% of PISO's net worth; aggregate equity investments not to exceed PISO's net worth; and equity investment in any given enterprise normally not to exceed 35% of the paid-in share capital of that enterprise. (b) Operating guidelines on portfolio diversification; relation- ships with client enterprises; divestment of equity investments and dispersal of ownership; provision for reserves: plow-back of at least 40% of average net earnings as retained earnings. The Statement also includes policies on: the application of - 26 - professional standards to project evaluation and project follow-up; new entrepreneur/enterprise promotion and small business enterprise financing; money-market operations; management-board relationships; relationships with Government authorities; and organization and staffing. 4.24 The Policy Statement does not include any guidelines on debt/equity limits (see para. 5.12). Provisions covering these aspects have been sepa- rately provided for in the legal documents for the proposed loan. In accord- ance with the Project Agreement, PISO's total debt shall not exceed ten times and its long-term debt shall not exceed four times its equity, except as the Bank and PISO shall otherwise agree. Project Processing, Evaluation and Supervision 4.25 Project Processing. PISO's loan processing procedures have been established with the view to minimize the time lag between the first applica- tion by a prospective borrower and the eventual decision by PISO. They permit efficiency without sacrificing work quality and provide for rational work flow. As of December 31, 1977, PISO had appraised about 14 operations of which 11 had resulted in PISO's arranging financial assistance. On average, the processing period was between 6-12 weeks. Prior to a decision on proceeding with full-scale project appraisal and before submission to the Board for approval, every long-term assistance proposal (and each credit rating report for transacting money market business with a new client) is coursed through a Management Investment Committee (MIC) comprising the President and Vice-Presidents. 4.26 Project Evaluation. On the basis of a review of all of PISO's project appraisal reports and special market studies the existing project evaluation capability was found to be of uniformly high quality. Market and financial aspects were dealt with particularly thoroughly, and project reports were found to be comprehensive documents which provided a reasonable basis for sound investment decisions. 4.27 On the technical side, the reports were somewhat too descriptive about production processes and equipment and they needed strengthening in dealing with such matters as critical points in the process cycle, suitability of various equipment components, pricing of equipment packages, implementation schedules, plant layout, and elements of technical service agreements. 4.28 Most evaluation reports did not provide any formal economic justi- fication but this was not reflective of an absence of expertise in economic evaluation. Most of PISO's projects were BOI-registered and there was no demand for such analysis by PISO's syndicate partners. However, during negotiations an understanding has been reached, reflected in the Project Agreement, to the effect that PISO would include ERR analysis for all proj- ects exceeding the free-limit of US$750,000. Apart from this, all appraisal reports should contain the usual partial economic indicators (e.g., value added, new jobs generated, foreign exchange earned or saved). 4.29 Project Supervision. With a small and largely "new" portfolio, there was no firm track record on which to assess the quality of PISO's - 27 - supervision efforts. Supervision procedures, however, are soundly conceived and the few supervision reports reviewed were found to be of good quality. In the project implementation stage, supervision over disbursement and physical progress was tight, with variances between actual performance and the original cost budget being analyzed on a quarterly basis. PISO also required clients to submit financial statements on a quarterly basis. These were reviewed on receipt and a brief report prepared on borrower performance and financial standing. In general, PISO's management placed substantial emphasis on regular supervision. Procurement and Disbursement Practices 4.30 Procedures employed by PISO assured that equipment procurement and civil works contracting by clients were carried out with due regard for economy and efficiency. Clients were required to submit evidence of a reasonably broad canvassing effort with competitive quotations (usually three) being requested to support such evidence. In reviewing the clients' final choice, PISO's staff frequently checked with known users of chosen equipment to determine the soundness of the choice and the experience of suppliers. Disbursement procedures were also soundly conceived and ensured sufficient safeguards to minimize the possibility of funds misuse. For fixed asset purchase, PISO required the submission of pro-forma invoices against which actual disbursement requests were checked. Clients were generally required to apply equity funds to initial expenses before loan funds were released; on occasion, however, a pari passu disbursement request had been entertained. PISO's loan contracts include general conditions for disburse- ment as well as specific conditions appropriate to each client. Operating Practices and Procedures 4.31 PISO's establishment and the evolution of its organization have proceeded in a systematic fashion with internal operating procedures within and between operating units being carefully laid down and reviewed. Each department had set out in manual form its departmental role, functions, intra-departmental work-flow and operating procedures. Policies on specific activities carried out by each department have been modified and translated into sets of rules for working level staff. Furthermore, PISO's management has adopted a well-controlled system for the planning and budgeting of operations for each department, as reflected in its Board-approved Business Plan. B. CORPORATE STRATEGY AND DEVELOPMENT ORIENTATION 4.32 In its operational orientation, PISO has explicitly recognized the importance of: (a) maintaining a financially sound profile through the expan- sion of a stable portfolio base; and (b) eventually achieving levels of profitability which are commensurate with a competitive return to existing shareholders, attractive to potential shareholders and acceptable to commer- cial creditors. These objectives might be achieved without PISO's exerting substantial efforts to develop its long-term operations. However, PISO - 28 - realizes the danger of relying too heavily on short-term operations, partic- ularly in the light of the latest Government regulations, which aim at a shift of resources from nonbanking financial institutions to the banking sector and the mobilization of long-term resources. Accordingly PISO has decided to diversify from predominantly short-term operations to medium- and long-term lending. PISO has also been encouraged to go into medium and long-term financing by the advantage of its reputation for competence in project appraisal and supervision, established in connection with its syndi- cation operations. 4.33 PISO plans to play a role in financing of small-scale industries. Both its Policy and Corporate Strategy Statements call for the support of new entrepreneurs, of small-scale enterprises and of clients who do not enjoy ready access to financing elsewhere. PISO was accorded accreditation status under the Industrial Guarantee and Loan Fund (IGLF) scheme for financing small business. Nevertheless, as a newcomer to long-term financing, PISO will inevitably start with modest targets and will have to rely to a con- siderable extent on the financing of larger established companies. 4.34 However, PISO's general objective is satisfactory, that of gradually becoming an institution financing a wide range of companies in terms of size, and stressing such development objectives as export-orientation, employment creation and regional dispersal. The Bank's institution building role is expected to be significant in assisting PISO in its efforts to arrive at these goals. 4.35 Capital Market Development. Over the past year, PISO has expended considerable efforts in establishing contact with international, regional and local sources of long-term funds to widen the base of participating institu- tions in its syndications efforts. Particularly noteworthy in this connec- tion are its efforts to arouse the interest of trust and pension funds, and insurance companies in long-term project financing. To date PISO has had only limited success, in both these efforts and in mobilizing peso resources. 4.36 Corporate Strategy Statement. To bring into focus its developmental orientation, PISO's management has prepared a Corporate Strategy Statement which outlines the directions it proposes to take and what it hopes to achieve over the next 3 years. This Statement has been reviewed at negotia- tions. The agreed upon version (Annex 3), which has been formally adopted by PISO's Board in its meeting on March 29, 1978, has been cross-referred to in the legal agreements between PISO and the Bank. The main features of the Statement are PISO's plans to: (a) maintain its character as an investment house but with increasing emphasis on long-term financing; (b) increase the proportion of long-term assets to total assets from 2% in 1976 to about 50% by 1981; (c) attain an average annual growth of its short-term assets of about 25% during 1977-81; - 29 - (d) diversify its portfolio with respect to industrial, geographical, and regional distribution and to restrict its exposure in any single industry to 30% of its outstanding long-term portfolio; (e) closely monitor security market conditions with the intent to publicly list its shares and widen its domestic ownership base; (f) diversify its long-term foreign and domestic resources and to blend multiliateral official funds with commercial resources; and (g) evaluate the contribution of all projects to the Philippine economy and where possible stress such particular development objectives as employment creation, export orientation and regional dispersal of industries. C. OPERATIONS 4.37 Long-Term Financing Operations. Given its relatively short opera- ting life and the constraints on mobilizing long-term funds, PISO does not have an established track record (Annex 1, T-4). Apart from one equity investment (P 25,000), PISO has not yet taken any risk positions in primary equity investments. PISO has adopted the prudent approach of avoiding risky investments until its portfolio provides a sufficient cushion to absorb the impact of potential losses on such investments. The absence of significant activity in primary equity investment is generally in keeping with the experience of other similar financial institutions in an environment where good primary investment opportunities are confined to tightly-held corpora- tions unwilling to invite institutional participation. The general trend is for only marginal projects to seek equity participation from external sources. 4.38 PISO has, so far, managed 11 syndications of long-term loans (see Annex 1, T-5), in which it has approved loans from its own resources total- ling P 21.3 million /1 and has disbursed P 11.1 million of which P 4.0 mil- lion has already been repaid, leaving a balance of P 7.1 million outstanding as of December 31, 1977. Of the 11 projects, 7 were new and 4 were "pioneer- ing" ventures in product lines not hitherto established in the Philippines. Most of them were, nevertheless, undertaken by established companies or their subsidiaries. PISO felt that its initial concentration on established enter- prises was necessitated by a lack of its own resources. Since commercial banks, participating in syndications, were unlikely to venture into less well known corporations, PISO had focused on establishing a reputation with clients whose names could be "sold". 4.39 The average total cost of the indus3trial projects assisted was about US$7 million and their financial rates of return, estimated at the time of project appraisal, were expected to exceed 20%. Clearly, the need to balance its portfolio will require PISO to do business with established firms /1 The largest of these was a US$1 million loan for Sarmiento Industries from the US-Eximbank Cooperative Financing Facility. 30 - undertaking financially viable and economically desirable projects; but, on the other hand, PISO hopes to reflect its development orientation and efforts in the future distribution of its portfolio. 4.40 In addition to the above, PISO has: (a) privately placed (under- written), on a "best efforts" basis, common stock issues (total value P 8.7 million) of three of the newer companies /1; and (b) guaranteed part of three commercial loans for a total amount of nearly P 8 million. 4.41 Short-Term Financing Operations. With the obvious limitations on PISO's ability to finance long-term investments directly, the bulk of its income is derived from short-term financing operations, money market trans- actions and syndication efforts. The importance of such operations is reflected in the table below: PISO: SHORT-TERMI (TRADING) ASSETS AND LIABILITIES AS OF DECEMBER 31, 1974-77 12/31/74 12/31/75 12/31/76 12/31/77 A. Total assets/liabilities 40.25 108.92 116.62 125.53 B. Cash in hand 9.50 2.95 9.53 12.03 C. Short-term investments /a 29.47 101.57 95.33 93.11 D. Subtotal (short-term trading assets) 38.97 104.52 104.86 105.14 D as % of A 96.8% 96.0% 89.9% 83.8% E. Securities sold /b 7.41 47.25 32.06 55.42 F. PISO notes sold 10.90 33.47 49.34 25.83 G. Subtotal (short-term trading liabilities) 18.31 80.72 81.40 81.25 G as % of A 45.5% 74.1% 69.8% 64.7% /a Including promissory notes purchased under agreement to resell, Government and CB securities, certificates of assignment, participation or trust and other commercial papers. This figure is net of provisions for doubtful accounts. /b Under repurchase agreement. /1 Evertex (amount underwritten was F 5.2 million - secondary issue) LMG Chemicals (P 0.5 million - primary issue), and Paper Industries Corporation of the Philippines (P 100 million - public issue; PISO's share: 3%). - 31 - As shown above, short-term trading assets constitute the bulk of PISO's portfolio and are financed by short-term borrowings and equity. The volume of such assets has stabilized since 1976. 4.42 PISO has been prudent in the management of its trading operations which are guided by specific Board-approved policies and are based upon an approved "placement" list /1. The list comprises companies and individuals whose creditworthiness is thoroughly investigated; a rating is applied and an exposure limit is set for each one. PISO's credit rating analysis is quite sophisticated; each recommended addition to the placement list is carefully vetted by the MIC before approval is provided to place PISO funds. The policies applied include: (a) diversification in company and industry exposure and in PISO's government securities inventory; (b) a minimum current ratio of 1:1; (c) matching of assets and liabilities for each 90-day period; (d) maintenance of specified maximum limits on the net short forward position and on minimum forward cover under different market conditions; (e) maintenance of reserve positions well above the minimum levels required by Central Bank regulations; (f) a single enterprise exposure limit of P 10 million with typical approvals of P 5 million against commercial paper issues; and (g) a forced "clean-up" period for specific issues to test the ability of clients to meet maturing obligations without resort to rollover. 4.43 That these policies are prudent vis-a-vis industry practices is reflected in PISO's consistent ranking /2 each year at the top of the indus- try list in comparative analyses of liquidity/solvency ratios in the Philippine investment banking community. PISO also has the lowest debt/ equity position in the industry. The adoption of a liquidity margin has been agreed upon with PISO at negotiations (para 5.13). D. FINANCIAL POSITION AND OPERATIONAL PERFORMANCE Financial Position 4.44 PISO's audited balance sheets as of December 1974-77 are shown in Annex 1, T-6. Total assets have grown by 7.6% during 1977 against 5.7% dur- ing the whole of 1976 and they stood at P 125.5 million (about US$16.7 million equivalent) as of December 31, 1977. The growth of PISO's operations in 1976 was slow because early in the year, there were several new regulations issued by the Central Bank affecting interest rates and the business of investment houses generally which tended to constrain money market operations. This trend also continued through 1977 partly due to the additional introduction of a 35% transaction tax in mid-1977 on interest earned on commercial papers issued in the market as primary money market instruments. Almost all assets (95%) as of December 31, 1977 were classified as current assets of which the /1 As of February 24, 1977, the list included 509 corporations and individuals (in a roughly 60:40 ratio). /2 Business Day, Southeast Asia's First Business Daily, Manila, Philippines. - 32 - short-term investments, net of provisions for doubtful accounts, amounted to P 93.1 million or 74%, against P 95.3 million or 82% as of December 31, 1976. Although the term-loan portfolio increased by 3.7 times, it remains relatively insignificant accounting for only 6% of total assets (P 7.1 mil- lion). PISO's current ratio stood at 1.3:1 as of December 31, 1977 (Annex 1, T-12). With the availability of long-term resources, PISO's balance sheet would undergo major structural changes. Current assets are projected to decline from about 95% of total assets as of December 31, 1977, to less than 50% at the end of 1981. 4.45 PISO's assets were mainly financed by short-term liabilities (96% of all liabilities as of December 31, 1977) principally comprised of securi- ties sold under agreement to repurchase and, to a lesser extent, PISO notes. Current liabilities grew by 2.3% during 1977 against 7.7% in 1976. For the first time in its history PISO showed a medium/long-term debt position (P 5.3 million) resulting from its cooperative finance facility with the US-Eximbank (P 11.3 million). As of December 31, 1977 PISO's total debt/ equity ratio stood at 3.8, including contingent liabilities, against 3.7 at the end of 1976. Financial Performance 4.46 The audited income statements for FY74-77 and the pertinent ratios of operational performance are given in Annex 1, T-11 and T-12. Net income after provision and tax recovered substantially in 1977 and amounted to P 3.5 million, an increase of 49% after a sharp reduction in 1976 (by 22%). The recovery took place almost across the board; income from short-term operations increased in 1977 to P 3.2 million, or by 49%, against P 2.2 mil- lion for the whole of 1976, but did not reach the high 1975 level (P 5.4 mil- lion). The decline in profitability in 1976 was the result of regulatory measures introduced by the Central Bank in January 1976 which affected the operations of all investment houses. Revenues from medium/long-term operations, which went up from P 0.08 million to P 0.5 million in 1977, continue to remain insignificant. During 1977 there was only a modest income from underwtiting (P 0.08 million) and an insignificant amount received from management and financial consultancy services (P 0.08 million), but a substantially increased income from PISO's syndication operations (P 2.4 million against P 0.8 mil- lion during 1976). However, part of the effort that led to the high income from syndications was undertaken in 1976. Administrative expenses, which had stayed relatively stable in 1976, rose steeply by 61% in 1977. This develop- ment is mainly attributable to substantially increased (by 82%) personnel costs resulting from both an increase in the number of staff (from about 40 employees in 1976 to 55 as of now) and an upward revision of salaries. - 33 - Financial expenses of P 9.2 million in 1976 (including provisions) which rose by about 65% in 1976, declined again to P 5.9 million in 1977 or by 36%. The improved earnings situation resulted in a better net return on average assets of 2.9% in 1977 against 2.1% in 1976. 4.47 For 1976, PISO paid the same dividend (on par value) as for 1975 (6%) with pay-out ratios of 31.2% and 51.1% respectively. As of December 31, 1977 the book value of a PISO share was 18% above par, slightly less than as of December 31, 1976 (25%) due to a 15% stock dividend in 1977 (December). Quality of Portfblio 4.48 Since PISO has virtually no long-term portfolio, it has had no significant experience in containing a problem of arrears. Its disbursement on a medium-term loan is being repaid satisfactorily as are its outstanding guarantee accounts. On its short-term portfolio, PISO has one doubtful, fully secured (real estate with an appraised value of P 4.0 million) account of nearly P 2 million. In providing for doubtful accounts, PISO has adopted the practice of determining the level of provisions on the basis of an account-by-account review. In FY75 and FY76 PISO made a provision for doubtful accounts of P 1.5 million and a further P 1.0 million in FY77 as a charge against earnings. The management's policy is to increase provisions annually at a rate commensurate with portfolio growth until they correspond to at least 1.5% of total loan portfolio by 1981. As of December 31, 1977, PISO's retained earnings amounted to nearly P 4.2 million or over 18% of the paid-in share capital including stock dividends. Audit 4.49 Since its inception, PISO has had its accounts audited by the auditing firm of Sycip, Gorres, Velayo and Co. (SGV), which is well known to the Bank and familiar with the Bank's "long-form" audit requirements. PISO's accounts have always been passed by the auditors without qualification. 5. PISO: BUSINESS PROSPECTS, RESOURCES AND PROJECTED FINANCES General Outlook 5.01 During 1977, the Philippine manufacturing sector is expected to have achieved a growth of 4-6%. Its lackluster performance over the past few years was due to the slow growth of domestic demand coupled with a slower than expected recovery in the economies of the Philippines' major trading partners. It is expected that with stabilizing terms of trade, demand will revive in 1978 giving the necessary impetus to the manufacturing sector to achieve a faster growth rate. Subsequently, investments in durable equip- ment, which have remained at low levels since mid 1975 (following the invest- ment boom of 1974/75) are expected to rebound. 5.02 Over the medium to long term, the Government is committed to a strategy that includes emphasis on accelerated industrialization. The performance of the industrial sector will have to be significantly improved - 34 - if the Philippines is to be reasonably successful in easing the constraint on foreign exchange resources and in expanding productive employment to the required level of at least 75,000 jobs a year in the industrial sector by the early 1980s. To achieve these targets the Philippines will need to expand investment in export industries and in a wide range of intermediate goods industries where domestic demand prospects are reasonably good. According to the Five-Year Plan (1978-82), manufacturing is expected to grow at an annual rate of 9% over the plan period. To achieve this target, investments will have to grow by 15.5% p.a. between 1978 and 1982 to total P 86 billion, of which about 65% would go to larger industries. Business Forecast 5.03 Except for the US Export-Import Bank's Cooperative Financing Facility of US$1.5 million),/1 PISO has not had access to any other long-term resources. As the proposed Bank loan would be PISO's first long-term loan from an international institution, it is difficult to gauge, without the benefit of experience, the volume of lending operations PISO can achieve in the immediate future. Nonetheless, PISO's management has developed operational forecasts (Annex 1, T-8) on the basis of a pipeline and overall capital requirement assumptions which have been carefully reviewed. These are summarized below: PISO: PROJECTED COMMITIENTS 1978-81 (In P millions) 1977 1978 1979 1980 1981 (actual) Medium/long-term loans Foreign currency loans 7.5 38.3 116.3 135.0 165.0 Peso loans 0.3 2.0 4.4 5.6 7.1 Small business loans 1.0 2.5 5.6 6.6 8.1 Total loans 8.8 42.8 126.3 147.2 180.2 Guarantees 5.2 6.0 8.0 8.0 8.0 Syndications 237.3 150.0 172.5 198.4 228.1 Total commitments 251.3 192.8 306.8 353.6 416.3 Annual growth rates Loans (-16.7%) 386.4% 195.1% 16.5% 22.4% Guarantees and syndications (2,361.6%) (-35.7%) 15.7% 14.3% 14.4% Total commitments (1,862.5%) (-23.3%) 59.1% 15.3% 17.7% /1 This line, approved for the period 1976-78, can only be used if matched with an equal amount from other US bank sources (see Annex 1, T-11 - footnote). - 35 - 5.04 PISO's operational forecasts are also based on its perception of institutional capability (taking into account its plans for the present as well as the future for staff strengthening, see para. 4.19) and of what share of the potential market it could reasonably capture. Estimated dis- bursements would reach P 164 million in FY78 or about 2.6% /1 of the total size of the potential market, i.e., the estimated demand for investment funds from the private corporate sector for the type of projects which PISO is capable of catering to. This estimate is based on an assumption derived from historical time-series that about 62.8% of national investment in durable equipment and 11% of total investment in non-residential construction in the Philippines would be undertaken by the private corporate sector, with about 60% of the required amount being financed from institutional sources and 40% from internally generated funds. PISO's management believes that it should be able to increase its share of the market up to 3.8% by FY81 as summarized below: PISO: PROJECTED OPERATIONS VIS-A-VIS THE MARKET FOR LONG-TERM FINANCING (Amounts in P million) FY78 FY79 FY80 FY81 Foreign currency operations Total size of market 5,199 6,075 7,110 8,328 PISO's disbursements 8 78 123 145 Indirect financing /a 117 141 161 184 PISO's total share 2.40% 3.60% 3.99% 3.95% Local currency operations Total size of market 1,291 1,509 1,767 2,071 PISO's disbursements 4 10 12 15 Indirect financing /a 35 40 45 52 PISO's total share 3.02% 3.31% 3.23% 3.24% Total operations Total size of market 6,390 7,584 8,877 10,399 PISO's disbursements 12 88 135 160 PISO's share 0.19% 1.16% 1.52% 1.54% Indirect financing /a 152 180 206 236 PISO's total share 2.57% 3.53% 3.84% 3.81% /a Including PISO's syndicated loans and guarantees which would not involve PISO's own funds. /1 Including syndication operations which do not involve PISO's own resources. - 36 - 5.05 However, PISO's share of the total market is reduced to about 0.2% only in FY78, 1.2% in FY79, 1.5% in FY80 and FY81 if syndication operations are excluded. On a similar scale, projected disbursements of the other two development banks in the Philippines, DBP and PDCP, show an average market share of around 30% and 4% respectively for the same period. On balance, PISO's projected share of the market should be attainable. 5.06 PISO's estimates of its financing activities have been influenced by its current assumptions about resource availability. PISO's projections have assumed the availability of the proposed Bank loan of $15 million in early 1978 allowing it to launch its long-term lending operations from that year. This explains the sudden jump of loan commitments in FY78 and FY79. The share of direct lending operations in total commitments has been projected to increase from 3.7% in FY77 to 22.2% in FY78 rising to 43.3% in FY81. Foreign currency loans are projected to account for the lion's share in total loan commitments reflecting PISO's expectation that the prospects for long-term local currency resource mobilization will improve very slowly. It also reflects the continuing dependence of the Philippine industrial sector on imports for a major portion of industrial machinery and equipment. 5.07 Though small business loans are projected to increase in absolute terms, their share in total loan commitments is expected to remain at about 4.6% throughout the projected period. In terms of the number of operations, their share will be much larger and will increase. PISO's strategy for small business loans calls for their promotion to the extent that PISO's manpower resources will allow in view of the high administrative costs involved in such operations. Equity investments are projected to be supported more through underwriting and private placements rather than direct partici- pations in primary issues. PISO's guarantees, in local as well as foreign currencies, are projected to account for a minor portion of its operations. Resource Position and Requirements 5.08 Local Currency Resources. Details of PISO's resource position as of December 31, 1977 are provided in Annex 1, T-9. As shown, PISO's long- term peso resource base consisted almost only of shareholder's equity amounting to P 27.8 million. As of the same date, PISO had long-term peso loans of P 1.7 million outstanding. Undisbursed long-term peso resources therefore stood at P 26.7 million which PISO kept in the form of current assets. Since PISO is to maintain a safety margin of 10% in its current ratio, it will need to continue keeping a subtantial portion of its long-term peso resources in liquid form. As a result, only about P 16 million could realistically be regarded as peso resources available for long-term commitments. Against this amount, PISO's peso commitments for the period 1978-81 are projected to be P 42 million (including small business loans totalling P 22.8 million for which refinancing is expected to be obtained from IGLF). The remainder is expected to be financed through additional paid-in capital, net collections and internally generated funds. PISO's future peso resource picture (posi- tion and requirement) is shown below: - 37 - PISO: PESO RESOURCE POSITION AND REQUIREMENTS (In P million) FY78/79 FY80/81 (2 years) (2 years) Opening balance 16.0 21.0 Add: Internal cash generation 2.2 13.6 Net loan collections 2.3 8.4 Share capital increase 15.4 17.3 Borrowings from IGLF 8.1 14.7 Resources available 44.0 75.0 Less: Long-term commitments 15.5 27.4 Fixed asset acquisitions 0.5 0.5 Minimum addition to net working capital 7.0 9.0 Closing balance 21.0 38.1 5.09 Foreign Currency Resources. As shown in Annex 1, T-9, PISO's only source for long-term foreign funds has been the U.S. Eximbank's Cooperative Financing Facilities (CFF). Utilization of the CFF by PISO is limited to US$1.0 million p.a. On the basis of these available resources and PISO's operational projections, PISO's future foreign currency resource requirements and position up to December 31, 1979 are summarized below: PISO: FOREIGN CURRENCY RESOURCE REQUIREMENTS AND POSITION (US$ million) FY78 FY79 Opening balance 1.0 10.9 Add: CFF - 1.0 /a Proposed Bank loan 15.0 - Resources available 16.0 11.9 Less: New commitments 5.1 15.5 Closing balance 10.9 (-3.6) /a Extension of the CFF arrangement with the U.S. Eximbank has been assumed. - 38 - PISO's projected requirements of foreign currency resources between FY78-79 amount to about US$20.6 million. The proposed Bank loan of US$15 million would meet the bulk of PISO's needs of foreign currency resources over that period. Projected Financial Position and Performance 5.10 Projected Financial Position. Based upon its operational fore- casts, PISO's total assets are expected to grow by 47.6% in FY78 to P 186 mil- lion (Annex 1, T-10). Thereafter, spurred largely by long-term financing operations, assets are expected to increase at an average annual rate of about 50% to P 626 million in FY81. The projected asset growth will be accompanied by a noticeable structural change in asset composition with the significance of long-term loans /1 in the total asset base increasing from 4.2% in FY77 to 6.8% in FY78 and further to 31.6% in FY79 and 52.2% in FY81. Current assets (including current maturities of long-term loans), on the other hand, are projected to grow by 43.1% in FY78 and at an average annual rate of 20.4% thereafter but their share in the asset base is expected to decline gradually from 98.0% in FY76 to 47.2% in FY81. On the other side of the balance sheet, long-term liabilities are expected to increase sharply from P 4.2 million in FY77 to P 321.5 million in FY81 and their share in PISO's resource base is projected to rise from 3.3% in FY77 to 51.3% in FY81. Short-term liabilities /2 are projected to increase in absolute terms from P 93.5 million in FY77 to P 229.0 million in FY81, but their share in the resource base is expected to decline gradually from 74.5% in FY77 to 36.6% in FY81. 5.11 Capital Base and Structure. PISO's current equity base of P 27.8 million (consisting of paid-in capital of P 23.6 million and accumu- lated retained earnings of P 4.2 million at end FY77) is only sufficient to sustain its current volume of operations. PISO recognized the need to strengthen its equity base to undertake an expanded program of long-term financing operations with the assistance of the proposed Bank loan. Accord- ingly, agreement has been reached during negotiations to increase PISO's equity by P 10 million./3 PISO's Board has approved the capital increase in its meeting on March 29, 1978; the funds are expected to be paid in on April 3, 1978. PISO's reserves are expected to grow by a rate averaging 55% annually between FY77-81 to P 20.0 million; they are expected to account for 26.4% of net worth in FY81. /1 Excluding current maturities of long-term loans. /2 Including current maturities of long-term liabilties. /3 Another equity increase of P 10 million is envisaged by 1981. - 39 - 5.12 On the basis of PISO's financial projections, the total debt equity ratio is expected to rise from 3.8:1 in FY77 and FY78 to 5.7:1 in FY79 and further to 7.6:1 in FY80 before it decreases slightly to 7.5:1 in FY81; its contractual limit is 10:1. Correspondingly, the long-term debt/equity ratio is expected to rise from 0.4:1 in FY77 to 0.5:1 in FY78, Z.2:1 in FY79, 4.1:1 in FY80, and further to 4.5:1 in FY81; its limitation to 4:1 has been agreed upon during negotiations. Liquidity 5.13 In addition to the recommended total debt/equity and long-term debt/equity ratio limits (para. 5.12), the Bank has discussed with PISO, at negotiations, the desirability of maintaining a minimum liquidity ratio, in view of the significance of its short-term operations and portfolio. (According to PISO's projections, the current liquidity ratio is not expec- ted to fall below 1.2:1). Moreover, confirmation was sought at negotiations that PISO will continue to adhere to prudent policies with respect to main- taining debt service and interest coverage at satisfactory levels. According to PISO's projections, the debt-service ratio would be 3.1 times in FY78 (when the long-term debt service burden is negligible) and would, in subse- quent years, decline to 2.8, 2.9 and 2.0 in the years FY79 to FY81 respec- tively (Annex 1, T-12), remaining well within prudent limits at all times. The understanding was reached during negotiations, reflected in the Agreed Minutes, that PISO will continue to adhere to prudent liquidity policies and will use as a guideline a 10% margin for the current, debt service and interest coverage ratios. 5.14 Projected Financial Performance. PISO's projected statements of income and expenses are shown in Annex 1, T-11. Net income is expected to increase from P 3.5 million in FY77 to P 16.6 million in FY81, reflecting a yearly average increase of about 48%. The income contribution from the long-term portfolio is expected to increase from 8.8% of total income in FY77 to 67% in FY81. Operating expenses are projected to increase from P 3.2 mil- lion in FY77 to P 9.1 million in 1981, which is not adequately reflected by the ratio of average total assets (2.7% and 1.7% in the years FY77 and FY81) due to the substantially increased asset base. PISO's projections show gradually increasing net returns on average equity from 13.3% in FY77 to 25.7% in FY81 in spite of the fact that PISO's long-term operations are expected to yield only marginal profit during the period 1978-81; this conclusion is based on a conservatively assumed spread of 3.5%, however. In accordance with its policy guidelines, PISO intends to pursue dividend policies which will allow for reasonable returns to shareholders along with a satisfactory build-up of retained earnings. PISO intends to plow back at least 40% of its average net earnings every year to strengthen its capital base. In line with this policy, PISO plans to maintain a cash dividend rate of 6% (of par value) through FY77, and projects increases in the dividend rate to 8% in FY78, 9% in FY79 and eventually to 10% in FY81. The cash dividend payout ratio will range between 57.5% in FY78 and 33.5% in 1980. - 40 - 6. CONCLUSIONS AND RECOMMENDATION Objectives of the Proposed Loan 6.01 At the moment there are only two specialized sources of long-term capital in the Philippines: the Government-owned Development Bank of the Philippines and the Private Development Corporation of the Philippines. The primary objective of the proposed Bank loan to PISO is to improve the institu- tional arrangements for providing long-term capital to the private sector by creating one more source in addition to the existing two, thereby increasing both the availability of long-term capital and easing the institutional bottlenecks to the flow of such resources. These objectives are consistent with the Philippine Government's efforts to strengthen the operations of private financial institutions and to re-orient their financing activities towards longer maturities. The proposed loan is consistent with the Bank's lending strategy in the country in that it will meet the investment needs of an increasingly important industrial sector. Another important objective of the proposed loan is the traditional institution-building role for the Bank. PISO is just beginning to undertake long-term operations. It is, however, a dynamic institution and has considerable potential and promise. The Bank's involvement from this early stage will have an impact on the institution that should prove mutually beneficial in the long run. Expected Utilization of the Proposed Loan 6.02 The proposed loan will be made to the Philippine National Bank (PNB) for the use of PISO. PNB will be used as a conduit because, under Philippine law, the Government may guarantee a loan to a public entity only. The Bank will have a direct contractual relationship with PISO by means of a Project Agreement. PNB is expected to charge PISO a service fee of 0.75% to cover its adminstrative cost and Central Bank charges (0.20% of the value of its assets related to the loan). The proposed loan will be used by PISO in making a number of subloans. Since PISO does not have a history of long-term lending, it is difficult to be precise about the size distribution of the subloans. The foreign exchange risk will be fully borne by the subborrowers. 6.03 As usual with Bank Loans to DFC's, the proposed loan would have a flexible amortization schedule conforming substantially to the aggregate of the repayment schedules of the subloans made by PISO. The maximum term for subloans would be 15 years including an appropriate grace period not to exceed 3 years. PISO will charge an interest rate on subloans of up to 12-14% (including all service charges). Based on the Bank's currently prevailing interest rate, PISO's spread could be between 3.75% and 5.75%. Its actual spread, however, is expected to be on the lower end because there is considerable competition from the new Off-Shore Banking Units and PISO would not want to be priced out of the market. 6.04 It is recommended that the limit for subloans not requiring prior Bank approval be fixed at US$750,000. Based on PISO's pipeline, this limit would assure that at least between two-thirds and three-fourths of the sub- loans by amount and 50% by number will be subject to the Bank's prior review. It is recommended, in addition, that an aggregate free limit of US$5 million should also be fixed to assure that no more than one-third of the proposed loan amount would be accounted for by below the free-limit projects. - 41 - 6.05 Procurement for subprojects financed from the Bank loans would be in accordance with the standard practice for DFC projects, i.e., PIS0 will require subborrowers to submit several bids to PIS0 before final se- lection of the supplier is made, after giving due regard to economy and efficiency. Disbursements under the proposed Bank loan would be: (a) 100% of the foreign exchange cost of direct imports; (b) the equivalent of 50% (being the estimate of the foreign exchange component) of such amounts expended for goods locally procured; and (c) the equivalent of 40% (being the estimate of the foreign exchange component) of expenditure for civil works. Agreements and Understandings Reached During Negotiations 6.06 During negotiations, the Bank reached agreement with PIS0 to the effect that: (a) PIS0 will increase its equity by P 10 million prior to loan effectiveness (para. 4.08); (b) PISO will adhere to a long-term debt/equity ratio of 4:1 (para. 5.12); and (c) PIS0 will adhere to a total debt/equity ratio of 10:1 (para. 5.12). 6.07 During negotiations, the Bank reached agreement with PISO with respect to: (a) PISO's adoption of a Policy Statement, acceptable to the Bank, as a Condition of Board presentation of the proposed Loan (para. 4.22); (b) the incorporation of ERR analysis in reports for projects exceeding the free-limit of US$750,000, and incorporation of the usual partial indicators into all appraisal reports (para. 4.28). 6.08 During negotiations, the Bank reached an understanding with PIS0 on the following (reflected in the Agreed Minutes of Negotiations): (a) PISO's adoption of liquidity and debt servicing policies acceptable to the Bank (para. 5.13); and (b) limiting the maximum holding of a single domestic investor to 15% of PISO's total share capital (para. 4.06); (c) the arrangements to be made for PICA's waiver of subscription rights so that its holding in PIS0 are not more than 30% of PISO's total share capital (para. 4.08); (d) the target date for a public listing of PISO's shares on the stock exchange (para. 4.06); (e) the possible timing and mechanism of a divestment of LBP's holdings in PISO (para. 4.09); and - 42 - (f) the contents of PISO's Corporate Strategy Statement. Recommendation 6.09 A loan of US$15 million is recommended for use by PISO in financing the foreign exchange component of imported capital goods and services for eligible productive enterprises in the Philippine private sector on the terms and conditions usual for Bank loans to development finance companies. ANNEX 1 T-1 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION List of Shareholders as of December 31, 1977 Number of Percentage Number of Percentage Shareholders shares /a of total shares /b of total Local: (Class "A" Shares) Inco Mining Corporation 459,999 19.5 460,000 14.56 Victor S. Barrios 292,982 12.4 356,815 11.30 Victor S. Chiongbian 250,994 10.6 305,706 9.67 Antonio M. Garcia 250,994 10.6 305,706 9.67 Lex Development Corporation 126,499 5.4 126,500 4.00 Augusto Y. Carpio 124,493 5.3 124,493 3.94 Others (Individuals) 60,950 2.6 72,640 2.30 Land Bank of the Philippines - - 460,000 14.56 Subtotal 1,566,911 66.4 2,211,860 70.00 Foreign: (Class "B" Shares) Private Investment Company for Asia (PICA), S.A. 794,039 33.6 947,940 30.00 Total 2,360,950 100.0 3,159,800 100.00 /a Par value of one share is B 10.00. /b After capital increase, agreed at negotiations. AEP Projects Department March 20, 1978 ANNEX 1 T-2 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Board of Directors as of February 28, 1978 Name Major Position 1. Victor S. Barrios Chairman of the Board and (Filipino) President (Chief Executive Officer) of PISO; Director of Evertex Industries, Inc. 2. Rafael M. Atayde Vice Chairman (Filipino) President of Inco Mining Corporation and four other mining companies 3. Victor S. Chiongbian Director (Filipino) President of William Lines, Inc., Manila Shipping Corporation and Director of four other companies 4. Antonio M. Garcia Director (Filipino) President of Chemical Industries of the Philippines, Inc., and three other companies in the chemical industry, as well as Director of two companies in the shipping and insurance industry 5. Andres G. Gatmaitan Director (Filipino) Partner of Sycip, Salazar, Feliciano, Hernandez and Castillo Law Office 6. Kerry St. Johnston Director (British) President and Chief Executive Officer of PICA (elected 2/2/77) 7. Eldridge D. Wood, Jr. Director (American) Vice President and Investment Manager, Central Region and Philippine Representative for PICA 8. Makoto Yasuda Director (Japanese) Executive Vice President PICA 9. Hyoung Mo Kim Director (Korean) Vice President and Investment Manager, Northern Region, PICA AEP Projects Department March 20, 1978 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Staffing Position 1974 1975 1976 1977 Beginning Additions /a End Additions /a End Additions /a End Additions /a End resignations FY74 resignations FY75 resignations FY76 resignations FY 1977 By Department 1. Executive Staff + 4 4 + 1 - 3 2 2 + 1 3 Support Staff for Exec. Offices __ + 3 - 1 2 + 1 3 - 1 2 2 Subtotal +7 -1 6 +2 -3 5 -1 4 +1 5 2. Corporate Services Department Professional Staff + 1 1 +1 - 1 1 + 1 2 2 Support Staff + 4 4 + 3 -3 4 + 5 -3 6 + 2 -1 7 Subtotal +5 5 + 4 -4 5 +6 -3 8 +2 -1 9 3. Corporate Planning and Dev. Dept. Professional Staff + 3 3 + 2 -1 4 + 4 8 Support Staff _ _ + 2 -1 1 1 + 1 - 1 1 Subtotal + 5 -1 4 + 2 -1 5 + 5 - 1 9 4. Resource Mobilization Department Professional Staff + 2 2 + 3 5 + 1 -2 4 + 4 8 Support Staff +1 _I 1 1 Subtotal +2 2 + 3 5 +2 -2 5 +4 9 5. Financial Markets Department Professional Staff + 6 6 + 6 - 2 10 + 7 -5 12 + 8 - 5 15 Support Staff _ + 1 + 7 - 3 5 + 4 -2 7 + 2 - 3 6 Subtotal + 7 7 +13 - 5 1 10 8 21 6. Investment Management Office Professional Staff + 1 1 + 1 2 + 2 -2 2 + 1 - 1 2 Support Staff Subtotal + 1 +-1 -2 +2 -2 2 +1 -1 2 7. Total Staff Professional Staff +14 14 +15 - 6 23 +13 -10 26 +18 - 6 38 Support Staff + 8 - 1 7 +13 - 7 13 +10 - 6 17 + 5 - 5 17 Grand total +22 - 1 21 +28 -13 36 +23 -16 43 +23 -11 55 By Profession/Background Engineers + 2 2 + 2 -1 3 3 + 5 8 Accountants + 2 2 + 6 -4 4 + 2 -2 4 + 7 -2 9 Financial Analysts + 4 4 + 5 -2 7 + 5 -3 9 -2 7 w z Economists + 2 2 + 5 4 +1 - 2 3 + 1 4 - Lawyers +1 1 + 1 -1 1 + 1 2 2 X Secretaries + 6 -1 5 + 4 -4 5 + 7 -4 8 + 2 -3 7 Others + 5 5 + 8 - 1 12 + 7 -5 14 + 8 - 4 18 Total +22 - 1 21 +28 -13 36 +23 -16 43 +23 -11 55 /a Additions are denoted by plus (+) sign and resignations are denoted by minus (-) sign. AEP Projects Department March 20, 1978 ANNEX 1 T-4 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Summary of Operations, March 1, 1974 - December 31. 1977 (P million) 3/1/74- Cumulative 12/31/74 1975 1976 1977 total No. Amount No. Amount No. Amount No. Amount No. Amount Approvals Loans Domestic currency - - 1 3,000 1 3,000 3 1,250 5 7,250 Foreign currency - - - - 1 7,500 1 7,500 2 15,000 Subtotal - - 1 3.000 2 10,500 4 8.750 7 22,250 Equity investment 1 0,025 - - - - - - 1 0,025 Subtotal 1 0,025 - - - - - - 1 0,025 Guarantees Domestic currency - - - - - - 1 1,000 1 1,000 Foreign currency - - 1 2,300 - 1 4,200 2 6,500 Subtotal - - 1 2,300 - 2 5.200 3 7.500 Underwriting/private placements - - 2 5,700 - - 1 3,000 3 8,700 Subtotal - - 2 5,700 - - 1 3,000 3 8,700 Syndications Foreign component - - 4 95,930 2 9,638 3 193,500 9 299,068 Local component - - - 10,000 - - 2 43,750 2 53,750 Subtotal - - 4 105.930 2 9638 5 237,250 11 352,818 Total approvals 1 0.025 8 116,930 5 20.138 12 254.200 25 391.293 Commitments /a Loans Domestic currency - - 1 3,000 1 3,000 3 1,250 5 7,250 Foreign currency - - - - 1 7,500 1 7,500 2 15,000 Subtotal - - 1 3,000 2 10,500 4 8,750 7 22.250 Equity investment 1 0,025 - - - - - - 1 0,025 Subtotal 1 0,025 - - - - - - 1 0,025 Guarantees issued Domestic currency - - - - - - 1 1,000 1 1,000 Foreign currency - - - - 1 2,300 1 4,200 2 6,500 Subtotal - - - - 1 2.300 2 5.200 3 7,500 Total commitments 1 0,025 1 3,000 3 12,800 6 13,950 11 29,775 Disbursements /a Loans Domestic currency - - - - 1 3,000 3 2,000 4 5,000 Foreign currency - - - - - 1 6,120 1 6,120 Subtotal - - - - 1 3,000 4 8,120 5 11,120 Equity investment - - 1 0,013 - - - - 1 0,013 Subtotal - - 1 0.013 - - - - 1 0,013 Guarantees issued Domestic currency - - - - - - 1 500 1 500 Foreign currency - - - - 1 2,300 1 4,200 2 6,500 Subtotal - - - - 1 2_300 2 4.700 3 7,000 Total disbursements - - 1 0,013 2 5,300 6 12,820 9 18,133 /a Excluding underwriting and syndication operations. AEP Projects Department March 20, 1978 PRILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Details of Syndication Operations Project type Financial Indostry/ new/ Frolect cost Syndications: aaount & terms P150 exnmare rate of Firm location existing Foreign Domstic Total Foreign Domestic Total Foreign Domestic Total return (US$OOO) (P million) (USS'000) (P million) (UD$000) (P million) (X) 1. Porceless Marivasa (1975) Dinnerware New 6,500 4.00 52.75 4,000 L. - 30.00 39.0 (Metro Manila) 2% over LIBOR (2-6) 2. Evertex Industries (1975) Textiles New 7,500 33.00 89.25 6,800 /b 7.00 LA 58.00 - - - 23.2 (Metro Manila) 1-1/2Z over LIEOR 12-141 (3-12) (2-5) 2. samma Computer Services (1975) Conpater Services New 930 2.16 9.14 930 /c - 6.98 - - 31.5 (Metro Manila) 21 over LIBOR (2-5) 3. LMr Chemicals (1975) Chemicals (Rixal) New 5,364 29.47 69.70 1,050 /d - 7.88 300 - 2.25 20.1 2% over LIBOR (guarantee) (guarantee) (1-8) 5. Proton Chemicals (1976) Chemicals (Qoexon) New 347 5.40 8.00 560 Ic - 4.20 - - - 25.0 21 over LIBOR (2-5) 6. Swinstim_ Philippines (1976) Watch cases New 705 6.15 11.44 725 /e - 5.44 - - - 44.5 (Metro Manila) 2S over LIBOR (2-5) 7. Sarmilento Indostrieas (1976/77) Logging Existing 6,406 56.96 105.00 8,000 /f - 60.00 1,000 - 7.50 35.4 (N. Mindenso) 2% over LIBOR (US Exim CFF) (loan) (2-5 8. Philippine Blooming Mills (1977) Steel rolling Working - 42.00 42.00 - 41.00 /h 41.00 - 1.00 /i 1.00 - (Metro Manila) capital (17S) (in) (1-3) 9. El Salvador Timber Corp. (1977) Tiber New 2,540 12.49 31.54 2,800 - 21.00 Li 560 - 4.20 18.1 2% over LIB R (guarantee) (2-5) 10. Sabena Mining Corp. t1977) Copper New 16,400 87.80 210.80 15,000 Lk 10.00 122.50 - 14.9 (mixed) 11. Vicor Music Corp. (1977) Phonograph Expansion 300 2.79 5.05 - 2.75 2.75 /1 _ 1.25 1.25 52.0 records (19%) (1.00 guarantee) (0.25 loan) Ls Taken up by Crocker National Bank guaranteed by the Manila Banking Corporation. /b Taken up by PDCP, PICA and Manufacturers Hanover. The rate charged by PDCP was 12Z; terms of PICA and MH loans were 10 and 8 years respectively. /c Taken up by Continental 11linois through Philippine Veterans Bank. /d Taken up by Orion Pacific and PICA. The terms of OP and PICA loans were 5 and B years respectively, with PICA granting a 2-year grace period. OP loan guaranteed by Insular Bank of Asia and America. Le Taken up by PICA and Republic National Bank of N.Y. (guaranteed by Manila Bank). Lf Taken up by City Bank, China Banking Corporation, Metropolitan 6 Trust Co., Philippine Veterans Bank and provided by Citibank, Rainier National Bank, Bank of Californis and PICA. a Local portion syndicated between RCBC, PCIB and Manila Bank with a tern of 5 years (2 years grace) and at a rate of 12% on land-macured portion, 14% on chattel secured portion. /h Syndicated between Contrust, Insular Bank, Consolidated Bank and Trust Corporation. /i Amount approved by PISO Board wan P 3.0 million of whiCh only P 1.0 million has been otilieed by P6M. /4 Taken up by Philippine Banking Corporation and the Manila Banking Corporation and provided by United California Bank and PICA. /k US$7.5 millios provided by DBP (2-75) and another US57.5 million by PICA, Girard Trust, Swins Banking Corp.. Tad Lee Bank and Hong- Eong and Shanghai Banking Corporation at 1.75% over LIBOR (2-4). /1 Syndicated between Land Bank of the Philippines, Far East Bank and Trust Co., PISO, and a Trost Fund. AEP Projects Departmnt March 20, 1978 ANNEX I T-6 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Audited Balance Sheets, December 31, 1974-1977 (In thousand pesos) 1974 1975 1976 1977 ASSETS Current Assets Cash on hand and in bank 9,496 2,953 9,528 12,028 Short-term investments (net of provisions for doubtful accounts) 29,465 101,571 95,334 93,110 Medium/long-term loan due within one year - - 480 1,779 Interest receivable 735 3,149 4,013 4,546 Prepaid expenses (and other current assets) 176 409 4,924 7,504 Total current assets 39,872 108,082 114,279 118,967 Medium/Long-Term Loans (net of current portion) - - 1,440 5,317 Property and Equipment (net of depreciation) 330 657 759 725 Other Assets 52 178 139 520 TOTAL ASSETS 40,254 108,917 116,617 125,529 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses 441 2,421 7,615 8,842 Income tax payable 164 62 47 - Interest payable 528 1,761 2,400 2,225 Securities sold under agreement to repurchase 7,408 47,253 32,060 55,424 PISO notes sold 10,897 33,446 49,344 25,831 Medium/long-term debt due within one year - - - 1,215 Total current liabilities 19,438 84,943 91,466 93,537 Medium/Long-Term Debt - - -_4,190 Stockholders' Equity Paid in capital 20,000 20,115 20,135 23,609 Retained earnings Appropriated to reserves - - 200 200 Unappropriated 816 3,859 4,816 3.993 Stockholders' Equity 20,816 23,974 25,151 27,802 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 40,254 108.917 116,617 125,529 CONTINGENT LIABILITIES 2,002 6,605 AEP Projects Department March 20, 1978 ANNEX 1 T-7 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Audited Income Statements for Years Ended December 31, 1974-1977 (P '000) 1974 1975 1976 1977 (10 months) INCOME Revenues Medium/long-term operations: CFF program - - 77 142 Medium-term loans - - - 361 Subtotal - - 77 503 Syndication fees 300 963 842 2,432 Underwriting fees - - 60 77 Guarantee fees - - 62 292/a Management and financial consultancy fee - - 101 82 Short-term operations: Interest income 2,866 9,469 7,908 7,235 Trading income - 1,569 3,517 1,944 Subtotal 2,866 11.038 11,425 9,179 Other income 19 257 1.242 413 Total revenues 3,185 12,258 13,809 12,978 EXPENSES Financial expenses Interest on short-term borrowings 1,183 5,394 7,945 4,934 Provision for doubtful accounts - 200 1,300 1,000 Subtotal 1.183 5.594 9,245 5,934 General and administrative expenses Manpower cost 391 1,118 1,107 2,010 Transportation and travel 9 113 66 167 Representation expenses 33 85 91 103 Depreciation and amortization 11 78 118 158 Printing and other supplies 14 61 62 71 Postage, cable and telephone 14 42 49 52 Light and water 35 36 33 33 Advertising and promotion 10 117 120 108 Professional fees 20 41 50 65 Charitable contributions 16 31 35 69 Miscellaneous expenses 98 250 280 406 Subtotal 651 1,972 2,011 3,242 Total expenses 1,834 7.566 11.256 9,176 Operating income before taxes and licenses 1,351 4,692 2,553 3,802 Taxes and licenses 535 1.648 188 280 TOTAL NET EARNINGS 816 3.,044 2.365 3 522 /a Estimate AEP Projects Department March 20, 1978 ANNEX 1 T-R PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Operational Forecast, 1978-81 (P '000) Years ending December 31 1977 1978 1979 1980 1981 (Actual) Approvals Loans Foreign currency loans Cooperative financing program 7,500 7,500 7,500 7,500 7,500 Other sources - 56,250 112,500 135,000 165,000 Local currency loans 250 3,000 4,500 6,000 7,500 Small loans 1,000 4,000 5,500 7,000 8,500 Total 8.750 70.750 130,000 155.500 188,500 Guarantees Foreign component 4,200 6,400 6,400 6,400 6,400 Local component 1,000 1,600 1,600 1,600 1,600 Total 5,200 8.000 8,000 8,000 8,000 Underwriting/private placements 3,000 12.000 14.400 17,400 20,800 Syndications Foreign component 193,500 116,000 134,600 154,700 177,900 Local component 43,750 34,000 37,900 43,700 50,200 Total 237,250 150.000 172,500 198,400 228,100 Total approvals 254,200 240,750 324.900 379,300 445,400 Commitments Loans Foreign currency loans Cooperative financing program 7,500 7,500 7,500 7,500 7,500 Other sources 250 30,750 108,800 127,500 157,500 Local currency loans - 2,000 4,400 5,600 7,100 Small loans 1,000 2,500 5,600 6,600 8,100 Total 8,750 42,750 126,300 147,200 180.200 Guarantees Foreign component 4,200 4,800 6,400 6,400 6,400 Local component 1,000 1,200 1,600 1,600 1,600 Total _5200 6.000 8,000 8.000 8,000 Total Commitments 13,950 48,750 134,300 155,200 188,200 Disbursements Loans Foreign currency loans Cooperative financing program 6,120 6,800 7,500 7,500 7,500 Other sources - 1,500 70,500 115,500 137,500 Local currency loans 2,000 1,500 4,300 5,400 6,900 Small loans - 2,000 5,400 6,400 7,900 Total 8.120 1 87.700 134,800 159,800 Guarantees Foreign components 500 1,000 6,200 6,400 6,400 Local components 4,200 1,000 1,600 1,600 1,600 Total 4,700 2,000 7,800 8,000 8,000 Total Disbursements 12.820 13,800 95,500 142,800 167.800 AEP Projects Department March 20, 1978 ANNEX 1 T-9 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Resource Position as of December 30, 1977 1. Long-term resources (P million) A. Local currency Equity: share capital reserve & 23.6 retained earnings 4.2 Long-term borrowings 0.6 Total local currency resources 28.4 Less: Local currency loans outstanding 1.7 Equity investments .0 Equals: Available for disbursement 26.7 Less: Undisbursed peso commitments - Available for commitment 26.7 B. Foreign currency (US$ million) Exim loans 1.5 /a Other loans 1.5 /a Foreign exchange loans committed 1.0 Approved by PISO Board, not yet committed 1.0 Available for commitment 1.0 /a C. Total long-term resources (P million) /b Total resources 50.9 Available for commitment 34.2 2. Short-term peso resources (P million) Short-term investments outstanding 93.1 Short-term notes & commercial papers sold 81.3 Subtotal 11.8 Add: Remaining current assets minus current liabilities 13.6 Net shortfall 25.4 /a The US-Exim Bank has approved a credit line of US$1.5 million under its Cooperative Financing Facility" program for the period 1976-1978; these funds can only be used if matched with an equal amount from other US bank sources. One million has been matched so far with funds from the Continental Bank International Pacific and Rainier National Bank; the remaining US$0.5 million has been approved by the same finance institutions but the arrangement has yet to be finalized. /b Peso equivalent converted at $1.00 - P 7.50. AEP Projects Department March 20, 1978 ANNEX 1 T-10 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Prolected Balance Sheets, December 31, 1978-81 (P '000) (Actual) (Est.) Projected la As of December 31 1977 1977 1978 1979 1980 1981 ASSETS Current assets Cash on hand & in banks 12,028 7,186 8,200 9,075 9,950 11,025 Short-term investments /b 93,110 108,867 140,106 157,048 177,600 216,542 Portion of medium/long-term loans due within 1 year 1,779 1,754 3,929 7,521 18,991 39,306 Interest/principal receivable 4,546 4,496 4,981 6,417 7,585 8,990 Prepaid expenses & other current assets 7,504 11,189 12,987 14,917 17,136 19,688 Subtotal 118,967 133,492 170,203 194,978 231,262 295,551 Long-term assets Medium/long-term loans outstanding /c 5,317 5,693 12,664 91,630 206,766 326,693 Property & equipment /d 725 733 908 1,200 1,400 1,700 Other assets 520 861 1,980 2,058 2,176 2,341 TOTAL ASSETS 125,529 140,779 185,755 289,866 441,604 626,285 LIABILITIES Current liabilities Accounts payable & accrued expenses 8,842 10,336 11,886 13,669 15,719 18,077 Interest payable 2,225 2,875 3,995 4,651 5,307 6,034 Securities sold under agreement to repurchase 55,424 73,682 86,000 103,500 121,000 134,500 PISO notes sold 25,831 20,047 28,000 28,000 28,000 36,000 Medium/long-term debt due within 1 year 1,215 1,274 3,199 5,957 15,740 34,118 Subtotal 93,537 108,214 133,080 155,777 185,766 228,955 Medium/long-term debts /d US Eximbank 3,626 4,283 9,059 11,285 12,986 13,799 Industrial Guarantee & Loan Fund (IGLF) 564 450 1,975 5,786 9,083 12,056 Other long-term sources - - 1,500 72,000 180,592 295,623 Subtotal 4,190 4,733 12,534 89,071 202,661 321,478 Equity Paid-in capital 23,609 23,587 33,587 38,595 38,595 55,854 Retained earnings 4,193 4,245 6,554 6,423 14,582 19,998 Subtotal 27,802 27,832 40,141 45,018 53,177 75,852 TOTAL LIABILITIES 125,529 140,779 185,755 289,866 441,604 626,285 CONTINGENT LIABILITIES 6,605 6,845 7,888 9,612 15,527 20,850 /a PISO's projection for the years 1978-81 is based on the latest revised estimate for 1977; since the projection is unlikely to change significantly if based on the actual 1977 data, it has not been adjusted. /b Net of provisions for doubtful accounts. /c Net of provisions for doubtful accounts and current maturities. /d Net of depreciation. /e Net of current maturities. AEP Projects Department March 20, 1978 ANNEX 1 T-11 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Projected Statement of Income and Expense 1978-81 (P '000) Years ending December 31 1977 1977 1978 1979 1980 1981 (Actual) (Estimate) Income Short-term operations 4,245 4,028 9,160 10,745 12,050 15,231 Medium/long-term loans CFF program 375/b 429 853 1,409 1,809 2,050 Small business loans 11 4 156 672 1,248 1,824 Medium-term loans 350 500 327 907 1,600 2,320 Project loans - - 471 5,708 19,546 36,136 Subtotal 4,981 4,961 10,967 19,441 36,253 57,561 Guarantee fees 292/c 292 169 137 266 369 Commitment fees 47 45 135 887 1,110 1,365 Syndication & underwriting fees 2,509 2,395 1,675 2,085 2,419 2,801 Consultancy fees 82 46 175 500 600 700 Insurance agency commission 10 12 550 330 400 480 Other 403 415 150 210 220 230 Total 8,324 8,166 13,821 23.590 41,268 63,506 Expenses Operating expenses 2,820 2,808 4,128 4,954 5,942 7,131 Financial expenses & commitment fees on long-term borrowings 280/d 280 750 5,739 16,968 29,782 Provision for doubtful accounts Short-term operation 1,000 700 700 700 700 700 Medium/long-term loans - 300 1,300 1,700 2,500 3,300 Incentive bonus 422 - 520 845 1,279 1,941 Subtotal 4.522 4,088 7,398 13,938 27,389 42,854 Income before taxes 3,802 4,078 6,423 9,652 13,879 20,652 Taxes & licenses 280 556 1,746 2,050 2,367 4,082 Net income 3,522 3,522 4,677 7,602 11,512 16,570 /a PISO's projection for the years 1978-1981 is based on the latest revised estimate for 1977; since the projection is unlikely to change significantly if based on the actual 1977 data, it has not been adjusted. /b Net income (P142) plus estimated financial expenses minus commitment fees. /c Estimate. /d Estimated amount added back to net CFF income. AEP Projects Department March 20, 1978 ANNEX 1 T-12 PHILIPPINES PHILIPPINES INVESTMENTS SYSTEMS ORGANIZATION Actual and projected Indicators of Financial and Operational Performance, 1974-81 (P '000) Actual Projected 1974 1975 1976 1977 1978 1979 1980 1981 I. Financial Data Total assets 40,254 108,917 116,617 125,529 185,755 289,866 441,604 626,285 of which: short-term portfolio 29,465 101,571 95,334 93,110 108,867 140,106 157,048 177,600 medium/long-term portfolio - - 1,920 7,096 16,593 99,151 225,757 334,857 Total long-term debts - - - 5,405 15,733 95,028 218,401 355,596 Equity 20,816 23,974 25,151 27,802 40,141 45,018 53,177 75,852 Contingent liabilities - - 2,002 6,605 7,888 9,612 15,527 20,850 II. Financial Performance Percentage of average total assets 1. Total gross income 15.8 16.4 12.2 10.7 10.7 18.4 12.1 12.6 2. Total financial expense 5.9 7.5 8.2 5.1 3.6 7.7 6.4 7.1 3. Gross spread (1-2) (Total operations) 9.9 8.9 4.0 5.6 7.1 10.7 5.7 5.5 4. Gross spread (medium/long-term operations) - - - 0.4 0.0 1.5 1.6 2.0 5. Administrative expenses 3.2 2.6 1.8 2.7 3.0 4.0 2.0 1.7 6. Provision for doubtful loans - 0.3 1.2 0.8 1.3 1.7 0.9 0.8 7. Taxes & licenses 2.6 2.2 0.2 0.2 1.1 1.4 0.7 0.8 8. Profit before provision 4.1 4.3 3.3 3.7 4.3 6.9 4.0 3.9 9. Net profit 4.1 4.1 2.1 2.9 3.0 5.2 3.1 3.1 Net profit as % of average net worth 4.0 13.6 9.6 13.3 13.8 17.9 23.4 25.7 III. Other Ratios 1. Provisions & reserves as % of total loan portfolio 2.8 4.0 6.7 6.7 8.8 5.6 6.4 6.7 2. Book value as % of par value 104 119 125 118 120 117 138 136 3. Earnings per share 0.41 1.51 1.18 1.49 1.39 1.97 2.98 2.97 4. Dividends as % of par value - 6 6 6/a 8 9 10 10 5. Dividend payout ratio - 31.2 51.1 40.2 57.5 45.7 33.5 33.7 6. Debt service cover ratio - - - - 3.1 2.8 2.9 2.0 7. Current ratio 2.1 1.3 1.3 1.3 1.3 1.3 1.2 1.3 8. Total debt/equity ratio 0.9 3.5 3.7 3.8 3.8 5.7 7.6 7.5 9. Long-term debt/equity ratio - - - 0.4 0.5 2.2 4.1 4.5 /a In addition to a stock dividend of 15%. AEP Projects Department March 21, 1978 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANISATION ORGANIZATION CHART AS OF DECEMBER 31,1977 | Board of Directors l Chairman Victor S. Barrios Executive Committen Chairman_ Victor S. Barrios I President Victor S. Barrios | Senior L aaeet netnt Vice-President (Special) nate Eldridge D. Wood Jr. ICorporateServices Coprt PlnIn Invesmet MngmentReoreMblisto Fiaca Market VcPresident Cone S eeomentorVice-President V ice-Presid ent Vice-President-Tes e Jorge M. Juco lcro .uii Glicerio V. Sicat (Tmoay Roan U. Youn Fraci R. *Yuseco q Personnel l _{ Business Development l _| Portfolio Management | -| Syndication Credit Rating -1 Administration l 5 Corporate Reconstruction Investment Advisory Underwritings Securities Marketing { Public Relations l { Primary Equities l { Secondary Equities l | Primary Placements l |Small Business Financing | Staff: Professional: 2 Staff: Professionals 8 Staff: Professionals 2 Staff: Professionals 8 Others 7 Others 1 Others - Others 1 Accounting Total 9 Total 9 Total 2 Total 9 Staff: Professionals 15 Others 6 Total 21 World Bank-17276 AEP PROJECTS DEPARTMENT April 1,1977 ANNEX 2 Page 1 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Policy Statement A. PISO's Role and Objectives 1. Corporate Character. PISO is a financial institution which is: essentially Philippine in origin, sentiment and character; committed to the active promotion of development-oriented investments and to the provision of financial assistance and related services to ensure the success of such investments; systems oriented in its approach and operations; and reliant upon the strength derived from its organization and the diversity of its ownership. Its primary role will be to mobilize and allocate financial resources as efficiently as possible to further the process of economic development. 2. Objectives. As a participant in the process of resource allocation, PISO will actively seek out and assist the development of productive ventures and income-generating projects undertaken by privately-controlled /1 business enterprises in various sectors of economic activity. PISO will assist only those projects and ventures which, in its judgment, are or will be financially, economically and technically viable, and are properly organized and soundly managed. PISO will likewise participate actively in furthering the develop- ment of the capital market in the Philippines especially by way of long-term domestic and foreign resource mobilization. 3. Activities. PISO will provide a full range of financial services, and technical and management assistance as provided for in its Articles of Incorporation. These will include (but not be restricted to): (a) the pro- vision of medium and long-term financing facilities /2 by way of domestic and foreign currency loans, guarantees and equity participation; (b) syndication, underwriting, private placement activities; (c) the provision of financial packaging, consultancy and investment portfolio management services; (d) leas= ing and hire-purchase facilities; and (e) management consultancy assistance in association with its financial services. On the resource mobilization side, PISO will continue in expanding and diversifying the supply of financial instruments to stimulate savings and channel them into longer-term maturities. /1 As used here, the term applies to enterprises in which private-ownership represents a majority (greater than 50%) share. In this connection, PISO explicitly recognizes the role that Government participation in ownership may need to play in accelerating investment in certain areas. /2 For financing fixed assets and working capital. ANNEX 2 Page 2 B. Guidelines for Operations 4. Project Evaluation and Follow-up. In providing assistance to any project or enterprise, PISO will apply high professional standards in evaluat- ing: managerial aspects; technical aspects; market prospects; financial viability and debt-service capability; and the economic viability and desir- ability of such projects/enterprises. It will closely monitor the implemen- tation of projects and the eventual operations of the enterprises to which it provides long-term assistance. Whenever it considers necessary, PISO will provide constructive remedial advice to those enterprises it perceives in present or eventual difficulty. 5. Collateral. In accordance with normal business practices, PISO will obtain adequate security for the financial assistance it provides. PISO will also take steps to have adequate insurance coverage obtained for its security. Its investment decisions, however, will be guided primarily by considerations relating to project merits. 6. Investment Exposure Limits. To ensure that its resources are widely spread and prudently diversified, PISO shall adopt the following guidelines: (a) Total financial commitment /1 (including amounts of outstanding and undisbursed commitments) to any single enterprise /2 shall not normally exceed an amount equivalent to 25% of PISO's net worth (defined as the sum of its paid-in unimpaired capital, surpluses and reserves). (b) Total investment in any enterprise shall not normally exceed 50% of the assets of that enterprise if it is already established or 75% if the enterprise is being newly established. (c) No outstanding equity investment made by PISO in any one enter- prise shall normally exceed 49% of the paid-in share capital of that enterprise and 15% of PISO's own net worth. This limitation will not apply to a subsidiary, if and when established by PISO. (d) The aggregate sum of PISO's equity investments shall not exceed PISO's own net worth. /1 This term includes equity investments, loans and guarantees (excluding short-term for the latter 2 categories). The term excludes exposures covered by hold-out agreement or any firm off-setting arrangements on debt extended to PISO. /2 The term enterprise as used in this Statement shall include the enter- prise and its subsidiaries whenever PISO has any investments in such subsidiaries. ANNEX 2 Page 3 7. Portfolio Diversification and Divestiture (a) PISO will endeavor to diversify its loan, equity and guarantee investments in a wide variety of sectors and industries. It will also exert its efforts to encourage investment in underdeveloped regions and to actively promote the location of investment outside the Metropolitan Manila Area. (b) In accordance with its views on capital market development and to maximize the use of its own resources, PISO shall dispose of its equity investments as early as practicable. In selling its hold- ings, PISO shall consider, in addition to its own interests, the interests of the other original participants in the investment as well as the interests of the concern whose shares are being dis- posed of. PISO will endeavor to diversify, as widely as possible, ownership in the entities in which it invests. 8. New Entrepreneur/Enterprise Promotion. In its operations, PISO will stress the promotion of new entrepreneurs and enterprises. Broadening the entrepreneurial base in the Philippines will be one of PISO's operational objectives. To this end, PISO will exert reasonable efforts to: (a) extend financial and technical assistance to small and medium scale enterprises /1; and (b) attempt to develop a client base of enterprises which, by virtue of their size, age, ownership or location, have not enjoyed ready access to financial assistance as have larger, more established and better-known corporations. 9. Relations with Client Enterprises. Recognizing the value and implications of sound lender-borrower relationships, PISO will adhere to the following policies in its dealing with client firms: (a) PISO shall not normally seek to control any of the enterprises that it finances nor to assume primary responsibility for the management of such enterprises, except in the event that its interests are jeopardized, in which case, it may take such action as may be necessary to protect its interests. A higher percentage of equity holding than mentioned in 6(c) above may also result from an under- writing commitment undertaken with the expectation that the eventual investment would be within the cited limit. Every attempt will be made to reduce the equity holding to the maximum limit mentioned in 6(c) above as soon as practicable, all factors considered. /1 As defined by the Department of Industry. ANNEX 2 Page 4 (b) PISO shall request its clients to establish and maintain up-to-date records and accounts in accordance with generally accepted account- ing practices, and furnish whatever information it may reasonably request on their operations and accounts. Under its financial contracts, PISO will establish its right to inspect the enterprises it finances as well as their operations and accounts. (c) PISO shall honor the confidences of its clients. In this connection: no member of PISO's Board, by virtue of his/her membership, shall have access to information submitted by clients to PISO's management or staff when, in the view of management, such access would prejudice the interest of the client. 10. Dispersal of Ownership. PISO will strive to broaden its ownership base as widely as possible. PISO will take all possible steps to prevent any one person, entity or group from dominating its ownership or management. C. Financial Policy Guidelines 11. Capital Structure, Liquidity and Debt Service. In the conduct of its business affairs, PISO shall exercise due financial prudence and shall ensure that its capital structure remains sound, a reasonable liquidity position is maintained and that its cash inflow is always sufficient to allow a comfortable margin for servicing its debt. 12. Reserves and Dividends. PISO will adhere to a prudent dividend policy which will allow it to provide a fair return on shareholders' invest- ments and simultaneously allow for building-up retained earnings and reserves at a reasonable rate. At a minimum, PISO shall plow back at least 40% of its average net earnings in any given fiscal year as retained earnings. PISO will provide, by charges against income, valuation reserves consistent with the size and quality of its loan and equity portfolio. From time to time, PISO shall appropriate as necessary a portion of its retained earnings to surplus reserves to ensure that they adequately reflect the size and risks of its portfolio and to protect its equity against erosion. 13. Foreign Exchange Risk. It is PISO's policy not to expose itself to foreign exchange risks associated with foreign currency obligations/trans- act ons. Accordingly, PISO shall, to the extent possible, pass such risks on to its clients or arrange, on behalf of clients, for forward cover on such risks at no cost to itself, or make any other arrangement which insulates PISO from bearing any part of such risks. D. Relationships with Government Authorities 14. PISO shall, at all times, maintain cooperative working relation- ships with various government agencies and authorities with respect to its investment operations and its activities toward capital market development. Its operations will be consistent with overall government economic policies. ANNEX 2 Page 5 E. Organization and Staffing Policies 15. In furtherance of its institutional capabilities and to assist its clients to the fullest possible extent, PISO shall, on a continuing basis, build and strengthen its management and staff, and evolve an efficient and sound organizational structure. To those ends, it shall adopt equitable and competitive recruitment, employment and compensation policies. PISO shall provide for continuous training of its staff, realizing as it does, the importance of human resources. PISO shall endeavor to ensure that its staff are of a high professional calibre and represent an appropriate mix of pro- fessional qualifications, ability and experience to permit the achievement of its corporate objectives in the most efficient manner. F. Revision of Policies 16. This Policy Statement may be amended only by the affirmative vote of at least two-thirds of all directors. AEP Projects Department April 1, 1978 ANNEX 3 Page 1 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Statement of Corporate Strategy for 1978-80 1. In the conduct of its operations, PISO will be guided by the Policy Statement approved by its Board on March 29, 1978. This Statement of Corporate Strategy enunciates the general directions of PISO's operations and activities, frames in broad terms its objectives over the next three years and outlines the course which Management proposes to chart to achieve them. Clearly, adaptive changes in strategy will be necessary to respond flexibly to changes that may ensue in government policy, overall economic conditions and the regulatory environment in which PISO must function. Management, with the approval of PISO's Board, therefore reserves the right to change strategic thrusts in the best interests of sound and balanced long-term corporate growth. 2. Support for Economic Development. PISO's corporate strategy will be consistent with the Government's efforts at achieving stable long-term economic growth and the efficient mobilization and allocation of financial resources. Its efforts on the allocation side will be to concentrate on furthering the development of the industrial, agro-industrial, tourism, transportation, and services sectors by encouraging directly productive, revenue generating and privately controlled business investments in these sectors. In financing specific investments, PISO's strategy will be to adhere to the policy established by regulatory agencies such as the Board of Investments, Department of Tourism, etc. On the resource mobilization side, PISO's strategy will be to support actively the development of a market for long-term capital through the direct issue of suitable financial instruments, support for the establishment of an effective secondary market for long-term securities trading, encouragement for the diversification of industrial enterprise ownership by persuading client enterprises to go public, and cooperation in the establishment of a sound regulatory framework for the operations of financial institutions. 3. Operational Strategy. With the stage of its corporate formation and of the establishment of its reputation in the financial and business communities coming to a close, PISO will, over the next three years, embark on a growth path along the following lines: (a) While PISO will maintain its character as an investment banking- type institution, emphasis will be placed on long-term resource mobilization and financing operations with PISO attempting to develop a direct long-term loan portfolio (resources permitting). Resource mobilization activities to be emphasized alongside direct long-term financing are so-called "off-balance" sheet activities ANNEX 3 Page 2 consisting of underwritings, private placements, syndications and guarantees. Specifically, PISO will aim to increase its share of the long-term financing market (for durable equipment and non- residential construction) by about four times from a level of 1.0% in 1977 to a level of about 3.9% by 1980. In.monetary terms (current pesos), PISO will endeavor to provide (on an approval basis) aggregate long-term financial assistance, by way of direct loans, guarantees, syndications and underwriting, totaling over F 350 million annually by 1980; of this amount, PISO's strategy will be to achieve a balance between its direct long-term loans and other forms of term financing. (b) Recognizing that the gestation period for developing a mature long-term portfolio yielding a stable revenue stream will be around 3-5 years, PISO will continue to follow a balanced approach in restructuring of its assets to ensure the generation of income at a satisfactory level. In relative terms, PISO will aim at reducing the proportion of short-term assets (from trading operations) in its total asset base from around 80% in 1977 to less than 50% by 1980. PISO will maintain an average annual growth rate in its short-term asset base of around 25% for the period 1977-80. (c) Growth in both short- and long-term financing operations will be based upon a strategy of risk and portfolio diversification by industry, by geographic region and by business groups/client firms. PISO will aim at spreading its available funds as widely as possible between industries, entrepreneurs and regions. Special emphasis wil be given to the establishment of "pioneer" projects undertaken by newer or lesser established entrepreneurs. To the extent possible, it will actively encourage investment outside regions where industry is presently concentrated. While being guided primarily by considerations of individual project merit and the investment priorities of the Government, PISO's strategy will be to review investment proposals with particular care if such investments cause PISO's exposure in a given industry /1 to exceed 30% of its outstanding (including committed but undisbursed funds) long-term /2 portfolio. The limits will not be applied as arbitrary /1 Industries here will be defined as those categories of activity at the 2-digit level using the standard international industrial classification code. /2 Long-term in this connection, includes PISO equity investments, and its loans and guarantees with a maturity of over one year at the time originally contracted. ANNEX 3 Page 3 cut-off points but as guidelines beyond which PISO's management and Board will require special justification before approving such investments. Exposure limits in client firms and business groups will be based upon the guidelines embodied in PISO's Policy Statement. 4. Financial Strategy. In keeping with its policy of maintaining a sound financial structure of improving financial performance as rapidly as operational constraints will allow, PISO aims to adopt the following strategic objectives: (a) A reasonable increase in paid-in share capital that enables PISO to maintain its solvency and liquidity, and at the same time a reasonable return on capital. PISO's objective is to retain 40% of its net earnings. During the 1978-80 period, PISO will closely monitor securities market conditions with a view to the public listing of its shares and the widening of its domestic ownership base. (b) Diversification of sources of long-term foreign and domestic funds. PISO will aim, to the extent possible, to reduce reliance on any one source of funds. While PISO recognizes that it may be hard pressed to achieve, by 1980, levels of financial performance which would permit access /1 to foreign commercial credit on reasonable market terms, it will keep this goal in mind as one to be achieved as soon as circumstances permit. One financial strategy to be tested is the blending of funds from multilateral financial insti- tutions with those from commercial sources, hoping to yield blended costs and repayment terms that meet the requirements of the country and projects assisted. (c) An annual growth rate in earnings per share that will enable PISO to attract additional equity capital, when needed. (d) The broadening of the company's ownership base is considered as an important objective. A gradually increasing dividend rate is considered an essential element in the process of widening PISO's ownership base and making its shares attractive to smaller investors. 5. Promotional Strategy. Between 1978-80, PISO's strategic objectives in its promotional activities will include: (a) Promoting (by way of identification, prefeasibility analysis, persuasion of business groups, and financial packaging) the devel- opment of projects in industries which: (i) utilize indigenous raw materials; (ii) increase the value-added component in existing product lines; (iii) create substantial employment; and (iv) further /1 Without support by way of government guarantees. ANNEX 3 Page 4 diversify the range of nontraditional manufactured exports. Speci- fically, PISO will attempt to identify and promote projects which manufacture a wider range of intermediate an; finished products: wood nnd lumber-based products; copper and nickel-based products; copra and coconut oil-based products; leather-based products; construction-related products and activities; and sugar and molasses-based products. PISO will also attempt to identify and develop smaller projects which result in the development and utilization of domestic energy resources (e.g. coal mining). (b) Promoting the developing of adaptive/intermediate, i.e., labor- intensive technology in industrial operations. While recognizing the limitations on its abilities to convince business groups and entrepreneurs of adopting more labor-intensive methods of produc- tion, PISO will endeavor to support its attempts at persuasion, with the development of close relationships with faculties of engineer-.ng and with domestic institutes for science, applied technolog,y and development. PISO will actively cooperate with the Technology Resource Center in its aim to promote commercially new, appropriate technologies. PISO will also attempt in its project evaluations to consider whether more labor-intensive modes of production are known which are economically feasible and point out the advantages/difficulties of adopting such methods in a proposed investment. (c) Promoting the development of indigenous capital goods and engineering industries especially in the production of general purpose equipment commonly used by other domestic industries. (d) Promoting small business development. PISO will aim to increase its operations in this area from around 4-6 projects for loans totaling P 2 million in 1978 to 15 projects for loans totaling about P 7 million by 1980. PISO will actively participate, in a prudent manner, in the program of the Industrial Guarantee and Loan Fund designed to assist small entrepreneurs. In this connection, PISO will attempt to establish formal links with smaller financial institutions (such as private development banks and some of the larger, better-run rural banks) to finance on a joint basis small business projects in the regions to undertake an analysis into the feasibility of launching a leasing and hire-purchase financing subsidiary to address the equipment acquisition problems of smaller enterprises. (e) Promoting joint ventures and foreign investment in pioneer indus- tries within the framework of established incentives and regula- tions. PISO will actively seek out suitable foreign partners to participate in projects which would benefit through the introduc- tion of foreign capital and technology. It will actively assist ANNEX 3 Page 5 domestic entrepreneurs with contractual arrangements with foreign partners on terms which would equitably meet the mutual interests of project participants and would yield a substantial benefit to the domestic economy. AEP Projects Department April 1, 1978 ANNEX 4 Page 1 PHILIPPINES PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION Related Documents and Data Available in the Project File A. General Reports and Studies on the Sector or Subsector /1 Al. PDCP, Philippine Business Review: A Report on the Twelfth PDCP Survey of the Manufacturing Outlook for the year 1976, Manila, II/1976 A2. PDCP, Industry Digest, Studies on Various Industries, Manila, January through June, 1977 A3. PDCP, Studies on Philippine Industries: No. 16 - The Wood Industries, Manila, 1977 A4. Business Day's, 1,000 Top Corporations in the Philippines, Manila, VIII, 1976 A5. Manila Stock Exchange, Investment Guide 1976, Manila, 1976 A6. World Bank, Report on the Small Business Advisory Centers Program of the Department of Industry, Government of the Philippines, (white cover), June 1977 A7. Central Bank of the Philippines, 28th Annual Report, Manila, March, 1977 A8. Central Bank of the Philippines, Statistical Bulletin, Manila, December, 1975 A9. Vicente Muro, Philippine Finincial Institutions, Manila, 1976 A10. Vicente Muro, Philippine Development Banks, Manila, 1976 All. Equityman, The First Asian Securities Industry Forum, various articles on industrial finance in the Philippines, Manila November, 1975 A12. Equityman, 1976 IMF- World Bank Annual Meeting, various articles on Banking in the Philippines, Manila, September - October, 1976 B. General Reports and Studies Related to the Project Bl. PISO, Operational Procedures B2. PISO, Business Plan 1977, Manila, December 27, 1976 /1 Literature related to the sector and subsector (Al-A12) is catalogued in the PDCP Project File. ANNEX 4 Page 2 B3. PISO, Materials Prepared for Appraisal Mission (operational, financial data and projections) B4. PISO, Minutes of Shareholders and Board Meetings, Semi-Standard Contract Forms, Corporation Documents, Structure and Performance of Investment Houses,Staff Curricula B5. PIS0, Business Plan for 1978 and Medium-Term Corporate Plan, Manila, December 16, 1977 B6. PISO, Annual Reports - 1974-76 and 1977 (draft) B7. SGV, PISO's Audited Financial Reports 1974-77 AEP Projects Department March 20, 1978
Groupe de la Banque mondiale · Staff Appraisal Report
Philippines - Investments Systems Organization Project
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