Colombia - Third Small Scale Industry Project

Document of The World Bank COPY FOR OFFICIAL USE ONLY Report No. P-2 7 59-CO REPORT AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE LA REPUBLICA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A THIRD SMALL-SCALE INDUSTRY PROJECT March 31, 1980 This document has s restricted distribution and may be used by recipients only in the performance of their officil dutie. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Average Calendar 1978 Average Calendar 1979 Currency Unit Peso - Col$ Col$ US$1 = Col$ 39.3 Col$ 42.6 Col$1 = US$0.025 US$0.023 GLOSSARY OF ABBREVIATIONS ACOPI - Asociacion Colombiana Popular de Industriales i ~ (Colombian Association of Small Manufacturers) BR - Banco de la Republica (Colombia's Central Bank) CAJA - Caja de Credito Agrario Industrial y Minero (Agricultural, Industrial and Mining Bank) CFP - Corporacion Financiera Popular DANE - Departamento Administrativo Nacional de Estadistica (National Department of Statistics) DFC - Development Finance Company FFI - Fondo Financiero Industrial (Industrial Financing Fund) FICITEC - Fundacion para el Fomento de la Investigacion Cientifica y Tecnologica (Foundation for the Development of Scientific and Technological Research) FIP - Fondo de Investigaciones Privadas (Private Investment Fund) IFI - Instituto de Fomento Industrial (Industrial Development Institute) IIT - Instituto de Investigaciones Tecnologicas (Institute of Technological Research) KfW - Kreditanstalt fur Wiederaufbau PROEXPO - Fondo de Promocion de Exportaciones (Export Promotion Fund) SENA - Servicio Nacional de Aprendizaje (National Vocational Training Organization) SMI - Small- and Medium-Scale Industry SSI - Small-Scale Industry UNDP - United Nations Development Programme UNIDO - United Nations Industrial Development Organization  FOR OFFICIAL USE ONLY WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 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.   COLOMBIA THIRD SMALL-SCALE INDUSTRY PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco de la Republica (BR) Guarantor: The Republic of Colombia Beneficiary: Corporacion Financiera Popular (CFP) Amount: US$32 million equivalent Terms: 17 years, including 4 years of grace, at an interest rate of 8.25% per annum. Project Description: The project would consist in the provision of (a) term financing to about 1,500 medium- and small-scale indus- trial enterprises to carry out necessary investments required for expansion, renovation or relocation of their installed productive capacity; and (b) technical assistance to CFP and its clients. In view of the un- satisfied needs of smaller firms, at least 58% of the proceeds of the loan would be channeled to industrial enterprises with total assets below US$300,000 equiv- alent. Estimated Cost: Local Foreign Total (US$ Million Equivalent) Construction and Installation 5.9 4.5 10.4 Imported Machinery (CIF) - 2.0 2.0 Imported Machinery Acquired Locally 7.5 12.5 20.0 Locally Manufactured Machinery 5.0 4.0 9.0 Working Capital 32.0 9.0 41.0 Technical Assistance 0.6 - 0.6 Total 51.0 32.0 83.0  - ii - Financing Plan: Local Foreign Total (US$ Million Equivalent) Bank - 32.0 32.0 CFP 8.0 - 8.0 Other Financial Intermediaries 19.0 - 19.0 Sub-borrower's own Funds 24.0 - 24.0 Total 51.0 32.0 83.0 Estimated Disbursements: FY81 FY82 FY83 (US$ Million Equivalent) Annual 13.0 14.5 4.5 Cumulative 13.0 27.5 32.0 Relending Terms: (a) US$31.4 million equivalent for fixed asset and working capital financing: (i) BR to CFP: repayable at such times as shall be required by BR to service the proposed Bank loan, at 21.25% p.a, on sub-projects located in Bogota, Medellin and Cali and at 20.75% p.a. on sub-projects located elsewhere.(*) (ii) CFP to its clients: repayable within 4-10 years (for fixed assets), or 3-5 years (for working capital), including 1-3 years of grace in both cases, at 26% p.a.(*) (b) US$0.6 million equivalent for technical assistance: (i) BR to CFP: repayable as in (a)(i) above, at 12% p.a. (ii) CFP to its clients: repayable within 4-10 years, including 1-3 years of grace, at 15% p.a. Procurement: As usual under DFC-type projects, there would be no inter- national competitive bidding. Most capital goods and materials would be purchased "off-the-shelf" from domestic distributors. Construction of industrial buildings would be by domestic firms. * Rates subject to review (see paragraph 44).  - 1ii1 - Consultants: Colombian consultants would principally be utilized for technical assistance to CFP and its clients. Rate of Return: Based on the experience with the first and second projects, the financial rates of return on the invest- ment projects to be financed by the proposed loan are expected to average between 15% and 20%. The economic rate of return would be higher since the project would generate substantial additional employment. Appraisal Report: No. 2626b-CO, dated March 20, 1980   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE LA REPUBLICA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A THIRD SMALL-SCALE INDUSTRY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Banco de la Republica with the guarantee of the Republic of Colombia for the equivalent of US$32.0 million to help finance a third small-scale industry project. The loan would have a fixed term of 17 years, including 4 years of grace, with interest at 8.25% per annum. The peso proceeds of the loan would be re-lent by the Banco de la Republica to the Corporacion Financiera Popular (CFP) as follows: US$31.4 million equivalent for fixed asset and work- ing capital financing at 20.5% or 21.25% 1/ per annum, depending on the location of the ultimate beneficiary; and US$0.6 mTllion for technical assistance financing, at 12% per annum. CFP's onlending rates to beneficiary firms would be 26% 1/ and 15% per annum, for fixed asset/working capital and for technical assistance subloans, respectively. PART I - THE ECONOMY 2/ 2. An economic report on Colombia (2535-CO) was distributed to the Executive Directors in June 1979. A small updating mission visited Colombia in mid-December and this section on the economy reflects its major findings. Country data sheets are provided in Annex I. Background 3. Colombia has made substantial progress over the past two decades in the transition from a predominantly rural and agricultural economy scattered among several isolated, but largely self-contained, regions to a more inte- grated, urban industrial economy. The productive base of the economy has been widened and diversified, and a modern sector relying heavily on imported inputs has developed. The country's external sector has been strengthened by the rapid growth of non-traditional exports. Fluctuations in domestic economic conditions resulting from unpredictable shifts in world coffee prices, while still considerable, have become more manageable. 4. Following several years of erratic economic growth and high unemploy- ment, the Colombian authorities introduced in 1967 a dramatic change in devel- opment policy, shifting emphasis from a protectionist policy of import substi- tution to measures designed to expand and diversify exports. With only minor 1/ Rates subject to review (see paragraph 44). 2/ This section is unchanged from that included in the President's Report for the Fifth Telecommunications Project (Report No. P-2683-CO, of March 10, 1980).  -2- modifications, this export promotion strategy remained in effect until the mid-1970s. These policies were successful in expanding non-coffee exports, thereby alleviating the foreign exhcange constraint to growth and making possible a higher level of investment. As a consequence, real GDP growth accelerated to an average 6.5% p.a. between 1968 and 1974, well above the historic average, and non-coffee merchandise exports rose nearly threefold. 5. Despite these advances, the economy showed signs of deteriorating by late 1974. This was largely the result of slower growth in the industrial economies, an inelastic tax system and imported inflation which led to a weakening of the public finances and balance of payments and an acceleration in domestic inflation. In addition, the country was faced with a pending loss of self-sufficiency in petroleum, its primary energy source. These develop- ments prompted the authorities to introduce a stabilization program, accom- panied by basic reforms of the fiscal, monetary and trade systems aimed at restoring the basis for accelerated long-term growth. Concurrently, petroleum pricing policy was modified to improve incentives for oil exploration and development and policies were initiated to reduce the subsidy on local consump- tion of petroleum products. These reforms were successful in improving the public finances and reducing inflation in 1975, but initially caused economic growth to slow (from 6.0% in 1974 to 3.8% in 1975) as the economy adjusted to the changing domestic and international circumstances. Recent Economic Developments 6. During the three years 1976-78 the Colombian economy was subject to severe inflationary pressures which caused the Government to focus economic policy on short term stabilization rather than on long term development issues. The origin of these pressures was the exceptionally high world coffee price prevailing during this period which caused Colombia's export earnings from coffee to increase to US$1.8 billion and US$2.1 billion in 1977 and 1978, respectively (from an average US$725 million in 1974-75), producing an unpre- cedented rise in incomes and internal demand. The supply of consumer goods, particularly of basic foodstuffs which was adversely affected by drought conditions in most of the country, lagged behind the growth in demand and inflation accelerated to the unprecedented rate of 44% in the twelve months ending June 1977, from 26% the preceding year. The authorities responded rapidly by introducing a broad range of fiscal, monetary and trade policies designed to gain control over the explosive increase in prices. As a conse- quence of these measures and of a favorable second semester harvest, inflation declined sharply throughout most of the following 18 months, with the annual inflation rate leveling off at 29% in 1977 and falling to 18% in 1978. 7. Because of the lack of dynamism in world markets and modest increases in domestic investment, the Colombian economy expanded only moderately in 1976 and 1977, with real GDP growing by 4.6% and 4.8%, respectively, in those two years. In 1978, however, real GDP rose by an estimated 8.5% in response to continued strong growth in aggregate demand, supported by expanded private investment financed increasingly through a rapidly growing extra bank market and by favorable agricultural conditions. Since growth was concentrated in the relatively labor intensive sectors of the economy--personal services,  -3- trade, transport and communications, and small-scale manufacturing and agri- culture--unemployment declined sharply during this period. In 1978, unemploy- ment in the four major cities averaged about 8% of the labor force, compared with an average of about 12% a few years earlier. Both the balance of payments and the public finances generated large current surpluses in the 1976-78 period. Largely as a result of increased coffee export receipts, Colombia's net official international reserves had risen from US$573 million at the end of 1975 to US$2.5 billion by the end of 1978, equivalent to about nine months imports of goods and non-factor services. This increase in reserves occurred despite nearly 12% p.a. real growth in imports and slow growth in manufactured exports. Curbs on public investment and higher revenues from the coffee tax and from earnings on international reserves made possible unprecedented overall surpluses in the public finances. 8. Despite continuation of the stabilization policies in effect since early 1977, inflationary pressures increased somewhat in 1979. A mild frost in Brazil's coffee areas caused world coffee prices to rise early in the year, resulting in an acceleration in reserve accumulation and in aggregate demand growth. Widening interest rate differentials favoring Colombia and real appreciation of the peso, generated short-term capital inflows, which, together with delays in import payments, led to further reserve increases. Receipts from illegal exports provided an additional source of funds for the already overly liquid economy. In all, net official reserves rose by approxi- mately US$1.6 billion for the year, reaching the equivalent of 11 months imports at year end. About mid-year the authorities issued a new series of short term securities carrying highly competitive interest rates in an effort to absorb some of the excess liquidity existing in the formal and informal credit markets. This issue, which represents a significant break with past open market operations that were not interest-competitive and forced onto financial institution portfolios, was successful in attracting funds equivalent to 5.4% -of the monetary base by year end, helping to reduce money supply growth (M2) in the formal market from 30% in 1978 to 24% in 1979. Nevertheless, large wage increases and higher energy costs, together with rapid growth in domestic demand, pushed inflation up to 30% for the year. Economic growth was strong again in 1979, with real GDP rising by an estimated 5.5%, and unemployment remained low. Inflation has slowed thus far in 1980 (on an annual basis the increase in the cost of living was 27.3% through February), and the Government is committed to reducing further the rate of inflation in coming months. Distribution and Welfare 9. The steady gains in per capita income, together with rapid rural/ urban migration and expanded employment opportunities for women over the past quarter century caused a dramatic drop in the crude birth rate. The achieve- ment of lower birth rates was facilitated by expanded family planning programs. Consequently, Colombia's population growth rate declined sharply, from over 3% in the late 1950s, to about 2.8% in the early 1970s and to an estimated 2.1% at present. Although 66% of the population lives in urban centers, there are now 22 cities with populations exceeding 100,000 persons. Some of the major cities have serious transportation, housing and urban congestion problems, however, and large numbers of persons live under poor conditions.  - 4 - 10. Available evidence suggests that the welfare of all income groups in Colombia has increased significantly since the 1950s and that the propor- tion of the population living in absolute poverty has declined. These gains were in part a consequence of reasonably good economic growth and of efforts to raise welfare through investment in health, education, low income housing, water and sewerage, and other social services. Existing data on income dis- tribution trends present a less clear picture. It is probable that some improvement occurred in income distribution between 1950 and the mid-1960s as a result of a strong shift of the labor force from rural areas to higher productivity jobs in urban industry and services and of relative wage gains for urban unskilled workers. Accelerated inflation through the early and mid- 1970s caused real wages to increase less rapidly than returns to non-labor factors of production. While the trends in income distribution during this period are unclear, it seems unlikely that any significant improvement occurred. Since 1977, however, rural wages have risen in real terms and unemployment has declined notably, supporting the presumption of some distributional improvement. Development Strategy of the Current Administration 11. The development strategy of the present Government is essentially unchanged from that of the previous administration, with the most significant variation being a greater emphasis on expanding economic and social infrastruc- ture. The key elements of this strategy are the promotion of non-coffee exports and investment, supported by measures to increase allocative and productive efficiency. Factor (particularly capital) and product markets are to be freed from unnecessary controls in order to increase efficiency and lower costs, and tariff and non-tariff barriers to imports are to be reduced to provide greater competition to domestic industry. These steps, along with periodic exchange rate adjustments as required by relative cost differences, tax rebates and favorable access to credit, are expected to provide the stimulus for rapid growth in non-coffee exports and in private investment. Public investment is to be accelerated, with particular stress on improving and extending the transportation network and on resolving the country's rapidly growing energy problem. Investments in transportation are expected to lower freight costs substantially and those in telecommunications to facilitate economic activity as well as to minimize the unnecessary use of transport; both are aimed at integrating regional growth centers into a national market. Complementary measures to encourage industry to locate outside the four major metropolitan areas have been introduced. 12. Raising investment and productivity in agriculture and industry are important objectives of the Government's plans to expand growth and employment. Substantial increases in credit are being provided to agriculture. Extension programs are to be expanded to cover larger numbers of small and medium scale farms and widened to include farm management and broader dissemination of crop research. Innovative programs such as the integrated rural development (DRI) and nutrition (PAN) projects financed by the Bank are expected to receive continued high priority. Low income rural areas are to be helped through rural electrification, health and education programs and through an expanded feeder roads program. Industry, which is experiencing high capacity utiliza- tion ratios because of lagging investment in recent years, is expected to  benefit from improved functioning of domestic capital markets, as controls are eliminated from these markets, and from increased incentives for exports as the real effective exchange rate recovers to pre-1976 levels. This, plus increased competition from imports as tariff and non-tariff barriers are lowered, should provide the stimulus for greater industrial investment and bring about more rapid technological change. 13. Projections of Colombia's energy balance indicate a rapidly growing deficit which is expected to reach significant proportions in the mid-1980s in the absence of an aggressive energy development program. High priority is being given to the development of additional energy resources in order to avoid the constraint on growth that large scale shortages of energy would entail. The strategy adopted is designed to reduce the country's dependence on petroleum as an energy source by developing substitutes. Major projects are being executed and others prepared to expand hydroelectric power genera- tion, and incentives are being given to private foreign companies for accel- erated exploration and development of the country's petroleum, coal and natural gas potential. Exports of coal and natural gas are expected to offset a large portion of the petroleum imports projected for the mid to late 1980s. Higher energy prices are expected to slow the growth in energy demand. While the total investment cost of future energy development is still being deter- mined, preliminary estimates indicate that the required investment could run as high as US$8.0 billion in 1979 prices over the next decade. Even under the most optimistic assumptions regarding development of energy resources, however, Colombia will continue to rely heavily on energy imports until the mid-1980s when exports of coal and natural gas begin to reduce the nation's net energy deficit. 14. With Colombia's long term growth prospects enhanced by the increased availability of foreign exchange and with inflation expected to moderate, the authorities are beginning to focus policies on a number of issues that need to be addressed if the country is to achieve its full growth potential and poverty is to be alleviated at a more rapid pace. These issues include the reduced competitiveness of Colombian goods in external markets brought about in recent years by the relatively high domestic inflation uncompensated by foreign exchange adjustments, and the slow modernization and lowered efficiency of domestic industry resulting from low investment levels and limited foreign competition. Public investment has not increased significantly in the past few years and domestic resource mobilization is still insufficient, particu- larly in comparison to the expansion required in public investment. While income distribution and welfare trends appear favorable, substantial efforts will have to be made to reduce the widespread poverty still existing in the country. 15. Economic policy is presently in a period of transition as the authorities attempt to combine stabilization and growth measures so as to arrest inflation while still permitting the economy to expand. Some advances have already been made in dismantling the existing stabilization program and in bring- ing about conditions favorable to increased investment and growth. For example, the 100% marginal reserve requirement imposed on commercial banks has been rescinded and the Government has taken a more active role in the capital market through open market operations. The transition process, however, has been  - 6 - moving slowly in certain respects and the Government recognizes the importance of acting quickly in finding appropriate solutions to these potential constraints to growth. Exchange rate adjustments are expected once again to become a tool of development, rather than a component of stabilization policy, and further measures to stimulate private investment and encourage technological change are proposed. As inflationary pressures continue to recede, controls on interest rates and credit, which have already been relaxed somewhat, are expected to be further reduced as are tariff and non-tariff barriers to trade. Such measures, once fully effective, could be expected to produce a sizeable jump in private investment and in economic efficiency. Delays in carrying out economic and social infrastructure investments could adversely affect growth of the pro- ductive sectors and reduce economic welfare. Thus public investment is to be accelerated at the maximum consistent with continued progress toward economic stability. The Government is particularly concerned with the slow growth of energy sector investment (with the exception of investment in hydropower). Although some progress has been achieved as capital outlays by foreign oil companies have risen as a result of more profitable wellhead prices and the growth in demand for petroleum products has been slowed by higher retail prices, the Government intends to advance development of the country's other energy resources, i.e., coal and natural gas. 16. Since in the absence of corrective measures both the current account of the balance of payments and public sector savings are expected to weaken over the next few years, mobilization of domestic resources to support the strong expansion required in public investment is likely to be a critical issue in carrying out the Government's strategy. The authorities are already moving ahead on this issue, having taken measures to improve tax administration and enforcement and to generate resources through large real increases in charges for public services. Additional tax measures will probably be needed, however. Capital market improvements, including realistic interest rates on savings deposits, are expected to stimulate private savings. These efforts are being complemented by measures to encourage the production of basic foodstuffs-- which weigh heavily in the consumer market basket--as a means of reducing infla- tionary pressures and moderating inflationary expectations, which should have a further favorable effect on savings. 17. Given the country's strong resource base and with continued sound economic management, Colombia is expected to achieve annual real GDP growth averaging about 6% during the 1980-85 period. However, because of the expected decline in coffee prices and with accelerating oil imports and the high import content of future investment, the current account of the balance of payments is expected to be in deficit throughout the early to mid-1980s. Colombia is expected, therefore, to centinue to be a large net importer of capital for some time to come. Even assuming that the Colombian authorities permit a drawdown of international reserves to the equivalent of three months' imports in the years immediately ahead, gross external capital requirements are projected at US$10 billion between 1980 and 1985, or an annual average of about US$1.7 billion. An increasing proportion of this capital inflow is expected to be provided by foreign commercial and financial sources.  18. Colombia's public external debt repayable in foreign currency amc .ed to an estimated US$4.4 billion at the end of 1978, equivalent to about 18% of GDP, of which US$2.8 billion was disbursed and outstanding. The Bank/IDA share of tbis external debt was 26.5% in 1978. Because of the expected decline in commitments from bilateral sources and corresponding recent acceleration in Bank lending, this slinre is expected to exceed 30% in the early 1980s, before falling to about 27% by 985. Although the public debt service ratio fell in recent years as export growth accelerated, this ratio is expected to increase from 10% in 1978 to about 15% in 1985. The World Bank's share in public debt service is expected to rise to 26% in 1985 from 24% in 1978. Balance of payments prospects beyond the early 1980s will depend heavily on the timely development of domestic energy sources and on progress made in executing several natural resource-based export- oriented projects currently under preparation. Given the expected continuation of sound economic and financial management and timely execution of the country's energy program, Colombia is considered creditworthy for the required external borrowing on conventional terms. PART II: BANK GROUP OPERATIONS IN COLOMBIA 19. The proposed loan, the 86th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$2,432.6 million (net of cancella- tions). Of this amount the Bank held, as of December 31, 1979, US$1,803.9 million; IDA made one credit of US$19.5 million for highways in 1961. Disburse- ments have been completed on 49 loans and the IDA credit. During 1972-77 disbursements averaged US$86 million equivalent per year, then declined slightly to US$74 million in 1978 but increased sharply to US$135 million in 1979. The improved performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures which should allow relaxation of fiscal restraint and the recent Bank leniding for infrastructure projects, all point to higher levels of disbursements in the future. IFC has made investments and underwriting com- mitments of US$53.9 million in 24 enterprises and, as of December 31, 1979, it held US$16.7 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of December 31, 1979. The Annex also contains summaries on the execution of the 34 ongoing projects. 20. In response to the priority objectives established by successive Governments (self-sustained economic growth, increased employment and improved income distribution), since 1966, Bank lending to Colombia has become increas- ingly diversified and has been concentrated on production-oriented programs and activities which emphasized social as well as economic benefits. All three loans for education have been made during this period, and so have twelve of the fourteen loans for industry, eleven of the thirteen agricultural loans, one loan for a nutrition project, two loans for urban development projects and all nine loans for water supply and sewerage. During the same period, fifteen loans were made in the power and transport sectors, while before 1966, twenty-two out of a total of twenty-five loans were made to these sectors. 21. Bank lending to Colombia in FY79 consisted of two loans each for water supply/sewerage and power, and one each for urban development, aviation development and agricultural credit, totalling US$311.5 million equivalent.  - 8 - In addition to the loan proposed in this report, the FY80 program includes already approved loans for a nickel project, telecommunications and power distribution, as well as proposed loans for vocational training, power genera- tion and distribution, further industrial credit, and secondary oil recovery and exploration. Work is also under way on projects for land settlement, agro-industries, railways, ports, feeder and rural roads, further mining development, power (including village electrification), irrigation, agricul- tural credit, water supply and sewerage, urban development and environ- mental improvement, for possible consideration by the Executive Directors during the next two years. 22. The proposed Bank lending conforms closely with the Government's development strategy which is attuned to the requirements of the era that began with the 1973 price rise of internationally traded petroleum. To help Colombia develop domestic sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank intends to assist the development of coal mines and petroleum, which hold potential in helping Colombia meet part of its energy requirements and in diversifying exports. Bank involvement in the energy sector would help mobilize additional external financing as some of the projects would require co-financing. Other future loans would finance agriculture and industry (including agro-industry) to assist the Government in its efforts to raise overall productivity, income and employment, and to strengthen and diversify exports. Closely related to these objectives would be the proposed Bank lending for transport infrastructure. In this context, the Bank is assisting the Government in preparing a rural and feeder roads project to integrate the more backward areas of the country into the modern economy. Other loans under preparation for ports and railroads are aimed at helping Colombia handle larger volumes of non-traditional exports and the imported inputs on which the modern sector of its economy relies for expansion. Lending for telecommunications would assist the Government in its efforts to integrate cities and towns into the national economy and reduce the congestion in existing networks. Finally, a relatively large number of loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. Lending for urban development and slum improve- ment, rural electrification, agricultural credit, land settlement, water supply and sewerage, irrigation and environmental improvement projects is principally designed to improve the standard of living of the poor. 23. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB, and other bilateral sources provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approximately 50% for the 1975-77 period and it is expected that during the period 1979-83 this share will decline further to about 38% of external capital requirements. Like the Bank, IDB has given increased emphasis to social projects and has financed projects in low cost housing, urban and rural development, agrarian reform, uniiversity education, water supply, rural electrification and land erosion control. In the future, it proposes to assist Colombia to develop sources of domestic energy and to expand the activity of the productive sectors to help generate increased employment. USAID has supported programs in education, urban development and small farm development, but is phasing out its aid program in Colombia over the next few years with about US$10 million remaining to be disbursed on previous loans. The Governments of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for social and regional integration projects.  - 9 - PART III: THE INDUSTRIAL SECTOR AND SMALL-SCALE INDUSTRY Growth, Structure and Employment 24. Manufacturing industry, which contributes about 20% of Colombia's GDP, is a leading growth sector. Between 1967 and 1977 manufacturing output grew by an average annual rate of 7%, a level unmatched since the 1950's and, after a slowdown in the 1974-77 period reflecting lower growth in the developed economies and domestic anti-inflationary programs, it rebounded to 8.5% in 1978. Even with the unprecedented increases in coffee prices, exports of manufactured goods rose to about 14% of total merchandise exports in 1977 from only 6% a decade earlier, and contributed strongly to the sector's growth. This export expansion was characterized by a remarkable diversification in the range of goods exported and in trade partners. Exports to Latin America, and particularly to Andean Pact countries, have increased very rapidly. 25. The five largest branches of Colombian industry are textiles, beverages, food products, chemicals and non-metallic minerals, which together account for more than 60% of value-added in manufacturing. The most rapid growth has taken place in textiles, with production doubling within five years. Intermediate goods output, in items such as paper, oil products, non-metallic minerals (particularly cement) and basic metals, have also grown rapidly. Colombia has achieved a substantial degree of import independence, with imports accounting for only about 20% of domestic consumption of manufactured products. 26. Rapid population growth and rural migration have resulted in con- tinuing high unemployment in urban areas (about 66% of Colombia's population is urban). The recent rapid industrial growth has made an important contri- bution towards alleviating this problem, helping to lower urban unemployment in the four largest metropolitan areas from an average 12% in the early 1970s to about 8% in 1978. Employment in manufacturing has grown between 4% and 5% annually since 1968, faster than the average annual rate of 3.5% characteristic of the 1953-63 period and 1.6% for the period 1963-68. This growth was largely the result of rapidly growing employment in non-durable consumer goods industries, particularly in the export sector. Compared to many other Latin American countries, industrial wages in Colombia are fairly low. While recently some of this comparative advantage may have been lost as a result of improve- ments in real wages, which had deteriorated until 1978, Colombian industry has remained competitive in the Latin American region where it sells the bulk of its exports. Small- and Medium-Scale Industry 27. Small- and medium-scale industry (SMI), defined as manufacturing firms with 5 to 99 workers 1/ represents about 92% of all manufacturing units, 1/ As yet, there is no generally accepted definition of small- or medium- scale industry in Colombia. For sectoral analysis purposes, the defini- tion adopted by DANE has been used above. The small- and medium-scale industry (SMI) selected as the target group for Bank lending in this project have been defined as enterprises with total assets not exceeding US$650,000 equivalent.  - 10 - employs 42% of the labor force in factory manufacturing, is responsible for 25% of manufacturing value-added and accounts for an estimated 25% of net industrial investment. Although widely distributed among all industrial subsectors, small- and medium-scale industry is particularly important in the production of non-durable consumer goods and, to a lesser extent, in the manufacturing of intermediate goods for large-scale enterprises. Foodstuffs (15%), apparel and footwear (16%), wood and wood furniture (7%), metal products (11%), printing (6%), non-electrical equipment (3%), textiles (4%), and transportation equipment (7%) accounted for almost three-fourths of small- and medium-scale industrial establishments in 1975 and the first four of these sub-sectors provided about 50% of SMI employment. 28. Colombia's mountainous terrain and widely distributed population have encouraged the development of independent local and regional markets. The small size of these markets and the high cost of internal transport provide SMI with a competitive advantage vis-a-vis the more centrally located firms in industries not requiring large scale production. Over three-fourths of SMI firms are located outside the Bogota area. As stated, SMI is also an important supplier of intermediate inputs to large industry. In this comple- mentary role, SMI has tended to specialize and, therefore, has been successful in withstanding competition from the large industrial enterprises. 29. From available statistics, firms classified as SMI appear to have had moderate economic performance during the 1970s, with employment rising between 1970 and 1975 at an average annual rate of 3.2%, while firms classified as larger enterprises recorded employment growing at 7.5%. However, these figures are misleading as firms can change their statistical classification through expansion or contraction. A sample study by DANE indicates that the growth of SMI firms over time, in some cases leading to their classification in later years as "large" industry, played a major role in the growth of total industrial employment between 1970 and 1975. Since average labor productivity in SMI has been low, 40-50% below that of large industry, increases in output have been brought about by additional employment. 30. Several factors limit the growth of small- and medium-scale industry, chiefly insufficient credit and inadequate technical assistance. Other problems include the inherent difficulties common to small- and medium-scale industry in most developing countries, such as deficient management skills, inadequate technology, obsolete machinery, crowded workshops, shortage of qualified technicians, lack of quality control, inadequate raw material supply and low capacity utilization in some branches. Also, Government policies toward small- and medium-scale industry have not always been clearly defined or well coordinated. However, the 1975-1978 Development Plan and the present Government (see paragraphs 11 and 12 of this Report) amply recognize the importance of SMI through improvements in urban infrastructure and in the allocation of credit. The proposed project would assist the Government in its efforts to increase the availability of credit and technical assistance to small- and medium-scale industrial enterprises.  - 11 - Industrial Credit 31. Colombia's relatively well diversified financial system includes twenty-six comnercial banks (three of which are Government owned), thirty-LV private investment banks ("Financieras"), one public industrial development bank (IFI), one LJrtgage bank, several savings and loan associations and mutual funds, and stock exchanges in Bogota and Medellin. The credit alloca- tion has traditionally favored agriculture, housing and the public sector, with the result that private industry and commerce have had to pay substan- tially higher interest rates than other sectors and have faced frequent shortages of credit for both short- and long-term purposes. Larger firms have been able to expand through internal cash generation and by making use of institutional sources of medium- and long-term credit and funds provided by the extra-banking market. Private institutional credit is supplemented by several specialized rediscount facilities. The most important of these for industry are: (i) the Private Investment Fund (FIP), established within the Banco de la Republica (BR) in 1963 with cooperation from the Bank, which has attracted external financing mainly from the United States, the Netherlands, and the Inter-American Development Bank; (ii) the Fondo Financiero Industrial (FFI), also at BR, which makes loans to small-scale industry (SSI); and (iii) the Fondo de Promocion de Exportaciones (PROEXPO), which provides primarily export credit. Also, the state-owned Agricultural, Industrial and Mining Bank (CAJA) provides limited credit to the lower spectrum of SSI. Defective accounting and the lack of a solid asset base to offer as collateral make it difficult for SMI to have access to credit available from commercial sources. As a result, SMI has had to rely heavily on the extra-bank market and thus has found it even more difficult and expensive to undertake necessary borrowings than is the case for large-scale industry. 32. The cost of industrial credit varies greatly according to source. Maximur nominal interest rates are established by the monetary authorities but financial intermediaries, through additional charges and collection of interest in advance, increase the effective cost of borrowing by 2-6 percentage points. At present, effective interest rates of short-term commercial bank lending range from 35% to 40% per annum. On medium- to long-term loans, CAJA is offering the lowest nominal rates to SSI at 16%-20% per annum but on a rela- tively small lending volume, followed by FFI's and CFP's rates ranging from 23% to 29% and IFI's at 26% per annum. DFCs now charge from 25% to 29% per annum for long-term funds in local currency and up to 40% per annum for short-term working capital loans. 33. During 1973-78 the consolidated outstanding portfolio of the finan- cial system grew at an average of 4.1% per annum in real terms, somewhat below the average 5.5% GDP growth rate over the same period. This limited growth, however, has been subject to short-term fluctuations as a result of Govern- ment policies designed to arrest inflation (see paragraphs 6 and 15 of this Report). On the other hand, industrial credit expanded at only 1.8% per annum in real terms, over the same period. SMI's share of total industrial credit has fluctuated from a high of 13.2% in 1970 to a low of 9.8% in 1973, after which it increased steadily to reach 11.5% in 1978. Even this share -- modest when compared with SMI's 25% share of both industrial investment and output -- has been difficult to come by, under pressure from recurrent credit  - 12 - restrictioins. In cosnnection with the second Bank loan for small-scale indus- try, the Government increased FFI's resources and made a special contribu- tion to CFP's equity and total resources. The flow of these additional resources, however, was uneven and this prevented both CFP and its clients from planning their expansion with reasonable certainty. The Government and the Bank have reached agreement during negotiations on increases of at least Col$150 million per annum in the domestic resources to be made available to CFP during 1980-82. one third of this amount would be in the form of equity, with at least Col$75 million to be paid-in by December 31, 1981. The balance would be provided oIn terms compatible with CFP lending terms to SSI. These contributions, which would be equivalent to about 25% of the proposed Bank loan, would be in addition to resources utilized by CFP during 1979 (see Section 2.02, draft Guarantee Agreement). Teclnical Assistance 34. There are several institutions rendering technical assistance to smaller industrial firms, but their programs focus on general managerial and vocational training and provide little specialized consulting. By far the most important and comprehensive programs are offered by the Servicia Nacional de Aprendizaje (SENA), a Government institution charged with improving skills of workers and managerial competence of entrepreneurs. The Fundacion para el Fomento de la Investigacion Cientifica y Tecnologica (FICITEC), a semi-private non-profit consulting institution, is providing commendable managerial, marketing, planning and production assistance to solve specific problems of individual firms, but the volume of its assistance (about 25 companies a year) is small. CFP also provides technical assistance to small- and medium-scale industry. Since mid-1975, CFP's technical assistance has improved significantly with the assistance of USAID, UNIDO and the Bank. In general, however, technical assistance programs for small- and medium-scale industry are implemented randomly, with little coordination and are not tailored to the specific problems of each firm; therefore, they have limited impact. Private consultants' services, which are readily available in Colombia appear better suited to solve specific problems but are generally perceived by SSI management as too costly and, consequently, are seldom used. Most SSI firms, however, are confronted with fairly basic production, accounting and marketing problems and can still benefit from basic technical assistance programs designed to overcome the most commonly prevalent problems in the subsector. These programs can be best organized by official institutions and delivered at a more affordable cost to SSI than private consultants' services. The indispensable requirement, though, is that official programs be based on actual day-to-day problems faced by SSI. The matter has been discussed during negotiations and, as a result, agreement has been reached on a state- ment of CFP's technical assistance strategy, to be implemented through annual technical assistance plans, which would, inter alia emphasize cooperation at the regional level between CFP and SENA. These plans would be prepared by CFP and reviewed annually by the Bank (See Section 2.07, draft Project Agreement).  - 13 - Experience Under the First Two Bank Loans 35. The first Bank loan for an SSI project, in Colombia and in Latin America, was made for the equivalent of US$5.5 million (Loan No. 1071-CO, January 1975). The second loan in Colombia was for US$15 million equivalent (Loan No. 1451-CO, June 1977). Both loans were made to Banco de la Republica (BR), with the guarantee of the Republic of Colombia, and their proceeds were re-lent by BR to CFP. A Project Performance Audit Report (No. 2645) on the first loan was distributed to the Executive Directors on September 6, 1979. The Report observed that the economic benefits expected from the investments financed under the loan had been fully realized and CFP's organi- zation had been substantially streamlined. It commended the Bank for concen- trating on the lower range of SMI, noting particularly the favorable employment impact of such investments. It recommended upgrading the quality and coverage of technical assistance to SSI. This point has been addressed under the aforementioned second loan and complementary measures would be taken as part of the proposed project (paragraphs 34 and 41 of this Report). 36. Upon completion of the second project (around June 1980), about 850 industrial enterprises will have received financial assistance from the Bank. The ultimate beneficiaries conform closely to the intended target group; two-thirds had total assets of less than US$85,000 equivalent and employed fewer than 25 workers. The average subproject cost was US$55,000, of which, on average, the Bank funds financed 39%. It is estimated that about 5,000 direct jobs will have been created by the investment financed with the two bank loans, with an average investment of about US$9,000 (in 1976 terms) per job, which is reasonable in light of Colombia's urban conditions. PART IV - THE PROJECT 37. The project was appraised during April/May 1979. Negotiations were held in Washington during January/February, 1980, with representatives of the Ministry of Finance, BR and CFP. The Staff Appraisal Report (No. 2626b-CO, of March 20, 1980) is being distributed separately to the Executive Directors. 38. The proposed project aims at assisting CFP to expand its credit and technical assistance to small- and medium-scale enterprise (SMI) in order to support the Government's objective of increasing employment and promoting more balanced regional growth. 1/ The project would provide financing to some 1,500 SMI enterprises to carry out productive investments. It is estimated that the project would create some 6,000 to 7,500 new direct jobs with another 2,000 jobs created indirectly through forward and backward linkages. About 70% of the sub-loans would be made outside the three large industrial centers (Bogota, Medellin and Cali), thus fostering new economic activity in several regions. The project would also have an important role in institution building as it would continue the work of strengthening CFP started under the first two loans. 1/ See footnote 1/ to paragraph 27 of this Report.  - 14 - Project Description, Cost and Financing 39. The proposed Bank loan would support investments by small- and medium-scale enterprises costing, on average, US$55,000 equivalent and requiring, in the aggregate, investments of approximately US$82.4 million equivalent over the next two-and-a-half to three years. Based on the results achieved under the first two loans, the foreign exchange cost is estimated at US$32 million or 39% of total project costs. The proposed Bank loan of US$32 million would cover all the foreign exchange cost. CFP would contribute US$3.5 million equivalent from new share capital increases and an additional US$4.5 million equivalent borrowed locally, or a total of about 9.6% of total costs. Of the remainder, financial intermediaries would provide about US$19 million equivalent (23%) and ultimate beneficiaries US$24 million equivalent (29%). 40. The proposed Bank loan would be divided into two components. The first one, for fixed assets and working capital financing, would amount to US$31.4 million equivalent. This amount would be allocated as follows: (a) US$13.2 million equivalent to firms with total assets not exceeding US$650,000 equivalent; (b) US$13.2 million equivalent to firms with total assets not exceeding US$300,000 equivalent; and (c) US$5.0 million equivalent to firms with total assets of less than US$100,000, located outside the areas of influence of Bogota, Medellin and Cali. Thus, 58% of this component would be allocated to the smaller firms and the remainder would be available to medium size firms which are generally not served through the Bank loans to private DFCs. Up to US$2 million of the amounts respectively allocated to categories (a) and (b) above, would be available to finance permanent working capital needs arising from the proposed investment, but not in excess of 30% of the corresponding subloan, whereas in category (c), up to 100% of each subloan would be eligible to finance permanent working capital needs (Section 3.02(a)(ii), (iii) and (iv), draft Loan Agreement and paragraph A.2(iv) of the Schedule to the draft Project Agreement). In recognition of the particular problems confronting SSI in this respect, up to 28% of the proposed loan would be available to finance working capital. Given the large number of subloans envisaged (about 1,500) the Bank loan would not be repaid in conformity with the aggregate amortization of the individual subloans but in equal instalments over a fixed 17-year term, including four years of grace. 41. The second loan component, equivalent to US$0.6 million, would be available to finance technical assistance to SSI (US$0.5 million equivalent) and to CFP (US$0.1 million equivalent). The Bank's experience with its second SSI project indicates that these amounts would be adequate to meet the internal needs of CFP and of about 10% of its borrowers which are expected to undertake financial, managerial or production improvements in their businesses. However, should circumstances demonstrate otherwise, the amounts allocated for investment lending and for technical assistance could be redistributed as agreed between the Bank and BR (see Section 3.02(a)(i), draft Loan Agreement).  - 15 - Technical assistance to CFP would concentrate on (a) further computerization (started as part of the second project) of information services, and (b) insti- tutional upgrading, particularly as regards technical assistance to CFP's clients (see paragraph 34 of this Report). Any contract to be entered into by CFP for this purpose and to be financed out of the proposed loan would be subject to Bank approval (Section 2.03(b), draft Loan Agreement). Relending Terms and Conditions 42. As borrower, BR would assume the foreign exchange risk on the proposed Bank loan and would re-lend its peso equivalent to CFP for the same period as the Bank loan, pursuant to a Subsidiary Loan Agreement satisfactory to the Bank. CFP would pay to BR (a) 21.25% per annum on funds lent to SMIs located in the areas of influence of Bogota, Medellin and Cali, and (b) 20.75% per anum on funds lent to SMIs located elsewhere in Colombia. The resulting larger spread to CFP is intended to encourage increased financial assistance to industries located outside the main metropolitan areas. Whenever interest rates of sub-loans are revised (see paragraph 44 below), the rates on the subsidiary loan to CFP would be revised accordingly to assure CFP spreads of, respectively, 4.75 and 5.25 percentage points. Funds for technical assistance would be lent to CFP at 12% per annum. 43. CFP's subloans to SMI for both investment and technical assistance would be made for terms ranging from four to ten years, including one to three years grace, except that subloans made exclusively to finance permanent working capital (see paragraph 40 of this Report) would be for three to five years, including one to three years grace. The limit for investment sub-loans not requiring the Bank's prior approval would be US$100,000 equivalent, as it was under the second loan and it is estimated that this would permit Bank prior review of about 15% of the lending component. For technical assistance sub-loans, the corresponding free-limit would be US$20,000. Adequate assurances on the lending terms described in the last two paragraphs have been obtained (see Schedule to the draft Project Agreement). 44. Loans for fixed assets and working capital would carry a nominal interest rate of 26% per annum. (The effective interest rate would be between 2 and 5 percentage points higher since interest is collected quarterly in advance.) During 1979 prices were on average 24.8% above those of 1978 (29.8% from December 1978 to December 1979). Inflation is expected to fall gradually during the commitment period of the proposed Bank loan and, therefore, the nominal rate of interest on funds committed during this period is expected to be substantially positive in real terms. Nevertheless, as such estimates are inevitably conjectural, agreement has been reached to maintain the nominal interest rate on this type of subloan under review throughout the commitment period of the loan. This review would be undertaken twice a year by BR, in consultation with the Government. BR has advised the Bank that it intends to maintain the interest rate positive in real terms (see paragraph 58 of this Report). Should the Bank have objections to any rate thus fixed, the Govern- ment, the Bank and BR would review the matter jointly and, should they fail to reach agreement on the interest rate level within the next 60 days, the Bank would be entitled to stop approving or authorizing investment projects submitted by CFP until such agreement is reached. This is a modified version of the  - 16 - system agreed in connection with the Bank's seventh DFC project (Loan 1598-CO, June 1978) and places greater responsibility for relending terms on the Colombian authorities while retaining sufficient safeguards for the Bank. Adequate assurances have been obtained in this case (see Section 3.03, draft Loan Agreement). On the other hand, all technical assistance subloans would be made at a nominal interest rate of 15% per annum. Project Execution and Organization 45. CFP would be responsible for the appraisal and supervision of subloans, and for providing or making arrangements for technical assistance when required by its borrowers. Banco Popular, a Government-owned commercial bank, founded CFP in 1967. As of December 31, 1978, CFP's paid-in capital totalled Col$478 million. Banco Popular and its subsidiary Corporacion de Ferias y Exposiciones, which is responsible for commercial exhibitions and conventions, held 35%; the Government (through the Ministry of Development and its agency, PROEXPO, which is responsible for export promotion and financing) 64%; the Institute of Industrial Development (IFI) and the private sector held the remainder. 46. CFP's Board is headed by the Minister of Development ex oficio and includes six other members and seven alternates from the Government, the industrial community, and national technical assistance and export-import institutions. The Board actively guides CFP's policies and operations. The Board-appointed Loan Commmittee is empowered to: (i) approve operations between Col$600,000 and Col$5 million; and (ii) make recommendations to the Board on all larger requests. Also, in response to the Government's decentral- ization policies and to cope more efficiently with the increasing business volume, CFP established in 1976 Regional Advisory Boards for each of its branch offices to: (i) review and approve credit applications between a minimum of Col$350,000 and a maximum of Col$l million depending on each location; and (ii) orient the activities of regional offices and provide operational assistance to them. 47. CFP's operations are governed by its Statutes and its Statement of Operating Policies. During negotiations, it was agreed that CFP's Statement of Operating Policies and Procedures would not be modified if in the Bank's judgement such modification adversely affected CFP's operations (Section 5.01(e), draft Loan Agreement). As regards the financing of industrial buildings, agreement has been reached on an amendment to the Statement, to be enacted as a condition of loan effectiveness, providing that CFP financing should be used only in the construction of productive facilities, outside the area of influence of Bogota, Medellin and Cali (Section 6.01(e) draft Loan Agreement). 48. CFP's branch network grew from nine to fourteen during 1975; further increases in the number of regional offices are not contemplated. CFP's staff is relatively inexperienced but most department managers have served at least three years with CFP and, on the whole, the staff possess the basic knowledge a-d skills necessary to carry out their tasks. Professional staff grew from 6. in 1974 to 129 at the end of 1977 and has remained at that level since. the past, management and staff turnover has been a problem for CFP, with  - 17 - considerable detriment to the continuity of a number of CFP's programs, particularly technical assistance. However, the new management which took over CFP with the change of government in August 1978 has decreased turnover by raising salaries and promoting from within. 49. During 1974-78 CFP's assets, financial expenses and gross income grew at an annual rate of about 40% in nominal terms (or about 13% per annum in real terms). At the time the second loan was made, CFP undertook to reduce its administrative costs from 7.8% of average total assets to 5.8% by 1981. This objective was reached in 1978 but it had a cost in terms of CFP's ability to discharge its development role, particularly regarding technical assistance. As operations and assets grow, CFP should be able to achieve greater economies of scale on administrative costs and fulfill its functions without a relative increase in operating expense. However, in order to assist CFP to meet the start-up costs of its expanded technical assistance operations (see paragraph 34 of this Report) and a somewhat lower than expected growth of portfolio in 1980, agreement has been reached with CFP on maintaining administrative costs at not more than 7.5% of average total assets in 1980, 6.9% in 1981 and 6% in 1982 and onwards (Section 3.07(b), draft Project Agreement). 50. One of the consequences of high staff turnover has been a relative decline in the quality of subproject appraisal where generally more emphasis has been placed on the existing enterprise than on the incremental effects of the proposed investments. UNIDO's technical assistance (see paragraph 34 of this Report) includes a review of CFP's credit regulations and proce- dures with the objective of (i) requiring a judgement from the credit analysts on the proposed investments, (ii) improving the financial and market analysis, and (iii) streamlining the appraisal process. Approval by CFP's Board of Directors of revisions to CFP's credit regulations and procedures, satisfactory to the Bank, would be a condition of effectiveness (Section 6.01(d), draft Loan Agreement). The quality and scope of supervision has been mainly a reflection of CFP's management concern over portfolio quality and arrears (see paragraph 52 of this Report). Informal supervision works acceptably well in small cities, but an improved, more systematic effort is needed in the larger urban centers where personal knowledge of numerous clients is clearly imprac- tical. Financial Performance 51. CFP's local resources have originated mainly from PROEXPO, Banco Popular and FFI. External resources have come from USAID, KfW, IDB, and the Bank. CFP equity has grown from Col$67 million to Col$517 million during 1972-78, or an increase of almost eight times in seven years (about 13% per annum in real terms), achieved, in part at least, as a result of agreements reached with the Bank in connection with the previous two loans. Agreements reached in connection with the proposed third loan (see paragraph 33 of this Report) would add another Col$450 million in new domestic resources during 1980-82. However, despite the agreed equity component (Col$150 million) of such contributions, CFP's debt/equity ratio is expected to grow from 2.6:1 in 1978 to the 5.5:1 limit agreed with the Bank in connection with the second loan. Increased lending during 1980-82 would be financed primarily from external sources (Bank, 60%), while increases in net worth would contribute  - 18 - only 9%. The resulting debt service burden and the relatively narrow profit margins usually associated with SSI lending make it advisable to establish the debt/equity ratio limit at 6:1 and assurances have been obtained to that effect (Section 3.04, draft Project Agreement). 52. Despite short-term fluctuations in resource availability, CFP's portfolio has grown rather steadily at about 40% per annum (or about 13% per annum in real terms) since 1974. This appears in line with the growth of CFP's equity (see paragraph 51 of this Report) and considerably better than the financial system as a whole (see paragraph 33 of this report). CFP pro- jections indicate a 5% annual portfolio growth in real terms over 1978-82, which appears somewhat conservative in the face of projected GDP growth of about 6% per annum during the same period. Arrears, which in the past were a reason for concern to the Bank, represented, at end 1978, 10.5% of the port- folio, while provision for bad debts stood at 3.5% of total portfolio or 31% of the portfolio in arrears. These figures are considered acceptable for a lender to SSI. CFP's gross income has also risen at about 40% per annum in nominal terms (or about 13% per annum in real terms) during 1974-78. Profits after taxes rose from 0.8% to 2.0% of average equity between 1976 and 1978. Net profits after taxes are projected at 7% of average equity for 1979. Thereafter, however, income growth is expected to be balanced out by growth in administrative and financial expenses and result in projected net profits after taxes of about 5% to 6% of average equity during the period 1980-82. Procurement and Disbursement 53. As is customary in this type of project, procurement of goods and services would not be subject to competitive bidding. Except for some direct imports, sub-borrowers would obtain most of the capital goods "off-the-shelf" from Colombian suppliers or local distributors of foreign suppliers. Competi- tion appears sufficient to ensure reasonable prices. Colombian suppliers of the type of equipment to be financed out of the proposed loan do not enjoy high levels of effective protection from imports. The local construction industry is also efficient and competitive. Practically all consultant services are expected to be provided by Colombian firms. Agreement has been reached that CFP's subloan documents will include adequate rights for CFP to ensure that goods and services financed out of the proposed loan will be procured at reasonable prices, taking into account such relevant factors as time of delivery, efficiency and reliability of goods, availability of mainte- nance services and spare parts and the quality and competence of those render- ing services. (Paragraph A.2(viii), Schedule to the draft Project Agreement). 54. The Bank loan would be disbursed against (a) 100% of the foreign expenditures on directly imported goods, or (b) up to 100% of the amounts (i) spent by CFP in consultants services to CFP or (ii) disbursed by CFP under subloans for investment projects or for technical assistance, but not in excess of 90% of the cost of specific goods and services required for any investment project. In the case of finished industrial buildings, Bank financing would be limited to facilities in the Rionegro industrial park, a venture 85% of which is presently owned by CFP, and the maximum disbursement would be 70% of the reasonable purchase price of facilities at said park. The above arrangements are intended to ensure that, without detriment to CFP's  - 19 - operational flexibility, in all cases domestic funds are also avai .able to finance the investment project in question. Adequate assurances have been obtained in respect of these matters (Section 2.02(a), draft Loan Agreement). 55. Due to the large number of subloans, CFP would continue to submit proposals below he free limit (US$100,000 equivalent) on a monthly basis and those above the free limit on an ad-hoc basis. In order to streamline the procedures followed in the first two loans, CFP's requests for disbursements would be sent directly to the Bank, with copies to BR; loan disbursements, though, would be made to BR, as borrower of the proposed loan. Disbursements for the direct acquisition of imported goods would be made against the usual purchase and shipping documents submitted to the Bank; all other disbursements would be made against CFP's certified statements of expenditure and supporting evidence would be retained by CFP for inspection by Bank supervision missions. Adequate assurances have been obtained in these respects (Sections 2.02 and 2.03, draft Loan Agreement and Section 2.02, draft Subsidiary Loan Agreement). Disbursements are expected to be completed within FY83, substantially as estimated in page ii of the Loan and Project Summary of this Report. Benefits and Risks 56. The economic and social benefits resulting from the project would be substantial. Based on the results of the first two projects, it is estimated that the project would help foster 6,000-7,500 direct employment opportunities, with another 2,000 created indirectly through forward and backward linkages. The average investment cost per job created as a result of the project is expected to be around US$11,000 (in 1976 prices), roughly comparable in real terms to the investment cost per job under the second project. This figure is about half of the estimated marginal investment cost per job for the Colombian industrial sector as a whole. Most significantly, the project would provide credit to a group that has been generally denied access to term financing, help develop local management capacity and contribute to the broadening of business ownership in Colombia, while creating new employment and income opportunities for workers on the lower levels of the income distribution scale. Given the expected wide geographical distribution of subloan recipients, the project would also support the Government's policies to achieve a more balanced regional development and decentralize economic growth. As borne out by the results achieved under the first two loans, the financial rates of return on the investment projects to be financed by the proposed loan are expected to average between 15% and 20%. The economic rate of return would be higher since the project would generate substantial additional employment, as noted above. 57. The project is technically feasible and does not represent any unusual risk. One uncertainty is whether the project may be implemented in the time proposed should CFP be unable to mobilize the required local currency resources as anticipated. However, given the assurances obtained from the Government that adequate additional funds will be obtained in a timely fashion (see paragraph 33 of this Report), it is expected that the project will be carried out within the intended period.  - 20 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 58. The draft Loan Agreement between the Bank and Banco de la Republica, the draft Guarantee Agreement between the Republic of Colombia and the Bank, the draft Project Agreement between the Bank and the Corporacion Financiera Popular, the draft Subsidiary Loan Agreement between Banco de la Republica and Corporacion Financiera Popular, the statements of the Borrower concerning its interest rate policy, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 59. Special conditions for the proposed loan are listed in Section III of Annex III. A special condition of effectiveness would be that BR and CFP have entered into a Subsidiary Loan Agreement (Section 6.01(b), draft Loan Agreement). 60. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 61. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments March 31, 1980  - 21 - ANNEX I COLOMBIA - SOCIAL INDICATORS DATA SHEET Page 1 of 5 LANDDALEA(THOUSABDIA. KM.)REFERENCE GROUPS (ADJUSTED Ay.ERAGES LAND AREA (THOUSAND SQ. 1XM.) C0LOHJI- MOST RECENT ESTIMATE) - TOTAL 1138.9 SAME SAME NEXT HIGHER AGRICULTURAL 225.6 MOST RECENT GEOGRAPHIC INCOME INCOME 1960 /b 1970 /b ESTIMATE /b REGION /c GROUP /d GROUP /e GNP PER CAPITA (USS) 240.0 380.0 870.0 1124.4 1097.7 1942.6 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 491.0 606.0 685.0 943.1 730.7 1646.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 15.8 21.3 24.6 URBAN POPULATION (PERCENT OP TOTAL) 48.2 59.8 65.5 59.3 49.0 51.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 38.0 STATIONARY POPULATION (MILLIONS) 55.0 YEAR STATIONARY POPULATION IS REACHED 2065 POPULATION DENSITY PER SQ. KM. 14.0 19.0 22.0 23.5 44.6 28.2 PER SQ. KM. AGRICULTURAL LAND 71.0 93.0 109.0 80.5 140.7 100.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 46.0 46.8 38.0 40.9 41.3 35.4 15-64 YRS. - 51.0 50.5 59.0 54.4 55.3 56.3 65 YRS. AND ABOVE 3.0 2.7 3.0 3.9 3.5 5.1 POPULATION GROWTR RATE (PERCENT) TOTAL 3.1 3.0 2.1 2.4 2.4 1.7 URBAN 6.01 5.2 3.9 3.7 4.5 3.0 CRUDE BIRTH RATE (PER THOUSAND) 46.0 36.0 30.0 32.8 31.1 27.5 CRUDE DEATH RATE (PER THOUSAND) 14.0 11.0 6.0 8.5 9.2 9.1 GROSS REPRODUCTION RATE 3.2 3.2 1.8 2.4 2.2 1.8 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115.4 263.8 USERS (PERCENT OF MARRIED WOMEN) .. .. 48.6 17.7 34.7 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 97.0 99.0 107.0 99.4 104.4 102.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 94.0 92.0 94.0 /k 107.0 105.3 120.8 PROTEINS (GRAMS PER DAY) 50.0 51.0 45.5 7k 60.4 64.4 80.9 OF WHICH ANIMAL AND PULSE 28.0 29.0 36.8 /1 28.3 23.5 31.3 CHILD (AGES 1-4) MORTALITY RATE 17.0 13.0 9.0 6.7 8.6 5.1 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 53.0 58.5 62.0 63.6 60.2 65.6 INFANT MORTALITY RATE (PER THOUSAND) .. .. 98.0/ 76.1 46.7 45.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 63.0 64.0 63.4 60.8 69.4 URBAN .. .. 73.0 79.5 75.7 85.1 RURAL .. .. 46.0 38.6 40.0 43.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 47.0 48.0 58.8 46.0 70.1 URBAN .. 75.0 73.0 77.8 46.0 88.3 RURAL .. 8.0 13.0 24.5 22.5 33.2 POPULATION PER PHYSICIAN 2400.0 2170.0 1820.0 1841.9 2262.4 1343.2 POPULATION PER NURSING PERSON 3740.0 2040.0 .. 933.7 1195.4 765.0 POPULATION PER HOSPITAL BED TOTAL 580.0 510.0 530.0 563.4 453.4 197.6 URBAN .. .. 320.0 279.4 253.1 260.2 RURAL .. .. 9670.0 1140.9 2732.4 1055.0 ADMISSIONS PER HOSPITAL BED .. 23.0 25.0 25.7 22.1 17.3 NOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 6.0 5.7/J 5.0 5.3 4.7 URBAN .. .. 5.5J; 4.8 5.2 4.4 RURAL .. .. 5.9J 5.3 5.4 5.1 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. 1.8/d 1.3 1.9 1.1 URBAN .. .. 1.6 1.3 1.6 1.2 RURAL .. .. 2.4 1.5 2.5 1.2 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 47.0/f .. 58.1/ 54.3 50.0 66.0 URBAN 83.07 .- 87.5T 80.1 71.7 85.1 RURAL 8.07 .. 13.2 14.2 17.3  - 22 - ANNEX I COLOMBIA - SOCIAL INDICATORS DATA SHEET Page 2 of 5 COLOMBIA REFERENCE GROUPS (ADJUSTED Ay1RAGES - MOST RECENT ESTIMATE) - SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 /b 1970 /b ESTIMATE /b REGION /c GROUP /d GROUP /a EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 77.0 100.0 106.0 07.3 102.5 101.7 MALE 77.0 98.0 103.0 109.1 103.6 110.0 FEMALE 77.0 102.0 109.0 107.4 97.1 92.8 SECONDARY: TOTAL 12.0 23.0 35.0 40.5 33.5 51.2 MALE 13.0 23.0 35.0 40.4 38.4 56.4 FEMALE 11.0 22.0 35.0 39.0 30.7 43.7 VOCATIONAL ENROL. (X OF SECONDARY) 31.0/h 21.0 17.0 1.5 11.5 18.3 PUPIL-TEACHER RATIO PRIMARY 38.0 38.0 30.0 37.1 35.8 27.1 SECONDARY 11.0 17.0 19.0 17.9 22.9 25.3 ADULT LITERACY RATE (PERCENT) 63.0 73.0 81.0 77.4 64.0 86.1 CONSUMPTION PASSENCER CARS PER THOUSAND POPULATION - 7.0 11.0 16.5 29.1 13.5 53.4 RADIO RECEIVERS PER THOUSAND POPULATION 139.0 105.0 119.0 172.1 122.7 225.9 TV RECEIVERS PER THOUSAND POPLLATION 11.0 38.0 51.0 67.9 38.3 102.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 56.0 69.0 76.1 40.0 78.5 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 6.8 4.2 3.7 3.6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 5100.0/f 6200.0 6700.0 FEMALE (PERCENT) 18.9 24.6 24.6 21.5 25.0 24.5 AGRICULTURE (PERCENT) 51.4 37.9 31.0 30.2 43.5 28.9 INDUSTRY (PERCENT) 19.2 21.0 23.0 23.8 21.5 30.6 PARTICIPATION RATE (PERCENT) TOTAL 30.6 29.7 29.7 30.9 33.5 33.8 MALE 49.8 44.9 44.7 47.3 48.0 51.3 FEMALE 11.6 14.6 14.6 13.3 16.8 16.3 ECONOMIC DEPENDENCY RATIO 1.7/f 1.7 1.6 1.5 1.4 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 41.2/f i 31.9/i .. 23.7 20.8 HIGHEST 20 PERCENT OF HOUSEHOLDS 67 7/f i 60.17i .. 58.7 52.1 57.6 LOWEST 20 PERCENT OF HOUSEHOLDS 2.17Tf 3.5/i .. 2.9 3.9 3.4 LOWEST 40 PERCENT OF HOUSEHOLDS 6.87 10.1/i .. 9.9 12.6 11.0 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 214.D 265.6 270.0 RURAL .. .. 197.0 185.1 183.3 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 267.0 396.3 282.5 550.0 RURAL .. .. 122.0 308.1 248.9 403.4 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 34.0 35.2 20.5 RURAL .. .. .. 46.6 35.3 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1977. /c Latin America & Caribbean: /d Internediata middle Income (t551-1135 per capita, 1976); T7 UPrer Middle Income (S1136-2500 per capita, 1976); /f 1964; Lj 1951-64; /h Includes techer-training at the third level; /i Economically active populstion; /1 1973. /k National data, not strictly comparable with previoua years. Recent JAO data show 102.0, 52.0 and 26.0, respectively for these three measures.- Moet Recent Estimace of GCM per capita is for 1978. Bayised October 1979  -2s-, ANNEX 1 DEFIMOKS O SOCTL MICTORSPage 3 o~ Notes: Although the data are dram fros -ouce gene.rally joidged the mat sithoebtative sad reliable, it should alas he Mated that they may son be intea-- tionaL-Ly -oapsobie beoua of the Lace of standardloed defbaitions od concepts used by dIfferent coutries in coi1ectig the data, the oats r,antees usflto b-orbe orders of agoltode, tadioate treads, and oharteib-ecetain major differences tet-seec ost-ss. Th 1-jotad cr000 ..erIgec toe each inui-ator are pspslation-oegbted geomtric seabs, .esludlug the extreme olues of the indicator and tie soot populated oootr;In ac grup.Dietolack of data, group a-eragee of all iadioators for Capital Sueplux Oil bport-e and of ondioato- of Access to Water and tEcreta Disposa, Zouing, Prom Distributio and Poverty foe other coutry grouPs are pspulanion-oeghted geomtrIc men ithcUt emolssn of the e-tr-s vausad the mot copulated ocuntry. Shor the ovrage fcutre s theinictosepnd on-avilabilit obf data end Is sot uniform. caution mut he exerised in r-lnto aveages of cne oclotn tanther These avrgs r astSy usfil as anProobsati... ofh..oed nle -bsoopaiogtevaesoon indicator at a time smes the country and -eferen groups. LAnD ARPA ~thouand uqk.h. IAcces to PrtaDsosl(peet of popslattus) - total, -I-ia, en Iua Total - Toctal surface are cop, _ig land araad islano eaters. Nme fcoi ttal,, uIrban,and ua) oe-vd bty e-cret i la Agiclurl- ot recet cooote of sg uiorlarea usd tesporarily pe-etages of these r-onetice coplation. Ducret disos a oid orperanently for crps, psut-rec rarit and kitchen gardens or tthcoetisadipsl, ihor sitbout treatmen of' humoturet lieall.n. and sate-eater by eater-hos system or the use of pi, priobes endsola UlIP PER CAPITA (10$) - GNP Per capita estiae at current maket prics uuanu e byian-Psolatioc ulcided by uub-r of pracoiooog pbpios-os onlcuTlated by sane co-v.si.. hethod an World Bank Anlna 11976-7, bais). 196C, 1970, and 1978 d.t.~~~~~~~~ Popultbon per ursIng Perasa - Pcpuitios divide1d byl nuber of practicIng male ENEiht CONSUMiPTION PER CAPITA - Ansua1 cosuPtion of -cine-iul -nrae and femle graduase nurse, practical -u-e, and --otantnus. (ocal nd iigite, etrolem, naural gs andbydro- nuclar and~ Poplato one oun,pital had -tsal. urban, and rural - opulatton ~total, urban, thera eecriIt) isigrsm of coal equi-aleat Per capita; 1960 n ual ibedb hi repectice nuber-of hospital beds aemiable i 19711 and 119% data. publb and pri-ane genral and spesaLised hontpital and rehabilitt-o centers Hospitals are esnbji~h_t.n pe_anetly staffed by an leas on physs-iab. PDPIjIATION AND VITAL STAfTiISTIS Entablibah.ets providing prisipmlly custsdhi. car are s ot isoluded. aRa1l Tlcool Psou 'tict, rio-dem avIiio-) - As of July 1; 1960, 1970, std hospitals, hb..ecer, include health and medical oet- noct permnetly utaffed 1:177 data. by a physician (hut by a medic.al anis tant, turs, ldsfe, eto.) shih offer Urba Thoulstoo peroet of total) - Patio of urban, t total pupuiatio; is-_patient anooadatlxa and Provide a iietted range of medical faciloose. iffe-eot defi-tini- of urban area asy affect coparability of dtna Adminoboss Per 4oaptal Bed - Total number of uasob-ina to or u;s-tsrg-o Iron ,5a ootrien t,911), i97t, and 1975 data. boapitals divided by the nuber of beds. yoZlo o n er210_OO - furrentpopulation Pnje-nicas are based o HOUSINGI 1201 total. puntlos by beande and theIr artality and fetiitoy Average Sloe of H-hnrbid (persns Per- h huebld) - tonal, rban, end rura - rates. rojecton parmetersfur nortlinty eaten -npriae nf three A sousebld cons ists uf a grcup cf iolodl nh share lio-oqurtr and hero nuing Isfe e-petanoy an birth --orasig suhb cutry a their main meals. A hoarder or iceger any or ay not ho -ncluod on tie per ooit 1-ncmeise and fe-mle If.f espeotano utablinig at houshold for otatixticul purposes. P5yeses The para-etov toe feroIIt rte also hace thre level Aveae= uoc f coon per nan- totl -ia,adrra vraesne ai-iislg de-li- is fertilipy -ocoding to income len and past of persoopr room in all ura,ad rura vocurie c on-r.tbnatiseh o famil nIi.oin pe-f- - iE. mo c-ntry is then asigned on of these I- rcpet-ioy. _nlog cIude non-pe rmanet struture and -noopi- pa-tc. oiOcminations of =ortklsty ano fernlllnp trends for projeotion Atce_ t etroty percet of d-ellings( - total, orbs so rra - - purpose. -entionnl d-ellbgo with el-trn-ity In living qurer-s- eostg Itutot-y copultion- an o tatio-ry population ther is so grouth total, urban, and rural dwe11Ings respe-n-ce. olic tie birth rate is oqual to the death rate, and also the age ztruon rev...io-v-nstst. Thosahievd only after fertility rates tiSfATTIN eoC joe to the I re -cnot irve of unit -et reprodutin rate, she- Adjusted EnroILnet Patios e_h g-n-rtixofumee repaces itself e-atly. The stationary popu- Primary noncol - total ruead female -Oross to~I, male an !eexle coroll mo isslo uso -tto-td 00 tho hacks of the projected characterIstics .ent u;fall agsat the Priary levl peroetagen of re-peti-e pr-sary of tIe population In the pea 2000, and ohs rate of decline of fertility schcol-sge ppultoicon; torsalp includes children -cd 6-11 y-ar hot -te to elcnetlvl ad junted for oofferet I-ngths of pr-anry education; for o -rvli th Yevsascaryouitio... lin ratd- The pear he- statosary pupalatis universal educatIon es..et .ay ..ed 100 peret oooz smi pp- cu .cn oe reahed. ar hle csbo toe offi-al school age. Pvuit - lnity loxdr ool-ttl aeand femal - Conptndatio:o tab ko.s a - id-yea popultion Per squar iilosster (iDe hbetares) of education require at leat four year of appro-ed pr-oy ooriis total ares provides general -nctoonal , s- tesher training Intuto. rpup,io 0er 00. 0.nnclu imad - tputro as above fnr agriculturl land usually of 12 to 17 pears of age; correpondene... io r g-,ertly only.ecued P.pujtloi g Jrtaeorsn}-ChIldren (0-14 ycara(, ocrisig-age Voainle..letloreto eodar)- Vocational ici tinuoon oroluo .1-nyas,and rtie inpero and ser) as percentages of nod-year -hical, Indusril,o othepog hi se Pe-ai independentlyoro conculatuo.; 1960, 1970, and 1977 data. department of -d-noay isatitotionn. fou nto GroEthhate (percnt - oaL nulcrnnrtso7oalsd ui-echrrtopo y and sesondary - Total studnnto ranolid it fea po pulations for 1910-Ad,