Peru - Second Industrial Credit Project

Document of FILE COP The World Bank FOR OFFICIAL USE ONLY Report No. 3238-PE PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT March 12, 1981 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS The exchange rate is being adjusted daily roughly in line with the difference between domestic and international inflation. The exchange rates and currency equivalents as of several dates were as follows: Currency Unit = Sol (SI. ) December 31, 1976 US$1 = SI. 69.37; S/. 1 = US$0.0144 December 31, 1977 US$1 = S/. 130.72; S1. 1 = US$0.0076 December 31, 1978 US$1 = S/. 196.68; S/. 1 = US$0.0051 December 31, 1979 US$1 = S/. 250.75; SI. 1 = US$0.0040 June 30, 1980 US$1 = S/. 286.07; S/. 1 = US$0.0035 December 31, 1980 US$1 = S/. 342.73; S/. 1 = US$0.0029 GLOSSARY OF ABBREVIATIONS BIP - Banco Industrial del Peru (Industrial Bank of Peru) BMP - Banco Minero del Peru (Mining Bank of Peru) CERTEX - Certificado de Reintegro Tributario a la Exportacion (Export Tax Credit Certificate) COFIDE - Corporacion Financiera de Desarrollo (Development Finance Corporation) DFC - Development Finance Companies ERP - Economic Recovery Program FENT - Fondo de Exportaciones No Tradicionales (Non-Traditional Exports Fund) FIRE - Fondo de Inversiones Regionales (Regional Investment Fund) FONCAP - Fondo de Bienes de Capital (Capital Goods Fund) FONEX - Fondo de Exportacion (Export Fund) FRAI - Fondo de Redescuento Agroindustrial (Agroindustries Discount Fund) MEF - Ministry of Economy and Finance PETROPERU - Empresa de Petroleos del Peru (Peru Oil Company) PROINVERSION - Coordinating Committee for Public Investment RNM - Registro Nacional de Manufacturas (National Registry of Manufactures). SIDERPERU - Empresa Siderurgica del Peru (Peru Steel Company)  FOR OFFICIAL USE ONLY PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT TABLE OF CONTENTS Page No. I. THE ECONOMIC SETTING .1.............. ... I Introduction .................... 1 Major Economic Activities . . . . . . . . . . . . . . . 1 Recent Developments ............... 2 II. THE MANUFACTURING SECTOR . . . . . . . . . . . . . . . . 2 Past Performance.. ............. 2 Structure of Manufacturing . . . . . . . . . . . . . . . 3 Industrial Employment . . . . . . . . . . . . . . . . . 4 Industrial Location ............... 5 Investment . . . . . . . .. . . . . . . . . . . . . 5 Industrial Protection ... . . . . . . . . . . . . 6 Exchange Rate Policy ............... 7 Manufactured Exports and Export Incentives . . . . . . . 7 Recent Developments ............... 9 1II. THE FINANCIAL SECTOR ............... 9 Background . . . . . .. . . . . . . . . . . . . . . . . 9 Main Financial Institutions . . . . . . . . . . . . . . 10 The Banking System . . . . . . . . . . . . I . . . . . . 11 The Non-Banking System . . . . . . . . . . . . . q . . . 12 Domestic Resource Mobilization . . . . . . . . . . . . . 13 Interest Rates .14 Term Lending to Industry and Other Sectors . . . . . . . 15 Recent Developments.. .............. 17 IV. INSTITUTIONAL ARRANGEMENTS AND PARTICIPATING INSTITU- TIONS . . . . . . . . . . . . . . . . . . 18 A. General . . . . . . . . . . . . . . . . . . . . . 18 B. COFIDE .20 This report is based on findings of an appraisal mission which visited Peru in August/September 1980. The mission comprised Messrs. M. Penalver, N. Fostvedt and X. Simon (LCPII) and Mr. F. Garza, (CCM). Mr. G.B.H. Renger participated in final mission discussions. | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Cont'd) Background . . . . . . . . . . . . . . . . . . . . 20 COFIDE's New Role . . . . . . . . . . . . . . . . . 21 Organization and Management . . . . . . . . . . . . 22 Policies and Procedures . . . . . . . . . . . . . . 23 Past Operations ... . . . . . . . . . . . . . . . 24 Portfolio Quality . . . . . . . . . . . . . . . . . 25 Resources . . . . . . . . . . . . . . 27 Financial Position and Results. . . . . . . . 27 Projected Operations . . . . . . . . . . . . . . . 28 C. Other Participating Financial Intermediaries . . . 29 Introduction . . . . . . . . . . . . . . . . . . . 29 Financieras . . . . . . . . . . . . . . . . . . . 29 Regional Banks . . . . . . . . . . . . . . . . . . 30 V. THE PROJECT AND PROPOSED BANK LOAN . . . . . . . . . . 31 Project Objectives . . . . . . . . . . . . . . . . . . 31 The Proposed Bank Loan . . . . . . . . . . . . . . . . 31 Margins to Intermediaries . . . . . . . . . . . . . . . 31 Onlending Terms and Interest Rates . . . . . . . . . . 32 Participation of Intermediaries ... . . . . . . . . . 32 Eligible Enterprises and Lending Limits-. . . . . . . . 33 Free Limit . . . . . . . . . . . . . . . . . . . . . . 33 Procurement and Disbursement . . . . . . . . . . . . . 33 Project Benefits and Risks . . . . . . . . . . . . . . 34 VI. AGREEMENTS AND RECOMMENDATION . . . . . . . . . . . . 35 ANNEXES 1. COFIDE: Summary of Operating Policies and Procedures as of October 31, 1980. 37 2. COFIDE: General Policy for Financial Intermediation 47 3. Estimated Schedule of Disbursements 51 4. Supporting Tables and Charts 52 5. Selected Documents and Data Available in Project File 98 MAP  I. THE ECONOMIC SETTING Introduction 1.01 Peru, the fourth largest country in Latin America, has a total area of 1,280,000 km2, divided by the Andes Mountains into three regions with extreme topographic and climatic contrasts. Along the 3,000 km of the Pacific coastline there is a narrow strip of flat and dry land (the Costa) covering only 11% of the country's total area but containing the major cities and nearly half of the total population. The Andean Highlands (the Sierra) above 2,000 meters, cover 26% of the country, are composed of steep mountain slopes and high valleys, and account for 44% of the country's population. East of the Sierra are vast tropical lowlands (the Selva), covering the remaining 63% of the country but containing only 10% of the population. The rugged topography limits trade and integration between the three regions of Peru, and modern economic activity has concentrated in the Costa. Thus, the main coastal cities account for well over 80% of industrial activity and commercial bank credit, with the bulk of it concentrated in Lima. 1.02 The natural resource base holds both major opportunities and constraints to Peru's future development. Vast mineral resources are the largest asset, aad mining will remain the backbone of the economy as a source of savings and foreign exchange, although it provides little direct employment and may have, for a period of time, few linkages with the rest of the economy. A major resource constraint is the scarcity and poor quality of agricultural lands. The population pressure on agricultural land is high, and the only new lands that could be brought into production are limited areas in the upper Selva and, with extensive irrigation and drainage, some valleys in the Costa. Energy is also a potential constraint, as with the current proven oil reserves the country might become a net oil importer by 1985. A third potential natural resource problem is water, as the long term needs of the area west of the Andes will require water transfers from the eastern side of the mountains at a very high cost. Major Economic Activities 1.03 During the past twelve years, the Peruvian economy has gone through a period of rapid growth fueled by expasionary fiscal and credit policies from 1968 to 1976, a serious financial and balance of payments crisis, followed by a recessionary period from 1977 to 1979, and the incipient stages of an economic recovery, started in late 1979. The cyclical nature of the economic activity during the 1970s is reflected in the growth of GDP, which averaged 4.7% p.a. during the 1965-1976 period, dropping to minus 1.5% p.a. in 1977-78. Preliminary data suggest a modest increase in 1979 of 3.4%. I'he sectoral distribution of economic activity changed substantially during the 1960s and early 1970s, and stabilized after 1976 except for a continuing increase in the share of mining. At present, the largest contribution to GDP is that of manufacturing, accounting for about 26% of the total, followed by agriculture with 14% and mining with 10%. With economic stagnation and a rapidly growing population (2.7 percent p.a.), the country's per capita income fell considerably during the late 1970s, and was $730 in 1979. The recent  - 2 - economic crisis and the high rate of growth of population have worsened a traditionally serious unemployment problem, and it is estimated that 11% of the non-agricultural labor force is currently unemployed and 44% is under- employed. 1/ Recent Developments 1.04 Since 1976 there were successive Government efforts to cope with the economic crisis, but it was only after mid-1978 that an effective stabilization program was carried on and the basis for economic recovery was established. In addition to accelerating the devaluation of the sol, the Government adopted a short-term stabilization package including a reduction in the fiscal deficit, an increase in interest rates and a refinancing of the external debt. This program was supported by a stand-by arrangement with the IMF. At the same time, the Government prepared an Economic Recovery Program (ERP) which included, in addition to the stabilization measures, a package of medium and long-term policy measures to open up the economy, stimulate industrial sector efficiency, promote non-traditional exports, strengthen the tax system and generally improve the efficiency of resource allocation in the private and public sectors. The ERP was supported by a Bank Program Loan (Loan 1693-PE). Progress in carrying out the ER.P was generally satisfactory, and was an important factor leading to the improved economic performance in 1979. 1.05 The economic team of the new Government, inaugurated on July 28, 1980, is firmly committed to the continuation, and in some cases acceler- ation, of the policies initiated under the ERP. Such policy would help reduce the high rate of inflation (averaging about 60% in 1980) as the lower levels of protection would increase competition from imports (and reduce the expansionary impact of the balance of payments surplus), whereas the exchange rate policy would help employment creation and would prevent the inflow of short-term foreign capital that might otherwise follow the increase in interest rates. The Government has already started to take action on several of the areas above, including a first round of reductions in tariffs, the elimination of non-tariff barriers to imports, an increase in interest rates, and the acceleration of the rate of devaluation. II. THE MANUFACTURING SECTOR Past Performance 2.01 Industrialization in Peru during the 1950s and 1960s proceeded along the path of import substitution common to most Latin American countries. The market orientation of the different economic sectors was clearly defined, with mining and most of agriculture being fully export-oriented, while indus- try was to gradually replace trade as the supplier of consumer goods for the growing domestic market. Under a constantly increasing level of tariff pro- tection, the manufacturing sector grew substantially. Its share in the country's GDP increased from about 20% in the mid-1950s, to about 25% in 1968. Consumer products for the domestic market accounted for two-thirds of the sector's total output, while manufactured exports accounted for only 0.5% of gross manufacturing output and less than 2% of total exports. 1/ Earning less than the minimum wage or working less than 35 hours a week and wishing to work more.  - 3 - 2.02 After 1968, the Government attached a new role to the manufac- turing sector, which was considered the main force of the development pro- cess, and its overall policy environment changed accordingly. Increasing volumes of public resources were shifted towards manufacturing, the role of foreign enterprises was sharply reduced, public sector ownership of industrial firms expanded rapidly, workers' participation in ownership and management of privately-owned firms was introduced, and strong support was given to new forms of enterprises. Basic industries (mainly steel, chemicals, fertilizers, cement and paper) were reserved for government ownership, and the remaining subsectors were tightly controlled through allocation of inputs, channeling of credit, tax and other incentives and investment planning. 2.03 The development of the Peruvian industrial sector during the early 1970s continued to be mostly inward oriented. While the first policy measures to promote non-traditional exports were passed in 1968 (and started to operate in 1970), the beginning of an export promotion policy coincided with two other developments in economic policy which worked in the opposite direction. These were the adoption of a policy of full protection of domestic industry from foreign competition through non-tariff barriers and the adoption of a policy of fixed exchange rate which resulted in a constantly increasing overvaluation of the sol from 1970 to 1975. 2.04 Manufacturing value added grew substantially during the early 1970s, with average growth rates of 6.6% p.a. from 1969 to 1974, well above the also high average annual growth of GDP during the same period (4.8%). Industrial growth was induced mainly by sharply growing domestic demand for industrial products, fueled by the Government's expansionary fiscal and credit policies. However, as a result of these policies, aggregate demand considerably exceeded aggregate supply, which in turn led to widen- ing external gaps and strong inflationary pressures, with a resulting loss of international reserves and a massive build-up of external debt. Industrial growth dropped from 11.0% in 1974 to 4.0% in 1975 and 1976. The economic crisis accelerated in 1977 and by mid-1978 it had reached grave proportions, with a drop in GDP and an acceleration of inflation to an annual rate of 100%. In this environment, and given the industrial sector's strong dependence on imported inputs, the severity of the foreign exchange crisis, and the fall in domestic demand, industrial output fell for two consecutive years, by 4.3% in 1977, and 3.5% in 1978. Following the successful implementation of the stabilization and recovery programs, the economy resumed growth in 1979, and manufacturing value added grew by about 4%. In 1980, the recovery continued, with manufacturing sector growth of 6% well above an estimated 3-4% growth of GDP. Structure of MIanufacturing 2.05 The Peruvian manufacturing sector is relatively diversified, with a substantial proportion of manufacturing value added originating outside the traditional consumer goods industries. The share of food, beverages and tobacco, clothing and footwear, furniture, plastics and other consumer pro- ducts has been decreasing over time, and in 1978 accounted for 45% of manufac- turing value added (Table 2.1), whereas the share of intermediate goods (particularly export-oriented, resource based products such as metal products  -4- and textiles) has increased in recent years. The decrease in the share of domestically oriented consumer goods was mostly the result of the 1977-78 crisis and the reduction in domestic demand. Thus, the index of manufacturing production indicates that in 1979 footwear production was nearly 50% below the 1976 peak production, and production of most other consumer goods was also below the production levels prior to the crisis. Table 2.1. STRUCTURE OF MANUFACTURING VALUE ADDED 1971 1975 1978 Consumer Goods 55.0 55.9 45.0 Intermediate Goods 33.7 30.4 43.0 Capital Goods 11.3 13.7 12.0 TOTAL 100.0 100.0 100.0 2.06 Industrial enterprises are mostly small. Two-thirds of the about 10,000 registered industrial establishments 1/ have less than thirty workers. However, nearly 80% of the sector's value added, and more than two-thirds of the sector's labor force are in firms with more than 50 employees. The most recent size distribution of registered enterprises indicates that, in 1975, there were less than 500 firms employing more than 100 people, and only 12 firms had more than 1,000 workers. The larger scale industrial establish- ments are concentrated in the chemical and metal processing industries, and a small number of textile firms have now moved into the larger categories. The country's largest industrial employer is SIDERPERU, a public sector steel mill with about 4,600 workers in 1980. Industrial Employment 2.07 Employment in manufacturing accounts for a small percentage of the total labor force. Total employment in the formal manufacturing sector is about 267,000 or less than 5% of the total labor force (Annex 4, T-4). However, if the informal sector is included, manufacturing accounts for about 10-12% of total employment. Formal sector employment in manufacturing has declined somewhat since 1976, with an apparent slight recovery in 1980, but has not yet returned to its 1976 peak (270,000). 1/ There were 9,634 establishments registered in 1979, excluding the fish industry.  2.08 In line with the deterioration of the labor market conditions since 1976, real wages and salaries suffered a severe decline to nearly half of their peak level. The lowest point was reached in June 1979, but by Fe!bruary 1980 there had been a slight recovery of about 12%. Total labor costs to manufacturing enterprises have a relatively high 'social' component in the form of goods and services (subsidized or free clothing, food, and recreation facilities) which maintained its real value. Also, labor stability legislation combined with the drop in output after 1976 resulted in a sharp decline in productivity and higher labor costs per unit of output than indi- cated by the fall in real wages and salaries. Peruvian industrial wages and salaries are in line with comparable countries in Latin America. In February 1980, nominal monthly salaries were about SI. 61,000 (US$240), whereas the average daily wage was about S/. 1,230 (US$5). If social costs of about 70% are added, total labor costs would be about US$400 and US$8 respectively, with variations of 50-60% between large enterprises with more than 100 employees and small firms with 10-24 employees. Industrial Location 2,09 Manufacturing activity is heavily concentrated in the metropolitan area of Lima-Callao which accounts for about 70% of formal sector manufacturing establishments, employment and output. Other areas with some industrial agglomeration are Arequipa in the south, and Chimbote, Trujillo and Piura in ttle north. Most of the import-substituting industrial firms are located in Lima, where most of the country's purchasing power is concentrated, and Arequipa is the only other center (much smaller) for light consumer industries. Major industries outside Lima and Callao are resource-based, including steel and non-ferrous metal refining close to the mining areas, cotton spinning in the cotton growing area near Piura, sugar refineries and a large paper mill using bagasse in the sugar cane growing area of Trujillo, and the fish meal industry in a number of coastal locations. Decentralization efforts have been inadequate and uncoordinated, consisting mainly of higher rates in nearly all industrial incentives (tariff and other tax reductions or exemptions, interest rate differentials and other). These measures have not effectively counter- acted the powerful forces which have encouraged concentration: the concen- tration of domestic demand as well as economic and social infrastructure in Lima and the infrastructure deficits in all other locations. Investment 2.10 Investment in manufacturing fluctuated widely during the 1970s. Fixed investment in formal manufacturing doubled in real terms between 1971 and 1975, but by 1978 it was 25% below its 1975 peak (Annex 4, T-5). The subsectoral distribution of investment was much more volatile. Between 1971 and 1975 investment in state-dominated industries expanded rapidly and accounted for the overall investment growth, while investment in industries dominated by private enterprises declined sharply. Gross fixed capital formation by public enterprises in the form of industrial machinery and equipment rose from S/. 0.3 billion in 1971 (about 3% of the total) to S/. 7.9 billion in 1975 (about 40% of the total). After 1975, budget and foreign exchange constraints led to a sharp decline of public sector industrial investment (to S/. 1.4 billion in 1978 and S/. 1.8 billion in 1979) thus raising the share of private investment.  -6- Industrial Protection 2.11 Tariff protection in Peru increased constantly during the 1950s and 1960s. While in 1958 the unweighted average of nominal tariffs was 38%, it increased to 42% in 1964, 55% in 1967 and 69% in 1973. By the latter date, Peruvian tariff protection was the highest among all Andean Market member countries. (Table 2.2). Between 1973 and 1979 there were no major changes in the structure of tariff rates, but the increasing avervaluation of the sol between 1968 and 1975, and the widespread system of tariff exemptions and exonerations on industrial inputs and equipment eroded the protection afforded by the tariff system, which was replaced in this function by a system of non-tariff barriers after 1970. Table 2.2. LEGAL AND ADJUSTED TARIFFS IN THE ANDEAN MARKET COUNTRIES, 1973 (Unweighted Averages) Peru Bolivia Colombia Ecuador Venezuela Average Legal Tariff 69 23 30 31 49 Average Adjusted Tariff 1/ 48 19 24 22 38 1/ Legal tariffs excluding exonerations and exemptions. Source: Situacion Arancelaria de los Paises Andinos J/PE/45, Junta del Acuerdo de Cartagena, Lima 1975 (mimeo). 2.12 Non-tariff protection operated through a complex system of import licenses, prohibitions, state monopolies, and, particularly, the National Register of Manufactures (RNf) established by the General Industries Law of 1070. Import prohibitions applied mainly to luxury consumer products, whereas the RNM granted unlimited protection to domestically produced goods by prohibit- ing imports of competitive products. In 1973, out of about 4,600 items in the Customs Classification (NABANDINA), about 40% were affected by non-tariff barriers to imports, and by early 1979 the percentage had increased to about 60%, including about 1,400 items in the REM. 2.13 The impact of non-tariff protection on prices of domestically produced goods was very large, particularly in clothing and textiles. A study based on a sample of about 100 products subject to import prohibition or included in the RNM showed that price increases for such products (or very close substitutes) in the year following the import prohibition (or the inclusion in the RNM) averaged 40%, ranging from 20% for agricultural products to &3% for textiles and clothing. In some cases, such as polyester fibers, domestic prices in early 1979 ranged between 200-300% of world prices.  2.14 One of the main elements of the 1978 ERP was the reorientation of industrial policy, including the dismantling of the complex structure of non-tariff protection to industry, and its replacement by a new tariff system which could be used flexibly and in a coordinated way with the exchange rate policy and the system of export incentives, to develop an efficient and outward-oriented industrial sector. The first measures were taken in March 1979, when the protection granted by the REM was eliminated and a temporary list of import prohibitions was established (including only 529 items of the 1,437 previously in the RNM) to be gradually reduced aver a two-year period. Between mid-1979 and mid-1980, the elimination of non-tariff barriers proceeded rapidly, and in July 1980, only 4% of the items in the NABANDINA list were subject to such barriers. 2.15 Together with the elimination of non-tariff barriers, the Government approved, in July 1979, a Decree-Law establishing the principle of a unified tariff structure, abolishing the complex system of tariff exemptions and exonerations, and giving authority to the Ministries of Finance and of Industry to publish a new tariff structure. The new tariff was approved in August 1979, published in October, and became effective on December 2, 1979 (Annex 4, T-8). With ad-valorem rates ranging from 0 to 120%, and a still high unweighted average of 39.5%, the new tariff structure was nevertheless the starting point in the process of tariff reductions and rationalization to be implemented over a period of 3 to 4 years. A first round of tariff reductions, leaving the maximum tariff rate at 60% and reducing the average to 34% was appraved by the new government in September 1980. Exchange Rate Policy 2.16 One of the most important elements of economic policy affecting the Peruvian manufacturing sector during the last decade has been the exchange rate. Since 1968, Peru's foreign exchange policy has been instrumental first in establishing a strong dependence on foreign inputs, generating high (foreign) capital/output ratios and low capacity utilization, and discouraging exports as a result of an increasing overvaluation of the sol during the period of fixed exchange rates (from 1968 to 1974), and later in promoting industrial export growth when a more flexible exchange rate policy was adopted (after 1976). After substantial improvements in 1977 and 1978, some ground was lost again in 1979 and the situation remained approximately stationary during the first half of 1980 (Annex 4, T-7). The new Government accelerated again the rate of devaluation after July 1980, to compensate for the differential inflation. Manufactured Exports and Export Incentives 2.17 As indicated above (paras. 2.01 and 2.03) the development of the Peruvian manufacturing sector from the 1950s through the mid-1970s was mostly inward-oriented. In 1976 manufactured exports were US$117 million, less than 2% of gross manufactured output. In the same year, per capita manufactured exports in Mexico, Argentina, Colombia, Brazil, Chile, and Venezuela averaged US$25, ranging from a high of US$38 (Mexico) to a low of US$10 (VTenezuela), whereas the corresponding figure for Peru was US$7. Similar figures for East Asian countries were US$433 in Taiwan and US$185 in Korei -  -8- 2.18 After 1976, changes in the policy framework, and the severe economic recession which reduced domestic demand for industrial products resulted in an unprecedented increase in Peru's manufactured exports, which jumped from US$117 million in 1976 to more than US$700 million in 1979 (Annex 4, T-6). After this increase, Peru has 'caught up' with its neighbouring Latin American countries, exceeding Colombia (whose exports were 3 times above Peru's in 1976) and reaching about two thirds of Chile's manufactured exports. The amount of per capita manufactured exports in 1979 (US$40) and the share of exports in manufactured output (about 8%) are still low, but much more in line with Peru's status as a semi-industrialized country and with its per capita income level. 2.19 The two main policy changes that triggered the recent increase in manufactured exports were the more flexible exchange rate policy, starting in 1976 (para. 2.16) and a large increase in the main fiscal incentive to non- traditional exports, a negotiable tax credit certificate (CERTEX) that had been introduced in 1970. Since June 1976, exports of non-traditional products (agricultural, mining and manufactured) have been eligible to receive CERTEX. The basic CERTEX rates are established on a product-by-product basis, with a maximum of 30% of the FOB value of exports. Currently they are concentrated at the higher end of the range. Of the total of about 1,800 products that have been classified to receive CERTEX, only some 300 products have rates below 20%. Also, non-traditional exports produced by firms located outside the Lima-Callao area receive an additional decentralization' CERTEX of 10% of the FOB value. The total amount of CERTEX granted increased from US$1.8 million in 1970 to US$25 million in 1976 and nearly US$150 million in 1979. CERTEX has also increased as a percentage of eligible exports, and in 1979, average CERTEX (including basic and decentralization) was about 22% of total non-traditional exports and about 30% of eligible exports. 2.20 The very flat structure of CERTEX rates, with most products receiving about 25% of FOB value, resulted in a large variation in the effective rate Of subsidy granted to different export products. Thus, the main non-traditional export products such as canned fish, cotton gray cloth, and cotton yarn, which are resource-based products, with a low percentage of domestic manufac- turing value added, received a very high effective rate of subsidy (probably of between 150 to 200%) 1/, whereas the effective incentive received by exports of products with high domestic manufacturing value added and highly protected intermediate inputs such as metal products, light machinery and fishing boats may be low or even negative. Therefore, it was necessary to revise the scale of CERTEX rates, to obtain lower and more similar rates of effective subsidy across products. The Government has recently completed a review of the operation of the CERTEX system, including the administrative procedures and is preparing a lower and simplified structure of CERTEX rates. In addition, gold products, alpaca wool and other semi-processed products have been recently excluded from the eligible list. 1/ A more extreme example refers to exports of simple gold jewelry where the combination of high CERTEX rate, an export tax on gold (ingot) and very low manufacturing value added content may result in effective subsidies of more than 800%. The high subsidy rates (and probably some fictitious exports) could help explain the jump iti exports of 'gold products' from US$20,000 in 1977 to US$340,000 in 1978, and more than US$30 million in 1979.  -9- Recent Developments 2.21 Peru's new Government has outlined an economic policy program which includes the completion of the liberalization policy initiated in 1978 (paras. 1.04 and 1.05). The program focusses on the need to eliminate the remaining non-tariff barriers to imports, reduce import tariffs, create industrial employment and promote manufactured exports by maintaining an adequate real exchange rate and an efficient system of export incentives, and encourage financial savings and efficient resource allocation by maintaining positive interest rates in real terms. In other areas, the Government is also committed to (i) promote an increased reliance on the market mechanisms for resource allocation, and move towards reduced government controls; (ii) review, and possibly reduce, the Government's direct involvement in manufacturing; (iii) support the development of small scale enterprises; and (iv) improve the industrial infrastructure in areas other than Lima-Callao. 2.22 The Government has already started to carry out some of the measures outlined in the economic program. Thus, the rate of devaluation has been accelerated to compensate for the differential inflation, and the Central Bank has approved a substantial increase in interest rates (para. 3.19). All the remaining administrative barriers to imports were eliminated in August 1980, including the system of import licenses, and a first round of tariff reductions took place in September (para. 2.15). Finally, the system of export incentives is being revised and some administrative reforms and reclassification of products have already taken place (para. 2.20). 2.23 In recent years, particularly since mid-1978, the Bank has main- tained a close and continuing dialogue with the Government on industrial and general economic policies. This dialogue took place mainly in the context of the preparation and implementation of the ERP supported by the Program Loan (para. 1.04). During recent months, the economic dialogue with the new Government has intensified and general economic, industrial and financial sector review missions have taken place. The proposed project would provide an appropriate vehicle for continuing the dialogue on industrial and financial policy issues. III. THF FINANCIAL SECTOR Background :3.01 The Peruvian financial system is dominated by the banking system which has historically held around 88% of the total assets of the financial system. Besides the Central Bank (Banco Central de Reserva del Peru), the banking system comprises Banco de la Nacion (the central Government's bank and tax collector), other specialized banks and eleven commercial banks. The non-banking system includes the government's development finance institution, COFIDE (Corporacion Financiera de Desarrollo), 12 finance companies, 17 savings and loan associations, 20 insurance companies and several small savings coop- eratives and credit unions. Peru also has a small but growing securities exchange which has become increasingly active during the past two years.  - 10 - 3.02 The Government plays an influential role within the Peruvian finan- cial system. During the early 1970s it introduced several reforms aimed at strengthening government control of financial institutions, channelling credit to "strategic" sectors, and improving access to credit of small enter- prises, beneficiaries of the agrarian reform, and enterprises located outside the Lima region. The major reform measures included the nationalization of three commercial banks, the establishment of a Council for Monetary Policy, the creation of COFIDE and strengthening of the development banks, a new law regulating the operations of the finance companies, and the channelling of comercial bank credit to priority sectors and regions. Since 1978, some of these measures were relaxed and Government guidance of financial institutions and policies has been considerably reduced. Most importantly, the responsi- bility for monetary policy was returned to the Central Bank, and channelling of credit to priority sectors has been phased out. Nonetheless, the Government continues to exercise much influence in the financial system through the poli- cies of the Central Bank and the Government-owned financial institutions which have historically handled about 80% of the total assets of the financial system. 3.03 The main features of the financial system's recent performance have been financial disintermediation and the build-up of foreign currency resources. Negative real interest rates on time and savings deposits and tight monetary policy since mid-1978 led to overall financial disintermediation, evidenced by a decline in real terms in the strict and wider definitions of money supply (M1, M2 and M3) from 1975 to 1979, as well as in total deposits in commercial banks and total loans outstanding of commercial banks (Annex 4, T-10). On the other hand, foreign currency deposits increased substantially as a hedge against inflation and devaluation. They increased from 7.8% of total time and savings deposits in the banking system in 1977, to 45.1% in 1979. Main Financial Institutions 3.04 The Central Bank. Established in 1931, the Banco Central de Reserva del Peru regulates money supply, credit, and the operations of all financial intermediaries, and manages international reserves. With the abolition of the Council for Monetary Policy in June 1978, the Central Bank became again responsible for monetary policy in cooperation with the Ministry of Economy and Finance. The Central Bank's main monetary policy instruments are minimum reserve requirements, discounting facilities and discount rates, and operating limits for the different financial institutions. Furthermore, until recently, the Central Bank was authorized to set the structure of interest rates for all deposits and bonds issued to the public as well as on all loans granted by all financial intermediaries, but only within the legal maximum established by the Government. The interest rate law passed in December 1980 (para. 3.19) returns to the Central Bank full autonomy in setting interest rates. In recent years, the Central Bank has also operated several special development funds (FONEX, FIRE, FRAI, and FONCAP) through which it channels funds to priority areas via onlending by both banking and non-banking institutions (paras. 3.22 to 3.24).  - 11 - The Banking System 3.105 The banking system includes several specialized banks and eleven comnmercial banks. The specialized banks are Banco de la Nacion, six regional banks which operate as commercial banks with a particular focus on promoting economic development within their respective regions, two construction industry banks which are limited to financing construction-related activities, a savings bank, and five Government-owned development banks. All of these institutions are allowed to accept deposits from the public and all except for the develop- ment banks rely to an important extent on deposits as a major source of funds. 3.06 Commercial Banks. Eleven non-specialized commercial banks in Peru carry out short-term (i.e. less than one year) banking operations (Annex 4, T-11). Three of the largest commercial banks were nationalized in 1970 and placed as "associated" banks under the control of Banco de la Nacion. Never- theless, these state banks operate under the same legislative regulations as the other commercial banks. Of the remaining banks, four are private sector banks and four are branches of foreign banks. Currently these banks maintain a total of 690 offices, two-thirds of which are located in the Lima area. During the period from 1975-1979, the commercial banks actually decreased in size if measured in constant terms and also diminished slightly in relative importance within the financial system. 3.07 By law, commercial banks are not allowed to extend credits that exceed one year in maturity. As a consequence, all but one of the domestic commercial banks have created finance company subsidiaries (financieras) as vehicles for providing medium-term financing to their clients. The sector receiving the largest share of commercial bank lending has historically been the industrial sector, which at year-end 1979 accounted for over 47% of all commercial banks loans (Annex 4, T-18). The volume of commercial bank lending has decreased in real terms over the last four years; at year-end 1979 the volume of outstanding loans stood at only 65% of the 1975 volume, representing a real decline of about 12% p.a. 3.08 Regional Banks. The six regional banks operate as commercial banks with special emphasis on regional development, and are also allowed to make medium- and long-term loans. They are relatively small, with total assets of less than 11% of those of the commercial banks (Annex 4, T-14). Until 1979 (when the program was phased out) the regional banks, along with the associated banks, were the principal intermediaries for channelling funds under the Central Bank's selective credit program. Nonetheless, these banks have experienced a much higher rate of growth in recent years than the other commercial banks, having grown by 25% in real terms during 1979 as compared to a 12% real decline for the commercial banks. The structure and operations of the regional banks are more fully described in Chapter IV. 3.09 Development Banks. Five state development banks (Annex 4, T-12) operate as specialized financial intermediaries through which the Government channels foreign borrowings and resources mobilized through the banking system to priority sectors, (i.e. industry, agriculture, mining and housing). Although these banks are authorized to accept deposits, with the exception of Banco Central Hipotecari- ethe Central Mortgage Bank), they are not active in mobilizing funds from the public, relying instead on Central Bank funding and foreign borrowings.  - 12 - 3.10 Banco Industrial del Peru (BIP) was created to promote the develop- ment of the industrial sector, particularly small- and medium-scale industry, through the provision of short- and medium-term financing. The bank also provides bill discounting, letters of credit, guarantees and other banking services, although to a lesser extent than the commercial banks. The bank complements the efforts of COFIDE in the industrial sector and concentrates on medium and small enterprises. Since 1972, BIP has also operated the Government's special fund for financing non-traditional exports (FENT) which makes short-terms loans at below market rates. About half of the bank's loans are short-term, funded principally through FENT or from its own resources. BIP's medium-term loans to industrial enterprises are provided at rates slightly below commercial bank short-term rates and substantially below medium-term loan rates of the financieras. The bank has relied heavily on funding from the Central Bank and continued capital increases. Other important sources of term financing for small and medium (and sometimes large) industrial enterprises have been loans from international development organizations, repaid by the government and capitalized in BIP. 3.11 Banco Minero del Peru (BMP) was established to provide medium- and long-term financing to small and medium mining companies. Like BIP, it complements the activities of COFIDE which has focused on the larger, mainly state-owned mining companies. BMP is also active in participating in small mining companies on a partnership basis, and serves to provide technical and marketing assistance. Of its total assets, 37% were in the form of loans and 27% in investments at year-end 1979. Though Banco Minero may take demand deposits from the public, time deposits from financial institutions and issue bonds, it has relied principally on Central Bank credits as its main source of funds. The Non-Banking System 3.12 COFIDE, (Corporacion Financiera de Desarrollo). Established in 1971 as a state-owned industrial development finance institution, COFIDE's principal focus has been the financing of medium- and large-scale industrial projects, in particular those of state-owned enterprises. Acting as an agent for the Government, COFIDE negotiates foreign credits and provides credit guarantees which, in recent years, have accounted for 40% of its total assets. COFIDE also raises local resources through the issue of bonds which, because of special tax benefits, are among the most attractive savings instrument in the country. In 1976, COFIDE received a Bank loan (Loan 1356-PE) to carry out the First Industrial Credit Project and will also be the implementing agency under the proposed project. Although it started to lend through other financial intermediaries in mid-1978, COFIDE is currently being restructured to increase its wholesale credit function. A detailed review of COFIDE's past operations, financial situation and.future role as the main wholesaler of term resources to the industrial and other sectors is included in Chapter IV.  - 13 - 3.13 Financieras. Private finance companies were established primarily to provide medium-term financial services which, under the banking law, cannot be offered by the commercial banks and were not being fully met by the special- ized development banks. In 1971, a new law was passed bringing the financieras under the control of the Central Bank and establishing minimum capital require- mients. Of the 37 financieras existing in 1971, only six companies remained in operation when the law was passed. Since 1978, when local commercial banks and other financial groups took a renewed interest in setting up other finance companies, six new financieras have been authorized, of which two had not yet begun operations as of June 1980 (Annex 4, T-13). Of the 12 finance companies, three are majority owned by government-owned institutions. A more detailed discussion of the financieras and their operations is included in Chapter IV. Domestic Resource Mobilization 3.14 The mobilization of domestic financial savings in Peru is done mainly by the banking sector, which at the end of 1979 held 85% of all finan- cial obligations with the private sector (Annex 4, T-10). Non-bank financial instruments include savings and time deposits of the savings and loan associa- tions, and time deposits and bonds issued by COFIDE and the financieras. Insurance policies are also an important form of financial savings. In addition, a limited number of non-financial institutions place financial instruments, principally stocks and bonds. 3.15 At year-end 1979, demand deposits in local currency accounted for 24.1% of the total monetary liabilities of the banking system, but they had been steadily decreasing in real terms since 1975 and also decreased as a percentage of total liabilities, from 30.1% in 1977. Savings deposits are issued by the banking system (except the foreign bank branches), savings cooperatives and savings and loan associations. They account for 19.7% of the monetary liabilities of the banking system and are the main source of funds of cooperatives and savings and loans associations. Savings deposits have also decreased in real terms since 1975, although at a smaller rate than demand deposits. 3.16 All financial institutions operating in Peru (except insurance companies) may take time deposits in local currency, whereas the regional banks and financieras also issue negotiable certificates of deposit. In 1979, time deposits accounted for only 6.2% of the monetary liabilities of the banking system, down from 11.0% in 1977. In contrast, the financieras have been very aggressive in mobilizing resources through their three-year cer- tificates of deposit, particularly since late 1978 when the maximum interest rate was raised to 38.5%, above that of all other instruments (Annex 4, T-22). Certificates of deposit of the financieras were also given a favorable treat- ment by the Central Bank in terms of the legal reserve requirements, which are only 6%, compared to 38% on time deposits of commercial banks and 17% for regional banks. Although there is no active secondary market for the certifi- cates of deposits, they may be normally sold to the commercial bank associated to the issuing financiera at little or no discount. As a result of all these relative advantages, certificates of deposit have been the main source of funds of the financieras and have grown substantially in real terms. As of December 1979, certificates of deposit were S/.20.3 billion (US$81.1 million equivalent), about 59X of the total liabilities of the financieras.  - 14 - 3.17 Bonds have not been used to any large extent by Peruvian financial institutions, with the exception of COFIDE. Although the financieras, construc- tion industry banks and Banco de la Vivienda are also authorized to issue bonds, a maximum interest rate below that of the certificates of deposit, longer term maturities and the lack of a well developed secondary market have made them relatively unattractive instruments. COFIDE's type 'C' bonds have been more successful, particularly after 1978, because of a special tax incentive which permits the original buyer to reduce his income tax liability by 35% of the purchase value of the bond. In the past, two financieras issued bonds but in very small amounts. Banco de la Vivienda has also issued bonds, placing them with insurance companies that were required to hold them. 3.18 All deposits taking institutions, except the savings bank, are authorized to take deposits in foreign currency (demand deposits as well as negotiable certificates of deposit) as part of the government's efforts to repatriate the savings invested abroad. Certificates of deposit in foreign currency have grown remarkably as a result of the high world interest rates (to which the rates on the deposits are tied) and the negative real rates paid on local currency deposits. From about 3.2% of the monetary liabilities of the banking system in 1977, they increased to 23.7% in 1979. Interest Rates 3.19 During the last ten years, interest rates in Peru have been regu- lated by the Monetary Council and, since mid-1978, by the Central Bank and the government which established a very complex structure of rates differentiated by financial instrument, by type of intermediary, and by sector of destination. As a result of the very high rates of inflation, all deposit and lending interest rates in local currency have been negative in real terms since the early 1970s. Substantial increases in the structure of interest rates took place from mid-1978 to early 1979 (Annex 4, T-24) but the further acceleration of inflation quickly eroded the improvements. As of September 30, 1980, lending rates were for the most part unified at 32.5% for short-term loans and 37.5% for medium-term loans in local currency (plus commission fees of 1 to 3% p.a. and a 17% tax on interest payments). In December 1980, a new law was passed, eliminating the 17% tax and giving the Central Bank full responsibility for establishing interest rates. At the same time, the Central Bank approved a full revision and simplification of the interest rate structure, including an average increase of 20 percentage points on most deposit and lending rates effective on January 5, 1981 (Annex 4, T-22 and T-23). Under the new structure, medium- and long-term loans in local currency carry an interest rate of 56.5% p.a., plus annual commissions of 1.5% to 3%. As interest in paid quarterly, the corresponding effective rates range from 71.9% to 74.1% p.a. If the Government's fiscal and monetary policy measures are successful in bringing down inflation from the current 60% (average for 1980) to 50% in 1981, the new rates would be highly positive in real terms. 3.20 Foreign currency lending rates have not been regulated in recent years, in spite of the fact that practicalliy all fotelgAn fesXres used f4or term lending have been mobilized by the Government and lent by public sector financial institutions. Given the lack of coordination among institutions and the competition based on low interest rates using cost-free resources  - 15 - provided by the government, some of the state development banks have been [Lending to the final borrowers at rates below the cost of the foreign resources. As an example, since early 1980, BIP has been making US dollar denominated :Loans to industrial enterprises located outside the Lima-Callao area at 9% p.a. using funds provided by the Government (as equity contributions) and obtained from the IDB and co-financing commercial banks at a financial cost (LIBOR plus 7/8 for the co-financing component) that exceeds the final lending rate of BIP. However, at the same time, term lending for industry provided by the Central Bank (through FIRE) for projects outside Lima-Callao and denomi- nated also in US dollars, carried interest rates of 13-14% (para. 3.23). Thus, it is necessary to establish an efficient and consistent interest rate policy for term lending in foreign currency, to eliminate distortions in the allocation of resources and to develop a healthy and competitive financial system. The proposed project would help to accomplish this objective by strengthening the new role of COFIDE as the major wholesaler of foreign financial resources for term lending (para. 4.10) and by supporting its role as one of the main public sector financial agents. Term Lending to Industry and Other Sectors 3.21 The main institutions channelling term resources to the industrial and other productive sectors have been COFIDE, the state development banks, the financieras and, to a smaller extent, the regional banks. In addition, the commercial banks have been ocassionally involved in term lending, channel- ing resources provided by the Central Bank and COFIDE with special authoriza- tion of the Central Bank. The relative importance of public sector financial institutions has been substantial, with COFIDE and the state development banks accounting for 72% of the total assets of the institutions engaged in term lending (Table 3.1). In addition, the Government-owned financieras account for an additional 4.6% of the assets of the group, and two of the five regional banks are also owned by the Government. Table 3.1. MAIN TERM LENDING INSTITUTIONS Institution Total Assets % of Total (S/. billion as of 12/31/79) COFIDE 162.3 33.5 Banco Industrial 100.0 20.6 Banco Agrario 65.1 13.4 Banco tIinero 21.4 4.4 Financieras 69.9 14.4 Bancos Regionales 65.8 13.7 Total 484.5 100.0 3.22 Term lending institutions have complemented their own funds with the rediscount funds established by the Central Bank during the last two years. The first to be introduced was the Fondo de Redescuento Agroindustrial (FRAI) escablished in 1978 to finance agroIndustrial projects, and partalazy financed 1:hrough a US$14.7 million loan from AID (plus US$4.9 million equivalent in  - 16 - counterpart funds provided by the Central Bank). Subloans for a period of up to 10 years with up to 2 years of grace, for a maximum of US$750,000 equivalent, are denominated in local currency and carry an interest rate of 1.5 percentage points above the Central Bank rediscount rate (currently 46.5%). As of August 15, 1980, a total of 89 subloans had been approved, for a total amount of S/.5.02 billion. The average subloan size at the prevailing exchange rate for that date was a low US$191,000 equivalent, indicating that the FRAI has operated basically as a small and medium scale industry credit line. A total of 24 financial intermediaries channelled FRAI resources, with 8 financieras accounting for nearly 58% of the total, followed by 7 commercial banks (about 27%) and 4 regional banks (9.5%). The FRAI resources are likely to be fully committed by the end of 1980 when only repayments will be available for additional lending. 3.23 In November 1979, the Central Bank established the Fondo de Bienes de Capital (FONCAP) with total resources of S/.5 billion (about US$17 million equivalent) to finance the sale of domestically produced capital goods and equipment. Subloans for a period of up to 10 years for a maximum of US$2 million equivalent, are denominated in local currency and carry an interest rate of 3 percentage points above the Central Bank rediscount rate. As of the end of July 1980, 63 subloans had been approved for a total amount of S/. 4.45 billion and an average subloan size of about US$240,000 equivalent. Of the 13 intermediaries channelling FONCAP resources, 8 financieras accounted for 70% of the total, two commercial banks used 22% and two regional banks used 4%. A third Central Bank fund, the Fondo de Inversiones Regionales (FIRE), was established in February 1980 to finance a wide range of activities outside the Lima-Callao area. FIRE resources were also S/. 5 billion, of which S/. 2.62 billion had been committed by July 30, 1980. Subloans of up to US$2 mil- lion equivalent can be denominated in Soles (for the local component of the projects) or in US dollars (for the imported component). Local currency subloans carry interest rates ranging from 3 to 5 percentage points above the Central Bank rediscount rate, and US dollar subloans carry rates of 15%. As of the end of July, 1980, 14 subloans had been approved with an average size of about US$650,000 equivalent. Five financieras accounted for 73% of the total amount, two regional banks channelled 20% and two commercial banks the remaining 7%. 3.24 The Central Bank also established, in April 1980, the Fondo de Exportaciones (FONEX) with total resources of US$250 million, to provide pre- and post-shipment financing for exports of capital goods. As of July 30, 1980, only 4 subloans for a total of US$1.13 million had been approved. As another well established fund for non-traditional export financing (FENT) has been managed by BIP (and channelled through financial intermediaries) since 1972, the need for the establishment of FONEX as a separate fund is not at all clear. Consolidation of all export financing mechanisms, including a review of terms and conditions, and coordination with other export incentives would be desirable. The government and the Central Bank are currently reviewing the justification for FONEX in the context of the proposed simplification of term tenivng mechatzis% an) of the transfer of tLe_ Ce.atral Bank funds to COFIDE (paras. 3.25 to 3.27).  - 17 - Recent Developments 3.25 Since July 1980, the new Government has been reviewing the role of public sector financial institutions (particularly those channelling term resources) and the consistency and efficiency of the multiple credit lines for term financing currently in operation. In this context, the Government requested Bank assistance to establish a new set of mechanisms to handle the flow of term financial resources to industry and other subsectors, using to the maximum extent possible the institutional capabilities of the country's financial system, both public and private. 3.26 During the preparation of the proposed project, the Government and the Central Bank established a clear separation and allocation of the follow- irng functions: (i) definition, control and enforcement of financial policies arLd operating procedures for term lending; (ii) domestic and foreign resource mobilization and allocation to different subsectors; (iii) wholesale credit operations, ensuring equal access to the available funds by all qualified financial intermediaries and eliminating advantages derived from privileged access to funds; and (iv) retail credit operations, by a wide range of finan- cial intermediaries (both public and private) competing with each other on the basis of the quality of service given, and not depending on their access to more or less subsidized financial resources. 3.27 As part of the reallocation of functions, the Central Bank will concentrate on the establishment and execution of the financial policy, and has transfered the operation of the special funds (FRAI, FONCAP, FIRE and FONEX) to COFIDE. The transfer was approved by the Board of Directors of the Central Bank on November 13, 1980. COFIDE's increased function as the major wholesaler of term resources required some changes in its institutional sltructure, which were approved by COFIDE's Board of Directors on September 23, 1980 (para. 4.10). 3.,28 Resource mobilization (both domestic and foreign) under the new system will take place both at the retail level,.by each financial interme- diary (mostly for domestic resources), and at the wholesale level (partic- uLarly for foreign resources). All public sector foreign borrowings will be coordinated by PROINVERSION, a coordinating committee established on October 30, 1980, under the chairmanship of the Ministry of Finance and Economy, and including the Central Bank, the Planning Office, and the Ministry of Foreign Affairs. The Central Bank will also establish the general terms and conditions for on-lending term resources obtained through public sector foreign borrowings by COFIDE and for the state development banks. Finally, a draft Foreign Debt Law allocates to COFIDE the role of financial agent for medium- and long-term foreign borrowings of public enterprises, and to Banco de la Nacion a similar role for the central Government. The financial agents will provide assistance in the identification and selection of sources of funds, as well as in the negotiations, and will charge a fee for such services, but their participation will not imply the provision of a guarantee. 3.29 The new set-up would allow tapping all external sources of funds available within an integrated demand and resource allocation framework, after evaluating the requirements of the different subsectors, thus eliminating the piece-meal, institution-by-institution approach used in the past by COFIDE,  - 18 - BIP, Central Bank, Banco Minero, other state development banks, and various other public sector entities and enterprises. The coordination of all public sector external borrowings for development financing would also increase the borrowing and negotiating capacity vis-a-vis foreign lenders, help to use the full absorptive capacity of the financial system, eliminate the 'bilateral monopoly' situations developed over the last few years (IDB-BIP, World Bank- COFIDE, AID-Central Bank), and force both the domestic and foreign institutions to analyze Peru's financing requirements within a global context, taking into account all subsectoral needs and priorities, and achieving an efficient allocation of resources. IV. INSTITUTIONAL ARRANGEMENTS AND PARTICIPATING INSTITUTIONS A. General 4.01 Past Bank involvement with the industrial and tourism sectors in Peru has been mainly through the first Industrial Credit Project with COFIDE (Loan 1358-PE of December 27, 1976) and the recent Program Loan (Loan 1693-PE of 1979) 1/. In addition to the proposed Second Industrial Credit Project, a project to support the development of small scale enterprises (SSE) through a wide range of financial intermediaries is currently under preparation. The main objectives of the first Industrial Credit Project were to support efficient manufacturing, processing and tourism projects with a favorable impact on Peru's balance of payments, to increase COFIDE's effectiveness as a development bank, and to help improve its economic analysis of projects. After suffering some delays during the first 18 months of the project, mainly due to the country's economic crisis of 1977-78 (para. 1.03), commitments started to improve in late 1978. Currently, 91% of the total amount of Loan 1358-PE (US$35 million), has been committed. 4.02 In spite of the economic recovery during 1979, particularly in the export-oriented industrial subsectors, commitments under Loan 1358-PE increased only moderately because of the requirement that final borrowers take the full exchange risk between the currencies disbursed and the S/. During a period of rapid devaluation of the SI. with respect to the US$ and with a recent history of poor performance by the US$ in the international currency markets, most borrowers were reluctant to take such risk. The increase in commitments in late 1978 and early 1979 was caused by several factors, including the temporary operation of the special disbursement pro- cedure for DFC operations (which guaranteed 50% of the disbursements in US$), discontinued in 1980, and the severe shortage of foreign exchange in Peru 1/ A mining project with CENTROMIN (a public sector mining company) was also supported by a Bank loan of US$40 million in 1976 (Loan 1281-PE). In 1980, two technical assistance loans to SIDERPERU (the Government-owned steel mill) and to the Government (for PROBAYOVAR, a Government-owned firm which develops the Bayovar phosphate mining project) have also been approved.  - 19 - during the same period. Improvements in the availability of foreign exchange, the elimination of the special disbursement procedure for DFCs and the avail- ability of term resources in local currency and in US$ at negative real interest rates in the Central Bank and BIP (paras. 3.20 to 3.23) slowed down commitments again in 1980. 4.03 As of October 31, 1980, 67 subloans had been approved under Loan 1358-PE, for a total of US$31.2 million. Of these, 15 subprojects were above the free limit of US$500,000, with an average subloan size of US$1.4 million, and 52 subprojects were below the free limit with an average subloan size of about US$200,000 (Annex 4, T-39). The 15 subprojects above the free limit had total investment costs of US$77.8 million of which US$20.4 million were financed with proceeds of the Bank loan. Excluding three subprojects for wh:Lch detailed incremental employment generation is not available, the num- ber of direct jobs created by the remaining 12 subprojects was 1,322, with a relatively high average investment cost per job of US$51,000 (Annex 4, T-40). Employment generation by the 52 smaller subprojects was considerably higher, as the most recent 11 subprojects under the free limit (receiving total subloans of US$2.5 million) indicate a total employment generation of 1,826 jobs. The figures for subprojects above the free limit understate the generation of employment because of some very large modernization sub- projects which did not create additional employment but allowed the conti- nuation of existing jobs. On the other hand, the figures for the smaller subprojects appear to be overestimated in at least two cases as it is unlikely that the respective firms (to be created) will reach the volume of employment indicated in the reports. Assuming an average investment cost per job of US$10,000 in the subprojects below the free limit (well above the reported average for the 11 subprojects above), the overall average for the subprojects financed under Loan 1358-PE would be about US$25,000. The subsectoral dis- tribution of subloans approved under Loan 1358-PE is summarized in Annex 4, T-39, and the main features of the 15 subprojects above the free limit, including total project cost, employment generation as well as economic and financial rates of return are summarized in Annex 4, T-40. During the last two years' COFIDE started to lend through other financial intermediaries, which channelled one half of the number of subloans (all of them under the free limit, with one exception). The total amount of subloans channelled through intermediaries was US$9.8 million, nearly one third of the total amount committed. 4.04 The proposed Second Industrial Credit Project would be a follow up to the ongoing project with COFIDE, and would support the realignment of public sector financial institutions channelling term credit to the productive sectors (paras. 3.25 to 3.29). It would concentrate on strength- ening COFIDE's capabilities to supervise other participating financial intermediaries and to review subprojects, helping it to carry out its new role as the major wholesaler of term resources. In addition to COFIDE, the partici- pating financial intermediaries through which COFIDE would on-lend resources under the proposed project would be mainly the institutions participating under Loan 1358-PE. However, in order to reflect more fully the specialization of the different types of institutions, commercial banks, which are now limited by law to lending operations of less than one year would not be eligible in principle under the project.  - 20 - B. COFIDE Background 4.05 COFIDE was established in 1971 as an autonomous state enterprise principally to stimulate and promote Peruvian entrepreneurial activity; to coordinate and guarantee the financing of state enterprises; to mobilize resources for priority projects of state, reformed private, private, and social property enterprises; and to expand the domestic capital market. Initially, COFIDE was also designated to own the Government's shares in all state enterprises, but when this proved too difficult for the institution, legislation was enacted reducing COFIDE's responsibility to that of holding the shares in custody. However, between 1973 and 1979 several private sector firms nationalized by the Government were allocated to COFIDE to be held on its own account (para. 4.08). Thus, COFIDE's scope and tasks are wider and more complex than those of many DFCs associated with the Bank. 4.06 At year-end 1979, COFIDE had total assets of SI. 160.8 billion ($643 million), including SI. 45.6 billion ($187 million) in net loans out- standing, S/. 37.8 billion ($151 million) in investments, and S/. 65.6 billion ($262 million) in guarantees issued on its own account (Annex 4, T-25). Its equity, including surplus from revaluation of its investments portfolio, reserves, and retained earnings, stood at SI. 41.6 billion ($166 million). Of the S/. 23.7 billion of paid-in capital, 93% was held by the Government, and the remainder by individuals and companies that had received COFIDE's shares as part of compensation under the agrarian reform. At the height of the latter program (in 1973) as many as 21% of COFIDE's shares were held by individuals and companies. Continued capital increases subscribed by the Government and a decreasing use of COFIDE's shares to compensate individuals and companies have resulted since 1973 in a steady increase in the Govern- ment's share control of COFIDE. Regardless of ownership, however, by law the control of COFIDE rests with the Government which exercises its authority through the Ministry of Economy and Finance (MEF) and COFIDE's Board of Directors. 4.07 Until recently COFIDE's operations and management attention were heavily concentrated in activities related to its mandate to coordinate and guarantee the financing of state enterprises, including the holding of shares of certain of these companies. In addition, COFIDE has had since its estab- lishment the added responsibility for coordinating all state enterprise financing as well as guaranteeing their financing when and as required. In support of the latter, COFIDE can lend to state enterprises from its own resources; arrange and participate in the financing of state enterprises, other than State banks, either on its own account or on behalf of the Govern- ment; and issue guarantees on behalf of these enterprises, either on its own account or acting as agent for the Government. Until very recently, these activities, together with its ownership of basic industries described in the following paragraph, have dominated COFIDE's operations. The effect of the institution's emphasis on public sector financing is still reflected in its portfolio (para.4.22 ). Although during the last three years lending to the private sector has increased substantially, as of June 30, 1980, 50% of the loans outstanding and 56% of the guarantees issued on COFIDE's own account were to State enterprises. Together they represented 35% of COFIDE's total assets.  - 21 - 4.08 Between 1973 and 1979, the Government decreed that COFIDE hold for its own account some of the private companies operating in "basic industries" that were nationalized during the period. Currently it holds twelve such companies in its portfolio . Five are cement companies, three are in paper, two in chemicals, one is a combined paper and chemicals concern, and one is in metalmechanics. 1/ Most of these equity holdings exceed COFIDE's single client exposure limits, and have diverted from its originally intended purpose and frozen a large proportion of COFIDE's resources. As of June 30, 1980, the equity held by COFIDE in the thirteen companies accounted for 89% of its investments portfolio, and represented 85% of COFIDE's own equity. Including loans and guarantees, COFIDE had 36% of its total assets tied up in these companies (Annex 4, T-30). COFIDE's New Role 4.09 As part of the ongoing realignment of public sector financial insti- tuitions channeling term resources (paras. 3.25 to 3.29), COFIDE went through a fundamental reassessment of its role. The outcome has been a reorientation of COFIDE's objectives and priorities, with a consequent major change in its organizational (para. 4.10) and financial structures, and some additions to its operating policies and procedures (para.4.16). Most important, COFIDE will divest itself of its frozen investments in basic industries and concentrate on development banking functions. To this effect, COFIDE would sell its invest- ments in basic industries to the Government. The shares of the basic industries wcould then be owned by the Government (directly or through a holding company) and would be held by COFIDE on behalf of the Government (in custody) as is currently the case with the shares of the large public enterprises (SIDERPERU, PETROPERU, and others). The sale would be financed through a long-term loan from COFIDE to the Government (or to the holding company). Servicing of the loan would provide COFIDE with the increased liquidity it needs. Given COFIDE's low debt/equity ratio (about 3:1 in December 1981) there is no immediate need for additional capital contributions by the Government. Thus, with the proposed transfer and the corresponding financial arrangements, COFIDE's total assets and equity would remain unchanged after the transfer without additional burden to the Government. During negotiations, agreement was reached with the Govern- ment and COFIDE on the transfer of ownership, to be carried out not later than December 31, 1981. As the transfer would require changes in legislation, to be approved by the Government under the special powers given by Parliament on December 15, 1980, for a period of 180 days, approval of the appropriate legislative decrees would be a condition for loan effectiveness. 4.10 Another major objective of COFIDE is to expand its lending operations to the private sector, and to increase the coverage of that sector by channel- ling increasing amounts of term capital, particularly foreign resources, through financial intermediaries. Although COFIDE began lending through intermediaries and expanded its volume of private sector operations in 1978, this type of lending was limited. COFIDE did not actively promote lending through intermediaries because it lacked the organizational capability. 1/ The metalmechanics company, MORAVECO, is not considered a basic industry. The Government, however, decreed the takeover, against COFIDE's wishes, because the company was facing very serious financial difficulties.  - 22 - COFIDE's Board of Directors took a decisive step to remedy this situation with the organizational changes it approved on September 23, 1980, and which included the creation of a new Financial Intermediaries Division along with COFIDE's other two operating divisions. The new division has been partly staffed with personnel experienced in dealing with intermediaries as a result of the transfer to COFIDE on November 13, 1980, of the four funds (FRAI, FONCAP, FIRE and FONEX) operated by the Central Bank (paras. 3.22 to 3.24). COFIDE will also help strengthen the financial intermediaries, both institutionally and financially. This objective is reflected in the new division's operating policies (para. 4.16). One of the objectives of the proposed loan is to support COFIDE's activities in this new area of operation. Finally, COFIDE will no longer be responsible for project evaluation and financing of all investment projects of public enterprises, but will act as a financial agent for such enterprises. The projects themselves and their fi- nancing plan will be subject to approval by the Prime Minister and PROINVERSION will act as a coordinating committee and make appropriate recommendations. COFIDE's role will be limited to providing financial consulting services and to act as an executing agent for PROINVERSION, without taking any credit risks (para 3.28). Organization and Management 4.11 COFIDE's organization includes a seven-member Board of Directors and a Credit Committee. The Board, which is COFIDE's highest authority, is appointed by the MEF (Annex 4, T-38). The Board takes an active interest in directing COFIDE's policies and operations, and has fully endorsed the new role of the institution (paras. 4.08 and 4.09). The members of the Board and the senior management have the experience, skills and capacity to carry out this role successfully. 4.12. Under the General Manager, who is mainly responsible for day-to-day operations, operational responsibilities have functionally been assigned to the new Resources, Operations, and Financial Intermediaries divisions (Annex 4, C-2). This structure contrasts sharply with the previous organization in which operating responsibilities were vested in four operating divisions, Finance, International, Credits, and Investments, with many overlapping functions and responsibilities and little coordination among them. The Investments Division, in charge of managing COFIDE's investment portfolio and recommending new promotional investments, acted independently of, and with little coordination with the Credits Division. Each division had subsector specialized project analysts that often duplicated work in the same subsector, and which have now been merged under the new Operations Division. Each division had its own legal department; this function has now been consolidated under the General Manager. 4.13 COFIDE's second-level management and professional staff are competent and experienced. The Resources, Financial Intermediaries, and Operations division managers recently joined COFIDE and brought with them considerable commercial and development banking experience. About two thirds of COFIDE's 220 professionals, out of a total staff of 441, have been with the institution five or more years. The number of staff members appears somewhat high consider- ing the current level of clients and operations (para. 4.22), but should facili- tate handling of an increase in activities, particularly that expected from the new Financial Intermediaries Division.  - 23 - 4.14 Although COFIDF's accounting systems appear adequate, both the new management and the appraisal mission were concerned with the quality of information produced for decision makiiig and control purposes. Furthermore, COFIDE's old organization did not contain the function of controller. One result was that very often conflicting information reached management on the same subject. Consequently, during negotiations agreement was reached on the development and implementation by COFIDE of a uniform management information, control, and performance evaluation system, to be operated by the new Financial Administration department, by December 31, 1981. Policies and Procedures 4.15 During the preparation of the first industrial credit project (Loan 1358-PE) COFIDE prepared a comprehensive Policy Statement (Annex 1), focusing on its development banking functions. Some minor modifications and additions to it have since been made (for example, to tighten the conditions of disbursement or additional funding to clients with a poor repayment history, and to allow application of stiffer penalties for arrears), but their substance remains unchanged and applicable to COFIDE's new role and priorities. Except for the need to expand on policies applicable to lending to or through finan- cial intermediaries (para. 4.16), the existing policies and procedures are adequate. At the time of appraisal of Loan 1358-PE the Bank had been unable to endorse COFIDE's policies in the absence of a clear definition of the institution's involvement in holding state enterprises. Instead, a separate Statement of Operating Policies and Procedures was developed and made part of the contractual arrangements that governed lending under Loan 1358-PE. Since the issue of COFIDE's involvement in holding state enterprises was already solved (para. 4.05), and its involvement in basic industries will be solved with COFIDE divesting itself of these activities (para. 4.09), the need for two separate policy documents has disappeared and the Bank can endorse COFIDE's Policy Statement. 4.16 The expansion of COFIDE's lending operations through financial intermediaries made necessary the preparation of a comprehensive set of policies to govern these activities (Annex 2). Agreement was reached during negotiations that these policies be approved by COFIDE's Board, with any modifications they may introduce being satisfactory to the Bank, and included in its overall Policy Statement as a condition of effectiveness of the proposed loan. 4.17 COFIDE appraises all projects submitted to it for financing, with emphasis on financial, technical, marketing, and, increasingly, economic aspects. Overall, appraisals and the appraisal reports are of good quality. Before Loan 1358-PE, COFIDE had introduced economic appraisal on a trial basis, and Loan 1358-PE required this appraisal on all Bank financed sub- projects. Since then, COFIDE has been increasingly including the calculation of economic rate of return among the criteria it uses in selecting projects for financing with resources other than those of Loan 1358-PE. COFIDE has also improved its supervision activities and capabilities, and pays greater attention to the project implementation capacity of investment enterprises than it was doing at the time of the first Bank loan. In part this has been aided by the growing experience of its loan officers, and by their being  - 24 - organized along sectoral and subsectoral lines which allows them greater specialization and know-how of their clients' activities. On balance, COFIDE's appraisal and supervision capacity is sufficiently strong to entrust it with allocating the proceeds of the proposed loan. 4.18 In recent years COFIDE has been giving increasing attention to procurement decisions, particularly those of its larger clients. Also, COFIDE assists their clients by preparing financial packages which blend export financing from supplier countries (generally at lower interest rates than Bank resources but with restricted procurement sources) with resources from Loan 1358-PE. Thus, the proposed loan will continue to support COFIDE's efforts (and those of the participating intermediaries) to expand and diversify the procurement sources and to provide matching financial packages. COFIDE requires several alternative quotations for all procurement in its lending to the private sector, and national or international bidding is the standard procedure for public sector enterprises under Peruvian law. For all Bank projects COFIDE would satisfy itself that the goods and services to be purchased are suitable for the investment project and are reasonably priced, and it would provide the rationale for procurement in all subloan appraisals (para. 5.08). Disbursement procedures are adequate to ensure that funds are used for their intended purpose. Loan collection procedures and follow-up on arrears are also satisfactory. 4.19 Under Peru's public sector law, COFIDE is subject to the control of the Government's General Accounting Office, which in turn annually appoints independent accounting firms to audit COFIDE's accounts. These firms have performed reasonably well, but the frequent change of auditors has resulted in a lack of continuity and frequent changes in the auditing format, although primarily for minor items. Past audit reports (1977, 1978 and 1979) have had minor qualifications regarding the underestimation by COFIDE of its investment portfolio, and its income from such investments, arising from the capitaliza- tion of revaluations. The increased investments and equity corresponding to 1977 and 1978 were registered in 1978 and 1979, respectively. The Government is now considering the possibility of allowing public sector firms (including COFIDE) to carry out the selection of external auditors, which would result in greater continuity and shorter delays. During negotiations, agreement was reached with COFIDE on the appointment of independent auditors, acceptable to the Bank, to prepare annually full audit reports following the long form format for DFCs associated with the Bank. Past Operations 4.20 COFIDE's total operations (approvals measured in current soles 1/) increased from S/. 29.8 billion in 1976 to SI. 134.8 billion in 1979, a 65% yearly growth in a period during which inflation averaged about 54% annually. However, this increase was due mostly to COFIDE's operations on behalf of the Government and on which COFIDE assumes no risk. In this area COFIDE's role has been restricted to providing expertise in arranging and negotiating, when 1/ COFIDE's yearly foreign exchange approvals were converted into soles at the exchange rates prevailing at the end of each year. Although resulting figures are adequate for a year to year comparison of commit- ments, with the continuing devaluation of the sol these approvals cannot be compared directly with disbursements in the financial statements.  - 25 - and as required, foreign loans in line with its original mandate to assure the financing of state enterprises (para. 4.07). COFIDE's operations on its own account, including guarantees and investments, fell from SI. 19.3 million in 1976 to SI. 8.3 billion in 1977 due to the severe recession and balance of payments difficulties, wnich affected investment activities of both private and public sector enterprises, as well as COFIDE's ability to raise capital abroad. Since mid-1978, COFIDE's operations on its own account grew substan- tially reaching S/. 39.8 billion in 1979, and S/. 28.5 billion during the first six months of 1980. The level of loans during the first half of 1980 (S/. 21.5 billion) nearly reached the level for the whole of 1979. The number of operations fell from 120 in 1976 to 90 in 1977, and then increased gradually to 156 in 1979, and 116 during the first half of 1980 (Annex 4, T-27). 4.21 A sectoral breakdown of operations shows that the share of total approvals to the manufacturing sector increased from 19% in 1976 to 67% in 1979 (Annex 4, T-28), while mining declined from 58% to 3%. 1/ The most important manufacturing subsectors in 1979 were iron and steel (18% of the total amount), metalmechanics (14%), paper (9%), and agroindustries (8%). Other important subsectors were fisheries (11%) and transport (8%). The sectoral composition of COFIDE's lending has varied considerably from year to year with a few large projects making a substantial difference in any one year. However, the importance of manufacturing, followed by mining (14% during the first half of 1980) and energy (19%) is clear. Geographically, COFIDE's operations have been reasonably well distributed. Of the S/. 119.3 billion approved since 1976, the north has received 28%, the south 23%, the Lima/Callao area 17%, the central region 11%, and the east 10%, while non- regional projects accounted for 11%. By maturity, 75% of COFIDE's loans and guarantees during the same four and a half year period were for more than 5 years and 18% were for between 2 and 5 years (Annex 4, T-28). Portfolio Quality 4.22 COFIDE's overall exposure reached S1. 156.0 billion (US$624 million) at year-end 1979, and S/. 181.4 billion (US$636 million) by June 30, 1980. As of the latter date, the exposure included S/. 53.6 billion in loans out- standing, S/. 48.5 billion of equity investments, and S/. 79.3 billion of guarantees on own account. In addition, as of June 30, COFIDE had S/. 18.9 billion in undisbursed loan commitments. Included in the loan portfolio were 389 loans to 156 companies (Annex 4, T-29). Overall, COFIDE had 171 clients, of which 135 had received only loans, 21 had received loans and equity invest- ments, and 15 only equity investments (Annex 4, T-30). Of COFIDE's overall exposure, S/.71.5 billion (39.4%) were to state enterprises, S/. 72.0 billion (39.7%) to basic industry companies held by COFIDE (para.4.08), and S/. 37.1 billion (20.5%) to the private sector. 4.23 On the whole the quality and management of COFIDE's portfolio is adequate. As of June 30, 1980, arrears over 90 day were only 6.2% of the loan portfolio (Annex 4, T-31), and the exposure to companies in arrears was only 5% of COFIDE's overall exposure (Annex 4, T-32). Write-offs have been 1/ The reduction in mining operations was due to COFIDE's past concentration on large size public sector mining projects where no new starts took place recently. However, COFIDE is expected to give increased emphasis to small and medium size mining projects in the priva.e sector, both directly and through financial intermediaries.  - 26 - minimal and provisions adequate. 1/ Reschedulings during 1979 were SI. 4.3 billion, or 8.3% of the loan portfolio at the end of that year, but fully 92% were in one company that was reorganized and recapitalized and for which COFIDE had made provisions against its income equivalent to the reschedulings. The quality of the portfolio is partly a result of close supervision by COFIDE, which gives particular attention to companies with potential problems identified during biannual in-depth analyses of the portfolios. The bi-annual analyses rank companies into three groups according to their overall health, including financial, managerial, technical, and subsectoral growth and profit generation potential. In the first group are those companies developing satis- factorily, in the second those with some degree of potential for future problems, and in the third those that require COFIDE's immediate, close and continued supervision. Excluding exposure in companies in COFIDE's investment portfolio (ranked in Annex 4, T-30), as of June 30, 1980, COFIDE had 18 companies with a total exposure of SI. 16.2 billion in its so-called "critical" list, that is, those in the third ranking requiring close supervision. Signif- icantly, 86% of that exposure was to public sector companies, and only 14%, or S/. 2.3 billion to 9 private sector companies of which only two were in arrears. 4.24 There is, however, a substantial concentration of potential risk in COFIDE's portfolios. As of June 30, 1980, total exposure (loans, equity investments and guarantees) in Sociedad Paramonga, a basic industry company in the investment portfolio, was 73.4% of COFIDE's equity, in MINEROPERU, a state mining enterprise, 34.9%, and in PETROPERU, the state petroleum company, 29.5%. Furthermore, Sociedad Paramonga has been barely breaking even since the Govern- ment decreed in 1978 that it take over a substantial investment in a newsprint plant that just began operating and whose future profitability is still in question. The concentration of potential risk will decrease with the upcoming divestiture by COFIDE of the basic industry companies in its portfolio (para. 4.09) and the new emphasis on lending to the private sector (para. 4.10). 4.25 Although COFIDE's provisions for losses in its portfolios are adequate, and it has systematic procedures for determining provisions for potential loan losses, provisions for decreases in the value of the equity investments portfolio are made in an informal and ad hoc manner. During negotiations agreement was reached on the development and implementation of a systematic provisions policy for possible losses in value of the equity investments portfolio, by December 31, 1981. 1/ As of June 30, 1980, total provisions (including provisions on interest receivable) were St. 7.0 bUIIiomx, or 3,.97 of overall expo,Are. Provisions for loans and investments alone were 6.7% of those two portfolios combined.  - 27 - Resources 4.26 As of December 31, 1979, COFIDE had mobilized SI. 141.2 billion of which 19.3% were paid-in capital and retained earnings, 13.4% domestic borrowings, and 67.3% foreign borrowings including those on which it provided guarantees on its own account. COFIDE has traditionally played a large role in mobilizing foreign resources, particularly for state enterprises as indi- cated in para. 4.07. During the mid-1970's, it sought to actively mobilize local savings but was thwarted by high inflation and low interest rates (Annex 4, T-33). Since 1979 COFIDE has been able to begin raising substantial domestic savings, particularly through its Type C bonds (para. 3.17). With the Government's current change in interest rate policies (para. 3.19), it is likely that COFIDE will be able to mobilize yet larger amounts of domestic savings in coming years. COFIDF's foreign exchange resources available for new commitments stood at US$109.3 million as of August 31, 1980. However, 39.5% of this amount was earmarked for specific projects (mostly for ELECTROPERU), and 53.2% was in credits that were mostly tied to specific country procurement. Untied credits available for general project financing amounted to only US$8.0 million. This compares with US$77.0 million in loan applications (53) received during the first half of 1980, of which US$34.7 million were for foreign currency loans, US$14.7 for foreign currency guarantees, and US$27.6 for local currency financing. Financial Position and Results 4.27 COFIDE's total assets, excluding guarantees, increased from 8/. 16.16 billion in 1975 to S/. 95.18 billion in 1979, an average yearly growth of 56% compared with a 48% average yearly inflation during the same period. This average growth, however, was marked by a rapid growth (74% yearly) during 1976-1977 followed by a substantial slowdown (40% yearly) in the following two years due to the severe recession which led to reduced commitments in the earlier period (para. 4.20). Comparative balance sheets for the period show an adequate financial position, although during 1977 and 1978 the long-term debt, including guarantees, to equity ratio was just over the 5 to 1 allowed for in COFIDE's operating policy (Annex 4, T-25). This situation was corrected in 1979 with a S/. 7.7 billion increase in paid-in capital, and a further S/. 11.6 billion increase in equity resulting from the revaluation of COFIDE's equity investments, mostly those of basic industry companies. Liquidity has been satisfactory during 1975-1979, with the current ratio varying between 1.5 to 1 (1975) and 2.3 to 1 (1979). Through June 30, 1980, COFIDE had no uncovered foreign exchange exposure. 4.28 Income statements for 1975-1979 show an 80% yearly growth in reve- nues, excluding exchange gains, compared with an increase in administrative expenses of only 49% yearly. The latter decreased steadily from 1.1% of average total assets in 1975 to a very adequate level of only 0.6% in 1979. However, although net return on equity has increased steadily from 2.9% in 1975 to 7.4% in 1979, throughout the period it has remained well below the prevailing rates of inflation, resulting in an erosion of capital in real terms only partly offset by the revaluation of the equity investments porffolio. Income has been affected by high provisions for bad debts, necessary to offset the relatively low provisions made prior to 1976, and the low interest spreads  - 28 - and charges, particularly on foreign currency loans to state enterprises, and charges on guarantees on own account. COFIDE's Board, backed by the new Government's policy which calls for interest rates that more closely reflect the real cost of capital (para. 3.19), approved, in December 1980, a new structure of increased interest rates for local currency loans and of interest rate spreads, loans and guarantee fees on foreign currency effective from January 1, 1981 (Annex 4, T-34). Under the new system, COFIDE's interest rate for local currency loans is 56.5% p.a. plus an annual commision of 1.5%. COFIDE loans also carry a 1.5% flat service fee and commitment fee of 1% p.a. The corresponding effective annual rate (see para. 3.19) exceeds 70%. Projected Operations 4.29 Given Peru's current economic recovery, the recent increase in COFIDE's operations and its new role as a wholesaler of term resources, COFIDE's volume of operations (direct loans and loans through financial intermediaries) is expected to increase significantly during the next few years. The current financial projections prepared by COFIDE are based on a conservative growth rate of 5% annually in real terms. Based on expected inflation rates and the expected devaluation of the sol, the projected loan approvals (in current soles) are summarized in Table 4.1. Table 4.1. COFIDE: PROJECTED APPROVALS 1980-1984 (SI. billion) 1979 1980 1981 1982 1983 1984 (Actual) Loan Approvals Local Currency (Direct) 8.7 16.0 24.5 34.5 45.2 57.1 Foreign Currency (Direct) 12.0 20.9 25.4 30.8 36.0 42.8 Financial Intermediaries 1.7 2.0 6.0 9.0 12.0 15.0 TOTAL 22.4 38.9 55.9 74.3 93.2 114.9 of which Foreign Currency (US$ million) 54.8 68.0 74.4 78.6 82.5 86.3 4.30 The above pattern of expected approvals, combined with the new structure of interest rates (para. 4.28) would result in a satisfactory financial situation for COFIDE during the next five years (Annex 4, T-35 to T-37), including a gradual increase in its return on equity, and a debt/equity ratio below the currently agreed limit of 5:1. As currently envisaged, the proposed Bank loan (US$60 million equivalent) would account for nearly 25% of COFIDE's foreign exchange requirements during the three-year commitment period. As indicated above (para. 4.26), foreign exchange resources available for commitment as of August 31, 1980, were US$109.3 million and several other foreign borrowings are currently being negotiated, including a US$30 million loan from IDB, originally scheduled to be used by the Central Bank through FIRE and FONCAP.  - 29 - C. Other Participating Financial Intermediaries Introduction 4.31 The financial intermediaries that would participate under the proposed loan would be those legally authorized to undertake term lending. Currently, they include financieras, regional banks, and the specialized state development banks of which only two, Banco Industrial and Banco Minero are ex- pected to participate. Although commercial banks would not directly participate, six of the seven locally owned commercial banks have a subsidiary financiera. T'he limited term lending done in the past by commercial banks was mostly with resources of the Central Bank funds (paras. 3.22-3.24) under an exception to the applicable lending regulations. Commercial banks, however, accounted for only 21% of the resources committed through July, 1980, and were mostly in relatively small loans to the smaller sized beneficiaries of the Central Bank funds. Thus, commercial banks could be important for participation under the separate SSE project currently under preparation (para. 4.01). Financieras 4.32 After several years of stagnation (their total assets fell in real terms every year from 1975 to 1978) the financieras experienced a very rapid growth, including the establishment of five new financieras, during 1979 and the first half of 1980 (Annex 4, T-13). The main reason for the outstanding performance of the financieras in 1979 was the change in the Central Bank policy that allowed interest rates paid on time deposits in the financieras to be set at levels above those paid by any other financial institution (para. 3.16). These higher yields attracted a large flow of savings to the financieras generating an increase in total assets of about 54% in real terms during 1979. This trend has continued during the first half of 1980, during which assets have grown at an annual rate of about 70% in real terms. The bank- ing law permits financieras to extend financing through medium-term credits, which must exceed one year in maturity, and through contingent financing such as guarantees, letters of credit and discounted bills. Loans are typically extended at three-year maturities, commensurate to the average maturity of their time deposits. In October 1979, a new decree was passed authorizing the financieras to offer leasing services and expanding their abilities to provide underwriting services. The financieras also play an important role as interme- diaries in channelling resources from the four Central Bank development funds and COFIDE. Historically, about 90% of their lending was to the industrial, commercial and construction sectors (Annex 4, T-19), with industry taking the largest share. In recent years, the share of financiera loans going to industry has increased, reaching 75% of the total in 1979. 4.33 The principal source of funds for the financieras are negotiable time deposits. As of June 30, 1980, time deposits in all financieras represented 53% of their combined assets (72% of their assets excluding guarantees). Financieras are allowed debt-to-equity ratios of 13 to 1 on time deposits and long-term bonds, plus 4 to 1 on credits received from other financial institutions. As of June 30, 1980, the time deposits (long- term bond sales have been insignificant) captured by financieras were 9.3 times their combined paid-in capital and reserves, while credits from  - 30 - other financial institutions were equal to their equity (Annex 4, T-17) reflecting in part the shortage of long-term capital other than that made available by the Central Bank funds. The proposed Bank loan would help fill the gap in long-term foreign currency funds available to the financieras for the financing of private sector projects requiring foreign exchange. Regional Banks 4.34 The six regional banks, which operate as commercial banks with a mandate to focus on the development of their respective regions, have in recent years experienced a much higher rate of growth than commercial banks. Their growth in 1979 was 25% in real terms compared to a 12% decline for commercial banks (Annex 4, T-14). In addition to providing the normal services offered by the other commercial banks, the regional banks may extend medium-term financing and may issue certificates of deposit in local currency. They also have access to special discounting facilities, operate with lower reserve re- quirements (and receive higher yields on these reserves) and are allowed to offer higher interest rates, in competing for time deposits. As a result, 30% of their total liabilities consist of time deposits, as compared to 17% for the commer- cial banks. While they are also allowed to operate in Lima, no more than 50% of the resources mobilized in Lima may be placed in Lima; all resources raised in the regions must be invested within the region. In recent years, the regional banks have been expanding their operations in Lima, and have concentrated in short-term lending. However, their potential contribution to decentralization of economic activity is considerable, and the Government is interested in supporting a more pronounced orientation towards financing of regional development. 4.35 Wlhile financieras and regional banks have already developed some capabilities for project appraisal and have been exposed to economic analysis of projects through their use of COFIDE resources, and particularly of re- sources from FRAI, FIRE and FONCAP, their capabilities vary substantially and they need improvement in nearly all institutions, with the possible exception of the three largest financieras. COFIDE will actively help the participating financial intermediaries to improve their capabilities through the subproject review process and also by seminars and other technical assistance. As part of this process and also to publicize its increased role in operating through financial intermediaries, COFIDE recently organized a Project Appraisal Seminar for the technical staff of the financial intermediaries and for COFIDE's own staff. The seminar, carried out with Bank assistance took place from January 26 to January 30, 1981. COFIDE, through its Financial Intermediaries Division will also monitor on a regular basis the financial performance of the intermediaries to satisfy itself of their creditworthiness (para. 4.16), and could stop further commitments to a given intermediary if sound financial criteria are not being followed.  - 31 - V. THE PROJECT AND PROPOSED BANK LOAN Project Objectives 5.01 The proposed project would be a follow-up to the ongoing Industrial Credit Project (Loan 1358-PE) with COFIDE. Its main objective would be to support the reorganization of public sector financial institutions chan- nelling term resources, and the establishment of a more open and competitive system where a wide number of financial intermediaries would have equal access to the resources available. COFIDE would be the main institution mobilizing foreign resources to be channelled through other financial intermediaries to small and medium size projects, or directly by COFIDE to finance larger projects. The proposed loan would also contribute to make COFIDE's new organizational structure operational (para. 4.12), and would help to improve its capabilities for economic analysis of projects, to pass on such capabil- ities to the participating intermediaries, and to supervise and follow-up the performance of the intermediaries (para. 4.35). In addition, COFIDE would continue to mobilize domestic resources and to promote and generate new projects, providing equity and long-term financing, and packaging joint ventures with domestic and foreign investors. The Proposed Bank Loan 5.02 Based on the prospects and trends in the general economic environ- ment and the demand for industrial investment (para. 2.04), the processing capacity and projected operations of COFIDE and the eligible financial inter- mediaries (para. 4.29), as well as the expected availability of funds from other foreign and local sources (para. 4.30) a Bank loan of US$60 million is proposed to support the project. The proposed loan would be made to COFIDE with a maturity of up to 17 years including up to 4 years of grace, but the usual composite amortization schedule for Bank DFC loans would apply. The Government would guarantee the loan and would assume the cross-currency exchange risk (between the currencies being disbursed and the US dollar) in exchange for a fee of 1.5% p.a. on the amount outstanding. The fee would be reviewed periodically and would be credited to a special reserve fund to be maintained by COFIDE. The accrued exchange differentials would be calculated annually and the government would cover any shortfalls that may appear in the reserve fund. Signing of an agreement between COFIDE and the Government on the proposed mechanism to cover the cross-currency risk would be a condition for loan effectiveness. Margins to Intermediaries 5.03 Assumming a Bank interest rate at the time of Board presentation of 9.6% p.a., and a cross-currency risk fee of 1.5% p.a., the interest rate to COFIDE would be 11.1% p.a. COFIDE's onlending rate to the participating financial intermediaries would be 12.1% p.a. providing a margin of 1.0% p.a. to cover the administrative costs of financial intermediation and the commit- ment fee on the total uncommitted amount, part of which would correspond to funds to be used by the participating intermediaries.  - 32 - The financieras and other intermediaries would have a margin of up to 3.0% p.a. on their subloans and COFIDE, when lending directly, would have a total spread of up to 4.0% p.a. but not less than 3.0% p.a. (para. 5.04). The additional spread on direct subloans by COFIDE would help to cover the additional costs of foreign resource mobilization and commitment fees corres- ponding to its wholesale function. Onlending Terms and Interest Rates 5.04 Subloans would have a minimum maturity of 4 years and a maximum of 15 years, including up to three years of grace. Actual terms are expected to range mainly between 7 and 12 years, with an average term of about 9 years, although some tourism projects may require terms of 12-15 years and some mining projects may have somewhat shorter terms (4 to 6 years) depending on the size of the proven reserves. The subloans would be denominated in US dollars and would bear an interest rate of up to 15.1% to the final borrowers except in the case of large, creditworthy firms borrowing directly from COFIDE, which might receive a lower rate but in no case less than 1411% p.a. Similarly, the participating financial intermediaries, mainly the financieras, may be willing to accept a smaller spread for some prime customers. Competition among financieras to obtain the best customers has already provided some examples of reduced spreads in 1980. The spreads and interest rates to the final borrowers are in line with COFIDE's current practices, including the terms of the Central Bank funds recently transferred to COFIDE (para. 3.27). The US dollar onlending interest rate would be reviewed periodically by COFIDE, at its own initiative or at the initiative of the Bank, and may be adjusted, subject to the Bank's agreement, to take account of fluctuations in the international capital markets and domestic credit demand. The terminal date for submission of subproject proposals under the loan would be June 30, 1984, and the closing date for disbursements June 30, 1985. Annex 3 shows the estimated schedule of disbursements. Participation of Intermediaries 5.05 All financial intermediaries legally established in Peru, autho- rized to undertake term lending operations in the industrial, mining and tourism sectors, and in good standing with the Superintendency of Banks and Financial Institutions would be eligible in principle for participation under the proposed loan. Currently, the types of institutions meeting the above criteria are the state development banks, financieras and regional banks. Before signing the contract of participation, the Financial Intermediaries Division in COFIDE would ensure that the specific intermediaries meet the above criteria, as well as the conditions set forth in COFIDE's Policy for Financial Intermediation (Annex 2), particularly regarding sound financial practices and project appraisal capabilities. COFIDE's Financial Intermedia- ries Division would monitor periodically the compliance with the above criteria and conditions (para. 4.35). New types of financial institutions or existing institutions subject to a revised legal framework may be considered for participation inT the project at a later stage. The participation of addi- tional types of intermediaries would be subject to Bank approval, following COFIDE's recommendation.  - 33 - Eligible Enterprises and Lending Limits 5'.06 Enterprises eligible for subloans would include public, mixed and private enterprises undertaking investment projects in the industrial (including construction), mining and tourism sectors. Subprojects would have to be financially and economically viable, and the direct lender (COFIDE or t:he participating financial intermediary) would prepare a complete evaluation of the proposed subproject, including the calculation of the economic rate of return (ERR) for subprojects involving Bank financing above US$250,000. To ensure the distribution of industrial credit over a satisfactory number of recipients, a cumulative limit of US$5.0 million on the total financing to a single enterprise or group of related enterprises would be applicable. An enterprise would be considered to be related to a group when it owns or effectively controls the voting stock of another firm, or itself is owned or effectively controlled by another firm. Free Limit 5.07 All subloans made directly by COFIDE using the proceeds of the Bank loan and exceeding the amount of US$1 million would be subject to prior review and approval by the Bank. In the case of subloans made by other financial intermediaries, the free limit would be US$500,000. Initially, all subloans submitted by the intermediaries will be subject to prior review and approval by COFIDE irrespective of size, but COFIDE's Financial Intermediaries Division would periodically review the performance and capabilities of the participating intermediaries and may grant individual free limits to specific intermediaries, in consultation with the Bank. UJnder the first project, subprojects above the free limit accounted for 20% of the total number and 60% of the total loan amount (para. 4.03). While the free limit for participating intermediaries other than COFIDE would be the same as under the previous project, their increased participation in the financing of projects with smaller average size than those financed by COFIDE is expected to result in a similar share of sub- projects being reviewed by the Bank. Procurement and Disbursement 5.08 Procurement for subprojects would conform with standard practice for DFC loans and procedures would be similar to those under the first Industrial Credit Project. The financial intermediary (or COFIDE in the case of direct loans) would require final borrowers to obtain quotations from a reasonable sample of qualified suppliers for major pieces of equipment. COFIDE would also monitor closely the procurement of items to be financed under the Bank loan by other participating intermediaries, in order to ensure that the items are reasonably priced and appropriate for their intended purpose. Disbursement procedures would be similar to those under the first project. The loan proceeds would be disbursed for: (a) 100% of foreign expenditures for directly imported equipment, including installation and start-up costs; (b) 70% of the expenditures on imported equipment purchased Erom domestic distributors; and (c) 50% of the ex-factory cost of locally 'produced equipment and 35% of construction and civil works expenditures.  - 34 - The above percentages represent the estimated average foreign exchange component of eligible projects and are in line with comparable figures else- where. As is customary under the Bank's DFC-type loans, only expenditures made no more than 90 days prior to the date of receipt by the Bank of the corresponding financing requests would be eligible for reimbursement under the proposed loan (180 days for projects through financial intermediaries). Project Benefits and Risks 5.09 The proposed project would make a major contribution in providing term financing for investment projects in the industrial, tourism and small and medium mining sectors. The project would provide financing for about 100 subprojects involving total investment costs of about US$120 million. It is expected that about 50% of the proceeds of the loan would be used by COFIDE for direct subloans ranging from US$500,000 to US$4 million, whereas the remaining 50% would be on-lent through the participating financial intermediaries for subloans ranging from US$150,000 to US$1 million. Direct employment generation is expected to be about 4,000 jobs, based upon an average investment cost per job of US$30,000, 1/ and substantial indirect employment generation would also be expected. Most subprojects to be financed under the proposed project are expected to have an ERR in the range of 15-40%. 5.10 The proposed project would also have a significant impact by support- ing COFIDE's reorganization, its increased orientation towards the private sector and its expanded role as a wholesaler of term resources through a wide range of financial intermediaries. The project would contribute to strengthen the main financial institutions providing term resources to industry and other sectors, would encourage competition based on the quality of the service provided, eliminating monopolistic situations arising from privileged access to special sources of funds, and would help to improve the project evaluation and supervision capabilities of the participating intermediaries. Thus, the project would have a significant institution building impact on the Peruvian financial sector. 5.11 While the project does not involve unusual risks regarding the attainment of its major objectives, the ongoing policy changes in the indus- trial and financial sectors may result in a lower than anticipated level of economic activity, and the institutional changes within COFIDE may limit its processing capacity and the level of loan approvals in 1981. The quality of COFIDE's new management and the speedy implementation of the reorganization are expected to keep the institutional risks to a minimum, whereas the pros- pects for continuing economic recovery in Peru appear to be good. 1/ The average investment cost per job in the industrial sector during the period 1972-76 was US$22,000 ranging from US$2,500 in garments to US$55,000 in industrial chemicals. The estimated average for subprojects financed under Loan 1358-PE is US$25,000 (para. 4.03).  - 35 - VI. AGREEMENTS AND RECOMMENDATION 6.01 During loan negotiations, agreements were reached on the following: (a) With the Government and COFIDE on (i) loan size, provision of the government guarantee and assump- tion of the cross-currency exchange risk by the government (para. 5.02); (ii) COFIDE's divestiture of its current equity investments in basic industries while maintaining COFIDE's current level of equity, with the divestiture to be carried out not later than December 31, 1981 (para. 4.09); (b) With COFIDE on (i) a draft policy statement for financial intermediation (para. 4.16), on providing assistance to the participating financial intermediaries to improve their project appraipal capabilities, and on monitoring their financial practices, creditworthiness and operating capabilities (para. 4.35); (ii) subloan terms, interest rate to the intermediaries, maximum spreads and interest rates to the final borrowers (paras. 5.03 and 5.04); (iii) eligible subTprojects and maximum subloan size (para. 5.06); (iv) calculation of ERR for subprojects involving Bank financing above US$250,000 (para. 5.06); (v) free limit (para. 5.07); (vi) procurement and disbursement procedures (para. 5.08); (vii) maintenance by COFIDE of a maximum debt to equity ratio of 5 to 1 (para. 4.30); (viii) development and implementation, by December 31, 1981, of a uniform management information, control and performance evaluation system, satisfactory to the Bank (para. 4.14), and appointment of independent auditors, acceptable to the Bank (para. 4.19); and (ix) development and implementation, by December 31, 1981, of a systematic provisions policy for possible losses in the value of the investment portfolio (para. 4.25).  - 36 - 6.02 The following would be conditions for loan effectiveness (a) signing of an agreement between COFIDE and the Government to cover the cross-currency exchange risk (para. 5.02); (b) approval by the Government of the appropriate legislative decrees enabling COFIDE's divestiture of its equity investments in basic industries (para. 4.09); and (c) approval by COFIDE's Board of Directors, of a policy statement for financial intermediation, satisfactory to the Bank (para. 4.16). 6.03 Signing of a participation contract, satisfactory to the Bank, between COFIDE and the eligible financial intermediaries would be a condi- tion for participation of each financial intermediary. 6.04 The proposed project would constitute a suitable basis for a Bank loan of US$60 million with a term of up to 17 years, including up to 4 years of grace on conditions outlined in Chapter V.  - 37 - ANNEX 1 Page 1 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT COFIDE: Summary of Operating Policies and Procedures as of October 31, 1980 1/ GENERAL POLICIES In its operations, COFIDE shall apply the following financial and banking principles and practices: 1.0 POLICIES REGARDING RESOURCE ALLOCATION 1.1 GENERAL GUIDELINES 1.1.1 Financing shall be provided for projects that contribute to the country's economic and social development, in the light of priorities laid down in national development plans and the directives of the Ministry of the Ec:onomy and Finance. Such financing shall constitute a fundamental part of the implementation of global, sectoral and regional policies covering said plans. From time to time, specific policies shall be established regarding the purpose of such financing operations, the type of enterprise concerned and the location of projects. 1.1.2 In order to receive financial assistance from COFIDE, enterprises mttst also meet the following conditions: (a) They must be in a sound financial situation or have developed a plan to deal with their financial problems to the satisfaction of the Corporation, and the projects to be financed must as a minimum offer a return sufficient to repay the loan within the term normally fixed for COFIDE operations. (b) They must have the management and technical capacity to ensure the proper conduct of their operations, and also to implement the projects to be financed or, failing this, be able to obtain competent technical assistance. 1.1.3 The Corporation shall promote the preparation of preinvestment studies, by providing credits on preferential terms; it shall participate in the risks involved in investment studies or under certain conditions shall assume the entire risk. 1.1.4 The Corporation shall not limit its financial assistance to projects submitted to it but shall also identify and promote directly or indirectly projects of new or existing enterprises of substantial benefit to the country's development. 1/ Unofficial translation from the original in Spanish.  - 38 - ANNEX 1 Page 2 1.1.5 In order to afford small- and medium-sized firms access to the financial resources of COFIDE within the guidelines established in the above clauses, the Corporation shall undertake financial operations with and give technical assistance to financial intermediaries. 1.1.6 The Corporation may undertake, directly or indirectly, such operations as may be required by each enterprise in the following forms: (a) Equity contributions 1. temporary contributions to "social property enterprises; 2. capital contributions for public and reformed private enter- prises. (b) Loans and guarantees 1. local currency and/or foreign exchange loans for studies, investment projects and working capital; 2. endorsements and bonds; and 3. underwriting. 1.1.7 COFIDE shall not grant debt consolidation loans or loans for the substitution of shareholders except for operations undertaken pursuant to law or, exceptionally, to ensure the recovery of loans granted by the Corporation. Also, exceptionally, in cases where this is justified to ensure the completion of a project, the sound operation or reorganization of an enterprise and the recovery of loans granted, the Corporation may extend due dates, renew bonds or refinance debts in accordance with the rules established by the Board of Directors. 1.1.8 Loans, guarantees and investments by the Corporation shall be diversified among the economic sectors, and also as regards type of financing. 1.1.9 New applications for loans from enterprises with liabilities due but not paid to COFIDE shall not be processed or approved until such liabili- ties are regularized either by payment or through an agreement satisfactory to the Corporation. Nor will loan applications be processed for enterprises with liabilities to COFIDE where any condition of contracts in force or obligations pursuant to contracts expired have not been fulfilled. 1.2 ALLOCATION OF RESOURCES TO PROJECTS 1.2.1 Projects shall be submitted to detailed evaluation as regards their financial, market, administrative capacity, technical feasibility, and economic and social feasibility aspects. The socio-economic evaluation of projects shall be based on the social rate of return or other similar methods and the weighting of this factor will be increased over time as a means of reaching decisions.  - 39 - ANNEX 1 Page 3 1.2.2 COFIDE may finance projects in the national interest by decision of the State, for which purpose it will undertake an evaluation of market, administrative capacity, technical feasibility and economic and social feasibility factors, with the emphasis on economic and financial aspects to arrive at the best financial structure possible. 1.2.3 In the purchase of goods and services for projects financed by COFIDE, enterprises should as far as possible use appropriate bidding methods or such other procedures as will make possible satisfactory comparisons with a view to ensuring the best price and optimum quality. 1.2.4 For loan applications, a technical, economic and social feasibility study shall be submitted, together with a favorable opinion on the part of the appropriate public agencies. 1.2.5 The Corporation shall make it a condition that enterprises submit plans showing both that the project is fully financed and that the enterprise's financial structure is sound. The amount of COFIDE financing shaLl be adequate to ensure the success of the project, but the Corporation's total financial assistance, direct or indirect, may not exceed 75% of the total cost of the pr-oject, save in exceptional cases. 1.2.6 The Corporation's loan operations shall abide by the conditions as regards rates of interest, commissions, maximum repayment periods and grace periods established b; the Board of Directors. 1 2.7 The minimum amounr of any initial operation between the Corporation and a natural person or body 3rporate shall be S/. 10 million. The minimum for preinvestment loans shall be fixed by decision of the Administration. There slhall be no minimum limit for public and "social property" enterprises. 1.2.8 Loans, endorsements and bonds shall have adequate backing either through the establishment of adequate guarantees or in the light of the project's feasibility and soundness, and also based on the qualifiLcations of- the entrepreneurs. Public enterprises shall allocate the amounts required to service their debts in their biannual budgets. 1.2.9 COFIDE shall invest in projects which, in view of their rate of return and security, will contribute to maintaining the Corporation's net worth. Capital contributions shall be made both to enterprises with state participation required by law or on its own initiative, and to reformed private enterprises. In the latter two cases the capital contributions shall preferably not exceed 30% of the registered capital of the enterprise. 1.2.10 Temporary contributions to "social property" enterprises shall be made out of loans granted by the Corporation to the Fondo NacionaL de Propiedad Social (FONAPS).  - 40 - ANNEX 1 Page 4 1.2.11 The Corporation shall not seek to obtain administrative control over the enterprises that it finances, but shall exercise supervision to ensure that they comply with the objectives of the operation concerned while it continues in effect. It shall carefully monitor projects, requesting the information it needs on the economic, financial and administrative affairs of the enterprise. Where necessary, it shall provide, directly or indirectly, such assistance as may be required for sound operations or for reorganization of the enterprise and recovery of any funds provided. 1.3 ALLOCATION OF PREINVESTMENT RESOURCES 1.3.1 In operations relating to the financing of preinvestment studies relating to entrepreneurial projects and/or to technical assistance for the development of such projects, the opinion of public agencies will be required as to the priority of the study, together with a 20% minimum contribution on the part of the borrower. 1.3.2 COFIDE shall assume all risks of investment in studies, in the case of projects relating to the "social property" sector, and in projects identi- fied by the Corporation, or other national public-sector institutions, that are intended for regional development and are included in the regional financial program. 1.3.3 Through the regional financing program, the Corporation shall assume part of the risk of investment in studies in the case of projects submitted by investment promoters to be implemented by reformed private enterprises, cooperatives and agicultural societies of social interest (SAIS). 1.3.4 The Corporation shall in all cases seek to recover the investment made in preinvestment studies. 2.0 POLICIES REGARDING MOBILIZATION OF RESOURCES 2.1 As required for programmed financing and investment operations, COFIDE shall obtain its resources from: (a) contributions to subscribed capital; (b) the issue and placement of bonds on the domestic and foreign markets; (c) floating of foreign currency bonds; (d) loans obtained through the monetary program; (e) deposits of workers' communities (comunidades laborales); (f) other securities and bonds; and (g) earnings on its operations.  - 41 - ANNEX 1 Page 5 2.2 To meet temporary liquidity requirements, COFIDE shall obtain resources from: (a) advances on account from the Banco de la Nacion; (b) rediscounts with the Central Reserve Bank; and (c) other sources of short-term funds. 2.3 The search for financial resources internally or abroad will cover a broad front, bearing in mind competition from other securities and financial intermediaries. For this purpose, and in accordance with the legal provisions in force, COFIDE shall issue and place medium- and long-term bonds of various types, as well as other securities. 2.4 In its operations to obtain foreign currency resources, COFIDE shall act in the following capacities: (a) as direct borrower or obligor; (b) as borrower with the guarantee of the Peruvian State; (c) as financial agent representing the Peruvian State; (d) as guarantor of enterprises; (e) as guarantor representing the Peruvian State; (f) as operating agent. 2.,5 When mobilizing foreign currency resources, COFIDE shall abide by the following criteria: 1. It shall obtain loans for investment projects of an entrepreneurial nature and preinvestment studies. 2. It shall seek the most suitable financing structure, for which purpose it will combine the alternatives offered by the following sources: a. governent-to-government loans; b. loans from international development agencies; c. export credits; and d. bank loans. 3. When desirable, it shall negotiate separately for supply and service contracts and for financing, with a view to obtaining the most favourable ffnancial conditfons.  - 42 - ANNEX 1 Page 6 4. It shall provide advisory services to enterprises as regards any financial conditions that are explicit or implicit in supply and service contracts. 3. POLICIES REGARDING ADMINISTRATION AND CONTROL 3.1 FINANCIAL ADMINISTRATION 3.1.1 The Corporation shall maintain a budgetary system for the purpose of formulating, coordinating and evaluating its two-year operations program- ming. This shall be done in accordance with the two-year plan for the national public sector, legal provisions and guidelines in budgetary matters, and also with COFIDE's medium-term programming. The purpose of the latter is to formulate, coordinate and revise the objectives, policies, plans and programs of COFIDE and also to establish priorities for the use of funds, and the financial sources to which recourse will be made. This programming shall be based on the policies established by the Ministry of the Economy and Finance, and medium-term development plans. 3.1.2 When conditions permit, COFIDE shall contribute to the expansion of the securities market, through the placement of COFIDE bonds and the sale of shares it holds in portfolio. 3.1.3 COFIDE's total debt, including guarantees, less the amount of operations benefiting from the specific guarantee of the State or given on behalf of the State, shall not exceed five times the paid-in capital and reserves of COFIDE. 3.1.4 COFIDE shall maintain its capacity to meet its obligations, on the basis that the average maturity of its loans and guarantees shall be equal to or less than the average maturity of its obligations. 3.1.5 The Corporation shall diversify its loans and guarantees and shall preferably avoid undertaking operations with a single "social property" enterprise or reformed private enterprise in an amount in excess of 20% of the paid-in capital and reserves of COFIDE. This will exclude operations with the specific guarantee of the State or undertaken on behalf of the State. 3.1.6 The aggregate amount of equity investment by COFIDE may not exceed the paid-in capital and reserves of the Corporation. 3.1.7 The objective of COFIDE's financial policy shall be, as far as possible, to maintain the value of its capital in real terms. As a general rule, all of the Corporation's operations should be profitable. 3.1.8 'Me rates of interest and commission tor operations in local and) or foreign currency shall be determined from time to time by the Board of Directors, taking into account conditions on the capital market, the cost of COFIDE capital, its operating expenses, and a reasonable profit.  - 43 - ANNEX 1 Page 7 3.,1.9 For foreign exchange loans and guarantees, the Corporation shall charge a specific commission as financial intermediary, transferring to the customer interest and other charges. 3.1.10 When loans, guarantees or endorsements are granted in foreign exchange, the Corporation shall not assume, directly or indirectly, any exchange risk, which shall be transferred to the borrower or covered without risk to COFIDE through other mechanisms. 3.1.11 COFIDE shall make provisions and reserves in accordance with proper financial practices. It shall use a system for evaluating its portfolio holdings that will enable it to build up sufficient reserves to cover loan and guarantee risks, in addition to other types of provisions and accounting reserves. In the case of public enterprises, the fact of including provisions for servicing of their debt with COFIDE in their biennial budgets shall be considered sufficient guarantee. 3.1.12 The deadline for utilization of loans shall not exceed five months after the last date for disbursement shown in the schedule submitted by the enterprise and approved by COFIDE. The deadline for utilization of local currency loans shall not exceed two years. 3.2 CONTROL OF OPERATIONS 3.2.1 For loan, guarantee or endorsement operations in local and/or foreign cuirrency, a contract will be signed with the beneficiaries in accordance with technical regulations established by the Administration, which shall be recorded by notary public except for operations with public enterlprises. In cases where this is justified and where this does not alter the basic condi- tions under which the operation was approved, the Administration may modify thle utilization period of contracts, advising the Board of Directors accordingly. 3.2.2 Loans and endorsements for fixed assets shall be subject to a list of goods and services and a disbursement schedule which shall be the basis for the control of operations. At the request of the beneficiary, the Administration may accept duly jusitified departures from this list and/or modifications in the schedule. 3.2.3 Working capital loans shall be subject to a cash flow projection. Diisbursements shall be authorized up to the total amount agreed, beneficiaries being required to submit updated cash flow estimates justifying said disburse- ments. 3.2.4 The Corporation, when undertaking loan operations either in local or in foreign currency, shall include a clause in the respective contract that obliges beneficiary enterprises to pay the financial costs, commissions, ot:her financial expenses and amortization of principal automatically, without prior notification of payment due. In the event of failure to effect such payments or amortization instalments, clause 3.2.6 of the General Policies shall apply.  - 44 - ANNEX 1 Page 8 3.2.5 In the event of non-payment of any item by the debtor enterprise and when no decision has been taken to apply the terms of clause 1.1.7, the Corporation may have recourse to the courts to require the payment of any balance outstanding or to cancel the contract and require the payment of the debt in full through the courts. In the case of public enterprises, the minister of the respective sector shall be notified beforehand of any delinquent payment due in order that he may take such measures as he deems appropriate. 3.2.6 OVERDUE PAYMENTS 3.2.6.1 For local currency operations In the event of non-payment of any obligation in local currency, from the date on which it becomes due and until the date on which all amounts due and unpaid have been fully paid, without prejudice to the right to initiate such legal action as may be appropriate, charges shall apply on the total amount of the contract unpaid on the date on which an amount became overdue, which total shall include both the amounts overdue and those not yet due, as follows: (a) Rate of interest: The maximum legal rate in force for financial enterprises. (b) Commission: In addition to the charge under (a) above, a 3% management fee, calculated on the outstanding balance, the commission(s) agreed under the contract remaining in suspense during the period of default. 3.2.6.2 For foreign exchange operations In the event of non-payment of any foreign currency obligation, the following shall be charged from the date on which payment is overdue until the date of total payment of the amounts due and unpaid, without prejudice to the right to initiate such legal action as may be appropriate: (a) An overdue penalty of 4% annually over the rate of interest agreed; (b) In addition to the charge under (a) above, a 3% management fee, calculated on the outstanding balance, the commission(s) agreed under the contract remain in suspense during the period of default. 3.2.6.3 In the event of default for a refinanced loan, the 4% annual penalty shall apply to the rates of interest charged under the refinanced loan. 3.2.6.4 If as a result of the default COFIDE should be obliged to have re- course to external funds and the cost of these is greater than that originally contracted, the cost of said loan shall be passed on, with a penalty of 4 per- centage points per annum being applied in addition to said costs. Similarly, any other cost resulting from said default shall also be passed on.  - 45 - ANNEX 1 Page 9 SPECIAL DISBURSEMENTS 3.2.7 To safeguard assets given in guarantee to the Corporation, the Administration is authorized to effect special disbursements, to be charged to the borrower, covering the cost of insurance premiums, safekeeping, ware- housing, customs duties and similar charges, in an amount not to exceed 10% of the specific loan granted to the enterprise to which the guarantee refers. 3.2.8 The Administration is authorized, in special cases at the Administration's discretion, to effect disbursements of or enter into commit- ments for up to 25% of the total amount of loans or guarantees approved to public enterprises, even if the relevant contract has not been signed. Clause 3.2.8 shall be subject to the following prerequisites: 3.2.8.1 Approval of the operation in question by the appropriate decision- making body in the Corporation. 3.2.8.2 Submission by the public enterprise of a written disbursement application, attaching a copy of the resolution of its board of directors approving the debt to COFIDE. Similarly, assumption of all the financial charges from the date established by the Administration. 3.2.8.3 Submission by the public enterprise of an updated investment plan indicating its sources of funds. 3.2.8.4 Delivery by the public enterprise of the relevant foreign exchange documents duly signed to the Corporation. 3.2.9 The Administration is authorized to effect disbursements of up to 50% of the amount of loans granted in local currency to non-public enterprises and approved by the Board of Directors and/or the Management Committee, against letters of guarantee, until such time as the loan or guarantee contracts are formalized. 3.2.9.1 The letters of guarantee referred to in the above clause shall be issued jointly and severally, irrevocably and unconditionally, in favor of COFIDE by banking and/or financial institutions satisfactory to the Corporation, and shall be automatically cashable. They should be issued for 90 days and may be renewed for additional periods of 90 days with the authorization of the General Management. 3.3 GENERAL ADMINISTRATION 3.3.1 To fulfill its objectives, the Corporation shall maintain adequate numbers of staff with adequate qualifications, and an efficient organizational structure.  - 46 - ANNEX 1 Page 10 3.3.2 In accordance with the legal provisions in force, the Corporation shall maintain adequate levels of remuneration, establish a permanent system of personnel upgrading, and allocate resources for training and prefessional development. 3.3.3 The Corporation shall undertake activities aimed at providing for the social well-being of pesonnel and for their social, cultural and economic betterment. 3.3.4 The Corporation shall maintain a public relations system enabling it to consolidate and improve its image at the national and international levels. 3.3.5 The Corporation shall implement an efficient system of supplies, support services and administration of assets, ensuring that each organiza- tional unit can carry out its duties in a normal manner. 3.3.6 An adequate security system shall be maintained to provide protection for the workers and the Corporation's installations. 3.4 CONTROL OF THE CORPORATION 3.4.1 The Board of Directors shall provide for control and supervision of the Corporation's business and is the sole body authorized to amend its general policies. 3.4.2 The Corporation shall have an Internal Audit department which shall report to the Board of Directors and each year it shall engage firms of external auditors of recognized reputation, to conduct an external audit of its financial statements. In both cases the standards established under the National System of Control shall apply.  Annex 2 - 47 - p.1 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT COFIDE - General Policy for Financial Intermediation (Draft) I. OBJECTIVES 1.1 The purpose of this statement is to set forth the general policy that will govern COFIDE's financial intermediation activities, and to expand and develop the paragraph 1.1.5 in COFIDE's General Policy Document. Therefore, the policies and procedures established in this document are complementary to COFIDE's General Policy, which will also apply to its financial intermediation operations. 1.2 These activities will be carried out through public and private financial intermediaries and will be designed to : 1.2.1 Complement the public and private financial system in medium- and long-term operations, to that end channeling funds from various domestic and external sources, particularly to small- and medium-size firms. 1.2.2 Promote projects contributing to national development, in accordance with the policies of the government; 1.2.3 Help strengthen the country's financial system and the capital markets, improve the capabilities of the financial intermediaries authorized to carry out medium and long term lending operations to appraise and supervise investment projects, and promote competition among financial intermediaries, based on the quality of the service provided and on equal opportunity in the use of financial resources (particularly foreign) available. II. GENERAL CONDITIONS 2.1 In order to plan and develop a general development policy, COFIDE, through its financial intermediation activities, will finance high priority sectoral and/or regional projects. The financial inter- mediaries will take the credit risk in the operations to be financed, and they will be fully responsible for the repayment of the subloans to COFIDE, irrespective of the fulfillment of the repayment obligations by the final borrowers. 2.2 COFIDE will obtain the necessary funds in local currency and foreign exchange from various sources (at the lowest cost possible) in order to meet existing demand; these funds will have to be channeled through the system's financial institutions, under similar conditions, for both the institutions themselves and the sub-borrowers.  ANNEX 2 p.2 -48- 2.3 The sub-borrowers will be able to use the funds to finance expansion projects or new investments, i.e. to purchase capital goods and finance permanent working capital associated with such new invest- ments or expansion projects, or which can be expected to bring about some increase in production. 2.4 The cost of the money, both local currency and foreign exchange, should be consistent with the policy set by the Central Reserve Bank (BCR) regarding interest rates and take into account COFIDEts cost in obtaining and administering the funds, an adequate rate of return for the Corpora- tion and the conditions of the financial market. 2.5 For operations in foreign currency, COFIDE will not take any foreign exchange risk, and the interest rate to the financial intermediary will cover, at least, the financial cost of the resources, including the cost of mobilizing the resources and the foreign exchange risk fee or premium when there is one, and a fee of at least 1% p.a. to cover COFIDE's administrative costs. The interest rate to the financial intermediaries for loans denominated in US dollars, including those of special funds such as FONEX, FIRE, and FONCAP, will not be less than 12% p.a. and will be periodically reviewed. 2.6 Likewise, a uniform policy will be established with regard to: 2.6.1 Amount and maximum duration of loans. 2.6.2 Proportion of each project to be financed: COFIDE will satisfy itself that the subprojects to be financed have an adequate debt/equity ratio, which normally will not exceed 65/35 for the overall firm including the proposed subloan. According to COFIDE's operating policies and procedures (para. 1.2.5 of COFIDE's General Policy Statement), COFIDE's total contributions, direct and indirect, will not exceed 75% of the total cost of the project, except in extraordinary circum- stances. 2.6.3 Contributions by the financial intermediary and beneficiary: In addition to the conditions established in para. 2.6.2 above, COFIDE will require that the contributions of the financial intermediary and the final borrower not be less than 10% of the total project in each case. 2.7 Finally, COFIDE must observe the pertinent regulations established by the BCR and take into account the financial soundness of the sub-borrowers, with the possibility under certain circumstances of promoting greater capitalization with the funds of the financial intermediaries and/or COFIDE itself. In that event, the objective  ANNEX 2 p.3 - 49 - will be to act as a promoter, i.e. such that in the shortest time possible COFIDE will no longer be a shareholder, so that the capital can be used to benefit other eligible enterprises. III. FINANCIAL INSTITUTIONS 3.1 The financial intermediaries eligible to use the COFIDE system will be those legally authorized to make medium- and long-term loans, including state development banks, finance companies and regional banks. Exceptionally, other institutions may be used, with prior authorization from the BCR, to carry out special programs, such as the development of small businesses. 3.2 In order to participate in COFIDE's financial intermediation system, the eligible intermediaries will have to satisfy all requirements on risk concentration, maximum ratios of deposits, debts and guarantees to equity, maximum loan sizes and other requirements established by the Central Bank, and will also have to comply with the requirements of the Superintendency of Banks. Moreover, COFIDE will satisfy itself that the intermediaries follow sound financial policies and are credit- worthy. COFIDE could establish limits to the resources lent to specific intermediaries, and stop approving new subprojects in those cases where the intermediaries do not follow the conditions established above. 3.3 The financial intermediaries will have to be able to handle project appraisal and supervision, as well as implementation and development. For this purpose, the intermediaries will submit to COFIDE, together with the request for financing of a subproject, a report covering the main technical, financial and economic characteristics of the subproject, and the report will be reviewed by COFIDE. 3.4 COFIDE will take the necessary steps to ensure that the financial intermediary functions are properly carried out, with disbursements made promptly and each project followed up. 3.5 COFIDE will sign the pertinent intermediary contracts with the eligible institutions. IV. STRENGTHENING OF THE INTERMEDIATION SYSTEM 4.1 COFIDE's intermediation activities are designed to strengthen and develop the financial sector in medium and long-term operations. 4.2 To that end, the counterpart of the financial institutions must promote greater mobilization of savings, it being made a requirement that funds used be obtained from sources of long-term savings.  ANNEX 2 p.4 - 50 - 4.3 COFIDE will contribute to improve the project appraisal and supervision capabilities of the intermediaries through the subproject review process, and through the provision of other technical assistance activities, including seminars, specific assistance to intermediaries, and other. 4.4 COFIDE will periodically monitor the performance of the financial sector institutions specialized in medium and long-term lending operations, including their resource mobilization, volume of operations, profitability, efficiency and project appraisal and supervision capabilities. Based on this information and analysis, COFIDE will make its policy decisions in the area of financial inter- mediation, and will make suggestions and recommendations to the Central Bank for improving the financial system. V. FINAL USERS 5.1 The promoters of the projects to be financed must be credit- worthy and must have adequate technical knowledge and administrative and management capabilities to carry out the projects. 5.2 The projects must be economically and financially viable and have adequate guarantees. 5.3 The equipment, machinery and other goods and services needed to carry out the projects to be financed will be acquired following appropriate procurement procedures. The financial intermediaries will satisfy themselves that the quality and prices of the goods and services are adequate. COFIDE will monitor the procurement procedures established by the intermediaries. VI. PROMOTION 6.1 Once the government has established its development policies, promotion should be used to generate sufficient demand. 6.2 COFIDE will provide adequate information to the financial intermediaries and potential final borrowers on the resources available requirements for access to such resources, and lending conditions.  - 51 - ANNEX 3 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Estimated Schedule of Disbursements Cumulative Disbursements 1BRD at End of Quarter Fiscal Year and Quarter (US$ thousands) F'Y 1982 September 30, 1981 500 December 31, 1981 2,000 March 31, 1982 5,000 June 30, 1982 8,000 FY 1983 September 30, 1982 13,000 December 31, 1982 18,000 March 31, 1983 23,000 June 30, 1983 29,000 FY 1984 September 30, 1983 35,000 December 31, 1983 40,000 March 31, 1984 44,000 June 30, 1984 49,000 FY 1985 September 30, 1984 52,000 December 31, 1984 55,000 March 31, 1985 58,000 June 30, 1985 60,000  - 52 - ANNEX 4 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Supporting Tables and Charts Tables T-1 Gross Domestic Product and Sectoral Distribution T-2 Value Added in Manufacturing, 1971-1979 T-3 Size Distribution of Industry, 1974 T-4 Employment in Manufacturing T-5 Fixed Investment in Manufacturing T-6 Manufactured Exports T-7 Nominal and Real Exchange Rates, 1970-1980 T-8 Frequency Distribution of Tariff Rates, 1980 T-9 Structure of the Financial System T-10 Financial Liabilities Held by the Public T-11 Total Assets of Commercial Banks T-12 Total Assets of.Development Banks T-13 Total Assets of Financieras T-14 Total Assets of Regional Banks T-15 Commercial Banks: Summary Balance Sheets T-16 Development Banks: Summary Balance Sheets T-17 Financieras: Summary Balance Sheets T-18 Commercial Banks: Sectoral Distribution of Loans T-19 Financieras: Sectoral Distribution of Loans T-20 Commercial Banks Deposits and Obligations T-21 Gross Deposits and Bonds in the Financial System T-22 Deposit Interest Rates T-23 Lending Interest Rates T-24 Changes in Main Interest Rates, 1976-1980 T-25 COFIDE: Audited Balance Sheets 1975-1979 T-26 COFIDE: Income Statements 1975-1979 T-27 COFIDE: Summary of Operations, 1976-1980 T-28 COFIDE: Operations on own Account, 1976-1980 T-29 COFIDE: Outstanding Loan and Equity Portfolios and Guarantees T-30 COFIDE: Equity Investments T-31 COFIDE: Statement of Arrears and Affected Loan Portfolio T-32 COFIDE: Total Exposure to Companies in Arrears Over Three Months T-33 COFIDE: Local Currency Resources as of December 31, 1975-1979 T-34 COFIDE: Interest Rates and Charges T-35 COFIDE: Projected Balance Sheets T-36 COFIDE: Projected Income Statements T-37 COFIDE: Main Assumptions Used in the Financial Projections T-38 COFIDE: Eoara d T-39 COFIDE: Subloans Approved under Loan 1358-PE by Subsector. T-40 COFIDE: Main Indicators of Subloans Above the Free Limit Under Loan 1358-PE Charts C-1 Structure of the Financial System C-2 COFIDE: Organization Chart  ANNEX 4 - 53 -T- PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Gross Domestic Product and Sectoral Distribution (SI. million) 1970 1975 1976 1977 1978 1979 GDP, Current Prices 267,121 627,392 830,446 1,143,132 1,854,276 3,317,555 GDP, 1973 Prices 352,596 441,073 449,987 449,738 446,740 461,831 Yearly Increases, % 5.4 4.5 2.0 -0.1 -0.7 3.4 Percentage Distribution Agricultural Sector 16.4 13.9 12.9 13.0 10.7 10.1 Mining 6.8 4.5 5.5 7.1 9.8 13.2 Manufacturing 23.8 24.9 26.6 25.7 27.2 26.4 Construction 3.0 3.7 3.7 3.6 2.8 2.5 Electricity, Gas, Water 0.7 0.8 0.9 0.9 1.0 1.1 Government 9.5 9.5 9.3 9.3 7.7 6.8 Others 39.8 42.7 41.1 40.4 40.8 39.9 TO'CAL 100.0 100.0 100.0 100.0 100.0 100.0 Source: Cuentas Nacionales del Peru, 1980 (One)  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Value Added of Manufacturing Industries, 1971 - 1979 (S/. billion) % Shares 1971 1972 1973 1974 1975 1976 1977 1978 1979 1971 1975 1979 Manufacturing Industry 73.7 81.7 99.5 131.5 156.5 220.7 293.2 504.7 877.4 100.0 100.0 100.5 Artisan Product 7.3 8.3 9.6 11.8 15.6 19.3 24.7 40.6 70.7 9.9 10.0 8.1 Factory Product 66.4 73.4 89.9 119.7 140.9 201.5 268.5 464.1 806.6 90.1 90.0 91.9 Ln Food, Beverages 23.8 22.8 25.6 35.2 41.4 60.2 75.8 128.8 211.0 35.8 29.4 26.1 Textiles, Garments 10.9 12.0 14.3 17.9 23.1 29.7 32.9 60.4 110.2 16.4 16.4 12.4 Wood products 1.7 2.0 2.3 2.9 3.8 6.5 7.7 11.1 17.0 2.6 2.7 2.1 Paper Products 3.4 4.2 4.9 6.0 7.5 11.1 14.0 23.7 36.3 5.1 5.3 4.5 Chemicals 10.6 12.5 15.5 19.6 21.3 30.7 46.7 89.3 148.9 16.0 15.1 18.5 Non-metal Minerals 3.1 3.5 4.1 5.0 6.2 8.7 9.6 17.5 39.7 4.7 4.4 4.9 Basic Metals 4.2 5.4 8.3 12.9 9.8 15.1 34.0 63.1 134.1 6.3 7.0 16.6 Metal Products 7.8 10.0 13.8 18.8 26.0 37.0 45.1 66.0 103.9 11.8 18.4 12.9 Other 0.9 1.1 1.2 1.4 1.8 2.5 2.7 4.1 5.5 1.3 1.2 0.7 Source: Cuentas Nacionales del Peru, 1979 1978 and 1979 data are preliminary; factories are defined as establishments with employment (one employee and more); artisans are without employees. 4S  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Size Distribution of Industry, 1974 - Size of Employment Enterprises Employment Value of Production Number of Employees Number % Number % X 5 - 9 3554 46.3 23,320 9.4 3.9 10 - 49 3173 41.3 64,725 26.1 17.8 50 - 99 486 6.3 33,451 13.5 11.9 100 - 199 267 3.5 38,111 15.3 15.1 200 - 999 193 2.5 70,156 28.3 32.5 u 1000 and over 10 0.1 18,361 7.4 30.8 Total 7683 100.0 248,124 100.0 100.0 {/ Includes establishments with 5 and more employees; does not include fish industry. Source: Ministry and Industry and Tourism; Estadistica Industrial 1974. 4z:  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Employment in Manufacturing (1000 Employees) Growth (X) 1971 1972 1973 1974 1975 1976 1977 1978 1971-1975 1975-1978 311-312 Processed Foods (excl. Fish Prod.) 31.8 33.0 34.5 35.8 35.7 38.5 40.8 40.3 12.1 13.0 313 Beverages 9.9 9.9 11.1 10.8 11.1 11.3 11.1 11.2 12.0 0.8 314 Tobacco Products .7 .8 .8 .9 .9 .8 1.0 .9 29.6 4.3 321 Textiles 31.9 35.7 36.8 33.6 33.8 34.3 34.3 34.7 5.7 2.8 322 Clothing 10.2 11.0 11.3 12.7 13.6 14.6 13.4 13.3 32.6 -2.1 323 Leather Goods 2.8 2.7 3.0 3.0 3.1 3.2 3.7 3.3 11.9 4.9 324 Leather Footwear 6.4 6.8 7.0 6.9 7.5 8.5 6.5 6.7 17.6 -11.1 331 Wood Products (excl. Furniture) 6.3 7.2 7.3 7.3 7.6 8.1 8.6 9.9 20.8 15.8 U' 332 Furniture and accessories 5.9 5.7 6.0 6.6 6.3 6.1 5.9 5.9 6.3 -5.9 Ca 341 Paper and Paper Products 4.8 5.7 5.8 6.1 6.1 6.6 6.0 6.0 27.] -0.8 342 Printing and Publishing 9.3 9.4 9.9 9.6 9.6 10.9 10.9 10.2 4.1 6.2 351 Industrial chemicals 4.9 5.4 6.0 6.9 7.0 7.3 6.6 6.9 42.8 -1.2 352 Other Chemicals 12.7 13.2 14.1 14.5 15.5 15.9 15.7 16.3 22.6 5.2 353 Petroleum Refining 2.0 2.3 2.3 3.4 3.5 3.5 4.1 4.2 77.8 19.6 354 Petroleum and Coal products .1 .2 .1 .1 .2 .2 .2 .2 16.4 1.2 355 Rubber Products 2.5 2.6 2.9 3.1 3.0 3.3 3.3 3.3 22.1 10.8 356 Plastic Products n.e.s. 5.5 5.8 6.2 6.6 7.4 8.0 8.0 8.3 33.3 12.4 361 Clay, Earthen and Chinaware 1.2 1.3 1.5 1.7 1.8 1.8 1.8 1.8 56.5 -1.3 362 Glass and Glass Products 3.7 3.9 4.2 4.3 4.4 4.6 4.5 4.5 17.7 2.8 369 Other Non-metallic Minerals 8.7 9.4 10.1 10.3 10.3 10.8 10.5 11.2 18.8 8.7 371 Basic Ferrous Metals 4.3 4.8 6.1 7.3 8.3 7.7 7.5 7.7 94.7 -7.2 372 Basic Non-Ferrous Metals 3.6 3.7 4.0 4.0 4.1 4.1 4.1 4.1 14.9 0.8 381 Metal products 12.5 13.4 15.0 15.6 16.3 17.7 17.5 17.6 29.8 8.2 382 Non-electrical Machinery 7.5 8.3 8.5 8.7 9.2 9.5 8.8 9.2 22.5 -0.3 383 Electrical Machinery and Appliances 6.1 6.9 8.3 10.0 10.9 11.8 10.8 11.3 78.2 3.3 384 Transport Equipment 8.6 8.6 10.9 12.9 14.1 15.6 14.4 13.0 62.9 -7.8 385 Scientific and Other Equipment .9 .9 1.0 1.1 1.1 1.2 1.4 1.4 29.4 24.7 ' B 390 Jewellery and Misc. Manufacturers 4.0 4.3 4.1 4.2 4.3 4.6 4.2 4.6 7.2 5.3 x Total Employment in Manufacturing 208.8 222.9 238.9 248.1 256.6 270.4 265.5 266.9 22.9 4.0 4 Annual Growth (%) 6.8 7.1 3.9 3.4 5.4 -1.8 0.5 SOURCE: i4ICTI  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Fixed Investment In Manufacturing (S/. Million) Total In Machinery Total In Machinery Total In Machinery Shares 7. Shares % and Equipment and Equipment and Equipment Total Investment Investment-Machinery Equipment 1971 1975 1978 1971 1975 1978 1971 1975 1978 311-312 Processed Foods (excluding Fish Products) 774 381 1935 1206 10648 4494 18.8 10.0 21.8 14.8 10.5 19.4 313 Beverages 176 75 1776 1028 3122 1277 4.3 9.2 6.4 2.9 8.9 5.5 314 Tobacco Products 18 10 90 63 172 59 .4 .5 .4 .4 .5 .3 321 Textiles 591 414 2650 2145 3881 2245 14.4 13.7 7.9 16.2 18.6 9.8 322 Clothing 48 34 182 119 203 79 1.2 .9 .4 1.3 1.0 .3 323 Leather Goods 34 25 67 35 199 100 .8 .3 .4 1.0 .3 .4 324 Leather Footwear 64 46 109 70 383 176 1.6 .6 .8 1.8 .6 .8 331 Wood Products (excluding furniture 91 55 550 323 711 665 2.3 2.9 1,5 2.2 2.8 2.8 332 Furniture and Accessories 43 31 112 76 157 122 1.0 .6 .3 1.2 .7 .5 341 Paper and Paper Products 88 65 300 196 4260 1904 2.2 1.6 8.7 2.5 1.7 8.2 342 Printing and Publishing 61 37 337 265 1041 566 1.5 1.7 2.1 1.5 2.3 2.4 351 Industrial Chemicals 178 111 2243 1238 1866 955 4.3 11.6 3.8 4.3 10.8 4.1 352 Other Chemicals 204 90 738 278 3436 1737 5.0 3.8 7.0 3.5 2.4 7.5 353 Petroleum Refining 144 113 1147 1124 937 444 3.5 5.9 1.9 4.4 9.8 1.9 354 Petroleum and Coal Products - - 1 - 36 30 - - .1 - - .1 355 Rubber Products 44 31 288 226 631 285 1.1 1.5 1.3 1.2 2.0 1.2 356 Plastic Products n.e.s 186 135 790 590 2033 1070 4.5 4.1 4.1 5.3 5.1 4.6 361 Clay, Earthen and Chinaware 8 4 126 77 93 8 .2 .7 .2 .2 .7 - 362 Glass and Glass Products 34 23 453 119 926 838 .8 2.3 1.9 .9 1.0 3.6 369 Other Non-metallic Minerals 202 140 660 349 1748 427 5.0 3.4 3.6 5.5 3.0 1.8 371 Basic Ferrous Metals 89 45 1878 364 287 134 2.2 9.7 .6 1.8 3.2 .6 372 Basic Non-ferrous Metals 171 130 240 100 534 522 4.2 1.2 1.1 5.1 .9 2.3 381 Metal Products 211 152 719 451 5081 2084 5.1 3.6 10.4 5.9 3.9 9.0 382 Non-electrical Machinery 133 81 497 260 3329 1504 3.2 2.5 6.8 3.2 2.3 6.6 383 Elec. Machinery & Appliances 155 124 555 339 1227 581 3.8 2.8 2.5 4.8 2.9 2.5 384 Transport Equipment 304 175 689 273 1358 468 7.4 3.5 2.8 6.8 2.4 2.0 385 Scientific and Other Equipment 10 5 62 44 233 219 ..2 .3 .5 .2 .4 .9 390 Jewelery & Misc. Manufactures 41 27 207 148 340 214 1.0 1.1 .7 1.1 1.3 .9 TOTAL 4102 2559 19302 11506 48873 23206 100.0 100.0 100.0 100.0 100.0 100.0 Source: MICTI  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Manufactured Exports (US$ million) Jan-May- 1973 1974 1975 1976 1977 1978 1979 1980 Food, Beverages, Tobacco 25.4 14.1 9.5 12.1 21.4 43.0 76.1 25.9 Fish ProductS 10.1 14.8 10.9 18.8 21.8 56.4 119.8 60.8 Textiles, Garments 111.3 178.8 72.0 Leather 3.0 8.6 4.9 u Wood Products, Furniture 2.2 2.3 0.6 2.0 4.5 X Paper, Printing 2.2 3.1 1.9 3.8 3.6 Chemicals. 9.7 14.7 7.2 13.9 38.6 31.2 54.6 23.1 Non-metallic Minerals 1.7 1.5 0.8 1.8 2.6 28.9 51.2 24.9 Basic Metals 26.1 48.4 15.8 12.7 14.8 38.8 75.0 31.7 Metal Products, Machinery 5.0 13.1 18.2 18.0 36.6 37.8 68.5 24.5 Artisan Products 7.4 35.0 8.9 Other 11.7 37.6 41.8 Total Manufactures 100.2 139.3 83.1 116.9 198.1 382.8 724.7 322.6 Total Exports 1041.1 1505.3 1313.0 1302.0 1654.2 1781.8 3158.0 1728.9 Source: MITCTI, Banco Central 1/ Export Registrations. M1 >x  - 59 r ANNEX 4 T -7 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Nominal and Real Exchange Rates, 1970-1980 (SI, per vtg) Nominal Peru US Exchange Consumer Consumer Real Rate Price Price Exchange Year (Period Average) Index Index Rate 1970 38.7 100.0 100.0 38.7 1971 38.7 106.8 104.3 37.8 1972 38.7 114,5 107.7 36.4 1973 38.7 125.4 114.4 35.3 1974 38.7 146.5 127.0 33.1 1975 40.8 181.2 138.6 31.2 1976 57.5 241.9 146.6 34.8 1977 :[ 71.8 297.1 152.0 36.7 II 77.1 318.9 155.4 37.6 III 80.8 354.0 157,6 36.0 IV 105.5 368.6 159.4 45.6 1978 T 130.3 417.3 162.0 50.6 Il 141.9 488.2 16.3 48.3 III 165.8 569.0 170.2 49.6 IV 187.4 633.8 173.5 51.3 1979- I 203.4 720.5 178.0 50.3 II 218.6 820.5 184.1 49.0 III 232.2 921.2 190.2 47.9 IV 244.0 1,052.4 195.7 45.4 1980 I 258.2 1,164,9 203.3 45.1 March 263.5 1,205.9 206.2 45.1 Source: IMF: International Financial Statistics; Mission Calculations.  - 60 - ANNEX 4 T -8 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Frequency Distribution of Tariff Rates as of June 30, 1980 Range Number of % Cumulative % (% ad valorem Tariff) Products Share Share 0 - 9 156 3.1 3.1 10 - 19 667 13.1 16.2 20 - 29 1426 28.1 44.3 30 - 39 902 17.8 62.1 40 - 49 500 9.9 72.0 50 - 59 366 7.2 79.2 60 - 69 412 8.1 87.3 70 - 79 215 4.2 91.5 80 - 89 159 3.1 94.6 90 - 99 116 2.3 96.9 100 - 109 100 2.0 98.9 110 - 119 12 0.2 99.1 120 - 129 51 1.0 100.0 Source: Ministry of Commerce  - 61 - ANNEX 4 T-9 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Structure of the Financial System (as of December 1979) TOTAL ASSETS No. of No. of Institutions Offices S/.,million Z A. Banking System 27 1,427 2,787,285 88.7 Central Bank 1 6 919,000 29.3 Banco de la Naci6n 1 456 786,969 25.0 Commercial Banks: 20 803 742,325 23.6 Private Banks 4 330 324,601 10.3 State Banks 3 347 299,427 9.6 Regional Banks 6 82 65,816 2.1 Construction Develop- ment Banks 2 6 15,581 0.5 Foreign Bank Branches 4 11 26,444 0.8 Savings Bank Branches 1 27 10,456 0.3 Development Banks: 5 162 339,635 10.8 Housing 2 47 153,115 4.8 Industrial 1 21 99,992 3.2 Agricultural 1 79 65,087 2.1 Mining 1 15 21,441 0.7 B. Non-Banking System 46 226 354,469 11.3 COFIDE 1 6 162,363 5.2 Insurance Companies 20 99 81,916 2.6 Savings and Loan Assn's 17 96 50,690 1.6 Financieras 8 11 37,000 0.7 Contractual Savings Institutions n.a. n.a. 22,500- 0.7 TOTAL 73 1,639 3,141,754 100.0 1/ Estimated SOURCE: Superintendent of Banks and Insurance Companies Bulletin  - 62 - PERU ANNEX 4 T-10 STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Financial Liabilities Held by the Public (as of December 31) SOLES, MILLION 1975 1976 1977 1978 1979 Money in Circulation 42,603 49,505 60,795 90,973 162,005 Demand Deposits 37,245 47,415 60,220 86,078 154,223 Money (M1) 79,848 96,920 121,015 177,051 316,228 Savings, Time and other Deposits of Banking Institutions: Time Deposits 9,576 9,965 16,426 24,327 39,472 Savingf1Deposits 14,961 17,096 21,610 30,266 67,048 Other - 25,418 27,214 41,459 102,544 218,199 Quasimoney 49,955 54,275 79,495 157,137 324,719 Money and Quasimoney (N2) 129,803 151,195 200,510 334,188 640,946 Savings and other Deposits qf Non-Banking Institutions2 23,619 29,698 35,356 40,405 68,665 Total Liquidity %N3) 153,422 180,893 235,866 374,593 709,611 M3/GDP, Z 27.6 23.5 22.4 22.4 23.1 Bonds Issued by Financial Institutions 4,482 5,342 6,241 7,637 12,561 Total Financial Liabilities (N. + 3onds) 1.57,904 186,235 242,107 382,230 722,172 Total Financial Liabilities/=P 29.0 24.2 23.0 22.9 23.5 MO ITMS: E in 1970 Prices 45,137 40,774 36,771 33,224 33,524 Yearly Increase, Z - (9.7) (9.8) (9.6) (0.9) M2 in 1970 Prices 73,376 63,607 60,927 62,711 67,947 Yearly Increase, % - (13.3) (4.2) 2.9 8.3 M3 in 1970 Prices 86,729 76,101 71,670 70,293 75,232 Yearly Increase, % - (11.3) (6.2) (2.0) 7.0 Total Fiaancial Liaibilities in 1970 prices 89,263 78,348 73,566 71,726 76,564 Yearly Increase - (12.2) (6.1) (2.5) 6.7 1/ Includes foreign exchange deposits of S/. 10,698 in 1977; S/. 64,480 in 1978; and S/. 146,552 in 1979. 2/ Comprises savings and time deposits of Savings and Loan Associations, time daPosits of fiance coupanles includIn% COFEMM, and eav'ings devposits of cooverative savings institutions. Source: Central Bank Bulletin and Superintendent of Banks and Insurance Companies Bulletin  - 63 - ANNEX 4 T-11 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Commercial Banks (Total Assets as of December 31) 1979 1978 Year Z of Founded S/.million Total S/.million % State Banks Banco Popular 1899 131,436 20.5 110,444 23.4 Banco Continental 1951 107,099 16.8 87,173 18.5 Banco Internacional 1897 50,157 7.8 34,550 7.3 SUBTOTAL 288,692 45.1 232,167 49.2 Private Banks Banco de Crddito 1889 184,922 28.9 130,487 27.7 Banco Wiese 1943 58,266 9.1 40,871 8.7 Banco Comercial 1947 53,043 8.3 28,352 6.0 Banco de Lima 1952 28,371 4.5 19,568 4.2 SUBTOTAL 324,602 50.8 219,278 46.6 Foreign Bank Branches Banco de Tokyo 1965 8,487 1.3 6,214 1.3 Citibank 1920 6,495 1.0 5,002 1.1 Bank of America 1966 6,266 1.0 4,342 0.9 Banco de Londres 1936 5,196 0.8 4,406 0.9 SUBTOTAL 26,444 4.1 19,964 4.2 TOTAL 639,738 100.0 471,409 100.0  - 64 - ANNEX 4 T -12 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Development Banks (Total Assets as of December 31) 1979 1978 Year Founded S/. million % S/. million % Production Banks: Banco Industrial 1936 99,992 29.4 73,296 33.5 Banco Agrario 1931 65,087 19.2 42,580 19.4 Banco Minero 1942 21,441 6.3 14,101 6.4 Subtotal 186,520 54.9 129,977 59.3 Housing Development Banks: Banco de la Vivienda 1962 79,007 23.3 45,752 20.9 Banco Central Hipotecario 1929 74,108 21.8 43,267 19.8 Subtotal 153,115 45.1 89,019 40.7 TOTAL 339,635 100.0 218,996 100.0  - 65 - ANNEX 4 T- 13 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Financieras (Total Assets) 06/30/80 12/31/79 12/31/78 Year Founded SI. million % SI. million % S/. million % Peruinvest* 1959 14,623 20.9 8,824 23.8 2,603 19.2 Financiera San Pedro* 1946 13,392 19.2 8,691 23.5 3,895 28.7 Fincoper 1978 9,788 14.0 5,681 15.4 1,055 7.8 Financiera Peruana* 1952 7,305 10.5 4,981 13.5 2,600 19.2 Finanpro 1964 6,022 8.6 2,976 8.0 1,091 8.0 Financiera de Credito 1980 5,946 8.5 - - - - Promotora Peruana 1970 5,193 7.4 2,866 7.7 1,731 12.7 Financiera Andina 1960 4,116 5.9 1,895 5.1 601 4.4 Financiera Nacional 1979 3,285 4.7 1,086 2.9 - - Financiera de Lima 1980 200 0.3 - - - - Financiera Sudamericana 1980 - - - - - - Financiera Internacional 1980 - - - - TOTAL 69,870 100.0 37,000 100.0 13,576 100.0 * Finance companies controlled by state institutions.  -66 - ANNEX 4 T -14 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Regional Banks (Total Assets as of December 31) 1979 1978 Year Founded S/. million x S/. million % State Controlled: Banco Nor-Peru (Trujillo) 1961 11,229 17.1 5,511 18.5 Banco de los Andes (Cuzco) 1962 10,811 16.4 4,261 14.3 Subtotal 22,040 33.5 9,772 32.8 Privately Controlled: Banco Regional Sur Medio y Callao (ICA) 1962 16,333 24.8 8,133 27.2 Banco del Sur del Peru (Arequipa) 1962 10,882 16.5 5,124 17.2 Banco Amazonico (Iquitos) 1962 9,648 14.7 3,911 13.1 Banco Regional del Norte (Piura) 1960 6,913 10.5 2,888 9.7 Subtotal 43,776 66.5 20,056 67.2 TOTAL 65,816 100.0 29,828 100.0  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Commercial Banks 1/: Summary Balance Sheets as of December 31 (S/. billion) Assets 1975 1976 1977 1978 1979 Current Assets 25.9 33.3 46.9 95.6 201.4 Loans (net) 58.9 71.5 84.7 114.4 203.1 Investments 17.2 14.0 19.0 30.2 25.7 Other Assets 65.0 96.8 164.4 275.8 301.5 TOTAL ASSETS 167.0 215.6 315.0 516.0 731.6 Liabili ties Deposit-s 74.9 81.0 101.8 179.0 357.7 Debts with other Banks 3.0 8.4 18.5 19.3 11.3 Central Bank 10.1 10.4 7.2 7.6 10.0 Other Liabilities 72.9 108.6 1716.7 294.1 322.8 TOTAL LIABILITIES 160.9 208.4 304.2 500.0 701.8 Equity 6.1 7.2 10.8 16.0 29.8 TOTAL LIB. AND EQUITY 167.0 215.6 315_0 516.0 731,6 TOTAL ASSETS, 1975 PRICES 167.0 160_5 169.3 171.3 137.2 1/ Excluding Banco de la Nacion. >  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Development Banks: Summary Balance Sheet as of December 31, 1979 (S/. million) Banco Banco Banco Banco de Banco Central Industrial Minero Agrario la Vivienda Hipotecario ASSETS Cash 161 280 1,225 64 92 Central Bank Deposits 878 190 43 1,757 26,769 Other Current Assets 4,044 1,422 598 3,111 2,402 Loans (net) 70,232 7,897 58,481 29,067 21,893 Investments 1,396 157 989 15,737 16,499 Other Assets 11,754 10,602 3,549 25,721 6,453 TOTAL ASSETS 88,465 20,548 64,885 75,457 74,108 LIABILITIES Demand Deposits 2,325 1,298 6,126 7,908 276 X Savings Deposits _ 16 4,023 517 220 l Time Deposits 1,164 _ _ 9,036 58,438 Other Deposits 2,288 1,646 7,037 4,973 394 Liabilities with Banks 19,927 _ 20,211 3 Bonds - - 1 2,630 - Central Bank 31,246 4,928 19,833 15,239 8,966 Other Liabilities 20,080 7,734 7,199 10,284 3,982 TOTAL LIABILITIES 77,030 15,622 44,219 70,798 72,279 Equity 11,435 4,926 4,659 1,829 TOTAL LIAB. AND EQUITY 88,456 20,548 64,885 75,457 74,108 CONTINGENT LIAB. 11,527 893 202 3,550 - o3> i z a' t ZE x 41  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Financieras: Summary Balance Sheets as of December 31 (S/. million) 1975 1976 1977 1978 1979 ASSETS Current Assets 200 305 432 753 1,954 Loans (net) 3,230 4,332 5,765 8,325 21,382 Investments 339 152 395 656 1,201 Fixed and other Assets 339 585 877 1,739 2,824 TOTAL ASSETS 4,108 5,374 7,469 11,473 27,361 LIABILITIES Term Deposits 2,519 3,732 5,267 8,049 20,280 Bonds 320 420 320 399 334 Borrowings 451 352 764 1,125 2,605 Other Liabilities 183 256 116 485 1,310 TOTAL LIABILITIES 3,473 4,760 6,467 10,058 24,529 Equity 635 614 1,002 1,415 2,832 TOTAL LIAB. AND EQUITY 4,108 5,374 7,469 11,473 27,361 Contingent Liabilities 975 1,380 1,671 2,103 9,639 2> z_  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Commercial Banks:-/ Sectoral Distribution of Loans (S/. million) 1975 1976 1977 1978 1979 Amount % Amount % Amount % Amount % Amount Z Agriculture 1,107 1.9 1,107 1.5 1,149 1.4 1,088 1.0 1,772 0.9 Animal Husbandry 843 1.4 1,043 1.5 1,128 1.5 1,331 1.2 1,769 0.9 Fishiug 241 0.4 168 0.3 193 0.2 418 0.3 1,097 0.5 Industry 22,516 38.2 30,203 42.3 36,327 42.9 53,581 46.8 96,257 47.4 Mining 661 1.1 666 0.9 1,123 1.3 2,796 2.4 3,606 1.8 Commerce 15,223 25.9 17,541 24.5 20,474 24.2 25,794 22.5 39,246 19.3 Construction 7,158 12.2 8,287 11.6 8,975 10.6 10,052 8.8 12,355 6.1 0 Goverament 362 0.6 326 0.4 1,145 1.3 978 1.0 802 0.4 Otherfs 10,760 18.3 12,122 17.0 14,096 16.6 18,354 16.0 46,162 22.7 TOTAL 58,871 100.0 71,463 100.0 84,710 100.0 114,392 100.0 203,066 100.0 Total, 1975 Prices 58,871 53,184 45,534 37,973 38,082 Yearly Increase, - (9.7) (14.4) (16.6) 0.3 1/ Excludes Banco de la Nacion. aoxm  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Financieras: Sectoral Distribution of Loans (S/. million) 1975 1976 1977 1978 1979 Amount % Amount / Amount % Amount % Amount % Agriculture 25 0.7 33 0.7 29 0.5 13 0.1 39 0.2 Animal Husbandry 81 2.3 86 1.8 75 1.2 98 1.0 318 1.4 Fishing 16 0.5 11 0.2 16 0.2 33 0.4 105 0.5 Industry 1,264 35.8 1,842 38.5 2,720 43.0 4,998 53.0 15,362 67.0 Mining 78 2.2 73 1.5 150 2.4 165 1.8 305 1.3 Commerce 743 21.1 987 20.6 1,214 19.2 1,448 15.4 3,372 14.7 Construction 1,068 30.3 1,431 29.9 1,715 27.1 2,221 23.6 2,495 10.9 Others 251 1.1 318 6.7 405 6.4 451 4.6 922 4.0 Total 3,526 100.0 4,781 100.0 6,324 100.0 9,427 100.0 22,918 100.0 Total, 1975 Prices 3,526 3,558 3,399 3,978 4,298 '- i~  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Commercial Bank Deposits and Obligations-/ as of December 31 (W/. million) 1975 1976 1977 1978 1979 Amount % Amount % Amount % Amount % Amount % Local Currency: Demand Deposits 35,226 47.0 41,022 50.6 50,598 49.7 67,889 37.9 120,567 33.7 Savings Deposits 16,552 22.1 18,772 23.2 23,414 23.0 31,566 17.6 66,493 18.6 Time Deposits 2/ 14,417 19.2 8,218 10.1 11,543 11.3 12,278 6.9 19,627 5.5 Certificates of Deposit - 805 1.1 1,287 1.6 2,613 2.6 3,950 2.2 11,203 3.1 other Obligations 4,758 6.3 8,782 10.8 8,798 8.6 16,766 9.4 26,382 7.4 Subtotal 71,758 95.7 78,081 96.4 96,966 95.2 132,449 74.0 244,272 68,3 Foreign Currency: Demand Deposits 2,860 3.8 2,504 3.1 3,840 3.8 8,317 4.6 6,287 1.8 Time Deposits - - - - - . - 88,697 24.8 other Obligations 326 0.5 420 0.5 1,020 38,244 21.4 18,441 5.2 Subtotal 3,186 4.3 2,924 3.6 4,860 4.8 46,561 26.0 113,425 31.7 Total 74,944 100.0 81,005 100.0 101,826 100.0 179,010 100.0 357,697 100.0 Total, 1975 Prices 74,944 60,285 54,734 59,423 67,080 1/ Excluding Banco de la Naci6n. 2/ Regional Banks. Source: Superintendent of Banks and Insurance Companies. 4x  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Gross Deposits and Bonds in the Financial System, as of December 31, 1979 (S/. billion) Demand Deposits Savings Deposits Time Deposits Bonds Total Banking System Amount X Amount x Amount Amount x Amount % Banco de la Nacion 280.2 66.9 0.1 - 60.3 42.9 - - 340.6 46.2 Commercial Banks 102.1 24.4 56.2 33.8 14.7 10.5 - - 173.0 23.4 Regional Banks 15.3 3.6 4.5 2.7 12.5 8.9 - - 32.3 4.4 Development Banks 11.8 2.8 59.6 35.9 19.6 14.0 2.6 20.6 93.7 12.7 Other Banks 9.5 2.3 5.8 3.5 4.5 3.2 1.5 11.9 21.2 2.9 Banking System 418.9 100.0 126.2 76.0 111.6 79.5 4.1 32.5 660.8 89.6 < Non-Banking System COFIDE - - - - 0.6 0.4 8.1 64.8 8.7 1.2 Pinancieras - - - - 20.3 14.4 0.3 2.7 20.6 2.8 Savings and Loan Assoc. - 18.8 11.3 7.6 5.5 - - 26.4 3.6 Other Institutions - - 21.1 12.7 0.3 0.2 _ - 21.4 2.9 Non-Banking System - - 39.9 24.0 28.8 20.5 8.5 67.5 77.1 10.5 TOTAL FINANCIAL SYSTEM 418.9 100.0 166.1 100.0 140.4 100.0 12.6 100.0 737.9 100.0 ->  -74- ANNEX 4 T-22 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Deposit Interest Rates (As of January 5, 1981) Maximum Type of Deposit Institutions Interest Rate (%) Demand Deposits All commercial banks 2.0 Savings Deposits All commercial banks except foreign bank branches 50.5 Banco Agrario 52.0 Savings and Loan Associations 51.5 Time Deposits State and Private commercial 51.5-53.0 banks (90-?360 days) Savings bank (90->360 days) 52.5-54.0 Regional banks (90- 179 days) 52.5 All development banks except 52.5-54.0 Banco Hipotecario (90->360 days) Savings and Loan Associations 52.5-54.0 Certificates of Deposit Regional banks (180->360 days) 53.0-54.0 Finance companies (90--1 360 days) 52.5-56.0 Mortage Certicates Savings bank 52.0 Banco Central Hipotecario 52.0 Bonds Constructions industry banks 53.0 Finance companies 53.0 COFIDE 53.0  -75- ANNEX 4 T-2 3 PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Lending Rates (As of January 5, 1981) Maximum Interest Type of Institution Type of Loan Rate (%) Co.mmercial Banks short-term credits 49.5 Banco de la Nacion short-term credits 49.5 Savings Banks short-term credits 49.5 long-term credits 56.5 Banco de la Vivienda single-housing units 49.5 Banco Central Uipotecario for single-housing units 49.5 qther loans 56.5 COFIDE fixed assets 56.5 working capital 56.5 for feasibility studies 51.5 Financieras all credits 56.5 $avings and Loan Associations short-term credits 51.0 long-term credits 56.5 Cooperative Savings Institutions all credits 49.5 Insurance Companies short-term credits 49.5 long-term credits 56.5  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Changes in Main Interest Rates, 1976-1981 1/76- 7/76- 3/77- 8/78- 11/78- 2/79- From Nominal Rates, % p.a. 7/76 3/77 8/78 11/78 2/79 1/81 Jan. 1981 Savings Deposits 5.0-6.0 9.0 11.5 23.5-26.0 29.0 30.5 50.5 Bank Time Deposits 3 months 7.0 10.0 13.0 25.0 30.5 31.0 50.5 6 months 7.0 11.0 14.0 26.0 31.5 31.5 51.5 9 months 7.0 12.0 15.0 27.0 32.5 31.5 52.0 12 months 7.0 13.0 16.0 28.0 33.5 32.5 53.0 Financieras Time Deposits 12 months 9.5 13.0 16.0 28.0 33.5 35.5 54.0 18 months 10.5 14.0 17.0 29.0 34.0 35.5 54.0 24 months 10.5 15.0 18.0 30.0 35.0 37.0 54.0 30 months 11.0 16.0 18.5 30.5 36.0 37.0 56.0 36 months 11.5 17.0 19.0 31.0 37.0 38.5 56.0 Bonds Mortgage 10.0 13.0 16.0 28.0 33.5 35.0 52.0 Finance Companies 9.0 12.0 15.0 27.0 33.0 35.0 53.0 COFIDE, Type C 8.0 13.0 16.0 29.0 35.0 35.0 53.0 Lendinlg Commercial Banks 12.0 15.5 17.5 27.5 31.5 32.5 49.5 Financieras 12.0 19.0 21.5 31.5 36.0 37.5 56.5 Central Bank Rediscount Rates 4 Central Bank eRediscountks Rat6.0-9.5 9.0-12.5 11.0-14.5 21.0-24.5 25.0-28.5 29.5 46.5 To ommercial Bank To Finance Companies 11.0 16.0 18.5 29.5 34.0 35.5 54.5 Selective Credits 3.5-5.0 3.0-8.5 5.0-10.5 15.0-20.5 20.0-24.5 20.0-25.5 n.a. _ . _ _ _- -  - 77 - ANNEX 4 PERU T-25 STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT COFIDE: Audited Balance Sheets as of December 31. 1975-1979 (in millions of Soles) 1975 1976 1977 1978 1979 A u d i t e d ASSETS Current Cash and bank balances 195.4 728.1 946.2 2,570.9 7,505.2 Interest receivable and other current assets - gross 553.1 1,181.0 2,550.5 7,246.1 6,035.1 Less: Provisions (5.3) (354.4) (808.8) (2,047.5) (2,106.3) Net interest and other current assets 547.8 826.6 1,741.7 5,198.6 3,928.8 Net current assets 743.2 1,554.7 2,687.9 7,769.5 11,434.0 Portfolio Loan portfolio - gross 12,102.3 24,209.6 38,636.5 52,522.2 50,265.8 Less: Provisions (52.9) (70.8) (554.0) (1,532.0) (4,711.0) Loan portfolio - net 12,049.4 24,138.8 38,082.5 50,990.2 45,554.8 Investment portfolio - gross 3,284.3 4,358.3 7,922.9 14,624.8 38,174.5 Less: Provisions (26.9) (65.1) (173.5) (201.8) (402.8) Investment Portfolio - net 3,257.4 4,293.2 7,749.4 14,423.0 37,771.7 Net loan and equity portfolio 15,306.8 28,432.0 45,831.9 65,413.2 83,326.5 Other Assets Studies - net 43.5 47.3 89.3 83.7 72.3 Fixed assets - net 30.4 53.0 77.1 146.1 252.9 Other assets 37.1 56.6 215.8 158.8 98.0 Subtotal 111.0 156.9 382.2 388.6 423.2 TOTAL ASSETS 16,161.0 30,143.6 48,902.0 73,571.3 95,183.7 LIABILITIES AND EQUITY Current Liabilities Accounts payable 58.2 135.0 232.3 1,644.6 1,183.6 Interest and commissions payable 391.2 657.8 1,213.2 2,408.4 2,922.6 Taxes and social security payable 28.3 94.9 167.9 401.2 712.6 Provision for staff compensation 10.8 19.4 31.0 39.9 50.4 Total current liabilities 488.5 907.1 1,644.4 4,494.1 4,869.2 Long-term Liabilities Foreign currency loans 5,873.3 10,955.9 24,578.1 35,349.1 29,471.2 Loans from Banco Central de Reservas - - 5,487.0 7,387.0 9,936.5 Other local currency borrowings 4,495.8 9,839.7 4,255.5 4,897.2 9,287.E Total long-term liabilities 10,369.1 20,795.6 34,320.6 47,633.3 48,695.3 Foreign Exchange Gainl/ 48.6 47.8 - 1,227.2 - Equity Share capital 5,047.0 8,031.7 10,252.3 16,060.9 23,712.8 Revaluation surplus - 23.4 2,174.5 2,841.5 14,467.1 Teclmical reserve 64.2 98.9 5.0 5.0 29.0 Retained earnings 143.5 239.0 505.2 1,309.3 3,410.2 Total Equity 5,254.7 8,393.0 12,937.0 20,216.7 41,619.1 TOTAL LIABILITIES AND EQUITY 16,161.0 30,143.6 48,902.0 73,571.3 95,183.7 Guarantees on Own Account 3,353.4 9,772.8 33,469.0 54,674.0 65,590.0 RATIOS Total liabilities _ /equity 2.7:1 3.8:1 5.4:1 5.3:1 2.9:1 Long-term liabilities /equity 2.6:1 3.6:1 5.2:1 5.1:1 2.7:1 Current ratio 1.5:1 1.7:1 1.6:1 1.7:1 2.3:1 Provisions /loan and equity portfolio (%) 0.5 1.6 3.1 5.1 7.6 Note: Sums may not add up due to rounding. 1/ Foreign exchange gains accrued but not realized. Starting from the 1979 accounts, all foreign exchange gains (accrued as vell as realized) are taken to income. 2f locineive of guarantees on own account.  - 78- PERU ANNEX 4 T-26 STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT COFIDE: Audited Income Statements, 1975-1979 (in millions of Soles) 1975 1976 1977 1978 1979 A u d i t e d INCOME Income on loans 975.9 1,806.8 3,812.3 6,702.3 9,387.5 Guarantee commissions -on own account 19.8 47.0 121.2 252.0 383.0 Income on other guarantees,and service fees 68.4 150.0 98.2 152.3 317.9 Interest on bonds and deposits 9.4 11.8 94.0 179.1 970.7 Dividend income 145.8 201.9 248.2 1,395.5 1,232.8 Exchange gain - - - - 1,885.8 Other income 5.8 22.4 52.6 69.3 567.6 TOTAL INCOME 1,225.1 2,239.9 4,426.5 8,750.6 14,745.3 EXPENDITURES Interest and commissions on borrowings 807.2 1,227.4 2,324.8 4,289.4 7,072.0 Administrative expenses 61.1 146.0 126.2 196.4 328.9 Salaries and other personnel expenditures 111.6 154.5 218.8 294.3 533.4 Exchange loss 1/ - - - 210.3 - TOTAL EXPENDITURES 979.9 1,527.9 2,669.8 4,990.3 7,934.3 GROSS PROFIT 245.2 712.0 1,756.7 3,760.2 6,811.0 Provisions 53.6 480.1 1,17'.1 2,315.5 3,488.9 NET PROFIT BEFORE YAX 191.6 231.9 585.6 1,444.7 3,322.1 Tax on net worth 51.3 121.8 217.9 426.0 844.6 Income tax 8.5 - 84.7 150.4 202.6 NET PROFIT AFTER TAX 131.8 110.1 283.0 868.3 2,274.9 RATIOS (%) Net profit before tax/Average total assets 2/ 1.2 0.8 1.0 1.4 2.3 Net profit after tax/Average equity 2.9 1.6 2.7 5.2 7.4 Administrative costs /Average total assets 1.1 1.0 0.6 0.5 0.6 Income on loans/Average loan portfolio 10.0 9.5 11.5 13.3 16.2 Income on guarantees on own account/Average 0.7 0.7 0.6 0.6 0.6 guarantees on own account Borrowing costs/Average borrowings 9.9 7.5 8.1 9.7 13.4 1/ Exchange loss taken to income. In the same year, there were exchange gains accrued of S/.1,227.2 million. 2/ Inclusive of guarantees on own account.  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT COFIDE: Summary of Approvals-, 1976-1980 (first half) (in millions of Soles) Publ. Enit. Priv.Ent.; Sod.Prop.Ent. T o t a 1 No. Amount No. Amount No. Amount No. Amount A. OPERATIONS WITH OWN RESOURCES 1. Local Currency Capital contributions - - 6 112.6 - - 6 112.6 Loans 18 2,754.6 21 1,598.5 - - 39 4,353.1 Studies 3 42.8 3 2.9 - - 6 45.7 Subtotal 21 2,797.4 30 1,714.0 - - 51 4,511.4 2. Foreign Curreney Capital contributions - _ _ _ _ _ _ Loans 19 1,590.4 8 7,191.3 1 1.7 28 8,783.4 Studies 6 140.4 2 3.0 _ - 8 143.4 Subtotal 25 1,730.8 10 7,194.3 1 1.7 36 8,926.8 3. Guarantees 26 3,650.0 7 2,181.5 - - 33 5,831.5 TOTAL OPERATIONS WITH OWN RESOURCES 72 8.178.2 47 11,089.8 1 1.7 120 19,269.7 B. OPERATIONS AS REPR. OF THE GOVERNMENT Loans 4 672.7 - - - - 4 672.7 Guarantees 8 7,351.1 2 1,791.8 - - 10 9,142.9 Capital contributions _ _ _ _ _ _ TOTAL OPER. AS REPR. OF GOV.T 12 8,023.8 2 1,791.8 - 14 9,815.6 C. OTHER OPERATIONS Operations with FRAI with FONAPS _ _ _ - 36 742.5 36 742.5 TOTAL OTHER OPERATIONS _ _ _ _ 36 742.5 36 742.5 TOTAL APPROVALS (A+B+C) 84 16,202.0 49 12,881.6 37 744.2 170 29,827.8 1/ Net approvals. CU IDW's foreln exchange oetraticee for ach year hae bem converted lato soles at the exchange rate at the end of the roopective years: 1976 - US$1 - S1.69.37; 1977 - 130.719; 1978 - 196.68; 1979 - 250,747; 1980 (June) - 286.073. I loo ZI| o -> lb a- 40  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Summary of Approvals-. 1976-1980 (first half) (in millions of Soles) It 7 7 1 9 7 8 Publ. Ent. Priv. Eut. Soc.Prop.Ent. T o t a 1 Publ. Ent. Priv.Ent. Soc.Prop.Ent. T o t a 1 No. Amount No mut No. Amount No. Amoun-t No. Amount No. Ampunt No. Amount No. Amount A. OPE CIONS WITH OWN RESOURCES I. 5 D GSEERc Capital contributions - - 5 102.7 - - 5 102.7 - - 8 160.5 - - 8 160.5 Capital contributious 4 914.0 24 1,420.8 - - 28 2,334.8 7 300.5 28 1,622.9 - - 35 1,923.4 Studies 13 218.1 2 9.8 _ - 15 227.9 2 3.4 2 3.7 - - 4 7.1 Subtotal 17 1,132.1 31 1,533.3 - - 48 2,665.4 9 303.9 38 1,787.1 - - 47 2,091.0 2. Fofeign Currency C,pital contributions - - - Wlans 10 1,001.3 5 205.5 2 137.9 17 1,344.7 11. 3,348.8 50 3,254.7 2 70.8 63 6,674.3 sCudies 7 204.0 3 134.0 - - 10 338.0 - - 1 49.2 - - 1 49.2 Subtotal 17 1,205.3 8 339.5 2 137.9 27 1,682.7 11 3,348.8 51 3,303.9 2 70.8 64 6,723.5 3. Gurntees 13 3,616.5 2 363.7 - 15 3,980.2 11 7,398.1 16 7,190.5 - - 27 14,588.6 TOTAL OPERATIONS WITH OWN RESOURCES 47 5,953.9 41 2,236.5 2 137.9 90 8,328.3 31 11,050.8 105 12,281.5 2 70.8 138 23,403.1 B. OPERA IONS AS REPR. OF THE GOVERNMENT Loans - - - - - - - - 2 2,694.5 - - - - 2 2,694.5 GOlarantees 4 21,682.3 6 1,827.2 - - 10 23,509.5 4 11,939.4 - - - - 4 11,939.4 0 Capital contributions - - _- - _ _ _ _ _ _ TOTAL OPER. AS REPR. OF GOV.T 4 21,682.3 6 1,827.2 _ _ 10 23,509.5 6 14,633.9 _ _ - - 6 14,633.9 C. OTHER OPERATIONS operations with FRAI - _ _ _ _ 2 28.3 - - 2 28.3 with FONAPS _ 9 262.8 9 262.8 __ - - -_fl 95.5 8 95.5 TOTAL OTHER OPERATIONS _ - _ _ 9 262.8 9 262.8 - - 2 28.3 8 95.5 10 123.8 TOTAL APPROVALS (A+4B+C) 5L 47 4,063.7 11 400.7 109 32j100.6 37 35,684.7 107 12,309.8 10 166.3 154 38 160 8 1/ Net approvals. COPIDE's foreign exchange operations for each year have been converted into soles at the exchange rate at the end of the respective years: 1976 - US$1 - S/.69.37; 1977 - 130.719; 1978 - 196.68; 1979 - 250.747; 1980 (June) - 286.073. 5H fD0  PERU STAFF APPRAISAL REPORT SECOND INDUSTRIAL CREDIT PROJECT Summary of Approvals-, 1976-1980 (first half) (in millions of Soles) 1 9 7 9 1 9 8 0 (January-June) Publ. Ent. Priv.Ent. Soc.Prop.Ent. T o t a 1 Publ. Ent. Priv.Ent. Soc.Prop.Ent. T o t a 1 No. Amount No~.Amouint- No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount A. OPERATIONS WITH OWN RESOURCES 1. Local Currency Capital contributions - - 15 3,904.7 - - 15 3,904.7 - _ 10 3,912.4 - - 10 3,912.4 Loans 6 1,660.8 47 7,058.6 - - 53 8,719.4 4 2,058.0 36 4,234.2 1 90.0 41 6,382.2 Studies 5 102.9 4 15.1 _ - 9 118.0 6 215.5 1 2.4 - - 7 217.9 Subtotal 11 1.763.7 66 10,978.4 - - 77 12,742.1 10 2,273.5 47 8,149.0 1 90.0 58 10,512.5 2. Foreign Currency Capital contributions - - - - - - - - 2 3,118.2 - - 2 3,118.2 Loans 6 2,292.5 59 11,357.3 - - 65 13,649.8 4 4,648.9 45 7,683.0 1 28.2 50 12,360.1 Studies 4 335.1 2 25.1 _ - 6 360.2 - - - - - - . - Subtotal 10 2,627.6 61 11,382.4 - - 71 14,010.0 4 4,648.9 47 10,801.2 1 28.2 52 15,478.3 3. Guarantees 2 2,563.5 6 10,518.3 - - 8 13,081.8 3 1,723.9 3 788.8 - - 6 2,512.7 TOTAL OPERATIONS WITH OWN RESOURCES 23 6,954.8 133 32,879.1 - 156 39,833.9 17 8.646.3 97 19,739.0 2 118.2 116 28,503.5 a. OPERATIONS AS REPR. OF THE GOVERNMENT Loans 6 47,773.9 - - - - 6 47,773.9 - - - - _ _ _ _ Guarantees 3 43,253.9 3 3,189.3 - - 6 46,443.2 5 46,772.9 - - - - 5 46,772.9 Capital contributions - 1 450.0 _ - 1 450.0 - _ __- TOTAL OPER. AS REPR. OF GOV.T 9 91,027.8 4 3.639.3 _ _ 13 94,667.1 5 46,772.9 _ - _ _ 5 46,772.9 C. OTHER OPERATIONS Operations with FRAI - - 2 31.0 - - 2 31.0 - - - - - - with FONAPS _ - - - 4 240.0 4 240.0 - - ---- TOTAL OTHER OPERATIONS - 2 31.0 4 240.0 6 271.0 _ - - - TOTAL APPROVALS (A+B+C) 32 97,982.6 139 4 240.0 175 2 2 55,419.2 97 19739.0 1.2 121 75,276.4 I/ Net approvals. COFIDE's foreign exchange operations for each year have been converted into soles at the exchange rate at the end of the respective years; 1976 - US$1 S/.69.37; 1977 - 130.719; 1978 - 196.68; 1979 - 250.747; 1980 (June) - 286.073. 00 Ibz  - 82 - PERU ANNEX 4 STAFF APPRAISAL REPORT 21 of2 SECOND INDUSTRIAL CREDIT PROJECT COFIDE: Breakdown of Operations-! 1976-1980 (first half) (in millions of Soles) 1976 1977 1978 1979 1980 (first half) No. Amount % No. mount % No. Amount % No. Aimunt Z No. Amount % A. OWNERSHIP Public 72 8,178.2 42 47 5,953.9 71 31 11,050.8 47 23 6,954.8 17 17 8,646.3 30 Gov't participation )47 19,