The World Bank FOR OFFICIAL USE ONLY Report No. 6321 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (CREDITS 566-CE AND 742-CE) June 27, 1986 Operations Evaluation Department This documnat has a festricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS ADB - Asian Development Bank BMR - Balancing, Modernization and Replacement CTB - Ceylon Tourist Board DEG - German Corporation for Economic Cooperation DFCC - Development Finance Corporation of Ceylon DFI - Development Finance Institution ERR - Economic Rate of Return FIAC - Foreign Investment Advisory Committee F1O - Netherlands Finance Company for Developing Countries ?RR - Financial Rate of Return GOSL - Government of Sri Lanka IBD - International Bank for Reconstruction and Development IDA - International Development Association IDP - Industrial Development Project IFC - International Finance Corporation LIAC - Local Investment Advisory Committee NDB - National Development Bank of Sri Lanka PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report SAR - Staff Appraisal Report SSE - Small Scale Enterprise SKI - Small and Medium Industry USAID - United States Agency for International Development EXCHANGE RATES Name of Currency (Abbreviation): rupee (Rs) Average Exchange Rates During the Period: 1975 US$ I = Rs 7.050 1976 US$ 1 - Rs 8.459 1977 US$ I = Rs 9.153 1978 US$ 1 = Rs 15.611 1979 US$ 1 = Rs 15.572 1980 US$ 1 - Rs 16.534 1981 US$ 1 = Rs 19.246 1982 US$ 1 = Rs 20.812 1983 US$ 1 = Rs 23.529 1984 US$ 1 - Rs 25.438 1985 US$ 1 = Rs 27.163 FISCAL YEAR Government: January 1 to December 31 DFCC: April 1 to March 31 FOR OFFICIAL UtaE ONLY THE WORLD BANK Washington. D.C. 20433 U.S.A. Office of Dieector-cneral Operatons Evalutant June 27, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Sri Lanka - Development Finance Corporation of Ceylon (Credits 566-CE and 742-CE) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Sri Lanka - Development Finance Corporation of Ceylon (Credits 566-CE and 742-CE)" prepared by the Operations Evaluation Department. Attachment 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. FOR OFFICIAL USE ON1Y PROJECT PERFORMANCE AUDIT REPORT SRI LANKA DEVELOPMENT FIKANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE' TABLE OF CONTENTS Page No. Preface............................... Basic Data Sheets ................................................... i1 Evaluation Summary ..........................vi PROJECT PERFORMANCE AUDIT MEMORANDUM l. BACKGROUND ......................... II. PROJECT OBJECTIVES AND DESIGN ............................... 2 III. UTILIZATION OF BANK GROUP FUNDS ............................. 4 Credit 566-CE ................................... 4 Credit 742-CE ........................... 7 IV. INSTITUTIONAL D-ELOPMENT ................................. 10 Organization, Management and Staff .......................... 10 Appraisal Procedures ................................ 11 Supervision Procedures ................................... 12 Resource Mobilization ...................................... 13 Promotional Activities ....................15 Consultancy and Merchant Banking ............................ 15 Leasing ....................................... ...... 15 Future Business Strategy .................................. 16 V. OPERATIONAL AND FINANCIAL PERFORMANCE ....................... 16 Operations .............................................. 16 Small Scale Enterprises .......... ...................... 17 Financial Performance ........................... 18 VI. IMPACT OF TUE BANK GROUP'S ASSOCIATION WITH DFCC ............ 19 VII. SUSTAINABILITY ..............................0 20 VIII. CONCLUSIONS ............................... 21 This document has a rtricted distribution and may bo usd by recipient only In te prformance of thir offcial dutes. Im contents may not otherwis b@ discoed without World Bank authori~tio. TABLE OF CONTENTS (cont'd) PPAR Page No. ATTACHMENTS 1. Listing of Subprojects under Credit 566-CE .......... 22 2. Status of Subprojects under Credit 566-CE ......... 24 3. Performance of Subprojects under Credit 566-CE .....o.. 26 4. Listing of Subprojects under Credit 742-CE .......... 27 5. Status of Subprojects under Credit 742-CE .......... 29 6. Performance of Subprojects under Credit 742-CE ........ 31 70 Income Statements - FYO3-FY85 ..........* .... 32 8. Balance Sheets - FY83-PY85 .................o 33 9. Indicators and Ratios -FY82-FY85 .o ............ 34 10. Arrears Situation ........ .......o..... 35 11. Collection Performance - Y82-FY85 ...... 0000000*0000**60000* 37 PROJECT COMPLETION REPORT I, Introduction ......0ee*......00** *.*o o 39 11. The Economic Environment .........oo.oo e 000 40 III. Industrial Finance ...... o...ooo.eo....e* 42 IV. The Credits .... 0000000000000 ......* ** 43 V. Performance of DFCC ..........oooooooooo 44 VI, Achievement of Objectives *................o 55 VII. Role of the Bank Group and Lessons Learned .......... 56 ANNEXES L1* Schedule of Estimated and Actual Disbursements oooooe*0 58 2. DFCO's Organization Chart 59 3* DFCC's Statement of Policy ............o o o..o 60 4. Actual and Projected Operations, EY77-EY83 ...ooooooo 62 5. Synopsis of 15 "A" Subprojects Financed Under Credit 742-CE.. 63 6. Income Statements, FY76-FY83 ........o..***.* * 64 7. Cash Flows - Projections and Actuals, EY76-FY81 .*00000*009* 66 8. Balance Sheets, FY75-EY83 .........o.. ooooo 67 9. Portfolio Arrears, Loans, EY76-FY82 ............ 70 10. Portfolio Arrears, Under Credit 566-CE and Credit 742-CE .... 71 11. Portfolio Arrears, Preference Shares, FY80-FY82 *ooe O* 76 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) PREFACE This is a performance audit under Credits 566-CE and 742-CE in the amounts of US$4.5 million and US$8.0 million respectively to the Democratic Socialist Republic of Sri Lanka and on-lent to the Development Finance Corporation of Ceylon (DFCC). Credit 566-CE was approved in June 1975 and the final disbursement was made in Novemb-er 1979 with the undisbursed amount cancelled a month later. Credit 742-CE was approved in September 1977 and the final disbursement was made in September 1982 with the undisbursed amount cancelled the same month. The Project Performance Audit Report consists of the Project Per- formance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department and the Project Completion Report (PCR) prepared by the South Asia Regional Office of the Bank. The PPAM is based on the attached PCR, the Staff Appraisal and President's Reports, the Credit documents, sector, eco- nomic and other reports on the country, the Asian Development Bank's Project Performance Audit Report on its first loan to DFCC, the Private Development Corporation of the Philippines' report of February 1985 to DFCC on its con- sulting assignment, the summaries of the Board discussions, study of the project files, and discussions with Bank staff. An OED mission visited Sri Lanka in July 1985 and discussed the effectiveness of the Bank Group's assis- tance with DFCC, Government officials and a sample of DFCC's clients. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR describes the financial and economic environment preN,ailing in Sri Lanka at the time of the Credits and gives some details on DFCC's institutional development and operational and financial performance. The PPAM elaborates on the utilization of the Bank Group's funds and on several aspects of DFCC's institutional development and performance, and draws lessons from the project experience. A copy of the report was sent to the Government and the Executing Agency for review. No comments were received. - ii - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE) BASIC DATA SHEET (Amounts in US$ millions) CREDIT STATUS As of 02/28/86 Original Disbursed Cancelled Repaid Outstanding Credit 566-CE 4.50 4.15 0.35 0.02 4.13 CUMULATIVE CREDIT DISBURSEMENTS FY76 FY77 FY78 FY79 (i) Planned 0.77 2.77 3.90 4.50 (ii) Actual 1.60 3.20 3.57 4.15 (iii) (ii) as % of (i) 208% 116% 92% 92% OTHER PROJECT DATA Original Actual Board Approval - 06/26/75 Credit Agreement - 06/27/75 Effectiveness 09/25/75 08/22/75 Final Subproject Submission 09/30/77 12/31/77 Closing Date 09/30/79 09/30/79 Last Disbursement 09/30/79 11/06/79 Borrower Democratic Socialist Republic of Sri Lanka Executing Agency Development Finance Corporation of Ceylon STAFF INPUT (manweeks) FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 Total Preparation 3.7 3.7 Appraisal 4.7 34.6 39.3 Negotiations 9.3 9.3 Supervision 26,4 2.2 4.9 0.1 1.8 3.3 38.7 8.4 43.9 26.4 2.2 4.9 0.1 1.8 3.3 91.0 - iii - MISSION DATA No. of No. of Date of Month/Year Weeks Persons Manweeks Repc.rt Appraisal 06/74 3.6 2 7.2 06/11/75 Supervision I 11/75 2.1 2 4.2 12/19 75 Supervision II /a 09/76 2.6 2 5.2 12/09/76 Supervision III 10/77 2.3 3 6.9 10/21177 Supervision IV 09/78 3.0 2 6.0 10/16/18 Supervision V 10/79 2.3 2 4.6 10/17/79 Supervision VI 03/80 0.7 1 0.7 03/20/80 Supervision VII 09/80 3.0 1 3.0 11/21/80 Supervision VIII 07/81 1.7 1 1.7 08/31/81 Supervision IX /b 12/81 3.0 4 12.0 03/13/82 Completion I 11/82 1.1 1 1.1 01/15/83 Supervision X 04/83 1.7 2 3.4 06/06/83 Supervision XI 12/83 0.7 2 1.4 12/18/83 Completion II 02/84 0.7 1 0.7 06/21/84 /a Appraisal of Credit 742-CE. /b Appraisal of Credit 1401-CE. - iv - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 742-CE) BASIC DATA SHEET (Amounts in US$ millions) CREDIT STATUS As of 02/28/86 Original Disbursed Cannelled Repaid Outstanding Credit 142-CE 8.00 7.54 0.46 0.00 7.54 CUMULATIVE CREDIT DISBURSEMENTS FY78 FY79 FY80 FY81 FY82 (i) Planned 0.10 2.60 5.70 7.70 8.00 (ii) Actual 1.36 3.71 5.72 7.48 7.54 (iii) (ii) as % of (1) 1,360% 143% 100% 97% 94% OTHER PROJECT DATA Original Actual Board Approval 09/13/77 Credit Agreement - 09/30/77 Effectiveness 12/28/77 12/16/77 Final Subproject Submission 12/31/79 06/30/80 Closing Date 12/31/81 12/31/81 Last Disbursement 12/31/81 09/17/82 Borrower Democratic Socialist Republic of Sri Lanka Executing Agency Development Finance Corporation of Ceylon STAFF INPUT (manweeks) FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 Total Preparation 0.6 0.4 1.0 Appraisal 45.8 3.1 48.9 Negotiations 1.1 2.7 3.8 Supervision 20.5 27.0 18.9 7.4 12.3 3.3 89.4 Totals 0.6 47.3 26.3 27.0 18.9 7.4 12.3 3.3 143.1 - v - MISSION DATA No. of No. of Date of Month/Year Weeks Persons Manweeks Report Appraisal 09/76 2.6 2 5.2 12/09/76 Supervision I 10/77 2.3 3 6.9 10/21/77 Supervision II 09/78 3.0 2 6.0 10/16/78 Supervision III 10/79 2.3 2 4.6 10/17/79 Supervision IV 03/80 0.7 1 0.7 03/20/80 Supervision V 09/80 3.0 1 3.0 11/21/80 Supervision VI 07/81 1.7 1 1.7 08/31/81 Supervision VII /c 12/81 3.0 4 12.0 03/13/82 Completion I 11/82 1.1 1 1.1 01/15/83 Supervision VIII 04/83 1.7 2 3.4 06/06/83 Supervision IX 12/83 0.7 2 1.4 12/18/83 Completion II 02/84 0.7 1 0.7 06/21/84 FOLLOW-ON PROJECTS DFCC has access to the Industrial Development Project, Credit 1401-CE, approved July 1983 for SDR 23.1 million (US$25.0 million equivalent). It also participates in IDA's two Small and Medium Industry projects, Credit 942-CE epproved June 1979 for US$16.0 million and Credit 1182-CE approved October 1981 for US$26.7 million. /c Appraisal of Credit 1401-CE. - vi - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (CREDITS 566-CE AND 742-CE) EVALUATION SUMMARY Introduction The Development Finance Corporation of Ceylon (DFCC) was estab- lished in 1955 as a multi-sector financial intermediary, with the mandate to provide long-term capital to, and make equity investments in, private enterprises. The majority of its share capital is privately owned. The Bank Group first provided financial assistance to DFCC in 1967 through a line of credit of US$4.0 million (Loan 520-CE). This was followed by a second loan of US$8.0 milliot (Loan 634-CE) in 1969. The two IDA Credits that are the subject of this report were made in 1975 and 1977 (paras. 1-6). Objectives The objectives of the two projects were similar and two-fold: (a) to provide foreign exchange for private investments in industry, tourism and related activities; and (b) to continue the efforts to improve DFCC as an institution (para. 7; PCR, para. 17). Implementation Experience Credit 566-CE was committed to 50 subprojects (after cancella- tions) within two and a half years of its approval. All but about 8 percent of the Credit was disbursed without extending the Closing Date with the remainder cancelled (para. 13). Credit 742-CE was committed to 45 sub- projects (net of cancellations) within two years nine months of its approval. The last disbursement took place about nine months after the original Closing Date, leaving about 6 percent of the credit to be cancelled (para. 23). DFCC's appraisal procedures were generally good at the time Credit 566-CE was made, with the exception of its economic analysis. It undertook to improve this aspect, including the calculation of the economic rate of return (ERR) for the larger subprojects. This undertaking was repeated at the time Credit 742-CE was granted. However, the ERR was actually calculated for only about half of the larger subprojects financed under the two Credits (para. 39 - 41). With regard to supervision procedures, DFCC increased the frequency of post-completion visits at the Bank Group's urging - vii - (para. 42). Systematic preparation of completion reports would be a logical extension of DFCC's generally satisfactory supervision work (para. 45). One of the objectives of the project supported by Credit 742-CE was the strength- ening of DFCC's promotional activities. Until recently, though, little progress had been made (para. 51; PCR, para. 28). Results The proceeds of both Credits were used by DFCC for equity invest- ments (15 percent) as well as subloans (85 percent) (para. 12). Some 46 percent of the amounts disbursed by DFCC had been repaid by March 31, 1985. Of the subloans still outstanding, about 11 percent were in arrears, an improvement over 18 months earlier (paras. 22 and 32). The two Credits helped finance 95 subprojects which were sectorally well dispersed (paras. 15 and 25). Thirty percent of the amount disbursed supported 17 export-oriented subprojects. Thirteen subprojects, accounting for only about 3 percent of the Credits, were small-scale enterprises (paras. 16 and 26). The average total cost of the subprojects assisted by the first Credit for which data are available was US$527,000 equivalent, which amount doubled under the second Credit. Cost overruns under the first Credit were modest, but increase.' significantly under the second (paras. 18 and 28). Based on fairly limited data, the average cost per job created under the first Credit was US$3,210 equivalent and under the second, US$9,290 equivalent. The subprojects supported by the second Credit, however, were more labor intensive as indicated by the median cost per job created figure of US$5,580 equivalent, almost half that for the first (paras. 20 and 30). Since first borrowing from the Bank group, DFCC has been successful in arranging lines of credit from other official foreign sources (pares. 46-49). It has also reduced its dependency on the Government for rupee resources (para. 47). Its paid in share capital has been increased from Re 8 million to Re 100 million and DFCC will shortly issue a Rs 200 million local debenture which commercial banks are likely to subscribe to (para. 50). DFCC has been financing small scale enterprises since 1975 when part of Credit 566-CE was earmarked for this subsector (para. 61). More recently it has established a Consultancy and Merchant Banking Division (para. 53) and has entered into equipment leasing (para. 55). Sustainability DFCC operates at a profit, and distributes dividends, reflecting the lower than market rates of interest it pays as well as its own efficien- cies. It enjoys the support of Government. However, DFCC is currently having to devise a long-term strategy to become more competitive in the increasingly diverse financial community of Sri Lanka. Its future sustain- ability will depend on the success of this strategy (paras. 74 - 76). Findings and Lessons The resource transfer objective of the two projects was success- fully achieved, though some of the subprojects are suffering from arrears - viii - (para. 77). The institution building objective was partially met, the main shortfalls being DFCC's failure to consistently calculate the ERR and its slowness in increasing promotional activities (para. 78). Overall, DFCC has been a successful development finance institution (DFI). It currently is facing two main problems, the arrears situation and its future role (para. 80). The fact that DFCC is having to adapt to meet its changing environ- ment reinforces the lesson that institution building is a continuing process with success often requiring continued Bank Group supervision (para. 81). These projects demonstrate that the management and staff of a DFI must be convinced of the validity and practicality of procedures and proposals put forward by the Bank Group if they are to be accepted. They also reemphasize the importance of a strong Board of Directors providing overall guidance (para. 82). PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (CREDITS 566-CE AND 742-CE) I. BACKGROUND l. The Project Completion Report describes in some detail the evolu- tion of the Sri Lankan economy and financial sector (PCR, paras. 7-16)1/ as well as the establishment and growth of the Development Finance Corporation of Ceylon (DFCC) (PCR, paras. 1-6). DFCC was established in 1955 by an Act of Parliament in response to a recommendation of an IBRD economic survey mis- sion report published in 1952. IBRD assisted in drafting the Act. DFCC was established to provide long-term credit to, and make equity investments in, private enterprises (originally defined as enterprises in which Government ownership does not exceed 20 percent but redefined when DFCC's Act was amended in 1982 as 49 percent) In industry, agriculture and commerce, includ- ing hotels, transportation, construction and engineering. The majority of its share capital is privately owned. 2. Although the Government gave industrial development high priority during the late 1950s and the 1960s, most of the new enterprises were wholly or mainly Government-owned and so ineligible for DFCC financing. During much of this period the Government discouraged external borrowings. As a result, DFCC's operations were limited to local currency and it needed no assistance from the World Bank. In 1965 the Government shifted its emphasis and began to encourage private sector investment. At about the same time it also began allowing foreign currency borrowings. These changes sparked a significant growth in DFCC's activities. 3. To support this growth, in 1967 IBRD made its first loan to DFCC (Loan 520-CE). Commitment of this US$4.0 million Loan started very briskly and it was followed in 1969 by a second for US$8.0 million (Loan 634-CE).2/ The prospects for the industrial sector, which had appeared reasonably bright when these two loans were approved, dimmed considerably as a result of the elections in May 1970. The new socialist Government introduced extensive price controls, limited the area of private sector industrial activity, established many new public sector corporations, progressively nationalized 1/ For a fuller discussion of the evolution of the economy and of the Bank Group's overall relationship with Sri Lanka, see "The World Bank and Sri Lanka - A Review of a Relationship," OED Report No. 6074 dated February 24, 1986. 2/ The experience with this second project is reviewed in a Project Performance Audit Report (No. 1833) dated December 22, 1977. - 2 - wholesale and retail trade, established income ceilings and promulgated the Business Acquisition Act under which it was empowered to take over any pri- vate firm at its discretion. These measures led to a sharp cutback in pri- vate sector investment and a severe drop in DFCC's business, As a result, US$6.8 million of the two IBRD Loans was cancelled. 4. The investment climate in Sri Lanka gradually improved during the early 1970s, as did DFCC's operations, and by 1975 the Government had suc- ceeded in restoring a good measure of the private sector's confidence. This led to a restoration of Bank Group contact with DFCC and, in June 1975, to the first IDA Credit (No. 566-CE, discussed in this Report). In 1977 the Government, with IMF advice, took the first steps towards liberalizing the economy, including the encouragement of private (foreign and local) invest- ment. This was supported by the second IDA Credit (No. 742-CE, also dis- cussed in this Report). 5. By 1976 DFCC had become the largest long-term industrial credit institution in the country, a position which the Government-owned Bank of Ceylon had previously held. It achieved this position in part because it was an efficient, well-run institution and in part because it was the only insti- tution in Sri Lanka with direct access to foreign exchange. This foreign ex- change monopoly position ended in 1977 when foreign exchange became more readily available. In 1979 the Government established the National Develop- ment Bank (NDB) with the power to offer a wide range of financial services to both public and privates enterprises. Because of its much larger capital base, within five years NDB overtook DFCC as the largest industrial credit institution in Sri Lanka. The Government also encouraged foreign banks to establish branches in the country and 22 have, further increasing the availa- bility of credit. In addition, several leasing companies and a number of general financing institutions have been established. As a result of these developments, DFCC's role in the financial sector in particular and in the economy in general has become diluted and unclear. 6. Industrial growth was strong immediately following the 1977 liber- alization in trade and industrial policies, but then began to slow because of the world recession. The poor overall performance, however, hides the diver- gent growth of public and private sector industries. While output in private industry grew by about 26 percent in 1984, it fell by 15 percent in public enterprises. The civil disturbances that began in July 1983 have had a measurable negative impact on economic activity, especially in the tourism sector and on investor confidence. II. PROJECT OBJECTIVES AND DESIGN 7. The objectives of the two projects were similar, though they were less well spelled out in the Board documents for Credit 566-CE than for Credit 742-CE. They were two-fold: (a) to provide foreign exchange for pri- vate investments in industry, tourism and related activities; and (b) to con- tinue the efforts to improve DFCC as an institution (1977 SAR, para. 7.01; PCR. para. 17). - 3 - 8. Under the first Credit US$200,000 was specifically allocated for lending to small scale enterprises (SSEs), defined as enterprises whose fixed assets did not exceed Ra 200,000, and up to US$15,000 was available (though not used - see para. 38) to cover the cost of overseas training of DFCC staff in hotel project appraisal and supervision (1975 SAR, para. 8.01). The pro- ceeds of the Credit were on-lent by the Government to DFCC at 8.5 percent p.a. Subloans carried a 12 percent p.a. interest rate except to SSEs where a 10 percent p.a. rate applied. The Bank Group's initial negotiating position was that DFCC's on-lending rate should be a uniform 11.5 percent p.a. DFCC, on the other hand, wanted a 4 percent spread which the Bank Group thought unnecessarily large. In the end, the split rate was agreed as a compromise. It was also noted at negotiations that there was no indication that SSE lend- ing was a significant activity of DFCC and therefore little of the Credit was expected to be used for SSE leading. However, as the spread on SSE subloans was only 1.5 percent versus 3.5 percent on other subloans, the Bank's senior management, in an effort to ensure that SSEs were not ignored, instructed the staff after negotiations had ended, and in spite of staff reservations, that at least US$200,000 of the Credit be reserved for SSEs. In the end, only US$155,000 was so used for seven subprojects.3/ 9. The institution building objective of the project supported by Credit 566-CE included improvements in project appraisal (specifically exam- ining the economic impact of projects and the level of capacity utilization in the industries it financed) and supervision (specifically increasing the frequency of visits to projects during implementation and after completion). DFCC was also, as part of its domestic resource mobilization efforts, to con- tinue to make efforts to tap sources other than the Central Bank and commer- cial banks (letter from DFCC dated June 27, 1975). 10. It was expected that about 40 percent of tie second Credit would support export-oriented subprojects and another 15 percent, hotel projects (1977 SAR, para. 7.01(a)). The proceeds of the Credit were on-lent by the Government to DFCC at 8 percent p.a. DFCC's on-lending rate was a uniform 13 percent p.a., providing it with a 5 percent spread which was now seen as appropriate (1977 SAR, para. 8.02). Specific institution building objectives were staff expansion, improved appraisal standards and increased promotional activities (1977 SAR, para. 7.01(b)). 11. The possibility of DFCC financing subprojects in industries where there already was unutilized capacity was again a concern under the project supported by Credit 742-CE. To permit the Bank Group to have a closer con- tact with subprojects where capacity utilization might be a problem, a lower 3/ In November 1975, six months after negotiations, DFCC requested that the fixed assets limit be raised to Ra 500,000. After protracted corre- spondence and discussion, over a year later the Association agreed to this change. Six of the seven SSE subprojects were authorized only after this change was made. free limit was established for subprojects producing for the local market which involved an increase in installed capacity of at least 10 percent, and for all tourism subprojects (1977 SAR, para. 8.05). 12. DFCC was allowed under both Credits to make equity investments from the proceeds of the Credits, and did so (see paras. 14 and 24). All such equity investments, though, were to be approved by the Association, the free limits of both Credits being applicable only to subloans. In the event, this requirement of both Credits was overlooked by both the Association and DFCC, the free limit being interpreted to mean the total amount from the Credit that DFCC proposed to invest in a subproject. III. UTILIZATION OF IDA FUNDS Credit 566-CE 13. The first two subprojects authorized under Credit 566-CE were sub- mitted to the Association before the Credit was declared effective and were authorized immediately thereafter, demonstrating DFCC's need for additional resources. The original subproject submission deadline was September 30, 1977, about two years three months after the Credit was approved. By that time 52 subprojects had been authorized, of which five were subsequently can- celled. The deadline was extended by three months, during which time eight more subprojects were authorized, fully committing the Credit. Another five subprojects were later cancelled, however, which together with a small bal- ance held to cover foreign exchange fluctuations led to US$347,000 or about 8 percent of the Credit being cancelled. Eight of the resulting 50 subproj- ects4/ were above the free limit of US$150,000. These subprojects are listed in Attachment 1. 14. About 20 percent of the amount disbursed from the Credit was invested by DFCC in preference and ordinary shares of its clients. Such investments are an attempt by DFCC to improve its earning position as inter- company dividends are not subject to income tax. DFCC invested ir the pref- erence shares of 23 of the subprojects, usually in the form of 12% redeemable cumulative preference shares. The redeemable feature allows DFCC to revolve its funds more easily. In 13 of these cases DFCC also made a subloan to the client from the Credit. DFCC invested in the ordinary shares of five of the subprojects, in four cases with a parallel subloan from the Credit and in the fifth, an investment in preference shares. Attachment 2, which updates pages 1 and 2 of Annex 10 of the PCR, lists these investments. 15. Nine subprojects involved the establishment and another nine the modernization of hotels, accounting for 17.6 percent of the amount disbursed from the Credit. Most of these subloans were quite small (eight were less 4/ The PCR refers to 48 subprojects (paras. 18, 33 - 40), no doubt because two subborrowers each received two subloans. - 5 - than US$20,000) with only two being over US$100,000. The second largest category in terms of number of subprojects was ready-made garments, account- ing for five subprojects and 18.0 percent of the amount disbursed. Four of these were specifically export-oriented. The other subprojects were well distributed sectorally (Attachment 1; PCR, para. 35). 16. Besides the four garment subprojects, there were three other speci- fically export-oriented subprojects; two involved rubber products and the third, tropical fish. Almost one-quarter of the disbursed amount went to these seven subprojects, with two alone accounting for 18.5 percent. On the other hand, two of the seven SSE subprojects were among this group. In all, the SSE subprojects accounted for about 4 percent of the disbursed amount (Attachment 1). 17. Twenty of the 50 subprojects were expansions of existing companies and accounted for some 57 percent of the disbursed amount. Another 14 were modernizations of existing plants, accounting for 18 percent. The remaining 16 subprojects were new entities and used 25 percent of the disbursed amount (Attachment 1; PCR, para. 37). Seventeen subprojects, accounting for 39 per- cent of the disbursed amount, were located in the capital city of Colombo with 26 (54 percent) located elsewhere in the country; the location of seven subprojects was not provided by DFCC. Fifteen of the subborrowers (receiving 29 percent of the disbursed amount) were private limited liability companies, 16 (43 percent) were public limited liability companies and two (14 percent) were sole proprietorships. Data was not provided on 17 subborrovers, includ- ing all seven of the SSEs (Attachment 1). 18. The following table provides the size distribution of amounts withdrawn from the Credit for subprojects. As can be seen, the average Table 1: SIZE OF SUBLOANS/INVESTMENTS FROM CREDIT 566-CE Size Range Subprojects Total Amount Average Amount (US$ '000s) (No.) (%) (US$ '000s) (Z) (US$ '000s) 0 -50 28 56 685 17 24 51 -100 10 20 716 17 72 101 -200 6 12 765 18 128 201 -300 3 6 681 16 227 above 300 3 6 1 306 32 435 Totals 50 100 4,153 100 83 subloan/investment is quite small. The actual total project cost is avail- able for 25 subprojects and is indicated in Table 2. - 6 - Table 2: ACTUAL TOTAL PROJECT COST - CREDIT 566-CE Size Range Subprojects Total Amount AverUe Amount TRE'ooos) (NO.) (Ri '000s5)7 ) (Rs -pO00) (USl 00./a 0 - 1,000 6 3,133 3 572 67 1,001 - 2,000 6 9,018 8 1,503 177 2,001 - 5,000 4 13,746 12 3,436 404 5,001 - 10,000 7 49,156 44 7,022 826 above 10,000 2 36,677 33 18,338 2,157 Totals 25 112,030 100 4,481 527 /a An exchange rate of RB 8.50 - US$1.00 was used. Details can be found in Attachment 3 which also gives the estimated project cost and the cost over- or underrun. Five subprojects cost less to complete than originally estimated, the largest savings being 42 percent of the estimated cost. The actual cost of three subprojects was the same as the estimated cost. The remaining 17 subprojects for which there are data experienced cost overruns ranging from 2 percent to 29 percent. The overall cost overrun represented only a bit over 5 percent of the originally esti- mated cost. The PCR (para. 38) suggests that the cost overruns were a result of the time overruns; no further details are available. 19. Estimated and actual completion dates are available for 27 sub- projects (Attachment 3; PCR, para. 38). Three subprojects were completed ahead of time and five, when expected. Eight had completion delays of up to three months and ten, between four and twelve months. Only one subproject for which there are data experienced a time overrun of more than one year; its completion was delayed 27 months. The average time overrun for the 27 subprojects was 4.4 months. There is little information on what caused the over- and underruns. The PCR (para. 38) suggests changes in project design, delays in obtaining site clearances and construction delays due to the heavy demand for new construction, particularly after 1977. 20. Cost per new job created can be calculated for 13 subprojects, five based on actual jobs created (250 new jobs) and eight based on estimated jobs created (2,660).5/ The average cost per job created was US$3,210 equivalent. The maximum cost per job created was US$196,710 equivalent; the minimum, US$1,330 equivalent; the median, US$10,070 equivalent. 21. The internal economic rate of return (ERR) was estimated at the time of appraisal for 15 subprojects, including the eight above the free limit, and ranged from 16 to 50 percent (Attachment 3). It was not recalcu- lated for any subproject after operations began. The financial rate of 5/ The PCR (para. 40) notes that in all 5,150 new jobs were created. - 7 - return (FRR) was estimated for 25 subprojects, again including the eight above the free limit, and ranged from 8 to 50 percent (Attachment 3; PCR, para. 39). It too was not recalculated for any subproject after operations began. 22. Attachment 2 indicates that 16 of the 38 subloans originally made out of the proceeds of the Credit were entirely repaid by March 31, 1985, with 13 others being repaid on schedule. The amount outstanding represented only 25 percent of the original amount lent. Nine subborrowers were in arrears, however, with the,amount of principal in arrears ranging from 4 to 100 percent of the amount of the subloan outstanding. This is a significant improvement over the situation on October 31, 1983, (PCR, Annex 10, page 1) when 22 subloans were in arrears and only eight subloans had been entirely repaid. Since then thirteen subborrowers have caught up on their payments, including four who have entirely repaid their subloans. Of the nine subproj- ects in arrears, four are hotels, reflecting the problems faced by this sector since the civil disturbances began in 1983. Legal action is scheduled to be taken against another subborrower in arrears for over twelve months. Credit 742-CE 23. Commitment of Credit 742-CE began shortly after it became effective and 42 subprojects had been authorized by the original subproject submission deadline of December 31, 1979, about two years three months after Board approval. Six of these were cancelled, however, so the deadline was extended by six months, allowing an additional 14 subprojects to be authorized and the Credit to be fully committed. Five more subprojects were later cancelled and the resultant uncommited amount, together with the funds held to cover foreign exchange fluctuations, totalling US$457,000 or about 6 percent of the Credit, was cancelled. Thirteen of the 45 subprojects that did go forward were above the free limit (five were above the lower free limit - see para. 11). These subprojects are listed in Attachment 4. 24. DFCC used about 13 percent of the proceeds of the Credit to make 13 investments in preference shares and three investments in ordinary shares. In all but three cases there were parallel subloans from the Credit. These investments are listed in Attachment 5, which updates pages 3 - 5 of Annex 10 of the PCR. 25. Four subprojects in the textile sector accounted for 20 percent of the amount disbursed from the Credit. Six ready-made garment subprojects accounted for 17 percent of the Credit; all six were specifically export- oriented. There were six hotel subprojects which again were generally small, accounting for only 5 percent of the Credit versus the 15 percent expected at appraisal (see para. 10). As with the earlier Credit, the subprojects were well distributed sectorally (Attachment 4; PCR, para. 35). 26. There were four other specifically export-oriented subprojects in addition to the six garment subprojects. They manufactured block rubber, latex thread, activated charcoal and automobile springs. Over one-third of the disbursed amount of the Credit went to these ten subprojects, close to -8- the 40 percent expected at appraisal (see para. 10). Though not specifically identified as a target group, the Credit did assist six SSEs which together received 2 percent of the disbursed amount (Attachment 4). 27. Credit 742-CE assisted many more expansion subprojects than the earlier one; the 31 expansion subprojects absorbed 88 percent of the amount disbursed. The Credit also assisted in financing five modernization subprojects accounting for 2 percent of the proceeds and nine new entities accounting for 10 percent (Attachment 4; PCR, para. 39). Eleven subprojects were located in Colombo and absorbed 22 percent of the disbursed amount. Thirty subprojects, accounting for 62 percent of the Credit, were located elsewhere. The location of four subprojects was not provided by DFCC. Twenty-three of the subborrowers (receiving 24 percent of the disbursed amount) were private limited liability companies and 14 (66 percent) were public limited liability companies. Data was not provided on eight subbor- rovers, again including all six SSEs (Attachment 4). 28. Individual subloans and investments made from the proceeds of Credit 742-CE were larger on average than those made from Credit 566-CE, as indicated in Table 3 below. The actual total project cost is available for Table 3: SIZE OF 3UBLOANS/INVESTMENTS FROM CREDIT 742-CE Size Range Subp l%tets Total Amount Average Amount (US$ 000s) (No.) ) (US$ '000s) (%) (US$ '000s) 0 - 50 17 38 420 5 25 51 - 100 11 24 774 10 70 101 - 200 5 11 688 9 138 201 - 300 3 7 735 10 245 301 - 500 2 4 817 11 408 501 - 600 4 9 2,253 30 563 above 600 3 7 19856 25 619 Totals 45 100 7,543 - 100 168 37 subprojects and is indicated in Table 4. As might be expected from the size of the subloans/investments, it too is larger on average than those financed under the earlier Credit. Details can be found in Attachment 6 which also gives the estimated project cost and the cost over- and underrun. Fourteen of the 37 subprojects for which there are data cost less to complete than originally estimated, with the savings ranging up to 27 percent of the estimated cost. One subproject was completed for the amount estimated while 22 subprojects had cost overruns. Thirteen of these were over 30 percent while seven were over 40 percent. The largest cost overrun was 172 percent. Overall, the cost overrun represented 35 percent of the originally estimated amount, a significantly worse experience than under the earlier Credit. There is no information available to explain why this is so or what caused the overruns. - 9 - Table 4: ACTUAL TOTAL PROJECT COST - CREDIT 742-CE Size Range Subprojects Total Amount Average Amount (Re '000s) (No.) (Rs '000s)(% (Rs '000s) Uo '000s)/a 0 - 1,000 4 2,035 /b 509 33 1,001 - 2,000 5 6,688 1 1,338 86 2,001 - 5,000 12 37,512 6 3,126 200 5,001 - 10,000 5 38,359 6 7,672 492 10,001 - 20,000 4 56,213 9 14,053 901 20,001 - 30,000 4 100,295 16 25,074 1,607 above 30,000 3 379,754 61 126,585 8,114 Totals 37 620,856 100 16,780 1,076 /a An exchange rate of Rs 15.60 - US$ 1.00 was used. /b Less than 0.5 percent. 29. Estimated and actual completion dates are available for 28 subproj- ects (Attachment 6; PCR, para. 38). Five subprojects were completed ahead of time and two, when expected. Eight had completion delays of up to three months and nine, between four and twelve. Four subprojects experienced delays of more than a year, the longest delay being 31 months. The average time overrun for the 28 subprojects was 5.8 months, slightly more than under Credit 566-CE. Again, there is no information available on the causes of the over-and underruns. 30. The actual number of new jobs created is available for 28 subproj- ects where actual cost data are also available (3,265 new jobs), and was estimated for another seven (990).6/ In one case, no new jobs were expected to be created. The average cost per job created for the remaining 34 sub- projects was US$9,290 equivalent, almost three times as large as under Credit 566-CE. This figure is about half of what it would have been had the rupee not depreciated significantly in the intervening years. The median cost per job created was only US$5,580 equivalent, about half of that for the previous Credit, indicating that more of these subprojects were labor intensive. The maximum cost per job created, at US$83,330 equivalent, was also less then half of that for the Credit 566-CE while the minimum, US$430 equivalent, was about one-third. 31. The ERR was estimated at appraisal for only 15 subprojects, includ- ing only seven of the 13 subprojects above the free limit. It ranged from 29 to 50 percent (Attachment 6). It was recalculated after completion for nine subprojects above the free limit and ranged from 17 to 50 percent, indicating that these subprojects were economically justified. The FRR was estimated at appraisal for 30 subprojects, including all those above the free limit, and 6/ The PCR (para. 40) notes that 6,075 new jobs were created overall. - 10 - ranged from 14 to 50 percent. It was recalculated after completion for four subprojects above the free limit and ranged between 17 and 28 percent (Attachment 6; PCR, paras. 39 - 40 and Annex 5). 32. Attachment 5 indicates that three of the 42 subloans originally made out of the proceeds of the Credit were entirely repaid by March 31, 1985, with 23 others being repaid on schedule. Though the remaining 16 sub- loans are in arrears, the situation had improved from that on October 31, 1983, when 32 subloans were in arrears (PCR, Annex 10, pages 3 - 4). The amount of principal in arrears in March 1985 ranged from 6 to 100 percent of the amount of the subloan outstanding; the total principal in arrears repre- sented almost 10 percent of the principal outstanding. One of the subproj- ects in arrears was a hotel, seriously affected by the civil disturbances. Seven others had been in arrears for over twelve months; legal action had been taken or was planned in three of these cases. IV. INSTITUTIONAL DEVELOPMENT Organization, Management and Staff 33. DFCC's current organizational structure is the sae as that described in the PCR (para. 22 and Annex 2) with the exception that the Proj- ect Implementation Department has been moved from the Consultancy and Merchant Banking Division back to the Operations Division where it had origi- nally been until January 1983. The Assistant General Manager of this Division now has appraisal, implementation, promotion and SMI activities reporting to him, while the responsibilities of the Assistant General Manager for Consultancy and Merchant Banking have been reduced considerably, at least temporarily (see para. 54). 34. The conflict between the Chairman of the Board and the General Manager during the late 1970s and especially the early 1980s is described in the PCR (paras. 20 - 21, 49). This situation, which basically resulted from the then Chairman involving himself excessively in the daily affairs of DFCC, was resolved in 1982 with the appointment of a new Chairman who concerns himself more with broader issues of policy and leaves the day-to-day running of DFCC to the General Manager (the current General Manager was appointed in 1981). 35. The earlier problems, however, also involved several other mem- bers of the Board who, like the Chairman, were long-time members and, being retired, were able to involve themselves in DFCC's daily affairs, including questioning closely the details of every loan and investment proposal. This situation, which negatively affected staff morale and DFCC's operations, was resolved by amending the DFCC Act in late 1982 to provide, inter alia, that shareholder-directors cannot hold office for more than eight continuous years. Board-management relations are now harmonious and effective. 36. Staff expansion was a specific objective of Credit 742-CE (see para. 10), although only an industrial economist was singled out as needing immediate recruitment (1977 SAR, para. 3.06). The PCR (para. 23) details the - 11 - evolution of DFCC's staffing situation through 1983, noting that the current salaries and benefits are reasonably competitive, an improvement over the past. In early 1984 ten additional officers were recruited, four for the SMI unit, three for the implementation unit, two for legal and one for ap- praisal. In mid-1985 DFCC was actively recruiting an additional eight officers, two of whom would join the recently created Project Identification and Promotion Unit (see para. 51). A third would be a training officer, a fourth, an information officer, with the other four's specific assignments to be determined but most likely in appraisal and/or implementation. DFCC's future staffing needs will to a large extent be a function of its future strategy (see para. 57). Appraisal Procedures 37. In the two or so years prior to Credit 566-CE tourism projects had accounted for the largest commitments of DFCC's resources. The pro- cessing of Credit 566-CE was therefore purposely delayed in late 1974 until a tourism sector mission could report its findings. The mission noted that there still was a need for additional hotel rooms, both in Colombo and on the beaches and in the interior. However, it also noted that there was a lack of hotel experience on the part of DFCC, the Ceylon Tourist Board (CTB) which approved hotel projects for various Government incentives, and the newly established hotel companies. It reported that DFCC relied upon CTB's prior approval of hotel projects, concerning itself primarily with the financial security of its loan. The mission recommended that CTB engage a hotels advi- sor to assist in appraising projects, and that DFCC be required to utilize his services. 38. During negotiations it was agreed that CTB would hire such an advisor by the end of 1975 (1975 Credit Agreement, Section 4.02). It was also agreed that DFCC would, by the end of 1975, either hire a local tourism specialist or arrange for the training of a DFCC staff member in the evalu- ation and supervision of hotel projects (1975 Project Agreement, Section 2.10); the cost of such training would be covered by the Credit (see para. 8). In the event, DFCC in September 1975 decided to hire a tourist consul- tant to assist in reviewing hotel projects and to train DFCC staff. This was timely as eleven of the first 19 subprojects under Credit 566-CE were hotels. 39, The Appraisal Report for Credit 566-CE noted that DFCC's ap- praisal procedures were generally thorough and of a high standard with the exception of its economic analysis. A letter from DFCC at the time Credit 566-CE was signed recorded DFCC's undertaking to carry out a thorough exami- nation of the economic impact of subprojects, including inter alia the eco- nomic rate of return (ERR) for all subprojects costing Rs 1 million or more. - 12 - However, this undertaking was carried out in only a little more than half the required cases,& a situation that was apparently accepted by the Bank Group without comment. 40. The Appraisal Report for Credit 742-CE again reported that DFCC's appraisal standards were generally good, though the quality had lately been affected by a staff shortage. It noted the undertaking discussed above and reported that "DFCC has been doing these calculations for most projects, but in the beginning it did not make full use of them in the appraisal process" (1977 SAR, para. 3.08). This inaccuracy may have been the result of staff rotations within the Bank Group; the authors of the two Appraisal Reports were different. 41. In any case, the Minutes of Negotiations for Credit 742-CE record DFCC's undertaking to continue, inter alia, to calculate the ERR for subproj- ects costing Ra 1 million or more. Again, though, this was done for only about half of the required subprojects (15 of the 33 for which there are total cost data), and was not done for six of the 13 subprojects above the free limit. There is little indication in the files that the Bank Group made much of an attempt to correct this situation. It would appear that, while DFCC has indicated a willingness to adopt new appraisal procedures such as the ERR, the Bank Group's constant attention is required to ensure that these procedures are actually implemented. Supervision Procedures 42. The PPAR for Loan 634-CE (Report No. 1833 dated December 22, 1977) noted that at the time that Loan was appraised (early in 1969) DFCC's super- vision of clients was confined almost entirely to annual reviews of their financial statements. As a result of the Bank Group's involvement, though, DFCC improved its follow up procedures considerably, introducing frequent site visits and internal reports (Report No. 1833, paza. 11 (e) of the PCR). The Appraisal Report for Credit 566-CE noted that while site visits during construction were frequent, post-completion visits were infrequent (para. 3.18); during negotiations DFCC undertook to increase their frequency. The Appraisal Report for Credit 742-CE notes improvements in this area. The fre- quency of visits during the past two years is detailed in Table 5 below. It indicates that DFCC is continuing to emphasize this aspect of its supervision work. 7/ Twenty of the 25 subprojects for which there are total cost data cost Rs 1 million or more. The ERR was estimated for only eleven of these. It was also estimated for four of the 23 subprojects for which total cost data are not available (see paras. 18 and 21 and Attachment 3). - 13 - Table 5: FOLLOW-UP VISITS (Non SMI Projects) No. of No. of Projects Visits % FY84- Under Construction 80 48 60 In Operation 117 68 58 Problem Projects 38 63 166 Totals 235 179 76 FY85 UNder Construction 49 32 65 In Operation 103 58 56 Problem Projects 60 66 110 Totals 212 156 74 43. These visits were all made by staff in the Project Implementation Department; supervision as well as appraisal of small and medium industry (SMI) projects are handled by the SMI Department. The five most serious problem projects are not included in this table as they are handled by the Consultancy and Merchant Banking Division (see para. 53). 44. The Appraisal Report for Credit 742-CE reported that "DFCC has just started to prepare completion reports on its projects, comparing appraisal estimates with actuals" (para. 3.11). It would appear that "completion reports" are currently being prepared only for projects with major problems, and then focusing mainly on those problems. This is a reflection of the present arrears situation and the consequent increased demand on staff time. Even in the past, though, completion reports were not prepared regularly for all projects but only the larger ones. This is borne out by the frequent lack of actual data on subprojects financed under the two Credits (see paras. 13 ff). 45. Systematic preparation of completion reports, including recal- culating the ERR and the FRR, would be a logical extension of DFCC's gener- ally satisfactory supervision work. The findings of these reports, as well as of the rest of DFCC's supervision work, should be regularly fed back into DFCC's appraisal work so that the latter can benefit from the experiences gained. Resource Mobilization 46. The Appraisal Report for Credit 566-CE noted that DFCC had been ex- clusively dependent on IBRD loans for its foreign currency resources and heavily dependent on the Government and Central Bank for its rupee resources (para. 4.01). While it had contacted other official foreign institutions, it had so far been unsuccessful in raising new resources. During negotiations DFCC undertook to try to tap other sources of local currency. - 14 - 47. By the time Credit 742-CE was approved, DFCC had succeeded in doubling its issued share capital to Rs 16 million (including an IFC sub- scription) and in arranging substantial loans from two local commercial banks. It had also successfully approached the Asian Development Bank (ADB) for a foreign currency line of credit of US$ 5 million equivalent. According to the record, though, this latter operation caused the Bank Group some concern. Initially the concern centered on the fact that both appraisal mis- sions were to overlap; the Bank Group fe.t that this would put too much strain on DFCC. As DFCC did not object, the Bank Group reluctantly agreed to the timing of the missions. 48. The Bank Group continued to feel, however, that DFCC was too small an institution to support a long-term financial relationship with both ADB and the Bank Group. At the 1976 Bank/Fund Annual Meeting the Bank Group informed the Government that it had agreed with ADB that, "given the modest foreign exchange requirements of the DFCC at the present time," the Govern- ment and DFCC should decide which institution should finance DFCC's foreign exchange requirements. The Government spokesman replied that DFCC's opera- tions had been constrained by a shortage of foreign exchange and could expand rapidly if additional funds were made available to it (internal memorandum to Files, dated October 19, 1976). There is no further reference to this matter in the files, suggesting that it was dropped. 49. That the Bank Group should have had this concern in the case of DFCC is curious. At the time of the 1976 Annual Meeting DFCC's foreign exchange gap was set at US$15 million, hardly a modest amount. With other development finance institutions of a similar size the Bank Group was simul- taneously urging a diversification of foreign resources.8/ In any case, DFCC has subsequently received a second ADB line of credit (1980) and a line of credit from the Netherlands Finance Company for Developing Countries (FMO) (1984), as well as participating in two Credits for SMI projects (1979 and 1981) and a Credit for an Industrial Development Project (1983). 50. DFCC has increased its issued share capital twice since the increase mentioned in para. 47. A second increase of Rs 8 million took place in FY80, while in FY83 the issued share capital was increased to Rs 100 million. The 1982 amendments to the DFCC Act included amendments allowing DFCC to accept deposits and issue debentures. The deposits must be fixed, for a period to be determined by the Board of Directors. None have so far been taken. In mid-1985 DFCC reached agreement with the Government for a debenture issue of Rs 200 mf!lion at 7 percent p.a. which can be used by the commercial banks as part of their required reserves. This feature is expected to make the issue quite attractive; if so, it may be followed by 8/ The Development Bank of Mauritius (DBM) is an example. Loan 1168-MAS for US$7.5 million equivalent, negotiated in 1975, was only expected to cover half of DBM's foreign exchange requirements, the other half coming from other, new international lenders. See the PPAR on Loans 979, 1168 and 1481-MAS, Report No. 6206, dated May 27, 1986, paras. 46-47. - 15 - others. DFCC will continue to be constrained in raising local resources, however, until major decisions are taken by the Government to rationalize the overall interest rate structure. Promotional Activities 51. The Appraisal Report for Credit 742-CE noted (para. 4.14) that DFCC had been playing an important promotional role through its contacts with businessmen and potential investors. Nevertheless, one of the objectives of the project supported by that Credit was to strengthen DFCC's promotional activities, in particular through the preparation of internal working papers and feasibility studies for selicted subsectors. The PCR notes, however, that until recently little progress was made in this area; though the Project Identification and Promotion Unit had been established in 1983, it had not been staffed (PCR, para. 28). Possibly because staffing this unit is a condition for participating in the proposed Second Industrial Develop- ment Project, two officers were being actively recruited in mid-1985 (see para. 36). 52. DFCC is apparently not convinced, however, of the efficacy of establishing this unit. It notes that it currently has more than enough projects in its pipeline, and in the past has been effective in identifying projects without a special unit. It also points out that in 1984 the Min- istry of Planning with USAID assistance established the Sri Lanka Business Development Centre with the aim of promoting private sector businesses. Though this entity is well funded and has been staffed for a year or so, nothing concrete has resulted. If this effort is going nowhere, DFCC wonders what can be expected of it. Nevertheless, DFCC intends to activate the Proj- ect Identification and Promotion Unit. Consultancy and Merchant Banking 53. The 1982 amendments to the DFCC Act enabled DFCC to provide mer- chant banking among other new services. This led to the creation of the Consultancy and Merchant Banking Division. However, this unit has so far undertaken few if any merchant banking activities, the two staff members having been totally occupied since early 1984 dealing with the five most serious problem projects. 54. In early 1985 the Government announced its intention to privatize some of tie public sector corporations. As the public sector comprises some 65 percer.t of industrial production, this could lead to a great deal of activity, with a large potential role for DFCC's merchant banking unit. This, in turn, could provide the impetus for the development of an active secondary market for shares. Leasing 55. The 1982 amendments to DFCC's Act also allowed it to undertake equipment leasing and hire purchase activities. This coincided with a change in the depreciation laws that made leasing especially attractive. From 1977 to 1981 businesses could depreciate new investments in one year. Starting in 1982, however, fixed investments had to be depreciated over eight years. - 16 - Leases, though, could be for as short a period as two years, thus allowing the write-off of investments in two years. This situation was changed some- what in 1984 when a minimum lease period of four years was established. 56. In spite of their attractiveness to the client, DFCC did not begin to offer leases until FY85. It intends to continue offering leases as part of a larger financing package, if only to compete with the several leasing companies doing business in Sri Lanka. Future Business Strategy 57. The developments in the financial sector since 1977, outlined in para. 5, have made DFCC's future role unclear. In particular, the establish- ment by Government of NDB in 1979 led DFCC to question whether it had any role left at all as NDB was empowered to do everything that it could do, plus more. However, the approval by the Government of DFCC's debenture issue (see para. 50) has convinced it that the Government does want it to continue to operate. It is now focusing on a study, financed under ADB's second loan, that it had commissioned in late 1984 to design a long-term strategy; the consultants, the Private Development Corporation of the Philippines, pre- sented their report early in 1985. 58. The thrust of that report is that DFCC should define and play a broader and more significant role, that it should provide new financial ser- vices and undertake new functions, and that it should broaden its market. Among the specific suggestions for new services and functions are medium-and short-term as well as long-term lending, letters of credit, insurance, mer- chant banking services, unit trusts, and money market services. DFCC is tak- ing these suggestions into account in developing a new Strategy Statement. An added incentive to do so is that such a Statement is another condition of DFCC's participation in the Second Industrial Development Project. V. OPERATIONAL AND FINANCIAL PERFORMANCE Operations 59. The PCR discusses DFCC's operations through FY83 (paras. 30-32 and Annex 4). In that year loan and investment approvals fell to less than 20 percent of their level the previous year. As noted, this was due to the world recession and to the economic and political uncertainty associated with an election year in Sri Lanka. Approvals in FY84, though, returned to the level of FY82 and in FY85 increased almost 25 percent. Disbursements, which had decreased slightly in FY83 after a steady increase over the previous years, decreased again in FY84 but turned iround in FY85 and recorded a solid increase. 60. During FY84, in order to meet the growing competition from leasing companies which are able to approve financing operations without time con- suming project appraisals, DFCC introduced a scheme for equipment finance. - 17 - Under this schemet applications for finance to purchase machinery and equip- ment are processed under abbreviated procedures without a detailed project appraisal. As noted in para. 56, in FY85 DFCC began actual leasing opera- tions, though on a very limited scale. Small Scale Enterprise 61. At the time of the appraisal for Credit 566-CE (June 1974) DFCC had not engaged in SSE lending as its Act contained a legal restriction barring non-corporate borrowers. While this had recently been eliminated, DFCC was still reluctant to enter this area for fear that its small staff would be swamped. As noted in para. 8, however, part of Credit 566-CE was earmarked for SSEs, and DFCC slowly started to undertake this activity, approving its first SSE subproject under that Credit in September 1975. 62. During 1976 DFCC began developing a financing scheme for SSEs with the Industrial Development Board, the Bank of Ceylon and the PeoplA's Bank. Under this scheme the commercial banks, with the help of the Industrial Development Board, would review loan applications from SSEs and, when ap- proved, grant them loans. The foreign exchange part of these loans would then be refinanced by DFCC. Though this scheme was not eligible for financ- ing under Credit 566-CE as it involved refinancing, it specifically was made eligible for financing under Credit 742-CE. In the event, though, DFCC never took part in the scheme because foreign exchange became available to the commercial banks in 1977 (see para. 5) and DFCC was no longer needed. 63. DFCC nevertheless continued to increase its emphasis on SSE financ- ing. It agreed to utilize at least 10 perc.nt of ADB's first loan for this purpose. As DFCC had so far had little experience with this sector, ADB also made a technical assistance grant of US$75,000 available to cover the cost of an SSE expert for nine months. This expert was to advise and assist DFCC on policy, organization and procedures for SSE lending and to train DFCC staff. Towards the end of 1977, at his suggestion, a small cell was established within DFCC to look after this activity. This cell has since grown into the SMI Department, now staffed with six professionals. Its record of project approvals is shown in the following table. The recent year to year variations follow those for DFCC's larger project approvals. Table 6: NUMBER OF SSE PROJECT APPROVALS FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Total 2 19 78 42 51 39 11 21 54 317 64. In June 1979 Credit 942-CE for US$ 16 million was approved. This Credit financed a small and medium industry project and was channelled through the Government to the recently (January 1979) established NDB. An SMI Fund with its own staff was created within NDB for this project. The Credit also financed consultants to assist NDB's management, including an advisor for the SMI Unit. This Unit refinanced SMI loans made by the five - 18 - major credit institutions in Sri Lanka, four commercial banks and DFCC. DFCC, however, used little of the Credit proceeds as it received a better spread on, and 100 percent refinancing from, its facility with the Central Bank (PCR, para. 31). Only seven of DFCC's SSE projects were refinanced under this project. 65. This first SMI project proceeded much more quickly than expected, even without DFCC's participation, due to the pent up demand for financing within the SMI sector. A second SMI project, modeled after the first and supported by Credit 1182-CE in the amount of US$30 million, was approved in October 1981. DFCC has been participating in this one as it earns a 7 per- cent spread (about a 2 percent improvement over SMI 1) and because the Cen- tral Bank will no longer refinance SMI projects so long as the Credit is available. The second SMI project is going very slowly as the demand was over-estimated, the participating banks are more cautious due to the high arrears under the first, and the cost to the SMI borrowers was 20 percent p.a. versus the 15 percent p.a. under SMI I (the rate was recently reduced to 14 percent p.a.). 66. It should be noted that IFC has financed two SMI projects in Sri Lanka, both with the Bank of Ceylon, one of the commercial banks participa- ting in the above two projects. The first, a US$2 million line of credit, was approved in FY78; the second, a US$5 million line of credit, was approved in FY81. Financial Performance 67. DFCC has a history of profitable operations and dividend payments. The PCR discusses its financial performance though FY83 (paras. 41-42). Attachments 7 and 8 present DFCC's financial statements for FY83 through FY85, while Attachment 9 presents various indicators and ratios for the same years plus FY82. DFCC's net profit, which had been climbing steadily in pre- vious years, turned down in FY83, dropping from Rs 18.3 million to Rs 15.0 million. This fall was basically due to the extraordinary provisions for bad and doubtful loans and investments made in FY83, Rs 17 million versus some Rs 3 million the year before. Net profit in FY83 amounted to 14 percent of average net worth, less than half the 31 percent registered in FY82. The decrease in this measure reflected the large increase in paid in share capital at the end of FY83 as well as the large provisions. The increase in share capital resulted in a reduction in DFCC's long-term debt to equity ratio from 6.7 to 3.6. 68. That DFCC is an efficiently run institution is evidenced by its relatively modest administrative expenses; during FY85 these totalled 1.3 percent of average total assets. Its dividend payout ratio took a signifi- cant jump in FY84 as it maintained about the same return on its enlarged share capital. In FY85 it reduced this return somewhat, thus also reducing the payout ratio. 69. DFCC continued to make large provisions for bad and doubtful loans and investments in FY84 and FY85, with the result that the provisions as a percent of the total portfolio rose from 2 percent at the end of FY82 to 5.5 - 19 - percent at the end of FY85. Attachment 10 presents the arrears situation for the loan portfolio at the end of FY82 through FY85 and for the preference share portfolio at the end of FY82 through FY84. About 20 clients account for the major part of the arrears, with five accounting for 40%. These five are being handled by the Consultancy and Merchant Banking Division (see para. 53). With regard to hotel loans, which were especially hard hit by the civil disturbances that began in July 1983 (PCR, para. 43), the Government has recently approved substantial relief. This includes rescheduling of principal and capitalizing interest in arrears. 70. DFCC's collection performance for the last four years is pre- sented in Attachment 11. The total amount collected as a percent of the total amount due has been falling steadily from 70 percent in FY82 to 46 per- cent in FY85. As a result, of course, the amounts in arrears at year-end have been increasing. This situation is a reflection of the unfavorable eco- nomic environment prevailing in Sri Lanka and worldwide and is shared with other development finance institutions (DFIs) around the vorld. DFCC has taken steps to control the problem including increasing the frequency of visits to problem projects (see para. 42) and taking a firmer approach in calling for legal action. In FY85 it changed its approach to accounting for interest in arrears. Before, interest in arrears had been credited to the profit and loss account except for certain clients who had been in arrears for over twelve months. Now no interest that had been in arrears over six months at the end of the fiscal year is credited to the profit and loss account. VI. IMPACT OF THE BANK GROUP'S ASSOCIATION WITH DFCC 71. As noted in the PCR (para. 52), the Bank Group devoted considerable time to working with DFCC during the implementation of the two projects sup- ported by the Credits under review. These efforts, especially the efforts of IFC's representative on DFCC's Board, were instrumental in resolving the problems between the Chairman and other members of the Board and the manage- ment in the early 1980s as well as improving DFCC's procedures in general and supervision in particular. 72. While these two Credits, and the two Loans to DFCC that preceded them, benefited the private industrial sector by providing badly needed foreign exchange, no serious attempt was made to address industrial policy issues or to improve the functioning of the public enterprise sector. These areas began to be addressed only after the first comprehensive industrial sector mission in 1978. The three Credits that followed, two SMI Credits (see paras. 64 - 65) and a general Industrial Development Credit (US$25 mil- lion in 1983), all involved multiple institutions, with DFCC losing its posi- tion as the Bank Group's chief industrial intermediary. 73. One would have expected IFC as a significant shareholder to have had more of a positive influence on DFCC. Instead, while the well qualified individuals it has appointed to represent it on the Board have made important - 20 - and welcome contributions, / IFC itself is seen by DFCC more as a com- petitor. This is especially so in the SHI area (see para. 66) and the leasing field where IFC in 1981 assisted in the establishment of Lanka Orient Leasing Company and subsequently was perceived by DFCC as attempting to block it from entering the field. VII. SUSTAINABILITY 74. DFCC is an example of a DFI which initially served a clear purpose, providing private enterprises with at first local and then also foreign ex- change financing, but then lost its main raison d'etre when foreign exchange became available to other lending institutions. Its competition became more intense when the larger NDB was created. In addition, more recently it has had to compete with new forms of financing such as leasing. In its present form it may be unsustainable due to its limited market and small product line. In order to become more competitive and to continue to grow it is having to redefine its role. 75. DFCC does enjoy the support of the Government, as witnessed by the Government's agreement to allow DFCC's forthcoming debenture issue to qualify as part of the required reserves of commercial banks (see para. 50). This will make it attractive to banks as an investment while keeping its cost to DFCC down. The Government has thus indicated that it would like DFCC to sur- vive and continue helping private enterprises along side the larger NDB, which helps both private and public enterprises. 76. DFCC has a history of profitable operations and dividend payments. It has built up substantial reserves while making large provisions for possi- ble losses. While the current arrears situation is a cause for concern, and while DFCC's ability to meet the growing competitive pressures is still to be demonstrated, it has sound management and a tested staff. These suggest that its activities can be sustained in the future. It should be noted, though, that all of its borrowed resources have come from official sources, that its forthcoming debenture issue will also not carry a market interest rate and that the exchange risk on its foreign borrowings has been borne by the Government. To the extent that DFCC cannot raise resources from private capital markets, local and abroad, at market rates and conditions, there is a question as to its sustainability. 9/ 'he other two foreign shareholders with directorships, FMO and DEG, have appointed locally based individuals to represent them. Only IFC now has a foreign based representative. - 21 - VIII. CONCLUSIONS 77. The objectives of the two projects were, in the main, met. The first objective, resource transfer, was successfully achieved, though more recently some of the subprojects are suffering from arrears. The specific objective under the first project of lending US$200,000 to SSEs was not com- pletely attained as only US$155,000 was so lent, and this only after the definition of an SSE was substantially broadened. This, however, was an objective imposed at the last minute by senior management over staff objec- tions that it was not realistic. 78. The second objective, institution building, was partially met, the main shortfalls being DFCC's failure to consistently calculate the ERR as part of the appraisal procedures and its slowness in increasing promotional activities. With regard to the latter, DFCC is clearly still not convinced that additional effort is worthwhile. With regard to the former, the Bank Group staff should have been more insistent that the ERR was calculated for the larger subprojects submitted to it for approval or authorization. 79. The calculation of the ERR on subprojects costing Rs 1 million or more was an undertaking of DFCC for both ptojects, and should have been en- forced by the Bank Group more strictly (see paras. 39 - 41). More seriously, though, the two Credit Agreements provided for the approval by the Associa- tion of all equity investments, there being no free limit provision for them. This was not enforced, and should have been (see para. 12), or else the Credit Agreements should have been amended. 80. Overall, DFCC has been a successful DFI, operating profitably and in general achieving its developmental goals. It is currently facing two main issues, though, whose resolution will largely determine its future. One is the arrears situation, not unique to DFCC and which DFCC is reacting to with vigor. The other is the more profound question of its future role in the increasingly competitive and diverse financial community of Sri Lanka. DFCC is currently preparing its future business strategy to meet these challenges. 81. The fact that DFCC is having to adapt to meet its changing environ- ment reinforces a lesson demonstrated by other DFI projects: institution building is a continuing process usually requiring a series of Bank Group operations. But success in this area often requires continuing Bank Group supervision to ensure that agreed changes are introduced (for example, calculation of the ERR or additional promotional efforts). 82. These projects demonstrate that the management and staff of a DFI must be convinced of the validity and practicality of procedures and pro- posals put forward by the Bank Group if they are to be accepted. They also reemphasize the importance of a strong Board of Directors providing overall guidance to the institution's operations but not interfering with its day-to- day management. - 22- Attachment 1 Pege 1 of 2 PROJECT PERFOMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Listing of SubproJects Under Credit 566-CE IDA IDA Now, Exp. Legal No. Name of Client Activity Amount or Mod. Location Form* Other Notes (US$ 000) A-01 Associated Motorways rubber products 233 mod. other public export A-02 Richard Plars & Co. rubber products 224 exp. other public export A-03 Ceylon Tobacco Co. cigarettes 223 exp. Colombo public A-04 Ceylon Glass Co. glass containers 200 exp. other public A-05 United Spinning & Weaving Mills yarn 99 exp. other public A-06 Ceylon Match Co. matches 354 exp. other public A-08 Dase Industries garments 545 exp. Colombo sole export A-09 Serendip Texprints textile printing 406 new other private B-01 JInasenae Ltd. hotel 58 new other private B-02 Brighton Hotels Ltd. hotel 113 new Colombo private B-03 Renithu Hotels hotel 58 new Colombo n.a. 8-04 Hotel Swanee hotel 14 mod. other public B-0 Seawater Aquaria tropical fish 10 new Colombo n.a. export/SSE B-08 Alhambra Hotels hotel 133 mod. Colombo private B-09 QuIckshaws Ltd. hotel 60 mod. other private 9-10 Altkin Spence & Co. carton printing 102 exp. Colombo public 9-11 Palm Gerden Hotels hotel 8 new other n.a. 8-12 Mallban Biscuit Mfg. Co. biscuits 16 mod. other private 9-14 Shril Nilavell Hotel hotel 32 new n.e. n.a. B-15 Parquet (Ceylon) Ltd. parquet flooring 49 exp. n.a. n. 8-16 Galle Face Hotel Co. hotel 62 mod. Colombo private 8-18 Muwara Elije Hotel Co. hotel 28 med. other public 9-19 Ceylon Glass Co. glass containers 40 exp. other public 9-20 St. Anthony's Bolts & Nuts Ind. hardware 112 exp. Colombo private B-21 Kelani Cable Ltd. wire 104 exp. Other public 8-22 Sun & Fun Hotels hotel 17 new other private 9-23 Dipped Products Ltd. rubber gloves 89 new other public export 9-24 Associated Motorways tire retreading 19 exp, other public 8-25 Leedons Ltd. hotel 10 mod, n.e. n.a. 9-26 Dasa Garments garments 47 exp. Colombo sole export 8-27 Multi-Packs (Ceylon) Ltd. cartons 55 exp. other private 8-28 Ranwell Resort Hotel Ltd. hotel 13 exp. other private 9-29 Hotel Hantana Ltd. hotel 6 new other private * 23 * Attachment I Page 2 of 2 PROJECT PERFORMANCE AUDIT MEMORANDI SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Listing of Subprojects Under Credit 566-CE IDA IDA Now, Exp. Legal No, Name of CI lent Activity Amount or Mod. Location Form* Other Notes (US$ 000) 8-30 Candy Garments garments 43 exp. other n.a. export 8*31 Associated Cables Ltd. wire 22 mod. other public 8-32 Felix Hotels Ltd. hotel 52 new other n.a. 8-33 Automotive Springs Ltd. auto springs 27 new Colombo private 8-34 Chemical industries (Col) Ltd. plastic pipes 44 mod. n.a. n.a. B-36 Intli. Tourists & Hotellers Ltd. hotel 41 new other public 8-37 Ceylon Inns Ltd. hotel 18 mod. Colombo n.a. 0-38 Three Acre Farms Ltd. poultry 13 exp. Colombo ne. SSE 8-39 Gamini Ameratunga wood products 32 exp. n.a. n.a. SSE 8-40 Jinedesa Bros. (Garments) Ltd. garments 14 new Colo abo n,a. export/SSE B-42 Ceylon Crushers Ltd. minerals 8 mod. n.e. n.a. SSE 8-43 W. P. Wire Industries hardware 29 exp. other n.e. SSE 8-45 Jinasena Electric Motors Ltd. electric motors 27 new Colombo private 8-46 Ladyhill (Tourist) Hotels Ltd. hotel 8 mod, other public 8-48 St. Anthony's Thermoplastic Ind. plastic pipes 85 mod. Colombo private 8-50 Monta Garment Industries garments 98 new n.a. n.e. B-51 Latitha Kelale Industries printing 49 exp. Colombo n.a. SSE Totals 4,153 .a. Source: DFCC (except IDA Amounts) ' public - public limited company private a private limited company sole * sole proprietor - 24 - Attachment 2 Page 1 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) Status of Subprojects Under Credit 566-CE on March 31, 1985 (Rs 000's) Subloans Granted Principal Interest Principal in Amount Amount in in Arrears as % Name of Client Granted Repaid Outstanding Arrears Arrears of Outstanding Altkin Spence & Co. 470 400 70 Alhambra Hotels 1,284 739 545 Associated Cables Ltd. 38 38 0 Associated Motorways 2,006 2,006 0 Brighton Hotels Ltd. 985 271 714 Candy Garments 316 316 0 Ceylon Crushers Ltd. 130 128 2 Ceylon Glass Co. 1,997 1,501 496 Ceylon Inns Ltd, 103 103 0 Ceylon Match Co. 2,155 1,185 970 Ceylon Tobacco Co. 1,339 1,339 0 Chemical industries (Col.) Ltd. 119 119 0 Dase Garments 345 345 0 Dasa Industries 4,793 2,716 2,077 973 118 46.8% Dipped Products Ltd. 398 228 170 Felix Hotels Ltd. 194 84 110 110 100.0% Gamini Amaratunga 297 137 160 7 2 4.4% Hotel Swanee 118 118 0 Jinadasa Bros. (Garments) Ltd. 118 118 0 Jinasena Electric Motors Ltd. 427 427 0 JInasona Ltd. 495 373 122 Kelani Cable Ltd. 915 775 140 Lalitha Kalale industries 756 405 351 204 12 58.1% Leedons Ltd. 109 33 76 Maliban Biscuit Mfg. Co. 143 143 0 Monta Garment Industries 1,278 833 445 445 201 100.0% Multi-Packs (Ceylon) Ltd. 376 376 0 Palm Garden Hotels 68 34 34 14 41.2% Quickshaws Ltd. 652 346 306 21 6.9% Ranmuthu Hotels 496 190 306 153 50.0$ Richard Plerts & Co. 1,136 734 402 Seawater Aquaria 50 50 0 Serendip Texprints 5,354 5,354 0 St. Anthony's Bolts & Nuts Ind. 978 805 173 St. Anthony's Thermoplastic Ind. 1,327 1,165 162 Three Acre Farms Ltd. 115 115 0 United Spinning & Weaving Mills 784 354 430 110 41 25.6% W. P. Wire Industries 440 440 0 Totals 33,104 24,843 8,261 2,037 374 24.7% sommus us=UU a3=a * 25 - Attachment 2 Page 2 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) Status Under Credit 566-CE on March 31, 1985 (Rs 000's) Equity Investments Name of Client Original Amount Sale/Redemption Balance Ordinary Shares Associated Motorways 300 31 269 Ceylon Tobacco Co. 600 8 592 Kelani Cable Ltd. 25 25 Monta Garment Industries 130 130 Nuware Elija Hotel Co. 200 200 Preference Shares Altkin Spence & Co. 300 240 60 Associated Cables Ltd. 125 125 Automotive Springs Ltd. 228 182 46 Ceylon inns Ltd. 30 30 Ceylon Match Co. 1,000 600 400 Chemical Industries (Col.) Ltd, 200 200 Dipped Products Ltd. 300 240 60 Felix Hotels Ltd. 475 190 285 Galle Face Hotel Co. 596 596 Hotel Hantana Ltd. 74 46 28 Int'l. Tourists & Hoteliers Ltd. 664 251 413 Ladyhill (Tourist) Hotels Ltd. 130 130 Multi-Packs (Ceylon) Ltd, 100 100 Nuvare ElIja Hotel Co. 155 149 6 Parquet (Ceylon) Ltd. 426 312 114 Quickshaws Ltd. 300 150 150 Ranwell Resort Hotel Ltd. 125 125 Richard Pieris & Co. 1,000 875 125 Seawater Aquaria 23 14 9 Serendip Texprints 1,000 80 200 Shril Nilavell Hotel 235 235 Sun & Fun Hotels 160 60 100 Three Acre Farms Ltd, 22 22 Totals 8,923 5,606 3,317 =m=u s=W Total for Subloans and Equity Investments 42,027 30,449 11,578 Source: DFCC -26* Attachment 3 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELGPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) Performance of Subprojects Under Credit 566-CE ---*-*--investment Cost - - Completion Date-- Overrun Overrun Overrun Estimated Name of Company Estim. Actual (Underrun) (Underrun) Estim. Actual (Underrun) FRR ERR --- *Rs 000- % (Months) Altkin Spence & Co. 1,550 1,420 (130) -8.4% Aug-76 Jun-76 -2 Alhembra Hotels 2,415 noa. n,a. Apr-76 n.e. Associated Cables Ltd. 750 750 0 0.0% Oct-77 Oct-77 0 Associated Motorways 3,372 3,452 0 2.4% Jun-77 May-77 -1 18.00 20.0$ Automotive Springs Ltd. 2,324 n.e. n.e. Apr-77 Nov-77 7 41.7$ 22.7% Brighton Hotels Ltd. 8,510 9,349 839 9.9 Aug-76 Jun-77 10 Candy Garments 1,344 1,566 222 16.5% Jan-78 Apr-78 3 13.0% 16.6% Ceylon Crushers Ltd. .. n.e. n.e. n.e. n.e. 50.0% Ceylon Glass Co. 3,738 n.a. n.e. Feb-77 n.e. 15.2% 20.0% Ceylon inns Ltd. 317 380 63 19.9% Apr-77 Jun-77 2 Ceylon Match Co. 5,695 n.a. n.e. Oct-77 Jan-78 3 27.80 19.4% Ceylon Tobacco Co. 4,450 4,294 (156) -3.5% nae. Oct-76 12.5% 50.0% Chemical Industries (Col.) Ltd. 1,773 n.e. n.a Dec-77 n,e. Dese Garments 973 1,114 141 14.5% Mar-77 Mar-78 12 50,0% 36.7% Dase industries 27,673 24,307 (3,!66) -12.2% Jun-77 Aug-77 2 37.0% 50,0% Dipped Products Ltd. 2,528 3,000 472 18.7% Jan-78 Apr-78 3 26.9% 16.8% Felix Hotels Ltd. 7,404 8,817 1,413 19.1% Jul-77 Dec-77 5 21.6% Galle Face Hotel Co. 4,096 n.a. n.e. Jul-76 Aug-76 1 Gemini Ameratunge n.e. n.e. n.a. n.os n.e. Hotel Montana Ltd. 2,852 n.e. n.a. Jul-77 Dec-77 5 16.5% Hotel Swanee 266 n.e. n.a. n.a. n.e. Int'I. Tourists & Hotel lers Ltd. 4,610 5,392 78 17.0% Apr-78 Oct-78 6 11.9% Jinadasa Bros. (Garments) Ltd. 704 n.e. n.e. n.e. n.e. 28.8% Jinasena Electric Motors Ltd. 389 461 72 18.5% Jan-79 Jan-80 12 50,0% JInasona Ltd. 4,647 5,850 1,203 25.9 Oct-75 Mar-76 5 Kelani Cable Ltd. 1,166 1,291 125 10.7% Apr-77 Jun-77 2 26,0% 39.0% Ladyhill (Tourist) Hotels Ltd. 582 582 0 0.0% Aug-78 Aug-78 0 Latlthe KWalee Industries 1,042 n.e. n.e. n.. n.e. Leedons Ltd. 375 n.e. n.e. n.. n.e. Maliban Biscuit Mfg. Co. 277 250 (17) -6.1% Oct-76 Oct-76 0 Monte Garment Industries 4,461 5,763 1,302 29.2% Sep-78 Sep-78 0 42.0% 50.0% Multi-Packs (Ceylon) Ltd. 1,000 1,000 0 0.0% Apr-77 Apr-77 0 27.4% Nuwara EIlIja Hotel Co. 1,866 n,a. n.ea. Oct-76 n.e. Palm Garden Hotels 5,400 6,400 1,000 18.5% Jan-76 Aug-76 7 8.0% Parquet (Ceylon) Ltd. n.e. ne. ns n.e. n.e. Quickshaws Lt.. 1,600 1,955 355 22.2% May-76 Feb-77 9 Ranmuthu Hotels 6,530 7,585 1,055 16.2% n.e. n.e. Ranwell Resort Hotel Ltd. 1,244 n.e. n.e. Nov-76 ne. 34.0% Richard Pleris & Co. 4,359 n.e. f.a. ne. n.e. 30.0% 39.0% Seawater Aquaria 200 na.e. n.e, n.e n.e, Serendip Texprints 9,924 12,370 2,446 24.6% Dec-78 Mar-81 27 27.0% 16.0% Shril NlIevell Hotel 3,610 ne. n.e. Apr-76 May-76 1 St. Anthony's Bolts & Nuts Ind. 1,625 1,672 47 2.9% Apr-77 Feb-77 -2 36.0% 27.0% St. Anthony's Thermoplastic Ind. 7,340 n.e. n.e. Jul-79 n.e. 32.0% Sun & Fun Hotels 3,350 n.e. ne. Jan-77 n.e. Three Acre Farms Ltd. 280 n.e. n,e. n.a. n.e. United Spinning & weaving Mills 5,180 3,000 (2,180) -42.1% Jan-78 n.e. 13.3% 29.2% W. P. Wire Industries 479 n.e. n.e. nea. n.e. Source: DFCC - 27 * Attachment 4 Page 1 of 2 PROJECT PERFORMANCE AUDIT MEMORANDIM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Listing of Subprojects Under Credit 742-CE IDA IDA Now, Exp. Legal No. Name of Client Activity Amount or Mod. Location Formi Other Notes (US$ 000) A-01 Asiaknit Ltd. garments 557 exp* other public export A-02 General Auto Works Ltd. engineering 83 exp. Colombo private A-OS Lake House Printers & Publishers printing 122 expo Colombo private A-06 Kilani Cables Ltd. wires 237 exp. other public A-07 Gloweave Rubber Ltd. latex thread 607 expo Colombo puble export A-08 Ceylon Biscuits Ltd. biscuits 564 exp. other public A-09 Pure Beverages Ltd. food & beverages 490 exp, n.a. public A-10 Wickramasinghe Polythene Ind. plastics 121 exp. other private A-11 Ceylon Synthetic Textile Mills textiles 537 exp. Colombo n.a. A-12 Azeez Textile Mills Ltd. textiles 290 exp. other private A-13 Ahungalla Hotels Ltd. hotel 595 exp. other public A-14 Haycarb Ltd. charcoal 622 expo other public export A-15 Asian Cotton Mills yarn 627 exp. n.a. public 8-02 Contiforms Ltd. paper products 72 new other private 8-03 Lanka Light Ltd. matches 25 mod. other private 8-04 Wornels Reef Ltd. hotel 133 new other private 8-05 Multi-Packs (Ceylon) Ltd. printing 47 exp. other private 8-06 Ceylon Paper Sacks Ltd. garments 327 new other public export 8-07 Regency Garments Ltd. garments 207 exp. other public export 8-09 St. Anthony's Thermoplastic Ind. plastic pipes 72 mod. Colombo private 8-10 Metco Industrial Enterprise Ltd. engineering 54 exp. other private 8-11 Automotive Springs Ltd. auto springs 4 mod, other private export 8-12 Mayura Garments Ind. (C/J) Ltd. garments 71 exp. n,. n.a. export 8-13 Palm Garden Hotels Ltd. hotel 41 exp. other public 8-16 Sado industries Ltd. garments 42 exp. other private export 8-17 Plerglobe Ltd. garments 55 new other private export 8-18 Lanka Light Ltd. matches 20 mod, other private 8-19 Brown & Company Ltd. hotel 32 exp. Colombo private 8-20 S.A. Perera & Co. Ltd. leather 92 exp. other prIvate 8-21 Packwell Lanka Ltd. cartons 91 expo other private 8-22 Ceylon Luxury Hotels Ltd. hotel 14 exp. other public 8-24 Sherman Sons Ltd. block rubber 196 exp* other private export 5-25 Dons Beach Resorts hotel 61 exp. other public 8-26 St. Anthony's Bolts & Nuts Ind. hardware 66 exp. Colombo private B-27 New Ceramic Industries Ltd. wall tiles 5 mod. other private 8-29 Ray-8an Opticians eyeglasses 6 exp. Colombo n.a. SSE * 28- Attachment 4 Page 2 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Listing of Subprojects Under Credit 742-CE IDA IDA New, Exp. Legal No. Name of Client Activity Amount or Mod. Location Form* Other Notes (US$ 000) 8-30 Ranasirl Textile Industries Ltd. textiles 57 new other private 8-31 Swastika (Private) Ltd. printing 41 new Colombo n.a. SSE 8-32 Ananda Industries hardware 14 exp. Colombo n.. SSE 8-34 A.K.S. Ltd. roofing tiles 16 new other public B*35 Lanka Pen Company ballpoint pens 47 exp. other n.a. SSE 8-36 Moonway Metal industries crushed stone 23 new other n.as SSE 8-37 St. Patrick Metal Crushers crushed stone 21 new nea. n.ea. SSE 8-39 Metro Industries Ltd. engineering 21 exp. other private 8-41 Rovim Concrete Works Ltd. terrazzo tiles 116 exp. Colombo private Total 7,543 aWWan Source: OFOC (except IDA Amounts) * public * public limited company private * private limited company sole a sole proprietor - 29* Attachment 5 Pap 1 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) Status of Subprojects Under Credit 742-CE on March 31, 1985 (Rs 000's) Subloans Granted Principal Interest Principal In Amount Amount in In Arrears as $ Name of CI lent Granted Repaid Outstandi19 Arrears Arrears of Outstanding Ahungalla Hotels Ltd. 7,492 580 6,912 Ananda Industries 267 147 120 9 4 7.5" Aslaknit Ltd. 6,760 6,103 657 Asian Cotton Mills 12,742 3,133 9,609 1,787 Azeez Textile Mills Ltd. 4,017 4,017 1,770 1,652 44.1% A.K.S. Ltd. 271 271 177 128 65.3% Brown & Company Ltd. 500 236 264 Ceylon Biscuits Ltd. 8,800 5,499 3,301 Ceylon Luxury Hotels Ltd. 228 59 169 Ceylon Paper Sacks Ltd. 3,881 1,764 2,117 Ceylon Synthetic Textile MIlls 6,364 6,364 1,591 3,224 25.0% Conti forms Ltd. 846 544 302 Dons Beach Resorts 939 939 579 617 61.7$ General Auto Works Ltd. 794 397 397 Gloweave Rubber Ltd. 798 2 796 266 443 33.4$ Haycarb Ltd, 11,179 3,364 7,815 KIlanI Cables Ltd. 3,703 2,380 1,323 Lake House Printers & Publishers 1,896 1,001 895 53 5.9$ Lanka Light Ltd. 328 328 0 Lanka Pen Company 833 833 518 511 62,2S Metco Industrial Enterprise Ltd. 543 98 445 244 28 54.8% Metro Industries Ltd. 361 215 146 13 3 8.9 Moonway Metal industries 397 397 326 271 82.1% Multi-Packs (Ceylon) Ltd. 553 553 0 New Ceramic Industries Ltd. 80 58 22 22 3 100.0% Packwell Lanka Ltd. 1,455 951 504 Palm Garden Hotels Ltd. 347 95 252 150 59.5% Plerglobe Ltd. 884 494 390 28 7.2% Pure Beverages Ltd. 7,642 2,611 5,031 RanasIrl Textile Industries Ltd. 718 429 289 49 17.0% Ray-Ban Opticians 105 80 25 Regency Garments Ltd. 2,132 1,493 639 Rovim Concrete Works Ltd. 2,072 986 1,086 Sado Industries Ltd. 657 608 49 Sherman Sons Ltd. 339 198 141 14 9.9% St. Anthony's Bolts & Nuts Ind. 1,057 1,057 0 St. Anthony's Thermoplastic Ind. 1,122 466 656 St. Patrick Metal Crushers 378 311 67 Swastika (Private) Ltd. 733 343 390 5 S.A. Perera & Co. L.d. 1,445 572 873 Wickramasinghe Polythene Ind. 2,038 1,510 528 Wornels Reef Ltd. 2,358 2,358 Totals 100,054 38,665 61,389 5,809 8,676 9.5s uumuu .3m amm mmma amam - 30 - Attachment 5 Page 2 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) Status Under Credit 742-CE on March 31, 1985 (Rs 000's) Equity Investments Name of Client Original Amount Sale/Redemption Balance Ordinary Shares Ahungalla Hotels Ltd. 2,000 2,000 Asiaknit Ltd, 1,000 1,000 Ceylon Synthetic Textile Mills 2,000 2,000 Preference Shares Ahungalla Hotels Ltd. 2,000 1,200 800 Aslaknit Ltd. 1,000 498 502 Automotive Springs Ltd, 57 34 23 Azeez Textile Mills Ltd. 750 750 Contiforms Ltd. 280 186 94 General Auto Works Ltd. 500 500 0 Gloweave Rubber Ltd. 2,500 2,500 Lanka Light Ltd. 375 375 0 Mayura Garments Ind. (C/J) Ltd, 1,109 211 898 Metco Industrial Enterprise Ltd. 300 300 Multi-Packs (Ceylon) Ltd, 200 200 0 Palm Garden Hotels Ltd. 299 299 Ranasirl Textile industries Ltd, 200 80 120 Totals 14,570 3,284 11,286 Totals for Subloans and Equity Investments 114,624 41,949 72,675 Source: DFCC *31- Attachment 6 PROJECT PERFORMANCE AUDIT MEMORANDU" SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credits 566-CE and 742-CE) Performance of Subprojects Under Credit 742-CE ****investment Cost-*****-**- *----Completion Date- Overrun Overrun Overrun Estimated Actual Name of Company Estim. Actual (Underrun) (Underrun) EstIa. Actual (0nderrun) FRR EIR ERR - -As 000*-- % (Months) Ahungalle Hotels Ltd. 58,566 100,300 41,734 71.3% Oct-81 Nov-81 1 23.0% 21.5%* Anands Industries 439 n.a. n.a. n.a. n.e. Aslakolt Ltd. 13,110 18,032 4,922 37.5% Jan-79 Dec-78 -1 48.5% 46.0% 46.0 Asian Cotton Mills 73,432 98,254 24,822 33.8% Jun-81 Jan-84 31 31.0% 32.0% 32.0% Automotive Springs Ltd. 112 112 0 0.0% n.e. n.a. Aeet Textile Mills Ltd. 6,367 8,381 2,014 31.6% Jan-81 Mar-82 14 42.0% 45.0% 45.0% A.K.S. Ltd. 2,000 2,809 809 40,5% Apr-80 Apr-81 12 23.0% Brown & Company Ltd. 3,395 4,911 1,516 44.7% Jan-79 Jan-79 0 29.0% Ceylon Biscuits Ltd. 19,462 21,400 1,938 10.0% Nov-79 Jan-80 2 25.2% 17.0% Ceylon Luxury Hotels Ltd. 1,350 2,050 700 51.9% Aug-79 Aug-79 0 21.1% Ceylon Paper Sacks Ltd. 8,745 8,856 til 1.3% n.a. n,a, 43.6% 45.6% Ceylon Synthetic Textile Mills 130,462 181,200 50,738 38.9% Oct-80 n.e. 39.0% 38.0% 19.0% Contiforms Ltd. 1,990 2,106 116 5.8% Oct-78 Jun-79 8 21.0% Dons Beach Resorts 6,200 10,066 3,866 62.4% Sep-79 Dec-79 3 15.0% General Auto Works Ltd. 1,925 1,396 (529) -27.5% May-79 Dec-79 7 16.9% 16.9* Gloweave Rubber Ltd. 14,990 17,200 2,210 14.7% Feb-80 Aug-79 -6 28.5% 32.3% 28.5% Heycarb Ltd. 21,527 29,198 7,671 35.6% Oct-80 Aug-81 10 30.0% 29.0% 29.0% Kilani Cables Ltd. 7,181 7,052 (129) -1.8% Oct-79 Dec-79 2 22.0% 31.0% 31.01 Lake House Printers & Publishers 2,740 2,571 (169) -6,2% Jul-79 Nov-79 4 50.0% 50.C% Lanka Light Ltd. 2,696 2,600 (96) -3.6% Apr-79 n.e. 16,3% 50,0% Lanka Pen Company 1,121 n.e. ne,a n.ea. n.e. Mayure Garments Ind. (C/J) Ltd. n*e. n.e. n.e. n.e. n.e. Metco Industrial Enterprise Ltd. 1,379 1,055 (324) -23.5% May-79 Jun-79 1 14.1% Metro Industries Ltd. 720 665 (55) -7.6% n.e. na.e. Moonway Metal Industries 522 n.a. n.e. n.e. n.e. Multi-Packs (Ceylon) Ltd. 977 840 (137) -14,0% Mar-79 Mar-80 12 New Ceramic Industries Ltd. 439 418 (21) -4.8% Jul-79 Jan-80 6 Packwell Lanka Ltd. 4,821 4,463 (358) -7.4% Aug-79 Oct-80 14 50.0% 40.5% Palm Garden Hotels Ltd. 3,446 5,770 2,324 67.4% Apr-79 Nov-78 -5 Plerglobe Ltd. 3,276 3,694 418 12,8% Oct-79 Mar-80 5 33,5% 33.5% Pure Beverages Ltd. 23,826 24,897 1,071 4.5% Mar-80 Nov-80 8 28.0% 28.0%0 Ranesirl Textile industries Ltd. 2,005 2,010 5 0.2% Aug-80 n.e. 41.0% 40.0% Ray-Ban.Opticlans n.e. n.e. n,.* n.e. n.e. Regency Garments Ltd. 9,500 8,300 (1,200) -12.6% May-79 Mar-79 -2 31.0% 43.3% Concrete Works Ltd. 2,228 2,732 504 22.6% Apr-81 Jun-81 2 38.0% 50.0% Sado Industries Ltd. 848 1,148 300 35,4% Oct-78 Dec-78 2 Sherman Sons Ltd. 8,777 10,915 2,138 24.4% Apr-80 Feb-80 -2 27.0% St. Anthony's Bolts & Nuts Ind. 4,477 4,123 (354) -7.9% Jul-79 Oct-79 3 23.8% 42.2% St. Anthony's Thermoplastic Ind. 1,276 1,207 (69) -5,4% n.e. n.a. St. Patrick Metal Crushers n.a. n.e. n.a. n.e. n.a. Swastika (Private) Ltd. 1,174 n.e. n,a, n.e. n.a. S.A. Perera & Co. Ltd. 2,069 1,882 (187) -9.0% n.e. n.e. 46.3% Wickramasinghe Polythene Ind. 3,518 3,443 (75) -2.1% Dec-79 n,. 26.0% 26,0%* Wornels Reef Ltd. 9,100 24,800 15,700 172.5% Oct-79 Feb-82 28 21.5% Source: DF0C (except Actual ER which is from PCR, Annex 5) FR - 32 * Attachment 7 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 564-CE and 742-CE) Income Statements - FY83-FY85 (Rs millions) Year ended March 31, 1983 1984 1985 INCOME Interest on: Rupee loans 50.4 60.6 n.. Foreign currency loans 31.7 23.9 nea. Subtotal - Interest income 82.1 84.4 88.0 Net dividends from: Quoted shares 1.3 1.3 2.3 Unquoted shares 4.0 3.5 2.7 Subtotal - dividend income 5.2 4.8 5.0 Leasing income - - 0.1 Other income 5.6 17.9 18.3 Total income 92.9 107.2 111.4 EXPENSES Interest on: Rupee loans 24.6 30.2 29.2 Foreign currency loans 23.1 25.0 35.9 Other loan charges /a 1.0 0.1 Subtotal - financial expenses 47.7 56.2 65.1 Administrative expenses 8.5 9.0 10.8 Depreciation 0.3 0.5 0.4 Profit before tax and provisions 36.4 41.5 35.1 Provisions for: Doubtful loans 1.9 0.8 3.7 Fall in share value /a /a 0.2 Specific bad loans & Interest 15.1 18.1 9.3 Specific bad investments 0.0 2.4 0.0 Subtotal - provisions 17.0 21.3 13.1 Profit before tax 19.4 20.1 22.0 Less: Income tax 4.4 5.7 5.3 NET PROFIT 15.0 14.4 16.7 a== wwwa am Dividepd declared 2.5 10.0 7.0 /a Less than Rs 50,000. Source: DFCC * 33 - Attachment 8 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Balance Sheets - FY83-FY85 (Rs millions) March 31, 1983 1984 1985 ASSETS Accrued Income 26.5 35.1 10.7 Repayments due 25.4 26.4 31.0 Other current assets 72.0 88.5 43.6 Subtotal - current assets 123.9 150.0 85.3 Loan portfolio /a 503.6 562.4 746.0 Ordinary share portfollo 27.7 36.7 48.8 Preference share portfolio 35.2 30.6 27.1 Lease rental receivable - - 1.5 Less: Provisions -23.4 -35.7 -45.2 Subtotal - net portfolio 543.1 594.0 778.2 Other assets 16.5 25.1 34.6 Total assets 683.5 769.1 898.2 LIABILITIES AND NET WORTH Proposed dividend 0.6 10.0 7.0 Other current liabilities 17.9 20.9 28.9 Subtotal - current liabilities 18.5 30.9 35.9 Government loan 14.9 12.8 11.7 Central Bank refinance 216.8 227.0 219.8 Other local loans 21,9 14.7 18.9 Bank Group loans 125.1 119.1 181.6 ADB loans 142.7 175.9 207.2 FMO loan - 35.3 60.1 Subtotal - loan-term loans 521.4 584.8 699.2 Paid-up share capital 94.8 100.0 100.0 Reserves 48.8 53.3 63.0 Subtotal - net worth 145.6 153.3 163.0 Total liabilities and net worth 683.5 769.1 898.2 /a Excludes repayments due. Source: DFCC - 34 - Attachment 9 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Indicators and Ratios - FY82-FY85 Year ended March 31, 1982 1983 1984 1985 Profitability Indicators Net Profit as a % of Average Net Worth 31.2 14.3 9.7 10.6 Net Profit as a % of Average Total Assets 4.0 2.5 2.0 2.0 Dividend as a % of Share Capital (effective rate) 14.5 10.5 10.8 8.3 Dividend as a % of Net Profit 15.7 16.8 69.4 41.9 Operational Indicators Total Income as a % of Average Total Assets 15.9 15.3 14.8 13.4 Financial Expenses as a % of Average Total Assets 7.8 7.8 7.7 7.8 Administrative Expenses as a % of Average Total Assets 1.5 1.4 1.2 1,3 Financial Structure Indicators Long-term Debt/Equity Ratio 6.7 3.6 3.8 4.3 Provisions/Total Portfolio (5) 2.0 4.1 5.7 5.5 * 35 - Attachment 10 Page 1 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Portfolio Arrears (amounts In Rs millions) March 31, 1982 1983 1984 1985 A. LOANS Total Loans Outstanding 436.6 '529.0 588.8 776.8 Loans In Repayment Stage 305.0 378.8 424.6 488.8 Loans (Principal) Affected by Arrears 121.1 185.2 303.3 n.a. Arrears: Principal 17.1 24.5 56.2 68.6 Interest 10.5 19.8 53.2 85.9 Totals 27.6 44.3 109.4 154.5 WWW Wmu mue. ama Arrears of More Than One Year 22.3 37.8 88.8 147.4 Provision for Doubtful Loans /a 8.7 10.6 11.4 15.0 Arrears of Principal to: Total Loans Outstanding 3.9% 4.6% 9.5% 8.8% Loans In Repayment Stage 5.6% 6.5% 13.2% 14.0% Loans Affected by Arrears 14.1% 13.2% 18.5% n.a. Loans Affected by Arrears to Total Loans Outstanding 27.7% 35.0% 51.5% n.a. Arrears of More Than One Year to Total Arrears 80.8% 85.3% 81.2% 95.4$ Provision for Doubtful Loans to Total Arrears 31.5% 23.9% 10.4% 9.7$ /a Not Including provision for specific bad debts of Rs 11.6 million (1983), Rs 20.6 million (1984) and Rs 26.3 million (1985). - 36 * Attachment 10 Page 2 of 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Portfolio Arrears (amounts In Rs millions) March 31, 1982 1983 1984 B. PREFERENCE SHARES Total Preference Shares Outstanding 39.1 35.2 30.6 Shares in Redemption Stage 33.0 32.4 30.1 Total Preference Shares Affected by Arrears 19.9 25.0 25.5 Arrears: Capital Redemption 6.4 9.9 13.9 Dividend Payment 3.3 5.2 6.6 Totals 9.7 15.1 20.5 M" 88 ae Provision for Fall in Share Value /b 1.2 1.3 1.3 /c Capital Redemption Arrears to: Total Shares Outstanding 16.4% 28.1% 45.4% Shares in Redemption Stage 19.4% 30.6% 46.2% Shares Affected by Arrears 32.2% 39.6% 54.5% Shares Affected by Arrears to Total Shares Outstanding 50.9% 71.0% 83.3% Provision for Fall in Share Value to Total Arrears 12.4% 8.6% 6.3% /b Includes provision for ordinary shares. 'c Not including provision for specific bad investments of Rs 2,4 million. Source: DFCC * 37 - Attachment 11 PROJECT PERFORMANCE AUDIT MEMORANDUM SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (Credit 566-CE and 742-CE) Collection Performance - FY82-FY85 (amounts In Rs millions) FY82 FY83 FY84 /a FY85 /a Arrears at Beginning of Year: Principal 8.6 17.8 26.8 50.1 Interest 11,6 19.4 28.5 53.2 Total 20.2 37.2 55.3 103.3 sme &am* ame ae Amounts Falling Due During Year: Principal 40.0 58.4 88.8 78.2 Interest 63.0 82.1 93.5 104.6 Total 103.0 140.5 182.3 182.8 ama WWWWa maWW mamma Total Due for Collection: Principal 48.6 76.2 115.6 128.3 Interest 74.6 101.5 122.0 157.8 Total 123.2 177.7 237.6 286.1 Total Collected During Year: Principal 30.8 49.4 65.5 60.6 Interest 55.2 73.0 68.8 69.6 Total 86.0 122.4 134.3 130.2 oms amas ma =ammen Total Collection/Total Due (): Principal 63.4 64.8 56.7 47.2 Interest 74.0 71.9 56.4 44.1 Total 69.8 68.9 56.5 45.5 Total Collection/Amounts Falling Due During Year (5): Principal 77.0 84.6 73.8 77,5 Interest 8'.6 88.9 73.6 66.5 Total 83.5 87.1 73.7 71.2 Arrears at End of Year: Principal 17.8 26,8 50.1 67.7 Interest 19.4 28.5 53.2 88.2 Total 37.2 55.3 103.3 155.9 WWm am awww a0e /a Loans specifically Identified as bad debts have been excluded. Source: DFCC PROJECT COMPLETION REPORT SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (DFCC) (CREDITS 566-CE AND 742-CE) Industrial Development & Finance Division South Asia Projects Department June 21, 1984 - 39 - PROJECT COMPLETION REPORT 1 SRI LANKA DEVELOPMENT FINANCE CORPORATION OF CEYLON (DFCC) (CREDITS 566-CE & 742-CE) I. INTRODUCTION 1. Background. The Development Finance Corporation of Ceylon (DFCC) was established in 1955, with technical assistance from IBRD, 2/ under a special Act of Parliament, to provide long-term financing to private enterprises in industry, agriculture and commerce. From 1955 until 1967 most of its operations were in local currency as external borrowings were discouraged by the Government of Sri Lanka (GOSL). In the late 1960s this policy was changed and IBRD made two loans to DFCC to provide foreign exchange term loans to the private industrial sector, increase DFCC's level of activity, and help strengthen the institution. By 1969, considerable progress had been made in attaining these objectives. DFCC's foreign and local currency commitments increased from Re 4.2 million in FY67 to Re 21.2 million in FY69. The Corporation hired an advisor for a two-year term, increased its professional staff substantially, and improved its appraisal and follow-up procedures. 2. In 1970, GOSL adopted investment licensing, price controls and other forms of investment restriction which significantly affected the investment climate and in particular, reduced private sector investment. The flow of new applications for funding by DFCC dried up almost completely, and a number of projects already approved were cancelled by their sponsors. Consequently, DFCC was unable to utilize about US$6.8 million of the US$12 million available under the two IBRD loans (US$4 million, Loan 520-CE, of 1967 and US$8 million, Loan 634-CE, of 1969); these amounts were cancelled by IBRD. In this difficult period, DFCC maintained sound if limited operations, improving some of its procedures - particularly follow-up operations. 3. In the mid 1970s, Government policies showed evidence of some liberalisation. The Bank renewed its contact with DFCC and in June 1975, the first IDA Credit (Credit 566-CE, US$4.5 million) was approved to meet the foreign 1/ This report was prepared by C. Dean Papavassiliou following a mission to Sri Lanka in February 1984 to review the overall performance of DFCC and the subprojects financed under Credits 566-CE and 742-CE. The report incor- porates findings of previous IDF missions to Sri Lanka. 2/ DFCC was established in response to a recommendation of an IBRD economic survey mission report published in 1952. IBRD assisted the Government of Sri Lanka in setting up the Corporation. - 40- cost of imported capital goods. The terms of the Credit provided for a repayment period of 15 years including grace. The interest rate from GOSL to DFCC was set at 8.5% p.a.; the onlending rate to DFCC's sub-borrowers was 12% p.a., except to small scale enterprises (with fixed assets of less than Rs 200,000) for which an interest rate of 102 p.a. was applicable. The repayment of the loan from DFCC to the GOSL was to be made on a "back-to-back" basis, set in approximate conformity with repayments received by DFCC from sub-borrowers. The Credit also provided for the reimbursement of 65% of the cost of imported capital goods bought "off the shelf" in Sri Lanka for tourism projects, and '1S$15,000 was earmarked for training. The foreign exchange risk.was assumed by COSL. 4. Credit 566-CE was fully committed within 27 months of effectiveness, and to give DFCC commitment authority to meet a growing investment demand, Credit 742-CE for US$8.0 million was approved in September 1977. The Credit funds were lent to GOSL and on-lent to DFCC at 8%, which passed funds to sub-borrowers at 13%, giving a spread of 5% to help DFCC build its -eserves. This second credit was to be used for export-oriented projects (40%) and hotel projects (15), with the balance for miscellaneous projects in the industrial sector. The foreign exchange risk was borne by COSL. 5. This Project Completion Report (PCR) covers Credits 566-CE and 742-CE, with a review of institutional developments in DPCC and the performance of subprojects financed from FY71 to FY82. 6. The Bank's involvement with DFCC also led to IFC taking up equity in the Corporation (US$103,430 in 1977). Subsequently, IFC took up additional shares of US$51,000 in 1980 and US$302,000 in 1983 to maintain its holdings at about 10% of DFCC's paid-up share capital. In July 1983, IDA approved an Industrial Development Project (IDP) which provides foreign exchange resources to both DFCC and the National Development Bank (NDB) on a competitive, first-come first-served basis. This credit represented a change in IDA's practice of working with DFCC alone in the financing of medium and large industry in Sri Lanka. II. THE ECONOMIC ENVIRONMENT Pre-1977 7. Until FY77 Sri Lanka's economy faced a number of fundamental difficulties, including heavy reliance on exports of traditional tree crops, deteriorating terms of trade, dependence on food imports and widespread unemployment. The impact of these weaknesses were compounded 6y an expensive system of subsidization and industry protection through tariffs, licensing, price controls and other barriers which led to serious misallocation of resources. Between FY70 and FY77, economic growth slowed to 2.9% p.a. which was too low to support the high expenditures for the Government's costly social programs. This slowdown reflected a combination of factors, including ineffective management of the economy, a policy environment not conducive to growth and investment, fluctuating crop production. and a sharp rise in the cost of imported food and petroleum. Import controls and a lack of confidence by the private sector resulted in Limited investment in industry, with a bias toward import substitution in product lines dependent upon the maintenance of protectionist policies. - 41 - Post-1977 8. In FY77, in close consultation with the IMF, GOSL introduced policies designed to: reduce Government intervention in commodity markets; reduce Government consumption subsidies t) assist in restoring producer incentives and public savings; and create a favorable environment for a greater role by private foreign and domestic investors by tax concessions, the creation of a Free Trade Export Zone, with direct foreign investment actively encouraged, and the unification and depreciation of the exchange rate. As most import controls were lifted and the exchange rate was allowed to depreciate, priority was given to the development of the private sector and export-oriented industries. In addition to these policy reforms, GOSL embarked on an ambitious public investment program. Capital expenditure jumped from 6% of CDP in FY77 to an average of 13% in FY78 and FY79, peaking at 19% in FY80, and declining to an average of 14% during FY81 to FY83. At the center of $nis investment program were three major new undertakings: the accelerated implementation of the Mahaweli Ganga Development Program, a large multi-purpose river basin development; the establishment of a Free Trade Zone aimed primarily at attracting foreign investors; and a massive housing and urban renewal program including the construction of a new capital outside of Colombo. 9. The Impact of Liberalization. The new policies were reasonably successful in raising the rate of economic growth and the level of investment, and to some degree, in reducing unemployment. On the other hand, export performance and the savings effort, especially that of the public sector, were weak and far from sufficient to support the increased levels of investment and imports. Having taken some bold economic reform moves during the late 1970s, GOSL failed to implement the additional policy measures needed to achieve its objectives,of faster economic growth. The result was an initially high but then declining GDP growth rate against a background of increasing balance of payments and budgetary problems. 10. Under its new policies, a major objective of GOSL was to stimulate the growth and development of private industry. National accounts estimates of growth in the public and private manufacturing sector suggest that GOSL's actions provided an initially favorable stimulus to growth, although subsequent performance was disappointing. During FY77 to FY83, the manufacturing sector registered an average annual growth rate of only 3.3%, due in part to the continuing poor performance of public sector enterprises. Growth rates in industry slowed from 7.8% in FY78 to 4.6% in FY79, and to 0.8% in FY80. However, this poor overall performance hid contrasting patterns in different industrial segments. In FY80, value in processing of traditional tree crops, representing about 35% of industry, declined by nearly 10% due to drought and resultant raw material shortages. Output by public corporations, excluding the petroleum refinery, declined by 6%. In contrast, output value in private factory industries grew by an average of 7.2% during FY79-FY80. Although other factors -- such as sluggish world growth and rising petroleum prices, the small domestic market and narrow industrial base -- had an adverse effect on performance, the industrial policy of the Government was a contributing factor. To a significant extent, post-liberalization measures served to replace quantitative restrictions with a tariff structure which was still both protective and biased against exports. - 42 - III. INDUSTRIAL FINANCE 11. The Financial System. Prior to FY77, the institutional sources of credit for industry were: the four domestic commercial banks; the Development Finance Corporation of Ceylon (DFCC); and four foreign commercial banks. Traditionally, private industry relied on self-financing for the majority of its fixed capital needs and on commercial banks to finance working capital, with some roltovers used for term credit. Public sector industrial corporations used budgetary allocations for up to 80% of their capital investment requirements. DFCC was the only source of long-term equity and loans, and had a monopoly on foreign exchange lending to private industry. After FY77, the number and size of investments in projects increased and the traditional reliance on self-financing declined, resulting in an increased demand for term loans and equity participation. With DFCC's financing capacities hampered by limited local currency resources as well as a low capital base and exposure limit, term lending needs were met largely by the domestic commercial banks and the newly created National Development Bank (NDB). In addition, funds for trade financing and working capital for industry were made available partly through the opening of new branches by 22 foreign banks. Project finance was also secured through suppliers' credits and, in a limited number of cases, through foreign currency denominated term loans by foreign and domestic commercial banks. Equity finance provided by project sponsors, usually amounted to 30% to 40% of project costs. 12. GOSL's fiscal policies in the late 1970s, which allowed for free currency conversion and commercial banks' involvement in term financing operations, had a significant effect on the volume of foreign exchange lending. The NDB, with a much larger capital base, became a significant factor in term financing for industry. The commercial banks, especially the large state-owned Bank of Ceylon and People's Bank, began to make term loans to industrial projects often in the small and medium industry sector but sometimes in direct competition with the development banks. Demarcations between the various financial institutions faded away: any institution could finance imports of machinery and equipment since Rupees could be converted freely into foreign currency. The prospective investor now had a choice either to go to DFCC -- which continued to employ rigorous and fairly time consuming procedures -- or to take his application to another institution where he often did not have to go through such detailed scrutiny. 13. DFCC's Role. Although GOSL gave industrial development high priority during the late 1950s and 1960s, allocating 20% of the capital budget of the Ten-Year Plan (1959-1968) to industrial investment and providing high protection and generous fiscal incentives for new projects, most of the new industrial units were in the public sector and, therefore, outside of DFCC's client base. 14. Between FY65 and FY70, GOSL encouraged private sector investment. However, the country was still economically weak with an acute shortage of foreign currency reserves, which restricted any significant increase in private industrial development financing. Nevertheless, during the period, DFCC's annual lending increased by 40% over its annual average operations in the previous eleven years. - 43 - 15. In FY70, with the advent of a socialist Government, the public sector again became the center of attention. The resulting uncertainty and hesitation by private sector investors in initiating new investments affected DFCC activities, reducing the level of its lending operations. However, by FY77, with the economy's inflationary pressures and private sector's uncertainty easing, DFCC was able to commit funds more rapidly, providing foreign currency subloans from the IDA credits and Rupee funds through the Central Bank's Refinancing Scheme. During this period, tourism expanded rapidly and became a major area of new activity. DFCC saw considerable potential and rapid growth in this sector (although not without some risk), and financed a significant number of hotel investments. 16. The impact on DFCC operations of the more competitive system of industrial finance introduced in FY77 was siguificant; DFCC operational patterns became volatile with considerable fluctuations in approvals, commitments and disbursements. However, despite the increased competition, DFCC was still an efficient and viable institution. With recent improvements in Board composition, delineation of responsibilities between Board and management, and expanded capital structure, DFCC is now in a position to increase its activities significantly, provided its project and business promotion efforts are improved. IV. THE CREDITS 17. Objectives. Against the changing economic and political background of the mid-1970s, IDA made available to DFCC Credits 566-CE and 742-CE. The objectives of the credits were similar: to provide foreign exchange for private investments in industry, tourism, and related activities; and to continue the efforts to improve DFCC as an institution through appropriate staff expansion, improved appraisal and supervision standards, and increased promotional activities. The credits were to meet the direct cost of capital goods imported for projects financed by DFCC, support the private sector's increased interest in industrial investment, and help channel this interest into investments of economic benefit to Sri Lanka. It was estimated that 40% of the credits would be used to finance export-oriented projects, either labor intensive or utilizing local raw materials; and 25% to fund hotel projects, resulting in two thirds of the credit amounts going to subprojects which would generate direct foreign exchange earnings. Other projects were to provide foreign exchange savings by financing investment in import substitution product lines. Under the second Credit, DFCC was permitted to finance equity investments due to a lack of alternative sources of venture capital. 18. Commitment and Disbursement. Both Credits were fully committed well before their projected completion dates (Annex I), although subsequently, there were some cancellations of projects due to sponsors' lack of sustained interest or difficulties in adjusting to new policies. Disbursements were satisfactory, although disbursement for some projects were delayed due to difficulties in mobilizing adequate equity or problems in obtaining infrastructural facilities. Cr 566-CE was fully committed by December 1977, 27 months after effectiveness, and was fully disbursed in November 1979. Although 60 subprojects were approved - 44 - originally, by the closing date only 48 were actually committed, resulting in an unutilized balance to be cancelled of US$0.3 million out of a total Credit of US$4.5 million. Cr 742-CE became effective in December 1977 and was fully committed by February 1980. By the last date of disbursement (September 1982) US$7.5 million had been disbursed for 45 subprojects. Thus, out of a combined Credit amount of US$12.5 million, 93.6% was disbursed, leaving only a small balance held for foreign exchange fluctuations to be cancelled (7.7% for Cr 566-CE and 5.7% for Cr 742-CE). V. PERFORMANCE OF DFCC Institutional Aspects 19. Establishment and Ownership. DFCC was established by an Act of Parliament in 1955 as a iHited joint-stock company with an initial share capital of Rs 24 million to finance industrial, agricultural and service oriented industrial firms in which Government ownership would not exceed 49% of the share capital. In January 1983, DFCC's authorized share capital was increased to Rs 300 million, with an issued and paid-up capital of Rs 100 million. The private sector hold 56% of DFCC's issued capital while Government-owned banks (Bank of Ceylon and People's Bank) own 44%. Of the private share holdings, 35% (of total share capital) is held by international institutions including: IFC (9.9%), Netherlands Financierings Maatschappij voor Ontwikkelingslanden NV (FMO) (12.5%), Deutsche Gesellschaft Fur Wirtschaftliche Zusammenarbeit (DEG) (10%), and other foreign commercial banks (3%). The balance (21%) comprises 800 Sri Lankan private companies and individuals, owning less than 500 shares each, indicating DFCC's broad-based ownership. 20. Board and Management. DFCC's Act provided originally for a ten member Board of Directors; in December 1982, it was revised to increase the Board to eleven members: six members elected by the shareholders; three appointed by the Government; two representing foreign investors; and the General Manager as an ex-officio member. Recent changes in the DFCC Act restrict the maximum term of office of a shareholder/director to eight years. During the period of the Credits (FY74-FY82) the Board provided little guidance in the development of an operational strategy for DFCC. This weakness was compounded by the lack of clearly defined, and monitored, areas of responsibility for the then Chairman of the Board and General Manager. This situation was resolved in 1982 with the appointment of a new Chairman (Mr. B. Mahadeva), who serves concurrently as Director General of Planning at the Ministry of Planning and Finance. The Board issued approved guidelines -- which IDA had encouraged -- distinguishing its role and functions from those of the management, and also delegating considerable day-to-day operational management authority to the General Manager and his deputies, including approval of subprojects of up to Rs 2 million. Additionally, the Board has created an Executive Committee consisting of the Chairman, General Manager and three Board members to discuss current operational issues on a semi-monthly basis. The full Board now meets monthly and focuses on the development of long-term policies. Due to these changes, relations between Board members and management are much smoother. - 45 - 21. As noted above, during FY74-FY82, the Chairman was closely involved in DFCC's day-to-day operations. This involvement resulted in significant overlap and conflict with the responsibilities of the General Manager, which eroded staff morale and affected the operations of the Corporation and the performance of the senior staff. As a result, DFCC's operations slowed down, and some of the Corporation's aggressiveness was lost. However during the late 1970s, with considerable pressure from the Board, the Chairman and the GM did develop a working relationship under which the CM remained as the Chief Operating Officer, while the Chairman continued to obtain any information required to carry out the Board's work. Although there were subsequent changes in the position of General Manager, it was not until 1982 that the conflict between the Chairman and the GM was resolved and DFCC was provided with the strong leadership necessary to restore staff confidence and improve DFCC's performance. 22. Organization Structure. At the time of the first IDA appraisal (September 1974), DFCC was organized into five departments: Project Evaluation, Project Implementation, Legal Affairs, Accounts and Administration and Consultancy Unit. The organization was generally adequate for the level of activity undertaken. Subsequently, with the increase in Small Scale Industry (SSI) operations, a special SSI Department was created to carry out project promotion, evaluation and implementation. In addition, the functions of the Chief Legal Officer and the Secretary were divided into separate units, easing the workload of the Legal Department. By 1983, the growth in DFCC's operations necessitated a major restructuring of its organization to reflect current needs and areas of operation and to reduce excessive spans of control. Accordingly, the operations were grouped into three major functional areas each under an Assistant General Manager (Annex 2). The creation of this structure and allocation of responsibilities eased the routine workload of the General Manager, allowing him to concentrate on planning, strategy and management matters. Overall, the restructuring was effective and flexible enough to enable DFCC to respond to changing operational requirements. 23. Staff. Althougb still a relatively small organization, DFCC has grown significantly since 1955 when it only had three/four professionals. By 1968, there were eight professionals, and by 1971, this number had increased to 20 in anticipation of a substantial increase in operations. When this fell short of expectations, owing to a sudden deterioration in the private investment climate, eight professionals left. When Cr 566-CE was appraised in FY75, there were 38 staff, of whom 12 were professionals. By FY77, the number of professionals had risen to 20 and as of December 31, 1983, there were 40 professional officers, and about 90 support staff. In FY83, the number of resignations (particularly amongst project officers) increased, and this placed an excessive workload on the remaining staff. As of January 31, 1984, 14 of 27 sanctioned project officer positions were filled, although management was actively recruiting and expected to fill the vacant positions by June 1984. Overall, DFCC continues to have strong senior and mid-level staff, although a few experienced officers have resigned over the last two years. Most of the senior positions (Assistant General Managers and Managers) were filled by internal promotions of officers with an average of eight years experience. Eight officers currently hold the position of Manager or its equivalent, while a fourth Assistant General Manager's - 46 - post was recently sanctioned. The high professional staff turnover in some years, especially during FY78-FY80, was attributed in part to internal management difficulties, but more to below market benefits, as the Board was reluctant to review DFCC's salaries and benefits and kept salaries tightly controlled. In addition, some of DFCC's more experienced project appraisal staff were attracted to NDB and the newly created foreign banks by better prospects of promotion and benefits. Failure to replace staff has Led to weaknesses, particularly in the project evaluation and follow-up departments. Staff turnover ranged from 6% to 15% during FY79-FY83. Staff salaries and benefits have since been revised and are presently reasonably competitive with the Government service, commercial and development banks in Sri Lanka. However, it still remains difficult for DFCC to retain qualified staff given the attractive opportunities in foreign banks and pria7ate industry. 24. Training. Under the provisions of the IDA Credits and funding from the Asian Development Bank, DFCC took advantage of foreign as well as local training opportunities. During FY77-FY82, 22 staff attended 53 trainiag courses or seminars which averaged two weeks duration; 22 courses were held locally and 31 involved foreign training in India (17 courses), the Philippines (7), and Korea (3). Three officers participated in courses in West Germany and America. DFCC also conducted its own training programs which were attended by staff of other Sri Lankan banks. Policies and Procedures 25. Policies and Strategy. DFCC's present Statement of Policies (Annex 3) which reflects revisions since it was originally drafted in 1967, provides a satisfactory framework for its financial assistance to private sector enterprises. The Policy Statement was last modified in 1982 to reflect new circumstances and was supplemented by a Strategy Statement covering the period FY82-FY86, which outlines DFCC's priorities and confirms its primary focus on project financing; although the Statement also notes other potential activities including leasing, underwriting and merchant banking, DFCC's strength and emphasis remains in project lending. The Policy Statement also establishes exposure limits: total exposure in a single enterprise is limited to 20% of DFCC's equity; individual share investments are limited to 10% of DFCC's equity and 25% of the share capital of the enterprise; and the aggregate of ordinary share investments is limited to the amount of DFCC's own equity. In the past, DFCC's low equity base and 20% exposure limit restricted its maximum loan size to under US$750,000 equivalent. However, the recent increases in DFCC's share capital have incraased its maximum exposure limits in a single project to about Rs 40 million (US$1.8 million). The Policy Statement also requires DFCC to maintain its debt/equity ratio at 7:1. 1/ The Policy and Strategy Statements are satisfactory in their coverage and allow DFCC ample scope to diversify its operations into a multi-service institution. Any changes to the Policy and Strategy Statement require IDA's prior approval. 1/ Until recently, DFCC was at its debt/equity Limit. The recent share capi- tal issue has decreased the ratio to 4.9:1, which should provide DFCC with sufficient flexibility to raise additional loans in the future. - 47 - 26. Appraisals. During the period under review, DFCC's appraisal reports were generally satisfactory, although under Cr 566-CE, appraisals were often weak in the areas of market analysis, economic evaluation, and debt/equity coverage. Detailed calculations of rates of .-eturn were missing and the bases for price assumptions were defined inadequately. Under Cr 742-CE, IDA's appraisal guidelines were followed more closely and appraisal standards were tightened; calculations of financial and economic rates of return were presented and a detailed analysis of Domestic Resource Cost (DRC) for subloans involving foreign exchange of more than US$250,000 equivalent was made. Currently, DFCC is paying particular attention to the level of capacity utilization of industries to ensure that DFCC financing does not result in excess capacity. There are still some questions on project appraisals, especially as projects become larger and more complicated, and as newer, less-experienced staff fill positions created by the resignation of more experienced officers. While appraisal standards are satisfactory, DFCC's review of larger and more complicated projects needs careful monitoring particularly in the areas of demand analysis. 27. Project Implementation. During its initial period of operations, DFCC gave limited attention to end-use operations, focussing its resources on project appraisals. When supervision was carried out, much of the officers' time was spent on expediting procurements and disbursements, settling legal matters, and dealing with delays in obtaining land titles and equipment quotations. With technical assistance under the IDA Credits, project implementation improved with the introduction of better systems and with additional staff assigned to this task. In FY81, a problem projects cell was created within the follow-up section to focus attention on companies in arrears. Under the 1983 reorganization of DFCC's functions the Project Implementation Department, which consists of sections for disbursement and follow-up was strengthened with additional staffing. ,However, DFCC needs to recruit about three additional officers to handle the increased size of its portfolio and to visit problem projects more frequently. During FY83, the follow-up section of eight officers handled a portfolio of over 200 projects, excluding the SMI projects which were handled by the SMI Department. Officers make quarterly visits to projects under construction; problem projects are visited more frequently, and projects in operation are visited at least once a year. DFCC's follow-up reports are generally satisfactory, capturing accurately the existing conditions of a subproject, identifying any problems and providing for actions needed to correct them. The recent increase in arrears (paragraph 43) stems in part from the downturn in economic conditions, but is due also to the failure by senior management to act promptly on the recommendations suggested in the follow-up reports. 28. Business Promotion. Until FY77. DFCC relied on its exclusive position as the provider of foreign exchange loans as its primary means of developing a pipeline, although the need for more promotional work was noted by IDA appraisal and supervision missions. To rectify this weakness, IDA encouraged DFCC to establish a program of sector studies to identify suitable areas for development, and a priority ranking of subprojects from the economic viewpoint. However, until recently, little progress was noted in this area. Some promotion and identification work has been done by DFCC's Consultancy Unit to assist prospective investors with project feasibility studies and market surveys, as well as to undertake project appraisals for other financial institutions, but in the main, its staff worked on project appraisal and supervision. In 1983, the - 48 - Business Promotion Unit was sanctioned, but its work is still carried out by the Consultancy Unit. At least two officers need to be assigned exclusively to the project and business development, and the unit should operate under the AGM, Operations, given the close link required with appraisal activities. Officers working with this unit should liaise with FIAC, LIAC and individual entrepreneurs in order to follow-up the development of emerging new projects. However, there is a need to question the reason for the two units. Most of the Consultancy Services Unit's functions could be performed by the Promotion Unit when it becomes fully operational, since there is need for close coordination in project promotion, identification and sectoral studies especially in key subsectors such as engineering, rubber products and agro-processing. 29. Procurement, Accounting and Legal. DFCCs procurement standards are satisfactory. For large foreign and local currency subloans (above US$50,000) at least three quotations from foreign suppliers are required, which are reviewe4 by DFCC's Engineering and Consultancy Department. With the increased interest in Sri Lanka by foreign suppliers in recent years, DFCC is able to ensure greater responsiveness to bid offers. For small equipment subloans, DFCC ensures that machinery procured is competitive in price and quality, but three quotations are not required if the contract does not exceed Rs 1.2 million (US$50,000). DFCC's manual accounting system is adequate for DFCC's present needs; although, if DFCC is to diversify its operations and keep tight control over its arrears it will need to consider updating its data processing procedures. The Audited Financial Statements contain all the required statements of DFCC's operational and financial activities, and have been approved without qualifications by DFCC's auditors, Ford, Rhodes, Thornton & Co., and De Silva Wijeyeratne & Co. Their long-form audit report is of good quality. DFCC's legal standards and procedures have been satisfactory. Operations 30. Lending Activities. Since its inception in 1955, DFCC has disbursed Rs 535 million to more than 500 companies. About 85% has been in loans and 15% in equity investments of ordinary and redeemable preference shares. From 1955 to 1977, DFCC experienced slow growth, and its impact on industrial development was limited. With the relaxing of investment controls in FY77, DFCC's operations increased significantly, although annual commitments have fluctuated dramatically (Annex 4). In FY79, net approvals reached Rs 124 million, up from Rs 72 million in FY78, while in FY80 net approvals declined to Rs 49 million, largely due to management problems in DFCC and cancellations of import-substitution projects which had become unviable under the Liberalized import regime. In FY81, DFCC's net approvals almost quadrupled to Rs 183 million, and in FY82, increased to Rs 211 million. However, in FY83 private sector investment was at low level due to general economic conditions and uncertainty associated with the election year, and net approvals fell to Rs 37 million. Commitments show a similar pattern, while disbursements increased steadily until FY83: Rs 71 million in FY79, Rs 96 million in FY80, Rs 117 million in FY81, Rs 160 million in FY82 falling slightly to Rs 147 million in FY83. DFCC's management has instituted measures to restore loan approval activity to the FY82 level and to reduce the volatility experienced during FY79-FY83. - 49 - 31. Although DFCC has a separate small industries department, its operations are concentrated on term loans to medium- and large-scale companies. As of December 31, 1983, DFCC had a portfolio of about 200 small industry clients. While DFCC participates in IDA's Small and Medium Industry (SMI) projects (Cr. 942-CE and Cr. 1182-CE), its participation has been limited because it does not have an extensive branch structure and it has access to other domestic and foreign exchange resources with more favourable spreads and 100% refinance. 32. Five subsectors: tourism, chemicals, textiles, rubber products, and ready-made garments, account for 69% of the total loans and investments DFCC has made up to March 31, 1983. The concentration in these five subsectors under the IDA Credits is even higher .at 74.7% and DFCC is carefully monitoring new lending to these sectors. Of the five sectors, DFCC's involvement in the tourism sector was particularly heavy. During the second half of the 1970s, DFCC pioneered the expansion of the tourism sector and financed it with long-term loans and equity participation to the extent of 40% of its portfolio. Although the sector was booming, this entailed considerable risks which are now reflected in the level of sectoral arrears. While the share of tourism decreased to 33% in FY83, it remains the largest sector concentration (Table 1) and was significantly higher than projected at the time of the appraisals: Table 1: Sectoral Investment, FY83 Rs million Total Exposure IDA Credits (%) Total Loans & No. of Amount Industry Group Investments % Projects of Loans Chemical Products 67.67 11.43 8.0 13.3 Textiles 47.96 8.10 6.8 19.9 Electrical Products 25.62 4.33 3.4 2.9 Tourism 199.45 33.70 28.4 15.6 Building Materials 26.95 4.55 5.7 1.8 Ready-Made Garments 46.30 7.82 12.5 15.3 Food 18.57 3.14 2.3 4.7 Engineering 24.83 4.19 9.1 3.2 Rubber Products 47.46 8.02 5.7 10.6 Printing & Packaging 22.61 3.82 10.3 5.6 Agriculture 1.42 0.24 1.1 0.1 Beverages 18.51 3.13 1.1 3.9 Metal Products 6.67 1.13 1.1 0.4 Miscellaneous 37.85 6.40 4.5 2.7 Total 591.87 100.00 100.0 100.0 Source: DFCC 1983 Annual Report and internal statistics. 33. Subproject Size. Under Cr. 566-CE and Cr. 742-CE DFCC approved 94 subprojects, utilizing US$11.7 million of the US$12.0 million available. These were distributed as follows: - 50 - Table 2: IDA Subprojects "A" Projects 1/ "B" Projects Total No. % $ 000 % No. % $ 000 % No. $_000 Credit 566-CE 8 16.7 2,286 55.0 40 83.3 1,867 45.0 48 4,153 Credit 742-CE 13 28.3 5,451 72.3 32 71.7 2,092 27.7 45 7,543 Total 21 22.0 7,737 66.2 72 78.0 3,959 33.8 93 11,696 34. These results were close to the appraisals estimates. Under Cr 566-CE it was estimated that eight to ten subprojects would be above the free limit ("As") utilizing about 60% of the total loan amount. The actuals were eight subprojects, which utilized 55% of the total amount. Under Cr 742-CE, it was estimated that 25% of the number of projects and 70% of the credit would be above free limit category. The actual results were in line with the estimates. The 13 "A" subprojects of Cr 742-CE utilized 72% of the credit funds; the balance was used by the 32 "B" subprojects. The average loan size was US$86,500 under Cr 566-CE and US$164,000 under Cr 742-CE. The average loan -- both "As" and "Bs"-- went up almost 90% between the first and the second credit. Coincidentally, the 21 "A" subprojects accounted for 22% of all subprojects, and utilized 66% of the Credits. 35. Sectoral Distribution. Table 3 details the sectoral distribution of projects financed under the two Credits. As with DFCC's general portfolio, five subsectars: tourism, chemicals, textiles, rubber products, and garments, accounted for the major areas of lending operations. 1/ Projects above the agreed Free Limits, i.e. Credit 566-CE Free Limit - $150,000; Credit 742-CE Free Limit - $400,000. - 51 - Table 3: Sectoral Distribution of Projects Credit 566-CE Credit 742-CE No. of Amount No. of Amount Subsectors Projects (Rs million) % Projects (Rs million) % Chemical Products 4 6.8 16.1 3 14.6 11.7 Textiles 2 7.1 17.0 4 26.8 21.5 Electrical Items 2 1.1 2.6 1 3.8 3.0 Tourism 18 7.6 18.1 7 17.8 14.3 Building Materials 2 0.6 1.3 3 2.6 2.1 Ready-made Garments 5 7.1 16.9 6 18.0 14.4 Food Products 1 0.1 0.3 1 8.0 7.1 Engineering 3 1.6 3.9 5 3.6 3.0 Rubber Products 3 5.1 12.2 2 12.1 9.7 Printing and Packing 3 2.0 4.7 6 7.6 6.1 Agriculture 1 0.1 0.3 - - - Beverages - - - 1 7.6 6.1 Metal Products 1 0.4 1.0 - - - Miscellaneous 3 2.3 5.6 1 1.5 1.2 Total 48 42.1 100.0 40 124.8 100.0 == =RR aa= saas as 36. Geographical Distribution. DFCC's financial assistance is heavily concentrated in the Western part of the country including the greater Colombo area (over 80%). This distribution reflects the concentration of industrial activity around the capital, to a large extent due to lack of infrastructure for industrial projects in other areas. This does not, however, apply to tourism projects, for which suitable locations have been found along the South Coast and at historical sites in the Central areas. 37. Nature of Projects. About 50% of the subprojects financed under the two IDA Credits were expansion of existing companies. New subprojects represented 30%, while BMR projects accounted for 20% (Table 4). - 52 - Table 4: Types of Projects Cr 566-CE Cr 742-CE Total No. of Amount No. of Amount No. of Amount Type of Project Projects (Rs 000) Projects (Rs 000) Projects (Rs 000) New 15 17,552 12 45,601 27 63,153 Expansion 19 14,739 24 77,114 43 91,853 BMR 14 9,843 4 2,102 18 11,945 Total 48 42,134 40 124,817 88 166,951 38. Project Implementation. Under Cr. 566-CE subprojects took about seven months longer to begin operations than was estimated at the time DFCC appraised the subproject. Causes of delays included: policy shifts from protected import substitution to liberalized trade, which necessitated changes in project design in some cases; delayi in obtaining site clearances; and construction delays due to the heavy demand for new construction, particularly after 1977. On the other hand, project implementation was facilitated since permit licenses were obtained more rapidly under the new regime. The net effect of these delays was cost overruns of about 22% over project cc3t estimates, mainly in the area of foreign exchange requirements. Under Cr. 742-CE, due to closer scrutiny in implementation and more realistic forecasting by the appraisal staff, the average implementation delay was reduced to 5.5 months. 39. Project Viability. Capacity utilization for projects funded under Credits 566-CE and 742-CE was 75%, which is satisfactory and compares favorably with the overall level of utilization in the industrial sector. However, wide variations by company were noted, ranging from 50% to 95% on an ex-post basis. Financial performance was also satisfactory. The ex-ante financial rates of return for subprojects under Cr 566-CE were 12%-50% with a weighted average of 18%, and 14%-50% under Cr 742-CE, with a weighted average of 20%. Average net profits of 20% were higher than the appraisal estimates for 22 of the 48 projects under Cr 566-CE. In seven cases, ex-post net profit was more than 40% of net worth. Under Cr 742-CE. 16 of the 38 subprojects recorded profitability rates higher than the appraisal estimates. The highest net profit, as a proportion of net worth 70%, was recorded by Regency Garments, a ready made garments firm. 40. Economic Impact. Under Cr. 566-CE, 5,150 jobs were generated compared to the appraisal estimate of 5,600 jobs. Under Cr. 742-CE, 6,075 jobs were generated, compared to an estimate of 5,600 jobs. The capital cost/job ratio for Cr. 566-CE was US$ 2,730 and US$ 5,800 for Cr. 742-CE. The gross foreign exchange earnings (net earnings and/or foreign exchange savings) were US$ 7.5 million for 15 subprojects under Cr. 566-CE, and somewhat higher for projects financed under Cr. 742-CE. The ex-ante internal economic rates of return on a sample of ten subprojects ranged from 15% to 47% with a weighted average of 29%. - 53 - The domestic resource cost (DRC) ranged from Rs 8.90 to Rs 18.60 (below the exchange rate at the time), indicating that most projects were economically attractive; ex-post economic rates of return for the "A" subprojects show a range of 17% to 50%, with an average of 22% (Annex 5). Financial Performance 41. Profitability. DFCC's income statements for FY76-FY83 (Annex 6) indicate that profit before tax increased from Rs 3.9 million in FY76 to Rs 19.4 million in FY83, primarily as a result of DFCC's increased lending volume. A corporate tax rate of 44% (before investment relief and other deductions) left DFCC with after tax income of Rs 15.0 million in FY83, of which Ps 2.5 million was allocated to dividends, Rs 3.0 million to special reserves 1/ and Rs 6.5 million to general reserves. The proportionate dividend rate on the increased capital was 10%. DFCC's administrative costs were 1.6% of total assets in FY83, up from 1.4% in FY76, due to higher supervision coefficients of recent years and increased rental costs for DFCC's offices. Return on equity was 32.8% in FY83 compared to 31.2% in FY82, and 12.4% in FY77, the high percentages reflecting DFCC's small capital base until recently. The debt-service coverage ratio (DSCR) was 1.2:1 in FY83, which is satisfactory. The cash flow statement is shown in Annex 7. 42. Capital Structure. DFCC's balance sheets for FY79-FY83 are shown in Annex 8. Total assets grew frim Rs 223.9 million in FY79 to Rs 683.5 million in FY83, a rate of 34% per annum. Shareholders' equity stood at Rs 143.6 million, of which retained earnings and reserves accounted for 37% and share capital, 63%. DFCC's debt:equity ratio stood at 3.7:1 on March 31, 1983, within the existing 7:1 limit. Portfolio Management 43. General. The quality of DFCC's portfolio is satisfactory, although arrears have increased considerably in recent years. As of March 31, 1983, DFCC's outstanding loan portfolio was Rs 481.4 million. As of December 31, 1982, arrears of principal and interest were Rs 45.4 million or 9.4% of the outstanding portfolio compared to Rs 27.6 million or 6.3% as of March 31, 1982 (Annex 9). By December 31, 1983, arrears had reached 17.3% of tie portfolio, and the percentage of the portfolio affected by arrears (in terms of total loans) was 53% compared with 32% in FY81 and 13% in FY79. About 5% of the portfolio in arrears is in loans to companies operating at a loss or in serious technical difficulties, compared to 0.8% in FY79. Collections as a percentage of total dues (overdues plus amounts fallen due) fell from 80% in FY79 to 64% in FY82 and to 58% in FY83. To counter this deterioration, DFCC's management has instituted monthly status reports for all loans in arrears and equity investments which are late in dividend payments; increased the number of review visits to problem projects to 1/ DFCC's Act requires that at least 20% of annual profits be set aside as special reserves and invested in fixed deposits as long as the subordinated GOSL loan is outstanding. - 54 - two or three times each six-months; accelerated processing of legal action to recover arrears (although progress in the courts is slow); and undertaken more frequent reviews and evaluations of the need for reschedulings (which presently account for about 3% of DFCC's loan portfolio). About 75% of DFCC's arrears are concentrated in 15 companies operating in three subsectors (ready-made garments, hotels and chemical firms). During 1983 the hotel sector recorded the highest arrears, mainly as a result of the ethnic disturbances and the international economic situation. In addition, openings of new facilities in neighboring countries which offer similar conditions reduced the flow of tourists to Sri Lanka. However, current projections for future hotel bookings are good, as Sri Lanka remains popular with European tourists. If these projections materialize, the arrears of the hotel sector should be contained and subsequently reduced. 44. IDA Subprojects. As of March 31, 1982, 38 (41%) of the 93 subprojects financed under Crs 566-CE and 742-CE were in arrears on principal and interest fallen due (Annex 9 ). 45. Equity Portfolio. Due largely to the small private industrial base and the general preference in Sri Lanka for closely held company ownership, DFCC did little underwriting from the mid-1960s until about 1977. However, with liberalization and the encouragement of private investment, DFCC's invest:rent portfolio has increased, and as of March 31, 1983, was Rs 73.6 million (about 15% of its total portfolio), invested in 95 companies (Annex 11). In FY82, the average dividend yield on the equity portfolio was 8.8% compared to 5.4% in FY80. However, 19 of the 31 companies in which DFCC held ordinary shares did not declare dividends in FY82 while 24 of the redeemable preference shares were late in dividend declaration. The real value of DFCC's ordinary share portfolio is difficult to assess, due to the lack of active trading in many of the ordinary shares, while preference shares are not quoted on the equity market; if the shares were liquidated, DFCC could make capital gains on most issues. Over each of the last five years, DFCC has sold off about 10% of its portfolio holdings, replacing the sales with new subscriptions. DFCC intends to continue to make share investments financed from its own resources and from cash generated by selling matured investments. 46. Provisions. DFCC's provisions for doubtful loans and investments increased significantly from Rs. 2.8 million in FY77 to Rs. 9.9 million in FY82 and to Rs 16.4 million in FY83 (or to 3.1% of DFCC's loan portfolio as of March 31, 1983), to match the significant increase in overdue interest and loan installments which have taken place recently. The current percentage does not differ much from historical averages when this ratio ranged from 2% to 3.7%. Provision for doubtful share investments was Rs 1.3 million or 2% of the equity portfolio in FY83. These provisions appear low, although DFCC claims that the risk of losses arising from bad debts also is low, given its liens on the fixed assets of its clients. However, much would depend upon DFCC's ability to sell the liened properties which, in times of economic hardship, could be difficult. DFCC has assured IDA that in light of the rising trend of arrears, it will review its criteria for provisions for bad accounts and will make appropriate adjustments to the provisions. - 55 - VI. ACHIEVEMENT OF OBJECTIVES 47. Institutional Aspects. The objectives of the Credits in this area were: to improve DFCC as an institution through appropriate staff expansion, training, improved appraisal and supervision standards, and through special efforts to increase DFCC's promotional activities (para. 28). Additionally, at the time of the appraisal of Cr 742-CE, in 1976, it was agreed that DFCC should become involved in financing export-oriented and tourist industry projects as well as medium- and small-scale industries. To achieve these objectives, and to upgrade appraisal and follow-up standards, the professional staff was strengthened with the addition of two specialists, one being a market analyst. In addition, DFCC agreed to analyze in more detail the economic impact of its projects and in particular, to calculate the economic rate of return and the domestic resource cost for the larger as well as the medium-sized projects. 48. In the ensuing years, DFCC achieved most of the institutional objectives set at the time of the IDA appraisals. Staff increased gradually and acquired more experience and specialization, although more officers should be hired to even the flow of work, and division of work according to relative priorities should be actively pursued. At present, a few experienced officers carry a heavy work load, which prevents them from spending sufficient time on the more difficult appraisals or on the most serious of the problem projects. 49. The management problems and conflicts that existed in the late seventies created an impasse for several years and undermined staff morale and quality of work. However, the management team which came into office in 1982 has been able to give a new sense of vitality to an already basically sound organization. With the roles and functions between Board and management now clearly defined, the roard should continue to focus on policy aspects and leave day-to-day operating issues to management and staff. DFCC should focus on boosting the quality of work, maintaining the professional integrity of the organization, increasing its promotional activities and finding solutions to the difficult and growing arrears problem. 50. Business promotion and marketing still remain weak areas of DFCC's activities. The Business Promotion Unit should be manned quickly and used correctly. There is investment potential in the country but it can only be identified and brought forward if officers of the Promotion Unit actively search for it; otherwise, many prospects might be lost. The management of DFCC will need to increase their own promotion efforts with owners/managers in the major industrial houses, and initiatives that result from these higher level contacts will need to flow more systematically to officers in the Business Promotion Unit. 51. Appraisal Standards. The appraisal standards of DFCC have been improved over the past eight years reflecting the experience gained by the staff and changes suggested by IDA (and ADB) in the course of subproject reviews and end- use/supervision missions. DFCC officers now undertake financial and economic analyses and DRC calculations on most projects and more recently, DFCC management has adopted the Bank's suggestions for a minimum rate of return standard to be applied to all projects. However more emphasis should be given to the market/ - 56 - demand analysis of subprojects during appraisal; this aspect was neglected in the past, and is also one of the reasons why arrears are increasing in some projects. To DFCC's credit as an institution, there have been very few instances of approval of projects as a result of political pressures, partly because of its private sector nature and its generally good appraisal capabilities. Where arrears arose, they were due in part to changes in Government's economic policies, for example the difficulties which import-substitution projects encountered in the post-1977 era, and the failure of the senior management to respond quickly and resolve problems highlighted in the follow-up reports. VII. ROLE OF THE BANK GROUP AND LESSONS LEARNED 52. Since 1974 IDA has devoted a considerable amount of direct and indirect time to the supervision of Credits 566-CE and 742-CE. Through the supervision/ appraisal process, IDA and IFC took an active role in trying to resolve major operating difficulties e.g. the problems between DFCC's management and its Board. IPC's Board representation allowed the Bank Group, working as a team, to exercise considerably more influence than ADB for example, whose advice was confined to missions alone. IFC's Board Representation was particularly useful in dealing with the tensions at the Board, focusing Board attention on policy issues and matters of substance, and less on divisive arguments on mundane operational matters. 53. IDA could have exercised a more creative role in assisting DFCC to adopt new tools and techniques to cope with the competitive industrial financing environment reflected by the creation of leasing companies, expansion of term lending by commercial banks, and free conversion of the Rupee into foreign currencies. To address a major constraint to DFCC's operations - lack of rupee resources - IDA did initiate discussions with DFCC's management on the possibility of arranging a merger or formal collaboration tie-ups, with one or two of the domestic commercial banks. Partly as a result of IDA's initiatives, DFCC has held recent discussions with commercial banks to areange collaborative financing mechanisms. This should be continued in the future. A more permanent arrangement to secure rupee resources in the future could be a merger of DFCC with a commercial bank, which would provide for full financial packages - term loans and working capital - for their clients; help solve DFCC's perennial problem of inadequate Rupee resources; and provide a pool of appraisal skills and talent to the commercial banks which still have much to learn in project based lending. However, if this possibility is pursued it has to be handled with tact and judgement since not only are jobs threatened by such a development, but the quality and output of an institution. IFC, as a shareholder could play a more active role in this regard, particularly considering its expertise in venture capital transactions and financial buy-outs. 54. At the time of the two Credits, IDA's involvement with DFCC did not encompass explicit trade and industrial policy objectives. DFCC's private shareholding status, and its small size precluded it from having any influence - 57 - with the Ministry of Finance and Planning or the Ministry of Industries. IDA recognized this in the late seventies and through its SMI Credits and the IDP Credit, sought to deal with financial policy, trade issues, and subsector programs more effectively than it could under the DFCC Credit lines. 55. IDA gained some valuable insights by Norking with a small institution such as DFCC. The problems in generating a substantial pipeline and in wielding a significant influence in the promotion and financing of industries were made difficult by DFCC's small size. It could at best be a player at the margin. With the need to provide the more efficient and effective system of industrial financing necessary to foster industrial development, IDA realized that it could no longer work only through DFCC, and expanded its contacts to involve NDB and the commercial banks, as it did under the SMI Projects 1/ (Cr. 942-CE and Cr. 1182-CE). However, IDA chose not to cut its links with DFCC and preserved its eligibility under the IDP (Cr. 1401-CE). IDA recognizes that while DFCC may remain a smaller institution than NDB, it could be a good example of efficiency, professional competence, an innovator of financial techniques; and as an important source of equity investments, play a useful rote in developing stock market operations. 1/ Under the SMI Credits, IDA assisted in forming a banking consortium com- prised of five major credit institutions: the two public commercial banks, Bank of Ceylon and People's Bank; the two locally controlled private commer- cial banks, Hatton National Bank and the Commercial Bank of Ceylon; and DFCC. The IDA funds were placed with NDB for the account of the SMI Fund to cover disbursements for refinancing eligible subloans made by the participating credit institutions under the consortium; the SMI Fund which was established under NDB, was the coordinating authority of the Credits. - 58 - A!!%...1 arVELOPMENT.fINri E CORERATION 0D CEILON DC) Gnrs 56ESj . 742-CI PROJECT COMPLETION REPORT Wchedb of Estimated and Actual Disbursements (US$ 000) QUIT11566-45 t8Eil1A2-Cs Planued Actual Plane Actual Estiua- Z of Estima- I of ted per Per Cuula- total ted per Per Cumula- total Unt OBAteU Cortor Ouarter tive _oan Oarter Oaarter tive loan flM 2nd Qtr. 75 200 200 5 3rd Qtr. 295 600 800 19 4th Qtr. 400 600 1,600 39 WIM 1st Qtr. 400 400 2000 50 2ad Qtr. 600 400 2,400 58 3rd Qtr. 600 400 2,800 67 4th Qtr. 400 400 3,200 77 En lt Qtr. 400 100 39300 79 2nd Qtr. 300 100 3,400 82 3rd Qtr. 230 100 3,500 84 4th Qtr. 200 70 3,570 86 100 1,360 1,360 18 U Ist Qtr. 200 200 3,770 91 300 500 1,860 25 2nd Qtr. 200 200 3,970 96 600 600 2,460 33 3rd Qtr. 200 183 4,153 100 800 700 3,160 42 4th Qtr. 800 550 3,710 49 EMk lst Qtr, 800 514 4,224 56 2nd Qtr. 800 500 4,724 63 3rd Qtr. 800 500 5,224 69 4th Qtr. 700 500 5,724 76 Efl 1st Qtr. 700 500 6,224 83 2nd Qtr. 600 500 6,724 89 3rd Qtr. 400 499 7,223 96 4th Qtr. 300 255 7.478 98 Igg 1st Qtr. 200 35 7,513 99 2nd Qtr. -- ..1. ..I .130I 19. M Total 4,500 4,153 8,000 7,43 Osso mase ImDm&"u m mss waM *m 59 - AfflX 2 Uil l - 60 - ANNEX 3 1 of 2 PEVELOPMENT FINANCE CORPORATION Or CEYLON (DPCC) CREDITS..:CE . 742-CE ZROJECT COMPLKION REPORT Statement of Policy (Adopted by the Board on 4/11/67 and amended on 7/10/69, 9/05/74 and 8/05/75) 1. The function of the Development Finance Corporation of Ceylon (the Corporation) is to further the economic development of Ceylon by assist- ing In the promotion, establishment, expansion and modernization of private industrial, agricultural and commercial enterprises in Ceylon and encouraging the participation of private capital, both internal and external, In such enterprises. Commercial enterprises eligible for financing by the Corporation will include projects in fields such as hotels, transportation, construction and engineering, which are conducive to the economic development of Ceylon. However, the Corporation vill not finance enterprises which are solely en- gaged in trading activities, i.e. the buying and selling of goods. 2. The Corporation will provide finance in the forms which it considers most appropriate and as empovere by the DFCC act, namely, by medium and long-term loans with or without security, by share participation, by under- writing operations and by guaranteeing loans from other sources. 3. The Corporation will assist in promoting the growth of a capital market in Ceylon by selling investments from its portfolio when it can do so on satisfactory terms, and by underwriting security issues in suitable cases. 4. The Corporation will develop and maintain a strong and well-balanced organization capable of appraising the projects financed by it and of assist- ing its clients, if necessary, in the formulation and execution of their proj- ects* S. The Corporation will ensure that every application for assistance is considered on its financial, technical, and economic merits. 6. In considering the amount and form of its financial assistance to an enterprise, the Corporation will take account of the total financial requirements of the project and the soundness of the resulting financial structure for the enterprise. 7. The Corporation will not in normal circumstances manage enterprises which it assists in promoting. It will not seek in any enterprise it finances a controlling interest or other interest which will give it the primary responsibility for management of that enterprise. It will not normally take - 61 - ANNEX 3 2 of 2 up more than 252 of- the issued ordinary share capital of any individual enterprise. Notwithstanding the above limitations, in any case of jeopardy it may take such action as it considers necessary to protect its investments. 8. The Corporation will develop a balanced portfolio by distributing its loans and share investments among the various economic sectors. 9. (a) The aggregate amount of the Corporation's loans to, share investments in, and guarantees on behalf of, any individual enterprise will not normally exceed 202 of the sum of the Corporation's equity and the outstanding amount of the subordinated Government loan. (b) The Corporation will not normally commit to any individual enterprise in the form of share investments more than 102 of the sum of the Corporation's equity and the outstanding amount of the subordinated Govern- ment Loan. (c) The aggregate of the Corporation's share investments will not exceed the sum of its equity and the outstanding amount of the subordinated Government Loan. 10. The Corporation will restrict its long-term indebtedness to a maximum of seven times the sum of its equity. For the purposes of paragraphs 9 and10, the Corporation's equity is defined as the sum of its share capital, surplus and reserves not allocated to cover specific liabilities. 11. The Corporation will protect itself fully against any foreign ex- change risks which it may assume in respect of borrowings which are repay- able in foreign currencies. 12. The Corporation will levy charges for its loans and services which, together with the earnings on its share investments, will enable it to pay a satisfactory dividend and to accumulate reserves consistent with sound financial practice. It will make adequate provisions for bad debts and other losses on investments. In addition to the special reserve the Corporation is required to provide in accordance with the DFCC Act, it will allocate an adequate portion of its income to a general reserve, so as to build up total reserves to a level appropriate to the size and quality of its portfolio of loans and share twvestment. 13. Subject to the restriction of dividends as provided in the DFCC Act and subject to the observance of sound financial policies, the Corporation will pay such dividends to its shareholders as will give them a reasonable return on their investments. sa1 LI.,taA 1DKYKtIrnant VIIAtIcK comIPntseTI01 0V CUYi0 (wfCC1 C#EDITe 566-CB AS 742-CE Actual ad Protected 0oerations (a milling) .1976177 . 1977174 1978179 1979/1m 1980181 . S 198 2 143 ftdj. Act. rroj. Act. ftoj. Act. ftoj. Act. Proj. Act. wroj. Act. roj. Act. A. APPOV.J(NAT) 1. Lcal Curresey Loa0 11.2 5.2 14.1 8.3 15.5 38.3 43.2 20.9 49.6 110.8 51.1 195.4 22.3 10.0 Ivetaca t.. .A& .14 .14 ...1 11 .JA »lae . J. _ I L -L. -JA -I subtotal 16.2 10.7 17.6 13.6 19. 46.9 53.9 24.7 62.0 115.8 11.3 199.6 27.9 13.4 11. vogeIa Cawra~y ukame 40.0 26.4 48.0 48.9 56.0 7P.9 69.6 19.0 78.0 65.2 88.1 11.2 112.8 23. JAv te AUJ m - " -a Saboa 00 29.2 60.0 58.1 10.0 71 10 24.3 97.9 61.1 110.1 blol 141.0 24.0 otal Approvel 66.2 39,9 77.6 71.7 86.4 124.3 141.0 49.0 159.9 183.1 181.4 210.8 168.9 31.4 . " t 3. Loe81 Cureoney L~one 16.0 14.2 14.2 7.5 14.4 16.0 34.1 30.6 46.5 57.8 48.0 13.3 20.1 111.0 "tkot&& 22. 9 M9. 11.9 18.4 26.T 32. 3F43 WIJ 67,7 59.9 ?tof 25.4 114.4 . Foreas ertelcy sa~ 22.3 15.3 34.8 27.1 46.5 37.2 55.5 53.4 67.3 51.0 70.7 79.2 96.7 30.6 bateaste ..L . -14 -AL jLai .. iLI .J.As -I.& -La! 1-iIU .baJ Ud -3&a -IA lkbtotal 28.4 19.5 44.4 29.3 58.3 45.1 68.8 52.3 84.5 52.9 89.3 81.1 120.9 33.1 total loburse~te 51.0 39.3 63.7 41.1 76.7 71.7 121.5 95.6 148.1 116.6 149.2 160.0 146.3 147.1 &Ime Approvte 51.2 31.6 62.1 57.2 71.5 110.2 112.8 39.8 127.6 176.0 145.2 206.6 135.1 31.5 MAalawseet 38.2 29.5 49.0 34.5 60.9 53.2 89.8 84.0 113.7 108.8 118.7 152.5 116.8 141.6 ApPaee 15.0 8.3 15.5 14.5 19.7 14.1 28.3 9.2 32.3 7.1 36.2 4.2 33.8 5.9 aasb>nsua 12.1 9.0 14.7 6.6 15.8 18.0 31.8 11.6 34.4 7.8 30.5 7.5 39.5 5.4 A8fl0 5J21186 1 ak ~ BMaRLafMEn PIIUCE ceaWmest10U 0, CmwMB (d aCC) Cprojtt ~r ~-CB & 742-cD U*tottr canare w9atom SYOPSI8St 5F d'"A SUBPRl400US VINAiNC80 18W83 ClIDIT 743-CE share amet troj.ee subprojaes CapsSaI 0. Ca s able A.ese 2.w.esa 5,.ka1i n 5eo---S Uate DSre Sease: hese.rce feed 8SteuI A-8 5.247.000 705.528 - Donest 442 5?3 509 55.000 - ja Vacftory E1ectrical Evetéeant 8see1cae A-6 *s.793 83,793 - 0..ntt - L1 313 - - ad.33 åt 8.bber 'hread A-7 998.000 450.077 158.477 V.rima 422 21.52 550 8.638 8.30 triet1apessa A-5 375.000 126.966 - Dessette - jS 503 - - - ja 11ihlase patom ^-l2 408.000 246.859 48.0ti gem e 381 458 50 8.200 9.1 £~Epaastn Å-1 8.422.000 16.462 529.11 D~..tlc -9 59 940. 8. .asente #t fac~ory l-a 874.000 3986.047 13M.292 fteemg 362 468 305 1.780 6.7 a* auge sgnees g apane 5-2 532.600 92.680 32.530 Dha.tte - t1 16.92 j2 80 3.300 - t leesIes taeSte 4-3 273.000 39.684 32.550 h.nat 59% -g -lt -5 - ta ~ wasSa tirS 4-4 303.699 911.438 56.426 D.et 283 37 0 3 .91 Factory 30089 read s.re Ortek A-9 5.628.000 504.543 - pae e 668 28'3 j2 - £8 - 1 - .u5 Pelysbem. A-50 :59.000 107.484 - hB.IOt - 5 263 j2 - 0 -jU -¿ Satk tPa. 8..nane asse1 A-13 3.720.000 370.000 55.000 ?aesa 411 21.s3 £a 200 88.650 11.31 leentle seeaBses 4-8s 5.186.000 552.800 536.800 D----a 473 32 204 2s.480 10.55 tpama Wl &sseidety asteeted -14 1.730.000 655.731 - 84esma 403 293 40 43.250 80.08 Carben 119~ rri~ 7~ 3~t fotelef -.94. A-,s ,b... . r..,s.t... S/2p/~ il sP3 Ut~/34 3571 ~ag40a 84 - 64 - ANNEX 6 SRI LANKA 1 of 2 DEVELOPMENT FINANCE CORPORATION OF CEYLON (DFCC) CREDITS 566-CE & 742-CE PROJECT COMPLETION REPORT COMPARATIVE INCOME STATEMENTS, FY76-FY$3 (Re million) Y7 FY7 Y7 U_9 n_ S lIj FY82 FY83 INCOM2 Interest on: Rupee loan. 4.7 6.8 7.1 7.3 25.8 38.1 62.9 82.0 Foreign currency loans 2.0 2.7 4.4 8.8 - - * * Fixed deposits .2 .2 .2 1.9 2.1 1.9 1.4 1.2 Dividends .9 .7 1.2 2.0 .5 1.3 2.9 4.0 Fees & other income .5 .7 .8 1.8 3.3 5.9 5.7 5.6 Gross Income 8.5 11.1 13.9 21.9 31.7 47.2 72.9 92.8 SKPENSES Interest on: Rupee loans 1.9 3.6 3.9 4.7 6.2 7.9 16.2 24.6 Foreign currency loanas 1.3 1.9 3.4 6.7 11.0 15.0 19.9 23.1 subtotal 3.3 5.5 7.3 11.5 17.2 22.9 36.1 47.7 Salaries, etc. .7 .9 1.1 1.5 3.6 5.0 7.0 8.7 Other Ada. Expeupes .5 .6 .7 .9 Depreciation .. .1 .1 .2 .2 .2 .3 .3 subtotal 1.2 1.5 2.0 2.6 3.8 5.2 7.3 9.0 Total Expenses 4.5 7.0 9.3 14.1 21.0 28.1 43.4 56.7 Profit before tax 3.9 4.1 4.6 7.8 10.7 19.1 29.5 36.1 and Provisions Provisions for: doubtful loans - .2 .4 .8 1.5 2.4 3.0 15.1 doubtful investments - - - .1 Adjustm. of prev profit - - - - - - - - PROFIT BEFORE TAX 3.9 3.9 4.2 6.9 9.2 16.7 26.5 19.4 Income Tax 2.2 2.0 1.8 2.5 2.8 4.2 8.2 4.4 NET PROFIT 1.8 1.9 2.4 4.4 6.4 12.5 18.3 15.0 Ratios Set P-ofit/Av.total aest. 2.02 1.68 1.63 2.75 2.16 3.24 3.43 4.25 Net Prof/Aver. equity % 13.36 12.41 11.68 16.70 18.80 27.50 31.20 32.75 Ada. ezp./Av.total asst Z 1.38 1.38 1.38 1.35 1.40 1.60 1.60 1.60 ASPID 5/21/84 - 65,- DE L109EBT NAC 01 C?YLOV (DFCC) CasDts 566-C b 742-4 POJECT COMPLETION REPORT Projected Income Staeneasu 1Y77-VY8 (1s Mi1L@te) Fr77 IT74 nT9 M n81 l5 Interamt tncocia-Lpet 6.3 7.3 8.0 9.0 10.1 11.2 -lor. exchante 2.9 4.6 7.0 10.2 14.0 17.6 Dividends (gross) -Rupe 1.5 1.9 2.4 2.8 3.2 3.6 -ror. exchancc 0.3 0.6 1.0 1.6 2.2 2.9 Cocni Charges 0.1 0.1 0.1 0.1 Other fees and harg 0.4 0.5 0.3 0.6 0.7 0.8 Iaterest on fixed deota 0.2 0.3 0.3 0.4 0.4 0.5 Los on sale of and (/ (0.3) - TOTAL =IOss INC0MB 2 E I 2 j Lntare c xuss-Iupe 3.3 3.9 4.2 4.6 3.2 3.8 -For excang 2.1 3.6 5.6 8.7 11.6 14.9 C~msat charges - - 0.1 0.1 0.1 0.1 AdaScrativt expffmc 1.4 1.6 1.9 2.3 2.6 3.1 Depreclatio - 0.1 0.1 0.2 0.1 TOTAL EXPUSES 9. ~ PROFIT SEFORS = a PTOAIMP0 .al L ..4 A. .a Al. Provision for doubgful 1oan 1.0 0.5 0.8 1.1 1.2 1.1 Provision for doubtful invesaet- - 0.1 0.1 0.3 0.3 0.3 PMTIT M0 T TT TT TA 9 m Intcem Tax 1.6 2.2 2.4 2.7 .4 3.7 NET PROFIT 1 4 4.8. Unappropriaced proftt b/t Secial reserve 0.7 0.7 0.9 1.0 1.3 1.3 General reserve 0.8 1.1 1.8 2.0 3.0 4.3 Dividends (gros) 0.7 1.4 1.4 1.8 1.8 1.8 Unappropriaced profit c/t Pufit before ta and provitsons/ Average total assat* (2) 4.1 4.5 4.5 4.3 4.3 4.2 tit prof Itc/Average equity(2) 13.1 16.3 13.6 15.4 16.6 18.2 Adalstrativs expass./Avarage total sse:a(2) 1.3 1.2 1.1 1.1 1.0 1.0 utvidand Payou& (2) 36.8 43.5 34.1 37.3 29.$ 23.7 ate of dividend (2) 9.0 9.0 9.0 9.0 9.0 9.0 U .and taken over by COtt. T%e log# 1s ca~ed by present land prices and 008L com.ensatton practtice. SRI LANKA DEVELOPMT FINANCE CORORATION OF CEYLON (DFCC) CRE'ITS 566-CE & 742-CE PROJECT COMPLETION REPORT CASU FLOWS - PROJECTalNSw.N.mCTUALS 1975/16 197? 1977/78 1978/79 3979/80 1980181 Rev. Rev. - Actual Proj. Attua1 92jAtu1 A 1roj. , Proj. Actual Pro. Prol. Acetal laternal eas generattoa 2.0 3.5 2.0 5.4 3.5 7.2 5. 9.1 7.4 8.7 10.3 9.6 14.9 laerease In capitel - 4.0 1.8 4.0 6.0 - 4.0 8.0 7.5 - 8.0 0.5 Sorrovtags - Local currenty 19.9 14.0 21.3 11.0 13.7 9.5 7.6 7.9 40.0 23.8 8.7 44.0 43.6 - Forelgo curgeucy 2.8 28.5 19.5 44.4 29.2 58.3 50.6 68.3 69.7 64.0 76.4 85.9 56.7 Repaye~ta from borofier 8.5 9.6 SÅ 11.6 13.2 14.7 13.2 17.8 20.1 20.9 22.7 31.9 22.2 Disposal of share Investants 0.8 1.4 0.5 2.4 0.9 3.6 2.7 4.9 7.0 2.0 6.4 3.4 4.4 Sale of file4 assets - 0.7 0.4 - - - - - - - - Incrase a current liab1Ltae 0.8 0-9 027 0:4 j2 07 t.t 2) . Total 34.8 62.6 94 7_ 2. 9. J 7 13. 152. 124.7 125. 183.0 147.0 LAn 41stnarsemenata - Local currency 19.0 16.0 14.2 14.2 7.5 14.4 16.0 15.8 34.7 30.6 17.4 46.5 57.8 - Fretrn currency 2.5 22.3 15.3 34.7 27.1 46.5 37.2 54.6 55.1 53.4 61.1 67.3 51.0 Share Investaeta 4.3 12.7 9.8 14.9 6.6 15.8 18.0 17.7 31.1 11.5 19.7 34.7 7.8 Repay~cats of boroulag - Local currency 3.5 6.1 7.7 6.3 6.5 9.1 8.2 13.3 7.4 10.1 9.2 28.6 13.7 - foreten currency 3.8 3.8 3.9 4.2 .3.4 6.0 4.1 8.8 13.6 12.6 15.0 12.4 13.6 Acqualttont af fixed assets - 0.2 0.3 3.0 0.2 - 6.6 - 4.2 0.1 0.2 0.3 Special aeserve Fuad Investamts 0.3 0.4 0.4 0.5 0.4 0.8 0.3 1.1 0.8 0.9 1.4 0.9 1.3 Sbare t~u expms~9 - - 0.2 - - - . - 0.1 0.1 - 0.. - alvi4*-46 0.7 1.3 0.6 1.4 0.9 1.4 0.5 1.8 2.2 2.0 1.8 2.2 0.7 j.cre.a. In curret aset 0.7 - 2. - 10.2 - ,, , 2.3 3.4 ,,J9I> .1L2 .e the -tie of D ~CC ø apweaal (September 1976> [g Sev. ?éoj. - aP vleed peojecti-s at he time of a7CC 22 .ggraLss2 ( esember 1979> - 67 - SRI-tANKA ANNEX 8 DEVLOPMENT FINANCE g9RPORATION OF CEYLON (DFgC) CREDITS 56-C8 & 742*CE PROJECT SOMPLETION REPORT Prolected and Audited Salance Sheets, FY1975-1978 (As Millions) TY1975 FY197 FY1977 FY1971 ear Ending March 31 ft-.2i L ho d d EPi AU-4 Pta. ki Loans 69.6 69.4 70.4 82.4 79.2 103.1 118.1 124.4 Ordinary Shares 8.7 8.6 8.4 12.1 8.3 21.5 26.1 27.1 Preference Shares J - - - - - %'btotal 78.3 78,0 78.8 94.5 87.5 124.6 144.2 151,5 Less Provisions .6 _W 1 2 . _J ,1A .6.i _JA1gg Special Reserve fund 2.0 2.0 - 2.3 - 2.7 3.1 3.1 Loans to Staff Fixed Assets 0.9 0.9 0.9 0.9 0.3 0.3 0.3 0.4 Other Assets Subtotal ..9d i 1 .. ..1 W _ .... ....2._ Currey& Asset* Debtors Deposits 6 Accrued Income 2.0 - 2.2 - 2.4 * Temporary Investments 0.2 - - 10.0 CashlBank Balances (Net) 1.1 1.3 1.1 2.0 1.1 4.4 5.9 4.7 Repayments Due Current Assets Subtotal _U _U2 ja _20 J 10A _.M -_Aa Total Assets l& .2 7.2.1 .iu 2.L I. 2 L.. L.. IA. LIABILITIES Share Capital 8.0 8.0 8.0 8.0 8.0 8.0 16.0 15.8 Special Reserve 2.2 2.3 2.4 2.7 2.6 3.1 3.8 3.5 Building Reserve N.B. - - w - - - General Reserve 2.1 2.3 2.4 3.2 2.6 3.6 5.1 5.1 Profit 6 Loss Balance - - * * .,1 .2 -.-= 0i0 Total Equity Subtotal LU ),M. ),, 1,&,Q ,)l IA.t ,4,1 iA7 1 Loan from Government 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 Central Bank Refinance 20.4 20.3 18.4 28.9 19.8 39.4 33.8 48.0 Bank Loans 5.5 4.6 8.6 9.6 9.2 12.7 13.7 10.4 IBRD Loans IDA Loans 22.4 21.5 20.5 20.5 29.1 36.0 52.5 61.8 ADB Loans Other Total Long-Term Debt Subtotal J§A 2.I JU. LUat LlU 1i41 L1i&1 1 137. Tax - 2.2 - 2.7 - 2.6 1.9 1.9 Sundry Creditors - 1.3 - 1.4 - 4.1 4.7 2.4 Dividend - 0.5 - 0.5 0.4 1.5 0.5 Bank Overdraft (Net) - , .., . . . , ... . .... *,,,,A Current Liabilities Subtotal . .st. 1 L _.. .. - Jd - Total Liabilities UI.L ..A . . liM. I. U..M.s.L .iRA Debt:Equity Ratio 5.2:1 4.9;1 4.9: 1 5.4:1 5.4:1 7.1:1 6.0:1 5.6:1 - 68'- SRI LANK ANNEX 8 DEVELOPMENT FINANCE GORPORATION OF CEYLON (DFCC) 2 of 3 CREDITS 56§-CE 6 742-CS PROJECT COMPLETION REPORT Audited Balance Sheets, FY979-1983 (Rs Millions) Year Inding March 31 E11921 Elt80 EX128 112 1 21124 ASSETS Loans 164.5 227.6 314.9 436.5 481.4 Ordinary Shares 13.5 16.9 17.5 22.8 27.7 Preference Shares )2. .0 _,jL ,LL .2j,. Subtotal 206.9 279.5 370.3 498.4 544.3 Less Provisions ...&4. 5-.4.,6 ...-,A .AA Special Reserve Fund 3.5 4.4 5.7 8.2 12.0 Loans to Staff 1.0 1.1 1.8 2.4 3.4 Fixed Assets 0.8 0.8 0.9 1.2 1.2 Other Assets * - * iLL Subtotal ., ..A _.LU,_,. _U.AI Current Assets Debtors Deposits & Accrued Income 5.8 11.7 13.6 22.6 29.3 Temporary Investments 10.0 5.0 4.0 4.0 0.2 Cash/Bank Balances (Net) - * * 6.8 69.0 Repayments Due -A Current Assets Subtotal 11t .iL .L6 33.4 11 Total Assets 23,.9 ,,A ,,.s .LL iV.A LIABILITIES Share Capital 16.0 23.5 24.0 24.0 94.8 Special Reserve 4.4 5.7 8.2 12.0 15.0 Building Reserve N.B. - - - 7.0 10.0 General Reserve 7.1 10.8 18.5 23.0 23.5 Profit & Loss Balance 0.4 0.2 0 . Q .._. Total Equity Subtotal .,U,Ag .,A2 i 66.,3 LUA Loan from Government 16.0 16.0 16.0 14.9 14.9 Central Bank Refinance 45.7 43.7 73.6 139.2 216.8 Bank Loans 11.7 28.6 28.7 26.4 21.9 IBRD Loans. 10.0 7.1 3.8 2.8 1.8 IDA Loans 64.7 106.0 126.6 141.2 123.3 ADB Loans 35.0 46.8 61.6 119.5 142.7 Other Loans 9,,,* .... . Total Long-Ter= Debt Subtotal IV_& 248.2 W.4a 444.0 Ui Tax 2.9 3.6 4.2 7.7 - Sundry Creditors 6.5 4.2 8.8 12.8 17.9 Dividend 1.2 0.7 2.3 2.9 0.6 Bank Overdraft (Net) . . , ..2,A -.., .. ... Current Liabilities Subtotal .A9 .$J j 23.4 _JU1 Total Liabilities 2..1st 3.. . . UlIA. Debt:2quity Ratio 6.53:1 6.17:1 6.27:1 6.7:1 3.7:1 -69- SRI LANKA ANaEX 8 DEVLOPIENT FINANCE CORPORATION OF C&YLON (DFCC) CREDITS -6-C & 742-C8 PROJECT COMPLETION REPORT Proiected Balance Sheets. F-1979-1983 (as millions) Y2*r Indin- IMrch 311 Eful IULt. FIIL ULEI F1.21 Loans 153.6 217.1 295.5 372.2 450.7 Ordinary Shares 41.2 62.5 85.4 107.2 130.0 Preference Shares ) Subtotal 194.8 279.6 380.9 479.4 580.7 Les Provisions .,j _JA J.A ..JA _iA Special Reserve Fuod 3.5 4.4 5.1 6.3 7.9 Loans to Staff - - - - Fixed Assets 0.6 0.7 0.7 0.7 0.7 Other Assets - * -* - Subtotal ...,. J A ,,4 . ...,1jt ..5,A Current Assets Debtors Deposits & Accrued Income - - - - Temporary Investments 10.0 10.0 6.3 - - Cash/Bank Balances (Net) 1.9 4.1 7.2 18.2 16.5 Repayments Due - - - - . Current Assets Subtotal 14. _ 18 1.5 -LL 2 _Ltj Total Assets M,LA7. 2,J, UMgA. 9LL VAL LIABLITIES Share Capital 16.0 24.0 24.0 24.0 32.0 Special Reserve 4.2 5.1 6.3 7.9 10.0 Building Reserve N.B. - - - - General Reserve 6.8 8.4 11.5 16.1 22.1 Profit 6 Loss Balance 9 & .. , 0.1 .1, -.., Total Equity Subtotal .2.. J .i .A AL. ..A_.# Loan from Government 16.0 16.0 16.0 14.9 13.9 Central Bank Refinance 46.3 48.1 50.9 53.9 57.3 Bank Loans 9.9 8.5 7.1 20.6 14.2 IBRD Loars IDA Loans 102.5 176.8 266.0 350.7 434.4 ADB Loans i Other Loans - Total Long-Term Debt Subtotal 1L4. 2 39.29 &QA 112,t Tax Sundry Creditore Dividend Bank Overdraft (Net) Current Liabilities Subtotal Total Liabilities M.& V2IA a..1 22 . 1 .2t.. Debt:Equity Ratio 6.4:1 6.6:1 8.1:1 9.2:1 8.1:1 - 70 - 8I LAA ANNEX 9 SVELOPMURT TINANCE CORPORATION OF CBiLON (DFCC) CREDITS 566-CE AND 742-CE PROJECT COMPLETION REPORT Portfolio Arrears (Re million) 31 March 1976 1977 1978 1979 1980 1981. 1982 Loans Total loans outstanding 62.4 103.1 124.4 164.5 227.6 314.9 436.6 Loans In repayment stage 58.4 as s as na as 305.0 Tocal loans (Principal) affected by arrears 3.9 8.4 16.1 22.1 $3.4 103.1 121.1 Arrears TiRie-pal 0.8 1.1 1.6 3.0 6.0 9.1 17.1 - Interest 0.2 0.4 0.8 2.9 3.8 7.7 10.5 Total 1.0 1.5 2 . 4 US T.8 8 27.6 Arrears of more than one year na 0.9 1.8 4.6 7.2 10.7 22.3 Accumulated provisions for loan losses 2.1 2.1 2.5 3.3 4.6 6.3 8.7 Arrears of principal to: - Total loans outstanding (2) 1.0 1.1 1.3 1.8 2.6 2.9 3.9 - Total loans In repayment stage () 1.4 us as sa as *a 5.6 Arrears affected loans to total loans (X) 4.7 8.1 12.9 13.4 23.5 32.7 27.7 Arrears of more than one year to total arrears (Z) ma 60.0 75.0 78.0 73.5 63.7 60.8 Provisions to total arrears (2) 210 140 104 56 47 38 32 - 71 - ANNEX 10 IEVELOPMENT FINANCE CRPORATI0N Of CEYLON (DFCC) PROJECT COMPLETION REPORT losgo.lionte4 CRUDIT_ 66-4 testal* Instal- IGstal- Loa leest Interest least eeant Interest epaid Balance io arrear io arrest in arrear in arrear to arreT Loans upto as at as at as at as a of as at as at wsof Coear gtantd 19111183 10131183 10131183 1013I183 Logo Sol, 03131182 03/31182- Aitken Spence 6 Co. Ltd. 470 306 164 - 2 * Albasbra Hotels Ltd. 1,284 536 748 - 7 Associated Cables Ltd. 38 38 * * * * Associated motorways Ltd. 2,006 2,006 - * * * * * Brighton Hotels Ltd. 985 271 714 58 41 8 48 - Ceylton Ions Ltd. 103 103 * - * Candy Carments Ltd. 316 169 147 4 * - * Ceylon Hatch Co. Ltd. 2,155 808 1,347 54 14 4 * Ceylon Class Co Ltd. 1,997 795 1,202 472 43 39 156 .29 Ceylon Tobacco Co. Ltd. 1.399 1,399 - - - Ceylon Crushers Ltd. 130 99 31 2 * 6 * * Chemical Indust (Colombo) Ltd. 119 117 2 2 - 100 * * s Germents Indust. 345 244 101 44 3 44 185 - nas Industries 4,793 1,812 2,981 313 130 10 - * ipped Products Ld. 398 153 245 4 5 2 - * Wla Hotels Ltd. 194 84 110 97 6 88 32 3 Gainti Amerstunga 29? 87 210 7 4 3 10 Jiasena lectic Motors 427 342 85 - - * Jiasess Ltd. 495 300 195 * 2 - * Jiadasa Brothers Carmests 18 97 21 21 2 100 2 1 Reai Cables Ltd. 915 554 361 57 14 16 * S Ueedo Ltd. 109 33 76 2 3 2 * Leliths Ralake Indust. 756 357 399 63 27 16 20 aliban Biscuit anto. Ltd. 143 143 - - - - * Moltipacks (Ceylon) Ltd. 376 295 81 58 2 72 37 2 Mets Carmants Indust. 1,278 833 445 445 112 100 - 655 on-Traditional Baterp. Ltd. 118 116 * * * * Palm Carden Hotels Ltd. 68 34 34 3 2 9 * quickshave Ltd. 652 238 414 13 14 3 * 4 Iaautb Peiria 6 Co. Ltd. 496 190 306 83 11 27 * 4 Rishard Peis 6 Co. Ltd. 1,136 509 627 * 8 * tereadib Texprints Ltd. 5,354 5,105 249 * 32 31 Seavaer Aquaria Ud. S 50 * * St. Anthony's Bolts Nuts Ind. 978 $71 407 41 28 10 * 8 St. Anthony's Thermoplastic Ind. 1,327 1,156 171 1 11 * 3 getted Spinning 6 Weaving Hills 784 307 477 46 27 10 * 5 V.P. Sie Indust. 440 403 37 - 1 - * Three Acre farems ,15 *o', TOTAL 33.104 20,717 12.387 1885 55 IS 501 739 08.... u e . ammme &AM s gas - 72- ANNE 10 2 of 5 SRU LAMK DEVELOPMENT INANCE CORPORATION OF CEYLON (DFCC) PROJECT COMPLETION REPORl Equity Shares Invested CREDIT 566-Cg Balance Original Sale/ as at Ordinary Shares Invest=ent Redemption 10/31/83 Associated Motorways Ltd. 300 31 269 Ceylon Tobacco Co. Ltd. 600 8 592 Kelani Cables Ltd. 25 25 - Monta Garmeas Ld. 130 - 130 Nuvara Eliya Hotels Co. Ltd. 200 - 200 Preference Shares Aithen Spence & Co. Ltd, 300 210 90 Associated Cables Ltd. 125 125 Automotive Springs Ltd. 228 146 82 Ceylon Inns Ltd. 30 30 Ceylon Match Co. Ltd. 1,000 400 600 Chemical Indust. (Col.) Ltd. 200 200 s Dipped Products Ltd. 300 220 80 Felix Hotels Ltd. 475 190 285 Hotel Hantanna Ltd. 74 37 37 International Tourists 6 Hoteliers Ltd. 644 251 393 Lady Hill Tourist Hotels Ltd. 130 - 130 Maltipacks (Ceylon) Ltd. 100 100 Monta Garments Ltd. 130 - 130 Nuvara Eliya Hotels Co. Ltd. 155 13 142 Parquet (Ceylon) Ltd. 426 236 190 Quickshavs Ltd. 300 120 180 Ranweli Resorts Ld. 125 98 27 Richard Peiris & Co. Ltd. 1,000 625 375 Serendib Textprists Ltd. 1,000 400 600 Seavater Aquaria Ltd. 23 18 5 Sun and fun Hotels Ltd. 160 60 100 Serendib Holiday lans & Resorts Ltd. 235 235 Galle Face Hotels Ltd. 596 596 - Three Acre Farms Ltd. 2 2 TOTAL .233 4.2.1 Total for Loans & Share Investments 42,137 250113 17,024 ummn mm uinui DEVELOPMENT PINANCE CORPORATION OF CETLON (DFCC) PROJECT COMPLETION REPORT CREDIT ZA2-CS Instal- Instal- Instal- Loan 1ment Interest Iment 1meat Interest Repaid Balance in arreat in arresr in aear in arrear in arrear Loans apto as at as at as at as at of as at as at Name of Comany Grsnted 10/31183 10/31/83 10131183 1131/83. Lan aL, 03131182 03131182 St. Anthony's Bolts 6 Nut* lad. 1,057 499 558 117 41 21 18 14 opan Moore (Coloabo) Ltd. 846 331 515 11 6 2 24 8 Multipacks (Ceylon) Ltd. 553 221 332 276 8 83 92 4 Regency Garments Ltd. 2,132 666 1,466 178 35 12 180 26 Asiakait Ltd. 6,760 2,742 4.019 94 33 2 94 103 St. Anthony's Thermoplastic Ind. 1,122 432 689 - 43 - - 12 wev Ceramic Ind. 80 17 62 48 5 77 21 15 Shernon Soas Ltd. 339 127 212 5 5 2 - - Lake House Printers & Pub. Ltd. 1,896 687 1,208 64 16 5 - - Ceylon Paper Sacks Ltd. 3.881 798 3,084 904 164 29 30 61 Ceylon soscuits Ltd. 8,800 3,664 5,135 183 56 4 92 75 Kelani Cables Ltd. 3,703 1,406 2,298 282 100 12 - 32 Pure Beverages Co. Ltd. 7,642 1,465 6,177 - 11 - - 4 S. A. Perera 6 Co. 1,445 231 1,214 35 14 3 - 18 Lanka Light Ltd. 328 328 - - *- - - General Auto Works Ltd. 794 271 523 7 6 1 - - brova 6 Company Ltd. 500 236 264 49 28 8 - 8 Vickteassingbe Polythene lad. 2,038 899 1,139 34 27 4 - * P&clvell Lanka Ltd. 1,455 517 938 3 12 3 - Rassiri Textile lad. 718 239 479 70 7 i5 - - Metco tadustrial Enterprise Ltd. 543 20 523 236 9 45 141 22 A. K. S. Ltd. 271 - 271 104 159 38 9 73 Rovim Coacrete Works Ltd. 2,072 518 1,554 - 19 - - - Cloweave Rubber Ltd. 6,135 - 6,136 596 2,385 10 - 877 Ceylon Synthetie Textile Hills 6,364 - 6,364 1,591 1,909 25 397 19 Hoonva Metal lad. 397 - 396 176 171 44 - 55 St. Patrick Metal Crushers 378 160 218 - 3 - - - Ceylon Luxury Motel@ Ltd. 228 51 177 8 7 4 - - Dons Beach Resorts (Keg.) Ltd. 939 - 939 313 408 33 - 294 kaada Industries 267 54 213 26 16 12 - 17 eox Textile Hills Ltd. 4,017 - 4,017 957 634 24 - 918 U.-carb Ltd. 11,179 897 10,283 - 127 - *- Bay Bas Opticians 105 48 57 * 1 * * * Swastika Private Ltd. 733 176 557 * 7 - * " Wornels Reet Ltd. 2,358 - 2,358 - 783 - * 37 Ahungalla Hotels Ltd. 7,492 516 6,976 .64 174 1 0 - Lanka Pean Company 833 - 832 $75 340 33 10 100 DVELOPmNT TINAnCE cogPOATION Of camna (Dycc) PROJECT COMPLETION REPORT Loans Granted Instal- Instal- Instal- CREDIT 742-CE Loan lmeat Interest lment 1ment Interest Repaid Balance in arrear in arrear in arrear in arrear in arrear Loans upto as at as at as at as a Z of as at s at Refinance Projects Granted 10131/83 10/31/83 10/31183 20131/83 Loan Bal., 03/31/83 03131/82 Asian Cotton Mills Ltd 12,742 3,133 9,609 - 136 - - 36 Regency Garments Ltd. 1,033 304 730 53 16 7 87 12 Palo Garden Rotels Ltd. 347 96 252 54 16 21 - - Ceylon Papersacks Ltd. 1,033 457 576 150 47 26 18 9 Sado Indust. Ltd. 657 474 183 7 2 4 - - Gloweave Rubber Ltd. 798 1 796 78 289 10 - 106 Pierglobe Ltd. 884 343 541 83 14 .15 - 55 Shermon Sons Ltd. 20744 99 20645 58 68 2 - - Metro Industries 361 140 21 .. s 15 2 - . TOTAL 110,999 23,263 87s736 7,224 8,425 1,225 3,012 Share Investments Balance Original Sate/ as at Ordinary Shares Investment .Redenption 10/31/83 Ceylon Synthetic Textile Mills 2,000 2,000 Asiaknit Limited 1,000 1,000 Aungalla Hotels Limited 2,000 - 2,000 o fti t-A - 75 - ANNEX 10 5 of 5 DEVEOMNT..IINMESCORPORATIOR..7LCITRYZ(HQQI) CREDITS 566-C AND 742-Cg PRQJECT. CONFLETION .85908 Loans Granted CREDIT 742-CE Balance original Sale/ as at Preference Shares Investment Redeeption 10i//83 Asiankit Ltd. 1,000 498 502 Ahungal1a Hotels Ltd. 2,000 400 1,600 Gloweave Rubber Ltd.ited 2,500 - 23500 Palm Garden Hotels Ltd. 299 - 299 Asees Textile Mills Ltd. 750 - 750 Automotive Springs Ltd. 57 23 34 Toppan Moore (Colombo) Ltd. 280 140 140 Ceylon Papersacks Ltd. 500. 200 300 General Auto Works Ltd. 500 300 200 Mayura Garments Ltd. 1,109 211 . 898 Lanka Light Ltd. 375 375 - Metco Industrial Enterp. 300 - 300 Nultipacks (Ceylon) Ltd. 200 160 40 Raniasiri Textile Indust. .., 0 , TOTAL 15,070 2,347 12,723 Total of Shares and Loans 126,069 25,610 100,459 - 76 - i LoA ANNEX 11 DEVELOPMENT FINANCE CORPORATION OF CEYLON (DFCC) CREDITS 566-CE AND 742-CE PROJECT COMPLETION REPORT Portfolio Arrears (Ra million). ---- 31 March -- 1980 1981 1982 Preference Shares Total preference shares outstanding 39.0 37.9 39.1 Shares in redemption stage 22.6 29.5 33.0 Total preference shares affected by arrears 17.3 17.2 19.9 Arrears: - Capital redemption 1.2 2.3 6.4 - Dividend payment 1.2 1.9 3.3 Total 2.4 4.2 9.7 Arrears of more than one year 2.3 3.6 9.5 Arrears of capital redemption to: - Total preference shares outstanding (%) 3.1 6.1 16.4 - Total preference shares in redemption stage (%) 5.3 7.8 19.4 Arrears affected shares to total shares (%) 44.4 45.4 50.9 Arrears of more than one year and total arrears (Z) 95.8 85.7 97.9 Cumulative provision for share investment losses a/ 1.0 1.1 1.2 a/ This provision is to meet losses on the entire share portfolio including equity shares.
Groupe de la Banque mondiale · Project Performance Assessment Report
Sri Lanka - Third and Fourth Development Finance Corporation of Ceylon Projects
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Groupe de la Banque mondiale
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Project Performance Assessment Report
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Sri Lanka
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Banque mondiale