Colombia - Fifth Small and Medium Scale Enterprise Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7493-CO STAFF APPRAISAL REPORT COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPVTSE PROJECT FEBRUARY 9, 1989 Trade, Finance and Industry Division DepartmenL III, Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of July 1, 1988) Currency TUnit Colombian Peso (Col$) US$ 1 Col$ 300.0 Col$ 1 US$ 0.0033 FISCAL YEAR OF THE GOVERNMENT OF COLOMBIA January 1 - December 31 GLOSSARY OF ABBREVIATIONS ACDPI SME Producers' Association BR Central Bank of Colombia CDT Term deposit certificate CF Private development bank CFP Public SME Development Bank DANE National Agency for Statistics DNP National Planning Department DTF Average 90-day rate for term deposit certificates issued by development and commercial banks. FFI Industrial Finance Fund FNGI National Deposit Insurance Fund GDP Gross domestic product ICOR Incremental capital-output ratio IDF Industrial Development and Finance Division of the World Bank INCOMEX National Institute of External Commerce IDB Inter-American Development Bank LIBOR London Inter-Bank Offering Rate MED Ministry of Economic Development NGO Non-governmental organization PFI Participating financial intermediary PROEXPO Export Promotion Agency SME Small and medium scale enterprise SME 4 Fourth Small and Medium Scale Enterprise Project SME 5 Fifth Small and Medium Scale Enterprise Project SOE Statement of expenditures WWB Women's World Banking  FOR OFFICIAL USE ONI STAFF APPRAISAL REPORT COLOMBIA FIFTH SMALL AND MEDItUM SCALE ENTERPRISE PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ......................................... i 1. THE INDUSTRIAL AND FINANCIAL SECTORS ......................... 1 Recent Industrial Sector Performance ....................... 1 SME Structure and Growth ................................... 2 SME Exports ............................................... 3 SMEs and Protection ........................................ 4 SME Employment and Wages ................................... 6 SME Efficiency and Factor Intensity ........................ 7 Financial Sector Institutions and Performance .............. 7 2. INCREASING THE DEVELOPMENT CONTRIBUTION OF SMEs .............. 9 National Objectives and SME Policy Agenda .................. 9 The SME Credit System ..................................... 9 Increasing SME Credit Volume and Access ................. 12 Directed Credit ..... ......... 13 Administrative Efficiency ............................... 15 Technical Cooperation ...................................... 16 Microenterprises ........................................... 17 Overall Policy Environment ................................. 18 3. THE PROJECT ..............-. . . . . 18 Relation to the Country Lending Strategy ................... 18 Lessons from Past Bank Assistance to Colombian SMEs ........ 18 Objectives, Strategy and Beneficiaries ..................... 19 Description ............................ 20 Credit Program .......................................... 20 Structure .............. ............................. 20 SME Financial Policies .............................. 21 Institutional Development ........................... 22 Technical Cooperation .................... 23 Cost and Financing ......................................... 23 Relending Terms and Conditions ............................. 23 Project Implementation ..................................... 24 Administration and Oversight ............................ 24 Procurement and Disbursement ............................ 25 Accounts, Auditing and Reporting ........................ 26 Benefits and Risks ......................................... 26 4. PROJECT AGREEMENTS ........................................... 27 This report is based on the findings of an appraisal mission which visited Colombia in July 1988. The mission comprised Messrs./Mmes. J. Hanna (Senior Financial Analyst and Mission Leader), K. Hallberg (Economist), and H. Jackelen (Consultant). This document has a restricted distribution and may be used "y recipients only in the performance of their official duties. Its contents may not otherwise be disc^ised without World Bank authorization.  - ii - SUPPORTING GRAPHS IN THE TEXT Page No. Graph 2.1 Total SME Credit by Banking Institutions, 1970-86 .... 10 Graph 2.2 Total SME Credit by Banking Institutions, 1980-86 Share of SME Credit Through CFP ................... 10 Graph 2.3 FFI Credit to SMEs, 1970-87 .......................... 11 Graph 2.4 FFI and World Bank Credit to SMEs, 1980-87 ........... 11 Graph 2.5 Use of FFI and World Bank Credit by CFP, 1980-87 ..... 15 SUPPORTING TABLES Table 1.1 Industrial Sector Growth Rates, 1967-86 .29 Table 1.2 Industrial Sector Share of GDP, 1967-87 .30 Table 1.3 SMEs by 4-.Digit SITC Classification .31 Table 1.4 SME Exports by Subsector, 1980-86 .32 Table 1.5 Financial Indicators of All Commercial Banks, 1980-87 .33 Table 1.6 Financial Indicators of Private Development Banks (CFs), 1980-87 .34 Table 2.1 Composition of All Credit to SMEs, 1980-85 .35 Table 2.2 Volume and Compostion of Institutional Credit to SMEs, 1980-87 .36 Table 3.1 SME 5 Detailed Financing Plan .37 Table 3.2 SME 5 Interest Rate Structure .38  - iii - ANNEXES 1. Status of Bank Operations ..................... ................ 39 2. Experience Under Past Bank Lending for SMEs .................. 44 3. SMEs and the Environment ..................................... 48 4. Participating Financial Intermediaries ....................... 49 Corporaci6n Financiera Popular .......................... 50 Private Development Banks ........................... 52 Commercial Banks ........................................ 53 Recent Financial Indicators ............................. 55 5. Microenterprise Program .60......... ................ 60 6. Credit Terms and Conditions a) The Fondo Financiera Industrial (FFI), Existing and Proposed under SME 5 .................. 66 (b) FFI and the Proposed Bank Loan under SME 5 . . 69 (c) Past and Proposed Bank Loans to Colombia for SMEs ....... 72 ?. Guidelines for the Restructuring Program . . . 75 8. Technical Cooperation Program . . . 79 9. Estimated St.hedule of Bank Loan Disbursements . . . 80 10. Key Indicators for Project Implenmentation . . 81 11. Documents Available in the Project File . . . 83 MAP IBRD 18370R  - iv - STAFF APPRAISA9L REPORT COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT Loan and Project Summary Borrower: Banco de la Republica (BR) Guarantor: Republic of Colombia Beneficiaries: Small and medium scale enterprises (SMEs) in manufacturing, mining and related service industries with total assets of less than US$1.0 million equivalent. Loan Aijount: US$80 million equivalent, to be repaid in 17 years, including 5 years of grace, at the standard variable interest rate. Relending BR would relend the proceeds of the loan to participating Terms: financial intermediaries (PFIs), pegged to the fully variable average deposit rate of the Colombian banking system (DTF). BR would relend in local currency and would bear the foreign exchange risk since the free market DTF rate has reflected over the long run expectations of currency adjustment and thus contains an implicit foreign exchange risk premium. Relending rates to SMEs by PFIs would be determined by the PFI according to the maturity, credit risk, operational cost and competition for each SME loan. Guidelines would establish an allowable maximum of DTF+4 percentage points in 1989 and DTF+5 percentage points in 1990 for SME loans carrying the minim.um 4 year maturity. Maximum inte.:est rates to SMEs and the margins of PFIs would be progressively increased for loans with longer maturities, up to an additional one percentage point for maturities up to 10 years. Project The proposed Project is intended to accelerate the growth Description: rates of value added and employment creation of SMEs, mainly by: (a) making modest changes in public policy and institutional mechanisms influencing SME access to longer- term credit; (b) engaging Colombia's commercial and development banks as SME loan intermediaries and the resources of these entities for this p rpose; (c) simplifying Bank loan processing and increasing technical cooperation to SMEs; and (d) preparing studies and recommendations during project implementation on policies influencing capital intensity, business establis}ment and operations, to help promote a neutral policy environment for SME development. Project resources would be committed over about a two-year period during CY1989-91.  Project Risks: The central project implementation risk lies in the ability of commercial banks to adapt their appraisal and supervision work to SME lending. To mitigate this risk, PFIs would make clear organizational, staff and financial resource commitments -a the Project with the support of staff training prior to Project start-up. Estimated Costs: Local Foreign Total -------US$ millions- Credit program 154.9 80.0 234.9 Technical cooperation 0.2 __0.2 Total 155.1 80.0 235.1 Financing Plan: %Total Enterprises 54.1 54.1 23 Financial intermediaries 43.7 43.7 18 Industrial Finance Fund 44.1 44.1 19 Other Domestic Sources 13.2 13.2 6 World Bank _ 80.0 80.0 34 Total 155.1 80.0 235.1 100 Estimated Disbursements: Based on average profile for SME Bank loans in Colombia ---------------- US$ millions ------------------ FY 89 90 91 92 93 94 Annual 0.3 9.7 20.7 27.7 15.8 5.8 Cumulative 0.3 10.0 30.7 58.4 74.2 80.0 Rate of SME loan approvals would require at least an 11 percent Return financial rate of return  COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT 1. The Industrial ard Financial Sectors Recent Industrial Sector Performance 1.01 The 1967-74 period witnessed strong growth and diversification of industrial production in Colombia, both as a result of import substitution and export market penetration. The industrial sector showed its highest growth since World War II, with manufacturing value added increasing at 8.6% per year in real terms, forming an increasing share of GDP (see Tables 1.1 and 1.2). In addition, industry's contribution to employment creation was high, labor produ-tivity exceeded the increase in real wages, and capital-output ratios fell markedly. 1.02 An overvalued foreign exchange rate and other macroeconomic management problems associated with a boom in world coffee prices were substantially responsible for a fall over the 1974-80 period in the average annual value added growth rate to 4.8%. Overtaken by growth in the service sector, the share of manufacturing value added in GDP began a steady decline that was to continue through the early 1980s. With the end of the coffee boom in the early 1980s and other external shocks, combined with domestic structural problems and a macroeconomic policy framework which was generally unfavorable to industrial development, manufacturing value added declined by an average of -0.1% per year during the 1980-83. This period was characterized by stagnant domestic and foreign investment, low rates of employment creation, low factor productivity and a serious deterioration in the financial condition of enterprises. 1.03 A period of macroeconomic adjustment beginning in 1984 saw both GDP and industrial output recovering more quickly in ColcAbia than in the rest of Latin America, propelled by substantial real devaluation in 1985, the coffee boom of 1986, and Colombia's relatively sound macroeconomic management. During 1984-86, manufacturing value added rose by 4.9% annually, compared to 3.0% in the rest of Latin America. Industrial value added continued to grow in 1987 at 5.9%, with industrial exports (excluding nickel) increasing by 35% in U.S. dollar terms. 1.04 A sense of confidence generated by the recent impressive macroeconomic performance and industrial growth is tempered by several Factors. First, the level of industrialization in Colombia, as measured by the share of manufacturing value added in GDP, is at 21.6%, still below its 1974 peak of 23.5%. In addition, the 4mportance of the industrial sector in Colombia has been and continues to be less than in other Latin American countries. Second, much of the recent growth in manufactured exports may be attributed to real exchange rate devaluation rather than to structural change and improved efficiency in the industrial and financial sectors. The authorities feel that, as the demand effects of the coffee boom fade,  - 2 - the industrial sector must increase its international competitiveness if growth is to be sustained. The Administration has consequently focused heavily on increasing industrial efficiency as a central theme in ita 1987-90 National Plan. Finally, recent industrial growth has been achieved at considerable resource cost, reflected in increasing ICORs. Future rates of growth ih industrial output and exports are likely to be lower than in recent years ulnless policy reforms address the lack of competitive pressure, both domestic and international, and barriers to real and financial resource mobility. Alternatively, attempts to maintain industrial growth rates at recent levels under the existing policy framework would require increasingly high resource costs which would make future adji:stment more difficult. SME Structure and Growth 1.05 In 1985, small and medium scale enterprises (SMEs)l accounted for 93% of the 6406 formal sector firms with more than 10 employees in Colombia. While SMEs produced about one-third of total industrial output (13% by small scale enterprises, 25% medium scale) and value added (11% small scale, 23% medium scale), they accounted for over half of industrial employment (small scale enterprises accounted for 22% and medium-scale enterprises another 30%). The importance of SMEs has remained fairly constant during the past ten years in relation to some 450 large scale Colombian industrial enterprises, following the heavy industrial import substitution phase of the 1950s and 1960s in which large firms increased their share of industrial activity.2 1.06 Small scale enterprises were particularly hard hit during the recession of the early 1980s, possibly as a consequence of a relatively stronger impact of the restrictive import regime of the period, lower access to working capital to support operations during poor sales performance, and more fragile marketing systems. Manufacturing value added of small scale enterprises fell -40.4% and -17.5% in 1980 and 1981, compared to -9.6% and -0.4% for the industrial sector as a whole. Medium scale enterprises were able to maintain more stable value added growth rates during the 1980-83 period. During the recovery phase initiated in 1984, however, small scale enterprises showed more dynamism than either medium scale or large enterprises, with value added growing at an annual average of 22.3% during 1984-85, compared to 4.6% for medium scale firms and 7.4% for large enterprises. 1/ In this section, firm size is defined according to number of employees: microenterprises (fewer than 10 employees); small scale enterprises (10 to 49 employees); medium scale enterprises (50 to 199 employees); and large enterprises (200 or more employees). For purposes of the project, however, "small and medium scale enterprises" are defined as enterprises with total assets less than US$1.0 million equivalent. 2/ Pinto, Juan S, and Arango, Juan F. La Pequena y Mediana Industria en Colombia. Situacion y Perspectivas. Universidad Externado de Colombia, Bogota, 1968. Also, additional DANE date for 1984-85 provided by ACOPI.  1.17 In 1985, SMEs generated more than half the total value added in 27 of the 94 four-digit industrial subsectors (see Table 1.3). These include apparel, shoes, leather products, wood products and furniture, metal products and machinery. SMEs are also prominent in food, printing, rubber and plastic products. The participation of SMEs is notably lower in su^h concentrated industries as textiles (dominated by a few large firms but under increasing competition by medium scale firms employing modern technology), beverages and tobacco, clay and cement, glass products, basic metals, and petroleum refining. About 69% of SMEs are located in Colombia's four principal cities (Bogota 33%, Medellin 17%, Cali 12%, and Barranquilla 7%) and the remainder mainly in smaller cities. SME Exports 1.08 Industrial exports, responding to a favorable real exchange rate, grew from US$624 million in 1934 to US$875 million in 1986, though still falling short of the 1980 level of US$949 million (Table 1.4). Recent data show continued strong growth: during the first four months of 1988, registrations of industrial exports were 21% higher in dollar terms than during the same period a year earlier. Growth in exports of ferronickel (114%) was an important factor in this expansion; non-nickel industrial, exports were 14% over their 1987 values. 1.09 The export orientation of small scale enterprises is generally low, due primarily to lack of knowledge of external markets and export procedures, other fixed costs involved in exporting, more restricted access to credit to handle export risks, and inability to satisfy the quantity and quality requirements of external markets. In all but five 4-digit industries (in food products and leather goods), small firms export less than 10% of their production. 1.10 Medium scale enterprises have a stronger external orientation than do small firms, exporting more than 10% of their production in 14 of 94 4-digit industries. Large firms export more than 10% of production in about the same number of industries, though the particular industries differ. In many subsectors -- e.g., milling, cotton weaving, leather goods, plastics, non-electric machinery -- medium scale enterprises export a larger share of their production than do large firms. Mainly as a result of exports by medium scale firms, direct exports by SMEs as a group contributed fully 43% of total industrial exports in 1986 (Table 1.4). SME exports in 1985 accounted for more than 50 percent of exports in four branches -- food processing, furniture, paper products and non-ferrous basic metals. In four others, SME exports constituted between 40-50 percent of total exports---other wood products, plastics, metal prod:cts (excluding machinery and equipment) and "other" industries. 1.11 As in the case of production and value added, SME exports have been more variable during the 1980s than exports from larger enterprises. During 1981-84, SME exports declined more rapidly than those of larger firms (-16.2% for SMEs versus -4.2% for large enterprises), while their recovery rate was more rapid than that of large firms (29.3% for SMEs  versus 12.0% for large enterprises). Preliminary data indicate that subsectors in which SMEs are concentrated have been the most responsive segment of industry in Colombia's recen industrial export expansion. However, by 1986 SMEs had not yet regained the share of total exports they accounted for in 1980. SMEs and Protection 1.12 The Colombian industrial sector is characterized by distortions in product markets and factor markets, which are created or reinforced by economic policies. The most significant policy-determined distortions stem from the trade regime, financial policies (dealt with in the proposed Project) and, to a lesser degree, from labor market tegulations (paras. 1.23-1.24). Factor markets providing labor and capital inputs to SMEs are substantially free of distortioas, particularly relative to larger enterprises. This is corroborated by evidence from Colombia as well as other countries which suggests that differences in efficiency across industrial firms are often correlated with firm size, as small and (particularly) medium-scale enterprises frequently outpace larger enterprises in various measures of efficiency. 1.13 The trade policy reforms made since 1984 and supported by two World Bank loans (the Trade Policy and Export Diversification Loan of 1985 and the Trade and Agricultural Policy Loan of 1986) reduced the average level and the dispersion of tariff rates, but did not significantly change the protection granted to domestic production by quantitative restrictions. Ave,age tariff rates were reduced by 31 percentage points and their standard deviation was halved between 1984 and 1988. Currently the unw' ghted average tariff rate is 27.4% for raw materials and intermediate goods, 22.9% for capital goods, and 42.9% for consumer goods. Ir. addition, a surcharge of 18% of the c.i.f. value applies to all imports, and some imports are also subject to a sales tax. Tariff receipts are substantially reduced by an extensive system of exemptions for both the public and private sectors. A recent pzoposal for tariff reform would reduce the number of rates to five and would reduce the dispersion of rates, but would still leave a wide variation in the levels of effective protection and would afford the greatest protection to those industries with low domestic content. 1.14 Colombia's system of import licenses remains more important than tariffs in determining the structure of protection, particularly during periods of foreign exchange scarcity. Where INCOMEX believes zhere is domestic production of sufficient quantity and quality, import licenses are not granted. While the number of tariff positions subject to prior licenses or prohibitions fell during the recent reform period, the reduction did not completely reverse the import protection measures introduced in the early 1980s. Currently, about three fifths of tariff positions are restricted by licensing requirements, compared to less than a third in 1980. In 1987, the foreign exchange budget available for prior licenses was only about 54% of the value of applications for these licenses.  - 5 - 1.15 According to preliminary results of Bank sector work, coverage of domestic manufacturing by licenses or prohibitions fell from 99.7% in 1984 to 82.1% in 1988, which remains high by international standards. For example, in Venezuela, the coverage of domestic manufacturing by quantitative import restrictions is 49%; in Mexico, the production coverage by quantitative restructions fell from 100% to 20% during the first three years of the reform program; Chile and Bolivia have no system of quantitative restrictions on imports. 1.16 With respect to output markets, the available evidence suggescs that industries (at the four-digit classification level) in which SMEs are important receive about the same protection as industries in which larger firms dominate. For example, there is no significant correlation between output coverage by import restrictions, and either average firm size or the output contr4bution of SMEs. Similarly, four-digit industry estimates of nominal protection calculated using tariffs do not appear to be related to average firm size in the industry. 1.17 On the input side, however, the distortionary effects of the import regime are significantly lower for SMEs than for larger enterprises. SMEs use fewer directly imported inputs than do large enterprises. In part, this is due to the administration of the licencing regime. During times of greater foreign exchange scarcity (or anticipated future scarcity), the priorities assigned by INCOMEX to prior license applications sometimes favor large firms. In addition, INCOMEX will consider the employment impact of denying import licenses, which also tends to favor large firms employing more workers. More impor.antly, SMEs use fewer directly imported inputs because of their lacic of information about external markets and the fixed costs of direct importing, of which bureaucratic obstacles are a major component. These costs involved in direct importing cause SMEs to substitute locally produced inputs or "indirect imports" bought off-the-shelf from direct importers. 1.18 Prices of indirect imports of raw materials, intermediates and capital goods are often significantly higher than those of direct imports. During times of foreign exchange scarcity, the premium paid for indirect imports is of course even higher. In these times, INCOMEX also frequently favors applications for direct imports by manufacturing enterprises over those by commercial distributors, in effect severely restricting the supply of indirecrt imports for SMEs. The oligopolistic structure of markets for indirect imports may also be an important factor determining their high prices, and this concentration of sellers is encouraged by the INCOMEX practice of approving prior licenses based on historical import records of the applicant. 1.19 Prices of alternatives, domestically produced inputs (when reasonable substitutes are available), also exceed ths prices of directly imported products. There are a number of examples of final goods produced by SMEs in which the domestic markets for intermediate inputs are highly concentrated (and substantially protected by the trade regime)-- e.g., garments (with concentration in textiles), plastics (with concentration in  - 6 - petrochemicals), furniture (with _oncentration in certain wood products), alnd metal products (with concentration in basic metals). It should also be noted that SMEs often pay higher prices for the same domestically produced :Input than do large enterprises, simply because the scale of production of thc latter allows greater access to quantity discounts. 1.20 In sum, due to economies of scale associated with direct importing and the administration of the import licensing system, SMEs use a greater proportion of indirect imports or locally produced goods, usually purchased at higher cost, than do larger firms. As a result, effective protection of SMEs is often lower than for large enterprises. With respect to exports, similar conclusions apply: though the administration of incentives does not appear to discriminate against SMEs, their use of them is 'Less profitable at lower scales of production. In addition, with respect to PROEXPO credit, collateral and counter-guarantee requirements of the National Guarantee Fund impede SME access to this export incentive. SME Employment and Wages 1.21 Open unemployment in Colombia has been and continues to be high. The unemployment rate reached 14-15% in the mid-1980s, fell to nearly 10% toward the end of 1987, and subsequently climbed to 11.9% in June 1988. The growth rate of labor supply is likely to remain high into the 1990s, particularly in urban areas, in view of high birth rates prior to the 1960s and the more recent increase in women working in the formal marketplace. These factors, combined with persistent socio-politlcal unrest, have led the Government to assign a particularly high priority to employment creation and socio-economic development among lower income segments of Colombian society. 1.22 The creation of new SME firms accounted for about half of all industrial employment growth during 1953-78. Such firms had rates of employment creation (15% per year) which substantially exceeded the average for all SMEs (about 5%) .5 During the recessionary period of the early 1980s, SMEs were relatively more stable employers than were large firms, as they adjusted to declining output by lowering wages rather than the number of workers. Full-time employment in the industrial sector fell by about 70,000 jobs (13.5% of the industrial labor force) in the early 1980s; of this reduction, 83% was accounted for by large firms. 1.23 Remuneration per employee in SMEs averages only 40% of the that paid to employees of large firms, though in a few four-digit subsectors, e.g., some clothing, non-electrical machinery, and petroleum and coal derivatives industries, labor in medium scale firms are paid more than large firms. In most industries, both wages/salaries and non-wage benefits are highest in large firms, followed by medium scale and small scale enterprises. The higher labor remuneration in large firms is apparent for skilled and unskilled worker categories. This is partly due to the fact that workers and managers in SMEs are less specialized than their large- enter'rise counterparts. 3/ Cortes, Berry, and Ishaq. Success in Small and Medium Scale Enterprises: The Evidence from Colombia. The World Bank, 1987.  - 7 - 1.24 SMEs tend to be less subject to distortions created by labor market policies. Current labor legislation makes no distinction according to size of firm regarding non-wage benefit requirements. However, large enterprises tend to pay higher "extra-legal" benefits as a result of agreements negotiated with unions, which are predominant in large firms, and because of lower turnover rates in large firms. SMEs also tend to use a greater proportion of workers from the "informal" labor market, at lower labor costs and with greater flexibility in the allocation of workers to different tasks within individual firms. On balance, then, SMEs are less subject to distortions created by labor market policies. SME Efficiency and Factor Intensity. 1.25 Capital-labor ratios in SMEs are lower than in larger enterprises: in the industrial sector overall, the value of fixed assets per employee in small scale enterprises is about one-third that of large firms, while it is about one-half in the case of medium scale enterprises. Within most three- digit subsectors, it is still the case that capital-labor ratios increase with firm size. During 1975-83, capital-labor ratios in medium scale firms increased relative to those in large firms, while the reverse was true in small enterprises. The lower capital intensity of SMEs is also reflected in lower levels of value added per employee, by about the same proportions, and in higher output/capital ratios. 1.26 The study by Cortes, Berry and Ishaq cited above suggests that technical efficiency, in addition to being associated with operating levels in relation to the optimum scale of production, is predominantly correlated w"-h the personal characteristics of the entrepreneur (skills, education and previous job). EntreDreneurs whose skills are limited to production tend do to rather poorly because they find it hard to organize other aspects of the business. While nearly 90% of those surveyed go to fairs or read trade catalogs and magazines, technical improvements reflect mainly an entrepreneur's learning by doing in the firm, knowledge acquired in a previous job, and technical cooperation. Empirical evidence from the study shows that many SMEs have an impressive capacity for technical change, even without help from outside. It found that smaller firms are able to adapt technology according to the changes in its financial situations, market access and factor prices which they face and that technical change tends to be diffused from one firm to others with labor mobility and the movement of workers from the factory to their own enterprises. Financial Sector Institutions and Performance 1.27 Credit in the Colombian financial system is dispensed by some 96 intermediaries, ranging from commercial banks to savings banks, development banks, savings and loan corporations and trade finance companies. The Central Bank, Banco de la Republica (BR), also plays a significant role in credit markets through its management of the directed credit system and external credit lines. Commercial banks are the central players in the financial system, accounting for more than one-third of the total outstanding credit, and have by far the largest branch network (over 1,800 offices) across the country.  - 8 - 1.28 The Colombian financial system has experienced substantial difficulties in the 1980s. Financial intermediaries encountered an increasing inability of a broad range of borrowers to repay as a result of sharp changes in relative pri. es over 1976-82, high real interest rates in combination with stagnation in aggregate demand, and relaxed credit standards applied to their affiliates in the real sector. As a consequence, net profit as a share of equity of the commercial banking system fell progressively over 1980-85 from 10.1% to negative levels while total arrears (under and over 1 year) as a share of equity rose from 7.0 to 20.4% and total assets in relation to equity increased from 10.1 to 39.6. The financial performance of private developments banks (CFs) was far less drastically affected overall, though reflected similar tendencies (Tables 1.5 and 1.6). 1.29 The Government has taken a number of steps to redress the financial sector's weak conditions and underlying problems. In 1982, it set restrictions on interlocking ownership of financial and industrial entities and on the portfolio concentration of financial institutions. Over 1983-85, it increased the yield on forced investments from 8 to 15% created a racility to help recapitalize the system by financing the purchase of equity and quasi-equity ir. financial and industrial enterprises at subsidized rates, created a Deposit Insurance Fund (FNGI), nationalized the banks in greatest trouble (Cr Grarncolombiana and Banco de Colombia) and used the FNGI to lead workout exercises and to provide financing to other banks. 1.30 More tecently, Colombia has moved ahead under the reform of the Andean Pact Decision 24 to seek foreign investment in the financial sector in order to increase capitalization and efficiency of intermediaries. It has designed reforms in legislation for receivership ("concordato"), which currently favors debtor firms over creditors in the workout process. In addition, it has changed the interest rate structure for its industrial directed credit lines by converting them from fixed to fully variable rates. The average level of interest rates charged to enterprises was also raised to about 2 percentage points above the average 90-day rate for term deposit certificates (DTF). And at year-end 1987, the Government made adjustments to reduce the low yields and illiquidity of forced investments by reducing the share of institutions' assets subject to forced investment (from 16.5 to 15.5%), increasing their effective yield (from 15.2 to 17.4% though still remaining significantly below the 26% inflation rate), making forced investment paper negotiable and permitting about half of reserve requirements to be met by them. 1.31 The condition of the banking system, supported by strong aggregate demand growth and relatively sound macroeconomic management over 1986-87, has slowly improved since its 1985 lowpoint. After-tax profit reached 5.6% of equity, arrears fell as a share of equity to 14.4% and total assets in relation to equity dropped to 11.2, comparable to its 1980 level. Nevertheless, steady progress needs to continue in order to bolster the solvency, liquidity and efficiency of the system and to letter support development of the real sector. In particular, the forced investment  system needs to be gradually phased out (see para. 2.10), incentives and mechanisms strengthened to restructure non-performing portfolios (para. 3.11c and Annex 7), fiscal disincentives to write off bad debts removed, and new financial instruments and services promoted, such as investment banking, venture capital and medium-term bond markets. These issues are currently under discussion with the Government in the context of Bank sector work and preparation of other projects. 2. Increasing the Development Contribution of SMEs National Objectives and SME Policy Agenda 2.01 Colombia's current development strategy, the 1987-90 National Plan, views SMEs and microenterprises primarily as important instruments to increase productive employment, income and output -- especially among lower income groups. They have demonstrated their ability to provide employment creation in a capital efficient fashion, and a large share of the country's SME output---particularly in agroindustry, apparel, household goods, construction materials and metal mechanical products---is oriented toward low-income users' needs rather than large import-substitution industries, which tend to produce primarily for higher income groups. 2.02 The Cortes, Berry and Ishaq study referred to in the previous section suggests that larger firms among SMEs have higher average benefit- cost ratios, explained statistically by their access to finance, entrepeneurial skills, and type of technology rather than by size itself. These findings are reinforced by a recent survey on the determinants of investment by the private sector in Colombia, in which SMEs ranked the availability of funds as clearly the most important factor determining the investment decision. The public policy agenda, much of which is already identified in the National Plan, should thus concentrate on three main areas to accelerate SME development: (a) increased access to institutional credit facilities tailored to SME needs; (b) increased access to vocational training and technical cooperation, particularly that which supports resolution of enterprise-specific problems in production, management and marketing; and (c) a more neutral policy environment in order to expand the potential scope of benefits from SME development. The SME Credit System 2.03 Colembia's credit markets are characterized by a strong dualism in which SMEs are served almost exclusively by the subsized directed credit system eid the extra-banking market, while larger industry is associated with the commercial banking network. Available data on investment and credit flows to SMEs over 1980-85 suggests that formal banking institutions intermediating SME directed credit - the Corporaci6n Financiera Popular (CFP, the specialized public SME lender), Caja Agraria, CFs and commercial banks - financed a steadily diminishing share of SME investment financing (Table 2.1). Bank credit fell from 33 to 211 of total investment as firms resorted increasingly to internal cash ger:eration (52 to 59Z) and suppliers' credits (10 to 15Z); the extra-banking financial market accounted for a relatively stable 3-62 of the total.  - 10 - Graph 2.1 Total SME Credit by Banking Institution 1970-86 900 80 83 9. 0 838.7 8004 804.7 / 71. 700w 693 9 6 5.0 0 600 0 54.6 8 55-3 o 5~~~~~~~~~~~~~~~~~~~~~~~~6.6 500- 447.062 .1 60- .3 5.5 300 - 1970 1972 1974 1976 1978 1980 1982 1984 1986 Volume im Real Terms Graph 2.2 Total SME Credit by Banking Institution 1980-86 65.7 66- 64 - 62 - 605. 54- o 52- w 49.5 so- o 48 0 46- 44 -44 42~~~~~~~~~~~~~~~ 40- 38- 36- 34 34 1980 1981 1982 1983 .1984 1985 1986 Shore of SME Credit Through CFW  - 11 -- Graph 2.3 Total FFI Credit to SMEs 1970-87 460 - )40.3 420- 39 9.4 400- 380 9 360 347.2 to ~~~~~~336.5 o 340 - o 320 t 300 t 280 -7 1 15 '/olumc 260 Reoi Term .0 260 24 .2 24 7 36.7 240 -232.2 c 200 180 16 .5 160 1 . 140 2 120- 1970 1972 1974 1976 1978 1980 1982 1984 1986 Volume in Reol Terms Graph 2.4 FFI & Wo'rld Bank Credit to SMEs 1980-87 2802 261.2 260- 240 -367 220 215.2 200- c iso - ~~~~~~~~~~~~~~~~16.k5 o 160- 02 140- O 120- H .0 100 80~~~~~~~~~~~~~~~~8. 60 -7. 1980 1981 1982 1983 1984 1985 1986 1987 Volume mn Real Terms D World Bank + Total FFI  - 12 - 2.04 At the same time, the volume of SME credit provided by formal banking institutions has fallen in real terms almost steadily since 1979 from about Col$850 million annually to under Col$350 million in 1986 (in constant 1970 Col$) to a level lower than that ir 1970 (Table 2.2 and Graph 2.1). This decline is likely to have been a consequence of falling SME investment levels during the early 1980s and a decline in their debt service capacity, as well as changes in the financial system---increasing real interest rates, decreasing use of directed credit by commercial banks and CFs, and shifts to larger enterprises which were perceived (in retrospect, probably incorrectly) to be better credit risks. Notwithstanding the overall real decline in SME formal credit, CFP increased the real value of its new lending over 1980-83 and maintained it in an irregular fashion over the course of the preceding Bank-financed project (SME 4, covering 1984-87). Consequently, CFP's lending as a share of total formal banking credit to the SME market nearly doubled over 1980-86 from 34 to 66% and probably continued to grow in 1987 (Graph 2.2). 2.05 Among banking institutions, sources of longer-term funds for SME lending have tended to emanate mainly from the Government's directed credit line, the Industrial Finance Fund (FFI) a.'d the World Bank. The value of FFI resources utilized by these institutions has fallen substantially over 1978-87, to the extent that it was lower in 1987 in real terms than when the FFI was established in 1968 (Graph 2.3 and para. 2.10). Over a similar period, the volume of Banik funds become of comparable importance for SMEs (Graph 2.4). In fact, the maintenance in the real value of CFP's lending, the major user of both sources of funds, was made possible exclusively by the Bank's loan under SME 4. As a consequence, the Bank's share of total CFP outstanding borrowings increased from 41 to 64%. 2.06 Increasing SME Credit Volume and Access. Use of institutional credit from CFs and commercial banks by SMEs is very low, constituting about 0.2% of their total 1987 estimated commitments. It is funded almost entirely by the Government's FFI directed credit facility and is strongly positively correlated with enterprise size. Credit supply to SMEs by these institutions appears, according to interviews during prcject preparation, to have been constrained mainly by (a) the scarcity of resources in the system, (b) the absence of longer-term maturities of such resources, which are critical to SME lending, (c) the opportunity cost incurred by not lending to large, well-established clients, and (d) a general lack of an active marketing and promotion strategy by most of these institutions. As a consequence, SMEs frequently turn to the informal market or seek no credit at all. 2.07 Nevertheless, CFs and commercial banking intermediaries have the potential to offer the SME market wider access to credit, a broader range of banking services, more efficient intermediation and greater responsiveness to its changing needs. The Government's 1986 tax reform has effectively led financial institutions to seek new market segments and provide new services to sustain growth. By progressively reducing corporate tax rates from 40 to 30% through 1990, and eliminating double taxation on dividends and the deductability of the inflation portion of  - 13 - interest costs, the reform provides incentives for traditional bank borrowers to reduce the share of indebtedness in their capital structure and increase internal cash generation for investment. Those institutions interviewed consider SMEs to be the next natural market into which to move and one in which enterprises are relatively creditworthy. 2.08 These institutions can help to promote the expansion of SME capacity as well as increases in efficiency of existing capacity. A significant number of SMEs require financial and physical restructuring efforts to enhance efficiency and loan repayment capacity. Specific restructuring exercises are needed to deal with an array of SME problems, ranging from high levels of customer receivables which have diminished working capital, to high debt service aris partially from informal money market obligations and to more fundamental problems associated with inadequate prior investments and technolo7ical obselesence. 2.09 The proposed Project would represent a promotional and transitional step to stimulate increased SME credit volume and lending by private CFs and commercial banks. To this end, the project would offer the following incentives to such institutions: (a) a source of long-term funds approximating short-term deposit rates with no liquidity (short-term refunding) risk (para 3.18); (b) adequate profitability via flexibility in pricing new SME loans according to cost, risk and competition (para 3.19); (c) lower administrative cost via more streamlined administration in the use of domestic directed and Bank credit lines (para 3.11 b) and (d) flexibility in the definition of expeaditures eligible to finance workouts of existing non-performing SME loans (para 3.11 c). The following paragraphs of this section discuss the institutional and policy aspects of these areas. 2.10 Directed Credit. The directed credit system in Colombia is funded primarily by forced investments of financial intermediaries, which represent about 15Z of commercial banks' loan portfolios and carry substantially negative real interest rates despite the recent rate increases by the Government. Forced investments have been established by law to finance agricultural development, public debt and low-income housing, and by the Monetary Board to finance industrial activities, other housing and to recapitalize the financial sector. 2.11 The system not only promotes fragmentation of financial markets but increases spreads and raises market interest rates, creates barriers to the mobilization of financial resources and distorts factor markets. An analysis of marginal interest rates paid by the industrial sector in 1982 showed that rates exceeded 25Z per year in real terms on 60Z of its indebtedness while rates of -4 to 8Z prevailed for the 23Z of the debt originating from the Government's directed credit system. Interest rate differentials, while not as drastic today, persist with average effective commercial lending rates in June 1988 approximating 13Z in real terms (43Z nominal) alongside effective directed credit rates averaging about 7% (372 nominal).  - 14 - 2.12 Directed credit to SMEs is channelled primarily through the FFI, created in 1968, to rediscount loans made to industrial enterprises with total assets up to Col$140 million (US$467,000 equivalent) to cover fixed asset and incremental working capital needs. While all CFs and commercial banks are eligible intermediaries, in practice three public entities with a central mandate to support SMEs (CFP, Banco Popular and Caja Agraria) utilize the majority of the funds. The remaining FFI resources are utilized Dy commercial banks and CFs, which so fund nearly all their SME loans. 2.13 Commercial institutions have stated clearly that the FFI is not a commercially attractive proposition because of lengthy procedures, documentary requirements and rigid conditions for its use. These necessitate specialized staff, make its profitability marginal at best and thus lead CFs ar.d banks to limit themselves to other markets. One main deterrent to the use of FFI under the present system is the establishment of obligatory enterprise production and other investment-related targets. FFI's focus on increasing output and immediate job creation largely excludes those enterprises which seek funds to reduce production costs and increase productivity without necessarily expanding employment in the short-term. Insofar as increased efficiency is likely to lead to increased product demand, enterprise expansion and employment creation, this narrow focus does not best serve the FFI's own objectives. 2.14 Other aspects of the present FFI system stifle its use: (a) long processing times for subloan applications, as FFI loans must be approved both by the intermediary and BR (CFP reports an average of 107.5 days from application to disbursement, of which 50 days for approval of BR); (b) high administrative costs associated with SME loan processing and supervision, especially for smaller loans; (c) high and costly rejection rates of SMEs' second loan requests under FFI (89% in CFP), due to their ineligibility if they have not met targets under a prior FFI loan; (d) inflexible loan conditions, with maturities of less than 5 years for fixed asset and construction financing, inadequate grace periods and the requirement that firms capitalize within the maturity period an amount equivalent to the loan; and (e) an inability to finance secondhand equipment already used in Colombia.4 Some of these restrictions (particularly (d)) may place undue financial pressure on SME borrowers and be substantially responsible for the disproportionate share of non-performing assets associated with FFI lending. For CFP, FFI non-performing assets were 41.6% of all CFP non- performing assets, though the FFI portfolio represented only 21.0% of its total portfolio. The figures for Bank-financed loans were 2.2 and 46.2%, respectively. 4/ SMEs less than 5 years old were found, according to Cortes, Berry and Ishaq, to have nearly twice the share of used equipment as older ones. Its cost, possibly one-quarter to one-third that of new, can substantially influence capital requirements and the feasibility of market entry.  - 15 - 2.15 The stagnation in the use of FFI resources reflects widespread discontent by the banking system with these many conditions and administrative requireL.ents. It has also resulted during SME 4 in Bank resources substituting for rather than complementing the use of domestic resources. Over 1984-86, FFI commitments fell on average 19.6Z in real terms, commitments of Bank funds grew by 38.7Z (the loan was fully committed by September 1987). This follows a pattern in which CFP's use of FFI has been inversely proportional to the availability of Bank funds (see below). Graph 2.5 Use of FFI & World Bank Credit by CFP 1980-87 3.2 3 2.8- 2.6- 2.4- 2.2- la 2 un 1.8 o 1.4 E 1.2 0.84 0.6 1980 1981 1982 1983 1984 1988 1986 1987 Loan Commitmn,tst 0 FF 4 World Bank 2.16 Some progress has recently been made toward reducing the rigidities of FFI. BR has adopted automatic rediscounting for FFI credits up to Col$2 million (about US$6,700), reducing the elapsed processing time for some credits. However, the need to increase substantially access to SME credit and to shift BR's role from ex ante project approval to ex post supervision of the institutional performance of financial intermediaries requires further change as outlined under the proposed Project (para. 3.11 b). 2.17 Administrative efficiency. The administration of SME lending by financial intermediaries and the Bank is also of concern given the already high operating costs of the banking system and the need for simplicity by  - 16 - SMEs. A study was carried out in 1986 by the SME producers association, ACOPI, of about 150 SME users through CFP and commercial banks around the country.5 It concluded that an average of 7.5 months was required between credit application and disbursement, undoubtedly influencing the ability of many SMEs to invest, promoting the use of extra-banking market credit and closing off access entirely to some SMEs. 2.18 From the SME perspective, institutional requirements for credit applications themselves represent a serious development obstacle. The study identified some 12 basic documents required for credit applications, which in addition to basic financial data included the tax returns and personal financial statements of principals, social security reports, registrations and certificates related to the Chamber of Commerce, real estate and equipment, banking and commercial references, property valuations, and property and personal life insurance. Collection and presentation of this information took on average about one-third of the elapsed time between loan application and disbursement. Once gathered, processing is frequently hampered by technical staff shortages, centralized decision-making and low priorities accorded (by private commercial intermediaries) to SMEs. 2.19 Some changes to reduce administrative time and expense are underway in these areas. The Superintendency of Notaries and Registration has begun to decentralize and computerize its operations. Requests for banking references have been reduced in favor of credit reference searches through the Bankers' Association, and efforts have begun between intermediaries and BR to seek more unified lending criteria. Further efforts are required, however, as proposed under the Project to streamline credit processing (see paras 3.21 and 3.25). Technical Cooperation 2.20 More effective technical cooperation (TC) in support of SMEs is needed to help them to increase competitiveness and to reduce credit risk to lenders. The study by Cortes, Berry and Ishaq cited above suggests that entrepreneurs whose skills are limited to production tend do to rather poorly because they find it hard to organize other aspects of the business. Firms with less than 20 workers do participate in general administration and management training. It is freely available, mainly from CFP and the national vocational training service in Colombia, SENA. Larger SME firms, more frequently receive assistance on production issues from SENA, which has a staff of about 60 persons involved in this program nationwide. ACOPI, PROEXPO (the national export promotion agency), and several universities also provide such services. They together provided help, ma:nly in the form of courses and seminars, to some 2,300 SME participants in 1987. 2.21 Despite this help, however, surveys of SMEs reflect a strong interest in advisory services for individual enterprise problems, particularly in the areas of quality control, bulk purchasing of production 5/ El Ejemplo Colombiano en la Agilizacion del Credito de Fomento a la Pequena y Mediana Industria. ACOPI 1988.  - 17 - inputs and product marketing. Individual support is at a premium (only a total of 250 SME received such assistance in 1987), as priority is accorded by SENA and others to their group outreach programs. CFP, in collaboration with local SENA staff, helps to identify TC needs during appraisal and supervision of its SME loans. To help increase the provision of assistance in such areas, the proposed project would support through its financial intermediaries the promotion of expanded distribution sers.ices which provide bulk purchasing of production inputs and product marketing for SMEs. It wculd also finance the cost of private sector consulting services to expand TC for specific production, quality control, and other problems confronting SMEs (para 3.06). Microenterprises 2.22 A great deal of interest and activity has been generated in Colombia by both public and private business sectors about those who are largely self-employed by forming small informal production units, or m3.croenterprises (entities with fewer than 20 workers). Informal microenterprises probably directly employ about 450,000 people (1975), or as many as the formal industrial sector itself. It is estimated that over one-half are operated by women. Such operators tend to have very modest formal education and lack extensive marketing, business organization or financial management experience. 2.23 Colombia has become a laboratory for local initiatives in support of microenterprises. Non-governmental organizations (NGOs) endowed by the private sector provide a combination of credit, courses in business management and on-site counselling. Among foundat!.ons led by the Carvajal Group, training in business administration is a prerequisite for credit to such enterprises. They have been supported since 1980 by credit from the Inter-American Development Bank (IDB), which recently made a US$7 million loan available for this purpose. During 1987, over 1,800 businesses received loans averaging US$1,200 under this project. Results so far, in terms of repayment of loans accorded to graduates of the training program, have been very good. 2.24 The proposed project would seek to complement the IDB's support by orienting assistance through CFP and the Caja Social de Ahorros (CSA), a private bank experienced in lending to microenterprises, to (a) those who have already acquired adequate education and professional experience to establish an enterprise, and (b) those microenterprise groups supported by other NGOs in Colombia. In the former category fall those leaving manufacturing with experience to set up their own ventures and many with post-secondary school training (the largest single category of those currently unemployed in the country). In the latter category fall enterprises backed by organizations such as Solidarity Group, a set of eleven NGOs (including Women's World Banking in Colombia), which operate successful programs providing credit and technical cooperation to enterprises. The proposed program 'ould offer credit on formal market terms to microenterprises benefitting from assistance of these NGOs and would also finance the expansion of the advisory services of such NGOs (see Annex 5).  - 18 - Overall Policy Environment 2.25 Intervention to reduce capital market failure and to diffuse specialized knowledge in support of SMEs is more productive with a more neutral policy environment in which SMEs and large industries operate. More equal access to economic inputs and to development incentives is also likely to increase the labor-absorbing capacity and competitiveness of industry overall. 2.26 Under Colombia's import regime, difficulties in obtaining raw materials at reasonable prices and quality and in importing capital goods have been frequently mentioned by SMEs in surveys as primary constraints to operations. These increase uncertainty of supply and raise prices of capital goods, production inputs and spare parts for SMEs above those for larger firms (para. 1.17). Other drawbacks for SMEs are frequently found in investment incentives which favor large firms, burdensome registration, tax laws and other regulations which discourage setting up and legalizing SMEs, and large volumes of subsidized and venture capital for heavy industrial development. The proposed Project would support preparation of studies which would analyze the above-mentioned areas and make recommendations as warranted for changes in the policy and regulatory en-ironment influencing the capital intensity of industry, business establishment and operations to helr gain a more neutral business environment for SME development (para 3.15). 3. The Prolect Relation to the Country Lending Strategy 3.01 The Government's key medium-term development objectives are to sustain economic growth at 4-4.5% per year while maintaining fiscal and monetary discipline; increase export diversification and maintain creditworthiness; and reduce poverty and unemployment. The Bank's country strategy calls for emphasis on project loans with selective support from policy-based operations to help achieve these aims. The Government's 1985-86 Reform Program, supported by two Bank trade-related loans, has led to a relatively satisfactory macroeconomic policy framework in which to pursue this strategy at the sector level. The proposed Project would be an instrument mainly to help reduce policy, institutional, and credit constraints associated with SME development (see Statement of Loans and Credits to Colombia in Annex 1). Lessons from past Bank Assistance to Colombian SMEs 3.02 Four Bank loans totalling $92.5 million have been made to SMEs in Colombia over the past thirteen years. All have been intermediated by the public development bank established especially to support such enterprises, the Corporacion Financiera Popular (CFP). The fourth loan was fully committed in September 1987 and 95% disbursed in October 1988. All of these operations have principally focused upon generating employment and  - 19 - the development of CFP as a financial intermediary. These project have been successful in stimulating growth in employment and in increasing the quality of CFP's development banking services. They have made very littli progress, however, toward reducing the administrative cost of CFP's operations and tackling policy issues influencing SME performance (ref. PPAR No. 2645 for Ln. 1071-CO of 1979; PCR of April 1983 for Ln. 1451-CO; PCR of April 1986 for Ln. 1834-CO, and Annex 2). The experience gained in these projects has inspired more attention under the proposed Project to changes in policy and institutional "actors, which are equally important constraints to SME development as the lack of available credit. The Project also places increasing emphasis on raising efficiency and incomes of SMEs, which should also help generate increased employment over the medium-term. In addition, it would focus increasingly on the provision of technical advisory services to SMEs to resolve enterprise-specific production, management and product marketing problems. 3.03 The proposed Project also aims to reverse the trends of declining volume of institutional credit to SMEs and increasing concentration of flows through CFP by expanding the level of SME lending, relying more on private CFs and commercial banks, and introducing a specific component for microenterprises. Continued emphasis would be placed on increasing the capacity of CFP to efficiently intermediate SME credit by promoting a more competitive environment for SME lending. At the same time, to reduce the high share of Bank indebtedness in CFP's liability structure and to stimulate increased domestic market resource mobiLization, the Project would provide for limitations on the share of CFP commitments financed by the Bank's loan. Objectives, Strategy and Beneficiaries 3.04 The development objectives of the proposed Project would be to increase SME value added and employment creation. This would be done mainly by: (a) making changes in public policies and institutional mechanisms influencing SME access to long-term credit; (b) expanding the number of financial intermediaries making SME long-term loans and the volume of their own resources mobilized for this purpose; (c) simplifying loan processing and increasing technical cooperation to SMEs; and (d) preparing sector-wide industrial studies and recommendations during Project implementation on policies influencing capital intensity, business establishment and operations to help promote a neutral policy environment for SME development.  - 20 - 3.05 The project would be expected to support over its two year commitment period at least 2,500 existing and newly created SMEs and 2,000 microenterprises. Based upon past experience, direct job creation should exceed 14,000 positions, most likely to the direct benefit of the relatively young (about 77 percent of the unemployed in Colombia are 12-24 years of age). Productivity gains reflected in increased wage levels and other improvements in existing enterprises would complement employment creation, and be expected to help alleviate the poverty inberent in low incomes, long working hours and poor health and safety conditions. Description Credit Program (total cost, US$ 234.9 million) 3.06 The credit program would support SMEs and microenterprises in manufacturing and associated service sector businesses (e.g., repair shops and spare parts dealers) with total assets of less than US$1.0 million equivalent. The program would finance SME loans or equity investments for the purchase of machinery and equipment, spare parts, construction and/or purchase of industrial building facilities, and permanent working capital needed to increase SME productivity and expand production capacity. It would also finance technical cooperation to expand enterprise-specific support services for SMEs, responding to the expression of many Sl4Es for help in areas such as production, marketing techniques, organization and management. Such services would also include assistance to identify and adopt solutions to pollution and other environmental hazards being created by SMEs (Annex 3). Such financing would be made available in connection with a PFI's financing of pre-investment work, an SME investment, or in support of the investment itself. 3.07 Structure. All development and cummercial banks legally constituted in Colombia would, in principle, be eligible as participating financial intermediaries (PFIs) of the proposed Project. Many are keenly interested in expanding their markets beyond their current exposure to a relatively small number of large clients, consumer finance and credit card operations (para 2.07). Interested intermediaries irould be qualified as PFIs upon satisfactory review by BR and the Bank of the following eligibility criteria: (a) certification by the Superintendency of Banks that the intermediary is in good standing with respect to overall operating policies and practices, financial condition and reporting requirements. The standards of the Superintendency are satisfactory to the Bank for the purposes of the proposed Project; (b) for CFs, that it meets the operating and financial standards established by the CF Reform Act of 1987, which embrace virtually the same standards as set under past Bank DFC projects. It provides inter alia for a minimum share of long-term loans in a CF's portfolio (50Z), a minimum level of capitalization (US$2.1-2.3 million), and a maximum debt/equity ratio (10:1) (Annex 4); and  - 21 - (c) a satisfactory examination of its organization, staffing, loan appraisal and supervision procedures for SME lending under the Project. 3.08 Seven CFs and six commercial banks have expressed their desire to participate in the credit program, meet the iligibility criteria, and would constitute the initial PFIs: (CFs) Caldas, Del Norte, Nacional, Colombiana, Santander, Suramericana, and Valle; (commercial banks) de Bogota, Cafetero. de Colombia, Comercial Antioquefto, Popular, and Occidente. Their participation, with their 1,300 branch offices throughout Colombia (versus the 17 of CFP), would substantially increase the geographical and numerical coverage of the SME market. They are likely to focus on larger enterprises in the SME market, which tend to have stronger operating, management and marketing skills. CFP would continue to be a principal intermediary under the Project. It specializes in lending to SMEs with less than 20 employees, a market segment highly correlated with labor-intensive industrial subsectors, lower investment costs per job created and SMEs outside major urban areas (Annex 4). 3.09 Each PFI would conclude a Participation Agreement with BR, renewable annually, to protect the rights of the borrower and the Bank and to enable obligations to be carried out per the Loan Agreement. The Participation Agreement would specify inter alia indicative SME loan commitments under the Project, the need to maintain an adequate overall financial condition, employ an adequate number of staff capable of managing the portfolio of Project resources, and ensure proper control and provisions for SME arrears. As a condition of loan effectiveness, BR would conclude and duly execute Participation Agreements with at least three PFIs whose aggregate indicative commitments exceed 40Z of the Bank's loan amount and one Managing Institution for the microenterprise program (see para. 3.10). A financial rate of return calculation, market evaluation, technical and management assessments would be prepared for SME loans in excess of $100,000. A cash flow analysis would be undertaken for loans below this threshold. SME loan approvals would require at least an 11 percent financial rate of return. 3.10 Lending to microenterprises under the rcredit program would be implemented by two Managing Institutions, CFP and the Caja Social de Ahorros (CSA). As second-tier banks, they would appraise the capacity of NGOs, and approve and supervise credit lines to these organizations (Annex 5). 3.11 SME Financial Policies. Under the proposed Project, changes in regulations and management of financial resources destined to support SME investments would be made in order to increase SME credit access and to encourage more diversified participation by CFs and commercial banks as PFIs. Simultaneously, this would support the on-going adjustment process in the financial sector by helping to reduce distortions in resource allocation, adjust the pricing of credit to reflect its cost and associated risk, and upgrade portfolio quality and profitability of those few financial intermediaries which are already significant SME lenders. Agreement was obtained during negotiations on the following policy changes:  - 22 - (a) Definition of SMEs: increase the enterprise total asset ceiling which constitutes the definition of SMEs from the present US$467,000 (Col$140 million) to US$1.0 million (Col$300 million) and provide for annual corrections according to the full amount of inflation. This step, which became law in December 1988, would just recover the real value of the indicator at the outset of the SME 4 project (Col$100 million in 1984); (b) Adjustments in FFI Credit Regulations: revise FFI regulations so as to (i) eliminate interest rate subsidies and expand financial margins to PFIs, (ii) extend maturities and grace periods, (iii) expand eligible expenditures to include imported used equipment, (iv) adopt substantially higher automatic rediscount ceilings and simplify documentation to reduce loan processing time and cost, (v) adopt repayment performance as the key ex post monitoring criterion, (vi) relax capitalization and production target requirements, and (vii) eliminate the discretionary bases for cancellation of already approved rediscounts (Annex 6). The implementation of these measures would be a condition of loan effectiveness; and (c) Restructuring Program: make a provision for a broader definition of eligible expenditures under the credit program for enterprises preparing well-defined restructuring plans aimed to reduce output costs and increase productivity of existing assets of SMEs. Expenditures to be financed via SME loans or equity would include goods and services associated with such items as product research and development, marketing and distribution network development, labor relocation and retraining, and acquisitions where the utilization of capacity is substantially below subsector averages. The Bank's loan would provide a fresh injection of funds for such plans, generally in conjunction with rescheduling, quasi-equity, debt/equity conversions and/or write-offs of existing loans of PFIs (Annex 7). 3.12 Institutional Development. Like many commercial financial institutions, CFP's financial condition suffered considerably during the early years of SME 4 (1984-85) from rising non-performing assets, falling financial margins and high administrative costs. Despite improving performance over 1986-87, this cut into its capital base such that its 1987 debt/equity ratio was 16.7. With capital injections for 1988, it reached 7.5 by year-end. CFP's administrative cost as a share of average total assets for 1988, 6.9Z, has not complied with the covenant under SME 4 of 6.0 (ref. Annex 2). 3.13 The proposed Project would establish a financial framework for CFP and the Government, defining the following targets which they would need to meet in order to maintain CFP's eligibility as a PFI: (a) attainment of the 6.02 administrative cost target in 1989 and 5.5X in 1990 under semi-annual monitoring arrangements, (b) attainment of a net after-tax profit/total average assets ratio of 1.02 in 1989 and 1.6? in 1990; and (c) a debt/equity ratio not to exceed 7.5:1 from 1989. BR's rediscounts for CFP using the Bank's loan, while having minimum access to US$25 million, would also be limited to 352 of CFPs total commitments over 1989-90 in order to reduce its high share of CFP's indebtedness (ref. Annex 4).  3.14 Most of the other core PFIs have a limited amount of SME lending experience. Although they generally do not presently maintain separate units within their organizations for such lending, a focal point exists for management of directed credit lines and represents a reasonable starting point upon which to build their Project participation. Each has agreed to designate a specific entity responsible for its SME lending program, allocate specific staff to it, and tailor its lending regulations and procedures as required. Most of the core PFIs, with the exception of Banco de Colombia, tend to rank above the banking system average with respect to overall return on equity, portfolio quality, net capital and institutional efficiency (ref. Annex 4). Given that lending of Project resources is not expected to exceed 1 Z of total new loan commitments of these institutions over the commitment period, no explicit conditionality on institutional financial performance is warranted. Technical Cooperation ($0.2 million) 3.15 Technical cooperation (TC) amounting to US$200,000 would be included in the Project, to be prepared and financed by BR, to assist in preparation of in-depth policy studies. These would be intended to improve the basis for a dialogue with the Government on steps which might be required to modify the regulations and policies influencing capital intensity, business establishment and operations so as to help establish a more neutral policy environment for SME development (Annex 8). Cost and Financing 3.16 The Project's total cost is estimated at US$235.1 million. This takes into account projections of total SME credit demand for CY1989-91, commitments in principle by PFIs, which are significantly higher than SME 4 particularly in view of the Project's broader network of financial intermediation, the increased scope of enterprise eligibility, and simplification of FFI and other administrative procedures. Of the total cost, US$80 million or 34 Z represents direct and indirect foreign exchange requirements. To finance the Project (Table 3.1), SMEs themselves would cover an average of 23 Z (US$54.1 million) of total Project cost from internal sources. The proposed Bank loan of US$80.0 million equivalent would meet foreign exchange needs, while financial intermediaries would mobilize an estimated 18Z (US$43.7 million), and FFI and other public domestic sources utilized by CFP (mainly PROEXPO) would cover the remaining 25 Z (US$57.3 million). Relending Terms and Conditions 3.17 The proposed Bank loan would be made to BR at the standard variable rate with the guarantee of the Republic of Colombia. BR would bear the explicit risks of interest rate and cross currency fluctuations and pay the standard Bank commitment fee of 3/4 of one Z per annum. The loan would be repaid in equal principal installments over 17 years, including a five-year grace period. Any surplus of repayments from SME loans made by the Project's PFIs to BR over amounts due to the Bank by BR would be recycled to PFIs per the Project's legal agreements.  - 24 - 3.18 BR would relend the proceeds of the loan for the credit program. BR would rediscount 80 Z of the total SME loan or equity investment amount and charge an interest rate in 1989 equivalent to DTF minus 1 percentage point to CFs and DTF for commercial banks; one percentage would be added to each rate in 1990 and these rates maintained thereafter. The difference between the rates to CFs and commercial banks reflects the lower average cost of funds of the latter, which have substantially gr2ater access to demand and time deposits than CFs. As the DTF rate has ov.r the long-term reflected international interest rates plus expectations of the local nominal devaluation rate, the interest rate risk would be implicitly borne by the PFI and passed on to SME beneficiaries. Maturities of funds relent to PFIs would match those set for SME clients. 3.19 The individual SME loan and cumulative financing limits for any one SME would be US$0.5 million. Maturities of between 4-10 years with 1-3 years of grace would be established for financing of fixed assets, restructuring plans and technical cooperation. Permanent working capital would carry maturities up to a maximum of five years including up to one year of grace. Flexible pricing by PFIs to client SMEs would be encouraged for the credit program by setting interest rates according to the maturity, credit risk, operational cost and competition for each SME loan. However, guidelines would establish an allowable maximum of DTF + 4 percentage points in 1989 and DTF + 5 percentage points from 1990 for SME loans carrying the minimum 4 year maturity. Maximum interest rates to SMEs and the margins of PFIs would be progressively increased for loans with longer maturities, up to an additional one percentage point for maturities of 10 years (Table 3.2). Such rate limits would recognize the probable oligopolistic tendencies in financial markets which drive up rates to beneficiaries. This structure would place the maximum project lending rate to SMEs above the "prime" rate (DTF + 3) to large-scale industrial enterprises, though slightly below average commercial lending rates, and 4-6 percentage points above the effective interest rates of the SME 4 Project. The long-term maturities of the Bank's loan would permit PFIs to compensate higher interest rates with longer maturities when necessary to meet cash flow requirements. Project Implementation. 3.20 Administration and Oversight. The proposed Project would be administered by BR as the "second-tier" institution. To allow for maximum financial and administrative autonomy of PFIs, its role would be kept to a minimum consistent with accountability for the use of Bank funds. Specifically, it would (a) qualify and supervise compliance with eligibility criteria for PFIs, (b) review rediscount applications above the free limit for PFIs, (c) provide ex post monitoring of SME loan appraisal, supervision and portfolio quality, (d) disburse and account for Project resources, (e) aggregate and analyze Project implementation indicators, and (f) ensure compliance with the Project's Loan and PFI Participation Agreements. BR has an adequate organizational and staff capacity to carry out these responsibilities given in particular its experience in second- tier operations with Bank-financed DFC projects.  - 25 - 3.21 Several steps would be taken to reduce administrative requirements for the Bank's loan in order to reduce cost and elapsed time of SME loan processing for PFIs and to simplify the process for SMEs. The Bank's free limit for ex ante approvals by BR of SME loans would be set at US$400,000, covering an estimated 25 Z of the Bank's loan amount. The ex ante free limit set by BR would vary according to the experience of the PFI. BR has established a limit of US$250,000 for CFP and most CFs, $120,000 for less experienced CFs, and US$80,000 f`or commercial banks. All SME loans and equity investments under the restructuring program would, however, require ex ante approval of BR and the Bank. To monitor portfolio quality, a provision would also be made for tracking by BR of SME loan repayment obligations and performance, and for the right of automatic suspension by BR of a PFI's access to the Project's rediscount facility if performance during a quarter, in terms of recovery cf principal and interest due from SME loans, fell below 90 Z. BR and Bank supervision of the Project would also make individual reviews of SMt credits and the PFI's appraisal and supervision work. Data required by the Bank and BR for SME loans would be simplified to include only the essentials on an SME's financial performance and condition, the proposed investment and financing plan, and procurement of goo's and services. 3.22 Procurement and Disbursement. BR would be responsible for ensuring the use of procedures under the Project for procurement of all goods and services aimed to obtain competitive quality and price. Given the relatively small average size of SME loans expected to be financed (about $57,000) and the limit of US$0.5 million in cumulative loans to any single SME, established commercial practices consistent with economy and efficiency would be the standard for this purpose. PFIs would maintain records enabling examination of the procurement procedures used, responses and price quotations received and criteria for selection of suppliers. 3.23 The final date for submission of SME loan proposals to the Bank would be June 30, 1991 and the closing date for loan disbursements would be December 31, 1993 (Annex 9). This takes into account the average disbursement profile for past SME loans to Colombia and the nearly two-year rather than three-year commitment period, which is considered appropriate given the expected increase in SME loan demand occasioned by the factors ment4.oned in para. 3.16. In view of the present shortage of financial resources, a provision has been made for retroactive financing of up to 10? of the proposed loan '$8.0 million) for SME loan and equity investments commitments incurred following completion of loan negotiations. The provision would be available only following certification by BR and the Bank that the PFI concerned has met the Project's eligibility criteria. Bank funds would be disbursed on up to (a) 80 Z of expenditures under qualifying SME loans or investments of PFIs, and (b) 100? under the microenterprise program. 3.24 To facilitate rapid Project execution, a Special Account would be established in BR with an initial deposit of $7 million, representing on average about four months of disbursement requirements. BR would submit to the Bank a monthly statement of transactions of the Special Account.  - 26 - Withdrawals from the loan account would be made on the basis of statements of expenditures (SOE), with detailed documentation for each SME loan and equity investment maintained by the PFI for review by the Bank upon request. As PFIs would be likely to experience a longer period between expenditures by SMEs and disbursement by PFIs than is normal for non-IDF projects, the Bank would disburse for expenditures incurred up to 180 days prior to the receipt by BR of a disbursement rLquest. 3.25 Accounts, Auditing and Reporting. PFIs would maintain records adequate to reflect their operations and financial situation, in accordance with accounting principles consistently applied and in a form satisfactory to the Bank. They would maintain separate Project records, including for the Special Account, which would be audited annually by independent auditors acceptable to the Bank. Project audit reports, along with copies of financial statements and institutional audit information required by Colombia's Superintendency of Banks, would be submitted within six months after the end of the fiscal year of each PFI. They would include opinions inter alia as to the reliability of SOE to support claims for disbursement and to properly reflect the expenditures eligible for financing under the Loan Agreement. PFIs submitting requests for automatic rediscounting would submit to BR the SME loan agreement, repayment schedule and promissory note. For requests above their free limits, PFIs would submit a description of the SME and its financial performance, an appraisal of the SME investment, goods and services to be financed, the financing plan and terms and conditions of the loan. They would maintain for inspection during supervision work essential information on the SME's investment, financial performance, subloan and procurement characteristics. BR would obtain, aggregate and analyze information on progress of the Project's implementation (Annex 10). Benefits and Risks 3.26 The proposed Project would help Colombia to realize its current development strategy by accelerating value added, employment creation and the supply of goods and services of SMEs. Previous Bank-financed projects have clearly demonstrated their ability to have a substantial impact in these areas. Under SME 3 (1834-CO), for example, an ex-post evaluation based on a strvey 127 borrowers revealed average incremental growth in sales of 26.5% per year, in employment of 13.3% per year, and in labor productivity of 10.4% per year.. The Project would also substantially expand access to scarce long-term investment resources to increase productivity, expand installed capacity, and help to revive existing non- performing loans in the banking system. It would make modest adjustments in financial policies influencing SMEs' credit access and help private development and commercial banks to expand their relationships with the SME market. 3.27 The main implementation risk associated with the Project lies in the ability of participating commercial banks to adapt their appraisal, supervision and administrative processes to the requirements of SMEs. To mitigate this risk, they, along with other PFIs, would make clear organizational, staff and financial resource commitments to the Project and participate in staff training courses under the aegis of Colombia's Bankers' Association in order to ensure that their systems are well prepared for SME lending.  - 27 - 4. Project Agreements 4.01 During negotiations, agreement was obtained on the following: From BR (a) Project objectives (para. 3.04) and the description of the ,.redit program (paras. 3.06-3.10) and technical cooperation program (para. 3.15); (b) SME financial policies (para. 3.11) (c) Project costs, the loan amount and finan.Ring plan, and relending terms and conditions to financial intermediaries (paras 3.16-3.19); (d) implementation arrangements for the Project's administration and oversight (paras 3.20-3.21); and (e) procurement, disbursement, accounts, auditing and reporting arrangements (paras 3.22-3.25). From PFIs (a) CFP: (i) reach a target of 6.0 % of administrative cost as a share of average total assets in 1989 and 5.5 % in 1990, (ii) attain a target of 1.0% of net-after tax profits as a share of average total assets in 1989 and 1.6% in 1990; (iii) not exceed a debt/equity ratio of 7.5:1 from 1989; and (iv) limit BR rediscounts using the Bank's loan to 35% of total annual CFP commitments over 1989-90 (para 3.13); and (b) All PFIs: a draft Participation Agreement between BR and PFIs which would specify inter alia relending terms from BR to PFIs and SMEs, appraisal guidelines, documentation requirements, minimum SME loan commitment volume, the need to maintain an adequate overall financial condition, employ an adequate number of staff capable of managing the portfolio of project resources, and ensure proper control over and provisions for SME arrears (para. 3.09). From the Government ensure that capital contributions to CFP are adequate to keep its debt/equity ratio within the 7.5 target from 1989 (para. 3.13). 4.02 As special conditions of loan effectiveness, (a) the Government would put into effect the financial policies and institutional changes outlined in para. 3.11, and (b) BR would conclude and duly execute Participation Agreements with at least three PFIs whose aggregate indicative commitments exceed at least 40% of the loan amount and with one Managing Institution for the microenterprise program (para 3.09).  - 28 - 4.03 The proposed Project constitutes a suitable basis for a Bank loan of $80 million equivalent on the terms and conditions set out in Chapters 1-3 of this Report.  - 29 - Table 1 .1 COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT INDUSTRIAL SECTOR GROWTH RATES, 1967-86 1967-74 1975-79 1981-68 1984-86 Total (excluding procoeosd coffe.) 8.60 3.92 -0.13 4.87 Non-durable Consumer Goodc 6.13 3.96 -0.34 3.68 Food 7.4U 6.51 2.0e 3.160 Procosefd coffe. 2.35 13.14 -1.82 6.9w othor food products 7.84 6.23 2.45 3.79 beverages 7.91 6.39 1.76 2.16 tobacco 6.90 -3.96 1.19 7.46 Textiloe, clothing A leother 9.29 . 2.36 -6.02 4.19 Durablo Consumer A Interediste Goods 8.21 3.48 0.64 2.95 Wood industrios A furniture 4.83 1.63 -0.89 4.91 Paper producet A printing 13.70 6.20 0.81 6.88 Chemicals A rubber products 7.67 4.72 0.10 -2.79 Potroloum refining products 8.63 -2.14 6.92 9.74 Non-metal min-rnl products 6.20 6.43 1.51 5.33 Basic motals 7.74 2.58 -2.38 3.71 Capital Goods 17.10 6.67 -3.47 5.93 Machinory a equipment 11.84 7.16 -2.90 6.08 Transport equipment 27.40 6.14 -4.15 6.28 Other industries 5.40 3.30 3.99 6.72 Light Manufacturing 1/ 8.47 4.04 -0.11 4.10 Hoavy Manufacturing 2/ 8.82 * 3.77 -0:16 2.64 1/ includes food, textiles, clothes, leather, wood A other 2/ include paper, chemicals, non-metal minerals, basic metal. o capital goods  - 30 - Table 1. 2 COLOMBIA FIFTH SMALL AND mEDIUM SCALE ENTERPRISE PROJECT INMUSTRIAL SECTOR SHARE OF GOP, 1967-67 1967-74 1975-79 191-68 1984-66 PRIMARY Agriculture, Fishing 9 Foroetry 25.2 23.4 22.6 21.S SECONARY (INDUSTRY) 26.7 23.6 27.3 29.9 Mining 2.6 1.4 1.8 2.5 Manufacturing 21.7 23.9 21.8 21.3 coffee 3.4 2.8 2.9 3.0 other 18.4 20.1 18.4 18.3 Electricity, Gas a Water 0.8 0.9 1.0 1.0 Construction -3.0 3.s3 3.6 4.2 TERTIARY (SERVICES) 43.3 45.5 46.6 46.2 Co mercC 11.4 13.2 12.6 12.1 Transport, Storage A Comounication 7.7 8.9 9.6 9.4 Financial Establishoments 14.9 13.8 14.7 14.3 Comunal Services, social A person 12.8 12.3 12.9. 13.1 minus Imputed Bank Servicos -2.6 -2.6 -8.2 -2.7 VALUE ADDED 97.2 97.6 96.5 97J1 indirect taxes 2.8 2.5 3.5 2 9 GROSS DOMESTIC PRODUCT, W 1. 1.0 19.9 199 0 SOURCE: DANE, Cuentas nacional  COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT SMEs BY 4-DIGIT SITC CLASSIFICATION 1/ SITC Description X total *ub- X total SITC Description X total *ub- totnl sector output SUE output *ector output SUE output SIE Output Exceeding U0S of Total for Subsctor SHE Output Amounting to 20-49X of Total for Subsector 3113 Canned Fruit - V-gtables 64.2 0.6 3111 Slaughter A meat prepsration 33.2 2.0 3182 Wine 89.8 0.6 8112 Dairy products 83.5 4.8 Sub-total 1.1 8116 Grain milling products *C.0 18.9 8117 Bakery product. 38.4 5.4 8212 Made-up toatil- goods 57.9 9.3 8121 Food products, n.e.c. 22.7 2.5 8214 Carpeto A rugs 62.5 0.4 8122 Animal eeods 22.4 8.O 8216 Cordage, rope & twine 9S.9 0.2 8184 Soft drinks 28.4 2.3 8229 Apparel except shoes 66.3 9.1 Sub-total 51.6 8221 Apparel except shoes, other 82.4 0.6 8283 Leather products 10n.0 0.9 8211 Spun A woven textiles 27.8 2.0 8240 Footwear U .8 2.2 8213 Knitting mills 46.0 2.8 Sub-total 13.7 8282 Skin dressing and dyeing 28.2 *.1 Sub-tot l 4.9 3312 Wooden containers 139.0 a 8319 Wood products. n.e.c. 97.7 0.3 3811 Sawmills 42.9 1.1 8320 Wooden furniture 75.6 1.4 Sub-total 1.7 3419 Paper products, n.e.c. 22.6 0.7 8691 Structural elay product. 69.1 1.1 8420 Printing A publishing 28.9 8.6 Sub-tot l 4.2 8728 Pecio;us metal rf t)nlng 139.0 9.1 3611 Fertilzers A pesticides 28.6 2.1 w 8812 Metallic furniture A fixtures 76.5 1.0 8628 M)icellaneous cbheical products 46.1 0.8 8614 Metallic plumbing A heating 66.8 0.4 3529 Chemical products. n.e.c. 40.4 1.4 8522 Agricultural mchinery 100.0 8.4 8659 Rubber product., n.e.c. B4.0 *.8 M823 Metal & woodworking machinery 1".0 0.2 860# Plnstic products, n.e.c. U4.8 6.8 8824 Other specialty ind. machinery 100.6 0.6 Sub-total 9.9 8826 Office & computing machinery 139.0 9.2 3826 Other non-classifi d machinery 96.3 9.8 3621 Other glass products 28.4 0.1 U2 2 scuhinry, n.o.ec. 62.4 0.7 8699 Mon-metollic mineral prod., n.e.c. 26.7 1.3 8849 Transport materials, n.e.c. 67.9 0.1 Sub-total 1.9 3862 Photo A optical goods 76.6 0.1 Sub-total 4.9 8722 Tin I nickel refining 32.6 *.1 3902 Musical instruments 100.0 0 3903 Sporting goods 100.0 * 3813 Structural _etal products 29.5 1.2 8904 MIscollaneous ind. products 53.e 1.6 3819 Fabricated metal products, n.-.c. 27.5 2.4 Sub-total 8627 Non-electrical mach A *quip, n.e.c. 26.5 1.5 3831 Electrical industrial machinery 29.8 1.1 3842 Railway equipment 23.0 6.6 8844 Motorcycles A bicycles 83.2 *.4 3851 Prof A scientific equipment. n.-.c. 83.1 9.7 Sub-total 7.1 3909 Other miscellandeous ind. products 38.8 0.3 U Total SUE Output 23.2 X Total SUE Output 61.1 m Average SME Output in Industry 19.0 w l/ Using 185 DANE daLa and defining SUEs as those enterprises with total assets of l-e nhan Coll 118 million, or an estimated ColS ae million in 19g9.  - 32 - COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT Table 1.4 SME EXPORTS, 1986-86 (oillion$ of i,St) 1980 tool 1982 I9n 1954 1985 1986 Food Products 225.4 151.6 101.4 134.8 109.6 116.3 1560.5 Clothing 113.8 114.0 180.7 69.2 89.8 49.6 77.0 Leather 28.6 26.6 32.8 26.1 22.5 38.7 51.9 Shoes 18.3 16.2 19.5 8.0 7.3 11.0 20.8 Wood Products 11.7 13.9 16.9 9.5 6.0 12.7 15.1 Furniture 3.2 4.6 3.9 1.6 1.7 8.8 7.9 Petroleum and Coal Derivatives 6.5 5.9 4.8 2.6 4.4 4.6 10.0 Plastic Products 11.2 11.7 9.2 12.6 11.3 10.3 11.2 Metal Products 46.1 62.7 66.2 26.5 22.1 22.8 28.6 Other 14.4 19.8 19.0 7.0 3.0 6.6 7.9 Total SUE Exports 489.1 417.3 398.9 289.1 227.2 274.8 378.4 Large Scale Industrial Exports 479.4 486.6 424.2 867.0 396.6 427.7 496.5 Total Industrial Exports 948.6 992.8 816.1 656.1 628.7 762.0 874.9 Annual Growth Rates (X) Total SUE Exports -11.0 -5.6 -26.6 -21.4 20.7 38.0 Largo Scale Industrial Exports 1.8 -12.6 -13.6 8.0 7.9 16.1 Total Industrial Exports -4.8 -9.4 -19.3 -4.9 12.6 24.8 Share of Total Industrial Exports Total SME Exports 49.6 46.2 46.1 44.1 36.4 89.1 43.3 Large Scale Industrial Exports 56.6 63.8 61.9 66.9 63.6 69.9 58.7 Total Industrial Exports 100.0 100.0 100.0 190.0 196.0 190.0 100.0 Source: Banco do Is Republics. Evolution Recionte do Los Exportaclonsa manutactureras, May 1987.  COLOMBIA FIFlH SOALL AND MEDIUM SCALE ENTERPRISE PROJECT FDNANCIAL INDICATORS OF ALL COMAERCIAL BANKS. 1986-87 lioi 1981 1982 1963 1984 1986 1986 1987 1. SOLVENY Total Assets / Equity 10.1 10.3 9.6 19.8 12.7 39.6 10.8 11.2 (Equity * NPA Provisions - WA) / Equity 1.0 9 9 8 0.8 066 -0.9 1.3 098 2. PROFITABILITY Not Profit / Equity 10.1 14.1 6.9 5.7 4.6 -206.8 -3. 6 6.6 Gross Financial Margin / Productive Assots 12.6 11.4 11.7 10.1 8.4 7.2 9.2 9.7 Net Financial Margin / ProductIvo Assets 12.2 11.1 109. 8.7 7.6 -9.3 8.3 08. 3. RISK MANAGEMENT (Arrears * NPA) / Equity 7?. 7.6 11.4 12.4 19.4 20.4 18.2 14.4 (Arrars * WPA - WA Provisions) / Equity 39.4 38.7 63.7 62.2 116.0 237.7