Colombia - Export Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11442-CO STAFF APPRAISAL REPORT COLOMBIA EXPORT DEVELOPMENT PROJECT MAY 5, 1993 t ., r ;i, -,. .. .: . ,. :: AL ! I lt~ ~ ~~~~0 i l-- i l-e< ...f i 7 Trade, Finance and Industry Division Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the perfonnance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as at October 14, 1992) Currency Unit Colombian Peso (CoiS) US$1 = ColS 688 CoI$ 1 = .00145 FISCAL YEAR OF THE GOVERNMENT OF COLOMBIA January 1 - December 31 GLOSSARY OF ABBREVIATIONS BR Central Bank Bancoldex Foreign Trade Bank CERT Indirect tax rebate CF Development bank COLPUERTOS Colombian Ports Authority DIANA National Tax and Customs Service DNP National Planning Department DTF Average rate for 90-day time deposits ECI Export credit insurance EDP Export Development Project EMP Economic Modemization Program FDI Foreign direct investment FIDUCOLDEX Export Promotion Trust Administration FNG National Guarantee Fund GDP Gross domestic product IDB Inter-American Development Bank IFC Intemational Finance Corporation IMF International Monetary Fund IRDP Industrial Restructuring and Development Project ISIC International Standard Industrial Code LC Letter of credit LIBOR London Inter-Bank Offering Rate MIGA Multilateral Investment and Guarantee Agency MFT Ministry of Foreign Trade NIC Newly industrialized country NPA Non-Performing Assets OECD Organization of Economic Cooperation and Development OPIC Overseas Private Insurance Corporation PV Duty exemption system PROEXPO Export Promotion Agency PFI Participating Financial Intermediary OR Quota restriction SME Small and medium scale enterprise SOE Statement of expenditures TA Technical assistance TPO Trade promotion organization This Report was prepared by James Hanna (Task Manager), with the contributions and teamwork of Mmes./Messrs. Adeline Frangois, Julie Phillips (LA3TF), Yung Whee Rhee (IENIN), Donald Keesing (CECTP), Patrick Low (IECIT), Rob Brown, Min-Chi Chen, Shui-Chi Chuang, Maria Edna Carrasco, Steve Graubart, Chris Isaacs, Jagiit Jain, Yun-Sen Jiang, Robin Olland, Alberto Polio, Claudia Rodriguez and Andrew Singer, (consultants).  FOR OMCIAL USE ONLY STAFF APPRAISAl REPOR COLOMBI EXPORT DEVEUMENT PROJECT TABLE OF CONTENTS Paae Ng. LOAN AND PROJECT SUMMARY ........................................ i 1. THE NEED TO ACCELERATE EXPORT DEVELOPMENT .. ...................... 1 1.1 Economic Modemkation . ..................................... 1 (a) trade liberalization ........................................ 2 (b) real exchange rate and exchange regime ........................ 3 (c) foreign direct investment .................................... 4 id) financial sector ........................................... 4 {e) transportation services ...................................... 6 1.2 Increasing Expon Momntum ........... ....................... 7 (a) export supply structure . ................................... 7 (b) recent economic environment ............................... 8 1.3 Reducing ExportCommodity Concentrion ....... ................. 9 2. CONSTRlUNTS TO EXPORT DEVELOPMENT .......... .................... 10 2.1 Trade Policy and Adminaiion ............ .................... 10 la) export tax feea systm .. ................................. 11 (b) antidumping system ...................................... 14 (c) customs service ........................................ 15 2.2 Export Promotion Services ..................................... 16 (a)rmarketfailures ......................................... 16 (b) trade promotion mechanisms ............................... 17 (c) PROEXPO ............................................. 20 (d) development program ............ ........................ 21 export development matching grant program ..................... 21 restructuring promotion savices .......... ................... 22 trading company deregulation & development .................... 23 2.3 Export Rnance Services . ..................................... 25 (a) narket failures ......................................... 26 (b) resource needs ......................................... 27 (c) The Foreign Trade Bank ........... ........................ 29 (d) development proran.m .................................... 33 (i) export finance training for bank ........ .................. 33 (ii) preshipment export credit guarante program ...... ............ 34 {iii) postshiprm.nt export credit insurance ........................ 36 This document has a restrcted diibution ad may be used by recipients only in the perfonnance of their offcial duticL Its contents may not otherwise be disclosed without World Bank authodzation.I  3. THE PROJECT ................................................ 37 3.1 Origin and Relation to the Country Lending Strategy .................. 37 3.2 Lessons from Past Bank Assistance .............................. 38 3.3 Objectives, Strategy and Desceiption ............................. 40 3.4 Cost and Financing .......................................... 4 3.5 Project Implementation . ..................................... 46 la) responsibility and support .......... ....................... 46 (b) plans, performance, indicators and supervision ................... 47 (c) procurement and disbursement .............................. 51 (d) accounting, auditing and reportng ............................ 51 Project Benefits and Risks ....... a ............................... 52 4. PROJECTAGREEMENTS ............................................ 52  TABLES AND FIGURES IN THE TEXT 1.1 Real and Real Effective Exchange Rate, 1967-91 1.2 Export Commodity Prices, 1970-1991 1.3 Structue of Exports, 1974-90 2.1 Public Sector Agenda for Export Development 2.2 Incentives for Non-Traditional Exports, 1967-91 2.3 Indirect Taxes as a Share of Export Value Added, 1991 2.4 Private Sector Agenda for Export Development 2.5 Documentary Payment Terms for Colombian Export, 1990 2.6 Uquidity of Banks, 1985-92 2.7 Comparadve Capital Structure of PROEXPO and Banking System, 1991 2.8 D;rected Credit to Private Sector, 1986-90 2.9 PROEXPO Credit Use and Inte Rate Subsidies. 1985-91 2.10 Project Organizaton and Flow Chart 2.1 1 Matrix of Key Ptoject PoUlcy and Instituonal Adjusents 2.12 Estimated Project Cost and Financing Plan STATISTICAL ANNEX F IGUBES 1.1 Tarff Structure, 1990-91 '1.2 Import Linse Requirements and Average Tadff Levels, 1990.91 1.3 Levels and Composton of Foreign Direct Investment, 1968-91 2.1 Survey of Barriers to Exports of UK Smaller Business TABLES 1.1 Share of GDP by Sector, 1967-91 1.2 Manufacturing Share of GDP: Intematonal Comparisons, 1967-87 1.3 Manufacturing Output by Subsector, 1965-90 1.4 Composition of Manufacturing Output by Subsector, 1965-90 1.5 Import Ucensing Requirements by Economic Activity, 1990.91 1.6 Frequency Distribution of Tariff Rtes, 1990.91 1.7 Average Tariffs by Economic Activity, 1990-91 1.8 Blance of Payments. 1966-91 1.9 Producton Coverage of Non-tariff Barriers, 1991 1.10 Colombian Exports, 1967-91 1.11 Compostion of Colombian Exprs, 1967-91 1.12 Entrpise Concentaton In Non-Traditonal Expor, 1990 1.13 Export Orination of Manufacturing, 1967-90 1.14 Composition of Colombian Exports to Latin America, 1990 2.1 Main Non-Financil Obstacles of Exporters, 1991 2.2 Main Financial Obstcles of Exporters, 1991 2.3 Export Incndve, 1967-91 2.4 Plan Vallejo as a Share of Non-Traditional Exports, 1991 2.5 CERT Indirect Tax Reimbursments in Reltion to Estirmad Indirect Tax Payments  2.6 Survey of Initial Export Support Services Use 2.7 Survey of Market Strategy Services Use 2.8 Survey of Initial Export Support Services Recommendations 2.9 Survey of Market Strategy Services Recommendations 2.10 Documentary Payment Terms for Non-Traditonal Exports, 1990 2.11 Export Payment Terms and Maturity of Fnancing, 1990 2.12 PROEXPO Income Statement 1980-91 2.13 PROEXPO Balance Sheet, 1980-91 2.14 PROEXPO Export Credit SubsWies, 1980-91 2.15 PROEXPO interest Rates, 1987-91 2.16 PROEXPO Credit as a Share of Non-Traditional Exports, 1985-91 2.17 PROEXPO Investments as at June 30, 1990 SUPPORTING INFORMATiON ANNEXES 1. Status of Bank operatons 2. Financial sector profile 3. Technical Assistance Programs and Budgets (a) export tax free system (b) antidumping proaram (c) customs reform program {d) export development matching grant program (e) export promotion restructuring program Sf) trading companies development program (g) trade finance training program (h) preshipment export credit guarantee program li) postshipment export credit insurance program 3) capital markets development program 4. Schedule of estimated Bank loan disbursements 5. Key indicators for ProJect implementaion 6. Documents available in the Project file MAP IBRD 18370R  (i) KUMR DEVLOMENT PROJEClr ,Loan and froict Sumrnary browur: Republic of Colombia .Neftiorim: (a) Private enterprses with potential or existing export sales; (b) financial instutions providing export finance services; and (c) Govemment agencies responsible for trade policy and administration and capital markets development. US$ 50 million equivalent, to be repaid In 17 years, including 5 years of grace, at the standard variable interest rate. D ; The proposed Project is desined to accelerate the export supply response to Colombia's trade reform program by (a) adjusting exWsng Government trade policy and administraton in the areas of duty exemptions and indirect tax rebats, antidumping, and customs so as to facilitate exporter competitiveness and be GATT-consistent; (b) increasing the quality of export promotion services by stimulating increased use of private overseas and local export support services, restructuring the Govemment's public promotion organkation and deregulating and developing trading companies; Ic) building export financing capacity by establishing new export finance services in the Forein Trade Bank and making its policies consistent with liberalized financial sector policies, establishing private/public joint venture preshipment export credit guarantee and export credit insurance facilities, and providing trade finance training to local banks; and Id) initiating capital markets development with regulatory and institutional improvements. ' *ez t aw The proposed Project would help to accelerate the export development process during the early stages of trade liberalization in Colombia. It would, In particular, streamline trade administration mechanisms and ensure GATT- consistency. It would help existing and potential exporters to better assess export markets, adapt products and build export market share. It would also help to bwld export finance capacity, and begin to stimulate local capital markets and increase the access of enterprises to such financing. The main Project inplementation risk involves delays due to Government adminsrative, budgetay and contracting procedures. To mitigate this risk, the detaied design of each technical assistance program of the Project has been completed and agreed upon. There is also substantial commitmnent of public authorities to Project execution and the full involvement of private sector inrests in each program through ownership, management and/or service cost-sharing.  (ID Local Foreign Total %Totd -US milloons Trade Policy and Adm _nistraio 1.2 4.7 5.9 6.8 Export Promotion ServIces 8.2 68.7 76.9 88.8. Export Fnance Services 0.4 1.4 1.8 2.1 Capitl Mwks DA la I& TOTAL 10.2 76.4 86.6 100.0 Private Enterp_as 10.2 26.4 36.6 42.3 World Bank Au Au AU TOTAL 10.2 76.4 86.6 100.0 D_b;mminma FY 94 95 96 97 98 99 00 (avg. profil or Bank bans for tecical assince In LAC) Annual 5 5 10 13 10 5 2 Cumuatve 5 10 20 33 43 48 50  1 1. NEEQM TO ACCELElRATE,EXPRT DEVELOPMENT 1. The need to accelerate Colombia's export development at this juncture arises from three tbsic factors, which are discussed in this Chapter. First, many policy-makers and private entrepreneurs agreed In 1990 that Colombia's socio-economic objectives for the 1990s .^ould not be met by continued high trade protection, import substitution, and capital-driven growth. Rhus, the Government set In motion an Economic Modernization Program (EMP) which aims through a number of initiatives, including export development, to raise progressively economic efficiency to international market standards. 2. Second, the process of building sustained and significant participation in international markets must acquire Its own critical momentum so as to provide interest groups with enough of a stake to avoid a reversal to protectionist policies. For this, the market failures outlined in Chapter 2 must be alleviated In order to provide the opportunity to a broad range of enterprises to participate in the export development process and to transmit its socio-economic benefits as widely as possible across the countr. Neither this momentum nor broad enterprise participation was evident in Colombia in 1991 and 1992, making the acceleration of the export development now more compellng. 3. Lastly, Colombia's business environment and economy have been heavily influenced by recurrent volatilt in commodity export revenues. Such exports have maintained their presence in the export structure since the mid-I 970s and represented over one-half of total exports in 1991. Diversification of revenue sources, particularly from agro-business and manufacturing exports, and a more stable business environment are hoped to be derivative benefits from the export development. 1.1 Economic Modernization 4. The Economic Modemization Program is a set of far-reaching public policy and institutional adjustments aimed to build an intemationally competitive private sector in Colombia. Colombia's industrial production structure has remained stagnant for the past two decades and, in general, has become inefficient behind heavy trade protection. The share of manufacturing in Colombia's GDP has remained relatively constant (21.4% in 1990, Table 1.1). contrasting with the experiences of many newly industrialized countries (NICs) in which manufacturing growth has become an Increasingly important contributor to the economy (Table 1.2). The composition of industrial production has sso demonstrated unusual uniformity, again unlike the structural dynamics of many other NICs (Tables 1.3-1.4). International comparisons show that the share of nondurable consumer goods in Colombia remains high (51.2% in 1990), while the averages of other Latin American countries and all NiCs have fllen progressively (44% and 32%, respectively). Economy-wide estimates of long- term factor productivky growth are very low. 5. Wide-ranging enterprise-level studies in 1990 corroborate this view and suggest that the ave Colombian enterprise is not likely to be competitive in an open domestic market environment or In export markets without considerable restructuring and development. Average product costs are frequently above and factor productivity generally below their NIC comparators. Product designs suffer basically from inadequacies in both communication with external markets and local institutional support. Product quality is hampered by both inadequate quality of raw materials and the aging production technology frequently in use. Market response time is uniformly high, due largely to organizational problems of producers, public administration and infrastructure which are not geared to nor disciplined by overseas markets.  2 6. The EMP aims to provide a business environment in which far more Colombian private sector enterprises will become internationally competitive. The liberalization of the extemal trade regime Is the centerpiece of the EMP and is complemented by adjustments Inter aHa In the exchange and foreign investment regimes, the financial sector and transportation services which are essential to this process. These reforms are also e,sential to, though not sufficient for, export development and, as such, are summarized below along with the status of their implementation. (a) Trad UbrElizagon 7. Colombia's first major steps toward a neutral external trade regime were the establishment of the crawling peg exchange rate policy in 1966, the progressive depreciation of the Peso from 1966, and gradual import liberalization which made imported capital goods and production Inputs readily accessible on a sustained basis. Much of the country's present trade institutional infrastructure was also established at that time, namely the duty exemption system (Plan Vallejo, or PV3, an indirect tax rebate scheme (currently known as CERTs), and subsidized credit and promotion services through the Govemment's export promotion organization, PROEXPO. Major gains were achieved in productivity, growth and export orientation during the 1967-74 era. This effort was aborted, however, mainly by the effects of a major coffee boom over 1975-79 (see Section 1.2). 8. The next advance was made under the 1984-86 macroeconomic adjustment program, which stressed the use of macroeconomic policies instead of quantitadve restrictions (QRs) to correct the external imbalance of the economy. Its major achievements were the establishment and maintenance of a competitive exchange rate and reduced levels and dispersion of tariff rates. I However, ORs on the importation of ooods competing with locally manufactured goods remained, as diid the incentives for industry to maintain a strong inward-looking orientation. The coverage of domestic manufacturing by import restrictions thus fell only from 100% in 1984 to 82% in February 1990.2 In addition, the number and dispersion of tariff levels remained high (23 tariff rates ranging from 0% to 200%), tarffl rates still averaged 26.6%, and tariff surcharges were introduced in 1985 at a uniform rate of 10% and increased to 18% in 1987 (Tables 1.5-1.7). 9. The trade reform program adopted In early 1990 under the EMP aimed to achieve greater neutrality in incentives, both across products and across markets (domestic versus export), and to substantialy reduce protection and administrative discretion. The plan encompassed two stages, the replacement of ORIs with tariffs, and the subsequent gradual reduction in tariff levels and rates through mid-1994. The Government of President Gaviria, which took office in August 1990, completed the first phase and initiated tariff reductions by the end of 1990. Over March-November 1990, production coverage by ORs of 2-digit manufacturing subsectors fell to only 8%, the average tariff declined to 21%, and the surcharge dropped to 13%. 10. By the beginning of 1991, it had become apparent that the actual current account reaction to liberalization differed markedly from that anticipated. Rather than an expected annual deficit of $390 million in the current account in 1990, growth in petroleum exports and, to a lesser extent, non-traditional exports and slow growth in imports led to a surplus of about $700 million, or I See "Colombia: Commercial Policy Survey', February 23, 1989 (Green Cover). 2ib. The coverage of domestic manufacturing by import restrictions for each industry is defined as the proportion of tariff positions (NABANDINA) related to each four-digit ISIC category that were either prohibited from import or subject to prior import licenses. The QR coverage ratio is a weighted average of the subsector values, jsing production shares as weights.  3 about 1.5% of GOP (Table 1.8). The behavior of imports was due, in part, to the continued high level of tariffs and surcharge which producers anticipated would be decreased, and to tight credit policies constraining new private sector investment (see Section 1.3). Faced wih a substantial balance of payments surplus and continued accumulation of international reserves, the Government decided to accelerate the implementation of the trade reforn. Macroeconomic stabilization and trade liberalization objectives were both served by this action. In August 1991, the final reform targets were adopted and the import surcharge was reduced to 5% and incorporated into the regular tariff structure. 11. Thus, four tariff rates are now in effect (5, 10, 15 and 20%). with exceptions for about 140 tariff positions (or 2% of all imports), mainly In the food, beverage and tobacco, chemical and motor vehicle subsectors. The highest tariff remains on certain motor vehicles, at 45% (Figures 1.1-1.2). The average unweighted tariff is now about 11.7%; consumer goods have an average tariff level of 17%, while those for intermediate and capital goods are 9% and 10%, respectively. Only about 1 % of all imports (such as certa;n chemicals and armaments) still require a prior license, primarily for health and national security reasons (Table 1.9). With this relatively simple and transparent trade regime, the Govemment has reaffirmed its commitment to integrate the Colombian economy with world markets and to encourage the adoption of international competitive standards in the local marketplace. This was further reinforced in December 1991, when the Andean Group's Presidential Council decided to establish an Andean Common Market in 1992 through the adoption of a common extemal tariff. To date, Colombia, Venezuela and Ecuador have agreed that a common tariff structure would be adopted which is identical to that already adopted by Colombia until January 1, 1994, when the 20% rate category is to be eliminated. Usts of exceptions (mainly related to motor vehicle imports) are to be eliminated by June 1994. (b) Real Exchane Rate and Ex hanae Reaime 12. The Government's adjustment _ _j h program of 1984-86 included a major real - devaluation of 39% of the Peso, which more than corrected a persistent and growing exchange rate overvaluation totaling 17.2% over --_._ .--.. 1975-84. Through 1988, the Govemment maintained the real exchange rate level attained in 1986. In 1989, however, it devalued the Peso another 8% In real terms, partly in - ------- - ---- - - -- . - response to the decline in coffee prices, and by ... _ .... . * a further 13% in 1990 in anticipation of trade liberalization. This aggressive devaluation policy..... helped to create a trade surplus in 1990. However, in the absence of additional fiscal adjustments, and with strong capital inflows in _ 1991, this move was unsustainable and probably ,- inflationary. Hence, the Peso appreciated in 1991 by about 12% in relation to 1990, nearly returning its value to levels similar to 1986-88. 13. Over 1991-92, the Govemment revised its foreign exchange regime regulations to better harmonize them with the new trade regime. The new exchange regime primarily simplifies the rules goveming pay,aents for intemational trade, increases the role of the market in the allocation of foreign exchange, and decentralizes the management and possession of foreign exchange. The new rules for trade transactions reduce the time and cost for compliance and permit the use of modem trade finance instruments. Foreign exchange licenses and prior import deposits have been eliminated.  4 Importers may make payments overseas directly through a local bank by presentation of documents. Financial Institutions can also extend credit overseas to purchase Coombian goods, and they are furthr enabled to purchase exporter receivables in foreign exchange. 14. Whereas previously only the Central Bank IBR) and the Office of Exchange managed foeign exchange transacftions, the new egislaion permits autrzd financial Institutions (namely, commercial and development banks, and exchange offices) to buy and sell foreign exchange. Colombians are now authorized to hold overseas financial assets and to make fore;gn investmnents up to certain amounts without prior approval when foregn exchange is acquired from local banks. Those receiving income In foreign exchange, as wfell as importers and borrowers of overseas credit, are also able to maintain overseas accounts to reduce costs and improve exchange management. Some control will remrain on Colombian investment abroad so as to avoid speculation and to channel money to lonaer-term activities. However, the Government intends to progressively further simplify and liberalize the exchange regime to continue to develop a more competitive and efficient market. (c} Foreig- Direct investment 15. Foreign direct investment (FDI) in Colmbia became of measurable importance during the 1 950s, when the Govemment pursued an industrial development policy of import substitution in Intermediate and capital goods. Over 1957-64, registered FDI went mainly into industrial enterprises producing paper and cardboard, pharmaceuticals and other chemicals, rubber products, metal mechanical and transport equipment. However, tis led subsequently to the first policy steps to contain this increasingly prominent FDI. The main provisions were ceilings on annual profit renittances, prohibitions on forein monopoly power and FDI presence in key sectors, conversion to local majority ownership within a determined period, and geographical restrictions on FDI within the country. FDI has since grown most rapidly in petroleum, coal and ferronickel development. Non- mining FDI has generally maintained its promi in import substitution era product groups, freuently figuring among the most rapidly gowing sement of Colombian indust. However, despite some reultory liberalization, the growth in the real value of FDI in Industry over 1970-89 was very modest, totaling about 13.9% overall, snd accounting for less than 4% of gross fixed capital formation in industry (Figure 1.3). 16. Consequently, particularly to facUiitat technology transfer and export market development, the Government substantially liberalized its FDI legal framework In January 1991. It now offers substantial parity in the treatment given to domestic and foreign investment. It provides that all sectors of the economy, includin the financial sector but excluding national defense and security activities, are open to FDI up to 100% of capial. There is automatidty in the authorization process for FDI, excepting requirements for the National Planning Department (DNP) to review the proposed terms and conditions in the cases of FDI In pubric services, the financial sector, mining and petroleum. It further permits (a) full reinvestment of undistributed profits, (b) full repatriation of net profits up to 100% of the prior year's capital level of the enterprise, and Ic) full access to domestic credit. New FDI will also be facilitad by the Government's decision to join MIGA and the US OPIC. (d) Einancial Sector 17. During the 1980s, the Govemrnment successfully strengthened prudential regulations of the financial system and the financial performance of intermediaries followino the banking crisis of the  5 early 1980s. 9 However, financial markets in Colombia remain characterized by a continuing lack of long term credit and underdeveloped capital markets, and by high margins and low levels of competition in financial intermediation. Also, in the absence of adequate competiton and reliable Information on potential borrowers and their markets, credit allocation is made overwhelmingly on a collateral basis rather than on project appraisal and retum on investment criteria. This has yielded inter alia a low share of credit to small and medium scale enterprises (SMEs). 18. More fundamentally, however, it raises concern that the supply and export response expected from trade liberalization under the EMP is seriously constrained by the existing financial sector, particulary In respect of new enterprises and products expected to emerge. In 1990-91, the Govemment adopted a new financial sector reform program aimed to eliminate distortions created by long-standing forced investment, directed credit and subsidized interest systems, and to increase sector competitiveness so as to improve allocative efficiency, reduce intermediation costs and expand financial instruments. 19. To promote competition and contestability, the Govemment divested itself in 1991-92 of four nationalized banks. Two more nationalized or public banks are expected to be put on the market In 1993. With their sale, this would together reduce the Govemment's participation in the banking system from 57% to 12% of total banking assets. In addition, a 1990 reform bill allows free entry of new financial Insitutions into any segment of the market Isubject to minimum capital requirements and review), and has simplified procedures goveming liquidations, mergers, and conversions. FDI reform legislation also allows up to 100% foreign ownership in financial institutions. The Govemment is further committed to clarify the role of any remaining public sector financial intermediaries and will Increase monitoring and control of noncompetitive behavior. 20. Forced investments (portfolio requirements as a share of deposits or assets of financial institutions, at below-market retums) have been used as a source of funds for directing credit to the private sector and a number of public agencies. Such investments, along with reserve requirements, created a significant burden on intermediaries and explained a large portion of high financial margins. In May 1990, forced investments to finance the Central Govemment directly were eliminated, as were those to finance the Financial Institutions Guarantee Fund, the Institute for Territorial Credit and the Municipal Fnance Agency. 21. The Govemment intends to phase out remnaining forced investments, excepting those financing credit programs for well-defined target groups to achieve equity objectives (small-scale farmers, low-income housing, and victims of disasters and terrorism) and those substituting for direct lending requirements to the agriculture sector. Forced investments will be gradually eliminated by freezing the nominal stock at existing levels. At the same time, average retums on remaining forced investments will be increased. 22. Since the mid-I 980s, the Govemment has progressively reduced the segmentation and Interest rate subsidies in the directed credit system. Directed credit mechanisms for smaller and large scale Industry have been eliminated. Also, most lending rates from second-tier entities to financial Intermediaries have by now been defined as the variable short term deposit rate in the local commercial market (DTF), basically eliminating subsidies to the financial sector. Interest rates to final borrowers on long-term loans will be fully liberalized by 1994, excepting credit directed to the target groups and through publc agencies for infrastructure development. Currently, directed credit rates to final 3 See Annex 2 for additional information on Colombia's financial market structure, prudential regulation, and performance of financial intermnediaries.  6 borrowers average 89% of market rates for agricultural credit, 95% for trade finance, 97% for municipal finance. 23. Finally, the Government is reorienting the structure for the mobilization of credit to the private sector. sR has already eliminated its domestic resource mobilization role and substantially expanded its sectoral and expenditure eligibility criteria for rediscounting. it is also restructuring the second-tier financing facilities of two remaining entities, increasing their specialization in the intermediation of extemal resources, and establish credit regulations with the broadest possible eligibility criteria. 24. The securities markets in Colombia, especially the market for privately issued securities, are currently underdeveloped, and have suffered a deterioration in recent decades. The market is Umited in terms of size and depth, as well as diversity of instruments and participants. Govemment securities and money market instruments such as certificates of deposit and bankers acceptances of short duration dominate the formal domestic market. The market for privately issued securities is extremely thin in respect of both variable income securities and medium and long term fixed income securities. Moreover, Colombia's equity market Is characterized by a high level of concentration of ownership, as 0.3% of shareholders account for 92% of total shares outstanding. Finally, both the primary and secondary markets are subject to high transaction costs, caused by regulatory and market sVucture inefficiencies. 25. Distorted tax incentives, directed credit regimes and trade policies prevailing during the 1960s-1980s period are the root causes of the underdevelopment and decline of capital markets. Although these past policies have generally been corrected by now, the govemment recognizes that rebuilding Colombia's securities markets will also require the adoption of a combination of consistent improvements In laws and regulations relating to those markets as well as in the upgrading of the Institutional infrastructure necessary for their efficient functioning. The proposed project would include technical assistance to help to stimulate this process. (e) Trnsportation Servces 26. Given the long-standing internal focus of the Colombian economy, the existing public transportation system has not been developed to facilitate intemational trade. This obstacle is a particular deterrent to international competitiveness given that a large share of production is located in the central regions of the country. While air freight charges from Colombia appear competitive and capacity can be readily expanded, highway, port and maritime transport services are highly inefficient and costly. The Govemment is well aware of these problems and has adopted in 1992 a public investment plan which places considerable emphasis on upgrading of major roads and airport expansion. It has also introduced a number of measures to stimulate competition in port and maritime services. 27. The Govemment's strategy consists mainly of the liquidation of the public port authority, Colpuertos, the segregation of the regulatory and operational functions, revision of tariff poRicies, the establishment of regional port companies, and the granting of new port concessions to private investors. Implementation of this strategy is well underway, and its satisfactory completion is a condition for the release of the third tranche of the Bank's Public Sector Reform Loan. In the shipping industry, the reserve quota system, by which a large share of trade was required to be shipped by a public Colombian line, was completely eliminated in 1991 and replaced by a regime of free entry for all shipping companies. In addition, the Govemment eliminated all freight remittance ceilings for foreign shipping companies and put in place a simplified withholding tax of 12% of freight receipts as their sole tax liability.  7 1.2 Increasina Export Momentum 28. Non-traditional export performance has basically been driven by a relatively few domestic and intemational .nterprises with substantial experience In business and exporting. Such enterprises nevertheless have maintained the domestic market as their primary business domain, with a relatively low overall export orientaton and narrow product/export market relationships. Export sales have been partly a basic response to relative price changes though, as importantly, a more ephemeral reaction in times of weak domestic market demand conditions. 29. Notwithstanding the comprehensive policy adjustrnents made under the EMP, there are few indications to date that even significant homework has been done to subsequently generate a broad supply and export response by private sector enterprises which would change this export structure. This lag during the early stages of trade liberalization has been observed elsewhere. Nevertheless, it remains of concem that competitve import pressures have not been generated, producers have generally not undertaken essential investments to increase intemational competitiveness, nor have they adopted a more expansive commitment to (or possibly even a serious investgation of) the intemational market. (a) Exoort SupplV Structure 30. Tie export supply structure is characterized by sbon ent ectin. In 1991, 8 enterprises exporting petroleum, coffee, coal and bananas were responsible for about one-half (US$3,795 million) of all Colombian exports. Among the leading five industrial export subsectors, 80% of the export volume in 1990 was generated by: 6.7% of all clothing export firms (51 enterprises), 5.2% of all shoe export companies (18 enterprises), 10.0% of all leather goods exporters (40 enterprises), 7.3% of all paper and paper products exporters (11 enterprises) and 4.6% of all chemical product exporters (24 enterprises). Overall, 12.1 % of all exporting firms accounted for 80% of non- traditional exports (Table 1.12). 31. A survey conducted in 1991 4 among a representative sample of 170 exporters, constituting about 29% of non-traditional exports (US$784 million), revealed that most of such exporters already have substanaW expedence. About 75% of the sample firms surveyed have been in business for more than 10 years and 37% had over 10 years of export experience. Nearly two-thirds of the large scale firms had export experience exceeding 10 years and another 43% of firms had from 3 to 10 years in the export business. 32. Still, the expotmarket orlentatkn Is low for most producers. They tend to tum to it in times of insufficient domestic demand and abandon it when output can be sold at home. Few firms have made the Investments required to diversify products, improve quality, reduce costs and expand their scale of operations to meet International requirements. Consequently, the average export orientation of industry has ranged between 3.6-7.9% of total output over the past 15 years (Table 1.13). 33. Compounding these effects is the fact that export destinations show a hh dg of pmduc/mdrket cencentIn. In 1991, about 76% of all Colombian exports were destined for OECD 4 Colombia Export Finance and Promotion Study", prepared by First Washington Associations, August 1991.  8 countries. Exports to the European Community show a high concentration in coal, flowers, bananas, and nickel, representing 65-99% of exports to Germany, Belgium, Denmark, France, the Netherlands, Norway, Sweden and the UK. Among industrial goods, only clothing reflected a visible share of indutrial exports to these countries (6413%, except 31% in Sweden). About 84% of exports to Japan consisted of precious stones, coal and nickel. Exports to the US are more diversified, though about half the total Is dominated by flowers, bananas, sugar and coal. 34. In addition, export destinations reflect a high degree of segmentation between goods shipped to OECD countries (commodities and consumer products) and those destined for Latin American countries (intermediates and capital goods). In Colombia's trade with Latin America, about 22% of total exports in 1991, chemicals and editorial products accounted for the majority of exports to most countries. Metal mechanical goods tends to make up a significant share of the remainder (Table 1.14). 35. This pattem of concentration is corroborated by survey results. About 100 of 167 non- traditional exporters surveyed indicated that 81-100% of their exports were accounted for by only one basic product or product group. Forty-four firms indicated that one country accounted for 81-100% of their total exports and 51 more indicated that one market accounted for between 61-80% of their total exports. The high utilization of direct product distribution channels by these firms (over one-half, versus use of agents/distributors, contract manufacturing, trading companies or joint ventures) reinforces this observation. Overall, these patterns strongly suggest a low degree of knowledge and experience among most Colombian producers of complex export market characteristics, saleable product requirements, competitor strengths and weaknesses, marketing channel options and market penetration strategies. (b) mntE mic Environmen 36. Surveys suggest that producers generally continue to view skeptically the export market. The private sector seemed to consider that EMP implementation in 1991 generated an environment of confusion and uncertainty with multiple and unexpected changes in the rules of the aame (eg., repeated adjustments in trade, exchange rate and exchange regimes). It also cited (not surprisingly) as counterproductive to EMP objectives low and diminishing profitability of exporting with revaluation trends, the sharp reduction in export credit subsidies in PROEXPO financing, a cutback in PROEXPO promotion activities, and the cut by 50% in CERTs for 1992. Adding to this the slowdown In many international markets from recessionary influences, overall non-traditional exports stagnated in 1992. 37. The Government took strong measures in 1991 to curtail inflation, which had accelerated from 28% in 1988 to more than 32% in 1990, through the control of liquidity of banking hIsiuons and the heavy placement of open-market instruments. This effort resulted in a sharp increase in interest rates, a decline of private investment, and weak domestic aggregate demand. Economic growth slowed considerably to 2.2%, depressed in particular by declines of 2.0% in manufacturing output (the poorest performance since the early 1980s) and 0.4% in commerce. 38. Given strong differentials in domestic and international interest rates in 1991, the external sector experienced a large inflow of private sector capital, leading to a substantial overall balance of payment surplus of nearly US$2 billion and an appreciation by 8% in the real foreign exchange rate. While the current account officially registered a surplus of 5% of GDP in 1991, it is believed by the authories that current account flows concealed capital inflows estimated to amount to about 3% of GDP. In 1992, the registered surplus fell to 1.8% of GDP under growing import levels and the eal exchange rate remained relatively stable. Thus, while non-traditonal exports nominally  9 increased by 46% in 1991, cofrecting for esimnatd capital rpatriation suggests that there was only a modest increase in these exports over their 1990 level. In 1992, non-traditional exports stagnated. Imports fell by 11.2% in 1991, due party to anticiption and uncertainly during most of the year about changes in the import tariff levels, though In 1992 Imports Increased sharply by 28.7% in reaction largely to falling Interest rates and riing construction demand. 1.3 Ruina Export Commodity Conenmation 39. In the twenty years following World War II, an average of nearly three quarters of Colombia's export receipts were derived from coffee. This concra was diminished to 49% by the sustained growth of manufacturing expors (averaging 13.7% p.a.) during the 1967-73 period. Such exports grew from 7.3% to 24.3% of total exports and included significant industrial export diversification (Tables 1 .10-1.11). Both Colombia's adjustment program of the mid-1 960s described above and a verV favorable intenaional trade environment were responsible for this shift. 40. However, in the following two decades, developments In the commodity export E Ct UlalOdt Pri market had a major influence on the behavior of non-traditional exports In particular and the s 40 economy In general. The frequent short-term . fluctuations In the worid price and demnand for 4 coffee, and more recently in those for petroleum, . y have introduced marked volatility in ColombiaWs external sector. Until recently, the Govemment / relied heavily on trade policy instruments to deal 0 with this problem. Access to prior import o . licenses was used widely as a vehicle to Omit or o encourage Imports in order to manage balance of - ' we an payments disequiibria. This led to cycles of short-lived trade liberalization initiatives, ___ generally in harmony with coffee export growth, followed by reversals to protectionism. a 41. The coffee export boom of 1975-79 led to a surge In intenational reserves, domestic liquidity and inflation. Tax increases were imposed and public investment growth was slowed In order to achieve a fiscal surplus, while private sector investment and output growth declined markedly with sharply increased banking reserve requirements. The strong non-traditional export drive over 1967-74 faltered as the Peso began a progressive revaluation, trade protection measures were Imposed, and exchange crificats were Introduced to delay monetization of export receipts. 42. So, while overall NIC industral expors continued to grow over 1974-80 at rates similar to those of 1966-73, Colombian industil exporters lst market share to competitors in both export and their own domestic markets. Over 1974-80, averae industrial export growth rates fell to 5.4% p.a., about one-third the average for middle-income developing countries, and declined by 3.3% p.a. over 1981-84. By 1984, the share of indusral export In total Colombian exports had fallen to 16.5%. Over this period, Colombia mntained a very high proportion of labor-intensive products in 'See 'Commodity Booms, Macroeconomic Stabilization and Trade Reforms in Colombia", John T. Cuddington, CPDRM, June 1986.  10 its industrial exports (above 90%), while the NIC average continued to make a sharp shift in product composition, particularly out of agro-industrial exports and in favor of capital goods 43. During the 1980s, a structural change in overall exports took place as Structure of Exports petroleum exports grew from US$100 million to 1974-90 US$1.9 billion. Its share in exports increased WnoA from 2.3% to 27.5% over the decade and 'IO" almost entirely supplanted the decline in the an. share of coffee to 19.8% of total exports. By ti, the end of the 1980s, the concentration in petroleum and coffee along with other commodities-coal, nickel and gold-maintained Colombia's total commodity export dependence, , compared with 55.5% in 1974 to 52.5% in W 1990. , _ zo t- 44. As the result of its commodity export dependence, the Colombian economy has always been vulnerable to commodity-related extemal shocks-sometimes favorable, sometimes not. The persistent flux in export markets and macroeconomic management have together often created a highly uncertain business environment for the private sector. In particular, enterprises have had to face pronounced business cycles of relative expansion and contraction in the local market, creating production bottlenecks or excess capacity. This has been compounded by doubts about timely access to imported raw materials, spare parts and capital goods inputs. It has created marked and unpredictable shifts in profitability with relative price changes. It has also been a deterrent to investment for both the domestic and international markets. Consequently, the Govemment hopes that a derivating benefit of increased economic efficiency and export development, will be diversification of Colombia's export structure through further non- traditional export development and more stable business environment. 2. CONSTRAINTS TO EXO.REVELOE 45. For a private enterprise to successfully transform its business from a high domestic market orientation subject to long-standing trade protection into a sustained and significant participant in intemational markets requires that govemment provide a business environment which places enterprises on a equal footing with competitors elsewhere. Some of the main features needed are outlined in the Box 'Public Sector Agenda for Export Development. As discussed in the previous Chapter, the Govemment is making a strong effort through the EMP to establish such an environment and address some of the dominate concems of exporters and non-exporters according to surveys conducted during Project preparation (Tables 2.1-2.2). This Chapter addresses complementary issues of trade policy and administration, trade promotion and trade finance which, for the most part, need to be resolved jointly by the public and private sectors to accelerate export development. 2.1 Trade Policv and Administration 46. During the 1984-86 trade reform program, most of the 728 tariff positions subject to quantitative or administrative export restrictions were eliminated. In 1991-92, the Govemment took action to eliminate all remaining economic-related export restrictions (excepting for gold and emeralds) on 41 positions, which were associated mainly with agricultural commodities (eg., cotton, sugar and  11 rice) and minerals. The remaining restrictions now relate to intemational commodity agreements (eg., coffee, multifiber and cocoal and non-economic considerations, such as compliance vith environmental, sanitary or defense regulations or national artistic, archaeological or historical interests. 47. Since 1967, Colombia's main economy-wide instruments to provide free-trade 1S87 -u status to exporters have been the duty exemption system (Plan Vallejo, or PV) and the indirect tax rebate system (CAT/CERT). PV . ...... allows exporters to import production inputs at international prices without paying the tariffs due. The tariff remains in suspension until the u ..l. finished product is exported. CERTs give a tax rebate on indirect taxes paid on local value added. PV duty drawback values have depended upon coverage, the import content of particular exports, tariff rates, and the financial cost of prior deposits required as guarantees. r CERT payments, generally at least 70% of total incentives, have been influenced primarily by import levels (as they were financed by an import surcharge until late 1991) and administrative discretion. PROEXPO has also offered interest rate subsidies provided on rediscounted loans for trade and fixed investment. 48. The sum value of these provisions has run in cycles (see above and Table 2.3), oscillating between 18-26% of gross export value over 1967-74, falling under fiscal pressure to 9.5% in 1976, rising progressively to 25.6% in 1985 in an effort to compensate for currency revaluation, then falling following the Government's major adjustment program in the same year. Over 1990-92, the Govemment tooc several decisions which reduced their value to 9.9% of non-traditional exports in 1991, and has decreased it further to an estimated 5% In 1992. First, the substantial decrease in tariff rates over 1990-91 reduced the value of PV to users. Second, 1991 CERT payments fell in relation to exports and the central Govemment's 1992 budget provision is only one-half of the 1991 level in nominal terms. Even under conservative assumptions, this will no longer in the aggregate overcompensate PV users in relation to the estimated actual indirect taxes included in their exports, and may even undercompensate those not using PV (see below). And third, trade finance subsidies to financial intermediaries were eliminated in 1990 and final rates raised to 95% of market rates. (a) Export Tax-Free Systems 49. Duty Exemption System (PV). To enable exporters to achieve international competitive standards, a duty-free import administration must meet several key design and operating criteria: compliance with the GATT rules on export subsidies,' transparency and automaticity, speedy processing, prevention from misuse of duty-free imports, equal treatment of all export activities, and I Article 6 of GATT does not consider the refund of indirect taxes as a subsidy to exports in itself. If the refund is based on the composition of taxed imported raw materials in the exported finished product and within the duties/taxes levied, it will not constitute a subsidy.  - 12 - temu;^i *__ - Ve =~~ a _#Iz~ __.rtEtuas=~O WCOG 4p v ieiG u 9, _=~Aa bmca = 9,. =1 _ w~ W4 u~EsWW,Wso =~~~~~~* Ae*r s h f~~~~5J*~ - minimum administrative coats.'7 The main administrative arrangements to operate these systems for exporting firms consist of Ui) approved input-output coefficients, (ii) payment guarantees in the event of duty liability, (iii) documentation for expected Or completed export transactions, and (ivl a fixed drawback schedule. Under present regulations, an exporter must register for PV by establishing an export plan in a contraet with Ministry of Foreign Trade. Once registered, the exporter may import duty exempt (a) inputs and raw materials for direct production of articles for export and for indirect exports - products which wilt subsequentiy be incorporated into export products; and (b) equipment Or machinery to create or expand capacity, provided that all the additional output will be exported. Occasional exporters can qualify for the PY wJuniorw scheme, in which duty exemptions are granted for second-time imports and tied to imports of pre-determined quantities of specific goods. 50. Partieipation Tn PY is not automatic but contingent on arrangements between the exporter and the Ministry of Foreign Trade. Prior to 1985, contracts between them were dependent largely upon the exporters past export record, the non-avaibability of similar domestic Inputs, the availability of foreign financing and the posting of guarantees with Customs. The system tended to work in favor of a relatively few existing large exporters and against the inclusion of occasional and indirect exporters, and capital goods imports for exports. PV has since been modified to eliminate these rest;rictions. In addition, under the Industrial Restructuring and Development Project (FY91), requirements for the provision of guarantees from PV users were made more flexible by permitting the ' See Rhee, A Framework for Analyzing Choice of Alternative Duty-Free Import systems by Foreign and Domestic Firms. Working paper, Jlune 1991.  13 use of personal guarantees In addition to those through banking institutions. Administrative adjustments were made within INCOMEX (Resolution 4747) aimed to reduce processing time by reducing the number of level& required to approve applications and increasing the authority of INCOMEX 6 regional offices, leaving the PV committee to formulate and monitor policies. 51. In August 1991, further changes were made to PV (Resolution 4405) to faciltat Importation of materials for local assembly and export of the final product. It authorizes programs with annual ceilings in US Dollars for imported production inputs to permit rapid tumaround times In import- export. At the same time, procedures were simplified in order to include Indirect exporters such as trading companies to participate in PV (Resolution 4406). Minimum export requirements for capital goods imported under PV were also adjusted from 156 of incremental production to 1.5 times the import value. Further decentralization of PV procedures to regional offices was also made. 52. These steps appear to have helped to extend the use of PV among exporters. Non- traditional exports involving PV have grown progressively, from 41 % (US$595 million) of the total in 1980 to 55% IUS$1,470 million) in 1990 ITable 2.4). Correspondingly, the number of programs approved under PV has grown considerably, reaching 391 in 1990. Of these, about 81% originate in the manufacturing sector and 17% from agriculture. Within manufacturing, a large proportion of PV Is used by producers of textiles and clothing, footwear and leath goods, and by publishers; within agriculture, flowers, fruits and concentrates. In 1990, 65% of PV imports were for production inputs and the remainder for capital goods. 53. Though overall coveraoe has improved, larger enterprise exporters have about twice the average coverage (60.8%) as smaller enterprises (31.7%). The time currently required to execute PV procedures in the Ministry remains very long for exporters, especialDy those selling in highly time- competitive markets. The average processing time in 1991 was 33 days to take a decision on a PV application for programs involving imported production inputs and 43 days including the time to issue an official communication of approval. The time for applications involving capital goods was 25 days and 39 days, respectively. However, the times involving processing of modifications or additions to ,V programs, as well as acceptances of guarantees was less than 5 days on average. 54. Reasons for these delays include an excessive number of procedures and requirements, inefficient handling of the data, and too many application review levels. PV applications aFr particuarly complex for smaller scale industies. The cost in time and administration according to interviews carried out was 1990 is equivalent to a high 2% of product cost. 55. Indirect Tax Rebate Systm (CERTS). CERTs are paid on the domestic value added, calculated for PV users as the difference between the duty-free Inputs and the fob value of exports. For other exporters, the CERT is paid on the fob value. The rebate is a freely negotiable certificate which may be used to pay national taxes on profits, sals or imports. It replaced the export bonus system (the Certificado de Tributario, CAT) Introduced in 1967 which had a similar purpose. 56. CERT policy has generally lacked transparency, fluctuated sharply over the years, and had little apparent connection between the indirect taxes a firm pays and the rebate it receives. Average CERT payments have varied since 1967 within a range of 3.2-15.6% of the gross value of non-traditional exports (Table 2.2). Recently, payments have shown a declining trend, with the average rate of CERTs failing from 12.7% In 1985 to 4.9% in 1991, a level lower than for all but three (1976- 78) of the past 24 years. CERT rates have also varied widely among products. They ranged from 15- 30% in 1984, though by 1992 this had been reduced substantially to between 2.5-5.0%. The rationale for differentials is not clear-for example, in 1991, the rate of 5% applied to plastic products while 9.5% was applied to treated rubber products; non-sugar products received a CERT of 5.3% while meat products received 10%. Products having a significant volume of exports and receiving the  14 highest level of CERTs in relation to estimated indirect taxes were textiles, clothing, shoes and editorial products. 57. The recent decline in CERT payment levels and dispersion among products has resulted basically from the Govemment's decisions to place the economy on a fully market-determined basis. In 1990, the Govemment decided (Resolution 956) that CERTs are no longer to be paid out of earmarkings from the Govemment's import surcharge, but out of the national budget. Thereafter, multiple CERT rates have been reduced to three rate levels-2.5%, 4.0% and 5.0% for 1992, as fiscal pressures have led to a cut of total CERT payments by one-half in nominal terms In relation to the 1991 level to Col$67,000 (about US$97 million). 58. The Govemment has also expressed its intention (Article 7 of Law 7 of 1990) to make CERT payments which do not exceed actual indirect taxes incurred. CERT payments among Andean Pact countries are also to be eliminated by December 31, 1992 under the Andean Common Market Agreement. The excess payments made regularly to date have been tantamount to an export subsidy rather than a tax rebate, inter alia creating incentives to overvalue exports. A recent study 8 made detailed calculations by non-traditional export product group of the average value of the main components of indirect taxes and CERT payments in 1991 as a share of export value added for both PV and non-PV users (see Table 2.5). The incidence of these taxes differs according to subsector, and tend to be higher for more capital-intensive and import-dependent industries. However, CERT payments in 1991 as a share of non-traditional export value averaged 6.8%, suggesting that exporters received an effective average subsidy of about 4% of export value. CERT payments in 1992 did not exceed 3% of non-traditional export value, thus erasing subsidies in the aggregate. 59. Further simplifications are needed in the PV system to reduce processing time and to expand coverage to smaller and new exporters. The CERT system needs a transparent and automatic mechanism to ensure that CERT payments are commensurate with the indirect tax burden associated with specific export product groups. In its absence, the tendency to provide effective export subsidies may persist as well as incentives for export overvaluation and fictitious exports. Under the Project, the PV and CERT would be harmonized, the calculation of indirect tax refunds for domestic inputs based upon input-output coefficients for product groups requirements, procedures simplified and the VAT exemption rzero rating") extended to export-related services such as transportation, insurance and technical assistance. (b) Antidumina System 60. Colombia promulgated an antidumping and countervailing duty law (Decreto 2444/90) in 1990 in concert with its trade liberalization initiatives. It is in the process of formulating accompanying regulations, a petitioners' questionnaire, and a procedures manual for intemal use in antidumping and countervailing duty investigations. Antidumping involves many conceptual and procedural complexities, not least due to the very definition of dumping. Dumping is said to occur by virtue of the existence of price discrimination, such that sales of products in a foreign market are below their fully allocated cost (direct cost, plus a reasonable allowance for overhead and profi). 61. There are numerous reasons why price differences might exist, and in a world of less than perfect markets, competitive firms will frequently differentiate their sales prices in order to maximize profits in segmented markets. This means that under the broad definition of dumping, the 8 Contenido de ImDuestos Indirectos en las Exportaciones y Analisis de Politicas de Comercio Exteror May 1991.  15 practice may be virtually ubiquitous. As positive dumping margins are quite easy to find, the injury determination is often the key to the decision whether or not to apply duties. Good methodological practice In antidumping systems encompasses mechanisms to help avoid the possibility that a govemment will turn It Into a surrogate of protection that nullifies trade liberalization. Key aspects of methodology include guidelines for dumping margin calculations and injury investigation, public interest procedures and transparency of proceedings, duty assessment and collection systems, and sunset provisions. 62. This is all the more important given that firms seeking relief under antidumping proceedings frequently enjoy a monopolistic position in the domestic market if competition from imports is blocked. In the case of Mexico, over 90 percent of all antidumping cases since 1987 have involved monopolies or oligopolies (defined as markets In which three or four firms entrolled over 80 percent of national output). In addition, exporters to small markets sometimes refuse to cooperate in antidumping investigations, preferring to cease export sales altogether and eliminating a source of supply for domestic consumers. Mexico has experienced a complete lack of cooperaton from foreign suppliers on a number of occasions, and this was the case in Colombia's first investigation in respect of phosphoric acid imports from Belgium, which ended in the imposition of an antidumping duty. 63. The proposed Project supports provisions adopted by the Government in Decree 150 of January 25, 1993 aimed to help ensure sound provisions and implementation of the antidumping and countervailing system so as to avoid its use as a protectionist instrument. These provisions draw upon two consultants' reports and the antidumping case that Colombia has already completed. Basically they bring the law and draft regulations into line with GATT rules, simplify documentation for the benefit of petioners, minimize sources of conflict between petitioners and the authorities, and build administrative and technical support for sound administration of the system. (c) Customs Sanri 64. The Govemment began a major customs reform program in 1990 to complement other aspects of its Economic Modernization Program. The program has Included revisions in legislation goveming customs administration to simplify and harmonize the regulatory framework with intemational standards, measures to increase the efficiency of the importion and exportation process to facilitate intemational competitiveness of Colombian products, steps to improve controls over fraudulent practices and contraband in order inter alia to increase Govemment revenues, and changes to upgrade overall Customs organizational and staff performance. 65. Implementation of the reform is well underway. The National Tax and Customs Service (DIANA) personnel were drastically reduced from about 3,350 persons in 1990 to about 1,390 in 1991, primarily through reductions in auxiliary personnel. The plan is to progressively rebuild the staff to a total of about 2,000 with increases at the professional and technical levels. The Custom's warehouse system has been privatized. A system has been piloted by which large firms can complete Customs documentation via computer directly from their business location. Other steps have been taken under the program with outside assistance. Three IMF-supported specialists worked over 1990- 91 mainly to help to improve Customs legislation, procedural revisions, instruction manuals, and management information systems. It also assisted in the establishment of a customs career planning and training system. Customs has been developing enhanced computerization capacity with assistance from the German Government to better monitor manifest entries and improve data management. 66. Still, DIANA suffers from a variety of serious problems which frequently cause traders excessive delays and costs in clearing customs and revenue losses for the Government. The incidence of overvaluation and fictitious exports, which have stemmed mainly from CERT payments, repatriation  16 of capital, and VAT zero rates accorded to exports, remains high. Existing DIANA systems of export and import monitoring, both physical and documentary, are weak. Customs officers lack experience in evaluating documentary evidence for both exports and imports; the professional level of those working in DIANA supporting systems Is also generafy low. Technical equipment and laboratory fatiesW to assist Inspectors in making Judgements about product quantity and description are inadequate. Also, very low priority in staff allocations is also afforded selective cargo examination and valuation at export. 67. In additon, while the tendency to underinvoice imports in order to reduce tariff chuas is likely to decline substantially in lght of the drastic reductions In the tariff rate schedules, an Import reference price regime remains in effect lArticles 26 and 27 of Decree 2011/73). The system covers approximatly 30% of Colombian tariff positions and 50-60% of total import value and is operated under the direction of the Valuation Division of Customs. It aims to address DIANA's valuation problems at import, particulary for household electrical goods, electronics, motor vehicles, textiles and chemical/pharmaceutical products. I Is charged with preparing reference price flats, which Customs officers are required to apply before cearance to duty If the declared value is not comparable to the reference price. 68. However, under the GATT valuation code, imports are to be valued primarily according to tansaction value (the price actwfly paid or payable for goods when sold for export and adjusted for insurance, freight, etc.). When valuation cannot be determined on this basis, a series of specific steps for comparable transactons is to be used for such purposes. A lst resort is on the basis of data available In the country of importation, which in any case is to exclude the price of goods in the domestic market of the exporter, the price for export to another country, and minimum customs values. 69. Support would be provided under the Project, for the current phase of the customs reform program ,Una Nueva Aduana...psra un Nuevo Pals", and the DIANA's management plan for 1993-94. Technical Assistance would basically entail a combination of procedural simplification, information systems development and computerization, staff training and equipment upgrading in four strategic areas: (a) export facilitation, (b) proper import and export valuation, based upon the Goverment's commitment to adopt GATT-consistent practices and phase out its reference pricing system prior to January 1, 1995, and (c) strong emphasis on ex-post documentary control systems and selective physical monitoring of goods. This assistance would be coordinad closely with existing help being given through the Inter-American Development Bank, which is focused mainly on the import prn cess. 2.2 Export DQgMigon Services 70. In January 1991, the Colombian Congress passed Law 7 transforming PROEXPO (The Fund for the Promotion of Exports), Colombia's publc trade development organization, Into the Bank for Foreign Trade (BANCOLDEX), a trust company, FIDUCOLDEX and the Export Promotion Trust. The purpose of this initiative was to restructure the Govemment's trade development services to facilitate export development under the trade lberalzation process, and to redirect to the central Govemment budget the 6% import surcharge which had financed Its activities. This section reiterates the market failures which need to be alleviated through promotion service support, identifies the weaknesses of public trade promotion organizations (TPOs In general and of PROEXPO in particular toward this end, and outlines a development program under the ProJect aimed to more effectively accelerate export growth.  17 (a) Market Failura 71. The Colombian exporte and nonexporters surveys during ject pWmrion Identified the following main non-financial factors as likely to curtai an export response: (a) lack of entrise familiarity wth the export process ie aw its Instruments; (b) Inability to readily identify or confide in Informaton, analytical resources and joint venture relationships needcd to nitlate the export process and lc) lack of ability Ot willingness to meet the higher costs of overseas expertise Infally required. given doubts about the cost/benefit relationship or the inial inadequacies of resources in an enterprise's marketing budget. In addition, while oversea8 private service finms may provide ample coverage of major markets, services may not initially be available for markets of lower volume (such as those in Latin America) or address the neeos of smaller potent exporters. 72. These surveys concluded that most perceive the export market as more time- consuming, costly, risky, and hence ess profitable than domestic market business. They also show that non-exporters had a very low willingness to pay for export support services. Instead, their number one priority (particulary among SMEs) was to contact buyers, after which they fek that their export problems would be solved. While this is obviously an important objective, it suggests an absence of knowledge of what is required to penetrate an export market iniialy and to sustain exports through persistent adjustments to market demand, product design and competitor position. Experience elsewhere shows that a well recognized sequence of steps is usually required for this purpose (see Box on following page). (b) Tradg Promotin Mechanisms 73. Public Trade Promotion Organizations. Over 100 countries have designated focal point organizations to promote exports. TPOs were originally established by European countries (such as Finland, Netherlnds and Italy) after World War I and evolved usually as part of the civil service into publicly funded parastatal bodies to provide infornation and guidance to exporters. Currently, such promotion is organized in OECD countries in many ways, from special departments in a commerce or extemal affairs ministry (Canada, US), to autonomous public bodies (Ireland, Italy), to those in Nordic countries which are more private-sector driven services based on membership and fees. Most such promotion programs are part of national service networks, which are provided by trade associations, financial instiuons, chambers of commerce, and private suppiers of information and consultancy. 74. TPOs in developing countris were generally established in the 1 960-70s, frequently in an environment of macroeconomic instability, strong antexport bias, an absence of ocal export support services, and with heavy involvement of inexperienced civil service staff. In Latin America, PROEXPO was the oldest autonomous export promotion institution of the 22 found there, and one of the few in the world which combined promotion with the provWsion of export credit. These TPOs have typically provided trade information services, organized trade fairs and trade missions for market development, and occasionally offered market studies and advisoW services on product and market penetration strategies. Most TPOs remain autonomous bodies reporting to a ministry, while less than 10% are wholly or semi-private. Less than 10% of TPO budget are more than 50% financed by non- govemment funds, with about one-half financed entirely from national budgets. About 21 % are financed by non-govemment budget mechanisms such as levis on exports and/or imports and port charges (Hong Kong, Colombia) 9 OComparative Study of National Export Promotion Institutions and Programmes". Trade Development Institution of Ireland, May 1991.  It . ift'1jjtI .  I If  t A! .kr",...s **w PU A .:1  ti . I p9 go iIit$rft PIi go C ii 1111 f1"  19 75. Strong doubts about the efRciency and Impact on exports of TPO delivery systems have been raised in recent years, Including in recent assessments by the Bank. "I Such assessments strongly suggest that most TPOs In developing countries and Bank assistance to them have lacked impact on export growth. The main reasons seem to be (a) promotion services have been provided inappropriately through a single public service supplier; (b) the legacy of Import substitution and associatcd attitudes and motivations against exports; (c) external assistance for support services has rarely been organized to focus directiy at the enterprise level, especially for the purpose of overcoming production problems and adapting products to target market; (d) programs have not been a product of consultation between private and public sectors to serve exporter needs; (e) high tumover in leadership of TPOs and inexperienced staff; and Mff financing agencies have not been sufficiently concerned with impact of funds on the fundamental objective of increasing exports. 76. Private Service Providers. In response to a number of these concerns, new delivery approaches have been introduced in recent years, particulrly in OECD countries, to increase the impact on exports. In tbe main, steps have been taken to rely much more on private services in countries such as the UK and Germany for market research, buyer contacts, and information services. Also, among TPOs, cost recovery charges are increasing to obtain a clearer definition of which services are really in demand and what the marketplace can provide to exporters without public assistance. 77. In Colombia, however, few of such services are available. Producer associations devote some of their programs to export-rated activities, providing in particular publications with market, regulatory information and contact data, holding export-related seminars (particularly at the production level), and participating in trade fairs. Given the long-standing domestic orientation of the economy, however, the private sector basically provides a minimum of support for the export process. There is a substantial lack of enterprise-based local rnarket research capacity, confidential marketing advisory services, and access to basic and sophisticated market information. 78. However, there is a wealth of overseas resources now available." There is a wide range of oeneral and product-specific market research subscriber reports (eg., National Panel Data in the US and Dympanel in Europe), on-line data bases (eg., SICE of the OAS, Trade Inflow, Footwear Market Insights) and consulting services (eg., Emanual Weintraub, The Brand Consulting Group). These provide such information as monthly consumer purchasing behavior and attitudes analyses, import/export volume and selling price trends, trade regulations, concept testing, supplier evaluations by retailers, and strategic market positioning audits. These services can be accessed by Colombian private enterprises directly or some of them can be obtained through service systems which aggregate such information. One example of this is the Hong Kong Trade Development Council's 'LINK' or the Trade Development Board's GlobalUnk in Singapore, which allow firms to access a massive data base for a fee. 79. Private consulting firms also offer assistance with joint ventures and licensing agreements (eg., TradeNet). Others offer product testing services to determine the performance characteristics of raw materials and finished products. Other organizations provide Information on the status of quotas under import control, trade negotiations and consultations, countervailing duty and antidumping actions, labeling requirements (eg., IBERC In the US and Bleckmann in Europe). Still other firms arrange for space rental and management for the very wide range of trade fairs held each year (eg., 10 See 'Development Assistance Gone Wrong" and 'How Support Services Can Expand Manufactured Exports", PRE Worldng Papers 543 and 544, respectively, November 1990. l This was documented under Project preparation in *Private Sector Export Services for Apparel, Footwear and Accessories,' by Falcon lntemational,1 992.  20 Southem Apparel Exhibitors, Gralb Publcations) or organiz trade fair booths (eg., Exhibit Designers and Producers Association). Business office services to support export development work are also available. (c) PROEXPO 80. PROEXPO was founded In 1967 as an autonomous commercil public enterprise, under the direction of the Ministary of Economic DeveWpment with adminitration managed by BR. Its non- financial export promotion functions Included market omation servces, a network of local and overseas offices to facilitate contact between importing countries and Colombian suppliers, trade fairs and commercial missions, and advisory services to Colombian businesses to encourage adequate product quality, design, packaging and market promotion. Perfornance assesments of PROEXPO's activities, described below, correlte closely with internadonal assessments of TPOs and suggest that they have had a very limited positive impact on exports. 81. The exporter survey prepared during Project prepaation reflects that, for an enterprise's initial decision to export, two-thirds of the firms contacted sources other than PROEXPO (Table 2.5). These firms undertook market r"earch mainly on their own (40% of respondents) and through unidentified 'other outside' sources (30%) (Table 2.6). PROEXPO and private foreign firms were only utilized by 10-15% of respondents each. Among non-exporters surveyed, only 20% indicated that they would seek PROEXPO help in making an inital decision to export. 82. Experienced exporters recommended that prospectve exporters seeking help (assuming that they paid market-prices for those services) give highest priority to 'confidential export advisory services' and 'inormation on competitive activityw (Table 2.7). They also judged assistance with meeting intemational standards and testing requirement as wall as legal advice to be highly important (Table 2.8). Ex-post, they judged these activities to be of considerably greater importance than in their own cases, in which information on foreign demand and prices had ranked at the top of their concems. In addition, the PROEXPO services which they had made greatest use of, its overseas offices and information on foreign demand, they considered to be only one-half to one-third as important as the priority activities which they recommended to prn pective exporters. 83. The survey further suggests that t product development work has been done by existing exporters-two-thirds sold existing product. Where adaptaion was done, however, most was by the firm itself and in no case with PROEXPO help. Similarly, firms did not seek PROEXPO's assistance to help meet international standards, testing, quality control and engineering. As a source of buyer introductions and marketing advice, PROEXPO was used only about one-quarter of time by experienced exporters, with self-reliance or the use of other outside sources of comparable importance. Among non-exporters, PROEXPO was considered more favorably for assistance in buyer introductions (30%). Overall, the survey suggests that the majority of experienced exporters have depended upon themselves or other local private entes for support services, and that the service requirements of greatest importance to new exporters are not those that PROEXPO has generally provided. 84. These views of PROEXPO's promotion services are corroborated by an independent professional evaluation.12 It considered a MOEPO's Export Promotion Department generally lacked leadership and experienced staff, and appeared unable to spend its budgetary allocations, reflecting the ample resources of the organizaton. Exceptional performance was found in the Fairs and Exhibitions Department, where the staff was considered to be highly professional and output to be very 12 By the Trade Development nstitue, under subcontract with the First Washington Associates, 1991.  21 Impressive. The Infomation and Publcatons Department was considered to produce materials wih ittle consideation of ditribution or end use and almost regardless of cost. Such materil appered to be used more for reference work than as sources of immediately useful marking Infomton. The librarv resources were lare and Impessve, but out-of-date and marginally relevant to exporters. 85. Staff of the Induwty Development Department was seen as mosdy desk-bound wh limitd knowledge of export supply and as not having vhisd the markes of Intest to exporters. The quality control section of Technicl Assistance Departme, constng of one staff member, and it involvement with indusrial design were considered to be ineffective. The Transport Departuent was considered In a like manner, though It also adminidtered the Freight Compensation Scheme under which about 5,000 shipments by 500 exporers were subsidized in 1990 for eli9gible routes. A small sampling of overseas offices suggested that, while they were very busy, most activity was associated wih diplomatic and other Govemment interests outside of export promotion and exporters generally did not consider most of them to be of significant help. 86. Direct expenses for these services (which were provided essentialy free of charge) were US$8 mrilion equivalent In 1990, of which about US$2.6 million was for transporation compensation, US$2.2 million for trade fairs, and US$1.2 for convention center costs (Table 2.9). In addition, the cost of maintaining PROEXPO's domesic and overseas offices was about US$14 milion and directly associated staff operating costs at another US$2.7 million. In all, total esmated promotion expense of US$24.7 million represented 1.0% of non-traditional exports in 1990, at least ten times the level found among successful East Asian promotion agencies1 (d) Devepoomet Mrorarn 87. Three Initiatives would be undertken with the support of the proposed Project to increase non-financial support services for export development: (a) etablishment of an Export Development Matching Grant Program, lb) the restucung of promotion activies formerly provided by PROEXPO, and (c) the deregultion and development of tradin companies. These steps would basically shift substantially sources of support service to private sector providers and place TPO programs more in the hands of exporters themselves. They would be focused on all three phases as required of the export development process: la) Inial high-lvel advice on planning a reorientation of sales into exports, (b) specialist assistance in adapting the supply package to be in line with extemal market preferences rather than with a lon-protected domestic market, and (c) help with selecting the most appropriate entry channel into each new export market. 88. Export Development Matching Grant Pram. Matching grant programs have been utilized In several countries (notably India, Indonesb, Singapore and Taiwan Province) as an instrument to alleviate the temporary market fagures identfid above. The central objective of the Export Development Matching Grant Program to be developed under the Project would be to improve the Unkage between local and internatonal markets by increasing information flow and advisory services to potential exporters and the interchanges between potential selers and buyers. 89. The Program would operate on a tenporay basis over about three years only and provide Govemment supported-financing to individual firms on a 5050 cost-sharing basis with the firm. All non-traditonal exports, whether from manufactured goods or service enterprises, would be eligible for the grant with the exception of those agricultural commodities having negligible value added and 1S ee 'The Four Successful Excepions", TPD CED, September 1988.  22 tourism. Any one-time initial activity requiring advisory services and/or travel expenses defined within a properly formulated and credible Export Expansion Plan would be eligible. Typically, the following needs would be supported by the Program: (a) initial advice to discuss the stages of entering into the export process and requirements for subsequent steps. Particularly for smaller companies, which tend to immediately consider that buyer identification Is the prime consideration, it is difficult to appreciate the requiremts of exporting and the benefits of using a range of export services without adequate exposure; (b) advisory services and travel required to determine appropriate export market entry, evaluating such issues as time horizon, target market, distribution channels, product development or adaptation, approach to pricing and promotion; (c) new or enhanced product design, commercial promotion design, packaging and certification by the exporter; and (d) support for the initial costs incurred by those prepared to develop local trade information and inquiry brokerages independently or as a joint venture with overseas information services. It would also cover the full cost of overseas TA for advice on initiating such services. 90. The day-to-day management of the Program would be the responsibility of a separate Matching Grant Trust to be set up, on terms and conditions satisfactory to the Bank and to be administered by FIDUCOLDEX (condition of loan effectiveness). To help ensure operational separation and an absence of conflict of interest between the Program and other activities of the Trust the Trust Itself would not be eligible as a promotion service provider. The Trust would include operational arrangements such as a Program Manager and a team of seven account executives. The Program Manager would have responsibility for grant application review and approval with ex post quarterly monitoring by a council also to be set up under the terms of the Trust. Promotion services would be selected solely by the enterprise according to basic guidelines which would ensure that the entity is experienced. Payment of grants would be on a reimbursement basis following receipt of satisfactory documentation (see Annex 3 (d) for the Statement of Policies and Operating Procedures of the Program). 91. Festructuing of Promotion Services. Promotion services, formerly provided by PROEXPO, would be substantially reshaped under the Project to address primarily areas in which the commercial marketplace would not be likely to operate during the early stage of trade liberalization and to ensure compatibility with the Matching Grant Program. For this purpose, an Export Promotion Trust was esabrished and as a transitional, measure endowed with Col$ 35,000 million (about US$51 million) of PROEXPO capital to cover the cost of export promotion activities over 1992-1993. The trust has an oversight Board of Directors, with three members from the private sector and two from the public sector (the Minister of Foreign Trade and President of BANCOLDEX). The Trust has responsibility for programming, budgeting, funding and implementing promotion activities. It receives administrative support from a trust company, FIDUCOLDEX, established for this purpose. A business plan has been adopted by the Export Promotion Trust In agreement with the Bank. 92. The basic purpose of this new entity would be to make the market work better, providing a wider flow of export-related product, market, and marketing information to local enterprises and the awareness of Colombian supply in overseas markets. It is expected that the focus of is activities would be of broad interest to all of the Colombia export community or to selective producers and markets where private sector services may not operate initially or there is a lack of economies of scale.  23 The former category is likely to include promotion campaigns in major export markets to increase the positive image of successful non-traditional Colombian exports, emphasizing a wide range of Colombian non-traditional products. It also might cover sponsorship of local demonstratons (exhibitions, competitions, seminars, publicity) of exemplary export product designs, quality control methods, certification schemes, and marketing techniques (OEM, brand names, etc.). Specific support would be undertaken for SMEs and for new export destinations, such as in Latin America and East Asia. Activities might include the intermediation of (mainly overseas) existing market research data services for major OECD markets, for the benefit of SMEs, and original market research for other markets of emerging interest to Colombian exporters. 93. To help ensure that the Export Promotion Trust is responsive to exporter needs and sustainable, under the Project, the three seats presently held by private sector representatives would be maintained and represent the majority in decision-making. Also, the Export Promotion Trust has adopted the following guiding principles for its development: (a) broad management responsibility enabling a strong client enterprise focus, quick responses to exporter needs and flexibility to adjust budgets and programs as required in the course of an operating year; (b) professional staff recruitment standards requiring substantial private sector commercial experience in the export process, accompanied by salary and non-financial personnel conditions comparable to private sector standards; (c) programmatic focus on those services, especially for SME, having strong economies of scale and not available from private enterprises in the domestic or overseas market; and (d) cost recovery from all program services provided of at least 50% of cost, excepting for trade fairs and missions which would recover at least 20% of costs. Technical assistance would also be provided under the Project for institutional twinning arrangements with trade development organizations to assist in systems development, staff training and other aspects of program implementation. 94. Trading Company Deregulation and Development. Direct export producers, which are generally larger enterprises with experience in the process, sell through their own branch or subsidiary to a (a) foreign manufacturer, distributor, importer trader, wholesaler or retailer, or a (b) local foreign trade agent or resident foreign buyer, which is still direct since the intermediary does not take tite to the goods in the transfer to the buyer but is paid a commission. Often, direct exporters sell to big chains or department stores with strong buying power, which frequently demand large orders and a wide range of products. 95. Indirect exporting is done when a producer sells to a local or multinational trading company (TC), which purchases the goods, performs marketing functions, and absorbs risks and profits from sale. Basically, the TC facilitates exports in the absence of an enterprise' own capacity to export directly. In doing so, TCs typically address market infornation failures In which a producer lacks in- depth knowiedge about a foreign product and/or market requirements, and the overseas buyer and/or export financier lack intimate knowledge about local export manufacturing capabilities.  24 96. TCs perform several ssrvices, '4 frequently emphasizing sourcin management and production quality control. They provide information mainly on market trends to manufacturers and occasionally provide technical information on production methods. They initiate marketing links with ndirect exporers so as to ensure the specified product, order size, quality and delivery time agreed upon with buyers. Small frequent orders may be organized with other orders to maximize the use of cargo container space and to reduce shipping costs. TCs may provide quality control by making inspections of goods before shipment and sometimes during production. They may provide preshipment finance to indirect exportrs, as imported inputs, advance deposit payments as an order guarantee, and/or working capital. TCs can also provide a risk buffr by diversifying selling risks and give broader market penetration to an indirect exporter. They further take the sales risk with respect to product specifications, quality control and delivery, and bear the buyer-non payment risk. 97. Most ornizations identified in Colombia as TCs do not corespond to the above-mentioned concept and do not appear to have been a motive force in exporting during the 19809. They consist primarily of firms owned by and acting as sales affiliats for Colombian manufacturers. A number of these, dedicated to products such as flowers, futs, garments and lather goods, operate with offices In targeted rkets overseas in order to better sell to the local market. Other TCs are organized as Joint venturegs wh intemational iners to supply the partner's home market leg. fruits and vegetables, coal and tuna). Overseas sales branches of multinational firms and a very few foreign general TCs (mainly Japanese) are also found in Colombia to faciitate product imports into the local market. 98. Enterprises regitered as TCs have handled only 3-7% of total exports over 1 981-90, of which bananas and coal generally represented about 70%. The remenng products handled by such TCs represented about 2-5% of non-tradional exports over these years and conssted primarily of texties, clothing and leather goods. 'I The majority of TC transactions are handled by a relatively few nterprses according to a recent survey. ' Most TCs focus on the export marketing function, though minor attention is given by some to financing, subcontracting and information gathering. As most TCs are organized essentaly as a sales office of a sWle manufacturer, they have rarely served unrelaed indirect exporters. 99. While Colombi's long-standing anti-export bias and the general absence of an international tradin culture are probably at the root of this profile, the TC regulatory framework is also a contibutor. Framng lgislation in 1979 and succeeding amendments have (similar to models elsewhere) specified mainly capitalization and export target qualification requirements to induce TC activity, and offered subsidized PROEXPO credit in return. It also provides for oversight by a Trading Company Commi#sion of the Government's Ministry of Economic Development. The regime basically led manut to split their export sales fofces into Independent affiliates In order to capture the benefits wihout developin and extending the TC skills menioned above to other enterprises in the economy. In tum, this undermined the concept in the view of Govemment and led to further controls of TCs to try to ensure at incentives were conferred on only those meting the TC concept. With the elimination of PROEXPO subsidized credit under the Governments EMP, the regime now basically 14 See 'Small Trading Companies and a Successful Export Response: Lessons from Hong Kong', IENIN Industry Series Paper No. 16, December 1989. Is 5Empresas de Comercalacion Interatonal en Colombia*, by C.M.T. Consultores Asociados Ltda., June 1990. '" See Trading Companies: The Colombian Experience', by Claudia Rodriguez, February 1992.  25 acts as a barrier to entry to entepreneurs Interested In forming TCs and distorts the business environment for exporting. 100. Basic product compettiveness, not TCs, will drive export development in Colombia. However, TCs may be parcuarly important to the nawsent and potential SME Indirect exporter along side the existing, mature direct exporters curreny moving the bulk of Colombian exports. Surveys suggest that there is a high demand for the kind of TC services outined above, especially given the relative shortage of skils in intrational business practice, marketing and foreign languages. 101. Under the Project, the TC rgime has been substantially deregulated as Decree 509/88, the most recent TC framework gislation, was replced on October 26, 1992 by Decree 1728. This step eliminated, in particular, provisions: (a) requiring minimum equity of US$0.5 million, US$3 million in exports in year one and US$2 million annualy theafter for market entry. Notwithstanding the importance of sound financial management of TCs, lgislated minimums in Colombia and elsewhere have not proven to be means to this end but bariers to market entry; lb) establishing the Trading Company Commission for Government oversight, and (c) lmiting TC activities among each other as well as with other local services. 102. In addition, the Project would support technical assistance to facilitate the development of Colombian TC services. It would be sponsored by the Export Promotion Trust of FIDUCOLDEX and encourage the upgrading of the organization, operations and staff skills of existing TCs and the formation of new ones. Seminars, training programs and the promotion of TC joint ventures would be provided through (a) cooperation wit trade development councils to draw upon the successful experiences of TCs in that region, (b) cross-fertilzation of experience of successful Colombian TCs operating overseas (mainly in Miami), and (c) exchanges with other trading companies operating in other export markets. 2.3 ort Einance Srvices 103. Once an enteprise receives an export order from overseas, rapid and reliable funding for the two basic stages of the export process-to produce the good (preshipment financing) and to offer as required sales on credit (postshipment financing)-are crucial to permit direct and indirect exporters i' to respond. In countries where financial markets work well, exporters and their suppliers have little difficulty to obtain such funds through commercial bank loans, capital market instruments (bankers' acceptances, commercial paper) and factoring services. This Is not the case in many developing countries, including Colombia, where the financial sector is characterized by lac: of skills, instruments and risk-taking capacity to deal with imperfect infofnation in relation to export transactions. 104. This Section examines the market failures underlying these problems and their effects. It then reviews resource needs and bast-resort credit rediscounting failities to help ensure that financial sector weaknesses do not constrain the export development process In the early stages of trade liberalization. It further discusses the role of the recently established Foreign Trade Bank and thereafter outlines a development program to help increase the fundamental capacity of the financial sector to provi'de export finance through technica sstnc, credit guarantee and insurance instruments. "Defined as enterprises that supply imediate goods to enterprises producing and exporting directly to importers, as wel as final goods producers selling to local trading companies.  26 (a) Market Failures 105. Preshipmentexportfinancing is constrained most importantly by inadequate information or analyses available to bankers to assess an exporter's ability to meet the requiremerts of an export order with respect to product specifications, quality and delivery agreed upon with the foreign buyer. While good collateral mechanisms do exist and the raw materials financed can be secured by bonded warehouses owned by banks, this security is mitigated once used in the production process. This exporter performance risk ("adverse selection') is particularly problematic with respect to new exporters and existing one-product, one-market exporters seeking to diversify and expand, which lack assets which can be pledged as collateral. It is reinforced by the inabiity of banks to distinguish between honest and dishonest borrowers ("moral hazard") and volatility of banking liquidity in the system which may disproportionately affect export financing. 106. Access to both preshipment and postshipment financing is also restricted by a lack of reliable information on foreign buyers (particularly those located in developing countries) to assess creditworthiness, creating higher perceived risks and uncertainty of payment delay, default, insolvency and bankruptcy. This is aggravated by the long distance from the buyer and lack of local presence in the event of default, creating potentially prohibitve cost of enforcing legal claitns for payment. As important for many export destinations are the political risks of accessing foreign exchange for payment, war and civil disturbance. etc. 107. A heavy concentration of lending to large scale enterprises and very restrictive lending practices are the consequences of these failures and constrain the export response. In 1990, twelve large domestic and intemational enterprises leg., IDEMA, Coltejer, Carvajal, Ciba Gigy, Dow Chemical), utilized about 25% of PROEXPO's rediscount volume for preshipment working capital and utilized 68% of its postshipment financing. Access to such financing has been determined essentially by the availability of full recourse to real property or personal guarantee collateral. Collateral averaged about 100-120% of the loan amount for most of 13 Colombian financial institutions recently surveyed. The survey showed that 52% of the responses of existing exporters and 42% among non-exporters 1 focused on this issue. 108. No institution surveyed was willing to lend against export orders or even letters of credit UICs). Viewed strictly from a lending perspective, this would entail exporter performance risk as these are not assets until they are converted into accounts receivable. Documents against payment or acceptance, in which banks would have to assume the payment risk of the foreign buyer instead of the banking issuing an LC, are even less acceptable collateral for extending credit. Unlike many banks and countries which do routinely lend on such bases, Colombian banks are only prepared to provide export credit having full recourse to collateral. 109. A significant share of secured export preshipment financing is provided as general domestic working capital lines of credit rather than credit tied to specific export transactions. While appropriate for larger, well-estabrished, creditworthy firms, this mechanism does not take advantage of the security which can be gained by lending on a export transaction basis in order to serve the remainder of the exporter market. On average, about 85% of the proceeds of preshipment working capital are used to purchase imported and domestic production inputs and only the remaining 15% or less for the value added portion cannot be secured. 110. When banks do not tie their export financing to an export transaction and documentary payment such as an LC, it makes It difficult for an exporter to arrange for financing of its local supplier through a domestic back-to-back LC. Indirect exporters are therefore also disadvantaged in access to 1* Excludes concems about Interest rates  27 credit, which eurtails both those exports substantially dependent upon domestic input industris and the backward linkage benefits of the export process. 111. Collateral requirements for postshipment financing are also heavy and there Is little activity in non-recourse postshipment financing or advances against documentary collection without recourse. The existing insurance scheme against the risk of non-payment by buyers is virtualty defunct, making acceptable payment terms difficult to arrange and financial institutions are unwilling to take assignment of such insurance policies as collateral substitutes. These practices create an important barrier to securing financing for many firmns, particularly smaller and newer exporters, which may have export orders but lack adequate collateral for such transactions. Survey results reflected that exporters consider that such constraints have led bank credit to provide only about one-half of actual credit demand. 112. Such constraints are frequently reinforced by the documentary terms obtained by Colombian exporters from buyers. "I Terms are largely dependent upon the nature of the good, the basic competitive practices related to it and the negotiating position of the exporter with the buyer. SME exporters, in particular, are less likely to be able to demand the more secure forms of payment (such as LCs), which are also more costly and less inclined to be used in highly competitive trading markets. LCs were used for the majority of transactions of lo-e scale enterprises (53%), about twice as often as small (28%) and medium (19%) scale enterprises (Table 2.10 and Text Figure 2.5). The opposite relationship was true with respect to the use of cash/sight draft and consignment sales. 113. Documentary terms also influence export financing requirements. Where a firm can secure from the importer payment at the time of placing an order (ie., in advance of production), financing is obviously not required. For a confirmed letter of credit, the enterprise has the potential of rediscounting it In the local market and meeting preshipment financing needs immediately. For documentary collection of time drafts, consignment and open account salss, neither preshipment nor postshipment requirements are met. The exporter must arrange financing in these cases prior to shipment, including in the latter two without the benefit of acceptable documentary evidence of payment responsibility from the Importer. (b) Reojce Needs 114. Preshipment working capital is designed to support the cost of producing and shipping an export product, normally over 90-180 days, for four cost components: (a) the purchase of imported raw materials and intermediate goods as production inputs, lb) fte purchase of local production inputs, (c) payments for value added (eg., labor, interest and rents) required to fabricate and ship the product to the buyer, and (d) the cost of finished goods inventories. Additional working capital for similar purposes may be required if one or more subcontracts is let by the exporter with other enterprises in order to manufacture local production inputs. Approximately 33% (US$868 rmillion) of preshipment financing of total non-traditional exports In 1990 was provided by local financial institutions, of which '* The documentary terms used for export transaction are advance payment, cash on delivery (COD), documentary credit (sight and usance (term) letters of credit), documentary collection of biUs of exchange (sight bills, known as DIP, and usance bills, known as D/A), consignment and open account.  28 PROEXPO rediscounts accounted for the vast majority." The remander of preshipment financing needs was met from non-banking sources, such as exporter retained earnings, foreign buyers providing imported materials for assembly operations (such as 807 program for clothing), and foreign corporations shipping intermediates to their Colombian subsidiaries on a deferred payment basis. 115. Colombian exporters' needs for preshipmentt financing from local banks are about ten times greater than those for postshipment financing, given the large volume of payments for exports at shipment and the more diversified sources of funds to support postshipment. Approximately 63% of Colombia's 1990 non-traditional exports (US$1,704 million) are paid for in cash at or about the time of shipment and required no postshipment financing (Table 2.11). Of the remainder, about 99% (US$973 million) of postshipment financing carried repayment terms of less than one year for essentially consumer and intermediate goods exports. PROEXPO postshipment rediscounts were only a fraction of this volume (US$46 million), given that large exporters have access directly or through local banks to short-term postshipment loans in foreign currencies, and are increasingly tuming to them given the substantial elimination of PROEXPO interest rate subsidies (see Section 2.3(c)). Longer-term postsmhpment financing (1-5 years) totaled only US$9.4 million in 1990 and was provided for the occasional export of finished metal products, machinery and equipment exports. The very small capital goods industry in Colombia and bankers' unwilling to assume the repayment risk for periods in excess of one year account for this performance. 116. Non-traditional exports by 1995 are likely to be some US$2,600 million per year above their 1992 level (assuming an annual growth rate of 20% p.a.). The need for preshipment financing from all sources is likely to increase by about US$1,300 million (assuming the observed tumover rate of around 180 days). The demand for such funding from financial institutions is likely to increase disproportionately to that from other sources, to the extent that internal profitability of firms may decrease in a more competitve environment, foreign investment activity Is unlikely to constitue a large share of incremental transactions, and supplier credits will not cover domestic working capital needs. Postshipment financing requirements are also likely to increase as a share of non-traditional exports, as Colombian producers are likely to move increasingly to sell higher value-added products which generally need more postshipment sales credit. Consequentiy, it is estimated that incremental requiremernts of about US$650-900 miilion will be sought from the banking system, amounts comparable to the ougttanin stock of export financing currently in the system. 117. Prospects appear good for Colombian financial institutions and large, well established enterpses to maintain access to overseas trade credit for financing In foreign exchange the imported Input component of preshipment working capital needs and for short-term postshipment financing. Past macroeconomic management performance and the absence of debt rescheduling have encouraged 20 The diursement figure recorded is US$467 million. However, this understates considerably PROEXPO's preshipment funding level, as many rediscounts operate on an annual rollover system under which rediscounts are renegotiated each year based upon new export plans rather than for each export transaction.  29 interational commercial banks to respond favorably In this area. Also, short-term export credit Insurance coverage for enterprises exporting to Colombia has been liberal In recent years. All but two official export credit Insurance agencies were open wihout restictions in 1990, while the others had a short-termn waiting period on transactions and a low limit on total exposure. 116. The main export fiance access problem Is for enteprises wih export orders but (x} Inadequate collateral seekin preshipment working capital to expand a one product/one * market expont operation. and entepris (particulariy SMEs) interested but not . experienced In the export market. Given the - reatively uncompetitive marcet conditions of the financdal sector, banks have generally not o -_ addressed this market by taking advantage of the selfliquidating nature of preshipment * financing and securing most of such working capital lending with te production Inputs for export transactions as a means of reducing risks .. . . . .. In the absence of other collteral. X 5 119. This access problem Is exacerbated by remaining segmentation of financial markets and volatile iquidity levels of the bankin system (see box above) in previous paragraph). 21 Whil recent liqudy has been high given vety high Interest rates and overall economic uncertainty accompanying rapid economic reforms, thi is not likely to continue in the longer run. Bancoldex ast-resort lending facilty can help to ensure adequate liquidity for export financing as a temporary bridging Insrument over the period in which trade financing instruments are developed and accepted by the private market. 2 (c) The Foreban Trade Bank 120. PROEXPO operated over 1967-91 as a Govemment fund to rediscount short-term preshipment, postshipment working capital and longer-tern investment credit for export producdon, as well as to provide technical assisane for feasiblity studies, quality control and export promotion. It was converted on January 1, 1992 under Decree 2505 into a wholly-owned public banking Instto. The Foreign Trade Bank (Banco de Comerclo Exterior, or Bancoldex) under the direction of the Minisry of Trade. The foilowing first reviews the export credit and financial performance of PROEXPO as background to then consider the role and struct for Bancoldex, both as an instrument to help meet futre export finance needs and in relation to the Goverment's financial sector refonn program. 121. PROEXPO Performae. PROEXPO was unique in Colombia for its fundin arrangements-if not In themselves then at la for their proportions. PROEXPO was provided free of charge import tax receipts amonting to 6% of impors each year In order to provide subsidized 1 Saee "Analsis de las Posbilidades del Nuevo Banco de Comerclo Exterior Dentro del Marco de la Reforms del Sector FinancieroO, by Maria Mercedes de Martinez, August, 1990. 2 Such a facility is commonpbce in othr countries-eg., the Bill of Exchange Act of the Bank of England, Export Advance Bill System of fte Bank of Japan, and similar faciities established with the central banks In Korea, the Philippines, Sinapore, Taiwan Province and elewhere.  30 directed credit and promotion services to exporters. These receipts amounted to US$135 million in 1980 and reached US$198 million in the year 1990 (Table 2.12).23 The other main source of PROEXPO incremental funds was interest Income generated from its rediscount portfolio, which reached US$165 million In 1991. Given the essentially short-term maturity of the portfolio, PROEXPO also received a very large annual cash inflow of loan principal repayments as part of its resources, which in 1991 amounted to US$571 million. 122. The interest income eamed on the portfolio has covered entirely PROEXPO's promotion and administrative expenses over the years. However, It has been inadequate to maintain the real value of PROEXPO's total resources given the substantial subsidies for export credit and export promotion activities. Only the annual inflow of import taxes at no cost to PROEXPO has kept its funds replenished and on a modest growth path in real terms. PROEXPO has accrued since Its Inception a very laroe volume of assets, totaling US$711 million at December 31, 1991 (Table 2.13). They are both highly liquid and essentially unencumbered by liabilities. Over one-half of PROEXPO's loans outstanding in May 1991 were payable within 7 months and only an estimated 14% were payable in excess of three years. Non-performing loans and questionable investments were fully provisioned at December 31, 1991. Total liabilities were a mere US$28 million, yielding a debt:equity ratio of 1:24.4. 123. PROEXPO's fund came to represnt a verv promnt Pool of liquid resources In the financial sysotm. At December 31, 1991, PROEcXPO's portfolio represented 1 5.5% of the combined total net portfolio of the commercial banking system (Text Table 2.7). More Importantly, its equity represented 69.6% of the combirned equity of that system and was m-ore than fourfold the level of Colombia's largest dividual commercial bank. The absence of debt o in PROEXPO's capital structure contrasts sharply with the remainder of the commercial banking ou systm, which mainained an average debt:equity " ratio of 7.8:1. 124. In addition, PROEXPO was responsible for a large share of Colombia's directed credit programs-neary one-half of all of directed credit to agriculture, Industry and exporters in Colombia's private sector over 1986-90 (Text FIgure 2.8). However, the bulk of PROEXPOts rediscounts were intermediated through a very few banks and reached a very narrow segment of the exporter market. PROEXPO rediscounts consisted mainly of short-term preshlpment working capital (70.0% of its total portfolio at December 31,1991), with a small and declining share of postshlpment financing (3.%) and a growing share of fixed investment rediscounts (26.4%). The Industial sector has traditionally utilized slightly over one-half of PROEXPO's total credit rediscounts, while agricultural and fishing exports accounted for nearly 40%. 23 In August 1991, these tax receipts were redirected to the Centra Government as part of the forthcoming restructuring of PROEXPO into Bancoldex. Total receipts by PROEXPO therefore fell to US$113 million.  31 125. PROEXPO was an Important source of liquidity for trade credit rediscounting. However, its main advantage was related to credit cost. Over 1980-85, PROEXPO interest rates to exporters for export credit were generally negative in real terms and averaged a nominal 25.6 percentage points below commercial maket rates. This was equivalent to neary 15% of non-traditional export value (Table 2.14). However, the nominal spread fel to 7-10 percentage points over the 1987-90 once fixed nterest rates were Instead linked to and set at the variable deposit rate Index (DTF), which reflcs the average cost to banks of raising 90-day funds. In 1991, export credit rates to users were raised again to DTF+ 4 percentage points and reduced the spread further (Table 2.15). 126. With this trend has come the relative fall since the mid-1980s in the use of PROEXPO Credi Use PROEXPO credit for export financing (Text and Inieret Rate Sub8dI Figure 2.9) and a growing reliance among larger firms on private sources of export financing. PROEXPO's preshipment and postshipment working capital portfolio fell from 31 .1 % of non- traditional exports in 1985 to 13.0% in 1991, 15 with its share of postshipment credit dropping disproportionately (Table 2.16). 127. PROEXPO's direct investment _J *.W* . us VA A.1 ao .G activity over the 1980s reflects basically the PfrMaagar AI1 37* ff e 't OA s UA Govemment's appropriation of a ready source of liquidity under public control to launch or rescue | -t1I -_ I a variety of not always export-oriented activities. The total book value of the 15 investments held at December 31, 1991 was $30,611 million (US$49.5 million), or 6.8% of PROEXPO's total assets (Table 2.17). One investment accounts for the bulk of the total, the National Coal Company (Carbocol, 88.7%). Three others of significant size were made in public financial entities with essentially domestic interests-the National Guarantee Fund (4.0%), the Industrial Development Institute (2.3%) and the SME Industrial Development Bank (1.9%). 128. Most of such investments have performed poorly, especially CARBOCOL, and Private SeCtor Directed Crdit 88.8% of its total book value was provisioned Redi9coumt, 1986-90 for losses as at December 31, 1991. Since then, three enterprises have been liquidated, e PROEXPO interests in two more have been sold, privatization of shares is anticipated in the very a - near future for two more (CFP and the National 40 - - - - Guarantee Fund), and most of the remainder an - related to export promotion have been am . . - -. - - transferred to the Bancoldex Export Promotion u Trust. * 129. PROEXPO's operatonal efficiency m m hgy somwt was quite low. The institution had six Directors _ General appointed by the Govemment over its last 9 years. Administrative costs in 1989  32 [update to 1991 1 related to export credit oprtons were tmatd at 3.2% of totl asse, " very costly for a second-tier credt rediscount mechanism. In 1991, PROEXPO had 591 authorized staff potns, of which 391 were at headquwters. This dW = include staff of BR contractd by PROEXPO to provide aUl pesnnel sevis, Including payroll, and all accounting and administrative services for PROEXPO's lan portfolio. Most financial Institutions surveyed expressed operional difficulti with PROEXPO redicou n procedures and had to dediat a significant number of staff to adminster them. A number complined of excessive documentary requirements and, overall, rated PROEXPO as geeally Inaccessible. They further complained that PROEXPO mainly worked out detaiis of new proJects in final form directly with exporters, then advised them of approvals only several days after exporter was notified. They commented that PROEXPO was sometines so late in responding that deals were lost. 130. BANCOLDEX. According to the 1990 Congressional law and Dee 2505 of 1991 mandating the transformation of PROEXPO intc a foreign trade bank, legally, Bancoldex may finance activities related to exportation through a wide variety of possible funct7ons. Specifically, it may operate at both the first- and second-tier levels through credit operations and guarantees. It may engage In credit operations with buyers of Colombian exports, and act on behalf of public sector entitles to contract direcdy, guarantee and/or administer funds from overseas in foreign exchange. It may also support export credit insurance and promotion programs. 131. OraanizatIonally, it is an autonomous mixed corporation with personnel statutes and contracts with third parties subject to private statutes.m The Board of Directors is composed of the Minister of Foreign Trade (President), the Minister of Finance, the lgal representative of the promotion trut one representave of the private sector nominated by the President of the Republic and one representaive of the pfivate sector elcted by exporter associatons registered with the Ministry of Foreign Trade. As long as the Nation has more than 10% of the shares of the Bank, the Minister of Foreign Trade will be the President of the Shareholder's Assembly. 132. Financially, BANCOLDEX has assumed most of PROEXPO's subscribed and paid-In capital. Its initial authorized capital was US544 million and may be Increased by 100% of this amount. No debt-equity Umitations are specified; therefore the standard prudential regulton cap of the Superintendency of Banks of 12:1 applies. The nation may sell its shares or exchange them for public debt or CERTS. 133. During its first year of operation, BANCOlDEX management worked hard to update rediscount policies and increase opeational efficiency. BANCOLDEX eliminated equity financing from Its product lines and is preparing to do so for fixed investment with the expansion in sectoral scope of BR rediscounting. It establshed a preshipment working capital fine denominated in US Dollars at a cost of UBOR+ 1.75 to intermediaries and up to UBOR + 3 percentage points to exporters. It has aso adopted a capital goods postshipment overseas buyer line covering 70% of the FOB price at a rate of up to DTF+4 plus 0.25% for each year of maturity. In addition, It has reduced staffing levels substantaly from 351 In June 1991 to 148. Still, by January 1993, no clear business plan had been defined by BANCOLDEX to ensure that its corporate financial policies were well aligned with the Govemment's overall financial sector policies and to pinpoint its niche in the Colombian's export development stategy. a" PROEXPO's accounting system did not allocate costs between promotdon and export credit with respect to personnel and general expenses. Expenses included here are those related to PROEXPO headquarters office and management of the portfolio by the Central Bank. m This is conditioned upon the se within three months of is founding of at least 1 1 % of Bancoldex shares to the privat sector, which has not as yet taken place.  33 134. Viewed ftom the perspective of the ongoing financial sector reform program, the establishment of BANCOLDEX as authorized in Decree 2508 of 1991 ha several troubing aspects. The large capitaltion of BANCOWDEX represents a contribution of about four times the total equity accumulated by Colombia's largest private bank (Banco de Bogota). This position Is significantly sugmented by is ablt to borrow overseas with the explicit or implict guarantee of the Govemment. Given its initial 'under leveraged capital structure, BANCOLDEX has the potential (both in first- and second-tier operation) to create an overwhelming public presec and rivalry in the financial sector, effectively reversing much of the current painstaking work to privatize banks. For example, if BANCOLDEX had In 1991 levweraged iu equity with debt to the average level of the banking system (7.8) and plwed the proceeds as loans In the market, its portfolio would have represented more than one-half of the total loan portfolio of the banking system. This is at variance with the spirit If not the latter of the reform program in which the Government's program of structuwal reforms is intended to lead to a more efficient financial setwr characterized by greatr competition and in which market entry Is fcilitated by ensuring that no special competitive advantage Is granted to certain financW agents. The accrued import tax funding base assumed by BANCOLDEX from PROEXPO is thus much too large and should be reduced so as to create a smaller equity base. 135. Public policy-making and control over BANCOLDEX under the aegis of a sectoral ministry creates a powerful potendal for public administrative discretion over resource allocation of a large volume of funds (a total cash inflow of US$571 million in 1991) in response to both public and private interest groups. This practice has been amply demonstrated in the past with such enties as IFI, Caja Agraria and the investment portfolio of PROEXPO itself, and pressures already exist on BANCOLDEX to follow suit. In this case, BANCOLDEX has by leoal mandate a broad latitude to allocate resources to partcular export sector strateges, priority subsectors and/or markets, or financial market niches so designated for support by the Government. Given the fact that BANCOLDEX pays nothing in financial terms on its initial capital, its practices could again give way to subsidized rediscounting with below- DTF rates. In explicitly seeking to increase the efficiency of the process of assigning funds from second-tier to first-tier financial institutions through more nor-directed eligibirity criteria at market rates, the reforn program aims to eliminate such discretion. 136. With respect to BANCOLDEX role in export development, project preparation work has bascally concluded that existing and emerging exporters need most risk mitigation services at the micro' level to increase their access to export finance services from their commercial and development bankes. They also need a broad range of local banks with sufficient competent staff to provide financial, fee-based export finance products and advisory services and linkages with the international financial system. Finally, such Banks need access to a reliable last-resort liquidity facility to rediscount export credits to ensure that funds are available under varying financial market conditions to support export growth. 137. Under the Projec, BANCOLDEX would establish new export finance products as described in the folowing section. Agreements have also been concluded that BANCOLDEX would engage in activities so as to preserve the real value of its capital, operate solely as a second-tier institution in the provision of export credit and without administrative discretion in is allocation (direct sales credit to overseas buyers of Colombian exports provided according to at least OECD consensus rates would be the only exception to this), and would adjust by July 1, 1994 its capital structure so as to help ensure a market-based rate of retum on equity and substantial private sector participation in its equity capital. Technical assistance would be provided under the Project to help determine an appropriate capital structure. (d) DevelooMent Proram 138. Export Fince Training for Banks. Collaboration over many years between the core of large Colombian exporers responsible for most non-traditional exports and their bankers has created  34 a basic trade finance service capacity among a significant number of Colombian banks. However, Colombia's financial sector constraints and very narrow export experience to date have also yielded a concentration by banking Institutions on non-rsk based export finance products, an absence of modem trade finance techniques, and very thin Ins_tiuiol capacity to help accelerate the export development process. 139. Recent surveys of 11 financial institutions I representing 46% of the total assets of commerecl banks and 30% of the total assets of development banks suggested that such institutions have capably established standard fee-based operational trade finance products requiring almost no assumption of credit isk-LCs, collections and foreign payment transactions. These are underpinned by organizational units within such banks headed by experienced senior managers and sound computerized management information systems. Such institutions also have good foreign correspondent bank relationships and substantial foreign exchange lines for short-term trade finance transactions (as indicated above). However, operational customer service does not appear to be a high priority. Time to process LCs, collections and payments are not well defined, and only a few institutions provided custorner-oriented training and promotion in export finance. Only three institutions had formal market research activities. 140. More fundamentally, where risk assumption is involved, a number of weaknesses are evident and arise from banks export lending practices. Given the structure of the financial and export sectors, most banks are conservative and not well exposed to intemational business. Notwithstanding competent senior managers, there Is a general lack of people trained and experienced in trade finance and In project credit analysis. Most of those Interviewed did not see a real need for a formal credit evaluation process of foreign banks or for the evaluation of country risk (some banks try to keep in balance the due to and due from foreign banks on an informal basis). Most expressed no demand for (nor was th&lr much availability of) credit information on foreign buyers. Most were also uninformed about modem trade financing techniques, foreign exchange management practices and derivative products. 141. In conjunction with other steps under the Project to facilitate more export transaction- based financing and the development of export credit guarantee and insurance products, technical assistn (TA) would be provided to accelerate the acquisition of export financing and service capacity of Colombian banks. The TA would be organized and managed by BANCOLDEX with external support to upgrade the export financing skills and systems of Colombian financial institutions. This would include training seminars in Colombia, visits of Colombian bankers to selected overseas banks, and the publication of materials on the following topics: (a) trade financing techniques, such as arranging export transaction-based financing, factoring and other postshipment funding techniques, hedging, buyer credit checks and market information on country risk, insurance and guarantees; and (b) foreign exchange treasury operations and risk management tools, such as futures, options and swaps. The TA would have two programs, one with a strong strategic content on senior bank managers, and the other with greater emphasis on operational issues for operating managers and their staff. 142. Preshipment Export Credit Guawrat Program. The lack of ability to handle exporter performance risk can be reduced only over an extended period of time as experience grows between exporters and bankers. In the meantime, a program can be developed to alleviate adverse selection and moral hazard problems by (a) development of an effective collateral substitute, (b) the pooling of exporter non-performance risk, and (c) an information exchange system to identify those exporters seeking credit who have misused credit or have had poor credit repayment performance. Under the Project, a preshipment export credit guarantee program (PECG) would be established with the objective I 'Colombia Export Finance Study' by The Sigma Group Inc., April 1992.  35 of helping those enterprises with promising export prospects but lacking an export track record, collateral, and/or capital structure to gain access to export credit. 143. Such a program would be of help mainly to experienced exporters wth inadequate collateral, single product group/single market exporters, and enterprises (particularly SMEs) without export experience. It is expected that all private enterprises with confirmed orders to export non- traditional products and services would be eligible to benefit from such guarantees, excepting those enterprises with a poor credit standing-overdue debt service payments, a bad check history, negative net worth, or a financial history of successive -osses. Guarantees would be provided to help an enterprise obtain bank guarantees for export bUi acceptance and bank loans for preshipment working capital against export or domestic sight (or usance) letters of credit, documents against payment or acceptance in order to finance its procurement of raw materials and Intermediate goods, value added and finished goods inventories. Whole coverage guarantees would be available to more experienced exporters to cover multiple export transactions within a specific total credit ceiling. Only the unsecured portion of the export loan would be eligible for guarantees. Guarantees would not be available to recover previous credits undertaken by the enterprise. 144. Enterprises would have two paths to seek a guarantee: with the financial intermediary under its normal loan processing procedures (likely to be used In most cases), or directly with the PECG as recourse where a financial institution is not ready to provide it initial consideration. A high free limit for guarantee applications would be set, permitting a financial institution to approve an export credit application meeting PECG criteria within this limit prior to PECG review and approval. This would minimize guarantee program cost and permnit rapid tumaround time, critical to Its effectiveness In supporting exports. The PECG would enter into participation agreements with financial intermediaries which would inter alia require collection of the guarantee fee on behalf of the PECG from the exporter, and give adequate and equal attention as for iheir own non-guaranteed loans to recovery of overdue accounts. 145. Risk-sharing by financial intermediaries of 30% of the total credit value would be Important under the PECG, as it would help ensure that the intermediary would give adequate attention to creditworthiness reviews and screening of unacceptable proposals to reduce its own risk, reduce the operational requirements of the PECG, and enhance cooperation between the two. The PECG would provide automatic payment of claims meeting non-payment criteria to ensure credibility with the financial sector. 146. Given that intermediaries would undertake the large majority of credit assessments and supervision, the PECG would not require a large organization. The main staff functions would be to (a) review the eligibility criteria of guarantee applications within the free limit, assess cases requiring prior approval, (b) monitor deteriorating credit cases and coordinate account recoveries after default, and (c) provide seminars on credit guarantee operations. Efficiency would be facilitated by on-line data processing between PFIs and the entity. 147. The PECG would be expected to earn a market return on its equity. The program would seek a balance of risks in its portfolio and guarantee fees would be set variably according to the level of risk assessed. However, to help ensure the program can cover losses which might be generated at the higher risk end of the spectrum of exporters performance, guarantee fees are expected to be a relatively costly (estimated at 2-4% of the credit amount). Projected guarantees are project to account by 1995 for about 25% of incremental export preshipment credit and 12% of total preshipment credit ir. the system. 148. The PECG would be a joint venture between BANCOLDEX and FUNDESCOL which would manage the operation. FUNDESCOL Is a private Colombian enterprise partially capitalized, organized and directed by FUNDES of Switzerland. FUNDESCOL aims to help build the compettiveness  36 of mainly SMEs through credit guarantee, training and advisory programs. It has a strong commitment to the integrated provision of such serices as a basis for enterprise success. t has operated for nearly four years and concentrated primarily on enterprses selling to the domestic market. Its guarantee portfolio has grown rapidly, amounting to about US$6 million in November 1992, and loans guaranteed have an excellent repayment record. BANCOLDEX and FUNDESCOL would each assume 50% of the responsibility for each guarantee Issued. 149. Under the Project technical assistance would be provided through the PECG to potential SME exporters to help shape sound preshipment export credit financing arrangements and support the credit guarantee facility. Training and enterprise-specNic advisory programs would mainly focus on preparation of export marketing analyses, export financing practices, and the regulatory and operational requirements for exporting (customs, transportation, packaging, etc.) About 400 enterprises would be expected to participate In the first year and some 900 In the following year. 150. Postshipment Export Credit Inurance. Exporters, especially new or recent exporters, may well be trying to penetrate a market In which the competitive environment is such that buyers must be offered credit extension as part of sales. In cases in which an exporter can obtain an LC backed by a very reputable bank or get cash payment, there is a reduced need for postshipment export credit insurance (ECI). Otherwise, it provides several advantages. Particularly in an underdeveloped financial market with inexperienced and conservative banks, it is easier to obtain bank financing for exporting (possibly at lower cost). It reduces firm's risk of substantial losses or prolonged illiquidity associated with failure of foreign buyers or its country to pay sales credit. It generates increased availability of credit information on countries and buyers for exporters and banking system. Exporters can also approach unfamiliar markets and buyers with offers of credit terms. This coverage is important particularly at the outset of export development, when exporters are most likely to utilize buyers who are small agents whose assets are mainly their sales force and warehouse. In distress, the chances of recovery are small and other creditors (particuarly tax authorities) are likely to have a preferred position. 151. ECI reduces the buyer risks and transaction costs associated with exporting as it can distinguish those risks more accurately with an extensive, specialized credit investigation systems and daily Information on claims. ECI grew in OECD countries particularly from the 1950s with the difficulties of SMEs in securing short-term trade finance and the problems of even large firms to offer medium and long-term export financing, particularly to developing countries. ECI programs have been a part of export support institutions in many developing countries for many years, including in India, Mexico, Morocco, Pakistan, Portugal, Korea, Hong Kong and Singapore. Many public ECis have undergone in the 1 980s financial difficulties and competition from private insurers (factors, agencies, banks and self-insurers). There has been a decreasing willingness of gmrernments to spend large sums on export promotion and a reluctance to provide officil lending to sovereign borrowers. The OECD Consensus has been strengthened and has reduced the scope for non-market competition for exports. 152. Consequently, ECis are becoming more market-oriented in their operations, as illustrated by recent trends in which they are paying closer attention to the quality of new credits and lending to well-qualified buyers in the private sector operating on purely commercial considerations. The movement is continuing toward flexible premium structures to reflect transaction type and country destination, financial strength of individual buyer, quality of any supporting guarantee, and the share of risk bome by exporter. Most developing countries are lending at rates which meet or are within 1-2 points of the OECD consensus and are more conservative on terms. They are seeking increased collateral via irrevocable LCs from bank In borrowing country or LCs confirmed by bank in another country, or guarantee from the govemment. ECIs are focusing on cover for short-term business with relatively small contract transactions, making exposure control easier and avoiding involvement in rescheduling exercises as arrears for short-term clisms are generally not consolidated under Paris Club reschedulings. Also, they are continuing lmits on country exposure (particularly for developing  37 countries) to limit and diversify sk, though remaining open at a prie to counries wih debt-serscln diffiues th are implemendng adJustment prams. 153. Under the Project, a Colombia Export Credit Insurance Corporation ICECIC) wouW be estblished as a J3nt venture b en private insurance companies and Bancoldex as agent for the Govenment. ECI would concentate on short-term needs for non-traditional export products, which represent tie vast majorlt of Colomb'e needs, and would concentat on underwritng sound risks on well-qualified, going concern buyers. CECIC would also offer is insured a debt collecton service for payment overdue. It would cover for its own account X commcal (or foreign buyer) risk that it will fail to mest payment obligations to the exporter due to default or insolvecy, and seek diversied private market reinsurance. It would manage polWical for country) risk of non-payment due to transfer risk Ondequate foreign exchange) revokng of Inport authorization, and war, revolution, etc. on prmarly non-OECD countries, which would be reinsured with the Government via a reinsurance agreement. 2' Colombian Government support would be based upon a pre-specwfled loss-limit, with ceilins established per country, adjustd for experience as requred, and taspaetiy budgeted. The CECIC would be expected to cover about 10% of non-traditonal exports within three years of start-up. 154. The CECIC would be a majority private sector joint venture Insurance company wih the public interest of no more than 20% of total capital held by Bancoldex. Private shareholders are expected to include Companba Colombians de Seguros, S.A., Segurose Comeciales Bolivar, Seaguros Colmena, S.A. and Compania Seguros Antorcha Colombia, which represent the larst companies In this indust in Colombia, and the Nederlandsche Credietverzekering MastschappQ nv (NCM). It would be built upon the exdsting system of the private Seguros La Union S.A., a local firm which has some experience in ECI. The CECIC would be designed to operate profitably In accord wih GATT provisions which require export credit agencies not to operate as a subsidy mechanism and to seek to at least break even on operations over time by charging premium rates adequate to cover claims payments and administrative expenses. Premium poriies would be set to yield comparable returns on both commercial and political risk accounts. As the CECIC woul insure essentially short-term export credits, unlike such agencies in most OECD countries which cover mainly longer-term credit risks, this nceases substantally the Probability of achieving CECIC's financial objectives. The CECIC would be expected to seek observer status in the Berne Union and eventual membeship (following the required 3-year waiting period), which inter als offers the opportunity to exchange information about country dsk assessment, cover policies, claims experience and underwriting problems. Technical assistance would be provided to prepare detailed polcies and operast procedures for the CECIC, help guide stat-up and train staff. Also, commercial risk underwwring debt collections and clims management functions of CECIC would be provided by the NCM for at least the first 2 years of operation while the new company gains experience. 3. THE PROJECT 3.1 Oriain and Relation to the Country Lendina Strateav 155. The Government began to actively consider how to accelerate export development upon inil Imkplementation of its trade liberalization process. Active preparation of the proposed Export Development Project (EDP) started in mid-1 991 under the leadership of PROEXPO In association wih 27 Political risk has traditionally been a government responsibilty because of the difficuly of spreadin the risk due to the iimited number of countries and volume of business in which such risk are concentrated. The private insursnce market does not have sufficient capacity available to absorb lage eaxpu of poltical rsk.  38 private sector working groups for a number of Project components and with Bank support. A number of preparation studies were carried out under this framework to determine the justification for and design of the Project. Such work has in a number of instances already resulted in follow-up action for policy adjustments and hnstitution-building. 156. The Bank's country strategy calls for emphasis on investment loans to support implementation of the EMP. Bank sector work and policy discussions with the Government have been intensive over the past several years on trade, industrial and financial sector issues associated with the EMP. The lending program has also been designed specifically to embrace policy and institutional adjustments needed to help implement it. In addition to the proposed Project, a Bank loan of US$300 million was approved in FY91 to support broad-based public sector regulatory and enterprise reforms, and a US$200 million loan was approved in the same year to facilita industrial restructuring and development. Another loan for US$100 million was approved in FY92 to facilitate the reorganization of Colombia's industrial development bank. Additional projects are planned to help accelerate capital markets development and the acquisition of technology (see Statement of Loans and Credits to Colombia In Annex 1). 157. IFC`s FY93 operations for Colombia include a significant pipeline of projects. About two-thirds of the volume involves coal and gas pipeline/distribution projects and the remainder entail mainly two credit lines to local Colombian banks. Its strategy is to aim at the large top-quality Colombian Industrial groups to assist in major physical plant restructuring, provide credit lines to the top 3-4 financial institutions seeking long-terrn Dollar-denominated financing, participate in privatzation (for which a power utilitV is under consideration), and support a limited number of individual export-oriented projects with demonstration effects. 3.2 Lessons from Pat Bank Assistance 158. Trade Policy and Administration. Recent Bank-wide analyses on trade policy reforms reflected support for export development in 35 trade adjustment loans. " One or more of the following export policy adjustments were addressed in these operations: elimination of restrictions on exports teo., licensing, quotas, bans), reduction of export taxes and subsidies, improved access of exportes to imports (duty-free imports schemes), export credit (pre- and postshipment finiancing, Insurance schemes, fixed investment for exporters), and export promotion (reforms of public trade promotion organizations). 159. This assessment concluded that adjusting countries that have placed an equal emphasis on export as well as import policy changes have reduced adjustment costs associated with lost output and unemployment in inefficient industries through the early shift in resources to export industries. Of equal importance, other analyses I indicate the need to provide policy and institutional infrastructural support to an incipient export drive so as to achieve a critical momentum that confers on interest groups sufficient political power to avoid strong advocacy of policies to reinstate protectionism. Also, it is essential that the main benefits of such support mechanisms must be well See World Bank Support for Trade Policy Reform" (Report No.9527), April 22,1991 by OED. 2 See PPAR for the Chile SAL I, II and IlIl (Report No. 8851), June 26, 1990 by OED.  39 understood by government authorities and exporters alike for them to be accepted and well implemented. 90 160. Good project performance also requires that reforms go beyond the legal aspects of regulatory reforms to management and operating Issues based upon sufficient analytical depth. For example, the absence of such work has made the implementation of reforms In the duty drawback system slow and inadequate.8' In the case of Colombia, the Trade Policy and Export Diversification Project (FY85) inter alia did reduce the dispersion of indirect tax rebates (CERTs), simplified the criteria for eligibility in the PV duty exemption and provided for automatic import licenses for production Inputs needed by exporters. However, the Project failed to achieve essential increases In the operating efficiency and coverage of PV, and did not address the inconsistent, unpredictable administration by the Govemment of CERTs which has directed subsidies to selected exporters.32 161. The Bank's export promotion measures have consisted mainly of providing technical assistance to or through public trade promotion organizations (TPOs) in 23 lending operations In at least 18 countries since 1979.SS While quantification and causality are very difficult to establish, careful assessments have concluded that lasting results in the form of Incremental exports were rarely evident. TPOs have infrequently proven capable even with technical assistance of effectively providing enterprise-level support services (Sri Lanka, Mauritius) and have experienced difficulty in becoming well established given considerable leadership turnover with changes in political administration and inexperienced staff (Philippines, Jamaica). Such evaluations have further shown that TPOs have generally operated in an policy environment favoring import substitution, did not address the highly Individualistic needs of exporters (particularly in regard to the most difficult tasks of adaptation of products for extemal markets and improving supply capabilities), were unclear or unrealistic in their objectives, and were ineffective in influencing public policy towards exports. 162. Such experience is corroborated by other assessments 9 and offer a number of lessons for the design of Bank support for export promotion. Mechanisms should be employed with clear and direct support to the generation of exports by producers. Particularly with the broad access to market Information offered by current technology, reliance on a single, centralized source of support services which frequently impose govemment promotion programs on exporters is no longer appropriate. Promotion entites should rather be organized as joint or wholly private promotion organizations which are fully responsive to exporters priority needs, and provide services which are not oherwise available in the marketplace, mainly involving newer and smaller scale exporters. s See PCR for Pakistan Export Development Loan (Lo 2701-PAK), December 15, 1988 by EMENA. sr See PPAR for Brazil Export Development Project (Report 8327) of January 12, 1990 by OED. 2 See PPAR for Colombia Trade Policy and Export Diversification Project (Report 9528) of April 28, 1991 by OED. 93 See "Development Assistance Gone Wrong: Failures in Services to Promote and Support Manufactured Exports, Annex 2: "World Bank Experience with the Public Instution Approach', CED, 1990. 34See 'Comparative Study of National Export Promotion Institutions and Programmes, Trade Development Insute of Ireland, May 1991.  40 163. Servk delivery shouwd rely more on expanding access to commercil service suppliws generally found overseas. Staff remaining in core entities must be trained and experieneed in the export field and compensad at competve rats. Financially, incrad stress needs to be placed on cost recovery as a central indicator of vlue of export promotion. Specific time-bound proje In partnership with private enterpre throuh mathing grant sms should also be employed as temporary menms to overcome market filures. In any case, the funding of programs and operations should not depend upon high bvels of guaranteed funding. Finally, It should be recognzed ta promotion effrts wM not be effective on their own, but only when accompanied by a supportive neutral policy environment and other export support instruments. 164. The real sector cannot deliver an adequat supply response at the outset of trade reform without an appropriate mix of macroeconomic and financial sector policies coupled with quick, sure access to lUquidky. Lare fiscal deficts need to be reduced to ensure sufficient access of the private sector to domestc credit. Financial sector policies should promote a competitive market stucture absent of credit controls. Experience in several cases also argues In favor of a backup facility to ensure funding of export transactions, either in the form of a revolving fund or other mechanism. 0 It Is importan however, that this mechanism be designed to be speedy and cost-effctive so as to be consistent with the market response times required bV export markets. 3.3 Obiectves. Stae and Descrntion i 5. The Project's objective is to accelrate is export supply response In Colombia's EMP. The Project's strate to accomplish this objective is to: (a) adjust exisfing Goverment trade policy and dminao In the areas of duty exemptions, indict tax rebate, antidumpimg, and customs so as to facilitate exporter compefitveness and be GATr-consistent (b) inra the qualt of export promotion services by stimuating increased use of private overseas and ocal export support services, restructuring the Government's public promotion organizatin in order to offer exporter-responsive complementary services, and deregulating and developing tradi companies; (c) buildin export financing capacity by establishing new export finance services in the Foreign Trade Bank and making its policies consistent with libealzed financial sector policies, establishing privatepublic joint ventures to provide preshipment export credit guarantees, export credit insurance, and providing export training to local banks; and (d} initan capital markets development with reubltory and Institutional improvements. A description of each component follows and an organization chart and matrx of poUcy and insttonal adiustnts and technical assisac programs are found at the end of this chapter. Most of the adjustment measures have been taken prior to Board presentation. 160. Trade Poly and Adm sion (ref. Chapter 2.1). The Govemment Is making a strong effort through the EMP to establish an overall business environment for export development which places erp on an equal footing with competitors elsewhere. Under the Project, poricy and s See PPARs for the Mexico First and Second Export Development Projts (Report No. 8876 of June 29, 1990), the Costa Rica Export Develpment Loan (Report 7779 of May 10, 1989) and the Brazi Export Development Loan (Report 8327 of January 12, 1990).  41 institutional adjustments and technical assistance would be focused on three complementary issues in trade policy and administration to facilitate export competitiveness and develop GATT-consistency. To ensure a tax free system for exports, the Govemment has adopted a provision that ensures that total 1993 indirect tax rebate payments (CERTs) by the government will not exceed 3% of total nontraditional export value. Furthermore, from January 1, 1994, Indrect tax rebate payments will not exceed actual indirecttaxes incurred. To accomplish the latr, the ProJect would support development of an automatic and transparent mechanism to lnk such payments to the actual indirect tax content of defined export product groups. This requires harmonizton of the PV and CERT systems, adoption of input-output coefficients to calculate indirct tax refunds, and streamlining requirements and present PV and CERT administratons to fuher reduce processing time. Technical assistance totaling an estimated USS0.2 million would be provided to the Ministry of Foreign Trade (MFT) for advisory services to implement these adjustnents (Annex 3 (a)). 167. Govemment has adjustd antidumping regulations in Decree 150 of January 25, 1993 to ensure consistency with GATT ruls for dumping margin calculations and injury investigation, duty assessment and collection systems, sunset provisions and other provisions. To help implement this policy, the MFT would expand and reorganize its technical staff. Technical assistance totaling an estimated US$0.3 million would be provided to the MFT for training programs giving particular attention to verificaton procedures, dumping margin and injury calculations, acquisition of e4uipment and software (Annex 3 (bW). 168. The Government would commit to a program aimed to reduce the time and cost to private enterprises of Customs import and export procedures, to improve controls over fraudulent practices and contraband, and to increase Govemment revenue yields from trade duties. It would also include a commitment to adopt and utlize the GATT valuation code for imports and phaseout its current reference pricing system prior to January 1, 1995. Technical assistance totaling an estimated $5.4 million would be provided to the National Tax and Customs Service (DIANA) of the Ministry of Finance mainly for a combination of information systems development and computerization, procedural simplification, staff training and equipment upgrading in four stragic areas: (a) export facilitation, (b) proper import and export valuation, and (c) strong emphasis on ex-post documentary control systems and selective physical monitoring of goods (Annex 3 (c)). 169. Export Promoton Serices (ref. Chapter 2.2). Colombian exporters and non-exporters face several important non-financial obstacles to export development. Many lack familiarity with the export process Itself and its instments. There is an inability to readily identify or confide in information, analytical resources and joint venture relationships needed to initiate the export process. Also, a lack of ability or willingness is found to meet the higher costs of overseas expertise initially required, given doubts about the costibenefit relaionshp or the initial inadequacies of resources in an enterprise' marketing budget. Under the Project, the following three initiatves would be undertaken to increase non-financial supportservices for export development. A ExportDvelopment Matching GrantProgram would be established on a ternporary basis under a Matching Grant Trust administered by FIDUCOLDEX and yet to be created under a Statement of Policies and Operating Procedures (already sgrewd and to be adopted prior to loan effectiveness) (see Annex 3 (d)). The Program would provide grants to individual firms on a 50-50 cost-sharing basis for advisory services and travel defined In an acceptable Export Expansion Plan to facilitate on a one-time basis the use of export promotion services. A Manager and seven qualified Account Executives under the Trust would review and approve grants with ex post quarterly reviews of the Pgramn by the Board of the Trust. The Program Is estimated to make an average of over 400 grants per year at an average value of US$30,000 each, yielding a total grant cost (excluding administration) of US$36 mnillon. Private enterprises would provide a like amount. 170. The Export Promotion Trust, also administered by FIDUCOLDEX, had adopted a business plan satisfactory to the Bank for the resmuetwing of PROEXPO sees. The three private  42 representatives on the Trust Board, representing a majority, would be maintained and a cost recovery policy from all program services of at least 50% of cost, (excepting 20% for trade fairs and missions) put Into effect. Operating guidelines for the plan include broad management responsibility, professional staff recruntment and a programmatic focus on those services having strong economies of scale and not available to enterprises in the domestic or overseas market, especially for SMEs. Technical assistance totaling an estimated US$0.5 million would be provided for institutional twinning arrangements with trade development organizations to assist in systems development, staff training and other aspects of program implementation lAnnex 3 (e)). 171. The Government has already taken steps under Decree 1728 of October 26, 1992 to establish an equal business environment between direct exporters and trading companies by eliminating the barriers to entry and regulation in previous framework legislation (Decree 509/88). In addition, technical assistance totaling an estimated US$0.4 million would be provided for seminars, training programs and the promotion of trading company joint ventures through (a) cooperation with trade development organizations to draw upon the successful experiences of such companies in that region; (b) cross-fertilization of experience of successful Colombian trading companies operating overseas (mainly in Miami); and (c) exchanges with trading companies operating in other export markets (Annex 3 (f)). The technical assistance, as well as that in the above-mentioned paragraph, would be administered by FIDUCOLDEX Export Promotion Trust. 172. Export Finance Servics (ref. Chapter 2.3). Exporter performance risk is particularly problematic with respect to new exporters and existing one-product, one-market exporters seeking to diversify and expand and is aggravated by the volatility of banking liquidity in the system. Access to both preshipment and postshipment financing is also restricted by a lack of reliable information on foreign buyers to assess creditworthiness, creating higher perceived commercial and political risks. Under the Project, Bancoldex would establish new export finance services and maintain the following polcies: (a) an annual rate of return in real terms on BANCOLDEX average total assets of 1% and, once its capita structure is adjusted (see (f) below), an average total return on equity capital of at least the real average value of DTF; (b) the provision of credit only as a second-tier institution for export credit rediscounting, except in the case of financing provided directly to overseas buyers for the purchase of Colombian exports; (c) export credit rediscounting policies providing for eligibility of all enterprises in all non-traditional export sectors and automatic rediscounting of individual export credits approved by first-tier financial intermediaries within BANCOLDEX portfolio risk diversification criteria for such intermnediaries; (d) interest charges to first-tier banking institutions for rediscounting export credit containing no subsidy element or, in the case of financing of overseas buyers, at least rates specified under the OECD Concensus; (e) elimination of interest rate ceilings to users of BANCOLDEX long-term export credit rediscounts and increase in ceilings or short-term rates from DTF + 4 to DTF + 6 from July 1, 1994; mf) agreement on adjustment to be made to BANCOLDEX capital level and structure by December 31, 1993 and completion of such adjustments by July 1, 1994; and (g) mobilization of resources by BANCOLDEX only as short-term indebtedness from the domestic credit market up to a maximum of 10% of total liabilities at any one time. It would also undertake a Bank-financed study under the Project totaling an estimated US$0,35 million to help determine the appropriate adjustments required In the level and structure of BANCOLDEX' capital and liabilities which would permit BANCOLDEX to meet the market demand for Its export finance services, earn a market-based rate of retum on its equity, and to secure, as soon as possible, the minimum share of total equity (11 %) required for it to operate as a mixed economy company under Colombian Law and, in the longer run, attra the largest possible equity share by private investors. 173. To help accelerate the acquisiton of export financing and service capacity by Colombian banks, BANCOLDEX would carry out a training program offering seminars in Colombia, visits to selected overseas banks, and publication of materials on trade financing techniques and foreign exchange management. Financing of the Program under the Bank loan (US$0.4 million) would support its organizaton, operation and evaluation (Annex 3 (g)).  43 174. A business plan has been prepared to help establish an pre-shlpment export credit guarant.e program (PECG) to help those enterprises with export orders but lacking an export track record, collateral, and/or capital structure to gain access to export credit. Technical assistance totaling an estimated US$0.25 million wouW be provided through the PECG to potential SME exporters to help shape sound preshipment export credit financing arrangements and support the credit guarantee facility. Financing of the TA program under the Bank loan would cover start-up costs and a portion of operating cost for the first year of the program, after which it would be expected to become self- financed through user fees (Annex 3 (h)). 175. A business plan has been prepared as of November 1992 to help establish a Colombia export credit insurance corporation (CECIC), to be operated as a joint venture between BANCOLDEX and private companies, to help those enterprises with export orders to reduce risk of extending credit to foreign buyers, generate increased credit information on buyers and countries, and increase access to export credit. Technical assistance totaling an estimated US$0.4 million would be provided to facilitate neootiation of its capital and operating structure, prepare detailed policies and operating procedures for the CECIC, help guide start-up, training staff and hold seminars to communicate the CECIC operation to the banking system (Annex 3 i)Q). 176. Capital Markets. With substantial progress in policy and institutional reform of Colombia's financial sector, attention is turning more to the performance and prospects for the nation's capital markets as the next major step in mobilizing domestic resources and extending the maturities of financial instruments. Bank sector work on this subject has been completed recently and preparation of a proJect (FY94) to promote capital markets development Is under way. In the meantime, the Export Development Project would include a technical assistance program to address the first key steps in this process. 177. This program would contribute to remedy deficiencies in the regulatory and Institutional framework of securities markets. It would also contribute to phase in the social security reform planned by the Government. The program would Include the provision of training, specialized consultants and information systems {hardware and software). It would assist in: () upgrading the legal and regulatory framework, concerning market intermediaries, exchanges, rating agencies and insider trading/informnation; (ii) improving information disclosure by issuers of securities and market intermediaries; (iii) upgrading the regulatory authorities' monitoring and surveillance capacity of markets, intermediaries, exchanges and institutional investors; (iv) promoting development of the market through, inter alia, Introduction of new instruments, establishment of new markets and privatizations of public enterprises; (v) implementing the proposed pension system reform, includin the detailed design of the complex process of transition from the old system to the new one; and (vii) strengthenino the regulatory framework of Govemment securities transactions (Annex 3 0)). 178. Condit1onality. Providing effective technical assistance and attaining Project objectives depend upon appropriate policy, instWtutional and TA program conditionality. In several instances, new policy and institutional commitments are required prior to implementation of the technical assistance: (a) adoption of GATT-consistent antidumping regulations; (b) adoption of a Statement of Policies and Operating Procedures for the Export Development Matching Grant Program; (c) adoption of new regulations to eruninate barriers to market entry for trading companies. Failure to maintain these commitments would be events of suspension of loan disbursements. 179. In other cases, the provision of technical assistance Is required in order to put new policies Into effect on an agreed timetable: (a) ensure that indirect tax rebates do not exceed actual indirect taxes incurred (from January 1, 1994); (b) adoption and administration by Customs of the GATr valuation code for Imports and phasing out of the current reference pricing system by July 1, 1994; and (c) agree on the adjustments to be made to BANCOLDEX capital level and structure by  i1i t]i