Philippines - Second Private Development Corporation Project

RESTRICTED Report No. DB-26c This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report moy not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVE]LOPMENT ASSOCIATION APPRAISAL OF T'HE PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES September 12, 1966 Development Finance Companies  CURRENCY EQUIVALENTS Currency Unit = Philippine Peso (P) US$1 = R 3.90 R 1 = US $0. 256 US $1 million = P 3, 900, 000 P 1 million = US $256, 000  1EMORANDUM ON THE ECONOMIC SITUATION OF THE PHILIPPINES 1. The last report on the Philippines, entitled "Current Economic Position and hPospects of the Philippines" was dated June 2, 1965 (FE-414). That report noted the marked slow-down of the Philippine econorm since the beginning of the 1960's, after an impressive economic growth record in the preceding decade. The leading sector in the growth of the 1950's was manu- facturing, which increased its share in total output from 1i to 20%. Manufacturing wras stimulated by a variety of favourable circumstances, the chief of wlhich was the protection given to import-substituting industries by an over-valued currency accompanied by tight import and exchange controls. Import and exchange allocations thus enabled manufacturers to obtain foreign exchange at far less than its real cost and therefore encouraged the flow of investment into manufacturing for the highly protected local market, while discouraging the flow of capital into export agriculture. There were also tax exemption and liberal credit policies for investment in manufacturing. Between 1951 and 1957 national income grew by nearly 7% per annum at constant prices, with industry growing by nearly 13% per annum. 2. Towards the end of the decade, however, these formulas began to lose their effectiveness. New opportunities for relatively inexpensive import substitution were becoming harder to find, the domestic agriculture was lagging badly, and most seriously the system of controls was breaking down through mal- administration and evasion. Hence, in 1960 a course of staged devaluation and decontrol was decided upon. By 1962 a free exchange system was introduced, with an exchange rate which has been stabilized at P3.90 to the dollar as compared to P2 to the dollar before decontrol. The effect of this was a sub- stantial shift in income from the manufacturing sector into export agriculture. It has not, however, revived the rapid economic growth of the 1950's. Indus- trial growth has been slow and agriculture even slower. Real national income increased between 1960 and 1964 by only 4% per annum, which with population growth of about 3.5% meant virtual per capita income stagnation. Furthermore, with sagging real wages, income levels have probably fallen for a considerable part of the population. 3. The sluggish state of the economy continued in 1965. The growth in output was at much the same rate as in previous years, but industry registered its second slowest year since 1951. The situation was aggravated by the actions of the Government. Current government expenditure rose sharply, a characteristic feature of a Philippine election year. The Govern- ment was forced to reduce first the allocations for capital investment and then the credit available for private sector investment. While money supply was about constant in the first half of 1965, it jumped by 11% in the last six months. There was little change with regard to exports and imports, though reserves improved during the year as a result of some net capital inflow. Despite generally adverse economic indicators there was little indica- tion of a coherent approach to deal with the economic difficulties. Vested  - 2 - economic and political interests were proving strong enough to ensure that measures which seriously affected their interests were either not approved or not effectively administered. 4. In assessing Philippine economic prospects, the last economic report identified obstacles in the way of translating the Philippine economic poten- tial into actual growth of output and income, It saw the task of removing these obstacles as being firstly "financial and organizational reforms designed to enable the public sector to provide more active support to the expansion of productive activities by the private sector". Here the problem was to raise public revenues to a point where they could make a real contribution to infrastructure investment, and to reform the organization and administration of governmenl; to ensure that the increased revenues were effectively utilized, The second task was to assist and encourage "private initiative and invest- ment into those fields where their contribution to the growth of the economy is likely to be optimal'", more particularly into the intermediate stages of manufacturing and domestic agriculture. Such reforms are difficult to carry out in the best of circumstances and even more difficult in the political atmosphere of the Philippines. 5e LNevertheless, it is the declared intention of the new government of President Ferdinand Marcos, which took office in January 1966, to take measures necessary to revitalize the Philippine economy. It is early as yet to make judgments as to the achievements of the new administration, but the President has made a start in the process of dealing with some of the more glaring economic shortcomings. Perhaps his most significant effort so far has been in reform of the administration, particularly the National Irrigation Authority and the Department of Public lWorks. Both of these agencies are crucial to the execution of high priority programs for the future and both have constituted serious bottlenecks in the past. Itich attention has been devoted to the agencies responsible for revenue collection, the Eureau of Internal Revenue and the Customs Bureau and the President has made clear his intention to deal firnly with corruption. Steps have been taken to ensure better performance on major investment projects particularly those involving foreign financing, in which the past record is extremely poor. A "troubleshooter" has been appointed to provide a direct link between the President and these projects, and where necessary he has not hesitated to intervene directly in expediting the completion of a project; e.g. in calling on the army corps of engineers to assist in the construction of the Manila Nbrth Diversion road. Solutions of this kind are not satisfactory in the long run however, and much will hinge on his attempts at funadmental reform, In this he has been hindered by the failure of Congress to pass a bill for administrative reform, 6. Efforts at fiscal improvement have been concentrated so far on action to improve the collection of revenue. This campaign has focused particularly on smuggling, including technical smuggling through undler- declaration. The Customs Bureau has been put in the charge of a new "team", heavy penalties instituted and rewards offered for information. There is some evidence of early success in the anti-smuggling campaign in the form of somewhat larger customs collections and reduced competition from smuggled imports, especially textiles. It is still too early, however, to judge the extent of fiscal improvement that can be expected from these efforts at more effective tax collection. They will undoubtedly help, but it hardly seems  - 3 - probable that better tax collection alone will be adequate to raise the low Philippine revenues (now only about 'Ll% of GMP) to a more satisfactory level. 7. One of the most pressing problems facing the new Government was the lack of credit for the private sector. Many of the lending institutions were fully extended and government deficit financing had abosrbed much of the credit which might otherwise have been available for private purposes. The first steps to ease credit were taken in January 1966, when the redis- count rate of the Central Bank was lowered from 6C, to 4 3/4% and reserve requirements were reduced. Bank liquidity has also been improved. IThe Banks, however, have followed a cautious policy during the first half of the year, apparently preferring to strengthen their financial position rather than increase markedly their lending. They are very much stronger at present than at the beginning of the year. Mid-year indications are, however, of a marked rise in money supply reflecting a revival of bank credit activity, although information is not yet available as to the sectors of credit expansion. With the open nature of the Philippine economy it will be difficult to ex- perience any sustained and substantial increase in credit without adverse effects on reserves. Despite the recent additions to reserves, they are still only equivalent to about three months' imports ($223 million in June, 1966). 8. In dealing with the problems of the economy this year, the Philippines have been assisted by favourable export developments. During the first quarter of the year export receipts grew by $37 million from $163 million to $200 million both through buoyant demand and prices for Philippine exports and increased production by the export agricultural sector. Pay- ments for imports also rose but only by $16 million. A breakdown of imports indicates that the increases have been largely concentrated in consumption goods and raw materials, while the proportion of investment goods has fallen. Revival of investment and economic activity generally will probably stimu- late import demand which, as indicated above, may overtake export growth unless prudent monetary policies are followed. 9. The plans of the Government for increased investment are contained in the Fbur-Year National Economic Program for the years 1967-1970. The plan has so far appeared only in draft form and is still subject to change. The aim of the Plan is to raise investment from 11% to 24% of GNP, which seems almost certainly over-ambitious. In many respects the draft P'lan leaves much to be desired. Its financial framework has not yet been well- formulated and appears to rely on a large internal credit expansion, the inflationary tendencies of which would be counteracted by a substantial rise in imports to be financed, hopefully, by increased foreign aid. The sectoral balance is not well-articulated and individual programs are inade- quately worked out. These are faults which can be corrected however, given the effort necessary to raise domestic resources and provide the administratior required for a large-scale program of investment. 10. With such an effort, and given Philippine potentialities for economir growth, it shlould be possible to deal successfully with the current economic difficulties, as well as the longer-run structural problems which the economy faces. Of these longer-run problems, there is, first the need for industry to adapt from the present pattern of producing mostly finished and more simple intermediate goods to a more complex and increasingly vertically integrated  -4 - industrial structure. Fbrtunately, the Philippines possesses adequate entre- preneurial and managerial qualities to carry out this task, given the neces- sary incentives and financial and infra-structure facilities. A second major long-term problem is the one of accelerating the growth of domestic agri- culture which has fallen behind the rate of population growth. Fundamental to this are irrigation schemes and other programs of improvement in agri- cultural facilities, methods and institutions, including land reform. Previous governments have had little success in revitalizing and reforming Philippine agriculture and it remains to be seen -whether the record of the present administration will be better in this respect. There is another basic long-term problem - the severe inequality of income, recently aggra- vated by the decline in real wages. This is not only a social problem but an economic one since falling standards for the working population mean a restriction in the local market and lack of incentives for the necessary growth in manufactures. Improvements in this situation will have to be made in the face of strong political opposition. 11. Measured against both potentialities and requirements for economic development, the economic ro'e of the Philippine Government in recent years hardly constitutes a satisfactory record of economic performance. Perhaps the new Government, with its stated determination to improve the public per- formance, will be able to make a better record. It will have to overcome formidable political obstacles to do this, however, and the results remain to be seen. 12. Nevertheless, faster Philippine economic growth should be possible on the basis of the dynamic forces writhin the private sector - given adequate incentives and means. It was with the aim of helping to improve the means for private development that the Bank and IFC took part in organizing the Private Development Corporation of the Philippines. In its three years of operation the P.D.C.P. has become an important supplement to the other institu- tional facilities for financing private investment. It promises with adequate resources to become increasingly important and a key element in facilitating the further contribution of the private sector to Philippine economic develop- ment. The P.D.C.P. provides an effective channel through which the Bank can assist directly in the further development of the private sector. It is this sector, especially private manufacturing, where past performance has been impressive and where the major future contribution to development can be expected. Asia Department September 6, 1966  APPRAISAL OF PRIVATE DEVELOPME1TT CORPORATION OF THE PHILIPPINIES Table of Contents Page SUMMARY i I. INTRODUCTION 1 II. THE ENVIRONMENT 1 Industrial Growth 1 Sources of Finance 3 III. DESCRIPTION OF PDCP 4 Background 4 Objectives and Powiers 4 Initial Resources 5 Organization and Procedures 5 IV. POLICIES AND OPERATIONS 7 Policies 7 Operations 9 Underwriting Activities 10 Conversion Options and Stock Purchase W..arrants 11 Promotional Activities 11 Guarantees 11. V. FINAINCIAL POSITION AND RESULTS 12 Balance Sheet 12 Profit and Loss 13 Reserves and Dividends 14 VI. FUTURE PROSPECTS 14 The Setting 14 VII. CONCLUSIONS AND RECO'MTNDATIONJS 16 Evaluation 16 Recommendations 17 This report is based on the findings of a mission consisting of Mes3rs. P. M. Mathew, Tore Hedberg and David Y*. K. Peacock, which visited the Philippines in November, 1965.  PRIVATE DEVELOPIENT CORPORATION OF THE PHILIPPINES List of Annexes ANNEX 1 - Shareholders, as of December 31, 1965 2 - Board of Directors as of March 15, 1966 3 - Organization Chart as of March 15, 1966 4 - General Business Policies 5 - Approved Investment Projects, by Maturity, as of December 31, 1965 6 - Approved Investment Projects, by Size, as of December 31, 1965 7 - Approved Investment Projects, by Industry, as of December 31, 1965 BA - Approved Investment Projects, by Location as of December 31, 1965 8B - Approved Investment Projects, by Location - Chart, as of December 31, 1965 9 - Undeririting Record as of December 31, 1965 10 - Comparative Balance Sheet 11 - Comparative Statement of Income and Expenses 12 - F'orecast of Peso Currency Commitments and Sources of Funds 13 - Forecast of Foreign Currency Commitments and Disbursements 14 - P'rojected Balance Sheet 15 - F'rojected Statement of Income and Expenses 16 - F'rojected Cash Flow 17 - Assumptions Used in the Forecasts  SU1EARY i. Private Development Corporation of the Philippines (PDCP) was established in February 1963, with an IFC equity participation, to assist private industrial enterprises in the Philippines. Its share capita:L of P25.0 million, is divided into Class "A" shares (70%.) which may be held only by Philippine nationals, and Class "B" shares (305), which may be held by any individual or entity. The share capital is supplemented by a thirty-year AID loan of P27.5 million and a loan of US$15.0 million from the Bank. ii. PDCP has a Board of eleven Directors, of whom eight represent Class "All shareholders and three represent "B" shareholders. The Chairman and President is Mr. Roberto S. Villanueva. The day-to-day management is in the hands of the Executive Vice President, Mr. Vicente Jayme. PDCP is well organized and the work flow is efficient. Project appraisals are reasonably good, although some lack of financial expertise is noticeable. PDCP realizes that improvements are desirable. The Board of Directors, consisting ofC some of the most respected business leaders in the Philippines, has exercisedl good judgment in its investment decisions. iii. Re:Lations with the Govermnent are good. PDCP is independent of politics. Relations with the business community are generally satisfactory, although some business groups feel that PDCP is not sufficiently venturesome. iv. PDCP has committed its funds rapidly since start of operations in mid-1963, nearly all in loans. Only one equity investment has been made. The loan portfolio is generally well diversified among industrial sectors. There is some concentration in the electric utility and cement industries, but this will diminish as the portfolio increases. PDCP's operations have been profitable from the beginning. Operating costs have been kept low relative to the size of the portfolio and the return on equity has been quite satisfactory, reaching 15.8% in 1965. The Corporation ranks with regard to the level of its operating costs as one of the most efficient development finance companies with which the Bank and IFC are connected. v. PDCP's contribution to the development of the Philippine economy is still relatively modest, but its financial and technical guidance has been of value to the business community. vi. The future prospects for PDCP appear promising. The moderate growth of the industrial sector which has occurred in the recent past is expected to continue during the next few years, although much depen(is upon the policies of the new administration. Long-term capital is likely to continue to be in short supply, and the demand for PDCP's assistance is expected to remain high. PDCP has been urged to seek partners, including IFC, in some of the larger projects which it intends to finance; in this way PDCP can, help develop the capital market while minimizing the demand  - ii - on its own resources. PDCP has also been urged to undertake more equity investment. vii. PDCI' is in need of additional resources. It has almost fully committed its present foreign currency resources, and can be expected to employ efficiently around $25 million over the next two years. It is a suitable recipient of a second Bank loan. In view of PDCP's satis- factory performance to date, projects requiring less than $250,000 out of the loan shlould not be subject to prior approvbaJby the Bdnk. The loan should be on terms usual'for Bank loans to development finance companies.  APPRAISAL OF PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES I. INTRODUCTION 1. Private Development Corporation of the Philippines has asked the Bank for a loan of $25 million to replenish its foreign exchange resources. On February 13, 1963, at the time of PDCP's establishment, IFC subscribed to P800,000 (equivalent to US$205,128) of its share capital and entered into a stand-by commitment to purchase an additional 420,000 shares. At the same time the Bank made a loan of US$15.0 million. This loan, which was PDCP's only foreign currency resource, has now been almost fully committed. 2. A mission visited the Philippines in November 1965 to review PDCP's operations and to appraise its performance and prospects, including its needs for additional resources. It was the first appraisal mission to visit PDCP since it was established. This report is based on the mission's findings and recommendations, and on further information obtained from PDCP during and after negotiations. II. THE ENVIRONMERT Industrial Growth 3. Reference is invited to the report entitled "Current Economic Position and Prospects of the Philippines" (No. FE-44, dated June 2, 1965) circulated to the Executive Directors on June 2, 1965. 4. The Philippine economy is somewhat more diversified than that of many other developing countri-es. Although agriculture is still the largest element in the national income and has continued to be the principal source of foreign exchange earnings, manufacturing has become more important, and now contributes about one-fourth of the national product. 5. Manufacturing in the Philippines is largely a postwar develop- ment. It was aided by the Government's policies in the 1950's, which made available relatively cheap foreign exchange for the import of raw materials and restricted the import of iinished products. Ample credit was also available through the banking system. Ianufacturing began with and still mainly consists of light finishing operations applied to  imported materials, and output increased rapidly. Devaluation of the peso, removal of exchange controls, and liberalization of imports in the 1960's made such finishing industries less profitable and encouraged a move into the intermediate stages of production. 6. Out of about 490,000 industrial establishments, all but about 8,000 have fewer than five workers. Some 1,900 employ 20 or more workers. In the past ten years there has been an increase in the labor employecd and goods produced in establishments employing 20 or more iworkers, tithout a corresponding increase in the number of such establishments. 7. By 1960 gross investment in the fixed assets of manufacturing establishments employing more than 5 workers reached an annual level of P300 million (at post devaluation prices). No reliable data exist about more recent investment, but there are indications that it continued to increase through 1964. In that year the figure was perhaps P500 million. This level was probably not maintained in 1965. 8. Since the introduction of the free exchange system in 1962, manufacturing has not developed as well as had been hoped. Measures to encourage industrial development, which the Government had intended to introduce as a substitute for those operating under exchange control in the 1950's, ran into legislative difficulties. Exemptions from income taxes were still granted, and, as a stop-gap measure, some industries were exempted from import duties on capital goods; but Government plans for a far-reaching revision of tariffs and for financial assistance through Government-owined agencies to industry, for refinancing, and/or financing new investment, were not carried out. In particular, Congressional opposition to additional taxation forced the Government to rely increas- ingly on borrowing from the banking system and public financial institutions; this led to restrictions on private credit. Smuggling and under- declaration of imports for customs purposes created difficulties in the domestic market for some industries. The new Government is interested in carrying out reforms but it is too early to predict howf effective its action will be. 9. Industrial enterprises in the Philippines suffer in general from a disproportionate burden of short-term debt, and their difficulties have been aggravated by a decline in profit margins following introduction of the free exchange system. Refinancing is urgently needed, but available sources are inadequate. 10. The pace of economic growth quickened in 1963 and 1964, when agricultural export production was stimulated by the devaluation of 1962 and helped by favorable weather and demand conditions. In these years the annual rate of growth was about 5 to 6%. Because of a population growth rate of over 3% per annum, however, per capita income has risen more slowly, to a level of about $150. In 1965 the pace of economic growth seems to have slowed down. 11. There is no doubt that the basic conditions for fairly rapid industrial development exist in the Philippines. The country possesses  - 3 - political stability, and there is wide scope for private economic activity and initiative. General education is comparatively advanced, and labor has proved readily trainable. The spirit of entrepreneurship exists, and a growing group of professional managers in both the technical and general fields has developed in recent years. Apparently, family enter- prises have begun to change towards broader ownership. Moreover, the domestic market is fairly large, consisting of over 30 million people with comparatively high average incomes by Asian standards. Sources of Finance 12. Commercial Banks. The Philippines has 40 commercial banks which together have more than 250 branches, but their lending is mainly short-term. Their operations have until recently been restricted by a lack of liquidity, as well as oy credit restrictions imposed by the Government. The begin- nings of an improvement in the credit situation stemming from the policies of the new Government are now apparent. 13. Insurance Companies. The most important insurance enterprises are the Government Service Insurance System (GSIS), which owns 67% of the assets of all insurance companies, and the Social Security System (S'S). In the past, most insurance funds have been invested in real estate and loans to policy-holders. For example, of loans totaling A500 million granted by GSIS and SSS in 1964, only P1.29 million went to industry, compared with P495 million to real estate and policy loans. These Government-owned agencies, with their large resources, could provide substantially more industrial finance with even a relatively small change in their investment policies. 14. Development Banks. Important agencies established to provide investment finance are the Governmernt-owned development banks and the private development companies. By far the largest of these is the Development Bank of the Philippines (DBP) with resources totaling P1,118 million. It has organized a network of 23 small private development banks operating in the smaller cities to assist agriculture and smalL industry. 15. National Investment and Development Corporation (NIDC), was established in 1963 as a subsidiary of The Philippine National Bank, a large, Government-owned commercial bank. NIDC had loan and equity commitments of P135 million and resources of P136 million on Septermber 30, 1965. In addition, outstanding guarantees amounted to P151 million. WIDC has the staff to undertake a larger volume of business, but its limited resources are likely to be aLpplied mainly to projects such as the coconut industry, livestock development and warehousing. Its management has recently decided, in view of existing heavy commitments, not to undertake new long-term financing for some time.  16. Among the private institutions, PDCP already has the largest resources (P1:16 million), and if they are augmented it will have the opportunity of becoming an important source of finance for private industry. 17. Baricom Development Corporation (Bancom), established in 1964, has as its Chairman a former director of PDCP, and as its President the former consultant to PDCP's Board. It is owned by a Filipino group led by its Chairman, and Bankers International Financing Corporation. Its resources, almost entirely share capital, were P7.3 million on June30, 1965. It undertakes all types of investment banking, including promotions and refinancing. Aggressively led, ancd flexible in its operations, Bancom is likely to expand considerably. 18. CCP Securities of the Philippines became active in 1964 as an underwriting and security sales agency and finance house. It is owned by the Ayala Group of investors in association with three U.S. investment houses. 19. House of Investments, with equity of P8.2 million and total resources of P18.3 million at the end of 1964, acts mainly as a holding company. 20. A fairly well established securities market exists in the Philippines. During the fiscal year ending June 30, 1965, 3.1 billion shares with a total value of P110.7 million were traded on the Manila Stock Exchange. About 110 issues are listed on the Exchange. A new stock exchange was recently opened in Makati, but its volume of business so far has not been substantial. Over-the-counter trading is relatively unimportant. III. DESCRIPTION OF PDCP Background 21. PD(CP was incorporated on February 4, 1963. Its inception dates back to discussions in early 1961 between the Bank and the then President of the Repub:Lic. The Bank, on the advice of Mr. George D. Woods, then a special consultant, recommended setting up a development finance company with a P25 million ($6.4 million) share capital, a long-term AID loan, a Bank loan, and an IFC subscription to the Corporation's equity. A Steering Cormnittee took charge of the steps to establish PDCP, and in March 1963 PDCP made a public share issue. IFC has a holding of 80,000 shares (P800,000) or 3.25 of the capital stock of the Corporation. Objectives and Powers 22. PDCP was established to assist in the creation, expansion and modernization of private productive enterprises in the Philippines, to  - 5 - encourage participation of foreign and domestic private capital, to help develop capital markets, and to encourage the growth of technical, financial, managerial and administrative skills in the country. Its functions are broadly defined to include making long- and medium-term loans, equity investments, underwriting, and guarantees, and furnishing managerial and technical assistance; they include those directed towards expansion of the securities market, by such means as purchasing securities and revolving investments. Res 5irrs 23. PDCP began operations in June 1963 with the following resources, which have not yet been replenished: Share Capital: "A" shares P17,500,000 "B" shares P 7,500,000 P25,000,000 AID loan (fully paid-in) P27,00,0OO0 First Bank Loan $15,000,000 The authorized, issued and fully paid share capital totals 2.5 million shares of PIO par value each (or P25 million) divided into P17.5 million (70/%) Class "A" shares which may be owned only by citizens of the Philippines, corporations in which 60% of the share capital is owsned by such citizens, and IFC, and P7.5 million Class "B" shares which may be held by any person or entity. 24. The AID peso loan is for 30 years including 15 years of grace and carries an interest rate of one-half of 1% per annum. In the event of liquidation, any part of the loan outstanding and not due for paynent will be subordinated to other debt and equity. The AID loan is maintained as a separate fund and may be used only for goods and services of Philippine origin. Individual loans from this fund exceeding P500,000 (equivalent to US-$128,000) require AID approval. The first Bank loan, channeled through the Philippine National Bank, is on the terms usual in Bank :Loans to development finance companies. Projects using the equivalent of US$100,000 or' more require the approval of the Bank. Organization and Procedures 25. Shareholders. At December 31, 1965, PDCP had 945 shareho:Lders, 878 of whom (including IFC) held "A" shares and 67 of whom held "B" shares. There are 856 Filipino holders of less than 209000 "A" shares each who together own about 35% of the Corporation. Twenty-two Filipinos have holdings of 20,000 or more shares and owm 34% of the Corporation. Details of shareholders are given in Annex 1. 26. No significant changes have taken place among small shareholders in the past two years, but several institutional investors, including Bancom, accumulated substantial blocks during 1965 through a series of small purchases in the open market. The price of "A" shares reacheld a low of P8.70 in December 1964L but was quoted around P10.00 during  most of 1965. In June 1966 the price increased to P12.50. The volume of trading in "B" shares has been very small and prices have remained firm around par. Foreign financial institutions show no wish to sell. 27. The Board. PDCP's Board consists of 11 members, eight of whom must be citizens of the Philippines, representing Class "A" shareholders. The remaining three are elected by the Class "B" shareholders. All directors are elected for one-year terms. PDCP has agreed with the Philippine National Bank., the channel for the first Bank loan, that as long as any portion of that loan is outstanding, PNB shall be entitled to one member of PDCP's Board of Directors. IFC is not represented on PDCP's Board. 28. PDCP's Board of Directors (listed in Annex 2) consists of leaders in the business community, representing some of the strongest business houses in the Philippines. It meets every two weeks, but as most members have other business interests, Board meetings are not always well attended. 29. FoLlowing the Annual Shareholders' IMIeeting on i'larch 15, 1966, MJr. Roberto S. Villanueva was elected Chairman and President oy the Board, in succession to Mr. Aurelio Montinola. Mr. Villanueva, an important and respected business leader, is taking an active part in PDCP's affairs. 30. PDCP has an Executive Committee consisting of the President and four other directors, one of whom must represent "3" shareholders. This Committee is a device used when there is no quorum at a regular meeting of thie Board. In that event, any three directors of whom one! is a Class "B" director, may constitute themselves the Executive Committee and take action on behalf of the Board. 31. Management and Staff. The Management of PDCP consists of the Executive Vice President, M4r. Vicente R. Jayme, and six heads of depart- ments. Mr. Jayme succeeded Mr. J. K. Paulding as Executive Vice President in March 1965, after serving PDCP a little more than a year as Vice President-Treasurer. He is an economist by training and was a Vice President heading the Department of Economics in the PNB before he joined PDCP. During this time, he was PNB's representative on the Steering Committee which established PDCP and was its Director on PDCP's Board at the beginning. HIe is able and energetic and is considered one of the more promising professionals in the business community. 32. The position of Vice President exists but is now vacant. The team of senior staff which assists management is young, well-educated and enthusiastic. The top seven executives have had relatively wide experience in government and business, and are acquiring it in practical financial analysis and development banking. 33. PDCP's staff consists of 27 professionals and 25 others, organized in three line departments, each headed by an Assistant Vice President, and three supporting staff departments. The Project Develop- ment and Economics Department-which was created very recently is engaged- in the development and promotion of new projects, while the Project 'Evalua- tion and Supervision Department (to which a senior engineer wqas appointed  in 1965) prepares detailed appraisa:Ls for Board consideration. The Treasury and Finance Department handles disbursement, follow-up reviews, short-term placement of funds and capital market operations. The three supporting staff departments are Legal, Accounting, and Administration and Personnel. Annex 3 shows the Organization Chart as of June 1, 1966. PDCP's work procedures are orderly and well developed, and the flow is smooth. 34. The staff needs to be strengthened by the recruitment of financial analysts to the Project Evaluation and Supervision Department. Management is aware of this problem, and is giving it priority. 'Then financial analysts have been recruited, only small increases in the number of the staff over the next two years are foreseen. A training program for the staff has been set up in business finance, to be taught by, among others, facuLty members of local coLleges. The head of Project Develop- ment and Economics Department has recently completed the Industrial Project Evaluation Course in the Economic Development Institute. Staff training in other development finance companies is planned. 35. Project Appraisals. If a project does not need to be reshaped, PDCP can complete an appraisal and get a Board decision in about two months. These quick decisions have helped PDCP to commit its resources rapidly. The mission noted that some of the earlier appraisal reports were super- ficial and tended to be summaries of the facts and views presented by the sponsor of the project; the cause was partly the inexperience of the staff and partly the sacrifice of quality to speed. More recent appraisal reports have been quite satisfactory. The risk of poor investment decisions, which might have resulted from the shortcomings of PDCP's appraisal techniques during its start-up phase, appears to have been avoided largely through the good business judgement of the Board. 36. Follow-Up. As its portfolio grows, PDCP is improving the follow-up procedures needed to supervise projects in the post investment stage. Periodic reports in great detail are now required from clients and procedures to deal with these reports have been organized. Regular on4he-spot inspections of projects are also part of the follow-up program. 37. In general, PDCP's management and staff have established sound procedures for the conduct of the business and show promise of attaining with further experience a high degree of efficiency. IV. POLICIES AND OPERATIONS Policies 38. General Policies. PDCP's Statement of General Business Policies adopted by the Board of Directors on March 17, 1964, defines the scope of the Corporation's activities. It is contained in Annex 4. The Statement emphasizes PDCP' s role in the economic development of the Philippines through assistance to private productive enterprises in the  - 8 - form of medium and long-term loans as well as equity financing. PDCP has the declared aim to assist in the development of a wider market for cor- porate securtities and to encourage a wider distribution of ownership of private enterpr-ises. PDCP defines private enterprises as those enter- prises where private ownership amounts to at least two-thirds of the voting stock., 39. PIOP has adopted several policies designed to reduce its risks. It endeavors to diversify its portfolio as far as practicable in types of industries fiLnanced, location of enterprises, and the nature of the assis- tance granted. Investment, both loans and equity, in any one enterprise has been limiLted to 10% of PDCP's total assets. PDCP has now decided to be somewhat more restrictive and to limit its help to any one client to 15% of PI)P's equity and the AID loan and to 50% of the total assets of the client. It plans to amend its statement of business policies accordingly. 40. PIOP's Board has from time to time given consideration to in- creasing the Corporation's flexibility in dealing with investment op- portunities. It is now willing, in appropriate circumstances and using its owt,n resources, to refinance existing projects, though, in practice, it has not yet become active in this field. It is also considering possibilities for financing large-scale agricultural projects run on commercial lines. Projects in these new fields have not yet become ripe for finmaicing. PDCP passes the exchange risk on foreign currency loans to the borrower. Some prospective borrowers have objected, but there is no evidence that PDCP has lost any substantial amount of business on account of this. 41. Loan Terms. It is PDCP's policy to adjust the terms of its loans to reflect the risk it undertakes, but its interest rate has varied little. The limits have been 8 1/2 - 9 1/2%. In addition it generally charges an acceptance commission of between 1% and 2%, and a semi-annual service charge of one-quarter of 1%.. PDCP's effective interest rate therefore ranges up to 10% per annum. It is the same for both peso and foreign currency loans; in view of the greater demand for peso loans, PDCP is considering some increase in the interest rate for this category of loans. The rates charged by comnercial banks in the Philippines vary from 10 1/2% to 14 1/2%. 42. Repayment periods on loans made by PDCP are related to the borrower