Sri Lanka - Third Development Finance Corporation Project

Report No. 731a-CE FI C py Sri Lanka Appraisal of a Third Development Finance Corporation of Ceylon Project June 11, 1975 Agricultural Credit and Development Finance Companies Division South Asia Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS (as of July 1, 1974) Parity Rate US$1 = Rs 6.47 Rs 1 = US$0.155 Rs 1 million = US$155,000 FEEC Rate US$1 = Rs 10.68 Rs 1 = US$0.094 Rs 1 million = US$94,000 The Sri Lanka Rupee, which had been linked to the U.S. Dollar from November 6, 1971, was re-linked to the Pound Sterling from July 10, 1972 onward at a parity rate of f 1.00 = Rs 15.60. Parity rates with all other currencies are determined from time to time by the Central Bank. The Central Bank of Ceylon makes foreign exchange avail- able for certain categories of imports through sale of Foreign Exchange Entitlement Certificates (FEECs) for which a premium is charged. The same premium is offered to exporters on foreign exchange earnings from the sale of non-traditional goods. The net revenue from the sale of FEECs is credited to the Government's Revenue Account. The premium is presently fixed at 65% of the Rupee parity rate and results in an exchange rate of Rs 10.68 = US$1. This rate currently applies to about 20% of merchandise exports, about 60% of merchandise imports and to most invisible transactions with the exception of aid receipts. The proceeds of the Credit will be lent to Government and subsequently on-lent to DFCC clients at the rupee parity rate of exchange, but clients must pay the Government the FEEC premium, where applicable, for the goods imported under the Credit. FISCAL YEAR Government: January 1 to December 31 DFCC: April 1 to March 31  ABBREVIATIONS DFCC Development Finance Corporation of Ceylon AICC Agricultural & Industrial Credit Corporation NDC National Development Bank NSB National Savings Bank LIAC Local Investment Advisory Committee FEEC Foreign Exchange Entitlement Certificate BOC Bank of Ceylon KfW Kreditanstalt fur Wiederaufbau   APPRAISAL OF A THIRD DEVELOPMENT FINANCE CORPORATION OF CEYLON PROJECT TABLE OF CONTENTS Page No. BASIC DATA SUMMARY AND CONCLUSIONS ......*............t*.. ... ..*.... i-v I. INTRODUCTION . .......................... 1 II. ECONOMIC ENVIRONMENT AND INDUSTRIAL FINANCE .......... 1 General ................................*. .. ..*....... 1 Industrial Sector ...... ............... 2 Industrial Policy , .......................... 4 Tourism Sector .. *. .... ......*.....*... 5 Industrial Finance .... . ..... ..... *.... * 8 III. DFCC AS AN INSTITUTION .. . . . * . . . . . . . . . . . . . . . . . ....... 10 Introduction .....*........................... 10 Ownership and Organization ...................... 10 Policies and Procedures ......................... 12 Relations with Government and Business and Financial Communities ......................... 15 IV. RESOURCE MOBILIZATION ..o... .... ...... .. . . . ........o.. 16 Foreign Currency Resources ...................... 16 Rupee Resources ....**.*... *.**. ........*......... 16 V. OPERATING RESULTS AND DEVELOPMENTAL IMPACT ........ .... 18 Operating Results ...... . . . . . . . . . . . . . . . . . . . . . . . . 18 Developmental Impact ....... . . . . . . . . * * . . . . . . . * * * * 19 VI. FINANCIAL PERFORMANCE ........ . . . . . . . . . . . . . . . . . . . . . . . . 21 Profitability .. .... .... 21 Financial Position ............ ..***4*... 22 Quality of Portfolio . ...................... 22 Audit ... oo ............... 24 This report is based on the findings of a mission consisting of Messrs. Yoshito Kimura and Nabil Sukkar, that visited Sri Lanka in June 1974 and on data subsequently received by the mission.  -2- Page No. VII. PROSPECTS ...... .................................. 24 General Outlook . ..... ... * .......................** *. 24 Business Porecast .......... *.*. .**.*....* ... .. 24 Resource Needs ....... .......*.. ................. 25 Financial Projections ........................... 26 VIII. MAIN FEATURES OF THE PROPOSED CREDIT ................. 27 LIST OF ANNEXES Annex 1 Government Policies on Private Sector and Small Industries Annex 2 Interest Rate Structure in Sri Lanka as of September 30, 1974 Annex 3 List of Shareholders as of September 30, 1974 Annex 4 Board of Directors as of September 30, 1974 Annex 5 Number and Classification of Staff by Profession (FY68-FY74) Annex 6 Statement of Policy Annex 7 Summary of Operations (FY70-FY74 and First Half of FY75) Annex 8 Cumulative Loans and Investments Committed by Size and Duration as of September 30, 1974 Annex 9 Cumulative Loans and Investments Committed by Industrial Branch and Location as of September 30, 1974 Annex 10 Loans and Investments Committed by Industrial Branch (FY71-FY74 and First Half of FY75) Annex 11 DFCC's Development Strategy Annex 12 Economic Indicators of DFCC-Assisted Companies (FY72-FY73) Annex 13 Income Statements (FY70-FY74 and First Half of FY75) Annex 14 Balance Sheets (as of End FY70-FY74 and First Half of FY75) Annex 15 Cash Flow Statements (FY70-FY74 and First Half of FY75) Annex 16 Loans in Arrears over Three Months (as of End FY70-FY74 and First Half of FY75) Annex 17 Share Investments Held as of September 30, 1974 Annex 18 Forecasts of Approvals, Commitments and Disbursements (FY75-FY79) Annex 19 Projected Income Statements (FY75-FY79) Annex 20 Projected Balance Sheets (as of End FY75-FY79) Annex 21 Projected Cash Flow Statements (FY75-FY79) Annex 22 Estimated Disbursement Schedule for the Proposed Credit CHART Organization Chart MAP Sri Lanka  DEVELOPMENT FINANCE CORPORATION OF CEYLON BASIC DATA 1. Year of Establishment: 1955 2. Ownership(as of September 30, 1974) Value of Shares Held Percentage of Total Private 5.998,800 75.0 Domestic (3,653,000) (46.o) Foreign (2,345,800) (29.0) Public 2,001,200 25.0 Total 8,000,000 100.0 3. Bank Group Assistance (as of Decemoer 30, 1974) Loan Date Date of Rate of Original Amount Net of Authori- Disburse- No. Signe Effectiveness Interest Amount Cancellations zation ments Outstanding 520-CE 11/22/67 2/26/68 Variable 4,o0o 2,201 2,201 2,201 1,334 634-CE 7/18/69 10/9/69 6.5% 8,000 3,000 2,964 2,400 1,950 L. Operations (Rs '000): Net Approvals FY70 FY71 FY72 F73 FY74 Local currency loans 18,090 5,295 700 7,120 16,449 Foreign currency loans 3,330 5,031 293 9,544 4,095 Investments 500 - 2,500 - Total 21,420 10,826 993 19,164 20,544 Net Commitments Local currency loans 18,090 5,295 700 5,620 15,399 Foreign currency loans 3,330 4,823 173 9,231 3,117 Investments 5co 2.500 - Total 21,240 10,618 873 17,351 18,516 Disbursements Local currency loans 15,286 15,147 2,095 985 6,073 Foreign currency loans 8,640 1,442 4,477 2,h49 5,063 Investments 1?50 500 _ _ 2,500 Total 25,176 17,089 6,572 3,479 ,436 5. Earr,ings Record (%): Gross income/ATA 1/ 7.1 8.4 8.3 8.3 9.0 Financial expenses/ATA 1/ 2.3 3.9 3.7 3.4 3.6 Administrative expenses7 ATA 1/ 1.6 1.5 1.3 1.2 1.1 Profit before tax and provision/ATA 1/ 3.2 3.0 3.3 3.7 4.3 Net profit/Average net worth 9.3 9.7 9.2 8.4 8.3 Net profit/Share capital 12.4 13.4 13.0 12.1 12.3 Dividend 8.0 8.0 8.0 8.0 8.0 Dividend payout ratio 64.6 59.7 61.4 66.1 64.9 6. Financial Position: Total long-term debt/Equity ratio 4.2:1 5.3:1 5.3:1 4.7:1 4.8:1 Long-term debt/Equity ratio (as defined in Bank loan agreement) 2.1:1 2.8:1 2.8:1 2.5:1 2.6:1 Reserves and provisions/ Total portfolio (%) 6.3 6.o 6.4 7.8 8.8 Debt Service Coverage 2.7:1 1.8:1 1.4:1 1.1:1 1.6:1 1/ ATA: Average Total Assets   APPRAlSAL OF A THIRD DEVELOPMENT FINANCE CORPORATION OF CEYLON PROJECT SUMMARY AND CONCLUSIONS i. The Covernment of Sri Lanka has asked for an IDA Credit to assist in financing private industry, through the Development Finance Company of Ceylon (DPCC). This report recommends a $4.5 million Credit, which would be used mainly to meet the foreign exchange requirements of export-oriented industries and tourism projects that have high Government priority because of their foreign exchange earning potential. ii. The severe strains in Sri Lanka's economy have resulted in a stagnant per capita GDP in real terms, while the balance of payments has deteriorated because of increased oil, fertilizer and food prices. Ex- ports are mainly tea, rubber and coconut, and little attention has been given to diversifying them until recently, when Government introduced various incentive schemes to promote non-traditional exports. Sri Lanka has enjoyed advanced welfare policies, notably free or low-cost food for low-income groups. Since 1973, Government has taken various measures to reduce food subsidies and encourage domestic production, but despite these, the fiscal burden of subsidies remains high, because of rising commodity prices. iii. The industrial sector accounts for about 13% of GDP and 11% of employmenit. Production and investment have been low for some years, since industries rely heavily on imported raw materials and capital equipment, and these have been restricted because of the severe shortage of foreign exchange. Investment in the private sector has been depressed because of the foreign exchange shortage and uncertainty as to the future of the sector. iv. There has in recent years been some improvement, particularly the introduction of an elaborate system of incentives designed to promote industrial exports. Exporters receive a premium above the official ex- change rate for export sales, and can retain 5% of export sales proceeds in foreign exchange and can use it for any purpose. Also profits from export sales are exempt from income tax, and shareholders in export firms receive tax concessions on their investment. As a result, export of in- dustrial goods (mainly garments, leather goods, and vegetable oil products) have increased almost fourfold over the past 3 years, though from a very small base. These incentives have stimulated private investors. However, the severe shortage of foreign exchange overall has prevented full benefits to industry from these incentives. v. Investment has been quite active in tourism. Hotel accommoda- tion has increased to 2,660 rooms in 1974, while a further 2,700 are under construction or planned. This reflects the rapid growth in tourist arrivals, which have more than doubled over the past 3 years. The sector enjoys various fiscal incentives including tax holidays and concessions.  ii - Despite the world decline in tourism, a recent IBRD mission that reviewed Sri Lanka's tourism sector estimated that tourist arrivals should increase by 45% over the next 3 years, reaching about 122,000 in 1977. At this traffic level, the projected capacity of 4,800 rooms in that year could operate with reasonable profitability. To achieve sound long-term devel- opment, the Ceylon Tourist Board requires strengthening. It was aRreed during negotiations that the Board would employ a tourism advisor by the end of the 1975 to assist mainly in setting up hotel construction and operating codes, in hotel classification and in planning and implementation of tourism development programs. vi. DFCC was established in 1955 with Bank Group assistance. Three- fourths of its shares are owned by private individuals and institutions, the rest by Government and its agencies. It is the only institution spe- cializing in long term finance for the private industrial sector. It has financed mostly manufacturing ventures, but has recently increased its lending for tourism projects. DFCC's operations since 1970 have fluctuated widely, reflecting the changes in the climate for private investment. Its commitment in loans and investments declined from Rs 21 million in FY70 to less than Rs 1 million in FY72, and rose to an annual average of Rs 18 mil- lion in FY73 and FY74. The sharp increase since FY72 is mainly due to tour- ism, with some improvement in export-oriented industries. vii. As of September 30, 1974, DFCC financed some 177 projects involv- ing 107 companies, to a total of Rs 152 million (US$23 million). About a half went to food processing, chemicals, textiles and tourism projects. The rest was reasonably well diversified among other industries. The share of hotel projects is expected to continue rising in the next two years but DFCC intends to set a maximum hotel exposure limit of 45% of its total portfolio. viii. DFCC's loans and investments are of a medium and relatively small size as have been the recipients of its lending. As at September 30, 1974, 60% of DFCC's operations represented individual loans and investments of less than Rs 0.5 million (US$77,000) and 82% were for individual loans and investments of less than Rs 1 million (US$155,000). DFCC's Act and Policy Statement were amended in 1974 to enable it to extend assistance to proprietorships, partnerships, and cooperatives, in addition to limited liability companies, and its minimum loan size was reduced from Rs 100,000 to Rs 75,000 (from US$15,000 to US$11,600) - which may be reduced further still - to enable it finance smaller enterprises. There is no official definition of small scale enterprise in Sri Lanka, but these have sometimes been defined in terms of enterprises whose fixed assets do not exceed Rs 200,000 (US$31,000). DFCC intends to start limited financing of small scale units of this size in the next two years, and a portion of the Credit (US$200,000) has been spefically allocated for lending for this purpose. DFCC intends to move slowly into this type of financing in view of its small staff and its limited experience in this field which requires close supervision and con- centrated provision of ancillary services. It will collaborate with the Industrial Development Board (a statutory body under the Ministry of Industries)  - iii - which undertakes feasibility studies of small industrial projects and provides technical services to such projects. ix. Lack of projects resulting from uncertainty in the private invest- ment climate in the country has constrained the development impact of DFCC. DFCC's efforts have focused on financially attractive projects with the intention of building a strong portfolio and maintaining a sound financial position. DFCC management is now conscious of the need to make additional efforts to identify and promote projects and to assist in the formulation of industrial policies. Recently, Government has recognized a definite role for the private sector in export-oriented industries and tourism where there is scope for DFCC to play a more active developmental role. DFCC development strategy in the next two to three years is to focus its financing on export oriented industries and tourism and to start a limited association with small scale sector units. It will finance import substitution projects, but in these it intends to give preference to projeccts in industries with relatively high level of capacity utilization and to balancing, modernization and replacement projects. It may also finance one or two projects directed to the cultivation and processing of non-traditional agriculture. DFCC also intends to play a promotional role in helping in the regional distri- bution of industry, in identifying, improving, and screening project and policy ideas emanating from the private sector and in advising the Government on these ideas. DFCC should thus become a useful and effective channel of communica- tion between the private sector and the Government. x. DFCC is well managed; and despite an increasing Government role in managing the economy, it has preserved its operational autonomy. A new Chairman has taken over DFCC's leadership and a second Government director has been added to DFCC's Board, which should improve contacts between DFCC and the Ministry of Industries and Scientific Affairs. The present 12 pro- fesional staff are competent. DFCC intends to further strengthen its staff by recruiting a market analyst and a junior execution during the current year. It will also strengthen its capacity for appraisal and supervision of hotel projects. It was agreed during negotiations that DFCC will, by the end of 1975, either recruit a qualified hotel projects specialist or make suitable arrangements for the training of one of its staff in this field. Up to US$15,000 of the IDA Credit proceeds could be used for training abroad for this purpose. xi. DFCC's project appraisals are adequate to assess financial viability, technical aspects, market prospects and management capability, but its economic analysis requires improvement. An undertstanding was reached with DFCC that it will look more thoroughly into the economic impact of its projects and in particular calculate the economic rate of return for all projects costing Rs 1 million or more and the domestic resource cost per unit of foreign exchange earned/saved for projects costing between Rs 0.5 and up to Rs 1.0 million. DFCC has three senior staff who have been trained at the EDI and who are capable of making such evaluations. DFCC also intends to pay particular attention in its future appraisals to the level of capacity utilization in industries it assists to ensure that its financing does not create additional excess capacity.  xli. DFCC's current annual lending rates for both rupee and foreign currerncy loans is 10.5%Apa. The rupee rate is in line with those of other financial institutions in Sri Lanka, but Government is aware that interest rates are generally low in the country and the Central Bank is currently reviewing their structure. DFCC rates for local currency loans might be adjusted upward in the light of the review. Given the scarcity of foreign exchange, there is need to encourage a more economic use of foreign currency resources. It was therefore agreed that DFCC's foreign currency lending rate under the proposed Credit would be increased to 12% pa. However, it was also agreed that DFCC would lend to enterprises whose fixed assets do not exceed Rs 200,000 (US$31,000) at a special rate of 10%pa which is in line with Government's policy to encourage the small scale sector. A small portion of Credit will be used to finance such enterprises and the weighted spread to DFCC on the proceeds of the Credit would be about 3.4%; the spread on DFCC's overall debt resources (including the interest-free Government loan) would be 4.2% in FY79. The Government would continue to assume the exchange risk. Passing on the risk to the final client at this juncture would create additional element of uncertainty in the present private investment climate. xiii. DFCC has depended on IBRD for its foreign currency resources (total US$5.2 million), and on Government, the Central Bank and commercial banks for its rupee funds. Since 1966 it has increased its rupee borrowings from commercial banks, but has been unsuccessful in diversifying its sources of foreign exchange. Because of a sharp rise in rupee lending in the past two years, DFCC faced a rupee resource constraint, but in October 1974 it obtained an overdraft facility for up to Rs 6.5 million from the Bank of Ceylon which is being converted into a long term credit. DFCC intends to continue making efforts to tap new sources of funds. xiv. Despite the decline in portfolio over the past several years, DFCC has been able to maintain a reasonable level of profitability by mainly reducing its administrative expenses. Net profits amounted to 8.4% of average net worth in the past two years and 12.2% of year-end share capital. It has paid dividends at 8% since FY68. DFCC's long-term debt/equity ratio, as defined in the last IBRD loan agreement, varied between 2.1 and 2.8 over the past five years against a contractual limit of 3.0. The new agreement sets a new long-term debt/equity ratio of 7.0 based on a new definition. 1/ The quality of DFCC's portfolio is good. It had four companies in arrears of Rs 490,000 at the end of September 1974 while it had provisions against bad debts of Rs 1.4 million. Only one of the nine companies in which DFCC has investment was operating at a loss but DFCC has ample provisions against bad investment (Rs 650,000) to more than cover a possible loss of Rs 50,000. 1/ In the last IBRD agreement, the portion of the Government subordinated loan which falls due after the last maturity of the IBRD loan is ex- cluded from debt and included in equity. The present agreement bases the ratio on total debt and equity. Using the new definition, debt/ equity ratio during the past five years varied between 4.2 and 5.3.  - v - xv. DFCC expects to commit Rs 45 million over the two years through March, 1977: Rs 29 million (US$4.5 million) in foreign currency and Rs 16 million in rupees. By January 1975 DFCC had identified 54 projects with foreign exchange requirements of about US$7 million (approximately 30% export-oriented, 40% tourism and 30% import substitution projects). How- ever, because some projects are tentative and others may drop out, it is more likely DFCC will be able to commit about US$4.5 million in foreign exchange in the next two years. DFCC's present foreign exchange resources have all been committed and the IDA Credit is expected to cover its needs through March 1977. xvi. The Credit would be used to cover the direct CIF cost of capital goods imported for projects financed by DFCC, and also to cover 65% of the cost of imported goods bought "off the shelf" in Sri Lanka for tourism projects, representing the estimated uverage foreign exchange component of these goods. US$200,000 of the Credit would be specifically allocated for lending to small enterprises whose fixed assets do not exceed Rs 200,000, and upto US$15,000 would be made available for short term training abroad of DFCC staff member in hotel project appraisal and supervision. xvii. The Government would lend the proceeds of the Credit to DFCC at an interest of 8.5% pa. Repayments to Government would be made within 15 years including grace period, on a flexible amortization schedule in appro- ximate conformity with repayments received by DFCC from sub-borrowers. It was agreed that DFCC would submit to IDA for prior approval projects using US$150,000 or more of the proposed Credit. Requirement of IDA approval of a part of DFCC's projects is still desirable to maintain a dialogue on project appraisal.   APPRAISAL OF A THIRD DEVELOPMENT FINANCE CORPORATION OF CEYLON PROJECT I. INTRODUCTION 1.01 The Government of Sri Lanka has requested an IDA Credit for the Development Finance Corporation of Ceylon (DFCC) to finance private invest- ment in the industrial and tourism sectors. An IDA Credit of $4.5 million is recommended. 1.02 The Bank has made two loans to DFCC totalling $12 million. The first of $4 million was approved in 1967, and the second of $8 million in 1969. In 1970, the sudden deterioration in the investment climate in the private sector caused a sharp decline in DFCC's business in the subsequent two years and forced it to cancel $6.8 million of these loans leaving $5.2 million to be disbursed. Its lending has picked up significantly over the past two years, and this balance was fully committed by end-1973. The re- covery was due mainly to reactivated investments in export-oriented indus- tries and tourism projects which, because of their foreign exchange earning potential, now benefit from various Government incentives. 1.03 Prospects for private industrial investments are still somewhat uncertain. There is a severe shortage of foreign exchange which makes it difficult for investors to import the necessary raw materials as well as capital equipment. It is vital, therefore, that Sri Lanka develop industries with high foreign exchange earning capacity. This Credit is intended principally to help promote such industries. II. ECONOMIC ENVIRONMENT AND INDUSTRIAL FINANCE General 2.01 A detailed review of Sri Lanka's economic situation is contained in the latest Bank economic report "Recent Economic Developments and Current Prospects for Sri Lanka", dated February 20, 1975 (No. 622a-CE). 2.02 Sri Lanka's economy is largely dependent upon the services and agricultural sectors, which contribute about 46% and 33% to GDP respectively, while the industrial sector contributes about 16%. Although the standard of living for much of Sri Lanka's population is considerably above that of the poorest Asian countries, and a minimum basic diet is supplied to all through the subsidized food ration, average annual per capita income is low (around $100). The economy is currently undergoing severe strains. There has been little expansion in commodity output in recent years. Between 1969-70 and 1972-73 GDP increased at an annual rate of about 2.3% in real terms a gross income at a considerably lower rate because of a sharp decline in the terms of trade. With population growing at a 2.2% a year, there has been no im- provement in the standard of living of the average Sri Lankan in the past few years. A most serious problem is the balance of payments situation.  Jwing to the sharp increase in prices of imported goods, the estimated 1974 current account deficit was $240 million, against $39 million in 1973. Basically, the current predicament is a product of both the rising prices of major imports and the large food subsidy program. Social welfare policies pursued since independence have, among other things, resulted in continued food subsidization, which in turn discouraged domestic food production and perpetuated a heavy dependence on food imports. Despite the chronic deter- ioration in the countryts terms of trade, little attention was paid to re- structuring its export sector, ich depends heavily on three major crops (tea, rubber and coconuts), which account for 80% of total exports.l/ 2.03 Recently Government has launched a variety of incentive schemes to promote the export of non-traditional goods. As a result, industrial exports have grown significantly over the past three years, though from a very small base. Since late 1973, Government has implemented a number of measures to abolish or reduce subsidies on food and other mass consumption goods and services. Although the continued escalation of imported food, fertilizer and oil prices has on balance prevented a reduction of the fiscal burden of subsidies, Government should be given credit for initiating these necessary but politically unpopular measures. Industrial Sector 2.04 Characteristics. The industrial sector accounts for about 13% of GDP and employs about 410,000, or 11% of total employment. Industry consists mainly of consumer goods production. In 1973, food processing represented 50% of total industrial value added and textiles 14%, compared with 11% for capital goods. Some 2,500 relatively large-sized and well-organized firms contribute an estimated 70%O of industrial value-added and 30% of industrial employment. Included in this group are 26 state-owned enterprises which account for some 23% of value-added and 6% of employment in the industrial sector. The rest of the sector consists of a vast number of small, mostly non-corporate units 2/, largely in handloom and powerloom operations and other cottage-type industries such as coir products, potteries and carpen- tries. 2.05 Overall, Sri Lanka's industry depends heavily on imported raw materials. During 1973, two-thirds by value of industrial raw materials were impprted. Geographical distribution of industries is extremely uneven: about 90% of manufacturing output is concentrated in the Colombo area. Government is establishing a number of industrial estates in various parts of the country to help dispersal outside Colombo. 2.06 Recent Performance and Problems. Industrial activity has been virtually stagnant for the past several years. Value added from manufac- turing (at 1963 factor prices) grew at an annual average rate of 1.0% 1/ IBRD, Republic of Sri Lanka: Agricultural Policy and Program Review; repor report no. 579a-CE dated February 19, 1975. 2/ Estimates of the number of such units vary from 25,000 to 100,000.  -3 - between 1971 and 1973 compared to 9% in the latter half of the 1960's. With few exceptions, industries requiring larger proportions of raw material im- ports experienced slower growth. This confirms that the principal constraint on industrial growth has been the severe shortage of foreign exchange for the import of raw materials. This shortage, coupled with management deficiencies, labor disputes and unbalanced facilities, have forced many units to operate at below capacity; often at 50% or less. 2.07 Industrial investment in general has been inactive. While offi- cial statistics indicate that investment in plant and machinery at current prices increased by 32% between 1971 and 1973, there was probably no growth in real terms because of price increases. 1/ Here again, the major factor contributing to the slow investment growth has been the foreign exchange shortage, which has not only made importation of capital equipment difficult, but also deterred new projects because of dim prospects of obtaining neces- sary imported raw materials and spare parts. In addition, private sector in- vestment has been hindered by uncertainties about its future role (Annex 1). 2.08 Against this background, however, the export of industrial goods more than tripled between 1971 and 1973 (reaching $15 million), and in the first nine months of 1974 was 26% above the level in the corresponding period of 1973. Among items which showed particularly high growth were garments and fabrics, leather goods, vegetable oil products, rubber products (footwear, tires, etc.), processed sea food and some engineering goods. This improved export performance was recorded mainly by products with a relatively low import content (40% or less), except for garments (70-80%). Overall, private-sector firms have achieved a higher rate of growth in industrial exports than public enterprises, their share rising from 45% in 1971 to 50% in 1973. 2.09 This remarkable improvement in industrial exports reflects Govern- ment's recent vigorous efforts to promote non-traditional exports through various tax and other incentives to manufacturers of these products (para 2.12). These incentives have induced many existing manufacturers to switch from production for the domestic market to that for export. Government licenses for leather, wood and rubber goods projects soared from five in 1972 to 44 in 1973. However, implementation of many of them has been de- layed or stalled for lack of access to foreign exchange to import plant and machinery. The foreign exchange shortage has also prevented existing firms from modernizing and balancing their machinery, which in many cases is obso- lete and unsuitable for producing goods of exportable quality. 1/ The Colombo Consumers' Price Index, which is the only official indi- cator of price trends in Sri Lanka, rose by 6.3% during 1972 and 9.7% during 1973; however, this index is generally considered to understate substantially the real price increase because of its inadequacy of coverages and obsolescence of weight allocation.  -4- Industrial Policy 2.10 Strategies. Government laid down new industrial development pol- icies in 1971 which placed primary emphasis on: (i) reorienting industrial activity towards exports; (ii) promoting labor-intensive projects mainly in the small-scale sector and rural areas; and (iii) minimizing the foreign exchange requirements for capital goods and raw materials. 1/ Also, Gov- ernment proposes to lessen the concentration of wealth and income in a few priviledged groups, and to this end, has assigned a leading role to public sector enterprises and to strengthening social control over the private sector. 2.11 Achievement of these goals, amounting to a fundamental restructur- ing of industry, would require comprehensive and coordinated policy formula- tion and well-calculated incentive systems. Government has been preoccupied with more urgent problems of balance of payments and budgetary deficits, and has not yet spelt out detailed and-coherent programs to implement the pro- nounced objectives, except for export promotion. Also there has been no systematic approach, particularly in the demarcation of the roles of the public and private sectors and the promotion of small industries (Annex 1). 2.12 Promotion of Industrial Exports. Government has in recent years intensified its efforts to stimulate export of non-traditional products (other than tea, rubber and coconuts) and these have met with reasonable success (para 2.08). The current package of incentives consists mainly of: (a) Foreign Exchange Entitlement Certificate (FEEC): Exporters of non-traditional goods receive a premium above the official exchange rate. The premium was increased in November 1972 to 65% from the previous 55%. Since the FEEC rate also applies to most merchandise imports, exports with a lower import content can obtain larger benefits from this scheme. (b) Convertible Rupee Account: Introduced in January 1973, it allows exporters to retain a proportion (originally 2%, increased to 3% in November 1973 and 5% in November 1974) 2/ of the F.O.B. value of their exports, inclusive of FEECs, for the importation of any goods except those which may compete adversely with locally manufactured articles. (c) Tax Holidays and Investment Relief: Effective April 1972, profits from export sales are exempt from income tax for 8 years (new companies) and 5 years (existing companies). Dividends declared during the tax holiday are also exempt 1/ "Ceylon's Industrial Policy" (July 1971) and "The Five-Year Plan 1972-76" (November 1971). 2/ 20% for gem exports.  - 5 - from tax to the extent they relate to the profits from export (new companies only). Investors in exporting enterprises are also granted investment relief whereby the actual amount of investment in ordinary shares or one-fifth of taxable income, whichever is lower, can be deducted from income for taxation purposes. (d) Other Incentives. Manufacturers of industrial goods for export receive custom duty rebates on their imported inputs. Export sales are exempt from the compulsory savings and income ceiling scheme and from business turnover tax. Export enterprises can also benefit from a lump-sum depreciation allowance (50-80% for machinery), development rebate (20-40%) and carry-forward of losses. 1/ 2.13 To complement these efforts, Government has since mid-1972 encour- aged joint ventures with private foreign enterprises, in which local part- ners (whether public or private) hold majority ownership and retain effec- tive control. In exchange, Government gives assurances that full compensation for the investment will be made in the event of nationalization, and that re- mittances of profits and repatriation of capital will be allowed. During the two years up to June 1974, 20 joint ventures, mostly export-oriented, involv- ing foreign investment of about $3 million were approved. 2.14 Export incentives have contributed significantly to the recent increase in industrial exports, but exporters have sometimes been constrained by shortage of foreign exchange for raw material imports. The Government is now according highest priority to export industries in the allocation of foreign exchange for raw material imports. Tourism Sector 2.15 A Bank mission visited Sri Lanka in November/December 1974 to re- view the tourism sector. The mission's report, from which the findings below are derived, has been submitted to Government. 2.16 Recent Performance and Characteristics. Sri Lanka's tourism sector has achieved a rapid growth since the mid-1960's. Though starting from a very small base, tourist arrivals increased from 19,000 in 1966 to 77,900 in 1/ The 1975 budget contains proposals to withdraw some of the fiscal in- centives, which were considered overly liberal. They mainly include limiting tax holidays and investment relief to broad-based (yet to be defined) companies, and abolishing both development rebates for plant, machinery and fixtures, and lump-sum depreciation. The rebate of 40% in respect of industrial buildings which includes hotels will not be affected. It is difficult to assess at this stage the impact of these measures, still under discussion in Parliament, on future private in- vestment. However, it is unlikely that the projected levels of DFCC lending in the next few years would be significantly affected if these measures are enacted.  1973, an average annual growth of 22.4%. This compares with the average increase of 12.8% for the South Asia region and 7.4% for the world over the same period. While the growth rate in 1974 has somewhat declined to an estimated 9% (85,000 arrivals) mainly because of the world-wide economic recession, this must still be regarded as a satisfactory performance when compared with the zero growth for world travel as a whole. Official foreign exchange receipts from tourists (net of FEECs) rose from $7.3 million in 1972 to $12.8 million in 1973 and further to an estimated $15.1 million in 1974. 2.17 The major source of tourist traffic is Western Europe (particularly Germany, France, Scandinavia) which in the past two years accounted for about 65% of all arrivals. Travel from this area has been heavily promoted on the basis of group inclusive tours. About 90% of total traffic from this source travelled either on charter aircraft or in groups on scheduled air services. 2.18 The tourism sector is one of few areas where private investment has been quite active. Hotel accommodation, which is predominantly provided by the private sector, has increased from 770 rooms in 1967 to 1,891 in 1972 and 2,661 (59 hotels) at end-1974. About 30% of these rooms are in Colombo, 44% on the beaches and 26% on the interior circuit (consisting of the ancient cities, Kandy and the hill country). Sri Lanka's tourism is characterized by high seasonality with tourist arrivals heavily concentrated from November to March. Consequently, the average annual room occupancy has been relatively low - 42.4% in 1973 and 42.8% in 1974. Fortunately, however, average break-even occupancies in Sri Lanka hotels are also low by inter- national comparison and typically range around 40% for many of the small resort hotels which account for the bulk of tourist accommodation. The low break-even point derives mainly from relatively low investment and operating costs. As a result, the profitability of hotel operations has been quite attractive with gross operating profits often reaching 30% of total revenues, which themselves are high in relation to investment. 2.19 Incentives for Tourism Promotion. The active hotel investment has also been induced by an extensive system of Government incentives which are fairly similar to those for export-oriented industries. These include 1/: (a) Tax Holidays: Hotels are granted a 5-year full tax holiday and thereafter, if operated by limited companies, an additional 15-year partial (50%) exemption from income tax. Dividends declared during the full year holiday are also exempt from tax. (b) Investment Relief: Companies holding shares in hotels are entitled to investment relief up to a maximum of 50% of their investment. Individual investors benefit from full relief and also from exemption from wealth tax for five years.  - 7 - (c) Other Incentives: As with exporters of non-traditional goods, hotel projects are entitled to Convertible Rupee Accounts (5%), accelerated depreciation allowance, develop- ment rebate, carrying-forward of losses, and custom duty concessions. 2.20 Prospects. In 1967, Government's 10-year tourism development plan projected tourist arrivals in 1976 at 307,000, subsequently revised downward to 220,000. However, as a result of the change in the world travel outlook following the sharp rise in oil prices since October 1973 and the subsequent doubts about world economic prospects, Government again revised its projections in mid-1974, and estimated arrivals in 1977 at 206,500. The recent Bank sector mission suggested a more realistic arriv- als target of 122,000 in 1977 which would represent a 45% increase during 1975-77, compared with a 114% actual growth over the past three years. 2.21 Currently 52 hotel projects with a combined capacity of 2,691 rooms have been approved by Government and are in various stages of imple- mentation. If all of these are completed on schedule, Sri Lanka's total hotel capacity would expand to 5,352 rooms by the end of 1976. However, since Government expects to withdraw from graded classification 559 exist- ing hotel rooms by 1977, 4,793 rooms would be effectively available to the international travel trade in that year. Based on the historical data on room density (1.7 persons per room) and average length of stay (10.3 nights), and given the expected traffic level of 122,000, these hotels would operate at a 45% average occupancy in 1977, which is above the break-even point of average-sized hotels in Sri Lanka. Although acceptable for a first full year of operation, the 45% occupancy is substantially below the highest possible level (55%). Thus, the projected hotel capacity of 4,793 rooms in 1977 should not be exceeded, given present market expectations. The Government intends to keep the demand situation under review to avoid creating excess hotel capacity. f 2.22 Problems. While the overall prospects for the sector appear rea- sonably good, planning and implementation need considerable improvement for sound long-term development. The standard of many of the lower-grade hotels is barely acceptable for the international trade, particularly finish, in- terior design and equipment. Many of the existing hotels and new projects are too small to accommodate the package groups, the most dynamic element in traffic growth. Operating standards are also deficient. It is therefore important that the capabilities of the Ceylon Tourist Board, the Government agency responsible for tourism planning and development, be strengthened to provide the necessary services. The Government has agreed that a tourism advisor will be employed by the Tourist Board by December 31, 1975. The 1/ Government has proposed to withdraw some of these fiscal incentives (para 2.12, footnote). However, if implemented their impact on hotel investment in the immediate future is expected to be relatively small.  - 8 - advisor would assist in developing a hotel code for both physical and oper- ating standards; appraising new hotel projects to ensure that they conform to the hotel code and development plan; inspecting hotels in operation regularly to ensure the maintenance of operating standards and service in conformity with the hotel code; and in overall tourism development planning. The Government expects to obtain UNDP financing for the services of this advisor. Industrial Finance 2.23 Financial Institutions. Institutions have played a minor role in financing industry in Sri Lanka. In 1967, only 9% of private invest- ment in the manufacturing sector (including inventories) was financed by institutions, whereas 53% came from firms' own funds and 38% from trade credits and other non-institutional sources. While statistics for more recent years are not available, there are no indications that this financing pattern has changed significantly. Amongst financial institutions, 11 commercial banks (four domestic; seven foreign) provide the bulk of funds; their aggregate outstanding lending to the industrial sector (both public and private) stood at Rs 517 million at end-1973, of which more than three- fourths were lent by two Government-owned banks (Bank of Ceylon and People's Bank). The commercial banks, however, have no access to foreign exchange resources. Also, their loans are predominantly short-term: almost two- thirds by amount outstanding at end-1973 had maturities of less than one year and only 11% (Rs 58 million) of more than five years. For all prac- tical purposes, DFCC is the only long-term credit institution providing capital for private industry. Although the Government-owned Agricultural and Industrial Credit Corporation (AICC) can finance industry, its indus- trial lending has been marginal. Since 1955 it has made new loans only to the extent of its loan collections and annual profits because of lack of new resources.1/ DFCC's portfolio (Rs 57 million in March 1974 excluding tourism finance), which consists predominantly of loans over five years and equity investments, roughly matches the aggregate balance of total commercial bank industrial loans with maturities over five years. 2.24 Commercial banks' industrial lending is generally conservative; their lending decisions mainly based on the adequacy of the borrowers' security. DFCC is the only institution whose lending criteria are pri- marily concerned with project viability and which has sufficient expertise to perform project appraisals. DFCC has in the past provided modest con- sultancy services to commercial banks for financing large and complex proj- ects. 2.25 Government intends to establish a National Development Bank (NDB) to provide long-term capital mainly to industrial, but also to agricultural 1/ AICC was established in 1943 mainly to extend loans for agriculture and construction. Lack of funds and rigid security requirements have been the main reasons for its poor performance. Government is currently planning to merge AICC with the State Mortgage Bank which provides housing and agricultural loans.  and commercial, enterprises in the public sector. NDB would relieve Govern- ment of its budgetary support to these enterprises and instill more finan- cial discipline in them. The Government envisages that NDB will specialize in financing public sector enterprises, while DFCC would continue financing private sector companies. Given the increasing importance of the public sector, the proposed NDB could be a vital mechanism for promoting industrial development, and Bank Group assistance to it might be possible at some future date. Government, the Central Bank and commercial banks are expected to provide the bulk of NDB's equity capital. 2.26 Interest Rate Structure. Interest rates charged/paid by financial institutions in Sri Lanka are shown in Annex 2. They have been somewhat low. While the commercial banks' current lending rates range from 6.5% to 12.0% pa., about two-thirds by value of their outstanding loans carry rates of 7.0% to 9.0% pa. Specific rates are decided mainly on the security offered and the bank's relationship with the client, rather than on the duration of the loan. Rates on commercial banks' fixed deposits (3 months to 4 years) are between 4.5% and 5.75% pa., while the Government Treasury Bills (3 months) offer 5% pa. and Government Bonds (10-12 years) 9.0% pa. Because of the limited role of institutional finance in private investment, Government has played down the influence of interest rates on resource allocation. However, it is now aware that the low rates, particularly on commercial bank deposits, have hampered mobilization of private resources, especially through the commercial banking system. Government saving insti- tutions 1/ have been paying higher rates than commercial banks. In April 1972, these instutions were consolidated into the National Savings Bank, (NSB) which has paid 7.5% pa. on one year fixed deposits and 11% pa. on savings certificates (10 years). This has helped in generating new savings but has also diverted considerable deposits from commercial banks which are under pressure to increase their fixed deposit rates to compete with NSB. If these rates were increased they will probably be associated with an increase in their lending rates also. The Central Bank is currently reviewing the interest rate structure. 2.27 Capital Market. The strong inclination among private entrepreneurs for self-financing, and the adverse climate for private investment have stunted the development of Sri Lanka's capital market. In the absence of a proper stock exchange, the Colombo Brokers' Association (four members) has functioned as an intermediary for a narrow and sluggish stock market. While the shares of some 150 companies are quoted, the bulk (92 companies) cover tea and rubber business. Only 29 industrial companies are quoted. There is a traditional preference in Sri Lanka to keep company ownership closely held, and at present many companies are reluctant to have their shares quoted in the stock exchange because of instability in the market resulting from the economic uncertainties. To broaden equity ownership the Minister of Finance has proposed in his recent FY75 Budget Speech to limit the granting of in- vestment relief (in the various sectors) and tax holidays for non-traditional 1/ The Post Office Savings Bank, the Ceylon Savings Bank and the Savings Certificate Fund.  -- 10 - exports, to broad-based companies (para 2.12, footnote). There have been very few bond issues by private sector companies, partly because commercial banks provide short and medium term loans subject to rollover at lower rates than those that need be offered (at least 9% pa.) to compete with Government bonds, and partly because Government and Government-owned institutions are large borrowers of long term funds and pre-empt a substantial proportion of these funds. III. DFCC AS AN INSTITUTION Introduction 3.01 The Development Finance Corporation of Ceylon (DFCC) was estab- lished in 1955 by an Act of Parliament with advice and technical assis- tance from IBRD, 1/ to finance private enterprises 2/ in industry, agri- culture and commerce, including hotels, transportation, construction and engineering. The Act confined financing to "limited liability companies," but an amendment in April 1974 enabled DFCC to assist proprietorships, partnerships and cooperatives also. Ownership and Organization 3.02 Shareholding. A list of DFCC shareholders as of September 30, 1974 is shown in Annex 3. DFCC's authorized share capital is Rs 24 mil- lion, of which Rs 8 million is subscribed and paid-in; it has remained unchanged since 1966 when it was increased from Rs 7.1 million. About 46% of DFCC's shares are held by 289 private Ceylonese investors, 29% by 26 foreign investors (mostly banks) and 25% by three Government-owned institutions. Originally the entire share capital was privately held. Public shareholding came through the nationalization in 1961 of the Bank of Ceylon which currently holds 19.5% of total shares. The other public shareholders are the Insurance Corporation of Ceylon (5.3%) and the People's Bank (0.2%). There has been no significant change in DFCC's ownership over the past several years. With 318 shareholders (of whom 292 are Ceylonese) DFCC's ownership is fairly broad-based by Sri Lanka standards. 3.03 Board of Directors. A list of the members of DFCC's Board as of September 30, 1974 is given in Annex 4. The Board has ten members consisting of six shareholder-elected (including the Chairman), two Government-appointed and two ex-officio (including the General Manager). 1/ DFCC was established mainly in response to a recommendation of an IBRD economic survey mission report published in 1952. IBRD assisted in drafting the DFCC Act. 2/ Defined in the Act to include enterprises in which Government owner- ship does not exceed 20%.  - 11 - The April 1974 amendment to the DFCC Act added a second Government direc- tor 1/ and also made the Chairman's appointment subject to confirmation by the Minister of Planning and Economic Affairs. After the former Chair- man, Mr. N.E. Weerasooria passed away last MIay, Mr. W. Tennekoon was elected in August 1974 under the new appointment procedure. Mr. Tennekoon, formerly Governor of the Central Bank, an alternate Executive Director of IBRD (1955), and an Executive Director of the Asian Development Bank, is well respected in Government and business circles. The shareholder elected directors in- clude three banking executives, a retired Auditor General (and former General Manager of DFCC) and a retired civil servant. The Board usually meets once a month and considers, amongst other things, all loan and investment pro- posals. The Board has guided DFCC's operations in a sound but conservative manner. The new chairman and the increased Government representation on the Board are expected to bring about a more dynamic attitude. 3.04 Management. Mr. S. Kanagaratnam has been DFCC's General Manager since August 1972, when he was promoted from Assistant General Manager, for a three-year term. Mr. Kanagaratnam joined DFCC in 1956 and has consider- able background in development banking. Although constrained by the uncer- tainty in Government policies towards the private sector, he should be credited with reviving DFCC's business during the past two years through an active involvement in tourism financing, a relatively new field for DFCC. 3.05 Staff. DFCC has 12 professional and 26 non-professional staff (Annex 5). Between FY68 and FY71, DFCC increased its professional staff from 8 to 20 in anticipation of a substantial increase in business, but the actual volume of operations in the following three years fell far short of expectations owing to a sudden deterioration in the private investment climate. As a result, 8 professionals left DFCC. Fortunately, however, DFCC retained most of the senior staff. The existing staff is generally well-qualified and adequate for the current level of operations. However, in expectation of an increase in business following the availability of this IDA Credit, the management plans to recruit a market analyst and a junior professional and to strengthen its expertise in appraisal and supervision of hotel projects. 3.06 DFCC's staff comprises personnel of various disciplines including a lawyeK, professional accountants and engineers. The increasing importance of hotel projects in DFCC's operations, makes the strengthening of hotel projects' expertise particularly important. It was therefore agreed that DFCC will by December 31, 1975 either recruit a new staff with this expertise or make arrangement for suitable training for one of its staff. Up to $15,000 of the proposed IDA Credit could be used for training abroad. 3.07 Organization. DFCC's organizational structure is shown in the attached Chart. There are five departments, Project Evaluation, Project 1/ To be appointed by the Minister of Industries and Scientific Affairs; the other Government director is appointed by the Minister of Finance.  - 12 - Implementation, Legal Affairs, Accounts and Administration, and a Con- sultancy Unit. Following the decrease in staff in FY73, two Assistant General Manager posts were abolished. Given the current size of the staff, intervening positions between the General Manager and the department heads are not necessary. Responsibilities of each department are clearly defined. The consultancy unit, established in 1969, was originally intended to pro- vide prospective investors with consultancy services such as project feasi- bility studies and market surveys (for a fee), and also to undertake project appraisals for other financial institutions. However, largely because of the low investment activity in the private sector, this unit has not been fully utilized; the staff (two engineers and a management consultant) have spent about half their time on DFCC's own project appraisal and supervision. Policies and Procedures 3.08 Minimum Lending Limit. DFCC's Statement of Policy (Annex 6) has remained essentially unchanged since July 1969, and continues to provide sound guidelines for its operations. In September 1974, DFCC lowered its normal minimum limit for a single loan or investment from Rs 100,000 to Rs 75,000. This was a follow-up to the earlier removal of the "limited liability company" restriction for eligible recipients (para 3.01). 3.09 Lending Terms. Since January 1970, DFCC has charged 10.5% pa on both rupee and foreign currency loans; but rupee loans, if refinanced by the Central Bank, are extended at 9.5% pa. Foreign currency loans are subject to a commitment charge of 1.25% pa. DFCC also charges an appraisal fee of 0.5% on rupee loans and 1% on foreign currency loans. DFCC's rupee lending rate is roughly in line with commercial banks' rates on term loans secured by immovable property. These range between 8% and 11%, while those charged by AICC on project loans range between 9% and 10% (Annex 2). However, given the scarcity of foreign exchange, there is need to encourage a more economic use of foreign currency resources, even though import transactions under foreign currency loans are carried out at the FEEC exchange rate 1/. Because of this and taking into account the recent price trends (para 2.07), it was agreed during negotiations that DFCC's foreign currency lending rate under this Credit would be increased to 12% pa. However, to encourage the development of small scale enterprises, it was also agreed that DFCC would lend to units whose fixed assets, excluding land, do not exceed Rs 200,000 at a special rate of 10% pa. Government would continue to take the foreign exchange risk. Government risk-taking would be justified mainly because passing on the risk.to sub-borrowers at this juncture would create an unnecessary additional element of uncertainty in the private sector invest- ment climate. Adjustment of the rupee currency lending rate is not recom- mended at present, awaiting the result of the Central Bank's review of the structure of interest rates (para 2.26). I/ Foreign currency loans are lent to clients at the parity rate, but clients must pay the Government the FEEC premium (65% of the parity exchange rate) for the goods imported under the loans.  - 13 - 3.10 DFCC usually lends at maturities ranging between 5 and 16 years. It normally requires a primary mortgage on the borrowing company's fixed assets; the loan is usually limited to 75% of the value of land and build- ings and 60% of the cost of machinery to be acquired. In addition, bank guarantees or personal guarantees of the major sponsors are sometimes re- quired. DFCC also requires that the sponsors provide a reasonable propor- tion of the finance needed so that the project's debt/equity ratio can be maintained at about 1:1. 3.11 Investment Policies. While the Act empowers DFCC to underwrite security issues, it has so far undertaken only two such operations (both in the mid-1960's), mainly because of the general preference in Sri Lanka for closely held company ownership. DFCC's direct subscription to shares has also been small in recent years because very few new shares have been issued in the market since 1970, reflecting uncertainties in the investment climate. As a matter of policy, DFCC has subscribed to more preference shares than ordinary shares. Given the small capital market, investment in ordinary shares means freezing funds, whereas preference shares, which normally are redeemable, allow DFCC to revolve its funds. All preference shares held by DFCC have a fixed dividend rate, which has recently been 11% pa. 3.12 DFCC normally limits share investment in a single enterprise to below 25% of the enterprise's issued share capital or 10% of DFCC's equity (plus the outstanding amount of the subordinated Government loan), whichever is lower. Also, the aggregate of DFCC's share investments is not allowed to exceed the sum of its equity and the outstanding amount of the subor- dinated Government loan. These exposure limits are reasonable and all DFCC's investments have been within them. 3.13 Appraisal Procedure. DFCC's involvement in project appraisal normally takes place at a relatively late stage. Project proposals are first screened by the Ministry of Industries or other relevant Ministries (hotel projects are examined by the Ceylon Tourist Board which is under the Ministry of Shipping and Tourism). Industrial projects involving no foreign participation 1/ are finally scrutinized by an inter-ministerial committee (Local Investment Advisory Committee - LIAC) mainly on the basis of their foreign exchange earning potential, contribution to the rural sector, degree of dependence on imported raw materials and use of locally manufactured machinery and inputs. After the LIAC's license has been issued a private project needing foreign machinery is referred to DFCC. Normally by this stage, some of the important project elements (such as site) have been decided, and the leeway left for DFCC to modify the project design is fairly limited. In the past, when the proceeds of the previous IBRD loans were being utilized, Government invited DFCC staff as consultants (in an individual capacity) to participate in preliminary discussions on project proposals, but this practice has been discontinued for several years. The 1/ Projects with foreign capital participation are examined by the Foreign Investment Advisory Committee.  - 14 - Ministry of Industries now intends to resume inviting DFCC staff, to early discussions on private investment proposals needing DFCC finance. DFCC's experience and expertise in project appraisal would usefully contribute to the selection of sound projects. 3.14 Appraisal Standards. In its appraisal, DFCC closely examines the engineering aspects, the marketability of the product, the company's financial viability and the comp-tence of management. In general, DFCC's appraisal is thorough and the quality of analysis of these aspects is good. On the other hand, DFCC's economic analysis leaves room for improvement. Although it calculates some partial indicators of economic justification (such as employment effects and net foreign exchange earnings/savings), it does not make an overall economic evaluation. During negotiations, an understanding was reached with DFCC that it will cover the economic impact of projects more thoroughly in its appraisal and in particular will calculate the economic rate of return for all projects costing Rs 1 million or more, and the domestic resource cost per unit of foreign exchange earned/saved for all projects costing between Rs 0.5 and up to Rs 1.0 million to gauge the economic viability of projects. DFCC has three senior staff members who have been trained at the EDI and who are capable of making such evaluations. 3.15 Also, since many industries are currently suffering from low utilization of existing capacity, DFCC intends to pay particular attention to this aspect in its project appraisal to ensure that its financing does not create additional excess capacity. 3.16 Procurement and Disbursement Procedures. For procurement of foreign machinery, DFCC usually requires the prospective investor to obtain several quotations from well-known foreign suppliers. The quota- tions are examined mainly for pricing, delivery, quality of equipment, availability of spare parts, warranty conditions and the supplier's ability to furnish technicians for installation and training of local staff. After the supplier has been selected, investors are also required to furnish an assurance from a reputable firm of international surveyors that the plant and machinery to be purchased meet the required specifica- tions, are in good working order and are reasonably priced. For civil works, DFCC normally insists on competitive bidding by a number of selected contractors. DFCC's procurement procedures are satisfactory. 3.17 Disbursement of rupee funds is authorized by the Accounting Department either against the presentation of invoices or after checking the physical progress of construction work. In any case, DFCC ensures that the sponsors have contributed their funds in a prescribed manner. Because IBRD has been DFCC's only source of foreign exchange, disburse- ment of foreign exchange has been made in accordance with the Bank's dis- bursement procedures. DFCC's own disbursement procedures are sound. 3.18 Project Supervision. DFCC follows-up projects through reports from clients, visits to project sites and, in some cases, representation on the Board of client companies. DFCC regularly receives and reviews  - 15 - annual financial statements of its clients. Site visits take place every quarter during project construction, but after project completion, visits are infrequent. Only 35% of projects in operation were visited in FY74, though the percentage increased from 24% in FY73. Although most clients are performing well, DFCC needs to increase the frequency of its post- financing visits which it informed us during negotiations that it intends to do. DFCC is represented on the Board of 15 client companies (out of 82) most of which are ones in which it holds shares. Generally, DFCC's project supervision is reasonably good. Relations with Government, and Business and Financial Communities 3.19 DFCC's relations with Government have become closer. The April 1974 amendments to the Act empowered the Minister of Finance to give directives to DFCC (after consultation with DFCC's Board) in matters of general policy, added another Government director to the Board, and made the appointment of DFCC's Chairman subject to the approval of the Minister of Planning and Economic Affairs. These amendments indicate an increasing Government interest in DFCC's role, but there are no signs that Government intends to interfere in DFCC's daily operations. In fact, DFCC Board mem- bers consider the enlarged Government representation useful for increased contacts and better coordination with the Ministries of Industries and Planning. To complement these Board level relationships, DFCC is planning to enlarge its contacts at staff level with the Ministries and other Gov- ernment agencies concerned with industrial development. The proposed participation by DFCC staff in project licensing could provide a useful opportunity for DFCC to contribute to Government policy in project selec- tion and also to serve as a channel of communication between Government and private-sector entrepreneurs. 3.20 DFCC's image in the business community is improving. In the past, clients complained about the time taken in processing loans (in comparison with commercial banks) and the amount of data and information DFCC requires, but these complaints are now voiced less frequently. Clients increasingly appreciate DFCC's advice and assistance in formulating their proposals, im- proving their cost estimates and preparing financial forecasts. On its part, DFCC has been able to expedite its processing of loan applications by start- ing preliminary appraisal on the basis of whatever information is available, instead of awaiting the applicant's submission of complete data. 3.21 DFCC has had good relations with the commercial banks. In particular, these have traditionally been close with the Bank of Ceylon (BOC). BOC is DFCC's largest shareholder, has always been represented on the Board, and has been an important source of DFCC's lending funds. For a large number of projects, BOC has guaranteed DFCC's loans and pro- vided working capital. BOC has also been a main client of DFCC's con- sultancy services. Since 1972, DFCC has undertaken six assignments for BOC including project appraisal, valuation of machinery and evaluation of civil engineering contracts.  - 16 - IV. RESOURCE MOBILIZATION 4.01 DFCC has been exclusively dependent on IBRD loans for its foreign currency resources, and heavily dependent on official funds (both Government and the Central Bank) for its rupee resources. Although it has tried several times to diversify its sources of foreign exchange funds and to mobilize do- mestic private savings directly, the country's economic situation has frus- trated its efforts. Since 1966 rupee resource mobilization from the public has been limited to utilization of commercial bank credits. Foreign Currency Resources 4.02 DFCC has obtained two IBRD loans totalling $12 million. The first of $4 million was made in 1967 and the second of $8 million in 1969. Mow- ever, the change in Government in 1970 and the subsequent slow-down in pri- vate investment not only reduced new applications for loans but also caused major cancellations of approved DFCC loans in FY71 and FY72. As a result, DFCC was forced to cancel more than half ($6.8 million) the total loan amounts. As DFCC's business picked up again in the past two years, the balance of the second loan was fully committed by end-1973. DFCC's for- eign currency resources at the end of FY74 were as follows (Rs '000): IBRD loans (net of cancellations and repayments) 26,544 Less: Loans and investments outstanding 19,249 Resources available for disbursement 7,295 Less: Resources committed but not yet disbursed 7,295 Resources available for commitment nil 4.03 At various times in the past, DFCC has contacted official foreign institutions (including KfW) for foreign currency loans, but has so far been unsuccessful. It faced competition from the Government in tapping these sources. Prospects of tapping commercial sources of foreign funds are almost nil at present, because of the country's creditworthiness position. Rupee Resources 4.04 At the end of FY74, DFCC's rupee resources totalled Rs 54.6 million as detailed below. However, its rupee loans and investments outstanding to- gether with its committed but undisbursed resources amounted to Rs 64.8 mil- lion, leaving an overcommitment of Rs 10.2 million. A summary of its re- source position at the end of FY74 is as follows (Rs '000):  - 17 - Share Capital 8,000 Reserves and surplus /a 2,025 Government loan (subordinated) 16,000 Central Bank refinancing /b 19,579 Bank of Ceylon credit facility _9,000 Total 54,604 Less: Rupee loans and investments outstanding 49,426 Resources available for disbursement 5,178 Less: Resources committed but not yet disbursed 15,396 Rupee resources available for commitment -10,218 /a Excluding special reserves (Rs 2 million) which DFCC is required to maintain in the form of fixed deposits. /b Outstanding balance. 4.05 DFCC intended to raise its share capital from Rs 8 million to Rs 16 million in 1970 but did not do so because of the change in the pri- vate investment climate. The 1956 Government loan is repayable over 40 years (including 30 years grace 1/) and subordinated to share capital. The loan is interest free and represents 30% of DFCC's rupee resources raised by the end of FY74. 4.06 The refinance facility at the Central Bank is available for term loans (both industrial and agricultural) extended by financial institutions including commercial banks. The interest rate charged by the Central Bank is 6.5% pa and the primary lender is allowed a maximum margin of 3%. The refinance period is up to 15 years. While no ceiling is set on the re- finance available for individual institutions, the Central Bank has in the past several years restricted it to loans extended to unclearly-defined "broad-based" public limited companies. As a result, resort to this facil- ity by DFCC and other institutions has declined recently. In the past year, however, interpretation of the eligibility of access to this facility has been relaxed. 4.07 The credit facility with BOC has a maximum limit of Rs 9 million, of which Rs 2 million could be in overdrafts. Any amount of outstanding overdraft could be converted to term loans, repayable over ten years. Such credit carries interest at 7.5% pa and is secured by DFCC's share investment portfolio. On March 31, 1974, borrowings from BOC were Rs 2.8 million, all in term loans. 1/ Repayment starts in 1986.  - 18 - 4.08 A rapid increase in rupee lending in FY74 (mostly for hotel projects) created a strain on I)FCC's rupee resources, resulting in an overcommitment of Rs 10.2 million at the end of the year. Of this, a minimum of about Rs 6.2 million could be refinanced under the Central Bank's refinance facility, and in October 1974, DFCC obtained a new overdraft facility of Rs 6.5 million from BOC. It is currently negotiating with BOC to convert this facility into a long term c<-edit. This would ease DFCC resource con- straint, but does not obviate the ueed to continue mobilizing additional resources. 4.09 Circumstances continue to be unfavorable for DFCC to raise capital from the market either through bond issues or a share capital increase. The bond market is very thin, and the market price of DFCC shares is depressed (Rs 85 in September 1974 against the par value of Rs 100). Thus, the most likely sources of rupee funds for the moment are borrowings from the Central Bank and from other domestic financial institutions. DFCC intends to con- tinue making efforts to tap new sources of funds. V. OPERATING RESULTS AND DEVELOPMENTAL IMPACT Operating Results 5.01 Volume of Operations. A summary of DFCC's operations from FY70 through FY74 and for the first half of FY75 is in Annex 7. After a dramatic surge in FY69 and FY70, business declined sharply in the subsequent two years because of the rapid deterioration in the private investment climate. Total net commitments reached a low of Rs 0.9 million in FY72 compared to Rs 21.4 million in FY70. Since then, the climate has somewhat improved owing mainly to the Government incentives for tourism and export-oriented industries that led to an improvement in DFCC's business. In the two years through FY74, net commitments averaged about Rs 18 million a year, comprising rupee loans of Rs 10.5 million, foreign currency loans of Rs 6.2 million equivalent, and share investments of Rs 1.3 million. Since inception to September 30, 1974, DFCC's net commitments were Rs 152.2 million, of which rupee loans consti- tuted 72%, foreign currency 20% and share investments 8%. 5.02 Size and Maturity. A breakdown by size and maturity of commit- ments until the end of September 1974 is shown in Annex .8. The bulk of DFCC's operations were of a medium and relatively small size. About 60% of individual loans and investments made until September 30, 1974 were of less than Rs 0.5 million ($77,000) and 82% were of less than Rs 1 million ($155,000). Most DFCC loans (80% by number and 72% by amount) had maturities between 10 and 16 years, with concentration on 10 and 11 years. On the other hand, loans with maturities less than 5 years were less than 1% of the total amount.  - 19 - 5.03 Sectoral and Geographical Distribution. The sectoral and geo- graphical distribution of DFCC's commitments up to September 1974 is given in Annex 9. The largest number of operations (13.5%) were in food process- ing, followed by garment manufacturing (9.8%) and tourism and engineering (each 9.0%). By amounts committed, tourism received the largest share (19.6%), followed by chemical products and food processing (each 11.2%) and textiles (10.8%). The rest of DFCC's financing (47.2%) is reasonably well diversified over a wide range of industries. 5.04 In the past two and a half years the largest commitments (45% by number and 53% by amount) have been in tourism (Annex 10). As a result, DFCC's exposure in this sector reached Rs 27 million by the end of September 1974 (Rs 12 million in outstanding loans and Rs 15 million in un- disbursed commitments), representing 30% of total portfolio and undisbursed commitments. Exposure in tourism is expected to continue rising in the next two years, but DFCC has informed us that it will set a maximum exposure limit in hotel projects consisting of 45% of its total portfolio. 5.05 79% of projects financed by DFCC are located in and around Colombo, where industry is concentrated. The lack of adequate infrastructure and of effective Government incentives have limited projects in less-developed areas. But because Government has recently been encouraging projects out- side Colombo, and establishing industrial estates in different parts of the country, and since most future hotel projects are being planned outside Colombo, DFCC's future financing should show a more even geographical dis- tribution. Developmental Impact 5.06 General. Towards the end of the 1960's DFCC embarked on an ambitious lending program and succeeded in increasing its lending by tenfold over three years, but the subsequent change in the Government's attitude towards the private sector curtailed its initiative. DFCC's efforts since inception have focused on financially attractive projects with the intention of building a strong portfolio and maintaining a sound financial position. Its manage- ment is now conscious of the need to make additional efforts to identify and promote projects, to help out new entrepreneurs and to influence in- dustrial policies. 5.07 In recent years, Government has recognized a definite role for the private sector in export-oriented and tourist industries and in medium and small scale projects, wherein DFCC could play a more active developmental role. DFCC has prepared a development strategy (Annex 11) in which it expressed its intention to give first priority to export and tourist oriented industry financing in the next two to three years. It will finance import substitution projects, but in these, it intends to give preference to projects in industries with relatively high level of capacity utilization and to balancing, modernization and replacement projects. It may also finance one or two projects, possibly with foreign collaboration directed to the  - 20 - cultivation and processing of non-traditional agriculture. DFCC also intends to move gradually into small scale sector financing and to play promotional role, in helping with regional distribution of industry, identifying, improving and screening project and policy ideas emanating from the private sector, and advising Government on these ideas. It could thus become a useful and effective channel of communication between the private sector and the Government. The intended involvement of DFCC into an earlier stage of project consideration by Government (para. 3.13) would enable it to work with Government on influencing project design and location and helping en- courage their establishment in or near the newly established industrial estates. DFCC's continued financing of hotels that are widely distributed throughout Sri Lanka will also be a useful contribution to regional develop- ment. 5.08 Small Scale Sector Financing: As mentioned above, the bulk of DFCC operations were of medium and relatively small size (para 5.02). Likewise the recipients of its financing are basically medium and smaller scale enterprises. During the three year period through FY72, 68% of DFCC's individual loans and investments were made to comPanies whose fixed assets (after completion of the project) were less than US$0.5 million (15% were for companies whose fixed assets were less than US$100,000). This trend con- tinued over the past two years. There is no official definition of small scale industries in Sri Lanka, but such industries have sometimes been defined in terms of enterprises whose fixed assets do not exceed Rs 200,000 (US$31,000). Following the amendment of the DFCC Act in 1974, empowering it to provide finance to proprietorships, partnerships and cooperatives, and the lowering of its minimum lending limit to Rs 75,000 (US$11,600), DFCC is expected to finance more small uni some of which would be within this definition. A portion of the credit (US$200,000) is proposed to be specifically allocated to such small enterprises. In this work, DFCC in- tends to collaborate with the Industrial Development Board (a statutory body under the Ministry of Industries) which undertakes feasibility studies on projects considered to be small scale industry and provides technical services to such projects. In view of its small staff and its inexperience in the very small scale sector, DFCC intends to move slowly into this area since investments in it will require intensive supervision and technical assistance. The Government has not yet formulated a coherent policy and incentive schemes for promoting the very small scale sector (Annex 1) and in the course of implementing this project IDA and the Government will examine more closely the ability of DFCC and other agencies to play a more effective role in assisting this sector. 5.09 Performance of Assisted Projects. There is insufficient data to measure quantitatively the impact of DFCC's finance on Sri Lanka's capital formation. From its inception through FY73, DFCC provided Rs 133 million to 92 companies (for 162 projects), of which 71 were in operation at the end of FY73. 1/ Some economic indicators for these companies are shown in 1/ The other 21 companies either had repaid their loans or were still constructing their projects.  - 21 - Annex 12. During FY73, their total output was some Rs 990 million, their value-added Rs 530 million and their employment 24,600, although these figures are not entirely attributable to DFCC assistance. DFCC-assisted companies accounted for an estimated 12% of total value-added and 5% of total employment in the industrial and tourism sectors. Total capital employed by DFCC-assisted companies was Rs 413 million, indicating that the combined capital/employment ratio of these companies was relatively low (Rs 16,800 or $2,600 per worker). On average, DFCC provided about 16% of project costs. 5.10 Most of the companies financed by DFCC produce for the local market, but over the past two years there has been a growth in assistance to export-oriented industries (including hotels). Those companies earning foreign exchange increased from 15 in FY72 to 18 in FY73, and their gross foreign exchange earning increased from Rs 21 million to Rs 30 million. Although their export sales in FY73 were only 3% of total output of DFCC- financed companies, they represented an estimated 9% of the country's total industrial Pxports and tourism earnings. VI. FINANCIAL PERFORMANCE Profitability 6.01 DFCC's income statements for FY70 through FY74 and for the first half of FY75 are shown in Annex 13. Certain performance indicators are shown below: As % of average total assets: FY70 FY71 FY72 FY73 FY74 Gross income 7.1 8.4 8.3 8.3 9.0 Financial expenses 2.3 3.9 3.7 3.4 3.6 Administrative expenses 1.6 1.5 1.3 1.2 1.1 Profits before tax and provision 3.2 3.0 3.3 3.7 4.3 Profits before tax 3.0 2.8 3.1 3.3 3.5 Net profits as % of: Average net worth 9.3 9.7 9.2 8.4 8.3 Year-end share capital 12.4 13.4 13.0 12.1 12.3 6.02 The sharp decline in business in FY71 and FY72 considerably slowed down the growth of income in subsequent years, but DFCC has maintained a moderate level of profitability, mainly by cutting down on its administra- tive expenses. Gross income grew at an average rate of 4% pa. between FY71 and FY74, compared with a 40% annual growth over the previous three years (income decreased by 6.2% in FY73). DFCC's administrative expenses have continued to decline since FY72 both in absolute amounts and as a percentage of average total assets. As a result, profits before tax have  - 22 - steadily increased, from Rs 1.9 million in FY71 (2.8% of average total assets) to Rs 2.5 million in FY74 (3.5%). Net profits have decreased in FY72 and FY73 due to an increase in the income tax rate. DFCC has provided an increasing amount of its revenues for doubtful loans and investments: from Rs 100,000 in FY71 to Rs 550,000 in FY74. These provisions are not related to specific loans from which DFCC expects losses, but are in the nature of general reserves. DFCC has paid dividends at 8% since FY68. Financial Position 6.03 Annexes 14 and 15 show DFCC's balance sheets and cash flow state- ments from FY70 to FY74 and for the first half of FY75. After reaching its previous peak of Rs 70.2 million in FY71, DFCC's portfolio (net of provi- sions) dropped in the subsequent two years to Rs 64.9 million in FY73; it rose again to Rs 70.8 million in Septenber 1974. While share capital re- mained the same over the period, DFCC's reserves increased to Rs 4 million at the end of FY74. The DFCC Act requires that at least 20% of annual net profits be set aside as special reserves so long as the subordinated Gov- ernment loan is outstanding. The special reserves were Rs 2 million at the end of FY74 and are invested in fixed deposits at rates ranging from 5 to 7%. 6.04 As shown below, DFCC's total long-term debt/equity ratio moved between 4.2 and 5.3 over the past five years. The debt/equity ratio as defined in the last IBRD Loan Agreement ranged between 2.1 and 2.8 over the same period, against the contractual limit of 3.0. DFCC's debt serv- ice coverage also remained satisfactory over the period except in FY73 when the ratio dropped to 1.1 as a result of reduced earnings. FY70 FY71 FY72 FY73 FY74 Total long-term debt/equity ratio 4.2 5.3 5.3 4.7 4.8 IBRD-defined debt/equity ratio 2.1 2.8 2.8 2.5 2.6 Debt service coverage 2.7 1.8 1.4 1.1 1.6 Quality of Portfolio 6.05 DFCC's total portfolio at the end of September 1974 was Rs 72.8 million representing 72 loans and 24 investments in 82 companies. Its portfoliQ is reasonably well diversified amongst a wide range of indus- tries. DFCC's largest exposure in a single enterprise was Rs 4.4 million, representing 15% of DFCC's equity plus subordinated Government loan. This compares with a maximum exposure of 20% set in its policy statement. There are three other companies in which its exposure exceeds Rs 3 million. All four companies are operating profitably. 6.06 Loan Portfolio. DFCC's arrears position for the past three and a half years is shown in Annex 16. On September 30, 1974, only four com- panies were in arrears over three months, with aggregate outstanding prin- cipal of Rs 2.6 million (4.1% of total loan portfolio) and actual arrears of Rs 490,000 (0.8%). Debt service performance of DFCC's clients has been  - 23 - traditionally good, except in FY72 and FY73 when the insurgency and wide- spread labor disputes caused business setbacks and temporary liquidity problems for some borrowers. While the year-end levels of arrears remained low, DFCC rescheduled four loans totalling Rs 8.5 million in FY72 and three loans totalling Rs 5.4 million in FY73 (for a further two to three years). Only one loan involving Rs 518,000 was rescheduled in FY74. Except for one, all clients whose loans were rescheduled in the past three years have since been repaying regularly. 6.07 Of the four companies currently in arrears, two have been in default for more than two years, and legal action is being taken for recovery. Should none of the arrears be recovered, Rs 195,000 would have to be written off. Accumulated provisions against bad debts at the end of FY74 were Rs 1.4 million, which would be more than sufficient to cover these possible losses. Since its inception, DFCC has written off Rs 366,000 on two loans, representing only 0.3% of its cumulative disburse- ments through FY74. 6.08 There are six other companies which are currently operating at a loss or are in technical, financial or managerial difficulties. DFCC has remained in close touch with them and has advised them on the necessary remedial measures, including diversification of products, balancing of equipment and improvement of labor-management relationships. 6.09 Investment Portfolio. DFCC's investment portfolio (Rs 9.0 mil- lion in 21 companies) as of September 30, 1974 constituted 30% of its equity plus subordinated Government loan, as against the policy limit of 100%. Most of the investments are in preference shares (Rs 6.9 million in 14 companies) privately placed with DFCC, and almost all are redeemable at par on dates agreed at the time of issue. Since none of them is quoted on the Colombo stock exchange, they have no market price. However, their aggregate net worth at the end of September 1974 was Rs 7.7 million or 12% above their acquisition cost (Annex 17). DFCC does not expect any loss from these investments. The average yield on preference shares increased from 4.2% in FY73 to 5.3% in FY74. 6.10 DFCC has ordinary share investment totalling Rs 2.2 million (at cost to DFCC) in nine companies. 1/ Eight are operating profitably and one is making losses. DFCC is doubtful if it will recover its investment of Rs 50,000 in the loss-making company. Against this, provisions for doubtful investments were Rs 650,000 as of March 31, 1974. On the basis of stock market prices and book values on March 31, 1974 2/ DFCC's ordinary share investments are estimated to be worth Rs 4.2 million, about twice their acquisition cost of Rs 2.2 million. The average return on these invest- ments improved from 6.4% in FY73 to 7.5% in FY74. 1/ Including two companies in which DFCC has preference shares as well. 2/ Only three of the nine companies have their shares quoted on the stock exchange.  - 24 - Audit 6.11 DFCC's accounts have always been approved without qualification by the firms of chartered accountants, Ford, Rhodes, Thornton & Co. and Satchithananda, Schokman, Wijeyeratne & Co. IBRD has found their long- form audit report of good quality. VII. PROSPECTS General Outlook 7.01 Private-sector confidence has not yet fully recovered, partly because of the remaining uncertainty about the sector's future role. However, the strong incentives provided by Government to export-oriented and tourism industries have drawn an active response from private entre- preneurs and a momentum is gradually building up for new investment in these industries. The incentives have also stimulated existing industries to modernize and balance their production facilities to manufacture goods of exportable quality. While no significant increase in new investment can be expected from industries producing for the domestic market, there is a substantial pent up demand, even from these industries, for replacement and balancing equipment arising from the prolonged non-availability of foreign exchange. Business Forecast 7.02 DFCC's business projections for FY75 through FY79 are shown in Annex 18. Commitments of loans and investments are forecast as below (Rs million): Foreign Local Currency Currency Loans Loans Investments Total FY74 (Actual) 3.1 15.4 - 18.5 FY75 - 3.0 0.3 3.3 FY76 12.0 7.0 0.5 19.5 FY77 17.1 8.0 0.5 25.6 FY78 11.0 9.0 1.0 21.0 FY79 18.1 9.0 1.0 28.1 7.03 DFCC expects a sharp drop in commitments during FY75 because it has fully committed the second IBRD loan ?nd because it faced rupee resource constraint (para 4.08). Foreign currency commitments in FY76 and FY77 are based on projects most likely to materialize among those already identified and for which Government approval has been or is likely to be granted. 7.04 By the end of January 1975 DFCC had identified 54 projects. Of these 26 are in the tourism sector and consists of 24 hotels (1,209 rooms) and 2 tourist transport projects. These hotels represent 45% of total  - 25 - capacity expansion planned by 1977. Direct foreign exchange costs for these projects are estimated at $1.6 million; in addition, they would involve indirect foreign exchange costs of $1.2 million on account of the import content of goods that could be bought "off the shelf" in Sri Lanka. These include such items as kitchen facilities, air conditioning units, fixtures and sanitary and electrical equipment etc. This would put the foreign exchange demand from these tourism projects at $2.8 million. In addition, about Rs 10 million of their rupee costs is expected to require DFCC financing. 7.05 Of the remaining 28 projects, 10 with a foreign exchange content of $2.2 million belong to export-oriented industries and 18 with a foreign exchange content of $2.0 million are of an import-substitution nature. The sponsors of the above 28 projects expressed the desire to proceed with their plans despite recent Government intentions to modify some of the fiscal incentives (para 2.12). 7.06 Thus, the above-mentioned projects have a foreign exchange component of $7.0 million (including $1.2 million representing the indirect costs for the tourism projects). About 40% is for tourism projects, 30% for export- oriented projects and the remainder is for import-substitution projects. DFCC's lower projection of foreign exchange commitments (Rs 29.1 million or $4.5 million), is justifiable for two reasons. Firstly, the project list is by no means definitive. Many of the candidate projects, particularly those in the industrial sector, are in a preliminary stage of planning. Secondly, in view of the widespread low capacity utilization among existing industries, DFCC intends to examine with much rigor in its appraisals the prospects for capacity utilization of these projects, particularly those producing for the domestic market, with the possible result that some will be rejected (para 3.15). Resource Needs 7.07 Foreign Currency. As shown above, DFCC's projected new commit- ments in foreign exchange are Rs 29.1 million ($4.5 million) through FY77. DFCC currently has no uncommitted foreign exchange resources and no new loans from bilateral or other international sources are likely to materialize in the immediate future. Therefore an IDA Credit of $4.5 million would meet DFCC's estimated foreign exchange requirements through FY77. 7.08 Local Currency. DFCC had overcommitted its rupee resources by Rs 10.2 million as of end-FY74 (para 4.08). Over the next three years through FY77, its projected new commitments of rupee loans and invest- ments are Rs 19.3 million (table below). A significant portion of this will go to projects receiving foreign currency financing also. Against these projected commitments, Rs 21.5 million will be available from loan collec- tions and share redemptions and Rs 3.2 million from internal cash generation over the same period. In addition, a new overdraft limit of Rs 6.5 million  - 26 - has been obtained from BOC during FY75 which is currently being converted into a long term credit facility. The balance of DFCC's borrowings from the Central Bank refinance facility shows a projected drop of Rs 2.8 million over the next two years, but DFCC explained during negotiations that access to this facility has recently eased and the drop may more likely be half the previously projected amount or may not materialize at all. Thus DFCC expects to have sufficient rupee resources to cover its projected commitments in the next two years. However, it intends to continue making efforts to tap new sources of funds. FY75 FY76 FY77 Total (Rs million) Loan collections and share redemptions 6.5 7.1 7.9 21.5 Internal cash generation 0.9 1.1 1.2 3.2 BOC overdraft 6.5 - - 6.5 New commitments (3.3) (7.5) (8.5) (19.3) Net decrease in Central Bank refinance 0.8 (2.0) (1.6) ( 2.8) Resources available for commitments: Opening balance (10.2) 1.2 (0.1) (10.2) During period 11.4 (1.3) (1.0) 9.1 Closing balance 1.2 (0.1) (1.1) (1.1) Financial Projections 7.09 Projected income statements for FY75 through FY79 are given in Annex 19. Net profits after tax are expected to grow from Rs 984,000 in FY75 to Rs 1.3 million in FY79. The return on share capital should increase from 12.3% in FY75 to 15.7% in FY79. While DFCC expects to in- crease its dividend rate from the current 8% to 9% in FY77, the pay-out ratio would decline from 65% in FY75 to 57.4% in FY79. Rising profit- ability would allow DFCC to set aside increasing amounts as bad-debt pro- visions (from Rs 575,000 in FY75 to Rs 850,000 in FY79) and as reserves (from Rs 340,000 to Rs 495,000). Administrative expenses would be main- tained in the range of 1.1% to 1.2% of average total assets. 7.10 Projected balance sheets and cash flow statements through FY79 are shown in Annexes 20 and 21. DFCC's total assets are projected to increase at an average rate of 8% pa (from Rs 79.9 million in FY75 to Rs 107.3 million in FY79), mainly because of a fast growing loan portfolio from FY77 onwards. Reserves and provisions would increase from 8.9% in FY74 to 10.7% in FY79 of total portfolio. DFCC's debt service coverage would remain above 1.4 throughout the projected period.  - 27 - 7.11 Debt/Equity Ratio. DFCC's total long-term debt/equity ratio (including the total outstanding amount of the subordinated Government loan in debt) would move over the next five years as follows: FY75 FY76 FY77 FY78 FY79 Total long term debt/equity ratio 5.2 4.9 5.4 6.0 6.3 7.12 The previous loan agreement between IBRD and DFCC (634-CE) set a debt/equity limit of 3:1 using the definition that the portion of the Gov- ernment loan which falls due after the last maturity of the IBRD Loan is excluded from debt and included in equity. This definition, however, lacks conceptual clarity and does not help reveal the actual leverage on DFCC's real equity. It has tl-lerefore been agreed that the debt/equity limit under this IDA Credit be defined on the basis of total long term debt and equity. DFCC would be allowed a debt/equity limit of 7:1 according to the new definition. Since DFCC's total long term debt/equity ratio has in the past reached 5.3:1 (para 6.04), the new limit in fact does not represent a significant increase in DFCC's leverage. This limit is also justified by DFCC's sound management, its good portfolio and the ample debt service coverage expected over the coming five years. DFCC's projections indicate that the debt/equity ratio would be maintained below the new limit through FY79. VIII. MAIN FEATURES OF THE PROPOSED CREDIT 8.01 Use of Credit Proceeds. The Credit would mainly be used to meet the CIF cost of capital goods imported for projects financed by DFCC. It would also cover 65% of the cost of imported capital goods bought "off the shelf" in Sri Lanka for tourism projects financed by DFCC, representing their average import content (indirect foreign exchange cost). US$200,000 of the Credit will be specifically allocated for lending to small enter- prises whose fixed assets do not exceed Rs 200,000 and upto US$15,000 would be available for training abroad of DFCC staff in hotel project appraisal and supervision. 8.02 On-lending Terms. The principal terms and conditions of on-lend- ing under the Credit would be as follows: (a) Government would lend the Credit proceeds to DFCC at an interest rate of 8.5% pa. Repayments to Govern- ment would be made within 15 years including grace, on a flexible amortization schedule in approximate conformity with repayments received by DFCC from sub-borrowers; and (b) DFCC would on-lend to sub-borrowers at an interest rate of 12% pa except to small scale enterprises (those whose fixed assets do not exceed Rs 200,000) where a 10% pa would be applied. DFCC can afford such a concessionary rate. The weighted spread to DFCC on the proceeds of the IDA Credit would be about 3.4% and the spread on DFCC's overall debt resources (including the interest free Government loan) would be 4.2% in FY79. The repayment period for individual sub-loans would not exceed 15 years including grace.  - 28 - 8.03 Foreign Exchange Risk. The foreign exchange risk would be assumed by Government, as under the previous two IBRD loans to DFCC (para 3.09). 8.04 Free Limit. The free limit under the Credit would be $150,000, compared to $100,000 under the second loan of 1969. With this limit, IDA would receive for prior approval about one-fifth by number (8-10 projects) and about 60% by amount of total loans to be made under the Credit. Require- ment of prior IDA approval of a part of DFCC's sub-projects is still needed to maintain a dialogue with DFCC on project appraisal, especially in view of the expected introduction of economic appraisal techniques (para 3.14) which are new to many DFCC staff. 8.05 Disbursement. The schedule of expected Credit disbursements is given in Annex 22. The Closing Date would be September 30, 1979.  ANNEX 1 Page 1 DEVELOPMENT FINANCE CORPORATION OF CEYLON Government Policies on Private Sector and Small Industries 1. Roles of Public and Private Sectors. Immediately after it came to power in 1970, Government announced that "the heavy and capital goods indus- tries and other suitable basic industries will be state-owned. Other in- dustries will be assigned to the cooperatives and private enterprises." These broad definitions of the respective roles of the public and private sectors, still stand and no further elaborations have since been made. The uncertainty about the future role of the private sector was compounded by the enactment of the "Business Undertakings (Acquisition) Act" in October 1971, under which Government was empowered to take over any private firms at its dis- cretion. These pronouncements and measures shook the confidence of private entrepreneurs and contributed to the sharp decline in new private investments since mid-1970. 2. Nevertheless, only a few private enterprises have been taken over by Government under the Acquisition Act and mostly on the charge of mal- practice. Also the number of state monopolies has not increased, with most of them (such as steel rolling, petroleum, cement, paper and pulp, tires) consisting of industries which, given their economies of scale and the small size of the domestic market, would not warrant operation by more than one unit. In addition, the recent provision of Government incentives to finance export-oriented and tourism industries indicates a de facto recognition of private-sector roles in these fields. Nevertheless, a clearer demarcation and positive recognition of private-sector responsibilities by Government would contribute to the healthy growth of the sector. 3. Promotion of Small Industries. Because of its high employment potential and low foreign exchange requirements, promotion of the small- scale industrial sector is accorded a high priority in Sri Lanka's develop- ment. However, Government's approach to the development of the sector has so far been rather fragmented. There is yet no official definition of small industry; and while several Government agencies are engaged in project identification, as well as technical and financial assistance for what they consider "small industry" there is an apparent duplication of functions,  ANNEX 1 Page 2 on the one hand, and a lack of coordination of work, on the other, between them. 1/ Government has undertaken a series of researches with a view to identify industries where production by small-scale units could be viable, but not much progress has been made to date. In the absence of coherent strategy, Government has not yet established any significant fiscal or other incentives designed specifically to promote small industries. 1/ Th epartment of Small Industries (Ministry of Industries) provides technical assistance to handloom and powerloom units of all sizes and cottage industry with plant and machinery valued at Rs 10,000 or below. The Industrial Development Board, a statutory body under the Ministry of Industries, undertakes feasibility studies on projects considered suitable for small industry (defined as a manufacturing unit with plant and machinery valued between Rs 10,000 and Rs 200,000 and with no more than 75 employees), provides technical services and runs pilot projects and several industrial estates. Besides these two agencies, the Ministry of Planning has under its iurisdiction some 550 Divisional Development Councils which, scattered all over the country and each consisting of several Government officials and local leaders, identify projects (industrial as well as agricultural with no size limits) and extend financial assistance from the Government budget. South Asia Projects Department September 3, 1974  AMiEX 2 DEVELOPMENT FINANCE CORPORATION OF CEYLON Interest Rate Structure in Sri Lanka as of September 30, 197L Percent Per Annum I. Lending Rates Minimum Maximum Commercial banks: Secured by Government securities 6.5 9.5 Secured by shares of joint stock companies 9.0 11.0 Secured by stock in trade 8.5 12.0 Secured by immovable property 8.0 11.0 DeveloDment Finance CorDoration of Ceylon: 1/ Rupee loans 10.5- Foreign currency loans 10. Agricultural and Industrial Credit CorDoration: Secured by immovable property 9.0 Secured by movable property 10.0 II. Deposit Rates Commercial banks: Savings deposits .5 Fixed deposits (3 - 48 months) 4.5 5.75 National Savings Bank: Savings deposits 7.2 Fixed deposits (12 months) 7.5 Savings certificates (10 years) 11.0 III. Government Securities Treasury bills 5.0 Rupee loans (10 - 12 years) 9.0 1/ Reduced to 9.5% if Central Bank refinance is available. '/ The proceeds,of the IDA Credit will be lent at 12% pa., except for small scale enterprises (defined as those whose fixed assets do not exceed Rs 200,000), where a rate of 10% pa will be applied. South Asia Projects Department January 31, 1975  ANNEX 3 Page 1 DEVELOPMENT FINANCE CORPORATION OF CEYLON List of Shareholders as of September 30, 1974 No. of Share- No. of Percen- holders shares Amount tage I. PRIVATE DOMESTIC A. Companies and Organizations Hunter & Co. Ltd. 3,59o 359,0oo Hatton National Bank Limited 3,000 300,000 Associated Newspapers of Ceylon Ltd. 2,000 200,000 Ceylon Guardian Investment Trust Ltd. 2,000 200,000 Commercial Bank of Ceylon Limited 2,000 200,000 Free Lanka Insurance Company Ltd. 1,893 189,300 Ceylon Investment Comparny Limited 500 503O00 29 others (holding less than 500 shares each) 2,898 2892,80 Sub-Total 36 17,881 1,788,100 22.h% B. Individuals W. Siriwardene, S.R.A. Dharmaratne & P.A.R.S. Perera 5,825 582,500 Mrs. E.R. Amarasuriya 1,345 134,500 G.B.S. Gomes, B.A. Abeyawardena & A.M. Karunaratne 750 75,000 Dr. R.S. Deraniyagala 650 65,000 G.B.S. Gomes, B.A. Abeyawardena & A.M. Karunaratne 500 50,000 L.A. Weerasinghe 500 50,000 247 others (holding less than 500 shares each) 9,079 907,9 Sub-Total 253 18,649 1,864,900 23.3%  ANNEX 3 Page 2 No. of Share- No. of Percen- holders shares Amount tage II. FOREIGN National & Grindlays Bank Ltd., U.K. 6,000 600,000 Chartered Bank, U.K. 5,000 500,000 Hongkong & Shanghai Banking Corporation, U.K. 4,000 400,000 Commonwealth Development Finance Co. Ltd., U.K. 3,250 325,000 Indian Overseas Bank, India 1,229 122,900 National Mutual Life Association of Australia Ltd., Australia 1,150 115,000 Prudential Assurance Co., Ltd., U.K. 750 75,000 Habib Bank (Overseas) Ltd., Pakistan 500 50,000 Indian Bank, India 500 50,000 17 others (holding less than 500 shares each) _1,079 107,900 - Sub-Total 26 23,458 2,345,800 29.3% III. GOVERNIMENT Bank of Ceylon 15,640 1,564,000 Insurance Corporation of Ceylon 4,220 422,000 People's Bank 152 15,200 Sub-Total 3 20,012 2,001,200 25.0% TOTAL 318 80,000 8,000,000 100.0% Supmary of Shareholding Private Domestic: Companies and Organizations 36 17,881 1,788,100 22.4% Individuals 253 18,649 1,864,900 23.3% Sub-Total 289 36,530 3.653.000 45.7% Foreign 26 23,458 2,345,800 29.3% Government 3 20,012 2,001,200 25.0% TOTAL 318 80,000 8,000,000 100.0% South Asia Projects Department January 31, 1975  ANINEX Ei DEVELOPMENT FINANCE CORPORATION OF CEYLON Board of Directors as of September 30, 1974 Year of Firs' Election/Appointment Background Status W. Tennekoon 1 974 Former Governor Shareholder Chairrman Central Bank of Director Ceylon J.A. Cruickshank 1972 Manager, National Shareholder and Grindlays Director Bank H.C. Goonewardena 1970 Retired Civil Shareholder Servant Director C. Nadesan 1970 Head Shroff, Shareholder Indian Overseas Director Bank S.E. Satarasinghe 1974 Director, Bank Shareholder of Ceylon Direc tor L.A. Weerasinghe 1973 Retired Auditor Shareholder General; Former Director General Manager, D.F.C.C. P.V.M. Fernando 1967 Senior Deputy Government Governor, Central Director Bank of Ceylon Appointed by the Minister of Finance L.N. De L. Bandaranaike 1974 Secretary, Government Ministry of Indus- Director tries and Appointed by the Scientific Affairs Minister of Industries and Scientific Affairs 1/ R.A.H. Weerakoon 1970 Director, Ceylon Ex-officio Institute of Director Scientific and Industrial Research S. Kanagaratnam 1972 General Manager, Ex-officio D.F.C.C. Director 17TPosLtion added by amendment to the DFCC Act in April 1974. South Asia Projects Department January 31, 1975  DEVELOPMENT FINANCE CORPORATION OF CEYLON Number and Classification of Staff by Profession (Fy68-FY74) March 31 September 30 Category of Staff 1968 1969 1970 1972 1973 1974 197h Professional Staff Accountants and Financial and Marketing Analysts 1/ 6 10 12 15 15 11 9 8 Engineers I 1 1 3 2 2 2 2 Legal Officers 1 1 2 2 2 1 1 1 Others - - - - 1 1 1 1 Sub-total 8 12 15 20 20 15 13 12 Non-Professional Staff 14 18 27 30 27 27 27 26 TOTAL 22 30 42 a 7 42 40 38 / Includes General Manager. South Asia Projects Department January 31, 1975  ANNEX 6 Page 1 DEVELOPMENT FINANCE CORPORATION OF CEYLON Statement of Policy (Adopted by the Board of Directors on April 11, 1967 and amended on July 1O, 1969 and on September 5, 197h). 1. The function of the Development Finance Corporation of Ceylon (the Corporation) is to further the economic development of Ceylon by assisting in the promotion, establishment, expansion and modernization of private industrial, agricultural and commercial enterprises in Ceylon and encouraging the participation of private capital, both internal and external, in such enterprises. Commercial enterprises eligible for financing by the Corporation will include projects in fields such as hotels, transportation, construc- tion and engineering, which are conducive to the economic development of Ceylon. However, the Corporation will not finance enterprises which are solely engaged in trading activities, i.e. the buying and selling of goods. 2. The Corporation will provide finance in the forms which it con- siders most appropriate and as empowered by the DFCC Act, namely, by medium and long-term loans with or without security, by share participation, by underwriting operations and by guaranteeing loans from other sources. 3. The Corporation will assist in promoting-the growth of a capital market in Ceylon by selling investments from its portfolio when it can do so on satisfactory terms, and by underwriting security issues in suitable cases. 4. The Corporation will develop and maintain a strong and well- balanced organization capable of appraising the projects financed by it and of assisting its clients, if necessary, in the formulation and execu- tion of their projects. 5. The Corporation will ensure that every application for assist- ance is considered on its financial, technical, and economic merits. 6. The Corporation will not normally make a loan or a share investment of less than Cey Rs 75)G6GO 7. In considering the amount and form of its financial assistance to an enterprise, the Corporation will take account of the total financial requirements of the project and the soundness of the resulting financial structure for the enterprise. 8. The Corporation will not in normal circumstances manage enter- prises which it assists in promoting. It will not seek in any enterprise it finances a controlling interest or other interest which will give it the primary responsibility for management of that enterprise. It will not  ANNEX 6 Page 2 normally take up more than 25% of the issued share capital of any individ- ual enterprise. Notwithstanding the above limitations, in any case of jeopardy it may take such action as it considers necessary to protect its investments. 9. The Corporation will develop a balanced portfolio by distributing its loans and share investments among the various economic sectors. 10. (a) The aggregate amount of the Corporation's loans to, share investments in and guarantees on behalf of any individual enterprise will not normally exceed 20% of the sum of the Corporation's equity and the out- standing amount of the subordinated Government loan. (b) The Corporation will not normally commit to any individual enterprise in the form of share investments more than 10% of the sum of the Corporation's equity and the outstanding amount of the subordinated Government loan. (c) The aggregate of the Corporation's share investments will not exceed the sum of its equity and the outstanding amount of the sub- ordinated Government loan. 11. The Corporation will restrict its long-term indebtedness (not including the subordinated Government loan) to a maximum of three times the sum of its equity and the outstanding amount of the subordinated Government loan. For the purposes of paragraphs 10 and 11, the Corporation's equity is defined as the sum of its share capital, surplus and reserves not allocated to cover specific liabilities. 12. The Corporation will protect itself fully against any foreign exchange risks which it may assume in respect of borrowings which are repayable in foreign currencies. 13. The Corporation will levy charges for its loans and services which, together with the earnings on its share investments, will enable it to pay a satisfactory dividend and to accumulate reserves consistent with sound financial practice. It will make adequate provisions for bad debts and other losses on investments. In addition to the special re- serve the Corporation is required to provide in accordance with the DFCC Act, it will allocate an adequate portion of its income to a general reserve, so as to build up total reserves to a level appropriate to the size and quality of its portfolio of loans and share investments. 14. Subject to the restriction of dividends as provided in the DFCC Act and subject to the observance of sound financial policies, the Corpora- tion will pay such dividends to its shareholders as will give them a reason- able return on their investments. South Asia Projects Department September 3. 1974  DEVELO1ENT FINANCE CORPORATION OF CEYLON Summary of Operations (FY70 through FY74 and First Half of FY75) (Rs O000) Local Currency Loans Foreign Currency Loans Share Investments Total No. of No. of No. of No. of No. of Com- No. of No. of Com- No. of No. of Com- No. of No. of Com- No. of Loan/in- panies Projects Loans Amount panies Projects Loans Amount pnics Projects Loans Amount panies Projects vestments Amount Net Approvals FY70 15 15 15 18,090 1 1 1 3,330 - 15 15 15 21,420 FY71 7 7 7 5,295 6 5 5 5,031 1 1 1 500 10 9 13 lo,826 FY72 4 4 4 700 1 1 1 293 - 5 5 5 993 FY73 9 8 9 7,120 7 6 7 9,544 1 1 1 2,500 13 11 17 19,114 FY74 14 13 14 16,449 8 8 8 4,095 - 16 15 22 2o,ij414 FY75 (First Half) 2 2 2 900 - - - - 2 2 2 900 Since Inception 89 155 179 111,688 30 34 35 32,629 26 26 33 12,111 109 179 247 156,428 Net Commitments FY70 15 15 15 18,090 1 1 1 3,330 - 15 15 15 21,420 FY71 7 7 7 5,295 6 5 5 4,823 1 1 1 500 10 9 13 10,619 FY72 4 4 4 700 1 1 1 173 - 5 5 5 F' FY73 8 7 8 5,620 7 6 7 9,231 1 1 1 2,500 13 11 16 17,351 FY74 12 11 12 15,399 8 8 8 3,117 14 13 20 18,516 FY75 (First Half) 2 2 2 900 - - - - - - - _ 2 2 2 900 Since Inception 86 152 176 109,126 30 34 35 31,010 26 26 33 12,086 107 177 244 152,222 Disbursements FY70 15,286 8,640 2 2 3 1,250 25,176 FY71 15,147 1,442 1 1 1 500 17,089 FY72 2,095 4,477 - 6,572 FY73 985 2,494 - 3,479 FY74 6,073 5,063 1 1 1 2,500 13,636 FY75 (First Half) 5,923 1,854 - - M- 7, Since Inception 81 98,753 22 25,654 26 26 33 12,151 101 136,558 , South Asia Projects Department January 31, 1975  ANNEX 8 DEVELOPMENT FINANCE CORPORATION OF CEYLON Cumulative Loans and Investments Committed_/by Size and Duration as of September 30, 1974 (Rs '000) (i) By Size Share Loans Investments Total No. Amount No. Amount No. Total Amount Total Below Rs 100,000-/ 20 1,109 8 283 28 11.5 1,392 0.9 Rs 100,000 - Rs 249,999 57 9,350 9 1,45o 66 27.1 10,800 7.1 Rs 250,000 - Rs 499,999 46 14,306 7 2,201 53 21.7 16,507 10.9 Rs 500,000 - Rs 999,999 46 30,418 6 3,652 52 21.3 34,070 22.4 Rs 1,000,000 - Rs 1499,999 12 12,5o4 2 2,000 14 5.7 i1h,50o 9.5 Rs 1,500,000 and above 30 72,449 1 2,500 31 12.7 74,949 49.2 211 140,136 33 12,086 244 100.0 152,222 100.0 (ii) By Duration of Loans Percentage Percentage No. of Total Amount of Total Less than 5 years 5 2.4 1,100 0.8 5 - 7 years 20 9.5 11,650 8.3 8 - 9 years 18 8.5 26,572 19.0 10 - 11 years 96 45.5 43,138 30.8 12 - 13 years 29 13.7 17,478 12.4 14 - 16 years 43 20.4 4o,198 28.7 211 100.0 140,136 100.0 1/ on net basis 2/ mostly repeat loans and loans approved before the minimum lending limit (of Rs 100,000) ws impo-ed (19h7). lc Limit has now been reduced to Rs 75,000. South nsia Projects Department January 31, 1975  AWiJEX 9 DEVELOPMENT FINANCE CORPOPATION OF CEYLON Cumulative Loans and Investments Cor-mitte4"by Industrial Branch and Location as of September 30, 1974 (Rs '000) (i) By Industrial Branch Investment Total Loans in Shares % Of % No. Amount No. Amount No. Total Amount of Total Chemical Products 19 16,495 2 600 21 8.6 17,095 11.2 Textiles 8 11,998 4 4,400 12 4.9 16,398 10.8 Electrical Products 13 11,640 6 1,652 19 7.8 13,292 8.7 Tourism 21 29,182 1 700 22 9.0 29,882 19.6 Building Materials 9 6,404 1 750 10 4.1 7,154 4.7 Readymade Garments 22 7,595 2 300 24 9.8 7,895 5.2 Food 25 16,319 8 683 33 13,5 17,002 11.2 Engineering 20 6,613 2 1,050 22 9.0 7,663 5.0 Rubber Products 9 5,617 1 100 10 4.1 5,717 3.8 Printing & Packaging 17 5,074 1 200 18 7.4 5,274 3.5 Large Scale Agriculture 4 3,350 - - 4 1.7 3,350 2.2 Beverages 8 2,325 2 601 10 4.1 2,926 1.9 Metal Products 14 4,863 2 550 16 6.6 5,413 3.6 Miscellaneous 22 12,661 1 500 23 9.4 13,161 8.6 Total 211 140,136 33 12,086 244 100.0 152,222 100.0 (ii) By Geographical Location No. of Percentage Amount Percentage Operations of Total. Committed of Total West (which includes Colombo) 193 79.1 120,398 79.1 South 35 143 23,006 15.1 North 5 2.1 1,050 0.7 Central 6 214 868 0.6 East 5 2.1 6,900 4.5 Total 244 100.0 152,222 100.0 1/ on net basis South Asia Projects Department January 31, 1975  ANNEX 10 O 3- -* 34 -C ' '0 D 0) ,' 4 H1 -+ Gj 0 a400 - 0) ) o 0 .4, 0 H 4O C 04 o 0 04 0 740 cn. C' O H O 4. . . . . . . . . 8 ' . .1 140 I IItO I H 4 I I i I I I I I I H c 4) 0- 1