Peru - Industrial Credit Project

Report No. 1195b-PE Peru: Appraisal of an Industrial Credit Project to Corporacion Financiera de Desarrollo December 7,1976 W. , *; Projects Departrnent J r Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recif only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Sol de Oro (S/. ) Exchange Rates effective: Up to September, 1975 Up to June, 1976 Up to September, 1976 _i US$1.00 = S/. 38.701/ US$1.00 = SI. 45.00 US$1.00 = S/. 65.00 US$1,000 = S/. 38,700 US$1,000 = S/. 45,000 US$1,000 = S/. 65,000 S/. 1.00 = US$0.0258 S/. 1.00 = US$0.0222 SI. 1.00 - = US$0.0154 S/. 1,000 = US$25.84 S/. 1,000 = US$22.22 S/. 1,000 = US$15.38 S/. 1,000,000 = US$25,839.79 S/. 1,000,000 = US$22,222,20 S/. 1,000,000 = US$15,384.61 A C R ON Y M S AID - Agency for International Development ACM - Andean Common Market BIP - Banco Industrial del Peru, Industrial Bank of Peru CERTEX - Certificado Tributario de Exportacion COFIDE - Corporacion Financiera de Desarrollo, Development Finance Corporation CONAPS - Comision Nacional de Propriedad Social, National Social Property Commission DFC - Development Finance Company EPS - Empresa de Propriedad Social, Social Property Enterprise SPS - Sector de Propriedad Social, Social Property Sector FONAPS - Fondo Nacional de Propriedad Social, National Social Property Fund IDB - Inter-American Development Bank IERR - Internal Economic Rate of Return INP - Instituto Nacional de Planificaci6n, National Planning Institute MEF - Ministerio de Economia y Finanzas, Ministry of Economy and Finance MIT - Ministerio de Industria y Turismo, Ministry of Industry and Tourism FISCAL PERIOD Biennial Period, starting from January 1, of uneven year to December 31,of following year 1/ US$1 = S/. 43.38 in a small parallel draft market. 2/ On September 20, 1976, the Government instituted a policy of minidevaluations.  P E R U YOR OFFICULUU C? L'Y APPRAISAL OF AN INDUSTRIAL CREDIT PROJECT TO CORPORACION FINANCIERA DE DESARROLLO TABLE OF CONTENTS Page No. BASIC DATA ON CORPORACION FINANCIERA DE DESARROLLO SUMMARY AND CONCLUSIONS i I. INTRODUCTION . II. ECONOMIC ENVIRONMENT AND THE INDUSTRIAL SECTOR ................. 2 A. Economic Setting. 2 B. Industrial Policies. 4 C. Evaluation of Industrial Policies. 5 D. Role of Public Enterprises in the Industrial Sector. 8 E. The Financial System. ; 10 F. Financing of the Industrial Sector .11 G. Level and Structure of Interest Rates .12 III. EMPLOYEES' PARTICIPATION SCHEMES IN PERU 13 A. Industrial Communities and the Reformed Private Sector ..... 13 B. Social Property ............................................ 14 IV. SUMMARY DESCRIPTION OF COFIDE .. 17 ~~~~. Or a i a i n............................................... 17 A. Organization ........ 17 B. Operational Policies and Procedures ........................ 18 C. Role of COFIDE .......................................... 19 D. Resources ............................................. 20 E. Financial Position and Results ............................. 20 F. Past Operations .......................................... 22 G. Ec6nomic Impact .......................................... 22 H. Projections .......................................... 23 V. THE PROJECT ...........................................23 A. Background and Objectives .................................. 23 B. Project Description ........................................ 24 C. The Fund Approach and COFIDE's Role ........................ 25 D. Project Benefits and Risks ................................. 26 VI. RECOMMENDATIONS .......................................... 27 This report is based on the findings of appraisal missions, composed of Messrs. P. Knotter, K. Challa, C. Ludvik, G. Prenoveau, D. von Stauffenberg (all of the Bank), B. Decaux and P. Knight (consultants),which visited Peru in March and December 1975. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its coitsnts may not otherwise be disclosed without World Bank authorization.  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO ANNEXES 1. Organization Chart 2. Board of Directors 3. Members of the Management Committee 4. Operating Policies and Procedures of the Fund 5. Operating Policies of COFIDE 6. Description of Share Capital 7. Total Resources 8. Distribution of Operations Approved by Type of Operation and Type of Enterprise 9. Analysis of Operations Approved 10. Analysis of Loans Approved 11. Analysis of Outstanding Loan and Equity Portfolio and Guarantees 12. List of Equity Investments 13. Sectoral and Regional Distribution of Studies 14. Summary of Follow-up Activity 15. Statement of Arrears 16. Interest Rates and Terms on Local Currency Loans 17. Past and Projected Balance Sheets, 1971-1978 18. Past and Projected Income Statements, 1971-1978 19. Past and Projected Sources and Uses of Funds, 1974-1978 20. Major Assumptions Used for Financial Projections 21. Estimated Schedule of Disbursements  APPENDICES A. The Financial Sector and Policies Table 1: Financial Requirement by Sector, 1968-1975 Table 2: Financial Structure of the Economy, 1965-1975 Table 3: Selected Statistics on the Banking System and COFIDE Table 4: Components of Net Domestic Credit by the Central Bank, 1965-1975 Table 5: Selective Credit System for Commercial Banks Table 6: Commercial and Savings Bank-Credit Granted by Economic Sectors, 1950-1975 Table 7: Commercial, Savings and Development Banks--Credit Granted by Economic Sectors Table 8: Interest Rates on Deposits and Other Savings Instruments, 1962-1975 Table 9: Interest Rate Ceilings on Lending and Deposits, June 1976 Table 10: Structure of Interest Rates on Central Reserve Bank Credit,1968-1976 B. The Social Property Sector C. Description, Activities and Prospects of COFIDE  PERU: INDUSTRIAL CREDIT PROJECT CORPCRACION FINANCIIRA DE DESARROLLO BASIC DATA 1. Year of Establishment: 1971 2. Ownership (December 31, 1975): Value of Shares (in millions or Soles) Percentage Government 4,230 84c%t Individuals or Corporations (as partial payxent of Agrarian Reform Debt) 817 16% Total 5,047 100.0 3. Operations 1971 1972 1973 1974 1975 7in millions of Soles) Loans Approvals 31 626 6574 7559 6122 Disbursements - 209 1893 4228 5845 Equity Investments (including underwriting) Approvals 23 894 27 821 - Disbursements 15 632 177 101 326 Guarantees Approved On own account - 22 1697 3876 5569 On Government's behalf - 3962 4622 15701 7990 4. Financial Performance Total Incone as % of Average Total Assets 3.6 7.8 5.1 9.0 8.6 Net Profit as % of Average Net Worth 0.3 4.7 1.7 2.3 3.0 Provisions as % of Total Portfolio (including Guarantees on own account) - 0.2 0.3 0.4 065 5. Financial Position Total Assets at year-erd (millions of Soles) 1371.3 1994.5 4105.2 8496.1 16173.1 Total debt/equity ratio (including guarantees given by COFIDE) 0.51:1 1.15:1 1.90:1 2.72:1  P E R U APPRAISAL OF AN INDUSTRIAL CREDIT PROJECT TO CORPORACION FINANCIERA DE DESARROLLO SUMMARY AND CONCLUSIONS i. This report appraises an industrial credit project to assist development projects through Corporaci6n Financiera de Desarrollo (COFIDE), a government- controlled multi-purpose development bank. The proposed US$35 million loan, which would be guaranteed by the Peruvian Government, would be made to COFIDE. The proposed project would be the Bank's first DFC-type operation in Peru. It would finance the foreign exchange component of productive sector projects. ii. The Peruvian economy has undergone major structural reforms since the assumption of power by the new Government in 1968. In an effort to achieve economic growth while at the same time promoting broader worker participation in the country's economic, social and political life, the Government established within the industrial sector four alternative modes of ownership involving varying degrees of employees' participation in ownership, profits and management. They are referred to respectively as the public, reformed private, private and social property sectors, and coexist in what is called "economic pluralism." Moreover, in an attempt to ensure a pattern of investment that would support an integrated economic growth, the state's direct control of the economy has been increased through the creation of public enterprises in-most major productive sectors and through strict regulations of foreign exchange flows. iii. In order to foster industrial development within its overall reform objectives, the Government has established a complex industrial policy framework involving fiscal incentives, import restrictions, concessional financing terms and other subsidy measures. Special high priority treatment has been accorded to selected categories of industries considered basic for the integrated development of the economy and to projects promoting geographical decentralization of development. Spurred by the incentives and a growing domestic demand through income redistribution policies, industrial sector investment increased rapidly in recent years and the value added by the industrial sector investment increased at an annual real rate of 8.6% during 1968-74. However, the incentives were less successful in ensuring an optimal composition of industrial investment and output, and in promoting an integration of the industrial sector, as originally envisaged. A crucial factor has been the lack of a consistent and unified framework of analysis in formulating the industrial policies and the priority system. Rigid priorities and corresponding incentives have often been assigned without full regard to Peru's comparative advantages or considerations of economic efficiency. Recent government measures have tended to counter the shortcomings of previous industrial policies. Priority is now being given to increasing efficiency in the production system and to restoring confidence and dynamism in the private sector. iv. Overall, the industrial sector has become increasingly dependent on imports, thereby aggravating Peru's balance of payments problem. Domestic resource mobiliza- zation and, hence, the rate of productive sector development also suffered from interest rates that have been kept artificially low under government regulation in the face of a recent high rate of inflation.  - ii - v. The Government now faces the task of consolidating the var`ous economic and social reforms, and reconciling the objectives of growth and preservation of private initiative with those of income redistribution and broader worker partici- pation. Increasing economic difficulties during the last two years have led the Government to recognize an urgent need tc readjust some of the development policies and improve savings, production efficiency and the balance of payments position. Accordingly, the Government has recently taken a series of constructive economic measures, involving a reduction of many consumer goods subsidies, increase in the incentives to non-traditional exports, reduction in duty exemptions on imports of capital goods, and a gradual liberalization of price policies--including interest rates and exchange rates. vi. The loan would assist Peru in improving production efficiency as well as its balance of payments by covering the foreign exchange component of subprojects with potential for, preferably, export earnings, but also efficient import substi- tution, and by strengthening the economic evaluation capacity of COFIDE and other government agencies involved in productive sector investment decision making. Beneficiaries would include state, reformed private, private and social property enterprises, mostly in the medium-and large-size range. While COFIDE would only be required to apply systematic internal economic rate of return tests to all Bank- financed projects, it is expected that their application will spread to other projects financed by COFIDE and, possibly, other government agencies. The project's wider objective would thus be to help Peru improve its resource allocation by increasingly taking into account its comparative advantages and economic efficiency criteria in the consideration of investment proposals. At the same time, it would help COFIDE strengthen further its ability to formulate, evaluate and implement projects to complement the functions performed by other government entities. Progress in this area should gradually increase COFIDE's influence over industrial investment decisions, irrespective of the source of funds. vii. Mainly due to uncertainties regarding the future role of COFIDE as a holding company of a number of large government-owned enterprises, COFIDE would be required to place the loan proceeds into a special "Fund" segregated from all other funds of COFIDE, and the Government would be required to assure sufficient liquidity for COFIDE to meet its obligations. The loan proceeds would be re-lent in foreign exchange at a fixed rate of interest of not less than 11% p.a.. COFIDE would receive no more than 1-1/2% p.a. as an administration fee. The remainder of the spread between cost of Bank funds and the ultimate re-lending rate would accrue to the Fund and would be available to finance training and technical assistance programs. Subloan terms are expected to range between 5 and 15 years, with grace periods of 1 to 3 years. viii. Apart from the support of an expected 35 to 50 development projects in a wide range of productive subsectors, the proposed loan would contribute to the strengthening of COFIDE by improving its capacity to mobilize and allocate resources, increasing its autonomy in the planning and investment decision-making process of Peru's productive sector development, and by strengthening its effectiveness as a development bank. Furthermore, it would afford an excellent opportunity to intensify mutually useful policy discussions between the Bank and the Government on such matters as the industrial incentive system, and level and structure of interest rates. Finally, the project would enable the Bank to familiarize itself with the workings of the self-management system practised under the new social property sector. ix. The project is suitable for a Bank loan of US$35 million on terms and conditions outlined in Chapter V.  P E R U APPRAISAL OF AN INDUSTRIAL CREDIT PROJECT TO CORPORACION FINANCIERA DE DESARROLLO I. INTRODUCTION 1.01 The Corporacion Financiera de Desarrollo (COFIDE), a government-controlled, multipurpose development bank, has applied for a Bank loan to finance the foreign exchange component of a wide range of manufacturing, processing and tourism projects of state, reformed private, private and social property enterprises. Established in 1971 as an autonomous state enterprise, COFIDE has been growing fast, assuming quickly its role as the Government's principal agency for promoting and financing productive sector development through a widely diversified range of operations. 1.02 The proposed US$35 million industrial credit project would be the Bank's first DFC-type operation in Peru. Although it would aim at establishing the same close working relationship with the borrower as is customary for regular DFC lending, a main loan objective would be to help the Government in formulating industrial policies oriented towards a more efficient use of the country's resources. Since 1968 great importance has been given to developing a diversified and self- sufficient industrial sector. To this end, while broadening the scope for state activity and investing heavily in the sector, the Government pursued dual policies, aiming at stimulating private investment while achieving broader worker participation in economic growth. 1.03 Past industrial policies have been concerned mainly with structural changes and with providing generous investment incentives, while paying relatively little attention to economic efficiency. The increasingly urgent need to strengthen Peru's balance of payments position now suggests that projects with potential for exports or for efficient import substitution be given priority. The proposed loan is oriented to- wards such projects. 1.04 The proposed loan would be guaranteed by the Peruvian Government and granted to COFIDE, which would place the loan proceeds into a separate account (the Fund) to be created for this purpose. The loan proceeds would be segregated from all other funds and accounts of COFIDE and would be used in accordance with clearly defined lending criteria and operating policies and procedures. Also, the Government would assure sufficient liquidity for COFIDE to meet its obligations, while keeping it within a 5:1 overall debt to equity limitation. These special arrangements are necessary, since COFIDE has been assigned responsibility for a number of very large government-owned enterprises, but the nature of this involvement and its likely impact on COFIDE's consolidated financial position and operations and, thus, its creditworthiness as an institution cannot be determined fully for some time. However, COFIDE's qualified staff and its good appraisal capacity provide reasonable assurance that the Fund's loan portfolio will be of good quality. Only in case the Fund cannot meet its payment obligations would the Bank call upon COFIDE's ability to service the debt from its general resources. Also, the Bank's institution-building  -2- efforts associated with the proposed loan should contribute to strengthening COFIDE and to defining clearly its role and financial obligations. 1.05 Following several visits to Peru in 1973-74, missions consisting of Messrs. Knotter, Challa, Ludvik, Prenoveau, von Stauffenberg (all of the Bank), Decaux and Knight (consultants) appraised the project in March and December 1975. This report is based on the missions' findings. II. ECONOMIC ENVIRONMENT AND THE INDUSTRIAL SECTOR A. Economic Setting 2.01 Shortly after assuming power in 1968, the Military Government began to implement basic changes in the pattern of economic development in order to link economic growth to a broader participation of the population in the country's economic, social and political life. This is mainly taken to mean improving the distribution of income and wealth, increasing the participation of employees in enterprise ownership and management, and drawing the rural poor into the modern development process. Another important goal has been decentralizing economic activity away from Lima. 2.02 To achieve these objectives, the State assumed an active role in economic management in the belief that the unregulated pursuit of private investor interests would not assure the desired. socioeconomic development. The divergence of private and public interests was held to be particularly significant in the case of foreign investment,and thus a number of foreign-owned industries in strategic sectors were nationalized. The expansion of the State's control and management of the country's productive resources were pursued through the creation of public enterprises in all major productive sectors and through the control of domestic and foreign private investment. With a view to reforming wealth and income distribution, the Government also embarked on a fundamental transformation of the ownership and management structures in the economy, including the creation of new schemes of employee participation in the agricultural and industrial sectors (para. 2.06 and Section III) which coexist in what is called "economic pluralism." 2.03 During implementation of these deep structural reforms, some major problems have arisen which are now being tackled by the Government.--Household savings dropped because of the redistributive policies and the heavy subsidies stim- ulating consumption. On the other hand, the public enterprise sector, rather than contributing to national savings, has had to rely on large subsidies, partly due to the past government policy of maintaining unrealistically low prices for basic consumer goods. Deficiencies in planning and selection have led to the execution of some very large but economically marginal public sector investment projects, which appear unlikely to produce significant economic surpluses. Finally, private investment has been adversely affected due to investor uncertainty regarding the Government's posture toward the private sector. As a result of all these factors, total savings in the economy, which were already at a low 10.6% in 1968, dropped rapidly, to about 8.3% of GDP last year. The low level of savings, together with the heavy import dependence and generally poor international competitiveness of Peruvian  - 3 - industry, 1/ has led to an increasingly large balance of payments gap. Peru's balance of payments current account deficit rose from 0.3% to 11.4% of GDP between 1972 and 1975. As rates of investment and consumption exceeded domestic production, the Government had to resort increasingly to foreign borrowing. Triggered by rapid increases in import prices and excessive growth of domestic demand, the official consumer price index increased 9.5% in 1973, 17% in 1974, and 24% in 1975, compared to average annual increases of about 5% during 1968-72. As shown by recent measures (para. 2.04),the Government is aware of the urgent need to reconcile (a) the large investments required to fully complement the growth and reform program with the redistributive policies that have tended to stimulate consumption at the expense of savings, and (b) the extent of the direct economic role of the State and the new Social Property Sector with the scope for private investment and initiative. 2.04 President Morales Bermudez, who assumed control in August 1975, reaffirmed his Government's commitment to the reform program initiated by the military revo- lution, acknowledged some errors in the past economic management and asserted that savings and production efficiency must be improved. He also stressed the need for a more stable environment that would stimulate private investment and attract foreign investment in suitable sectors. Accordingly, since early 1975,the Govern- ment has been intensely revising and correcting several of the past economic policies. To stimulate agricultural production, farm-gate prices for most crops have been increased; to reduce aggregate demand and consumer subsidies, and to increase public savings, taxes and prices of imported petroleum and foodstuffs have been raised and salary increases curtailed; as a first step towards reducing subsidies and consequent inefficiencies in industry, exemptions on imported capital goods have been lowered; PESCAPFRU, the large state fishmeal corporation, is being reorganized, and its fishing fleet has been returned to the private sector; and finally, price policies have been liberalized gradually--including interest and exchange rates 2/--as part of a package of austerity measures. 2.05 Mainly due to the above economic measures and to an expected recovery of mineral prices, short and medium-run prospects for Peru's balance of payments and economic growth are encouraging,despite a sharp downward revision of the expected returns from petroleum exploitation. Overall, GDP is expected to increase in real terms during 1976, but at a rate lower than the 5.2% average real growth achieved during 1970-75; average annual growth rates of 5-6% may be expected over the following five years. Receipts from mining exports should contribute substantially to the long-run growth, although its employment effects and linkages to other sectors are likely to remain small. Expected upturns in agriculture and fisheries output, while helpful, will be slow,due to the sectors' relatively limited potential. Thus, the Government will have to look increasingly to industrial sector expansion to provide increases in domestic value added, exports and employment. 1/ Until recently, industry's difficulties in competing in international markets had been compounded by an overvalued exchange rate. 2/ In September, frequent mini-devaluations were initiated; by October 13, the U.S. dollar parity had reached S/. 66.13.  -4- B. Industrial Policies 2.06 In order to foster industrial development within the overall objectives outlined above, the Government has established a complex policy framework involving fiscal incentives, import restrictions, concessional financing terms and other measures that stimulate industry directly or indirectly. The Government's policies are contained in four basic pieces of legislation: the General Law of Industries and the Industrial Community Law of 1970, the Social Property Law of 1974, and the Law of Small Enterprise of 1976. These laws divide all industrial activities according to the mode of ownership into (a) the Public Sector, through which the State has been increasing its direct participation in developing and exploiting the country's productive resources; (b) the Reformed Private Sector, i.e., private sector industrial firms in w'hich workers, through the "industrial community," gradually acquire up to one half of an enterprise's ownership and corresponding participation in management and profits; (c) the Social Property Sector, which is composed of fully employee-owned and managed enterprises (para. 3.04); and (d) the Private Sector, which comprises small private firms not affected by the Industrial Community legislation. The latter three sectors together are called the nonpublic sector. In principle, productive investment projects by enterprises in any one of the above sectors would be eligible for financing under the proposed loan (para. 5.05). 2.07 Peru's industrial policies are mainly designed to redress what the Govern- ment perceives as the sector's characteristic weaknesses: its excessive focus on consumer goods production and concentration of both ownership and location, by creating a balanced structure comprising basic, intermediate and finished goods industries. This aim is pursued by encouraging heavy industries, which, in turn, are expected to stimulate the growth of capital and intermediate goods industries. Other goals are decentralization, broader distribution of ownership, transfer of vital industries into Peruvian hands, employment creation, and integration into the Andean Common Market (ACM). 2.08 The General Law of industries provides the framework for industrial development according to a priority system. First-priority "basic" industries receive maximum incentives and are reserved for state exploitation, either directly or through joint ventures. A number of other first-priority industries not considered "basic" i.e.,crucial for achieving government objectives (such as transport equipment and some engineering industries) are open to nonpublic enterprises as well. The second-priority category covers a wide range of industries producing essential goods for mass consumption and supporting the production of "basic" materials in agriculture, fishing, mining, transport and construction. The third-priority category includes all other industries, which are considered "complementary" to the first two categories, but nontssential, with the exception of a relatively small fourth group of industries producing nonpriority (most luxury) goods. Besides their priority classification, the location of enterprises influences the level of most incentives, additional benefits being given to industries located outside Lima/Callao. 2.09 The fiscal incentives include tax exemptions of 85%, 75%, and 65% of profits reinvested for first-, second-, and third-priority industries, respectively,  - 5 - plus additional exemptions for companies established outside Lima/Callao. 1/ Import duties on both capital goods and imported materials are similarly reduced according to the priority or location of an enterprise. Until recently, only between 10-65% of the standard tariff for nonpriority enterprises was payable on capital goods imports of priority industries located in Lima/Callao, and between 5-35% for those outside. 2/ Furthermore, state development banks such as COFIDE and Banco Industrial del Peru (BIP) are required to grant local currency loans for capital goods and working capital to priority industries at differentiated concessionary terms (para. 2.29). In addition, exporters of nontraditional exports are exempt from export taxes and are granted transferable tax credit certificates (CERTEX) of 15-35% equivalent of the f.o.b. value 3/ of the exports, depending on the extent of their net foreign exchange surrender, domestic raw material content, value added component and degree of product elaboration. An export credit guarantee system has been established, and a fund to provide export financing was set up in 1972. The above system of incentives provides an average nominal protection for manufactured goods of about 90%. However, as a result of quantitative restrictions, including import quotas and mandatory prior authorizations and prohibitions of some imports, the effective rate of protection is likely to be considerably higher, in particular for consumer goods such as textiles, beverages, tobacco, footwear, leather and wood products. C. Evaluation of Industrial Policies 2.10 Spurred by the system of import quotas and fiscal incentives, as well as the growing domestic demand stimulated by income redistribution policies, industrial sector investment increased rapidly in recent years, as seen below: Rate of Investment in the Manufacturing Sector (Index based on investment in constant Soles 1970=100) 1968 1970 1971 1972 1973 1974 115 100 121 168 229 253 Industrial value added showed a similarly rapid growth, averaging 8.6% annually in real terms during 1968-74, well above the annual 5.5% real GDP increase; it accounted for 27% of Peru's GDP in 1974, up from 23% in 1970. 4/ Industrial sector growth appears to have slowed in 1975 as firms were increasingly hampered by shortages of foreign exchange and domestic credit, which are likely to remain an important 1/ The Lima/Callao area currently accounts for some 72% of value added and 75% of employment in manufacturing but houses only one quarter of the country's population. 2/ Tariff levels for priority industries have recently been increased by about 50%. 3/ Of the c.i.f. value for goods shipped on Peruvian vessels. The above percentages have recently been raised slightly. 4/ An even more dynamic sector growth could have been achieved but for the fishmeal crisis of 1972, and some difficulties in administering the import licensing system.  - 6 - constraint in the near future. The relatively low cost of labor and the CERTEX tax rebate system were instrumental in raising nontraditional exports from US$56 million (5.4% of total exports) in 1971 to US$157 million (10.4%) in 1974. 1/ Hampered by an increasingly overvalued exchange rate, nontraditional exports fell to US$135.1 million in 1975. 2/ 2.11 Industrial policies, however, have not vet been as successful. in directing investment towards priority industries. Over the four years since the incentive scheme became fully effective,a large part of manufacturing expansion has continued to take place in consumer goods industries catering to the domestic market. In 1974, value added by capital and intermediate goods industries accounted for 45% of gross value added (i.e.,an increase of only 5% since 1968), while such sectors as food processing, beverages, tobacco and textiles contributed 40% to gross value added. Duty exemptions on imported inputs and, increasingly, outright import bans for products produced domestically have been used to promote import substitution. These policies have tended to stimulate production of goods with low domestic value added and, sometimes, mere assembly of imported inputs. As a result, the manufacturing sector has remained generally inefficient 3/and poorly integrated, and shows a substantial degree of import dependence (para. 2.15). 2.12 One reason for growth along established patterns is that incentives favor expansion of existing,rather than creation of new,enterprises, as is shown by the sudden surge in reinvestments from 1972 onwards. The threat of growing worker participation may also have acted as a reinvestment incentive in existing firms, as industrialists, by expanding their own equity, attempt to keep the workers' share low (para. 3.03), while the likely eventual loss of management control may have made industrialists reluctant to start new firms. Also, incentives play a relatively minor role in stimulating first-priority public sector investments. The public investment program in manufacturing is only beginning to gather moment-m, and much of its success in reorienting the industrial sector will depend on the ultimate success in strengthening the implementation capacity of public sector enterprises. 1/ Main manufactured export items were canned and frozen fish, textiles, alpaca wool tops, zinc alloy, copper wire and fishing vessels. Exports to ACM countries have been expanding rapidly and now represent about one quarter of Peru's nontraditional 2/ Manufactured exports are expected to resume 1974 levels in 1977 and then grow by an annual average of 12% during 1978-80. If present policies to increase efficiency in production (para. 2.16) and to maintain a realistic exchange rate are followed, a much higher growth in manufactured goods exports seem likely. 3/ Observation by the missions and recent studies of Peru's industrial sector indicate that low domestic value added, low productivity and/or low capacity utilization are especially prominent in the more highly protected subsectors such as textiles, paper and pulp, and food processing. High protection also impairs the manufacturing sector's ability to benefit from ACM integration.  -7I 2.13 The cost to the Treasury of liberal incentive programs 1/is becoming exceedingly high. In 1974 investment incentives reduced corporate income tax collection by an estimated 25%. Until recently, the estimated loss of government revenues through duty exemptions has been even higher, amounting to an average of 60% of nominal import duties, and as much as 85% on capital goods imports. Given the extent to which incentives are being granted, they have ceased to be an effective tool for selective changes in the structure of the industrial sector. 2014 Industrial policies < so have had little apparent impact on stimulating manufacturing sector emp'loyment, which has been growing at about 4% annually, i.e., well below the growth in output. At present the industrial sector (excluding cottage industries) employs only some 5% of Peru's labor force. While investment incentives have tended to favor the use of capital-intensive technology, this trend may have been accentuated by labor legislation that makes it virtually impossible to dismiss employees. In addition, poor labor discipline and widespread strikes have become a serious problem, reducing the comparative advantage afforded to Peruvian industry by the country's relatively cheap labor. 2.15 Perhaps the most serious shortcoming has been the lack of a consistent and unified framework of analysis in formulating industrial policies and the priority system. Rigid priorities and corresponding incentives have been assigned mainly with a view to reducing dependence on foreign inputs, without full regard to Peru's comparative advantages or considerations of economic efficiency; in some cases, these policies have pursued contradictory goals. For instance, many heavy industries, which indiscriminately enjoy the highest priority, may not make the best use of the country's resources. Similarly, strong protection and fiscal incentives may discourage employment creation and development of industries with high domestic value added. Therefore, instead of increasing its integration and independence as hoped for, Peru's manufacturing sector has become more dependent on imports and thus on other sectors of the economy to provide it with foreign exchange. By 1975, annual imports of raw materials and semifinished goods by the manufacturing sector had reached $928 million (up from $237 million in 1970), compared to the country's total export earnings of $1.38 billion ($1.03 billion in 1970),thereby aggravating Peru's balance of payments situation. 2.16 Recent government measures have tended to counter the shortcomings of previous industrial policies. Priority is now being given to increasing efficiency in the productive system,and extensive efforts to restore confidence and dynamism in the private sector are being made. Private sector participation in petroleum exploration and medium-scale nmining development is being encouraged,and ambiguities in the industrial community legislation are to be eliminated, guaranteeing the present owners managerial control of the enterprise,2/ Social property development is still supported but no more as a priority sector, and it is to compete with the private sector on equal terms. Also, the labor stability law, a cause of low labor productivity, has been suspended pending the issuance of new legislation. Most important of all, the Peruvian authorities have come to understand the need to replace gradually the present rigid priority and incentive system with a consistent industrial strategy based on a comprehensive and rational analysis of Peru's 1/ Most manufacturing enLerprises are, in fact, granted exemptions. 2/ The industrial community's share in a compan- will be limited to one third of equity.  comparative advantages, and economic evaluation of projects that ensures efficient resource allocation. 1/ 2.17 The proposed loan is primarily designed to help overcome a basic weakness in the manufacturing sector development, by orienting investment decisions towards projects which utilize the country's resources efficiently. It will do so initially on a comparatively small scale, by requiring that COFIDE determine the economic efficiency of all Bank-financed subloans. In computing the internal economic rate of return (ERR) of projects, distortions created by the complex system of duty exemptions, artificial price supports and other subsidies would be corrected, using,to the maximum extent possible, international prices and shadow prices for factor inputs. The loan's impact should, however, extend beyond the limited number of projects which it would support directly. It is expected that as COFIDE becomes more familiar with systematic economic evaluation the DFC would extend its use to other projects and that the concept would eventually spread to other government agencies concerned with investment decisions (para. 5.02). 2.18 Application of economic efficiency tests alone, however, cannot bring about a lasting reorientation of investments unless industrial policies favor efficient resource allocation. The Government has become increasingly aware of the shortcomings of present incentive policies, and far-reaching reforms of the incentive system are being studied. The recent reduction in exemptions of import duties on capital goods is the first step in a gradual revamping of fiscal incentives to industry. The Bank would continue to assist the Government's efforts through industrial policy discussions whenever called for. D. Role of Public Enterprises in the Industrial Sector 2.19 Given COFIDE3s important role in financing and holding the shares of state enterprises (para. 4.11), this sector and its decision-making process call for particular attention. Reflecting the Government's development priorities, public enterprises have increased from 10 in 1968 to 48 at present. 2/ At the same time, operating deficits of public enterprises have been the main source of the poor public sector savings performance in recent years. The financial situation of public enter- prises still bears the imprint of an earlier government policy to maintain low prices 1/ For instance, decentralization of industrial activity is probably better promoted by providing the necessary infrastructure rather than through automatically granting generous fiscal incentives. Also, export promotion and import substitution policies need to be better coordinated and the CERTEX scheme improved, perhaps by linking the entire tax rebate/subsidy system for industrial exports to value added measured in international prices (rather than in domestic prices as is the present practice) and employment creation. 2/ These include the following major enterprises in (a) Production: PETROPERU (petroleum,gas, petrochemicals); MINEROPERU and CENTROMIN (mining, fertilizers); HIERROPERU (iron ore mining); PESCAPERU (fishMeal fish oil); SIDERPERU (iron and steel); INDUPERU (diversified industrial production); SIMA (shipbuilding), and (b) Marketing-Trade: PETROPERU (petroleum); PESA (food); EPSEP (fish); ENCI (industrial inputs. liquors, fruits); EPCHAP (food, fish products, coffee, cotton); MINPECO (mineral products); SIDERPERU (steel); Compafnia Peruana de Vapores (overseas shipping)  - 2 - for basic goods such as petroleum products, fertilizers and foodstuffs in the face of sharp increases in the international prices of these commodities. While the cost of the required subsidies was to be borne by the Government through transfers to the four largest trading enterprises (PETROPEKU, ENCI, EPSA and EPCHAP), these have had to rely heavily on domestic bank financing from 1974 onward,as delays in the subsidy payments occurred. The following table illustrates the problem created by heavily subsidized consumer prices prior to the general price increases of 1975 and 1976: State Enterprise Finances (billions of Soles) 1972 1973 1974 1975 (Estimate) Total Revenues 18.1 25.3 45.9 66.9 Current Expenditure 12.7 21.9 43.5 88.4 Capital Expenditure 4.9 11.2 19.6 22.5 Total Expenditure 17.6 33.2 63.1 104.9 Surplus/ eficit .5 -7.9 -17.2 -38.0 Financing of Deficit Foreign Borrowing 2.2 4.8 8.3 16.0 Domestic Borrowing -2.6 3.1 8.9 22.0 Sources: Enterprises' financial statements, Ministry of Economy and Finance, Central Reserve Bank, IMF. In the first half of 1975 alone, lending by Banco de la Naci6n (para. 2.24) to state enterprises accounted for one third of the increase of net domestic assets of the financial system. Faced with this situation, the Government virtually eliminated subsidies through price increases in June 1975 and January and June 1976. Significant subsidies remain only for fertilizers, cement, flour, sugar, and edible oils. 2.20 Government price policies and other factors make it difficult to assess state enterprise efficiency. Those companies which have either had enough time to build up an experienced staff or have taken over an established organization from their private predecessor are generally quite effective. 1/ However, shelter from competition and access to the Treasury and Banco de la Nacion have tended to relieve most public enterprises from the type of financial discipline imposed on private companies. The Government is increasingly concerned about this lack of incentives for efficiency, and a high level commission (including two COFIDE representatives), reporting directly to the President, is reviewing state entrepreneurial activities. 1/ These include PETROPERU (by far the largest public enterprise), CENTROMIN, HIERROPERU, Compafiia Peruana de Vapores and INDUPERU. SIDERPERU has recently been modestly profitable despite a depressed demand for its products. Experience with MINEROPERU's three huge projects suggests that the company's effectiveness can be further improved. PESCAPERU, which was formed at the height of the fish- meal crisis, is striving to reduce excess capacity but still faces a large deficit.  - 10 - 2.21 Investment decision making. Public sector resource allocation is determined jointly by the National Planning Institute (INP), the Ministry of Economy and Finance (MEF) and COFIDE. Whereas INP sets overall development targets and economic priorities against which it reviews project proposals, MEF strives to keep investment levels within the limits of resource availability. Finally, COFIDE is charged with determining the viability of public sector projects, mostly in financial terms. 2.22 INP's medium- and long-term development plans that define development strategies and assign priorities are complemented by the work of sector planning offices within each ministry. Although INP has attempted to measure economic returns of a few major projects, apparently on an experimental basis, priorities have been assigned thus far mainly according to the type of industry without fully considering Peru's comparative advantages or the project's relative efficiency. INP is interested in improving this situation (para. 5.02). 2.23 COFIDE is represented to some degree at all stages of the planning process for state enterprise projects. While it can advise on the composition of the sector's investment program, its most important role is to evaluate projects once they require financing. In practice, the sequence of steps involving the sector planning offices, INP, MEF and COFIDE is not observed rigorously. Public enterprises on occasion approach COFIDE informally before their projects are approved by INP or included in the investment budget. However, to ensure the greatest possible effectiveness of its appraisal work, there is a need for COFIDE to get involved systematically in the selection of projects from an early stage before they build up an excessive momentum (para. 4.15). E. The Financial System 1/ 2.24 At present, the Peruvian banking system includes the Central Reserve Bank, 17 commercial banks, 6 state-owned development banks, 2/ several private financieras and the state-owned Banco de la Nacion. The latter is the main depository of public funds and reserve requirements of commercial banks and plays a major role in channeling short-term funds to state enterprises. Three of the largest commercial banks passed into government ownership in 1970. Although these "associated banks" are under the supervision of Banco de la Nacion, they have retained a considerable degree of autonomy and are subject to regulations for private commercial banks. Term financing is provided mainly by the state development banks and, marginally, the private financieras. Of the former, Banco Agrario and Banco de la Vivienda have received Bank loans. 1/ For a detailed discussion of the financial system and policies, see Appendix A. 2/ In addition to COFIDE, there are five specialized state development banks: Banco Agrario (agriculture), Banco de la Vivienda and Banco Hipotecario (both housing), Banco Industrial del Peru (small- and medium-scale manufacturing) and Banco Minero (mining).  - 11 - 2.25 Since 1968, government control of the financial system has increased. A Monetary Policy Council and the State Council for Credit Policy were established, both headed by the Minister of Economy and Finance and including representatives of various ministries, the Central Reserve Bank, the Banco de la Naci6n and the state development banks. Coordination of the associated banks and state development banks (including COFIDE) is facilitated through government-directed committees. The Government also introduced a selective credit system (para. 2.27) for commercial banks, established COFIDE as a strong new development bank predominantly for financing public sector projects, revised the lending policies of other state development banks and the private financieras, 1/ and introduced foreign exchange controls. 2.26 The total flow of funds through the financial institutions increased from 26% of GNP in 1965 to more than 30% in 1973. However, due to the low legal interest rate ceilings (para. 2.30) in a period of rising inflation, real interest rates have become increasingly negative and the annual growth of the domestic liabilities of the banking system (excluding COFIDE) has been slowing down since 1974. In 1975 it was even somiewhat below the estimated 24% rate of inflation. On the other hand, as shown below, net domestic banking assets grew 47% per year, mainly because of a sharp increase in public sector financing requirements. Development of the Banking System Percentage annual increase 1973 1974 1975 (Estimated) Use Increase in net domestic assets 19.5 13.9 47.5 Source: Increase in liabilities to private sector 16.4 21.6 21.4 Medium- and long-term foreign borrowing and drawdown of net international reserves 3.1 -7.7 26.1 Total 19.5 13.9 47.5 Source: Central Reserve Bank and staff estimates. To close the gap between domestic resource mobilization and credit demand in 1975, the banking system drew down a large part of its international reserves and increased foreign borrowing. In an attempt to counter this development which has been hampering productive sector growth, local currency interest rates have recently been raised (para. 2.32). F. Financing of the Industrial Sector 2.27 The commercial banks are the main institutional source of industrial finance providing local currency loans and arranging short- and medium-term foreign I/ In 1971 the role of the private financieras was redefined towards medium- and long- term financing of industry, agriculture and fishing, in contrast to their earlier orientation towards consumer financing and short-term commercial and construction loans. Consequently, the number of private financieras fell from 37 to 7.  - 12 - credit. 1/ Industrialists also frequently finance their medium- and even long- term investments by rolling over short-term commercial and bank credit. As of mid-1975, outstanding loans of commercial banks to industry amounted to S/. 20.3 billion, or 38% of their total credit. 2/ While commercial banks located in Lima are required by the selective credit system to direct no less than 60% of their credits to first- and second-priority industries, 3/ second-priority industries received as much as three quarters of the banks' industrial sector loans in 1974; and only 19% went to first-priority industries. 2.28 Other important sources of industrial financing are BIP, COFIDE, and for short-term financing of state enterprises, Banco de la Naci6n. BIP covers the whole range of banking services from short-term working capital loans to investment financing, 4/ whereas COFIDE concentrates on medium- and long-term project financing, especially of state enterprises. G. Level and Structure of Interest Rates. 2.29 The Peruvian Government employs the level and structure of interest rates as a major tool for providing concessionary financing to selected high-priority investments. Accordingly, mandatory ceilings imposed on the cost of credit vary widely, depending on the priority of the recipient enterprise and the institutional source of funds used. 5/ 2.30 Until recently interest rates on savings and time deposits with commercial banks have been limited to 5% and 7%, respectively; they have remained unchanged since 1962. The short-term lending rates by commercial and savings banks had been limited to a maximum of 14%; private financieras charged effective rates of 15-16% (including commissions). COFIDE's and BIP's rates ranged from 10-15% on short- and medium-term, and from 8-13% on long-term loans. 1/ In May 1974, the Government tightened regulations by requiring foreign bank financing for all private sector imports. Commercial banks and Banco de la Nacion usually guarantee such foreign credits. As a result, guarantees extended by these institutions doubled in 1974 to SI. 102.8 billion, exceeding their total lending volume (S/i 85.4 billion). While most guarantees are for imports of raw materials or intermediate goods, they are also important for financing imports of fixed assets. 2/ Industry receives by far the largest proportion of commercial and savings bank credits, followed by commerce (26%) and construction (12%). 3/ Commercial banks are required to purchase government bonds to make up any shortfall. 4/ BIP, established in 1936, has a substantial loan portfolio of SI. 12.7 billion, mainly to small- and medium-sized private manufacturing enterprises. It extended a total of US$97 million equivalent in loans and guarantees in 1974, partly using credit lines from the IDB and USAID. 5/ Money supply in the Peruvian economy is controlled mainly through discount quotas to the banks. To avoid disruptions in the savings and investment process through the monetary system, the Central Bank has been following the policy of expanding the money supply approximately in pace with the expected inflation rate.  - 13 - 2.31 At the present and projected near-term inflation levels these interest rates were highly negative and tended to have an adverse effect on resource mobilization and allocation. This is exemplified by the sharp drop in the demand deposits held by the banking system from 7.4% of GDP in 1972 to about 6.5% in 1975, and a parallel drop in savings and time deposits from 5.7% to 4.3% of GDP. As pointed out in para. 2.03, total national savings as a percentage of GDP during the same period fell from 10.6% to 8.3%. Furthermore, the low level of lending rates in local currency favors capital-intensive over labor-intensive industries, thus distorting factor proportions contrary to Peru's comparative advantage and encouraging unnecessarily high inventory accumulation. 2.32 The Peruvian authorities are becoming increasingly convinced of the importance of adequate interest rates as a means of improving domestic resource mobilization and allocation and to prevent a large-scale financial disintermediation. Thus the Government has recently raised the interest rate ceilings imposed by usury legislation,and the Monetary Board authorized significantly higher interest rates for the banking system. Interest rates on savings and time deposits with commercial banks now range from 13% (and up to 17% for private financieras) and relending rates from 14% to 19%. COFIDE's (Annex 16) and BIP's rates now range from 13.5 - 17.5% on short- and medium-term, and from 11.5 - 15.5% on long-term loans. However, rates, terms and grace periods for loans from the public development banks continue to be determined by a complicated system based on the borrower's ownership, priority, location and the use of funds. While it would not be realistic to expect the Government now to move to positive interest rate levels in real terms, the recent changes reflect a major shift in government policy. The Government has indicated its intention of reviewing the progress towards its longer-term goal of achieving positive interest rates, should inflation remain over 15% in 1977. In future, COFIDE would be expected to adjust its local currency interest rates whenever necessary (para. 4.21). 2.33 Foreign currency lending, accounting for a substantial part of industrial sector financing, usually carried an effective cost of 2.5% to 4.5% above LIBOR. The relending rate under the proposed loan would be not less than 11% p.a. in foreign exchange (para. 5.07). III. EMPLOYEES' PARTICIPATION SCHEMES IN PERU 3.01 The industrial community and social property concepts resulted directly from the Government's stated goal of broader popular participation in economic growth. These rather unique concepts are important not only since enterprises organized according to them would be eligible for financing under the proposed loan but also for their possible importance in Peru's future productive sector development. A. Industrial Communities and the Reformed Private Sector 3.02 The Industrial Community Law of 1970 governs all private industrial enter- prises with gross incomes greater than S/. 25 million and six or more emDlovees. These firms are called "reformed private" enterprises and their worker groups, industrial communities. A reformed private industrial enterprise is required to transfer 15% of its annual profits everv-vear i-n thelTormx of the firm's shares to its industrial community, until the community acquires 50% of the firm's capital; an additional 10% of the profits are distributed in cash among the workers. The industrial community also elects representatives to the company's Board of Directors. By increasing workers' participation in ownership and profits of the firm, the  - 14 - scheme is intended to foster higher productivity through better employee- management relationships and income redistribution. 3.03 Thus far, the industrial community scheme has shown ambiguous results. Many industrialists viewed it with apprehension, due to its long-term goal of 50% worker ownership of the firm, and they reportedly often reinvest profits to post- pone this event. On the other hand, most workers seemed to be rather indifferent towards the concepts of equity participation and profit sharing, as indicated by extended strikes for wage increases. This may be partly because workers currently own only a small share of the equity in most enterprises 1/. Thus, as long as the profit sharing effect of industrial communities remains small, workers tend to rely more on labor unions to obtain income increases. Overall, the industrial community concept has had only limited success thus far in achieving its main objectives. The Government has now announced its intention to introduce changes in the concept whic1 should overcome some of its shortcomings, most notably the fear of entrepreneurs to lose control which was seen as a threat to investment in new projects. The industrial community's share in a company will be limited to one third of eruity sad individual workers will have stronger property rights including the right to sell their sharms. B. Social Property 2/ 3.04 The new Social Property Sector (SPS) is composed of enterprises in which the workers, through their elected representatives, control most of the operating, marketing and financial decisions. The main objective of SPS is "to permit the efficient use of resources without concentrating benefits and decision-making powers." Social property involves a new form of ownership by workers, distinct from state or private ownership, and is seen as an attempt to construct a "fully participatory social democracy" which is neither capitalist nor communist in nature. SPS is intended to combine a more equitable income distribution with a rapid economic growth through more harmonious labor-management relations and worker incomes linked directly to the firm's performance. 3.05 An elaborate organizational structure has been established to administer and support SPS, which is to have three levels of self-managed institutions: the individual Social Property Enterprises (Empresas de Propiedad Social-EPS), Regional Assemblies performing certain planning and coordinating functions, and a peak-level National Assembly. Workers of each individual EPS elect delegates to the Regional Assembly, which in turn elects delegates to the National Assembly. While the latter is to be the highest administrative body of SPS, a wide range of policymaking powers- in sector administration and financing are assigned to the "supporting structure" of SPS. It comprises various autonomous and semi-autonomous agencies, including the National Social Property Commission (Comisi6n Nacional de Propiedad Social, CONAPS), the National Social Property Fund (Fondo Nacional de Propiedad Social, FONAPS), COFIDE, and the Housing Fund for Social Property Workers. In addition, government bodies such as INP, the National System for the Development of Social Property and the Council of Ministers, have varying degrees of authority; all EPS investments must be approved by the relevant ministry. 1/ The share of industrial communities in the equity of firms reached an estimated average of 13% as of year-end 1974, although with wide variations. 2/ See Appendix B for a fuller discussion of the Social Property Sector.  - 15 - 3.06 The central agency responsible for implementing the national social property policy is CONAPS; it has important decision-making power relating to the constitution and dissolution of EPSs, their hiring policies, some financial matters, and, indirectly, EPS wage and salary policies. CONAPS is composed of three worker repre-entatives elected from the SPS National Assembly, and twelve other members representing the President of the Republic, various ministries and other state agencies. Additional support for the implementation of SPS prograns is to be provided by regional offices of CONAPS and sectoral social property organs to be established within several ministries and state agencies. 3.07 FONAPS is the key financial organ supporting the sector through provision of transitory capital 1/ financing. At present, both FONAPS and COFIDE are responsible for determining project feasibility as well as for arranging the financing of EPSs whose formation have been approved by CONAPS. FONAPS is governed by aneight-member Administrative Board consisting of three worker members elected by the SPS National Assembly, four representatives appointed by the Minister of Economy and Finance, and one representative from CONAPS. Individual EPSs can obtain financing either through loans from financial institutions including COFIDE, transitory capital from FONAPS, or both. Both COFIDE and FONAPS are legally authorized to provide transitory capital, although in practice this activity has been restricted to FONAPS 2/. FONAPS has the powers to establish the terms of the transitory capital financing, including the amortization period, grace period and level of "rent compensation," to enforce the financial commitments, and to demand an individual EPS to submit a financial recovery plan, if called for. Being still a very new organization (established in June 1975), FONAPS does not yet have the technical or administrative staff to investigate project feasibility and economic viability, and relies heavily on COFIDE for technical support; however, this situation is expected to change in line with recent legislation, converting FONAPS in effect into the central financial institution for the SPS, concentrating on transitory capital financing. 3.08 The socialization of capital formation in Peru,usually referred to as "social accumulation," is a concept directly linked to social property of the means of production. Although workers of individual EPSs can make most of the decisions involving matters such as acquisition or disposal of assets, reinvestment and remuneration, the assets of all EPSs are conceptually owned by the totality of all SPS workers,and "social accumulation" is thought of as capital formation for the sector. Capital accumulation at the level of SPS takes place through FONAPS. In addition to the permanent capital charge, it receives a fixed share of the pre-tax profits generated within each EPS, any liquid funds in excess of predetermined limits, 1/ Transitory capital, which performs the function of equity, is similar to a loan granted without collateral, except that annual payments of a capital charge ("rent compensation") continue perpetually, even after full amortization. 2/ FONAPS provides transitory capital either directly or through credit-line arrangements administered by state development banks, including COFIDE.  - 16 - and specified portions of surpluses that have not been reinvested. While the EPSs receive a special kind of bond in exchange for these surpluses of funds transferred to FONAPS, these financial instruments, in effect, contribute directly to capital accumulation at the sectoral level. 1/ 3.09 SPS projects are usually initiated by state enterprises, private business- men or popular community-based organizations; new EPSs may also be formed by transformation of existing firms. Prior to implementation, all project proposals must be approved by CONAPS, in consultation with INP, COFIDE and the concerned ministries. Also, while SPS projects promoted thus far by public agencies or established private entrepreneurs have tended to be well prepared and supported by competent technical personnel, there is a lack of an institutional and technical assistance framework to support small projects expected to originate at the grass- roots level. The Government is studying institutional mechanisms and training schemes to support SPS implementation. The technical assistance arrangements under the proposed loan could contribute towards alleviating these problems (para. 5.07). 3.10 In the past, EPSs were given first priority treatment under investment incentive schemes and, for the first five years of operation, preferential access to government contracts if their bids are competitive. The Government now stresses that EPSs will have to compete under equal conditions with other enterprises. Resources committed to the implementation of Social Property have been relatively small. At year-end 1975, CONAPS had a staff of 84 professionals and FONAPS total resources for transitory capital financing of some S/. 3.3 billion for the biennium 1975-76, of which SI. 2.5 billion was from the Central Reserve Bank and the rest from a COFIDE loan. 3.11 In the initial stages of SPS implementation, CONAPS has tended to emphasize speed rather than economic impact of projects and planned sector development. As a result, three major problems have become apparent: (a) insufficient attention to an integrated planning and development strategy to expand SPS activities; (b) lack of specific criteria for preparing, evaluating and financing SPS projects and of a clear allocation of responsibilities for project financing and implementation; and (c) absence of an effective national training system for EPS's special technical and management needs. 3.12 Given the small number of operating EPSs and their short history of operation, it is not yet possible to draw any definitive conclusion from their experiences. Impressions gathered through mission visits to eight EPSs suggest tendencies towards possible improvements in worker attitudes, particularly in seeking new business for their firms, and, in two instances, development of organiza- tional innovations allowing the firms to respond better to local community needs. 1/ In addition, non-SPS enterprises and individuals can invest in SPS and participate in its profits by purchasing "certificates of participation," i.e., diversified indirect holdings of nonvoting "shares" of several EPSs, issued by financial intermediaries. These indirect investments in SPS will be encouraged through generous tax exemptions to investors. The capital accumulated by the sector, regardless of its source, would be made available to support new SPS projects in the future (Appendix B, Section III).  -- 1 7- However, more time is needed to determine the long-run productive efficiency and effects on worker participation and income distribution of EPSs. 3.13 The fervor which accompanied the introduction of social property, and which often has led other sectors to regard it as a threat, has given way to a more sober assessment of the possibilities and limits inherent in the concept. The GovernLment continues to be committed to SPS development particularly in labor-intensive industries but it follows a prudent approach of cautious expansion while consolidating the supporting institutional mechanisms and training facilities. In view of the linited experience to date with SPS, no more than a maximum of 307 of the proposed loan would be available for EPS projects (para. 5.05). IV. SUMMARY DESCRIPTION OF COFIDE A. Organization I/ 4.01 COFIDE was established as an autonomous state enterprise in 1971, principally to stimulate and promote Peruvian entrepreneurial activity, coordinate and guarantee the financing of state enterprises, 2/ mobilize resources for priority projects of state, reformed private, private and social property enterprises, and expand the domestic capital market. It has also been designated to act as a holding company of a number of state enterprises which are in turn holding companies in the industrial and tourism sectors (para. 4.12). Thus, its scope and tasks are wider and more complex than those of many DFCs associated with the Bank. 4.02 As of year-end 1975, COFIDE's S/. 5.05 billion paid-in share capital was held 84% by the Government, and the remainder by individuals and companies which had received COFIDE's shares as part of compensation under the agrarian reform (Annex 6). However, by law, the control of COFIDE rests with the Government, regardless of share ownership. COFIDE is responsible to MEF and is expected to orient its operations in support of Peru's Economic Development Plan. 4.03 COFIDE's organization includes a fourteen-member Board of Directors and Management Committee. The former, which is COFIDE's highest authority, is dominated by government appointees (Annex 2); working relations between the Government and COFIDE are close. The Board takes an active interest in directing COFIDE's policies and operations. The present full-time Chairman and former General Manager has the experience, skills and capacity to carry out this role successfully. The Management Committee, composed of senior COFIDE executives, is another key element in COFIDE's decision making (Annex 3). At present, it is empowered to approve all operations under S/. 20 million. 4.04 COFIDE's General Manager also appears well qualified for his position. Under the General Manager, who is mainly responsible for day-to-day operations, responsibilities are functionally assigned to the Operations, Finance, Technical, International and Social Property Divisions. (For COFIDE's organization chart, see Annex 1). COFIDE's second-level management and professional staff are relatively young and somewhat inexperienced, but generally well qualified and responsive to the 1/ For a detailed description of COFIDE and its activities and prospects, see Appendix C. 2/ By law, all medium- and long-term borrowing of state enterprises (including foreign borrowings) requires COFIDE's approval, giving it a unique central role. However, many state enterprises have continued, in effect, to arrange their own financing.  - 18 - leadership provided by a dynamic top management. The number of 325 employees (including 155 professionals) appears somewhat high for the current level of operations, but should facilitate the handling of an increase in activities expected for the near future. Professional staff is well diversified and COFIDE's professionalism is respected more and more by other government agencies. Staff turnover has been moderate thus far. 4.05 Management recently made a series of organizational improvements. These have tended to strengthen COFIDE's organization and control, particularly in the Finance and Social Property Divisions, the performance of which had been a matter of concern in the past. However, COFIDE's financial planning and internal reporting systems are not yet fully geared to the increasing complexity of its operations. The proposed association with the Bank is expected to further improvements in these and other areas over time. B. Operational Policies and Procedures 4.06 Since existing policies of COFIDE provided relatively little operational guidance in several important areas, COFIDE (with Bank assistance) prepared a comprehensive Policy Statement (summarized in Annex 5), focusing on its development banking functions. It was approved by COFIDE's Board on August 13, 1975. While in its present form the Policy Statement cannot yet be fully endorsed, 1/ COFIDE is expected to move towards a solution of outstanding issues. In this the Bank would lend assistance and advice to the extent necessary. A separate Statement of Operating Policies and Procedures (Annex 4) would govern the operations of the Fund (para. 5.09). 4.07 COFIDE appraises all projects submitted to it for financing, with emphasis on financial, technical and marketing aspects. Overall, appraisal reports are of good quality, except that most do not yet contain a thorough economic evaluation. However, the proposed loan is expected to help correct this deficiency. Also, there is a need to pay more attention to the project implementation capacity of investment enterprises. On balance, COFIDE's appraisal capacity is sufficiently strong to entrust it with allocating the proceeds of the proposed loan. 4.08 COFIDE only recently introduced economic appraisal on a trial basis. While the law creating it did not specifically foresee that COFIDE would concern itself with the economic justification of projects, COFIDE's Policy Statement corrected this situation. The Government's desire that COFIDE apply economic tests increasingly as decision-making criteria for project financing was confirmed during negotiations. IERR tests to correct the distortions mentioned in Dara. 2.17 would be aDnlied to all Bank-financed projects as a minimum, but are expected to be carried out for an increasing number of other projects receiving COFIDE financing. A seminar on this subject was held in July 1976 (para. 5.02). 4.09 With COFIDE giving increasing attention to follow-up, supervision procedures are generally satisfactory (Annex 14). Thus far, COFIDE has been devoting most of its promotional and technical assistance activities and financing of preinvestment studies to EPS creation. The focus of its promotional activities is likely to be more dispersed among different subsectors in the future. 1/ Mainly due to the absence of a clear definition of COFIDE's involvement in holding state companies,neither specific policies on these activities nor fully satisfactory financial policies could be included in the Policy Statement; thus, it would not form part of the contractual arrangements under the proposed loan.  - 19 - 4.10 While COFIDE had been giving relatively little attention to procurement decisions, it now intends to gradually strengthen its procedures by requiring several quotations for all procurement and insisting on international procurement for large projects, as feasible. For all Bank-financed projects, as a minimum, COFIDE would satisfy itself that the goods and services to be purchased are suitable for the investment project and are reasonably priced and it would provide the rationale for procurement in all subloan appraisals (para. 5.07). Disbursement procedures are sufficient to ensure that funds are used for their intended purpose. Loan collection procedures are also satisfactory. C. Role of COFIDE 4.11 One major reason for COFIDE's creation was to coordinate decision making for all state enterprise financing. Thus, COFIDE initially was to own the Government's share in all state enterprises. When this task proved to be difficult for the new institution, subsequent legislation provided that COFIDE would have neither management nor profit and loss responsibility for these enterprises but only hold their shares in custody. 11 However, a decree of August 1974 assigned to COFIDE full ownership, profit and loss responsibility, and a 'decisive vote" in the financing decision of four major state manufacturing and tourism enterprises, namely SIDERPERU (steel), INDUPERU (general manufacturing), ENTURPERU (tourism), and EPPAPERU (artisanal activity). These, in turn9 acting as second-tier holding companies, have been assigned ownership of all state enterprises in the industrial and tourism sectors. However, ministerial rulings defining COFIDE's holding company responsi'bilities have yet Lo be issued. 4.12 Existing uncertainties about COFIDE's future holding company role raise several important questions. Most important, since the share transfer to COFIDE would convert it into a predominantly industrial conglomerate with some development banking functions, appropriate policies and satisfactory financial and organizational arrangements would need to be devised to avoid excessive concentration of financial and operational risks for COFIDE. 4.13 As indicated in para. 2.21, substantial influence is exercised by other government agencies on COFIDE's public sector project financing decisions. As a state enterprise, COFIDE is subject to the public sector planning and control system. Thus COFIDE's budget depends substantially on projects included in the previously approved budgets of other state enterprises, which COFIDE is then expected to finance, and its own budget must be approved by MEF in addition to COFIDE's Board. There are also the very substantial operations which COFIDE performs on the Government's behalf (para. 4.22). While COFIDE thus has clear ex ante limitations in its financial planning and investment decision making, COFIDE has generally been exercising reasonable autonomy in rejecting, or at least modifying, projects it considered not to be viable or to involve excessive risks. 1/ As of December 31, 1975, these comprised S/.45.2 billion in nominal share capital of companies in the manufacturing and extractive industries, public utilities, banking, tourism, services, and trading sectors. These holdings do not form part of COFIDE's financial statements.  - 20 - 4.14 While COFIDE has been assigned-an important role in promoting EPSs, its financing decisions (including preinvestment studies) are interdependent with the activities of CONAPS and FONAPS. Up to now, FONAPS, without technical staff of its own, has relied exclusively on COFIDE's appraisals of project proposals. This situation, however, is likely to change as FONAPS builds up its own technical staff (para. 3.07). However, with COFIDE's representation on the administrative board of FONAPS, sound development banking criteria should continue to be important for EPS financing decisions. 4.15 Some projects presented to COFIDE in the future may continue to be too advanced to be rejected or modified, COFIDE's function being limited to providing adequate financing. To strengthen its role in the investment decision-making process and to have a better basis for its own financial planning, COFIDE needs to get involved at an early stage in project preparation, particularly of state and social property enterprises. This is being recognized increasingly by the Peruvian authorities. D. Resources 4.16 Up to 1972, COFIDE relied mainly on its equity for its own financing operations. Since then, COFIDE gained access to additional resources and its borrowings increased rapidly from S/. 182.9 million to S/. 11.1 billion as of December 31, 1975. By that date, COFIDE had mobilized S/. 19.6 billion, of which 26.0% in equity, 7.1% through issues of bonds and certificates of deposits, and 66.9% through foreign borrowings. So far, paid-in capital and retained earnings have provided the bulk of COFIDE's local currency resources; the remainder came from tax-exempt bonds, bonds issued by COFIDE on the Government's behalf to pay for enterprises whose activities are reserved for the state, tax-free temporary deposits mainly by productive enterprises for investment into high priority productive projects, and deposits from industrial communities. The foreign resources consist of a wide variety of borrowings from commercial banks and export credit agencies, and Canadian and Dutch development credits at concessional terms. While most foreign financing thus far has been for specific projects, COFIDE also obtained recently credit lines for general project financing, mostly tied to specific country procurement. All of COFIDE's foreign borrowings have to be authorized by Supreme Decree. E. Financial Position and Results 4.17 As of September 30, 1976, almost 70% of COFIDE's loan portfolio was still in the disbursement and/or grace period stage (Annex 15). Arrearage, reschedulings and write-offs have been minimal. On the other hand, there is a substantial concentration of potential risk in COFIDE's portfolio. 1/ _/ As of September 30, 1976, COFIDE's exposure (loans and guarantees on COFIDE's own account) in PETRCPERU, the state-owned petroleum company, was equivalent to 89.8%, and in MINEROPERU to 35% of COFIDE's own equity. In addition, COFIDE had given guarantees on behalf of the Government for loans to the state-owned companies PETROPERU, ELECTROPERU and MINEROPERU, eouivalent to 496.0%, 77.8X and 67.5%, respectively, of COFIDE's own equity.  - 21 - 4.18 As of September 30, 1976, COFIDE held 25 equity investments (exclusive of the state holding companies, see Annex 12) totaling SI. 3.0 billion, equivalent to 41.3% of its own equity. The equity portfolio, consisting mainly of minority holdings often in relatively new companies, was generally of good quality. The auditors declined to give an opinion on the adequacy of SI. 26.8 million in loss provisions for equity investments at year-end 1975. To establish their necessary level and to have a basis for a general provisions policy in the future, COFIDE asked for a complete portfolio review in connection with its 1975 audit. Its results and their implications for COFIDE's financial policies will be discussed prior to finalizing its 1976 audit. 4.19 COFIDE is subject to the control by the General Accounting Office which in turn appoints annually independent auditing firms to audit COFIDE's accounts. Past audit reports have been qualified regarding the carrying value of COFIDE's equity (1972, 1973, and 1975) and equity and loan portfolios (1974). While all three firms appointed thus far would have been satisfactory, there is a need to improve substantially the scope and quality of the auditors' work, particularly regarding analysis of loan, equity investment and guarantee portfolios, loss provisions, liquidity structure and profitability. During negotiations COFIDE agreed to employ the services of independent auditors acceptable to the Bank and to have them prepare annually full audit reports (following the long form format for DFCs associated with the Bank) on (a) COFIDE only; (b) COFIDE consolidated with its subsidiaries, once the state enterprise holding company legislation has been implemented; and (c) the operations and financial position of the Fund (para. 5.08). 4.20 Comparative balance sheets for 1971 to 1975 (Annex 17) which exclude COFIDE's shares in the state holding companies, indicate an acceptable financial position. During that period COFIDE's loan and equity portfolio grew rapidly, from S/. 0.18 billion to SI. 14.8 billion. Reflecting sharply increasing foreign borrowings, mainly since 1973, COFIDE's total debt-to-equity ratio jumped from 0.5:1 in 1972 to a still rather low 2.7:1 in 1975. A contractual 5:1 debt to equity limitation (for COFIDE and its financial subsidiaries) would ensure a sound financial structure for COFIDE in the future. Except for 1974, the company has been maintaining an adequate, although rather tight, liquidity position. In future, the Government would assure sufficient liquidity for COFIDE to meet its obligations. 4.21 Income statements for 1971 to 1975 (Annex 18) show a correspondingly rapid increase in revenues and administrative expenses. In 1975, the latter were equivalent to 1.7% of total assets,which although somewhat high is not excessive. However, with returns on equity between 1.7% and 4.7% during 1972-75, COFIDE's profitability has been substantially below annual inflation (of about 24% in 1975), resulting in an erosion of capital in real terms. Income has been affected by COFIDE's rather low local currency lending rates and commissions on foreign exchange loans; this had been made possible only by its present low-cost capital structure. There is a clear need for COFIDE in the future to charge local currency relending rates reflecting the opportunity cost of capital in Peru. This would tend to offset the erosion of equity through inflation and would improve COFIDE's capacity to mobilize and allocate resources more effectively. All of COFIDE's local currency relending rates have recently been increased by 3.5% (Annex 16). During negotiations, it was agreed that COFIDE would adjust its interest rate structure to reflect changing capital market conditions and achieve a satisfactory return on its equity.  - 22 - F. Past Operations 4.22 Despite its still relatively small size as the Government's main instrument for project financing of state enterprises (total assets of US$359 million equivalent as of year-end 1975) and short period of operations, COFIDE has made an important contribution to Peruvian productive sector development. Within less than six years, COFIDE has approved 495 operations totaling S/. 116.3 billion (Annexes 8 and 9). Guarantees given and letters of credit issued by COFIDE on behalf of the Government accounted for over one half (52%) of total approvals, followed by COFIDE loans (26%) and guarantees on its own account (18%), and equity investments and transitory capital contributions (2%). Almost one half each of COFIDE's out- standing own portfolio is with state and private sector enterprises (Annex 11), but the latter include a number of firms which are, in effect, government-owned or controlled. The large number and wide sectoral and geographic coverage of pre- investment studies financed (Annex 13) indicates COFIDE's extensive efforts in the generation of new projects. 4.23 In analyzing past approvals (Annexes 8 to 10),it is important to distinguish between COFIDEts own operations (predominantly loans) and those performed on the Government's behalf. Since the latter, which are weighted heavily by a few very large guarantee operations, are less representative of COFIDE's development banking activities, the following analysis concentrates entirely on COFIDE's own operations. Loan recipients (Annex 10) represent a wide range of sectors. Manufacturing industry (30%) received the most, followed by petroleum (23%), transportation (13%), mining (11%), communications (8%), and energy (7%). Reflecting the relatively large size of loans to some public and established private companies, the size distribution of loans approved is quite skewed: loans of up to SI. 200 million account for 85% of the number of loans approved, but only 32% of the total loan amount. Almost nine tenths of its lending has been for fixed capital requirements. With less than one quarter for the Lima-Callao area, there has been no undue geographic concentration of lending. Finally, 85% of COFIDE's lending had final maturities in excess of five, and most of the remainder, between three and five years. G. Economic Impact 4.24 The preceding discussion of COFIDE's past operations gives some indication of its significant economic impact. Due to a lack of comprehensive data, it is virtually impossible, however, to quantify this contribution and to measure its benefits with any degree of precision. 1/ COFIDE is becoming increasingly aware of the need to prepare and record systematically, for all its projects, economic indicators like direct employment generation, cost of fixed investment per job created and net foreign exchange earnings/savings. Ex ante partial economic indicators for a small sample of projects reviewed by the mission give reason to believe that most were quite acceptable in economic terms. 1/ One measure of COFIDE's economic impact is the estimated 23% participation of COFIDE's own and COFIDE-arranged financing in the total fixed new industrial sector investment by state enterprises.  - 23 - H. Projections 4.25 Forecast of operations. COFIDE's operational forecasts are largely based on the approved budgets of other state enterprises, and thus, to some extent, the translation of Peru's industrial development plan into effective financial decisions and physical implementation. Very tentative and highly optimistic projections prepared by COFIDE for the period ending 1978 appear in Annexes 17-20. They do not include the assets, liabilities and financial results of the four state holding companies. 1/ 4.26 COFIDE expects its lending operations to rise rapidly over the next three years, with disbursements reaching S/. 18.4 billion in 1978, compared with S/.6.2 billion in 1975, and S/. 4.3 billion in 1974. To achieve its highly ambitious operational forecasts and maintain an acceptable financial structure through 1978, COFIDE would need to mobilize for its own operations as much as SJ. 43.8 billion net of repayments in new borrowings and S/. 2.4 billion in equity. 2/ While no sufficient data are available to revise COFIDE's projections, they will have to be reduced very substantially, particularly given Peru's present economic environment. However, COFIDE is expected to continue to benefit from strong government support and maintain a satisfactory financial and resource position throughout the forecast period. V. THE PROJECT A. Background and Objectives 5.01 At the Government's request, the Bank has agreed to consider granting the proposed US$35 million loan directly to COFIDE. The proposed loan amount (which is quite small relative to COFIDE's other resources) is supported by a mission survey of the likely demand for foreign exchange funds and a tentative COFIDE project list. 5.02 A principal goal of the project would be to help improve COFIDE's resource allocation ability, mainly by taking increasingly into account in its consideration of investment proposals Peru's comparative advantages. Although IERR tests would be mandatory only for Bank-financed projects, it is expected that economic analysis of projects will spread within COFIDE, and possibly, to other government agencies 1/ Separate highly tentative COFIDE estimates of the effects, through 1984, of the proposed transfer of state holding companies to COFIDE indicate a possible strengthening of COFIDE's consolidated financial position. However, it is not clear whether this transfer could increase COFIDE's consolidated borrowing capacity in the long run as expected by COFIDE. There would also be important changes in COFIDE's organization and administrative structure, the effects of which have not been considered in COFIDE's projections. 2! To support its local currency operations, COFIDE hopes to make increasing use of Central Reserve Bank borrowings. The possibility of increased resource mobilization in the local market is unclear and would depend on the Treasury's overall fund- raising plans as well as on the borrowing rates offered by COFIDE. The proposed Bank loan would only be equivalent to some 4% of COFIDE's projected foreign exchange disbursements during the next three years.  - 24 - concerned with decision making, such as INP and the sectoral planning offices in other ministries, and MEF. In July 1976, Bank staff conducted a seminar at COFIDE in which the Bank-recommended IERR test was applied to a sample of COFIDE projects. NEF and INP participated in the seminar. COFIDE would apply analysis in line with IERR guidelines (acceptable to both the Bank and COFIDE) to all Bank-financed sub- projects, as a minimum. 5.03 During project implementation, COFIDE would expand its in-house training capability to include expertise on assessing economic efficiency, to strengthen the project appraisal capacity of its own staff (and,as far as possible, the staff of other government agencies). The Bank would assist actively, making available teaching material and staff support for this purpose. Given the limited experience which exists in Peru in promoting, implementing and managing EPSs, there is also a need for systematic training and technical assistance in this field. Part of the spread on foreign currency subloans accruing to the Fund could be withdrawn for the above training and technical assistance purposes (para. 5.07). Since the spread will only accrue gradually while training and technical assistance needs will be greatest early in the project's life, COFIDE would advance training and technical assistance funding initially from its own resources. It would then be reimbursed as soon as sufficient funds under the interest differential have been generated. 5.04 During project preparation, Bank staff has had extensive discussions with the Government on industrial and interest rate policies,which are expected to be continued during loan implementation. The Government has began to make important improvements (paras. 2.04, 2.16 and 2.32), particularly as balance of payments and fiscal considerations have become increasingly important. B. Project Description 5.05 The proposed loan would be made on terms and conditions usual for Bank loans to DFCs, including the standard commitment charge. It would assist in covering the foreign exchange component of economically efficient projects which are expected to have a favorable balance of payments impact, preferably through export earnings but also through efficient import substitution. To maximize the expected demonstration effect of economic efficiency tests, a wide range of manufacturing and processing projects in the industrial, agroindustrial, and mining sectors, and tourism projects 1/ would be eligible. Beneficiaries would include state, private, reformed private and social property enterprises, mostly in the medium- and large- size range. However, no more than US$10.5 million (i.e. 30% of the total loan amount) could be re-lent to EPSs, as the concepts of social property and Peruvian-type self- management are still in an early experimental stage, and COFIDE does not have much experience in this field. For the same reason, all subloans to EPSs would require Bank approval, whereas a "free-limit" of US$500,000 would apply to other subprojects. This limit may appear high, but it is justified by COFIDE's operating experience, the high average size (US$2.6 million equivalent) of its project lending and the expected average subloan size of almost US$1 million. Finally, to avoid excessive concentration in relending Bank funds, a maximum limit of US$4.0 million per sub- loan and subborrower would apply. 1/ Due to their low foreign exchange component and expected small number, tourism projects are only expected to absorb a small part of the proposed loan.  - 25 - 5.06 Subloan terms are expected to range between 5 and 15 years, with an average life of about 9 years. Grace periods, included in these terms, would vary between 1 and 3 years. These terms should be sufficient for any of the rather complex subproject proposals expected, many of which may be for new enterprises. Since it is difficult to predict accurately the likely wide variety of subloan terms, the usual composite amortization schedule for Bank DFC loans would apply. The terminal date for submission of subproject proposals under the loan would be June 30, 1979; the closing date for disbursements, June 30, 1981. Annex 21 shows the estimated schedule of disbursements. 5.07 The loan proceeds would be re-lent in foreign exchange, following COFIDE's policy of not assuming any foreign currency risk, at a fixed interest rate of not less than 11% p.a. Contrary to COFIDE's present practice, there would be no differentiation in relending rate by the ownership, location or sectoral priority of recipient enterprises. COFIDE would receive an administrative fee not in excess of 1.5% p.a. The remainder of the spread between the cost of Bank funds and the ultimate relending rate would accrue to the Fund, but would be available to finance training and technical assistance programs, generally on a non-reimbursable basis. Eligible programs would include training in project evaluation of the staff of COFIDE and of other government and financial agencies involved in productive sector investment decision making; training of COFIDE staff in other operational matters; and technical assistance and training for promoting, implementing and managing EPSs. Disbursements and procurement procedures would be similar to those adopted under standard DFC loans. Subloans would cover up to 100% of the import component of subprojects. In most cases, they would finance the direct foreign exchange cost of equipment imports--including goods purchases "off-the-shelf" from domestic distributors, provided c.i.f. prices can be established. Otherwise, 50% of the documented local expenditures for manufacturing and processing projects and 35% for tourism projects and projects involving industrial construction would be reimbursed, unless a higher foreign exchange component of a specific project can be established. The above percentages represent the estimated foreiRn exchange component of eligible projects. COFIDE would satisfy itself that the goods and services financed are appropriate in quality and competitive in price. C. The Fund Approach and COFIDE's Role 5.08 COFIDE would deposit the loan proceeds, together with the local currency counterpart funds to be provided by it, into a Fund, which is a separate account to be established within COFIDE's financial statements. This mechanism was conceived in response to the uncertainty created by COFIDE's possible holding company role. Although the Fund would not be legally separate from the rest of COFIDE it would have its own resources which could only be used for defined purposes. Deviation of the Fund's resources to other ends would be an event of default. 5.09 The operations of the Fund would be governed by a separate policy statement fully acceptable to the Bank (Annex 4) which could only be ainendeA with the 1Rank's approval. Establishment of the Fund would be a condition of loan effectiveness.  - 26 - 5.10 According to the draft Fund Policy Statement, the minimum initial ratio between foreign exchange disbursements and COFIDE's local currency contribution would be 2:1. 1/ The share of funds provided by COFIDE may gradually increase as the proposed loan is being repaid (and possible other foreign currency borrowings). Only those repayments of local currency subloans not needed for servicing the Fund's obligations could be re-lent on a revolving basis. This should provide a sufficient liquidity buffer. The Fund's local currency resources would be used either to complement the financing of Bank-supported projects, as needed, or for other projects. 5.11 The Fund would be administered by regular COFIDE staff. For this purpose, COFIDE would maintain qualified staff in sufficient numb--~s. Subloans would be made on the basis of detailed evaluations of the technical, market, financial and economic aspects of each project, and of the management capacity and creditworthiness of the recipient enterprise. COFIDE's normal project approval procedures would apply. Interest charges on local currency loans would be in line with COFIDE's own rate schedule. The Fund Policy Statement further establishes the maximum lending exposure of the Fund to any one enterprise (15% of the total resources committed to the Fund), the Fund's minimum and maximum allowable financial contribution to any one project (25% and 75% of total project cost, respectively), and a minimum four-year maturity for both fixed asset and permanent working capital financing. 5.12 COFIDE would closely supervise all of the Fund's subloans and all borrowers would have to present annual independent audit reports of their accounts. COFIDE would maintain appropriate records of the Fund's operations and COFIDE's external auditors would prepare annually a separate report on the Fund's accounts, acceptable to the Bank (para. 4.19). D. Project Benefits and Risks 5.13 While the project's direct and indirect benefits are difficult to quantify, achieving its objectives would provide important advantages. The project would provide financing for some 35 to 50 development projects in a wide range of productive subsectors. Eligible subprojects are expected to be efficient in economic terms and to have a substantial positive balance of payments impact, preferably through increasing exports. While no formal cut-off rate would be established, the guidelines for calculating the IERR require a special justification for subprojects with a return below 10%. It is hoped that the application of systematic economic tests will spread to project decision making by COFIDE and other government agencies. 5.14 Although the Bank does not fully assess COFIDE's creditworthiness, the proposed loan would open a direct relationship which in most other aspects resembles that between the Bank and a DFC borrowing from it. Thus the project would contribute to strengthening COFIDE, the Government's main financial institution for productive sector development, mainly by helping it improve its capacity to mobilize and allocate resources, increase its autonomy and importance in Peru's productive sector development planning and investment decision-making process, and by strengthening its effectiveness as a development bank 2/. 1/ This ratio approximates the expected proportion of the Fund's foreign and local currency exchange financing and should provide sufficient cash flow for the Fund's debt service. COFIDE would charge reasonable interest on its local currency contribution. 2/ Mainly through gradually achieving greater independence in COFIDE's financial planning, improvements in its audits and operating policies, and clarification of its holding company role.  - 27 - 5.15 The Fund would assure use of the loan according to operating policies fully acceptable to the Bank and, since the Fund is endowed with its own resources, it would, to a certain degree, be financially independent from COFIDE's other operations. However, the Bank does not seek a privileged position versus other lenders to COFIDE and therefore ultimately it relies for financial security on the Government's u-dertaking to honor all of COFIDE's obligations. 5.16 The project would also afford a good opportunity to intensify the useful discussions between the Bank and the Government on industrial and interest rate policies. Finally, not enough is known to determine the best way of assisting EPS development. The project would enable the Bank to learn from direct experience about this innovative self-management system and to get involved early in a sector which may play an important role in Peru's future development. 5.17 Current uncertainties regarding industrial sector development are unusually high because of ongoing institutional and policy changes. However, project risks are not higher than usual for a DFC-type operation because of three special loan features. First, the Fund arranfgement would segregate the Bank loan from all other funds and accounts of COFIDE; secondly, the Government would assure COFIDE's liquidity and a sound financial structure; and finally, all subloans to the new SPS would be subject to Bank review. VI. RECOMMENDATIONS 6.01 During loan negotiations, agreement was reached on the following principal points: (a) the Government's assuring sufficient liquidity for COFIDE to meet its obligations (para. 4.20); (b) criteria for future adjustments of COFIDE's interest rates (para. 4.21) and relending terms and conditions for the proposed loan (para. 5.05 to 5.12); (c) application of IERR tests by COFIDE in line with guidelines acceptable to the Bank and COFIDE, as a minimum for all Bank financed projects (para. 5.02); (d) a maximum 5:1 debt to equity limitation for COFIDE (para. 4.20); (e) the training and technical assistance arrangements (paras. 5.03 and 5.07); and (f) local currency contribution to the Fund (para. 5.10). 6.02 A condition of effectiveness of the loan is that the Fund has been established (para. 5.09). 6.03 The proposed project constitutes a suitable basis for a Bank loan of US$35.0 million to COFIDE on the terms and conditions outlined in Chapter V.  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO ANNEX1 Organization Chart as of September 30, 1975 IBOARD OF DIRECTORSI IPRESIDENT -ING. OSCAR ESPINOSA 8BI INTERNAL AUD1TOR | |MANAGEMENT COMMITTEEI | GENERAL MANAGER I |GENERAL SECRETARY F | LEGAL ADVIS7ER D EPARTMENT TECHNICAL ADVISER| DOCUMENTATION AND OPERtATIONS PUBLIC RELATIONS RATIONALIZATION DEPARTMENT DEPARTMENT I ORGANIZATIO SYSTEMS AND METHODS UNI |FINANCIAL DIVISION | OLPERATIONS DIVISION SOCL PROPERTYm TECHNICAL DIVISION |IVISTRAIONA FINANCIAL FIHNINDSRA METAL I = PLANNING INDUSTRIES PROJECTS WORKING AND DEPARTMENT PROJECTS DEPARTMENT STEEL INDUS- ! ~ ~~~~~~~~DEPARTMENT TRIES D OMESTIC AGRO-INDUSTRIAL DEPARTMENT FINANCING COMMERCE PROJECTS IDEPARTMENT AND CHEMI- DEPARTMENT NEAS DEPARTMENT CEMENT AND PLANNING AND ELECTRICITY ACCOUNTING TECHNICAL IPROJECTS. r DEPARTMENT IMINING AND IASSISTANCE IDEPARTMENT I J ~~~~~~~PETROLEUM IDEPARiTMENT I I I ~~~~~~~PROJECTS II II CASHIER'S D EPARTMENT I AR-NUTIESI r UNIT IXDPRMN IIOPERIATIONS IHYDRO_ CONTROL IICARBONS, I L TATION, AND I ITELECOMMU-I INICATIONS I IDEPARTMENT IWorld B.nk-15861 LCPDF December, 1976  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Board of Directors, as of December 31, 1975 Representing Name Principal Occupation "All Shares: Ministry of Econony and Finance Dr. Oscar Espinosa Bedoya President of the Board, COFIDE Ministry of Economy and Finance Dr. Oscar Alban Moral General Director, Financial Affairs Ministry of Industry and Tourism Dr. Gil Indacochea Queirolo Vice-President of the Board, COFIDE Ministry of Energy and Mines One Director-not appointed Ministry of Fisheries Ing. Oscar Boero Villavicencio General Director of Fish Exploitation Ministry of Agriculture Ing. Jaime Paredes Castillo Director, Budget Plan. and Eval. Office Ministry of Commerce Ing. Enrique Fernandez Vargas Chief, Planning Sector Office National Securities Market Commission Dr. Fernando Nunez del Arco Montezuma President National Planning Institute Ing. Alejandro Seminario Duany Deputy Coordinator, Technical Office Naticnal Integration Office Ing. Luciano Silva Cisneros General Director Central Reserve Bank of Peru Dr. Fernando Reus Salinas General Manager, Public Credits Bank of the Nation Dr. Marco Antonio Pajuelo Ruiz General Manager "B" Shares State Banks]/ Sr. Juan Villanes Hernandez Manager, Central Administrative and Planning, Banco Continental "D" Shares Banco Industrial2/ One Director-not yet appointed These shares have been subscribed and, although none has been paid in, are entitled to a representlative on the Board. g In representation of private shareholders in part payment of the Agrarian Reform Debt. LCPDF December, 1976  ANNEX 3 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Members of Management Committee, as of December 31, 1975 Guillermo van Oordt Parodi General Manager (Chairman of the Management Committee) John Hartley Moran Manager, Operations Division Pedro Mac Kee Priale Manager, Finance Division Carlos Torres Llosa Manager, Social Property Division Rector Tapia Cano Manager, Technical Division Jaime Araoz Basurco Manager, International Division Enrique Valdivia Benavides Manager, Systems Unit Alfredo Ross Antezana -/ Assistant General Manager Eduardo Rossenfeld -/ Assistant Manager, a.i., Operations Division Rafael Longhi Nunez 1/ Assistant Manager, Social Property Division Alejandro de la Fuente Lutterbach - Chief Technical Assessor Pedro Coronado Labo Chief Legal Assessor Fernando Barco Massa - General Secretary (Secretary of the Management Committee) 1/ These members can vote only upon the recommendation to the Board of Directors of COFIDE and the Administrative Committee of FONAPS. LCPDF December, 1976  Page I of 4 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Draft Operating Policies and Procedures of the Fund 1. The Fund is established to provide loans for investment projects in industrial processing (in a wide sense) and tourism industries, which are selected by COFIDE, and contribute to the country's economic and social development in accordance with the priorities set in the development plans, and include the various kinds of enterprises that exist in Peru. 2. The resources of the Fund consist of those allocated to it by COFIDE, including both foreign currency resources, particularly such as COFIDE obtains from the World Bank, and the local currency counterpart contribution required for the financing of the investment projects, which shall amount to at least 50% of the foreign currency amount at the exchange rate prevailing at the time of each individual disbursement; and the earnings of the Fund. 3. The resources of the Fund shall be used exclusively: (a) to make loans to finance productive projects in accordance with these regulations on policies and operations; (b) to repay the principal of, and pay interest and other charges on, foreign currency loans obtained by COFIDE for allocation to the Fund; (c) to withdraw interest on the local currency contributions of COFIDE to the Fund; (d) to pay for the costs of training and technical assistance programs; and (e) to withdraw a service charge for COFIDE. 4. COFIDE shall maintain an adequate trained staff, together with an effi- cient organizational structure, for the activities related to the Fund's operations. 5. Approval of loans from resources of the Fund shall be governed by rules and procedures laid down by COFIDE.  AIAIAA X Page 2 of 4 6. Investment projects shall be selected from among opportunities for establishment of new, or for expansion and modernization of existing state enterprises, social-property enterprises, production cooperatives, reformed private enterprises and private enterprises. 7. The investment projects shall be diversified in terms of types of enter- prises and numbers of projects. Fund financing for one project or the total of several projects of one firm shall not exceed 15% of the Fund's total committee resources. 8. COFIDE shall require, as a condition precedent, that the enterprises submit plans that ensure both that the project will be fully financed and that the enterprise will have a suitable financial structure. The amount of financing from Fund resources shall be sufficient to ensure the success of the project, provided that the total financial assistance furnished by COFIDE from such resources shall not exceed 75% of the total cost of the project and shall in no case be less than 25% of such cost. 9. The investment projects shall be subjected to detailed appraisal of their technical feasibility, market aspects and financial and socio- economic justification, and of the administrative capacity, financial solvency and capability of thie loan recipient. Appraisal of these aspects shall in particular be based on the following criteria: (a) a satisfactory rate of financial and socio-economic return according to detailed and realistic estimates of project cost, income and benefits; (b) tompliance with the criteria of technical feasibility, markets, and suitable managerial and administrative capacity of the investing enterprise for execution and operation of the project; (c) as a general policy, projects shall not be financed whose rates of financial and economic return are below the minimum rate of return established in the guidelines for calculation of economic rates of return approved by management; (d) in the appraisal of the financial aspects, it shall be verified that the projected operating surplus is sufficient to sustain an appro- priate net working capital position during the useful life of the project and to meet debt-service needs. 10. COFIDE shall make sure that goods and services for projects financed by the Fund are obtained by means of suitable bidding competitions which allow to make comparisons, so as to ensure best prices and optimum quality.  ANNEX 4 Page 3 of 4 11. Fund resources may be used to finance purchases of fixed assets and/or permanent working capital, but in no circumstances shall the loans be for a term of less than four years. Financing of projects from Fund resources shall take due account of the re- payment capacity of the enterprise and the generation of funds by the project and shall carry such maximum amortization terms and grace periods as the Board of Directors of COFIDE shall prescribe. 12. The rates of interest and commitment fee for local and/or foreign currency operations shall be laid down periodically by the Board of Directors of COFIDE within the policies established by the Government, taking into consideration the situation on the capital market, the cost of capital for the Fund's resources and a reasonable profit. 13. The first disbursement of a loan from Fund resources shall be conditional upon prior signature of the loan agreement and delivery by the enterprise of all legal and technical documentation required for that purpose. In all cases it shall be a condition of disbursements that the beneficiary shall demonstrate the purpose of the funds and show that it has complied with all requirements of these Regulations and of the pertinent loan agreement. In loans that it makes from Fund resources, COFIDE shall carry out checks of the progress of the works and of the quality of the goods and services obtained and shall make progress inspections of the project and shall request additional information or special audit reports (whenever necessary). 14. COFIDE shall supervise the investment projects during the life of the operation to ensure that its objectives are being accomplished. It shall carefully follow the progress of the projects, requesting the necessary information about the economic and administrative developments of the enterprises. The latter must submit audited annual financial statements. 15. COFIDE may withdraw from the Fund account, for itself, a specific service charge in the form of a percentage of the loans it grants from Fund resources and pay for the cost of training and technical assistance. However, the service charge and the expenses of training and technical assistance mentioned above may be withdrawn from the Fund only on condition that sufficient funds exist for disbursement of the commitments incurred and/or for repayments that COFIDE has to make to its lenders against loans obtained by it for allocation to the Fund. 16. In loans made from Fund resources, COFIDE shall not assume, either directly or indirectly, the exchange risk, which shall be passed on to the borrower or covered without risk by means of other mechanisms.  ANNEX 4 Page 4 of 4 17. The Fund Account shall be a separate account in COFIDE's accounting system. COFIDE shall maintain suitable accounting and operational records, providing proper information about each investment project and about the operations relating to the Fund. 18. The annual external auditing of COFIDE shall include a special report on the Fund Account. 19. The Fund may be liquidated, and its funds withdrawn, only by agreement between COFIDE and any Fund creditors, or if there are none, by resolution of the Board of Directors of COFIDE. In all cases the net results shall be credited to COFIDE. LCPDF December, 1976  ANNEX 5 Page 1 of 6 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINkNCIERA DE DESARROLLO 9umvary of Operating Policies of COFIDE 1/ (Approved by COFIDE's Board on August 13, 1975) A. Purpose of the Corporation To contribute to the economic and social development of the country, by stimulating entrepreneurial activity in the various sectors of the economy and by mobilizing savings and channeling them to the enterprises in accordance with the national development plans. B. General functions (a) To coordinate the financial activities of the State in the entrepreneurial sector. (b) To encourage and promote the establishment, expansion and moder- nization of enterprises of all kinds, particularly in the social-property sector. (c) To provide medium and long term financing for priority investments. In cases where the investments are undertaken by public enterprises, ODFIDE is the sole authorized financial agent. (d) To mobilize the necessary financial resources for accomplishment of its objectives. (e) To grant surety bonds and endorsements on behalf of enterprises in guarantee of loans obtained by them outside Perua. (f) To manage shares of enterprises, supervising the financial and operational development of the enterprises in its portfolio, and to evaluate them periodically. (g) To support the capital markets by selling securities from its portfolio, by issuing and placing its own bonds and by acting as underwriter or trustee in the issue of shares, bonds and other securities of enterprises. (h) To hold and/or administer, directly or indirectly, the State's shares and participations in enterprises. (i) To promote, finance and carry out preinvestment studies for business projects, particularly those directed to the social-property sector. I/ Any amendments require approval by at least two-thirds of the Board members.  ANNEX 5 Page 2 of 6 C. Resource-allocation policies (a) Financing shall be provided for projects that make an essential contribution to the country's economic and social development, in accordance with the priorities laid down in the national development plans and the direc. tives of the Ministry of Economy and Finance. Specific policies shall be defined from time to time; special priority will be accorded to projects contributing to decentralization, strengthening of the social-property sector and other priority activities. (b) In addition, to qualify for financial assistance from COFIDE, enterpriees shall meet the following requirements: (i) Be in a sound financial position or have a satisfactory plan for resolving their financial difficulties, and their projects shall, as a minimum, have capacity for repayment; and (ii) Possess sufficient managerial and technical capacity to ensure the sound operation of the enterprise and implement the projects to be financed or, failing this, to ensure contracting of competent technical assistance. (c) The Corporation shall promote preinvestment studies by granting loans on preferential terms, and carrying the entire risk under certain conditions. However, it shall in all cases seek to recoup its financing. (d) The Corporation shall identify and promote projects of substantial benefit to the country's development. (e) To facilitate access by small and medium-scale business to the financial resources of COFIDE, it shall carry out financial operations with and furnish technical advisory assistance to financial intermediaries. (f) The Corporation may carry out operations, directly or indirectly, according to the needs of each enterprise, in the following forms: (i) E4uity financing in the form of transitory capital financing of social-property enterprises (through COFIDE loans to FONAPS) and capital contributions to public and reformed private enterprises; (ii) Loans in local currency and/or foreign currency for studies, investment projects and, exceptionally, working capital; and (iii) endorsements and surety bonds, and underwriting of securities. (g) The Corporation's placements and investments must be diversified in terms of economic sectors and types of financing. (h) The projects shall be subjected to detailed appraisal of the financial, market, administrative capacity, and technical and socio-economic feasibility aspects. The socio-economic aspects shall be appraised by means of an analysis system that uses calculations of economic rates of return or other similar methods; and this factor shall become increasingly important in arriving at decisions.  ANNEX 5 Page 3 of 6 (i) COFIDE may finance projects of national benefit by decision of the State. In this case it shall carry out an appraisal of the market, administra- tive capacity and technical and social-economic feasibility factors, placing emphasis on the economic and financial aspects in order to determine the best possible financial structure. (j) For procurement of goods and services investment enterprises shall, as far as possible, apply bidding or other procedures that allow proper com- parisons to ensure best prices and optimum quality. (k) Requests for financing must be supported by a technical, economic and social feasibility study and a favorable opinion from the pertinent public agencies. (1) Investment enterprises shall submit plans that assure both the total financing of the project and a suitable financial structure. The amount of COFIDE financing shall be sufficient to ensure the success of the project, provided that COFIDE's total financial assistance, direct or indirect, shall not exceed 75% of the total cost of the project save in exceptional cases. (m) In the case of reformed private enterprises in Lima and Callao, the minimum amount of the first operation shall be SI. 40 million; and for the decentralized enterprises, S/. 10 million. (n) Loans and guarantees must be backed by sufficient collateral, the feasibility and soundness of the project and by the standing of the entrepreneur. Pablic enterprises shall allocate the necessary amounts in theirbiennial budgets to meet debt-service obligations. (o) COFIDE shall invest in projects that by their profitability and sound- ness will help to maintain the capital worth of the Corporation. It shall provide equity capital both to enterprises with state participation, either by legal prescription or on its own initiative, and to reformed private enter- prises. In the latter two cases, the contribution shall preferably not exceed 30% of the corporate capital of the enterprise. (p) The Corporation shall not seek administrative control of the enterprises it financies, but it shall supervise them to ensure that the purposes of the investment are being accomplished throughout the duration of the operation. It shall closely follow the progress of projects, requesting the necessary information on the economic, financial and administrative operation of the enterprise. If necessary, COFIDE shall provide appropriate assistance, directly or indirectly, to ensure the sound operation of the firm or to enable its affairs to be put in order and ensure the recoverability of the investment. (q) Financing preinvestment studies shall be subject to an opinion delivered by the public agencies concerning the priority-rating of the study and to a minimum contribution of 20% by the borrower. (r) COFIDE shall assume the entire investment risk in studies for projects in the social-property sector and investments, identified either by the Corporation itself or by other national public-sector institutions, designed to promote regional development and included in the Regional Financing Program.  ANNEX5 Page 4 of 6 D. Policies for mobilizing resources (a) In obtaining domestic and foreign financial resources COFIDE shall seek to tap a wide range of resources and to compete with other securities and financial agents. According to the requirements of its financing and investment program, COFIDE shall obtain funds through: (i) capital contribu- tions; (ii) placement of its own medium and long-term bonds on the domestic and foreign markets; (iii) foreign-exchange borrowings; (iv) the Central Bank's "Monetary Program"; (v) deposits from the "Industrial Communities" (vi) other securities and credit obligations; and (vii) the income from its operations. (b) In its activities to raise foreign-currency funds the Corporation shall operate as: (i) borrower and direct obligor; (ii) borrower with guarantee of the Peruvian State; (iii) financial agent representing the Peruvian State; (iv) guarantor of enterprises; (v) guarantor, representing the Peruvian State; and (vi) agent. (c) To attract foreign-currency resources the Corporation shall seek the most suitable financing structure, through a combination of the possibilities offered by (i) government-to-government loans; (ii) loans from international development agencies; (iii) export credits; and (iv) loans from banking insti- tutions. (d) When desirable, it shall separate the negotiations for supply and service contracts from the financing negotiations, with a view to obtaining the most favorable financial terms and conditions. E. Financial management policies (a) The Corporation shall maintain a budgeting system for the purpose of preparing, coordinating and evaluating its biennial program of operations. This shall be drawn up in conformity with the Biennial Plan of the national public sector, the budget-related legislation and directives and COFID E's medium-term planning. The purpose of the latter shall be to prepare, coordinate and review COFIDE's objectives, policies, plans and programs and to determine investment priorities and the sources of financing to be used. It shall be based on the policy prescribed by the Ministry of Economy and Finance and shall conform to the Medium-Term Development Plans. (b) When circumstances permit, COFIDE shall assist expansion of the securi- ties market through the placement of its bonds and of shares of enterprises held in its portfolio. (c) OOFIDE's total debt, including guarantees, less the amount of operations carried out with the specific guarantee of the State or in representation of the latter, shall not exceed five times its paid-up capital and reserves. (d) COFIDE shall maintain its capacity to meet its obligations, on the basis that the average maturity period of its placements shall be equal to or less than the average term of its obligations. (e) COFIDE shall diversify its investments and preferably shall not engage in operations with a single enterprise in the social-property or reformed private sectors for an amount of more than 20% of COFIDE's paid-up capital and reserves. For that purpose, operations carried out with the specific guarantee of or in representation of the State shall be excluded.  Page of 6 (f) The total of COFIDEts share-capital investments shall not exceed COFIDE's paid-up capital and reserves. (g) COFIDEfs financial policy shall aim at maintaining, so far as possi- ble, the value of its capital in real terms. As a general rule all of the Corporation's operations shall be profitable. (h) The rates of interest and commitment charge for domestic and/or foreign currency operations shall be set periodically by the Board of Directors, account being taken of the situation on the capital market, the cost of COFIDE's capital its operating costs and a reasonable profit. (i) On loans and guarantees in foreign currency COFIDE shall receive a specific commission as financial intermediary, passing on the interest and other costs to its clients. (j) In the case of foreign-exchange loans, guarantees and endorsements, the Corporation shall not, either directly or indirectly, assume the exchange risk, which shall be passed on to the borrower or covered without risk to COFIDE by other mechanisms. (k) COFIDE shall maintain reserves and provisions in conformity with proper financial practices. For this purpose it shall institute a portfolio evaluation system that will enable it to make adequate reserves to cover the investment risk, in addition to other types of accounting provisions and reserves. In the case of' the public enterprises, the inclusion in their biennial budgets of provisions for servicing of the debt to COFIDE shall be regarded as constituting sufficient security. F. Control of operations (a) Loans and guarantees for fixed asset financing shall be subject to a list of goods and services and a disbursement timetable, which shall form the basis for control of the operation. At the request of the beneficiary the Administration may agree to justify variations in the list and/or the timetable. (b) Working-capital loans shall be subject to a cash-flow projection. The disbursements shall be approved up to the total agreed amount, subject to sub- mission by the beneficiary of the updated cash budgets justifying them. G. Personnel managenent (a) For the accomplishment of its purposes, the Corporation shall maintain an adequate staff of trained personnel and an efficient organizational structure. (b) The Corporation shall, in conformity with the legal provisions in force, maintain a suitable system of remuneration, provide continuous training of its staff and allocate resaurces for the instruction and professional develop- ment of the staff. H. Control of the Corporation (a) The Board of Directors shall be responsible for control and supervision of the operation of the Corporation and shall have sole authority to change the  ANNEX 5 Page 6 of 6 Corporation's policies. (b) The Corporation shall have an internal auditing department responsible to the Board of Directors and shall arrange annually for external audit of its financial statements by firms of independent auditors of recognized standing. In both cases the Rules of the National Control system shall be observed. LCPDF December, 1976  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Description of Share Capital GO0V E RN ME NT PRIVAE RGAINZATION & IJJ UAJ~ Type "A" Shares!/ Type "B" Shares / TySe "C" Share X oe I"D" Shares' Total Inception 435,981 _ 435,981 December 31, 1971 1,085,345 _ 252,673 _ 1,338,018 December 31, 1972 1,103,224 - 356,248 272,o401i 1,731,513 December 31, 1973 1,414,069 - 576,941 533,559 2,524,569 December 31, 1974 2,215,551 - 774,973 717,750 3,708,274 December 31, 1975 4,230,290 - - 816,7)9 5,047,039 Total Authorized as of December 31, 1975 12,000,000 3,000,000 3,000,000 18,000,000 2 Cormon "A" shares are reserved for the State and are non-transferable; they are not subject to cash dividends until total authorized capital has been completely paid in; by law, Goverment must subscribe and pay in a minimum of S/. 1 ,000 million every two years. / Conmmn "B" shares are reserved for the state banks and are non-transferable; they are not subject to cash dividends until total authorized capital has been paid in; possibility of eliminating this category is under consideration. / Preferred "C" shares were reserved for enterprises or individuals under tax-exempt reinvestment-of-earnings scheme; they were nominal, preferred as to a minimum 8% dividend. Private enterprises could invest free of income tax up to 85% of their annual net income before tax in theae shares and individuals, the lower of 50% of their net income or S/. 200,000 axcept that no enterprise or individual could own more than 5% of the total authorized "C" ahares effective January 1, 1975. g Common "D" shares are reserved for part payment of Agrarian Reform Debt through Banco Industrial del Peru; they are nominal, and non-transferable for the first ten years from date of issue. LCPDF December, 1976  ANNEX 7 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Total Resources as of December 31, 1975 (in millions of soles) A. Equity (Paid-in Capital) Type "A" Shares 4,230 Type "C" Shares Type "D" Shares 817 Total Equity 5,047 B. Domestic Borrowings Bonds Converted from Type "C" Shares 697 Certificates of Deposit (from Industrial Communities) 264 Type "C" bonds 264 Bonds of Decree Law 19311 170 Total 1,394 Total domestic resources 6,442 C. Foreign Borrowings Foreign credit through Government 3,429 Direct dollar, eurodollar and other foreign credits 9,739 Total 13,168 Total Resources already at COFIDE's disposal (A+B+C) 19,610 D. Resources made available to client companies through COFIDE's guarantees 39,157 LCPDF December, 1976  11X.17 71717 7. I 71 1172177 7'7 17117111771 11 171.7771L71 ~ ~ ~ ~ ~ ~ ~ ~ ~ Ag-am- AT !F.7117775177177757 177 111 ~ 1711177 771- 75 _ ___ 771-17171771777~71 7777177777I1117,177 14 A ------- -- 1 1 1- -- - 777 --- - -11 - - - ------17 7 7 7 1 7 7 1 7 7 1 7 7 7 7 - - - - I I I 7-- - - - - - - -- - - - - - - - - 1 77-- - 1-- - - - - - - - - - - - 177757717171~~~~~~~~~~~~~~~~~~~~~~,W6, -1 2 4 , - 71 7 - - - - - - - - - - - - - - - - - - -75 5 - - - - - - -- ---- - - - -1 - - 1 - --- ---- -7 1 7 1-1- .... .. 2 4.. "A, - -I'- 11- 71 71 I 7- '14 17 -1l 5 7 7 15 7440 77 7 117 17777 7775771177 - 77 171 12 17 1 71~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, -- , , 1 77777777717 - - Il 11 7,111 711 1.111 7.171 711 1117 7777 - 1711171 1,711 7,777 71,156 IS - - 7,777 77777757 7715 71,461Il_- 11 - - - - - - -- - - - -- - -- - - - - -- - -- --- --, ---177 - 77 171-- - - -- - - - --- - - - - - - -- - - - 77 10--- - - - - - - - - - --- - - - - -- 7 1777--- -- -- -11- - 1176~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~17177 777 11 7 77 -,1 ,7 512 1 -- 7714757  PERU: INDUSTREAL CREDIT PROJECT CORPORACION FTNANCIERA BE DeSARROrJ.O _ALYSIS OF OPERATIONS APPROVED 1/ (Amoints in thousands of soles) I 9 7 1 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 Janbary-ept er_L976 TotaI No. AmountNo. Am ntNo. - t % No. Amo. Acont % Co. A.0o-nt 7, 1. By Aount 500,000 3 600 0.9 3 900 - 17 4,300 - 13 3,700 - 3 700 - - 39 10,200 - 500,001-2,000,000 5 4.000 6.0 2 1,500 - 17 17,200 0.1 11 9,900 - 14 16,700 0.1 4 4,600 - 53 53,900 - 2,000,001-5,000,000 2 7,200 10.8 8 27,500 0.4 1 4,200 - 4 16,600 - 11 38,1DB 0.1 1 4,400 - 27 98,000 0B1 Mote than 5,000,001 5 54,800 82.3 28 7,956,800 99.1 60 19,351,800 99.9 105 39,971,600 99.9 113 26,988,000 99.8 65 21,840,200 99.9 376 116,163,200 99.9 Total 15 66,600 100.0 41 _7,986 _700 100.0 95 19,377.500 100.0 133 40,001.800 100.0 141 27,043.500 0 0.0 7 . 495 116,325300 100.0 2. By Doration 1 to 2 years 10 11,800 17.7 3 46,700 0.6 23 304,300 1.6 21 58,800 0.2 38 887,500 3.3 7 1,161,900 5.3 102 2,471,000 2.1 2 to 5 years 2 21,600 32.4 11 93,600 1.2 21 583,900 3.0 37 1,531,400 3.8 37 1,140,800 4.2 15 1,383,600 6,3 123 4,754,900 4.1 More than 5 years 3 33,200 49.9 27 7,846,400 98.2 51 18,489.300 95.4 75 38,411,600 96.0 66 25,015,200 92.5 48 19,303,700 88.4 270 109,099,400 93.8 Total 15 66,600 100.0 41 7,996,700 100.0 95 19,377,500 100.0 133 40.001.800 100.0 141 27.043.50D 100.0 70 21.849.200 100.0 495 116325.300 100.0 3. By PurBose Pi-ed assets 13 43,600 65.5 26 7,007,500 87.7 84 18,430,900 95.1 10 38,744,400 96.9 117 25,080,700 92.7 69 21,056,000 96.4 410 110,363,100 94.9 Working capital - - - 5 85,300 1.1 9 834,900 4.3 12 321,309 0.8 20 1,501,300 5.6 7 698,300 3.2 53 3,441,300 2.9 Others 2 23,000 34.5 10 893,900 11.2 2 111,700 0.6 11 935,900 2.3 4 461,500 1.7 3 94,900 0.4 32 2,520,900 2.2 Total 15 66,600 100.0 41 7,986,700 100.0 95 19.377,500 100.0 33 40 900.8 00 14500 1.0 70 4. By Geo2raphical lleg ion North 3 25,600 38.4 6 1,384,200 17.3 36 3,557,000 18.2 40 22,595,000 56.6 57 19,983,800 73.9 34 11,545,900 52.8 176 59,091,500 50.8 So-th 3 14,300 21.5 6 5,245,100 65.7 7 903,500 4.5 13 734,700 1,8 22 3,806,800 14.1 3 1,269,800 5.8 54 11,974,200 10.3 Central 4 2,400 3.6 - - 8 0,479,200 43,7 19 1,053,000 2.6 10 266,400 1.0 7 6,753,100 30.9 48 16,554,100 14.2 Oriental 1 15,000 22.5 5 187,000 2.3 5 3,891,300 20,5 10 6,806,500 17.0 11 280,600 1.0 3 62,300 0,3 36 11,242,700 9.7 Llssa 3 8,700 13,1 17 1,086,900 13.6 31 1,453,600 7.5 42 6,451,000 16.1 31 1.419.000 5.2 17 1,365,600 6.3 1.41 11,784,800 10.1 Un-pec10iedV7 1 600 9 7 83,500 1.1 8 1,092,900 5.6 9 2,361,600 5.9 10 1.286,900 4.8 6 842,500 3.9 41 5,678,000 4.9 Total 15 66,600 100.0 41 7,986,700 100.0 95 19,377.509 100.0 133 40.001.804 10- 0.0 i4 27,043.500 1 70 214900 101.0 495 11,35,-300 100.0 5. By Sector Agriculture 1 600 0.9 2 33,500 0.4 - - 1 5,300 - 2 16,400 0.1 1 26,200 0.1 7 82,000 0.1 Agro-industry 3 22,600 33.9 7 200,200 2.5 4 6,700 - 4 47,200 0.1 17 201,600 0.7 5 1,370,000 6.3 40 1,848,300 1.6 CoRsmunicatioos - - - 1 157,200 2.0 5 503,100 2.6 5 1,858,000 4.7 6 1,270,400 4.7 2 264,500 1.2 19 4,053,500 3.5 Energy - 1 602,400 7.5 10 7,101,500 36.6 16 2,440,200 6.1 8 653.000 2.4 9 450,900 2.1 44 11,248,000 9.7 Petrolelmo - - - 3 1,203,900 15.1 8 4,358,000 22.5 17 27,585,700 69.0 7 11,640,700 43.0 9 7,810,700 35.8 44 52,599,000 45.2 Ma-nfacturiog 3 15,700 23.6 14 304,400 3.8 40 2,153,200 11.1 59 6,350,100 15.9 63 8,295,300 30.7 23 2,302,900 10.5 202 19,421,600 16.7 Mining - - - 4 5,227,700 65.5 8 1,288,700 6.7 3 102,300 0.3 16 3,868,300 14.3 8 7,911,400 36.2 39 18,398,400 15.8 Fisheries 1 11,000 16.5 1 157,500 2.0 3 781,400 4.0 1 20,000 - 5 559,100 2.1 3 586,100 2.7 14 2,115,100 1.8 8ervices - - - 4 74,800 0.9 6 187,500 1.0 10 453,600 1.1 4 84,700 0.3 3 554,700 2.5 27 1,355,300 1.2 Tran-portation 5 3,300 5.0 1 4,700 - 11 2,997,400 15.5 12 1,022,600 2.6 8 341,700 1.3 3 460,100 2.1 40 4,829,800 4.1 Tourism - - - - - - - 4 21,300 - 4 81,000 0.3 4 111,700 0.5 12 214,000 0.2 HMouing 2 13,400 20,1 3 20,400 0.3 - - - 6 95,500 0.2 1 31,000 0.1 - - - 7 160,300 0.1 Total 15 66.600 100.0 41 7.986,700 100.0 95 19 377 .00 100 B 133 40 100 141 72 00 100Q -O 1 0 493511-6, 300 100 0 1/ -ncl,des loans.P for le-t-nt, loans for stodies, equity investments, Ruaranter. on its our account and guarantees oxecuted by COFIDE -n behalf of the G-ove-nent. |. 2 F Pro ectt covering 0:0re than coo re3ion are clas-ified as unspecified it slay bh noted that more thao halt uf the a-ounts under this category were actually spout iu the It - Northerncreion, thus increasing the total share of the region to sbout 49%. LCPDP Docemhbe, 1976  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Aoalvs{m of Loana Approved Upmto September 1976 1/ (all amoounts it oillio- of soles) 1 9 7 1 ] 9 7 2 1 9 7 3 1 9 7 4 1975 Jam. -Sept. 1976 T o t a I 5. Amount 7I o A No. Amoont 7. No. Am,oont 7. No, Aount 7. No. Amount 7. No. Amount 7 By Si.. (million soles) I - 20 8 39.9 100.0 12 47.7 6.0 21 115.3 1.3 31 254.3 2.4 43 333.9 4.7 9 78.7 2.1 124 869.8 2.8 21 - 40 _ _ S 223.4 28.1 2 70.0 0.7 7 241.3 2.3 14 441.0 6.3 6 171.9 4.6 37 1,147.6 3.7 41 - 80 _ _ _ 1 69.5 8.8 10 571.1 6.2 11 634.9 6.1 10 503.0 7.2 8 473.2 12.6 40 2,251.7 7.2 81 - 200 - - - 3 453.3 57.1 13 1,512.6 16.4 14 1,367.7 13.0 13 1,478.2 21.1 7 1,000.0 26.7 50 5,811.8 18.6 201 - 500 - - - - - - 8 2,131.7 23.2 10 1,942.4 18.5 5 1,393.9 19.8 5 1,367.4 36.5 28 6_835.4 21.8 More then 500 - -- - - 6 4,799.3 52.2 4 6,051.5 57.7 4 2,869.9 40.9 1 654.0 17.5 15 14.373.8 45.9 TOTAL 8 39.9 100.0 24 793.9 100.0 60 9,200.0 1QC.0 77 10,497.1 100.0 89 7,19,0 100.0 36 3,745.2 100.0 294 31,290.1 100.0 SorE.atoo 0 to 2 years 5 8.1 20.3 - - - 3 286.8 3.1 3 14.0 0.1 24 750.2 10.7 4 1,015.1 27.1 39 2,074.2 6.6 3 to 5 yemro 2 21.6 54.1 11 93.6 11.9 21 583.9 6./4 32 946.4 9.0 31 629.5 9.0 7 313.9 8.4 104 2,588.9 8.3 More than 5 years 10_ 9.2 25.1 13 720.3 88.2 36 0,329.3 90.5 42 9,531.7 90.9 34 5639.3 80.3 25 2,416.2 64.5 151 26,627.0 85.1 TOTAL 8 39.9 100.0 24 793.9 100.0 60 9,209,0 100.0 .77. 10,492-1 100.0 89 7,019.0 100.0 36 3,745.2 100.0 294 31,290.1 100.0 North 3 25.6 64.2 4 63.1 8.0 14 1,951.8 21.2 18 4,127.0 39.3 29 2,940.4 41.9 14 1,671.3 44.6 82 10,779.2 34.4 Sooth 2 13.4 33.6 3 17806 22.5 6 444.6 4.9 8 462.3 4.4 14 1,808.6 25.8 2 745.3 19.9 35 3,652.8 11.7 Orient - - - 3 172.2 21.7 3 2,842.4 30.9 6 127.3 1.2 7 161.7 2.3 2 61.0 1.6 21 3,364.6 10.8 Central 1 0.2 0. c _ - 5 1,887.8 20.5 l4 676.5 6.5 17 266.4 3.- 2 80.7 2.3 32 2,916.7 9.3 Lime 2 0.7 1.7 17 343.2 43.2 26 1,334.8 14.5 25 4,226.6 40.3 23 777.0 11.0 13 81326 .21.7 99 7.495.9 24.0 Unspecified _ _ -- 4 36.8 4.6 6 738.6 0.0 6 872.4 8.3 6 1,064.9 15.2 3 368.2 9.9 25 3,080.9 9.8 TOTAL 8 39.9 100.7 24 793.9 100.0 60 9,290.0 100.0 77 10.492.1 100.0 89 7,019.0 100.0 36 37.745.2 100.0 79h 11,290.1 100.0 Agrir-ltre_ - - 2 33.5 4.2 - - - - - - 2 16.4 0.2 1 26.2 0.7 5 76.1 0.2 Agro-ifd-iotry 2 14.6 36.6 5 185.5 23.4 2 2.5 - 3 46.4 0.4 12 188.6 2.7 2 56.5 1.3 26 494.1 1.6 Com-mnications - - - 1 157.2 19.8 5 503.1 5.5 3 565.4 5.4 4 1,042.5 14.9 1 200.0 5.4 14 2,468.2 7.9 Emergy _ _ _- 0 600.2 6.5 10 528.8 5.0 7 622.6 8.9 6 315.4 8.4 31 2,067.0 6.6 Petroleum _ _ _ 2 40.2 5.1 4 9,013.72 32.0 . 10 3,455.2 32.9 - - - 3 647.4 17.3 19 7,156.5 22.9 M-mofactoriig 2 0.7 1.8 R 175.3 22.1 21 1,444.9 15.7 27 4,416.8 42.1 38 2,400.0 34.2 11 912.0 24.4 107 9,349.7 29.9 Minimg - - - 2 173.9 21.9 4 594.2 6.5 3 102.3 1.0 10 1,836.5 26.2 2 719.6 19.2 21 3,426.5 11.0 Fisheriss I 11.0 27.6 - - - 2 211.2 2.5 1 20.0 0.2 3 461.2 6.6 3 586.1 15.6 10 1,289.5 4.1 Service - - - 1 22.4 2.8 5 186.5 2.0 5 226.6 2.2 3 83.8 1.2 1 30.0 0.8 15 549.3 1.7 Transport 1 0.2 0.S 1 4.7 0.6 9 7,G43.7 28.7 10 1,013.9 9.7 5 255.4 3.E 2 140.3 3.7 28 4,058_2 13.0 Tourism - - - - - - 4 21.2 0.2 4 81.0 1.1 4 511.7 3 12 213.9 0.7 L.dginga 2 13.4 33.5 7 1_2 1n.2 =_ _ 5 0. 1 31.0 4.4 - _4= -.__ 6 14b.1 0,4 OTAL 8 39,9 24 711.9 104 Q_ 1 9,240). 1OC)1,4 77 10,4T -2l.a 89 7,019.0 10.0- 36 3,741.2 100.0 294 31,290.1 100.0 Purpose Fixed capifol - - - 9 625.6 78.8 34 8,024.7 87.2 48 9,984.2 95.2 50 5,333.7 76.0 27 3,118.4 83.2 168 27,086.6 86.6 Working capital - - 5 85.3 10.7 8 716.9 7.8 11 806.3 2.9 20 1,501.3 21.4 6 598.3 16.0 50 3,208.1 10.2 Other (studiem) 8 39.9 100.0 10 83.0 10.1 09 406.4 5.0 18 201.6 1.9 1 P 184.0 2.6 1 28.9 0.8 76 995.4 2.2 TOTAL 8 39.9 100.0 24 793.9 100.0 60 9,00 0.0492,1 100.0 8i1 7,019.0 1000. 36 3,719.7 100.0 294 31,290.1 100.0 1F Figures prenented inelude loans for pre-investment stodies. T.CPDF December, 1976  PERU: INDUSTRIAL CREDIT PROJECT CORPOPACION FINANCIERA DE DESARROLLO Analysis of Outstanding Loan and Equity Portfolios and Guarantees as of September 30, 1976 (Thousands of Soles) EQUITY TOTAL EXPOSURE LO0 A N S INVES,TMENTS G UA R A NT E E S _ ON OWN ACCOUNTl/ To be Net Loan Own of the Type of Enterprises Committed disbursed Disbursed Recuperated Portfolio Account Government State enterprises 15,975,910 4,043,700 11,932,210 374,639 11,557,571 474,155 4,506,977 38,048,335 16,538,703 Private enterprises (except financial) 10,052,945 1,759,666 8,293,279 331,989 7,961,290 1,529,726 2,431,007 - 11,922,023 Financial Enterprises 2/ 160,000 5,800 154,200 6,723 147,477 70,244 - - 217,721 Enterprises with state participation 44,000 - 44,000 11,539 32,461 1,900,431 - 1,932,892 To FONAPS (for relending to social property enterprises) 907,447 336,102 571,315 539,144 32,201 - - - 32,201 TOTAL 27,140,302 6,145,268 20,995,034 1,264,034 19,731,000 3,974,556 6,937,984 38,048,335 30,643,540 1/ Total exposure is computed as the sum of the net loan portfolio, equity investments and guarantees on own account. 2/ Including "associated banks" (see para.2.24) LCPDF December, 1976  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO List of Equity Investments as of September 30, 1976 (Amounts in thousands of Soles) % of Cost * Company's Capital Value of Market Value Company's Company's COFIDE's Loans & Year of Paid-in Held by Shares Held of Shares H1d bd Return on Total Dividend Guarantees Out- Company Activity Investment Capital COFIDE by COFIDE by COFIPE Status- Equty I> Assets Received standing to C-panya Industrlso del Pers - IN0UPERU Various Todustries 1975 850,253 24.3 206,000 1 1. 0 934,274 2,843,716 Asociacion So ec Peruaea Industrial S.A. Metal working 1971 60,690 94.0 57,090 2 116,883 35,000 Peruans de Peera S.A. Fishing 1972 447,000 35.2 157,500 2 2,534,896 1,500,000 Negociacio- Avicols "El Cencerro" S.A. Agro-industrie= 1973 8,007 I00.0 8,007 4 32,142 12,320 Mina Aguila S0A. Metal working 1973 66,700 40.0 28,700 3 199,155 160,000 Cemento Norte Pacasmayo S.A, Cement products 1973 445,000 37.08 165,000 1 2.34 729,555 3,521 Moteres Diesel Andinos S.A. Metal working 1974 161,250 31.2 50,310 2 4.0 276,583 79,584 Maquisarias y Herramientas Andisas S.A. Metal working 1974 101,750 16.3 16,575 3 Trartores Andinos S0A. Metal working 1974 79,468 25.0 19,870 3 20.0 368,470 41,557 Industria Persans del Alambre S.A. Metal working 1974 40,000 20.0 50,000 2 3,167,000 1,700,000 FPndicion Andins del Peru S.A. Metallurgy 1974 75,000 16.0 12,000 14,400 1 2 199,000 51,859 Industrial Maderera del Oriente S.A. Forestal 1972 43,779 15.15 6,632 1 18.0 116,568 1,261 26,508 Manufacturas Metalicas Jotfel S.A. Metal working 1972 32,111 12.3 3,953 1 2n.n 149,161 390 11,907 Empress pars el Desarrollo y Explotacion de la Palms Aceiters S.A, Agro-industries 1973 107,571 9.95 10,700 3 365,149 223,249 Bayer Industrial S.A, Textiles 1973 568,229 4.29 81,200 1 2.4 1,892,882 1,560 Empresas Electricas Asociadas Power 1972 5,481,687 1.0 603,892 302,000 1 3.0 12,445,693 12, 324 1,951,566 Cia. Peruana de Telefonos S.A. Telecommunications 1976 2,054,763 1,084 1 2 4.0 6,637,867 3 962,000 Papelera Pucallpa S.A. Papers Industries 1975 357,453 100.0 357,453 3 157,465 Banco de los Andes Finance 1972 40,000 81.8 32,734 1 4.72 W4M;e19 1,043 31,302 Peruinvest Cia. do Fomento de Inversiones 0.A. Inversiones S.A. Finance 1972 97,075 42.0 40,771 34,655 1 4.05 684,998 100,693 Quimica del Pacifico S.A. Chemicals 1975 398,586 100.0 398,586 6.48 476,625 Fertilioantes Sinteticos S.A. Fertili:ers 1975 163,911 100.0 163,o11 1 16.83 250,092 Cementos Lima S.A. Cements Products 1974 654,053 100.0 675,674 1 2.28 1,639,038 33,561 Cemento Andino SA,. Cements Products 1974 238,632 100.0 443,770 1 4.31 822,706 Cements Sur S.A. Cements Products 1976 177,585 100.0 185,929 1 3.48 288,060 / Market value indicated only in cases where the information is available. Status indicated by the following code: 1. Operating profitably 2. OperatiEg at less or eoperieocing technical, financial or other operational difficulties 3. Companies in start-op phase or preparation 4. Bankrupt or in liquidation c/ loot-end 1975.M * Figures and ratios as of December 31, 1975. LCPDF December, 1976  ANNEX 13 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Sectoral and Regional Distribution of Studies Financed by COFIDE (accumulated until September 1976) A. Sectors Number of Studies Agriculture 5 Agro-Industry 16 Covmunications 0 Energy 15 Petroleum 4 Industry 67 Mining 13 Fisheries 3 Service 6 Transport 9 Tourism 5 Lodgings 5 Total 148 B. Region North 47 South 17 Orient 6 Central 23 Lima 45 Unspecified 10 Total 148 LCPDF December, 1976  ANNEX 14 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Summary of Follow-Up Activity July-Dec. Jan.-June July-Dec. Jan.-June July-Sept. 1974 1975 1975 1976 1976 (a) Number of Projects visited Projects under construction 20 30 35 31 12 Projects in operation 8 15 18 23 9 TOTAL 28 45 53 54 21 (b) Number of visits Projects under construction 33 45 39 48 19 Projects in operation 13 25 32 28 11 TOTAL 46 70 71 76 30 LCPDF December, 1976  PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCIERA DE DESARROLLO Statement of Arrears as of September 30, 1976 (Amounts in Thousands of Soles) Number of Number of Loan Principal Disbursed A R E A R S Companies Loans Amount Committed Amount % Principal % Interest % Total % A. Loans Not in Arrears In grace period 88 156 20,334,359 14,352,824 68.36 - - - - - - Being repaid on timel/ 49 74 6,443,059 6,291,339 29.97 158,997 70.11 205,673 69.66 364,670 69.85 Subtotal 137 230 26,777,418 20,644,163 98.33 158,997 70.11 205,673 69.66 364,670 69.85 B. Loans in Arrears 3 to 6 months 2 2 229,900 229,900 1.09 50,656 22.33 62,572 21.19 113,228 21.69 6 to 12 months 4 4 117,735 105,795 0.50 9,379 4.14 21,630 7.33 31,009 5.94 12 to 24 months 5 6 11,907 11,834 0.06 4,759 2.10 2,571 0.87 7,330 1.40 More than 24 months 1 1 ?,342 3,342 0.02 2,996 1.32 2,819 0.95 5,815 1.12 Subtotal 12 13 36,884 350,871 1.67 67,790 29.89 89,592 30.34 157,382 30.15 TOTAL 149 243 27,140,302 20,995,034 100.00 226,787 100.00 295,265 100.00 522X052 100.00 1/ This category includes loans with arrears of less than 3 months. LCPDF December, 1976  AiNNEX 16 PERU: INDUSTRIAL CREDIT PROJECT CORPORACION FINANCITYRA DE DESARROLLO Interest Rates and Terms on Local Currency Loans Priority Pur-ose Rate Grace Period Maximum Tern Fixed Assets 1it 1 to 4 years lO years 1st Working Capital 13% Up to 1 year 5 years Fixed Assets 124 . to 3 years 8 years State 2nd Working Capital 14% Up to 6 months 4 years Enterprises Fixed Assets 144 1 to 2 years 6 years 3rd lWorking Capital 164 UP to 3 months 3 years Fixed Assets 124 1 to 3 years 9 years 1st Working Capital 144 Up to 9 months 4 years Fixed Assets 134 1 to 2 years 7 years Non-State 2nd Working Capital 154 Up to 6 months 3 years Enterprises in Lima/Callao Fixed Assets 154 1 year 5 years Metropolitan Area 3rd Working Capital 174 Up to 3 months 2 years Fixed Assets 12 4 years 10 years 1st Working Capital 14 1 year 5 years nlecentrai4zed Fixed Assets 13 3 years 8 years Non-State 2nd Working Capital 15 6 months 4 years Interprises Fixed Assets 15 2 years 6 years 3rd Wiorking Capital 17 3 months 3 years 1 For terns longer than the maximum indicated, the interest rates are 13% for state enterprises and 14% for non-state enterprises. 2/ Decentralized enterprises are those located outside the ketropolitan Lima/Callao area. LCPDF December, 1976  PERU: INDUSTRIAL CREDIT PROJECT ANNEX 17 GORPORACION PIYANCIERA DE DESARROLLO Past and Projected Balance Sheets an of December 31. 1971-1978 (in millions of soles) A U DI T E D P R O J E C T E D 1 9 7 1 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 ASSETS Current - Cash and Banks (including Term Deposits) 593.6 504.6 146.2 15.0 129.1 42.0 70.0 70.0 - Negotiable Isvestnnsts 580.1 380.1 380.1 54.5 100.0 54.5 54.5 54.5 - Interest, Commissioss and Dividends Receivable 10.4 31.8 75.0 240.2 528.1 1,128.0 1,622.0 2,465.0 - Other Receivables 6.4 9.1 26.1 1.6 - 2.6 3.0 3.5 - Correct Portios of Loan Repayments .1 .0 119.2 150.0 - 1,842.0 4,111.3 6,223.4 Sob-total 1.190.6 925.6 746.6 461.3 757.2 3.069.1 5,860.8 8,816.4 Portfolio Inonstroets - Equity Ivenstlnests at Gost 18.6 659.0 986.4 1,211.8 2,800.2 2,113.9 2,740.2 3,183.5 - Provision for Possible Looses on Equity Investments - - (4.9) (20.3) (26.9) (53.4) (60.0) (68.0) - Loans 156.7 400.6 2,077.8 6,525.9 12,102.2 32,061.3 45,029.4 57,222.7 - Provision for Possible Losses on Lo.se - (4.1) (6.5) (24.8) (52.53 (133.6) (193.6) (261.6) Sob-total 175.3 ).055.5 3.052.8 7,692.6 14,822.6 33.988.2 47,516.0 60,076.6 FPied Assets - Gross 5.5 16.7 22.1 27.1 41.6 89.5 230.6 236.1 - Depreciatios (0.1) (3.3) (3.4) (3.4) 11.2 6.7 12.5 13.5 Sub-total 5.4 13.4 18.7 23.7 30.4 82.8 218.1 222.6 Other Assecs - - 287.1 318.5 877.0 324.4 417.7 539.1 TOTAL ASSETS 1,371.3 1,994.5 4,105.2 8,496.1 16,487.2 37,464.5 54,012.6 69,654.7 LIABILITIES AND EQUITY Current Liabilities Accounts Payable 4.9 6.5 21.5 56.6 44.9 332.9 421.4 722.0 - Interest, Consmis.imns and Dividends Payable - - 39.0 114.6 391.2 741.2 1,176.8 1,716.0 - Short-ter Maturities 1/ - - 130.2 1,546.0 172.0 526.6 1,846.7 3,025.7 - D.L. 19311 Sight Deposits - 163.5 225.6 277.2 170.5 677.2 877.2 1,077.2 Other - - 23.2 25.7 4S.6 68.5 78.8 160.5 Sub-total 4.9 170.0 439.5 2,019.6 656.7 2,346.4 4,400.9 6,701.4 Long-term Liabilities Borrowings from Central Reserve Bank - - - - - 6,162.2 8,931.4 11,170.4 Long-term Debt - - 1,030.8 2,614.7 9,876.9 21,201.8 30,817.5 39,949.8 Other 27.0 19.4 56.4 66.4 828.5 1.870.5 2,662.6 3,765.8 lob-total 27.0 19.4 1,087.2 2,681.1 10,705.4 29,234.5 42,411.5 54,886.0 Equity Share Capital 1,338.0 1,731.5 2,524.5 3,708.3 5,047.0 5,719.3 6,919.3 7,719.3 - Retained Earnings and Reserves 1.4 73.6 34.0 87.1 78.1 164.3 280.9 348.0 Sob-total 1,339.4 1,805.1 2,578.5 3,795.4 5,125.1 5,883.6 7,200.2 8,067,3 TOTAL LLABILITIED AND EQUITY 1,371.3 1,994.5 4,105.2 8,496.1 16,487.2 37,464.5 54,012.6 69,654.7 GUARANTEES GIVlN ON OWN ACCOUNT TO BORROWERS - 738.9 1,450.7 2,519.6 3,353,4 6,000.0 7,000.0 7,500.0 RATIOS Total Liabilities/Equity (Including guarantees on own account) - 0.51:1 1.15:1 1.90:1 2.9:1 6.4:1 7.5:1 8.6:1 Loog-Tens Liabilities/Equity (Inclsding guarantees on own account) - 0.42:1 0.98:1 1.67:1 2.7:1 6.0:1 6.9:1 7.7:1 Current Ratio - 5.4:1 1.7:1 D.23:1 1.15:5 1.31:1 1.33:1 1.32.1 Pro-slions/Total Portfolio (