Ceylon - Second Development Finance Corporation Project

Documentof FILE COPY The World Bank FOR OFFICIAL USE ONLY ONE 83 PROJECT PERFORMANCE AUDIT REPORT THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) December 22, 1977 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) TABLE OF CONTENTS Page No. Preface Basic Data Sheet Highlights PROJECT PERFORMANCE AUDIT MEMORANDUM 1 I. The Bank Loan 1 - 2 II. DFCC's Operations 2 - 3 Lending Operations 2 - 3 Share Investment 3 - 4 Profitability 4 III. Sub-projects Financed 4 - 5 IV, Institutional Objectives 6 Project Appraisal and Supervision 6 Resource Mobilization 6 V. Conclusions 7 Annex I: Summary of Operations, FY70 - FY76 Attachment: Project Completion Report A.1 Background A.1 - A.2 Environment A.2 - A.3 Loan Utilization A.3 Operations A.4 - A.5 Recent Developments A.5 Institutional Objectives A.6 - A.8 Projects Financed A.8 - Ao10 Conclusion A.10- A.11 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -2- Page No. Annexes: Table 1. Table 1. DFCC Income Statements: Projected and Actual, FY70-FY74 A.12 Table 2. DFCC - Cash Flow Statements: Projected and Actual, FY70-FY74 A.13 Table 3. DFCC: Balance Sheets: Projected and Actual, FY70-FY74 A.14 Table 4. Second Line of Credit (Loan 634-CE) Assistance According to the Type of Project A.15 Table 5. Second Line of Credit (Loan 634-CE) Assistance Sanctioned According to Industry Groups A.16 Table 6. Second Line of Credit (Loan 634-CE) Cost Overruns and Delays in Projects Completed A.17 Table 7. Projects Financed Under Loan 634-CE A.18 PROJECT PERFORMANCE AUDIT REPORT THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) PREFACE This report presents a performance audit of Bank Loan 634-CE made to the Development Finance Corporation of Ceylon (DFCC). This loan in an amount of US$8 million was the second loan made by the Bank to DFCC. It followed a first loan in an amount of US$4 million made in 1967 (Loan 520-CE). Since then, DFCC received an IDA credit (Credit 566-CE) in 1975 for US$4.5 million; a further IDA credit for US$8 million has been approved in September 1977. No completion/audit reports were produced for Loan 520-CE because of its early closing date in June 1972. However, as the periods covered by the two first Bank loans overlapped, some of the issues raised in this report naturally apply to both loans. Loan 634-CE was approved in July 1969 and became effective in October 1969. Its closing date was rescheduled from the original date of December 31, 1973, first to December 31, 1974, then to December 31, 1975, and finally to April 30, 1976. Large amounts of Loans 520-CE and 634-CE were cancelled: US$1.8 million for the first one and US$5.1 million for the second. The present audit is based on a review of the attached Project Completion Report (PCR), prepared by the Bank's South Asia Regional Office, other relevant documents, and discussions with Bank staff.  THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) BASIC DATA SHEET Amounts (in US$ m1n) As of 10/31/77 Original Disbursed Cancelled Repaid Outstanding Loan 634-CE 8.0 2.91 5.09 1.3 1.6 Project Data Original Plan Actual or Est. Actual Board Approval 7/15/69 Loan Agreement 7/18/69 Effectiveness 10/09/69 Loan Closing 12/31/73 4/30/76 Mission Data Month, No.of No. of Date of Year Weeks Persons Manweeks Report Appraisal 2-3/69 2.5 1 2.5 5/30/69 Supervision I 5/72 1 2 2 8/21/72 1/ Supervision II - 6/74 3.5 2 7 6/11/75 Supervision III 10/75 2 2 4 12/19/75 Supervision IV 2/ 9/76 2.5 2 5 2/09/77 Follow-on Projects Credit 566-CE of US$4 million, signed June 27, 1975 for DFCC - III Project. Credit 742-CE of US$8 million, signed Sept.30, 1977 for DFCC - IV Project. 1/ Appraisal mission for Credit 566-CE. 2/ Appraisal mission for Credit 742-CE.  PROJECT PERFORMANCE AUDIT REPORT THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) HIGHLIGHTS The focus of the Bank's efforts under this loan was to promote the institutional development of DFCC. Only modest progress was made towards improving DFCC's appraisal procedures, a goal in line with the Government's desire to see private investment allocated to economically viable projects with special emphasis on export generation (para. 4.02 of the PPAM and para. llc of the PCR). Follow-up practices, on the other hand, improved notably (para. lle of the PCR). The loan was marked by a substantial shortfall in its objective of financing foreign exchange costs of private investments supported by DFCC because of unexpected political and economic developments which led to the cancella- tion of 64% of the loan. Points of interest are: - the slow pace of commitment (paras. 1.02 to 1.04 of the PPAM and para. 7 of the PCR); - the increasing exposure of DFCC in tourism and its effort to build up its expertise in this sector (para. 3.02 of the PPAM).  PROJECT PERFORMANCE AUDIT MEMORANDUM THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) The Development Finance Corporation of Ceylon (DFCC) was estab- lished in 1955 by an Act of Parliament. It specializes in long-term credit to private manufacturing industries and tourism projects. The only other institution providing significant medium- and long-term finance to private industry is the Bank of Ceylon, a government-owned commercial bank, itself DFCC's largest shareholder. Furthermore, DFCC is the only institution in Sri Lanka providing foreign exchange credit to private ventures. I. The Bank Loan 1.01 The Bank extended its first loan to DFCC (Loan 520-CE) in 1967. At that time, the industrial policy pursued by the Government of Sri Lanka was to encourage a progressive extension of import substitution, giving large scope to private investment and allocating the largest possible amount of foreign exchange to productive uses. Still, business activity remained highly dependent upon fluctuations in exchange availability to finance imported raw materials. Due to an upsurge in industrial output which took place during the following three years (1968-1970), commitment of the proceeds of this first Bank loan (in an amount of US$4 million) proceeded at a faster pace than expected; in spring 1969, the loan was expected to be fully committed by August 1969, i.e., six months ahead of schedule. This acceleration in the pace of private investment was totally unexpected as it resulted to a large extent from an expanded allocation of foreign exchange to the private sector; this in turn was made possible by increased food production temporarily alleviating the country's traditional foreign exchange shortage. 1.02 In the context of a comparatively buoyant economy and in view of a more rapid commitment of the first loan than originally envisaged, the Bank decided in 1969 to extend a second loan to DFCC (Loan 634-CE) in an amount (US$8 million) twice as large as that of the first loan. The un- expected political and economic developments which occurred subsequently meant that events turned out quite differently from what had been expected at appraisal. In sharp contrast with the active support which the Govern- ment had been providing to the private sector between 1966 and 1970, the initial economic measures taken by the new administration, which came in as a result of the May 1970 elections, had a depressing effect on the level - 2 - of private business activity. In particular, the promulgation during its first year of administration of the "Business Undertakings (Acquisition) Act" which empowered the Government to nationalize private industries brought private fixed investment to a standstill. Nationalization affected mostly the country's basic industries, but this did not prevent uncertainties extending to the private sector's future role in the economy. These uncertainties were, however, somewhat reduced when a few years later the Government gave some indications about the activities which it wished to see covered by the public sector and undertook to lay down its basic industrial development policy. 1.03 The operational forecasts made on the occasion of this second loan (Table 1) and on the basis of which the size of the loan was decided were, in any case, an over-estimate, as recognized by the PCR (para. 7). Indeed, projections of private investment did not allow for the fact that the rapid increase in industrial output was likely to be temporary owing to its being indirectly dependent on a few successive monsoons particularly conducive to agricultural production and that the economy remained largely contingent upon the vagaries of the country's agriculture-based foreign trade. 1.04 DFCC decided early in 1971 to cancel large amounts of the two loans it had received from the Bank, including funds under the first loan which had been allocated to sub-loans committed before 1970 and subsequently cancelled by the sub-borrowers. Cancellations amounted to as much as US$6.8 million out of the US$12 million available under the two loans, representing 457 of the first loan and 64% of the loan under review. 1.05 An IDA credit (Cr. 566-CE) was made to DFCC in 1975 after the Government had succeeded in restoring the private sector's confidence; due to renewed investment interest, this credit has been utilized rapidly. A fourth credit (Cr. 742-CE) was further made to DFCC in September 1977. II. DFCC's Operations Lending Operations 2.01 Variations in DFCC's volume of operations during the last decade have mirrored the evolution of industrial activity in Sri Lanka. The dramatic increase in activity in FY69 and FY70 was followed by a striking drop in operations during the subsequent years. Table 1 Loan Commitments (Rs million) FY67 FY68 FY69 FY70 FY71 FY72 Projected Loan 520-CE 7.0 15.0 - - - Loan 634-CE - - 46.0 51.0 59.0 Actual 6.5 9.3 21.2 21.4 10.1 0.9 - 3 - 2.02 More recently DFCC has benefitted from an improving investment climate owing to a governmental policy which became gradually more favor- able towards private entrepreneurs. A package of various fiscal incen- tives was progressively introduced to assist export-oriented manufacturing industries and foster employment creation. In particular, the 1976 and 1977 Government budgets provided for tax deductions (investment relief) to investors in export-oriented industries. This incentive has been a major factor in mobilizing equity funds for export-oriented and tourism ventures. 2.03 Under the leadership of a new General Manager promoted from Assistant General Manager in August 1972, DFCC was able to reap the maximum benefit from the improving investment climate; it expanded the volume of its operations at a much faster pace than private investment through an active involvement in tourism financing, a relatively new field for DFCC. In 1976, DFCC had become the largest long-term industrial credit institution in the country, a position which the Bank of Ceylon used to hold in 1969. In fact, DFCC's recent operational results have largely exceeded its previous performance. Total loans and investments committed during FY76 amounted to twice as much as those committed during the previous FY70 peak year, a five-fold increase over FY75 results. 2.04 At the time of appraisal, the duration of foreign currency loans averaged 15 years, reflecting private investors' debt service difficulties. The matter was taken up during negotiations and subsequently DFCC agreed to take into account the nature of the sub-projects and the individual borrowers' debt servicing capability before deciding on the terms of its loan. The average maturity of sub-loans fell progressively and is now below 10 years. Share Investment 2.05 DFCC has traditionally been fairly active in preference share operations, and succeeded in preserving the good quality of its portfolio through a number of unfavorable years. This interest in share investments can be partially explained by the fact that, under Sri Lanka tax laws, inter-company dividends are not assessable for income tax purposes. Because of the stock market's low volume and narrow scope, DFCC has been con- centrating its share investments in the form of redeemable preference shares with fixed dividends in order to avoid freezing its funds and curtailing the liquidity of its portfolio. Hence, the impact of DFCC's share invest- ments should be discounted by the fact that they are neither, strictly speaking, equity investments nor capital market operations. Also, because of the inactivity of the stock market and the tendency in Sri Lanka for closely held industrial ownership, the underwriting which DFCC did early 1977 was the first in ten years; DFCC is at the moment planning two more underwritings. 2.06 Although one of DFCC's functions, as explicitly indicated in its statement of policy, is to assist in promoting the growth of a domestic capital market, this objective would require more active investment in common shares at the cost of reducing liquidity and was never emphasized in the Bank's successive appraisal reports. 2.07 Until 1969, DFCC's share investment activities were limited by a ceiling placed on its investment portfolio equivalent to its own equity. During negotiations for the loan under review, the Bank agreed with DFCC's request to relax this limit by including the Rs 16 million subordinated Government loan within the definition of equity. By 1976, however, DFCC had still not made use of this new limit because of the business slowdown in the early seventies, but expects to do so during coming years. Profitability 2.08 DFCC was successful in preserving its profitability through the 1971-74 lean years. In view of the substantial growth in operations which was expected at the time of appraisal, administrative expenses, as a per- centage of total income, were expected to decrease from 22% to 7% between 1969 and 1974. DFCC managed to lower this ratio to 12% in a depressed economic environment worsened by growing inflation pressures. Administra- tive expenses were cut down by 20% in nominal terms between 1971 and 1974, corresponding to about a 50% drop in real terms. To a large extent, cuts in administrative expenses were the result of staff reductions fully justified by an almost dried-up pipeline of loan applications. Sub- sequently, administrative expenses went up again as a result of staff expansion to represent 14% of total income in 1976. However, as a result of the sharp increase in its operations, DFCC has been somewhat understaffed during the last few years. Understaffing was clearly motivated by a desire to move cautiously in a quickly changing economic and political environ- ment; it was, however, at least partially responsible for the slow progress realized in appraisal procedures (Section IV). 2.09 As a percentage of average total assets, profit was satisfactory, averaging 3.1% between 1970 and 1974. As a percentage of average equity, however, net profit averaged only 9.0% during the same period, almost 3 percentage points below projections, owing to a lower debt-equity ratio and higher tax rate than anticipated. III. Sub-projects Financed 3.01 The Loan Agreement provided for a free limit of US$100,000 with an aggregate free limit of US$2 million. Twenty projects were financed from the loan under review, of which seven were new projects and the others expansion or modernization operations. Nine of them were presented to the Bank for prior approval. 3.02 Total cost of sub-projects amounted to about Rs 83 million (US$13 million), approximately 30% above the appraisal estimate. Total foreign exchange cost which represented 22% of total project cost remained within 2% of appraisal estimate. The difference between estimated and - 5 - actual total cost of sub-projects was almost entirely due to considerable overruns on local costs of three hotel projects (vide para. 14 of the PCR). These overruns were in part the result of the underestimation of construc- tion costs when the projects were appraised. This points to DFCC's lack of expertise in the tourism sector where its exposure has been expanding rapidly in recent years; as of March 31, 1976, tourism projects accounted for more than one-third of DFCC's total portfolio. The need to strengthen DFCC's expertise in this sector is stressed in the Bank's appraisal report issued in connection with Credit 566-CE; this report further notes that DFCC has undertaken to train part of its staff in this field. 3.03 In 1976, all sub-projects financed out of the Bank loan were generating profits, with the exception of one hotel still under construc- tion. Profit net of taxes as a percentage of net worth exceeded 10% in all but two cases. However, whenever foreign resources are available, business had traditionally been profitable in Sri Lanka because of the existence of substantial incentives, including a protected domestic market and substantial fiscal advantages. Financial profitability does not, there- fore, necessarily reflect economic advantage, and this indicates the impor- tance of an economic appraisal of sub-projects. 3.04 Sub-projects financed out of the loan under review directly reflect the changing industrial strategy of successive administrations. Recognizing that the economic policy followed prior to 1970 with its great emphasis on import-substitution industries with a high imported capital component had had an adverse effect on the balance of payments, the new Government gave top priority to tourism projects and export-oriented industries based on local raw materials and entailing minimum foreign exchange requirements on recurrent as well as capital account. 3.05 The period covered by Loan 634-CE overlapped this change in emphasis; consequently, the sub-projects financed out of its proceeds fall in two categories. On the one hand, those projects already in the pipe- line before or about the time of the change in Government and characterized by comparatively high capital intensity and foreign exchange requirements, and, on the other hand, subsequent projects belonging mostly to the tourism sector. Characteristic of the economic philosophy prevailing in 1969 was DFCC's declared intention "to restrict itself to loan applications requiring foreign exchange of at least RA 0.5 million (about US$84,000)." Most of the sub-loans after 1972 were well below this limit, although this may have been due to the predominance of hotel projects entailing low fixed costs in foreign exchange. 3.06 , The attempt made by the Government to concentrate private sector's activities on export-oriented industries had little effect on the use of Loan 634-CE. With two exceptions, all manufacturing sub-projects provided for the domestic market; however, all but two sub-projects resulted in some net savings of foreign exchange through import substitution. - 6 - IV. Institutional Objectives 4.01 Progress achieved in meeting the basic institutional objective of the loan to help DFCC expand its operations on an economically and financially sound basis, by strengthening its appraisal and supervision procedures and improving its financial management, is reviewed in the PCR (paras. 10-11). Progress realized under the loan was somewhat limited, possibly because resolution of most of the issues had to be postponed as a result of the low level of business activity. Project Appraisal and Supervision 4.02 Whereas the effort at improving DFCC's follow-up standards quickly bore substantial results, progress on the economic assessment of sub-projects was substantially slower. It is noticeable that during the last decade improvement in the quality of DFCC's economic project analysis has mirrored the Bank's own evolution in this matter. Indeed, when the second loan to DFCC was made in 1969, the Bank's philosophy did not go beyond the use of partial indicators which it advised DFCC to utilize under this loan. After the Bank had started to encourage the calculation of economic rates of return, DFCC initiated the practice under Credit 566-CE, having sent three of its staff members to the EDI for training. Hence, DFCC has demonstrated, all along its association with the Bank, its willingness to adopt new appraisal procedures, although the Bank's constant attention was needed to make certain of their prompt and proper implementa- tion. Resource Mobilization 4.03 An increase in share capital looked desirable at the time of appraisal in order to sustain DFCC's expected growth in operations; accord- ingly, a prompt increase from Rs 8 million to Rs 16 million was agreed upon during the loan negotiations. This increase, however, did not materialize until very recently as DFCC was enabled, by a reduced volume of operations, to remain within its prescribed debt/equity limit throughout those years. In 1976, DFCC's share capital was still unchanged from its 1967 level at Rs 8 million, but was planned to increase to Rs 20 million by FY80. The success of the last share issue in March 1977--the first one in ten years-- which helped in raising as much as Rs 5.6 million from a fairly large base of investors testifies to the confidence which DFCC enjoys among the public. In addition to the Rs 5.6 million in new share capital received from domestic sources, IFC and DEC1/will take up shares for, in all, Rs 2.4 million. 4.04 The slowdown in private investment was also responsible for delaying the need for DFCC to diversify its local currency resources. DFCC started, however, to use the Rs 9 million untapped credit line it has with the Bank of Ceylon (BOC). In 1976, DFCC's use of this credit facility had grown to Rs 9.6 million, the limit having been raised to Rs 26 million. In addition, DFCC receives funds from the National Savings Bank. 1/ Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit - 7 - V. Conclusions 5.01 The 1969-76 period covered by Loan 634-CE was marked by sub- stantial changes in Sri Lanka's economic environment. Under a competent management leadership, DFCC was able to minimize the effect of the 1970-74 private investment slowdown. It was able, in particular, to stand the effect of depressed levels of operations during several consecutive years, coupled with severe arrears problems on a few of its outstanding long-term loans. DFCC came out of the 1970-74 crisis remarkably well, having demonstrated its flexibility to adjust to a quickly changing economic environment. The percentage of total loan portfolio affected by arrears dropped from 9.1% as of March 1973 to 4.7% as of March 1976. Improvements in appraisal and supervision standards, however, have been slow and necessitated the Bank's continuous attention. DFCC is concentrating its efforts on quantitative performance targets and needs to do more in the area of sub-sector studies and analyses, and identification of new areas for investment. Operations Evaluation Department December 22, 1977  THE DEVELOPMENT FINANCE CORPORATION OF CEYLON (LOAN 634-CE) 1/ Summary of Operations, FY70 - FY76/ (Rs million) FY70 FY71 FY72 FY73 FY74 FY75 FY76 Local Currency Loans Gross Approvals n.a. n.a. n.a. 7.1 16.8 7.7 24.4 Net Approvals 18.1 5.3 0.7 7.1 16.0 7.7 24.1 Commitments 18.1 5.3 0.7 5.6 15.4 7.7 19.6 Disbursements 15.3 15.1 2.1 1.0 6.1 12.0 19.0 Foreign Currency Loans Gross Approvals n.a. n.a. n.a. 9.5 4.7 0.1 19.0 Net Approvals 3.3 5.0 0.3 9.5 3.9 0.1 18.0 Commitments 3.3 4.8 0.2 9.2 3.1 0.1 12.0 Disbursements 8.6 1.4 4.5 2.5 5.1 5.3 2.5 Equity Investments Gross Approvals n.a. n.a. n.a. 2.5 - 1.0 15.7 Net Approvals 0.5 - 2.5 - 1.0 15.2 Commitments - 0.5 - 2.5 - 1.0 11.3 Disbursements 1.3 0.5 - - 2.5 - 4.3 Total Gross Approvals n.a. n.a. n.a. 19.2 21.5 8.8 59.1 Net Approvals 21.4 10.8 1.0 19.2 19.9 8.8 57.4 Commitments 21.4 10.6 0.9 17.4 18.5 8.8 42.8 Disbursements 25.2 17.1 6.6 3.5 13.6 17.3 25.8 1/ The fiscal year is from April 1 to March 31. Thus FY70 means the period from April 1, 1969 to March 31, 1970. I - A.1 - 1/ COMPLETION REPORT- ON THE DEVELOPMENT FINANCE CORPORATION OF CEYLON LOAN 634-CE 1. Loan 634-CE, for $8.0 million, was the second IBRD loan to DFCC. The Loan Agreement was signed on July 18, 1969 and provided for an interest rate of 6.5% p.a. with a repayment period of 18 years including three years of grace. The original closing date was December 31, 1973. With cancellations of $5.09 million (para 6), effective financing amounted to $2.91 million, which was completely disbursed by April 14, 1976. The Loan's objectives were: (i) to enable DFCC to finance the foreign exchange costs of investment projects undertaken by private industrial, agricultural and commercial enterprises in Sri Lanka; and (ii) to continue the institution building efforts which were started with the first loan to DFCC. Background 2. DFCC was established in 1955 by2?n Act of Parliament with advice and technical assistance from IBRD- to finance private enterprises (defined as enterprises in which Government ownership does not exceed 20%) in industry, agriculture and commerce, including hotels, transportation, construction and engineering. In its early years, DFCC did no foreign exchange lending, and thus did not need any Bank Group assistance, and for about four years from 1961, GOSL's economic policies precluded IBRD and IDA lending to the country. Up to 1967,the volume of DFCC's operations was modest. From May 1956 to March 1967, DFCC approved 111 loans totalling Rs 46.5 million. Although DFCC was specializing in medium and long term finance to private industry, it was less important in this field than the Bank of Ceylon (a Government-owned commercial bank). The low level of activity was due to a scarcity of industrial investment opportunities in the private sector, acute scarcities of foreign exchange for raw materials and spares in the country, a lack of dynamism within DFCC, and the small size of its staff (in mid-1967,DFCC had only two professional staff in addition to the General Manager). 1/ This report has been prepared following a visit to DFCC by Messrs. N. Fostvedt and A. Wateler in August/September, 1976. 2/ DFCC was established in response to a recommendation of an IBRD economic survey mission report published in 1952. IBRD assisted in drafting the DFCC Act. - A.2 - 3. In 1967, IBRD made its first loan (520-CE) to DFCC. The loan was for $4 million and gave DFCC access to foreign exchange for the first time. The objectives of this loan were: (i) to provide foreign exchange for capital investments in the private industrial sector in Sri Lanka, (ii) to increase DFCC's level of activity, (iii) to help improve DFCC's follow-up procedures, and (iv) to broaden its project appraisals, in particular,by reducing DFCC's excessive attention to security considerations. By June 30, 1969, $2.32 million had been authorized by IRD under this loan, and $1.43 million disbursed. At that time, the loan was expected to be fully commited by August 1969. DFCC's loan co itments (foreign and local) had increased from Rs 2.4 million in FY67- to Rs 9.3 million in FY68 and to Rs 21.2 million in FY69. An Advisor who had been engaged by DFCC in December 1967 for two years to assist its management was completing his term; total processional staff (exclusive of the General Manager) had increased from two in 1967 to seven in 1968; the standard of project evaluation had been improving, and DFCC was in the process of establishing a more comprehensive follow-up system. Environment 4. Against this background, Loan 634-CE was made in June 1969. At that time,it appeared that there were good prospects for the industrial sector in Sri Lanka, despite the basic economic problems mentioned in para 5. There had been a number of desirable policy changes over the previous years, including a reduction in the subsidized rice ration, a devaluation, and an exchange reform. The Government had issued a policy paper in 1966, inviting private foreign investments in a wide range of industries. Although no new policy pronouncements on industry had been made (up to the time of appraisal), the Government's practices had been generating confidence among entrepreneurs, for instance by restricting the growth of the public sector primarily to expansion of existing concerns. The incentives for industrial investment were considered g2 erous. In 1968, the rate of growth of GDP was calculated at over 81%-, and the gain in industrial production at about 45%, mainly due to a better use of existing capacity. Between 1965 and 1968, the share of manufacturing in GDP increased from 8% to 12%. Gross private investments in industry had almost doubled from 1967 to 1968. During 1968, industrial investment projects agproved by the Government totalled Rs 220 million ($37 million equivalent-), of which about $21 million was in foreign exchange). There 1/ DFCC's fiscal year: April 1-March 30. 2/ However, after a later correction for under-valuation of exports in the national account series, the rate became 6%. 3/ Based on exchange rate: US$1 - Ra 5.95. - A.3 - were signs that overseas investors were beginning to be attracted to Sri Lanka, especially for textile projects. It was therefore considered likely that the rate of gross private investment in industry and allied sectors would rise sharply, decline thereafter for a year or two, and then stabilize at around Rs 150-170 million per annum, or at roughly double the level of 1968. 5. However, Sri Lanka's econoTy has suffered over the years from a number of fundamental difficulties-, including drastically deteriorating terms of trade, heavy dependence on food imports, a relatively high wage level combined with widespread unemployment, and an extensive and expensive system of subsidization in the name of social justice. The industrial sector suffered from.labor problems, management inadequacies, shortage of domestic agricultural imports, insufficient domestic demand in certain sectors, and a lack of foreign exchange for raw materials and spares due to Sri Lanka's precarious foreign exchange position. The change in Govern- ment as a result of the elections in May 1970 compounded the difficulties for the private sector. The new socialist Government's actions included extensive price controls, the limitation of the area of private sector industrial activity, the establishment of many new public sector corporations, progressive nationalization of wholesale and foreign trade, the establishment of ceilings on income, and the promulgation of the "Business Undertakings (Acquisition) Act", by which the Government was empowered to take over any private firm at its discretion. These measures had a negative impact on the private sector investment climate. In the spring of 1971, the situation was also affected by an abortive insurgency. Loan Utilization 6. With the change in Government, the private sector cut back its investments sharply. For DFCC, this meant that the flow of new applications dried up almost completely, and a number of projects already approved were cancelled. Under these circumstances, there was no hope that DFCC would be able to commit the whole amount of the 12n, and $5.0 million out of the $8 million loan was cancelled in April 1971--. The original terminal date for submitting projects for the Bank's approval was December 31, 1971. Due to the slow movement of the loan, even after cancellation of $5.0 million, this date was postponed twice, first to December 31, 1972, and then to December, 31, 1973. Similarly, the closing date was thrice postponed to December 31, 1974, to December 31, 1975 and then finally to April 30, 1976. In all, $2.910 million were disbursed, and a further $90,000 were cancelled at the time of closing. 1/ Sri Lanka's ecoacmic problems are sumarized in "Sri Lanka: Country . Economic Memorandum", March 15, 1976. 2/ Likewise, $1.8 million was cancelled out of Loan 520-CE. - A.4 - -Operations 7. DFCC's projected operations compare with the actual results as follows (Rs million): Projected Actual Loans FY70 FY71 FY72 FY73 FY74 FY70 FY71 FY72 FY73 FY74 1/ Commitments- - Rupee 15.0 16.0 17.0 18.0 18.0 18.1 5.3 0.7 5.6 15.4 - Foreign Exchange 31.0 35.0 42.0 45.0 48.0 3.3 4.8 0.2 9.2 3.1 Disbursements - Rupee 13.5 15.0 15.0 16.0 17.0 15.3 15.1 2.1 1.0 6.1 - Foreign Exchange 21.1 33.6 34.5 46.0 46.0 8.6 1.4 4.5 2.5 5.1 Share Investments Disbursements 3.0 4.0 4.5 5.0 5.5 1.3 0.5 - - 2.5 If cancellations are recorded in the year they took place, actual commit- ments for FY70-FY72 would be as follows (Rs million): FY70 FY71 FY72 Rupee 20.5 2.8 (1.4) Foreign Exchange 12.4 (7.8) (2.0) These figures show that the projected rupee commitments were reasonably close to the actual figures for FY70, projected disbursements close to actuals for both FY70 and FY71. However, actual foreign currency commit- ments and disbursements were only about 40% of the projected figures for FY70. Since the change in Government did not take place till May 1970, this indicates riat the projections, at least for FY70, were in any event too optimistic. For the subsequent years, the poor investment climate caused DFCC's level of activity to drop drastically, wit%,corresponding large discrepancies between projected and actual figures-. The decline was much sharper for foreign currency commitments than for rupee commit- ments. This meant that whereas the former had been projected at more than double the level of local currency commitments, the actual foreign exchange 1/ On net basis; cancellations have been recorded for the year in which the commitment took place. 2/ This also affected DFCC's professional staff which had increased to 20 in March 1971, in anticipation of a substantial increase in business. As a result of the lack of activity, eight professionals left DFCC. Fortunately, however, DFCC retained most of the senior staff, so that the quality of the staff remained good. - A.5 - commitments for the period FY70-FY74 were only about 31% of rupee commit- ments. 8. Tables 1-3 show projected and actual financial statements for FY70-FY74. Profit before tax increased rapidly up to FY72, although at a much lower pace than projected, and increased only slowly thereafter. As a percentage of average total assets, the profit remained adequate, fluctuating between 2.8% and 3.5%. Total administrative expenses increased to Rs 1 million in FY71, as projected, but then fell slowly as staff previously recruited were leaving DFCC, so that administrative expenses as a percentage of average total assets fell from 1.5% in FY70 to 1.1% in FY74. Despite the poor investment climate, the debt service performance of DFCC's clients was generally good, except in FY72 and FY73, when the insurgency and widespread labor disputes caused business setbacks and temporary liquidity problems for some borrowers. As a result, the debt-service coverage ratio fell from 1.8:1 in FY71 to 1.4:1 in FY72 and to 1.1:1 in FY73, but then improved to 1.6:1 in FY74. In the projections, it had been assumed that DFCC would increase its share capital by Rs 8 million in FY70 and Rs 12 million in FY74, but this did not happen (para 10) since DFCC's long term debt-equity ratio remained below what had been projected, because of the drastically reduced level oflactivity. The debt equity ratio as defined in the Bank Loan Agreement-.remained below the contractual limit of 3:1 during this period. Recent Developments 9. From the low level of the early seventies, the investment climate in Sri Lanka improved gradually, as did DFCC's operations. Accordingly, in 1975 IDA extended Credit 566-CE ($4.5 million) to DFCC. This credit, which became effective in August 1975, has been utilized ra dly thanks to a further improvement in the investment climate in 1976-. Subprojects for $4.2 million have been approved, and $1.5 million disbursed, while commit- ments as of September 1976 amounted to $3.2 million. DFCC's activity is projected to continue to increase. The Asian Development Bank has recently approved a loan of $5 million, and IDA is now processing a new IDA credit of $5-8 million. 1/ Under Loans 520-CE and 634-CE, the debt-equity ratio was defined to include as equity the amount of the Government subordinated loan repay- able after the date of the last maturity of any loan made by the Bank to DFCC. Since the subordinated loan is a debt that ultimately will have to be repaid, the definition was changed for Credit 566-CE to include all of the subordinated loan as debt with an adjustment in the ratio from 3:1 to 7:1. 2/ This improvement was caused in part by the 1976 budget speech, which placed increased emphasis on the private sector, although not all of the proposals have been implemented. - A.'6 Institutional Objectives 10. During appraisal and negotiations for Loan 634-CE, the following issues were discussed with a view to strengthening the institution: (a) increasi7g DFCC's share capital by at least Rs 8 million before the end of 1970; (b) pursuing the question of diversifying DFCC's sources of rupee finance; (c) strengthening DFCC's economic assessment of investment proposals; (d) having DFCC set the maturities of its loans, when using Bank funds, in the light of the nature of the project and the condition of the borrower; (e) improving DFCC's follow-up work. 11. The present status of these issues is as follows: (a) Share Capital. Due to the sharp deterioration of the invest- ment climate, there was no need for a share capital increase, nor would it have been possible under those conditions for DFCC to have obtained an increase of the magnitude originally foreseen, either from the domestic capital market or from its foreign shareholders. With the increase in its activity now projected, DFCC is at present considering an increase in its share capital of upto Rs 12 million in several tranches from FY77 through FY80; (b) Sources of Rupee Finance. Similarly, as a result of the decline in investment interest, there was no practical need for DFCC to diversify its sources of rupee finance. The Central Bank refinance scheme accounted for 77% of all rupee currency borrowings during the period FY70-FY74. Bank of Ceylon loans/overdrafts accounted for 23%. With the present increase in its level of activity, DFCC is now in the process of diversifying its sources of rupee finance. It has obtained a Rs 10 million line of credit with the National Savings Bank. Further, the controller of Exchange has recently al Iwed DFCC to accept long-term deposits of "blocked" funds-. It is also likely that DFCC may obtain funds from the Ceylon Insurance Corporation, and it is also considering the possibility of raising funds via debentures. (c) Economic Assessment of Projects. At the time of appraisal for Loan 634-CE, DFCC usually provided a partial economic I/ Another increase of Rs 12 million was projected for FY74. 2/ Funds now on deposit with commercial banks and owned by residents of foreign countries. - A. - analysis, covering the foreign exchange savings of a project and a comparison of prices and production costs with similar local products. This was unsatisfactory, and DFCC was requested to strengthen its economic assess- ment of investment proposals. However, little progress was made in this direction, except that DFCC for a few projects calculated the domestic resource cost per unit of foreign exchange earned/saved. Part of the reason was that IBRD was not specific in giving guidelines for DFCC's economic project analysis. This was corrected during the appraisal for Credit 566-CE (para 9), when it was agreed that DFCC would calculate the economic rate of return for all projects costing Rs 1 million or more, and the domestic resource cost per unit of foreign exchange earned/saved for all projects costing between Rs 0.5 million and Rs 1 million. (d) Maturities. The average maturity of DFCC's loans had been increasing considerably over the years prior to the appraisal of this loan, with amortization periods of around 15 years predominating for foreign currency loans. During the negotiations for Loan 634-CE, DFCC confirmed that, when using Bank funds, it would set the terms of the loans in the light of the nature of the project and the condition of the borrower. DFCC now takes into account the debt servicing capability of the borrowers, and the average maturity of its loans has come down considerably. Thus, for DFCC's loans and redeemable investments approved during FY76, 31% by amount were for nine years or less and only 9% for 12 years or more. (e) Supervision. At the time of appraisal for Loan 634-CE, DFCC'ssupervisi-onof its clients was confined almost entirely to annual reviews of their financial statements. As a result of IBRD's involvement, DFCC improved its follow up procedures considerably. Thus, DFCC started visiting projects under construction every quarter, projects in operation Ince a year, and problem projects as and when necessary-. Factory visit reports are prepared 1/ However, due to staff constraints and the increased number of projects under supervision, DFCC has been far from this target during the past 18 months. However, the Corporation has recently recruited additional project implementation staff, so it should be in a position to visit its present projects regularly from now on. - A.8 - after most visits and progress reports on each company are prepared once a year. Recently, DFCC also started to prepare completion reports on its projects, comparing appraisal estimates with actuals. 12. The following two questions were also for Loan 634-CE: (a) to increase DFCC's normal exposure limit for an individual enterprise from 15% to 20% of the sum of its equity and the Government subordinated loan. (b) increasing DFCC's policy limits! on share investment, by applying the percentages to the sum of DFCC's equity and the outstanding amount of the subordinated loan, instead of only to DFCC's equity. IBRD approved the changes which have now taken place. In view of the quality of DFCC's portfolio and the experience of its staff, the present exposure limits are appropriate for DFCC. Projects Financed 13. 20 projects for 18 companies were financed out of this loan. Of these, seven projects were new (of which four were new ventures under- taken by existing companies), ten were expansion projects and three were for balancing, modernization and replacement (Table 4). The average size of IBRD's contribution per subloan was $146,000. In addition, DFCC provided rupee assistance to these projects of Rs 17.2 million, amounting to 48% of its total financing. Of the twenty projects, seven were in the tourism sector (six hotels and one tourism transport project), three in the manufacturing of foodstuffs, three in other consumer goods, and seven in intermediate goods (Table 5). The tourism sector received 25% of the foreign exchange provided, foodstuffB received 23%, other consumer goods 29% and intermediate goods 22%. 14. The projects financed through Loan 634-C are listed in Table 6. Total project cost is known J?r 16 of the projects-. For these projects the cost was Rs 75.5 million-, or 31% above the appraisal estimates of Rs 57.6 million. However, most of this increase was due to heavy overruns 1/ The one applying to the aggregate of such investments, the limit being an amount equal to DFCC's equity; the other applying to individual share investments, for which the limit was 10% of DFCC's equity. 2/ Two "A" projects to one company have been treated as one project. 3/ For these projects, total DFCC assistance accounted for 44% of project cost (inclusive of working capital). In particular, the foreign currency portion accounted for 23%, so that 1 Rs equivalent of foreign exchange generated Rs 3.35 of local currency investments. - A.9 - on three hotel projects (Rs 34.2 million against appraisal estimates of Rs 17.0 million), which were caused primarily by revised constructt&n plans, construction cost overruns of access roads etc., and underestimates of construction costs at time of appraisal. Excluding these three projects, overruns of more than 10% occurred for only two projects, and in two cases costs were considerably lower than originally expected. The actual foreign exchange costs were Rs 18.6 million against the estimated Rs 18.2 million, and were within 10% of actuals for 14 out of the 19 projects. Nine projects were completed before schedule or with a delay of four months or less. The other ten projects suffered delays of up to a maximum of two years. Major reasons for these delays were problems with suppliers and contractors, delays in Government licensing, too optimistic time schedules, and cost overruns. 15. The amount of foreign ex 9ange disbursed for projects which were reviewed by IBRD prior to approval- was $2.455 million, or 84% of total disbursements under the Loan. IBRD questions and comments regarding these projects related mostly to issues concerning the market analysis, the procurement procedures,economic efficiency calculations, production estimates, capacity utilization, the availability of raw materials and spare parts, and the length of the repayment periods. Generally, DFCC was able to provide answers satisfactory to the Bank. As a result of the dialogue with IBRD, there was an improvement in the overall quality of DFCC's appraisal reports over the period of this loan. 16. None of the companies financed under Loan 634-CE was in arrears as of June 30, 1976. DFCC has rescheduled repayments for one company due to delays in the delivery of the trawlers purchased under the project, and to difficulties in recruiting.suitable captains for these trawlers. This company has also faced other problems, but DFCC is confident that the company's difficulties are of a temporary nature. 17. Economic rates of return for these projects are not available, but some partial indicators are given Table 7. The direct employment effect. was calulated ex-ante at 688 jobs-, giving an estimated cost/job of Rs 67,000-. Due to the heavy cost overruns for a few projects (para 13), the 1/ The free limit was increased from $30,000 under Loan 520-CE to $100,000 under Loan 634-CE, with an aggregate free limit of $2 million. For Credit 566-CE, the free limit was raised to $150,000, with no aggregate free limit. 2/ Although ex post figures are not available, DFCC believes that the actual employment creation of these projects was close to the projected figures. 3/ Inclusive of working capital. This figure compares to an average fixed investment per job of Rs 33,500 for the projects approved by DFCC in the period April 1975 - August 1976. The difference is due to the approval of a few large, labor-intensive projects in the latter period. - A.10 - real average cost/job increased to about Rs 98,000, corresponding to $6,900 at the present exchange rates. Expected annual gross export earnings (exclusive of receipts from tourism) were Rs 7.6 million, and expected net earnings/savings of foreign exchange, Rs 27.1 million, corresponding to 27% of industrial exports from the private seci7r in 1975. The latest capacity utiliza on figures for 12 companies- varied from a low of 39% to a high of 85%-, with most of the companies working on a one-shift basis. Net profits as a percentage of net worth is available for 17 companies, and varied from a low of 2.1% to a high of 40%, with an unweighted average of 17%, which is satisfactory. It is expected that both the capacity utilization and profitability figures will improve further once all the projects reach their normal level of operations. Conclusion 18. Due to circumstances over which DFCC had little control it proved impossible to utilize the greater portion of the original amount of loan 634-CE. These circumstances also made it unnecessary, and at the same time difficult, to take action on some of the questions (share capital increase and diversification of sources of rupee finance) discussed during the appraisal of this loan (para 10). On the other hand, there was considerable progress on issues such as project supervision and the.maturities of DFCC's subloans (para 11). There was also some improvement in the overall quality of DFCC's appraisal reports, with the exception of economic analysis of projects, which has been improved under Credit 566-CE. 19. Against the background of rapid staff increases in 1967-69, and the further increases contemplated at the time of appraisal, IBRD should have discussed during appraisal/negotiativ,of Loan 634-CE, the need for systematic staff training and development- 20. DFCC has been doing very little promotional work, for which there is considerable scope in Sri Lanka. IBRD should have encouraged DFCC to 1/ These figures relate to companies, and not necessarily to the DFCC- assisted projects. At this time, 12 of the 19 projects had been in operation two years or less. 2/ It is considered that most hotel projects can not reach much more than 55% average annual capacity utilization, due to the seasonality of of the traffic. 3/ Recently, DFCC has been placing heavy emphasis on staff training; in 1976 almost half the professional staff have attended courses outside of the Corporation. - A.11 - make at least a start in this direction. Due to the low level of lending activity in the early seventies, DFCC would have had ample staff to engage in promotional activities, such as sectoral studies and project identification. 21. Overall DFCC emerged from this very difficult period as a capable institution. It has been able to support the rapid increase in private sector investment interest taking place in 1975 and 1976.>\ In fact, whereas at the time of the first IBRD loan (1967), DFCCwas a less important term lending institution for the private sector than the Bank of,Ceylon (para 2), it is now the most important such institution in Sri Lanka-, DFCC's growth prospects are now good and it is an appropriate channel for term funds to the private industrial sector in Sri Lanka. 1/ In December 1975, total industrial outstandings of more than five years (excluding rollover of short term credits) from all the commercial ban to the private and public sectors combined was Rs 58 million, compared to Rs 94 million in loans and investments outstanding from DFCC as of March, 1976, almost all of which for private enterprises. DFCC Income buatementes Projected and Actual, FT70-FT74 (Re Million) FY70 FY71 FY72 FY73 PT74 FY70 V71 FY72 F773 FY74 --- ------ -projected ----- Actual !4COME Loan interest - rupee 2.255 2.800 3.480 4.000 4.520 2.214 3.872 4.299 3.963 3.643 foreign currency 1.050 3.520 6.590 9.680 12.910 0.519 1.054 1.235 1.348 1.744 Dividends 0.532 0.730 0.998 1.145 1.400 0.407 0.382 0.404 0.343 0.536 Commitment charges 0.219 0.280 0.3271/ 0.3701/ 0.3801; 0.106 0.163 0.046 0.077 0.082 Other income 0.479 0.585 0.885- 0.920- 0.98W 0.403 0.227 0.147 0.282 0.405 Total income 4.535 7.915 12.280 16.115 20.190 3.649 5.698 6.131 6.013 6.410 -XPENSES Interest on local currency loans 0.595 0.840 1.400 1.740 1.740 0.528 1.501 1.719 1.438 1.312 Interest on foreign currency loans 0.705 2.470 4.442 6.950 9.285 0.395 0.767 0.906 0.922 1.183 Commitment charges 0,185 0.160 0.319 0.225 0.310 0.260 0.395 0.126 0.111 0.068 Total financial expenses 1.485 3.470 6.161 8.915 11.335 1.183 2.663 2.751 2.471 2.563 Salaries 0.570 0.750 0.800 0.850 0.950 0.491 0.731 0.685 0.626 0.565 Other administrative expenses 0.220 0.280 0.300 0.320 0.350 0.285 0.281 0.269 0.219 0.216 Total administrative expenses 0.790 1.030 1.100 1.170 1.300 0.776 1.012 0.954 0.845 0.781 Provisions against doubtful loans 0.100 0.175 0.350 0.400 0.500 0.075 0.100 0.100 0.200 0.400 Provisions against doubtful investments 0.050 0.075 0.150 0.200 0.200 0.025 - 0.050 0.100 0.150 Depreciation 0.025 0.025 0.1251 0.1251/ 0.125-/ 0.033 0.031 0.027 0.024 0.021 Total other expenses 0.175 0.275 0.625 0.725 0.825 0.133 0.131 0.177 0.324 0.571 Total expenses 2.450 4.775 7.^36 10.310 13.460 2.092 3.806 3.882 3.640 3.915 Profit before tax 2.085 3.140 4.394 5.305 6.730 1..57 1.892 2.249 2.373 2.495 Income tax 0.835 1.260 1.774 2.2 5 .t30 0..GU .019 1.2?6 1.415 1.509 Net proft 1.250 1.880 2.620 3.nso m.900 0.991 1.073 1.043 0.968 0.986 RATIOS (%) Profit before tax/average total asset. 3.6 3.2 3.0 2.8 2.8 3.0 2.8 3.1 3.3 3.5 Net prof/average equity 11.6 12.1 12.7 13.8 12.9 Administrative expenses/average total 1.4 1.0 0.8 0.6 0.5 1.5 1.5 1.3 1.2 1.1 assets Dividend/share capital a 82/ 8 8 812 8 8 8 8 8 Dividend/net profit 51.2 51.0 48.9 41.6 45.1 64.6 59.6 61.4 64.1 64.9 I/ Inclui dig Im-onme f rom andl dt-pree lilt nil si now of Iee Iding, whih wi it hl lt . 2/ Half dividend for new share eputal projected Lo be raised during Lhe year. DFCC - Cash Flow Statements: Projected and Actual, FY70-FY74 FY70 FY71 FY72 FY73 FY74 FY70 FY71 FY72 F173 Y7A Projected------ - - - - - - - - Actual -------- SOURCES Net profit before tax 2.085 3.140 4.394 5.305 6.730 1.557 1.892 2.248 2.373 2.495 Provisions for loans and invest- ments 0.150 0.250 0.500 0.600 0.700 0.100 0.100 0.150 0.300 0.550 Depreciation 0.025 0.025 0.125 0.125 0.125 0.033 0.031 0.027 0.024 0.021 Local currency borrowings 13.000 9.500 13.500 14.500 5.000 12.407 11.426 1.195 0.085 3.650 Foreign currency borrowings 21.075 33.625 34.500 46.000 46.000 9.540 1.441 4.478 2.495 5.062 Loan collections Rupee 4.800 5.300 6.500 8.200 9.000 3.206 4.106 5.716 5.786 8.990 Foreign currency - 1.400 4.000 7.000 9.500 0.065 0.615 1.189 1.573 2.008 Share redemptions or sales 0.200 0.200 0.300 0.400 0.500 0.155 0.220 0.235 0.420 0.330 Increase in share capital - 8.000 - - 12.000 - - - - - Encashment of temporary invest- ments - - - - - 0.720 0.961 - - - Total Sources 41.335 61.440 63.819 82.130 89.555 27.783 20.792 15.238 13.056 23.106 USES Loan disbursements Rupee 13.500 15.000 15.000 16.000 17.000 15.286 15.148 2.095 0.985 6.073 Foreign currency 21.075 33.625 34.500 46.000 46.000 8.640 1.441 4.477 2.493 5.062 Share investments 3.000 4.000 4.500 5.000 5.500 1.250 0.500 - - 2.500 Special reserve fund investments 0.225 0.300 0.420 0.520 0.630 0.170 - 0.180 0.170 0.160 Repayment of: Local currency borrowings 1.000 2.000 2.500 3.800 5.400 0.754 1.600 4.106 5.770 4.559 Foreign currency borowings - 1.400 4.000 7.000 9.500 0.127 0.643 1.213 1.707 1.950 Furniture and office e4uipment 0.050 0.500 0.050 0.050 0.050 0.171 0.134 0.024 0.015 0.009 Taxation 0.835 1.260 1.774 2.225 2.830 1.045 0.596 1.001 0.851 1.422 Dividends 0.640 0.960 1.280 1.280 1.760 0.640 0.640 0.640 0.640 0.640 Temporary investments - - - - - - - - 0.800 0.500 Land and building 1.000 2.000 - - - - - - - - Net increase (decrea. n working cap4taL 0.010 0.395 (0.205) 0.255 0.885 (0.300) 0.090 1.5U2 (0.374) 0.231 e Total Uses 41.335 61.440 6i.A1q A?.14A RO.7.7a 9A.7n'2 15.218 13.056 23.106 S' Debt service coverage z-. 3.4:1 1.8:1 1.6:1 1.4:1 1.3:1 2.7:1 1.8:1 1.4:1 1.1:1 1.6:1 DFCC: Balance Sheets: Projected and Actual, FY70-FY74 (Ra million) FY70 FY71 FY72 FY73 FY74 FY70 FY71 FY72 FY73 FY74 - - - - - - - Projected - - - - - - - - - - - - - - - - - Actual- - - - - - - ASSETS Current assets 1.959 2.354 2.149 2.404 3.289 1.478 0.494 2.004 2.636 3.398 Special reserve fund invest- ments 1.420 1.720 2.140 2.660 3.290 1.365 1.365 1.545 1.715 1.875 Loan portfoliq, les provisions 60.197 101.947 140.597 186.997 230.997 51.101 62.869 62.436 58.355 58.092 Share investments, less provisions 8.768 12.493 16.543 20.943 25.743 7.088 7.368 7.083 6.563 8.583 Net fixed assets 1.763 4.238 4.163 4.088 4.013 0.876 0.979 0.976 0.966 0.953 Total Assets 74.107 122.752 165.592 217.092 267.332 61.908 73.075 74.044 70.235 -72.901 LIABILITIES AND EQUITY Current liabilities 2.550 2.550 2.550 2.550 2.550 5.327 2.173 2.592 3.352 3.469 > Long term debts Government 16.000 16.000 16.000 16.000 16.000 16.000 16.000 16.000 16.000 16.000 1 Other rupee borrowings 21.753 29.253 40.253 50.953 50.553 18.608 31.788 28.946 23.261 22.352 Foreign exchange borr6vinge 22.719 54.944 85.444 124.444 160.944 11.057 11.855 15.120 15.908 19.020 60.472 100.197 141.697 191.397 227.497 45.755 59.643 60.066 55.169 57.372 Equity Share capital 8.000 16.000 16.000 16.000 28.000 8.000 8.000 8.000 8.000 8.000 Special reserve 1.420 1.720 2.140 2.660 3.290 1.365 1.545 1.715 1.875 2.035 Ceneral reserve 1.515 2.135, 3.055 4.335 5.845 1.300 1.450 1.620 1.790 1.970 Unappropriated 0.150 0.150 0.150 0.150 0.150 0.161 0.264 0.051 0.049 0.053 Total Liabilities anj Equity 11.085 20.005 21.345 23.145 37.285 10.826 11.259 11.386 11.714 12.060 74.107 122.752 165.592 217.092 267.332 61.908 73.075 74.044 70.235 72.901 RATIOS Long term debt/equity 5.5:1 5.0:1 6.6:1 8.3:1 6.1:1 4.2:1 5.3:1 5.3:1 4.7:1 4.8:1 Long term debt/e,quLty (as defined in Bank Loan Agreement) 2.4:1 3.1:1 4.3;1 5.5:1 4.7:1 2.1:1 2.8:1 2.8:1 2.5:1 2.6:1 W Book value/par value (%) 138.6 125.0 133.4 144.7 133.2 135.3 1'.7 142.3 146.4 150.8 - A.15 - Table 4 DEVELOPEr FINANCE CORPORATION OF CEYLON Second Line of Credit (Loan 63h-CE) Assistance Accorring to the Type of Project DFCC Assistance No. of Foreign Rupee Type of Project ProJects Exchange Loan Total Rs illions -- New 7 7.830 10.763 18.593 (of which: new ventures (4) (5.215) (7.307) (12.522) andertaken by existing companies) Mcpansion 10 9.770 5.540 15.310 BalancingA.odernization/ 3 0.995 0.922 1.917 Replacement -.-.-.- Total 20 18.595 17.225 35.820 - A.16 - Table 5 DEVELO?"T FINNCE CORPORATION OF 0EYLON Second Line of Credit (Lonn 63L-CE) AssistAnce Sanctioned Accordiny to Industry Groups DFCC Assistance No. of Foreign Rupee Industry Groun Projects Exchange Loans Total - - - - - Rs million - - - - Tourian 7 4.674 14.453 19.127 Foodstuffs 3 4.365 0.922 5.287 Consumer goods 3 5.469 - 5.469 Intermediate goods 7 4.087 1.850 5.937 Total 20 18.595 17.225 35.820 / Includes edible fats, shrimping, soft drinks. ji Includes matches, cigarettes. f Includes PVC pipes, printing and packaging, leathercloth, cables, paints, activated carbon. DEVELOPMENT FINANCE CORPORATION OF CEYLON Second Line of Credit (Loan 634-CE) Cost Overruns and Delays in ProJects CompletM lqeoted Date Type of Appraisal Actual Foreign Exchange Actual Foreign of Completion Actual Date of Name of Comalz Project Cost Goat Cost of Appraisal Exchange Coot ot Appraifal Completion ----------------- Ra -000 sylan Match Company Ltd. EP 750 685 441 416 Sept., 1972 January, 1972 Ceylon Tobacco IausaWa Ltd. * EXP 3,066 2,720 1,870 1,682 March, 1972 February, 1972 - do - * EXP 5,400 5,623 3,1148 3,371 Dec., 1973 June, 1973 Maharaja Organisation Ltd. EXP 600 532 293 290 Oct., 1972 April, 1972 Richard Pieria & Co., Ltd. EXP 1,540 1,610 940 978 March, 1972 July, 1972 Lake House Printers & Publishers EXP 1,484 N.A. 580 578 July, 1974 March, 1974 Limited Kelani Cables Limited BMR 6,238 3,700 917 917 Jan., 1972 August, 1972 Lever Brothers (Ceylon) Ltd. EUP 1,750 N.A. 900 836 Jan., 1972 January, 1974 Ceylon Paint Industries Ltd. EUP 2,495 2,239 1,019 966 August, 1974 August, 1975 Hayleys Limited NEW 1,760 1,369 447 358 Sept., 1973 July, 1974 Ocean Foods & Trades (C & J) NEW 5,605 5,952 3,377 3,451 Teb., 1974 March, 1975 Limited * Ceylon Paper Sacks Limited * NEW 7,463 11,100 98 1,060 June, 1974 Dec., 1975 Serendib Hotels Limited ELP 3,000 3,124 200 254 Nov., 1973 Dec., 1973 Aitken Sponas & Company Ltd. NEW 50600 11,864 234 345 Nov., 1975 Dec.. 1975 Ceylon Holiday Resorte Ltd. HP 4,000 6.850 233 399 April, 1975 Dec., 1975 Palm Garden Hotels Limitedj NEW 4,500 N.A. 162 160 Dec., 1975 June. 1976 Walkers Tours fk Travels NE-1 3,937 11,230 182 180 Dec., 1974 Dec., 1973 (Ceylon) Ltd. Development Transport Services NEW 5,100 5,586 2,064 2,275 Dec., 1974 Sept., 1974 LUnited * Pure Beverages CompAny'Limited BMR 1,000 1,322 226 78 Kay, 1974 April. 1975 * A project. The two sub-projects for Kelani Cables Limited (A-8 and A-14) have been treated as one project. - A. 18 - Ugth.1 gyqLormer PINANCE CORPORATION OF CETLOR rtlesto Finaced Under Lgn 634-CE Pseeted Actualy Total Direct Gross Net Savings or Net profit ndustrI Project Employment Expert Earnings of Capacity No. of (after tax) as Veas of Company ActIvity Cost Effect EarningsY Forei Utilisation W Z of Net Worth o) 7amber) (s 00) (Rs000) Ceylon Match Company Manufacture of LImited Safety Matches 685 - - 65 842 2 232 Cey'l/ Tobacco Co., Ltd. Manufacture of Ltd.- Cigarettes 8,343 - - 2,000 602 1 16.52 Maharaja Organization Manufacture of Ltd. P.V.C. pipes 532 - * - 395 1 132 Richard Pieras 6 Co.. Manfacture of i.ated Lascbercloth 1,610 16 - 574 472 1 2.2Z Lake Souse Printers Printing and 6 Publishers Ltd. Packaginm NA. - - N.A. 1 10.32 alsal Cables Ltd.2/ Manufacture of Cables 3,700 - - 737 752 1 261 Lover Brothers (Ceylon) Manufacture of Limited Edible Fate N.A. - 70 S00 N.A. 1 16.32 Ceylon Paint Industrise Manufacture of LMated aint 2,239 4 - .444 572 1 27.85 Nayleys Limited Manfacture of Actiwated Carbon 1.369 42 1.731 1.06 sa0 3 151 Ocam Foods 6 Trades Shdiaping 5,952 30 5,800 4.300 N.A. - 102 (C 6 J) Ltd. Ceylon Paper Sacks Ltd. Hotel 11,100 120 - 1,71 N.A. - 401 Seradib Sotels Ltd. Hotel 3.124 72 - 1.655 45.7n - 11.52 Aitkan Spence & Co. Limited Hotel U,866 100 - 1,27 402 - 192 Ceylon Holiday Resorts Limited atal 6,850 25 - 5,938 691 - 13.51 Pala Garden Hotels Ltd. Hotel N.A. 55 - 1,935 N.A. - N.A. Walkers Tours 6 Travels (Ceylon) Ltd. Hotel 11,230 109 - 2,500 561 - 25% Development Transport Tourist Services Ltd. Transport 5,586 58 - 1,322 432 - 5.5Z Pure Severages Manufacture of Company Ltd. Soft Drinks 1.322 57 - 100 W.A. 1 14.7 It Elusive of tourism projects & As per 1976 annual accounts Two projects.