Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7029 PROJECT COMPLETION REPORT HGNDURAS FIRST AND SECOND INDUSTRIAL CREDIT PROJECTS (LOANS 1659-HO AND 2075-HO) December 1, 1987 Trade Finance & Industry Operations Division Latin America and the Caribbean Country Operations Department II 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. ABBREVIATIONS AND ACRONYMS BANAFOM Banco Nacional de Fomento BCH Banco Central de Honduras CDI Centro de Desarrollo Industrial CIDA Canadian International Development Association CTI Centro Tecnico Industrial COHDEFOR Corporacion Hondurena de Desarrollo Forestal CONADI Corporecion Nacional de Inversiones FAO Food arid Agricultural Organization FONDEI Fondo Nacional de Desarrollo Industrial IFC International Finance Corporation IMF International Monetary Fund KfW Kreditanstalt fdr Wiederaufbau PFIs Participating Financial Intermediaries SMI Small and Medium Scale Industry SSI Small Scale Industries UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization US AID United States Agency for International Development CURRENCY EQUIVALENTS Currency Unit = Lempira (L) US$1.0 = L2.0 L1.0 = US$0.5 FISCAL YEAR January 1 to December 31 FOR OMCIAL USE ONLY Tr WORLD BANK 'AashglWion C 20413 L.SA December 1, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Honduras - First and Second Industrial Credit Proiects (Loans 1659-HO and 2075-HO) Attached, for information, is a copy of a report entitled 'Project Completion Report on Honduras - First and Second Industrial Credit Projects (Loans 1659-HO and 2075-HO)" prepared by the Latin America and the Caribbean Country Department II. Under the modified system for project performance auditing, further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document has a restricted distribution and may be used by recipients only in the performance Of their oMFcial duties. Its contents may not otherwise be disolsed without World Bankt authorization. FOR OICL USE ONLY PROJECT COMPLETION REPORT HONDURAS FIRST AND SECOND INDUSTRIAL CREDIT PROJECTS (Loans 1659-HO and 2075-HO) TABLE OF CONTENTS PaRe No. PREFACE .... ........................ ................ i BASIC DATA SHEETS ...................................... ii * ~~~HIGHLIGHTS .... ........................................... vi I. INTRODUCTION .1............... 1 Bank Industrial Sector Lending Activity ...o ........ 1 Country Economic Environment 1 .............1 Manufacturing Sector .... ...................2 II. PREPARATION AND APPRAISAL OBJECTIVES OF THE LOANS 2 Preparation of Loan 1659-HO 2 Appraisal Objectives of Loan 1659-HO 3 Preparation of Loan 2075-HO 4 Appraisal Objectives of Loan 2075-HO 5 III. UTILIZATION OF LOAN PROCEEDS . 6 Resource Transfer............ . ... 6 Characteristics of Lending ........... ............. 7 Impact of Subprojects. ........ . . .....10 Technical Assistance . .................... .11 IV. INSTITUTIONAL DEVELOPMENT AND TECHNICAL ASSISTANCE 12 FONDEI Institutional Development ........... . 12 Management, Staffing and Organization. 12 Systems and Procedures ....... .... o.o* ....... 13 Resources .............. . .... ........ ....... .14 Interest Rates ..... ... 15 Technical Assistance........ 16 A. FONDEI-BCH ........... ................ . 16 B. Other Institutions li...... .1 COHDEFOR ........17 CONADI .................................... o . 18 Centre for Industrial Development (CDI) 19 V. OPERATIONAL AND FINANCIAL PERFORMANCE. 20 Operations.. .......... . ... 20 Financial Position and Results ....................... 22 Portfolio Quality .. ... ..... .... ............23 VI. CONCLUSIONS AND LESSONS LEARNED........ 23 I Th' dr "wi it? t r trirt I d'-rih4 it- *n nd fa v 4-1 hv r i ' t nniv in tt fnr r ANNEXES 1. Principal Economic Indicators, 1978-1984 ............... 26 2. Manufacturing Sector Value Added, 1975-1985 ............ 27 3. Schedule of Estimated vs. Actual Disbursements: (a) Loan 1659-HO .................................... 28 (b) Loan 2075-HO ....................... . . . ...... 29 4. Characteristics of Subprojects Approved Under the Loans 1659-HO *nd 2075-HO ................ ......... 30 5. Subprojects Approved and Financing Structure . 33 6. Listing of Subprojects Financed Under: (a) Loan 1659-HO .....o.oo ..ooooo. 34 (b) Loan 2075-HO ... o... .... -- .. .. 40 7. Performance of Subprojects ..................-...... 45 8. FONDEI's Projected and Actual Income Statements, 1979-1985 ........ ....... *........ . 47 9. FONDEI's Projected and Actual Balance Sheets, 1979-1985 **..............*---......o**oo*.* 48 10. FONDEI's Projected and Actual Financial Ratios, 1979-1985 .............. .. o.... 49 11. Analysis of Loans in Arrears: (a) Loan 1659-HO. .... . .... ... .o.. ......... 50 (b) Loan 2075-HO ..... ...............*.51 12. FONDEI's Projected and Actual Operations, 1979-1985 .... 52 Attachment . .. -. .....**** ... 53 - i - PROJECT COMPLETION REPORT HONDURAS FIRST AND SECOND INDUSTRIAL CREDIT PROJECTS (Loan. 1659-HO and 2075-HO) PREFACE This report reviewv the performance of the First and Second Loans to the Republic of Honduras for onlending through the Central Bank (BCH) to the Fondo Nacional de Desarrollo Industrial (FONDEI). It covers the period from FONDEI's inception in 1978 to 1985. Loan 1659-HO was approved on February 6, 1979, declared effective on June 7, 1979, and disbursed until June 19, 1985. An undisbursed amount of US$1.4 million was cancelled. Loan 2075-HO was approved on December 22, 1981, declared effective on August 17, 1982, and is still disbursing. The report is based upon the data obtained during a Bank mission to Honduras in May 1986 and was prepared by the former Industrial Development and Finance Division of the Projects Department, Latin America and Caribbean Region. Comments received from the Borrower have been taken into account as appropriate in finalizing the report and are included as an Attachment. The two projects have not been audited by the Operations Evaluation Department. - il. - Page 1 of 2 PROJECT COMPLETION REPORT HONDURAS FIRST INDUSTRIAL CREDIT PROJECT (Loan 1659-HO) BASIC DATA SHEET (Amounts in US$M) LOAN POSITIGN As of Sept. 30, 1987 Original Disbursed Cancelled Repaid Outstanding Loan 1659-HO 15.00 13.64 1.36 2.90 10.74 CUMULATIVE LOAN DISBURSE31ENT FY79 FY80 FY81 FY82 FY83 FY84 FY85 (a) Planned 0.05 2.38 5.90 10.94 14.18 15.00 15.00 (b) Actual 0.00 0.60 3.94 10.06 14.00 14.07 13.64* (c) (b) as % of (a) 0.0 25.2 66.8 92.0 98.7 93.8 90.9 OTHER PROJECT DATA Original Date Actual/Re-estimated Board Approval 2/6/79 2/6/79 Loan Agreement 3/8/79 3/8/79 Effectiveness 6/7/79 7/5/79 Subproject Submission 12/31/81 6/30/82 Loan Closing 12/31/83 12/31/83 Final Disbursement 12/31/83 6/19/85 Borrower Republic of Honduras Executing Agency FONDEI FOLLOW-ON PROJECTS Honduras - Second Industrial Credit Project, Loan 2075-HO, approved on December 22, 1981, in the amount of US$30.0 million. Honduras - Third Industrial Credit Project, Loan 2703-HO, approved on May 29, i986, in the amount of US$37.4 million. * The decline in disbursements is due to reimbursements made by Honduran Government for amounts withdrawn for subloans which were ex-post considered ineligible for Bank financing. - iii - Page A of 2 LOAN 1659-HO BASIC DATA SHEET (Cont'd) MISSION DATA No. of No. of Man- Date of Month/Year Weeks Persons Weeks Report Exploration 6/77 2 3 6 7/25!77 Identification 10-11/77 2 3 6 11/30/77 Preparation 12/77 1.5 1 1.5 12/13/77 Preappraisal 2/78 2 2 4 4/7/78 Appraisal 5/78 3 6 18 6/15/78 Post-Appraisal 9-10/78 1.5 2 3 - Supervision I 4/79 0.8 1 0.8 5/23/79 Supervision II 1/80 0.2 1 0.2 1/15/80 Supervision III 6/80 1 2 2 7/15/80 Supervision IV 10/80 1.2 1 1.2 11/17/80 Supervision V 2/81 0.6 2 1.2 3/10/81 Supervision VI 5/81 0.3 2 0.6 6/12/81 Supervision VII 4/82 0.4 1 0.4 5/14/82 Supervision VIII 12/82 0.3 2 0.6 1/21/83 Completion 4-5/86 1.0 1 1 STAFF INPUT (Manweeks) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 TOTAL Preparation 10.7 30.0 40.7 Appraisal 40.8 27.2 68.0 Negotiation 1.2 1.2 Supervision 3.0 5.2 11.6 0.6 - - 1.3 0.6 22.3 Subproject Supervision 0.8 0.2 1.0 Totals 10.7 7C.8 31.4 5.2 11.6 1.4 0.2 0 1.3 0.6 132.2 - iv - Page 1 of 2 PROJECT COMPLETION REPORT HONDURAS SECOND INDUSTRIAL CREDIT PROJECT (Loan 2075-HO) * BASIC DATA SHEET (Amounts in US$M) LOAN POSITION As of Sept. 30, 1987 Original Disbursed Cancelled Repaid Outstanding Loan 2075-HO 30.0 28.1 - 1.0 27.1 CUMULATIVE LOAN DISBURSEMENT FY82 FY83 FY84 FY85 FY86 (a' Planned 1.5 8.5 17.5 25.0 30.0 (b) Actual 0.0 2.0 5.4 15.3 25.1 (c) (b) as % of (a) 0.0 23.8 30.6 61.2 83.7 OTHER PROJECT DATA Original Date Actual/Re-estimated Board Approval 12/22/81 12/22/81 Loan Agreement 5/19/82 5/19!82 Effectiveness 8/17/82 8/16/82 Subproject Submission 12/31/84 12/31/85 Loan Closing 6/30/86 06/30/87 Final Disbursement - Borrower Republic of Honduras Executing Agency FONDEI FOLLOW-UP PROJECTS Honduras - Third Industrial Credit Project, Loau 2703-HO, approved on May 29, 1986, in the amount of US$37.4 million. v Page 2 of 2 LOAN 2075-HO BASIC DATA SHEET (Cont'd) MISSION DATA No. of No. of Man- Date of Month/Year Weeks Persons Weeks Report Preparation 10/80 1.2 1 1.2 11/17/80 Preappraisal 2/81 2 2 4 3/10/81 Appraisal 5/81 3 2 6 6/21/81 Post-Appraisal 10/81 0.6 1 0.6 11/4/81 Supervision I 4/82 1.6 1 1.6 5/14/82 Supervision II 12/82 0.3 2 0.6 1/21/83 Supervision III 5/84 1.5 2 3 6/26/84 Supervision IV 5/85 1.6 2 3.2 6/12/85 Completion 4-5/86 1.2 1 1.2 STAFF INPUT (Manweeks) FY81 FY82 FY83 FY84 FY85 PY86 TOTAL Preparation 18.9 18.9 Appraisal 16.5 26.1 42.6 Negotiation 10.0 10.0 Supervision 3.5 3.6 10.5 15.5 2.4 35.5 Subproject Supervision 1.0 0.9 1.8 4.6 8.3 Technical Assistance: DFC 3.0 3.0 CONADI 1.9 3.5 1.5 6.9 Totals 35.4 39.6 4.6 16.3 20.8 8.5 125.2 - vi PROJECT COMPLETION REPORT HONDURAS FIRST AND SECOND INDUSTRIAL CREDIT PROJECTS (Loans 1659-HO and 2075-HO) HIGHLIGHTS 1. The two loans under review in this report were the first two industrial credit loans made to Honduras to support FONDEI's operations as a second-tiet institution. The loans were in tne amounts of US$15.0 million and US$30.0 million respectively. FONDEI was established in 1978, and started operations with the first loan. The Bank's principal objective under these two loans was to help establish and strengthen an effective system to provide term financing for financially sound and economically efficient investment projects of mainly small- and medium-sized firms. Secondary objectives Lo_ussed on the institutional development of other Honduran institutions, namely Corporacion Hondurena de Desarrollo Forestal (COHDEFoR) under the first loan, Corporacion Nacional de Inversiones (CONADI) under the second loan, and Centro de Desarrollo Industrial (CDI) under both. Project implementation has been reasonably smooth and loan fund utilization relatively timely (para. 3.01-3.06 ff.) in light of the difficult economic circumstances that the country faces (para. 1.03). 2. The loans have been considerably more successful with respect to their primary than to their secondary objectives. FONDEI has developed into a reasonably sound institution which has already contributed significantly to industrial development in Honduras, and which finances a substantial percentage of commercial banks' industrial portfolios (paras 5.02-5.04). Stability in FONDEI's management and the fact that it is a second-tier institution in the central bank have contributed importantly to FONDEI's development. While FONDEI has experienced many of the growing pains to be expected in a second-tier institution, it has made considerable progress under the two loans. For example, it has resolved, for the most part, initial weaknesses in the areas of subproject preparation, appraisal and superviUion (paras. 4.05 and 4.09). Similarly, subproject processing time has declined significantly over the life of the two loans (para. 4.08). The technical assistance component for FONDEI included under the second loan helped FONDEI to overcome these and other weaknesses (para. 4.18). 3. There are still many areas in which FONDEI requires further strengthening, such as organizational structure and information system management (paras. 4.04 and 4.10 respectively) and diversification of financing sources (para. 4.12). Technical assistance under the second loan (there was no technical assistance component under the first loan) provided effective support for FONDEI's institutional development (para. 4.18). Further assistance to FONDEI in these and other areas Is planned under the ongoing third loan. - vii - 4. The participating financial intermediaries (PFIs) have also made progress under the loans with respect to subproject preparation, appraisal and supervision (para. 4.06 ff.), although this progress has been much slower than anticipated. Some PFIs have assigned specific st%ff to such work on a full-time basis and have provided the necessary training. This area is a major focus of concern under the third loan approved in May 1986. 5. The subprojects financed by FONDEI have generally had a positive impact, with significant employment generation (paras. 3.16-3.19). Investment cost per job, however, has been considerably higher than anticipated at appraisal, reaching around US$14,000 and US$15,000 respectively under the first and second loans, based on a sample of subprojects. It may be that these figures are overstated for some firms which are not working at capacity and are therefore not fully staffed. 6. While FONDEI has financed sound subprojects, some PFIs have experienced problems with subloan recoveries under the First Project (para. 5.09). About 20% of the original loan amount is outstanding for over six months. The main reason for the relatively poor loan recovery has been the unrealistic maturities FONDEI had allowed during its initial years of operation (para 3.10). However, a comprehensive review of all subloans was carried out by FONDEI in late 1984, and an action plan including rescheduling of subloan maturities and provision of fresh working capital was initiated by FONDEI in conjunction with the commercial banks. Recoveries have improved since then, and it is estimated that overall bad debts under the project would result from 7 subprojects representing 6% of the original loan amount. Under the Second Project, FONDEI has greatly improved its evaluation practices, including the preparation of cash flow projections for each subproject. Moreover, FONDEI's improved subloan repayment monitoring system permits it to follow more closely the problem subprojects in its portfolio. As a result, the arrears under the Second Project are minimal. 7. Under the first loan, the Bank expected COHDEFOR to play an important role as financial intermediary, channelling US$6.0 million to the wood and wood products sector (para. 3.03), leading the Bank to pursue significant institutional development objectives for COHDEFOR (para. 4.20). After a change in management, COHDEFOR apparently lost interest in the loan, and, as a result, the Bank was unable to achieve these objectives or to make a significant contribution to development of the forestry sector in Honduras (para. 4.21 ff.). 8. Under the second loan, the Bank was requested by the Government to provide technical assistance to CONADI to help tnis important institution resolve its severe financial problems (para. 4.22 ff.). The Bank and the Government/CONADI agreed upon an action plan in late 1982,but this plan was not completely implemented, following changes in CONADI's management and staff (para. 4.23). Although this technical assistance was only partially successful at the time, the framework established under the action program is now proving useful in renewed efforts to resolve CONADI's problems. - viii - 9. The Bank has also pursued, under both loans, the objective of building and strengthening technical assistance services for small scale industries (SSIs) through CBI (paras. 2.07 and 2.09). While CDI received technical assistance from UNIDO during the implementation of the first loan, no Bank technical assistance to, or direct involvement with, CDI was planned. This is despite the fact that one of the stated objectives of the Bank project was to strengthen CDI's support for SMI development (para. 2.05). Under the second loan, however, the Bank cofinanced, with UNDP, a UNIDO-executed technical assistance program for CDI. This program was relatively successful, bearing in mind the constraints facing CDI (para. 4.29 ff.). PROJECT COMPLETION REPORT HONDURAS FIRST AND SECOND INDUSTRIAL CWTT PROJECTS (Loans 1659-HO and 2075-HO) I. INTRODUCTION Bank Industrial Sector Lending Activity. 1.01 Bank lending to support the Honduran industrial sector to date consists of three industrial credit projects, totalling US$82.0 million, the first two of which are reviewed in this report. The third operation is in an early stage of implementation, having been approved by the Board on May 29, 1986 (Loan 2703-HO). All three loans have been channelled through the Fondo Nacional de Desarrollo Industrial (FONDEI), which was established in 1978 by the Central Bank of Honduras (BCH). FONDEI is a second-tier institution specializing in financing industrial and tourisml/ development. 1.02 The Bank has been associated with FONDEI since its inception, with the first industrial credit project (Loan 1659-HO for US$15.0 million) approved in February 1979, and a second such project (Loan 2075-HO for US$30.0 million) approved in December 1981. This report covers the implementation period from 1979 to 1986 and examines the impact of the two loans with respect to: (a) the institutional development of FONDEI and, to a lesser extent, the participating financial intermediaries (PFIs), including those that were expected to play a special role during prc !t implementation, and (b) the technical assistance component included U.ler the second project. Country Econcmic Xnviroo ent 1.03 Honduras is the poorest country in Central America, with a per capita income of only US$730 in 1985. The economy grew rapidly during the 1970s, propelled by improvements in the terms of trade and the availability of external financing. However, from 1980 to 1983 economic conditions deteriorated because of a combination of a drop in coffee prices, the drying-up of private bank lending, and the severe worsening of the political climate in Central America. Employment creation fell behind the / Loan 1673-HO, a US$19.5 million tourism development loan approved in FY79, included a US$16.0 million tourism credit component channelled through FONDEI. rate of growth of the labor force, and unemployment increased to an estimated 25% in 1984. Wages behaved moderately throughout the 1980-85 period. 1.04 In November 1982, the Government of Honduras reached a standby agreement with the International Monetary Fund (IMF) on the basis of its stabilization and economic recovery program. The agreement was suspended in 1983 when the fiscal targets were not met. In 1984 and 1985, the public sector deficit averaged 10.8% of GDP. In 1984, 74% of this deficit was financed from external sources. During the implementation of the two projects, the Government continued to maintain an exchange rate which has been fixed at L2.0:US$1 for nearly 60 years. In 1982, the Government introduced exchange controls to stem the loss of reserves, and since then, some foreign exchange transactions have taken place outside the Central Bank's controls at a rate that rose to L2.8:US$1 in 1985. This rate is now much closer to the official rate, owing to massive external financing being received by Honduras. Initially, the investments under the Bank> loans were also affected by the strict exchange control and import restrictions, but later the Central Bank allowed automatic access to foreign exchange for industrial investors using FONDEI lines of credit (para 3.06). Manufacturing Sector. 1.05 Value added in the manufacturing sector accounts for only 15% of GDP compared to 14% in 1975 which indicates that sectoral growth has, on average, barely exceeded total growth. Manufacturing employs about 90,000 people, almost 8% of the economically active population. According to the 1975 industrial census (the most recent), the sector comprised 849 firms with five or more employees. Of these 849 firms, 478 had up to 19 employees, and 290 had 20 to 99 employees, while only 81 had 100 or more. These 849 firms accounted for about 37,000 jobs, with the remaining jobs in the sector being attributable to artisans and firms employing fewer than five persons. The limited domestic market has constrained the sector's development. Export promotion efforts have not been strong enough to turn it into a leading sector. In the 1980s, stagnation and crisis in the sector brought a sudden end to the buoyancy of the 19709, largely due to the foreign exchange shortage provoked by the drying up of foreign capital inflows and aggravated by capital flight, and to the collapse the Central American Common Market. As a result, manufacturing output declined sharply in 1982 and 1983. Although it recovered in 1984, it fell again in 1985, leaving sectoral output still 5% below its 1980 level. Accelerating economic and sectoral growth and employment creation will need a major private sector investment effort, requiring a favorable investment climate. II. PREPARATION AND APPRAISAL OBJECTIVES OF THE LOANS Preparation of Loan 1659-HO. 2.01 An initial project brief based on desk work was prepared in May 1977; this was followed by an exploratory mission in June 1977, and an - 3 - identification mission in October 1977. At the time, a substantial number of private investment projects in Honduras requiring external financing had been identified by various institutions, such as the International Finance Corporation (IFC) the Honduran Corporacion Nacional de Inversiones (CONADI - see para. 2.03 below), and the Corporacion Hondurena de Desarrollo Forestal (COHDEFCR), the national institution responsible for managing all Honduran forest resources and financing related investments. 2.02 The proposed objectives of the Bank's lending strategy, as set out in the project brief, were to: (i) emphasize participation of small- and medium-scale industries (SMIs) both in lending and associated technical assistance; (ii) strengthen the capability of existing public and private institutions to service the industrial sector; (iii) minimize industrial development's drain on public sector resources; and (iv) address Honduran industrial sector policies in the context of an overall approach to the growth of Central American economies. 2.03 The new government-owned institution, Corporation Nacional de Inversiones (CONADI) had recently been set up (1974). It emphasized the development of new, primarily large-scale public, private and mixed Honduran-owned enterprises. In addition, in 1977, Banco Nacional de Fomento (BANAFOM) wit'hidrew from small- and medium-scale industry financing in order to focus on its agricultural lending activities, leaving SMIs without an effective source of term credit or institutional assistance. In the absence of an efficient structure for SMI credit operations, BCH proposed to establish an industrial credit channel with adequate staff and loanable resources. This facility would channel resources to the wood subsector through COHDEFOR and to SMis through existing financial intermediaries. After reviewing the feasibility of such a mechanism versus alternatives such as expanding CONADI's lending functions to include all SMIs, or CONADI operating an industrial credit rediscount facility, it was agreed that the Central Bank's suggestion to establish a new "SME lending window" be pursued. This view was supported by the Ministries of Finance and Economy. 2.04 The project was preappraised in February 1978 and appraised in May 1978, with no critical new issues being identified. Project processing continued smoothly through the Loan Committee and negotiations stages while BCH took the necessary steps to establish FONDEI. At the same time, COHDEFOR and CTI (Centro Tecnico Industrial, the predecessor of CDI, the Centro de Desarrollo Industrial, responsible for providing technical assistance to SMIs) took the measures required for their participation in the project. The Bank loan of US$15.0 million to the Republic of Honduras was approved by the Board of Directors on February 6, 1979 and the Loan documents were signed on March 8, 1979. Appraisal Objectives of Loan 1659-HO. 2.05 The first project was designed to support the Government's industrial strategy and to assist the Government in meeting its principal objectives for developing the industrial sector, which included promoting and helping to sustain rapid and efficient growth of industrial output, exports and employment. Specifically, the project was to assist the - 4 - government to achieve these objectives by: (a) establishing an effective system to provide term financing for financially sound and economically efficient investment projects of mainly small and medium-sized industrial firms; (b) helping COHDEFOR to finance priority investments designed to upgrade efficiency and increase output in the primary and secondary wood industry sectors; (c) assisting industrialists to improve the quality and thoroughness of their investment planning; (d) encouraging commercial banks to increase term lending to SMI's, based on sound project appraisal techniques; and (e) building an effective service of technical assistance to the smaller industrtal enterprises through CDI. 2.06 The loan proceeds were to be onlent to BCH to enable FONDEI to carry out the project, which consisted of a US$15.0 million credit with various allocations for subprojects to be financed by COHDEFOR, sublending to small firms, etc. There was no technical assistance component under the loan. UNDP had agreed to finance two or three consultant years of external technical assistance to help CDI build its small industry assistance program. It was expected that the subprojects financed would have a significant economic impact with, in particular, the generation of about 4,000 new jobs at an average investment cost per job of US$6,800 through about 165 subprojects with a total cost of US$28.0 million equivalent. The relatively low investment cost per job estimate was based on the expectation that about 60% of sublending would go to the relatively highly labor-intensive wood, construction materials and metal products industries. The wood industry component of the project alone was expected to account for almost 2,450 new jobs, at an average investment cost of US$5,300 per job, due to an emphasis on financing labor-intensive medium- and small-scale primary and secondary wood product projects; these projects were largely to benefit families with relatively low income levels, living in the small rural towns and villages of the Comayagua forest region. Preparation of Loan 2075-HO. 2.07 During a Bank supervision mission for the first project in October 1980, the Bank was requested to consider preparing a second industrial credit project since it was expected that the first loan would be fully committed by end-1981. A Bank mission accordingly visited Honduras in January-February 1981 to undertake preparation/preappraisal of the second project. Giveui COHDEFOR's inability to commit most of the US$6.0 million allocated to it under the first project (para. 3.04), and following discussions with COHDEFOR's management, it was decided that CORDEFOR should participate as a financial intermediary in the second project, with no specific allocation of loan resources made in advance. CONADI also expressed interest in receiving a Bank loan, primarily for agroindustry. However, CONADI was in a difficult financial situation for a number of reasons, including an inadequate capital base and a significant arrearage problem in its lending portfolio. It was therefore decided that a more appropriate initial form of assistance to CONADI might be through a technical assistance component in the second loan. The desirability of including a technical assistance component to help (i) strengthen FONDEI's operating systems, as well as (ii) the functioning of the PFIs, including CDI, was also considered at that time. UNDP indicated that it would be prepared to cofinance such technical assistance with the Bank. 2.08 The project was appraised in May 1981. Major issues addressed during appraisal, in addition to that already discussed, were FONDEI's onlending interest rate and the interest rate to final beneficiaries, the introduction of a guarantee mechanism to encourage lending by financial intermediaries for small-scale enterprises (SSI's), and the need to reach agreement with the Government on appropriate revision of its draft export promotion law (agreement on this issue between the Government and the Bank was required by the IMF in the context of its negotiations with Honduras (para. 1.04)). Because of a significant increase in the rate of inflation, it was felt that the interest rate to final beneficiaries needed to be raised substantially above the 12% prevailing under the first project. The possibility of financing tourism subprojects was also reviewed at FONDEI's request, but finally rejected by tile Bank, partly because of substantial amounts remaining to be committed under the Tourism Development Loan, as well as due to the difficult Central American situation, which was likely to discourage further significant development of the sector. Appraisal Objectives of Loan 2075-HO. 2.09 The Bank loan of US$30.0 million was approved by the Board on December 22, 1981, and the Loan documents were signed on May 19, 1982. Overall project objectives remained the same under the second project as under the first. Specifically, the project was to assist in their achievement by: (i) providing term lending through FONDEI for financially and economically sound investment subprojects of small and medium-sized enterprises; (ii) encouraging the building of an effective system within Honduras to generate sound industrial investment projects; (iii) supporting FONDEI's efforts to upgrade the project appraisal and supervision capabilities of participating intermediaries and strengthening FONDEI's operating system; and (iv) strengtitening technical assistance services to the smaller industrial enterprises through CDI. 2.10 In addition to continuing the positive institutional development activities initiated under the first project, the second project was to help fill a gap in the financing of efficient industrial projects in Honduras at a time when the financial system lacked long-term resources to cover industrial investment needs. The project was expected to finance some 200-225 investment subprojects involving total investment costs of about US$47.4 million, focusing on a wide range of small and medium-sized enterp:'ses. The economic rate of return of typical individual subprojects was expected to exceed 25%, and the subprojects were expected to have a substantial employment impact, generating about 4,200 new jobs at an average total investment cost per job of about US$11,300 in 1981 prices. Total output of the subprojects was estimated at about US$44.0 million a year (an investment to annual capital output ratio of about 1:1), of which about US$14.0 million would be for exports. Project impact was expected to be dispersed geographically, with agroindustrial projects focused mainly along the north coast and in the southwest of the country. 2.11 The extent to which the appraisal objectives of the first two loans, including the specific institution-building objectives, were achieved is described and reviewed in Chapters III to V. III. UTILIZATION OF LOUN POCEEDS Resource Trafer 3.01 Rate of Utilization under Loan 1659-ItO. The loan became effective five months after Board approval, on July 5, 1979. The first disbursement was made during the first quarter of 1980. The original commitment and closing dates were December 31, 1981 and December 31, 1983, respectively. The commitment date was subsequently extended to June 30, 1982 and then to June 30, 1983. The loan was closed as of June 19, 1985, and the undisbursed balance of US$1.4 million was cancelled. 3.02 Loan commitments were initially slow because of FONDEI's inexperience in working with the Bank and weak demand from the participating financial intermediaries (PFIs), COHDEFCR in particular. Subsequently, however, the pace of commitments picked up, as a result of improl'ements in subloan processing. FONDEI initially had also some difficulty committing the amounts allocated for small-scale industry but, with the introduction of CDI as a financial intermediary (para. 3.04), it redressed the situation. The transfer to FONDEI of the resources initially assigned to COHDEFCR (para. 3.04), along with the slower than expected commitment of resources to small-scale industry, caused the commitment date to be extended to June 1983. 3.03 Loan Components tnder Loan 1659-HO. The loan proceeds were intended to assist FONDEI in financing investment projects of industrial firms, with specific initial allocations as follows: (a) US$6.0 million equivalent for investment projects to be financed by COHDEFOR; (b) no less than US$2.5 million equivalent for sublending to small firms (those with total assets, excluding land and buildings, of less than US$100,000 equivalent); (c) no participating intermediary other than COHDEFCR was to commit more than US$2.5 million equivalent in Bank resources as sub-loans, with sub-loans to small firms being excluded froiu this limit; and (d) no participating intermediary was to grant a sub-loan exceeding US$750,000 equivalent for any one investment project or investment enterprise, except that the corresponding limit for COHDEFCR was US$1.5 million equivalent. An initial free limit of US$250,000 for autonomous subloan approval was established for FONDEI. 3.04 A number of changes were made to these allocations during project implementation. In late 1980 COHDEFCR's allocation was reduced to US$3.0 million equivalent, given the lack of demand from COHDEFOR, and the favorable prospects for fairly rapid utilization of these resources by FONDEI. At the same time, the restriction on other financial intermediaries limiting the total participation of each to US$2.5 million of Bank resources was raised to US$3.25 million of Bank funds. In addition, CDI was included as a PFI under the project but, in line with its mandate to help the smallest firms was only authorized to finance subloans of small firms with total fixed assets, excluding land and buildings, of not more than US$40,000 equivalent. Subsequently, COHDEFOR's allocation was further reduced, first to US$231,262, which amount corresponded to the only COHDEFOR sub-loan pending, and then to zero, when FONDEI did not approve this subloan and COHDEFOR appeared to have no further pipeline. (Subsequently, one COHDEFOR subproject was approved, with COHDEFOlR treated as any other participating financial intermediary.) -7- 3.05 hate of Utilization under Loan 2075-HO. The loan became effective on August 16, 1982, eight months after Board approval and almost three months after the loan documents were signed, due to delays in receiving the necessary legal evidence and opinions. The first disbursement was made in the last quarter of 1982. Originally, the commitment and closing dates were December 31, 1984 and June 30, 1986 respectively. The commitment date was extended first to December 31, 1985 and, more recently, to June 30, 1986; the closing date has been extended to June 30, 1987. 3.06 Loan commitments were slower than anticipated because of the uncertain political and economic situation in Central America; the slack demand caused by the world recession, and the imposition of cumbersome foreign exchange allocation procedures which restricted imports of industrial goods. The pace of commitmer.ts improved considerably, however, from 1984 on, as demand for loan funds increased following a relaxation in FONDEI's operating regulations, and the simplification of the import procedures under the project. More specifically, the Bank agreed to an amendment in FONDEI's "Statement of Policies and Industrial Regulations" which increased from 40% to 50% the maximum share of permanent working capital financing in the aggregate investment subloan amount that FONDEI would cover. Furthermore, firms having already received subloans could apply for a complementary permanent working capital subloan, up to the 50% limit. Concerning foreign exchange, BCH agreed, at the suggestion of FONDEI, in 1983, that imported goods and services financed by FONDEI be exempted from the regular import procedures, reducing the time required to receive an import permit to five days. FONDEI disbursements also accelerated as it increasingly made use of the Bank's direct payment procedure. The average processing time was halved by the establishment of a special account in 1985 with an initial deposit of US$2.5 million. 3.07 Loan Components under Loan 2075-Ho. The second project consisted of two components, the first intended to assist in financing specific investment projects of industrial enterprises in Honduras (US$28.7 million), and the second to finance technical assistance programs for FONDEI, CDI, and CONADI (US$350,000, US$700,000 and US$250,000 respectively). Few changes were made to these allocations during project implementation, except that the limit for the aggregate outstanding sub-loans to a single firm was increased from US$1.25 million to US$2.0 million in 1984. The project also specified that no less than US$4.0 million should be used for sublending to small investment enterprises (those with fixed assets, excluding land and buildings, but including the fixed assets to be financed under the proposed investment project, of less than US$150,000 equivalent). In addition, no participating intermediary was to commit more than the equivalent of US$7.5 million in Bank resources, with sub-loans to small firms being excluded from this limit. The free limit for subloans was increased to US$400,000 equivalent. Characteristics of Lendiog 3.08 Through the two industrial credit Loans FONDEI has financed to date, 402 subprojects: 207 under the First Loan and 195 under the Second. It had been estimated at appraisal that the First Loan would finance about 165 subprojects, and the Second some 200-225 subprojects. The larger-than-expected number of subprojects financed under the First Loan is largely explained by the almost total lack of participation of COHDEFOR and CONADI as intermediaries (one subproject each), whereas they had been expected jointly to account for about half the Loan amount through financing relatively large subprojects. Total investment costs under the First Loan had been estimated at US$28.0 million; they actually exceeded US$31.8 million. Similarly, total investment costs under the Second Loan, estimated at about US$47.4 million, have, in fact, exceeded US$64 million (c.f. Annex 5). The increase in project costs was essentially due to the higher than expected contribution by the subloan beneficiaries. 3.09 Subloan Size and Maturities. Under the First project, the average FONDEI loan amounted to US$88,000 which included Bank funds (subloans) averaging US$65,700, compared with a subloan average af US$91,000 estimated at appraisal. Under the Second project average FONDEI loan and Bank subloan sizes have been considerably larger, at about US$183,000 and US$147,000 respectively. Under the First project, nine firms received subloans, representing almost US$3.8 million in Bank resources, above the US$250,000 free limit; under the Second project, 18 subprojects, using about US$13.5 million in Bank funds, were above the new free limit of US$400,000, with 32 subprojects above US$250,000. Under the First project, FONDEI made subloans of up to US$40,000 equivalent to 98 firms, and subloans between US$40,000 and US$100,000 equivalent to a further 57 firms. Under the Second project, these figures declined to 63 and 51 firms, respectively. 2/ While the increase in averave subloan size may not be altogether desirable, it partly reflects the repayment problems experienced under the First Loan, principally affecting smaller subprojects, which led some PFIs to focus on lending to somewhat larger firms under the Second Loan; it should also be mentioned that the targets for lending to small-scale enterprises have been met under both Loans. A further factor tending to increase the size of subloans under the Second Loan was the suspension of CONADI's lending operations (paras. 4.26 ff.) and the consequent referral of many larger scale firms to FONDEI for financing. 3.10 Under the First Loan, 130 of the 207 subloans (63%) had maturities not exceeding five years, of which 11 subloans (5%) had maturities not exceeding three years. In addition, 46 subleans (22%) had grace periods of between nil (seven subloans) and six months; a further 142 subprojects (69%) had one year's grace. These relatively short maturities and, in particular, very short grace periods contributed significantly to subloan repayment difficulties under the First Loan (para 5.09 below). During the latter part of the commitment period of the First Loan, and particularly under the Second Loan, FONDEI has paid greater attention to 2/ The figures given here for subloans above US$250,000 and for subloans up to US$100,000 are not strictly comparable, since the former are based on data indicating use of Bank resources only, while the latter are based on use of FONDEI resources (including the Bank's funds). Thus, the number of subloans using less than US$100,000 of Bank funds is almost certainly somewhat greater than suggested here. repayment capacity when a'ialyzing subprojects. This was reflected in the subloan maturities under the Second Loan, with only 46 subloans (23%) having maturities up to five years, while 87 (45%) had maturities of 5 to 7 years, and 62 (32%) hai maturities in excess of seven years. With respect to grace periods, the bulk are still at one year (108 subloans, 55%), but 81 subloans (41%) carried grace periods of two years or more, as opposed to only 17 subloans (8%) under the First Loan. 3.11 Subproiect Characteristics. The Bank's participation in total investment costs under the two Loans has been about 43%, as opposed to the 53% projected *nder the First Loan (Annex 5). Financial intermediaries have financed 10% of investment costs, as required, and FONDEI has financed almost 12%, somewhat lower than the 17% expected. As a result, firms' own financing has averaged 34%, considerably higher than the 20% average expected. Firms may have self-financed such a high proportion of their investment costs in order to minimize interest expenses and/or because of the PFI's stringent policies. The high participation requirements may have excluded several viable subprojects which could not afford the high counterpart funding demands of PFI's. 3.12 Machinery and equipment financing accounted for 68% of total subloan amounts under each of the two Loans; under the First Loan, the remainder was almost evenly split between financing buildings and working capital (16% each), while under the Second Loan the share of building financing declined to 13% as working capital needs absorbed 19% of FONDEI financing.3/ Of the 207 subloans under the First Loan, 65 (31%) went to new firms, receiving 40% of FONDEI subloan amounts; under the Second Loan, 66 subloans (34%) went to new firms, representing 35% of subloan amounts. This quite high proportion of subloans and financing suggests that FONDEI has been fairly successful in helping to promote the development of new industrial enterprises. 3.13 Sub-borrower Characteristics. Under both loans, the subprojects have been reasonably well distributed among subsectors, with the distribution roughly corresponding to the various subsectors' share in manufacturing value-added. Three subsectors in particular have accounted for 65% of FONDEI's lending: the food and beverages subsector alone has accounted for 26% of subloans by number and 32% by value, the metal products subsector has taken 16% of subloans and 17% of their value, and chemical products have absorbed 16% of FONDEI resources for 13% of subloans by number. The textiles and apparel subsector has absorbed 17% of subloans by number, but only 12% by value; non-metallic minerals account for 10% of subloans, both by number and by value; paper and printing has received 8% of the financing through 6% of the subloans, while wood and wood products, and other manufacturing have received respectively 4% and 1% of FONDEI funds through 9% and 3% of the subloans. 3, Again, these figures represent use of FONDEI financing, including Bank resources. FONDEI's information system monitors the use of all funds channelled through FONDEI, rather than only Bank funds. - 10 - 3.14 While the average subloan size has been considerably larger under the Second Loan than .der the First (para. 3.09), the distribution by asset size of sub-borrowers has not changed substantially. Thus, while the First Loan financed 35 firms with assets of up to US$40,000 equivalent, allocating 2% of FONDEI financing to them, 54 such firms were financed under the Second Loan, receiving 4% of FONDEI financing. Similarly, 63 firms with assets over US$250,000 equivalent were financed under the First Loan, receiving 68% of FONDEI's financing, and 57 such firms were financed under the Second Loan with 71% of total subloan values. Expressed differently, 50% of subloans went to firms with less than US$100,000 equivalent in assets under the First Loan; such firms received 47% of the subloans under the Second Loan. 3.15 The two projects have been moderately successful with respect to achieving a reasonable geographic distribution of subprojects. almost half the subprojects are located in and around San Pedro Su a, the major industrial city, with a further 28% located in and around the capital, Tegucigalpa. Thn remaining 23%, alowever, are quite broadly distributed across the country, in 12 other departments (regions), and have received 13% of FONDEI financing under the two Loans to date. The Comayagua region, in particular, received only nine subloans, fewer than had been hoped for under the First Loan alone, since COHDEFOR did not participate in the projects as had been expected. Inpact of Subprojects 3.16 Employment Generation and Investment Cost per Job. Based upon the subproject appraisals, i.e. the ex-ante data, 3,720 jobs were created under the First Loan, at an average investment cost per job of about US$8,500 in current terms. These results compare reasonably favorably to the Bank appraisal estimates of 4,000 jobs at an average cost of US$6,800 in 1978 prices, bearing in mind that the wood industry, which had been expected to be a major source of low investment cost jobs under the Loan, received little investment (para. 2.06). Under the Second Loan, again based on the ex-ante data, for subloans approved up to year-end 1985, 3,711 jobs were to be created, at an average investment cost per job of about US$17,300 in current terms. This figure compares less favorably to appraisal expectations of some 4,200 new jobs at an average cost of about US$11,300 in 1981 prices. 3.17 The tables shown in Annex 7(a) and (b) give estimated (ex-ante) and actual (ex-post) data for a sample of subprojects under both Loans, and the comparisons are quite revealing since the tables show considerable differences between the estimated and the actual figures in all categories considered. Under the First Loan, it was estimated that the 36 subprojects sampled would, in aggregate, generate 652 jobs, whereas actual employment generation has been 461 jobs. Under the Second Loan, however, the 35 subprojects sampled were expected to generate a total of 500 jobs, but have actually generated 622 jobs. The sample suggests that the actual employment impact of the Loans has been about as positive as had been expected. 3.18 Investment cost per job, however, on the baais of the sample, #as considerably higher than expected under the First Loan: the average - 11 - estimated for the 36 subprojects sampled was US$8,600 equivalent (almost identical with the overall average ex-ante figure of US$8,500), while the actual average for these subprojects was almost US$14,400, dUe to a combination of investment cost overruns and lower than expected employment generation. Under the Second Loan, the discrepancies are much smaller: for the 35 subprojects sampled, average investment cost per job was estimated at US$15,300 equivalent (somewhat lower than the overall ex-ante data). with the actual results yielding an average of around US$14,800. In this instance, investment cost overruns were slightly outweighed by higher-rhan- anticipated employment generation. While these investment-cost-per-job figures appear rather high for a country such as Honduras and given the type of subproject generally undertaken (fairly small-scale, using * equipment that is generally not highly specialized), it should be borne in mind that many of the firms are working well below capacity, and that the figures given here reflect actual usage and employment rather than potential usage and employment. 3.19 Financial and Economic Viability of Sutprojects. The estimates of internal financial rates of return shown in Annex 7 are generally considerably higher than the actual results. This may be attributed in part to the higher than estimated investment costs: for the 36 subprojects in the First Loan sample, actual investment costs totalled L13.3 million (about US$6.6 million) as opposed to the L11.3 million (US$5.6 million equivalent) estimated, while for the 35 subprojects sampled under the Second Loan, actual investment cost totalled L18.5 million (UP$9.2 million equivalent) as against the estimate of L15.3 million (about US$7.6 million). The remaining differeaces must be attributed to a combination of two factors: a less favorable economic and business climate when subprojects came on line than could reasonably have been expected at the time of the investment decision and subproject preparation, and weaknesses in subproject preparation. It should be noted that for 23 of the 36 subprojects sampled under the First Loan the ex-ante financial rate of return was calculated subsequently, based on data available at appraisal. Also, given the often extended life of industrial investments, poorer-than-expected performance to date arising from external factors will have been projected into the future for the "actual" calculation, which might understate the actual benefits that will ultimately be achieved. Despite these problems, only eight of the 36 subprojects sampled under the First Loan, and five of the 35 sampled under the Second Loan, had actual rates of return below 10%. Economic rates of return were calculated for a sample of relatively larger projects financed under the Second Loan. The ex-post results, show an average ERR of 18% for the sampled projects, which was somewhat lower than that estimated at appraisal but within the acceptable range specified under the SAR. To clhnical Assistance _.20 The technical assistance component provided under the Second Loan was primarily oriented toward supporting and furthering the institutional development of FONDEI, CDI and CONADI. Its impact on each institution is discussed in the respective sections of Chapter IV. - 12 - IV. INSTITUTIONAL DRVRLOPHINT AND TKQINICAL ASSISTANCE FOIDKI Institutional Development Management, Staffing and Organization 4.01 PONDEI was established in late 1978 as a trust fund. It operates as a largely autonomous department within BCH. OONDEI is headed by an Executive Director who is responsible for managing day-to-day operations and who reports to an Executi-e Committpe, set up by BCH which oversees all of FONDEI's activities. This Executive Committee is presided over by the President of BCH, or his representative, and is composed of the Minister of Economy or his representative, a representative of the commercial banks, and FONDEI's Executive Director. The Committee's role is central to FONDEI's successful operation, not only for administrative reasons (it presents FONDEI's proposed budgets to BCH's Board, prepares staffing plans, and the like), h,ut also because it is responsible for establishing FONDEI's operating policies and approving its relatively larger subloans. 4.02 BCH, which has a well-deserved reputation for being technically sound, has endeavored from the start to ensure that this should also hold true for FONDEI. In this context, che Committee views protecting FONDEI from inappropriate external influences to be of prime importance. FONDEI has been successful in this regard, helped no doubt by its location within BCH and the fact that, since it is a second-tier institution, FONDEI subprojects must already have gained the approval of a commercial bank, which will bear the credit risk. 4.03 Yanagement and Staffing. FONDEI has had considerable stability and continuity in its management, in particular, having had the same Executive Director, Licernciado Arturo Corleto, since it commenced operations in 1979. FO!4DEI is known for its professionalism, and for its experienced cadre of analysts. In 1979, FONDEI commenced operations with a professional staff of four, which expanded rapidly to 13 in 1981, and to today's staff of over 35 professionals. They are generally dedicated, competent and respected by the private sector. Under the two projects, FONDEI contracted additional staff on a timely basis as operations expanded, and was generally responsive to Bank concerns at various times with respect to adequate staff training for FONDEI's staff as well their number and areas of specialization. 4.04 Organizational Stracture. FONDEI's organizational structure has evolved ini paraliel to its growth in staff, from a simple structure with three sections for Analysis, Engineering, and Administration, reporting to the Executive Director, tc today's structure, in which two central departments, one for Evaluation and Supervision and the other for Planning and Finance, earh with appropriate divisions, a Technical Assistance unit, and the San Pedro Sula regional office all report to the Executive Director and his Deputy. This organizational structure has proved to be satisfactory overall to date. A significant organizational development under the Second Loan was the establishment of FONDEI's internal Credit Ca.mnittee in late 1983. While retaining ultimate authority and - 13 - responsibility for subloan approvals, the Executive Committee has delegated part of its subloan approval authority to this committee (para. 4.08), which can meet much more frequently than the Executive Committee and thus has speeded up subproJect approval quite significantly. Systems and Procedures 4.05 Subproject Approval and Supervision. The qualitv of FONDEI's subproject approval and supervision work has improved consistently under the two projects. In theory, the PFIs are responsible for preparing subproject appraisals to be reviewed by FONDEI in order to determine whether the subproject meets the eligibility criteria for financing as well as whether the PFI's appraisal has been adequately perZormed. In practice PFIs have developed their abilities more slowly than expected. Under the First Loan, the PFIs focussed on merely evaluating the financial plan and risks of subprojects and on securing adequate collateral, leaving FONDEI to carry out the full appraisal of virtually all subprojects. 4.06 Under the Second Loan, FONDEI worked more closely with the PFIs to promote their awareness of the importance of complete technical, financial and economic appraisals of proposed subprojects. In addition, FONDEI has held training seminars which have been attended by some 120 PFI staff. The result has been a measurable improvement in the preparation of subproject appraisals by the PFIs, although no PFI has to date been considered sufficiently competent in subproject appraisal to be granted a free limit, which would help to speed up processing time. Under the Third Loan, it is proposed to grant those PFIs which establish competent special project units a free limit to approve subprcjects which are subject to only an ex-post FONDEI review. 4.07 Early weaknesses in FONDEI's subprojecZ appraisals included, in particular, the lack of implementation timetables for propobed subprojects. Such timetables are of great importance in estimating when new investments will come "on-line", and are generally used in preparing the subproject cash flow calculations utilized in repayment capacity analysis. This weakness led, ultimately, to problems with portfolio quality (affecting the PFIs -- see para. 5.09 ff.) because of insufficient grace periods and subloan maturities. In addition, financial and economic rates of return were not generally calculated until toward the end of the implementation of the First Loan. Under the Second Loan, however, financial rates of return were calculated for all subprojects and economic rates of return for subloans exceeding US$250,000. Repayment capacity analysis has improved considerably, as reflected in longer, more appropriate grace periods and maturities. 4.08 Subproject processing time which under the first loan was an issue of some concern to final subborrowers, PFIs, and the Bank, also improved substantially under the Second Loan. While much of this improvement is due to FONDEI having become more proficient, and thus speedier, at subproject preparation and appraisal, part of this improvement may be attributed to the establishment of the Credit Committee (para. 4.04). This Committee meets every week, if necessary, and may approve loans up to L200,000 (US$100,000), subject to a routine (ex post) Executive - 14 - Committee approval. The Executive Committee, by contrast, meets every six to eight weeks, often causing significant delays in subproject approval. Since the Credit Committee has proved successful to date, it's authorization limit was increased under the Third Loan to US$800,000 equivalent. 4.09 Subproject supervision by PFI's has generally consisted of verification of proper use of loan funds during disbursement and, subsequently, visits connected with interest and principal collection. FONDEI is now working with the PFIs to improve gradually their supervision procedures. FONDEI's own subproject supervision activities have improved substantially, particularly under the Second Loan, Under the First Loan, in fact, FONDEI commenced supervision activitire o.ni;, toward the end of project implementation, when it set up a regulat supervision program. FONDEI went almost to the other extreme, undertak'r.3 very intensive subproject reviews. With the expansion of operations, which has made the latter approach impractical, FONDEI is now taking a more selective approach to supervision. 4.10 Information Systms. FONDEI's information systems have developed in a generally satisfactory fashion, largely impelled by the Bank's requirements for various types of information. FONDEI started computerizing its information system under the Second Loan, with Bank support under the technical assistance component (para 4.17). Implementation of this component was delayed by about two years mainly because of BCi's procurement procedures regarding selection of computer and other office equipment. FONDEI is only now starting to have sufficient data loaded into the system to permit useful analyses to be made, and some further assistance has been included under the Third Loan to continue and reinforce the computerization process. While limited reporting to FONDEI from the PFIs has been more or less adequate in the past, there is now a need to organize, standardize and expand the system in the f.ture. This will gain particular importance with the planned increased Lransfer of subproject preparation, appraisal and supervision responsibilities to the PFIs. 4.11 Accounting System and Procedures. FONDEI's accounting systems and procedures are satisfactory, and its portfolio control and information system is being strengthened through the technical assistance component of the Second Loan. FONDEI's accounts have been audited by a firm of external auditors, in line with Bank requirements. Reports have been submitted on a timely basis, and the reports have been unqualified. Resources 4.12 All of FONDEI's financing to date has come either from the Bank or from its own resources (which consisted of an initial Government capitalization of US$5.0 million and an increase in capitalization of US$2.5 million provided by Government under the Second Loan). The Bank financing up to now has come through the tourism development loan and the two industrial credit loans; the recently approved third industrial credit project will provide a conduit for further Bank financing. These two sources of financing have so far proved adequate to enable FONDEI to become a significant source of term financing for industrial development. - 15 - Nevertheless, given FONDEI's maturity as a eecond tier intermediary and the desirability of strengthening its resource and capital base, a furrher diversification beyond its two original sources would be highly desirable. Interest Rates 4.13 Loan 1659-HO: All subloans financed by FONDEI so far have been denominated in lempiras (a dollar-denominated subloan option is included under the Third Loan) and, once a subloan has been made, the interest rate charged remains fixed for the life of the subloan. Interest rates to final borrowers have increased from 12% p.a. under the First Loan to the current rate of 17% p.a. Comparable a.ternative interest rates for medium- and long-term loans to industry were at around 12-13%, and annual inflation averaged under 7% from 1975 to 1978. Shortly thereafter, however, inflation increased to 12% in 1979 and 18% in 1980, although it started to decline in early 1981. FONDEI adjusted its rate to final borrowers with a lag, raising it in 1981 to 16%. The increased margin was a windfall to FONDEI, since the spread to PFIs was fixed at 3%, 4%, or 5% depending on the size of the final subborrower, and BCH's fee for bearing the foreign exchange risk was set at 0.5% for the life of the Loan. 4.14 Loan 2075-HO: Under this loan the interest rate was further raised to 17%, which was expected to be positive in real terms; in fact, annual inflation dropped to an average of 9.2% from 1981 to 1983, with a further decline to below 5% since 1984. During this period, the maximum r ate that could be charged by commercial banks for comparable lending was raised to 19%, although the banks have lent at rates below the maximum at times when credit demand has been weak. With the decline in inflation and sluggishness in demand, FONDEI considered decreasing its rate to final borrowers to 16%. So far, this has proven to be impossible without seriously affecting FONDEI's status as a financially viable institution, given the interest rate structure under the project: the See-nd Loan carries a fixed Bank interest rate of 11.6%, BCH receives a 1% per annum fee for bearing the foreign exchange risk under the Loan, and the participating financial intermediaries receive 3%, 4%, or 5% spread according to the size of the sub-borrower.4/ 4.15 FONDEI offers different spreads to the PFI's depending on the size of the borrowers. A 3% spread is offered when the ultimate beneficiary is a medium-sized or larger enterprise, while the spread increases to 4% for small firms (for definitions see paragraphs 3.03 and 3.07), and to 5% for very small firms with fixed assets not exceeding US$40,000 equivalent under the First Loan, and with fixed assets, excluding land and buildings, of not more than US$50,000 equivalent inder the Second Loan. These spreads appear to have been adequate to encourage participation under the two Loans by most financial iatermediaries which work with industry. Whether the spreads have been adequate to ensure 4/ Under the Third Loan, the Bank resources are transferred to FONDEI at variable rates, which permit (currently) adequate margins to the PFIs, a foreign exchange risk margin accumulated at the BCH and a 2.0% margin to FONDEI for its operational costs. - 16 - appropriate levels of lending to the very small entrepreneurs is more debatable. Even though under both Loans the minimum targets for lending to small-scale firms (para. 3.09) were exceeded, perhaps more could have been achieved through better commercial bank participation. CDI was the main lending channel to SMI's. The third FONDEI project recognizes what since commercial banks are reluctant to lend to the very small businesses, despite the higher spreads offered for such lending, FONDEI should undertake a study which would recommend specific measures to increase institutional lending to such SSI's. Technical Assistance A. FONDEI-BCH. 4.16 The First Loan contained no technical assistance component; this is rather surprising, given that FONDEI was a new institution, and that the L-an included as an objective the building of an effective technical assistance service to small firms through CDI (para. 2.06). It should be noted, however, that UNDP was committed to financing UNIDO technical assistance to CDI. 4.17 The Second Loan, on the other hand, provided for quite a substantial technical assistance pr3gram, with Bank financing being matched by UNDP financing. In particular, the loan provided for FONDEI to hire consultants to: (a) prepare material for the use of FONDEI, financial intermediaries and private consultants in subproject preparation, appraisal and supervision; (b) carry out a training program for FONDEI and financial intermediaries' staff, through total immersion seminars during 1982-84, and through visits to foreign DFCs, to complement the activities outlined in (a) above; (c) upgrade FONDEI's financial planning, its information and control system, loan administration, operating and disbursement procedures; (d) analyze technical aspects and carry out market and subse-toral studies as background material for subproject appraisal; and (e) strengthen and broaden the services offered by BCH's industrial department through its chemical analysis laboratory. 4.18 This technical assistance program for FONDEI was implemented substantially as planned and with good success. The achievements of the program are largely reflected in the comments on specific functional areas of FONDEI elsewhere in this report. In this section it suffices to note that the project helped FONDEI to mature into a competent second tier institution, with a positive impact on improving the project evaluation and supervision capacity of commercial banks through staff training. The program had a lesser impact with respect to the objective of improving the BCH's industrial technology laboratory. In the design of this activity, the Bank/UNDP project document allocated eight manweeks for a diagnostic study of the problem areas. The results of the study recommended a relocation of the laboratory outside the BCR complex and an investment plan amounting to US$600,000 in two phases. The BCH management was not keen to implement the report findings and hence this investment component was not included in the follow-up project. Besides, the functioning of the laboratory was not considered critical to the success of FONDEI's credit program. - 17 - B. Other Institutions pOIFO 4.19 As a forestry sector development institute OOHDEFOR was expected to play an important role under the First Loan, as outlined in Chapter II above. Established in 1974, COHDEFOR was responsible, among other things, for promoting and financing the growth of an efficient wood products industry, and for helping improve the living standards of the impoverished rural population. By December 31, 1977, COHDEFOR's outstanding portfolio to the forestry sector amounted to L22.8 million. Its lending was mainly focussed on financing invencories, other short-term needs, and exports, although its activities included some term lending to finance fixed assets as well as equity participation in certain industrial ventures. Its planned investments over the period 1978-83 were estimated at about US$75 million and involved three main areas, two of which, the Comayagua forest area development program and the expansion of the secondary wood industry sectar, were to be supported by the Bank under the First Loan through the US$6.0 million allocated to COHDEFOR. 4.20 Although COHDEFOR was considered to have a generally sound organization, after having received substantial assistance from FAO and CIDA, the Bank was pursuing a number of institutional development objectives for COHDEFOR through the project. In particular, COHDEFOR was to define its operating policy, establish a Forestry Industries Financing Fund, and create a Wood Industry Project Unit that was to be adequately staffed to assume responsibility for industrial project promotion, evaluation and supervision in coordination with COHDEFOR's Production and Forestry Departments. COHDEFOR was also to ensure that staff would receive training as necessary to be able to carry out these tasks. COHDEFOR's management changed, however, between project preparation and implementation, and was extremely slow in establishing the Fund and the Project Unit, and in approving an Operating Policy Statement. Subsequently, COHDEFOR failed to commit the bulk of the loan funds initially allocated to it (para 3.04). COHDEFOR's failure to live up to the Bank's expectations was largely due to the fact that the new management was scarcely interested in the Bank project, with one exception: in late 1979, COHDEFOR made a request that the Bank allow the Fund established in COHDEFOR to finance enterprises with 100% COHDEFOR ownership. This request suggests that the new management was primarily interested in developing those areas of the sector which were wholly under COHDEFOR's control; the Bank rejected the request as being contrary to the Government policy of fostering private sector investments. 4.21 As a result, the First Loan provided much less support to the forestry sector than anticipated and was also unable to contribute to COHDEFOR's institutional development. Although CORDEFOR was included as a financial intermediary under the Second Loan, it made no use of Loan funds. FONDEI has, however, financed the subsector to some extent through other financial intermediaries, with 27 subprojects (including the one CORDEFOR subproject) accounting for about US$1.6 million under the First Loan (as opposed to US$6.0 million equivalent in Bank resources originally allocated to COHDEFOR), and 11 subprojects absorbing less than US$0.7 million under the Second Loan (Annex 4). - 18 - CONAI 4.22 CONADI was established in 1974 by the Honduran Government in order to help (a) provide long-term resources for industrial investment, thus filling a gap in industrial equity and term financing; (b) develop a capital market; and (c) expand public and mixed Honduran ownership of larger scale enterprises. By December 31, 1977, CONADI's portfolio had already reached L99 million (US$49.5 million equivalent), made up of L71 million in loans (L42 million in long-term mortgage loans for tourism projects, and L28 million in loans to industrial enterprises) and L28 million in equity investments. CONADI was expected to be an important intermediary under the First Loan, easily absorbing the maximum allowed of US$2.5 million in Bank resources through a few relatively large subprojects. In practice, CONADI made only one subloan under the Loan, absorbing US$675,000 of Bank funds. 4.23 In late 1980, in the wake of senior management changes and a consequent shift in focus, CONADI requested the Bank to consider making a loan to it for agroindustry. When the Bank started to explore this possibility, it soon became apparent that CONADI's financial situation was precarious. By December 31, 1980, CONADI's total portfolio had grown to US$212 million, a fourfold growth in just three years, of which 51%, 28%, and 21% were for contingent liabilities (mainly guarantees), loans, and equity investments, respectively. CONADI's debt and contingent liabilities/equity ratio had grown to 16.4:1 CONADI was showing modest profits in 1978-80, but this was largely because it made very few portfolio provisions. About 13% of CONADI's loan portfolio was in arrears, affecting about one-third of the total lendirg portfolio; these figures were also underestimates, since CONADI frequently restructured loans in arrears. CONADI anticipated a US$14 million cash deficit in 1981. The institution's weak financial situation largely resulted from: (i) a mismatch of short- and medium-term (mostly foreign) liabilities with long- and very long-term assets, often of highly doubtful quality; (ii) attempts by CONADI to match asset maturity to the relatively short-term liabilities by establishing inappropriately short loan maturities, thus contributing to the portfolio arrears problem; (iii) payment of guarantees, since a high percentage of firms did not repay their loans secured by CONADI; and (iv) CONADI's inadequate collection system. 4.24 In view of CONADI's importance a- the largest industrial development institution in Honduras and the Government's concern to resolve its financial problems and transform it into a sound and efficient institution, the Bank agreed to include a specific technical assistance component ("second stage") for CONADI under the Second Loan. The "first stage" assistance to CONADI comprised a UNPP-financed, UNIDO-executed study of CONADI's operational and financial problems. Bank co-financing with UNDP of the follow-on technical assistance was made contingent on (a) Government/Bank agreement on the action to be taken based on the first stage study's recommendations; (b) satisfactory arrangements being made for the execution of the second stage; and (c) CONADI making no new investment, lending or guarantee operations until a decision was reached and agreed with the Bank on what to do with the institution. - 19 - 4.25 The US$0.25 million technical assistance component for CONADI was to be matched by the same amount for UNDP-financed technical assistance. These funds were to assist CONADI in implementing a plan of action that would be agreed with the Bank and would be based on the recommendations of a study of its financial situation carried out by UNDP-financed consultants. This study had two main objectives: (a) to review at the enterprise level appropriate actions concerning all CONADI subprojects; and (b) to review CONADI as an institution to determine whether and how it should be financially and operationally reorganized, as well as how its . financial crisis could be resolved. 4.26 By 1982, when the Second Loan was signed and became effective, * CONADI's financial situation was deteriorating rapidly, with a cash flow deficit for the year anticipated at about US$77 million, based on an expected cash inflow of only US$7.5 million. In October 1982, the Bank and the Government/CONADI agreed upon an action plan for CONADI. The plan had two basic objectives: (i) to recover, to the extent possible, CONADI's loan and investment portfolio; and (ii) to set up a new institutional framework for CONADI that would enable it to carry out its role as an industrial development institution. The Bank and the IMF were to be kept informed as to progress and revised plans to rehabilitate CONADI's financial status. It was agreed that the Bank-financed technical assistance to CONADI should focus on supporting the portfolio recovery effort. For this purpose, a full-time high level coordinating consultant was to be hired to work with CONADI, while various other consultants were to be hired on a short term basis, as needed, to work with the various firms involved. 4.27 During 1983 CONADI -ade some progress under the technical assistance component with respect to portfolio recovery and corresponding a:tions to be carried out at enterprise level; but progress was inadequate during 1984. In mid-1985, CONADI was preparing a new action program regarding its portfolio management, which it hoped to discuss with the Bank * in order to seek financial assistance for revitalizing part of its portfolio. CONADI later prepared a draft law to permit the sale of its assets/shares/enterprises, for which it sought rapid congressional approval. Such approval did not materialize until early 1986. The present Government seems more determined to restructure CONADI along the lines of the Action plan discussed with the Bank in the past. The assistance now being provided to the Government by US AID with respect to CONADI and the optimal disposal of its assets is consistent with the Bank's recommendations. Centre for Industrial Development (CDI) 4.28 CDI, as it exists today, came into existence in late 1978, having been transformed by law into an autonomous institution to provide a comprehensive range of extension and promotional services including technical assistance to SSIs. In 1980, CDI qualified as a financial intermediary under the First Loan, after extensive internal reorganization and technical assistance from UNIDO; CDI was limited, however, to financing very small SSIs (see para. 3.07). It financed 30 subprojects under the First Loan, using US$462,000 equivalent in FONDEI resources, and 26 subprojects under the Second Loan, using US$541,000 equivalent in FONDEI resources. - 20 - 4.29 The focus of CDI's activities has varied over time, with emphasis shifting back and forth between lending and technical assistance activities, largely reflecting changes in CDI's management. In addition, CDI's productivity has been quite low, as measured in terms of numbers of artisans and SSIs assisted, number of subproject appraisals/approvals, and man-months required. Accordingly, the objective of the technical assistance component for CDI included in the Second Loan, was, apart from helping to ensure sound lending, to increase CDI's efficiency by further upgrading its institutional capabilities and its staff. This technical assistance program was cofinanced with UNDP; UNIDO was the executing agency. 4.30 In addition to che relative frequency of changes in management, CDI's constraints include a stagnant budget in current terms for the last four to five years, and a shortage of both human and material resources, including means of transport to visit client enterprises. Given these constraints, the technical assistance program to CDI appears to have been relatively successful. In particular, subproject processing time, which until 1984 averaged about six months between CDI and FONDEI, has been reduced to an average of 45-50 days, with CDI taking about 30 days to prepare, appraise and approve subprojects over L25,000 (US$12,500 equivalent) and 15-20 days for smaller ones. CDI has also been quite successful using four mobile units, staffed with international volunteers, to provide technical assistance services in the wood, leather, metal mechanics, and food subsectors. V. OPERATIONL AND FINANCIAL PERFCRMW ACE Operations 5.01 While the overall trend in FONDEI's lending operations under the two Loans (Annex 5) has been one of growth, the operations have not been very regular, mainly due to fluctuations in demand. The second tier lending oparation has been quite successful if measured by the fact that the majority of Honduran financial intermediaries have participated under the two Bank Loans -- four out of 16 participating intermediaries accounted for 70% of FONDEI lending under the First Loan, and four out of 15 accounting for 65% under the Second Loan. The two leading banks under both loans were Banco de Occidente and BANCAHSA. 5.02 Participating Financial Intermediaries. Bank staff visited a number of Honduran financial institutions, sampling those active under one or both of the Loans and those with only marginal participation to date, in order to explore the reasons for their differing levels of use of FONDEI funds. Banco de Honduras a subsidiary virtually wholly owned by Citibank, has financed one subloan under each of the two Loans. It explained that up until 1980-81, its lending operations in Honduras consisted basically of channelling US dollar resources to generally large-scale firms in Honduras. As the climate turned sour for foreign lending, the bank became more aggressive in seeking domestic deposits, but it also adopted a policy of making only short-term working capital loans to relatively large scale industry. Banco de las Fuerzas Armadas (BANFFAA) - 21 - was formerly a saving institution for the Honduran armed forces, and in its new banking role appears still to be somewhat undecided concerning its lending focus, but seems interested in expanding its lending to industry. To date it financed one subproject with FONDEI resources. 5.03 Banco Sqgerin was one of the most active intermediaries under the First Loan, accounting for 19% of FONDEI financing. Under the Second Loan, however, Sogerin has financed only 13 subprojects, using 3% of total FONDEI funds under that loan. Sogerin was one of the banks most affected by some of the appraisal related shortcomings under the First Loan, with significant arrearage problems. Management feels that the difficulties were largely their own fault, since their appraisals were inadequate (however, they were also approved by FONDEI). It noted that many of the problem subprojects were viable but were granted insufficient maturities and grace periods, and that most of the subprojects which ran into problems involved new firms. Sogerin has been concentrating on portfolio recovery under the First Loan, and has adopted a more conservative policy under the Second Loan. Even so, the bank noted the significance of FONDEI as the first source of term financing in the country, as well as the importance of FONDEI-financed firms in its industrial and total portfolio: such firms account for around 50% of Sogerin's industrial portfolio anld 7% directly (12% indirectly, i.e. including other operations) of total portfolio. 5.04 Banco de Occidente, the fourth largest bank in Honduras, has a strong development focus and FONDEI resources account for almost all of the bank's industrial lending, which represents about 23% of the bank's portfolio in Tegucigalpa. While Banco de Occidente has remained active with FONDEI, it has generally financed larger firms under the Second Loan, to avoid the greater portfolio risks which the bank experienced with the smaller firms under the First Loan; the bank felt that FONDEI did not provide adequate support when it had problems with a subborrower. BANCAHSA has had a stable relationship with FONDEI using 13% of FONDEI financing under the First Loan and 14% under the Second. Moreover, BANCAHSA's industrial portfolio represents about 40% of its total portfolio, with FONDEI financing 20% of its industrial portfolio. BANCAHSA was pleased with its operations with FONDEI, feeling that FONDEI had given adequate support all along. The bank itself is quite selective with respect to clients and conservative in granting long-term financing. The bank's FONDEI-financed portfolio was generally very healthy, with only one or two small subprojects showing arrears. 5.05 Guarantee Fund. One relatively less successful aspect of operations under the Second Loan was the attempted resuscitation of the Credit Guarantee Fund which had been established by BCH in 1971 to encourage lending to SSIs. Due to inefficiences in guarantee procedures and the high cost of administration, the Fund had become inactive after 1979. Under the First Loan, the Bank had encouraged BCH to revise the Guarantee Fund, and during preparation of the Second Loan BCH proposed revisions to the Fund which, it was hoped, might foster increased lending by financial intermediaries to SSIs. 5.06 The revised Fund was to provide guarantees (up to 75% of a borrower's outstanding debt) for a one-time charge to the entrepreneur of 1% of the loan amount. Eligible enterprises would be those corresponding -22 - to FONDEI's very small enterprises (entitling PFIs to a 5% spread). BCH set up a small unit within its industrial department to manage the Fund. This unit was also to provide referral technical assistance services. In practice, the remodelled Fund had virtually no success in increasing the intermediaries' credit to small industries and artisans with insufficient collateral; in 1982, no loans were guaranteed; in 1983, operations for a total of US$273,000 equivalent were guaranteed; and in 1984, coverage of US$59,000 equivalent was granted. The poor results were achieved despite promotion campaigns by the Fund. Apparently, most financial institutions either distrusted the Fund or simply did not know how it operated. In 1984, a Bank supervision mission pointed out a number of problems in the way in which the Fund was operating, and made various suggestions to improve the situation. No action was taken on any of the suggestions, and the Bank did not raise the issue further since the targets for lending to SSIs were being fully achieved without the use of the Guarantee Fund. Financial Position and Results 5.07 FONDEI's financial position and results for 1979 to 1985 are shown in Annexes 8-10. They are fully satisfactory. FONDEI has been profitable in all except its first year of operation, with its net income generally exceeding projections by a significant margin. Even allowing for inflation, operating profits have increased steadily over the years. Net income at year-end 1984 was US$798,000, representing a 6.9% return on equity, with retained earnings reaching US$2.52 million and accounting for 22% of total equity. The corresponding figures for 1985 are: net income of US$1.4 million, representing an 8.3% return on equity, with total retained earnings reaching US$3.93 million, and 23% of total equity. Similarly, FONDEI's debt/equity ratio has at no time exceeded 2.7:1, despite orojections that it might rise to 4.6:1 under the Second Loan. FONDEI's sound financial position can be attributed to its appropriate interest rate policy (boosted by the additional margin received by FONDEI on later subloans under the First Loan - cf. para. 4.13); to the facL that it is a second-tier institution protected from portfolio risk, and to its reasonable administrative costs, which have generally been held within 2% of average total assets. In addition, FONDEI has successfully followed a policy of placing available liquid assets as short-term deposits with the banking system. 5.08 After strong initial growth from 1979 to 1981, FONDEI's portfolio remained fairly stable, at around US$20 million from 1982 to 1984, before growing strongly in 1985 to about US$31 million. The brief period of negligible portfolio growth can be attributed to the slow disbursement of new subloans in 1983-84 combined with the short repayment periods granted on many subloans under the First Loan. These loan repayments also resulted in the rapid buildup of FONDEI's liquid assets, which grew from US$1.1 million in 1981 to almost US$25.0 millioi. in 1985. This phenomenon is not expected to persist, however, since: (a) rONDEI is due to start principal repayments on the First Loan and on the Tourism Development Loan in 1986; (b) FONDEI has established a working capital loan facility and a second level tourism loan facility to recirculate loan recoveries not needed for current repayments; and (c) the local counterpart funds for the recently approved Third Loan will be met out of FONDEI's own funds. - 23 - Portfolio Quality 5.09 Since participating commercial banks bear the full credit risk for subloans and are required to repay FONDEI for principal and interest on due dates, FONDEI has minimal arrear risks and does not make any accounting provision for losses. However, as part of its supervision procedures, FONDEI receives periodic reports on the status of arrears from the participating financial intermediaries. Annex 11 summarizes the available information5/ on arrears under the two loans, with the improvement from the first to the second standing out quite clearly. Experience with recovery of subloans financed under the first loan has been somewhat uneven. In 1985 the cumulative subloans recovered represent about half of the total amount originally disbursed by the intermediaries. Regarding the other half, about 45% has been in arrears for over six months; this represents about 20% of the original total amount of subloans. However, it is estimated that the uncollectible subloans under the first loan (on account of 7 failed projects) would be about 6% of the total loan portfolio. As already noted in Chapter III, inadequate subloan maturities and grace periods under the first project were major contributing factors to the arrears problem. In addition, 12 firms accounted for nearly 60% of arrears, which facilitated the preparation and implementation of detailed recovery plans. In addition, as noted, FONDEI has been focussing particularly on these issues in undertaking and reviewing subproject preparation, and has also been working closely in this respect with those financial intermediaries with high arrears under the Firs- Loan. The loan arrear position for the Second Loan shows a marked improvement in that arrears over six months amounted to well under 1% of principal outstanding in both 1984 and 1985. This is partly due to the more realistic loan terms offered by FONDEI under this Loan and partly because of the relatively improved economic climate in which these projects were conceived and implemented. VI. CONCLUSIONS AND LESSONS LEARNED 6.01 The two Loans have been quite successful with respect to the Bank's objectives of establishing and consolidating an effective system to provide term financing for financially sound and economically efficient investment projects of mainly small and medium-sized industrial firms. FONDEI has developed quite rapidly into a respected second-tier credit institution, which seeks to be responsive to the changing needs of its largely small- and medium-scale clientele. The FONDEI mechanism has thus already made a significant contribution to development in Honduras, and looks well set to increase that contribution over time. 6.02 Project implementation has been reasonably smooth and loan utilization relatively timely, (para. 3.05) given the difficult economic 5/ Arrears information under the First Loan was not collected at all by FONDEI before 1983; it is expected that more complete information will be collected as a result of the computerization of the management information system. - 24 - circumstances the country faces. The subprojects financed by FONDEI have had a generally positive impact, with significant employment generation (para 3.16). Investment cost per job, however, has been considerably higher than anticipated at appraisal, reaching around US$14,000 and US$15,000 respectively under the First and Second Loans, based on a sample of subprojects (para. 3.18). However, the cost per job is in line with that for SMIs in other countries of Latin America (Colombia: US$13,500; Mexico: US$15,000). 6.03 FONDEI's success to date has been greatly assisted by having considerable stability in its management, as well as the fact that it is a second-tier institution within a sound central bank, which has helped to protect it against political and other external influences (para. 4.02 ff.). Nevertheless, project implementation revealed a number of weaknesses in the operational mechanism. These were particularly apparent under the First Loan, as might be expected, when FONDEI was a brand new agency seeking to operate in a fashion previously unknown in thd country. Particular areas of weakness included subproject preparation, appraisal, and supervision (para. 4.05-4.09). The first priority in these areas was to ensure that FONDEI itself was fully competent in these matters, so that it could subsequently train, and monitor the work of the PFIs; this was largely achieved under the Second Loan, supported by the technical assistance program. 6.04 Overall, FONDEI appears to have been quite successful in gaining acceptance by the commercial banking system which has benefitted itself from FONDEI's technical input in its project work (para 4.17). In a few cases there is evidence that a more aggressive promotional policy by FONDEI might have been beneficial in attracting new projects. Those banks which participated in the program only marginally, particularly under the First Loan, could have played a more active role in the program. FONDEI's importance as the first and principal source of long-term financing for industry in Honduras is acknowledged by the banking system and evidenced by the high percentage of FONDEI operations in the banks' industrial portfolios (para 5.02). 6.05 The Bank has been much less successful under both Loans in achieving its institutional objectives with respect to COHDEFOR, CONADI, and CDI (para 4.19, 4.22, and 4.28). One feature common to the lack of success with COHDEFOR and CONADI is the fact that the general manager of each agency was politically appointed. This made the institution vulnerable to changes in management, which entailed significant shifts in policies, and objectives. This fact makes the Bank's task much more difficult, since institutional gains made under one administration are often not carried over to the next. As a result, achievement of institutional objectives of such agencies which are not the primary focus of the project require additional investment of Bank staff time. 6.06 A major lesson from the experience of joint UNDP/Bank financing program for the CONADI and CDI technical assistance activities is that whenever the Bank agrees to accept an outside agency to act as an executing agency for a specific component, the input, roles and responsibilities of the Bank and the executing agency should be clearly defined to enable appropriate contributions by each and also to avoid unnecessary - 25 - institutional friction. In addition, it is important to establish a clearly defined coordinating and review mechanism to ensure concerted support for the program. These lessons have been incorporated in the joint UNDP/Bank technical assistance program for CDI and FONDEI under the ongoing Third Industrial Credit Project. April 23, 1987 Revised: December 1, 1987 " ~~HOUUA Preclijurl wofelo IiHentors WMd1994 Item 1978 lq?9 IR1 lqR0 I'FP? 1q15 I4 OW at Vector Cost 1,hf78.0 ,1,84.0 1,f46O1,851.6.0 l,R77b t,fl?.0o _A1mem Orowth Ible (W) n.a. 6.1, . 0.7. J.1 -'.I ledmtrial Value Adaed 259.0 2W).0 W.0 307.0 M74.0 28.0 "74.0 A I Growth aute (O n.a. f.l 1.8 1.6 4.1 -5.4 P.P lNporto of Goods ant ervicea 1.415.0 1,71f.4 1,14.4 1,A06.4 S,iW7.0 I. 'q 1,7411. xports or Igdustrial Gode n.a. 2f7.3 347.0 Th.0 ?46.? 263.1 n.a. More of lstrual Sector In Rgxporr (0) n.e. 16.1 17.4 1n.7 1S.7 16.1 n.e. Iqort. ot Gode and Services 1,762.0 2,143.4 2,611.8i 2,466.8 2,tP1Af 2,1S7.A 2,O1.A 'had. blanc -346.1 -425.0 -f76.6 -660.4 -441R. -41U.4 -W1.? CArnt Account surplus (Defict) 78.5 84.3 F8.3 -S0.2 -4$.4 -17n.4 -.74.4 nPie surplus (Dbmerit) -1IR.2 -206.6 -W47.0 -407.4 -6i1.8 -Si';p.4 .646.6 total owenent and bdgk pen d_lturs 764.9 424.1 1,?10.9 1,264.7 y,%44.S l, n 1 Wln.3 Pincel Dficit/leotal bpdltuau latlo (0 24.6 22.2 PA.? 32.2 41.0 16.1 44.n Comumr Price Indes 1M.0 11?.1 1t2.4 144IU R1. 17M.A 1!A. Aunul Growth Note (S) - 12.1 1.R C.I 4.4 A1.4 4.1 New luao to lahoasry fre the Ibilng Spate 271.? 244.0 62.8 ?q7.6 411.4 466.4 46'..7 VW "m L0 Indualay fc thw C omercl huba 2?.'l.3 21A.4 l43.2 244.3 370.5 4.4.1 474.1 SMre et C.ia ieal BUnk n Leaing to laduty (O .i 73.1 71.6i R4.4 qOA.4 41.4 n.a.: net evailaie .ourc.: Wil -27- ANN _2 A.~ SNW ~ ~ ~ ~ ~ ~ ~~~~~~~~- , * *--'W wC O_f tr FwM&U44e0 17.2 27.1 25.2 219 It.i1 4.S5 I.q IA.
Группа Всемирного банка · Project Completion Report
Honduras - First and Second Industrial Credit Projects
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