Argentina - Second Industrial Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9235 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) DECEMBER 28, 1990 Trade, Finance and Industry Division Country Department IV Latin America and the Caribbean Regional Office 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. CURRENCY EQUIVALENTS Currency unit - Before June 14, 1985 - Peso ($a) Since June 14, 1985 - Austral (A) = $a 1,000 Market Rates End of 1980 US$1 - $a 1,996 End of 1982 US$1 = $a 4.85 new pesos (1 new = 10,000 old) End of 1984 US$1 = $a 178.24 (May) 1985 US$1 = $a 593.85 (June) 1985 US$1 = A 0.80005 Australes End of 1986 US$1 = A 1.257 " End of 1987 US$1 = A 3.750 " End of 1988 US$1 = A 13.370 " (Nov.) 1989 US$1 = A 652.500 ABBREVIATIONS AND ACRONYMS Austral - Argentine unit of currency since June 14, 1985 BANADE - Banco Nacional de Desarrollo (National Development Bank) DEC - Development Finance Company ERR - Economic Rate of Return INTI - National Institute for Industrial Technology LIBOR - London Interbank Offering Rate PCR - Project Completion Report QR - Quantitative Restrictions TA - Technical Assistance GOVERNMENT OF ARGENTINA FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington. O C. 20433 USA Oice no oisector-Generao Operatonm Ivalutiin December 28, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Argentina Second Industrial Credit Project (Loan 2063-AR) Attached, for information, is a copy of a report entitled "Project Completion Report on Argentina - Second Industriol Credit Project (Loan 2063-AR)" prepared by the Latin America and the Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a resticted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Worl Bank autbonabon. PROJECT COMPLETION REPORT FOR OFFICIAL USE ONLY ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) TABLE OF CONTENTS Page No. 'REFACE ............................................................. i :VALUATION SUMMARY .................................................. iii PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .............. 1 A. Project Identity .................................... 1 B. Background ...1................................. I C. Project Objectives and Description ................ 2 D. Project Design and Organization .................. 4 E. Project Implementation .............................. 6 F. Project Results ....................... ............ 8 G. Project Sustainability .......9................... 9 H. Bank Performance ......................... ........ 10 I. Borrower Performance ........................... 11 J. Project Relationship ........................... 13 K. Project Documentation and Data ..................... 13 PART II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE . ...... 15 Project Development and Implementation .... ............ 15 Lessons Learned ................................ ....... 21 Effectiveness of Relations Between the World Bank and BANADE ...................................... 22 PART III. STATISTICAL INFORMATION ................................. 23 1. Related Bank Loans ............................. 23 2. Project Timetable .................................. 24 3. Loan Disbursements ............................. 24 4. Use of Bank Resources ............................... 25 5. Status of Covenants ....................... ....... 26 ANNEXES 1. BANADE: Subproject Profile and Distribution of Subprojects ..... 27 2. BANADE: Outstanding Arrears Under Loan 2063-AR ........ ...... 29 3. BANADE: Subprojects Financed Under Loan 2063-AR ....... ...... 31 4. BANADE: Comparative Balance Sheets, December 31, 1981- July 31, 1989 ................................................ 34 5. BANADE: Income Statements, 1981-89 ................ ........... 35 6. BANADE: Financial Ratios, 1981-89 ............................. 36 7. BANADE: Personnel Employed in .978-89 .................. ...... 37 This document has a restricted distribution and may be used by recipients only in the performance of their oflicial duties Its contents may not otherwise be disclosed without World Bank authorization PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) PREFACE This is the Project Completion Report (PCR) for the Second Industrial Credit Project in Argentina, for which Loan 2063-AR in the amount of US$100 million equivalent was approved on December 1, 1981. The project was implemented during a tumultuous period in Argentine history, marked by recession and financial crises, changes of administration, emergence of the Latin American debt crisis, and the South Atlantic war between Argentina and the United Kingdom. The loan was closed on June 28, 1989, about two and one- half years behind schedule. A total of US$15.7 million from the loan was cancelled, mostly reflecting cancellation of subloan commitments by sub- borrowers. The final disbursement was made on July 20, 1989. The PCR was prepared by the Trade, Finance, and Industry Division, Country Department IV, of the Latin America and Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). Preparation of this PCR was started during the Bank's final super- vision of the project in September 1989. It is based, inter alia, on the Staff Appraisal Report; the Loan and Guarantee Agreements; supervision reports; correspondence between the Bank and the Borrower; internal Bank memoranda; and the PCR for the Industrial Credit Project (Loan 1463-AR) which was issued by the Trade, Finance and Industry Division, Country Department IV of the Latin America and Caribbean Regional Office in June 1989. This PCR was read by the Operations Evaluation Department. The draft PCR was sent to the Borrower for comments, but none were received. - iii - PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) EVALUATION SUMMARY Objectives 1. Objectives of the US$100 million loan to the National Development Bank (BANADE) were to: (i) increase industrial sectoral efficiency; (ii) improve industrial energy efficiency; (iii) promote regional develop- ment; (iv) provide BANADE with technical assistance to improve its manpower planning and management control and information systems; (v) improve the capacity of BANADE and the National Institute for Industrial Technology (INTI) to promote energy conservation; (vi) carry out a study of industrial effective protection; and (vii) help mobilize complementary foreign commer- cial funding (para. 1.05). Implementation and Results 2. Credit Components. The most critical shortcoming of the loan may have been its failure to improve substantially industrial efficiency in Argentina. Since about 80% of commitments were made between 1985 and 1987 when quantitative restrictions (QRs) covered more than 70 percent of domestic manufacturing production, policy distortions may have led to inefficient use of loan proceeds, especially since ERR calculations appear to have been made for only 17 out of 137 subprojects. Other important shortfalls in implemen- tation were: (i) the slower than expected use of loan funds; (ii) the lack of demand for subloans for energy conservation and working capital; and (iii) the lack of demand for cofinanced projects or subloans originated by provin- cial banks (paras. 1.19-1.23). In addition, INTI's contemplated role in promoting energy conservation did not materialize because of budgetary cut- backs. Slow use of the credit components occurred for two reasons. First, by the time the loan became effective in 1983, successive currency devalua- tions and soaring domestic interest rates had weakened the finances of domes- tically and externally-indebted firms and their banks. This experience may have made potential subborrowers wary about borrowing in foreign currency. At the same time, the imposition of QRs in response to this financial crisis discouraged new investments to increase industrial efficiency and expand exports by the very export-competitive firms that would have been candidates for foreign-currency borrowing. Second, the high fixed interest rates charged initially on project sub'oans were only reduced in line with market rates nearly three years after effectiveness. The relatively high interest rates and complex procedural requirements under the working capital com- ponent, _.zh was included in the loan in 1985, made such borrowing unattrac- tive. Ac loan closing, US$14.6 million was cancelled from the credit component (para. 1.19). - iv - 3. BANADE used US$84.0 million in loan funds to finance 137 subprojects with a cost exceeding US$260.9 million. Some 46% of the disbursed credit amount went to small and medium enterprises. About 47% of the credit amount went for plant modernization, in line with expectations. Since after 1985 onlending interest rates were in line with LIBOR, credit subsidies did not account fUr loan demand. 4. As of January 1990, 30 of the 136 original subloans remaining in BANADE's portfolio were having payments problems; however, collections under this loan are better than for BANADE's entire portfolio (para. 1.26). 5. Technical Assistance. The TA component had mixed results. The proposed effective protection study, which had little Government support in a period in which trade liberalization measures were being reversed and for whic. necessary data were found to be unavailable, was substituted by a stud- to identify industrial subsectors with good export potential. This study was completed in May 1988, too late to affect the project materially. In any event, the study did not address the issues of industrial competitiveness and the anti-export bias of policy. BANADE's manpower development plan led to the establishment of its Training Institute which helped establish successful completion of technical training as a more important criterion for advance- ment in BANADE, bu- had little effect in reducing BANADE's overstaffing. More positively, co,aputerized accounting systems were installed by BANADE as foreseen at appraisal. These systems eventually helped reveal the grave financial problems faced by the institution (para. 1.36-1.37). However, the Bank did not reimburse 1ocal expenditures for acquisition and installation of these systems because at the time of the reimbursement request, which had been delayed, their dollar equivalent value had declined to only a fraction of the original expenditures, and the Bank declined to reimburse them at the historic exchange rate (para. 1.23). As a result, US$1.1 million was cancelled at loan closing from the allocation for technical assistance. Findings and Lessons Learned 6. The operation had several design problems. First, institutional improvements focussed too narrowly on the installation of improved management information systems and the preparation of a manpower plan, instead of upon a more comprehensive Action Plan with a set of monitorable targets aimed at improving the efficiency of BANADE's assets, liabilities and operations management, including better management of risks. Second, different loan components were targeted to specific end-uses that did not materialize, such as the inclusion of an energy conservation component which received little promotional support locally. Third, given the turbulent context and limited implementation capacity of the executing entities, the loan was probably overloaded with too diverse a set of broadly-defined objectives to be imple- mented successfully. Fourth, no apparent consideration was given to including commercial banks through an "Apex" system, which might have promoted greater competition in term lending in Argentina (paras. 1.16 and 1.17). 7. Overall project supervision was inadequate; better supervision would have revealed and maybe helped to avoid the marked institutional and finan- cial decline of BANADE which occurred over the project's life. The major weakness was the poor attention paid to BANADE's overall institutional development and financial situation, beyond review of compliance with the debt/equity covenant. This may be partly explained by the fact that the Bank's focus was already shifting by early 1986 to the preparation of a follow-on operation (Small and Medium Industries Credit Project, Loan 2793-AR). Close monitoring of important institutional aspects, like portfolio quality and liquidity, only began in early 1988. At appraisal in 1981 BANADE was held to have sound financial policies, a positive net worth, a satisfactory debt/equity ratio, and ample income. Over the life of the loan, large losses resulted from a portfolio highly concentrated in non- performing loans subject to weak collection efforts. In 1988, arrears were 21 percent of BANADE's total loan portfolio and over 50 percent of the loan portfolio was affected by arrears. The largest 50 loans amounted to some 75 percent of total loans, three fourths of which were considered problem loans. In 1989, a Bank review concluded that: (i) the institution was overbranched and overstaffed with poorly-paid, relatively low-skilled employees, and loan approval and follow-up procedures remained weak; (ii) its profitability was negative; and (iii) its net worth had eroded by some 82 percent to a very low US$34.7 million. While the exact extent of erosion in financial indicators was difficult to measure owing to distortions created by hyperinflation and weaknesses in accounting standards, the conclusion that BANADE was in need of recapitalization and restructuring was decisive (paras. 1.35-1.37). 8. This project demonstrates: (i) the difficulty of implementing credit operations in an unstable economy; (ii) the difficulty of maintaining a public bank as an effective financial intermediary, owing to the risk that political intervention will undermine its portfolio quality, despite the formal safeguards of Charters and Policy Statements which purport to guarantee decision-making autonomy; (iii) the futility of trying to direct credit demaad for diverse end-uses; (iv) the need to implement technical assistance activities rapidly, since the relevance of studies and the interest, both by the Bank and counterpart authorities, is subject to fast erosion; and (v) the need to maintain market-based terms and conditions on subloans at all times, in order to maintain subborrowers' participation (paras. 1.39-1.43). 9. The legal agreements generally provided the parties with adequate rights, protections and clarifications during project implementation. Proiect sustainability 10. The new Bank loan (Loan 2793-AR) that became effective in April 1988, five months before closing of this loan, allowed BANADE to continue lending despite the drastic reduction in funcing through Central Bank redis- counts. The financial crises and bouts of hyperinflation that affected Argentina since the second quarter of 1989 seriously affected BANADE, its clients and other participating financial intermediaries. BANADE's financial and administrative deterioration, and its non-compliance with the loan's debt/equity covenants, disrupted the operation of the new loan. Early in - vi - 1990, the Government named an interventor for BANADE and later issued a Decree ordering BANADE's restructuring with ths objective of restricting it to second-tier operations. The inability of BANADE to function as an effec- tive financial intermediary with proper financial discipline ani independence from political influence, after three Bank loane, is an indication that the objectives of this as well as those of the new loan are not being sustained (para. 1.30). PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE A. Project Identity 1.01 Project Name Second Industrial Credit Project Loan Number 2063-AR Loan Amount US$100.0 million equivalent Cofinancing US$200 million in commercial bank financing was sought concurrently with negotiations for the loan RVP Unit Latin America and the Caribbean Region Country Argentina Sector Industry B. Background 1.02 At appraisal in March 1981, the Government faced the task of reducing a large balance of payments deficit, easing the financial distress of a debt-ridden private sector, controlling inflation and revitalizing the economy. Central to this program was the development of a more efficient, internationally competitive industrial sector. This was to be fostered by policies aimed at: (i) liberalizing trade to encourage competition; and (ii) improving the mobilization and allocation of financial resources by developing a more competitive banking system. 1.03 Under the loan, the Government provided the Bank with a policy statement affirming its continued efforts to promote increased industrial efficiency and exports, and to liberalize foreign trade. However, the policy context at appraisal may best be described as one of tenuous liberalization. 1.04 Following tariff and exchange rate reforms in 1976 and 1979, the economy became more open, with the overall industrial input-output ratio rising from under 12% in 1971 to about 24% in 1979. There were moves to liberalize interest rates, lower barriers to entry to the banking system, establish deposit insurance for local time deposits, and introduce a system of fractional reserve banking. However, the opening of the economy did not generate the expected structural changes in industry. The initial tariff reforms between 1976 and early 1979 had only a mild effect on industrial producers. Due to redundancy in the tariff system, firms made only limited adjustment efforts. The second phase of trade liberalization in 1979 - 2 - produced greater adjustment. However, during 1979 and 1980, currency aDpreciation and sharply rising interest rates dampened firms' investment lans, thus slowing the process of structural reform. Moreover, as local interest rates soared and foreign loans became available at lower interest rates, intermediate goods producers--less affected by the recession-- turned increasingly to external financing. A banking crisis erupted in 1980 owing to the excersively rapid expansion of bank activities. The Peso was massively devalued in 1981. In 1982, the financial crisis deepened as a result of the combined effect of the devaluations of the previous 15 months, high interest rates, and the virtual cessation of new foreign loans as the Latin American debt crisis unfolded. The period of trade liberalization ended with the introduction of foreign exchange rationing in 1982. In December 1983, the new Government replaced foreign exchange rationing with quantitative import restrictions (QRs). These came to cover more than 70 percent of domestic manufacturing production and remained in force until 1987, when they began to be reduced with the support of a Bank Trade Policy and Export Diversification Loan (Loan No.2815-AR). In a further effort to manage financial distress in the private sector, in 1984 the Government introduced an enhanced program of Central Bank rediscounts which public banks, an- to a lesser extent private commercial banks, were able to use for term lending. While this program helped alleviate the immediate financial problems of some firms, the high reserve requirements required to sustain it ultimately reduced the lending capacity of commercial banks. C. Project Objectives and Description 1.05 The project was a US$100 million loan to BANADE with the guarantee of the Government. Its objectives were to: (i) increase the efficiency of the industrial and mining sectors by -inancing plant modernization, equipment replacement, and new capacity in economically-efficient firms; (ii) improve industrial energy efficiency by financing energy conservation investments; (iii) promote regional development by funding industrial projects through provincial banks; (iv) provide BANADE with technical assistance to improve its manpower planning and its management control and information systems; (v) improve the institutional capacity of BANADE and the National Institute for Industrial Technology (INTI) to promote energy constrvation; and (vi) carry out a study of effective protection in the Argentine industrial sector. At appraisal, the term credit needs of industry were not expected to be fully met from domestic sources. Since only the largest firms were expected to hav( access to external financing, the Bank loan was expected to help fill the financing gap for small and medium sized firms, which were expected to borrow mostly for equipment modernization. It was expected that the Bank loan would act as a catalyst for mobilization of complementary foreign commercial funding through parallel cofinancing arrangements. 1.06 The loan included components for: (a) a credit line of US$89.5 million for onlending by BANADE directly to subborrowers or to provincial banks to finance the foreign exchange costs of industrial and mining subprojects; - 3 - (b) a credit line of US$10.0 million for onlending through BANADE to finance the foreign exchange costs of energy conservation subprojects; (c) a technical assistance component of US$0.5 million to finance preparation of a manpower development plan and the design and installation of a management control and information system for BANADE. The energy conservation program in INTI and the effective protection study fo) industry were to be funded by the Government from its own resources. 1.07 Concurrent with the Bank loan, BANADE was negotiating for about US$200 million in foreign commercial bank loans; with this in mind, a standard cross-default claus- was included in the Loan Agreement. 1.08 The Bank loan bore a fixed 11.6% annual interest rate plus a 3/4% commitment fee on undisbursed loan balances, and was repayable over a maximum of 15 years. Loan proceeds were to be onlent in dollars or in pooled curren- cies, at the option of the subborrowers. At appraisal it was contempleted that BANADE would assume both the dollar and cross-currency foreign exchange risks on the Bank loan. BANADE would relend loan proceeds directly to sub- borrowers at an interest rate equal to the Bank rate plus 5% p.a. (i.e. 16.6%) for dollar-denominated subloans and 2.5% (i.e. 14.1%) for pooled currencies. Subsidiary loans by BANADE to provincial banks would bear an interest rate of at least 11.6% (the Bank loan's rate) in the case of pooled currencies and at least 14.1% in the case of dollar-denominated loans. Provincial banks would accept the credit risk of lending to their clients and would onlend subsidiary loans at interest rates at least equal to those charged by BANADE to its direct subborrowers. 1.09 Subloans would be for up to 15 years with a maximum 3 year grace period; the maximum loan amount was fixed at US$7 million in cases where no other external financing would be included in the subproject. This maximum could rise to US$12 million in those cases where any amount above US$7 mil- lion from Bank funds was matched by equal or greater amounts of external financing. The "free limit" below which the Bank would not review BANADE's appraisals was set at US$2.5 million, except that: (..) BANADE would seek the Bank's approval for the first two energy conaervation projects and the first two subprojects from any provincial bank; and (ii) the free limit would be reduced to US$500,000 for subprojects for products for which the rate of effective protection had changed substantially since loan signing. BANADE agreed to advise the Bank when submitting subprojects of any policy changes which would have increased materially the rate of effective protection for the products involved. Economic Rate of Return (ERR) analyses were required for: (i) all subloans of US$500,000 and above for new or expansion projects; (ii) all subloans of US$2 mil5ion and above for modernization or re-equipment projects; (iii) all subloans of any size where there had been a significant increase in effective protec;ion for the goods to be produced by the project. 1.10 In November 1985 the loan was amended inter alia to: (i) include US$50.0 million to finance working capital (imported inputs) for industrial firms, and reduce correspondingly the allocation for investment lending; (ii) refine the bases for computing the covenanted debt/equity ratio for BANADE to separate the impact of the Government guaranteed portfolio from the rest of BANADE's operations (para. 1.32); (iii) specify that subloans would be made exclusively in US dollars; (iv) provide the option of charging interest rates on subloans at either a fixed rate of 14.1% or a floating rate of LIBOR + 2.5%, with a floor of 12.1%; (vii) transfer the cross-currency exchange risk of the pooled currencies against the dollar to the Government; (viii) include a Special Account under the loan; and (ix) amend the under- taking to carry out an effective protection study to one requiring the design of a program to expand industrial exports. These amendments had been agreed initially in principle by BANADE and the Bank in July 1983, but had received little attention from the Central Bank and Government on account of the latter's preoccupation with forthcoming elections. 1.11 In February 1986, the Bank agreed to finance a greater share of the costs of eligible goods and services. In May 1986 the loan was again amended to reduce the loan allocation for working capital to US$5.0 million and delete the allocation for energy conservation; the allocation for investment lending was correspondingly increased. In April 1987 the loan was reallo- cated yet again, inter alia to: (i) delete the allocation for working capital; (ii) increase by about US$0.8 million the allocation for technical assistance and training; and (iii) authorize the use of local procedures satisfactory to the Bank for the acquisition of equipment and software related to the te:hnical assistance components. D. Proiect Design and Organization 1.12 The project was a traditional repeater DFC operation using BANADE, a public development bank, as a channel for lending to private enterprises. It was a follow-on loan to the Industrial Credit Project (Loan 1463-AR), which was almost fully committed. The loan included two innovative features: (i) an allocation for investments in industrial energy conservation in the context of a promotional program involving BANADE and INTI; and (ii) provision for funds to be channelled through provincial banks, in an attempt to decentralize industrial lending geographically. Despite its financial and organizational weaknesses, BANADE was selected as the borrower because the Bank had built a relationship with it under the previous project. Moreover, given the (then) state of Bank thinking about the organization of credit projects, BANADE was felt to be the most appropriate conduit in Argentina to channel Bank medium-term credits to the industrial sector. 1.13 At appraisal, BANADE's main institutional weaknesses were iden- tified as: (i) its ossified personnel structure, characterized by a large number of older professionals and young trainees, with a paucity of mid- career professionals; (ii) the prevalence of second jobs among many of BANADE's technical staff; and (iii) inadequate systems for data processing or management information and control. Accordingly, the project included components intended to address these issues (para. 1.06). 1.14 Regarding BANADE'S financial operations, it was recognized at appraisal that BANADE's debt/equity ratio had eroded to 5.5:1 at end-1980 and would reach 7:1 in early 1981, up from 1.6:1 at end-1976 following its recapitalization that year. However, since the 1980 and 1981 ratios fell below BANADE's statutory 10:1 limit, they were judged adequate. Under the loan, a covenant was included committing the Government to require BANADE to take all necessary measures to maintain its equity in real terms. While it was recognized that the debt/equity ratio had increased due to continued growth in liabilities and some real equity erosion, it was felt that BANADE had progressed in its capacity to protect itself against domestic inflation and in preserving its equity base by its practices of: (i) relending foreign borrowings for loans repayable in similar currencies, thereby transferring the foreign exchange risks to borrowers; and (ii) since March 1981, indexing interest rates on medium and long term peso-denominated loans to the cost of funds. 1.15 At appraisal, based on an analysis of BANADE's pipeline of loan applications, it was estimated that total foreign currency loan commitment demands on BANADE would amount to US$700 million through the two year loan commitment period. Thus, ample demand for loan funds and for associated foreign cofinancing was forecast. The scope and scale of the project seemed appropriate in the face of the implicit (but naive) assumptions by the appraisal mission about: (i) the ability of the loan to support the Government's liberalization program by helping revitalize the industrial sector; and (ii) the subborrowers' interest in making investments for energy conservation. However, the negative impact which the fixed Bank lending rate of 11.6% would have on the demand for credit by subborrowers facing an adjustment program could not be foreseen, since the Bank interest rate at appraisal was only 9.6%--some two points below the rate which ultimately prevailed at loan approval. 1.16 Retrospectively, however, the operation had several design problems. First, apart from the salutary installation of improved management control and information systems, institutional improvements focussed too narrowly on the preparation of a manpower development plan, instead of upon a more comprehensive Action Plan with a set of monitorable targets aimed at improving the efficiency of BANADE's assets, liabilities and operations management, including the better management of risks. Second, the success of the energy conservation component was dependent on the promotional efforts of INTI, which were in turn, dependent on continurd budgetary support from the Government. Moreover, the feasibility of the component seemed untested, an important point given the existence of subsidized energy prices in Argentina. Third, given the turbulent context and limited implementation capacity of the executing entities, the loan was probably overloaded with too diverse a set of broadly-defined objectives to be implemented successfully. 1.17 Moreover, measured against current Bank thinking regarding the design of credit projects--which has changed considerably since the time of project appraisal--other important design problems existed. First, the loan was made in an environment with a history of macro-instability and policy shifts between trade liberalization and protection. Provision of a credit line in such an environment may in fact have hindered the adoption of necessary financial and industrial sector reforms by allowing them to be postponed. Second, no apparent consideration was given to other organizational arrangements (e.g. APEX lending) which might have promoted greater competition in delivery of loan funds. Third, there was no focus on improving accounting standards within BANADE; this undermined the credibility of its financial statements. Specifically, BANADE did not adequately assess portfolio risk and its accounts were kept on an accrual basis with an inadequate provisioning policy. Fourth, insufficient attention was paid to BANADE's long-term financial viability, independent of Central Bank rediscounts and external financing. Fifth, the adoption initially of fixed interest rates on foreign currency-denominated subloans made the loan insensitive to interest rate shifts on competing international credit lines; this became particularly important since it turned out that international interest rates were at their peak when the loan was approved. However, the Bank loan also bore a fixed interest rate--which was the Bank's standard practice until 1981. E. Proiect Implementation 1.18 The Credit Component. The most critical shortcoming of the loan may have been its failure to improve substantially industrial efficiency in Argentina. Since about 80% of commitments were made between 1985 and 1987 when quantitative restrictions (QRs) covered more than 70 percent of domestic manufacturing production, policy distortions may have led to inefficient use of loan proceeds, especially since ERR calculations appear to have been made for only 17 out of 137 subprojects. Other important shortfalls in implementation were: (i) the slower than expected use of loan funds; (ii) the lack of demand for subloans for energy conservation and working capital; (iii) the lack of demand for cofinanced projects or subloans originated by provincial banks; and (iv) the failure of INTI's contemplated role in promoting energy conservation to materialize owing to budgetary cutbacks. 1.19 The loan was approved on December 1, 1981, signed on November 30, 1982 and became effective on February 16, 1983, almost fourteen months from the Board date because of delays in processing the required paperwork within the Government. The first subprojects were submitted for Bank approval only in April 1985 and the first disbursement was made in November 1985. At appraisal, it was forecast that the loan would be fully disbursed by end-June 1985. A July 1983 Bank mission attributed low demand for investment funds to the industrial recession and the relatively high fixed onlending interest rates under the loan. The mission also identified an unmet demand for working capital to finance imported inputs for firms to increase capacity utilization. Accordingly, in an effort to expedite its utilization, the loan was modified (para. 1.10) to denominate all subloans in US dollars and offer two options: (i) a (lower) 14.1% fixed interest rate; or (ii) a variable rate equal to LIBOR + 2.5%, with a floor of 12.1%. A US$50.0 million component for working capital was also included. Following these changes, which realigned onlending interest rates with foreign market rates, demand for investment funds picked up, but no demand for working capital or energy conservation subloans materialized. The loan was therefore eventually modified to delete allocations for these purposes (para. 1.11). To complete the project, the Bank extended the final commitment date from December 31, 1985 to September 30, 1987. The Closing Date was formally extended twice, from December 31, 1986 to December 31, 1987 and again to September 30, 1988. The loan's final disbursement was made on July 20, 1989, well beyond the lapse of the six month "grace period" normally allowed for final disbursements. Even so, US$15.7 million was cancelled at loan closing (paras 1.20 and 1.23). 1.20 Slow use of the credit components occurred for two reasons. First, by the time the loan became effective in 1983, successive currency devaluations and soaring domestic interest rates had weakened the finances of domestically and externally-indebted firms and their banks. This experience may have made potential subborrowers wary about borrowing in foreign currency. At the same time, the imposition of QRs in response to this financial crisis discouraged new investments to increase industrial efficiency and expand exports by the very export-competitive firms that would have been candidates for foreign-currency borrowing. Second, the high fixed interest rates charged initially on project subloans were only reduced in line with market rates nearly three years after effectiveness. The relatively high interest rates and complex procedural requirements under the working capital component, which was included in the loan in 1985, made such borrowing unattractive. At loan closing US$14.6 million was cancelled from the credit component, mostly due to cancellation of commitments by subborrowers. 1.21 The Role of Provincial Banks. No operations originated by provincial banks appear to have been made. 1.22 The Role of Cofinancing. No cofinancing arrangements directly linked to the Bank loan were concluded. However, about the time of loan negotiations, BANADE arranged US$200 million in commercial financing to fund its operations. Some of these funds were used to finance BANADE's local currency commitments during the life of the project. 1.23 The Technical Assistance Component. The Government submitted draft TORs for the effective protection study before the original June 30, 1982 deadline, but they were considered inadequate and rejected by the Bank. This occurred against a background of general Government disenchantment with measures to reduce protection, owing to the prevailing industrial recession; however, data problems had also become evident. In August 1982, the Bank agreed to a modified study of effective protection to be completed by December 1984. However, in 1983 BANADE requested that the study be again refocussed, this time to identify industrial subsectors with good export potential. This study was contracted to UNDP and delivered to BANADE in May 1988. BANADE's manpower development Plan led to the establishment of its Training Institute which helped establish successful completion of technical training as a more important criterion for advancement in BANADE, but had little effect in reducing BANADE's overstaffing. More positively, computerized accounting systems were installed by BANADE as foreseen at appraisal. These systems eventually helped reveal the grave financial problems faced by the institution (paras 1.35 and 1.36). However, the Bank did not reimburse local expenditures for acquisition aud installation of these systems because at the time of the reimbursement request, which had been delayed, their dollar equivalent value had declined to only a fraction - 8 - of the original expenditures. Moreover, the Bank, on account of the delayed submission of the reimbursement requests-- BANADE had presented a reimbursement request covering over a year of expenditures--declined to reimburse them at the historic exchange rate under its special provision for countries undergoing rapid currency devaluations, which requires, among other conditions, that reimbursement requests be presented within 90 days of expenditure. As a result, US$1.1 million was cancelled at loan closing from the allocation for technical assistance. 1.24 Use of Special Account. The Special Account was never made operational because: (i) BANADE and the Central Bank shared differences about the terms of its establishment -- specifically, the Central Bank objected to paying an above-market interest rate of 11.6% on the Bank funds; and (ii) given the difficult external credit conditions for Argentina and the fact that most disbursements were for equipment purchase, it was easier to use the Bank's Special Commitment disbursement procedure to support letters of credit. F. Project Results 1.25 The Credit Component. Statistics on subloans are shown in Annex 3. Under the loan, BANADE financed 137 subprojects; 5 subloans exceeded the "normal" US$2.5 million free limit; a further 33 exceeded the US$0.5 million free limit. Under the original loan design, these cases would have required monitoring of changes in effective protection, but this was not possible because the requisite effective protection study was not carried out. The total use of loan funds was US$84.0 million, and the total cost of subprojects, as reported by subborrowers, exceeded US$260.9 million. Some 46% of the disbursed credit amount went to small and medium enterprises (this percentage rises to 58% if the effect of one US$18.0 million subloan made to a large enterprise on an exceptional basis is excluded). Some 47% of the credit amount was used for 105 modernization subprojects; 46% went for 25 new projects, and 7% was used for 7 expansion projects. The high demand for funds for equipment modernization was in line with expectations at appraisal. Commitments accelerated markedly after 1985, when onlending interest rates were reduced from their original levels. Since these rates were in line with LIBOR it does not appear that credit subsidies accounted for this increased demand; however it must be noted that the access of Argentine producers to international credit markets may have become more constrained at the time, therefore diverting demand to the Bank credit line. 1.26 Annex 3 lists all subprojects financed under Loan 2063-AR. As of Janua- 1990, 136 of the original subloans remained in BANADE's portfolio. Thirty of tb.se were having payments problems. The four largest subborrowers in arrears a count, respectively, for 29% and 52% of the total principal and interest overdue. As part of a recent effort to increase collections, prompted by the Central Bank decision to stop new rediscounts to public banks, BANADE hac initiated legal action against, and/or is negotiating new repayment arrangements with several subborrowers. While the overdue loans represent about 22% in number of the 136 subloans still in BANADE's portfolio, the overdue amount represents 6.4% of the outstanding portfolio under Loan 2063-AR. The collection record under this loan is better than - 9 - that of BANADE's entire loan portfolio (para.1.36), probably as a result of more rigorous preparation and evaluation procedures and less political influence on Bank-financed loans as compared to loans funded with Government rediscounts and/or with guarantees from the Treasury. The arrears situation of the whole portfolio, in view of the Government decision to reduce rediscounts, would have been worse had it not been for BANADE's efforts to increase loan collections. 1.27 Regarding support for energy conservation, the project failed completely. Similarly, it is not evident that any lending took place through the provincial banks. Clearly in both instances the appraisal mission was unable 'o judge subloan demand accurately. 1.28 The impact of cofinancing is impossible to assess for lack of information on the types of investments financed by the local currency loans funded with externally- provided funds. 1.29 Regarding the technical assistance component, the installation of computerized accounting systems represented the greatest success. These systems generated data to make transparent the grave financial problems faced by BANADE and helped provide the basis for developing a control system to manage them. The manpower development plan led to the establishment of BANADE's Training Institute, which still operates, and helped establish successful completion of technical training as a more important criterion for advancement in BANADE. However, the recommendations of a manpower study carried out by a consultant under the previous Bank loan (Loan 1463-AR) were not implemented because of BANADE's limited discretion as a public bank to hire and fire staff and to determine salary levels based on performance. Overstaffing still therefore continued to plague BANADE. The export promotion study had little impact during the execution of the project. In any event, the study did not address the issues of industrial competitiveness and the anti-export bias of policies. G. Proiect Sustainability 1.30 The new Bank loan (Loan 2793-AR) that became effective in April 1988, five months before closing of this loan, allowed BANADE to continue lending despite the drastic reduction in funding through Central Bank rediscounts. The financial crises and bouts of hyperinflation that affected Argentina since the second quarter of 1989 seriously affected BANADE, its clients and other participating financial intermediaries. BANADE's financial and administrative deterioration, and its non-compliance with the loan's debt/equity covenants, disrupted the operation of the new loan. Early in 1990, the Government named an Interventor for BANADE and later issued a Decree ordering BANADE's restructuring with the objective of restricting it to second-tier operations. The inability of BANADE to function as &n effective financial intermediary with proper financial discipline and independence from political influence, after three Bank loans, is an indication that the objectives of this as well as those of the new loan are not being sustained. - 10 - H. Bank Performance 1.31 The appraisal mission was too optimistic regarding the capacity of BANADE's Charter and Statement of Policy to safeguard its financial soundness (para. 1.33). The mission also assumed naively that monitoring BANADE's debt/equity ratio, implementing a manpower development plan, and upgrading its management information systems would constitute adequate Bank influence to stimulate and see BANADE discharge a sufficient institutional development effort. The magnitude of BANADE's portfolio problems and the resulting loss of equity and decline in liquidity, which were only recognized in about 1988, may have become evident sooner if BANADE's institutional development had been monitored by a wider set of indicators than the debt/equity ratio. Similarly, the assumption that energy conservation investments could be stimulated by providing credit and technical assistance for energy audits proved simplistic. There is no evidence, for example, that an analysis of the private incentives to invest in conservation had ever been made; this would have bedn particularly important given the subsidized energy prices in Argentina at that time. 1.32 During implementation, the Bank demonstrated salutary flexibility by trying to restructure the project to match perceived shifts in the sources of subloan demand. However, some of these amendments were required in the first place by the Bank's decision initially to allocate the loan between invest- ment and energy conservation. Efforts to overcome weak loan demand by reallocating funds to new end-uses (working capital) proved ineffective because they did not account for the high transaction costs--in terms of interest rates and information--which using Bank funds implied. The Bank failed to take action to ensure that the objectives of the loans of con- tributing to greater industrial efficiency were being met after 1983, where protection to local industries increased. One possible action could have been to reduce BANADE's free limit. More generally, however, Bank super- vision of the project was inadequate. The major weakness was insufficient Bank concern regarding improvement of BANADE's overall institutional situa- tion. The eight supervision missions were mostly one person, one week missions which focussed on the status of loan utilization. Moreover, by early 1986 the Bank's attention began to shift to the preparation of a follow-on operation (Small and Medium Industrial Credit Project, Loan 2793-AR). Supervision effectiveness was further diluted by poor continuity of Bank staff--and their counterparts--owing to the protracted implementation period. The extent to which staff monitored the adequacy of the economic analysis being applied in subproject appraisals--which Government trade policy shifts during implementation would have warranted--is not clear. Neither is it evident that the cofinancing and regional development objectives of the project were ever pursued. 1.33 Supervision missions also generally paid little attention to BANADE's financial situation, beyond review of compliance with the debt/equity covenant. The Bank, moreover, enforced the debt/equity covenant leniently, and amended it fundamentally in 1985 (para. 1.11). At that time, the original covenant, which referred to the maintenance of a 10:1 ratio of all debt (guaranteed and non-guaranteed with a maturity greater than one year) to equity was substituted by a covenant which established different - 11 - targets for three debt/equity ratios respectively for: long-term unsecured debt, unsecured debt, and long-term debt. The target for the latter ratio--which was most similar in concept to the 10:1 debt/equity ratio as originally defined--was set to decline from 28:1 to 20:1 in the period 1985-88. This liberalization weakened the covenant fundamentally, and with it the discipline of the Bank's monitoring of BANADE's finances. Only in 1988 under the follow-on loan (No. 2793-AR) did Bank staff focus on BANADE's wider problems of asset quality, resource mobilization and liquidity. The Bank also failed to push for adequate reporting: there is no evidence that periodic progress reports were ever requested or provided during implementa- tion. Additionally, while external audit reports were only received sporadically by the Bank (for 1981, 1986, 1987 and 1988), the record shows little protest by the Bank. I. Borrower Performance 1.34 Prior to 1976, BANADE's low interest loans frequently became a channel for subsidies to industry and particularly to deficit-ridden state enterprises. After having lent at negative interest rates during a period of very high inflation, by 1976 BANADE's equity was almost completely eroded and its operations at a virtual standstill. The Government which took office in 1983, wanting to restore the role of BANADE as a term-lending financial institution, recapitalized it through new contributions and capitalization of BANADE's Central Bank liabilities. The Board and management appointed by the Government adopted a new organizational structure. Under Bank loan 1463-AR, BANADE had adopted a new Charter and Policy Statement. These were intended to safeguard BANADE's operational autonomy, and maintain sound credit evaluation standards and its financial viability. The Statement of Policy established several operational principles and limits to protect BANADE from unreasonable financial risks. 1.35 Notwithstanding these safeguards, the most striking aspect of borrower performance was BANADE's institutional decline over the project's life. At appraisal BANADE was judged to be deficient in its personnel practices and information and control systems. It was, however, held to have sound financial policies, a positive net worth, a satisfactory debt/equity ratio, and ample income. In contrast, a 1989 review of BANADE concluded that: (i) the institution was overbranched and overstaffed with poorly-paid, relatively low-skilled employees, and loan approval and follow-up procedures remained weak; (ii) its profitability was negative; and (iii) its net worth was a very low US$34.7 million. While the exact extent of erosion in financial indicators was difficult to measure owing to distortions created by hyperinflation and weaknesses in accounting standards, the conclusion that BANADE was in need of recapitalization and restructuring was decisive. 1.36 Comparative balance sheets and income statements for BANADE in US dollar equivalents for 1981-89 are presented in Annexes 4 and 5. The balance sheets reveal an 82% deterioration in net equity from US$188.4 million in 1981 to US$34.7 million in 1989. This was after substantial Government capitalization of BANADE through grants and the liquidation of its debt to the Central Bank between 1981 and 1983, representing an increase of more than 150% of BANADE's capital. Following a period of positive but variable - 12 - results from 1981-86, BANADE's results began a downward trend. By the first quarter of 1988 BANADE's profitability, liquidity and capital structure were all seriously deteriorating. Moreover, BANADE's actual position was worse than indicated because its provisioning policy systematically underestimated losses on loans made to state enterprises or with Government guarantees. 1.37 The c.ases of declining profitability were threefold. First, large losses resulted from a portfolio highly concentrated in non-performing loans subject to weak collection efforts. In 1988 the largest 50 loans represented some 75 percent of BANADE's total outstanding portfolio; moreover, three fourths of them were problem loans. Total arrears in BANADE's total loan portfolio increased substantially after 1984, and ranged between about 16 and 21 percent in the period up to 1988 (Annex 6); in 1988 over 50 percent of the loan portfolio was affected. Second, lags between various inflation indices used to adjust assets and liabilities eroded operating margins as inflation rose. Third, losses grew on BANADE's foreign currency denominated loans, as they were converted--following Central Bank regulations--to lower-margin local currency operations, and as the Government ceased honoring guarantees extended in favor of various private and public sector debtors. This income decline, combined with the use of lending instruments which implicitly refinanced the inflationary component of interest rates, led to a negative internally-generated cash flow and poor liquidity. As a result, BANADE was driven to depend on Central Bank rediscounts to fund fresh term lending, and costly short-term ("call money") local borro, .ng to meet its wages, reserve requirements, and other short-term liabilities. The eroded profitability and reliance on short-term, high cost borrowed resources to sustain operations eroded BANADE's equity, weakened its capital structure, and constrained its capacity to develop new business. In short, BANADE fell victim to a number of internal and external forces which weakened its capacity to manage effec- tively. Chief among these were: (i) inflation, which created distortions in incentives and accounting information; (ii) politicized lending decisions, with associated poor portfolio quality and weak collection efforts; (iii) an incapacity to mobilize stable, lower cost, resources and a resulting reliance on politically-driven Central Bank rediscounts and high cost, short term borrowings for survival; and (iv) unstable management--during project imple- mentation, BANADE's President and the manager in charge of the project both changed a number of times. Meanwhile, BANADE's still-inadequate accounting, information and control systems limited its capacity, and perhaps perceived need, to manage more effectively. 1.38 This project demonstrates important lessons for the design and supervision during a financial crisis of credit projects in which Bank lending is intermediated by a public bank. Several of these lessons have by now been discussed widely within the Bank (see the Report of the Financial Sector Operations Task Force issued in August 1989), but they will be repeated here. 1.39 First, the project shows the difficulty of implementing credit operations in an unstable economy with high inflation. Only very tight monitoring of subproject selection, the financial impact of shifting relative prices, and the condition of financial intermediaries could ensure the economic validity of the projects being financed and the viability of - 13 - enterprises and financial institutions. In this project, where ERRs were computed for only 12% of subprojects accounting for 48% of lending, and where overall monitorinf, of BANADE was lax, this was not the case. 1.40 Second, the project demonstrates the difficulty of maintaining a public bank as an effective financial intermediary, owing to the risk that political intervention will undermine its portfolio quality. BANADE's Charter and Policy Statement failed to shield its Board from political influences. Even if these influences did not directly play a role in Bank- financed subloans, they contributed to the deterioration of BANADE's wider portfolio and its resultant institutional decline. This decline remained unremedied partly as a result of the weak system of prudential regulation and supervision by the Central Bank. In these circumstances, the Bank should have required the establishment and maintenance of a far-reaching Action Plan, monitoring agreed targets--in a consistent and credible manner--inter alia for: (i) portfolio recovery (based on a thorough portfolio audit); (ii) resource mobilization other than through Government rediscounts; (iii) strengthening of management and auditing and of lending practices and procedures; and (iv) the adoption of adequate accounting standards to reflect properly the loan portfolio value and interest accrued. Moreover, besides the debt/equity ratio, the Bank should have monitored other indications such as solvency and liquidity ratios, level of arrears, operating costs and the match between the maturity, interest rate and currency configurations of BANADE's assets and liabilities. 1.41 Third, the project demonstrates the futility of trying to forecast demand for credit for diverse end-uses in a turbulent environment. What was needed was a global line of credit for productive purposes, rather than one allocated between industrial investment, energy conservation, and/or working capital. 1.42 Fourth, the project demonstrates the need to prepare technical assistance activities carefully in advance and to implement them rapidly, since the relevance of studies and the interest, both by the Bank and counterpart authorities, is subject to fast erosion. 1.43 Finally, the project reveals the need to maintain market-based terms and conditions on subloans at all times, in order to maintain subborrowers' participation. J. Project Relationship 1.44 Relationships between BANADE and the Bank were generally cordial. However, friction arose periodically between the Bank and the Government over the need to carry out the study of effective protection and over the Bank's refusal to reimburse the costs of the computerization program (para. 1.23). Because of the long implementation period and political changes in Argentina, there was a lack of continuity in personnel associated with the project. K. Project Documentation and Data 1.45 The legal agreements, including the various amendments, generally provided the parties with adequate rights, protections and clarifications - 14 - during project implementation. The deficiencies in Bank and borrower performance noted above arose from the manner in which they were followed. 1.46 Basic data for the Preparation of this PCR were generally readily available from BANADE and Project Files. The main deficiencies were in the contents of various supervision reports which, as noted above, neglected to treat certain aspects of the project. - 15 - PART II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE (Prepared by BANADE) Project Development and Implementation 2.01 BANADE's objective in initiating the request for a new loar in 1980 was to give it the same uses as the First Industrial Project (Loan 1463-AR), which supported the modernization and expansion of the industrial sector, recognizing that the latter, implemented at the end of 1977, had been diffi- cult to commit as a result of the general downturn of the economy; while, at the same time, understanding the need to provide continuity for long-term financing to encourage new investment in industry. 2.02 The first World Bank mission, in November 1980, included an energy conservation expert from the University of Pittsburgh who carried out a study to include in the operation an energy conservation program, with the assis- tance of the National Institute of Industrial Technology (INTI). 2.03 To this was added the participation of the Provincial banks and the carrying out of a study of the impact of changes in the industrial incentive system, as well as a Development Program for BANADE's staff and a Management Information System. 2.04 The project was approved by the World Bank on December 1, 1981, and by BANADE on January 22, 1982, with the Government's guarantee, obtained through an Executive Power Decree on November 19, 1982. The Project and Guarantee Agreements were signed on November 30, 1982, with effectiveness taking place February 16, 1983. 2.05 Without describing all t steps that had to be complied with by February 16, 1983, it is enough to say that it took countless hours of work and great effort to overcome obstacles, often outside the sphere of BANADE, and sometimes the result of the change cf authorities, insurmountable con- tracting systems, etc. Notwithstanding the efforts, project implementation was not possible: conditions within the country had changed substantially; we went through the Falkland Islands war; Argentina was in arrears on its financial foreign debt; investment decreased markedly, and demand was paralyzed. 2.06 In view of the above, and analyzing th-- situation In the loc-1 market, there was an attempt to change the purpose of th loan, through a letter sent to the World Bank in April 1983, which indicated that the most immediate use of the loan would be for prefinancing or fiaancing exports and financing imports of inputs for exporting industries. There wab a]so an effort to introduce a component to finance the conversion to gas of indus- tries using hydrocarbons. 2.07 In the meantime, the cost of money in the international market had decreased and the 11.6% annual interest rate of the Bank loans plus 5 points (1.5 for risk derived from the basket of currencies and 2.5 as spread in favor of BANADE), made it non-competitive. The World Bank, which in the face of the volatility of the currencies, was beginning to apply variable rates to new loans, maintained a policy of no change in the face of the current rates. - 16 - 2.08 In July 1983, the World Bank presented a proposal to introduce changes in the Loan Agreement, subject to compliance with new requirements, such as Government's commitment of new capital contributions in order to maintain the debt/equity ratio; establishment of a counterpart hedging fund and the opening of the Special Account in the Central Bank with a view toward speeding up the disbursements of the new component of working capital and to accumulate amortizations until such resources were once again lent, bearing interests in favor of BANADE at the annual rate of 11.6%, etc. 2.09 BANADE tried to comply with these objectives through notes and contacts wich the Central Bank and the Ministry of Economy, but these efforts were useless in view of the decision of the Military Government to call for general elections that year. 2.10 On the other hand, in November 1983, the World Bank informed BANADE that it was suspending consideration of changes to the contract for some time, in view of the lack of agreement between Argentina and the inter- national community and because of the lack of approval by the World Bank of the plans of the Government of Argentina. 2.11 In January 1984, once the change of government had taken place, the World Bank resumed negotiations. BANADE obtained a commitment from the Treasury that it would assume the currency pool risk, and the criteria for evaluating the debt/equity ratio was changed, excluding from the liabilities the operations guaranteed by the Treasury. It became obvious that INT! did not have counterpart funds to carry on the energy conservation program and negotiations continued. 2.12 In the meantime and until the contract was changed, BANADE requested authorization to use funds to give investment subloans at an annual interest rate of 14.1% (which, in any case, was outside the market rate and was not accepted by potential users). 2.13 In July 1984, the World Bank sent its proposal for amending the contract, stating that, in order to incorporate the financing of working capital, it would first be necessary to approve the review of BANADE's policies and operating procedures as well as new agreements with the Central Bank for maintenance of the accounts. 2.14 Negotiations continued; the Central Bank refused to recognize the 11.6% rate on the balances of the accounts that would have been opened and the correspondent banks recognized an annual interest rate of 9-1/8% at most. 2.15 The World Bank was then informed that the disbursement process, through credit letters, with reimbursement guarantees, would be used, and on February 15, 1985, the World Bank confirmed that the credit line for the granting of investment subloans could continue to be used because the amend- ment did not prevent it. 2.16 In the meantime, the study of effective protection was substituted by one linked to the encouragement of exports to be carried out under the Project. - 17 - 2.17 High interest rates continued to bz a problem for the placement of funds and, because of this, the World Bank accepted that in the subloans a provision would be made to utilize the rate negotiated, which, as a minimum, was 12.1% per annum, but only until May 1985, the date on which the Amendment became effective. 2.18 In March 1985, a legal counsel from the World Bank travelled to Buenos Aires to discuss the Amendment to the project prepared by the World Bank in February. It was agreed that the changes to be introduced to the Technical Assistance component and to the study to be financed would be agreed on a separate letter and reflected in the entire agreement, but not in the Amendment, and in April 1985, the World Bank sent the draft Amendment to the Loan and Guarantee Agreements, and BANADE granted intervention by the Ministry of Economy. 2.19 With regard to the amendments to be agreed separately, in June 1985 a letter was sent to the World Bank, the text of which was prepared by the World Bank, signed by the President of BANADE, and by the Minister of Economy, indicating their agreement to the amendments. Such letter was to be signed by the World Bank and returned to BANADE; its compliance was reiterated by telex dated June 17, 1985, without receiving a reply. 2.20 In view of the demand for investment projects, it was requested that, in the meantime, the agreed period be complied with in order to continue sending operations for approval by the World Bank. 2.21 In August 1985, BANADE approved the Amendment and on September 30, 1985, the Executive Power approved the text of the same. Both documents were signed in Washington on November 27, 1985. 2.22 The World Bank included in the Amendment the changes agreed to in the letter signed by the President of BANADE and the Minister of Economy. This resulted in the text of the Amendment approved by the executive Power Decree not coinciding with the one signed in Washington, which producee corresponding delays in obtaining the legal opinions in Argentina to overcome such problems. 2.23 In the meantime, the World Bank delayed the approval of subloans submitted, as well as the utilization of the funds for the approved projects, subjecting disbursements to the effectiveness of the Amendment. At that time there were 17 approved projects that could not be implemented. 2.24 On January 21, 1986, the legal opinion of the Treasury Attorney, accepting the changes introduced in the Contract Amendment, was sent to the World Bank and on January 23, 1986, the World Bank declared its effec- tiveness. 2.25 On March 12, 1986, BANADE requested (in face of the possibility that utilization of resources would be exclusively centered on investment projects) a change of categories, increasing to US$99.5 million the amount for the same and keeping US$500,000 for technical assistance. At the same time it was also necessary to return to the flexible amortization system, given that in the Amendment a fixedi reimbursement plan had been agreed. - 18 - 2.26 In May 1986, the World Bank accepted the change in categories, but maintained US$500,000 for working capital (a line that could not be placed because of its cost and the complex information required by the World Bank, whereas in the market these short-term businesses were processed fast and require minimum information to be supplied by the companies). It also accepted the change in the amortization plan. 2.27 In December 1986, 102 operations, amounting to US$63.6 million, had been sent to the World Bank for approval. There were projects under consideration that exceeded the available resources, which required an exten- sion of 120 days in the implementation period, which was to expire on December 12, 1986. 2.28 That same month the World Bank requested additional information, including a proposed disbursement 3chedule. The World Bank also indicated that it should take into account the changes that could be expected in the categories, taking into consideration what had been discussed during the appraisal mission for the Small and Medium Industrial Credit Project (SMI, Loan 2793-AR) with regard to financing with resources from the new loan--an amount of around US$1 million for computer equipment for the new project. This situation was reflected in the working document of the mission that analyzed -he SMI project. 2.29 In February 1987, the proposed disbursement schedule requested was sent to :he World Bank, along with a request for a change of categories: US$98.8 -rllion for Investment Subprojects and US$1.1 million for Technical Assistance, clarifying that in this Tay the US$1.1 million could be assigned to the .:quisition of computers needed to implement the SMI Project (US$1 mill--t.n for computer equipment and US$100,000 for studies to be carried out under such project). 2.30 On i;-ril 6, 1987, the application forms for the purchases to be made with resour, ms from Loan 2063-AR for the SMI project were sent to the World Bank, clarifying that in the technical assistance item the US$220,000 to finish paying for the study carried out by the United Nations had been omitted; thus, the loan categories should have been as follows: US$98.6 million fer investment subprojects and US$1.3 million for Technical Assistance; information on the computer equipment to be purchased or leased was to be sent later. 2.31 It was also necessary to request a new extension to present projects for World Bank approval. 2.32 Through a letter dated April 27, 1987, the World Bank accepted the requested reassignment of categories, and extended the closing date to September 30, 1987. This letter, signed by the President of BANADE, indi- cated agreement and was delivered to the World Bank official in charge of Loan 2063-AR, who was in Buenos Aires at that time. 2.33 Although the amount assigned for Technical Assistance included the funds required for the SMI Project, this was not specified in the letter sent by the World Bank, and no one realized it because the request for such reassignment indicated i-s purpose. - 19 - 2.34 Finally, and in view of the delay in the preparation and formaliza- tion of the projects, a new extension was requested until December 29, 1987, to present subprojects for approval, which was accepted by the World Bank. 2.35 Since progress had been made in the SMI Project, in September 1988 a request was sent for reimbursement of expenses incurred and details were given of the expenses to be incurred from the US$1 million in Technical Assistance. 2.36 In October 1988, the e=tension, until June 29, 1989, was approved for disbursements of the approved projects and, on November 2, 1988, US$9 million was cancelled from the loan funds because some of the companies abandoned the approved projects; a reply on the expenses incurred under the Technical Assistance component was also requested. 2.37 On November 21, 1988, BANADE received a telex asking BANADE to send the application for reimbursement of computer equipment expenses, but on December 13, 1988, the World Bank advised BANADE that there was no evidence that the transfer of technical assistance funds from Loan 2063-AR to Loan 2793-AR to the amount of US$1.1 million had been agreed on. 2.38 From then on there was differing information related to this subject, with BANADE trying to have the World Bank recognize the expenses incurred, and in June 1989, a 90-day extension was requested to process the reimbursement of technical assistance expenditures. 2.39 In August 1989, BANADE was informed that the telex requesting the extension was received and that the World Bank would reimburse the funds in local currency, using the historic exchange rate, without adjustment for inflation. Any exception, in view of the loss of value of the Austral, had to be considered at the highest levels within the World Bank. 2.40 Finally, and after different alternatives, the World Bank decided in September 1989 not to make the disbursement for expenses incurred by BANADE under the technical assistance component. 2.41 Based on the utilization of Loan 2063-AR, it originated of 137 projects, amounting to US$84.0 million disbursed, of which 25 operations were new projects (18.24%), 15 of which were located in the San Luis Province, 1 in San Juan, 2 in Santiago del Estero, and 1 in Cordoba, 2 in Mendoza (among them the most important one, Petroquimica de Cuyo), 3 in the Great Buenos Aires area, and 1 in Buenos Aires. The 137 projects created 4,209 new jobs. 2.42 The first disbursement of the Loan took place in 1985 and its utili- zation was slow, with disbursements being made through the opening of import letter of credit with reimbursement guarantees from the World Bank. 2.43 Because of the devaluation of the US dollar in relation to other currencies, there were problems with the World Bank reimbursement guarantees because they were issued exclusively in US dollars and did not cover the amounts of the letters of credit at the time of their negotiation--having to negotiate their increase on a case by case basis, until it was decided to give the credits with a 10% and a 20% surplus to avoid this situation. - 20 - 2.44 These problems could have been avoided if tne reimbursement mechanism of advances on account had been used, but after the Amendment the World Bank established that BANADE should receive an interest rate of 11.6% (financing cost) for the balances not utilized and that rate was too high and off the market, which made the opening of accounts provided for in the Amendment unfeasible. 2.45 The loan was almost completely committed to projects approved by the World Bank, but several companies gave up in formalizing the subprojects approved and this, in the end, reduced the total amount used, with advance cancellation of US$9.0 million from the loan and later the balance of US$6.7 million, which resulted in the total disbursed amount for investment subloans reaching US$84.0 million and US$256,826 under the technical assis- tance component. 2.46 With respect to the Technical Assistance component, at the beginning, the US$500,000 assigned for this purpose was to be used to finance the study on effective protection of the industrial sector, a program to promote energy conservation, a staff development program for BANADE, and the establishment of an information and management control system. 2.47 in practice, the study on effective protection, which was to be carried out by the Ministry of Economy under the coordination of BANADE, in the end was substituted with a program to plan the necessary policies for the expansion of industrial exports, contracted under the United Nations Program, which was completed and delivered to BANADE, satisfactorily complying with the terms of reference. 2.48 In this regard, the Economic Research Management of BANADE prepared a Working Document which highlighted the fundamental aspect of the study applicable to the work of BANADE and the actions to be developed to promote the development of the exporting sector, thus giving a practical sense to the conclusions of the study carried out. 2.49 The program to promote energy conservation was abandoned because INTI did not have the funds to cover its cost, with a change in the govern- ment taking place in the meantime, etc. The World Bank was to finance 45% of the cost of the program. 2.50 The staff development plan for BANADE created the Training Institute of BANADE, which has been functioning continuously, carrying out different internal training courses, as well as arranging BANADE's participation in external courses and seminars, both inside and outside the country. 2.51 The Staff Development Plan, in turn, brought about the contracting of a consultant whose cost was financed with funds from Loan 1463-AR, which, in practice, was not very useful to BANADE which in some aspects such as salaries, has limited room of maneuver. 2.52 Lastly, and with respect to the information and management control system, the set goals were completely achieved, with progress made in the development of new programs, financed completely by BANADE because it did not obtain assistance from the World Bank, in spite of efforts in this regard. - 21 - Lessons Learned 2.53 From the analysis of the development and execution of the project the following conclusions can be derived: (a) The time required to prepare a line of credit makes its effec- tive use uncertain in the face of the changing and generally altered global economic situation in Argentina. (b) The reduction of the negotiation period and effectiveness of the credit facilities should be an objective that cannot be delayed, although in practice this is not easy because the previous requirements that have to be met by the borrowers that sometimes are out of their control, demand considerable efforts that are not always successful. (c) It is understandable that the World Bank seeks to strengthen the entities that end up as borrowers of its credits; sometimes such requirement helps attain objectives that usually the borrower cannot obtain directly. But, experience indicates that the time that it takes makes the credit very costly and sometimes not very efficient, because of the changes taking place in the meantime that alter the markets and the investment decisions of the potential users. (d) The change of government, policies, inflation, and the general instability of the economy have been a constant throughout the life of the loan and although these are external factors to the World Bank and BASADE, they cannot be dismissed because of their influence on the concretion and development of the loan. (e) It is commendable that the World Bank wishes to introduce in its loans new destinations for its financing and experts from foreign universities can detect suitable fields for this, as has been the case in this project of incorporating a program for energy conservation. However, experience indicates the need to examine this type of measure thoroughly in the future, since even after enormous efforts with the entity that had to intervene in the program, it was not feasible to carry out its development and execution and its participation was necessary in order to generate a non-existent demand. (f) It is difficult to place resources in the long term with inter- est rates that do not reflect the market situation. It is possible that this was one of the last loans granted by the World Bank at a fixed rate, since the Bank reviewed its policy to come closer to the reality of the international capital market. However, it refused to change the rates of the loans already approved and this reduced the possibility of utilizing the credit facilities. - 22 - (g) We are left with the experience of the impossibility to respond to changing needs of the economic situation through this type of financing, since agreeing on changes takes as much or more time than preparing a new loan and by the time these has been achieved the reason for the request has already disappeared, presenting at the same time difficulties in operating the facilities under the original conditions. This is specifically related to the working capital component. (h) At the end, the funds were placed through the traditional demand for the financing of imports of capital goods. This demand began to materialize in 1985, when an agreement was reached to set a minimum annual iaterest rate of 12.1%. Because of this, it was necessary to request successive exten- sions of the final date to send projects for World Bank approval, a situation that was always agreed to by the Bank. (i) Another lesson learned is the need to follow-up each and every agreement reached with World Bank missions in order to corroborate its complete and proper instrumentation. Not doing this follow-up resulted in BANADE's not being able to use fundE from the Technical Assistance component of this loan to buy computers for the SMI Project (Loan 2793-AR), although the World Bank had agreed to increase this component for that purpose. Effectiveness of relations between the World Bank and BANADE 2.54 Relations between the World Bank and BANADE were always cordial and proper. It should be mentioned, however, that during the execution of this project we had four changes of World Bank staff in charge of the project and this undoubtedly affected somewhat the relationship as there was no con- tinuity. Each new project officer had to start by learning about the project and the borrower institution, sometimes having differences of opinions in judging similar situations. 2.55 This situation of repeated changes also took place in BANADE, mainly because of retirement from BANADE of the two staff members that, at some point, were in charge of the project. Because of this, it was necessary to carry out the global analysis of its development based on the documentation in BANADE's files. 2.56 We have noted, because of its frequency, that some of the communica- tions by telex addressed to Bank staff by name do not always reach them. Also, we have received telexes reminding us of messages that we had not received. This, we assume, must have had to do with communications problems within the World Bank. 2.57 We also tended to have problerl with the receipt of the Disbursement Notices, which did not arrive witih the necessary timeliness to keep our records up to date, since there has been, on average, a delay of one month between the date of the Notice and its receipt in BANADE. This has brought about frequent observations from the external auditor, especially at the close of each fiscal year. - 23 - PART III: STATISTICAL INFORMATION 1. Related Bank Loans Year of Loan Title Purpose Approval Status Comments Industrial To support 1977 Closed It took nearly Credit Project modernization five years to Loan 1463-AR and expansion commit the loan. of manufacturing Final closing was enterprises 10/25/85, almost through a four years later US$100 million than 12/31/81 as credit line. initially contemplated. Small and Medium To finance SMIs 1987 In About US$30 Industries Project projects through progress million committed Loan 2793-AR a US$125 million to date. The APEX operation financial using BANADE as a situation of second-tier bank BANADE and other and commercial participating banks and BANADE as banks is under first-tier lenders. review to assess the impact of current financial crisis. - 24 - 2. Project Timetable Date Date Date Item Planned Revised Actual - Identification 9/25/78 (Executive Project Summary) - Preparation 11/10/80 - Appraisal Mission 2/16/81 - Loan/Credit Negotiations 6/15/81 9/30/81 - Board Approval 8/81 12/01/81 - Loan/Credit Signature 11/30/82 - Loan/Credit Effectiveness 2/16/83 2/16/83 - Loan/Credit Closing 12/31/86 12/31/87 9/30/88 9/30/88 - Loan/Credit Completion 12/31/85 9/30/87 3. Loan/Credit Disbursements Cumulative Estimated and Actual Disbursements (US$ '000) FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 Appraisal Estimate 15 35 60 100 100 100 100 100 Actual 0 0 0 0 9.5 40.8 69.8 84.3a Actual as % of Estimate - - - - 9.5 40.8 69.8 84.3 Date of First Disbursement 11/15/85 Initial Loan Closing Date 12/31/86 First Extension Loan Closing Date 12/31/87 Second Extension Loan Closing Date 9/30/88 Date of Last Disbursement 7/20/89 /a A total of US$15.73 milliou was cancelled from the undisbursed portion of the loan. The final disbursement was US$11,824.68 on 7/20/89. - 25 - 4. Use of Bank Resources A. Staff Inputs Stage of Project Cycle Period Staff Weeks (FY) Through Appraisal 80 6.0 /b Appraisal through Board Approval 82 15.2 Board Approval Through Effectiveness / Supervision 82-89 77.4 TOTAL 96.6 B. Missions Month/ Number of No. Of Staff Dates of Overall Project Types of Activity Year Persons Weeks Weeks Report Status Rating Problems Identification 4/79 1.4 5/15/79 Preparation 11/80 2 3 6 12/05/80 Appraisal 2/81 2.5 4 10 11/5/81 Revision of L/A 8/82 2 2 4 9/7/82 Revision of L/A 3/83 4 2 8 7/1/83 3 m,f,p Subtotal 28 Supervision 4/83 2 2.2 4.4 7/01/83 3 m,f,p Supervision 2/84 1 1 1 2/29/84 n/a n/a Supervision 2/85 1 1 1 3/4/85 3 f,p Supervision 6/85 1 1 1 10/21/85 3 Supervision 3/86 1 1 1 3/20/86 2 Supervision 10/ 6 1 1 1 10/30/86 2 Supervision 2/88 2 1 2 5/2/88 2 Supervision 9/88 1.3 3 4 10/26/88 2 Subtotal 15.4 lb Staff weeks include only those weeks spent in the field for the Preparation Mission of 11/11/80 - 11/26/80, with two staff participating. Data for other portions of the cycle was taken from the MIS. /e Information was not available from the MIS. /4 f-financial; m-mangerial; t-technical; p-political; o-other /e Combined with SPN of Loan 1463-AR. /f Combined with 7/01/83 report for Loan 1463-AR. About 90% of staff time was dedicated to the supervision of Loan 2063-AR and 10% to Loan 1463-AR. Lg Combined with 7/01/83 report for Loan 1463-AR. - 26 - 5. Status of Covenants Covenant Description of Condition Status Comments Ln/Cr Appraisal Agreement Report 2.02 3.14 (a) establishes maximum loan Yes amount of US$5.0 million equivalent; and (b) establishes free limit loans of US$2.5 million equivalent. 2.02 N/A In 11/27/85 amendment establishes Partial No loans were made Zor energy (iii)(b) allocation of loan proceeds: conservation or working Energy Conservation subloans: capital; these funds were US$10.0 million; other subloans: reallocated to be used for US$39.5 million; Technical equipment purchase and Assistance: US$0.5 million and technical assistance. Working Capital loans: US$50.0 million. 2.04 3.12 Closing Date to be Dec. 31, 1986. No Closing Date was extended twice to: 12/31/87 and 12/29/88. The 6-month grace period for disbursement ended 6/30/89. 2.09 N/A In 11/27/85 amendment. The No The Special Account was not Borrower to open and maintain a opened because loans were mostly US$5.0 million equivalent Special for equipment purchase, and given Account. the difficult external credit conditions for Argentina, it was easier to open letters of credit under the Special Commitment procedure. 4.02 2.52 The Borrower to have its accounts Partial External audit reports were only and financial statements for each received sporadically by the Bank fiscal year audited by an external (for 1981, 1986, 1987, and 1988) auditor and to furnish to the Bank, no later than six months after the end of the year, copy of these audited statements. 4.02 N/A In 11/27/86 Amendment. The No No reports on the equity ratios (iii)(b) Borrower to furnish to the Bank were provided quarterly; they no later than 30 days after each were provided as part of the calendar quarter, a report with annual audit. the calculations of the various debt-to-equity ratios. 4.05 N/A In 11/27/85 Amendment. The Partial By December 1988, BANADE would have Borrower to maintain at all not been in compliance with the times a ratio of consolidated debt/equity ratios if Central Bank long-term unsecured debt to norms about provisioning had been consolidated capital and applied. This loan is closed, but surplus of not more than 10 the Bank is pursuing this issue to 1; a ratio of consolidated under Loan 2793-AR which has the unsecured debt to consolidated same covenant. capital and surplus of 15 to 1; and a ratio of consolidated long-term debt to consolidated capital and surplus of no more than 28 to I juring the year 1985, 26 to 1 during the year 1986, 23 to 1 during the year 1987, and 20 to 1 during the year 1988 and each year thereafter. h Paragraph reference. - 27 - ANNEX 1 Page 1 of 2 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) BANADE - SUBPROJECT PROFILE (as of 11/27/89) No. % Amount % (US$'000) By Size of Subloan Up to US$100,000 25 18.24 1,695 2.01 US$100,01-US$250,000 48 32.65 22,303 8.72 US$250,001-US$500,000 37 25.17 89,906 35.15 US$500,001-US$1,000,000 20 14.59 13,519 16.09 US$1,000,001-US$5,000,000 17 12.40 33,144 39.44 More than US$5,000,000 1 0.77 17,998 21.45 Total 137 100.00 84.016 100.00 By Size of Subprojects Up to US$250,000 50 36.49 6,833 2.61 US$250,001-US$1,000,000 47 34.30 21,101 8.08 US$1,000,001-US$5,000,000 37 27.00 88,424 33.88 More than US$5,000,000 3 2.21 144,604 55.43 Total 137 100.00 260.964 100.00 By Size of Enterprise Small 58 42.33 17,437 20.75 Medium 48 35.03 21,353 25.41 Large 31 22.64 45.224 53.84 Total 137 100.00 84.016 100.00 By Maturity Less than 1 year 0 0.0 0 0.0 1 to 3 years 0 0.0 0 0.0 3 to 5 years 30 21.89 5,336 6.35 More than 5 years 107 78.11 78,680 93.65 Total 137 100.00 84.016 100.00 Source: BANADE - 28 - ANNEX 1 Page 2 of 2 BANADE - DISTRIBUTION OF SUBPROJECTS No. % Amount % (US$'000) By Region Capital Federal 23 16.78 6,231 7.41 Gran Buenos Aires 38 27.73 15,704 18.69 Provincia de Buenos Aires 12 8.75 4,474 5.32 Provincia de Catamarca 2 1.45 3,563 4.24 Provincia de Cordoba 3 2.18 1,045 1.24 Provincia de Chubut 2 1.45 322 .38 Provincia de Entre Rios 1 .72 138 .16 La Rioja 3 2.18 697 .83 Mendoza 7 5.10 19,669 23.41 Neuquen 2 1.45 2,455 2.92 San Juan 3 2.18 2,368 2.81 San Luis 21 15.32 14,426 17.17 Santa Fe 8 5.83 6,574 7.82 Santiago del Estero 2 1.45 3,128 3.72 Tucuman 4 2.91 1,159 1.38 Tierra del Fuego, Antartida e Is 6 4.52 2,055 2.50 Total 137 100.00 84,016 100.00 By Sector Foodstuffs (except Beverages) 5 3.64 2,290 2.72 Beverages 3 2.18 424 .50 Textiles 44 32.11 21,679 25.80 Shoes and Clothing 7 5.10 3,249 3.86 Wood & Cork (except Furniture) 1 .72 73 .08 Paper & Paper Products 9 6.56 4,714 5.61 Printing 13 9.48 3,058 3.64 Leather & Leather and Skin Products 1 .72 49 .05 Rubber Products 2 1.45 1,053 1.25 Chemical Substances and Products 7 5.10 19,658 23.39 Mineral Products (non-metallic) 5 3.64 4.466 5.31 Metal industries (basic) 4 2.91 1.267 1.58 Metal Products (except Machinery) 11 8.02 6.387 7.60 Machinery (except Electric) 2 1.45 487 .57 Electric Machinery 4 2.91 5,422 6.47 Transport 2 1.45 420 .50 Various Manufacturing 12 8.75 6,968 8.29 Construction 3 2.18 2.121 2.52 Public Utilities 2 1.63 203 .34 Total 137 100.00 84,016 100.00 By Financing Purpose New projects 25 18.24 38,340 45.63 Expansion 7 5.10 5,925 7.05 Modernization 105 76.66 39,750 47.32 Total 137 100.00 84,016 100.00 - 29 - ANNEX 2 Page 1 of 2 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) BANADE - OUTSTANDING ARREARS UNDER LOAN 2063-AR AS OF 1/24/90 (USS'000) No. of No. of Payments Overdue Amounts Subloans Overdue Total Principal Interest Less than one year 51 3,271 More than one year 20 847 Total Arrears 30 71 4,181 2,551 1,631 Portfolio Total Total subloans granted 137 Total Subloans Outstanding 136 Total amount of the Outstanding Portfolio 65,641 Arrears as % of the balance of the Portfolio 6.36 - 30 - ANNEX 2 Page 2 of 2 SUBPROJECTS IN ARREARS UNDER LOAN 2063-AR (At Sources of Financing as of 1/24/90 in USS'000) Amount Overdue Overdue Total Total Company Outstanding Principal (%) Interest (%) Overdue (%) Exposure (%) (1) (2) (3) (4)=(2+3) (5)=(1+4) 1. Fadeat 3,188 0 0.0 287 17.6 287 6.9 3,476 22.4 2. Surarco SA 229 23 0.9 48 3.0 71 1.7 300 1.9 3. Textit ViLLa Maipu 87 17 0.7 6 0.4 24 0.6 111 0.7 4. Guipure La Rioja SA y Guipure 107 22 0.9 16 1.0 39 0.9 146 0.9 S. Pasadena SA 1,333 273 10.7 186 11.4 458 11.0 1,792 11.5 6. Supercemento SA 914 102 4.0 184 11.3 286 6.8 1,200 7.7 7. Fara SCA 241 60 2.4 46 2.8 106 2.5 347 2.2 8. Reinforced Plastic 396 50 1.9 27 1.7 76 1.8 473 3.0 9. Grafexsa 367 68 2.6 44 2.7 112 2.7 479 3.1 10. Ricardo Mario Bravo 45 45 1.8 14 0.8 59 1.4 104 0.7 11. J. CartelLone Const C. 490 61 2.4 33 2.0 95 2.3 585 3.8 12. San Sebastian SA 67 50 2.0 18 1.1 68 1.6 135 0.9 13. Kiwisa y Etviro Cuadrado 522 0 0.0 55 3.4 55 1.3 577 3.7 14. PapeLera San Vicente 91 182 7.2 57 3.5 239 5.7 330 2.1 15. Vanar SA 108 324 12.7 59 3.6 382 9.1 490 3.2 16. Fluidmec Saic 115 29 1.1 9 0.5 37 0.9 152 1.0 17. Marviplast SA 0 80 3.1 18 1.1 98 2.3 98 0.6 18. Las 4 Barras Saic 119 89 3.5 38 2.3 127 3.0 246 1.6 19. Tejedurias Homero La Rioja 78 104 4.1 24 1.5 128 3.1 206 1.3 20. Aldo Oscar Martinez 107 81 3.2 29 1.8 110 2.6 217 1.4 21. Ceramica Sassuoto SA 1,269 363 14.2 186 11.4 549 13.1 1,818 11.7 22. Jose CarteL Lone 247 70 2.8 17 1.0 87 2.1 334 2.2 23. Textit Monterrey 0 95 3.7 31 1.9 126 3.0 126 0.8 24. Saia Pascual 136 45 1.8 21 1.3 66 1.6 201 1.3 25. TextiL et Mirador Fu 274 164 6.4 70 4.3 234 5.6 507 3.3 26. CoLorama Laboratorio 69 28 1.1 11 0.7 39 0.9 108 0.7 27. Ameyca SA 378 54 2.1 49 3.0 103 2.5 480 3.1 28. Caele SA 308 44 1.7 40 2.4 84 2.0 391 2.5 29. Fototipia Linfoseter 19 10 0.4 4 0.2 14 0.3 33 0.2 30. Taboada SRL 28 18 0.7 5 0.3 23 0.6 51 0.3 Total 11,333 21. 100.0 1,631 100.0 4,181 100.0 15,514 100.0 Annex 3 Page 1 of 3 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT SUBPROJECTS FINANCED UNDER LOAN 2063-AR Subproject Company Sector Investment FRR (%) ERR (%) IBRD Status No. Purposes Financing (US$000) 2A-01 Petroquimica Cuyo SA Chemical Substances and Products new 17 21 17,999 normal 2A-02 Fialsa SA Textiles new 28 26 1,815 normal 2A-04 Pecom Nec SA Electric Machinery new 137 22 4,349 normal 2A-05 Alfodonera del Valle Textiles modernization 50 38 3,447 normal 2A-06 Fadeal Metal Products modernization 0 0 3,188 normal 2B-01 Serpina SA Textiles modernization 0 0 162 normal 2B-02 Hilvansa SA Textiles new 56 41 994 normal 2B-03 Mecca Castelar Metal Industries (basic) modernization 0 0 136 normal 2B-04 Fialsa SA Textiles new 28 26 1,314 normal 2B-05 Industrias Plasticas Various Manufacturing modernization 124 0 132 normal 2B-06 Fundiciones Norte SA Metal Industries (basic) modernization 26 0 315 arrears 2B-08 Coafi SA Textiles modernization 0 0 485 normal W 2B-09 Clio SA Various Manufacturing modernization 0 0 119 normal 2B-10 Rewetex SA Textiles modernization 0 0 187 normal 2B-100 Bandex SA Chemical Substances and Products expansion 46 0 785 normal 2B-101 J.Y.C. Romano Enos SA Shoes and Clothing modernization 0 0 243 normal 2B-102 Suc FCO Sanguinetti Shoes and Clothing modernization 0 0 105 normal 2B-103 Surarco SA Textiles modernization 0 0 298 fully repaid 2B-105 Textil Villa Maipu Textiles modernization 0 0 174 arrears 2B-106 Cayro Otavares Various Manufacturing modernization 28 0 87 normal 2B-107 Textile San Remo SA Textiles expansion 0 0 255 normal 2B-109 Longvie SA Metal Products (except Machincery)modernization 0 0 224 normal 2B-11 Interprint SA Printing modernization 0 0 115 normal 2B-110 Artes Graf Guaita Printing modernization 0 0 385 normal 2B-113 Bolsapel SA Paper & Paper Products modernization 0 0 263 normal 2B-114 Descartables Arg SA Paper & Paper Products new 37 18 955 normal 2B-115 Guipure La Rioja SA y Gui Textiles new 0 0 179 arrears 2B-116 Esteban Fabra Fons Shoes and Clothing expansion 0 0 97 normal 2B-117 Bodega Navarro Correas SA Beverages modernization 0 0 61 normal 2B-119 Mariano Mas Printing modernization 0 0 63 normal 2B-12 Sancor Cooperativas Foodstuffs modernization 24 0 1,386 normal 2B-120 Papelera Mitre Paper & Paper Products modernization 0 0 288 normal 2B-121 Roneu SA Textiles new 0 0 361 normal 2B-122 Pasadena SA Various Manufacturing modernization 17 0 1,600 arrears 2B-124 Supercemento SA Construction modernization 26 0 1,016 arrears 2B-125 Fara SCA Mineral Products (non-metalic) modernization 0 0 301 arrears P~*2 (,f 3 Subproject Company Sector Investment FRR (%) ERR (%) IBRD Status No. Purposes Financing (USS000) 28-126 Reinforced Plastic Various Manufacturing modernization 0 0 495 arrears 2B-129 Grafexsa Chemical Substances and Products modernization 0 0 472 arrears 2B-13 Veresit SA Chemical Substances and Products modernization 0 0 57 normal 28-132 Fotocromos Columbia Printing modernization 0 0 165 normal 2B-133 Sicom Electric Machinery modernization 0 0 176 normal 2B-134 Talleres Graficos Morales Printing modernization 0 0 251 nornal 2B-135 Indema SA Metal Industries (basic) new 0 0 37/ normal 2B-137 Clamet SA Metal Industries (basic) new 0 0 441 normal 2B-139 FCA ARC Bozalitos Metal Products (except machinery) modernization 0 0 140 n,rna 2B-14 Casa Piro SA Various Manufacturing new 50 0 857 normal 2B-140 Bersa SA Metal Products (except machinery) modernization 0 0 10! nornal 2B-141 Ricardo Mario Bravo Foodstuffs modernization 0 0 90 arrears 28-142 Plastirama San Luis Chemical Substances and Products new 47 0 159 normal 2B-144 Felix a Medoro Saymedoros Paper & Paper Products new 80 94 692 normal 28-145 Talleres Graficos Mundial Printing modernization 26 0 9 normal 28-146 Agapol SA Textiles modernization 29 0 1,200 normal 2B-147 J. Cartellone Const C. Construction modernization 20 0 613 arrears 2B-148 Nortextil SA Textiles modernization 50 0 353 normal 28-149 Top Toys Juguetes S Various Manufacturing new 75 0 1,097 normal 2B-150 San Sebastian SA Foodstuffs modernization 0 0 133 arrears 28-151 Ital Papelera San Luis Paper & Paper Products new 13 28 717 normal 2B-153 Kiwisa y Elviro Cuadrado Textiles new 0 0 522 arrears 23-156 Brahms SA Textiles modernization 25 29 1,215 normal 28-157 Nicieza y Taverna Machiner, (except Electric) modernization 0 0 201 normal 28-16 Industrias H-inca SA Rubber P:educts new 51 28 535 normal 28-17 Industrias Pampa SA Rubber Products new 39 21 518 normal 28-18 BCH SA Electric Machinery modernization 0 0 330 normal 28-19 Ind Del Plasticoacozzuol Various Manufacturing modernization 0 0 213 normal 2B-20 Papelera San Vicente Paper & Paper Products modernization 0 0 365 G.judicial 28-22 Vanar SA Textiles new 69 0 863 arrears 2B-23 Raselli Saifi Metal Products (except Machinery) new 0 0 60 normal 2B-24 Fluidmec SAIC Machinery (except Electric) modernization 0 0 286 arrears 28-25 Marviplast SA Chemical Substances and Products modernization 0 0 96 G.judicial 2B-27 Sevel Argentina SA Transport modernization 0 0 364 normal 28-28 Boldt SA Printing modernization 0 0 507 normal 28-29 Las 4 Barras SAIC Textiles expansion 0 0 268 arrears 2B-30 Tejedurias Homero La Rioj Textiles modernization 0 0 209 G.judicial 28-31 Fabrisur SA Textiles modernization 0 0 539 normal 28-32 Balder SA Textiles modernization 0 0 49 normal 2B-33 Vito-Glass SAIYC Mineral Products (non-metallic) modernization 0 0 105 normal 2B-34 Malelu SA y Telimp Various Manufacturing modernization 50 0 262 normal 28-35 Olega SA CIIA Foodstuffs new 7 83 608 normal 2B-36 Propulsora Patagonica Shoes and Clothing modernization 0 0 218 normal 28-37 Aldo Oscar Martinez Printing modernization 0 0 269 arrears 28-38 Technograf Sacif Printing modernization 25 0 755 normal 2B-39 Gabor SAIC Textiles modernization 0 0 263 normal 28-40 Carolani Fueguina Textiles modernization 0 0 102 normal 2B-41 Suaveandar SA Textiles expansion 0 0 109 normal 2B-42 Guida SA Paper & Paper Products modernization 0 0 50 normal 28-43 SurJet SA Textiles modernization 0 0 104 normal Annex 3 Page 3 of 3 Subproject Company Sector Investment FRR (%) ERR (%) IBRD Status No. Purposes Financing (US$000) 2B-53 Textil Monterrey Textiles modernization 36 0 351 arrears 2B-54 Dos Mu Ecoc Sacif Shoes and Clothing modernization 0 0 127 normal 2B-55 Viscosud SA Textiles modernization 0 0 386 normal 2B-56 SAIA Pascual Beverages modernization 0 0 226 normal 2B-57 Corbella y Cia Textiles modernization 23 14 418 normal 2B-58 Serpina SA Textiles modernization 0 0 176 normal 2B-59 Textil el Mirador Fu Textiles modernization 16 0 547 G.judicial 28-60 Celpan SA Paper & Paper Products modernization 0 0 726 arrears 2B-61 Celpak SA Paper & Paper Products modernization 0 0 658 arrears 23-62 Textil Lules SA Textiles modernization 0 0 66 normal 28-63 BG SA Electric Machinery modernization 0 0 588 normal . 25-64 General Textiles SA Textiles modernization 0 0 84 normal 28-65 Luis y Raul Zecnin S Metal Products (except Machinery) modernization 0 0 199 normal 2B-66 Pugliese Hnos SRL Transport modernization 0 0 57 normal 2B-67 Colorama Laboratorio Public Utilities modernization 0 0 139 normal 2B-68 Coteca SA Textiles modernization 0 0 117 normal 2B-69 Autumn SA Textiles modernization 0 0 100 normal 2B-70 Crispan SAICA Mineral Products (non-metallic) modernization 0 0 54 normal 2B-72 Ricardo Almar e Hijos Shoes and Clothing expansion 48 18 2,218 normal 28-74 Multifils SAIC Textiles modernization 0 0 89 normal 2B-75 Talleres Tandil SCA Metal Products (except Machinery) modernization 19 9 123 normal W 2B-76 Lyn SACI Shoes and Clothing modernization 0 0 242 normal 2B-77 Hisilan SAIC Textiles modernization 0 0 178 normal 2B-78 Fadete SAICI Textiles modernization 18 20 2,412 normal 2B-79 E Daneri IPSA Metal Products (except Machinery) modernization 91 0 1,313 normal 2B-80 Molinos Marimbo SAIC Foodstuffs modernization 0 0 73 normal 2B-81 Chiarito San Luis SA Textiles modernization 44 0 87 normal 2B-82 Akito Textil SA Textiles modernization 0 0 221 normal 2B-83 0 Danilo Bolognami Public Utilities modernization 0 0 65 normal 2B-84 Chiozzl SA Printing modernization 20 0 238 arrears 2B-85 Tecnoimpressa Printing modernization 0 0 171 normal 2B-86 Cilsa Cia Lamera SAF Textiles modernization 0 0 338 normal 2B-87 Veresit SA Chemical Substances and Products modernization 0 0 91 normal 23-88 Mineragua SA Beverages new 0 0 138 arrears 23-89 Lauda Textil SA Textiles modernization 0 0 132 normal 2B-90 Industrias Plastico y Met Various Manufacturing modernization 0 0 402 normal 2B-91 JC SRL Textiles modernization 0 0 161 normal 2B-93 Ameyca SA Metal Products (except Machinery) new 28 0 539 arrears 2B-94 Caele SA Metal Products (except Machinery) new 23 0 439 arrears 2B-95 Rotografica Argentina SA PrintiLg modernization 0 0 77 normal 2B-96 Fototipia Linfoseter Printing modernization 0 0 52 arrears 2B-97 Taboada SRL Wood & Cork (except Furniture) modernization 0 0 74 arears 2B-98 Clave Plast SA Various Manufacturing modernization 23 0 1,568 normal 2B-99 Ind Gummi SA Metal Products (except Machinery) modernization 0 0 60 normal Total 137 Subprojects 84,021 - 34 - ANNEX 4 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) BANADE - COMPARATIVE BALANCE SHEETS, DECEMBER 31, 1981-JULY 31, 1989 a (in US$ million) 1981 1982 1983 1984 1985 1986 1987 1988 1989 ASSETS Cash and due from Banks 235.3 219.1 114.1 103.7 61.4 89.8 69.8 58.5 71.8 Government Securities 52.1 90.1 71.0 45.4 37.1 26.4 12.4 11.8 18.0 Loans 2965.4 2833.3 2913.8 3026.7 3167.2 2846.8 3140.0 3111.8 2183.7 Other Receivables for Financial Intermediation 311.3 820.6 1570.3 1507.3 1568.5 1942.7 1557.9 1464.4 1386.4 Equity in other companies 24.2 27.2 32.6 49.9 48.8 25.6 14.5 15.5 26.4 Sundry Receivables 14.5 4.6 3.5 5.5 7.7 9.8 8.5 - 1.0 Property, Plan and Equipment 13.4 13.3 13.4 19.6 24.9 24.9 23.7 34.6 23.7 Miscellaneous Assets 0.7 1.2 1.3 1.7 6.5 7.4 6.8 6.4 8.3 Unappropriated items 55.4 24.7 54.9 44.6 59.0 47.7 47.7 50.2 1.4 Total Assets 3672.7 4034.5 4715.3 4804.7 4981.5 5021.4 4881.8 4753.1 3720.9 LIABILITIES Deposits 762.3 337.9 241.8 243.4 174.3 217.0 261.8 245.2 75.3 Other Obligations (for financial intermediation) 2628.4 3486.4 4281.6 4336.0 4514.2 4457.5 4300.6 4249.6 3593.8 Sundry Liabilities 15.0 7.3 13.5 9.4 18.5 16.0 17.7 10.7 15.3 Reserves and Allowances 14.8 10.2 9.6 7.4 8.7 18.1 7.5 6.1 .8 Items Pending Allocation 63.5 37.9 37.6 46.1 51.0 54.2 44.3 48.7 1.0 Total Liabilities 3484.2 3879.9 4584.3 4642.4 4766.9 4773.0 4632.1 4560.2 3686.2 Capital Stock 61.3 15.0 19.3 12.8 28.9 98.4 54.5 74.5 217.1 Non capitalized Contributions Monetary Adjustments 23.6 17.9 17.8 123.5 121.8 77.6 135.1 149.0 - Aggregate Capital Adjustment Profit Reserve 63.4 29.2 9.9 11.3 12.9 28.1 45.3 - - Retained Earnings 40.0 101.3 36.5 14.4 50.7 44.0 14.6 (30.6) 50.4 Adjustments of Accrued Earnings (232.8) Total Equity 188.4 154.5 130.9 162.3 214.5 248.3 249.7 192.9 34.7 Total Liabilities and Net Worth 3672.7 4034.5 4715.3 4804.7 4981.5 5021.4 4881.8 4753.1 3720.9 Contingent Liabilities 2325.1 2151.6 1973.2 1877.9 2022.5 2134.3 2148.7 n/a n/a Note: Minor discrepancies in decimals due to rounding. /a Figures for 1988 and 1989 were computed by Price Waterhouse (report submitted November 17, 1989). Figures for 1988 are computed as of June 30, 1988 and figures for 1989 are as of July 31, 1989. - 35 - ANNEX 5 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) BANADE - INCOME STATEMENTS: 1981-1989 /a 1981 1982 1983 1984 1985 1986 1987 1988 1989 Financial Revenues 722.2 637.6 710.2 1603.5 1310.3 757.7 1495.6 1266.0 1917.8 Financial Expenditures (533.9) (494.7) (462.7) (1020.7) (877.7) (464.0) (998.4) (896.8) (1523.3) Charge for Bad Debts 183.9) (95.6) (200.9) (387.4, (237.4) (166.6) (327.8) (299.5) (402.0) Subtotal 4.4 47.2 46.5 195.3 195.2 127.0 169.2 69.7 (7.5) Revenues from Service 15.4 13.9 20.2 35.0 32.0 19.1 22.5 7.9 11.6 Expenditures from Services (1.8) (0.9) (1.7) (2.7) (3.8) (1.2) (2.6) -- (1.0) Monetary Result From Financial Intermediation -- -- (201.9) (145.0) (75.5) (134.6) (156.7) -- Administration Expenses (39.8) (17.2) (23.3) (40.4) (38.4) (49.4) (53.6) (7.5) (22.8) Other Income 62.2 68.1 2.5 24.0 33.0 95.0 118.3 17.4 110.3 Other Losses/Expenses (15.0) (17.2) (9.6) (14.7) (32.2) (59.5) (70.7) (18.4) (193.6) Monetary Result for Other Operations - -- 15.2 8.2 (12.0) (34.3) -- (124.2) Net Result for Period 25.4 93.8 34.5 9.8 49.0 43.3 14.0 (87.7) (232.4) Note: Discrepancies in decimals due to rounding. /a Figures for 1988 and 1989 were computed by Price Waterhouse (report submitted November 17, 1989). Figures for 1988 are as of June 30, 1988 and figures for 1989 are as of July 31, 1989. - 36 - ANNEX 6 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) BANADE - FINANCIAL RATIOS Original Loan Agreement 1985 Loan Amendment /a 1981 1982 1983 1984 1985 1986 1987 1988/b 1. Debt/Equity Ratio (Including Contingencies) Consolidated long-term unsecured Max. Loan Agreement Requirement n/a n/a 10 10 10 8 with BCRA guidelines n/a n/a n/a n/a n/a 20.2 on provisions without BCRA guidelines n/a n/a 4.6 8.5 9.2 7.9 Consolidated unsecured Max. Loan Agreement Requirement n/a n/a 15 15 15 12 with BCRA guidelines n/a n/a n/a n/a n/a 23.9 on provisions without BCRA guidelines n/a n/a 8.5 9.9 11 9.4 Consolidated long-term Max. Loan Agreement Requirement 10 10 28 26 23 20 with BCRA guidelines n/a n/a n/a n/a n/a 45.1 on provisions without BCRA guidelines 12.3 18.4 26.3 26.4 18.7 20.6 21.5 17.7 2. Operating Costs as % of Total Assets 1.1 0.4 0.5 0.8 0.8 1.0 1.1 0.5 3. Arrears as % of Total Portfolio n/a n/a 12.3 21.1 15.9 19.9 21.0 4. Largest 50 loans/Total Loans n/a n/a 80.6 80.6 72.1 71.4 75.3 /a The amendment agreement of November 27, 1985 (Section 4.05, paras. a. arA b.) delineated 3 types of debt categories and assigned ratios respectively. /b Maximum agreed under the Small and Medium Industries Project (Loan 2793-AR), which superceded the maximum agreed under this loan. Source: BANADE, Contaduria, 1988. SIGEP, Report of November 24, 1989 - 37 - ANNEX 7 PROJECT COMPLETION REPORT ARGENTINA SECOND INDUSTRIAL CREDIT PROJECT (LOAN 2063-AR) BANADE - PERSONNEL EMPLOYED 1978-1989 Year Number 12/31/78 4,033 12/31/79 3,972 12/31/80 3,841 12/31/81 3,761 12/31/82 3,666 12/31/83 3,686 12/31/84 3,647 12/31/85 3,539 12/31/86 3,422 12/31/87 3,274 08/31/88 3,175 09/29/88 2,979 10/26/89 2,977