Philippines - Industrial Investment Projects

DoCument of The World Bank FOR OFFICIAL USE ONLY Report No.8781 PROJECT PERP010ANCE AUDIT REPORT THE PUILIPPINES SIX DPC AND SMI LOANS LOANS 1052-PR AND 1514-Pi (PDCP IV AND V) LOAt 1572-P (DBP III) LOANS 1727-Pi AND 2169-Pi (SNI II AND III) LOAN 1984-PR (APEE LOAN) JURE 21, 1990 Operations Evaluation Departmat nls d~aOnenå has a resd~ted d u ay be ud by any In #be o« their <AeaI 4dutes. Its conten my n ot ob be db~Wdd wank CURRENCY EQUIVALPJS (Period average) Ggrrner Philippine Poso (P) 1971 US$1 - P 6.43 1972 US$1 - P 6.67 1973 US$1 - P 6.76 1974 US$1 - P 6.79 1975 US$1 - P 7.25 1976 US$1 - P 7.44 1977 US$1 - P 7.40 1978 US$1 - P 7.37 1979 US$1 - P 7.38 1980 US$1 - P 7.51 1981 US$1 - P 7.90 1982 US$1 - P 8.54 1983 US$1 - P 11.11 1984 US$1 - P 16.70 1985 US$1 - P 18.61 1986 US$1 - P 20.39 1987 US$1 - P 20.57 1988 US$1 - P 21.10 ACRONYMS ADB - Asian Development Bank APT - Asset Privatization Trust B SI - Bureau of Small and Medium Industry of DTI CBP - Central Bank of the Philippines CEO - Chief Executive Officer DBI - Development Bafking Institute DBP - Development Bank of the Philippines DDRB - Department of Development and Rural Banks of DDP DFC - Development Finance Company DFU - Development Finance Unit of CBP DTI - Department of Trade and Industry of Government ERR - Economic Rate of Return m - Financial Rate of Return IGLF - Industrial Guarantee and Loan Fund MASICAP - Medium and Small Industries Coordinated Action Program of DTI NEA - National Electrification Authority OED - Operations Evaluation Department PCR - Project Completion Report PDB - Private Development Bank PDCP - Private Development Corporation of the Philippines PFH - Participating Financial Institution PISO - Philippine Investments System Organization PNB - Philippines National 9ank kPAR - Project Performance Audit Report SAR - Staff Appraisal Report SBAC - Small Business Advisory Center k SBP - Small Business\Program of PDCP SKI - Small and Medium Industry SMILE - Small and Medium Industry Lending Department of DBP THE WORLD BANK FM OFFKUL USE ONLY Wahmpon. D.C. 200J3 U.SA OpesIMMu todnesMa June 21, 1990 OORAM 1 THE EICUTIV DIMCTORS AND TH PMESIDENT SUBJECTs Project Performance Audit Report on The PhilJUbes - Six DC and SMI Loans Attached, for information, is a copy of a report entitled "Project Performance Audit Report on The Philippines - Six DFC and SI Loans (Loans 1052-PH and 1514-PH (PDCP IV AND V), Loan 1572-PE (DBX III), Loans 1727-PH and 2169-PH (SWI II and III), Loan 1984-PH (Apex Loan), and Loan 1984-PH (Apex Loan)]" prepared by the Operations Evaluation Department. Attachment This document h a rsicted distibution and ma be ued by ecipimnts only in Ihe perfomance of thei offial dutLs Its conwents may not othewisn be disclse without Worl Bank authoation. FOR OFFICIAL USE ONLY SIX D2C AND SH LOANS LONS 1052-PR AND 1514-PR (PDCP IV AND V) LOAN 1572-PH (D&P III) LOANS 1727-PR AND 2169-PJ (SHI II AND III) LOAN 1984-PO (APEE LOAN) PREPAC ....................................... U*SIC DATA SEETM ........ i OVERVIE ................ ................................. Xv i- ECONIC AND SECTOR STTING ............................... 1 Economle Developuente . .......................... 1 Induatrial Sector Developmenta ........................ 4 Financial Sector Developmente ......................... 5 II - PRIVATE DEVELOPENT CORPORATION OF THE PILIPPINES (PDCP IV AND V) (LOANS 1052-P AND 1514-P) ............... 9 EfALU N RY ........................................ 9 Introduction ......................... ........ 9 Objecttvea ............... ............ ......... 9 Implementation Eperienee .............................. 9 Regults ................................*t... 9 Suot~4aIlity .................. 9...................... 10 CFndinga and Leoson ................. 11 A. BACGROUND ................... .................... 13 Introduction ............................ ........... 13 Obj etives ................ 14 Concept, Design and Rationale .......öa............ 14 B. PRGRS IN E TINGC TATED OJELM 8 ......... 14 Institution Bulldin ............................. 14 Other Objectivef .................................... 14 C. OPERATICNAL AND_IACL EfERPORMANCE ............. 15 Okperationm ................ ........................ 15 PInancial Pogition .............*....*.................. 17 Quality of Portfollo .................................. 17 External Fators Affecting Performance ................ 18 Resource Mobilization Efforts and Constrainta ......... 19 Efforts at DiLversification and Expansion of Activities ............... .................. 19 Utiliation of Bank lund. .............. ............. 19 This document has a restricted distribution and may be md by recipients only, n thO perforance of their oicial duties. Its contents may not otherwlse be disclsed without WoMd Bank authoriauion. TABLE O CONTENTS (cont'd) Pafe No. II - PIVATE DEVELOPMENT CORPORATION OF THE PILIPPIES (PDCP IV AND VI (cont'd) D. 7IUDINGS AND ISSUES .................................. 21 Overall Assesment .................................... 21 Lessons and Recommendations ........................... 21 ANNEXES 2.1 PDCP: Summary of Operations, 1988-89 ..................... 23 2.2 PDCP: Comparative Balance Sheets and Comparative IncomG State~ets .................... 24 2.3 PDCP: Present Status of Subloans Under Loano 1052-PR and 1514-PE ...................... 26 III - DEVELOPMENT BANK OF THE PHILIPPINES (DBP III) (LOAN 1572-PR) ............................................ 29 EVALUATION SUIh~fAY ....................................... 29 Introduction ............ ......................... 29 Objectives .......................... 29 Implementation Experience ............................. 29 Resultg ............................... 30 Sustainability ................ .................. 30 Findings and Lessons ................................. 30 A. BACKGROUND ....... ................. 31 Introduction ....................................... 31 Project Objectives .................................... 31 Concept, Design and Rationale ....................... 32 8. PROGRESS IN MEäTIN STATED OBJECTIVES ................. 32 Progress in Institution Building ...................... 32 External Constrainte and Operational Autonomy ......... 36 C. OPERATIONAL ANDFINANCIAL PERFORMANCE ................. 36 Operations and Finance* ............................. 36 Utilization of Bank Punds ............................. 38 D. FINDINGS AND ISMUS ............................ 39 Overall Assessmet .................... ................ 39 Bank Role ................ ................ 39 Lessons and Follow-up Action .......................... 39 ANNEX 3.1 DBP: List of Large Subprojects Financed Under Loan 1572-PI ............ . .......... 41 TABLE OF C011TENTS (cont'4) IV - SMALL AD MEDIUM INDUSTRIES AEVELOPMENT PROJECTS <ffI II AND III) (LOANS 1727-PR AND 2169-PH) .............. 43 EVALUATION SUMKARY ........................................ 43 Introduction *.................................... 43 Objectives ................ ....... 43 Implementation Experience ....... ...... 43 Results ........................................... 43 Sustainability .................................. 44 Findings and Lessons ............................. 44 A* BACKGROUND .......... .. ...... ..... 45 Introduction .......................... .... .. ..... 45 Project Objectives ................................. 46 Concept, Design and Rationale ......................... 47 D. PROGRESS IN MEETING OBJECTIVES ........................ b Progress in Institution Building ...........••••••••••• 47 External Constraints and Operational Autonomy ......... 48 Role of Technical Assistance ......................... 49 Sector Policy Objectives .................... 50 C. OPERATIONAL AND FINANCIAL PERORMANCE ................. 50 Institutions' Operations ...............g..... 50 Utilization of Bank Funds ........................... 51 D. FINDINGS AND LESSONS i. g Overall Assessment . ......................... .... 53 Lessons ......................................... 53 V - INDUSTRIAL FINANCE PROJECT {APEX LOAN) (LOAN 1984-PR) ..... 55 EVALUATION SUTMARY ................ ............ 55 Introduction .................................... 55 Objectives ........................................ 55 Implementation Experience ......................... 55 Results .......................................... 56 Sustainability ................... . . ... 56 Findings and Lessons ............................... 56 A. BACKGROUND .......................................... 59 Introduction .............................ee.gg e... ...... 59 Project Objectives .................... 60 Concept, Design and Rationale ...................... 60 B. PROGRESS IN MEETING STATED OBJECTIVES ................. 61 Progress in Institution Building ...................... 61 External Constraints and Operational Autonomy ......... 62 Utilization and Effectiveness of the Technical Assistance Program .... .............. 63 Sector Policy Dialogue ............................... 64 TABLE OF CONTENTS (contId) Paae No. V - INDUSTRIAL FIANCE PROJECT ÄAEX LOAN) (contId) C. OPERATIONAL AD INANIALERFRMANCE ................. 64 Operational Performance ............................... 64 Financial Performance ................................. 65 Utilization of bank Funds .............. ............. 65 D. FINDINGS AND LESSONS ...................... .... 67 Overall Assessment .................................... 67 Role Of sank ...................... 7 sustainability ......................... 67 Findings and Lessons .................................. 68 VI - FOREIGN EXCNANGE RISK AND STRATEGIES FOR DFC LENDING AND RESTRUCTURING .............* ........................... 69 A. FOREIGN EXCUANGE RISK ISSUES ................... ..... 69 Performance Under SI Loans ..................... 69 Los to Larger Industry ................ 70 Experience Under the Philippines D1C Loans ... ........ 74 DFC Responses to Subborrover Problems ................. 76 B. DEC AND APEX LEDING ................................. 76 Constraints with the Bank's DFC Model ................. 77 Apex Lending Strategy ....... ....... 78 C* KETODS OF REARILITATION .............................e 79 VII - SUMMARY AND CONCLUSIONS ........................ 83 List of Tables in the PPAR 1. Philippines: Some Macroeconomic Indicators, 1976-82 ...... 1 2. Philipplnes: Basic Macroeconomic Indicators, 1983-88 ..... 2 3. Debt Service, 1987-92 ...... ..................... 3 4. Total Assets of the Financial System, 1980 and 1988 ....... 7 5. PDCP Approvals, 1980 and 1981 .................... 15 6. Summary Financial Data, 1984-87 ........................... 37 7. Utilization of Funda Under SMI III ........................ 52 8. Exchange Rates, 1971-88 . 71 9. Currency Disbursemente Under PDCP IV . 72 10. Disbursements, Repayments and Outstandinga ................ 73 11. DBP: Selected Balance Sheet Items and Staff Position ..... 79 TABLE OP CONTETS (cont*d) bas b. TEIRD SMALL AMD MEDIUM INDUSTRMES WROJECT (SNI 111) ............... 85 PART I - PROJECT REVIEW ROm BANK'S PERSPECTIVE ................. 87 i. Project Idwáitity .........., ............... 87 2. Background ......... ............... 87 3. Project Objectives and Descrition .......................... 89 4. Project Design and Organization ............................ 90 5. Project Implamentatiou ............................ 91 6. Project Results ............................................ 92 7. Project Sustainability .................................... 94 8. Bank Performance ........................................ 95 9* Borrover Performance ...................................... 96 10. Consulting Services ........................................ 96 11. Project Documentation and Data .............................. 96 PART II - ROJECT EVIEW iR BOMER's PERSPECTIV, ............ 97 A. Overview of Credit Component ................................ 97 B. Lending Operations .......................................... 98 C. IGLF Subloan Characteristies ............................ 98 D. Guarantee Scheme ............................................ 98 E. Reviev of PPI Performance ................................. 98 F. IGLF Development Strategy ............................. 99 G. Technical Assistance Component ............................. 100 PART III - STATISTICAL INFORMATION .............................. 102 1. Related Bank Loans .......................................... 102 2. Project Timetable ........................................... 102 3. Loan Disbursement .......................................... 103 4. Project Conto and FI~acil" ••••••••••••••••• 103 A. Project Costa ......................................... 103 B. Project Financing ....................................... 104 5. Project ]Renults ......................... 104 A. Direct Benefits ....................... 104 B. Summary of TL Operationu .................. ........... 105 C. Credit Distribution ..................... 106 D. Regional Distribution of 1GL3 Loans ..................... 107 E. IGLP Portfollo Performance ............................. 108 F. IGL-unded Subloan Performance ......................... 109 6. Status of Covenauts ........................................ 110 7. Use of Bank Resources ...................................... 111 A. Staf£ IMPUt$ ...................... 111 B. wissionc ........................~1 ANNEUES 1. Summarized Balance Sheets as of December 31, 1982-87 ........ 112 2. Summarized,ncmc Statements - 1982-87 ...................... 113 TABLE OF CONTENTS (cont'd) Pa No. IUSU$TRIAL FINANe PROJECT (AP LOAN) ............................ 115 VALUATION SUM~ARY ........................................... 117 Lessons . 119 The Future ................................................ 120 1. INTRODUCION ...................................... 123 II. THE APEX FINNING PROGRAM ................................ 124 Administration of the Program .......................... 125 General Responsibilities and Function .................. 125 Formulation and Review of Operating Manuals, Policies and Procedural Guidelines ................... 125 III. ENVIROMENT .......................................... 126 IV. LOAN OBJECTIVES ........................................... 126 V. BASIC TERMS AND FEATURES .................................. 127 Funding Sources ........ .............................. 127 Basic Ter04 *9....................................... 128 Other Nighlights of the Nain Loan Agreement ............ 129 VI. UTILIZATION OF LOAN 1984-Pi .................... 130 Subproject Characteristics ............................. 136 Procurement ..................................... 139 VII. DEVELOPMENTAL ROLE OF THE APEX FINANCING PROGRAN .......... 140 VIII. INSTITUTIONAL DEVELOPMENT ................................. 142 Institutional Aspects .................................. 142 Participating Financial Institutions .................. 143 Monitoring and Supervision of PI. ..................... 144 Procedures and Standards ............ ................. 144 IX. FINANCIAL CONDITION AND OPERATING PERFORMANCE ............. 146 Problem. Encountered Affecting Cost to CB and to End-Usera ............................ 147 1. EVALUATION OF PARTICIPATING FINANCIAL INSTITUTIONS ........ 149 Aneor Capital and Investment Corporation (ACIC) ....... 149 Bank of the Philippine Islands ......................... 151 Citytrust Banking Corporation (Citytrust) .............. 153 Metropolitan Bank and Trust Company (Netrobank) ........ 155 Philippine Commercial International Bank ............... 157 Far Kast Bank and Trust Company (FEBTC) ................ 159 International Corporate Bank (Interbank) .............. 162 Manila Banking Corporation (anilabank) ................ 164 Piso Development Bank (PISOBank) ...................... 166 XI. UAY AND CONCLUSIONS ................................... 167 TAE OF COEITS (cont'd) INDUSTRIAL PINCE PROJECT (AMx LOAN) (cont'd) A Operating Policy Guidelines of the Apex Development Flinan ce Unit ...................... 171 3 Sumary of Sub-projects per Participating Financial Institutions .................................. 176 8-1 Details of Sub-projects per Participating Financial Institution .............. .............. 177 B-2 Synopsis of Loan Approvals and Cancellations ............. 181 B-3 List of Subprojects' Comitment Dates and Disbursements Under Loan No. 1984-PR ...*............................ 182 C Charaeteristics of Subprojects Pinanced .................. 189 D Apex Subprojects According to Industry Sector ............ 190 E Regional Distribution of Apex Subprojecta ................ 191 p Procurement Questionnaire ................................ 192 G Details of the Operational Economie Performance of Subprojects Surveyed Under Loan lo. 1984-PR ............ 198 G-1 Rinancial Performance of Subprojecte Under Loan No. 1984-PI ............................................ 199 G-2 Operational and Economic Performance of Subprojects Under Loan No. 1984-PI ................................. 207 G-3 Status of Implementation of Subprojects Approved Under Loan 1984-PR .................................. 214 G-4 Current Status of Sub-loan Financed Under Loan 1984-PR .. 221 B Organizational Chart of DPU .............................. 228 i Sumary of UNDP-sponsored Training Activities of DPU ..... 229 J Subproject Review Process ............................... 231 K Apex Loan Program Balance Sheet ................ ......... 233 L Apex Loan Program Income Statement ....................... 234 M Key Financial Data for PPIs: M-1 Anscor Capital and Investment Corporation ................ 235 M-2 Bank cf Philippine Islands ............................... 236 X-3 Citytrust Banking Corporation ............................ 237 N-4 Metropolitan lnk and Trust Company ...................... 238 M-5 Philippine Coomercial International Bank ................. 239 M-6 Par East Bank and Trust Company .......................... 240 M-7 International Corporate Bank ............................. 241 X-8 The Manila Banking Corporation ........................... 242 N-9 Piso Development Bank, Inc. Balance Sheet ............... 243 TABLE OF CAR9EUS (cont'd) Uage No. 8ORROWEROS SUBMISSION - DIP III 2................................., 245 Za_blea 1. Features of Subprojects Financed Under Loan 1572-P8 ...... 247 2. Partial Indicator of Econoamic and Financial Performances of Subprojects Financed Under Loan 1572-P8 ............. 249 3* Serviced Accounts ........................................ 251 4. Fully Paid Accounts ..................................... 252 5. Accounts Transferred to Remedial Management .............. 255 6. Report on Projects Financed Under IBRD Loan 1572-PH ...... 257 7. Large-Scale Subprojects Financed Under Loan 1572-PH ...... 265 ATTACIHENTS 1. Comments Received from DBP ............................... 273 2. Coments Received from PDC? .............................. 275 3. Comments Received from CBP .............................. 277 PROJECT UPEOM AUDITEORT SIX DFC AND S1 LOANS LOANS 1052-P1 AND 1514-PH (PDCP IV AND V) LOAN 1572-PH (DBP III) LOANS 1727-PR AND 2169-PH (SWI II AND III) LOAN 1984-PU (APEX LOAN) This is a Project Performance Audit Report (PPAR) on the Bank9s six development finance company (DFC) and small and medium industry (SKI) pt j- ects in the Phlippiness Loans 1052-PR and 1514-PH to the Private Develop- ment Corporation of the Philippines (PDCP)i Loan 1572-PH to the Development Bank of the Philippines (DBP)g Loans 1727-PH and 2169-P8 for SHIs and Loan 1984-P8 for apex lending to larger industry. Basic data on these loans is given in the table below. Date of Loan Project Soerd Date ef Finat Amomt La N.Jm MW Anorgg Effetiveness sbUMalaalen 1052 PDCP IV 30.0 11/05/74 02107/75 06/30/79 06130/81 09/15181 210 1514 PDCP V 30.0 01/31/78 06/23/78 03/31/82 03/31/84 04/24/84 680 1572 DSP III 80.0 05/18/78 09/15/78 06/30/82 12/31/83 10/29/84 81760 1727 SNI II 25.0 06/12/79 11/0979 06/30/83 06/30/83 07/07/83 80 1984 Apex Loan 150.0 05/07/81 07/22/81 06/30/85 06/30/88 06/15/88 105.390 2169 SNI III 132.0 06/03/82 12/23/82 09/30/87 09/30/88 04/13/89 68,750 The two loans to PDCP were channeled through the Philippines National Bank on behalf of the Government of the Philippines, for onlending to larger industry. DBP III was made to the Development Bank of the Philippines, a Government-owned Development Bank, for onlending to both SI and larger industry. SHI II was made to the Industrial Guarantee and Loan Fund (101.), an agency operated by the Central Bank of the Philippines (CBP), for onlending to accredited participating financial institutions (PIs) for small and medium industry. SMI III was made to IGLF and to DBP for the same purpose. The Apex Loan was made to the Development Finance Unit (DIU) of CBP for onlending to accredited PFIs for larger industry. DBP III had a small component for setting up a training institute for development bank staff, and SKM II and III had components for technical assistance to Government agencies and other activities for small industry development. The Bank acted as the Executing Agency for a WDP technical assistance program for DFU. The PPAR was prepared by the Operations Evaluation Department (ORD). Project Completion Reports (PCRe) for PDCP V and V and SKI 11, prepared by Country Department II, Asia Regional Office (A82), have already been issued to the Board as ORD Reports Nos# 4565 (dated June 17, 1983), 7997 (dated August 28, 1989) and 7940 (dated June 30, 1989). The PCR for SKI III, prepared by A82, and for the Apex Loan, prepared by the Borrower with an - It - overview by AS2, are attached. The PCR for DBP III io under preparationg the PPAR covering DBP III has been prepared on the basis of a submission by the Borrower which is attached. The PPAR is based on the five PCRs and the Borrower's submission, the Staff Appraisal and President's Reports, the loan documents, summaries of the Executive Directors' meetings at which the projects were considered, a study of economic, industrial and financial sector reports, material in the project files, special reports and studies, and discussions with Bank staff. An OED mission visited the Philippines In October/November 1989 and held discussions with officials of the borrowing agencies and other financial institutions, industrial entrepreneurs, and Government agency officials dealing with small industry. The mission also visited several recipients of subloans. The kind cooperation and valuable assistance of all those contacted is appreciated and gratefully acknowledged. The PCRe provide a good account and assessment of the project experiences, and discuss the performance of the Bank and the project executing agencies. The PPAR elaborates on particular aspects such as the handling of the foreign exchange risk, the historic DFC model and the rehabilitation of financially weakened DEC. The draft PPAR was sent to the Borrower for comments. The comments received from DBP, PDCP and CBP are reproduced as Attachments to the PPAR. * 111 * PROJECT PERFORMANCE AUDIT REPORT FOURTH PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES PROJECT (PDCP IV) (LOAN 1052-PH) BASIC DATA SHEET IDAN POSITION (Amounts in US$ Million) As of Apr. 30- 1990 Original pisbursed Cancelled Eftai OutstandLn Loan 1052-PH 30.00 29.79 0.21 27.45 2.33 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS December 31 19ZI 12ZE .21M 12& I92 120 19. Apprai:al Estimate (US$ M) 0.8 12.5 27.0 30.0 30.0 30.0 30.0 Actual (US$ M) 1.7 5.4 10.1 14.6 24.6 28.7 29.8 Actual as a of Appraisal (%) 212 43 37 49 83 96 99 Date of Final Disbursement: September 15, 1981 RJECT DATES Original Revised/Actual Board Approval n.a. 11/05/74 Loan Agreement n.a. 11/12/74 Effectiveness 02/14/75 02/07/75 Loan Closing 06/30/79 06/30/81 STAFF INPS (staff weeks) IMW 1 "74 I=A EVA fl ZZ Eil 12 WIi MIl MI M& u ES MIU" Appraisal - 3.5 0.6 2.3 - * * * - - * * * 6.4 negotiations 1.7 - - 7.0 - - - - - - - - - .7 SupervLsion 0.3 0.5 - 7.7 10.1 22.3 2.0 13.7 5.9 0.2 1.7 7.2 0.2 71.8 Other 2.0 6.0 0.6 17.1 10. 1 . 2.0 1 . - P -0.:.6. - 1 .. . T4,t&I2.0 4.0 0.6 17.1 10.1 22.4 2.0 13.7 5.9 0.6 1.7 7.2 0.2 87.5 MISIN DTA No. of No. of Staff Date of fonth/"ar Waks Persons X Mka Repo Appraisal 05/74 2 2 4 10/14/74 Supervision I 06/75 2 2 4 08/08/75 Supervision II 02/77 2 2 4 04/28/77 Supervision III 08/77 2 2 4 12/14/77 Supervision IV 09/78 2 2 4 11/08/78 Supervision V 12/79 4 2 8 02/29/80 Supervision VI 09/80 4 2 8 04/07/81 Supervision VII 07/81 3 1 3 09/10/81 Supervision VIII 02/82 2 2 4 04/05/82 Completion 07/82 2 1 2 06/17/83 OTHE PROJECT.DATA Borrower : Philippine National Bank Executing Agency: Private Development Corporation of the Philippines Follow-on Proiect: Project : Fifth Private Development Corporation of the Philippines (PDCP V) Amount : US$30.0 million Loan No. : 1514-PH Board Date: February 9, 1978 -V- ROJECT. ERORMANCE. AUDIT REPORT PHIL1PPIN FIFTH PRIVATE DEVELoPMENT. COREDATIONF THE PHILIPPINES PROJECT (PDCP V) (LOAN 1514-PH) BASIC DATA SHEET LOAN POSITION (Amounts in US$ Million) As of A2r. 30. 1990 Original Disbursed Cancelled L"a84 Outtanding Loan 1514-PH 30.00 29.32 0.68 21.79 7.53 CUMULATIVE ESTINATED AND-ACTUAL DISBURSETS EZm =IS I=8 ES EM8. RSA Appraisal Estimate (US$N) 6.9 23.6 29.9 30.0 30.0 30.0 Actual (US$N) 5.0 17.5 23.0 28.1 29.1 29.3 Actual as % of Appraisal (t) 72.5 74.2 76.9 93.7 97.0 97.7 Date of Final Disbursement: April 24, 1984 PROJECT DATS OriainaL Agtual Board Approval n.a. 01/31/78 Loan Agreement n.a. 02/09/78 Effectiveness 05/10/78 06/23/78 Completion of Commitments 03/31/80 12/31/81 Loan Closing 03/31/82 03/31/84 STAFF IRUTS (staff weeks) SE mi z E n u Ema Imsa Ea E EMS IRM Ei kr 8 22m& Peappralsl 0.4 1.1 - - - * * * - - - - - 1.7 Appreal - 20.9 - - - - - - * * * - - 20.9 assetLatLOW - 5.2 - - - - - - - - - - - s.2 Sup*wsGM ...-.. dU ..z al4 1.. LA L LA I I 14 A 94 L ALZ TOt 0.6 33.5 - 21.3 1.,4 1.4 0.3 7.5 4.5 X.3 0.4 0.1 4.1 76.5 *-vi - No. of No. of Staff Date of Honth/Tear ][e,eks Persons MgMh ReMrt. Appraisal 08/77 2 2 4 10/77 Supervision I 11/79 2 2 4 04/81 Supervision II 08/81 3 2 6 11/79 Supervision III 06/82 3 2 6 04/81 Supervision IV 01/84 2 1 2 03/84 Supervision V 08/85 2 1 2 08/85 Completion 02/88 2 1 2 12/88 OTHER PROJECT DATA Borrower: Philippine National Bank (PNB) Executing Agency: Private Development Corporation of the Philippines (PDCP) Follow-on Proiect: Although there were no additional loans granted directly to PDCP, it is one of the Participating Financial Institutions (PFIs) under the Apex Loan (Loan No. 1984-PH), approved May 7, 1981. /A Being one of the PFIs under the Apex Program, PDCP is directly supervised by the Apex Development Finance Unit (DFU) of the Central Bank at least once a year. In line with the objective of the Apex Program, the Bank relied on the normal supervision of PDCP by DFU. The Bank reviewed the supervision reports prepared by DFU on a quarterly basis and conducted ad.hoe direct supervision periodically. PROJECT PEMR =EN~ MMDT ARMR THIRD DEVELOPMENT BANK OF PHILIMPINES PROJECT (DM. III) (LOAN 1572-PH) BASIC DATA SHEET L=ANPOSITON (Amounts in US$ illion) As of .Apr. 30. 1990 Qriginal Dabursed Cancelled Bal Ontatanding Loan 1514-PH 80.00 71.24 8.76 49.72 21.52 CUUIATIVE ESTIMATED,AND ACTUAL DISBURSENME Appraisal Estimate (US$ M) 9.3 32.0 73.0 80.0 80.0 80.0 80.0 Actual (US$ N) 8.3 26.8 44.5 56.1 64.2 65.0 71.2 Actual as 0 of Appraisal (%) 89.6 83.7 61.0 70.1 80.0 81.3 89.1 Date of Final Disbursement: October 29, 1984 Original Actual Board Approval n.a. 05/18/78 Loan Agreement n.a. 06/06/78 Effectiveness 09/06/78 09/15/78 Loan Closing 06/30/82 12/31/83 SZAF INPUTS (staff weeks) EMZ MA M E 1 I= EM Em I m M EM IssL PMeappaUsal 0.5 1.1 - - - - - - - - 1.6 Appraesal - 85.8 - - - - - - - - 85.8 seasestassn - 7.6 - - - L. - - - - 7.6 SLuerhLst * - 26.8 11.9 14.4 2.1 14.6 12.2 6.7 0.5 89.2 Other . - -. - - -.. J Total 0.5 94.7 26.8 11.9 14.4 2.1 14.6 12.2 6.7 0.5 184.4 * viii MISSION T No. of No. of Staff Date of Month/Year ][ . Prsons Weks Reot Appraisal 10/77 4 4 16.0 04/21/78 Supervision I 12/78 3 3 9.0 03/30/79 Supervision II 11/80 2 2 4.0 12/08/80 Supervision III 12/82 2 3 6.0 01/26/83 Supervision IV 03/83 0.5 3 1.5 03/28/83 OTHER PROJECT DATA Borrover Republic of the Philippines Executing Agency: Development Bank of the Phillprines Follow-on Project: Although there were no additional loans granted directly to DBP, it is one of the Participating Financial Institutions (PFls) under the Apex Loan (Loan No. 1984-PH), approved Nay 7, 1981, and is the apex institution under the Industrial Investment Credit (Apex II - Loan No. 3123-PH), approved October 5, 1989. -ix- PROJECT PERPORMANCE AUDIT REPORT PMLIPPINES SECRND SMALL AND MEDIUM INDUSTRIES DEVEIPMT PROJECT (m ID1 (LOAN 1727-PR) BASIC DATA SHEET IDNPOSITIO (Amounts In US$ Nillion) As of Ar. 30. 1990 WrIia Di~bused Cancelledl Repaid Outgtadin Loan 1727-PH 25.00 24.92 0.08 9.15 15.76 OflUATIV EåSTIMTE AND ACTAL DISBUMENTS Appraisal Estimate (US$ N) 6.65 17.75 25.00 25.00 25.00 25.00 Actual (US$ M) 0.00 17.08 24.64 24.89 24.92 24.92 Actual as 4 of Appratsal (4) 0.0 96.2 98.6 99.6 99.7 99.7 Date of Final Disbursemnt: July 7, 1983 Orinal Actual Board Approval n.a. 06/12/79 Loan Agreemnt n.a. 06/27/79 Effectiveness 09/28/79 11/09/79 Loan Closing 06/36/83 06/30/83 STAFF"INPT (staff weeks) =ZZ mZZZ w2 r Z ZE ZZE mEa ua ui m z=ma zu MI zu aaL Preappa~al 1.0 - 0.2 2.4 8.8 - - - - - - - - - 12.4 Apprai - - - - 27.0 - - - - - - - - - 27.0 gegotlatloaa - - - - 6.4 - - - - - - - - - 6.4 SupevIas= - - - - 0.3 3.2 22.7 2.1 0.3 - - 6.5 1.5 0.6 37.2 Othe . __- -- - -.= - ...~ ... - Total 1.0 - 0.2 2.4 42.5 3.2 22.7 2.1 0.3 0.2 - 6.5 1.5 0.6 83.2 -x- No. of No. of Staff Date of Month/Tear eks ersons sa b Identification 06/76 1 1 1 07/23/76 Preappraisal 06/78 3 4 12 08/25/78 Appraisal 12/78 3 3 9 05/18/79 Supervision I 08/80 2 3 6 10/09/80 Supervision II 11/81 4 4 16 04/13/82 OTHER PROJECT DATA Borrower : Republic of the Philippines Executing Agency: Industrial Guarantee and Loan Fund, Department of Loans and Credit, Central Bank Follow-on Proiect: Project : Third Small and Medium Industries Development Project (SKI III) Amount : US$132.0 million Loan No. : 2169-PH Board Date: June 3, 1982 * xi * PRO3ECT PORMANCR AMDIT REPORT THIRD SALL AND MEDIUM INDUSTRIES DEVEOPWMNT PROJECT (SMI III1 (IDAN 2169-PH) BASIC DATA SHEET IWAN POSITIO (Amounts in US$ Million) As of Apr. 30. 1990 OrIsinal DiWabuse Cancelled B"ald Outstanding loan 2169-PH 132.00 63.25 68.75 10.92 52.32 CUNDITIV ESTIMTE AND ACTUA DISBUREPENT = EM = EM EMZ MA I= Appraisal Estimate (US$ X) 12.8 44.0 87.0 125.5 132.0 132.0 132.0 Actual (US$ M) 0.0 18.4 41.9 59.1 62.1 62.3 63.2 Actual as S of Appraisal (%) 0 42 48 47 47 48 48 Date of Final Disbursement: April 13, 1989 PROECT DATES Original Actual Board Approval n.a. 06/03/82 Loan Agreement n.a. 06/30/82 Effectiveness 09/30/82 12/23/82 Loan Closing 09/30/87 09/30/88 (staff weeks) EM MI MA I= =I a EMIn VM n U e2a Pseapralsal 6.8 45.1 45.7 - - - - - - 97.6 *pp.as - - es.2 - - - - - - 6s.2 seneason.m - - 9.4 - - - - - - 9.4 Supesvision * * 0.1 50.6 37.3 20.2 24.2 12.7 7.6 152.7 Other . . A . . Total 6.8 46.4 121.5 50.7 37.3 20.7 24.2 12.7 7.6 327.9 No. of No. of Staff MonthlYear yela.. Persons W4835 Appraisal 03/80 n.a. 1 n.a. Supervision I 03j83 0.6 1 0.6 Supervision II 06/83 2.6 3 7.8 Supervision III 11/83 2.8 3 8.4 Supervision IV 02/84 0.4 2 0.8 Supervision V 06/84 3.0 2 6.0 Supervision VI 02/85 2.0 2 4.0 Supervision VII 05/86 2.8 3 8.4 Supervision VIII 02/87 3.4 1 3.4 Supervision IX 10/87 0.8 2 1.6 Supervision X 05/88 0.8 2 1.6 OTHER PROJECT.DATA Borrower : Republic of the Philippines Executing Agency: Development Bank of the Philippines Follow-on Proiect: Project : Fourth Small and Medium Industries Development Project (SKI IV) Amount : US$60.0 million Loan No. : 3038-PH Board Date: April 25, 1989 -xiii PROJECT PERMAUM AM=I RIO=T INDUSTRIAL FINANCE PROJECT (APE thANI (IWAN 1984-PH) BASIC DAT& SHEET IUA POSITIO (Amounts in US$ Million) As of ARr. 30. 1990 OrigLnal Disbursed gAncIled jgWg ousaning Loan 1984-PH 150.00 44.61 105.39 1.09 43.52 CUMULATIVE ESTIMATED ANDACTUAL DISBURSEMENTS Em WRzm Appraisal Estimate (US$ N) 2.5 50.5 135.0 150.0 150.0 150.0 150.0 Actual (US$ K) 0.34 12.57 18.66 35.23 41.85 45.20 45.2 Actual as % of Appraisal (%) 13.6 24.9 13.8 23.5 28.0 30.1 30.1 Date of Final Disbursement: June 15, 1988 PROJECT DATES Orginal Actual Board Approval n.a. 05/07/81 Loan Agreement n.a. 05/28/81 Effectiveness 07/01/81 07/22/81 Loan Closing 06/30/85 06/30/88 (staff weeks) WIA WI I= I EMI EMR EM& M EI EWE EER ios Pteappretet - 7.0 54.1 8.4 - - - - - - - 69.5 Appatsel * - - 90.9 - - - - - - - 90.9 a60tstalen - - - 9.2 - - - - - - - 9.2 Supesviato" * * - 2.5 SS.5 52.5 37.0 65.8 36.2 10.2 20.9 258.6 Other - . V. .1. .1 - - .. - - . - -z l Tota 0.2 7.0 61.8 128.5 SS.8 52.5 1.0 64.0 36.2 10.2 20.9 455.9 - xiv ISSIODATA No. of No. of Staff Date of MontTea ]gskA Persons ]We5 R Appraisal 08/80 4 6 24 - Supervision I 09/80 4 4 16 07/81 Supervision II 07/81 3 1 3 09/81 Supervision III 02/82 2 2 4 04/82 Supervision IV 07/82 2 3 6 10/82 Supervision V 07/83 2 2 4 08/83 Supervision VI 08/84 2 5 10 08/84 Supervision VII 08/85 2 2 4 09/85 Supervision VIII 04/86 n.a. n.a. n.a. 08/86 OTHER PROJECT DATA Borrower/Executing Agency: Central Bank of the Philippines Follow-on Project: Project : Industrial Investment Credit (Apex II) Amount : US$65.0 million Loan No. : 3123-PH Board Date: October 5, 1989 - xv * PROECT_EnRMfN AlUDITAREPDRT THE PHILIPPINES SIX DFC AND SNI LOANS LOANS 1052-PH AND 1514-PH (PDCP IV AND V) LOAN 1572-PH (DBP III) LOANS 1727-PH AND 2169-PH (SMI II AND III) LOAN 1984-PH (APEX LOAN) STRATEGIES FOR INTITUTIONAL DEVELOPMENT: AN 2VERVIW Introduction 1. This Project Performance Audit Report (PPAR) covers six loans, aggregating US$447 million, approved for industry in the Philippines during the period spanning 1974 to 1982 (see Table 1). The loans range in the coverage of industry from small industry to large industry. They were diverse in structure and design. They varied in the instrumentalities through which they were distributed, covering public and private sector institutions (Development Bank of the Philippines (DBP) and the Private Development Corporation of the Philippines (PDCP)), and apex agencies under different auspices (the Industrial Guarantee and Loan Fund (IGLF) and the Apex Development Finance Unit (DFU), both in the Central Bank, and the Department of Development and Rural Banks (DDRB) of DBP). They involved technical assistance for institutional organizations (the Development Banking Institute (DBI) for DBP and for DFU) and small industry development (through the Medium and Small Industries Coordinated Action Program (MASICAP) and Small Business Advisory Centers (SBACs), units within the Government of the Philippines). Besides the diversity in the requirements regarding onlending terms for the institutions and agencies involved, the arrangements for bearing the foreign exchange risk were also tailored to the perceived needs of each situation, the risk being borne by the subborrowers in the case of large subloans (those made through DFU, PDCP and DBP) and by the Government for small and medium industry (SMI) subloans (made through IGLF in the Central Bank, and the Small and Medium Industry Lending (SMILE) Department and the DDRB in DBP). Table 1: SELECTED DATA GR LOMS COVERED Industry Joan No. roect Board Date Amt Lntemediary Gro=p rig In. 1052 PDCP IV 11105/74 30.0 PDCP Large Subborrover/DIC LU. 1514 PDCP V 01/31178 30.0 PDOP Large Subborrover/DIC Ia. 1572 DBP III 05/18/78 80.0 DBP Large/SI SubborrowerIDIC for large; Goverament for 8O1 La. 1727 Sil II 06/12/79 25.0 IGLF SHi Government La. 1984 APEX 05/07/81 150.0 DFU/Central Large Subborrover Bank LU. 2169 Sil III 06103/82 132.0 IGI/DZP SKI Governmeat - xvi - Economic and Sectoral Setting 2. The Philippines went through a difficult economic phase in the late 1970s and early 1980s. Lacking oil resources, its external account was affected adversely by the oil price rise of 1979-80. However, it was able to tide over this period by resorting to large external borrowings (PPAR, para. 1.01). 3. The country was caught in economic difficulties by 1983, and its economic problems were compounded by political turmoil in the country. Economic growth decelerated in the first halt of the 1980s, and even became negative. The peso lost 60% of its external value between 1980 and 1984. This affected adversely the investment climate in the country (PPAR, para, 1.02). 4. Tha political situation in the country stabilized in 1986, with a democratically-elected Government coming into power. A large number of economic rehabilitation measures were put through with Bank and Fund support. As a result, investment has picked up in the economy, inflation has been reduced, and the slide in the external value of the peso brought under con- trol. Economic growth has resumed, with the rate of growth reaching a high level in 1988. The country, however, needs political stability to sustain its improved economic performance (PPAR, paras. 1.03-1.06). 5. Industrial Developments. Industrial investment in the Philippines was high in the 1970s, supported by the availability of finance, often at negative interest rates. This helped bring about rapid industrial growth in the country, sustained by protection and Government incentives (PPAR, paras. 1.07-1.08). 6. This pace, however, proved unsustainable in the 1980s, as economic growth declined, and industry did not have the easy domestic market environ- ment of the 1970s. In such a situation, with a rapidly depreciating peso, enterprises based on foreign currency borrowings were not able to meet their obligations. Moreover, industrial investment and growth slowed down by the mid-1980s, reflected in the cancellation of large amounts under loans granted by the Bank and regional and private banks (PPAR, paras. 1.08-1.09). 7. Industrial growth resumed in 1986, following the stabilization measures adopted by the new Government. As industrial capacity is becoming more fully utilized, new investment is also being made in industrial enter- prises. Moreover, many industries, among them cement, paper and coastal shipping, still continue to need investment for their rehabilitation and modernization requirements. These investment needs are being met partly by loans provided by the Bank and other agencies (PPAR, paras. 1.10-1.11). 8. Financial Sector DeveloRments. The financial sector made rapid strides in the late 1970s and early 1980s in the Philippines, following reforms introduced with Bank and Fund support. The Government sought to induce commercial banks to undertake medium- and long-term lending to indus- try by giving some of them the status of universal or "expanded" banks. The Government also broadened the availability of financial services to industry by recognizing some financial institutions as investment houses. Finally, * xvii - the Government used DBP to promote private development banks (PDOs) to prov4de banking facilities and finance outside Metro Manila. The Bank sup- ported these efforts by providing loans to DFCs and other financial institu- tions for financing large, medium and small industry, and seeking to promote institution building and maintaining a dialogue on sector policies and developments with the Government (PPAR, paras. 1.12-1.16). 9. These developments were put on hold during the 1983-86 economic crisis, but have since been resumed. The Bank has recently provided loans for general economic recovery, for financial sector adjustment and for fur- ther investment in industry. As a result, the financial sector, including the stock exchange, has become more active, and the Bank has resumed its dialogue with the country on the further development of the financial sector (PPAR, paras. 1.17-1.18). Bank Strategy in Financing Industry in the PhilijRRines 10. The Philippines has followed a path of industrial investment through the private sector. The Bank's financing of the industrial sector in the Philippines has been through development finance and other intermediaries, in the process seeking to develop the financial intermediation system as a ser- vice sector. IFC, in keeping with its mandate, has provided funds directly to industrial enterprises; moreover, IFC has also sought to broaden the financial system through its capital markets activities. 11. In terms of size groups, the Bank sought to cover a wide range of industries, from cottage industries (through financing of the IGLF and PDBs) to fairly large-scale industries. The Bank also sought to broaden its own reach, and thereby the financial intermediation system in the country, by providing apex loans, thereby seeking to create a competitive financial intermediation process. The Bank's institution building efforts through financial transfers have been strengthened by the technical assistance com- ponents in almost all the development finance company (DFC) loans reviewed in this PPAR. Subsequent to the operations covered in this PPAR, the Bank has provided economic recovery and financial sector adjustment loans to the Philippines, which have focussed on rehabilitation of financial institutions and reform of the financial sector in the country. 12. Apart from the overall strategy of the Bank, it is necessary to consider the range and role of the Bank loans in their individual components. In financing DFCs, the Bank plays a catalytic role, expecting to initiate a process which would expand and be self-sustaining. In financing industry (small-, medium-, and large-scale), the Bank performs a development function through the transfer of resources. In providing structural adjustment loans (economic or sectoral), the Bank seeks to create (or recreate) an environment which would help resuscitate a faltering development process. 13. In the past, the Bank made efforts to reach cottage industries in the Philippines, as through its SKI loans. The apparer't advantages of financing such industry seem obvious -- the large number -I establishments reached, the employment generated, and the direct improvement in welfare provided through income generation in such activities. Yet, such industries do not lend themselves to an economic calculus which the Bank seeks, the - xviii - institution building role (beyond the transfer of resources) of the inter- mediary is not obvious or measurable, and the employment element in such transfers possibly transcends the performance or growth of such activities. The Bank needs to take into account its experience of lending to cottage industry through the National Electrification Authority (NEA) under SMI I,l in particular, instrumentalities for such loans, before resuming lending to this group of industries. The Bank's financing of industry has become suf- ficiently large in the Philippines for it to review its overall role in resource transfer, in the development process, and in catalysing investment growth, before again undertaking lending to cottage industry. In particular, emphasis under such financing needs to be placed on linkages among indus- tries, utilization of local resources and setting up of common facilities for small industries. 14. A. regards institutions and agencies, two findings from this PPAR stand out. First, the move to apex lending for large industry was a great success in broadening the Bank's institution building role and the distribu- tion of its DFC lending operations. The failure to fully utilize the funds under the Apex Losu and under the IGLF component of SMI III was due essen- tially to the rapidly worsening economic situation in the country after 1983, and not to any shortcomings in the design and onlending mechanisms under the loans. Second, the integrity and professionalism of the DFC management are the key factors in its effective utilization of funds and in the success of its lending operations. With its dynamic management, PDCP diversified its operations (into investment banking, syndication and fund management activi- ties) and was able to gain access to the Bank's apex loans. Its difficulties emanated from its narrow capital base and its excessive reliance on foreign currency operations in the context of a rapidly depreciating currency, in effect, on its near-exclusive dependence on Bank loans. DBP, on the other hand, appears to have been submissive to Government wishes in its operations, and the Bank's attempts to avoid the contamination of subloans made with its funds through various conditionalities under DBP III and SMI III (as also through the mechanical calculation of financial and economic rates of return) were not successful with the normal degree of overseeing and supervision which the Bank could provide its DFC lending activities.2 15. The experience of the Filipino loans also illustrates the success of the Bank's industry- and objective-oriented lending. In the Philippines, SMI loans have been successful not only in helping the growth of SMI, but also in reaching the related objectives of promoting employment and regional diver- sification of industry. Such lending also illustrates other lessons for success in lending to DFCs and industry. There is a clear need for the Bank to keep under review its policies on coverage of foreign exchange risk and provision for onlending its funds in local currency terms to revive demand for its funds in many countries as the experience of the Apex Loan shows. 1/ The experience with SKI I (Loan 1120-PH) is reviewed in PPAR No. 3969, dated June 16, 1982. Zi See the PPAR on DBP I and II (Report No. 5744, dated June 28, 1985), para. 35, for a discussion of the Bank's failure to properly supervise DBP during its early association with it. - xix - Loan Exoerience 16. PDP IV ad . PDCP IV and V were the last two loans made directly to PDCP by the Bank. These loans helped finance 75 subprojects, and were used effectively (PPAR, paras. 2.14, 2.38-2.40). 17. The Bank had helped in the setting up of PDCP in 1962 to provide medium- and long-term funds to industry. It played a significant role in building up its appraisal and supervision capacity. PDCP diversified its operations in the 1970s into SMI lending and later into fee-based activities such as syndication and management of funds (PPAR, paras. 2.12-2.13). 18. However, it remained dependent predominantly upon medium-term foreign currency lending operations for its business and profitability. As the peso began to depreciate in the early 1980s, losing 60% of its external value between 1980 and 1984, PDCP*s business operations declined and its portfolio problems, small in the late 1970s, became accentuated (PPAR, paras. 2.20-2.35). 19. PDCP has taken various steps to deal with this situation. It has tried to diversify its activities in order to reduce reliance on foreign currency lending operations. It has dealt with its problem portfolio by rescheduling loans, by restructuring enterprises, and by inducing changes in their management or ownership. The Government has supported it by agreeing to accept the cross-currency risk (between its US dollar and other currency obligations) on its foreign currency borrowings. However, PDCP's position remains pr arious and it needs to increase the scale of its overall lending activities and thereby attract more share capital (PPAR, paras. 2.16-2.19, 2.36-2.37, 2.41-2.43). 20. The main lessons that arise from the experience of PDCP loans is that a DFC needs diversified activities, particularly with a mix of local and foreign currency operations, to be sustainable. Second, the Bank condition- alities, for example regarding ERRs, do not protect an institution's suscep- tibility to adverse economic conditions. Third, the Bank should continue its efforts to find solutions to the problem of foreign exchange risk which in the past has jeopardized DFCs' viability and more or less turned their sub- borrowers away from loans involving such risk (paras. 2.44-2.66). 21. DBP III. The Bank initiated its lending to DBP in 1974 with primarily an institution building objective, to build up DBP's appraisal and supervision capabilities so that it financed viable projects. DBP III for US$80.0 million was the third Bank loan to DBP and had two components, US$50.0 million for large industry and US$29.7 million for SMI, and included a small amount of funds (US$300,000) for setting up DBI to train staff (PPAR, paras. 3.09-3.13). 22. DBP approved 22 subloans under the large industry component and 811 subloans under the SMI component. The geographic and industrial distribution of SMI subloans was satisfactory, and their overall performance and repayment record uneven but reasonable. Most of the subloans under the large industry component ran into financial difficulties, and in 1986 the enterprises were transferred, along with most of the rest of DBP's loan portfolio, to a separate agency for rehabilitation and/or sale (PPAR, paras. 3.31-3.34). * xx - 23. DRP's position declined sharply in the early 1980s, and its opera- tions were stopped in 1984. The main reason was the non-viability of those of its operations which had been carried out at Government behest. The Bank's institution building efforts had not led to efficient and sound decision-making, its efforts to segregate behest operations did not work, and its supervision efforts were not successful in preventing the deterioration in DBP operations and portfolio (PPAR, paras. 3.26-3.28). 24. DBP was restructured with Bank help during 1984-86, with 85% of its portfolio (and the corresponding liabilities) transferred to the Asset Privatization Trust (APT). DBP is now a leaner organization, and its opera- tions earned a profit in 1987. DBP is expected to do only wholesale operations3 and, to this end, the Bank granted to it an Apex Loan in 1989 (Loan 3123-PH) for onlending to large industry through accredited financial institutions (PPAR, paras. 3.29-3.30). 25. The Bank's association with DBP did not have the impact on DBP's institution building, in particular in exercising autonomy in its industrial financing decisions, that was expected, even though DBP instituted appropri- ate mechanisms for appraisal and supervision of projects. The experience also shows the inability of the Bank's normal DFC review and supervision practices to bring under control the underlying weaknesses in an organiza- tion's internal decision-making system. The Bank needs to ensure a DFC's autonomy for the success of its institution building role. The Bank also needs to ensure adequate cover arrangements for the foreign exchange risk under its DFC loans for onlending to large industry (PPAR, paras. 3.35-3.38). 26. SMI II and III. This PPAR reviews two loans for the development of SKI in the Philippines. The distribution channel for SMI II was ICLF and for SHI III, IGLF and DBP. Both loans had technical assistance components for strengthening Government machinery for assisting SKI (PPAR, paras. 4.08-4.16). 27. In all, 264 subprojects were financed under SRI II, and it was dis- bursed fully. The technical assistance component under SKI II moved slowly because of reorganization within the Government and a freeze on employment, and a portion was cancelled; otherwise the Loan was disbursed more or less as expected. SKI III, through, ran into difficulties; the economic situation deteriorated soon after its approval, leading to reduced demand for funds, and DBP's institutional problems led to a cancellation of most of the DSP component. As a result, only 1,081 subprojects instead of the expected 2,100 were financed under SRI III. The technical assistance component was not fully disbursed because of lack of definition, lack of initiative to under- take activities and changes in organizations selected for technical assis- tance (PPAR, pares. 4.17-4.35). 28. The success of the two loans was largely due to their apex character and the transfer of the foreign exchange risk to the Government. This experience indicates once again that, in providing loans to DFCs, the Bank should ensure that, in freely operating financial sectors, the onlending & The future role of DBP and its retail operations in the financial sector in the Philippines is a subject of ongoing discussions between DBP and the Bank. - xxi - terms include a premium for foreign exchange risk cover and for lending in local currency terms. This experience also shows that in choosing an on- lending channel, the Bank needs to ensure its autonomy and a management capacity to withstand political pressures. Finally, apex lending enhances the institution building role of Bank funds in a cost-effective way (PPAR, paras. 4.28-4.31). 29. Aex Ln. The 1981 Apex Loan was a continuation of the Bank's efforts to broaden the channels of distribution for its loans to large indus- try in the Philippines. The Loan was provided to the Central Bank of the Philippines for administration by the specially-formed DFU which was to provide funds to, and supervise, accredited participating finance institutions (PFIs). Technical assistance was provided by UNDP through a Technical Advisor for DFU, with the Bank acting as Executing Agency. The main objectives of the Loan were to diversify the channels for Bank funds and increase their institution building impact, to broaden the spread of its funds, and to shift Bank dialogue to broad financial sector issues (PPAR, paras. 5.13-5.20). 30. DFU accredited 11 PFIs under the Apex Loan. However, with the economic and political situation deteriorating after 1983, the demand for funds under '.he Apex Loan declined. The Central Bank's efforts to stimulate demand for funds, by denominating some subloans in peso terms, by assuming the cross-currency risk, and by other measures, did not succeed fully, and only about one-third of the funds under the Apex Loan were utilized. Of the accredited institutions, one commercial bank is under liquidation, ancther under litigation, DBP was restructured, and PDCP faces portfolio problems. In all, 69 subloans were made under the Apex Loan and, generally, they have performed reasonably well (PPAR, paras. 5.21-5.42). 31. The apex lending experiment was successful, achieving most of its objectives, even though the funds were only partially utilized. The main lesson of the apex experience is that the Bank needs to be very circumspect in choosing the apex institution. The Bank did not foresee the likelihood of a conflict of interest between the Central Bank's regulatory function and the DFU's role in granting or denying accreditation to a bank. At the same time, it is necessary that the apex institution should be an impartial agency not competing with the PFIs in order to provide confidence to the PFIs that financial data provided to the apex agency for accreditation purposes will not be misused (PPAR, paras. 5.43-5.50). Overall Experience 32. The main issues which the six loans raine relate to the Bank's foreign exchange risk provisions, its DFC lending strategy, and rehabilita- tion methods for DFCs. (I) The Bank generally required subborrowers to bear the exchange risk under its DFC loans for larger industry. When currencies became more volatile in the 1970s, subborrowers began to face difficulty in meeting their obligations under DFC subloans; this problem was accentuated by the fluctuations in the exchange rates of currencies disbursed by the Bank, with the US dollar weakening - xxii - in relation to currencies like DM, yen and Swiss franc. The Bank's efforts to soften the impact of these currency changes on DFCs by introducing various currency pooling arrangements were palliatives, but still left their subborrowers with large obliga- tions in terms of domestic currency. Their repayment diffi- culties naturally affected their lenders adversely, with DFCs like PDCP, with most of its operations in foreign currencies, affected the most seriously. This experience has also reduced demand from industry for foreign currency loans. Reacting to this situation, and in line with the Bank's new approach, the Bank has now accepted a local currency denomination system for its second Apex Loan, with the interest charged the subborrowers reflecting an insurance premium for the foreign exchange risk and the actual foreign exchange risk being borne by the Government. In the present situation of the Philippines this, in effect, is a market-determined pricing policy, with the residual costs of changes in exchange rates being borne (or benefits taken) by the Government which is responsible for foreign exchange management. It should be noted, though, that the Government is assuming the foreign exchange risk because the financial system lacks adequate means to allow the intermediaries to handle the risk themselves (PPAR, paras. 6.01-6.20). (ii) The Bank's strategy of providing medium- and long-term funds to industry through specialized DFCs has helped to fill the gap in institutional finance available to meet the needs of industry. However, many of these institutions lacked natural access to local currency resources and, with the strong volatility in exchange rates beginning in the 1970s and their heavy dependence on foreign currency lending operations, they became vulnerable to depreciation of the local currency. The apex lending strategy helped the Bank to utilize new channels for the distribution of its funds and to broaden its institution building role. With their more diversified operations, the new intermediaries proved more stable and better able to survive exchange rate fluctua- tions, and thus provided an improved repayment experience under Bank loans (PPAR, paras. 6.21-6.29). (iii) The Bank helped in the rehabilitation of the Government-owned DBP under a program which transferred 85% of its assets and corre- sponding liabilities to the APT. As a result, DBP has apparently become viable, is expected to restrict its operations to whole- sale lending,4 and has again become eligible for Bank loans. The privately owned PDCP continues to face portfolio problems which, with its inability to expand operations and increase its share capital, become magnified as time elapses. Lacking a one-to-one relationship with PDCP, the Bank has not been able to support PDCP in its effort to regain viability (PPAR, paras. 6.30-6.37). The future role of DBP and its retail operations in the financial sector in the Philippines is a subject of ongoing discussions between DBP and the Bank. - xxiii - Lessons of Bank's DFC Lending 33. The main lessons which the Philippines DFC lending experience pro- vides are two. First, a diversified resource and operations base is essential for a DFC: a narrow specialization based on a single product (for example, foreign currency term loans) provides too narrow a base for opera- tional flexibility and, by making the institution vulnerable to changes in economic climate, does not afford it an adequate foundation for sustainable growth. In the long run the sustainability of DFCs will require various chanL.es in practices, if the recent experience is not to be repeated. The DFCs would, at a minimum, have to broaden their operations into local currency lending so as to have a balance in their overall exposure. They will also need to examine whether they should concentrate only on long-term operations or diversify into merchant and investment banking activities, perhaps also extending their operations into commercial banking. 34. Second, the Bank needs to rework its own lending practices in respect of the foreign currency risk. Recent experience with depreciation of local currencies, compounded by volatility in the currencies of developed countries, has turned entrepreneurs away from loans which carry foreign exchange risks. In this context, the Bank needs to work out arrangements for exchange cover with borrowing countries which would enable DFCs to offer local currency terms on their foreign currency resources, as, in fact, was done under the second Apex Loan (Loan 3123-PH) approved in October 1989. Significantly, these arrangements seem to have shifted the pendulum in the opposite direction in that the new loan does not allow the subborrower an option to take a foreign currency loan and bear the risk were he to want to. 35. At some point, assuming borrowers regain confidence in the local currency sufficiently to borrow in foreign exchange, the Bank needs to pro- vide borrowers with such an option. This will need changes in Bank lending practices, in particular, in charging interest rates according to currencies disbursed. IFC already follows the practice of approving loans in diverse currencies, quoting appropriate market-related interest rates on them, and now that the experiment, albeit on a much smaller scale of operations, has been found to be workable, the Bank needs to examine its adoption for its DFC operations. 36. A third lesson, as the experience of DBP shows, is that autonomy in operations is an important factor in the success of a DFC. Where the Bank finds deficiencies in DFC operations arising from a lack of autonomy, it should insist on corrective actions being implemented and satisfy itself about the capability and independence of management before providing funds to the DFC. 37. Finally, the rehabilitation of a DFC is a long-term process, and requires sustained support from the shareholders and a continuous increase in its operations to sustain it during the rehabilitation period. The experi- ence of PDCP shows that, in the absence of these factors, a DFC remains vulnerable to adverse factors. On the other hand, with its Government owner- ship, it was easier to rehabilitate DBP by transferring its non-performing assets and corresponding liabilities to a separate entity, bringing it back to a profit-earning level and making it re-eligible for Bank loans. PROECT PEMOMANCE AUDIT REPORT sI DYC AND SM LOANS LOANS 1052-PH AND 1514-PH (PDCP IV AND V) LOAN 1572-PH (DIP III) LOANS 1727-PR AND 2169-PH (8M1 I AND Ill) LOAN 1984-PH (APE LOAN) I - RCONOIC AND SECTOR SETTING Economic Developments 1.01 Like many other developing countries, the PhiliVpines went through a difficult economic phase during the late 1970s and most of the 1980s, brought about partly by its own efforts at accelerating the pace of economic growth in the 1970. and partly by the unusual developments in the developed and developing countries in the 1980s. While possessing large mineral resources, the lack of domestic oil resources compounded the country's economic diffi- culties in the 1970s. These economic difficulties were accentuated by political difficulties which arose in the first half of the 1980s. The political instability in the first half of the 1980. also prevented the Government from tackling the worsening economic situation effectively till after the mid-1980., when a democratically elected Government assumed power. 1.02 The economy had shown progress in the late 1970s and early 1980s. This progress was based partly on large foreign borrowings made during the period, and was facilitated by various economic reform measures, particularly in the financial and industrial sectors, referred to in the following sec- tions. Overall, the period 1976-82 presents a mixed picture with growth in national income, and reforms in the economy, but substantial deficits in the external account, as shown in Table 1 below: TableIs PRILIPPI 0 E C INDICATORS, 1976-82 1976 1 19 12ZA 1979 1980 1981 1982 GNP (2 change) +6.1 +6.7 +6.3 +7.6 44.3 +3.4 +1.9 Wolesle Prices (1980-100) 63.1 67.8 71.0 84.5 100.0 114.4 127.1 current Account Balance (US$11) -1,105 -753 -1,094 -1,496 -1,904 -2,061 -3,200 Exchange Rate (peace per US$) - 7.44 7.40 7.37 7.38 7.51 7.90 8.54 Sgures laternational rS-sc*a statistic. The economy did not have the resilience to absorb the adverse impact of external forces. It was obvious that by the late 1970s and early 1980s, the current account balance was deteriorating, the peso had begun to depreciate, and the economy was coming to a gradual halt. -2- 1.03 To deal with the economic situation, the new Government undertook, with the support of the Fund and the Bank, a series of reforms in 1986 and later years to revive the economy. These measures led to a positive GDP growth in 1986 after two years of decline, a reduction in the inflation rate, and a positive balance in international trade account, as shown in Table 2 below. Tal 2s PHILIPPINES: BASIC H&CROECONCHIC INDICATORS, 1983-88 (percent) IWdicator -1983 0_8A a985 n16 IL81 1988 a Percent Change (Real) GDP 0.9 -6.0 -4.3 1.5 4.7 6.6 Agriculture 2.1 2.3 3.3 3.7 -1.0 3.4 Industry 0.7 -10.2 -10.2 -2.1 7.7 8.9 GNP 1.1 -7.1 -4.1 2.0 5.9 6.7 Private Consumption 2.9 1.0 -0.1 0.9 6.2 5.1 Government Consumption -3.9 -6.1 -0.4 -0.4 7.2 10.5 Total Investment -4.4 -43.4 -21.7 -8.5 27.8 25.9 Fixed Investment -2.5 -32.5 -24.2 -15.0 15.6 21.4 CPI 10.0 50.3 23.1 0.8 3.8 8.8 Exports L 10.2 8.2 -7.2 21.8 -1.3 12.7 Imports 11.5 -16.4 -23.0 25.4 26.5 34.2 Percent of GNP Total Investment 27.1 17.4 14.3 13.2 15.4 18.2 Fixed Investment 25.2 19.0 15.1 13.2 14.1 16.2 Current Account Balance -8.1 -4.0 -0.1 -3.0 -1.6 -1.9 National Government Balance -2.0 -1.9 -1.9 -5.1 -2.3 -2.3 External Debt 72.7 80.7 81.7 92.9 83.1 74.1 "i Preliminary estimates. Ah Goods and non-factor services. Source: Philippines: Toward Sustaining the Economic Recovery, Report No. 7438-PH, dated January 30, 1989, p. 3. 1.04 The country's foreign exchange situation, however, still remains critical, mainly owing to the large overhang of its ineffectively used for- eign borrowings which left a large external debt service cost. A forecast of debt-service costs, made in January 1989, given in Table 3 below, shows the gradual improvement expected over the coming yearst -3- Table 31 DEBT SERVICEs 1987-92 (US$ million) 1987 1288 1989 1990 1 Debt Service Before Rescheduling 4,571 5,592 4,785 5,617 5,592 5,583 After Rescheduling JA 2,799 3,181 3,043 3,663 3,767 3,809 Exports of Goods and Services 9,217 10,432 11,804 12,927 14,578 16,388 Debt Service Ratio (2) Before Rescheduling 49.6 53.6 40.5 43.5 38.4 34.1 After Rescheduling /a 30.4 30.5 25.8 28.3 25.8 23.2 I& Excludes payments made under debt-equity conversion program. Soarce: Philippines: Toward Sustaininag the Economic Recovery, Report No. 7438-PH, dated January 30, 1989, p. 16. Attempts are currently under way to reduce the cost of such debt-service through the various options initiated under the Brady Plan. 1.05 The economic developments during this difficult period are described in detail and in-depth in many economic reports prepared by the Bank1 as well as in the economic sections of Bank appraisal reports on proposed loans to the Philippines. 1.06 While economic recovery has been initiated, the country still faces many problems. Sustained growth in productive sectors requires investment in public infrastructure which tended to be neglected in the past. An attempt to raise public resources to undertake such investment is likely to dampen investment in productive sectors; at the same time, with the large debt- service needs, the ability to raise resources from abroad is limited. These conflicting demands on the economy raise difficult problems for a Government which is still seeking stability and public support for measures needed to sustain economic growth. jf The main reports are the following: The Philippiness Country Reonomic Memorandum, Report No. 1765-PH, dated October 26, 1977; Philippines: An A&enda for Adjuetment and Growth, Report No. 5258-PH, dated November 30, 1984; Philippiness A Framework for Economic Recovery, Report No. 6350-PR, dated November 5, 1986; Philippines: Toward Sustaining the Economic Recovery, Country Economic Meorandam, Report No. 7438-PH, dated January 30, 1989. -4- Industrial Sector Developments 1.07 The industrial sector in the Philippines is large, accounting for almost one-third of GDP. The policy framework relating to it was studied in- depth by the Bank in the late 1970s, and has been the subject of further study and reform in the late 19806.2 The main thrust of Bank advice has been to revise the incentive and import tariff structure to accelerate the growth of industry on a viable basis in the future. 1.08 Industry is mostly privately owned, and Bank financing of industry in the Philippines, vide-ranging in institutional channels and broad in its coverage as it has been, has been mostly indirect. The Bank's industry coverage has extended from cottage industries (through, for example, the National Electrification Authority under SMI 1) to small and medium indus- tries (four SI loans) to large industries (five loans to the Private Development Corporation of the Philippines (PDCP) and two Apex Loans, among others). The onlending channels for large industry were diversified through the apex lending strategy adopted in 1981. 1.09 The major components of the industrial sector are food and bever- ages, textiles (including garmets), chemicals, pulp and paper, and cement. Growth in the industrial sector was rapid in the 1970s and the early part of the 1980s based mainly on a high level of Government support, particularly in the form of protection and the supply of cheap finance. A large part of value added in industry arises in the large industry sector, while export earnings are derived predominantly from traditional industries, mainly tex- tiles and garment-making. Industry was not able to withstand the strain imposed by the economic difficulties of the late 1970s and early 1980s, and a substantial part of large industry, particularly the newly formed enter- prises, ran into financial difficulties. One measure of this strain, com- pounded by its own policies, was the substantial volume of non-performing assets with the Development Bank of the Philippines (DBP), which it was relieved of in 1986 by transfer to the Asset Privatization Trust (APT); other finance institutions had their own portfolio problems, though on a smaller scale, from their operations in these years. 1.10 Growth was resumed at a vigorous pace in 1987 and 1988, backed by a return of confidence among entrepreneurs, improvement in the economic climate, introduction of various reform measures by the Goverament, and strong support, financial and advisory, from the Bank. The economic recovery since 1986 has helped demand for industrial output, leading to a revival of many industries, among them tourism, construction materials (including SIpduestrial Development Strategy and Policies in the Philinipes, Report No. 2513-PR (in 3 volumes), dated October 29, 1979; The Philippines - IsMu9s and Policies in the Industrial Sector, Report No. 6706-PH (in 3 volumes), dated July 30, 1987. Also the Staff Appraisal Reports on recently approved projects: Fourth Small and Medium Industries Develovment Project (Report No. 7531-PH, dated March 15, 1989) and Inadtrial Investment Credit Project (Report No. 7823-PH, dated September 5, 1989). -5 - cement) and others. This has raised profitability in many industries, and helped financial institutions, like PDCP, to restructure some of their past investments. 1.11 While the environment for industry Is being improved by various economic reforms, it has also been necessary to improve the process and rate of industrial growth. The Bank has played a vital role in this process through advice on economic recovery programs and by providing finance for them, and also by resuming project lending, as through the Fourth Small and Medium Industries Development Project and the Industrial Investment Credit Project, both approved in 1989. Financial Sector Developments 1.12 The financial sector in the Philippines has been subjected to detailed study during the last decade and, as the beneficiary of a large number of Bank loans, also to observations on the overall sector and on specific institutions which acted as conduits for Bank funds.3 The PCRe covered under this PPAR describe developments in the financial sector in the 1970s and early 1980s, with particular reference to their impact on perfor- mance under the loans. In the light of these, only the salient features of developments in the financial sector, in particular those relevant to the loans reviewed in this PPAR, are discussed in the following paragraphs. 1.13 By the late 1970s, the Philippines had a reasonably well-developed financial sector, including commercial banks, DFCs, insurance companies, and a social security system. Most of the institutions were in the private sector, with only the Philippines National Bank (PNB, operating mostly in agricultural lending), the DBP (operating in the industrial sector) and the social security system in the public sector. 1.14 This system had obvious lacunae and shortcomings, and lacked sophis- tication. The main shortcoming of the system was its concentration on short- term lending for both the agricultural and industrial sectors, and the main lacunase was the inadequacy of the system to provide for the long-term finan- cial needs of industry and its lack of securitixation through commercial paper, industrial bonds, and equity issues. The lack of sophistication of the sector was reflected in the rudimentary development of the stock exchange and the limited range of industrial bonds and equity traded on the exchange. Moreover, the financial sector institutions and activities were mostly in Metro Manila, thus effectively concentrating the provision of finance and of industry in that region. The Government's efforts to set up private develop- ment banks (PDBs) in the 1960s and 1970s through DBP vere intended to break up this concentration and to broaden the availability of finance within the country. g/ The sector reports include the following: The Philloines: Asects of the Financial Sector, a joint Bank-Fund Report, No. 2546-PH, dated October 1, 1979; Philipines - Financial Sector Study, Report No. 7177-PB (in 3 volumes), dated August 23, 1988; also, the President's Report on Philinines - Financial Sector Adjustment Proaram, Report No. P-5002-PR, dated April 6, 1989. -6- 1.15 Following the Bank-Fund report on the financial sector issued in 1979, the Government, with support from the Bank, carried out a series of reforms to Improve the financial system. The main thrust of these reforms was to encourage commercial banks to provide long-term funds (in effect, introducing the universal banking system), to support the setting up of investment houses, and to foster further the establishment of private development banks in the outlying regions. Following this, 11 commercial banks (of which 1 has since closed) were recognized as universal banks, and 11 institutions (including PDCP) as investment houses; 44 private development banks have been set up, with DBP holding a part of their share capital. 1.16 The Bank has played a significant role in developing the financial sector. In 1963 it helped set up PDCP as a specialist finance institution to provide term finance to medium and large industry. Subsequently, to induce banks and other financial institutions to undertake such lending, the Bank provided funds to central lending authorities (to IGLF and DFU, both originally administered by the Central Bank of the Philippines, and later to DBP) for onlending through intermediaries to small, medium and large indus- try. The Bank provided substantive support to broadening the operations of the financial system through its Apex Loan in 1981 and through its SMI loans, including targetting of the use of its funds outside Metro Manila. Even more than the provision of funds, the Bank conducted, as mentioned earlier, studies on the financial sector and provided advice on its further develop- ment. This broad reach of Bank lending, study and advice has been a major factor in the institutional growth of the sector in the Philippines. 1.17 The 1983 economic crisis followed soon after the financial sector reforms were introduced, and led, to some extent, to a slowing of the pace of development of the institutional structure. This was evidenced (i) in a decline in the real value of the assets of the financial sector, (ii) a slowing down of the pace of lending, evidenced by large cancellations under various loans (for example, the Bank's first Apex Loan and SMI III, and loans approved by ADB to PDCP, and by the Lloyds Bank-led commercial bank consor- tium complementing the Bank's Apex Loan), and (iii) financial difficulties, including in some cases stoppage of operations, of various banks and finan- cial institutions, among them PNB, DBP, and Manila Banking Corporation. The extent of the decline in the financial system is evidenced by data provided in the Table 4 below. The share of the financial system other than the Central Bank, even after adjusting for the items referred to in footnote 1b, has declined in total assets and, allowing for price change (more than three- fold rise between 1980 and 1988), their real value in 1988 was lower than in 19R0. -7- Table4A: TOTAL ASSETS OF THE FINANCIAL SYSTEM, 1980 AND 1988 LA (Amounts in billion peso) 1980 1988 A-nt %Amount 2 Central Bank (CBP) 65.4 20.9 349.9 39.8 /b Banking System 188.8 60.3 391.8 44.6 Commercial Banks 138.4 44.2 328.9 37.4 Private Banks 103.8 33.1 290.1 33.0 Government Banks 34.6 11.1 38.8 4.4 Thrift Institutions 10.6 3.4 24.9 2.9 Rural Banks 5.6 1.8 10.7 1.2 Specialized Government Banks 34.2 10.9 27.3 3.1 Non-banks 58.9 18.8 137.7 15.6 313.1 100.0 879.4 100.0 La As of December 31. 1 The relative importance of CBP in 1988, as indicated by the increase in the share of its assets in 1988, needs to be interpreted with care since many assets of CBP reflect merely book entries. For example, CBP assets include an item called Revaluation of International Reserves which, in fact, represents losses incurred by CBP in swap and forward-cover operations entered into in the past. Likewise, the accumulated interest expenses and issuances and servicing costs of CBP securities and open market instruments like CB bills and Reserve Repurchase Agreements are also carried in the books as assets. It appears that as much as half of CBP's assets may have this special character. If these items are eliminated, CBP's share of system assets would be raduced from 39.8Z to 25Z. Sougge: Philippines: Industrial Investment Credit Project, Staff Appraisal Report, No. 7823-PH, dated September 5, 1989, p. 48. 1.18 Following the changes in 1986, the Government took active steps to rehabilitate the financial sector. The Bank has helped in this process through studies of issues and problems within the financial system, as also by providing funds to the Government to support financial sector reform measures and to financial institutions to reactivate lending for economic activities. The main structural reforms introduced in the financial sector relate to freeing of movement of funds and of the interest rate structure. The Bank's main effort in the institutional system has been to enable restructuring of PNB and DBP and to encourage privatization of shares held by Government and Government-owned institutions in other banks. With the resumption of economic growth and of investment activity after 1986, the financial sector has become active, and the investment climate has improved. -9- PRhlCT P8RaAM AEDIT REPORT THR PHILIPPINES six DrM hAp sm LOANS II - PRMnAT DREWWNRT COUOM=IO OF 3 TEUUILPPNE (PDCR IV AND V) (LOANS 1052-Pt AdD 1514-PH) EVALUATION SUMMARY Introduction 2.01 The two loans reviewed in this chapter were the fourth and fifth loans to the Private Development Corporation of the Philippines (PDCP): Loan 1052-Pt (PDCP IV), for an amount of US$30.0 million, was approved in November 1974, and Loan 1514-Pt (PDCP V), also for US$30.0 million, the last to be approved for PDCP use exclusively, in January 1978 (paras. 2.12-2.14). Obiectives 2.02 The two loans had similar objectives: provision of funds for development of medium and large industry in the Philippines, with institution building for PDCP. In addition, under PDCP IV, PDCP was expected to foster regional diversification of its operations and to promote exports; and, under PDCP V, to mobilize funds from foreign commercial sources (pares. 2.15-2.16). Implementation Exoerience 2.03 Approvals and disbursements out of PDCP IV were slower than pro- jected, owing to a slowdown in the Philippines following the oil price rise in 1973. PDCP V moved at about the projected pace in terms of approval and disbursement, reflecting the relatively buoyant state of investment demand in the years from 1978 to 1982. The two loans financed in all 75 subprojects. Overall, the performance of these subprojects was satisfactory. However, towards the end of that period, PDCP had already begun to come up against repayment problems, reflecting initially mainly the weakening foreign exchange position, and consequently the currency, of the country. These problems were to become much more serious in the subsequent years when the overall economic situation became quite weak (pares. 2.38-2.40). Results 2.04 PDCP generally met the objectives set under the two loans. Exports under PDCP IV exceeded one-third of production, and only a quarter of its lending was In Manilat including subloans in Central and Northern Mindanao and Central Luzon, the total in these four regions accounted for three- fourths of its total operations. Apart from the commercial banking loan negotiated at the time of PDCP V, PDCP also raised additional funds from the Cou nwealth Development Corporation (CDC) in 1979 and the Asian Development Bank (ADB) in 1983 (pares. 2.17-2.19). - 10 - 2.05 PDCP's operations, despite its diversification efforts, were largely in the form of foreign currency loan. made out of World Bank funds. The weakening in PDCP's portfolio was reflected in its repayment problems, with arrears on both principal and interest accounts increasing sharply after mid- 1980 (paras. 2.20-2.26, 2.30-2.33). 2.06 The economic situation also affected investment demand for PDCP's funds. PDCP was the largest user of funds under the Bank's 1981 Apex Loan. However, it was not able to use the full line of credit it had obtained under the Apex Loan, and a loan it had taken from the ADB in 1983 remained almost wholly unutilized, with 942 of it eventually being cancelled. With limited new approvals and disbursements, PDCP's overall outstandinge remained nearly stagnant. The arrears, with the inexorable compounding of interest, became magnified in relation to the portfolio size; the principal affected by arrears reached 422 of total principal outstanding in 1986, marginally declining thereafter as PDCP made strenuous efforts to deal with problem cases individually (paras. 2.41-2.43). 2.07 This was reflected in PDCP's overall financial situation. Its pro- vision policy did not keep pace with the deterioration in its portfolio, and it maintained nominal profits till 1986. However, it began increasing provi- sions thereafter and, as a result, showed a loss in 1987. With a slight improvement in the economic situation, PDCP showed a nominal profit in 1988 (paras. 2.28-2.29). Sustainability 2.08 In the 1970s PDCP's dynamism was evidenced by its opening of branches outside metro Manila, its diversification into local currency and small business financing through Industrial Guarantee and Loan Fund (IGLF) resources, and by branching out into syndication and other investment financing activities. In the face of a weakening economic situation through the first half of the 1980s, PDCP's management continued to show considerable resilience by further development of these new lines of activity, though these activities continued to form only a small part of PDCP's operations and profitability. PDCP also sought Government help to insulate its borrowers from the increased cross-currency foreign exchange risk, and formed an alliance with a commercial bank through change in share ownership to strengthen its shareholder base (paras. 2.13, 2.17-2.18, 2.34-2.37). 2.09 However, the fluidity in currency values which increased sharply in the 1980s (and which has been mostly downwards for the Philippines, as for most developing countries) has had two consequences for the long-term sustainability of DFCs like PDCP. First, they have been faced with an accumulation of arrears from a weakened portfolio which they have not been able to stand up to, given their low capital base (and consequent inability to raise share capital). It is only in the last two years, following implementation of economic reforms and revival of economic growth, that the portfolio problems appear to have eased. Second, following their experience of the 1980s, investors in these countries are wary of undertaking any foreign currency obligations, with the result that demand for foreign currency loans has almost completely dried up (paras. 2.32-2.33). - 11 - 2.10 PDCP has to seek its future within this context. Now that it is dealing effectively with some of its problem projects and its provisions against loan losses have been raised, it needs additional business operations to remain financially sustainable. Its share capital base cannot be sustained purely on fee-paying operations, and there is little demand for foreign currency loans, the main source of its business in the past, even if it were to obtain such funds for onlending. Consequently, it needs access to local currency funds for continued operations and sustainability (para. 2.27). Findings and Lessons 2.11 The main finding of this review is that PDCP, narrowly based on the sale of essentially a single product (long-term foreign currency loans), was not able to sustain itself in a deteriorating economic situation compounded by a depreciating local currency. The main lesson is that it needs to have strong shareholder support and a diversified o2erational base, particularly in local currency, to remain sustainable in the long run. Second, the Bank needs to look into the conditionalities it imposes under its loans, for example, in requiring the calculation of ERRs. Third, the Bank needs to review its position on lending, particularly on the issues of currency disbursements and charging interest rates in consonance with currencies disbursed and the bearing of foreign exchange risk, to protect its DFC borrowers from unusual and large exchange rate movements (pares. 2.44-2.46). - 13 - II - PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPIUS (PDCP IV AND V) (LOANS 1052-PR AND 1514-PS) A. ACKGROUN Introduction 2.12 The Bank was instrumental in setting up the Private Development Corporation of the Philippines (PDCP) in 1962, and for 15 years thereafter PDCP obtained direct loans from the Bank for onlending to medium and large private industry in the country. During that period, PDCP developed like other Bank-financed (or initiated) DFCe by: (i) providing medium- and long- term funds to private sector industry; (ii) depending upon Bank loans for its foreign currency funds and the government for its local currency resources; and (iii) building up sound appraisal and, later, supervision capabilities. These institutions grew up in the 1950s and 1960s as the main conduits for Bank loans to manufacturing establishments of medium and medium-large size. They prospered in an era of stable currencies till the early 1970s, only to run into difficulties when exchange rates changed rapidly, particularly as local currencies depreciated in relation to foreign currencies. 2.13 PDCP's management has been dynamic, and it has sought to adjust to the changing environment and Bank focus to successfully continue in business. Thus, it set up a small industry financing division (Small Business Program or SBP) in 1972 to have access to local currency financing (and subsequently, Bank-provided foreign currency loans) from the Industrial Guarantee and Loan Fund (IGLF), an arrangement set up by the Government under the Central Bank to provide funds to small industry. Later, when the Bank shifted to apex lending, as with Loan 1984-PH in 1981, it was the major borrower under the scheme. As the economic situation worsened and PDCP's portfolio deteriorated in the early 1980s, PDCP found it difficult to maintain its independent insti- tutional status and most of its shares were taken over by a commercial bank. The narrow base of its operations and the risks inherent in foreign currency lending, despite its special status and dynamic management, could not ensure PDCP's independence. 2.14 Loans 1052-PH (hereinafter referred to as PDCP IV) and 1514-PH (PDCP V) were the fourth and fifth loans, approved by the Bank to PDCP.4 PDCP V was the last loan to be approved by the Bank to PDCP directly, marking the end of a direct relationship between the Bank and PDCP, though, as men- tioned earlier, PDCP maintained its indirect access to Bank funds through other arrangements. Al The PCR on PDCP IV (Loan 1052-PH) was issued to the Board as Report No. 4565, dated June 17, 1983. The PCR on PDCP V (Loan 1514-PE) was issued to the Board as Report No. 7997, dated August 28, 1989. * 14 - Objectives 2.15 By the time PDCP IV and V were approved, PDCP had been in existence for more than 12 years, and had built up the necessary institutional capabili- ties, in particular, appraisal and supervision of loans. The Bank had shifted its focus for DFC lending in the 1970s to induce them to play a more dynamic role, in particular, by broadening the geographic distribution of their loans and by diversifying their sources of foreign currency borrowings. As a result, in addition to the normal objectives of institution building and of transferring funds to viable projects, PDCP IV set before PDCP the objective of broadening the regional reach of its funds and promoting exports, and PDCP V that of raising additional foreign currency funds from the market.5 Concept. Design and Rationale 2.16 The two loans continued the concept and design of the earlier Bank loans to PDCP, with the same rationale, namely, using it as a conduit in the country to provide foreign currency funds to viable manufacturing units. B. PROGRESS IN MEETING STATED OBJECTIVES Institution Building 2.17 By the time the two loans were approved, PDCP had evolved as a highly efficient and competent DFC. Its management was dynamic and, in an era of pressures from diverse sources, it had maintained its independence and insti- tutional autonomy. PDCP had built up, under Bank guidance, high standards of financial appraisal of projects. Economic rates of return (ERRs) were calcu- lated, however, on a mechanical basis, adjustments being made mainly for international prices and import duties only. Allowances were not made for standard conversion factors, and prices were projected on a current level basis. The high rates of return estimated for Bank subprojects were not being achieved and, in the context of the evolving economic situation, the high projected ERR. proved hardly an adequate measure of the long-term interna- tional competitiveness of the projects. 2.18 PDCP also built up strong capabilities in project supervision, with a special unit set up to deal with problem projects. Moreover, in response to Bank suggestio-as, its management showed dynamism in broadening its activities in subsequent years, in particular, undertaking new activities (like small business programs and syndications) and opening branches outside Manila, thus diversifying the geographic base of its operations. Other Obiectives 2.19 PDCP helped finance 75 subprojects under the two loans. Exports under PDCP IV exceeded one-third of production, somewhat lower than projected. PDCP also achieved regional diversification of its operations, with only a quarter of its lending was still concentrated in Manila; the Manila region I/ OED Report No. 4565, op. cit., para. 4.01, and OED Report No. 7997, gpt cit., para. 2.1. - 15 - together with Central and Northern Mindanao and Central Luzon accounted for almost three-fourths of its operations. It raised US$10.0 million from the Bank of Tokyo in fulfillent of the Bank requirement that it obtain additional foreign currency funds from the market.6 C. OPERATIONAL AND FINANCIAL PERFORMANCE Operations 2.20 PDCP's operations comprise loans (in foreign and local currencies), equity (direct investments and underwriting), guarantees, syndications and external fund management. PDCP's operations are described in detail in paras. 5.1-5.7 and Annex 11 of the OED Report No. 7997 on PDCP Vs Annex 2.1 to this PPAR provides more recent information. The year 1980 marked a quanti- tative -- and, thereby, qualitative -- watershed in PDCP's operations and its financial position. Three years after the approval of PDCP V (and just before the approval of the Apes Loan in which PDCP participated), PDCP had reached the peak in its operations, and in 1981 began to show a slowdown in its approvals, reflecting the weakening of the economy, as shown in Table 5 belows Table 5: PDCP APPROVALS, 1980 AND 1981 (All figures, except line 1, in peso million) 1980 a8_1 Foreign Currency Loans: (US$M) 30.9 13.0 (peso M) 234.5 106.8 Local Currency Loans 13.3 - Small Loans 36.1 31.0 Equity Investments 28.2 7.7 Underwritings/Private Placements 27.8 25.3 Guarantees 29.0 Subtotal 369.1 233.7 Syndications/Advisory Services 920.8* 239.0 TOTAL 1289.9 472.7 *Of which a single transaction for P 848 million was for advisory services to one company. Sources OED Report No. 7997, op. cit., Annex 10. These figures relate to trends in approvall a fall in commitments and dis- bursements was to follow in later years. 61 ORD Report No. 4565, op. cit., paras. 6.01-6.05, and OED Report No. 7997, op. cit., paras. 4.1-4.6. - 16 - 2.21 All categories of loans (foreign currency, local currency and small loans) showed a decline between 1980 and 19#1, but the sharpest fall was In foreign currency loans. Considering that foreign currency loans had formed two-thirds or more of the non-fee-based operations of PDCP, the fall in these loans had a large impact on PDCP's total operations, to be reflected after a lag in its profitability. 2.22 PDCP has never recovered from this fall, and has continued to operate in subsequent years at around the 1981 level with only marginal fluc- tuations from year to year. Early in the 1980s, this was due to the deteri- oration in the economic climate in the country, accentuated (in the case of foreign currency operations) by the depreciation of the peso. For example, PDCP cancelled in 1986 almost the whole (94%) of the line of credit of US$45.0 million obtained from the ADB in 1983.7 Later in the decade, particularly after 1986 when the economy picked up momentum, the lack of resources was because of the incapacity of PDCP to mobilize resources on its own and its inability to have access to resources available through other institutions. These issues are discussed further later in this chapter. 2.23 The failure to regain the level of financing operations in the period after 1980, despite the economic racovery since 1986, has increased PDCP's dependence on fee-based operation . The present mix of its opera- tions, however, is not likely to genera a sufficient activity to employ its staff fully or to generate sufficient income to support its equity -- which were geared to carry on and service its substantial DEC operations. 2.24 PDCP's portfolio problems were accentuated by its overdependence on foreign currency loans in its operations in the context of the exchange rate volatility of the 1980s which, in the case of the Philippines (as of many other developing countries), has been a one-way movement (depreciation) of the peso. PDCP clients who had borrowed in foreign currency, facing a diffi- cult economic climate, were not able to meet their obligations, leading to PDCP's portfolio problems.8 An analysis of the problem portfolio of PDCP shows that subloans out of Bank funds (direct and apex loans) accounted for more than half of such portfolio. 2.25 PDCP's underwriting and equity investment operations have remained a marginal part, around 10%, of its total operations. The reason is entre- preneurial attitudes, mainly an unwillingness on the part of entrepreneurs to issue equity to, and to share management with, public participants, rather than PDCP hesitations or lack of resources to undertake such operations. PDCP's guarantee business, small as it was till 1981, totally disappeared after that year. 2.26 In the 1970., PDCP actively entered into merchant banking activi- ties, and syndications have proved a staple and reasonably stable part of this business. Varying with the business climate (and the total operations), syndications have formed between 152 and 351 of its total operations during Z1 OD Report No. 7997, o. ct.,, para. 5.19. ,#/ bld. para. 7.2. * 17 - the 1978-88 period. PDCP also began undertaking .fund management activities, mainly of pension and trust funds. These, like syndications, have provided a reasonable share (101 to 301) of its total operations. 2.27 Summing up, as general business activity picks up, in particular as private sector operations expand and as large businesses are privatized, there is likely to be further growth in loan, underwriting and syndication activities in the country. However, PDCP's participation in loan operations, which have provided the bulk of its operating income, is entirely dependent upon its access to local and foreign currency resources and, in the absence of such access, PDCP will find it difficult to maintain its existing staff or service its capital. Financial Position 2.28 PDCP's income before provisions and taxes has been reasonably stable. However, particularly after 1983, PDCP increased its provisions for doubtful accounts and made write-offs of bad debts.9 As a result, PDCP's net earnings have shown a sharp decline over the period 1978 to date. PDCP's profit declined after 1980 when it amounted to 14% on equity, to a level of 1.51 on equity in 1986. After recording a loss in 1987, PDCP showed a small profit in 1988. The PCR on PDCP V provided financial data for PDCP for the years 1978 to 1987;10 summaries of financial statements for 1988 and for the first half of 1989 are attached as Annex 2.2 to this PPAR. 2.29 Two aspects of PDCP's financial statements are worth notings first, the main source of PDCP's income is interest on long-term loans; this accounted for about 801 to 851 of its total income in the 1980s; second, despite attempts at diversification of operations, fee income still remains a small part (52 to 61) of total income. The rise in interest income in peso terms in recent years reflects mainly the depreciation of the peso. Ouality of Portfolio 2.30 The predominant part of PDCP's operations has been based on Bank funds, both direct loans and indirect borrowings (through the Apex unit and IGLF). IGLF loans were for small and medium industry and, being in local currency, did not involve PDCP or its borrowers in a foreign exchange risk. With the subborrowers bearing the foreign exchange risk on the Bank's direct loans to PDCP and under the Apex Loan, the depreciation of the peso had a major impact on the local currency equivalent of the borrowers' obligations and, therefore, on PDCP's portfolio. 2.31 PDCP's portfolio problems are not recent, but commenced in the late 1970s. The Bank assessment of PDCP for PDCP V in 1977 had already noted the 9/ For more details on PDCP's provisions, see Ibid*, para. 5.15. 10/ Ibid., Annexes 14 and 15. - 18 - arrears position on the PDCP portfolio.11 That SAR attributed those difficulties to project problem, mainly inability to sell in domestic or foreign markets, with one large project facing a foreign currency problem because of a deutsche mark liability. The Bank had discussions on the subject with PDCP management during the appraisal of PDCP V, and a program for dealing with the problem was agreed with the PDCP management. The SAR, however, contained no risk analysis or fall-back steps in relation to this emerging problem, in particular, within the context of PDCP's vulnerability to its near-exclusive reliance on foreign currency operations and the possi- bility of a depreciating local currency or a deteriorating economic situation. The apex unit of the Central Bank of the Philippines (CBP), which appraised PDCP for accreditation under the Bank?': Apex Loan slightly over three years after approval of PDCP V, still considered the state of PDCP's portfolio to be uneatisfactory.12 2.32 The peso began to decline in the late 1970s soon after the approval of PDCP V, reflecting the country's weak export base and strong import depen- deance (mainly on oil). The depreciation acceleraed'hk the 1980s with the mounting debt service cost of foreign loans obtained in the easy lending climate of the late 1970s and early 1980s. In relation to the US dollar, the peso depreciated by about 601, from peso 7.51 to the US dollar in 1980 to peso 20.35 in 1984 and peso 21.88 in 1988. As a result, the share of PDCP's outstanding loan principal affected by arrears of more than three months increased sharply from 19% in 1978 to 251 in 1981 and to 42% in 1986.13 The main factor in this situation, of course, was the increase in the peso value of foreign currency subloans, to the extent that in some cases the collateral value for such subloans is now considered inadequate.14 2.33 PDCP management has sought to deal with these problems in diverse ways, rescheduling loans, foreclosing on assets, and transferring enterprises to new managements. Such actions were only palliattves in the period 1983-86 when the economy was depressed, but have become more effective after 1986 as the economy has picked up. External Factors Affectiny Performance 2.34 PDCP's management has been meticulous in appraising projects and supervising the portfolio, and dynamic in diversifying its operations. How- ever, the external environment faced by it was not favorable to investment and to project viability through most of the 1980s. Apart from exchange rate movements, the oil price rise in 1979-80 led to a deterioration in the II Staff Appraisal Report, No. 1784-PR, PhilloLines: Private Develoment Corporation of the Philippines, dated December 14, 1977, paras. 3.50-3.55. I/ OED Report No. 7997, on. cit., para. 5.13. 3I I , Annex 19. 14/ Ibid, para. 5.14. - 19 - economy, which was accentuated by recessionary trends and political diffi- culties after 1983. This led to a fall in demand for funds for investment, to relatively poor project performance and to deterioration in the quality of the overall portfolio. Resource Mobilization Efforts and Gonstraints 2.35 PDCP's poorest performance was in domestic resource mobilization, for reasons inherent in the economic environment. Given the limited volume of domestic savings which is mobilized mostly by the banking system, and the interest rate structure (particularly the interest rate at which PDCP could lend out its funds), PDCP was not able to raise peso resources at a cost at which it could afford to use the funds profitably for its operations. Its main achievement in this area was to obtain access to official organizations (mainly IGIF) for credits for onlending to designated sectors of industry like small- and medium-scale industry. With prodding from the Bank, PDCP mobilized some foreign currency resources, in particular, a loan from the Bank of Tokyo at the time of PDCP V and, subsequently, in 1979 from the Commonwealth Development Corporation and in 1983 from the ADB.15 fforts at Diversification and Expansion of Activities 2.36 The dynamism of PDCP's management was evident in its efforts to diversify PDCP's business activities. First, PDCP started local currency operations in the small- and medium-scale sector in 1977 in order to expand its domestic currency operations, and soon became the largest borrower from IGLF under its small industry financing program. Second, it opened branches outside Manila in order to expand its operations in other reglons. Both these initiatives were undertaken in response to Bank prodding. 2.37 As its main financing business dried up following the deterioration in the economy and its own portfolio, PDCP tried to diversify into fee-based activities, in particular syndications, guarantees, and fund management. In the last three years these activities have formed the main base of PDCP operations as it has tried to work out its portfolio problems and to resume its long-term financing operations.16 One of the major contributions of PDCP has been the fact that many local banks and finance institutions have recruited PDCP staff, in particular after the Bank made the Apex loan, for their term lending activities, thus broadening the spread of efficient appraisal and supervision practices and financial sophistication to other financial institutions in the country.17 Utilization of Bank Funds 2.38 Utilization of PDCP IV was slow, as the economy took longer than expected to get out of the difficulties following the oil price rise of 1973. Moreover, the sharp appreciation of DM, yen and the Swiss franc in relation 15/ _]&L., pares. 5.17-5.20. 1l DAL,.9 paras. 7.5-7.6. IZl Ibid., pars. 4.2. - 20 - to the US dollar during the 1970s slowed further the demand for funds by subborrowers. However, total disbursement under the Loan came up to US$29.8 million. In all, 46 subprojects were financed under PDCP IV. Of 40 sub- projects for which data are available, overruns occurred in 17 subprojects, but they were small in amount, with a net underrun for the subprojects as a whole. In the case of eight subprojects, delays in completion were six months or more. Industrywise, 592 of the Bank funds under PDCP IV went to wood and wood products (28.7%), non-metallic mineral products (19.62), and mining (10.72). Economic and financial rates of return on the subprojects, where available, were satisfactory, FMRe being negative in only 6 out of 25 subprojects, and 3RRM, 3 out of 24 subprojects. Data on subprojects are given in the PCR for PDCP IV,18 and an update on their present status (26 of them fully paid up, 6 foreclosed and the remaining at various stages of repayment) is attached as Annex 2.3 to this PPAR. 2.39 The utilization of funds under PDCP V was far superior to that under PDCP IV. The bulk of the PDCP V loan was approved, and most of it disbursed, by the end of 1982, before the gradual deterioration which had already set in accentuated into the crisis of 1983-86. By the end of FY81, an amount of US$23.0 million had been disbursed against a projected US$28.9 million, and by the -ad of FY82, US$28.1 million against the whole amount of the loan. As a result, unlike the Bank's experience under the subsequent Apex Loan, approved in 1981, PDCP V was almost wholly utilized (US$29.3 million out of US$30.0 million). 2.40 PDCP approved 30 subprojects under PDCP V. Overruns in subproject costs were not serious, with overruns in seven cases being above 102; the reasons for overruns were changes in design, shift to local sources, increase in working capital requirements, and higher financial costs due to delays in completion. The deterioration in the economic situation, particularly after 1983, had an adverse iapact on the performance of the subprojects, as evi- denced by the FRRe (actual weighted average of 7.8% against an estimated 17.32) and RRs (actual 12.4% against anticipated 22.1%). The main reason for the deviation of the actual FRRs from those projected at appraisal appears to have been the lower market demand owing to economic difficulties after 1983 in most cases, though in some cases cost overruns, production difficulties and price controls (especially for navigation companies) were also factors in lower actual financial returns. A more detailed analysis of the performance of the subprojects, including their capital intensity, and exports and employment generated by them, is presented in the PCR on PDCP V.19 The present status of subprojects under the Loan is given in Annex 2.3 to this PPAR. It shows that of the subprojects, 6 are fully paid up, 7 are operating profitably, 6 operating at a loss, 4 are foreclosed or under fore- closure proceedings, 4 are matured or maturing, and the remaining 3 are due for prepayment, need capital infusion or awaiting decision from prospective investors. L/ Jkk.,I paras. 5.1-5.11. V_l ZhLG9 paras. 3.1-3.11 and Annex 3-9. * 21 - D. FINDINGS AND ISSURS Overall Assessment 2.41 PDCP has been an efficient DPC with a dynamic management which built up strong appraisal and supervision capabilities. The Bank's association with it was the main factor in building up such competence. The Bank's supervision efforts were adequate, and its various assessments of PDCP accurate. 2.42 PDCP V was the last loan the Bank approved exclusively to PDCP. Its implementation marked an acceleration in the deterioration of PDCP's port- folio and financial position which had become visible at the time of the PDCP V appraisal and negotiations. By the end of 1982, when the Loan was almost fully disbursed (US$28.1 million out of US$30.0 million), the peso had begun to depreciate markedly, a process which was accentuated after 1983. At this point, PDCP's portfolio problems arising from individual subproject difficulties became submerged in the general deterioration in the economy, with the accelerating depreciation of the peso further affecting PDCP sub- projects and its financial position. The consequent deterioration in PDCP' s portfolio has been magnified because of its inability to raise new share capital and its failure to make a not addition to its portfolio. With a near constant portfolio and the compounding of interest on old non-performing loans, the percent share of its arrears in total operations (and as a part of share capital) has increased over 1986-89.20 2.43 This has jeopardized PDCP's viability and raised issues about its sustainability. The management's attempts to deal with these problems -- by obtaining cover on cross-currency risks from the Central Bank, by diver- sifying its activities into fee-based operations, and by trying to bring in new shareholders -- are commendable and deserve support from the Bank, par- ticularly as PDCP, as constituted, has been a victim of vicissitudes in economic environment, over which the management has had little control, and its internal structure (lack of sustained shareholder support, lack of ability to raise loan resources on its own for further operations). Lessons and Recommendations 2.44 PDCP's present problems arise from its excessive dependence on for- eign currency loans for its operations in the context of a deteriorating economy and a depreciating peso. There are three lessons to be derived from this experience. First, a finance institution needs to have built-in sus- taining mechanisms to tide it over normal economic vicissitudes in developing economies. Apart from a strong capital base, its operations need to be diversified to neutralize adverse circumstances affecting one line of its 20/ OED Report No. 7997, op. cit.t para. 7.4. In this respect, its experience has been in contrast to that of Turkiye Sinai Kalkinma Bankaei (TSMB) which was able to ride out of its early 1980s difficulties because of support from its shareholders (who provided it with additional share capital) and the Bank (which provided it with lending resources for further operations). See Turkey: Five DFC and Industry Sector Proiects, OED Report ft. 7883, dated June 29, 1989. - 22 - activities. This can beat be achieved through integration of such an ineti- tution in the overall financial sector in the economy rather than its being solely a conduit, with a small margin, for long-term loan funds from a few agencies. Resource mobilization, domestic and foreign, should be a normal aspect of the institution's C erations, not the result of a favored status with its sponsoring agencies.2 2.45 Second, the Bank needs to look into the conditionalities it Imposes in relation to the situation and needs of its DFC borrowers. The Bank requirement on calculation of ERR, for example, has not been effectively met, has not served any useful purpose, and needs to be reconsidered.22 2.46 Third, the Bank needs to review its currency disbursement practices and its pricing criteria. It has shown considerable responsiveness in respect of currency risks in the past, as in forming the currency pooling system which insulated DFCs and their subborrowers partially from the foreign exchange risk of subloans in a single hard currency. The recommendations of the Task Force on Bank's Financial Sector Lending Activities23 provide for Bank funds being onlent to subborrowerv in local currency with an adequate premium for foreign exchange rate cover. The recent Bank loan to DBP (Apex II) follows this recommendation. This process should be subject to constant review in the light of Bank experience. U/ See also OED, The Sustainability of Development Finance Institutions in an Rvolutionar Environment, Report No. 7658, Vol. I, dated May 15, 1989, paras. 5.02-5.03. 1/ JU, pares. 6.02-6.03. /11 Regort of the Task Force on Financial Sector Operations, Report No. 89-163 dated August 1, 1989, in particular Section E of Chapter IV. - 23 - ANNEX 2.1 PROJECT PERFORMANCE AUDIT REPORT THE PHILIPPINES PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES (LOAN 1514-PH) Summary of Operations, 1988-9 (Amounts In P '000) 1988 June 80, 1989 No. Amount No. Aiouit Approvals Lons 5 221,960 90 48,980 Equity Investmenta - - - Quarante - - - - Underwriting/Placements 10 29,780 6 92,718 Syndications 2 168,000 8 40,000 Externs Fund Management 80 298,880 74 218,286 Total ApprovaIs 148 71090 172 9 Commitments Lo51s t 164,28 90Lb 97,029 Equity Investmente Guarantees Underwritlng/Placements (firm) 10 29,750 5 92,718 Syndications 2 168,000 8 40,000 Total Commitments e g3 g§1 g 9 2g0g4 DIAborsements 1oan0 51 164,288 90fi 97,629 Equity Investmets - - Guarantees - - - - Undarwriting/Placemnts (firm) 10 29,750 5 92,718 Syndications 2 168,000 8 40,000 Total Disbursements La 8 , 9 230 Outstandig Loans 851 2,084,198 287 1,602,689 Equity Investments 14 18,888 14 18,219 Guarantees 9 86,892 8 19,604 Underwriting/Placemots (firm) - - - Syndications External Fund Management 119 128,159 18 249,958 Total Dutstandiag L9 2,212,082 if 2,090,870 Mone Market OpEabgas Average montbly Volume 819.861 412,046 Lo Total commitment and disbursement values differ from those presented in Annex 2.2 (page 1), as commitments and disbursements on guarantees, underwritings and syndications are included ta this table. / Includes express/micro loans: No. Aount Approvals 68 5,810 Commitmente 68 8,610 Disbursements 68 5,810 Outstanding 61 8,684 Sourew POCP. - 24- ANNEX 2.2 Page 1 of 2 PROJECT PEORNMCE AUDIT REPORT THE PMlIPPIES PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES (LOAN 1614-P4) Comparative Balance Sheets As of December 81 1988 to June 80, 1989 (P *ooo) Unaudited June 80, INS 1909 Assets Current Assets cashTaiTilMrketable Securities 280,680 819,248 Loans Receivable-Current Portion Foreign 804,284 228,726 Peso 264,595 846,747 Other Current Assets 210,881 188,001 Subtotal Current Assets 1 9Z,870 1,082,717 Logp=Term asete miansReilv*ble Foreign 1,410,027 1,025,974 Pass 624,171 776,915 Loss: Al lowance for Doubtful Accounts (114,98) (126,906) Current Portion (568,859) (57,478) Equity Investeent 18,888 18,219 Less: Allowance for Market Decline (6,180) (6,180) Property and Equipment (net) 2,989 3,908 Other Asses 341,4s0 a22,586 Subtotal Long-Term Assets 1,707,075 1,489.098 Totsl Asset. 2,718.945 2,521,810 Llablititles and Stockholders' Eauity Current Liabilitles Accounts Payable and Accrued Expenses 69,261 101,479 Short-Term Borrowings - - Loans Payable-Current Portion 502,641 810,597 Other Current Liabilities 86,276 88,249 Subtotal Current Liabilities 62.179 445,925 Long-Term LiabiIIties Foreign currency Loans 1,507,120 1,164,899 Poso Currency Loane 750,482 688,586 Loss: Current Portion (602,841) (810,597) Subscription Payable 290 280 Other 46,978 6,799 Subtotal Long-Term Liabilities 1.802.214 1.788.967 Subordinated Loan 159,167 158,260 §Skholdersg' Equtyl Pein ciiapital 110,000 110,000 Rerves and Unappropriated Surplus 17,886 19,268 Subtotal Stockholders' Equity 127.88 129,268 Total Liabilities and Stockholders' Eauity 2,716,946 2.21.W1 Contingent Liabil1ties 86,892 19,608 Source: PDCP. -25- A EX 2.2 Page 2 of 2 POJECT PERFCfVACE A11T RUPR7 Tm PHILIPPDm8 PRIVATE DEVELOPM7 C~PORATIg OF THE PHILIPPINES (LOAN 1M14-P) ComporatIve Im~ stat*mont For the Period Ended De r a1. 198 to Jna 80. 1989 (P ,000) Unaudited June 80, 1988 1989 Intere~6 Incom from: Shor-Term Investmnte Monoy rke OprertIons/Forelgn Currency Depoit. 29,889 29,924 Long-Term Loans 257,048 1166800 DIvided Incom, Fe~s, Comissin1 and ahlr Incom. 81,688 11,680 Tote Inoomo 87.920 158.284 Operabing Expenees 84,768 17,84 Incom. Defore Interest and Obber Exp~nes 288.1 2 140.850 Interes and ~6her Expenmes 246,982 118,889 In~ome Befor Taxes 86.280 21.461 Proviens for Doubful Accoune/Bad Deb Written Off 21,574 12,000 Taxes and Licen*s 12,281 7,879 Provielon for Inc~m. Tax- - Foreign Exchange Loss - N EarnIngs for the Period 2.125 La! Segg PDCP. •26- 器擊么 !!！心！跚―,, 蠢！！雪潺尋’“藝‘’蘇“懿’認”絕’藝奉””露‘露露’寧”‘界’鳥號’”弄，’藝‘日’！鳥― 豪萋―艮鳥邑藝，邊邑懿邑號“‘發‘藝邑懿號號“’蘇“華曉各”藝吳’界’鳥號’發界•”藝養“―磬l 〕！!!!：〕，】！、。，〕。i!!!!！〕！〕！{｛〕〕；！〔〕〔！{;!!；〕！!-!,！、 Loan 1514-PH am MOT OUTSTANDING Wwa DISMSED EALANCE ROJECT M WED PROJECT LVATIOd VATUS - - ----- -------- ---------- - -------- .. ........ . ... ------- CORP. 2,070 2,075 1,59f Esp. of seat processag ad causing operatiers Cabuyao, Laguna Operating profitably I PtLIPIND TELWAK 1,539 1,539 t'393 f3tv. 4 "dern'tion of telephone Systems Palawan 4 Date* del Sur Operatir.9 profitably 3 FBI CHENICALS 1,750 1,750 1,;37 Estab. of oriented polypropylene file afg. plant Calamba, Legas For prepawqt 4 WORM NAV11GATION t'700 1,700 1,142 Acquisition of vessel and containers Wasilal Nationwide Operating Profftablf I VEM M GLAK 2,63% 2,01 lolls Etp. k "dorl'tt" of glass Sig. larilities fast%, Notre Wila Operatiri prolitabill 6 0 CORP. 1,50( 1,494 1,040 Up. of teat processing and caning operations Caboyao, Laguna Operating prof stably I (MIDI 100UMIES 1,477 1,477 1,022 Estab. of glass container $to. plant Tanza, Cavite Operating Profitably I STMICtURAL FOAN 100. 1'w 832 16 Estab, -,,f therencellular plastic eolding plant 1fintiolups, N.N. 'Operating at a to 9 a C P 1 75. 753 613 Acq. of sedt, I teleco i ejoijielt Wile; Matiollwide WeGjs capital lots:U ion for rehab if facilities; to I C P 1 2% 1451 ZU -d:- tkail4t Natio-Imide witing decision of prospective in-testers 11 N. 0. IVEZ 600 W 170 C*.ist. of civil woris of the ftgat liver Das fialor, Isabela Foreclosure proreedangs on-going 12 VASIP11 UM I'm L,000 149 Exptown of blackbeard of;. acilitits kisi;it, Agusan set NorteOperatiog at 4 ioss; heavy debt service burden 13 STROCTIMAL FOAN ING. 510 $to 128 Norking ca;1tal loan Muntinlup, N.H. Oprating at a losss heavy aeht service bord" 14 SWIGAO CONS. NINIE 1,000 1,000 111 Res'leptica of cold mining operations Siona Watrit, furigao Naturing Oct. 15, 1909 Is P I I C 395 315 46 Eap. of juarrying and earble protesting f&c. fulacan eperating profitably 16 STLINS IMSTRIAL 400 42 25 Estab. of 1,500 6 hyft-electric plant Halabaftg, Law del Sur Operating at a less; heavy debt service burden 11 MEM No. 10 31 16 Establishomit of pollproplene bag 09. plant Marilao, Oulaw Operating at a less; heavy debt service burden to swim M. 120 111 12 Establishment of corrugated and shot boi plant tariveles, Dateas Fully paid " L C, GGAMALM 30 M 0 Acq. of eartosoving A cov.struction eqpt. Viatte; Nationvide Fortclastil for deficiency ctej* vs. 486 20 UKKO INIPPINS 90 0 Acquisition of vessels anlta; Nationwide operating at a losil hoM debt service burden 21 M EW 100 10 0 top. I exp. of earble qosrriing and processing facFasig, ff2tro Nestle Foreclosure Proceedings ob-ping 22 MM REGMACES 4,500 4'i" 0 Const. of civil works of th Magat River On Bemis, Isabela Fully paid 23 IMMACIFIC TOM $20 320 0 Acquisition of we tugboat mod tow barqn "814141 hattowide fully astured 24 IM-01 Ito Ito 0 Acq. of truck tractors, otters mW cr"o Nantlal Nationide Fully paid 25 UANM IFIC Tom 410 450 .0 Acquisition of too togboat Will; Nationside Fully eatured 26 FILIPMA COW Soon 3,622 $Rebab. of cliater t1j. tin Teresa, Rizat Foreclosedl ander tem vith option to Wchm V 0"10 TIN BER 51, 14? 0 fio,Wrelab al facilities; A atilitles "p1l"weil, 8origoo.dal Sur Natured 20 Glows fRINTING 47.) 470 0 Acquisition of Printing W pnt Gootork City Fully paid 29 GUICAL 1MK CARRIERS 187 187 0 Acquisition ct bargo Wile Fully paid 30 011YERM TEXTILE 4115 4416 Purchase at one Artos Contiamin Bleaching Eqpt. harikins, Netro'11011A Fully paid 30,328 -'9,!22 10,921 *As of September 30, 1989. 0 . - 29 - PROJECT PERFORMANCE AUDIT REPORT THE PRILIPPINES SIX DFC AND SMI LOANS III - DEVELOPMENT BANK OF THE PHILIPPINES (DBP III) (LOAN 1572-PH) EVALUATION SUMMARY Introduction 3.01 Loan 1572-PH (hereinafter referred to as DBP III), the third loan to the Development Bank of the Philippines (DBP), was for US$80.0 million. It was approved in 1978 and had two major components, US$50.0 million for large industry and US$29.7 million for small and medium industry (SMI), and included a small provision (US$300,000) for setting up a Development Banking Institute (DBI) for training the staffs of DBP and of private development banks (PDBs) (para. 3.09). 3.02 DBP is wholly Government-owned, and was set up by the Government to undertake agricultural, industrial and real estate financing activities, and also to participate in the share capital of PDBe established to promote economic development in the country outside of Metro Manila. The first two Bank loans to DBP, in 1974 and 1975, were intended to build up its appraisal and supervision capability to help ensure that it financed viable projects. It appears, however, to have continued providing funds at Government behest and, recognizing its subservient position, the Government had agreed with the Bank at the time of DBP III that DBP would segregate Government-behest opera- tions from normal operations, DBP financing them on a back-to-back basis with Government funds (paras. 3.10-3.13). Obiectives 3.03 The main objective of DBP III was to continue building up appraisal and supervision capabilities within DBP. In addition, DBP III was also aimed at helping the Government's effort at developing SMI, in particular outside the Metro Manila region (paras. 3.12-3.13). Implementation Experience 3.04 The Bank reviewed the progress of its institution building objective under two subsequent projects (the Apex Loan in 1981 and SMI III in 1982). It pointed out the progress made and the remaining deficiencies in various aspects of DBP operations, and found the progress, though slow and deficient, sufficient to justify continued Bank lending to it. The PPAR on DBP I and II, issued in 1985, however, found that DBP had failed to achieve autonomy as intended by the Bank (paras. 3.14-3.25). 3.05 In all, 22 subprojects were financed under the large industry com- ponent for a total of US$44.0 million (with 12 subprojects above the free - 30 - limit of US$1.5 million) and 811 subprojects under the SH component for a total of US$29.7 million. The Bank efforts to segregate DBPs' behest opera- tions from the others did not succeed. DBP appears to have continued Its financing activities at Government behest as in the past, with appraisal procedures not influencing its project approval decisions. Most of the sub- loans under the large industry component of DBP III proved non-viable, with 17 out of the 22 being transferred to the Asset Privatization Trust (APT) in 1986 as part of DBP's rehabilitation (see para. 3.06). The SMI component appears to have performed better. An amount of US$6.3 million under the Loan was cancelled (pares. 3.31-3.36). Results 3.06 While DBP appeared to operate satisfactorily in the 1970s and was judged eligible for further Bank funds in the early 1980s (the Apex Loan in 1981 and SMI III in 1982), in fact its operations deteriorated seriously after 1983. In 1984, the Government stopped its operations, and most of its component under SMI III was cancelled. In subsequent years, with Bank help, a restructuring program was implemented, and in 1986 DBP's non-performing assets were transferred to APT, a specialized body set up specially to dis- pose of these assets. With 90% of its assets (and liabilities) being trans- ferred to APT, DBP restarted operations in 1986 as a such leaner organi- zation. Its functions have been reduced, mainly to financial wholesaling activities,24 and in 1989 the Bank provided it with an Apex Loan (Loan 3123-PH) for onlending to large industry (paras. 3.26-3.31). Sustainability 3.07 . The DBP experience showed that,,as set up, DBP was not sustainable aq an independent DFC, being mainly a financing arm of the Government for its largely politically motivated, behest operations. In the particular context of DBP's activities during the period 1976-84, these operations formed such a large part of its activities as to overwhelm the institution, leading to the stoppage of its operations in 1984 and its restructuring in 1986 (para. 3.35-3.36). Findinis and Lessons 3.08 The main finding from the DBP III experience is that it is difficult to segregate an institution's viable operations from its behest activities and that an indirect, external and sporadic supervision process, such as the Bank's, cannot be expected effectively to deal with such a situation. In view of this, the main lesson is that the choice of institutions for Bank lending needs to be made carefully, ensuring the intermediary's operational autonomy and providing for effective and capable management. If corrective actions are required, they should be required to be taken before the institu- tion is made eligible for Bank loans. The experience also shows that the arrangements for the bearing of foreign exchange risk need to be carefully worked out as industrial borrowers are generally not able to bear such costs and remain viable (paras. 3.37-3.38). .41 The future role of DBP and its retail operations in the financial sector in the Philippines is a subject of ongoing discussions between DBP and the Bank. - 31 - III - DVELOPMENT BANK OF THE PHILIPPINES (DBP 111) (LOAN 1572-PH) A. BACKGROUND Intro(uetion 3.09 Loan 1572-PH (hereinafter referred to as DBP III), made to the Development Bank of the Philippines (DBP) in 1978, had two major componentst a regular DFC component of US$50.0 million for large-scale projects, and an SMI component of US$29.7 million, with a small provision of US$300,000 for setting up a Development Banking Institute (DBI) to train staff in development banking. 3.10 DBP is a wholly Government-owned institution with broad-ranging activities, including industrial, agricultural, and real estate financing and promoting the setting up of banking facilities in regions outside Metro Manila. DBP's operations had shown aspects which reflected its subservience to Governments first, its willingness to carry out individual politically motivated, Government-directed operations, and second, its laxity in col- lecting dues on its loans. Its inadequate control of accounts and branches indicated ineffective management practices in running the organization. Given the history of DBP as an institution set up as an arm of the Government to carry out specified functions, the Bank had made an effort, beginning in 1974 with its first loan, to give it an independent decision-making status at least in its DFC operations. Given the ad hoc nature of DBP's past growth, Bank lending to DBP provided the Bank an opportunity to focus DBP's opera- tions on specific goals, thus potentially playing a large institution building role in relation to DBP. Moreover, even though not stated explicitly, DBP provided the Bank with an additional conduit for dialogue with the Government on both financial and industrial sector issues and the Bank's role in dealing with them. 3.11 The Bank association with DBP started with a Bank loan in June 1974, and continued with a second loan 18 months later. The aim was to turn DBP from a relatively amorphous institution with diverse financing activities, often at the behest of the Government, into an autonomous DEC in its indus- trial financing activities, providing funds to viable projects in industry and supervising those projects carefully. The main Bank effort was to build project appraisal and supervision capacity within DBP, to improve its branch relationships and to strengthen the audit of its finances. Progress had apparently been achieved in these areas during the three years after the approval of the first Bank Loan in 1974. However, despite the building up of appraisal capacity, DBP had continued making Government behest loans, and its collection record on its loans remained unsatisfactory. The Bank sought to maintain progress in these matters under DBP III. Project Objectives 3.12 Besides the institution building objective referred to above and the normal resource transfer objective, the Bank also proposed, through DBP III, to help in the Government's aim to develop small and medium industry (SMI), thus promoting industrial activity outside Metro Manila and helping remove - 32 - urban poverty. DBP had been active in financing small industry directly, and it had promoted, and participated in the share capital of, PDBs which were expected to finance small industry in regions outside Metro Manila. Concept, Design and Rationale 3.13 The design of DBP III was to broaden, through a single loan to DBP, the reach of Bank funds by participating in DBP's diversified role in financing industry of all sizes, and providing training facilities to PDR staff. The SAR for DBP III had envisaged that this would make PDBs eligible for Bank financing in the future,25 a goal which was reached through sub- sequent SMI loans. B. PROGRESS IN MUTING STATED OBJECTIVES frogress in Institution Building 3.14 Bank Analysis under DBP III. The SAR on DBP III reviewed at length the progress, institutional and operational, made by DBP after DBP 11.26 It noted the organizational changes made in DBP's Industrial Projects Depart- ments and the training provided to its staff. It noted that under DBP II, "improvement in the quality of DBP's appraisal has been slow but steady.... Generally, the appraisal reports are comprehensive and the methodology used is appropriate. The reports, however, are sometimes excessively descriptive and not sufficiently analytical, especially in DBP's market analysis." It noted that less progress had been made in supervision practicest "Supervision of large industrial loans is often not carried out regularly, and the objective of identifying and overcoming project problems as they arise has not been reached.n27 3.15 The SAR noted that DBP's procurement and disbursement procedures continued to be satisfactory and that DBP's internal reporting system and quality of reports were gradually improving. As agreed with the Bank under DBP II, the Government and DBP had taken measures "to bolster DPB's long-term resource position.... [However, ] despite these favorable developments, DBP's liquidity is still dependent on the roll-over of short-term Government deposits, a consequence of the persistent imbalance between maturity struc- ture of DBP's assets and liabilities." As regards the foreign exchange risk exposure on its commercial borrowings which DBP had agreed to reduce under DBP II, DBP had "set up for the first time in FY86 a 'Reserve for Foreign Exchange Risk' and passed on foreign exchange risk to all borrowers under its new foreign exchange borrowings.w28 251 Philippines - Staff Appraisal Report on the Development Bank of the Philivyines, Report No. 1972-PB, dated April 21, 1978, para. 5.04. 11 I , paras. 4.03-4.67. g/ ,b_JdL. paras. 4.15 and 4.18. 28 Ibid, paras. 4.21-4.22, 4.54 and 4.57. - 33 - 3.16 The SAR mentioned the reduction in arrearages on DBP's industrial loans portfolio from 21.6% of total loan portfolio as at June 30, 1974, to 6.52 as at June 30, 1977 and in principal affected by arrears from 59.9Z to 44.31 over the same period. However, it noted: "The improvement (in rela- tive terms) in the overall arrears position reflects the immediate impact of a major rescheduling effort coupled with a rapid increase in the outstanding portfolio base. However, in the past two years the number of accounts (especially small loans) in arrears has actually been rising....# The report attributed this increrse to the susceptibility of DBP's portfolio "to any adverse downturn in business and economic conditions. DBP's portfolio was severely hit first by the massive devaluation of 1972 and then by slack busi- ness conditions in recent years." It attributed the low recovery on loans to DBP's weak appraisals in the past, inadequate supervision efforts, and stringent loan conditions, especially for small loans (shorter grace period and loan maturities), and noted that "DBP's management is committed to improving DBP's arrears situation."29 3.17 Following this analysis and observations, the SAR summed up the situation as follows: "Being a Government-owned development oriented insti- tution, the character of which is manifested in a number of low income yielding social lending programs undertaken at the behest of the Government, DBP's financial performance should not be compared with the private, profit- oriented development banks.... Massive efforts are... being undertaken to increase DBP's profitability by improving DBP's collection performance.... If on social considerations the Government requires DBP to undertake programs not financially viable, DBP should undertake them on an agency basis against back-to-back Government funding. During negotiations, the Government agreed to this arrangement.o30 The Bank had also reached, during the negotiations for DBP III, agreements and understandings with the Government and with DBP on almost 20 subjects, among them reduction in processing times for loans, more efficient collection of loans, and timely submission of audit reports. 3.18 Bank Analysis under Apex Loan. Besides its normal supervision, the Bank had followed up on this analysis under DBP III in the course of its appraisal of two subsequent projects, the Apex Loan of 1981 and SKI III of 1982. Although the Apex Loan was made to the Central Bank, the appraisal mission for the Loan had made an independent assessment of DBP,31 and DFU had already done an accreditation review of DBP (as also of PDCP and PISO Bank). The SAR referred to institutional improvements in DBP in the late 1970s, including organizational changes, development of suitable operation proce- dures and improvement of standards, strengthening of its financial position, and increase in its lending operations. It referred to DBP's low profit- ability, attributing it to "continuing low level of collections," and noteds "DBP continues to face a number of organizational, operational and financial problems." A deterioration in the loan collection ratio "from 57% of total 91/ Ibid., paras. 4.62-4.65. 30/ Ibid, para. 4.59. 311 Philippines: Staff Apnraisal Report (SAR) on the Industrial Finance Project, Report No. 3331-PH dated April 7, 1981, paras. 5.25-5.37. - 34 - collectibles in 1977 to 332 in 1979" was also noted.32 These problems were to be dealt with through an action program agreed during discussions under the Apex Loan. 3.19 DBP had in the past dealt with problem projects by "conversion of arrears into new loans or equity investments and disbursement of new loans to refinance clients' old debts to other lenders." The SAR reported that such measures "had proved ineffective in improving the portfolio quality and/or the delinquency rate because: (a) many of these projects had structural problems caused by distortions in Government's industrial policy and in the absence of suitable policy changes, refinancing/restructuring was not rele- vant to the solution of their problems...." The other two reasons mentioned were DBP's focus on financial assistance rather than comprehensive package of remedial measures and resort to arrangements under which borrowers surren- dered their assets to DBP in settlement of their claims and then leased them back from DBP. The SAR also noted that "the provisions do not adequately reflect possible losses on DBP's equity investments, a large portion of which were acquired through conversion of arrears of projects of doubtful viability.n33 3.20 Bank Analysis under SMI III. The main focus of the SKI III 8AR34 was on the small industry lending activities of DBP. It reviewed the performance on DBP's commitments to the Bank under DBP I and II regarding disbursement procedures and arrearages, and noted that DBP had agreed to correct discrepancies in documentation for claiming disbursements under Bank loans. It also noted that though arrearages as a proportion of outstanding portfolio had declined between 1978 and 1979, the situation had deteriorated since then: "The deteriorating arrears situation can, in part, be attributed to DBP's inadequate supervision of its SKI portfolio.t3> As a result, an action program and a tranching arrangement for the DBP component of SMI III had been agreed to between the Bank and DBP. 3.21 Summing up, under the appraisal of the two loans subsequent to DBP III, the Bank continued to consider DBP to be a viable institution for onlending to small, medium and large industry which had been the focus of DBP III. It was in March 1983 that a Bank supervision mission observed a decline in DBP operations and collection rates and recorded a probable default under the arrears targets of the action program under the Loan. 3.22 Actual Performance under DBP III. Judging by results under DBP III and the events up to the appraisal of the two subsequent loans, DBP appears to have made only limited progress in the 1970s in institution building. Of the 22 subloans approved under the large industry component of DBP III, 17 were transferred to APT under the restructuring arrangements, and the others 2/ Ibid., paras. 5.28 and 5.33 and Annex 6, Attachment 2. ,Il Iid., paras. 5.34 and 5.35. 34/ Philippines: Staff Appraisal Report (SAR) on The Third Small and Medium Industries Development Project, Report No. 3838-PH, dated May 6, 1982. 35/ Ibid., para. 4.15. - 35 - were disposed of before the rehabilitation. This record is inferior to that under Bank loans to the other Filipino DFC. (directly to PDCP or under apex arrangements) for large industry in the Philippines, and indicates that DBP*' appraisal procedures had not been adequate to catch non-viable behest loans and that the Bank's attempts at segregating such loans through separate Government guarantees had not worked. DBP's performance under the SMI com- ponent (with substantial transfers of its subloans to remedial management) was also inferior to that of other intermediaries under IGLF. DBP, accredited under the Apex Loan for lending to large industry and being given a specific component under the SHI III Loan, was not able to use any signifi- cant part of funds under these two Bank loans, stopped operations in 1984 under a Government decision and, with Bank assistance, was restructured in 1986. On this basis, DBP's operations reflected its poor loan appraisal, weak administration and lack of independent decision-making. 3.23 OED Review of DBP. A PPAR reviewing the two earlier loans to DBP (Loan 998-PH in June 1974, referred to as DBP I, and Loan 1190-PH in December 1975, referred to as DBP 11) was issued in June 1985.36 The Report went in detail into institutional developments at DBP and the progress made by the Bank in institution building at DBP. Its main finding was: "Some progress was achieved before the first loan was granted and further progress was made between the first and the second projects. This progress, however, was very limited." It noted that no supervision mission was mounted after DBP I to review specifically the institutional progress made by DBP. The appraisal mission for DBP II had expressed reservations concerning the top management team of DBP, but the issues on the composition of DBP's Board and the Chair- man's authority over full-time Governors (appointed directly by the Govern- ment) were not resolved at the time of DBP II approval. The PPAR, however, noted that some limited progress had been made: appraisal work had improved, but lacked rigorous analysis; project supervision, on the other hand, had not improved; financial planning had improved, but DBP depended wholly upon the Government for resource mobilization.37 3.24 The PPAR on DBP I and II concluded that neither of the two objec- tives under the loans -- resource transfer to the industrial sector and institutional improvements in DBP's standards and procedures -- were fully met. It noted the difficulty in improving an institution like DBP, and it drew two main lessons from the experience of DOP I and II: first, the critical importance of effective, capable top management continuously in place in a DFC if institutional changes are expected to be made; second, the need for a DFC to enjoy autonomy if it is to carry out its mission.38 By this time, however, DBP had stopped operations, and options of restructuring it or winding it up were under consideration. 3.25 Summing up, the Bank assessments of DBP after the third Loan was approved remained cautiously favorable, at the same time as DBP'- internal 21I OED Report No. 5744, dated June 28, 1985. IZl Ihid.s, paras. 33-41. al Ibid., paras. 48-54. - 36 - position was deteriorating to the extent that in 1984, it had to stop opera. tions. The deterioration reflected the increasing non-viability of its operations. DBP's performance strongly reflects a lack of management prudence and autonomy in carrying on its operations. The Bank's reviews of DBP, however, were not able to catch its deteriorating position till it actually happened. External Constraints and Operational AutonMy 3.26 The economic situation in the Philippines deteriorated after 1983, and industrial establishments did not have the support which a buoyant economy gives to their transient weaknesses. In such a situation, the large projects financed by DBP, lacking viability, were especially vulnerable. However, given the record of subprojects under DBP III in relation to those under PDCP IV and V and the Apex Loan, the external environment can be con- sidered only partly responsible for their poor performance. 3.27 DBP was Government-owned and had been established to undertake Government-designated operations. Till the Bank came in with its first loan in 1974, DBP was used to operating as an arm of the Government. Apparently, while it was required to, and did, institute appraisal and supervision proce- dures under the Bank loans, DBP does not appear to have used them in its decision-making system. Its management seems to have made little use of the operational autonomy which the Bank sought to provide it under its loans, or to have used the mechanism of back-to-back funding or Government guarantees for its Government-behest loans. C. OPERATIONAL ADD FINANCIAL PERFORMANCE Operations and Finances 3.28 DBP continued its operations till 1983 on its normal lines. As discussed later under the section on utilization of Bank funds, DBP III was almost fully utilized. While outwardly DBP operations seemed to be carried on along normal DFC lines, the core of DBP operations had become politically contaminated, and the procedures and processes being observed had little relationship to or impact on the substantive decisions or actions taken. Most of the medium and large industry subprojects under DBP III, while osten- sibly viable, became non-performing assets in the early 1980s, and were ulti- mately transferred to APT. Reductions in arrears had been brought about often by changes in amortization schedules, refinancings, or conversions of outstandings into equity, and hardly reflected an improvement in collection efforts or improved performance of subprojects. Operational and financial data reflected cosmetics rather than real performance and, therefore, are difficult to assess. 3.29 DBP was restructured beginning in 1984. In the first phase, DBP's operations were stopped, involving, among other actions, a cancellation of most of the amount under the DBP component of SMI III. Later, beginning in 1985, the restructuring involved a transfer of non-performing assets and corresponding liabilities, to the newly established APT, so as to bring DBP's financial structure to a viable form. This process was completed in 1986; DBP's total assets were reduced from P 65,460 million as at Necember 31, -37- 1984, to P 9,503 million as at December 31, 1986, and Its income statements correspondingly pruned. A summarized statement of accounts for relevant items for the years 1984 to 1987 I given in Table 6 below to indicate the nature of the financial restructuring carried out: Table 6s SUMMARY FINANCIAL DATA, 1984-87 (Pesos Million) 1t84 12M 1986 Bal,ance Sheet Assets Items Loans and Advances 38,802 27,451 5,271 4,395 Investments in Securities 14,185 12,186 2,186 4,856 Other Assets 4,528 21,624 41$ 90 Total Assets 65,460 72,044 9,503 10,531 Liabilities Items Short-term Borrowings 8,742 12,817 585 727 Long-term Borrowings 43,808 45,001 2,026 1,340 Total Liabilities 62,376 65,573 6,825 7,070 Net Worth: Paid-in Capital 9,935 18,208 2,500 2,500 Retained Earnings (6,851) (13,737) 178 961 Off Balance Sheet Item Guarantees Outstanding 20,032 18,254 20,757 24,412 A Income Statement Revenue Item Interest on Loans and Advances 1,131 1,296 724 587 Operatini ERenses Item Interest and Other Financial Expenses 7,995 8,007 4,095 253 Net Income (Loss) (7,787) (6,886) (5,639) 782 LA As part of the DBP rehabilitation program, contingent liabilities arising from the guarantees issued by DBP were transferred to the Government under the 1988 financial statement. Sources Staff Appraisal Report, Philivpipes - Industrial Investment Credjj Proje, Report No. 7823-PR, dated September 5, 1989. - 38 - 3.30 The major restructuring of DBP comprised not only a transfer of its non-performing assets and corresponding liabilities to APT and a pruning of its operations and reduction in its staff, but also a restatement of its role in the financial system, moving it towards a financial wholesaling function.39 Following the completion of restructuring, DBP showed a net profit in 1987 and 1988, and the Bank approved in October 1989 a loan under an Industrial Investment and Credit Project to DBP for distribution to accredited banks and financial institutions for onward lending to large industry (the second Apex Loan). Utilization of Bank Funds 3.31 In the period after the approval of DBP III, DBP contirued its diverse operations, financing small, medaum, and large industry, seeking to upgrade PDBs, and raising resources for its many activities. In all, 22 subprojects were financed under the large industry component and 811 subproj- Rcts under the SHI component. 3.32 Of the 22 subprojects for a total amount of US$44.0 million under the large industry component (see Annex 3.1), 12 subprojects were above the free limit of US$1.5 million and required prior Bank approval. Many of these "A" subprojects were in cassavalstarch production and textiles. Bank com- ments on the subprojects referred to optimistic implementation schedules, overly optimistic sales prices, and raised issues about environment (waste disposal from starch plants) and availability of raw material supply. Over- all, though, the Bank reviews of subprojects considered DBP's appraisals to be comprehensive, the subpLojects technically feasible and economically justified, and financial projections to be based on realistic assumptions. On such review the subprojects were approved for financing. However, none of the 22 subprojects proved viable: in 5 cases the assets were repossessed and then leased back to the entrepreneurs or sold before DBP's rehabilitation, and 17 were transferred to APT. Of these latter, 9 have since been sold and 8 still remain with APT. Their subsequent performance and transfer to APT showed the substantive weaknesses of the subprojects and thereby the quality of DBP appraisals; despite Bank requirements for DBP appraisal and independ- ent decision-making on the use of for Bank funds, DBP appears to have con- tinued its past practices.40 3.33 In all, 811 subprojects for an amount of US$29.7 million were financed out of the SMI component of DBP 111.41 The SMI component appears to have been reasonably well diversified industrially and regionally. Full data on their performance and their repayment record are not available. On the 12/ The future role of DBP and its retail operations in the financial sector in the Philippines is a subje-t of ongoing discussions between DBP and the Bank. 40/ The PCR on DBP III is under preparation. In the meantime, use has been made of the tables submitted by DBP, attached to this report. See Table 7 regarding large scale subprojects financed under Loan 1572-PH. All Features of these subprojects are detailed in Tables 1, 2, and 6 of DBP'. submission. - 39 - basis of data provided for a part of the subloans, performance under the SMI component has been better than under the large industry component; the limited data provided in the Borrover9s submission appear to indicate that a substantial number of the SHI enterprises financed under DBP III have met their obligations fully (Table 4), that some enterprises units are current on repayments (Table 3), but that many SMI enterprises have been transferred to remedial management (Table 5). 3.34 The DBI was established and it provided training in development banking to PDBs and staff of other institutions. Under a review done at the time of SKI III, it vas found to be operating satisfactorily, and had agreed to increase its training programs. D. FINDINGS AND ISSUES Overall Assessment 3.35 Within a single operation, DBP III provides examples of the strong and weak points of the Bank's DEC lending strategy and process in the Philippines. The SMI component was well designed, lent itself less to political pressures and, with the foreign exchange risk being borne by the Government, led to broad diversification of industry in the country. The large industry component, despite the formal appraisal and supervision of the subprojects financed under it as required by the Bank, was not effectively used, with DBP apparently failing to maintain vigilance and autonomy in its decisions, and with all the subprojects proving in the end to be non-viable. Bank Role 3.36 DBP's association with the Bank appears to have helped it to improve its appraisal/supervision systems to a limited extent, but not to provide or maintain its autonomous status in relation to the Government. The Bank failed to accurately judge the level of influence brought on DBP by the Government, and DBP personnel's capacity to withstand it. As a result, the Bank did not provide the necessary level of supervision to ensure the achievement of the Loan's objectives. The Bank's assessment of the ability of DBP personnel to effectively implement a DFC role (exercise of autonomy in project decisions on the basis of thorough appraisals) was seriously flawed. Lessons and Follow-up Action 3.37 The main finding of DBP III is that DBP was unable to insulate its financing decisions from Government influence. In particular, DBP experience shows, first, that it is not realistic to expect an organization to operate at two incompatible levels -- an efficient appraising institution ard one implementing behest operations. Given its situation, DBP could not have openly identified behest operations or bring out their non-viability without jeopardizing its position. In such an environment, it was not possible to segregate the behest portfolio from the other operations of the institution. Second, there are limitations in expecting that supervision, at one remove and of a periodic nature as was the Bank's, could have spotted all the weak- nesses which underlay DBP's processes, procedures and operations. Following - 40 - DBP's failure, the Bank took two actions to deal with the situations it has helped with the restructuring of DBP to bring it to a viable portfolio and income position; and it has restricted DBP operations involving Bank funds to indirect apex lending activities so that primary decisions on lending are taken by independent finance institutions.42 3.38 The main lessois of experience under DBP III are, first, that the Bank needs to assure itself of the autonomy of the management in choosing an institution for its loans and that, where it seeks corrective action, it should assure itself that the corrective measures have been taken before a loan is given. Second, the Bank needs to make appropriate arrangements for covering the foreign exchange risk, with a premium for such cover, enabling its funds to flow in local currency to the final borrowers at appropriate interest rates. 421 The future role of DBP and its retail operations in the financial sector in the Philippines is a subject of ongoing discussions between DBP and the Bank. -41- ANE3.1 PROJECT PEORUNE AUDIT REPORT THE PHILIPPINES DEVELOPMENT BANK OF THE PHILIPPINES (DBP III) (LOAN 1572-PH) List of Large Subprojects Financed Under Loan 1572-PH (Amounts in US$1000) "A* Suborojects Ap.= 1. Alfa Food Products 1,904 Sold before DBP Rehabilitation 2. Aluminum World 2,336 Transferred to APT 3. Pearl Eagle Mines 4,024 Transferred to APT and sold 4. Extraco Shipping 4,986 Transferred to APT 5. Far East Starch 2,065 Transferred to APT 6. Interphase Development 0,788 Transferred to APT 7. Lirag Textile Hills 5,950 Transferred to APT 8. Peggy Mills 6,538 Dacioned JA before Rehabilitation 9. Philippines Starch 4,983 Transferred to APT 10. Universal Textile Mills 2,866 Transferred to APT and sold 11. Western Agro Industries 2,460 Transferred to APT 12. Wright Patterson Mfg. 1.Z7 Transferred to APT Subtotal 40,656 "B" Subprojects 13. Achievers Construction 0,444 Transferred to APT and sold 14. Alinsu Steel Foundtry 0,229 Transferred to APT 15. Century Canning 0,791 Transferred to APT and sold 16. Eco Philippines 0,157 Sold in 1983 17. Gutson Industries 0,051 Sold before DBP Rehabilitation 18. Milagrose Shipyard 0,276 Transferred to APT 19. Panama Mining 0,233 Transferred to APT and sold 20. Rice Mills Corp. 0,651 Transferred to APT 21. United Asia Weaving 0,501 Sold before DBP Rehabilitation 22. Vital Agro Industries .Q1I Transferred to APT Subtotal 3,352 TOTAL .A uDacion Pago" is a system under which a lender repossesses assets for a failure to repay, but then leases them back to the borrower. Sorc: Borrower's submission. - 43 - PROJECT PERFORMANCE AUDIT REPORT THE PHILIPPINES SIX DFC AND SWI LOANS IV - SMALL AND NEDIU INDUSTRIES DEVELOPMENT PROJECTS (SMI II AND III) (LOANS 1727-PH AND 2169-PH) EVALUATION SUMMARY Introduction 4.01 The two loans reviewed in this PPAR were the second and third loans approved for small and medium industry (SMI) developments Loan 1727-PH (SKI 11) was approved in 1979 and Loan 2169-PH (SMI III) in 1982. SMI II was for US$25.0 million, and was essentially utilized ahead of the projected schedule. SKI III was much larger (US$132.0 million), with three components (two for intermediating crganizations and one for technical assistance). Soon after its approval, the Philippines faced a period of political uncer- tainty which compounded the economic difficulties facing the country. As a result, SKI III was slow to disburse and a large part of it had to be can- celled (paras. 4.08-4.13). Obiectives 4.02 The two loans had similar objectives, development of SKI and the building up of an accreditation capability in the apex institutions (Indus- trial Guarantee and Loan Fund (IGLF) under SKI II and IGLF and Development Bank of the Philippines (DBP) under SKI III) and a long-term financing capability in participating financial institutions (PFIs). SKI III sought to achieve these objectives through technical assistance intended to help remove bottlenecks to SKI development, to increase private sector involvement in design and provision of assistance to SMI, and to help Government deal with SMI problems and issues through studies (paras. 4.14-4.16). Implementation Experience 4.03 SMI II was implemented smoothly, being disbursed faster than pro- jected. SKI III ran into a difficult period in economic and political terms, and its Implementation was also impeded by the portfolio difficulties of DBP. As a result, it took much longer to disburse, and a large part of the Loan (almost the whole of the component relating to DBP and two-thirds of the technical assistance component) had to be cancelled. Even in these, difficult years, the IGLF ccmponent was more or less fully utilized (paras. 4.36-4.37). Results 4.04 The IGLP parts of SMI II and III financed 1,345 subprojects. Over- all, these subprojects performed well. IGLF carried out satisfactorily its - 44 - institutional role -- accrediting Fle and supervising their SM1 financing activities and procedures -- and its financial position, with the Government bearing the foreign exchange risk, remained viable. As mentioned earlier, the DBP component under SI III was hardly used, and with only one-third of the technical assistance funds utilized, the results under this component were relatively poor (paras. 4.27-4.35). Sustainability 4.05 The operations of the two loans show that the concept of indirect lending, using an apex institution to select PFIs for onlending to Bank- determined target groups, is viable, and helps the achievement of Bank objec- tives in terms of institution building, distributing funds, and reducing the workload on Bank staff and the risks involved in such lending (para. 4.41). Findins and Lessons 4.06 SMI II was a success in implementation and in reaching its objec- tives. SMI III was only a partial success, being disbursed slower than projected and being used effectively only in respect of the IGLF component, failing partially in its technical assistance component and almost totally under the DBP component (paras. 4.17-4.26). 4.07 The main lessons of the two loans are the following: (a) the choice of apex institutions for onlending Bank funds needs to be carefully made, and the Bank should insist upon corrective actions being taken, where necessary, before approving an apex agency or institution; (b) indirect lending helps broaden the institution building role of Bank loans and the range of fund- users within the target groups for such loans; and (c) the Bank needs to work out clear mechanisms for foreign exchange risk-bearing, as the SiMI users of funds are not likely to have an understanding of such risks or a capacity to bear them (paras. 4.38-4.40). - 45 - IV - SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECTS (SMI II AMD III) (LOANS 1727-PH AND 2169-PH) A. BACKGROUND Introduction 4.08 The Bank has made, to date, five loans to the Philippines for financing of SMI in the country (Loans 1120-PH, part of 1572-PH, 1727-PH, 2169-PH, and the recently approved Loan 3038-PH). Loan 2169-PH (hereinafter referred to as SMI III), marks an evolution not only in the amount of resources sought to be transferred but also in the intermediating process used and in the nature of technical assistance provided. 4.09 The first loan, made in 1975, was for an amount of US$30.0 million; it used the Industrial Guarantee and Loan Fund (IGLF), operated by the Central Bank of the Philippines as the apex institution.40 The second loan (Loan 1727-PH, SMI II), was for the slightly smaller amount of US$25.0 mil- lion.41 However, in the meanwhile, the Bank had also started lending to SMI through its loans to the Development Bank of the Philippines (DBP), in par- ticular Loan 1572-PH (DBP III), thereby increasing both the Bank's channels of intermediation and the volume of funds provided to SMI.42 SMI III sought to bring all these components together, with the size of the loan enlarged to US$132.0 million, involving all the earlier intermediaries (IGLF and DBP, the latter lending through its own Small and Medium Industry Lending (SMILE) Department and through private development banks (PDBs)), and including related technical assistance for both the Government's SMI agency and DBP's SMILE. The Bank's coverage of the sector was thus both unified and made more comprehensive under SMI III. The Bank also began to phase out, at the time of SMI III, financing of cottage industries, mainly because of their poor performance under earlier loans. However, the decision was not so much to withdrawal from such financing as to work out a better strategy and inter- mediation mechanism to ensure viable lending to such micro industries. 4.10 This chapter reviews the experience with SMI II and III. The design of the Bank's SMI loans was traditional, seeking to improve the SMI promotion effort and investment process, rather than innovative in the sense of initi- ating new programs or institutional mechanisms. In particular, no attempt appears to have been made to promote linkages between large industry and (ancillary) SMI nor to identify the material resource base amenable to development through such industry. The technical assistance components sought improvements in different areas: first, in the Government's adminis- trative machinery for small industry to enable efficient and effective 4Q/ The experience with SMI I (Loan 1120-PH) is reviewed in PPAR No. 3969, dated June 16, 1982. j1j The PCR on SMI II (Loan 1727-PH) was issued to the Board as Report No. 7940, dated June 30, 1989. 4/ The experience with DBP III is reviewed in Chapter III. - 46 - Government supports second, through improvement in DBP's SMILE to make its assessment system effective; and, third, in improving the accreditation pro- cedures which the apex institutions used to determine the eligibility of finance institutions for onlending Bank funds to SMI. 4.11 The loans were essentially therefore resource-transfer efforts by the Bank to a selected target group within the Philippines industrial sector with a specific size criterion and specific objectives (employment and located mainly outside Metro Manila). In this the loans succeeded (except for location), as data on the number of units financed, employment generated and cost per job created, show. More important, the channels used to dis- tribute the funds were successively broadened, thus helping reach the Bank's institution building objective. 4.12 SMI II was approved in June 1979 and SMI III, in June 1982. SMI III was not only much larger in amount but, as noted earlier, marked an attempt by the Bank to reach out more effectively to the diverse needs of the SMI sector. It had, therefore, three components: (i) an IGLF component, the largest, of US$63.0 million which essentially followed the SMi II concept; (ii) a DBP component of US$48.0 million divided into two subcomponents: (a) US$27.0 million for direct lending by DBP through its SMILE, and (b) US$21.0 million to be onlent through PDBs accredited by DBP under its Department of Development and Rural Banks (DDRB); and, finally, (iii) a tech- nical assistance component of US$6.6 million, to be administered by the Government's Department of Trade and Industry (DTI) and to be used for three purposes: (a) US$2.5 million to conduct pilot projects for setting up common facilities and improvement of technology; (b) US$600,000 for improving the facilities of the Small Business Advisory Centers (SBACs) under DTI; and (c) US$3.5 million for consultancy services, mainly training of DTI's Bureau of Small and Medium Industry (BSMI) staff and of SMI entrepreneurs, and studies of issues affecting SMI development. In addition, the Loan contained an unallocated component of US$12.4 million for further distribution to IGLF and DBP as required, and a front-end fee of US$2.0 million. Project Objectives 4.13 The project objectives under the two loans were similar, though, given the range of SMI Ill, its objectives were broader and its design some- what more sophisticated. The main objectives of SMI II were to increase term-financing funds available for the development of SHI and also to expand the network of banks and financial institutions providing such finance and to improve their appraisal and supervision capabilities.43 The main objective of Sil 1-1 was to broaden the provision of financial and technical assistance to SMI within the framework of the Government's SMI sector strategy. The project sought to do so by: (a) developing the institutional capabilities of some of the key financing institutions servicing the sector; (b) providing technical assistance for removing bottlenecks faced by SMI subsectors and improving coordination of technical assistance programs; (c) increasing the 0/ Philippiaes - Staff Aipraisal Report on the Second Small and Medium Industries Development Project, Report No. 2417-PH, dated May 18, 1979, para. 6.01. - 47 - role and involvement of the private sector in design and provision of assis- tance to SMII and (d) helping Government in its SI1 policy and in dealing with subsectoral problems to foster the further development of the sector.44 Concept, Desigan nd Rationale 4.14 The concept and design of SMI II were relatively straightforward. IGLF was to be the apex institution which would pass the funds to accredited banks and financial institutions for lending to SMI. In addition, a small technical assistance component was included to strengthen the Medium and Small Industries Coordinated Action Program (MASICAP) under DTI to assist entrepreneurs in project preparation. The design of the project was intended to improve the access of SMI to long-term finance by upgrading their project preparation capacity through MASICAP and increasing the supply of funds for them through Bank lending to IGLF; institutional capability of the banks and finance institutions for such onlending would be improved through their access to and association with IGLF. 4.15 The design of SMI III included DBP (which had already acted as an SMI lender for a part of the Bank's Loan 1572-PH) as an additional agency for lending both directly and indirectly to SKI, provided technical assistance to SMI through the provision of common services and improvement of technology, and provided funds for the study of SMI-related issues impacting on Govern- ment policy towards SMI. The technical assistance component was dependent upon initiatives being taken by private sector agencies to propose setting up common facilities and by DTI in formulating programs for the use of funds under it. 4.16 The major rationale for the Bank's lending to the SKI sector was not only its employment potential but also the decentralized character of SMI, which was expected to increase infrastructure and institutional facilities outside the Metro Manila region. In fact, the Bank had envisaged that lending to SMI outside Metro Manila would use 60% of SMI III funds. SMI lending by the Bank thus complemented the Bank's lending to medium and large industry through DFCs and its direct lending to the Government for develop- ment of infrastructure. B. PROGRESS IN MEETING OBJECTIVES Progress in Institution Buildina 4.17 Progress in institution building objectives is considerea at three different levels: (a) at the apex institution level (IGLF and DBP), (b) at the participating financial institution (PFI) level, and (c) at the level of ministries and agencies concerned with SI programs. 4/ Philippines - Staff A-gpraisal Report on the Third Small and Medium Industries Development Project, Report No. 3838-PH, dated May 6, 1982, para. 3.01. - 48 - 4.18 The project objectives under both SH II and 814 III in relation to IGLF were reached.45 The IGLF program was already established under SMI II, and its progress under SHI III was accelerated, partly as it later took over a part of the DBP program because )f the almost total failure of the DBP component. The institution building objectives of SKI III in relation to DBP failed mainly because DBP as a whole proved to be a non-viable institution, having become mainly an arm of the Government to conduct behest loan opera- tions, that is, operations approved and financed at Government behest. DBP's SMI operations were overwhelmed by its much larger activities in other sectors which generally were not conducted on sound business principles and thus resulted in a nearly worthless portfolio.46 IGLF conducted its accredi- tation activities efficiently and was later able to deal with financing institutions which were eligible for access through DBP for SKI lending. IGLF procedures for accreditation and supervision of PFIs were constantly kept under review.47 4.19 The banks and finance institutions accredited under the two loans were large, and were able to provide funds to a large number of SMI units, 264 under SMI II and 1,081 under SMI III. The performance record of these units was satisfactory, reflecting in part the success of institution building at PFla.48 The range of SMI subsectors covered by the Bank loans is impressive. 4.20 Institution building at ministry and agency level is dealt with below under Technical Assistance. External Constraints and Operational Autonomy 4.21 Economic developments after the approval of SMI III in June 1982 seriously influenced the achievement of the objectives under that Loan. The economic situation deteriorated sharply after 1982, leading to a marked slow- down, and even some retrogression, in GDP growth until 1986. It affected the utilization of funds under all components of the Loan, though under the DBP component most seriously. Despite the addition of DBP-accredited finance institutions to those having access to ICLF funds, there was still a short- fall of some US$6.6 million, in the amount of funds disbursed under the IGLM program. While DBP-accredited finance institutions were given access to IGLF funds, none of DBP's loan component was transferred to IGLY (see Table 7). 451 For SMI II, see OED Report No. 7940, op. cit., para. 5.1. For SMI III, see attached SMI III PCR, Part 1, para. 5.02. 461 For a discussion of this, see Chapter III of this PPAR and also the attached PCR on SMI III. 47/ For SMI II, see OED Report No. 7940, op. cit., paras. 7.1-7.8; for SKI III, see attached SMI III PCR, Part II, paras. 1.08-1.09. Part 11 reflects IGLY's views. A8 For SMI II see OED Report No. 7940, op. cit., paras. 7.1-7.8, and for SKI III, see attached SMI III PCR, Part 1, paras. 5.02, 8.01, 9.1. - 49 - 4.22 The issue of operational autonomy concerned mainly DBP, and though it did not relate directly to DBP's SMI operations, the viability of DBP as a whole was affected by its failure to carry out all its operations on the basis of sound business principles. DBP stopped operations in 1984 pending a major restructuring, and as noted above its SI activities were transferred to IGLF. For further details, see SMI III PCR, Part 1, para. 4.04. Role of Technical Assistance 4.23 8MI I included a technical assistance program for strengthening MASICAP in its role of helping project preparation by SI. Progress under MASICAP was slow mainly because of organizational issues within the Govern- ment: the merger of MASICAP with the SBACs; a freeze on Government hiring; and bureaucratic procurement procedures which slowed the purchase of com- puters and vehicles under the technical assistance program. The lack of organizational focus and continuity affected adversely the effectiveness of the program.49 4.24 The technical assistance program under SMI III was imaginatively designed and had a broad reach. It sought to upgrade SE support activities in the Government and to sensitize the Government to SMI issues in its on- going and long-range program of SMI development. At the same t'Ae, it also tried to reach the SMI sector directly by providing for the setting up of common facilities and by raising its technological level. 4.25 This technical assistance component assumed that initiatives would be taken by the Government and the private sector to draw up need-based pro- grams to utilize the technical assistance funds. However, the environment emerging in the country after 1982 was hardly conducive to such initiatives. As far as the Government was concerned, apart from the problems created by an unstable political environment after 1983, there was also reorganization within the MTI, leading to uncertainty in personnel and authority regarding the technical assistance component of SI III. As a result, only a small part of the funds under the two Government components (equipment purchase and consultancy services) was used. The possibilities for setting up pilot proj?cts to provide common facilities and to upgrade SMIT technology depended upon private sector initiatives which, with the adverse economic situation after 1982, were also not forthcoming. Thus both political instability sad economic adversity combined with a lack of definition of the technical assis- tance component to lead to inadequate utilization of funds under the program, to its failure to undertake the action programs envisaged, and to the failure to reach the technical assistance objectives.50 Consequently, institution building achievements under SMI III were small. All OED Report No. 7940, op. cit., para. 4.4. IQ/ For further details see attached SMI III PCR, Part II, para. 1.11. - so - Sector Policy Objectives 4.26 Both SMI II and SMT III failed to reach the regional distribution goals set for them.51 The political uncertainty during the 1983-86 period also led to a failure to promote a dialogue on SMI development. This was resumed after 1986 as part of the Bank dialogue on the Government's overall economic recovery program, which has been supported actively by the Bank both through economic recovery and sector loans and direct lending for SMI and large industry. C. OPERATIONAL AND FINANCIAL PERFORMANCE Institutions' Operations 4.27 IGLF. Though IGLF is an agency administered by the Central Bank, it maintained separate accounts for its operations.52 ICLY made a net profit, and, after very small provisions for possible losses, it has maintained its net worth (Annexes 2 and 3 of the SMI III PCR). During the period covered by this review (1978 to 1988), IGL's onlending activity was based mainly on Bank loans. Not being an operating agency, it did not have any diversifica- tion in its activities and operations. The loan terms provided that the Government would bear the foreign exchange risk.53 In fact, the sharp depreciation of the peso, together with the failure to adjust the rates of interest charged to PFIs, left a large foreign exchange risk to be borne by the Government which is not reflected in IGLF accounts (SMI III PCR, Part I, para. 4.03). 4.28 DBP. The SAR on SMI III noted the weak portfolio position of DBP arising out of its past operations, and it relied on the corrective measures proposed under SM III and agreed to with DBP and the Government to improve the working of DBP.54 However, because of the non-viability of the other, mostly non-SKI-related, parts of its operations and the failure to take the actions agreed with the Bank, DBP became non-operational after SMI III was approved, and its SMI onlending activity were taken over by IGLF. DBP was restructured in 1986-87 vith Bank help, its non-viable portfolio (and cor- responding liabilities) being transferred to APT. The restructured DBP has now apparently become operational again (see Chapter III). 21/ For SMI II, see OED Report No. 7940, op. cit., para. 5.06; for SMI III, see SMI III PCR, Part I, para. 6.06. 521 OED Report No. 7940, op. cit., paras. 6.1-6.6 provide data on IGLF's financial position up to 1984. a/ Philippines - Staff Appraisal Report on the Third Small and Medium Industries Development Project, Report No. 3838-PH, dated May 6, 1982, para. 5.08. 54/ Ibid., pares. 4.01-4.03, 4.08-4.09, 4.14 and Attachment 2 to Annex 2. - 51 - Utilition of Bank lnd. 4.29 In all, 21 PFIl were used for onlending funds under SMI II, 10 com- .mercial banks, 7 non-bank financial intermediaries, and 4 other institutions. The non-bank financial institutions (among them PDCP) were responsible for using the bulk of the funds (about 72Z in amount and about 751 of the number of subloans) under the loan.55 4.30 In all, 264 subprojects were financed under SMI II. Implementation of SMI 11 was generally satisfactory, with expectations regarding number of jobs created (10,497 against an expected 11,500) and investment cost per job (P 38,000 against P 34,167) being met, on the basis of a sample coverage of subprojects financed. There were shortcomings in implementation, particu- larly in respect of regional distribution where subloans outside Metro Manila formed only 39% of the total amount against an appraisal target of 60Z. Moreover, most of the funds (83.5% in amount for 60.6Z of the total number of subprojects) was lent to medium industry. Commercial banks tended to finance the larger end of SMI projects, and the regional distribution of their sub- loans tended to be more towards Metro Manila. Operational data on a sample of subprojects financed under SMI II show that the subprojects were generally completed within cost estimates, but almost half the subprojects had delays, caused by various factors (changes in project design or project site, diffi- culties in obtaining complementary finance, and procedural delays). Operational and financial performance of some subprojects were below projected estimates, partly because of difficulties created by rising oil prices and by deterioration in the business climata. Overall, SMI II was disbursed faster than projected.56 4.31 In all, 1,081 subprojects were financed under SMI III, mostly out of the IGLF component. DBP used hardly any funds, and the following data on SKI III relate to the use of loan funds by IGLF. IGLF performance, in terms of number of subprojects financed, number of jobs created (23,564) and investment cost per job (US$5,576 equivalent) was satisfactory (see (Table 5A on Project Results, Part III of the SMI III PCR). Partial data on arrears between end-users and PFIs suggest an arrears position of only 9.4% of loans outstanding, with non-bank financial institutions and PDBs responsible for more than half (53.31) of the arrears, and with 62.8% of arrears being a year or more overdue. Experience of arrears on loans from IGLF to PFIs was slightly better, as might be expected (SMI III PCR, Part I, para. 6.03). 4.32 IGLF provided funds in local currency terms, with the Government bearing the foreign exchange risk. Almost all of its direct borrowers (banks and finance institutions) had had local currency operations (deposits mobilized, loans made), and their subloans to SMI from out of Bank funds, besides being local currency denominated, formed only a part of their other dealings with the SMI units and with their other operations. Financial reports also indicate that overall the SMI units financed out of Bank funds have remained viable, with, as noted above, generally low arrearages to the ii OED Report No. 7940, op. cit., para. 4.14. 2J/ OED Report No. 7940, op. cit., paras. 4.1-4.13 and Annexes 3-12. - 52 - PMla. SHI III loan operations under the IGLU component were satisfactory (see SHI III PCR, Part I, paras. 6.02-6.05, and Part II, para. 1.04, for details). The regional distribution goal under the IGLF component was not reached (SKI III PCR, Part I, para. 6.06, and Part II, para. 1.05). 4.33 Two factors appear to explain this relatively satisfactory perfor- mance of SHI units under both loans. First, the SHI unite depended upon local markets and, besides being flexible in their activities with low costs and low overheads, had been insulated from the larger recessionary trends in the economy. For example, one unit had met recessionary trends by laying off workers, subcontracting part of its remaining business, and adding new activities. Second, the obligations of the SME units under Bank funds were expressed in local currency terms, and thus the units did not find them inflated despite the depreciation in the external value of the peso. 4.34 A small part of the technical assistance to MASICAP under SMI II was cancelled. MASICAP was merged with SBAC, and the technical assistance com- ponent proved ineffective overall, mainly due to this organizational change. Of the technical assistance of US$6.6 million under SMI III, only US$2.4 million was utilized, with the balance being cancelled. 4.35 SMI III was closed in April 1989, and the following Table 7 sum- marizes the original allocation and the final position under each components Table 7: UTILIZATION OF FUNDS UNDER SMI III (US$ million) Asecr/Purnse Oristinal Amount Amount Disbursed IGLF 63.00 56.43 DBP 48.00 2.46 Unallocated 12.40 0.00 Technical Assistance 6.60 2.39 Pilot Projects (2.50) (0.03) SBACs (0.60) (0.32) Consulting Services (3.50) (2.04) Front-end Fee 2.00 1.95 132.00 63.23 .g ja Excludes a small amount (US$20,000) of exchange difference under a special account set up to facilitate disbursement under the Loan. SgurAes Files. The amount cancelled under the Loan was US$68.75 million, the final cancel- lation of US$4.20 million being made in April 1989. - 53 - D. FI=DINGS AND LESSONS Overall Assessment 4.36 Under SM1 II, IGLF remained a key element in the Government's pro- gram to promote and develop SI. It successfully expanded its network of accredited institutions. The arrears positions between the SMIs and accredited institutions and between the latter and IGLF were reduced, and by 1984 brought to a satisfactory level. IGLF provided useful training and technical assistance to the accredited institutions and the end-users. Overall, the project was a success.57 4.37 Despite the low utilization of funds and its slow pace, SMI III achieved most of its objectives, mainly helping finance SMIT growth and developing term-lending capability among banks and finance institutions. Many of the expected activities under the technical assistance component did not get defined, and two-thirds of the component were not utilized. The lack of focus and definition of the technical assistance component was a strategic decision by the Bank, based on the assumption that the use of the funds would be need-based, depending upon the emerging requirements of the SKI sector, and, therefore, should be left to the initiative of the user agencies. The change in political climate which appears to have immobilized both the Government and private agencies on the broad policy front relating to the SKI sector could not have been foreseen at the time of the SMI III appraisal. The low use of funds under SI III is to be attributed to the troubled political and economic situation through which the country passed during 1983-86, from which it has begun to emerge in subsequent yeari with strong support from international institutions (see SMI III PCR, Part I, para. 8.01). Lessons 4.38 The PCR for SMI II drew three lessons.58 First, in regulated environments, apex lending for SKI loans should be linked to financial sector reform in which interest rates are generally deregulated. In such an environment, interest rates on foreign currency loans on-lent in local cur- rency should crry a premium for the foreign exchange risk. Second, an apex unit should set limits on the maximum exposure for each accredited institu- tion. Third, apex arrangements appropriate for lending to SMI might not be suitable for reaching cottage firms. In view of the poor record of IGLF in this respect, the PCR suggested setting up another vehicle for financing cottage firms. This reviews supports these lessons. 4.39 The main lessons under SMI III are the following. First, the experience of Bank lending to DBP shows that the Bank needs to be carefu' in selecting the apex institutions for onlending its funds. Its reliance on action programs to correct DBP's deficiencies did not work out, and DBP had to stop operations after approval of SMI III mainly because of problems under its large industry loan operations. It is necessary to insist that agreed Ul OED Report No. 7940, op. cit., paras. 9.1-9.6. a/ Ibdg., para. 9.6. - 54 - action programs are implemented before funds are approved to an institution needing reform. Second, the good repayment experience under SMI sut'oans is mainly due to the fact that the foreign exchange risk was borne by the Government and not the end-users. The Bank needs to work out arrangements for its funds to be on-lent to the ultimate private industrial user (whether an SMI or not) in local currency terms, with an appropriate premium being charged to cover the foreign exchange risk. Third, indirect lending through apex institutions has helped broaden the Bank's institution building role and increased the geographical spread of its funds, though, under SMI II, as noted earlier, not to the full extent projected. 4.40 The main factor behind the relatively good performance of these SMI loans in spite of the poor environment was the fact that none of the direct participants -- IGLF, banks and finance institutions, SMI units -- concerned in the operation of the SMI loans were fa._wd with the foreign exchange Impli- cations of the use of Bank funds. This Io the most important lesson to be drawn from the experiences under SMI II and III. Another is the viability of the SMI sector even in difficult times, mainly because of its flexibility in operations and its low overheads. 4.41 The Bank has acted essentially as a source of funds, with the responsibility for a large part of institution building (accreditation, training and supervision of PFIs) being performed by IOLF, and of operating functions (lending, supervision and recovery of loans), by PFla. The Bank's overall role has thus been reduced through the apex approach, which thus represents a cost-effective use of its staff resources. - 55 - PROJECT PERMORMANCE AUDIT _EPORT THE PHILIPPINES SIX DFC AD SM LOANS V - INDUSTRIAL FINANCE PROJECT (APM LOAN) (LOAN 1984-PH) EVALUATION SUMARY Introduction 5.01 Loan 1984-PR (referred to hereinafter as the Apex Loan) in the amount of US$150.0 million was approved in 1981 to the Central Bank of the Philippines, to be used by accredited financial institutions for onlending to industry. The economic climate in the Philippines deteriorated sharply after the Loan was approved, leading to a slower, and even negative, growth of the economy. At the same time, following political turmoil, the country's ex- ternal situation also deteriorated, with a sharp depreciation (about 60%) in the external value of the currency over 1980-84. It was only after 1986 that, with the beginning of political stability, economic growth was resumed and the depreciation of the peso slowed down (paras. 5.13-5.17, 5.25). Objectives 5.02 The Apex Loan was the first such to be approved to the Philippines, Bank DFC lending for medium- and large-scale industry till then having been channelled through specific DFCs like the Private Development Corporation of the Philippines (PDCP) and the Development Bank of the Philippines (DBP). The main objectives of the Apex Loan were to shift the focus of the Bank dialogue to financial and industrial sector issues, to help raise additional resources for industry, to help the Central Bank to build up competence to appraise financial institutions and oversee their term lending operations and, finally, to broaden the distribution of funds geographically and industrially by making them available to a large group of financial institutions (paras. 5.18-5.20). Implementation Experience 5.03 The Central Bank set up a separate Apex Development Finance Unit (DFU) to administer the Apex Loan under a Chief Executive Officer (CEO) who reported directly to the Governor of the Central Bank. UNDP provided ftnds for the services of a Technical Advisor to help DFU build up expertise for its accreditation and monitoring functions, with the Bank acting as Executing Agency (paras. 5.21-5.24, 5.26, 5.28). 5.04 The DFU accredited in all 11 participating financial Institutions (PIle) -- commercial banks, Investment houses and development finance com- panies -- to which it provided funds for onlending. These institutions - 56 - onlent a total amount of US$44.7 million out of the Apex Loan (and another US$32.3 million out of a parallel commercial loan) to 64 subprojects (para. 5.42). 5.05 The Central Bank, with the approval of the Bank, took various measures to increase demand for funds from the Apex Loan, in particular, allowing the funds to be denominated in peace for priority activities and providing relief in various ways to the users of the funds. Despite this, hawever, the Apex Loan took a much longer period than projected to be com- mitted (the original deadline of June 30, 1983 was extended to June 30, 1987) and to be disbursed (June 30, 1985, extended to June 30, 1988). Despite the extension of the Closing Date, the actual amount committed and finally dis- bursed was only US$44.7 million, less than one-third of the original loan amount, with the balance being cancelled. This was mainly because of the sharp deterioration in the economic climate, together with the rapid depreciation in the external value of the peso, which reduced demand from industrial enterprises for investment funds, in particular, loans in foreign currency (paras. 5.37-5.39). Results 5.06 The Apex Loan was distributed through 11 PFIe, of which three (DBP, PDCP, and PISO Bank) had earlier had direct dealings with the Bank. Of these, PDCP accounted for almost half of the total funds actually disbursed. The subprojects were distributed broadly, with half outside the Metro Manila area. A survey of a sample of subprojects, after completion, showed acceptable financial and economic rates of return. Of the accredited financial institutions, three ran into difficulty: DBP had to be reorganized owing to its poor portfolio, PISO Bank is under liquidation, and Manilabank is subject to court proceedings. PDCP also had portfolio problems but is gradually resolving them (paras. 5.40). 5.07 The DFU maintained separate accounts for apex funds. While these showed a surplus till 1987 on income account, in fact, the financial statement shows a large deficit, to be borne by the Treasury, as a result of the various schemes which the Central Bank had introduced to accelerate the demand for apex funds (paras. 5.33-5.36). Sustainability 5.08 Despite the slow pace of fund use and the large cancellations under the Loan, the apex concept showed considerable validity, and the project left substantial benefits, in the form particularly of improved institutional capacity in a large number of financial institutions to provide long-term finance to industry. In this sense, the apex concept has shown sustain- ability, and was followed up in 1989 with a second Apex Loan, this time using a reorganized DBP as the apex organization (paras. 5.43-5.45). Findings and Lessons 5.09 The use of the Central Bank as the channel for the apex funds showed mixed results. On the one hand, it sensitized the Central Bank to issues of foreign exchange risk borne by entrepreneurs, which led to the introduction - 57 - of various measures and schemes, with Bank approval, to improve the demand for funds and to insulate the subborrowers, in however small a way, against the full rigor of a rapidly depreciated peso. On the other hand, because DFU was under the Central Bank, it implicitly constrained DFU's freedom to refuse accreditation to a finance institution, particularly a commercial bank, as this was feared to reflect adversely on the public market perception of such an institution.59 Overall, while the use of the Central Bank for the apex function proved useful in the unusual circumstances prevailing in the country after the approval of the Apex Loan, it is not essential to the effective performance of the apex function so long as the Impartiality of the organiza- tion under which the function is put is assured to the PFIle (para. 5.46). 5.10 The project was overall generally successful with the large cancellation under the Loan being due to the sharp deterioration in the economic environment and not to any design fault. The apex concept was valid in that it helped to broaden the channels of distribution for Bank funds, to diversify the use of funds, and to spread institution building to a large number of banks and financial institutions. The main lesson of the Apex Loan is the impact which the bearing of foreign exchange risk has bad on the viability of the financial institutions and subprojects financed through them, and on the final demand for investment funds. In the case of the Apex Loan, the costs of the peso depreciation were borne partly by the Treasury (through the losses sustained under the various measures used by the Central Bank to cover such risks), and partly by subborrowers. Commercial banks helped to cushion the impact of such costs on subborrowers, particularly in the form of delayed repayments by their clients within their other (working capital) relationships with the clients in local currencies. PDCP, not having such a cushion, has been crippled (as have been Bank-associated DFCs in other countries, dependent predominantly on a long-term foreign currency lending business). Further, demand for foreign currency loans dried up in the Philippines (as in other countries) owing to local currency depreciation, with investors no longer willing to accept such risk. The Bank needs to work out its DIC lending policies within this environmental context (paras. 5.47-5.50). 59/ The Central Bank has a different viewl see Attachment 3. - 59 - V - INDUSTRIAL FINANCE PROJECT (APEX LOAN) (LOAN 1984-PH) A. BACKGROUND IntroductUon 5.11 The Bank initiated DFC lending in the Philippines through its first loan to PDCP in 1962. In the 1970s, the Bank broadened its coverage of such lending both institutionally and industrially. Apart from continuing to pro- vide funds to PDCP, the Bank approved its first loan to DBP (DBP I) in 1974 for onlending to medium and relatively large industry. In 1975, the Bank provided funds (SMI) to IGLF and DBP for onlending to SHIs, with an experimental component for National Electrification Authority (NEA) for onlending to rural industrial cooperatives. In 1978, the Bank provided funds to Philippine Investments System Organization (PIS0, later PISO Bank) for onlending to industrial enterprises in the private sector. 5.12 In such a context, an apex loan, made available through a single organization to a broad group of financial intermediaries rather than separate loans to individual institutions, was expected to achieve two main objectives: first, it would broaden access to Bank funds institutionally (through a diverse range of intermediaries) and industrially (reaching a larger group of entrepreneurs covering more industries and more regions than was being done through individual DFCs) and, in the process, second, to oxtend the Bank's institution building role by building up accreditation capacity among the apex organization and appraisal capacity within the PFIs. An indirect impact of such Bank lending would be to reduce the Bank's workload and responsibility in appraising and supervising individual DFCs, enable the Bank to foster capital market activities in the country, and shift Bank dialogue to financial sector issues rather than constrain it to institutional performance. 5.13 Loan 1984-PH (hereinafter referred to as the Apex Loan) was the first apex loan by the Bank to the Philippines. The Bank devoted considerable effort to the design of the Loan to ensure its success. Since the apex institution, the Central Bank, was intermediating the Bar Loan to the financial institutions, the Bank designed, in addition to the normal criteria which are applied to DFCs, additional criteria for the apex institution to ensure appropriate accreditation of the PFIls and review of subprojects financed by them out of Bank funds, and also a technical assistance program to ensure that the the Central Bank had professional guidance in the conduct of work which was new to it. 5.14 The Apex Loan was approved in April 1981. It was to be administered by an Apex Development Finance Unit (DFU), set up separately in the Central Bank with a CEO recruited from outside reporting directly to the Governor of the Central Bank. The amount of the Loan was US$150.0 million, complemented by an additional loan of US$100.0 million from a syndicate of foreign commer- cial banks. - 60 - 5.15 By the time the Apex Loan vas approved, the Central Bank had recruited the initial staff for the DFU, laid down guidelines for accredita- tion, evaluated independently three finance institutions -- PDCP, DBP and PISO Bank (which, incidentally, had already been recipients of Bank funds), and identified other banks and investment houses as institutions for evaluation as possible PFIs. The Bank was satisfied with these arrangements. A Bank staff member was seconded as Chief Technical Advisor under the UNDP technical assiatance project, to assist the Apex Unit in the formulation of policies and In the conduct of day-to-day operations. Proiect Obiectives 5.16 The Apex Loan had four objectivess (i) to shift the focus of Bank involvement from institutional issues to those related to the financial sector; (ii) to help raise additional resources for financial institutions, as through the simultaneously arranged commercial bank loan; (iII) to help the Central Bank, through DFU, to onlend funds to PFle and to guide and supervise their operationst and (iv) to broaden access to Bank funds to additional financial inhtitutions by building up their institutional capacity for long-term lending. The objectives were closely related to a report on the financial sector produced jointly by the Bank and the Fund in 1979,60 and marked a further step in the structural reform of various sectors in the economy, supported by the Bank through its Structural Adjustment Loan (Loan 1903-PE) approved in September 1980. Concept, Desian and Rationale 5.17 There were three elements in the design of the project, and it is appropriate to relate these to the project objectives, so as to be able, later, to assess the design in ight of the actual experience under the Loans (i) The choice of the Central Bank as borrower was for two reasons. First, the Central Bank was an independent and impartial agency with powers of surveillance over the banking system. This gave the banking system confidence in seeking access to apex funds6l and, at the same time, ensured a certain carefulness in the choice of financial institutions for participation under the Apex Loan. Second, the Central Bank being t1e main instrument for defining and implementing financial sector policies, the Apex Loan provided the Bank direct access to it for discussion of sector-related issues, a major objective of the Bank in opting for apex lending in the Philippines. 6_/ Philippiness Aspects of the Financial Sector, Report No. 2546-PB, October 1979. JU/ For example, In providing, s part of the accreditation process, confidential financial data and projections to an authority which was not in competition with it. - 61 - (ii) It was agreed that the CEO of DFU would be recruited from outside, and would have direct access to the Governor of the Central Bank. A central banking authority has regulatory functions in relation to the financial sector institutions, intended to maintain public confidence in the banking system. DIU was to be a developmental arm of the Central Bank, in effect playing the same role relative to the PFIle as the Bank played in relation to DFCs. DFU therefore needed a distinct developmental character, sought to be provided by recruitment of its CEO from outside the Central Bank (and the Government), and a high statue in consonance with its role (provided by giving the DFU CEO direct access to the Governor). (iii) Finally, a strong professionai staff was needed to perform the main functions under the Apex Loan, namely, accrediting financial institutions for participation under the Loan, and supervising and guiding them in their (to them, new) long-term lending operations. To enable the Central Bank to do so, the Bank provided on secondment the services of a staff member as Chief Technical Advisor, under technical assistance funded by UNDP, to guide and train DFU staff and provide support to its CEO. Overall, the design of the project was determined by the objectives of the Loan. Considerable preliminary work had been done, as mentioned earlier, in putting all these elements into place by the time the Apex Loan was approved. 5.18 The broad rationale for the Bank moving away from its past practice of providing funds to a single DYC for onlending to industry was mentioned earlier. This found further support in the Philippines in the financial sector reforms introduced by tb Government in the country, intended mainly to strengthen the banking system, encouraging banks to provide long-term financing to industry (to act as "expanded" banks intended to undertake universal banking operations), and promoting the establishment of investment houses and merchant banks to support investment in industry. B. PROGRESS IN 1EETING STATED OBJECTIVES Progress in Institution Buildin 5.19 Institution building in the case of an apex loan is at two levels: (i) at the apex unit level where the objective is to build up a capacity to appraise and supervise the PFIs which seek accreditation from the apex unit; and (ii) at the PF1 level where the objective is to build up the capacity o2 PFle to appraise and supervise projects financed by them. At both levels, the Apex Loan was successful in meeting the objectives. 5.20 (1) While the Apex Loan was under negotiation, DFU had vetted three PFle, DBP, PDCP, and PISO Bank, all of which had obtained loans from the Bank in the past. DFU's appraisals of these PFIs were found satisfactory by the Bank. Since the apex program began in August 1980, 11 PFIs have been formally accredited by DFU -- the first 3 by August 1981, 2 each in 1982, - 62 - 1984 and 1987 and 1 each in 1983 and 1985. The practices built up at DFU were of a high standard. Besides accrediting Pl, DFU monitored their per- formance, reviewed their project appraisals and supervision practices, and occasionally made visits to plants financed under the Apex Loan (paras. 8.06-8.11 of the attached Apex PCR). 5.21 (ii) The PPls built up satisfactory levels of project appraisal and supervision capabilities. In this, besides the support provided by DFU, some of the PFIs also benefitted by recruiting trained staff from other DFI. in the Philippines, in particular PDCP (see Chapter II). 5.22 The performance of the PFle, both under the Apex Loan and generally, was satisfactory. Of the total amount of US$76.9 million equivalent approved by the PPIs, PDCP accounted for almost half (US$38.4 million), with the others accounting for the balance (each of them under US$10 million) (paras. 6.06-6.07 of the Apex PCR). For the commercial banks (and their associated investment houses), the apex subloans were only one component of the total funds provided by them to their clients, with the banks considering such subloans just an additional service. External Constraints and Operational Autonomy 5.23 Two factors affected the actual performance of DFU and, thereby, the attainment of the Apex Loan objectives. Soon after the approval of the Apex Loan in 1981, and in particular after 1983, the situation in the country deteriorated sharply, leading to an economic recession and a sharp fall in the external value of the peso. This had three effects on the financial sector, particularly the PFIs associated with the Apex Loan. First, the demand for funds under the Apex Loan slowed down, thereby restricting the volume of business anticipated under the Loan (and, consequently, the demand from more PFIs for accreditation under the Loan). Second, the performance of subprojects under the Apex Loan deteriorated at the same time as the peso obligations of the subborrowers under the Loan increased. Third, as a result, the portfolios of many of the PFIs deteriorated and with it their financial stability. 5.24 Four of the accredited PFIs ran into especially serious financial problems during the mid-1980s. DBP had portfolio problems because of its behest loans, which has since been dealt with under its reorganization by separating the contaminated portfolio from its other accounts (see Chapter III) .62 PISO Bank, the second largest user of the Apex Loan (after PDCP) for an amount of US$9.7 million, was unable to withstand the economic crisis of the early 1980s, was put under receivership early in 1986, and is now in liquidation. An amount of US$6.7 million equivalent from the Apex Loan remains outstanding for recovery under the liquidation proceedings. Manila Banking Corporation (anilabank), which expanded rapidly in the early 1980s, ran into difficulties reportedly due to overexpansion and problem- loans in agriculture. It was put into receivership in May 1987, and court proceedings for liquidation are in progress. Almost its whole borrowing (US$3.2 million) under the Apex Loan is still to be recovered. PDCP, backed I DBP's financial difficulties led to its losing its accreditation under the program before it could use any of the Apex Loan. - 63 - by competert management and a strong diversification effort and also se support from the Central Bank, has so far been able to ride out the period, but only by nearly freezing its lending activities (see Chapter 11). Detaila of the performance and accounts of each PI under the Apex Loan are given in Section I and Annex M of the attached Apex PCR. 5.25 The main impact of the external constraints was to deny the pro- jected momentum to the apex lending process, and thereby to inhibit institu- tional development of DFU and term lending operations of the PPIs. DIU con- tinued to appraise and accredit PFIs, in part to make up for the failure of some of the already-accredited Pile to utilize fully the lines of credit they had been given. The PFls were faced with a faltering demand for the apex funds and some had difficulties in obtaining repayments under loans made from such funds. The institution building objective, both for DFU and for Pits, was nevertheless achieved even as the Apex Loan was performing poorly due to external constraints. The external constraints also frustrated the full use of the complementary commercial banking loan arranged by the Central Bank for DFU simultaneously with the Bank Loan, and inhibited it from negotiating further funds for that purpose. 5.26 DFU had considerable autonomy in the exercise of its functions, and its autonomy was not compromised by interference from the Central Bank. However, it remained subject to constraints inherent in its role of accredi- tation and the position of its CEO within the central banking staff. In particular, the association with the Central Bank restricted DFUi's freedom to deny accreditation to a PFI as this would have been perceived to be lack of Central Bank confidence in the PPI even when such refusal could have been purely on technical grounds (like the PFI's appraisal or supervision capability). In this respect, there was a conflict of role between the Central Bank's regulatory and inspection functions and the developmental role inherent in the new DFU function.63 Second, while the DFU CEO head was given direct access to the Governor of the Central Bank, his position within the Central Bank' s permanent hierarchy remained anomalous, being created at World Bank instance but not in furtherance of the established functions and staff positions of the Central Bank, and dependent mainly upon the personal discre- tion of the Governor. With increasing economic difficulties in the country, the attention of the central banking authorities was taken up more with its economic and regulatory functions than with ensuring the functioning of DFU. Utilization and Effectiveness of the Techtcal Assistance Proiram 5.27 The project itself had no technical assistance component. However, given the fact that the proposed function was new to the Central Bank and was expected to need strong professional support, UNDP had agreed to provide, under its program oi technical assistance, the services of a Technical Advisor for DFU, with the Bank acting as Executing Agency. 5.28 The main role of the Technical Advisor was to help train DFU staff in their appraisal of financial institutions for accreditation and in their supervision and monitoring of the subloans, and to advise the CEO of DFU in 6/ The Central Bank has a different view; see Attachment 3. - 64 - carrying out his functions. Besides providing advice to DFU, the Technical Advisor also conducted seminars on project appraisal, supervision and other aspects of project financing for PF1 staff. UNDP technical assistance was also used for training DFU and P1 staff locally and abroad (see para. 8.04 and Annex I of the Apex PCR). 5.29 Overall, and given the pioneering nature of the role in the Philippines context, the technical advisory function was carried out remark- ably well. Much of the training provided was in the nature of enabling DFU staff to learn on the job, with guidance and corrective suggestions from the Technical Advisor. Moreover, manuals were prepared both on accreditation application requirements and procedures for DFU, and on monitoring of sub- project appraisal and supervision practices of PFle. Further, by building up a good rapport with DFUl' CEO, the Technical Advisor was able to discuss candidly with him problems of DFU and of the Apex Loan, which could be taken to the Governor of the Central Bank if necessary. The success of the tech- nical assistance program owed much to the professional expertise and under- standing of the Technical Advisor and the support and cooperation of DFU staff and of the central banking authorities. Sector Policy Dialoxue 5.30 One of the major objectives of the Apex Loan was to enable the Bank to focus its dialogue with the country on policy issues relating to the financial and industrial sectors, a process which had already been initiated following the Bank's reports on financial sector reform64 and its 1980 and 1983 structural adjustment loans.65 There appears, however, to have been little activity, beyond that inherent in the use of apex funds, in furthering a policy dialogue. This was partly because of the political dimension in the economic crisis which overtook the country after 1983 and of the sharp depreciation of the peso after the Apex Loan was approved. These isses were resolved only in 1986, when the country resumed the reform process inter- rupted during 1983-86, and the economy began to grow again. The Bank played an active role at this stage in the process through its lending program which straddled economic, industrial, and financial sector reforms, in addition to dealing with foreign debt and other issues inherited from the 1983-86 crisis. The sector dialogue thus took place in the context of the new lending program rather than the supervision of the Apex Loan. C. OPERATIONAL AND FIWANCIAL PERFORMANCE Operational Performance 5.31 The activities of the DFU revolved around the accreditation of financial institutions, supervising their activities in relation to sub- projects financed under the Apex Loan, and representing to the Central Bank issues arising out of the use of apex funds. 641 See footnote 3 on page 5. g/ The experience with SAL I (Loan 1903-PR approved in 1980) and SAL II (Loan 2266-PH approved in 1983) is reviwwed in PPAR No. 5813, dated July 31, 1985. - 65 - 5.32 Siting the DFU in the Central Bank vas a mixed blessing. On the one hand, the Central Bank link provided DFU with the status and Impartiality required to ensure confidence for DFlI, commercial banks and Investment houses to seek accreditation under the Loan. Moreover, as difficulties, particularly those arising from the depreciation of the peso, began to emerge, PMle were able to convey to the Central Bank through DFU their problems, and the Central Bank provided support to DFU and PFIs by asking rulings, particularly those relating to denomination of specific portions of the Apex Loan used for local purchase in local currency terms and to avoidance of cross-currency risks by restricting foreign exchange risk on non-US dollar disbursements to US dollar equivalent. On the other hand, the DFU felt constrained in its accreditation decisions as a refusal to deny such accreditation to a bank, coming from a unit within the Central Bank, might have adverse implications for the bank in its commerc"al banking operations.66 On balance, though, the DFU operated well. Financial Performance 5.33 The Central Bank, as the Bank borrower, was liable for repayment of the Loan. In onlending funds to PFIs, it was entitled to charge an adminis- tration fee of 0.75Z. DFU was required under the Loan Agreement to maintain a separate accounting system relating to apex funds. The Central Bank, in an attempt to promote the use of the apex funds in the face of growing foreign exchange risks, offered (with Bank approval) various facilities to PFIs and their subborrovers, in particular, local currency and single-currency (US dollar) denomination options. This resulted in the DFU account not being a purely pass-through self-contained operation as originally envisaged, but a relatively independent accounting operation involving not obligations due to foreign exchange gains and losses. 5.34 While the DFU financial statements formally show a positive balance, when account is taken of foreign exchange losses under the various terms on which apex funds were advanced, the apex account shows a net deficit, and is projected to close out with a deficit. For an account of the financial position of DFU, see paras. 9.02-9.04, 9.07, 9.11-9.12 and Annexes R and L of the Apex PCR. Utilization of Bank Funds 5.35 DFU had already lined up three PFl9 for lines of credit at the time the Apex Loan was approved; additional banks and investment houses were also being appraised at that time for accreditation. However, as mentioned earlier, the demand for investment funds declined sharply in the country, particularly after 1983, both as a result of the economic difficulties and of the large depreciation of the peso. As stated earlier, the Central Bank initiated various measures to improve the utilization of funds under the Apex Loan. These measures comprised: (i) broadening the purposes for which the funds could be used; (ii) reducing the uncertainty or cost of the foreign exchange risk; and (iii) providing carry-over mechanisms to relieve the sub- borrower of the additional peso cost of repayment under the apex borrowings. Under (i) the measures included use of apex funds for financing inventory and 6/ The Central Bank has a different view; see Attachment 3. - 66 - for refinancing of earlier loans that were on more onerous conditions (in terms, for example, of interest rates or amortization schedules). Under (ii) the measures included: (a) provision of a peso-denomItated facility for export-oriented or Import-substituting projectes (b) total dollar-denomina- tion for apex funds, thus seeking to eliminate liability in unwanted (bard) currencies and cross-currency risks; and (c) a forward cover facility on a swap basis for covering dollar-peso fluctuations. Under (iII) borrower, were provided with peso funds to cover additional requirements for pesos arising from its depreciation at the time of repayment under the Apex Loan. These and other measures taken by the Central Bank are discussed more fully in the Apex PCR (paras. 6.03-6.04). 5.36 Still, many PFIs were not able to use the full lines of credit made available to them, and large amounts were cancelled. Both the Apex Loan and the complementary commercial bank loan were thus not fully utilized. The funds under the Apex Loan moved tortuously slowly, the Closing Date for the Loan having to be extended for a total of four years, and more than two- thirds of the amount eventually was cancelled. The commercial bank loan, with its less restrictive conditionalities, was utilized more fully, with US$10.0 million cancelled by end-August 1985. 5.37 The decline in demand for funds in the country is evident from the fact that, while the actual total credit approved to PMle under the overall financing (US$250.0 million) amounted to US$292.0 million, subloan applica- tions received totalled only US$183.5 million equivalent (for 123 subproj- ects), those processed and approved totalled only US$130.1 million equivalent (98 subprojects), and the amount actually disbursed was only US$76.9 million equivalent (69 subprojects) (see paras. 6.08 and 8.06 of the PCR). 5.38 Of the 69 subprojects financed, 7 were above the free limit (US$4 million) and required Bank approval, and 29 were below the free limit set for the PFIs and thus did not require the DFUl's approval. Almost half the projects were in the greater Metropolitan Manila area, explained by the size of the subprojects and the existing concentration of industry in that region. The subprojents, all but 3 of them expansions, created more than 7,800 jobs, with an investment per job created of about US$20,000 equivalent. For a sample of subprojects for which PRRs and BRRs were calculated after comple- tion, the FER ranged from 161 to 1212 and ERRs from 282 to 12921; in two- thirds of the cases, actual FRRs and ERRs were higher than those projected at appraisal. Details of the iase of Bank funds (loan size, industrial classifi- cation, and regional distribution) are given in pares. 6.10-6.15 and Annexes C, D, and E of the Apex PCR. They show that the objectives of broadening the use of Bank funds, both in terms of PIs eligible and sub- project distribution, were met, despite the difficult economic climate in the country, justifying the Bank's apex approach to DEC lending. 5.39 Disbursements involving Bank funds amounted to US$44.6 million equivalent for 64 subprojects (with 5 subprojects being financed exclusively out of the commercl.al bank loan and a mix of 60:40 Bankscommercial loan funds for the other subprojects). Of the Bank funds, almost half (US$20.7 million) were provided in local currency, indicating the Important role which local currtncy denomination played in the demand for, and utilization of, Bank funds (Table 3, Apex PCR). - 67 - 5.40 The unfavorable economic climate appears to have bad a greater impacc on the volume of demand for funds than on the overall performance of the subprojects under the Apex Loan, as shown by operating data on a sample of subprojects (Apex PCR, pares. 7.02-8.06) and also their repayment record (Apex PCR, paras. 9.05-9.06). Two qualifications, however, need to be made on the repayment record. First, a large part of the apex funds (see pars. 5.34 and 5.37 above aud Apex PCR, Table 3) was denominated in local currency, and such repayment, by obviating the foreign exchange risk for the subborrower, does not reflect fully the repayment obligation (and, therefore, the repayment capability) of the subborrower under normal Bank DFC loan arrangements. Second, in the case of commercial bank PFls, the Central Bank followed the practice of debiting the banks' demand deposit accounts with the Central Bank for the amounts due (Apex PCR, para. 9.05). Moreover, it was commercial bank practice to debit their clients' working capital accounts for amounts of apex funds that were due, irrespective of whether the subborrowers had made specific payments of the dues, in order to maintain good standing with the Central Bank. As a result, actual defaults under the Apex Loan were small and confined mainly to non-bank-associated investment houses, in fact, mainly PDCP (Apex PCR, para. 9.05).67 D. FINDINGS AND LESSONS Overall Assessment 5.41 The main objectives set under the Apex Loan, namely, building up capacity within the country to appraise and monitor financial sector institu- tions, broadening the range of financial institutions capable of providing long-term project finance, and distributing Bank funds over a wider indus- trial clientele than in the past, were achieved, in soite of the fact that less than one-third of the Loan was actually drawn. The dialogue on finan- cial and industrial sector issues was maintained but primarily through the Bank's other lending activities and particularly after 1986 as the economic environment improved and became more amenable to such dialogue. Role of Bank 5.42 The Bank had a positive impact on the DFU and, through it, the financial institutions which participated under the Apex Loan, in particular through the UNDP technical assistance project for which the Bank was the Executing Agency. Bank supervision effort was focussed and was, to an extent, eased by the technical advisory arrangement. Sustainability 5.43 Accepting the need for continued Bank lending to the industrial sector in the Philippines, the apex lending process offers major advantages in relation to the earlier system of lending to a single institution. The .61 The Central Bank suggests that the two or three defaults experienced by PDCP were due to its taking greater risks in pursuing its development objectives see Attachment 3. - 68 - process, therefore, Is sustainable, and has, in fact, been resumed through a further loan (Loan 3123-PB, the Industrial Investment Credit Project approved in October 1989). Findings and Leasoa 5.44 The main finding is that the apex arrangement, in particular, the apex unit reporting directly to the Governor of the Central Bank, did not function as effectively as envisaged, partly as the Central Bank* other functions -- monetary and external account management -- had priority over the administrative function of overseeing the apex unit, and gained greater significance for the Centval Bank within the context of the economic crisis which the country faced after 1983. The Bank also failed to foresee the potential conflict between the Central Bank's role as a monitor of the banking system and the apex unit's right to deny accreditation to a financ;.4 institution.68 To an extent, this was an issue of perception which - Central Bank could have eased by sensitizing the financial institutions on the differences between the two processes and the issues involved in the accreditation requirements. It is necessary, however, to emphasize that siting the apex unit within the Central Bank induced confidence among PFle in giving data to it for accreditation purposes, and an apex arrangement needs to keep this requirement of PFIs for confidentiality in mind as an important factor in selecting an appropriate borrower for an apex loan. 5.45 The main lesaon arising out of the Apex Loan, which is also brought out in the Apex PCR (Section II of Summary and Conclusions), relates to the foreign exchange risk under Bank loans. This problem has affected a large number of the Bank's DFC loans in many countries, as exemplified in the recent review of DFC loans in Turkey.69 5.46 Taking the case of this operation, the Apex PCR calculates that in US dollar terms alone, the principal outstanding under the Apex Loan had increased from a nominal value of US$43.8 million to a December 1988 value of US$66.1 million. However, of the total incr-ase of US$22.3 million equiva- lent, the Central Bank is entitled to recover from the PFIs only about US$4.0 million, leaving the Central Bank to cover US$18.3 million equivalent from its own resources (see pares. 9.10-9.11 and Annexes K and L of the Apex PCR). The question of how to handle the foreign exchange risk on D1C-type loans is an issue which the Bank needs to examine in depth. 5.47 The main impact of the Bank's policy of passing the currency risk to its DEC borrowers (and of these borrowers passing it to their subborrowers) has been to place a large number of DFCs and their subborrowers in financial difficulty and to discourage entrepreneurs in developing countries from in- curring any debt in foreign currency, both consequences harmful to the development process and, therefore, not in consonance with the Bank's developmental charter. This problem has been compounded by the Bank's dis- bursement practices involving various currencies at different times. _/ The Central Bank has a different view; see Attachment 3. _6/ Turkeys Five DFC and Industrial Sector Projects, ORD Report No. 7883, dated June 29, 1989. - 69 - sDX pDC AMp sun LONS Vt - FOMnI= ExcANcE RISK AMD 0STeas FOR DEC LENDING AND RESTRUCTURIN 6.01 The review of the six DFC and SMI loans covered in the earlier chapters brings out three issues whict overlie the Bank's DEC and SMI lending activities and provide a common thread to the diverse experience under these operations. These relate to the role of foreign exchange risk, the Bank's strategy for DFC lending, and methods of rehabilitating DEC.. These are discussed in the following paragraphs. A. FORIGN EXCHANGB RISK ISSUES 6.02 The major issues that the experience with these loans raise in respect of the foreign exchange risk relate to the Bank's practices in dis- bursing funds, selecting disbursement currencies and passing on the foreign exchange risk. These issues arise mainly in respect of Bank loans to DEC. for larger industry where the risk was generally expected to be passed by the DFC to the subborrowers. Under small industry loans, the foreign exchange risk was generally borne by governments even when the loans were made to DECs. Zgrformance Under SMI Loans 6.03 Subloans from the SKI loans to subborrowere were denominated in pesos with special provisions relating to interest rates to be charged, and the foreign exchange risk was borne by the Government. No estimate of the actual cost of these loans to the country in local currency terms is available as no separate arrangements for determining the actual peso cost of the Bank funds were made, in distinction to the nominal peso cost borne by the subborrowere. However, an indirect estimate of such cost is available for the period 1982-1987 in respect of PDCP V, which showed that the cost of Bank funds over the specific period covered and in respect of the specific currencies disbursed and repayments due (all of which would be different in the case of the SKI loans) vas 34% per annum.70 In the case of SMI loans, with the principal and interest designated in pesos, the annual cost of Bank loans to the subborrowers was the peso interest rate payable, generally about 15 to 7J/ This rate is a compoun% of the currency depreciation on principal and interest and the nominal rate of interest charged by the Bank. Assuming, for example, a nominal interest rate of 81 on Bank funds, the additional cost due to peso depreciation, in respect of the currencies used by the Bank under that Loan, amounted to 26Z per annum towards interest and principal repayments on Bank funds. See Annex 8, PCR for PDCP V. - 70 - 181. The anwe to the question of whether S subberrowers would have been able to repay their subloans at the higher cost if the foreign exchange exposure had been included Is hypothetical, but is likely to be negative. Loans to Larier Industry 6.04 Under the loans to PDCP and DBP and the Apex Loan for onlending to larger industry, the foreign exchange risk was borne by the final subborrower, the loan-using enterprise. This milt notionally seem appropriate as the subborrower, being the user of the resources and also benefitting from the price rises for the products made with the use of the Bank'. funds, should legitimately be expected to return the resources used by his. 6.05 This system worked well before the early 1970s when exchange rates were stable. In such periods, there was little difference between borrowing and repaying in local or foreign currencies as the amounts payable remained roughly the same. A mildly inflationary situation provided a small advantage to local currency borrowers as the real cost of repayment declined slightly. The consequences of the occasional, once-in-years, exchange rate depreciation were absorbed by the subborrowers through some belt-tightening and with tem- porary relief measures from the lender (mainly reschedulinge) to tide over the Immediate problems of enlarged payments in local currency on the principal and interest account. The position in this respect, however, changed dramatically when U.S. delinked its currency from gold in October 1971 and, in particular, after the oil price rise in 1973: the economic situation became more volatile and the amplitudes of swings in economic indicators (prices, exchange rates) larger. Exchange rates in developed countries became fluid, and many govern- ments which had followed fixed exchange rate policies, facing such a situa- tion, were willing, or forced, to make adjustments to their currency values to keep up with the economic situation. The movements in exchange rates for four currencies (DM, yen, Swiss francs and peso) in relation to the US dollar for the years 1971 to 1988 are shown in the following Table 8. I 71 Tbl8s EXCRANGB RATES, 1971-88 in Swidog an Phili*a Paso (per US$1, period average) 1971 3.49 349 4.13 6.43 1972 3.19 303 3.82 6.67 1973 2.67 272 3.16 6.76 1974 2.59 292 2.98 6.79 1975 2.46 297 2.58 7.25 1976 2.52 297 2.50 7.44 1977 2.32 269 2.40 7.40 1978 2.01 210 1.79 7.37 1979 1.83 219 1.66 7.38 1980 1.82 227 1.68 7.51 1981 2.26 221 1.96 7.90 1982 2.43 249 2.03 8.54 1983 2.55 238 2.10 11.11 1984 2.85 238 2.35 16.70 1985 2.94 239 2.46 18.61 1986 2.17 169 1.80 20.39 1987 1.78 145 1.49 20.37 1988 1.76 128 1.46 21.10 Soures International Financial Statistics. 6.06 In this situation, the past symmetry between domestic currency bor- rowing and foreign currency borrowing broke down in terms of the payment obligations (interest, installments on loans) involved. Prices or profits did not always rise in keeping with the falling external value of the cur- rency, and often the supporting or insul-ting measures taken by the govern- ments undertaking devaluations ("temporary" price freezes or controls, higher taxation, monetary tightening), reduced the entrepreneurs' ability to pas* on cost increases to the buyers or to retain higher profits earned in Infla- tionary situations. Entrepreneurs did not see themselves as causes of the deteriorating economic situation but only as victims of forces (including, sometimes, of economic mismanagement) over which they had little control. They were caught beteen the Bank's requirement to bear the foreign exchange risk on their Bank-financed subloans and the governments' responses to a deteriorating economic environment. 6.07 With currency values being no longer fixed hut determined on a free market, inter-currency values also changed in the early 1970s within the developed country group; the US dollar was weak in relation to the D1, the yen and the Swiss franc in this period, this being the initial Impetus to the delinking of the dollar from gold in 1971. Apparently in some cases the Bank - 72 - disbursed the harder currencies (DM, yen, Swiss fra:Ac) in these years on its DFC loans (for example, to PDCP), and the local currency cost of such die- bursements vas higher to the subborrower than disbursements in US dollars would have been. As an example of this practice, the mix of currencies dis- bursed under PDCP IV with their US dollar equivalents is given in the following Table 9. Table 9: CURRENCY DISBURSEMENTS UNDER PDCP IV (all figures in '000) Currency US Dollars Aount or Equivalent Deutsche mark 15,872 7,620 Japanese yen 732,820 3,401 Netherland guilders 2,459 982 South African rand 581 667 Swiss francs 12,526 6,442 US dollars 10,153 10,153 Other Currencies* 523 29,788 *Australian dollar, French franc, Indian rupee, Irish pound, Malaysian ringgit and Taiwanese dollar, each below the equivalent of US$500,000. ggrgs World Bank, Borrowers' Current Currency and Repayment Position. 6.08 Under this system, the DFC was liable to repay the amounts in the specific currencies disbursed to it. The DFCs in turn were expected to pass on the risk in these exact terms to their subborrowers, making them liable for the specific currencies in the amounts borrowed by them. A subborrower was thus saddled with debt in a currency which had appreciated more than others (as was the case with DM, yen and the Swiss franc in relation to the US dollar in the 1970s), and he paid the same interest rate irrespective of the currency disbursed to him. 6.09 The Bank sought to deal with the specific currency aspect of the foreign exchange risk problem by introducing currency pooling arrangements for its DFC loans, seeking in effect to fix a DFC's liability as a mix or average of currencies. For example, under the currency pooling system (CPS) introduced in July 1980, the Bank expressed DFC loan liabilities in four specific currencies (US dollar, DH, yen, Swiss franc) with the US dollar veightage at 50%. This alleviated the risk 2.nherent in disbursement of a single hard currency to a subborrower, but still left him with a variable, and generally rising, repayment liability in a domestic situation which hardly cepensated him for their risks. - 73 - 6.10 The Bank agreements with DPCs provided for DFCs being liable to repay their loans to the Bank in the currencies disbursed, and required the DFC. to pass on the foreign exchange risk, so incurred, to their subbor- rowers. In the case of some DMCe, the Bank up to 1976 in practice used only US dollars for disbursement and, for many othere, to the extent possible, currencies of countries in which purchases were made by the DFC subborrowers. In 1977 the Bank began to follow its (then) standard practice for other Bank loans and disburse for DFC loans whatever currencies were available to it at the time of disbursement. This created problems, particularly for privately owned DeC. onlending to private sector borrovers, and the Bank introduced in mid-1979 for D?Cs only a currency pooling arrangement with a 50 weight for US dollar and 501 for DN, yen and Swiss francs. This pooling system was replaced in 1981 by one covering all currencies the Bank dealt in and applying it to all Bank loans. The pooling arrangements -- currency risk and the weights of the different currencies -- have varied over the period, with the latest change being made in January 1989. 6.11 These pooling arrangements, however, created their own problem. for the Bank's DEC borrowers (and the DEC.' subborrowers) as experience under the loans reviewed in this PPAR shows. Disbursements, repayments and out- standings as at December 31, 1989, with the number of currencies involved, and the US dollar equivalents for each Loan after the current currency pooling arrangements were introduced are given in the following Table 10.71 The last column shows the increase (in US dollar equivalents) in the borrowers' obligations under the loans (at exchange rates prevailing as at December 31, 1989) as a result of cross-currency exchange rate movements. Table 10s DISBURSEMENTS, REPATHENTS AND OUTSTANDINGS* (US$ million equivalent) (1) (2) (3) (4) Loan No. Proiect Disbursements Regavments Outstanding Increase 1514-PH PDCP V 29.32 (4) 22.38 (4) 8.75 (3) 31.13 1572-PB DBP III 71.24 (5) 52.89 (5) 28.34 (2) 81.23 1727-PH SM II 24.92 (5) 22.70 (2) 20.79 (24) 43.49 1984-PB Apex I 44.61 (7) 1.41 (3) 63.66 (43) 65.07 2169-PR SI1 III 63.25 (8) 13.13 (2) 80.27 (43) 92.38 *(a) The figures under columns (1), (2), and (3) are US dollar equivalents in each category, with the figures in brackets indicating the number of currencies for which the US dollar equivalent figure stands. (b) The rates of exchange used are those for the dates on which each transaction (disbursement, repayment) was made. (c) The figures in the column under outstanding represent the US dollar equivalent as at December 31, 1989, for the specific currencies outstanding under each loan. Souaes World Bank, Borrowers'.Current Currency and. Repa0ment Position. ZL/ PDCP IV is excluded as it did not come under the pooling arrangement. - 74 - 6.12 The Bank's currency disbursement practices have affected its DYC borrovers adversely in at least four respects since inter-currency exchange rate movements became significant from the early 1970s. First, in the days before the pooling arrangements were introduced and the Bank used diverse currencies in its disbursements to DFCs, the borrower was not informed of the currency or currencies which the Bank would use till after the disbursement was made under the loans with the bank's stock of cur-encies available for disbursement being different from the currencies in which the borrower made his purchases, the generally protective practice under which in earlier days the Bank used the US dollar or the currency of the country of purchase for its disbursements was no longer available. At the same time, second, a bor- rower was likely to be saddled with debt in a currency which appreciated more than others (as happened with PDCP clients who got disbursements in DM under PDCP IV) . As the Bank charged a uniform rate of interest on its loans, irrespective of the currencies it had disbursed solely at its own discretion, a borrower was not able to set his currency risk off against the market interest rate on such currency (as strong currencies carried a lower interest rate). Third, because the Bank denominated its loans in US d4llars, it some- times happened that the dollar equivalent amount proved inadequate to cover purchases from non-US-dollar sources, even with pre-disclosed firm quotations at which borrowers made their purchases, in cases where the US dollar depreciated in relation to the currency of purchase.72 Fourth, when multiple currencies were outstanding, the Bank retained the right to call any combina- tion for repayment on due days, with no advance warning given the DFC (or its subborrower). 6.13 It is thus apparent that the Bank's disbursement practices not only affected borrowers adversely, but they also had an arbitrary and unequal, sometimes discriminatory impact on them, depending upon the currencies which the Bank chose to disburse at any one time. The Bank's attempt to equalise the treatment of DFC subborrowers through currency pooling, initiated in the early 1980s, proved only a palliative in such an environment of fluid exchange rates.73 However, the Bank still charges a uniform price for differe- Aated commodities (different currencies) with varying market-deter- mined prices (interest rates) and this issue deserves further consideration by the Bank. Experience Under the Philippines DFC Loans 6.14 The foreign exchange risk borne by DFC clients (and, therefore, at one remove, by the DFCs themselves as being dependent upon the repayment 22I Yugoalavia: Kikinda Iron Foundry Expansion Project, OED Report No. 2103 dated June 20, 1978, paras. 2.02-2.07. ZjI The Bank has under consideration a policy under which it would agree to its DFC loans being onlent to subborrowers in local currency terms, provided the country has a relatively open financial sector and the rates of interest in the country are market-determined. - 75 - capacity, and therefore the viability, of their borrowers) is illustrated by the eerience of both the PDCP loans and the Apex Loan reviewed in this PPAR.74 6.15 PDCP became vulnerable to uneven changes in currency values in the 1970s under PDCP IV when the Bank borrowers were subject to the foreign exchange risk on the specific currencies disbursed.75 The Bank disbursed various currencies, among them such "hard" currencies as DM, yen and Swiss franc, which had appreciated in relation to the US dollar in the 1970s (see Table 8 above). Under a weakening US dollar, borrowers, made liable to pay- ments in such currencies, had to pay in US dollar terms, and therefore in local currency terms, even larger amounts than if they had borrowed in US dollars. This issue was already being reflected in the portfolio problems of PDCP; the 1977 SAR had noted PDCP's difficulties arising from DM disburse- ments.76 6.16 The introduction of the currency pooling arrangements since 1979 mitigated the impact of single "hard currency" disbursements but, in the environment of the early 1980s with increased currency volatility, the pool actually worsened the overall problem faced by the DrCs. The increasing liabilities involved in the more frequent and larger currency changes in the 1980s is evident from an estimate of the effective cost to PDCP of funds under PDCP IV (approved in 1976 and disbursed mostly in the 1970s) and PDCP V (approved in 1978 and disbursed mostly in the 1980s)3 the effective cost of PDCP IV was 18%77 and of PDCP V, 34%.78 6.17 Moreover, as the US dollar depreciated in relation to the other currencies in the CPS in the 1980s, the liabilities of DFC subborrowers (and, therefore, of DECs) continued to rise overall in US dollars (though at a pace slower than if the whole disbursement had been in these other currencies). Table 9 above shows the increase in US dollar equivalents under five of the loans reviewed in this PPAR. The PCR for the Apex Loan estimates that the US dollar equivalent of disbursement under the CPS, with 50% disbursement in DM, yen and Swiss francs, had increased by US$22 million over 1982-88 (Apex PCR, para. 9.11). 7/41 These issues, of foreign currency risk and particularly of cross-currency risk, ata dealt with in detail, as is to be expected, in the Borrower- prepared (Central Bank Apex Unit) PCR on the Apex Loan. See, in particular, paras. 6.03-6.04, 9.08-9.13, 11.07, 11.09(a) and (b). 751 The pooling arrangements were introduced under PDCP V and subsequent DYC loans. ZJ/ Philip2ines - Staff Appraisal Report on the Private Development Corporation of the Philibpines, Report No. 1784-PR, dated December 14, 1977, paras. 3.50-3.53. ZZ/ OED Report No. 4565, op. cit., para. 5.12 and Annex 7. 3/ ORD Report No. 7997, op. cit., para. 3.10 and Annex 8. - 76 - 6.18 The depreciation of the peso in relation to the US dollar (see Table 8 above) affected the DEC borrowers in two ways under their Bank bor- rowings: first, by way of an increase in the peso equivalent obligations against the US dollar, end second, by way of an increase in the US dollar liability (because of US dollar depreciation in relation to the other curren- cies). For example, the peso equivalents for disbursements in US dollars increased by 2.5 times and for disbursements in the yen by 4.5 times by 1987 in relation to their rates in 1981.7 Since 1986 the pes has been relatively stable in relation to the US dollar, but inter-currency movements, particularly among the developed countries' currencies, still remain large. As a result, all large subborrowers under the Bank loans hare been affected adversely, with those with liabilities in non-US-dollar currencies affected even more adversely. DFC Reaonses to Subborrower Problems 6.19 The cross-currency risk (between the US dollar and the other cur- rencies which the Bank used for disbursements) thus became a serious issue for the DFCs and their subborrovers even after the introduction of the cur- rency pooling arrangements. The DFCs covered in this PPAR sought to meet these risks in two ways. Under the Apex Loan (for which the Central Bank was the borrower), the Central Bank introduced for some subloans a local currency option, in effect transferring the whole foreign exchange risk on such sub- loans to the Government. It also introduced a US dollar option, thereby eliminating for such subborrowere the risk on the non-US dollar component of the currency pooling arrangements. Recently, PDCP sought, and was given, similar facilities on cross-currency risk by the Government. 6.20 In the case of the Philippines, in line with the Bank's new approach, the Bank has now accepted a local currency denomination system for its second Apex Loan, with the interest charged the subborrowere reflecting an insurance premium for the foreign exchange risk and the actual foreign exchange risk being borne by the Government.80 In the present situation of the Philippines this, in effect, is a market-determinad pricing policy, with the residual costs of changes in exchange rates being borne (or benefits taken) by the Government which is responsible for foreign exchange management. It should be noted, though, that the Government is assuming the foreign exchange risk because the financial system lacks adequate means to allow the intermediaries to handle the risk themselves. B. DFC AND APEX LENDING 6.21 PDCP was formed as a traditional DFC on the model which the Bank had initiated with Turkiye Sinai Kalkinma Bankasi (TSKS) in 1949, and honed through the 1950s with subsequently-formed DFCs like the Industrial Credit and Investment Corporation of India (ICICI) in 1955 and Pakistan Industrial Credit and Investment Corporation (PICIC) in 1958. It was expected that 121 Ib1iL, para. 3.10. 8Ll Staff _Anraieal Reort. Philiupiines - Industrial Investment Credit Polet Report No. 7823-Pf, dated September 5, 1987, paras. 4.10-4.14. - 77 - these DICs would fill a manifest gap in the financing of industry in developing countries by providing medium and long-term funds and, at the same time, help the development of the financial sector by mobilizing the required resources and broadening the supply of bonds and equity issues of companies on the market. The Bank sought to bmlp in this process by providing them with foreign currency loans for their julending operations and with technical assistance and advice. PDCP was fotr ; in 1962 on almost the same lines as the earlier DFC. and with the same objectives. Constraints with the Bank's DFC Model 6.22 While PDCP had access to foreign currency funds from diverse sources (the Bank, ADB, CDC and foreign commercial banks), it also became apparent that, within the context of the domestic financial sector in the country, it was not able to raise significant local currency resources to carry on its operations profitably in the domestic market.81 In its dialogues with the Government at the time of the several DEC loan negotiations, the Bank did not seek to obtain or support reform of the financial sector in the country to enable specialized financial institutions like PDCP to raise long-term resources on the market. One consequence of this was that the DFCs became predominately single-product firms -- not merely operators in long-term finance, but operators in long-term foreign currency finance. The conse- quences of this policy in respect to the foreign exchange risk have been discussed in the preceding section of this Chapter. 6.23 PDCP management strove strongly to deal with these problems and to mitigate their impact by diversifying into other activities, in particular, fee-based operations like syndications and cash management. PDCP's problems arose not from its management's performance or its attempts to diversify its operations; they arose mainly from an excessive dependence on foreign cur- rency operations, a dependence inherent in the model followed during its initial formation and its subsequent evolution. PDCP was, and remains, a specialist finance institution, lending foreign exchange and catering to the long-term financial needs of industry, and depending upon these activities for its profit base. 6.24 The real issue with PDCP, as with other Bank-initiated or supported DFCs, was the inadequate diversification of their resource base and of their business activities within a context of an underdeveloped financial sector (inadequate sophistication of business clients to engage in foreign currency obligations, reliance on the boutique character of specialization in rela- tively small undifferentiated market economies).82 In this context, the Bank generally emphasized, at the time of each negotiation for a DEC loan, the DFC's need for supplementary local currency resources from the Government (which often the Governments enabled DFCs to obtain only on a two-year basis, 81/ See OED Report No. 7997, opo cit., para. 5.17, for reasons why PDCP cannot raise and lend domestic funds on its own. 2/ See ORD Report No. 7997, op. cit., pares. 7.1 to 7.7, for an analysis of issues of domestic resources, exchange risk and sustainability as they faced PDCP. - 78 - as in India, Pakistan and Turkey), rather than inducing the Government to loosen the local currency capital market to enable DMCs to have free access to such resources for indepet 'ent operations in local currency. The Bank's flawed strategy In this regard touched many DICs.83 Anex Leadina Stratezy 6.25 As tima vent on, the Bank also found that DYC operations were con- centrated mainly in major metropolitan centers and sometimes with a limited industrial clientele.84 When the Bank sought to reach 81 through its loan operations, it found indirect (or apex) lending through a group of commercial banks and financial institutions a natural instrument for providing such loans. The Bank adopted in the Philippines an apex lending strategy in the early 1970s for it. SMI lending, the agencies being IGLF, DBP, and the National Electrification Authority (NBA), the latter mainly for lending to cottage industries. The two 814 loan. (8H1 11 and III) reviewed in this PPAR are examples of this strategy. The strategy was extended to large industry lending fc-r the first time under the Apex Loan approved by the Bank, also reviewed in this PPAR. 6.26 Apex lending offers advantages not merely in ensuring broader dis- tribution of Bank funds, but also in providing a greater stability and depth to the Bank's DFC lending through the use of established banking and other financial sector channels. Such loans also help broaden the Bank's role in institution building and financial sector development. The performance under the Bank's Apex Loan in the Philippines shows that the banks and financial institutions using Bank funds had less defaults or were more stable in the same environment which seemed to have overwhelmed PDCP. 6.27 One factor in the successful repayment experience under the Apex Loan is the fact that subloans made by banks and financial institutions (except PDCP) represented only a part of their overall loans and financial relationship with their subborrowers. With the total loan by the partici- pating bank to the subborrower being much larger and the relationship being much broader, the lender was better able to control the repayment experience under the Apex Loan by adjustments under the other components (working capital lending, security enforcement) of his dealings with his clients. This was also the Bank's experience in the Philippines in the 1970s with its SM lending. Thus, where an accredited financial institution has a broader lending base and relationship than that arising only through individual sub- loans out of Bank funds, the repayment experience under Bank loans has generally been satisfactory. Al/ See, for example, Turkey - Five DFC and Indstrial Sector Projects, OED Report No. 7883, dated June 19, 1989, pares. 81-82, 85. _4/ These limitations were brought out in one of the early ODD reports, Development Finance Companies, Report No. 485, dated July 26, 1974. - 79 - C. f = * 1 * *L ME 6.28 The experience of the loane reviewed in this PPAR also provides an insight into methods used to rehabilitate (or to rescue) institutions affected by financial or other difficulties. No such problems arose for banks and Institutions involved exclusively in handling SM funds a. in this case the foreign exchange risk was borne by the Government. In the case of the loans to larger industry through DFCs, though, as under DBP III, PDCP IV and V, and the Apex Loan, their subborrowers' difficulties in meeting their repayment obligations affected the financial position of the DFCa.85 6.29 The case of DBP, being Government-owned, is clearer to appreciate and was more capable of corrective action. DBP's portfolio problems arose out of its inadequate administration and procedures, including apparently a willingness to approve questionable loans requested by the Government. As a result, despite the safeguards introduced by the Bank to ensure the appropri- ate use of its funds, DBP's overall portfolio was contaminated, and its financial position became untenable by 1984. 6.30 Of the options considered to deal with this situation, namely, to wind up DBP, to write down its liabilities in keeping with its asset values, or to segregate such assets for separate management (with DBP left to con- tinue operating with the remaining portfoli*), the last was chosen for a variety of considerations. As a result, about 85% of DBP's assets and liabilities were transferred to a separate unit (APT), and its staff reduced by half, with DBP being able to continue operations with the balance. The following Table 11 shows DBP's position before and after restructurings: Table 11s DBP: SELECTED BALANCE SHEET ITEMS AND STAFF POSITION (Amounts in peso million) 1985 1m La 1. Paid-in Capital 18,208 2,500 2. Loans and Advances 27,451 5,271 3. Total Assets, Liabilities and Net Worth 72,004 9,503 4. Staff (number) 3,500 2,000 LA As at December 31. g/l The cases of PISO Bank and Manila Banking Corporation under the Apex Loan are conceptually different from the other PMls, as their difficulties arose from their other operations and management problems, and not their foreign currency borrowings, which were mainly from the Bank, as in the case of DBP and particularly PDCP. - 80 - 6.31 In fact, the solution found for DBP was to shift its problems to the Government, its sole shareholder. APT has been left with the problem project portfolio of DIP. However, while DBP has shown a profit since 1987 and has again been judged eligible for Bank lendings its future still remains a matter of speculation. In this situation, the Bank needs to, first, ensure that DBP stioke to wholesale operations to generate confidence among PIe about fair- ness and non-competitive behavior In the accreditation process under the Bank's second Apex Loan.86 Second, in view of the Bank's past experience with DIP, the Bank will need to exercise considerable firmness to assure DBP an autonomous position and vigilance to ensure that DBP does not revert to old ways. 6.32 The case of PDCP is different in nature, mainly because of its private ownership. It had, and continues to have, dynamic management which, over the years, diversified its activities and operations in response to Bank reviews,8 In particular, opening branches outside Metro Manila, undertaking SKI lending (mainly through borrowings from IO7), and undertaking various merchant banking activities, mainly fee-based activities like syn4ications and fund management. However, it remained a specialist operation dealing mainly in long-term financial operations which proved unviable within the country0s financial system, with its diversified activities contributing only a small part of its total income. 6.33 PDCP's capital base became inadequate to sustain its outstanding loans, and early in 1981 it sought an alliance with (in effect a virtual tske- over by) a commercial bank. As its outstanding loans were enlarged with the further depreciation of the peso after 1981, the commercial bank was unwilling to support the increase in liabilities with additional share capital, and its shareholding was transferred to PDCP's pension fund. 6.34 PDCP's equity base was intended to support lending operations, but, with increases in the peso values of its foreign currency obligations, it became inadequate to support its existing portfolio. At the same time, the income earned from fee-based operations was small and could hardly support an equity base geared to lending activities. PDCP's shareholding groups, unlike TSKB's,88 did not have the -sources to support it through its portfolio crisis, now seen to be in its final stages. With lending operations at a near Ail The future role of DBP and its retail operations in the financial sector in the Philippines is a subject of ongoing discussions between DBP and the Bank. AZI The Bank's main criticisms of PDCP related to the concentration of its operations in Metro Manila and its failure to diversify its sources of foreign exchange borrowing. C8/ Turkey - Five DFC and Industrial Se2tor Progects, Report No. 7883 dated June 29, 1989. paras. 76-79, 84-85, 87-88, 133-134. * 81 - standstill for lack of access to new resources, PDCP's problem portEq11o remaias large in relation both to its share capital and to its total port- follo.89 (Ses Chapter II for farther details.) 6.35 PDCP's attempts to attract additional share capital face difficulties in the light of its present financial situation. At the same time, with the shift of the Sank*' DEC lending to apex operations, the Bank no longer leads directly to PDCP (as it does to TSKB in Turkey), enabling it to maintain and increase its operations. PDCP's continuance, therefore, depends very much on its ability to access Bank funds through the apex lending agencies, thereby reducing the share of its problem portfolio in its total portfolio, and also Improving its financial position and thus attracting additional share capital. While DSP survived its 1980s crisis, PDCP still remains vulnerable to its after-effects. pjl In this respect, TSB was fortunate in being able to continue operations, with Bank and shareholder support, so that the sise of its problem portfolio has continued to come down. J,h., paras. 7e-79, 134. - 83 - six M AND SuI oAMS VII - SUMMARY AND CONCLUSIONS 7.01 The period covered by these loans, approved between 1974 and 1982 vith disbursement extending to 1988, has been a difficult one for the country. The oil price rise in the 1970s weakened the country's external accounts. However, the country was able to maintain economic growth during the 1970s, and there was relative price stability. The deficits in the external account were met by external borrowings. 7.02 This progress could not be maintained in the 1980s. The pressure on the external account was accentuated by large debt-service obligations on foreign debts not visely used, and GDP growth slackened in the early 1980s. This was compounded by an economic recession and political instability during 1983-86. The peso depreciated by 60% between 1980-84 and GDP growth was negative in 1984 and 1985. Political instability led to Goverament inertia in dealing with these problems. 7.03 It was only in 1986, with the resumption of power by a demo- cratically elected Government, that reform measures, supported by the Bank and the Fund, were instituted. The economic recovery since then has been rapid though the problems of a large overhang of foreign debt still remains. 7.04 Industrial and financial sector developments have followed these general economic trends. Industry made rapid progress in the 1970s, assisted by strong Government incentives and reform measures. However, industrial growth foundered in the first half of the 1980., and resumed only after 1986. Industry, supported by Bank loans and Government reforms, has made rapid progress since then, and industrial rehabilitation and expansion has led to the revival of investment in industry. 7.05 The Government introduced reforms in the financial sector in the 1970s to foster the flow of medium- and long-term funds to industry. The measures encouraged formation of universal banks and of investment houses. These developments were put on hold during the 1983-86 crisis but the process, backed by loans and advice from the Bank, was resumed after 986. The Bank has provided -oans for financial sector reforms as also loans to financial intermediaries for onlending to industry -- small, medium and large. 7.06 The PPAR covers two sets of loans: loans to SMI (SWI II and III and part of DBP III) and loans to larger industry (PDCP IV and V, part of DBP III and the first Apex Loan). The loan, were thus made directly to institutions (PDCP and DBP) and indirectly through apax arrangements (IGLY, DBP and DFU). Some loans also had strong technical assistance components, intended to - 84 - support the small industry promotion activities within the Government, to set up pilot plants and, through UNDP funds with the Bank acting as Executing Agency, to build up technical expertise. 7.07 The SI loan. performed well. The funds were disbursed to a large number of SMI unite through financial intermediaries, and the repayment record on them was good. The subloans generated substantial employment and were distr.buted broadly in regional terms. A large amount of funds was cancelled under SI III partly because of stoppage of operr one by DBP in 1984 but mainly because of the economic recession during 198.-86. The main factor in the success of the SI loans was the acceptance of all foreign exchange risk by the Government and the broad distribution channels used, particularly commercial banks which had other loan and business relationships with the SHI subborrowers. 7.08 The performance under the larger industry loans was mixed, partly due to the difficult economic environment in the country but mainly because of the requirement on the DFCs to pass the foreign exchange risk down to the subborrowers. PDCP IV and V and the larger industry component of DBP III were fully utilized, but a large part of the Apex Loan was cancelled because of the poor economic environment and the unwillingness of subborrowers, in the context of a rapidly depreciating peso, to bear the foreign exchange risk on subloans. Some of the movement of funds that there was under the Apex Loan was due to subloans for priority purposes being allowed to be denomi- nated in pesos or in US dollars, with the Government bearing the foreign exchange and the cross-currency (US dollar-non-US dollar) risk. The incapacity of the subborrowers to repay subloans on which they had agreed to bear the foreign exchange risk affected adversely their lenders, mainly PDCP, whose business was mainly in foreign currency lending. 7.09 PDCP has been dealing with, and is gradually recovering from, its portfolio problems, but its survival depends upon infusion of new share capital and access to additional resources for further operations. DBP stopped operations in 1984 because of the weight of its non-performing port- folio, and was restructured in 1986. Most of the other financial insti- tutions which had access to the Apex Loan have continued to operate because of their broader lending and business relationship. 7.10 Three broad lessons emerge from the review of these loans. First, the Bank policy on the foreign exchange risk has created repayment problems in an environment of exchange rate instability and affected the sustain- ability of those DFIs whose business was primarily in foreign currency loans. Moreover, it has also led to a drying up of demand for such funds from entre- preneurs. Second, the Bank's DFC model was flaved to the extent it led to specialization in foreign exchange lending, as the case of PDCP shows, and it is necessary for such DFCs to diversify their activities into local currency operations. The success of apex lending is because the DFIs and commercial banks used under it had such activities. Third, it was possible to restruc- ture DBP because the Government, as its owner, transferred its non-performing assets (and corresponding liabilities) to a new Government organization. PDCP, lacking sufficient shareholder support and access to further resources, has still to overcome its portfolio problems and prove its long-term sustain- ability. - 85 - PROJECT COMPLETION REPORT PHILIPPINES THIRD cS*MALL AND MEDIUM INDUSTRIES PROJECT (SMI III) (LOAN 2169-PH) January 31, 1990 Industry and Energy Operations Division Country Department II Asia Regional Office - 87 - PROJECT COMPLETIOR REPORT THE PHILIPPINES THIRD.- SMALL AND MEDIUM_ INDUSTRIES PROJECT (SI III) (LOAN 2169-PH) PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project..Identity Project Name: Third Small and Medium Industries Project (SMI III) Loan Number : 2169-PH RVP Unit : Asia Region Country : Philippines Sector : Small and Medium Industries 2. Background 2.01 The Small and Medium Industry (SMI) Sector in the Philippines is an important contributor to the manufacturing sector, accounting for 21% of value-added and 43% of employment in 1983. SKI firms are important in a wide range of manufacturing subsectors, contributing over 30% of value added in food processing, machinery and equipment, chemicals, rubber, printing, plas- tic products, furniture and wood products, and wearing apparel. Within these subsectors, about half of SMI activity is concentrated in two areas, food processing and chemicals. 2.02 Major industrial objectives of the 1978-82 Five-Year Development Plan included promoting small-scale enterprises, particularly in less developed areas; generating employment opportunities; and increasing the processing of domestic raw materials and the export of non-traditional manu- factures. Being labor-intensive, SMI were seen to be in a position to create employment at a low cost per job and simultaneously bring about a more equitable distribution of income. SMI were (and still are) an important element in the Government's countryside development program as they generally produce for local markets and are less dependent on infrastructure than is large industry. Furthermore, SKI often utilize indigenous resources and during the pre-project period were becoming increasingly export-oriented. 2.03 A variety of Government reforms implemented prior to the implementa- tion of the project were expected to have a positive impact on SMI develop- ment. Tariff reduction was expected to force local industries to be more cost-conscious and to promote subcontracting, largely involving SKI. It also was expected to enable cheaper and higher quality raw materials to be imported, and benefit such SKI-intensive subsectors as garments and leather. Provision of export financing, simplified export/import procedures and expanded access to bonded manufacturing warehouses were expected to encourage SKI to break into the export market. In addition, financial sector reforms undertaken by the Government starting in 1980 were expected to benefit SMI in two ways. First, the removal of interest rate ceilings enabled private financial institutions to assess charges for higher transaction costs and risks associated with lending to SMI. Second, the greater banking authority provided to thrift banks, which are largely located in rural areas, was expected to broaden the access to credit for SKI. 2.04 Elements contained in a Government- issued SHI Policy and Strategy Paper for the 1980's underlie various components of the SKI III Project: (a) To broaden the scope of financing available to SKI, the Government would adjust interest rates for SKI lending to be in line with prevailing market rates; develop additional financing schemes for the provision of working capital; and provide guarantee schemes to reduce the collateral require- ments for SKI borrowers. (b) The technical assistance agencies servicing SKI would cooperate to expand and strengthen such services as busi- ness counselling for individual firms or industry groups, the preparation of SKI project feasibility studies, and assistance in quality control and in gaining access to technology. The Government would increase its budget for technological research oriented towards SKI products and production processes, and would fund pilot projects to apply and test the results of these research activities. (c) The Government sought to assist SKI in identifying and establishing services that might be provided more economically through common facilities. 2.05 During the implementation period of the project, the Government operated a number of specialized loan programs to help SMI firms. Pre- eminent among these programs was the Industrial Guarantee and Loan Fund (ICLF) to which the bulk of the Loan funds were extended. While the Develop- ment Bank of the Philippines' Small and Medium Industries Lending (SMILE) Program and DBP's Department of Development and Rural Banks (DDRB) were also active in SKI lending at the outset of the project and were included as other major recipients (besides ICLF) of Loan proceeds, the programs were discon- tinued during the implementation period of the project because of the serious financial difficulties of DBP and its resulting worsening financial situa- tion. Only a small portion of the loan funds allocated to DBP were actually utilized; the majority were cancelled when financial programs agreed between DBP and the Bank failed to reverse DBP's financial difficulties (para. 5.01). 2.06 The IGLF, created in 1952, is a rediscount and guarantee mechanism operated by the Central Bank (CB) under which term loans (for fixed assets and permanent working capital) made to eligible SKI firms by accredited financial institutions (commercial banks, rural and thrift banks, private development banks and non-bank financial institutions) are rediscounted.1 IGLF also offers guarantees to cover credit and collateral short risks taken by the participating financial institutions (PFIs) on IGLF rediscounted loans. IGLF has to-date sourced its funds primarily from funds transferred from the Government budget and from World Bank borrowings. 11 The Central Bank points out that the 1M,Y is not a rediscount facility of the Central Bank, but utilizes the special time .posit scheme in channelling funds to end-users through accredited financial institutions; see Attachment 3. - 89 - 2.07 The Third Small and Medium Industries Development Project was a follow-on project from SHI I (Loan 1120-PH) and S41 1I (Loan 1727-PH). (Related Bank loans are listed in Part III, Table 1.) Under these loans, besides providing financing, the Bank helped institute several important changes in the operations of IGLF. Specifically, IGLF implemented the accreditation program under which financial institutions are approved for participation and eligibility for IGLF rediscounting of loans to SKI firms. 3. Project Objectives and Descri2tion 3.01 The SMI III Project was designed to broaden the provision of finan- cial and technical assistance to SMI within the framework of the Government's SKI sector strategy. By ensuring that term resources were available for the long-term financing needs of both the small and medium scale industry sectors, IGLF was to be a vehicle for providing employment opportunities, improving income distribution and regional development, and promoting exports and general economic growth. 3.02 The Loan, totalling US$132.0 million, consisted of three components: (a) the financing of the Industrial Guarantee and Loan Fund for on-lending through accredited institutions to SMI for fixed assets and permanent working capital (US$63.0 million); (b) a credit component for financing small and medium industry through the Small and Medium Industry Lending Department (SMILE) (US$27.0 million) and Department of Development and Rural Banks (DDRB) (US$21.0 million) of the Development Bank of the Philippines. The SMILE subcomponent was used to fund DBP's direct lending to SKI while the DDRB subcom- ponent was to fund DBP's re-discounting of SKI loans made by accredited private development banks (PDBs); and (a) an SMI technical assistance component (US$6.6 million) to be administered through the Department of Trade and Indus- try and divided into the following subcomponents: i) pilot projects (US$2.5 million), targeting the establishment of common facilities and the use of new or improved technolo- gies in priority subsectors; ii) equipment, vehicles, and reference publications (US$0.6 million) intended for up- grading the physical facilities and reference libraries of SBAC offices, and thereby improving the program's outreach; and iii) consultant's services, specialized training of BSMI staff and SKI entrepreneurs, and studies of major issues affecting the development of the SMI sector (US$3 -5 million). The Loan also included an unallocated portion (US$12.4 million) intended to be used to supplement funds of whichever credit component disbursed most quickly, and a front-end fee (US$2.0 million). - 90 - 4. Proiert Design and Organization 4.01 The IGLF component of the SMI III Project was basically well con- ceived. It enabled IGLF to continue to operate successfully with rapid growth and low arrears. The program operated on a model established under the Bank-financed SMI I and II projects, whereby IGLF accredited financial institutions and took the risk that in a general default those institutions may be unable to repay their obligation to IGLF. The PFIs in turn took the full credit risk on the final borrower. 4.02 The only aspect of the IGLF component design that needed subsequent revision was the structure for setting interest rates, which at the outset were fixed (para. 5.03). Although possible adjustments were foreseen, no regular mechanism was instituted to provide for review and alteration of the rates. The rates were felt to be more market-oriented than under previous Bank loans, since given the then projected rates of inflation of 10% and under, onlending rates were estimated to be significantly positive in real terms during the life of the project. 4.03 The fixed spread arrangement of the initial project design left IGLF vulnerable to volatile foreign exchange movements, which did in fact occur during the period of project implementation. The project coincided with a period of high inflation in the Philippines; although interest rates and accordingly the premium for foreign exchange were adjusted during implemen- tation, the adjustment lagged market movements. As noted in the Bank's July 1989 Report of the Task Force on Financial Sector Operations, "in an economy of market-determined interest rates and relatively open capital account, interest rates on local-currency loans would include an implicit premium reflecting the market's expectations of exchange rate change." However, because the IGLF rates did not change with market conditions, borrowers did not adequately assume the foreign exchange risk. 4.04 The design of the DBP portion of the project involved an element of risk, as was acknowledged during project appraisal. Possible problems were foreseen during preparation an' an action plan for DBP's financial improve- ment was designed. At the time of appraisal, DBP's performance was improving. DBP's arrears had improved to 16%, from 25% at the time of the SMI I loan, and were being further reduced under existing policy reforms and the proposed action plans outlined at the time of the SKI III Project negotiations. Revised refinancing policies, market rates of interest, strict foreclosure policies, staff training, and guidelines regarding Government- sponsored credit programs were being implemented. Under the project, funds to DBP's SMILE program were split into two tranches, with release of the second tranche contingent upon progress in implementing action programs, which involved upgrading project supervision systems, reducing loan processing time, meeting specific targets regarding arrears and portfolio quality, and implementing an MIS system. In spite of these efforts, however, the action programs were unable to prevent DBP's portfolio deterioration and liquidity problems, which caused most of the funds allocated to DBP under the loan to be cancelled. 4.05 The initial design of the technical assistance component of the project was defined only in broad terms with considerable detail left to be - 91 - elaborated during project implementation. The detailed design of this com- ponent rested on the shoulders of the implementing agency, DTI, which went through a major reorganization during the disbursement period. All of these factors combined to cause the component to proceed slowly. During implemen- tation, the design of the component was also changed significantly by DTI staff in consultation with the Bank to focus on a limited number of promising activities. 5. Protect Imolementation 5.01 While financial and institutional problems caused most of the US$48 million DBP component of the project (for both the SMILE and the DDRB pro- grams) to be cancelled on October 17, 1984, implementation of the project was generally commendable, despite the very volatile political and economic environment in the Philippines which prevailed for much of the project imple- mentation period. After the DBP allocation was cancelled, the private development banks (PDBs) expected to be funded under the DBP component were accredited by IGLF and provided funding under the IGLF component. Although the appraisal team had foreseen potential problems at DBP and tried to correct them, the institution was unable to make the necessary changes quickly enough. 5.02 The IGLF component of the project for the most part had successful results. IGLF a hieved its objectives of channeling substantial credit to SMIs and operating with low arrears and high collection ratios. However, demand for the funds was volatile due to unsettled economic conditions and occasional misalignment of IGLF interest rates with general market rates. Almost US$7 million of the funds allocated to IGLF was cancelled effective December 15, 1986. The lower than expected demand was brought about by a combination of initially reduced borrowing by end-users due to political and economic uncertainties and subsequently, by higher than market interest rates charged by IGLF to the PFIs under the interest rate structure agreed under the loan (para. 5.03). With improvements in the political and economic climate in early-1987, combined with the adjustments in the formula for setting IGLF interest (para. 5.04), demand for credit picked up substantially. However, the IGLF portion of the loan had by then been closed and most of the increased subloan activity was met from IGLF's internal resources. 5.03 At the outset of the SMI III Project, interest rates charged by IGLF to the PFTq were set at 11% for cottage and small industry and 16% for medium industry loans, with rates to end-users set at 18% and 21%. These rates were significantly positive in view of the then prevailing rate of domestic infla- tion (10% ina 1982). They also provided what was considered to be an adequate spread to IGLF for administrative risk. It was agreed that the rates could be adjusted periodically in light of market conditions by IGLF's Review Committee (comprised of representatives from the National Economic and Development Authority, the Central Bank, the Department of Trade and Industry, the Department of Finance and the University of the Philippines Institute for Small Scale Industry). In practice, however, the Review Committee was slow to change the rates, which often lagged market movements. 5.04 In response to these problems, in March 1987 the method for setting rates was changed. The changes were designed to bring IGLF rates in line with the market interest rates which had been deregulated. PFI lending rates - 92 - were deregulated, with the PFIs being allowed to s- choir own interest charges to subborrowers. The IGLF interest rate to the PFIs was revised according to a newly-adopted formula that set the price of funds as the higher of (a) the weighted average cost of all deposits in the Philippine banking system or (b) IGLF's total costs, including its administrative costs and its total cost of money (sourced from the Bank and from interest free budgetary transfers from the Government), with a 3-7% p.a. foreign exchange premium added on funds borrowed from the Bank. Interest rates on IGLF funds and foreign exchange risk to the PFIs were determined by the IGLF Review Committee on a seal-annual basis. The change, with its regular adjustments, alleviated some of the earlier problems, but the fact that the formula was based at least in part on IGLF's costs rather than the PFIs' costs caused the rates to continue to deviate from market-based costs of funds. In addition, the amount of judgment required (especially in determining the proper foreign exchange premium) introduced considerable margin for error in determining the rates. Under the subsequent SKI IV project approved in 1989, the Government agreed to link IGLF rates to the PFIs solely to the cost of long-term deposit rates without any link to the cost of Bank funds. The rates are to be adjusted each semester to reflect movements in the banks' alternative cost of long-term money. It is believed that under the liberalized financial system, the differential in the domestic rates and international rates (as denoted by the cost of World Bank funds) should provide IGLF with an adequate coverage for foreign exchange risk. 5.05 The technical assistance component of the project disbursed more slowly than anticipated and US$4.2 million was cancelled on April 13, 1989. Only US$2.4 million of the allocated US$6.6 million was spent, and much of that late in the project period. In addition to the lack of detail in the initial design, which made implementation more difficult, the cancellation was attributed to (1) the change in administrations in the Philippines and the major reorganization of the Department of Trade and Industry; (2) slow development of an integrated technical assistance program in which the various bureaus and agencies working in the SKI sector would be eligible to utilize loan proceeds, and (3) tight departmental control over all DTI expenditures. The focus of technical assistance under the SKI III Project changed during the project period towards export promotion. Particularly successful programs were the Product Specialist (PSP) and Market Encounter (MEP) Programs (para. 6.07). 5.06 Most of the US$12 million unallocated portion of the loan was can- celled effective July 23, 1986. 6. Project Results 6.01 The SKI III Project enabled the IGLF program, which already was operating well, to expand and improve its successful performance. The project clearly fulfilled its primary objective of channeling long-term funds to the SKI sector. By 1984, IGLF had become such an important source of term finance for SKI firms in the Phlippines that it represented 6% of all long- term loans outstanding in the country (see Part III, Table SC). When compared to the SKI share (21%) of value added in manufacturing, it is evident that IGLF represented a substantial portion of long-term credit extended to SMI in the industrial sector. IGLF operated successfully during the project period, expanding from P 523 million in 1982 to P 1,462 million - 93 - in 1985, before declining to P 771 million in 1987 because of economic problems in the Philippines. The IGLF Summary of Operations is given in Part III, Table 5B. 6.02 IGLF improved its arrears performance under the project and through most of the period operated with arrears at a low level. An ai9Iysis of the arrears of the IGLF portfolio as of December 31, 1987 is given in Part III, Table 5E, and an analysis of the arrears between end-users and PFIs under the IGLF accreditation scheme, as of December 31, 1987, is given in Part III, Table 5F. Whereas in early 1982, 24% of all loans under the IGLF accreditation scheme were affected by arrears, that ratio had fallen to 14% by 1987. Arrears from end-users to participating financial institutions averaged only 4.2% of loans outstanding from 1982-1986, before rising to 9.4% in 1987 due to the volatile economic environment and large decrease in IGLF's outstanding portfolio. Arrears from the PFIs to IGLF also jumped to 6.5%2 in 1987, but with the recovery in the following year and the substantial increase in the loan portfolio, fell to less than 2% by year-end 1988. 6.03 The Loan financed 1,081 subprojects, most of which were economically and financially viable. It resulted in the incremental employment of 23,564 persons at a total project cost of P 2,167.9 million. These numbers are reflected in Part III, Table 5A. 6.04 The project also realized its goal of helping the PFIs develop expertise in project evaluation and preparation. Training programs organized by IGLF for PFI staff helped to upgrade appraisal and supervision capabili- ties of the financial institutions. Significant improvements in portfolio performance during the project period can be seen in the arrears ratios between end-users and participating financing institutions. 6.05 The one explicit IGLF component objective that was not fulfilled under the project was channeling of a majority of project funds outside Metro-Manila. The proportion of project funds lent to the regions was sig- nificantly lower than expected (approximately 40% vs. a goal of 60%). The regional distribution of IGLF loans is shown in Part III, Table 5D. Perhaps, in retrospect, the objective of 60% was unrealistic. The failure to achieve the desired regional disbursement was due largely to the fact that most SMI firms are located near Manila, which is the country's major port and largest consumer market and has easy access to communication and transportation. In fact, the IGLF subloans went primarily to the larger end of the SMI spectrum, which is particularly concentrated in Metro-Manila. The proportion of subloans that went to the regions was similar to the 1983 share of value- added in the SMI industrial sector originating in the regions (42%). In retrospect, this is not surprising. PFIs, most of which are privately-owned financial institutions, cannot (and should not) be forced to lend in areas they consider unattractive. While incremental lending to the regions should 2/ Both the rural banks and the non-bank financial intermediaries had arrears higher than average. The rural banks, with arrears of 57%, were not funded by IGLF under the accreditation program and accordingly were not financed with World Bank money. The NBFI arrearage ratio of 9% (with 32% of their loans in arrears) was higher than average because of the bIankruptcy of Manphil, whose portfolio accounted for 35% of total NBFI loans. -94 - not be legislated, an improved guarantee system may help PFIs take the additional perceived risk of lending to the smaller firms located outside Metro-Manila. The SNI IV project included technical assistance to improve the guarantee program. 6.06 The objective of strengthening DBP's activities in SMI lending was also not successful because of DBP's serious financial problems which led to cancellation of the allocation to DBP. Since 1986, DBP has undergone a major rehabilitation and restructuring. Following a financial sector study con- ducted by the Bank (Report No. 3838; 1988), the Government has accepted the recommendation to convert DBP to a predominantly wholesale institution which would absorb the IGLF and apex programs previously administered by the Central Bank. 6.07 Disbursements under the technical assistance component of the project were slower than anticipated due in part to organizational problems and changes within DTI, and insufficient design of the technical assistance before the project implementation period. Disbursements for the project are given in Table 3 of Part III. The technical assistance component of the project was used to fund a variety of projects and studies, to purchase equipment - - including microcomputers, reference publications, and audio- visual equipment -- for the Bureau of Small and Medium Industry (BSMI), and to help fund the Product Specialist (PSP) and Market Encounter (MEP) Programs. It funded six pilot projects for common service facilities and financed training for SMI businesses and DTI staff in a small business con- sultancy course at the Institute for Small Scale Industry. In addition, it funded a study which reviewed all laws affecting SMI; pre-investment studies for 25 subsectors; a small business handbook; and a handbook regarding avail- ment of incentives. The PSP and MEP were particularly successful, resulting in a strong design awareness in firms and a small professional design industry in the Philippines. The increased level of design awareness led to a growth in the level of employment of in-house designers, who benefitted from their contact with the product specialists and with international buyers at the Market Weeks. The Market Encounter Program (MEP), through its organi- zation of regional fairs, served to introduce national and international buyers to regional producers of crafted goods. The program promoted improved product design and sales by SMI manufacturers through a program of product adaptation and market promotion in the regions, with follow-up consultancy and advisory services to participants. 7. Project Sustainability 7.01 The IGLF program has been operating effectively since its inception in 1952 and has shown increasing success under three Bank-financed projects. Under these projects, the accreditation system which forms the core of the program was implemented: through the appraisal and accreditation of the participating financial institutions, the program is able to expand and operate with low arrears rates with supervision by IGLF at a manageable level. Despite the fact that under previous World Bank loans the IGLF inter- est rate was not always adequate to ensure that final borrowers p&Ad a foreign exchange risk premium (see the Project Completion Report for the Second Small and Medium Industries Development Project [Loan 1727-PH], June 30, 1989, Report No. 7940), that situation has been corrected, and under an SMI IV project approved in 1989, the interest rates are established - 95 - according to a market-determined formula which by definition should protect Government against foreign exchange fluctuations (para. 4.03). The IGLF's strong and prudent managemant and careful supervision of PFIs, its policies to limit exposure of any single institution participating under the IGLF program and its policies to disqualify PFIs if arrears ratios or financial indicators are out-of-line should ensure continued success. 8. Bank Performance 8.01 The IOLU (to which US$56.4 million of the total US$63.2 million loan after cancellations, was allocated) performed with a low arrears rate and a high repayment performance. Bank supervision of the accreditation process and the subloan approval process left IGLF in a healthy, self-sustaining position. Although the DBP portion of the project was not successful, super- vision teams noted the DBP difficulties in a timely manner, tried to work with the institution for financial improvement, and recommended cancellation of the DBP allocation when it became clear the money could not be effectively used. As early as March 1983, a Bank supervision mission observed a decline in DBP's operations and collection rates and recorded a probable default under the arrears targets of the action program. The supervision effort, in fact, contributed to the design of the rehabilitation program for DBP con- ducted under the Economic Recovery Loan in 1986. 8.02 The lessons to be learned from the SKI III Project include the following: (a) Lending by an apex institution through a group of sound financial institutions which operate in a competitive environment and are responsible for project evaluation and the corresponding credit risk, is a good model for funding small and medium scale industry. The structure leaves the retail credit risk wizh the banks, which are accustomed to taking that risk and which have the direct relationship with the borrower. It puts only the risk of general default of the participating financial institutions with the wholesale fund and enables an on-lending program to operate successfully with a manageable staff and low administrative expenses. (b) Technical assistance needs to be focused and well-defined at appraisal so that implementation is almost automatic and requires little design or revision by the agencies involved. (c) Interest rates charged by the wholesale institution to the PFIs should be tied to market indicators and should not be out of line with the PFI's own cost of funds. Tying the ICLF interest rate to prevailing domestic interest rates should reduce fluctuations in demand stemming from mis- alignment of ICLF and other domestic market rates and should ale- ensure that IGLF money does not substitute for domestic resource mobilization by the PFIs. Such a formulation would further provide reasonable protection to - 96 - IGLF for foreign exchange risk since domestic interest rates in the Philippines, being market determined, incor- porate much of the exchange risk emanating from differen- tial international and domestic inflation. This arrange- ment was incorporated into the subsequent SMI IV project. 9. Borrover Performance 9.01 IGLF balance sheets and income statements are shown in Annexes 1 and 2. IGLF's financial position was healthy throughout the project period. Its administrative costs as a percent of average total assets declined from 0.8% in 1982 to 0.4% in 1987, showing increased efficiency during the period. Although its net income to average total assets ratio declined from 3.3% in 1982 to 2.3% in 1987, the profitability remained adequate. The return on assets decline was caused largely by the increase in interest expenses resulting from a higher interest rate on the World Bank loan (11.6% compared with interest rates of 8.5% and 7.9% on the two previous Bank loans). The increased interest rate caused IGLF' s financial expenses as a percentage of average total assets to rise from 4.8% to 6.4%. IGLF's sources of income are interest income on loans, interest income on temporary investments and guarantee fees. Although interest on IGLF's loans formed the largest con- tribution to gross income for the 1982-86 period, reduced demand for IGLF funds, as well as substantial end-user prepayments, caused income from short- term investments to exceed interest income in 1987. Short-term funds declined significantly in 1988 as they were used for term finaucing. 10. Consulting Services 10.01 Consultants were employed by DTI to assist with the Product Specialist Program and Market Encounter Program. Their performance was satisfactory. 11. Proiect Documentation and Data 11.01 The Loan Agreement in the case of the SMI III Project was quite adequate and appropriate for achieving project objectives in the key areas. The appraisal report of the project provided a useful framework for review of project implementation. IGLF and DTI provided draft project completion reports for the project. Further da .a relevant to preparation of the PCR were available in the project files. - 97 - PART II - PROJECT REVIEW FRCM BORROWER' S PERSPETIVE3 A. Overview gf Credit-Comnonent 1.01 IOLF operations under the SKI III Project were satisfactory. IGLF loan volume increased continuously through 1984 and 1985, with sufficient participating financial institutions actively using IGLF that the temporary disqualification of a few banks and non-bank financial institutions did not result in a slowdown of IGLF operations. Some slowing did occur in 1986 and 1987 due to political and economic conditions in the Philippines and to the relatively high price of IGLF loans. Sectoral distribution of IGLF's port- folio was broad, dominated by loans to the manufacturing sector with some services and construction industries as beneficiaries. Most of the 1,081 projects financed under the project were both economically and financially viable. The project resulted in the incremental employment of 23,564 persons and had a total project cost of P 2,167.9 million. 1.02 IGLF's staff was reorganized and strengthened during the SMI III Project implementation period. Staff strength was increased and IGLF was expanded from two to four divisions. Training programs for both IGLF and financing institutions' staff were conducted to enhance expertise in project appraisal, evaluation, and supervision/monitoring. A comprehensive promo- tional program was launched in 1987, and IGLF staff participated in a variety of seminars, workshops, and conferences with entrepreneurs and industry groups/associations. 1.03 IGLF would make the following recommendations towards a more effec- tive implementation of the program: a) IGLF should continue to work with the PFIs to improve their monitoring systems on IGLF-asaisted projects, and accordingly reduce the ratio of end-user loans past due. b) IGLF and the PFIs should monitor the compliance of end- users with IGLF's requirement that firms regularly submit certified/audited financial statements. c) ICLF should work with accredited financing institutions to help them improve their record-keeping on borrowers' accounts and to establish specific systems of supervision and monitoring for IGLF-financed projects. d) IGLF should promote more actively the participation in the IGLF program of PFIs in rural areas, considering incentives and policy reforms to effect this. e) IGLF should move quickly to computerize its own accounting, securities control, and other reporting requirements. 3/ This Part reflects IGLF's views since almost the whole amount under the DBP component was cancelled. - 98 - B. Lendina. Oerations 1.04 In spite of the political and economic turmoil of the Philippines in 1984 and 1985, IGLF disbursements were at a record level. This was reflective of the low IGLF rate to the PFIs during a period of high interest rates, the temporary closure of the DBP window for SMI and the inclusion of rice and corn mill projects eligible for IGLP financing. On the other hand, reduced lending in 1986 and early 1987 may be traced to the uncompetitiveness of the IGLF rates compared with other sources of PFI funds, to the very liquid position of most commercial and thrift banks which opted to utilize their own funds to finance SMI, and to the closure of several PFIs due to controllership/conservatorship/receivership and/or liquidation. The political climate continued to be unsettled during the period and entre- preneurs were hesitant to establish new businesses or expand existing projects. An upward trend in availments started in July, 1987, due in part to rising interbank call loan rates and a relatively low ICLF interest rate. C. IGLF Subloan Characteristics 1.05 IGLF's loan portfolio was dominated by loans to the manufacturing sector, although some loans to construction and service industries were also granted. From 1981 to 1987, the manufacturing sector accounted for 96% to 991 of approvals, the more important subsectors being food and food products; footwear, apparel and garments; and metal products. In terms of regional distribution, loans for projects located in Metro Manila averaged 61% (by amount) of IGLF approvals over the 1982-1987 period. The average size of IGLF loans grew steadily from P 1.1 million to P 2.0 million between 1981 and 1987, due to the inclusion of medium industry loans under the SMI II project and the increase in loan ceiling to P 16.0 million under the SMI III Project. D. Guarantee Scheme 1.06 One of the IGLF features embodied under the project was the optional guarantee coverage wherein IGLF shares in the losses with PFIs in case of ultimate failure by the borrower to pay. There are two kinds of guarantee coverage offered. Under the credit risk guarantee (up to 60% of the loan for small industry and 40% of the loan for medium industry), the 2% guarantee fee is absorbed by the financing institution while under the collateral short guarantee (maximum 251 of the loan), the 21 guarantee fee is passed on to the borrower and is available only for small industry projects. As of year-end 1987, the reserve account to take care of losses on guaranteed loans amounted to P 23.9 million, which was intended to cover estimated total losses of P 11.5 million, based on claims submitted by sponsoring financing institutions. Based on guarantee fees collected during the period, the amount of P 1.8 million was set up for possible losses in 1987. Losses on foreclosed loans which were covered by guarantees, consisting of 29 projects in the aggregate amount of P 7.2 million, were written-off as of 1987. E. Review of PFI erformance 1.07 An IGLF review of projects funded under the SMI III Project showed the entrepreneurs' tendency towards optimism in making financial forecasts. To strengthen the quality of project evaluation, IGLF has offered training - 99 - programs to provide PFI staff with skills to screen every loan application thoroughly, to identify possible strengths and weaknesses of projects and potential problems they might encounter. It recommends that analysis of marketing and technical aspects of projects be done with greater depth and that financial forecasts be adjusted to preclude too optimistic projections or targets. It noted that some accredited institutions relied more on the value of collateral than on project analysis and it hopes that training programs may help to change this approach. 1.08 Under the SKI III Project, IGLF conducted regular reviews of the performance of participating financial institutions. The reports on deficiencies/findings noted were transmitted to the institutions concerned and were accompanied with recommendations. Financing institutions were required to submit reports to IGLF on any action to correct or remedy these findings and/or any recommended measures implemented. 1.09 Some of the accredited financing institutions did not have estab- lished definitive systems of supervision and account monitoring in their IGLF lending operations. Post-audit surveys of IGLF projects were not conducted by these institutions on a regular basis, but rather borrower repayment per- formance was used as a gauge of whether or not there was a need for physical inspection. Results of plant visits, if any, were summarized in post-audit inspection reports which contained limited information on the utilization of the loans and on the operating performance and financial status of the borrowers. Records were not always sufficient to systematically monitor the status and performance of each IGLF grantee. Credit file folders maintained by some participating financial institutions were poorly kept and data was not updated. The submission of periodic financial statements by each bor- rower was not strictly monitored by the PFIs, but was requested only during the IGLF Examiners' end-use verification of selected projects. These deficiencies could be partly explained by the limited number of personnel directly assigned to supervise the projects, but the PFIs have been requested to note the deficiencies and take appropriate action. F. IGLF Development Strategy 1.10 During the preparation and implementation of the SMI III Project, IGLF initiated and implemented a variety of policy and administrative reforms. Cottage, small and medium industries were redefined for the purpose of aligning financing criteria with inflationary trends and industry growth: total assets, on which definitions were based, were revised upwards. The short-term working capital requirements of export-oriented SMI became eligible for IGLF financing. Effective May 25, 1987, interest rates from IGLF to the PFIs were changed each semester in accordance with market rates and/or with IGLF's costs. With this policy, the PFIs were allowed to set their lending rates to subborrowers. A basic ceiling on the overall level of outstanding IGLF credits to accredited PFIs was set at 100% of capital accounts, net of valuation reserves as of the end of the quarter immediately preceding the date of the application. This ceiling could be increased by the Review Committee based on satisfactory results of the appraisal/evalua- tion of the banks' continued compliance with the accreditatio 'riteria and its overall financial position. Thu IGLF commissioned NEDA v. undertake an -100- Economic Impact Study of IGLF - assisted projects, and it continued to col- laborate with other Government agencies and private organizations involved in SMI development. G Technical Assisance CMnt 1.11 The various subcomponents of the technical assistance component of the Project are outlined below. (a) Trainin Sort, involving DTI staff and client training to improve skills relevant to the SMI sector, included the following programs, in which about 15,000 people partici- pated during the project period. I) client training programs related to technology transfer, technical and managerial training, local study missions, productivity seminars, and investment opportunities seminars; and ii) staff training programs, including industry specific consultancy training, project appraisal and monitoring, management training, small business con- sultancy courses, and project feasibility preparation. (b) The Product Specialist Program (PSP) provides technical assistance to cottage, small and medium enterprises, the products of which have high export potential. The services are delivered by foreign product specialists expert in product development and design. Both local and foreign specialists directly assist the local manufacturers in terms of proto-typing, and new and improved product designs. The PSP covers the following sectors: furniture, gifts and houseware, fashion accessories, metals, and hand- loom weaving. (c) The Market Encounter Program (MEP) is a marketing program aimed at SKI. Entrepreneurs are extended assistance in terms of product development, product promotion and market linkages. The program is a three-level hierarchy of trade fairs and exhibits aimed at the gradual development of local producers towards the export market. The sectors and subsectors targetted for the program are the following: gifts and housewares, furniture and furnishings, food and garments. The total number of beneficiaries of the NEP under the project were 2,091. (d) Common Sevice Facilities/Eilot Projects included a bricks and tile kiln drying facility, two wood kiln drying facilities, a ramie degumming facility, and a hat block facility. -'101 - (e) Studies and Research SuWort relating to the development of SKI included the following: 1) subsectoral studies, a study regarding laws and regu- lations affecting SKI, pre-investment profiles, a small business handbook, a BSMBD MIS study, a study outlining the registration and administrative proce- dures on availment of SKI incentives, a Philexport bonded warehouse feasibility study, a duty draw- back/exemption scheme study, and research regarding measures to increase the access of cottage enterprises to credit and financing; ii) documentation and printing, including a small business information series, financing programs for SKI, pro- grams and services for SKI, an Ang Masicap publica- tion, MICSKEC leaflets, a BSMBD information kit, provincial investment brochures, small business hand- book, and producers/raw material directories and product catalogues; and iii) purchase of books and publications, including tech- nical and statistical materials and general information. (f) A cvnsAntanUc nrogra provided for seminars and workshops. Experts presented appropriate technology on processing techniques and methods, machine operations, quality control mes- res, and sanitation and hygiene. This program was int.-aded to increase SKI productivity, efficiency and effectiveness. The sectors and subsectors targetted for the program were food, gifts and housewares, furniture, metalworking, agro-based industries, footwear and leather goods, and garments. (g) An eauLome sub-cgmnent aimed at strengthening extension services to SKI through provision of equipment, vehicles and reference libraries in the regional offices and the head office. The equipment purchased included vehicles, computers and accessories, audiovisual equipment and accessories, typewriters, photocopiers, and other office equipment. - 102 - PART III - STATISTICAL INFORMTION 1. Related Bank.Loan Year of lam anmroval fiatas SKI I (Loan 1120-PH) 1975 Completed SKI II (Loan 1727-PH) 1979 Completed DBP I (Loan 1190-PH) 1976 Completed DBP II (Loan 1572-PH) 1978 Completed All four loans provided long-term financial resources to the SMI sector. The IGLF components of the two SMI loans were successful. Loan 1572-PH to DBP was slow disbursing and eventually partially cancelled due to financial dif- ficulties of DBP. Lending to industrial cooperatives through the National Electrification Administration (NEA) in SMI I was less effective than antici- pated, chiefly because the assistance required to establish industrial cooperatives was underestimated. A small technical assistance component in SKI II disbursed more slowly than expected because of changes in the MASICAP operation as a result of the integration of NASICAP with SBAC. 2. Project Timetable Date Date JIdml Planned Actal - Identification 07/23/80 - Preparation 07/31/81 - Appraisal Mission 10/26/81 - Loan Negotiations 04/20/82 - Board Approval 06/03/82 - Loan Signature 06/30/82 - Loan Effectiveness 09/30/82 12/23/82 - Loan Closing 09/30/86 09/30/88 -103- 3. La Disbursmens Cumulative Estimated and Actual Disbursemants (US$ million) Aftraigal Estimate Ank.F 12,1 12.4 21 12. 121 12MM, 1,2 Annual 12.8 31.2 43.0 38.5 6.5 Cumulative 12.8 44.0 87.0 125.5 132.0 Annual 0 18.4 23.5 17.2 3.0 0.2 0.9 Cwmflative 0 18.4 41.9 59.1 62.1 62.3 63.2 Actua as % of Estma 0% 42% 48% 47% 47Z 472 48% (Cumulative) 4. Project Costs and Financing A. Project Costa Auoraisal Estimate Actual Foreign Foreign Local Exchange Local Exchange 1o..s Costs Tota1 Q0a=* Costa Toal (US$ M) (US$ M) 1. Credit .Compon 1,7., 126.0 2,3.. 21A. .1 13.7 DBP/SMILR 36.2 30.5 66.7 1.2 1.1 2.3 DBP/PDB*s 27.6 23.5 51.1 1.6 1.4 3.0 IGLF 83.5 72.0 155.5 75.0 56.4 131.4 2. Technical Assistance Com0onent .-7 .Q2 5.0 SBAC/MASICAP 2.1 1.6 3.7 * Pilot Projects Fund 1.7 1.5 3.2 - - Studies/Equipment 0.4 0.5 0.9 2.7 2.3 5.0 Contingencies 0.5 0.4 0.9 .- Total Project Cost 15.0 12.0 28.0 . 141.7 Front-end fee on Bank loan - 2.0 2.0 - 2.0 2.0 Total Financina Reuire 152.0 132..0 MJ, W , 143.7 *Actual local costs are estimated assuming that the direct and indirect foreign exchange posts of (i) projects financed by DBP and of (ii) technical assistance are about 46% and 56% of total, project costs respectively, as estimated at appraisal. Total project cost of P 2,167.9 million for the IGLF subcomponent was converted into dollars at P 16.5-US$1, which was the weighted average exchange rate during the IGLF component's disbursement period. - 104 - B. Project Financing Bank Financing by Category (US$ Million) Planned (Loan Amrement), Astual 9XssU& 123,4 2...2 DBP/SKILE 27.0 1.1 DBP/PDBs 21.0 1.4 IGLF 63.0 56.4 Unallocated amount 12.4 Technical Assistance AA Pilot projects 2.5 Equipment, Vehicles and 0.6 0.3 Reference Publications Consulting Services and Training 3.5 2.0 Total for Both Cateories 130., AL Front-end fee on Bank loan 2.0 2.0 Total Project Cost 120 LLI 5. Project Results A. Direct Benefits Appraisal Estimated at Indicators Eatimate Project Completion 1. Number of Subprojects Financed 2,100 L& 1,081 La 2. Incremental Direct - - Employment Generated 32, 900 23,564 4n 3. Incremental Cost per Job $8,300 & $5,576 a L& The expected number of subprojects were 300 for IGLY, 300 for DBP- SNILE and 1,500 for lending through the PDB's. /b Incremental cost per job was estimated at appraisal to be US$10,000 for ICLF, US$8,000 for DBP and US$4,500 for the PDB's. La IGLF subcomponent only. - 105 - B. Susamy of IGLF Operations Releases Outstanding portfolio Years Cottage Small edium Total Cottage Small Medium Total 1982 0 42.0 145.2 187.3 0.6 183.5 338.7 -522.7 1983 1.! 133.0 78.1 212.6 6.8 326.9 317.8 615.5 1984 0.1 238.2 230.8 469.2 5.5 518.6 513.1 1,037.2 1985 0.3 151.7 467.2 619.2 4.7 555.2 902.3 1,462.2 1986 0.5 103.1 119.1 222.7 20.3 702.3 3,333.4 1,056.6 1987 2.5 75.9 242.4 320.8 15.8 425.5 329.5 770.9 - 106 - C. Credit Distribution: IGLF Loans Compared to Other Categories of Credit in the Philippines, 1982-86 (P million) Private sec- tor bust- Total loans nesse (ex- outstanding cluding in the loans to indi- Loans to Inter- Philippine viduals and manu- zediate Long- End- IGLF banking public sec- facturing term term year portfolio system tor entities) industries loans loans 1982 522.7 98,239.6 72,468.2 29,958.3 17,778.3 12,675.5 1983 651.5 111,387.7 82,177.2 35,409.9 16,858.2 17,303.6 1984 1,037.2 116,382.2 80,397.8 32,136.0 28,226.5 17,181.9 1985 1,462.2 87,573.3 58,606.6 21,856.6 14,667.9 14,806.5 1986 1,056.6 83,087.4 58,298.5 21,762.2 15,042.1 10,646.7 ∼ 」 & . & - - - · . 천 길 짓 · 107 · －』．「뢸；·，,,,-［」―,--.--&-―·―&-&-―·뻐·－‘…．,，【…，1，·1：떼．1‘… & & \ E. ICLF Portfolio Performance 1"m affected Total loans 1"Us affected Arrears, Total as 2 of lom outstanding by arrears Interest arrears as outstanding no. of Wb* Of & other X of lamas By or projects Amount prolects fqSgqt Prlacig!l ebacites Total autstoodis number &now Unwerclat banks 240 267,203 55 51,070 8,743 .3,930 12,673 4*7 22.9 19*1 Adebank financial Institutions 259.. 206,351 100 65,414 11,740 7,676 19,416 9.4 38.6 31.7 trivate development banks 202 237,943 48 32,068 8,776 3,869 12,"4 5*3 23.8 130! foral books 39 2,350 24 1,341 1,139 184 1,323 560 61.5 $7.1 other Institutions 65 57,044 Is 4,551 3,4% 921 4,411 7.7 23.1 a*( Total SOS .770,891 242 154,444 33,893 16,580 50,473 6*5 30.1 200( Interest and Principal other chanis Thtel Aalea of arrears Amount z Amiount z 'Aniount z Up to 45 days 4,267 12.6 2,129 12.9 6,3% 12.7 46 - 3 sonthe 2,616 7.7 1,050 6.3 3."$ 7.2 3 - 6 months 3,930 11.6 1,810 10.9 5,74,7 11.4 6 - 12 months 6,514 19.2 3,316 21.2 10,030 19*9 12 - 24 soothe 8,S46 25.2 4,621 27.9 13,167 26*1 over 24 soutbe 8,018 23.7 3,454 20.8 11,472 22.7 Total 33,993 100.0 16,580 100.0 $0,473 100.0 - 109 - F. IGLF-Funded Subloan Performance Anaiyts of Atrears het~een d-.ses and PFis nder 'he ccred1tation Sche~e as of December 31. .4' <#30') LnarA afeeced Total 1oas I.oans affected Arrears Total as i *f '.ans outecanding atryarars int*rest arrears as 3us 4t1 No. of N.6 other 2.of loats li pro~ectc pr_jects a Prinetpal char8as Total outetandina tumbet !:!~%t Commercial banks 182 171.881 26 26,413 9,177 5,692 14,869 8.7 1..3 .5. Nonbank financtal tnstitution/, 137 63,548 39 8,918 4,356 1.433 5,789 9.6 28.5 1.. private developient banks 129 152,888 32 22,034 3,895 4,748 8,643 5.7 24.8 :.4.4 Mural banks • - - - - - - * Other inatitutions 47 5.'.192 5 5,678 4,520 7,349 11,869 21.6 10.1 :.3 rotal 495 440,209 102 63.043 21948 19.222 41.170 9.4 20.-) Incerest and Principal other charges Total Aina of arrears mount #^Un Up to - 3 montha 3,451 15.7 2,155 11.2 5,606 13.6 Over 3 - 6 zonths 3.491 16.0 2.941 ..8 6,131 15.4 Over 6 - 12 month 1,028 7.4 1,758 -.t 3,386 8.2 Over 12 - 24 months 1,366 6.2 1,369 1.1 2,735 6.7 Over 24 nontho 12,012 54.7 11,1% 3.3 23,112 56.1 T«~al 2t,948 11#).0 19AU22 '1--3 41.170 100.0 Arrears rectos of ftnancal !nstitutona .oans affected as 2 of Icon ucstaandlig Total arrears as * v Sy Loans otsttandi:c nunbere aeount Arrears Position December 31, 1982 4.9 2'.7 24.7 December 31, 1983 - .9 29. .12.6 December 31, 1984 3.5 21.5 11.7 December 31, 1985 2.7 3.5 9.5 December 31, 1986 5.2 20.3 12.6 December 31, .987 9., 20.0 14.3 ta These data are based on reports suboitted to ICUlF y financialA tnstitutt)ns on the status of their ljan poIrtf3Lto jr. i quarterly basis. Movever, not all financial institutions report t> 1CF ts required, thus these data do not :->ver all loans that are 1n arrears betveen end-users of IGLY and participactng tnstitutions. b Including Savinge Loan Associations b %urtgate Banks. - 110 - 6. Statu of Covenants The IGLF-related covenants were substantially complied with during loan Implementation. While similar covenants were agreed with DBP, they became essentially irrelevant when most of the DBP portion of the loan was cancel led. The IGLF covenants related to the following: (i) interest rates to be charged to end-users; (ii) maximum subloan size; (ILL) free limit to be applied; (iv) provision of quarterly reports to the Bank on the basis of agreed formats; (v) provision of audit report. In addition, IGLF would require its accredited institutions to have their accounts audited annually; (vi) issuance of IGLF's Lending Strategy and Policy Manual; (vii) post-disbursement review of subloans; and (viii) computation of the financial and economic rates of return of subprojects. Covenants with the Government on SBAC/MASICAP's staff and budgetary resources and operations and on pilot project financing arrangements were established regarding the following items. These became largely irrelevant as the technical assistance portion of the project changed during imple- mentation. (i) adequacy of staff and budgetary resources to carry out BSMI and SBAC/MASICAP's responsibilities under the project; (ii) consultation with the Bank about any major changes affecting the operations of BSMI and the SBAC/MASICAP program; (iii) pilot project financing arrangements and Bank approval of all pilot projects; and (iv) periodic review of interest rates charged to end-users to ensure that they remain in line with market rates. - 111 - 7. Use of Bank Resources A. Staff InaWs Staff weeks-Actual Stes* on pani.r.i MS WE UA E1I WI EM I WA MZ rW EM2 WI W25& Through Apprsal 6.3 460.0 147.0 199.3 NesotLons 8.4 8.4 superoteson and MmlnLs:atio - -..L1 U11~L aLm UAL I LA ILl Azuii TOTAL 6.3 46.0 155.5 61.5 37.9 20,8 25.1 12.7 7.6 11.4 2.1 386.9 B. Missin Stage of Month/ Number of Days in Staff Performance Project Cyce Year Persons ield _Day Ratin Through Appraisal 3/80 1 29 29 10/80 1 2 2 2/81 2 20 40 7/81 7 20 140 10/81 7 20 140 Appraisal Through Board Approval 1/82 4 14 56 Board Approval Through Effectiveness 11/82 3 20 60 2 Supervision 3/83 1 3 3 2 6/83 3 13 39 2 11/83 3 14 42 2 2/84 2 2 4 6/84 2 15 30 2 2/85 2 10 20 2 5/86 3 14 42 1 2/87 1 17 17 1 10/87 2 4 8 1 5/88 2 4 8 1 -112 - ANNEX 1 PIPPNS 1mD SIALL AND EDIUM I~TUSRIES 0EVELOPMENT PRJECT PROJECT CWLETIGN RPnT Indultlill Guarqnend Loew, Fund Saarized Salane ShetsU a of D~ Pbr 31, 9M-*7 1a Deceeber 31 1982 1983 1984 1984 1986 1987 ~ii-fro celtral Sank 11,964 17,769 5,737 79,304 183,338 123,342 Å~cste r~eetvable from MEA 100 200 201 1 - • ?eporary tamvestmte 23.380 40,000 17,810 71,000 669,140 1,287,320 eCtal tI4 dequetts outetendlna 522.741 651,503 1,037,18$ 1,462,176 1,0$6,618 770,891 Advues to Niftetty of ~adtry - - - Ad~vaae to SDA - pometomal ep. 35 35 35 - - Acc~med tateeet re«etvables 11,964 14,580 24.930 44,310 41,755 35,904 Aeted guaa~tee fe recelvable 743 1,054 2,0$4 5,382 6,233 7,678 Prepad adtatetrative *ap. 202 18 $4 30 30 24 Prepaid tas oa uneamred dscou0C - - - - 2,336 7,605 Total Ase*e 571.129 22a.61 10884%0 1.662.203 .0 0 2.232.792 UMMbIGGe and Ceworth Aceounca pcythx 117 29 40 94 1,$90 4,987 Accomate payable - a' Gov*t 90,000 90,000 Aceaunts payable to Tr~asurer 3,200 44,913 16,859 19,684 - - et the PhIltpptacc eser% fotr defletecctee on 132 132 132 132 132 32 2= lo. ffinortaatlon Unered d~ ~ou.t on låtereat ta - - - 699 11,681 38,041 govera t scurit ee Aceru~d tateet payeble 23,940 16,428 44,999 106,160 210,304 333,265 AMegued comtmat fred paytble - 8,562 11,417 15,069 16,784 18,307 Subtota 117.389 160.064 73467 141.838 240.491 394.732 Long-teru loans de to CXIN banks 17,762 16,865 15,928 14,9$0 13,930 12,495 Long-tewu lo~, due to 180 260,134 333,594 653,292 1,037,311 1,188,311 1,159,478 subtotal 2 M 3896 30.459 669.220 1.072.261 1202441 1.171.973 Provstele for postble 1 3,80$ 7,921 11,567 12,189 14,257 15,702 ITo tåLl~eilie 39909 518.444 754.254 1.226,28 1.457.189 1.582.407 Au~latr f c peeret et funde 114,000 139,000 229,000 275,000 275,000, 375,000 Earned ruplue 58,039 67,717 104,752 160,915 227,261 275,385 get tesen- --e 1~a M MUr72.039 206.717 333.752 435.915 5026 650.385 Total Ltablti~s ad wee morth 571.129 1251#1 1a0g§.004 1,662.203 5 2A32.791 Total tetr Satte 2.3 - 113 - PRQJECT COPLCTION ImPont Industrial Guarantee and Loan Fund suamarised Income Statements - 1962-87 F'000) 1982 1983 1984 1985 1986 Income I=nterest income oan STD 40,611 53,691 78,027 162,031 184,008 91,632 Interest income/discount earned 2,205 877 6,935 586 34,557 130,194 on temporary inwestments Guarantee fees 3.300 3,962 4,446 6,078 3,591 3,218 Miscellaneous acoa* * 52 122 276 578 679 Total Incoe462 89.s30 s89 222734 225,723 Mal strative expenses 3,886 4,648 5,442 6,307 5,324 8,315 Interest expenses on EXI ank 723 - 691 5,995 617 583 559 loans Interest expenses and commitaent 23,804 37,880 45,226 94,800 124,082 132,347 fee on 18RD loans Tax expense on interest on - - 10,359 17,220 8,:15 ILl loans Tax expense on discount earned on * 147 6,554 :5,398 investment in goverument securities Total xOenses 2 8 43,219 g5263 175,334 Profit Before Provisions 0.703 15.363 32,i67 56,741 68,971 9.89 Provision for possible losses 789 4,886 4,695 2,749 2,732 1.755 Net Profit (les) .16914 10.477 28.:2 S3.992 66.239 ..34 Ratio as 2 of Averae Total Assets Gross Incoe 9.1 9.0 9.9 12.3 12.3 1.8 Financial expenses 4.8 3.0 5.7 6.9 6.9 6.- Gr*s meargia 4.3 3.0 4.2 S.4 5.4 4.4 Administrative expenses 0.8 0.7 0.6 0.5 0.3 0.4 et income 3.3 1.6 3.1 3.9 3.6 2.3 PROJECT COMPLETION REPORT PHILIPPINES INDUSTRIAL FINANCE PROJECT (APEX IDAN) (IDAN 1984-PH) September 26, 1989 Industry and Energy Operations Division Country Department II Asia Regiona Offioe * 117 - INDUSTRIAL FINANCE PROJECT (APX LOAN (LOAN 1984-PH) 1. Heavily dependent on imports and foreign capital, the Philippine economy did not adjust well to the severe external shocks of the post-1979 period--high oil prices and interest rates, and declining export prices. The economy experienced declining growth rates, a deteriorating balance of payments, and the accumulation of a large external debt. The period was also marked by a money market crisis in 1981. followed by economic contraction from 1983 until the end of 1985, during which time inflation surged. This period was characterized by an active monetary and exchange rate policy, with large devaluations and extremely high nominal interest rates. It should also be noted that a political crisis in 1983, combined with a world-wide debt crisis, led to a cessation of foreign credits, and forced the Government to embark on a major stabilization effort. The most recent phase, starting in 1986, and still continuing, is one of gradual economic recovery, supported by an IMF Standby Arrangement in 1986 and an Economic Recovery Loan approved by the IBRD Board in March 1987. The economic decline has been reversedt GDP grew by 1.52 in 1986, 4.72 in 1987 and 6.6Z in 1988. 2. Loan 1984-PH to the Central Bank of the Philippines (CBP) was made in 1981 on the basis of, and to build upon, financial sector reforms implemented by the Government in 1980-81 following the recommendations of a 1979 joint IMF/World Bank study. These reforms included the introduction of universal banking whereby financial institutions were empowered to combine commercial banking functions with investment bankingi the movement towards a more flexible and market-oriented interest rate policy and the introduction of variable interest rates. The Loan reflected a new approach to industrial lending in the Philippines: instead of leading separately to individual development finance companies, as in the past, the Bank used a two-tier approach under which CBP was the borrower which would then reland the proceeds of the loan to accredited participating financial institutions (PFIs). Because of this approach, the Bank project was referred to as the 8Apex' Project. The target market being privately owned medium and large enterprises, the pricing policy has been to relend the funds based on prevailing market rates, with CBP reviewing and adjusting its on-lending rate every six months. 3. The objectives of the Apex loan were to (i) finance economically and financially viable industrial sub-projects; (ii) assist in raising additional resources from the international market for the PFIs' relending operations; (iii) establish within CBP an organizational set-up with the capacity to relend the proceeds of the Bank loan to PFIs and for guiding and supervising the term-lending operations of the PFIs and (iv) expand the number of financial intermediaries having access to Bank funds, thereby enabling the Bank and CBP to help develop institutional capacity for long-term lending in a larger number of financial institutions. 1/ Prepared by Country Department II, Asia Regional Office. - 118 - 4. The Apex project had a catalytic effect in so far it did lead to the raising of foreign commercial funds of US$100 million from a syndicate of foreign commercial banks in addition to the US$150 million Bank loan. In the face of deteriorating economic conditions, disbursement of the Apex loan funds, however, was disappointing. Despite three extensions of the commitment period, total disbursement of Bank funds by the revised closing date of June 30, 1988 amounted to only US$44.7 million while commercial loan funds disbursed totalled US$32.2 million. The unutilized balance of the Bank loan (US$105.3 million) was cancelled at various dates. What discouraged loan utilization was the effective cost of funds to subborrowers because of their assumption of the foreign exchange risk. Given the significant Pes* depreciations since the Apex program was initiated (from P 8 to P 19 per US dollar between 1981 and 1984), potential subborrowers grew extremely averse to borrowing foreign currency loans. To increase the utilization of Apex funds, CBP decided in July 1984 to bear the foreign exchange risk on loans to export- oriented or import-substituting projects by making Peso-denominated loans available to export-oriented or import-substituting enterprises. Unfortunately, even this step did not help because the adverse economic and political developments (1984-1986) that subsequently occurred depressed demand for medium - and long-term credit. The demand for credit picked up again in late 1987 with the recovery in the economy, but by then a significant portion of the Bank loan had already been cancelled. The resurgence in investment continued strongly in 1988 and 1989, leading the Bank to develop a follow-up project, the Industrial Investment Credit Project, to be presented to the Board on October 17, 1989. 5. The Apex Development Finance Unit (DFU), a semi-autonomous group established within CBP and reporting directly to the CBP Governor, was a well- run unit which built up substantial experience in institutional and subproject review and supervision. Its operational activities focused on (a) accreditation of PFIs; (b) quarterly reviews of PFIs' institutional and operational performance and (c) review of PF1I' project appraisal activities and administration of Apex funds. 6. DFU consistently earned profits until 1986. Its losses in the last two years (US$501,000 in 1987 and US$57,100 in 1988) can be attributed to a variety of factors: (a) the drop in the Manila Reference Rate to which the lending rate on Peso-denominated loans is pegged, which substantially reduced the expected margin; (b) the accumulation of surplus Peso funds from repayments (due to earlier sub-loan maturities) which it could not relend; (c) the negative spread on investments of DFU's foreign currency deposites (d) the added cost of maintaining a revolving fund with Citibank, New York, and (e) the cross-currency and foreign exchange losses which CBP has to assume on some of the subloans (para. 4 above). Nonetheless, overall, DFU has earned a cumulative net income of approximately US$2.9 million. 7. The Apex project was successful in broadening the range of financial institutions engaged in term lending. When the loan closed, there were eight active PFls, consisting of six commercial banks and two investment houses. Three previously accredited institutions have been delisted and were inactive: Development Bank of the Philippines (DBP) on account of major portfolio problems prior to its rehabilitation program; PISO Bank which is under liquidation and Manila Banking Corporation which is the subject of an ongoing court case after it was ordered closed by the Monetary Board. - 119 - 8. Since CBP's borrowers under the Program are the PIs, the credit risk exposure of CSP depends on the latter's financial soundness. With the exception of PISO Bank, Manila Banking Corporation and the Private Development Corporation of the Philippines (PDCP), the accredited institutions have maintained an adequate equity base to cover individual subproject repayment problems. Furthermore, their portfolio quality as measured by past due loans as a percentage cf total portfolio has improved over the last two years. Moreover, they were profitable, with returns on average net worth ranging from 13.52 to 27.1% In 1988. Indeed, CBP's collection performance has stayed current and free from arrearages except for the Manila Banking Corporation and PISO accounts. 9. In addition to the problem of Manila Banking Corporation ana PISO Bank, mentioned earlier, the financial position of PDCP remains a cause of concern. The financial restructuring plan implemented in 1986 has not fully addressed the problems created by the increased debt servicing requirements of PDCP's foreign exchange obligations brought about by the Peso devaluations. PDCP continues to be plagued by poor collection performance and increasing loan arrears. Despite its efforts to increase its Peso lending and fee-based activities (merchant banking, trust, mutual funds, insurance, consultancy), PDCP's financial position remains precarious. This is alarming as it would result in PDCP's being unable to meet the financial covenants set out in its loan agreements with its lenders. As PDCP accounts for 402 of total Apex loans outstanding, DFU should closely monitor the situation, and keep abreast of the negotiations between PDCP and Department of Finance regarding possible labsorptiono of part of PDCP's foreign exchange losses by the Government or re-denomination of PDCP's foreign borrowings. Though PDCP has thus far remained current in its repayments to CBP, continuous monitoring of developments is necessary. 10. The economic contribution of the Apex project was limited by the fact that its implementation coincided with adverse economic and political conditions. DFU estimates that the 69 subprojects financed have generated net foreign exchange earnings of about US$75 million and provided about 7,800 additional jobs. The project's institution-building achievements are more noteworthy. Within the Central Bank, a semi-autonomous and well-trained organization was set up which acquired substantial expertise in term lending. As for Ithe PFs, they have set up special units or allocated and trained special staff to handle term lending. In short, the project, under difficult circumstances, encouraged the development of institutional capacity to undertake long-term lending among a relatively large number of financial institutions. Lessons 11. Experience in executing the Apex project suggests the following lessonst (a) Where there exists a core of creditworthy private sector PFIS and a qualified apex institution, the Apex approach to industrial lending is preferable to traditional DFC lending as it has the following advantages: (J) by enabling greater diffusion and use of project lending techniques throughout the financial system, it reduces the - 120 - quasi-monopolistic position of DFCs in term lending and promotes competition and (ii) the credit risk on the subloans to enterprises is borne by the PFIs which, being profit-oriented, handle them more efficientlyt they are not prone to succumb to the political pressures often associated with credit directed through DFCs and, because of their access to local funds, are in a better position than DFCs to offer a comprehensive package of financial services, including short- term working capital. (b) What discouraged loan utilization was the effective cost of funds to subborrowers because of their assumption of the foreign exchange risk. In retrospect, it is clear that it is difficult for private enterprises which do not earn foreign exchange to bear the foreign exchange risk. In an environment of market-oriented domestic interest rates and free capital movements, a better approach would be for the government to assume the foreign exchange risk for a market- related fee. This would be accomplished by the Government passing on the funds to intermediaries in the local currency at prevailing domestic interest rates. The difference between domestic lending and foreign borrowing rates would provide the Government with an implicit fee for assuming the exchange risk. The Future 12. While the Apex program has clearly succeeded in achieving its institution-building objectives, its main role to-date has been as a channel of foreign funds to finance long-term investments by the private sector. It was not intended to play any role in domestic resource mobilization. Furthermore, its location in CBP had to be reassessed in light of the fact that CBP wanted to reduce its involvement in the delivery of term credit. In light of these factors, the Bank has continued its dialogue with the Government since 1987 on ways in which the Apex experience could be built upon. The Bank's Financial Sector Study (Report No. 7177-PS, August 23, 1988) identified the lack of institutional arrangements for mobilizing and channelling long-term funds as a major constraint to investment and recommended that a revamped DBP could be developed to fill this institutional gap. This involves DBP acting as a predominantly wholesale financial institution catering to financial intermediaries rather than directly to business enterprises, along the lines of the Apex. In line with this, the Government has agreed to the transfer of the Apex Program from the Central Bank to DBP. The Industrial Investment Credit Project (para. 4) would reinforce the expected evolution of DBP by strengthening its wholesale lending function through provision of term funds for relending to PPIs. -121'- APEX DEVELOPMENT FINANCE UNIT (DPU) DEPARTMENT Or LOANS AND CREDIT PROJECT COMPLETION eEPCRT PHILIPPINES - INDUSTRIAL FINANCE PROJECT LOAN NO. 1984-PR MARCH 28, 1989 - 123 - PHILIPPINES INDUSTRIAL FINANCE PROJECT PROJECT COMPLETION REPORT-LOAN 1984-PH I. INTRODUCTION 1.01 This Project Completion Report (PCR) on Loan 1984-PH (Industrial Finance Project) was prepared in compliance with certain provisions embodied in the Loan Agreement dated May 2B, 1981 between the International Bank for Reconstruction and Development (IBRD) and the Central Bank of the Philippines (CBP). In addition, this PCR also seeks to assess the effectiveness of the project in achieving its goals. and objectives and reviews the manner of loan utilization of subprojects. 1.02 The basic information regarding Loan 1984-PH are summarized hereunder: Loan amount US$150.0 million Loan signing May 28, 1981 Effectivity date JuIV 27, 1981 Free limit US$4.0 million Maximum subloan size US$6.0 million .Interest rate 9 3/5 p.a. Commitment Closing Date Original Date June 30, 1983 As last extended June 30, 1987 Disbursement Closing Date Original Date June 30, 1985 As last extended June 30, 1988 a/ Amount disbursed US$44.651 million The above. loan is complemented by a US$100.0 million co- financing loan from a syndicate of foreign commercial banks led by Lloyds International, as Agent. Total amount disbursed as of closing disbursement date (August 7, 1985) was US$90 million. 1.03 -The following methodologies were followed in accomplishing this PCRt 1. A full listing of the 69 projects financed under the Program was made in reviewing the utilization of the loan; a/ Except for subproject PDCP/A-04/kPI whose disbursement closing date was extended up to November 30, 1988 as approved by World Bank. - 124 - 2. DFU staff were commissioned to gather financial and economic data on a representative sample of projects financed, after having taken into consideration its industry and regional classification, size, purpose of loan, and the. Participating Financial Institution (PFIs); and 3. Projects loans financed were evaluated against the objectives of the loan. II. THE APEX FINANCING PROGRAM 2.01 The Philippine government's concern for the future direction of the country's financial system led to the commission of a joint IMF/World Bank study on the nation's financial sector in 1979. As a result, the Philippine government prepared and implemented a comprehensive set of banking, monetary and fiscal reforms and, in general, provided financial institutions with the legal basis to undertake investments in equity and long-term loans. The aforecited reforms of 1990 formed the underlying basis for the establishment of the Apex Financing Program. 2.02 In 1978, Presidential Decree No. 1309 authorized the Central Bank to borrow from foreign banks and other foreign or international agencies for the purpose of financing its special credit operations which, as a consequence, gave CB full legal authority to undertake the Apex Financing Program. Corollarily, in April 10, 1991, the Monetary Board under Resolution No. 653 approved the draft documents which arose from the negotiations of the Industrial Finance Project. . Eventually, the loan signing for the US$15.0 million loan extended by the IBRD to finance the project was held in Washington D. C. on May 28, 1981. 2.03 As a condition of the US$150.0 million World Bank loan and in anticipation of the funding requirements of the local industries, the co-financing of the project by commercial creditors was vigorously pursued to supplement the World Bank Credit facility. Consequently, a number of international private commercial banks tendered offers to co-finance the project at very reasonable terms and on August 7, 1991, the Central Bank signed with a syndicate of twenty five (2*) private banks led by Lloyds Bank, International Ltd., as Agent, a US$100 million loan package. The aforesaid credit facility has a. 12-1/2 year term and interest rates at 3/4 percent over the London Interbank Offered Rate (LIBOR) for the first six years and 7/8 percent over LIBOR thereafter up to maturity. - 125 - Abinisttionof the Program 2.04 The Program is administered by the Apex Development Finance Unit (DFU) of the Central Bank of the Philippines (CBP). DFU is a semi-autonomous Unit which, until its merger with the Department of Loans and Credit, this Bank, in September 1989, reported directly to the Governor while operating under the broad scope of. Central Bank rules and regulations. The merger was in line, with CB's objective of realigning the various areas of responsibility of the Bank. General Responsib ilities and Function 2.05 Pursuant to the Program's prime objective of promoting and financing sound industrial development, CB-DFU undertakes the following functions: a. Administers financial resources borrowed from acceptable lending institutions for relending through accredited PFIs to finance the medium and long-term requirements of the Philippine industrial sector; b. Exerts continuous efforts at augmenting the number of PFIs to make industrial finance more widely available and t, promote efficient resource mobilization anc allocation;.and c. Provides guidance and assistance to PFIs to strengthen their institutional capabilities, particularly in long-term project financing. 2.06 CB-DFU's general policies are contained in its Operating Policy Guidelines (OPG) (Annex A) which covers the Program's basic lending principles and operating procedures. Formulation and Review of Operating Manuals, Policies and Procedural Guidelines 2.07 In an effort to improve the loan utilization and efficiency of the Apex Unit, a continuous review of the Unit's operating policies is being undertaken to make them more responsive to changing conditions. These operating guidelines include the following areas: (1) appraisal and accreditation of PFIs; (2) subproject loan review; (3) monitoring and supervision of' PFIs; (4) disbur$ements and accounting procedures; (5) application of the IBRD Currency Pooling System (CPS) in Apex Operations; (6) procurement; and (7) records management. - 126 - 1. ENVIRONMENT 3.01 1hpg Industrial Stor. During the loan commitment and disbursement periods for the Project, the Philippine .industrial sector was saddled with problems related to economic recession and political. instability. The Philippines, like other developing countries, was confronted with adverse recessionary pressures as reflected in a widening balance of payments deficit, the depreciation of the peso against other currencies, mounting demands for payment of short-term obligations and an increasing reluctance on the part of world capital markets to lend to developing countries. Available financing at the time was lent out at higher interest rates and shorter maturities limiting the access of borrowers to medium and long-term financing. 3.02 This unfavorable condition was further 'compounded with pilitical problems and hightened clamor for reforms in governmental economic policies. As a consequence, investment activities dampened and, shortly, led to,.amqng others, a slow availment of government-administered credit programs. Corollarily, business activities was characterized by low productivity, retrenchment programs and deferment of planned start-up and expansion projects, not to mention, the reluctance of investors to avail of foreign currency-denominated loans due to the corresponding foreign exchange risk problems involved. IV. LOAN OBJECTIVES 4.01 The Apex Financing Program was conceptualized and implemented to achieve the following objectives: a. To shift the focus of the World Bank's involvement from institutional issues to broader sector related issues; b. Through co-financing arrangements, additional resources from the international market could be raised for the financial institutions' relending operations; c. To establish an organization within Central Bank that has the capacity to relend the proceeds of the World Bank Loan through participating financial institutions (PFIs) and gradually assume the responsibility of guiding and supervising the. operations of the PFIs; and -127- d. To epand the number of financial intermediaries having access to World Bank funds, thereby encouraging development of institutional capacity for long term lending among a large number of financial institutions. 4.02 In summary, the Apex facility aims to facilitate the generation of cheaper long-term funds from multilateral and other 'foreign financial institutions to finance through a. network of PFIs medium to large industrial projects throughout the archipelago. V. BASIC TERMS AND EEATURES n!ding _ources 5.01 Sources. As indicated above, the Apex Financing Program was sourced from a US$150 million World Bank loan complemented by a US$100 million Commercial Loan from a syndicate of foreign banks led by Lloyds Bank International, as Agent. 5.02 The World Bank's past lending strategy in the Philippines focused mainly on the objective of promoting and strengthening the country's development finance companies (DFC's) to-enable*them to act as effective intermediaries of long&-term funds sourced principally from the World Bank'and other multilateral creditors. In the late seventies, the Bank's lending strategies were broadened to include industrial and financial sector policy Improvements aside from its lendings and institution building objectives. 5.03 Co-financing. The financing of development projects by the World Bank co-financed with other lenders had become an important strategy for increasing the flow of much needed capital to developing countries like the Philippines and for promoting the more effective use of such assistance. The project oriented. nature of the World Bank's lending program complemented by its exoertise and capabilities in appraising and administering projects has attracted co-financiers who are encouraged to channel funds to high priority development projects under favorable terms and conditions. Co-financing has enabled the Central Bank to avail of foreign commercial loans with longer repayment periods and attractive interest rates, lower- than what was normally available from these sources. - 128 - Basi Terms 5.04 Loan amounA. Of the US$250 million initial credit line of the Apex Program, only US*76.9 million was utilized for Apex project, while another US$57.8 million was held by CB-Treasury to be made available in case needed for projects. This credit, however, was not fully utilized due to various problems encountered during the whole implementation period (1981-1987). Of the US$250 million Apex Loan, a total of US$53.8 million was cancelled, leaving a balance of US$76.9 million committed to developmental projects. Of the US$100 million Commercial Loan component, a total of US$90 million had been drawn prior to the commitment termination date of August 7, 1985, of which US$32.2 million was utlized for Apex subprojects and the balance of. US$57.8, as previously mentioned, was handled by CB-Treasury. Drawings from the World Bank are made through a US$8 million revolving fund which is replenished as necessary, while the funds drawn from Lloyds are held and managed by CB-Treasury. Releases to projects are made by CB-Treasury upon receipt of payment instructions from DFU. 5.05 Commitment Period. Initial commitment closing-date for the World Bank portion was set on June 30, 1983. The, World Bank, however, upon requests of bank inter4nediaries through the DFU, allowed several extensions until June 30, 1987. 5.06 The Commercial Loan portion was subject to a commitment termination date of 4 years from loan signing date or up to August 7, 1985. Thus, the undrawn balance of US$10 million as of that date was automatically canceled. 5.07 Disbursement Closing Date. Similarly, the disbursement closing date which was originally set to close June 30, 1985, was likewise extended up to June 30, 1989. 5.08 Maturity and Grace Period. The original maturity period granted the Central Bank by its creditors was 20 years, inclusive of a 5 year. grace, or up to February 15, 2001 on' the World Bank portion, and 12 1/2 years, with a 5- year grace, or up to.February 15, 1994. on the Commercial Loan Portion. 5.09 Participating Financial Institutions (PFIs). The PFIs are allowed to grant loans with up to 15 year maturity but should not extend beyond February 15, e001 on the World Bank portion and February 15, 1994 'on the Commercial Loan portion, both with appropriate periods of grace (maximum of four years) which in no event should be later than August 15, 1989 (as last extended) on both components. - 129 - 5.10 Amortization Schedue. Amortization on both loans are due February 15 and August 15 of each year with lower amortizations on the World Bank portion for the first few year up too 1991 to accommodate payment of principal on-the Commercial Loan portion. These payments to Lloyds were, however, postponed due to the restructuring agreements entered into by the Philippine Government with its foreign creditors. 5.11 1 terest Rate. Basic policy is to relend the funds based on prevailing market rates. Thus, a semi-annual review of rates on other types of credit similar to the World Bank is being undertaken by the DFU regularly. To date, however, no adjustment has been deemed necessary on the World Bank portion. Thus, the World Bank loan has remained fixed at 9 3/5 percemt (fixed borrowimg cost of CS) plus DFU's 3/4, percent service charge per annum. The commercial loan is already market based and is quoted based on LIBOR (para 2.03) as determined by reference (syndicate) lenders every three to six months. The LIBOR quoted 180-day period August 15, 1988 to February 15, 1989 is 10 percent (including foreign banks' margin). 5.12 Commitment Fee. Since 1981 the Central Bank pays a commitment fee of 3/4 percent per annum on the principal amount of the World Bank Loan not withdrawn up to commitment termination date of June 30, 1987 and a commitment fee of 1/8 percent per annum on the Commercial Loan portion not. withdrawn .up to the commitment termination date of August 7, 1985. Other Highlights of the Main Loar, Agreement 5.13 Method of Disbursement. Withdrawals are generally made in the currency with which the expenditures to be financed are payable/paid. To expedite disbursements, the Apex Unit maintains with Citibank, New York a US$B million revolving fund from which approved disbursement requests from the World Bank loan component are paid. Disbursement requests from the Commercial loan component are paid by CB- Treasury which handles/manages the fund balance. 5.14 Method of Repayments. The Central Bank repayments are fixed based on an agreed amortization schedule appended to the Loan Agreement (adjusted as necessary due to line cancellations) subject to the rules under IBRD's Currency Pooling System. - Presently, maturing amortizations on the Commercial Loan-are being rescheduled in accordance with the Philippine restructuring Agreements entered into with sydicate of foreign creditors. 5.15 Currency Pooling_System. The Apex Loan is included in IBRD's Currency Pooling System. This system aims to equalize the exchange gains/losses to its borrowers by - 130 - revaluing daily the currencies included in the, pool and charging the borrower based on its proportionate share in the pool of currencies as, thus, revalued. 5.16 Premium on PrepAment. As a general rule, prepayment subject to payment of penalties, is allowed. This is, however, being discouraged, and requests are considered on a case-to-case basis. As of February 28, 1989, DFU has approved three prepayment requests (Phelps Dodge Phils., Union Ajinomoto, Inc., and Philippine Communications Satellite) and is on the process of evaluating two more (Indo-Phil Textile Mills and Republic Cement Corporation). DFU'-s decision to allow said prepayment are generally based on the impact of said prepayment on the company/project, in particular, and on the PFI and CB in general. 5.17 Cross-Default CAuse. The World Bank Loan Agreement contains a cross default clause in that the the World Bank shall suspend the right to make withdrawals in the event of failure by the Central Bank or the Republic of the Philippines to perform any of its obligations under any other agreement with the World Bank. Similarly, in the Commercial Loan Agreement, the Agent may declare the Central Bank in default when any other external indebtedness of the Central Bank is not paid when due or becomes due and payable before its normal maturity by reason of any other event of default. VI. UTILI?ATION OF LAN 1984-PH 6.01 Operating Performance. At the time the Apex Financing Program was created in 1990, creditors and CB management were confident that the economic recession, which began in 1979 would wane and that economic recovery was underway. Based on 'these expectations, it was believed that Apex Funds would be fully committed and utilized within the initial four-year availability period. Unfortunately, worldwide recession continued and the Philippines, like other developing countries, was confronted with adverse recessionary pressures which. threatened local investors. This unfavorable situation was further aggravated by political uncertainties as a result of heightened clamor for political reforms under the previous regime. Business activity was characterized by low productivity, retrenchment programs, and general unwillingness to pursue new and expansion projects. Investors became especially captious in availing foreign currency loans because of the sharp foreign exchange adjustments made during the period up to 1966 (the exchange rate jumped from US$1 - PB in 1981, to P14 in 1983, and to P20 by end 1986). With this scenario, the Apex fund utilization had been understandably below expectations despite two extensions of-the commitment deadline granted by the World Bank. - 131 - 6.02 The Program, however, had been quite successful in the attainment of its other objectives, particularly those that relate to its institution building role. The program has made possible the development, within the Central Bank and the PFIs, of organizational units that have the capability to handle the various aspects of long-term project-based lending. 6.03 Remedial Measures Adopted to Enhance Apex Line Utilization. In response to the problems previously-cited, CB-DFU in 1983, provided a set of financing facilities to counteract necessary pressures, particularly to reduce foreign exchange risk and stimulate investments. These measures included the following: a) Peso-Denominated Loan Facility.- Under this facility, a.portion (subsequently increased up to 100 percent) of subloans to foreign exchange earning/ saving projects may be peso-denominated, with Central Bank assuming partly/totally the foreign exchange risk on the foreign currency liabilities. To avail of this facility, export-oriented and import-substituting projects must show capability to generate net foreign exchange savings/earnings at least sufficient to debt-service their Apex Loans. The Monetary Board authorized US$75 million of Apex funds for lending under this facility. As of commitment closing date total loans. approved under this facility amounted to US$28.8 million. The 90-day MRR set every February 15, May 15, August 15, and November 15 has been applied on peso-denominated loans approved after June 30,' 1996. Interest rate is set at one percent over the 180-day Manila Reference Rate (MRR) determined every February 15 and August 15, of each year on peso- denominated loans approVed before June 30, 1986. The former was adopted to ensure that interest on peso- denominated loans would approximate prevailing market rates. b. Dollar-Denominated Loan. For funds to be disbursed for foreign expenditures from the World Bank line, the borrower was given the option to choose between a-100 percent dollar-denominated loan against a loan involving various currencies under the World Bank (IBRO) Currency Pooling System (CPS). Accordingly, repayment by the borrower to the Central-Bank will be in pesos based on the peso to dollar exchange rate at the time of payment. The option to borrow in dollars is offered to counter the general reluctance of borrowers to borrow under the Currency Pooling System of the World Bank where the currency'of repayment is unknown and therefore, hedging is difficult. Total loan approvals for pure-dollar loans totalled US$7.9 - 132 - million, representing 332e percent of the USSe3.8 million foreign-currency loan approvals under the World Bank portion. c) Raw Materia Inyentory Financing. This facility was an off-shoot of the foreign exchange crisis which started in late 1983. Because of the foreign exchange allocation scheme then adopted by the government, companies found it difficult to import their raw material requirements resulting to a drastic -reduction in their level of operations. As a "stop-gap' measure, CB-DFU had put up this facility to finance a reasonable level of imported raw materials and supply inventory requirement to operate existing facilities at viable levels. d) Apex Amortization Adjustment Facility (AAAF). The AAAF was created primarily. to provide a liquidity assistance mechanism for Apex borrowers whose finances might be affected by any adverse foreign exchange developments. The AAAF provides a ready source of peso funds from which advances may be made to sub- borrowers, to cover additional peso cost of repayment due to substantial currency adjustment. Funds for the AAAF are derived from the followings a. Loan collections in excess of amounts due for immediate remittance to DFU creditors; b. Other internally generated cash flow from Apex operations arising from interest spread and service fees net of operating expensest and c. Such other funds as the Central Bank may from time to time decide to make available for the AAAF. The funds herein accumulated are tamporarily invested in government securities and hopefully, would be used for second generation relendings tparas. 8.14 and 8.15). To-date, only one (1) sub-barrower, Nasipit Lumber Co. has availed of advances under the AAAF amounting to P1,90,280.61. Said advances have been fully settled. e) Refinancing. To a certain extent, refinancing of earlier loans -from foreign sources at onerous terms (higher rate,' shorter maturity) was allowed under the Program if considered important to the viability of an Apex financeable project. - 133 - f) Forward_Covr_Facilityon Swap Basis. One other way to partly cover the Apex borrower from the .exchange risk between the US dollar and the Philippine peso was the option to obtain forward cover on swap basis with the Central Bank from the proceeds of foreign currency loans approved under the Apex Program for domestic expenditures. Only one (1) project, Food Terminal, Inc. (FII) availed of the Swap Facility for its US$150,000 loan.. The facility had been scrapped following the Monetary Board's decision to discontinue, effective October 15, 1984, the issuance by the Central Bank of new forward exchange cover for foreign obligations. g) Other Measures. To encourage PPIs to keep their remaining uncommitted Apex lines and reduce their carrying cost in keeping the Apex line, pricing had also been continually reviewed and adjusted where possible. Commitment fee rates on the. uncommitted portion of the PFIs' Apex lines were reduced by 50 percent, effective June 30, 1986. Thus, commitment fee rates on the first six (6) accredited PFIs were reduced to 1/2 of 3/4 percent and 1/2 of 1/2 percent, for the uncommitted portion of the World Bank and CL lines, respectively. For the other PFIs, commitment fee rote was reduced to 1/2 percent for both the IBRD and CL lines as against the previous one percent. Upon commitment to project, however, the old commitment rates were applied. 6.04 Of these, the most beneficial measure to borrowers had been the Peso-denominated Loan and the Raw Material Inventory Financing Facilities which were primarily responsible for the upsurge in project loan requests in 1984. As mentioned earlier, one major factor that has deterred businessmen from pursuing expansion plans and new ventures is the foreign exchange risk that borrowers must bear on these loans. Dialogues between CB-DFU and the PPIs revealed that many projects, which these PFIs initially evaluated as profitable, were. adversely affected by the successive deprecation of the peso against other currencies, more particularly the U.S. dollar. Investors have found it difficult to quantify foreign exchange risks which had posed grave problems to both sub-borrowers and the PFIs. 6.05 Rate of Utilization. As reflected in Annex B only US$76.9 million or 59 percent of the total loan approvals of US$130.9 million was disbursed as of end of disbursement period *. This was attributed to the substantial loan cancellations aggregating US$53.2 million (29 subprojects) as a result of the then prevailing economic and political instabilities (para. 6.01). 6.06 Fund Allocation. Presented in Table 1 is a summary of the credit line availments by the PFIs. With the closing of the commitment period on June 30, 1987 and the disbursement period on June 30, 1988, all uhavailed loans and undrawn balances of previously approved Apex loans were cancelled effective July 1, 1998, except for the Kewalram subproject (PDCP/A-04/KPI) whose disbursement closing date was granted extension by the World Bank up to November 30, 1989. Thus, total Apex loans committedand disbursed to 69 projects as of December 31, 1988 amounted to US$76.9 million. Of this amount, US$40.14 million or 52 percent remains outstanding. Table 1 Summary of Apex Fund Utilization-(Per PFI) As of December 31, 1989 (Amount in Million Dollars) % of Out- Outstanding standing No. of Total Balance to total Name of Pro- Amount % to amount IntJ%itution Rrojects 1/ Disbursed Amount Total disbursed Anscor Capital 5 US$7.29 US$3.28 8.2% 45.0% Bank of P.I. 4 6.27 3.79 9.4 60.3 Citytrust 2 2.97 1.59 4.0 53.5 Far East Bank 2 1.74 1.58 3.9 90.9 Interbank - - - - - Metrobank 3 4.50 2.22 5.5 49.3 PCIBank 4 2.86 2.20 5.4 76.9 PDCP 33 38.36 15.76 39.3 41.1 Sub-Total .5_3 63.99 30.41 75.7 47.5 PISO Bank f/ 14 9.70 6.69 16.7 69.0 Manilabank 0/ 2 3.20 3.04 7.6 95,0 Sub"Total 16 i8L 2_1 24.3 75.4 GRAND TOTAL 69 US$76.99 US$40.14 100.0% 52.2% 1/ Net of cancellations. 2/. Original line is US$40.0 million. Uncommitted line of US$30.3 million was cancelled when PISO Bank was placed under receivership. 3/ Original line is for US$10.0 million. Uncommitted line of US$6.8 million was cancelled when Manila Bank was placed under receivership. - 135 - 6.07 As shown in the proceeding table, the biggest recipient of the Apex Loan Program was PDCP, accounting for 48 percent of the total number of projects approved and 50 percent of total amount approved .(both net of cancellations). Except for the loans granted through Manilabank, and PISO Bank which are presently under liquidation, all Apex loans are considered to be fully recoverable. 6.08 Flow of Suboroiecs. Since the start of operations.in August 1981 up to the end of the commitment period on June 30, 1987, CB-DFU received a total of.123 subproject loan applications aggregating US$183.5 million. Of said- 123 subprojects, 25 subprojects aggregating US$53.4 million were withdrawn or cancelled prior to DFU/WB's approval thus leaving 98 subprojects totalling US$130.1 million approved as of the end of the commitment period. Of the 98 approved subprojects, however, only 69 projects with total availments of US$76.9 million (net of cancellations) were implemented. A summary of the flow of Apex subprojects is presented in Table 2 while a summary and the details of approved subprojects (classified according to PFI), are presented in Annexes B and B-1, respectively. Also, summaries of quarterly loan approvals and cancellations from 1981 to 1987 and of commitment dates and disbursements.are shown in Annex B-2 and B-3, respectively. Table 2 Summary of the Flow of Apex Subprojects As of December 31, 1988 (Amounts In Million Dollars)' No. Amount Cumulative subproject.s received up to June 30, 1987 '*/ 123 US$183,486 Lesss Subprojects withdrawn/ cancelled prior to DFU/WB approval (g5) 53.350) Total subprojects processed/approved 99 130.136 Lesst Loan cancellationst - Up to December 31, 1987 26 46,572 - January to December 31, 1988 3 6,676 Total 29 53.P48 Net Loan approvals as of 12.31.88 69 US$ 7A88 4/ Commitment period officially ended on June 30, 1987. - 136 - Subproject Characteristics 6.09 Summarized hereunder are some basic information concerning the subproject financed under Loan 1984-PH. Annexes C-I. to E present the detailed information on the characteristics of the subprojects financed under the credit facility. Basic Data on Subprojects (In Millions) No. of subprojects 69 Average subloan size US$ 1.1 Nature of subprojects New 3 Expansion 66 Total project cpst P 3,427.1 Total Apex financing US$76.9 Total.incremental employment 7,836 Investment cost per job P .437. Total sales "- P37,301.7 Total Net profit *^ 3,381.2 Total exports ?' P 1,469.2 Total exports as . of total sales e' 3.9 V. 6.10 Loan Mix. Except for five subprojects amounting to US$4.7 million which were sourced 100 percent from the commercial loan* portion, the Apex loans were funded with a mix of around sixty percent from the World Bank loan and forty percent from the Commercial Loan. Despite the. availability of peso-denominated loans, US$48.1 million or 63 percent of total approvals (net of cancellations) are in foreign currency. Some borrowers were willing to assume the foreign exchange risk on foreign-currency denominated loans because of the comparatively low LIBOR-based interest rates. Interest rates on the Apex peso-denominated loans are based *on the 90-day or 180-day Manila Reference Rate (para. 6.03 a) plus the service fee of CB-DFU and the spread of PFI. In addition, Apex peso-denominated loan facility is limited to export oriented and/or import substituting companies. A summary of subprojects according to loan mix is presented in Table 3. 5/ Incremental amount on projects financed difficult to determine as per end-user borrowers/companies. - 137 - Table 3 Apex Subprojects According to Loan Mix As of December 31, 1988 (In Million Dollars) Fund Source/ Net Amount %-. Currency Denomination Approved Share World Bank Loan Foreign Currency $ 23.79 31% Local Currency 20.e6 Sub-Total 44 . Commercial Loan Foreign Currency e4.33 32 Local Currency 7.91 10 Sub-Total 32.24 42 Total . 76.89 100% 6.11 Loan Siz. The average loan size for the 69 net approved subprojects was US$1.1 million or approximately P23.5 million &'. A summary of sub-projects according to loan size is shown in Table 4. 6 Exchange rate useds US$1 = P21.335 (December 31, 1988 exchange rate). - 138 - Table 4 Apex Subprojects According to Loan Size As of December 31, 1988. Amount In Million Dollars) Net Average Subproject No. of % Amount Loan Classification Projects Share Ag.rypd "A" 7 10% $15.47 $2.211 "B" 28 41 41.75 1.491 "C" 29 42 14.99 0.517 "DC" 5 7 40.935 Total -9 100% 17_689 6.12 As shown therein, the bulk of Apex financed projects, in terms of number, fell under "B" (28 subprojects) and "C" (29 subprojects) subproject classifications which accounted for 41 percent and 42 percent of total number of approved projects, respectively. The average loan size for "A" subprojects is lower than CB-DFU's free limit of US$4.0 million because of partial cancellations made after approval. In addition, some of these subprojects were approved prior to the establishmont of CB-DFU's US$4.0 million free limit in late 1982 and thus, were classified as "A" subprojects regardless of loan size. 6.13 Industry Profile. The Apex financial assistance is widely distributed among various industries. In keeping with the main thrust of the Apex Loan Program which is to provide long-term funds for industrial projects, the 7/ For purposes of classifying projects as to loan size sub-projects submitted to DFU for review/approval were categorized as-follows: "A" subprojects - above US$4.0 million and required approval by the World Bank "B" subprojects - above the PFI' "free lending limit" but up io US$4.0 million "C" subprojects - within the PFI's "free lending limit" "DC" subprojects - sourced purely from the commercial loan portion. - 139 - manufacturing sector was the biggest recipient of the Program accounting for 63 percent (US$48.3 million) of total amount approved and disbursed and about 70 percent in terms of number.(48 out of 69 projects). The remaining 37 percent of Apex funds were distributed as follows: 21 percent to the telecommunications and shipping industries; 12 percent to the construction industry; one percent each for energy, gas and water sector and mining and quarrying sector; and two percent for the other industries. A summary of subprojects according to industry sector is presented in Annex D. 6.14 FRSgiaDl Distribution. In terms of location, the bulk (36 projects or 52 percent of total approvals) of projects assisted went to the National Capital Region (NCR) or Greater Metropolitan Manila Area totalling US$41.6 million (54%). Because of its proximity to NCR, the center of business activity, the second biggest share went to the Southern Tagalog region which had 21 projects (31%) amounting to US$27.1 million (35%). This was followed by Northern Mindanao Region with five subprojects aggregating USt3.0 million (4%). The Central Visayas and Southern Mindanao Region had two subprojects each (3% each) totalling US$5.2 million. The Ilocos, Central Luzon and Western Visayas Region had one subproject each (one percent each) aggregating US$2.0 million. 6.15 No subprojects were financed in five regions, namely: the Cagayan Valley, Bicol, Eastern Visayas, Western Mindanao and Central Mindanao. The political/economic situation in these areas may have affected investors decision to further invest in these areas. A summary of the regional distribution of Apex subprojects is presented *in Annex E. Procurement 6.16 One major item that DFU pays considerable attention with respect to evaluation of projects submitted for financing under the Apex Loan Program was the method of procurement chosen for each sub-project - below as well as above its free Unit. DFU tries to ensure that the PFI has carefully weighed the advantages and disadvantages of the various procurement methods and that acceptable practices are followed in the procurement of goods and services necessary to carry out the Project. This is to enable a reasonably broad domestic and/or international selection and considered comparison of bids, offers or quotations, to ensure optimum quality at the best possible price. Especially for large projects, in the context of Apex arrangements, DFU expects that International Competitive .Bidding 41CS) has been explicitly considered. DFU believes that the PFIs are in a unique position to guide and assist borrowers as to which procurement method would appear to be the most appropriate and beneficial in each case. In - 140 - particular, DFU tried to encourage end-users/borrowers to apply ICB procedures whenever it would seem, Judging from the size and nature of the purchases to be made, that the project would benefit from the economies accruing from this method of procurement. DFU's efforts toward this direction was somewhat strengthened with the issuance of P.D. No. 1764 dated January 11, 1981 on "Regulation and Instructions on International Competitive Bidding for Major, Industrial Projects," which, in some way, eliminated some of the procurement problems of the PFIs. Towards this objective, DFU had developed a ."Procurement-Questionnaire" which was required to be accomplished and submitted with each project loan proposal (Annex F). In general, however, PFIs had difficulty influencing projects specific procurement practices and decisions and, as well as project designs. 6.17 Of the 69 projects financed, none has applied ICB as no loan is that big enough to warrant the use- of said procurement method. Almost all projects have used the "comparative shopping" procurement method. The suppliers were chosen on the basis of several factors: suitability of equipment, availability of spare parts, efficiency of service, reliability of suppliers, compatibility with present equipment, and price. Most of the machinery and equipment financed are directly imported. VII. DEVELOPMENTAL ROLE OF THE APEX FINANCING PROGRAM 7.01 Despite the under-utilization of the Apex Financing Program, it provided the necessary financial support/assistance to both the end-user/borrower and PFIs in the development of their respective medium and long-term projects in a period of distinct political, economic and financial instability prevailing in the country. Corollarily, the Program likewise, extended to its PFIs, the required technical support through- the conduct of training programs, in coordination with the United Nations Development* Programme .(UNDP), World Bank and other government and private institutions (para. 8.04). 7.02 Economic Impact. From 1981 to. 1988, the Apex Financing Program extended credits to 69 subprojects through nine (9) participating financial. institutions aggregating US$76.9 million. The total number of incremental employeint generated by these Apex-assisted projects since 1981 was estimated at around 7,836. These projects generated sales amounting to P37,301.7 million of which 3.9 percent came from export.sales. In addition to the foreign exchange earnings generated by these subprojects, the incremental tax payments made by the sub-borrowers directly contributed to the country's economy. Data on the financial, operational and economic performance of subprojects financed are presented in Annexes G-1 and G-2, while the status of 141 - implementation and current status of subprojects are presented in Annexes G-3 and G-4, respectively. 7.03 Of the fifteen (15) subprojects surveyed, 40 percent (6 subprojects) surpassed or equaled their capacity utilization targets during the first year while another 40 percent (6 projects) had minimal shortfalls in their capacity utilization projections. The remaining 20 percent (3 projects) which were surveyed represented companies which shut down operations due to unavoidable reasons and firms which utilized their Apex loans for working capital purposes. During the second year of full operation, 60 percent (9 subprojects) exceeded their capacity utilization targets while 33.3 percent (5 subprojects) were behind their capacity utilization projections. 7.04 First and second year sales directly attributed to these sample subprojects amounted to P6,593.9 million and P6,105.8 0' million, respectively, higher than the subproject appraisal estimates of P5,479.5 million and P5,549.8 million for the same period. Forty percent (6. subprojects) of the subprojects surveyed exceeded their total sales targets during the first year of full operation while another forty percent (6 subprojects) fell slightly below project appraisal estimates. Three subprojects (20 percent) had no available data of income for the first and second years of full operation. 7.05 Annex 6 rvflects the details of the economic performance of the subprojects surveyed. Based on the information available for the subprojects surveyed, 3,705 jobs were created. The aforesaid figure exceeded the appraisal estimate of 3,493 by 6 percent. The average cost per job of Po.e45 million was lower than the appraisal estimate of P1.202 million by 29.7 percent. The subprojects surveyed contributed P1,070.5 million in export sales to the Philippine economy during its efirst full year of operation which is just about approximates the subproject appraisal estimate of P1,079.5 million. Data on the export sales of the aforesaid subprojects for their second year of full operation was not fully available. However., six subprojects (40.0 percent of subprojects surveyed) had an aggregate export sales of P379.6 million during the aforcited period, thus, surpassing the project appraisal estimate of P223.3 million for said six subprojects by 70.0 percent. 7.06 Ex-post FRRV and ERRs were calculated for a sample of eleven (11) subprojects. With the exception of four (4) subprojects (36.3 percent), ex-post returns exceeded subproject appraisal estimates by reasonable margins. Ex- post FARs ranged from 16 percent to 120.8 percent, with a 8/ No available data of second year income for four (4) subprojects. - 142 - median of 49.86 percent (compared to an ex-ante range of e3.0 percent to 58.53 percent and a median of 38.39 percent) while ex-post ERRs manifested a range of 28.0 percent to 189.43 percent with an average of 70.83 percent (compared to an ex-ante..range of 24.38 percent to 91.55 percent and a median of 55.63 percent). VIII. INSTITUTIONAL DEVELOPMENT Institutional Aspects 8.01 Mnagment/OrqaniXation. Policy issues affecting Apex operations are decided by the Monetary Board, upon the recommendation of CB-DFU management. However, operational matters such as loan approvals are decided upon by DFU management. 8.02 The Apex structure was designed to have a central body (Central Bank through the Apex Unit) handle the effective and efficient sourcing and distribution of long- term funds and resources. As the government monetary arm, CBP has access to and bargaining advantage with international creditors. As a policy formulating and regulating body, it has the capacity to formulate policies, and guidelines to direct flow of these funds through carefully selected financial intermediaries to economically desirable priority projects. With the wide branching networks of accredited commercial' banks, financial assistance is expected to reach projects benefitting a wider sector, including the countryside. 8.03 As previously .mentioned, the administration of the Program is being handled by DFU. DFU has two operating groups,.namelys the Operaticns Group *0G) and the Finance, Research and Administrative Geoup (FRAG). Of an authorized plantillaof 28 positions, the Unit has an existing staff complement of 21 (16 professional and 5 support personnel). The present organizational structure of DFU is presented in Annex H. 8.04 Traininq. - CB-DFU under the United Nations Deelopment Programme (UNDP) Technical Assistance Project No. PHI-80-018 and in coordination with the World Bank, conducted twelve (12) seminars from 1981 to 1986 which were attended by 318 participants from both the CS-DFU and PFIs. In addition, UNDP Project No. PHI-80-019 financed the expenditures necessary to enable CB-DFU staffmembers to participate in 6 local and 30 foreign training programs. The details of the CH-DFU training programs fdnded under UNOP Technical Assistance Project No. PHI-90-018 are presented in Annex I. - 143 - PprtiFiatinG Fincial Instutions 8.05 Accreditation ProceV%. Financial institutions which participated in* the Apex Financing Program passed an accreditation process wherein the institutions were subjected to a comprehensive evaluation by DFU with a view to assess its suitability as an efficient intermediary for industrial financing. The basic criteria which are utilized in the accreditation of Apex PFIs ares a) sound financial position and performance and a healthy'portfolio; b) sound. operating policies and procedures and a development-oriented strategy for future operations; * c) an organization, management and staff with the requisite expertise to undertake term lending operation including the technical, economic and financial appraisal of projects and their supervision; and d) compliance with all relevant loans, decrees and regulations to the satisfaction of all regulatory authorities. 8.06 Accredited Financial Institut!2"s. Since the Program's creation in August 1980, DFU has accredited eleven (11) financial institutions under the Industrial Finance Project. Of those accredited, two (2) are investment houses, seven (7) are private commercial banks (of which six (6) are expanded commercial banks) and another *two (2) are development banks (1 government-owned and another privately- owned) as follows: Date of Original Name of Institution Accreditation Line (USS M) Private Dev. Corp. of the Phil. 09.21.81 US*60.0 PISO Bank- 0.21.91 40.0 Development Bank of the Philippines 08.21.81 90.0 Metropolitan Bank & Trust Co. 05.0e.ee .30.0 Anscor Capital & Investment Carp. 12.02.82 10.0 Manila Banking Corporation 01.17.83 10.0 Phil. Commercial International Bank 09.13.e4 10.0 Citytrust Banking Corporation 11.16.84 25.0 Bank of the Philippine Islands 04.03.85 10.0 Far East Bank.and Trust Co. 05.29.87 10.0 International Corporate Bank 06.1.87 7.0 - 144 - 8.07 As of disbursement closing date, period, CB-DFU had eight active PFIs comprising of six (6) private commercial banks (BPI, Citytrust, FEBTC, Interbank,.Metrobank and PCIB) and two (2) investment houses (ACIC and PDCP). Previously' accredited, but, delisted/suspended for various reasons ares Development Bank of the. Philippines (due to substantial portfolio problems prior to government rehabilitation), PISO Development Bank and the Manila Banking Corporation (both under liquidation). Monitoring-and Supervision qf PFIs 8.08 One of the objectives of CB-DFU is to provide guidance and assistance to PFIs to improve their organization, intermediation efficiency and project evaluation efficiency. In this regard, DFU monitors the performance of PFIs to ensure that they continue to operate in conformity with sound principles and are upgrading the quality of their staff and their appraisal and analytical skills. To achieve these, DFU undertakes a performance evaluation of each PFI, if possible, at least once a year. In addition, PFIs are required to submit periodic reports (quarterly and semestral), which, in turn, is reviewed by DFU staff, the corresponding evaluation report of which is submitted to PFI management for comments and finally sent to WB. Procedures and Standards 8.09 Project Appraisal and Supervision. As embodied in the Unit's Operating Policy Guidelines, DFU is not involved in the selection and evaluation of projects since this function is exercised by PFIs in accordance with established and agreed criteria. However, DFU adopts the "appraisal of an appraisal" principle in evaluating credit proposals and critically reviews the PFIs methodology/process of arriving at judgements or conclusions. A summary of DFU's subproject review process is presented in Annex J. 9.10 The supervision and monitoring.of Apex-financed sub- projects is the responsibility'of the PFIs. In this regard, Apex PFIs furnish CB-DFU with periodic reports on the status of th@ sub-projects financed. Although project supervision is a major task of PFIs, CB-DFU, in coordination with . the PFIs, also conducts occassional project visits to determine status of implementation of projects financed. 9.11 DFU maintains a continuous relationship with accredited PFIs, not only during the active phase of loan commitment and disbursement, but during the entire life of the loans. The Unit is not only interested in the prompt servicing of loans, but as a development finance institution, DFU, through the PFIs, also looks into the - 145 - accomplishment of the purpose/objevtives of the project financed. 8.12 LendingRates. DFU's basic policy is to relend Apex funds based on prevailing market rates. Thus, a semestral review of rates on other types. of credit similar to the World Bank is being undertaken by the DFU regularly. However, due to the declining market rates, no adjustment has been deemed necessary until year-end .1989. Thus, the* World Bank loan remains fixed at 9 3/5 plus DFU's 3/4 percent service charge per annum. The commercial loan is already market based and is quoted at 3/4 percent over six months LIBOR up to August 15, 1997 and 7/8.percent over six months LIBOR thereafter. Peso-denominated loans granted before June 30, 1986 are charged interest on the basis of the 180-day Manila Reference Rate plus one percent and 90- day MRR on peso denominated loans granted after said date. As regards the PFI's on-lending rates to sub-borrowers, interest spreads ranging from 2 to 4 percent were charged by the PFIs to their respective Apex fund end-users. 8.13 Resource Mobilization. The Apex Loan Program mainly funded through IBRD Loan No. 1984 PH was somewhat circumscribed by a commitment date which terminated on June 30, 1997. Hence, a gap in the availability of funds from DFU to finance viable -industrial projects was created and needed to be filled until the next loan to the Industrial sector becomes more definite. 8.14 Interim Financing Facility. Consequently, in early 1987, DFU endorsed to the Governor a proposal to allow an Interim Financing Facility for medium - and large-scale industrial borrowers, which, otherwise, would have no access to long-term funds for economically desirable development projects. Funding for the interim facility was proposed to be sourced from surplus loan collections and net operating income of the Apex Loan Program. As conceived, it will not only provide continuity to the Apex Program but likewise maintain the marketing momentum it had started. Moreover, it will prevent the dislocation of trained professionals, both at DFU and PFIs, who have developed and upgraded their competence in development financing over the years. 9.15 However, the current thinking now prevailing within the Central Bank is that it should avoid being involved in development funding, among others, and that it should concentrate its efforts on purely central banking functions. As a result, there is an on-going proposal to transfer the administration of the Apex Financing Program to the Development Bank of the Philippines (DBP). With these developments, DFU's proposal to utilize the Program*s surplus collection for relending was temporarily deferred. - 146 - IX. FINANCL CNDITION AND OPRATING PERFOMANCE 9.01 As required. by the World,Bank, DFU maintains its own. set of books of accounts to record all transactions related to Apex Financing Program. These transactions are also reported daily to CB's general accounting for consolidation. 9.02 Financial Position. Presented in Annex K is a 5-year Comparative Balance Sheets of the Apex Financing Program as of December 31, 1984 to 1988. Consolidated in the statements are the account balances of the Apex Amortization Adjustment Facility (AAAF) which represents principally peso collections on maturing sub-loans net of amounts paid to the creditors. As early as 1983, some sub-loans started their principal repayments which constituted the initial AAAF. funding. Said fund is temporarily invested in government securities with short-term maturities. Total AAAF funds as of December 31, 1988 amounted to P886.6 million (approximately US$41.6 million) in the form of peso deposits with CB, investment in government securities, and accrued interest receivable. 9.03 For -the period 1994 to 1987, the Program's total assets (in terms of US dollars) have registered an average growth of 10.4 percent. In 1988, however, total asset has declined by US$29.4 million due mainly to lack of new lines for relending coupled with repayments on outstanding accounts. 9.04 Project loans have grown from US$6.3 million in 1982 to US$40.6 million in 1984, US$50.8 million in 1986, and further tq US$52.1 million in 1987. With the end of the commitment closing date in June 30, 1987 and total committed loans nearly fully disbursed as of year-end 1987, total project loans in 1988 have declined by US$10.5 million or 20.1 percent. 9.05 Portfolio Auality. With the exception of Apex accounts with the Manila Banking Corporation and PISO Development Bank (both currently under liquidation), collection performance between the eight participating financial institutions and CB-DFU has remained current and free from arr"arages. '" On the other hand, collection performance between PFIs and end-users improved substantially. As of September 30, 1988, only two PFIs, namely, BPI and PDCP have arrears on their outstanding Apex lendings. Total arrears reported by both PFIs was posted at P33.3 million, equivalent to 34.4 percent and 5.3 percent 9/ DFU automatically debits the PFI's demand deposi4 accounts with the Central Bank for the total amount due on collection date. -147- of principal affected by arrears of P96. millon and total loans outstanding of approximately P625.4 million, respectively. The bulk of past due accounts (P.13.2 million or 39.6 percent of total arrears) have been in arrears for less than three (3) months. Arrears of more than one (1) year amounted to P10.e million or 30.6 percent of total arrears. Detail1s on the past due level of the aforecited PFIs are presented below: Outstanding eF1 Sub-§orrowgr -alance Arrears (In Million Pesos) BPI Asec International P 1.3 P 0.4 PDCP Apo Cement Corp-. 42.7 4.6 PDCP Calatagan Resort, Inc. 13.5 1.6 PDCP Freeman, Inc. 13.2 7.1 PDCP Lorenzo Overseas 10.1 . 8.5 PDCP Nasipit Lumber 16.0 11.1 .Total P 96.9 P33.3 9.06 On the liability side under foreign loans payable, CB started its principal amortization payment on its Apex Loan from the World Bank from 1987. The commercial loan with Lloyds, Int'l. (as Agent), on the other hand, is included in .the accounts being periodically re-structured as part of the country's foreign debt. The December 31, 1989 balance of US463.347 million excludes the US$24.85 million restructured loan portion booked by CB-Treasury and classified as Consolidated Foreign Borrowings Program (CFBP) advances. 9.07 Profitability. Shown in Annex L is a Comparative Income Statement for the years 1984 to-1988. The Apex loan, while meant to encourage economically desirable ventures, was not conceived as a subsidized form.of credit nor as a profit-taking window of the Central Bank. The target market being privately-owned and medium- to large-scale developmental projects, pricing is generally based on prevailing competitive interest rates. The general policy is cost plus a minimum service fee for administration and premium on peso loans equivalent to the difference between the prevailing peso and foreign currency interest-rates. Problems Encounteredfftcting Cost to CB and- to nd-User% 9.08 As noted earlier, economic, political and operational problems resulted to the low utilization of the Apex Loan. Discussed below are the financial problems affecting cost to CD, PFIs and end-users. - 148 - 9.09 Pao to Dollar Exchanqe Risk. The peso to dollar exchange rate had jumped from P9.2 to US$1 in 1981 to P21.335 by December 31, 1989. Some of those severely hit in 1983-1995 were unable to recover and had caused the closure of PISO and major problems to other smaller institutions like PDCP. Not only the project proponents, but, also the PFIs, in general, have expressed reluctance to expand their foreign exposures even up to this time. 9.10 Cross-currency Risk. Borrowings from the IBRD are further exposed to cross-currency risk because the obligation of the borrower under the CPS is the equivalent of its pro-rata share in a pool of currencies that is revalued daily based on the movement of the various currencies comprising the "pool" (which includes principally Swiss francs, Deutch marks, U.S. dollars, Japanese yen, etc.) Borrowers, therefore stand to realize gains (as in 1981-1982) or incur losses (as in 1983-1988) depending on the movement of the pool value. The magnitude of the uncertainty involved has made project proponents even more reluctant to avail of loans under the CPS. 9.11 Below is a comparative table on the outstanding withdrawals of CB and PFIs and their counterpart outstanding principal obligation as of December 31, 1988, based on * cumulative pool values as of same date (amounts in thousand U.S. dollars). LOANS UNDER IBRD'S CURRENCY POOLING SYSTEM December 31, 1988 Withdrawal Principal Additional Outstanding Outstanding Liability Borrower (Historical) (CPS Value) (Exchange Loss) Loans payable to .IBRD by Central Bank 43, .9 66,130.2 2311.3 Less portion chargeable to: PDCP 5,084.7 7,397.1 2,31e.4 PISO Bank 973.3 1,448.5 475.2 Manilabank 1,846.1 2,787.8 941.7 . Metrobank 1,229.6 1,449.9 221.3 ACIC 691.3 767.3 76.0 Sub-total .98f4.0 13,850.6 4,026.6 Balance 33,994.9 52L279.6 19,284.7 - 149 - As shown, if the IBRD loans were to be paid on December 31, 1989, Central Bank would have to shoulder a net additional cost of US$18.3 million representing cross-currency exchange losses under the CPS net of amount chargeable to PFIs/sub- borrowers. 9.12 The Apex Program's performance shows that after registering growth up to 1985, net income has declined. In fact for the last two years the Program has incurred a net loss of US$501.7 thousand and US$57.1 thousand in 1987 and 1988 respectively. This is basically due to the added cost of maintaining the US$8.0 million revolving fund with Citibank, New York, the accumulation of surplus peso funds (due to earlier sub-loan maturities) which it cannot relend, negative spread on investments, the drop in peso interest reference rates (MRR) which has wiped out the expected pramium (foreign exchange rate differential) on peso- denominated loans, and the cross-currency and foreign exchange losses CB has to assume on its pure-dollar and peso-denominated loans. In the over-all, however, the Program has registered a cumulative net income of approximately US$2.9 million. 9.13 Audit. As required under the Loan Agreement between CBP and IBRD and the pertinent provisions of the Philippine Constitution, a yearly audit of the Program's books of account is being conducted by the Commission on Audit (COA). Since start of operations, COA has consisteptly issued an unqualified opinion on the Program's financial statements. X. (VALUATIO OLF PARTCIEATJNG FINANCIAL INSTITUTIONS Anscor Capital and Investment Corporation (ACIC) 10.01 RAcgrond. Anscor Capital and Investment Corporation (ACIC) was incorporated on January 13, 1980 as Anscor Finance, Inc. to engage in all aspects of the financing and leasing business pursuant to the provisions of the Financing Company Act (R.A. 5980). On September 4, 1990, Anscor Finance, Inc. filed with the Central Bank of the Philippines (CBP) an application for a license to operate as a full service investment house with quasi- banking, trust and foreign exchange functions which was, subsequently, approved by the Monetary Board of CBP- on September 17, 1980. Afterwhich, Anscor Finance was renamed as ACIC and was granted a license to operate as an investment house by the SEC on the same date. As a full investment house, the firm aims to provide a full -ange of financial services to selected multinational and prime domestic companies. 10.02 Man#gment and Orqaniain. As currently structured, ACIC is divided into five functional groups, - 150 - three of which are involved in operations and two providing support services. The three operational groups are: a) the Investment Banking Departmentl b) Financial Markets Department; and c) Trust and Investment Department.- The two support groups consist. of the Operations Department (which include financial reporting and administration services) and the Legal Department. Each department is, headed by a senior officer with the rank of Assistant Vice President. The day-to-day operation is being handled by its President and Chief Operating Officer, Mr. Francisco Dizon. AIC's eleven-man board is headed by Mr. Andres Sorian III, President and Chief Operating Officer of San Miguel Corporation. 10.03 Management and Stfing for Term-Lending. ACIC's term-lending transactions originates from its Investment Banking Department. The group is further subdivided into traditional units that normally handles long-term lending, such as, the Appraisal or Evaluation Group and Supervision Group while Accounts Servicing was integrated into the Accounting Section. ACIC is endowed with a very strong financinal expertise but lacks the necessary technical expertise to handle the technical aspect of appraisal and supervision work. The firm, however, engages the services of an affiliate engineering consultancy firm to neutralize this predicament. 10.04 Operational Performance. ACIC's financial condition,, in general, has remained sound as measured by an acceptable level of liquidity, solvency, and sound loan portfolio. For the period 1984 to 1987, ACIC has continued to register a modest increase in resources, averaging 8.7 percent annually. As of year-end 1988, however, ACIC's total resources had declined by P93.1 million or 24.4 percent as compared to the 1987 level. This was mainly due to the substantial decrease in short-term loans and securities of P155.3 million. The quality of ACIC's loan portfolio remained satisfactory. Provisions for losses of P18.9 million as of December 31, 1988 was 6.8 times of total past due loans of P2.8 million. ACIC's collection performance on long-term loans remained at 100 percent. 10.05 Financial Performance. ACIC has continued to operate profitabl,, with not earnings consistently registering an upward trend from. P11.1 million in 1965 to P34.6 in 1987. In 1988, however, ACIC's net income amounted to P21.J million, down by P13.5 mil.lion or 39 percent lower than the comparable figure of P34.6 million in 1987. This may be attributed to the '5.5 percent dacline in gross income in 1988 while total expenses had decreased by only 3.8 percent. With the lower level of not earnings, return on the average equity in 1988 was a low 13.5 percent compared to 26.0 percent in 1987. Return 'on average total assets also decreased from 9.3 percent in 1987 .to 5.7 percent in 1988. - 151 - ACIC's total equity increased at an average annual rate of 17.8 percent from P85.3 million to P16e.6 million in 1989. The increase in equity is mainly due to profits plowed-back to operations. Debt-to-equity ratio as of December 31, 1989 was a at low 0.8:1. This favorable development was largely brought about by ACIC's settlement/retirement of a substantial portion of its short-term. borrowings (bills payable) out of the proceeds from collection/redemption of short-term loans and securities. ACIC's key financial indicators are presented in Annex M-1. 10.06 Performance Under the Apex Program. Compared to other PFIs, ACIC's performance under the Apex Program may be considered satisfactory. Of the original line of US$10.0 million, US$7.8 million or 72.8 percent were committed and disbursed to the six (6) Apex-financed projects of ACIC, Collection performance on Apex loans, excluding Yazaki- Torres which is still in grace period remained at 100 -prcent. ACIC's total Apex loans outstanding amounted to P65.7 million or 55.7 percent of their total loan portfolio of P117.9 million. Bpk of the Philippine Islands 10.07 Background. BPI is the first private commercial bank in Asia and -is considered one of the biggest private commercial banks in the Philippines in terms of total assets and deposits. The bank was founded in 1851 by virtue of a, Royal Decree issued by the Spanish Monarchy and was then called as Banco Espanol-Filipino de Isabel II. In 1910, "Banco" was renamed as the Bank of the Philippine Islands. In 1974, BPI was further strengthened with its merger with Peoples Bank and Trust Company and the equity participation from J. P. Morgan Overseas Capital Corporation. *Six years after, another commercial bank, the Commercial Bank and Trust Company, joined forces with BPI through another merger and further strengthened the already strong financial condition of the Bank. The bank was, later, issued an expanded commercial banking license in September 1982 by the CBP. This authority enabled BPI, among others, to increase its majority holdings in two subsidiaries, namely; the DPI Investment Corporation and BPI Leasing Corporation. rn 1984, DPI acquired Family Bank and Trust Company, another universal bank, and, at that time, resulted in a business combination of aggregate resources valued at around P1,605.0 million, equivalent to 5.7 percent of the assets of the whole commercial banking system. Today, BPI is characterized by bigness, strength, and stability. 10.08 Management and Organization. BPI's organizational structure is. basically hierarchical in set-up in line with the major activities performed. The Board of Directors is the policy-making body of BPI. Conducting the critical Oay- to-day operations of BPI is the Executive Committee (Ex-Com) - 152 - which practically exercises all the powers of the Board of Directois in the management and direction of BPI's affairs. The President is BPI's Chief Operating Officer and is charged principally with the responsibility of carrying out the direction set by BPI's Board of Directors. The bank's operating divisions include: a) the Institutional Banking Group; b) Branch Banking Group; c) Private Banking Group; 6) Treasury; and c) Overseas.Banking Group. 10.09 Management and_Sjtffing for Term-Lendin. BPI's term-lending operstions is being handled by a subsidiary, the Merchant Banking Group of BPI Investment Corporation (BPI-IC). Under this arrangement, one of the original units of BPI-IC's Merchant Banking Group acts as the center of operations but draws support services directly from BPI. Although the Group is only a subsidiary, BPI-IC has much experience in project lending and has completed various development finance related projects. The group has, likewise, Undertaken numerous long-term financinal deals such as term fund servicing, corporate equity or debt issues and term loan syndications and has, in fact, remained as BPI's arm in the long-term finance business. 10.10 Qqetional_Prformance. DPI has experienced a steady growth during the last five years as total resources grew at an average of 20.2 percent annually. From P14.3 billion in 1984, total resurces nearly doubled reaching P26.3 billion as of December 31, 1989 (ranked third among the top ten private domestic commercial banks) or an average annual increase of Pe.4 billion. This was largely due to. the significant increase in BPI's deposit base which grew from P10.6 billion in 1984 to P21.3 billion in 1980, or an average annual increase of 19.2 percent. With the increase in loanable funds, BPI's loan portfolio has likewise expanded from P5.5 billion in 1984 to P10.6 billion as of year-end 1988 or an annual average growth rate of 16.9 percent. Likewise, liquid assets have more than doubled from P6.3 billion in 1984 to P13.4 billion in 1988. The quality of BPI's loan portfolio remains to be sound. Of the total loan portfolio of P10.6 billion as of December 31, 1989, P468 million-or 4.4 percent represents past due loans (including items in litigation), slightly higher than the industry average of 4.0 percent. However, BPI's level of past due is adequately covered'by its provision for losses which*as of year-end 1988 amounted to P444 million or about 95 percent of total past dues. 10.11 Financial Performance. BPI's net earnings registered a steady growth during the last five years. From Pe06.8 million in 1984, it reached P394.2 million in 1988 or an annual growth rate of 18.2 percent. As of December 31, 1988, BPI -is the fourth most profitable bank in the industry. Returns in equity averaged 21.9 percent during the period 1984-1988, making BPI one of the most profitable S1.53- bank during said period. In 198, BPI's return on average equity was computed at 22.5 percent, higher than the 20.3 percent achieved in 1987 and the industry average of 20.0 percent in 1988. With increased profitability. BPI's capital funds has nearly doubled during the last five years. From P955.8 million in 1984, it reached P1.9 billion in 1988 or an average annual growth of 18.7 percent which approximates the average annual growth of the BPI's. net income for the same period. BPI's key financial indicators are presented in Annex M-2. 10.12 Performance Under the Apex Progam. As a whole, BPI's performance under the Apex Financing Program may be considered satisfactory. Of the bank's US$10.0 million Apex line, it was able to commit US$8.1 million or 81 percent. Of said amount, however, only US$6.3 million or 77.3 percent was disbursed.. Cash collection ratio on Apex loans remains at 100 percent. Citytrust Banking Corporation (Citytrust) 10.13 Background. Citytrust, then named as Feati Bank and Trust Company, was estaSlished in 1961 with its Head Office in'Manila. During the -1960's, Feati Bank expanded to eleven branches throughout the archipelago (eigth in Luzon, one in Visayas and two in Mindanao). In October 1974, Citibank, N.Y. bought into Feati Bank. this tie-up did not only give Feati Bank direct access to Citibank's international network of branches and expertise but it also made Feati Bank to transform and redefine its goals, objectives and thrusti, target. markets and upgrade its technology. On September 5, 1977, Feati Bank changed its corporate name to Citytrust Banking Corporation and, six years after, obtained an expanded commercial banking license from the Central Bank, and. thus, became the eleventh universal bank in the Philippines. The bank's objectives and corporate goals revolve around the following: (1) active participation in the country's economic development; . (2) resource mobilization; (3) *portfolio diversification; and (4) regional development. 10.14 Maneqement-and Organization. Citytrust is divided into three functional groups with each particular group handling one specific core business area. These groupings are: (1) the Institutional Bank which handles the mbnagement of corporate accounts; (2) the Consumer or Individual Bank which caters to the consumer and retail markets; and (3) the Investment Bank which deals on the management of the Investment banking business, loan syndications, underwriting, -leasing and related products. Each of the respective groups, which are all under the control of the bank President, are supervised and headed by three Senior Vice-Presidents. The quality of the* bank's staff, especially at the executive and manager levels, - 154 - remain high. A major proportion (64.9 percent) of the bank's staff has at least five years of banking ekperience which reflects the level of staff competence. The relatively high proportion of seasoned staff connected with Litytrust may be partly attributed to the bank's fairly competitive compensation package and benefits which is a direct result of management's awareness of the importance of its human resources in achieving the bank's corporate goals. 10.15 Maanagement and ffffL9.. for Terg-Lenn. Citytrust's term-lending operations, including the supervision and moniboring of Apeg-financed projects, is being handled by the Institutional Banking Group wlich is further subdivided into three groups, namelys the Relationship Management Group (RMG); Credit Administration Group .(CAG); and Services Management Divsion (SMD). The lending arm of the functional group, the. Relationship Management Group, is composed of fiteen (15) Relationship Managers who are actively involved in lending. On the other hand, the CAw and SMD provides the necessary support services for the lending group. 10.16 Operational Performance. Citytrust continued to register satisfactory financial results for the last five years. For the period 1984 to 1988. Citytrust posted a steady asset growth which averaged 13.9 percent; from P4.9 billion in 1984 to P8.1 billion in 1988 (ranked tenth among the top ten private domestic commercial banks). The consistent growth in assets was largely due to the steady accretion in Citytrust's deposit base which grew from P1.9 billion in 1984 to P4.2 billion in 1988, or an average annual increase of 22.1 percent. Likewise, loan portfolio which has decreased by 0.6 percent and 7.7 percent in 1985 and 1986, respectively, has expanded by 33.8 percent in 1987 and 15.7 percent in 1988, respectively. The quality of Citytrust's portfolio remains to be generally sound. Total arrearages.as a percentage of total loans outstanding was at 3.8 percent as of year-end 1988, a marked improvement on the 8.2 percent and 5.1 percent past due ratio posted by Citytrust in 19e6 and 1987, respectively. This may be attributed to the effectiveness of the.bank's relationship- based management of loan accounts and potent credit evaluation system. 10.17 Financial Performan. Citytrust continued to operate profitability for the last five years, generating an average net income of about P150.0 during said period. Net income as a percentage of average equity, however, is on the downtrend. From a rate of return of 24.5 percent in 1985 it has declined to 18.2 percent in 1987, and further. to 16.9 percent in 1988. This may be attributed to the decline in the bank's gross income on one hand and the steady increase in total expenses on the other. Citytrust's earnings in relation to earning assets, gross earnings and average total - 155 - assets as of December 31, 1988, however, may be considered at satisfactory levels and compared favorably with the industry average. As of year-end 1988, Citytrust ranked eight in terms of profitability among the top ten private domestic commercial banks in the Philippines. Citytrust's key financial indicators are presented in Annex M-3. As regards capitalization, the bank's total capital funds soared by P337.9 million or 59.6 percent, from P567.1 million in 1964 to P904.9 million as of year-end 1988. The rate of increase in capital funds, however, manifested a declining trend with an average rate of increase of 12.6 percent per annum. Citytrust's total liabilities to networth ratio went down by 1.67 percent from 7.63 percent in 1984 to 5.76 percent in 1987 but again rose by e.18 percent in 1988 to register a 7.94 percent ratio during the aforesaid period. 10.18 Perfortance_ Under the x Prgram. Citytrust performance in the Apex Financing Program was below expectations. Out of its original Apex line of US$25.0 million, US$15.0 million was returned on May 31, 1986 and of the remaining US$10.0 million only US$6.289 million (4 subprojects) i.as committed. On the four projects approved for Apex financing, only Eastern Telecommunications Philippines, Inc. and Telefunken Semiconductors, Inc. availed of the credit facility leaving a total net.approval of only P2.970 million, the bank's below par performance may be linked to both external and internal factors. Citytrust was accredited at a time whn the country was in deep political and economic problems. There was a general slump in business and investment acitivities resulting to industries operating below capacities and in the postponement of possible projects. There was also the problem of foreign exchange risk which has always been a major disincentive for would be Apex loan borrowers. Amidst persistent rumors of another peso de-aluation, entreprenuers tried to shy away, from foregin-currency obligations. The poor performance of Citytrust may be likewise partly traced to the poor marketing of the Program. Unlike other Apex PFIs, Citytrust has no separate unit that handles and markets long-term loans, such as the Apex loan. Apex loans are just one among the many banking facilities which a relationship manager markets. Metropolitan_ApBk and Trust ComaD (Metrobank) 10.19 BackGround. Metrobank was incorporated as a commercial bank on April 6, 1962 and formally opened for business on September 5, 1962. Since its establishment, Metrobank has established a.network of over 200 branches and offices throughout the Philippines and other countries. The b,nk has also broadened its activities to international banking-participation through the acquisition of substantial stockholdings in the International gank of California in Los - 156 - Angeles, California and the First Metro International Investment Corporation in Hongkong. On September 4, 1981, Metrobank was granted authority to operate as an expanded commercial bank (EKS) under CB Circular No. 739, thus, making it the second private commercial. bank to become an EKS, The bank's goals are as followss a) active participation in rational economic development; b) resource mobilization and capital market development; c) regional development and portfolio diversification; d) manpower training and development; and e) operational efficiency. 10.20 Management and Organization. Metrobank's organizational structure is divided into five (5) principal groups, namely: a) Marketing/Domestic branches; b) Controllership; c) Corporate Affairs, Credit and Domestic Subsidiaries Group; d) General Services Group; and e) Operations. The bank's extensive network of' urban and provincial branches have been divided into eleven areas each of which is supervised and controlled by an Area/Regional Supervisor with the rank of Vice President or Assistant Vice President. In charge of the five corporate groups and the Downtown Center are experienced senior officers who have in their credit, long years of banking experience. 10.21 Management and Staffing_for Term-Lending. The Specialized Lending Unit, (SLU) under the Corporate Affairs, Credit and Domestic Subsidiaries Group, handles the bank's term lending operations. The SLU is headed by an Assistant Vice-President and is supported by three (3) Analysts. Considering the functions and responsibilities of the SLU and the volume of bank transactions linked to specialized lending, the present manpower complement of the aforesaid unit appears inadequate and, therefore, needs to be strengthened further. 10.22 Qerational Performance. After experiencing a minimal decrease of 1.6 percent in 1986, Metrobank's total resources grew by 19.7 percent in 1997 and further by 34.5 percent in 1988. As of year-end 1988, Metrobank ranked second in terms of assets among the top ten private domestic commercal banks. The impressive asset growth of Metrobank for the last two years maybe attributed to the substantial increase in its deposit base which grew-by 21.5 percent and 30.4 percent in 1987 and 1999, .respectively and increased income from operations. Corollarily, loan portfolio has expanded by 42.0 percent in 1997 and by 26.9 percent in 1988. Metrobank's loan portfolio remains to be sound. As of December 31, 1988, the bank's tota.l arrearages (including items in litigation) amounted to P634.0 million or 5.2 percent of .total loan outstanding as of said date, an improvement over the 6.4 percent past due ratio posted in 1987. This is, however, slightly higher. than the 4.0 percent average posted by the top ten private domestic commercial banks. Total provisions for losses of Pe48.0 -157- million as of year-end 1988, likewise, need to be increased to cover total unsecured past due loans of P328.0 million as of year-end 1988. 10.23' Financial Performance. Metrobank's profitability declined by 20.5 percent with a drop in net income after tax from P151.2 million in 1994 to P120.2 million in 1986 but rebounded significantly by 193.7 percent .to post a 1989 net income of P353.0 million. As of year-end 1988, Metrobank ranked fifth in profitability among the top ten private commercial banks in the Philippines. In addition to the increase in bank profitability, Metrobank's networth and equity investments, likewise, exhibited substantial upswings. Capital funds climbed by 92..4 percent from P780.5 million in 1984 to P1,502 million in 1988. On the other hand, the bank's equity investments, likewise, manifested an 8.5 percent hike from P267.3 million in 1984 to P504.0 million.in 1988. In sum, Metrobank had a very favorable financial performance from the years 1996 to 1986. The bank is expected to further improve its financial performance in the years to come considering the turnaround in the Philippine business climate. Metrobank's key financial indicators are presented in Anrex M-4. 10.24 Performance Under thg Apx rogram. Metrobank's performance in the Apex Financing Program, was below par. Out of its original credit line of US$30.0 million, a total of US$25.5 million was returned on various dates, leaving a balance of US$4.5 million committed to four (4) subprojects. The poor performance of the bank under the program may be traced to the inadequacy of the staff handling Apex accounts and the Bank management's decision to limit its foreign currency borrowings. As a result, SLU -has been concentrating on lending funded through IGLF. Philippine Commercial International Bank 10.25 RaSgrgund. On July 8, 1938, the first Filipino- owned bank, the-Philippine Bank of Commerce (PBC) started operating with a goal of providing financial support to Filipino businessmen and contribute to the country's commerce and industry. The growth of PBC spurred the emergence of many more Filipino-owned commercial banks. In 1963, Messrs. Ernesto Rufino, a former PBC Director, and Vicente L. Recto set-up Merchants Banking Corporation (MBC) and in the following year the Philippine Commercial and Industrial Bank (PCIB), which was inagurated February 1960, opened its first branch in Davao City and later became the largest Filipino commercial bank. In February 1976, a momentous event in Philippine banking occured when PCIB stockholders ratified its merger with PBC and MBC with PCIB emerging as the surviving bank. The pooled resources.of the three banks increased total assets from P1.38 billion to P2.1billion, peso deposits from P803 million to P1.3 - 158 - billion and manpower resources reached a total of 2,505. On August 28, 1981, PCIB became the fourth commercial bank ta be granted by the Central Bank qf expanded commercial banking authority. Four years later, PCIB acquired another commercial bank, the Insular Bank of Asia and America (IBAA). This second merger further widened PCIB's branch network to over 23 outlets and further increased its resources and capital base. The most recent development in the history of PCIB was the sale by the Development Bank of the Philippines (DBP) to the Gokongwei-Lopez Group of its 20.3 million common shares of stock, representing 42.65 percent of the bank's voting stocks. With the completion of the sale of the DBP-held shares, PCIB's capital base i6creased from P1.62 billion by thv end of 1987 to P2.03 billion as of March 31, 1988. 10.26 Management and Organization. PCIB's organizational structures may be-classified into two (2) major groups, namelys the Policy-Making Group and the Operations Group. The-Policy-Making -Group consists of the following units, each headed by a Senior Vice-President or Vice President who reports to the President/Chief Operating Officer: a) Employee Relations; b) Corporate Communications; c) Strategic Planning; d) Credit Policy; e) Programs and Policies; and f) PCI Development Academy. On the other hand, the second level group in PCIB's organization is the Operations Group which is made up of the following sectors: a) Institutional Banking Sector; b) Resources Management Sector; c) Information Controllership Sector; and d) Consumer Banking Sector. Each sector is headed by a Senior Vice President who reports to the Executive Vice President/Chief Operating Officer. 10.27 Managent and Staffng Term Lending. PCIB's term-lending activities are generally centered on the Institutional Banking Sector and the Consumer Banking Sector of the bank. All accounts falling under special lending facilities, including the Apex Financing Program, are being handled by the Special Lending Division (SLD) of the Consumer Banking Sector. SLD is divided into three units, namelys Account Management Unit. (AMU), Branch Support Unit (BSU) and Credit Support Unit (CSU). AMU takes charqe of accounts originating from the Head DYfice while BSU handles accounts from the branches. The CSU provides all the necessary assistance and support needed by.both AMU and BSU in the discharge of their functions. 10.28 Operational Performance. The Philipine Commercial International Bank (PCIB) has for the past five years maintained a sound financial structure, posting an average annual asset growth of about 20.3 percent. As of December 31, 1988, PCIB's total resources stood at P19.7 billion, the third largest in the industry, 13.9 percent higher than the P17.3 billion recorded as of year-end 1987. The substantial -159- growth in resources was funded mainly by the build-up in deposits which grew by 21.2 percent and 27.5 percent in 1987 and 1988, respectively, and earnings plowed-back to operations. Corollarily, loan portfolio has increased by 22.5 percent in 1987 and about 10 percent in 1989. The quality of PCIB's loan portfolio is considered satisfactory. While PCIB's loan portfolio continues to expand, the level of arrearages has exhibited a downward trend. From P641 million or 7.0 percent of total loan portfolio as of year- end 1987, total past due declined to P270 million or 2.8 percent as of end-1988, which compares favorably with the 4.0 percent average past due ratio poste3d by the top ten private domestic commercial banks. However, total provision 2 for losses of P146 million represents only 1.6 percent of total loan portfolio and insufficient to cover its. total unsecured past due loans of P238 million. Said provision for losses, therefore, needs to be increased. 10.29 Financial Performance. PCIB's profitability has shown exceptional growth during the past three years with annual increase in net income averaging 50.3 percent for the period 1986 to 1988. Likewise the ratio of net income to average equity averaged 21.4 percent for the same period. In 1988, PCIB ranked third in terms of profitability among the top ten private domestic commercial banks in the country. With earnings plowed-back into operations, and the premium realized from the conversion of the P15'million DBP- owned preferred shares to common, capital accounts have increased by 74.6 percent and 35.5 percent -in 1987 and 1988, respectively. PCIB's key financial indicators are presented in Annex M-5. 10.30 Performance Under the Apex Program. PCIB's loan portfolio under the Apex Financing Program was an offshoot of its merger with IBAA in 1985. Being the surviving entity, PCIB absorbed the Apex line from IBAA. The bank's utilization of its approved Apex credit line fell below expectations. Of the original US$10.0 million credit line, US$5.0 million was returned effective October 30, 1985. Five (5) projects requiring an Apex financing of US$5.0 million were submitted, but the loan applications for two (2) projects aggregating US$2.2 million were subsequently withdrawn. Three (3) projects aggregating US$2.8 million were thus appproved for financing. Cash collection ratio on Apex loans was 100 percent. Far East Bank and Trust Company (FEBTC) 10.31 aackground. FEBTC was founded on April 4, 1960, with the present CBP Governor Jose 8. Fernandez, Jr. as founder and presidet. In .1961, FEBTC established its Trust and Investment Division to provide investments management and other corporate services to its growing number of clients. In 1973, the bank distinguished itself by becoming the first - 160 - Philippine bank to have direct foreign equity bank investors. The Chemical Bank of New York and the Mitsui Bank Limited of Japan each infused a total of P22.5 million into the capital accounts of the bank by the first quarter of 1974, each representing a 12.5 percent ownership. In 1990, FEBTC was granted expanded commercial banking authority. As such, FEBTC acquired a majority interest in the Private Development Corporation of the Philippines (PDCP), a financial institution engaged *in development finance. In addition to PDCP, FEBTC later established the following subsidiaries: Far East Venture Capital Corporation; FEB Insurance Brokers, Inc.; Makati Insurance Company, Inc.; First Far East Realty Corporation; Cavite Development Bank and the Second Laguna Development Bank. These companies complement FEBTC's traditional commercial and trust banking services with the broad services of a universal bank group. As a primary corporate objective, FEBTC seeks to actively participate in the social and economic development of the country. Secondly, the bank will continue to promote loan portfolio diversification, both in terms of geographical distribution and industry exposure. Branch expansion shall*continue to be effected in order to accelerate lending operations in the countryside and to maximize small and medium scale financing. As of December 31,. 1988, FEBTC has a total of 109 branches nationwide. 10.32 Management and Organization. FEBTC is a well-managed financial institution as indicated by the bank's continous growth and increasing profitability. The -bank's 15-men Board of Directors acts as the prime policy-making body. Aside from the Board of Directors, there is also an Advisory Board consisting of two key FEBTC officers (President and EVP) and two non-FEBTC officers. The Advisory Board acts in a consultative and advisory capacity to the Board of Directors. The reponsibility of overseeing FEBTC's day-to- day operations is vested in the President and is ably assisted by an array of key management staff who are highly experienced in the banking business and with extensive training and requisite educational background and experiences in their respective fields of assignment. . 10.33 Management and Staffinq for Term-Lendin. FEBTC*s term-lending operations, including the supervision and monitoring of Apex-financed projects, is being handled by the Special Lending Unit (SLU) of the Corporate Accounts Management Division (CAMD) under the Business Development' Group (BDG). SLU is responsible for coordinating all activities required for the different funding facilities. In addition, FEBTC has designated a number of officers and staff who have the necessary educational background, training and experience to handle this specialized type of operation. The bank has also commited to upgrade the staff's skills and capabilities in the area of project - 161 - finance particularly in project appraisal, accounts servicing and supervision. 10.34 Operational Performance. 1988 was a banner year for FEBTC being ranked first in terms of total resources and profitability in the industry. For the past five years, FESTC's total resources posted an average annual growth of 25.2 percent, from P11.7 billion in 1984 to P28.1 billion in 1988. The bank's spectacular growth maybe attributed to the steady accretion of its deposits base which increased by an average of 30.8 percent annually, or from P7.3 billion i.n 1984 to P21 .1 billion in 1988. With the increase in loanable funds, FEBTC's loan portfolio likewise expanded from P4.5 billion in 1984 to P13.7 billion in 1988, or an average annual growth of 33.2 percent. The quality of FEBTC's loan portfolio remains to be sound with total arrearages of P 217.6 million or 1.5 percent of total loan outstanding. Said past due ratio compares favorably with the 4.0 average posted by the industry (top ten private commercial banks). Moreover, booked provisions for losses of*P737.9 is 3.4 times more than the totcl past due level of P217.6 million. 10.35 Financial Performance. As mentioned earlier, FEBTC was the most profitable. bank in the industry in 1988. For the past five years, FEBTC's net income has grown by an average of 20.9 percent, posting the biggest increase of 31.3 percent in 1988. The marked increase in profitability maybe largely attributed to the Bank's loan portfolio expansion which resulted in an incremental of P594.3 million in 1988 alone. Moreover, FEBTC's excess liquidity enabled it to become a net lender in the interbank market. As a result of FEBTC's very satisfactory operation for 1988. all profitability indicators were bet -tr than industry averages. Returrron networth and earning assbts were computed at 24.9 and 3.1 percent as against the induttry's average of 20.0 and 3.0 percent respectively. With net income plowed-back into operations, capital funds account has likewise demonstrated a steady growth. From P958 million in 1984, it has increased to P2.2 billion in 1988 or an increase of 133.3 percent FEBTC's key financial incdicators are presented in Annex M-6. 10.36 Performance Under the Apex Program. FEBTC was accredited in May 1997, barely two months before the close of commitment period on June 30, 1987. Despite - this constraint, FEBTC was able to commit and disburse a total US$1.745 million for two expansion projects. Said Apex loans granted to Rubberworld Philippines and Philippine Carpet Manufacturing Corporation are both in current status. - 162 - International Corporate Bank (Interbank) 10.37 Background. The International Corporate Bank was under the name Continental Bank when established in April, 1963. After eleven (11) years of operations, Continental. Bank was placed under receivership by the CBP in June 1974. In September 1977, as part of its reorganization and rehabilitation, the bank's name was changed to International Corporate Bank (Interbank) under Ramon S. Orosa's group who had acquired majority ownership of the bank. In December 1980, Herdis Group, Inc. (HGI) acquired all the stockholings of the Orosa Group and took effective control of the bank. In 1981, CB made advances to Interbank amounting to P2.45 billion and mandated the bank to take over the assets and liabilities of two other financial institutions owned by HGI, namely, Atrium Capital Corporation (Atrium) and Asia Pacific Finance Corporation (APCOR). The-Development.Bank of the Philippines (DBP) then infused P420 million in fresh equity equivalent to 67 percent ownership of Interbank's preferred shares. In April 198, the National Development company (NDC), a government investment agency acquired 22.4 percent of Interbank's capital stock in exchange for its assumption of HGI1s liabilities to Interbank. In September 1982, a new management team headed by Mr. Jovencio F. Cinco joined Interbank to recast the.bank's growth strategy and launch another rehabilitation program. One year later, NDC required DBP's share to become the majority owner of Interbank. By December 1985, NDC's holdings aggregated to 99.8 percent of the bank's equity. On July 4, 1996, the Interbank-American Express Bank (AES) partnership was established. AEB is a wholly-owned subsidiary of the American Express Company with a broad asset base of US$17.3 billion with 85 offices in 39 countries all over the World. 30.38 Management and Organigation. Interbank's ten-man Board of Directors acts as the policy making body of the- institution. The bank's Executive Committee exercises. almost all the powers of the Board in the management and direction of Interbank affairs. The President reports directly to the Executive Committee and to the Board of Directors. Interbank has a total of seven (7) operating divisions and five (5) support units. The operating groups consist of the Funds Management Group, Operations Group, Institutional Banking , Group, Asset Recovery Management Group, Business Development Group, Branch Banking Group and the Control and Administration Group. On the other hand, the*support units are composed of the Legal, Corporate Planning/Communicationp, Credit and Evaluation, Human Resources and Audit Divisions.. In addition, the bank has nine (9) corporate committees, namelys 1) Senior Management Committee; 2) Institutional Credit Committee; 3) Retail Credit Committeel 4) Regional Credit Committee; 5) Asset/Liability Committee; 6) Trust and Investment - 163 - Committee; 7) Internal Audit Control Committee; 9) Operations Committee; and 9) Product Development Committee. 10.39 Manament nd_Ltaffing for Term-LndAin* The bank's ter*m-lending activities, including the supervision and monitoring of Apex-financed projects, is being handled by the Business Development Group, the Institutional Banking Group and the credit and Evaluation Division. The Merchant Banking Division (MBD) of the Business Development Group coordinates all the different activities and draws support from other departments. Marketing of term loans are handled by the account officers of the Institutional Banking in the head office and by the branch managers in the brach offices. The preparation of the appraisal reports for the projects to be financed is being undertaken by the Credit and Evaluation division. 10.40. Operational Performance. During the' last four yeats, Interbank manifested an average growth rate on total assets of 40.1 percent, from P5,398.7 million in 1985 to P7,273.9 million as of December 31, 1998. On the other hand, the,bank's loan portfolio after experiencing a decline of 42.9 percent in 1986 rose at an average rate of 40.5 percent' during the last two years or from P1,726.2 million as of year-end 1986 to P3,350.1 million as of year-end 1998. Total deposit liabilities soared at an average rate of 28.0 percent per annum from P1,553.4 million in 1985 to P2,866.2 million in 1989. Interbank's success in generating deposits increased .the *ratio of deposits to total assets from 31.5 percent as of year-end 1987 to 39.4 percent as of end-1988. This ratio, however, is still very much below the industry average of 73.7 percent, indicating that Interbank would need to further improve its deposit-taking' function to sustain a more profitable growth performance. Interbank's total past due loans as of December 31, 1988 amounted to P89.7 million or 2.7 percent of total loans outstanding, better off than the average past due ratio of 4.0 percent registered by the top ten private domestic commercial banks. The allowance for doubtful accounts of P79.5 .million as of year-end 1988 represents .2.4 percent of total loan portfolio and 88.6 percent of total past due loans. As confirmed by CBP's Supervision and Examination Sector I, said provision was considered adequate to cover losses in loans. In sum, the quality of Interbank's loan portfolio maybe considered satisfactory. 10.41. Financial Performance. Interbank manifested a stable and profitable performance for the period 1995 to 1988. The bank's net income posted an average expansion rate of 22.1 percent annually, from P89.9 million in. 1995 to P162.4 million as of year-end 1989. For 1988, Interbank was the seventh most profitable bank in the industry. Rate of return averaged. 15.0 percent for the period which is considered satisfitctory. Capital funds grew at an average - 164 - annual rate of 14.5 percent which was due largely from net earnings plowed-back into operations. Interbank's key financial indicators are presented in Annex M-7. 10.42 EgEfSrmance, Under the pX Prgrm. Interbank was accredited late in the Apex Financing Program, in fact less than a month before the close of the commitment period on June 30, 1997. It has, nevertheless, submitted one project proposal (NDC-Guthcie) in the amount of US$7.0 million but has to be subsequently withdrawn due to Interbank's single borrowers limitation and other technical and operational issues raised by DFU on the project. Manila Banki Cororation (Manilabank) 10.43 Rackqround. Manilabank was incorporated on May 5, 1960 for the purpose of engaging in the business of commercial banking. The bank formally opened for business on January 23, 1961 with an authorized and subscribed paid- in capital of P20.0 million and P6.6 million, respectively. Manilabank had a total domestic branching network of 64 branches and extension offices and, likewise, conducted international banking operations through its 18 correspondent banks worldwide. In 1978, as part of its diversification program, Manilabank made equity investments in the Philippine 'American Investment Corporation (PAIC), an investment house licensed to -perform quasi-banking functions, initially subscribing to 22,000 shares at a cost of P2.3 million. The bank's domestic operations was further boosted in 1961 with the establishment of two subsidiaires, *the Manilabank Venture Capital Corporation (MVCC) and the Manila SMSE Corporation. Dur4ng the same year, Manilabank further-enhanced its international banking participation by investing in the Asean Finance Corporation, Ltd., a Singapore-based regional bank organized by the five member states of ASEAN. After the bank's total capital accounts surpassed the P500 million level in the first semester of 1982, Manilabank applied for authority to operate as. an expanded commercial bank. The bank's authority to engage in EKB activities was approved by CBP on July 2, 1982 and, thus, became the eight bank to be authorized to operate as a "universal bank". During the 80's, however, the bank was heavily burdened with financial problems and was, subsequently placed under receivership on May 22, 1987. With the failure of CBP's efforts to rehabilitate-the bank, Manilabank was subseqt-antly placed under liquidation. 10.44 Management and Oroanization. Manilabank's organizational structure prior to its liquidation was grouped into four functional areas: deposit management, credit management, 'funds management and trust management. The bank's structure is a typical set-up for commercial banks. The Office of the President manages the-day to day operations of the bank, supervises all the staff and - 165 - implements the policies formulated by the Board of Directos. Critical to the bank's set-up is the existence of corporate committees and administrative,sub-committees which forms a continuous link between the Board of Directors, Central management and middle management levels. Among the committees and sub-committees are the Executive Committee and the Management Committee which are the corporate committees, and the latter's sub-Comm.ttee on Loans and Credit, personnel, Method and Trust Investments. 10.45 Management and Staffinn for Term-Lendinq. Manilabank's term-lending activities revolved around the Account Management Group (AMG) of the Credit Management Division which is headed by a Vice-President and a Senior Vice-President, respectively. In discharging its functions effectively, AMS draws support from other groups/departments of the Bank. Credit Investigation.and collateral appraisal are handled by the Credit-Information Group (CIG) while- actual disbursements and implementation are the responsibility of the Loans and Discounts Department. The loan documentation functions are being handled by the Legal Department in close coordination with AMG 10.46 Operational Performance. Based on financial statements on file from 1984 to 1496, (Annex M-8) Manilabank's total assets grew at a yearly average of 10.6 percent. Total resources inched up by 5.6 percent from P7,666.e million in 1994 to P8,094.0 million in 1985 and further by 15.6 percent in 1996 to P9,357.5 million. The bank's total deposit liabilities during the' three-year period, exhibited an average rise of 2.2 percent per annum. 1984's total deposit of P3,767.8 million dipped slightly by 1.2 percent to P3,702.5 million in 1985 but increased by 5.6 percent in 1986 to post a total deposit level of P3,929.0 million. On the other hand, Manilabank's outstanding loan portfolio manifested a decreasing trend averaging 5.1 percent per annum. Outstanding loans dropped by 6.2 percent from P4,895.3 million in 1984 to P4,591.6 million in 1985 and further by 3.9 percent in 1996 to register an outstanding loan portfolio level of P4,411.3 million. 10.47 Financial Performance. The bank's average growth rate of 223.4 percent on net income after tax from 1984 to 1986 appears to be unrepresentative of Manilabank's profitability. as' not earnings in 1986 reflected a substantial drop. Net earnings ballooned by 512 percent from P7.5 million in 1984 to P45.9 million in 1995 but took a deep 65.1 percent plunge to P16.0 million in 1996. As regards capitalization, Manilabank's networth of P609.0 million as of year-end 1984 exhibited a 7.6 percent climb to P655.7 million in 1985 -and, in 1986, further expanded by 2.4 percentage points to register a networth of P671.9 million. - 166 - 10.48 Pthe UA x ProrLa. Of Manilabank's US$10.0 million Apex line, only US$3.2 million or 32 percent had been committed (two projects) and disbursed, of which US$3.04 million remains outstanding in DFU's books as of December 31, 1988. After Manilabank was placed under receivership in May 1987 and subsequently under liquidation, all payments collected by Manilabank from Apex borrowers Where held by the Receiver/Liquidator and not remitted to DFU. As reported by the Manilabank Liquidator, total outstanding Apex loans as of September 30, 1988 amounted to US$2.7 million, or lower by US$357 thousand compared to the amount appearing in DFU's records. As mentioned earlier, said difference represents unremmitted collections to DFU. As of same date, Manilabank reported toval arrears on Apex loans of US*31,674.71, representing portion of Fruchtchips Gimbh Phils. amortization due on August 15, 1988 which has not been paid. Piso -Deveopment Bank (PSOBank) 10.49 Background. Piso Development Bank, Inc. was the result of a merger between Market Savings and Loan Association (MSLA) and the Philippine Investments Systems Organization (PISO) on December 14, 1981. MSLA *was originally established in 1969 under the name of Orient. Savings and Loan Association which was later renamed Market Savings and Loan Association (MSLA). PIS0, on the other hand, was established on March 1, 1974, as an investment house with quasi-banking functions. Although the bank has generally strived to implement its corporate goals and objectives, the then prevailing business environment greatly affected bank operations and hindered the successful implementation of most of its strategies particularly in the area of resource mobilization and capital build-up program. As a result of the bank's failure to implement its corporate strategies and, likewise, as a consequence of the financial crisis which occured in the early 80's which adversely affected the bank's loan portfolio, PISO Bank was considered insolvent by the Central Bank and was placed under receivership on February 5, 1986 and subsequently under liquidation in early 1987. 10.50 Current Status. PISO Bank's latest available balance sheet as of September 30, 1988 is presented in Annex M-9. As shown therein, wl)ile book value of total assets exceeds total liabilities by P72.9 million, the estimated realizable value of total assets is deficient by P174.3 million compared to the estimated liabilities to be settled. As of September-30, 1988, the estimated percentage of recovery on assets was only 79.9 percent. 10.51 Status of Apex .Sbprojects. A total of 14 subprojects were approved through PISO Bank under the Apex Financing Program. Total financial assistance extended to -167- these projects amounted to US$9.7 million of which US$6.7 million remains outstanding in DFU's books as of December 31, 1988. After PISO Bank was placed under receivership in early 1986 and subsequently under liquidation, all payments collected by PISO Bank from Apex sub-borrowers were held by the Receiver/Liquidator and not remitted to DFU. As per report submitted by the PISO Bank liquidator as of September 30, 1988, 11 -accounts have pricipal arrearages totalling P55.7 million while interest in arrears totalled PeO.4 million. Total reported arrears of P76.1 million represents 63.9 percent of tot.l reported outstanding balance of approximately P119.1 million. As further reported by the liquidator, most of the Apex accounts are adequately covered by cqllateral securities in the form of sinking fund, real estate and chattel mortgages, and/or letter of credits/ guarantees. XI. SUMMARY AND CONCLUSIONqS 11.01 During the loan commitment and disbursement period for the Apex Fiiancing Program, the Philippine industrial sector was beleaguered with predicaments related to economic recession and political instability. Despite the problems faced by the Philippine economy, the Program continued to support the Industrial sector through the provision of medium and long-term credit assistance. 11.02 Any assessment of the performance of the Program should, therefore, not be centered on the basis of its low loan utilization, which as discussed has been due mainly to the unfavorable business environment, but should likewise consider its achievements in relation to its other objectives. While commitment and disbursement targets were not achieved for reasons already stated, the Program has been successful in meeting its other objectives, particularly those that relate to its institution building role. 11.03 To a great extent, DFU has been successful in expanding the number of financial intermediaries having access to World Bank funds. From an initial three financial institutions (DBP, PDCP and PISO Bank) accredited to the Program in 1981, the number of PFIs has increased to eleven as of year-end 1988. 11.04 The Program has likewise made it possible the djevelopment, within the Central Bank and the PFIs, of organizational units that have the capability to handle the various aspects of project based lending. 11.05 Overall, despite the operational prob I es encountered, Apex operations have been cuite satisfactory. - 168 - The economic contributions of project financed have been substantial. Most of the 69 projects financed under the Program proved to be economically and financially viable aside from being labor-intensive and export-oriented. The Program has resulted in the creation of 7,836 additional jobs with a total project cost 'of P3,427.1 million. Wider distribution of medium-and long-term funds became possible through PFIs' branches throughout the country. 11.06 As targetted, the bulk (63%) of the Apex portfolio was granted to the manufacturing sector. However, critical industries such as telecommunications, construction, mining and quarrying, shipping, and tourism-oriented industries have likewise benefitted from the Program. 11.07 DFU's financial position and performance have been fairly satisfactory, except for the year 1987 were it has incurred a net loss of US$507.4 thousand (P10.0 million). Said loss was due to substantial foreign exchange and cross- currency risks CB has to absorbed from its 100 percent U.S. dollar and peso-denominated loans. For the last two years, the movement of the various currencies comprising the World Bank's "Currency Pool" has been to the disadvantage of WB borrowers. This was compounded by the continued deterioration of the Philippine Peso vis-a-vis U.S. dollars. 11.08 On staff development, with UNDP assistance, training program for both staff of DFU and the PFIs were conducted to enhance their expertise in project appraisal, project evaluation, project supervision/monitoring and related fields. DFU staff were likewise sent to participate in various developmental seminars here and abroad (para. 8.04). 11.09 With the experience and insights gained from. the initial Apex Loan Program, it may be worthwhile considering the following on future World Bank lendings to fund needs of private sector projects. a. The experience of the past few years on the depreciation of the peso against the major currencies have caused project proponents to avoid borrowing in foreign exchange. This situation will probably continue to exist until such a time when investors are sure that the local economy has stabilized as can be viewed in terms of various barometers including export performance, GNP/GDP growth, level of international reserves, balance of payments/trade, and exchange rates. Foreign exchange lendings may have a limited market unless a forward cover mechanism is made available, or Government bears the foreign exchange risk on.said loans. b. Many borrowers likewise do not want to borrow under IBRD's currency pooling system. The experience - 169 - of Apex sub-borrowers that borrowed funds under this mode is that their liabilities have increased. Perhaps borrowers should be allowed the option to borr2w in dollars or any currency of their choice. c. To make the Program more attractive and accessible to more sub-borrowers, some kind of a guarantee mechanism should be made available. This will improve utilization of loan funds, and such a facility is needed particularly by borrowers who do not have any business track record with the PFIs/ commercial banks. d. A way of reducing commitment charges must be worked out in order to encourage the participation of more institutions. At present, commitment fees are paid by CB based on the agreed WB line of credit and computed from date of signing of loan agreement with WB. Same procedure is followed between the PFIs and CB. It is suggested that the next Apex loan be made effective.and available in tranches, to correspond to the estimated amounts required for the second-tier lending that can be undertaken by CB initially, and as new PFIs are added to the Program. Of course, commitment fees to creditors will commence only when each tranche becomes effective. e. Perhaps IBRD may wish to examine all its lines for industrial private sector lending and study the practicability of consolidating them under one window. Some financial institutions have expressed difficulty in dealing with different windows which handle IBRD funds, each window following different rules and regulations as well as standards for the evaluation of loan applications. f. Lastly, since it will deal essentially with the private sector, the organization handling funds from IBRD and other multilateral institations should.have the capability to move at the same pace as its private sector counterpart. -170- SCHEDULE OF AN NEX ES Annex Item A Operating Policy Guidelines of CB-DFU .B Summary of Sub-projects per PFI B-1 Details of Sub-projects per PFI B-2 Synopsis of Loan Approvals and Cancellations B-3 Sub-projects Commitment Dates and Disbursements C Characteristics of Sub-projects Financed under the Apex Financing Program D Apex Sub-projects According to Industry Sector E Regional Distribution of Apex Subprojects F -. DFU Procurement Vuestionaire 6 Details of the Operational Economic Performance of Subprojects Surveyed G-1 Financial Performance of Sub-projects Financed a-2 Operational and Economic Performance of Sub- projects Financed 6-3 Status of Implementation of Sub-projects Financed G-4 Current Status of Subprojects Financed H Organizational Structure of DFU I Summary of UNDP - Sponsored Training Activities of DFU J Sub-projects Review Process K Comparative Balance Sheet L Comparative Income Statement M Key Financial Data of PFIs - 171 - ANNEX A Page 1 of 5 PHILIPPINES INDUSTRIAL FINANCE PROJECT Operating Policy Guidelines of the Apex Development Finance Unit Central Bank of the Philippines Framework 1. This paper sets forth the objectives and basic principles of policy and operating procedures of the Central Bank APEX Develop- ment Finance Unit (DFU). The procedures apply to all lending operations of DFU. Objectives and Goals 2. The dominant objective of DFU is to assist in promoting and financing sound industrial development in the Philippines, in line with government policy and in coordination with other Central Bank offices and other government offices/institutions by channelling ftnds through suitable fnancial institutions capable of evaluating sound investment proposals and able to undertake efficient intermediation of medium- and long-term financial resources. To achieve these objectives DFU will perform, among others, the following major functions: (a) administer financial resources provided/loaned to the Central Bank by international lending agencies and by other sources acceptable to Central Bank for relending by DFU to partici- pating financial Institutions (PFIs) for financing the medium- and long-term needs of the Philippine industrial sector, all In accordance with national economic priorities. (b) make contiming efforts, but subject to stringent tests of admissability, to enlarge the number of institutions receiving DFU's financial assistance with a view of making industrial finance widely available and making Improvements in the general level of efficiency in term lending and investment banking operations of Philippine financial institutions, parti- cularly in the matter of resource use and resource mobili- sation; and (a) to provide guidance and assistance to PIs for Improving their organisation, intermediation efficiency, and project evaluation capability. -172 - Page 2 of 5 Aproval of PFIs 3. DFU financing will be available only to accredited financial institutions. Accreditation of PFIs will be approved by the Monetary Board of the Central Bank of the Philippines an recommendations by DFU. The prerequisite to accreditation of a PF1 will be a detailed evaluation of the applicant-Institution, taking Into account the following major criteria: (a) sound financial position and performance as evidenced by balance sheets and income statements and a healthy and sound portfolio; (b) sound operating policies and procedures and a well- articulated plan and strategy for future operations which will ensure a development orientation, continued viability and financial strength of the Institution; (c) an organization basically sound in its structure and a management and operating staff of undoubted competence and pospessing all requisite, expertise to undertake technical, economic and financial appraisal of projects and their supervision; and (d) compliance with all relevant laws, decrees and regulations to the satisfaction of all regulatory authorities. DFU may, where necessary, recommend to the Monetary Board to prescribe conditions, consistent with Central Bank's existing rules and regulations, with regard to capital structure. operating policies, strategy and planning for future operations and organization and staffing which it would like to see fulfilled before approving an institution as a PFI, DFU may in addition recommend to the Mone- tary Feard to prescribe conditions, among others, with regard to size of loans, exposure limits, gearing ratios and dividend and reserve policy of PMIs. and terms and conditions governing subloans, including interest rates and repayment terms. The appropriate Central Bank Departments and/or Offices will be duly consulted by DFU while drawing up conditions of accreditation. - 173 - ANNEX A Page 3 of 5 Government-owned Financial Institutions 4. Government-owned financial institutions applying for accredi- tation will be required to meet the following two additional conditions as a prerequisite of their accreditation: (a) support from the Government, in form and substance accepta- ble to DFU, that the applicant institution will be given finan- cial assistance against losses arising from undertaking af projects which do not meet the normal banking criteria, but are considered by the Government as economically and socially desirable, after taking into account the overall financial via- bility and liquidity position of such applicant institution; and (b) a commitment by the applicant institution that its lending terms (in particular, interest rates) would be generally con- sistent with the interest rate policy of the Government and with the objective of development of a competiti.'e market- oriented, long-term lending market. Use of DFU Loans by PFIs Project Selection and Appraisal 5. DFU will not involve itself in selection and evaluation of pro- jects and this tAntion will be exercised by PFIs in accordance with established and agreed criteria. DFU will, however, review project appraisals prepared by PFIs and take a decision in accordance with the pertinent provisions of this guideline (OPG). Free Limit Review by DFU of Projects in Excess of Free Limit 6. Appraisal reports of projects whose financial needs are higher than the "free limit" will be submitted by the PFIs to DFU for its review and approval. The appraisal reports will provide all necessary data required to establish the technical, financial and economic feasi- bility of the project. DFU may, on the basis of its review Of the appraisal reports, either approve a project for financing and authorize release of funds for disbursement except in cases where a final appro- val of DFU's creditor is required, or seek additional data or suggest a new line of evaluation or propose modification in the project design and concept or reject the project as not suitable for financing. - 174 - ANNEX A Page 4 of 5 Procurement Policy of DFU 7. DFU will review, for all projects, whether above or below the "free limit", the appropriateness of the procedure followed or proposed to be followed by PFIs for procurement of goods and services necessary to carry out the project, and may propose modifications i these procedures do not conform to criteria or guidelines set out in the loan agreements with PFIs. Monitoring and Performance of Projects 8, Each PFI will be responsible for monitoring and supervising the implementation and operations of projects financed by it. DFU, through its monitoring of the PF1. will ensure that the supervision function is being effectively carried out and, in particular, that pro- jects facing problems are being constantly reviewed, their difficulties are being analyzed, remedial measures are being prescribed and all necessary steps are being taken to assist such projects in overcoming their problems while at the same time, protecting the PF11s invest- ment in the project. To effectively perform the monitoring functions DFU shall: (a) require the PFIs to submit periodic reports In a pres- cribed form; and (b) send representatives to PPIs to inspect their financial, operational and project supervision records. Monitoring of PFIs 9. DFU will monitor the performance of PFIs to ensure that they continue to operate in conformity with sound principles and are upgrading the quality of their staff and their appraisal and analytical skills. DFU will undertake a perf6rmance evaluation of each PFI at least once each year. Relationship with End-Users 10. The lender-borrower relationship will exist between the Central Bank and PPI and not between the Central Bank and the ultimate beneficiaries. Contracts with project entities or visits to projects shall be made by DFU through the particular PF1. Autonomous Status of DFU 11. Within the parameters of its duties and responsibilities as defined by the Monetary Board and subject to such regulations as the Monetary Board may from time-to-time prescribe, DFU will be a unit reporting directly to the Governor of the Central Bank and - 175 - ANNEK A Page 5 of 5 responsible to him. In pursuing its objectives DFU will act as an autonomous unit, but it will operate within the broad scope of Central Bank's rules avd regulations. 12. DFU will adopt all necessary measures to ensure that it is adequately staffed with qualified persons. Recruitment will emphasize professional skills and employment will ordinarily be on a full-time regular basis, though in the initial stages, secondment of suitable Central Bank staff on a temporary basis for specific assignments may be considered. DFU will provide training opportunities to its staff to upgrade their skills. Accounting and Auditing 13. The Central Bank will maintain DFU accounts In accordance with generally accepted accounting principles and will have them audited by appropriate qualified and competent auditors. a m81 IF IUf-fi C S m8 PUTICIPita FilIAI 1 I1TI1UtIIOS AIMIIS I8 U.. SmLLImti mu8wi F U n 8 I 0 0 3 C . miifiemu F111 11111#c E MF No.f .Ikt 11K"Uents AME g a.of Cespa'l • Pro ~PO8D CCEU Prof. MI 0v9E~ a I-IIIT CL-foTIL WYt-1-OTA8 aTOTA.iig 1. I nsor Cap. i es't.Corp.' . 9 eø,5,000.0 L,97,441.53 5 7,ep,55.47 4,9,641.39 E,69791?.0 3,en,I41.14 lj,^,EM 6181. 11. of the hi11. Island 6 g,5 00M ,n3,i3.99 i 6,u61.81 C,M,421.0 3,9,439.78 s,7m,m,6m.7 1,4o,669.5 1,U869U.48 i11. citytr"t Baiq Corp. 3 6,689,000.00 3,319,EE5.15 e 2i90,774.85 I,781,4M.?I I,iU,3I0. t,589,3#.80 957834.10 431,50.I0 19. Far fast Ba* & Trest Co. ' ø,m5,000.0 0.00 i 1 5,000m.t 1,041,000.0 691,000.00 1,57,3M.9 14,99.53 031,sm.86 V. Ik haulla ba*tiq Corp. e 3,Et8,57i.00 83,645.0? i 3,1t4,95.93 1,918497,93 I,l7 4L.00 3,043,060.; ,1^,143.712 1,1%,911.0g VI. #etre. ad friøst Co. 4 5 ie,6n,0m.00 8,158,eg6.46 3 4,499,103.54 3,1%,698.50 1,01,405.04 ^, 185,lIB.18 i,45,186.?? m,93u VI. Fbil. Co. 4 lst'l Sad 4 5,3lø,000.0 1,451,71..3 4 1,I6D,i36M 1,7t734.9 1,994.57 e,t",641.01 1,m1,956.92 e5e,6.9 Vii. Privat* 11mpamt Corp. ef the PhilIppinms 50 64,15e,000.00 25^,19,tl.Il 33 3,368,f8.ø9 -e,5,803.59 -16,20^»S.30 15,75,is.ei 9,636,93.åe 6,I,I7.64 13. pIs aveo pset bao, ic. I7 II,000.00 8,6 893.58 14 9,699,6.42 5,94I,ø3.it 3,737268.30 6,191,972.5? 4,es1,510.10 2,#0,4.41 .o 1m111 T1L 9T 130,135,57fm 53,E4?,175.4e 69 &,888,345.5 t,650,707.3? 3,e37,&.ei 40,142,116.» 3,63,557.4. 16,478,5592 PSaama 88Wssass8sassa essassassese sau assuuaussusos asesamass soggassussmus smuussasesm mnsssuuuss *UusuSusasese I Ixclusive of oma prolect ener sysdicaloa ulith other PFI. to Foiy dishursud as of It-23-9. e211911 -177- A10hK E-1 Pag 1 of 4 Ii '1 i *eti 2 tk g a -a = E a v ae 1 sanestags t!as p res a a q%Rqax : R°sRIC °9 § 2~~E-f F.§R $ 8i È g( .J t °* . °£2 I { § I; a syn q . sq 1a : R*ses 151 !**na q*ss a etas:ss sknas gs fik44RRa an a Real a an 1. Eli S 2. - r 1111 'Ii !j --' a I tJiéééé* a Jgaqd qq 3*q 1 °É { v° Ii8° ° I g 3-mE .. lië ・．&\//--/&&- &--,,&- 円山 Lとよど恕 1卼区X吐出V -gLt- 多 ，ミ 1\ Ager IN,IM 10 Ø.S. m~l tIET f i a 0 9 a c 148 wmamw au om M . U1111 m løR "Mue m ex~ am ca m #fø I m 111-fl ete. 104m ho. 1>7§IAL CL.FI em. CL4m Du. CL.Ipa M-21-1111 milfill gegm»&"~ --- *~ 99988*99~ 0 ~ik C~ C". N-WII wtc-finm Ne 4.0 Mm'» M,R63.61 143,m.13 1114'e41.14 M,M.45 qu'imm ~ LIR M,t^o 13 i i I leptoralla 11-1" mwn-anmi a 145,M.Ø 11.0 #." 840 *.00 145,145.#Å 4.90 ia,m." 9.0$ ko *.l» 14 swign b~lliglet *q. 11~ Pwit-«W~ lu 6.0 3»,M.Ø 0.0 M^m M,m.0 ø.sø M^m 6.00 #JO MO IS ýrmm, lat. wl" m n-omw Ne m,m.m *m =,m.li 6.eb M.312.11 lq,e41,23 ø.* m,m.eg 316.M.4 inm.u 10,60x 14 cølatqu km# WIC~ m M,W.43 #m mta.v mo M,I69." kn,459.16 9.0 ^439.16 ^10.50 214,M.% M,I040 11 km bø fottory tuic~ l m 0.00 0.90 0.00 4.00 0.0 0.0 11.0 9.0 eM 0.0 ØM lo iklatt ~ i mg-"~ w# M,m.0 iu,m.øø 0.00 15,m." 164,m.0 Lo o.* 6.0 19 en~ %W Ukb ~x~ w$ 0.0 0.80 0.0 8.06 0.08 *.0 ØM Lo 6.1» n 411m1t IlotNq t*l., ýxpm-mml in 4.0 LO LM LO> LO 4.0 OM OM Lo et t~ fm9m Lim W IC-tum m 4%1*43 m* M,I12.63 M,I3e,63 M,T7m6 o.* M,m.* 139.7R.f4 ff,IN12.63 41,M." le F611. bøq a4st. (91. Ce. 18-0-111 PMIC-ll-fltt m M,447.St 0.0 tes,m.n 0.0 les,m.5e ØM Mmm m,m.02 mm.13 lp,*".* 23 tal* hk%* lut. Co. Ne 6.61: 6,* . e.* 6.0 - 0.06 6.06 6.0 Il-u o.* *.0 IL* n ødivil ~ c~ v" TA,m.n 6,0 M,"9,95 om 439,9M,95 m,m.n øm Mmm Mmm $%,"bås ^»?.B in in~ ~ttf" mic-14ALI Ne 6.0 ØA #M MO 11.110 0.0 e.* OM OM 6.0 om n Pridnit, Inc. 11~ m ic-lsnø m »%M.14 0.0 ",Iam ^ møs m,%e." n,I15.16 124,m.li lffjffl.få itmn V tlalto kftwy cort. 11~ W ic_l~ IL m 0.09 4.0 9.110 0.00 6.0 0.110 .4.0 L* *.00 4.0 a ~ 14 Inc. "-n mic-ilAm. Ne *.0 '#.** 0.0 ý.06 *.0 9.* *M OM Lu Lo Kuwan INIS.11 fm. lf-l>93 w ic-w~ Nø 169,MI.6$ 9.89 ».4W.29 f4.ot.45 ee,m.it kl^ m et,m li 11,4M.61 761111.0 ~ o ~ Kle. *-" * M 4-19mel M 10,413.11 Mø 0.0 10,473.11 70,4n31 M,M.06 6.0 M,m.m Lo #.96 t.* 111 Men All~ le, fat. " _m "mic-~ 1 11 8 igm mi.56 *.N oi,m.st mo øl,no.s6 0.86 01,ttå.W 0.0 L08 #Jø a m 9 C~ h~b 04~ wx-et~ om 610 0.0 OM OM 6.00 0.09 0.0 0.0 9.0 *.0 *A 83 #Ø twi & ~ C«p. 04~ ~ X-VAKICO w@ løs,m.00 Lo mo 116.416.0 110,416.90 »,M.iø MIM.0 tølkm.99 RM4$ 9.10.in I~ mIl. l~ . Cor#. ~ ~ 111-IPIC m M m.11 9.00 0.0 161,116.15 161,316.15 0,m.04 m* 0,m.06 9.« ~ . ku m*. hr ufflery ulte% ~ M IC-ommøt m M m 41 OM 0.00 135,4W.tl 135,M.øt 45,617.94 45,011.12 90,M.86 Mo. 048 , 36 A~k eult & Patilk W13-M M~ M OM OM 0.06 Lø* øloe øM LO 6.00 6.69 4.0 0.0 p "a. CristirA ~ . t*t. WII-Ilk. M ~ m 0.98 øM 0.00 8.0 11.0 #A* 4.00 OM om 4.0 0.0 30 nil. C~ W#. brp. jI~ R M it-V~ IR 0.0 0.110 ØM 9.0 0.00 0.00 0.09 644 0.00 4.0 9.0 N #MIT@ bles. Ist. 11~ ~ /C-~ m 9.0 øM 0.0 ý.00 Lø* ØM 0.00 #.80 649 e.* Lo 0 nil. htnim co". te~ W #t-291m m MIM.13 mo $0,130.73 3R.M.N 0.0 m,m.n ene».11 191.111.15 a er.fis Ca 1, Ikt41 ~ (A4m M JC-»Møa us MIM.10 0.00 00 m,sue6 M^m ?9 $1110 lie,W.m 41 2 0.0 4.0 m,m.m M;W.43 l R: Wk 9 elløffl fhil. Ltal Ost. lei. lýb. " -n M IC-31~ ne 90,W.14 9.0 ut,m 43 1~ 11 Intlle gille *11,* M IC-111~ 1, n tt*o,m." ø.* &%,mm om m,m.00 00,o»." om WIM.00 M1611149 V411*.111 11111*461-9 0 r~ hr. 4-1" m /r-um~ m 3»,M.Ø 6.0 »'610 0 1»,».* igem.06 gt,40.66 iu,m.eo tis,m.n 10#1».16 171421.* tå 1~ 111911119 lille W" "Cpn-mtlm #R 8,00 Lo 0:00 OM 0.0 Lco Loo 9.86 LIO 6.46 ti.* U M et*. t taløs, løe. 1~ ~ $t-"~ Ne 610 *.10 4." 0.0 4.0 0.0 OM 4.00 6.0 6.0 4.0 41 hlita Nr* W~ M141 mit-umt m e.* 0.00 OM OM OM #M t.* 4.0 90.00 Øøp o &ripe C»Wlldst« *4. %-»-W pffic-31~ affi IU e.* Mo Lo ØM 0.09 6.00 6.1M Øm kw OM f~ ~ Philg. løe. fi~ nu/"-«/fr ut stt,«3.19 0.0 ØA9 6.00 6.0 M,V1m M m.ss 9 ta elpet 4»". 014" Mat~ in 6.0 mil 1,mm.» emm." o.* eøm.q 9 w mt Øm lo,offi,e".13 le,m,w4.% 0,155,M.D 11'sn'114.24 4,00,051.04 6,1mtn.14 tg. pl» #M~t "f Inc. & 、 一le0- 、邊細開萬蠶a•1 祕不T訪7 I ;&._;;：〕〕〕〕〕〕一，一、―-!’一＿& PIUSIS OF LOM O~S m :~TIGE 198! $150 Fotrth karter 3,10 $1.060 11 2,40 #3,6M $1,4&0 $2,590 l9u First barter 5 2 3 $1,195 $5,02 st,m smr4 ømtor 2 t l 51M 3,09& bird quwtqf 4 2 e 4,112 1,46 Foofth Quarter e,m 1,6V 7!0 13 5 $lt,434 112,360 67,074 first Larter 3 43,1g ",5% Sttord amter 3 2 t 2,412 1,139 m Tbird ovarter 2 1 1 3,w eew 1,210 FoLfth amter 7 e 5 1,g" !,22S 10 In^ First amter 10 9 $15,8ý5 42,03 $13,3% Seørd amter 14 2 12 20,159 10,221 9,M Third amter 7 2 5 #"M 41M 5,4t7 Fmth amter 3 e t t,q43 9c7 34 First Garter £=ad karter 3 1 2 $1,m IkM $497 mr# ~ter 2 23M 20 11 2^ Fwth -Quarte? 3 553 5,9% 14 $11,611 $1,296 tto,4" 1986 First garter 4 $6,720 m 11 $6,60 S«Wd War. ter 11 t 2,326 1,"6 330 TNird barter 2 ffl åa - Fwth barter 1 190 M 1197 First amter $5,3N $2,060 1! $3.M hcom amter 2 9 8.723 5,frø 3,245 £ $14,m $7,3n -0.45 em MAL 98 29 69 $130,136 sm,m $76,89ý ti Partial ca"l&t»u  182 - Paeiof 7 PHILIPPIES INDUIRIAL FINUICE PR ET PROJECT CPLETIM RERT - L=I 1984 PR LIST QF UÆPRMJECTO' MUIENT DATES AND DISIURSENTS UIER LOM e.. 1984 PH Disb'orsema nt l Ut ( 00) Subproject Co~lteeut .Courcial Noe. 80R8 ØER Date i R Loan Total 1. MMAN1CR CAPITAL I iHESTRElli CORPRATIGN ""subprojects. 1-01 Ceåtral Cunt Crp. C A N C E L E D 8-02 Coca-Cola ottler Philh., Inc. 02-07-84 1,243 - 1,243 1-03 Eastern Telecoenwicatons 05-14-84 1,167 77 1,945 8-04 Cm*:ry Container 0644 561 259 .20 -05 .Atlagtic Gulf & Pacific Co. 08-13-84 . 1,200 800 2,000 8-06 -Coca-Cola fottlers Phils., Inc. C A n C E L L .E -07 Phil. Long Dist. lephone.Co. 01-mE-g6 418 279 697 4,589 2,116 6,705 ØC S ebprojects (100% Cosrcial Loa) WC-01 . Pheips edge Phils. C A N C E L L.E DC-02 Yauaki-Torrus Ifg. Inc.. - 03-11-87 - 592 58E 0 562 592 Sub-total 4,589 2,699 7,257 ni. BM 1 OF THiE PRiILIPPINE IULMD *A".Saprojecýts A-01 Integrad Nicroelectronics 10-31-95 465 977 -2,442 A-02 Yazaki-Torrm fg. Inc. 03-11-97 727 .631 1,358 2,192 1,60 3,800 -1383- AIEXB-3 Page 2 of 7 lNlllSTRIAL. FililCE PUD03ECT PRDoECT CIBEf1 8EPtT • L im PR LIST OF SUPR0ECTS' CMITiENfT DATE 0 DIS ET WDwi LAl ge. 1m PR Di s bur s (UD '00>) ~ jpreitet Cuuuitmmn Cmsrcax No. SORRODER Datt 1880 Lm Total *B" Subprojects .-01 .Y. San Discuitt, Inc. CIA # C E L.L E.D leO! Abc International- 101 67 168 9-03 flobeIackay Cable #C k a C L,£ 101 67 168 C Subproiects (1001 Cosrcal Loan) UC-1 Yazai-Torres Ng. lec. • .03-12-Bb - -,300 8,300 Sub-tta 1,293 3,975 6,ta8 it. C1I1UST amKa CUMORPRATIORM A Subproject% A41 E falea Phils. ¥Dc. C A 0 C E t L. E.0 *j. Subprjects 8-01 Eastrn Telcum nications . 08-07-t5 1,1o 788 1,970 -0 - Talfanke SuIcoducttr 10-17-85 600 -O0 1000 p-03 Pil. slobal Counication C A D ' C E L LE S9 b-total 1,788 1b18t t,970 19. FR ST 8 m iliT Ce. * 8-01 RebherrId Phis. lnc. 06-30-87 . 900 600 1,500 8-02 Phil. Carpet igf. Corp. 9806-30-87 14 98 945 b - t t a -184- AM=E 5-3 Page 3 of 7 PRI.IPPINES INIUSTRIAL·FINMCE PR=aCT ROET CR ONPLETIm REP LRT • LPø194P LIST OF SUØPROJECTS' C MIŠTÆET ATES AND DI.SBURSEV ~TS UDER L | n0. 1984 PH Dug sbmar sesaeont IS '000> Subroject Couitent Couercial . fhR Ru 0 E R Dale I 3RD Las Total V. THE NMILA DAMNlG CRPRATI!K. •B Subprojects -1 Phil. Tel. t Telqraph Corp. 03-08-93 1,300 1,200 3,000 8-02 Fruchtchips .11 Phils. 10-18-83 108 87 195 8 b - t o t a l 1,908 1,287 3,195 VI. NETRP.TA IMK& TRUST CD. E Sdprojects A-01 Asian Alcehol Cup. C A N CE L L E Ar-02 Intrnational Pharmaceuticals C A n E L L E D * -03 RFP Corp. 04-13-84 653 . .435 1,008 * 653 435 1,088 * •gD Subprojects "-I Coca-Cula Bottlers PhiTs., Inc. 02-07-84 1,843 - 1,248 8-02 Phil. Global Ci>auåications .07-04-84 4u . 302- 754 8-03 Phil. Long Dist. Telephon .. 01-EE-86 . . e4 . 546 T,414 e$543 868 3,411 Su -total 3,196 1,303 4,499 - 185 - AIMER B-3 Page 4 of 7 PHILIPPINES INDUSTRIAL FINcANE PROJECT PROJECT COMPLETION REPORT - LOAN 1984 PR LIST OF SUIPROJECTS' CONITNENT DATES AND DIUIRSEHETS IIDER LOAN No. 1984 PI Disburseumnt (aS9'00) Subproject Coaitsent Coamercial BUe 80RRO ER Date I I RD Loan Total VII. PHIL. COMERCIAL INTERRATIONA L ANK *A Subprojects A-01 Atlantic fklf & Pacific Co. 03-18-87 780 50 1,300 A-0 .Kwarae Phila. Inc. C A NCEL L El 780 580 1,300 '8 Subprojects H-1 AS & P AlSCO 06-17-85 61 40 101 8-02 Pacific Traders Nfq. 1o-10-85 2ES 153 391 8-03 Phil. Long list. Telephone Co. 01-22-86 648 432 1,080 937. 685 1I,568 DC' Subprojects (1001 Consercial Loan) IC-01 San wsIul Corp. C A N C E L LED Sub-total 1,717 1,145 2,86o VIII. PRIVATE 1E9. CORP. OF THE PHILS. "P Subproiects A-01 Seuirara Coal Corp. C ANC E LLfD A-0e Litton I119l, Inc. 04-14-82 1,829 1,267 3,096 .:03 Atlantic gulf I Pacific Co. 02-09-83 2s820 1990 4,700 A-04 tKmalrae Phils. Inc. 06-30-87 900 592 1,493 5,549 . 3,739 9,299 - 186 - A BlE -3 Page 5 of 7 PHILIPPINES INDOSTRIAL FINANCE PROJECT PROJECT CONPLETION REPORT - LOAN 1984 PH LIST OF SUPPROJECTS' COHNITIENT DATES AN1 DISSURSEENTS uIER LOAM N. 1984 PH Disburseaent (USSb900, Subproject Cositaent Coueercial O. 90RRONLR Date 19 ARC Loan Total '' Subprojects 8-01 Apo Count Corp. 03-20-83 1,096 * 734 1,830 8-02 Phil. Polyphosphates 08-17-83 786 484 1s210 B-0 Manila Bay Spinning Hills 02-02-84 2,035 052 2,887 -04 Stanford licrosystess 03-28-84 1,810 .1,207 3,017 B-05 Rubbernorld Phils. Inc. 05-09-84 1,59 . 1,068 2,654 8-06 Filipinas Synthetic Fiber Corp. 05-21-14 315 210 :25 B-07 Phil. Coans. Satellite Corp. 11-85-85 1,900 1,266 3,166 9,474 5,015 15,289 4C' Subprojects C-01 Republic Coeent Corp. 10-23-01 743 510 1,853 C-02 Senquet Exploration 11-17-81 - 146 146 C-03 Surigae Coas. Ifining 11-5-91 330 220 550 C-04 Freean, Inc. 01-18-82 338 392 784 C-05 Calatagan Resort 0140-88 .99 500 799 C-06 Davan Rope Factory CANCELLED C-07 Norgate Apparel. 02-05-92 156 104 860 C-08 Canlubang Sugar Estate CA N CEL LE C-09 Alberto Gothong Ent., Inc. C A N C E L L E 0 C-t0 Lorenzo Overseas Lines 07-19-82 388 859 647 C-11 Phil. Long Dist. Telephone Co. 10-14-88 196 124 310 C-12 Asia Cotton Mfg. Co. C AM C E L LE I C-13 Nasipit Luber Co. 05-02-63 440 293 733 C-14 Drugakers Laboratory CANCELLE I C-15 PrintVell, Inc. 11-28-83 237 158 395 C-16 Union iRefiery Corp. CA N C ELLED C-17 Rubbrmorld Phils. Inc. C A N C E L L E I C-18 Kenras (Phils.) Inc. 18-13-8a 101 68 169 C-19 Norgate Apparel Mfg. 02-17-84 760 200 960 C-8 Union Ainoboto Inc. 03-21-84 602 401 1,003 C-21 Red V Coconut Products CA N CELLE 8 C-22 AA Export I Isport Corp. 04-85-84 110 74 184 C-23 Trans-Phils. Inv. Corp. 05-85-94 161 41 202 - 187 -. ANNEX B-3 Page 6 of 7 PHILIPPINES INDUSTRIAL FINANCE PROJECT PROJECT COMPLETION REPORT - LOAN 1984 PH LIST OF SUPROJECTS' COHNITHElT DATES AND DISBURSEHENTS UNDER LOAM NO. 1984. PH Disbursement (US '000) SubproJect Comsitant Coauercial 0I. .BiRRO ER Date 1IR D Loan Total C-!4 Ianila say beisery mills 06-07-64 135 90 225 C-25 Atlantic Gulf & Pacific Co. C A N C E L L E 0 C-f6 ka. Cristina Chemicals CA I CELLED E-27 Phil. Carpet Ifg. Corp. CANCELLED C-8S Nasuive Sales , Inc. CANCELLED C-V9 Phil. Petroleus Corp. 12-18-84 545 361 90^ C-30 Oriental Tin-Can 06-29-85 238 158 396 C-31 Phil. Long Dist. Telephone Co. 08-22-85 570 380 950 C-32 Indo-Phil Testile Hills, Inc. 03-19-86 600 400 1,000 C-33 Papercon (Phils.) Inc.* 06-13-86 198 132 330 .C-34 Indo-Phil Textile Rills, Inc. C -A N C E L L E D C-35 SAC Nfg. ' Sales, Inc. CANCELLE D C-36 Pelican Agro Products, Inc. C A N C E L L E D - C-37 Suriga Consolidated Wining C A N C E L L E D 7,131 5,012 12,143 'DC4 Subprolects (100% Commercial Loan) DC-01 Phelps Dodge Phils., Inc. 01-23-94 - 511 511 DC-02 SuN Higuel Corporation 07-25-84 - 1,132 1,132 0 1,643 1, 643 Sub - total 22,154 1,C209 38,363 II. P!SO DEVeLOPHT sANK INC. *A' Subprojects A-01 Universal Robina Corp. CANCELLE b - 188 - AilEX 3-3 Page 7 of 7 PRILIPPIES IATRIAL FINACE PIOJECT PROJECT CMPLETIGN SPOT - LOAN 1984 Ph LIST OF SUPIOJECTS' COINElfNT BATES AND DIRUSEMETS UNDER LOAN No. 1984 PH Disbursesent (16$1000) Samproject Coasitment Comsercial No. SCRRO ER Date I8R0 Loan Total '8' Subprojects 9-01 Pacific Engineering Co. 12-02-9 400 - 400 1-0 Phil. Polyphosphates CANCELLED 8-03 Cagayan Elect, Pover & Light 11-23-83 347 620 967 8-0 Southern Textile Nills, Inc. 02-17-S4 1,562 670 2,232 8-05 Integrated Hicroelectronics 05-284 1,020 680 1,700 - yntics, Inc. 07--84 801 600 1,401 4,130 2,570 6,700 * Subprojects C-O Norther Nindanao Transport 10-26-81 30 189 491 C-08 Assoc:ated Seneral hilders 08-10-9E 496 342 83 C-0 Food Teraimal, Inc. 11-18-83 349 150 499 C-4 Unic Glass Containers Corp. 0" -84 236 59 29 C-05 Phil. belt Irg. Corp. 05-23-84, 155 103 . 2SS C-06 . IlIgan Casant Corp. 45-18-84 126 84 210 C-07 odnmtics Phils., Inc. CANCELLE 0 C-08 Concepcimn Industries, Inc. 06-13-94 89 38 127 C-09 J &P CoatsaNilaBay D88-84 77 52 19 1,83 1,017 2,849 C'K Subprojects (1005 Cossercial Loan) DC-01 Pacific Yeast Hfg. Corp. 09-24-31 - 150 150 Sub - total 5,962 3,737 9,699 8 RAN I T O T. AL 44,649 32,240 76,388 Of which: 'A' Subprojects 9,174 6,302 15,476 * Subprojects 26,511 15,834 41,745 'C' Subprojects 8,963 6,029 14,992 kCG Subprolects 0 4,675 4,675 -189- ANN=x C PHILIPPINES INDUSTRIAL FINANCE PROJECT PROJECT COMPLETION REPORT - LOAN 1984 PH CHARACTERISTICS OF SUBPROJECTS FINANCED NO. AMOUNT (USt'000) TYPE OF ASSISTANCE FOREIGN CURRENCY 37 4f,121 PESO-DENOMINATED 32 28,767 TOTAL 69 76,888 NATURE OF PROJECTS NEW 3 1,855 EXPANSION/MODERNIZATION 56 64,411 WORKING CAPITAL 10 10,622 TOTAL 69 76,882 SIZE OF LOANS (US$,000) Up to US$ 250 13 2,251 251 - 500 11 4,015 591 - 1,000 17 13,268 1,001 - 2,000 17 24,667 2,001 - 3,000 6 15,515 3,001 - 4,000 4 12e472 Above - 4,000 1 4,700 TOTAL 69 76,88 MATURITIES Up to 5 years 32 30,211 5 - 7 years 16 17,810 7 - 12 years 15 14,660 12 - 15 years 6 14,207 TOTAL 69 76,888 巒，，豐，豐，‘江― 磬寫g彥蠶寫審．亂― ;i霄奮爭訂發，計”＇計，計鉉l ，〕‘!&&,！讒！}“戴群！}&!&！〕’. 婦蒞法g江巨場；籐一•寫才計I: r『藝弄尋二鳥急言亂亂．！電 ，召”邸i:，寫計！邊 曆發言認鳥亂雙認斗 藝計汗奮亂響騖―纏寫 于界！巒•雇’ 寫審I三界騙仕 二：.，。騷訕二乙 〕誹鑲綢誹藪鑲弱矓鑲’〕；！一唱” 認―!--g蘇 屆妒I。，戶1．多1 rr計＇戶，〞汗！召奮 曆發！居邊表蘊’華秀醫―擊―留彎藝總養邊蓬藝瀾碧藝輪必鰓籐去聲―亂釁 寫計待戶9戶戶尸戶戶：戶：戶戶計P尸尸尸尸戶戶戶夕9分戶戶尸日 灘’“絨’彫矓翡誹謝州弱識降纏 A REGIONAL DISTRIBUTION OF APEX SUBPROJECTS AS OF DECEMBER 319 1988 (AMOUNTS IN US*'000) NET NO. OF % AMOUNT R E 6 1 0 N PROJECTS SHARE APPROVED SHARE -------- ------ I. Ilocos 1 1.4% $146 0.2% II. Cagayan Valley - - - - III. Central Luzon 1 1.4 10253 1.6 IV. Southern Tagalog el 30.5 27p109 35.3 V-A. National Capital 36 52.2 419567 54.1 V. Bicol - - - - VI. Western VisayAs 1 1.4* 647 0.8 VII. Central Visayas a 2.9 29207 2.9 VIII. Eastern Visayas - - - IX. Western Mindanao - - - - X. Northern Mindatiao 5 7.3 29952 3.8 XI. Southern Mindanao a 2.9 10007 1.3 XII. Central Mindanao - - - TOTAL 69 100.0% $76t888 100.0% - 192 - Page 1 of 6 FOERt No. CaP-DFU-003 Revised July, 1983 Date: PROCUWUAENT QUESTIONNAIRE Name of PFD _____________________ Name of Proje~t: Sub-Sector: Project Code: CHARACTERISTICS OF PwOECT 1. Nature of project: <check> now - p qm nm r7Others D Moderniation 2. Total project (st (in Eq. P): 3, Amnnt *of loan requeatd: Foreign currency Locl amrrency Total (In Eq. y) - 4. Estimted breakdown of itema to be procured: Imports Total (mnEq. .Xal -(1nEq. Us$ i) (tn p '000) . MMane/equipment/ good. civil Wrk Services/consultants ·____ 5. Ezpected start O cnmercial operaton: . PROCUREMENT PIAN A. Macbinary/Equipment/Goodu: 1. List down marnery aM equipment proposed to be fina~ced by DFU including a bri~f descrii of each. Indicate opposite em the dates on which each ma~Mary and equpmne should he delivered. - 2. What is your beut esta- of the oumber of suppliers. worm~wide. potentiaMy able to supply the required mamry and equipmet. L assUmant 5 sto 2 /7 Moreta zo - 193 - Form No. CBP-DFU.003a8 Beelaed Ju19g3 .N Pas "aot6" 3. Are there ay fators or consderaon (other than the noral n at quaUty and price) which have a special bearing on. w are Ukely to aftet bias, or constrain the choce af suppeam rs? 4. Does the company have In us in ts plant at present macd=y and .pnpmeat of the kind eimila to those proposed to be procured? fl;7 Ye . Q No If yes, please a11 up the followng: Rated Capa- Existing · city of M& Quntity/ E Prpsed Rated to be Ac- (2) • (b) (b) f (a) List maemnry/equipment/ To what extet is suda'dizatian relevant to the choice et supplier? 5. Method(s) at procurement considered (check one or mqre preferred method(s): Procrement Approxat~e Contruct M~ Amont Format Q Internata Competitive idding-- 7Lfimited Internatal Compe titive idding- Compt~tive Bidding Adver- tised L.neany . Comprative Q PurchaseaofStock tems off-thes-shelf fl Oth'er method (sperdfy) Procurement contract format intended may be by lots,' hamp su turn-key, etc. - 194 - *orm åao, W.r --taUuu.4 208 F Revisd July 198 Pae 3 of 6 6. Describe the pri~cpal mechantcs of proc?dure foreseen and, in ad~quate detal, the mai crteria for the selectan of suppUro: (include timetable for bid advertiling, bid opening, bid 8lectn. contract award and fi delvery date). Ci. åvii WorksServices (i.e. canmn=tnte etc.) 1. Liut down cIvil works (by type> prq~oed to be finaed by DFU. . incuding a brietf description of each. Indtcate opposite eah type at clvil works the dates on whch each asuld be *~pld. 2.. Wat is your best estimate of the number at muppers. worldwide. potentially able to supply the project's~'eeds for civil works/services r7 LeA than 5 Q 5 to 20 a Q oreth a 20 3. Are here any factors or caamerations (other tha the normal oes a qua~lty and price) which havé a special bearing on, or are Ukely to affect, blao, or constran the ch e of ~upplers? 4. Method(a) of procurement nadered (chock one or mor preferred method(a): PrLAure~eu Appropriate Contract Method Amount Format Internstiontal Compet^ve a3dding - ramIted rnternationai Com-~~ petitive Bidding- Competitive Bidding Adver- timed Loataly - Comparative Constrefion by force timd 1~ Sethod (specfy) 5. Describe the prb~cipal meccanls of procedure foresen and In ade- quate detal, the man eriteria for the selecon of suppiers: (Inelnds timetabe f.,r bid advertising, bid opeming, bid selectLin contract awardand fMinl deUvery date). - 195 - Porm No. CBP-DFU-003 AR Revised July 1983 C. For, A and/or B above, dies the procurement contract adequately provide for the following: *achinery and Civil Works/ EquipmeRRt Services Yes No Yes No 1. Price escalation provisions 2. Inspection and tests 3. Delivery 4. Insurance 5, Performance security/warranties 8. Payment 7. Sare parts 8. Technical assiatance etc. 9. Delays in Supplier's performance 10. Lquidated damages 11. Termination 12. Resolution of disputes 13. Goveraag languages .14. Applicable law 11. RATIONALE FOR CHOICE OF PROCUREMENT METHOD 1. What are the main reasons why International'Competitive Bidding is thought to be suitable/not suitable? 2. If ICS is not intended, what are the perceived advantages of the procure- ment method or methods preferred? Iv. IF COMPETITIVE BIDDING IS INTENDED. PLEASE ANSWER THE POLLOUTING :. A. Notification and Advertising 1. Would there be adequate notiffcation and adverising to all, potential bidders in terms of tiing and coverage? 2. What forum wiR be used for procurement advertising? Please check. a, oicial notice board . b. official gasette c. local newspapers - 196 - Form No. CBP-DFU-003 Renticd Ay1983 age 5 of 6 d. foreign nwupapers E *. *mcinta journs/ubtnc..ons . otußc~ton to embacies g. drect n*Mtlan to supplers/contractors Pr*fequaamestion I 1. Would there be prequaUncation of potenttal bidders g. x yes. would the pr,qinaficatenn requirements be based entirely upon the a~1ity of the contractor to carry cat the works concerned or to deltver the subject of big adiafac~?ly? 8. ]a judging coutractor's/bidder'es-bUiy. would the föllowing a*toes be cansådered? a. experence and past performance G £7 b. capabilty, in respect of personnel and equipment f * o. financia1 status L L d. existing Dmmitm net é. others (specity) __________ C. Bid Ev~inma P-stqnanfican and Contract Award 1. Type of bidding intended (pleas. check) - one-stage bidding ~ two-stage bidding .7 1. Would your biffing dåcument cantin all the föllowing stanad . informaun? it not. check out from the list below informa~an not Intendeok to be covered: a. 40rtation fe bids L7 b. Instructions to bidders L c. General conditions of cotract . d. eS cadffia of contract Q- Ordinrly, pregnalfication ta belag ds for large civil works contracts. . - 197- Porm No. CBP-DFU-00O8u Bevised July 13 Page 6 of 6 e * Scedule f requi'mven t £7 f. Techial c-eGatLans g. Bid form and price sched Nes • 7 h. Bid secuty torm 1. Contract form .7 *. Performance security form 7 3. Will ids be opened in the presee- of bdders or their dly au~ho-ied repreaenatives such that bid pening will bo perceived a fair by the bidders? 7 Yes No 4. The purpose of lad evaluann 1. for the Inveatment Enterprise to bio able to secm the goods or works at the most econamic~l overall cost. Does the bid evaluati on ~ansider the fo.lowng criterla? (Please check).- Weight/ Yes NO Assiged a. price D b. delivery/cmpletin schedul 7 c.. tehcl mn~t and productivity d. terms of payment 7 7 *. gUarantY oblugations l f operating and maintnne cost £7 g. «fitnyad Deiblt D7 £ h. resale vaue D 7 Are the above criteria speled out In the bidding document? D Yog w7o t5. pruam~atln-is ot required, will thre bs pos "a an requirementa for the lowest evaluated hidder? Yes £7. No Prepared by: ‘·”辭―!};::;:&&！〔；：】；:;;;’一 &I。―!::;;:;:;；訌！;;::；…’& -!-!:::::::::::&&: !,-!}::;::::::;::}:{ 豐、里l，雙‘_,,，。•．‘二二 :―、。！二！_，二禹建司J曉磚。1•寫 -，。―廈―谷蠶響響響粤訪乏乏畫：含聾訪盡―乏l I―召寫―&-’喜養森發甚：盡誰喜‘基：辟蠶―星― 遲遞―廈盤―•！.&,,,,,::::;:：。： I&i-i―蒙―壁參―靈！靈；-i耋I:I。書萬。I―呈―I& ff~ avtøm wm - LM M n FIMIAL M~ CF M«~ mo LM M. tm n #at foraløp m t 9ý "le kføre ~ sin MAL~ VIM) mitfam$ VIM b*. ø~th å 9 øl in. å~ fint of 8~ ?m et Fird fm of Se~ barof flIst~ of Somi~ d fitstimd k~ vmot Fell §watt*% fall hit Gwatlø foll DW&tL" Følt 0watle* foll øwation foll (ýma" F811 Gporstiff ~jus Ib. føl. ~ i tsk. Ackal ht. 4ekul cd. ktal fø. k" FAL ktøt ht. khat ht. * ktal & er ~Jult ~al 0~ ~Oin C~ la httien Phil$.* tic. ýli etm,w 3,269,519 tM,M 3,919,M N,M5 135,m ",8t4 IR,m. em lem 3." 16.81 e.16 mI 9.8 tm M futen tola~ tdim M^ W,OK Mm 4",961 to,m Mm 115,19 19,111 ".e& 4t.øl mo ax It.* e5.W "." mm " ~ Contatom 10.711 1«,#le lo,m Ikeli i,m 1,m 1,"? 1,515 8,11 lo.u e.st 7.31 4.5 Me 3.2 1.11 M utøtk bit % Pacifle eøw$m C,lo,lfl e,m,m 1,må,M 55,W 115,06 $oe,»6 ll»,M lem 24.55 tom ie.36 3.0 tim 5.86 6m " b" la httlart Mila., loc. c 4 9 c c L L 1 9 " phil. Loa@ tlst. bl~ Co. 1/ 9#M^ L*. 1#,eåi,m LL 1^ em L L 4. 0. Ø. N. 6. R.L Lo. a. ii. N. i. 1. L §.A. a,m,m M,S4 R,pbbo M,m v ~Wh Itm C~Cid SC-41 heiv$ ~ Mo. c 4 ø c i t L I t Tusti-torres iNg. loe. 11 Iffletm R. L 1,m,m 8. A. 1#9,00 0.4. 111,m L A. sk.n 8. 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Ou OF fIa PMILIPPE ISLNIDS '1' iubprojects A-0 unröted ncrotectftonics .2,42 - 5,87 - - 8 Taukl-rres Ng. luc. 5jss ...-.... . 網朧游州日 鬨必豐黜驕 悶啊購『 一j朧屆賺州 劇口馴奮馴抓勵膠個口引闖口l頗開朧．閱臼州目口默州 細吋鯽細由•鳥州口 自階劇n細．t畸 件！n•州彎細關•為城“•彎六”‘細開，〞”“憫 細細神細他…，••怔．網•劉臘，統•購勵『闢口磁州臘•網口翻頃• h…，榭，〞榭，．•，聯，仔”榭，細寫細“l輛露I•．，勵，,r聯，l&1& 一‘一－一－一一。句－么－一→．一一•一一一一 甲訕物細細 卜啊寫。奮。細計”勵細，騰。C總，t怔kL〔• •磁系魄月d留開”劇目臘歸•鰓－-．。， •嗡煙細抽臘物結細·C勵馳C 1 LL屆l •細•綱．．••國，卹•••自個個司•口闖馴•．口臼．卜自．糾••觔•．．劇，•．綱．個，•闖．．隨•••陶，•．••．•纏• 雲婦。參唱。O,. ．•．網．個闢．自•．••唱•‘•“•目．.，•開••畸’口．&．•個卜．哺．•，•卜口細．•國••開••自劊‘個目目司酌闕閑‘•口•”勵 馴計細申•細細露州滷物•目審域細州． 二，.，嚇‘邊竺贏竺么’贏贏” ,el州一1．跑黝…• .．……：兀不一T不．-T一叮一一7註 .--－一一一一一’自 絲l。粤n嗡口騙細離澀口口州臘m口 個頗口開細口口口目申口劉口馴•口團勵口口 、學州啊•織細 H自細州，個凡跑細。織。，C向•C怔【L〔． ．甲劍甲•細細 〞，一 珍劍訕”細”細“開．團。“馴．自，州”蟻”，•．”·” 卜總胎跑系j網細dod臘紛•，榭·榭··•·．· 卜開凡“,．細州“•州劇崎緬•·C二CC【L,．。 .．……，·不不一汗不•’汗，一汗，叮‘劉輪 神。，織劇口開讓‘絮間訂口。二I甲 &，州取•細” 一拿 H寫細鱸•謝t’州細．朧。奮州·l戶··－一，& 卜總伶n，馴甲個鄉偽神．，開，郎·‘,&，二 口闖．•．•一•細參•卜．．一自國•．個口唱網．個開口“參•．•煙•國么•．叫口．卜口口．頗•，口勵華口．“•唱 t.‘·他．他．t‘祖州參t戶審’0. m亂日神矚口 閑顯關屆亂寧謀頗朧網細馮群 神卹馳蓄口口騙網個閱個常•州馴言馴為n 口開口實唱闈團才馴H開開r纖矓•口臘騰」口l麟州 細討細細曲•鳥州滬 細n口．細•t吋 mr細閱邑磚自．”奮細“細州鰓h劇•哺•”齡劉州騙鬨 一一一一一k甲甲臘－-－一 細啊•細念．0二•．驪．戲口開頃•口劉劉頃•付劍啊側頃•攔閱劇臘• 自．,.lt，聯韋權伊州閱奮電t，榭勵仲”州韋細膩細細他悶籐I•t”喲，州聯魚煙t，總9 亂頂開口訪涌馴臘開口劇口萬向 甲州啊•細t. 鴒縣貓營臘師蠟二’嚅：：鳥：魚．: ••馴戶開－•闕．••目闔••目．，•悶，••．••．•••••網•．細．••．•細••，．••。．&h•．間．•網••• 一川．:.－竺＿邊竺＝.--3－一上 啊。矓化．魄州口開口編頗口甲個。 一一自 &，鄰編。二饅 州細•．,“細•）&，二c.,c oL亂‘.& 由啊言誠討闢也他馴州儿留“購瞬派川．C鳥掬C驪tL怔， 卜鰓網輪州•“”讓•個二觔 露•憫。觔6參參 甲細甲•撇細 卜01雜H幼‘h響勵跑戰觔萬，.,10.1州寫·自鈴 卜總外跑I。縱•細跑）口驪造朧他邑開唱他鳥·朧， 卜仰觔造．亂憫計驕。】d申開斗。魚州鳥·自．露飾 •，化I寫t!，磁你·t你 ，•b。會•奮•l鳥州陣個亂劉口0 0. ,I寫。州肱。口開寫織開龍開即口矓開瞭一個開 型乞雙豐·丁 自劍戰絨純卹f鳥細面化么自，榭，I戶 糾總細•輪•州州細．必日唱C權亂亂C• •。鑽．1，州••． IMMIAL flau mjtAT 1,11~ CULITION 11~ - L8011 lm PR Ciffloff stam OF SUB-Lom fl~ am LM 19M m sk of septenher N, im 49 a 9 #f PFI Flumt% 4~ ontstudttq Ar,gors 21 on 1~ BORRONER VEX Utkora ont Otber§ er AM othm AM 8~ 9 (Vma? (PIMI 111,000) (PION Reschek,kl 1/ 0,080) 19) At b p ma 101 59 Pacific Träders #fl. Ist m Phil. Long gist. Twleqhoný Ce. 1,155 0 8*proJeck Offi Commordöl Lm) 11c-et 889 111p91 Corporation C A M C t L L 1 0 9 te b - t 9 t a I ese 0 ems 0 0 9111. MVATE M. CM. OF M PM. A4i sulrörk tut C". C A 0 C E L L 1 0 Litton tillit fac. 3,096 '*2,M PAID 0.8 Atlantic W I pecifk to. 4^ 3,m A-04 buträn Phill. lec. 1,492 »fm ?,m - 0 8* ~eck 8-fi Cemt Cerp. Rescheltuled 88 6.4 IW ffillgplm PORY~ tu 1$218 781 matta Day svåming olik 21m , - Palt J DM IllMort lncr"tm 1,0v 1,162 Fern~ 845 Phitt..toc. em PAID 8-06 Fillfim Synthettc: Fiber Cert. 0 mil Hi- Phil. ~ sätellfte torg. 11,166 Nie 15^ M4SEIT OBIWIU US? - LOS 1986 Vm ler~m m-w nmm Ws. .As of Septeige 30, li. ~liar As - l I m pFf Fihaacig asshmt Icstaumg fruseut frrr fl Oi4 Luems Wuprejut ISIOIUe 8E R - 0l Olber 0 . Ollers er 19< OlSmre Ull Ske *. t'05 IP'00 IS*000) (P*0001 ketedliug 1i 1*'000> (p'0051 11> II • C-0I kepulicg~ teCrp. 1,853 - 904 C-0U kangest Espatis 146 - ItI C. tmrigl 4pIms$li 1i1li Ii - 1i C.04 Frsua, tec. 1 . 377 107 rn.1 C- u Davu kPO Fut,r C 11 C I L L C-07 . ngatt Ippare 360 - MIB C.- Calubq gar Estate C Å 1 C E L L 0 t- Ilert Iktleug 6a., In. • CåI # C E L L E D C-0 Lemuse Serseas Lim 6t? . 140 219 16.4 C-li Phil. Lom; eit. ltep~u co. 310 7,500 m mil 0.0 C-t fsla cetten Wg. C*. C å N C E L L E I C-13 asipi$ leste Co. 73 . Ut e,335 ~ttdled 37 10,350 ee.0 3.0 C-14 k~s Lasterry C n C I L t E C-li Pri~tiei, li. m9 - t - . C-16 ods blm tiwerp. C 1 8 C E L L E I C-1 1ermid fbill. I. CAN CELLEI Ct-l Earm hit.) lI. 169 - et C-19 Norgat. tppare Sig. 960 - 916 C-0 lhim ilokt t. 1,50 - tII Prpaid C-21 Red v ec~ Pred~Is C å 1 C I L t E 0 C-l M Epir ~!pert er. lk - 80 C-ll Iuas-Mils. l". Crp. m - N10 Cffl hulla K aM Neisry bIh £m5 - fiml C-5 Ottk elf 1 Paik Co. C 6 N C E L L I I C-21 Na. Cristin ~ ts C A N C t L L E 5 C.m7 m1il. carp~t ug. crp. C i K C E L L E C- nsive ale , lc. C A C I t tE C-e9 Mil. mntetes Cup. 907 . 9k C-30 erital Ti, Ca. 3% - In C-i nil. "qi, ltt. Tele~ CD. 950 . C-3E lds-phil. 1etile ille, lI. 1,000 . 119 C-33 Pmper~* Ipts.1 lot. 330 . 1% C.3 l~d-Pii. tetilt Mill, i. C C E L L E i C-5 M mg. i bile, le. C 1 1 C E L L E 9 C-36 Pelicas g0 Proutts, loe. C A I C I L L 9 C-37 erig» CUmlidate nii C å C E L LE 9 11,141 7,500 5,156 8,311 . 678 10,3 /＇網“L游憫個 償開視朧爾悶朧用矓群 悶瀾魷讓鑰閉戲日開叩領寧•j朧寫悵” 開閱卸戲師開騰劇卜州口f洶臘口個朧日」朧奮關奮州 細．f細州啄執州口 細鑰朧細t tj 斤In一向細齣念細緣•細遛他悶計“”伯觔”留．訂州細鹹． 一―-．一h叩甲州一一 刨妝。撇念••曉購個留醒發劍劉戲細神磬屆謐戲細吋．付開劉叫頃鄴劍矓圳臘• 勸。”電t．州勵C戶，南f神，聯•《計．爾參細觀細向視勵哺蠶t．•．榭珍坤，榭發嗡n作車 ••．”•呵．••．夠．•…“州．個目卜．．圈”.&,.．•，•．糾．仰••闢．•．•卜•陶••口•唱，•．州．目‘．•．dh.．州•．,．叫“..，•網•一•網■••，•細•．.&..&.．畸自．•，•卜■•闔•闖，•••闢．••，．••．－•細•••．“•••網．••間州•．••闢．•審口．啊國•．.“••州，．鬥，.‘•喝 馴妒州暱．徊細11劇鱸h“辟dd亂“卹 勵個州自唱叫口目間口細口口參閱國口闐口觔卜口闢睡個細口國繪劉闢中個個么口卜口開j，目目網，個網申 魷劊闕州卹州馴儿“,．潤I·悶歸．h學騙 ．驢嗡細矓州自細甲耐婉h復·嗡 口“口國．•”•藝•“卹個d“••．■目．’劇自．••••••••啊•鬥州擊口■口，勵．口．•畸．••卜•••．個中口目州．••• I，爾中描，你• ．叫．•“．•國’•．..“•．州．••“•．,.．•，．闖．，•．&.．•細．•一••卜•→．•叫•．-．•，細網斗“& ．…奮．奮O鳥糊啊，聯l&’州鳥鑽點州黝 ，個••州■偉卹••••網••闖．目•鬨口．卜••鱸，．闕卜目．•綢‘．物嗡闔．•．憫州•．&．•．劇•州•一。中目••闔•••自■口 鰓．州個麗閱口開鯽開瞭。嗎， •細■口闖，•綢．．•闢，個個合由•個口隨．闖“州“勵．昤－ 彎劍物•臘念I ＿江＿__’你鄙 杳劍臘馴”州細二。如•。C自儲Cf亂亂〔．發 , 甲細孼•撇細．召＿- 州州飯細臘編“．榭·…，。二么計么鳥．. 卜總玲盔l他開t•九勵神細州細嗡C自論C纏LL〔。 糾嬌h州“『l“發．細辭tLI州腳鼠嗡．啊，口．自．亂二鼠亂 ,．卜倘魚”檢計．碗奮么總•戲跑勵審。她．徑J總臼。亂•．網，目，由。亂勵。亂0. 糾冷岫甲•州妝憫言館馳”涌“1．黝總。編。自．m屆。亂亂總。亂么 卜飴勿州勵c.，袖，l•州亂•．日戶，口．由．，亂鳥亂自． 必。觸中奉，聯．參參· 甲黝甲．撇勵． 個啊口國申自口州劉口向州•細闢區自陽勵•細 闐！勿榆•．饑劍細“．計•神解跑州開．么黝個，：鳥亂么由． 卜總細誠法．州細甲d馳邑跑自∥．爾總．自。潤臘亂自．鳥•．亂膩 C嗡州必榭．亂州．日間．州口。么鳥驪，亂么·亂亂亂么 C•儲慟涌頗觔韶•細•域閱吋騙馳”。網，.，。．.&，•。自。：.&LL＿。 ‘唱才騙闖闢電tttn自lt。口魷二t．•C【LL【•11瀾 藝哺用騵健州陣寫饑，間波討勵卹•萬騰。驪訂，。鳥啊，.．。．。二LL，〕勰｀ 卜飾寥鳥r女•tt點朧饞自點留日牌鳥編。．’口，么亂二。亂L雙l覓 曆州”響I，講•••，. &－一一一•一－--&．一‘一一 瞭 . 】 ·網朧游細口 個舊閱亂寧目開咸n開購蓄 州馴鵬奮口．朧甲口開啊個蓄•州朧奮儲物州 劇口臼審網抓寫甲馴卜州開r臘閱•個曉自川騙騙啊倘悶 細吋鯽皂目臘黝．斕細 ’一“.,.f·＿ _&－一江二丁－－一彥 &&&&，·細開瞬細“&“哺h“綢．＊偽訪•馴州“”•－ 黝州””。。“叩．，界＿叫卹＿_．祝‘.‘二然．竺仕．吧嫵• －獸一’一’-----－二奉，勵，神·。l:&,.,.&,-,.,,I,：聯，.，·。，&,.& .“•闢．•州開．’糾••”••悶闕馴．•．．陶“州．,．•自•“••”•．網•。•”•．目，．國計•．•••．&．••目．••”卜•••．.,．•奮闢•個目”.，一劇同，•國，,.h•．•．網•．&．•一•一一•劇”間．飾•．尸•．•．“•• 門r細甲．細勿”劇細物“•d．鳥細．珍 ·”,&&‘嚇”·＿＿竺亡么．＿巴邊上＿__．邊上．鳥亂 •．物·t．也．19，州t么神雜。’0 .f •唱申響，“口．，•個州瞭•，師•中州••網口•個．••‘•網••自．-．州口•網中•闕．•••憫叫•．．•個••’,.k••．• .．…’t．言．‘、戶，．開州。•，編，”禺 •••個•開•••．目“口國必•個•馴圈••••••．．•••••••••口•••馴馴目開 Of•h騷C bt :t．州物撇鳥．婦戶訕，爾l自，欐群命你 ,．細”細胎，亂潤．碼聯．1儲。• ，黝細。”〞t.,..，鳥，，州”’勰 ，一『一，.-,，一，,－一哺 ,“頃．細”·｀網一●鳥州．’。．• 膾 二 t 騙 0Ir 馴觔參 吋I NMARIMMI or C~IT O~tArsmAti en~ a* ot Dum~ 31, comsa T. ARG9u~ [co roeition ?Aktet olt«t«ø Oovagkøwt& 01. Le~ 6 C*Øditl ten ftøltlon ffilet Atemists eir«tor$ #nø~ 6 ~PI"MTM 0~ 1131 In-cherge, " *ti¥* a I L-A Irafflem-AL IWANT føl 9,9MØBIML ymr - M t eatsle @"taut[¥* a"%. I - M. 9. I er. øket£ *Igloer* - b. 0. hopowitleLø le. 0. t*plid«i 4 3 øket£ oftigete TOWMros I stett Oftimorg - fi:rý uLk Iffillti 0 coligeff I bast. stett Oftio*r IV*esøkt I Asak. *tatt Offloors - r: vmølýkte l **"tog #Vhelvok 9ý69*løtt ".I. øl. $»fflimfft I rolooktma ~lytt - qvøeøntl two«mo I ~lyet Å - M. N. røres# at. Offr= 2~ =tRELAM til i Per»»*& s ~ ty Ateietut mot I &meieriet begiqt"t ~rotortet, Augletemt R. 9. muglioent, avrite* - M~m* 1»«*%« 51mo i trø iww-møø~ g l*a hosigned vith rinattow, notenirb 8 ~iingetiretive Déitifftstød hating #*"t &negativ* &Øst. h 6 60 *eta se gin-chøgg* gt #***em* on ftkøil vith 90~ Ø*øwgoø 91~& §111111 40911. vith eg Tzawoor olm* Pptil stelt vith beglet"t to ，計州，,:.’于頗婦州．:..:,& 一229，。’久．？才：&.：二；,.;&&.h&& 越細名震1 ‘…：&&”才‘~&&&- _&.：訕：－·‘、’．·… & ―。―一。二－---－一二一。一二－·：二－-----－一么。－ 蔔霎細畫·丑…，&,&,,&&,,，露，，編”&&&&’•’ 奮！‘發，織•，&&&&”•織”&’•祝”•”&&&’一’ 遷I化常 ―震―一’&？一”－一，一•－一禺－-------－一兀 二〕濺···＇ ―·＿二＿量攤豐蘆 二計。。霸，}&，。’撼，.！諱，，。桑‘&！蟾！, 纏呵 &-．。覓＿·惡讓，· l‘乞豐露．莖徑巨 ·’〕”谿。鑣無．{；贓 蓬．＿。聖邊。…離醒＿纏鑒豐變 。l藝。權＿_.！三豆。＿荊。一甩一藝囊甩匹－二杷斤斗。斗。： 澀I斗。．覓乞里里·e呵叮發，賽g。建鑒吃蘊〕喜合望藝豐蓬言仕二覓仕吧‘: 廈―．盛蠶認壁豐亡·亡訐壁k記註要壁言叩弋盒翁器‘· 月―’萬蘊鳥為為蔆萬·還雜．騙露云騖茲法權萬露汙云訌．汙弱蔆．蘊痲騙審 。薑”,，·怔一曇． 。纏·江薔一菁｀纏鑿纏l雪’L‘計， ,’二離呈＿＿言I一霾二豆鰓莖奮·才二鄴· ’【’。―&:.&．。、，!!&！飾．。。蛹；,!”蠔，！龔！！言．露·f 1.,-1.!!11〔！.!11：】l!11 11!11 1 .1輩！！居一遛：&!I i’·量韓！露曇i！藝響遛11!111·寡要l暑I&1 11要廈·盪‘！·曇I: I，奮獎I糁i!i!111澀聖111蔥蓄！!!11璽喜暑！i！賽－ 豐．森纏曄藝望豐黑響藝呈秀露話言暹l革蠶蠶萋蔆邏量薑緬叢亂韋遝，暹 遷，-&!‘一”&―禿二r&’二“,&,&”·‘,&,,j,“二，,/ k霸欺了斗1諍祕A.& 2加．&&.&.,? 州團雜讓1 ：·：…、’.&”…，二‘.’二”&&&.&’婉訐1蒲了1 :.&.‘……‘& 勵－一”一織”留一”一鑒盒一”－一” ’•’.,－寫’&&”念’,& ．•．••煙，•…••州口．‘••• 認”一”一”&&”一”‘當”---.- 。藝醒 二．邊．濾 -！石壇居 邊萬召 甚＿徑叢萬渥留屆震 讓，。煙屆甚。甚屆邊．蘿甚細。薑。庭 邊‘。 」透。盛 ，會斗萬．‘莖 打二＿變！:－合吃萬 秀，蘿名響叢豐煙，亙鄙鳥寫色建．_f! 響鑒藝要畫雲審響量寥．邊蓄話黠豐攤驗靈· 藝齋登甚奮面曇徑牙廈抓寡奮f審呂韋參！萬· 露痲邊語藝斗寫露蠶萬萬萬萋看鳥畫！邊萬 兀，．讓騙建賽症變要絕 挺：乞f也f豐。覓彎藝，f可他唱賽哼 于i亨亨乎乎舟喜爭示暑藝爭爭宇斗齋婦 總i徑審乎弋一‘寫認必森•購購森必審 ．看勵澀涌蠶蒼滷瀘“。‘滷丰‘」，騙‘ j·，。，}.1. 鑒館。壇邊。霆’琴露藝邊老翁．奮 ·畫豐j認l磨遛豐邊！暴藝署居豐廈11.”、 、i〕i糁11聽11。l〕翡I騵． ,&，仔，,&&&&&.，·！&,&&,&,j．汰． &&.．·····，…，: \ 妒計 ’〕’〕〕〕〕〕〕〕’〕〔〔！〕〕〕〕〕〕·〕〕’〕〕〕’〕’〕〕！-!-! & 232 - Page 2 of 2 C* Purther ff:!E for W ud *Bl, !gk:Lojscu <Onnti~ f~ point a (5) ) 10* a lettax, Of ChOUld b* Mat to the M vi~ 2 dayg of i;cCIPE. 11- The 90 r~/~«8 tbc g~ oject, ro~ end filig out the Internal Checklist for Re~ of sub-project avpraisal Ra~ » an alde In ch*~ 9 en the aM a~ cy of the appralsal. 12- IM PZOJGct OffICUr-lu-~ 8 (POICURO r~ the Sub-project ~ ajgal ~ort criti«lly »d 11~ dom issuen; and problem notod. 13. The, POICIM diould ~ vor to obtaln additional data ar » nccessary o U«ially ovex the talffhom with the POIC in c~ at tbc ffl- ~ M ShOUM fr891Y COBSUlt, With the POIC, =* CTA and the durlff the process. 14. The POICIM prepares list of isOMas/problem n~ for discusaiian. 15. The list of Issues/problem noted vill be discussed In ön wigguas äsatiffn which la ==*11y attended by the DM, OM, CTA,, polC ~ »0. 16. The me~ decisim en a project will not al~ bo entright, app=val. Of the =ny caurses of a~ possible, the =4n onas «9 nkely to be: 91~ (1) approval without quallfi or (11) approval with certain quallf:Lca~ or yations orMI) project, can omly bo appr~ a~ cartaln q~£« ham been »tisfwtor:Lly ans~ or certaln etepalvm~ t~I ar Uv) acceptability of project In In serious doubt, hut shoun not be precluxIed providad a certaln coursa of action can be a~ UP= 3 or (v) PFI ghould be r~ ~ to withd~ project, fr= or (vi) project, ~ 'd bo rejected outright. 17. Foll,~ the glo~ äécting", the POICIM should 4~ ia%ly disc~ renelning Issvag =d ~ti~ pröblem Mentified ~in the wastiff, if any, with the WI. 18. A~ the discusalon, the BO ~~ hia Revlev »4~ Md writas tM ffET-Opr~ Mnv-r ~ences to the ~Id ~ änd the oonow~ pri. 190 The sot a~ r~ by the POICCe 8~ts the f*U~ ps~ to the OM: a. no 4 si~ le~ (fr~ the WI) with appralsäl r~ ~ other at-nchants ~ludad In the sub-pmject, package); any o~ 7 v a q; m tt menas 7 b. 1% Re~ Yåm=andua: c. The Sub-project. M- Proceseiff ~ tal d. The Chacklist for Rev~ of Su~ jact Appraisel P~ ; 9. All pro~ o~ lng letters, in fånal fora with all nw«~ copi«. 20. The 1= ~ a f~ ovar-all ro~ of the gub-project pad~ and# if found to be In ~ler# 9~ to the CEO for f~ appgawl. APrg LGM PR~89 As of Decener 311, 199 to 199 199 4a' 149 /!986a 19 7 19 9 1 bl A$s1S Phil. P I UD $ le Phil. P laI In Pail. P In I a in Phil. tit$ In Phil. P A8ETS (*0001 -kilsensi '000> <4dxion, ('000) (million) 1000> iillicr.) 1'000 Million Pmso kpcits with Central kmal 4,381.0 86.6 $11,6170.3 221.7 1,531.8 93.0 1105.3 . 63,309.9 70.t Inestnmts in Gernewnt Becuritif 397.1 7.9 4,567.6 86.8 18,574.5 31.1 26,970.t 560.9 40,01.! 853.6 Loamsi M ~a0c bollar i.oan - Carrency Pooling Ssten 22,133.5 437.3 25,778.1 499.8 15,"77.9 323.7 17,092.5 355.4 12,440.8 e65.4 Pure bllar Loans - - - - 21,975.6 450.8 E1,521.9 447.6 16,119.2 343.9 Pes Lo4s 19,478.9 365.1 1,101. 30.0 13,052.8 267.9 13,48.9 280.5 13,8.3 978.8 4M - - - - 48.4 0.9 - - - - kcoonts Receivable 352.7 7.0 33.5 4.4 57.4 1.1 19.9 0.4 5.6 0.1 krmed Uterest Receivable 6,039.2 119.3 5,267.9 99.0 3,769.6 ".3 4,117.3 85.6 4,781.0 10.0 kvances to Treafry 72,221.2 1,427.0 69,181.2 1,314.5 62,059.5 1,273.2 61.096.7 1,E70.6 47,909.9 1,08.1 Avauces to Central Bak 1,639.0 31.6 6,723.1 125.9 12,79.1 255.8 24,714.6 507.2 2,099.9 39.0 Total Ast§ $125,642.6 E,aSw.9 1141,43.1 2.686.1 6152,64.6 3.124.7 1169,027.7 3,510.4 . 139,71.7 2,975.5 -~ LI.ILITIE..8 .S.RPLU Foreign Lans Pavable Im ' 28,874.0 570.5 M2,943.3 816.0 654,7%6.4 1,123.9 170,533.4 1,6.8 666,130.2 1,410.9 Lhyds Bok 90,000.0 1,773.3 90,000.c 1,"10.1 %,000.0 1,94.4 99,:81.1 1,954.4 43,3.6 1,351.5 kcraed Interest Pavable 5,416.2 107.0 4,599.3 87.4 4,451.4 91.3 3.562.6 74.1 4,497.6 96.0 Accouts Payable - IRM 352 7.0 3EE.4 b.1 100.1 E. 21.7 0.4 . . Tagi Payable - - - - - - 13.5 .3 45.2 0.9 Total Lblitses $124,64.4 2,4E.8 6137,964.0 2,619.6 $149,345.9 3,063.8 6163,31.3 3.3%.2 113,00.6 2,959.3 surpuf, §egnin 39.7 0.1 $998.2 19.9 63,259.4 60.1 s6,jE.8 14.2 65,783.E 116.7 fdd: Nccm (Losul for the Vear 967.5 18.9 2,60.8 47.5 42.3 0.8 (507.4) 10.05 <57.10 10.5) Total sörple $999.2 19.0 $3,599.6 66.5 $3,300.7 80.9 65,851.4 114.2 65,796.1 116.2 letal Liabilites and Surplus 615,642.6 ,481.8 1141,43.0 2,616.1 $152,64.6 3,124.? 1169,¡27.7 3,510.4 1139,74.7 9,975.5 ..Mae .pug..... ..=u31""* s8.888s803 - • • 43888833380 eng.e~" 8833383 ,amnaggg3 zmuusf88 8 ai fi.dsted statubeets Unaated statements1 APEX LSK PUGFAM 1C0E STcTEMEW FOR THE YEAR E#DED DECEMIER 31, 19g - 8 1 9 984éa 1 9a85 a/ I 9 8 a C 5 C 3i C 5 E a In US$ In PNil. p In US$ In Phil. P I S li Phil. J, tst in P, UES n P*nt. A P'ON (filo10000 (ilw-. (10.» ýýlhiMn - r x C it Interest Icess Loan and dvances $3,819.2 68.? ti,1.0 195.1 Q4.822.8 4,0 *3,7.7 78. 3,23.6 69, Invustumrts 49.8 1.0 594.9 11.1 92f.5 18.9 41.2 ,4.: F*reg C.rrency eposits 403.3 i.7 418.ý ".8 40r.8 9.4 395.? 7.1 242.. 14,272.3 76.4 SI,265.8 154.0 $,61.1 125.3 1,159.4 12^.0 V'.45.4 19.6 Uost Reiaburuemts 9,480.6 158.Å 7,352.2 139.7 5,541.= 113. ,-7 9. 2.)O&.. -i--el..ous - -thers . - - 26.5 -.5 - - - - - Total Inces 413,'52.9 234.4 *15,644.5 294.2 *:1.3.C 23. si0,;ié.2 224.4 110349.1 2. Lege: Eenses interest Expnse on Foreign Loans Payable $12,72.2 215.3 $12,"39.3 2.7 $11.4%.5 2;3.4 32,228.1 23211 U9R,3.. onestaent Fee - - :51.2 2.9 131.2 2. ,.i 1.7 .1< t.2 A4 y ee - - - ..e1 5 0.1 0. Tas and :cmnses - - - - - .5.5 C.S 550.4 20.3 Salartes and Magn 30.8 0.6 45.1 0.9 41.4 q.9 54.4 1.4 102. c. 2. Cost 6f L;ving Allo~ance - . 25.6 0.5 16.. .! 153 ).! - - Bank S.ere - th4sin4 øm s revident und - - 11.6 ..2 10.5 0.2 15.2 '.3 - Transprtation am Representation Expenses Mther Personnel Expensm 67.'' 1.3 21.6 -. 18.5 0.4 5.4 0.1 - - Compication Expenses 9.7 0.2 8.3 0.1 6.1 0.1 5.8 . 0.1 - liscell*neotm Epmnsus 19.2 0.$ 21.8 0.b 16.7 0.3 15.5 0.3 - - Cansitant's ond Advaser's Fem 12.6 0.4 - - - - - - - Light, Fel ai4 Water 9.3 0.2 8.7 0.2 5.8 0.1 - - - - Tval Epensus $12,882.5 218.4 113,033.2 24.5 111,634.2 23. iu,-il.9 23.3 510,16.2 215.2 Less 4d4sti.ts of Prnr Yea-'e Profits (57.2) J0.' - - - - - .. - *et lncwalloss, for te . 9812.2 15.8 52,611.3 47.? 52.' 1.1 1$5.1.'d E157.j '0.5-! Ae 4u*ited 4t6teurts 1 Unau:ted Statement :i »otal ø>nistratv Epmses"a e/ #at Ic~ *f f91,713.69 - 235 - AIiNK M-1 ANSCOF "PITnt W¶ INWESTsENT CCEPUR.AT:Dt le- Filancial a3 (P sillion) Total asets 321.2-) 30.Cc 374.20 321.90 283.80 L4id ssats 93.2 "S 1 V9.50 143.50 I7 Qttadio Lån Portftl-o 5.5C :69.60 13.0 149.40 117,% Equity investments 23.20 29.60 37.00 4 Provisions for LoSeE ..1 9.:) 10.5' 17.0_ U3.90 TUtal Deposits - J Lonq-Term - - Lo<ng-Te-r. Debt 73,73 132.70 100.00 64.00 46.10 et worth E5.30 9E,to :15.60 150,20 162.60 Cross Incose 77.50 64.50 89.80 75,9t a ~teres Expense 40,90 4.13 24.70 28.00 29,13 Prtvisions 2/ 2.03 3.0 1.30 6.5c 1.J Net Incosm 4fter Tax 12.3 !I-10 22.10 34.60 21.10 Diridends 5.60 2.2( 5.03 - 43.20 Ke/ Ratios 6r1ss lIi-efe/Ave-age Total Assets M 24.1C 25.(0 18 70 23.80 22.60 Firancial Charges 3/ /Avera;t Teta! Assets (x)0 016.1 7.70!6.11 9,2) Gross Svead (11 9.20 8.90 11.00 14,60 :3.4, Net Inc;uekverage Equity 15.10 12.1f- 20.60 26.00 13.50 Datt/Equity RaTio (tis) -4.50 2.20 2.20 1.50 0,80 Ikbt SErvice Cover it:ees) 3.67 1.53 L64 2.15 1.16 Provisioes/Tctal Loan ytfolio 3.90 5.4C c.40 11.90 16.0 Adainist;ative Excense/Aiverage Total Assets C 5.00 5.20 4,6) 5 5,. Liqid Assets/Total Dapsits - - - Lans/Total 'eposts Cash Cellection Ra4io 1/ . Total Loan Portfoli: -iate not ;VO able- " Apex -oar Portfoliz 0.! 10' 1/ Cash colle:ticn on iraseest ad princiral :ividMd by currant dues on ierest an pr:ncipal. 2. Provisions for daubtful accotiti/bad dets. 31 lncludes provisin fo- doubtful a counts. 41 Inl OS cash anm tue frön banks,\ trading account securities, and inventents ir bors and other debt irIstruents. 236 -2X-2 "y FinaM:vi DåN P ilinI (Unauditedi i; 4 17. 5 - 98 19 7 19688 Totad ¥'ssets ..5.1.2 . 8,?.. 2, .96. 0. Likuld Issaits é350-2287279857 . 3,7. GetCtA4410g tr P-rtfel:.05,L ,7.5,8.8,8.7162. Eq:i/Matens .9!34f. E 3. 7. 942.c P-oviions for LisEi E.3 2433. 37. total Depusits U0.U2.7.S4ô3. 5,-. 2,3. ISRort,- Tera #1-0,460,0 1,51. 4,'3.64 .'2,78.9 (L,g-Tera12. 426.9 5f,9 553.0 Dst8 4 06 Net IkrI.4 :. ,ibä.ä W,3s. ,0.4 . 1,9. ·âross Jntose 2,C75.é 2.611.7 ~ 2357.3 2,086.6 -- 25.. interest Etpense .:,2. ,1. ,166.0 7321,213.0 ýrev.isilcs 21 66. 1 135. 34.3 0.814.3 iet IcsC After Tal .6853.4 46.6. . 3.1 39-.2 ICey Ratios Gross 1rcose/4vera,e f4tal Assets (M 391. I. 07Ε Faanciale . :g1 t . ' . erage bi! set o94 6, .1t 5.7 Groes Spread < 6,. 6.3 .51 Het pn tävfrar,e Equty . 3.9. 19.4 . DahiEcit Raio:time) 130:. .92. lebt Ser'ice Cwer (times: - - -- Pr.visons/Tcotai lan Pot l:e 2.3 3.kfåt 4.3 minitratie Expeisa/Aierage Total Assets t) 4.7 M.. 2 tiquic ASeTToal tr.osis 59.4 59.1 39.9 7.8 Loa1s/fTtai Ä.psits 2,. 54.8 52.2 51.. Cah Col:Ution Nt:o 1/ . ! Lo t.can P-rtf,i - -Jatg pot avaiibla- Apfy L.:v P<r - -NnfIMN /Ca.cctt o i?tErEst ard P-Atpal dividéa ny current dces 0-, interest kid :incipal, Et F,ovisions4 Är dobtful accounts/e4 defts, 3/ !cludeå prcsioys for douttfö accouts. -237- AfHEX N-3 CITYTRST « 4PT0 Key Fsacial Data m:ilIio-J 198 19 5 1 286 1987 1 8 :otal Assets ',393.6 5,054.7 5,442.0 6,v95$70 8,091.00 iqu.d Aisets 2.&37.5 2,60,9 3.199.f 3,382.80 Gulstandin; tan Porto1:o 1.97.) , 1,786,3 2.3o.4n 2,'65.9c Equity Inva nts 4.4 17a.1 19?.5 212.80 213.2( Provisions f:r tr,sas 123.4 22.9 198.4 127.%0 81.80 Total DePoIts 1,'27.4 2,232.2 3.075.( 3,99.10 4,237.0 (Short-Tere) 93?.6 1,7!2.5 2,508.2 3,117.8C 3,060.20 (L'ag-Tere) 937.2 628.2 S66.8 802.30 ,768 Long-Tere Dsbt 27.2 W.8. Net korth 56.! 627.6 310.2 901 60 904.9v 6toss I.aca 729.3 888.' 697.5 655.30 758.20 interest Exea l53.6 3%.9 257.2 137.70 Provisions .2/ 103.8 103.6 5.3 - let Inctue After Ta! 125. 153.4 163.4 155.40 152.60 Dividend$ 66.5 33.0 105.9 63.10 7.70 Key Patits Srous ncofe/Average Total Asses . ) 1.7 7.9 13.3 11.4 13.70 Financial £harges 3/ /Avera0e Total Assets li .11.0 10.0 5.0 3.3C 3.20 tross Spread (11 ,7 7. 8.3 8.0 ".54 r.et lncele/Pverage Equity 23 24.5 21.8 18.20 !.Q Ieb.!Equi'v Retio (tivees 7.6 4.t 5.7 5.SC 7.91 Debt Service C.ver (tie' -data not available- Prsvismos/TDtal Luar Portf3!4,c b.3 1,1.15.IC030 Aleinistrative Expenselevraqe Total Assets (M3 4.2 5.1 4.9 4.80 Liq.id Assets/Tetal Depos:tt 436.9 9S. :04.0 81.1 95.3 LeÉs/Tctal Dagosit% 101,0 3.0 58. 6.O0 65,30 Cash Collection Ratis 1/ * Total Loan Portfolio -data not availajie- . Ape- Loar Portfolio 1 1/ FI*s :as collect* ner. rterest ar: princ;Pl divid&d by currept dues 0n i.:erest and, principa1. 21 Provsiois for dovbtfal accoultshal debts. 3/ Includes pro isiDn for doabtfil accounts. - 238 - AlNlH 1X-4 KETROFOLITAl BANK 8WND TRUST COMPANY Key Financial Data (P Aillier) (Unaudited) 1914 1985 1986 1987 1988 Total Assets 15,746.0 16,441.2 16,175.40 19,368.0 26,049.0 Liquid Assets 7,3).0 7,397.0 71288.00 7,550.0 11,38.0 Outstanding Loan Portfolio 7,183.0 6,795.0 6,G48.30 9,724.0 18,338.0 Equity Investsents 267.3 312.1 434.03 556.0 504.0 Provisions for Losses 174.5 ?17.0 67..0 346.0 410.0 Total Deposits 10,877.2 11,395.6 12,452.50 15,125.0 19,723.0 (Short-Ters) 9,367.2 9,913.6 11,142.70 14,110.9 18,476.1 (Long-Term) 1,510.0 1,582.0 1,309.80 1,014.1 1,E46.9 Long-Tere Debt 37.1 40.7 64.20 87.8 47.5 -Net 4orth 780.5 869.5 923.80 1,101.0 1,50.0 Bross Incas 1,986.5 2,004.2 1,731.00 1,633.0 2,407.0 Interest Expense 1,214.1 1,281.5 979.80 670.0 1,025.0 Provisions 21 55.0 51.1 13e.00 125.0 248.0 Net Income After Tax 151.2 138.7 123.20 250.4 353.0 Dividends 34.4 36.6 52.10 37.3 251.9 Key Ratios Bross lcece/Average Total Assets (1) 14.6 12.5 14.60 9.2 10.6 Financial Charges 31 /Average Total Assets 11) 9.3. 8.1 6.90 4.5 5.6 Gross Spread (3) 5.3 4.2 3.80 4.7 5.0 Net InconalAverage Eqcity 20.9 16.8 13.40 24.7 27.1 Debt/Ecuity Ratio -ties) 19.2 17.9 16.50 16.6 16.3 Debt Service Civer times) - - - - Provision/Total Loan Portfolio 2.4 3.2 3.90 3.6 3.3 Administrative Expense/Average Total Assets 1%) 4.3 3.1 3.10 3.S 3.4 Liquid Assets/Total Dkposits 66.5 64.9 58.50 49.9 57.0 Loans/Total Deposits 66.0 59.5 55.00 64.3 62.6 Cash Collection Ratio 1l Total Loan Portfolio -data not available- Apex Loan Portfolio 100% 100% 100% 100% I/ Prl's cash collection on interest and principal divided by current dues on interest and principal. 2/ Provisions for doubtful accounts/bao debts. 31 Includes provision for d*ubtful accounts. - 239 - phillppine Cýosrciel !nternational Bank Key Finalcial Data (millson) uaudited) 19 4 1985 1986 1987. 1989 Total Assets 10,28E.5 16,406.4 14,26.3 t7,67,90 19,676.00 .iid Assets 4,168.3 7.50.70 5,177.!0 6.345,50 Outttan<ing Lcan, Portf11 4,886.1 6,7i5.60 6,961.90 8,3-).00 9,372.00 EQuity nvtaents 161.5 179.00 137.60 150.80 233.00. Provisicns fer Loffes 24.5 145.é0 153.10 211.93 14.06 'otal Duosits 6,173. 55 10,449.80 11,52.80 14,237.00 I Srft-Termt 2,699,6 ;S13.S 7,024.60 2,514.0 16,54.00 Ln-Tr 4,3,4t.1435.20 3,028,80 3,33.00 Lonc-7orn Dat - - 23.0 26.70 46.80 Net tortN 81.2 480.40 9?8.20 1,6E^,50 2,1%.00 gross Inccie 1.437.5 1,592.00 1,877.30 1,704.70 2,162.m0 Intfrest Epense 877.5 189.30 896.40 567.90 .647.00 Provisions 2/ . 32. 115.3e 73.00 84.10 £6.00 Net incame Aftsr Tax 101.6 120.40 202.50 E'9.40 404.00 Divideds 50.6 36.30 r.00 90.80 Key Ratis gross Inceae/Average Total Assets (1 )6.0 11.33 12.20 10.90 1.7) iancial Charpes 3! /Average Total Asäets (U. 9,8 5.80 6.30 4,10 4.60 Sros Spread (1 - 6.2 4.50 5.90 6.70 7.10 Ket Iicese/Average Equity 12.2 12.90 21.20 21.0 21.20 Debt/Equity fatio (tis) 10.7 15.70 14.40 9.70 8.0 Debt Service Ccmr itimest - - - - PrvisionsTota' Lian Prrtftlia 0.7 2.C 2.2- 2.50 Adtinåstrati.e E..pesm/Average Tital Afsets M? > 5.1 3.60 4.30 5.10 iquid Assets/Tota Depouts 67.5 .2.2 49.54 '.97 54.60 - Loa.ns/¾T'al !eposits 79.1 62,30 66.6C "3.90 65.K tash~ Collection Batio 1/ . Total Lan Portfoli -lata rot availole- . Ap_x J.an Portolio - - 10% 100. i/ Cal. collectiao en interest and principal divided by crrent -ies c intorest and principal. 2/ Prov!siois fcr doubtful accounts/bad debtf, 3' Includen provision for dotåtful Accouts. - 240 - FAR EAS' 8W% MC" TRVT cAtY3 Key FntIa Data 984 19? 1986 1987 Total Asiats 11,6C7.0 i27t7.1 15,'5. 19,149.IC 28,093.00 .iquid Assets .,976.7 7,030.2 8,410.6 9,057.50 12,t68.20 Gitstardinq Loan Pirtfoi" 4,535. , , 9,791.60 quit 1.-vestets • 19.7 2(5.5 32 - .350.d PSviions for Lmes 971.6 834.E 733.4 741.9) Total Deoits '29v.0 8,!61.3 11,?34.0 15:351.13 E1,1.60 :Whrý-Ttet : 546!64. ,3. 1219 6423 (Lcr2-Tera) 1,8'1,9 2,413.8 2,892.3 3,979.20 4,499.30 i.g--ør* Det - - - 33.70 Met wrtc, 958.0 1,202.1 1,4t.6 i,785.7- 2,2,35.00 hterist Ex'Else •.3. 851.4 846.90 1,336.10 Provisions E/ 510.0 23T.0 9. 4.30 4.20 Met Inose 4fter 7sr - 290.1 311.3 3e0.90 V30.20 Divide;. - 46.2 52.8 52.9) 66.00 Key Ratiog etoss IncaRe/Average Tota! Asss kU 18.6 . 15.7 12.0 11.10 11, 0 Fia"cial chrges 31 IANrig To-'al Assets (M 13.E 9.5 . 4.9 -.7?o atoss 8or ad ( 5. 6.2 5.6 6.20 6.IC Nat Ircou/Avwrage £quiti 27.6 26.9 23.4 23.4 . tebt!Eqitv Pa:io itiaes: 1:.2 9,6 9.5 9 70 1.6O rbt Sevzce Cover (iuei - - - - PrviinsealUan Port'911e 1.. 17." 726 .60- 5.4<: Adinistrat: i Exnense/A '.r#ge Liquxid Ossets!TotEi Decoits 95.6 82.1 ^1,7 .v 7.60 Ltans/Tc-tal 39poiits Sa. 8.6 20:.0e9 ,ast Coecti;n Ratio 1 Total Loin %rt!cli) -data at agi&al * jp<e as!' Prtf&!it - - -10 Jl Ca,s4 nllectic. ffi intw-est a.md prit!cipil d;'vided. . . by current dues 2n i?tereit 4id princiia. 2/ Provisions fir dtabt'"u accarts/bat dah:s. 31 Incldes p'ision for dobtful feconts. - 241 - AMllIB M-7 INTEMNA'INAL CMPATE ON, Key rinmncial Data (S uillion) 'Unaudited) 1I8 1Q86 1987 1988 Total Assets 5.38."2 4,05.70 5,160.40 7,273.90 Liqjid Assets 4,972.70 2,300.10 _,695.40 3,329.20 itsta-ding Loan Potfalit 301.90 1,7E6.o 2.104.30 3,350.10 Equity Investeents - 3. 10 3.90 4.10 Provisions for Losses 66.2 62.00 52.70 79.50 Total Dposits 1553.4c 1.331.6- 1,62.33 2.866.20 (Short-Tes) 564.9c. 491.6( 704.70 1,571.90 (Long-Teral t68.5 239.0 923.60 1,E94.30 Leag-e Debt - - - - Vet Mort 740.20 90.30 1,001.80 1,108.13 Gross Ircos 576.00 CE9.9N 534.63 824.10 Interest Espsase E40.70 215.90 193.70 33.60 Provisions 2! 71.1. 14.3) t.Z E8.2 Hot Ircose After Tax 89,80 !20.40 40.40 162.40 Dividerds - - 48.20 5L.20 Key Ratios Gross Icot.e/Average Total Assets ) - 11.04 11.42 :3.26 Firacial Cbrqes 31 /Average Total Assets it) - 4.80 4.25 5.92 Sross Brea IS! - 6.24 7.17 7.44 'let IrcoeAverage Eqity - 14.60 14.9 15.40 Debt/Eq-ity Ratio ftaes% 6.30 3.60 4.20 5.60 Debt Service Cover (tiuas, Pro%isions/Total Loan Portfolio - 3.60 2.50 2.40 Adsinistrative ExpsnselAverage Total Assets it) - 3.73 3.52 6.94 Liquid Asseti/Total Deposits 12i.99 172.73 165.84 116.15 LzansifOtal Deposits 194.53 129.63 19.47 116.88 Cash "0election Ratio .I . 'otal Loan Portfolio -data not avaiiabla- . Ape% 1.tan Fortfolic -ot applicable- 11. Cash collection on interust and prin:ipal eiviced by current dues on interest and principa'. 2/ Provisions for doubtful accounts/bad debts. 31 Inludes provisl3a for doubtful accounts. - 242 - THE KAMLA p*1.:45 CERATIN Ke/ FInalcial Data 9)mdtted fultaudited: otal A3sets 7.696.9C 94@,357,50 Ligiid Assets ,40 ý70 051 ststanig Loan Perfo1to *,53 . - 4,59.60 L,411.3C Eq;t -Irvest~en&s 233.0 . 43).9 Xovisicns for Lsses 74.60 73.40 23. T3ta! Depoits 47.3 . • ShrtTea3.553.403 3.5EQ.10 385 (LorqyTerl 2I4.4Q !00.'3 103.00 tonc-Tera Dibt 59.!Ås 64.3 5#.90 set iar th 609.00 ~ 55.70 ó19 Srsse Itese 10??.809k6,10 6*7 rteret Eae S5.10 72U.60 Provsiens 2/ 5.8 4,9. ket Inco62 After ?ak 7.46 livwinends -- "ey ,atios . stss lncea/Avera;e Total Assets 1U :5.53 12 30 7.60 Fininc:a' Charges 3/ /4nrale Total Assetg 1')•12-0 .*.055 Sress Spread t .0 3.0-21 -lt Iuttae/A:erage EQUity .20 7,30 2.40 D-t/IEquIty Rat!o tiws) 11,6 113 2,*0 D#bt Service ,over ties) Prosions/TOtaI Loan Pe-tfolic .5 1,73 ki-istratiie Expens9'4vrage 230 2.40 .9 Total Assets () 36.2 2?.30 53,6< .Iquid Arsets!Total fep:sits .29.20 -23.e 112.3C .oans/Tetal Deposits ash Collec.iCo Ratio 1/ . Ttal L3a Pcrtfoli- - ata £tÅ a.lable- . Acex Loa4 Portfil:.o 100 100% 130 1/ Cash co)lecth'on on" interest andFi prilpa! !ivied by cturrent dues op ir4erest ad piridpal. 2! provisins fer doubtfuL accoints/bad deots. eIcludes orvisit: f*r :ubtful' accounts. 4/ Sank was placed under receivershi; on Nay 22, .1937 per .b. Res. lo. 05 and s;&se'ently v.-der liquidatian. PISO DEVELOPMENT BANK, INC. BALANCE SHEET . .As of.September 30, 1988 1/ (Amount in Thousand Pesos) Book Estimated Expected . ASSETS Value Gain(Lose) to Realize Loans and Discount (net) 540,923.3 (151,410.7). 389,512.6' Trading Account Securities 17,299.6 (17,299.6) Investment in Bonds, etc. 180,841.2 (396.3) 180,444.9 .Oher Assets . 116f040.3 (67,204.8) 48,835.5 .Total Assets .1,016,247.7 (325,098.4) .691,159.3 Book Liabilities Not Liabilities LI4ILITIES .& CAPITAL Value to be Settled to be settled ------- ------------------ Deposit Liabilities 67,116.4 - 67,116.4 Bills Payable 667,908.8 77,934.5 589,974.3 Total Liabilities 943,363.4 77,934.5 865,48.9 Capital (deficiency) 72,884.3 - 174,269.7 -------------------------- 1/. Latest available data. - 245 - BORROWER'S SUBMISSION 13Development Bank of the Phlippines MERCHANT BANKING DEPARTMENT 29 December 1989 Mr. Phiroze Medhora c/o Mr. Henry Thomas World Bank Dear Mr. Medhoras In connection with the completion report the World Bank is preparing for IBRD Loan No. 1572 PH, attached are your requested data regarding the sub-projects financed under said loan which we managed to crank out of existing files. both in the Head Office and branches. I apologize for the delay. I am sure that you hiard about the situation in Metro Manila, the power failures and the attempted coup. At any rate, I hope you will find the attached data useful in your preparation of the completion report for said loan. For your easy reference attached also is a summary briefly describing the contents of each table. Thank you and best regards. Very truly ye rs, WI F. BANGIT A is ant Vice President - 246 - ISRD LOAN 1572-PH DATA ON SUB-PROJECTS FINANCED Summary of Tables TAM "Dll Distribution of number and amount of SMI sub-projects financed by size of loan, size of borrower's assets, term of the loan, nature of enterprise, geographical location and industry classification. 2 Economic contribution and financial performance of SMI sub-projects financed as projected at the time of DBP*s appraisal. 3 SMI sub-projects handled at the Head Office showing economic conribution, market and current status of loan and project. 4 SHI sub-projects handled at the Head Office with fully paid accounts. 5 SMI sub-projects handled at the Head Office transferred to remedial management. 6 SMI sub-projects handled in the branches showing economic contribution, market and current status of loan and project. 7 Large scale sub-projects financed under Loan 1572-PH showing disbursements and status of account. Ija- . ___ - jt 1 4 2 ! U2 i R.M i 9*9 a asa cia a6 -.. are =-a Ä a L s n **=den -~u -vå-l--£ - * *à àà *q: a3qsan i Ras =.nq 4Mj dd cit d * ..U gg N saa, - - få t z a 2; ly Geographical Distributio. Begion I -'lloos 26 3.21 99..03 2,247.49 8,99,50 3 Regln I - ga7 Valley 32 3.95 912,52 3.07 2,291.58 9,125.20 ion II - Central Luam 69 8.51 1,09.26 6.43 4,773.15 19,092.60 6.43 g y - tre mala 190 23.43 13,642.79 43.94 34,106.95 136,4270 45.94 tvgi A9 - southerm Iagalog 57 7.0 2,255s.69 7.66 i,639.23 22,556.9076 0I 9 42 5.18 95.43 3.05 2,26t.58 9,054.30 3.05 kgl. 9I - keter, 8.yas7 916.36 3.09 2,290.90 9,163.60 3.09 egieo VlI Cuntral Visyas 96 . 10.60 2,755.36 9.28 6,^ 40 279553 60 9.281 begion VIII - vEster 1says 32 3.95 1,033.43 3.48 ;,5#3.5f 1,3.S 3.9 Lygi 3 - #ester ida 14 1.73 962.17 3.24 2,405.4 9,621.70 3.24 Regl 3 - Hertieru Sindenas 129 15.91 1,882.52 6.34 470630 11825.0ó 6.34 _gimiI - B stbre ØiWgMn 45 5.5 1,336.78 4.50 3,341.95 3,67.90 4.50 • gl f t Ciraj Bine 19 2.34 2u.60 0.95 21.50 0i.... tital' . øo9,699-d5 tso.W 74455.04 lfl;I :s0 a -----~~~---- -nee --a n an a - en = n Foud 8 ke&F Products # 9.73 11.53 ' 15.53 1,52.63 46,1m,3 15.53 ad atur F iøije Pdti il 2,943.43 9.91 7,359.10 29,43.30 9.91 (nå;. . auD tar iil iitrodi. . ? . .. ~ - Fmriture 4 Fistorms 97 11.M 3,917.51 13.19 9,795.70 39,175.10 13.19 - Papir I Paper 1Yai'oic 13~ 1.55 192:26 2.61 M"9f.90 7,i.i'6 2. Printing, Publiia8 4 stier AlhIbilddrii, 3.3.2 1,29.70 437 3,242.40 12,967.00 D4.. Leather Ler rodt 17 • • 2.10 1,037.M 3.4 2,591.M 10,370. 3.4 timlial 6 tiimlcil Pr'o~ilß 20 2.41 1,122.77 3.7? i,I6.96 - 11.104.1 hn-ntallic Products .68 3 2,507.51 8.44 - 920.30 25,07.180 8.44 Itil- étri . 46 3 2,~w i.7i .å 5, 23,1Y ..61 hchaucaIlectrial Equipm t, Iij1iucis,kisnserie,Prts, etc.. 7....ál 2,57idi 9.6 6,431.10 '7,-- 8.6 lc Piant & Cold stwragp 2 3.45 2,743.34 9.24 6,i.9 27,433. immuhlagtr. sE tre.øprl ties B Repir 36 4.44 1,591.60 l.99 1,477.50 5,916.00 1.99 hråtlii iuitris. 24 2.S1,58i.60 1.96 1,4S.1é bIJ. ~ ber F 7 .0 1,416.20 1.39 1,642.00 4,126.00 1.39 "1«k. ha~sturièg fairies 43 i.30 1,548.79 5.21 3,051.20 Ji4j5I Eli ist Specified - .43 8.35 1,634.51 2.16 ',8.' .,44.50 216 Tota1 ' . iII 100.00 29,699.95 100.M 74,250.04 296,99.50 . ... . - -- . -'"""" ---- .. f7 ...ilIILPPIES LL B3ERt191E IMLW45%ll PMMCI k~lopmst 8~8t of the N4tIppIuss Partilndlcatar et Ecosise and Finlaöl Perkeromcs of bpruects Finted IWdr Lees 152-9U iacreaeatal tap Synet b bi t bl 0001 PrSiat tåst lacrlmtal l~ystUot Eprt ma.éti Accit tlapaset •uCo. 5,5 SPI , Sals jt.s {P'00.' * - at,IO*h . ...- --... --äm.. ;,.. M,fot - 500,0 23,33 6.12 1,623 4,901 3,23.1 69,57 12,210 al,0t.5,M 3i,552 2.21 3,432 23,M62 Ii,532d :53,,M1 2=å,2jt 900,*0-9.800 ft,621,7 6.19 459 41,24 3,601 32,N 16,331 _T6.223,486. 2,83 - 70;142 in,i94 MI,m htt spaift -- - --,4-- _ 211,05 __ _ Ihf i4 3 1IN 09, 1. 2,1 M warrii~-i -s 100,001 - 500,0 es,119 33.4. 2,837 22,993 13,3% 1#9,718 1 10%- 00ii - i 600,m0 . 9,131 - 1.11 1.403 . 3,41 20,2||2 ' ,5,9 34W Our 8,00,009 227,552 -.64.19 2,897 79,547 32,611 335,22 366,912 90to3 aara 4,360 1.25 203 21,4n9 3,443 %9.- 3 tö 141 - #- .1 312 -08* 5 to ~rs . 41,976 11.13 1,363 30,133 3,441 83,912 v7,333 Usea , pars 229,23 62.90 4,575 49,393 31,9,3 349,11 31.939 *st'smscifie. ' 9,439 2.70 290 32,548 . ,75 17 - 711 tOtl 33t,18c 10m. 10,373 41,823 Wiß5; 7*natureo g* aterPi** i.Este'prims 110,22 31. 2,372 46,470 2,0^ 1,7 11995 Esihet ~l tnri 204,371 . M.O 5,203 .^3,i o,560 433,94 m;1 0 -- hmt spcifie 35,0t3 o9.02 798 43,%64 360 21,69 25,979 0tal 350.181 300.00. 8,373 41,23 m,s5 572443 .åtn By Beographical Distribution enien l tioces 6,3n 3. .. 13 4,754 465 136 .ø, . Re! Cagaya" Valley 6,330 1.81 65 97,50- 9,240 9,240 login lli - Central Ler . .31,376 9.96 øig 38,310 2,7050,i56 73,565 nro4,090 7 57,636 62,156 294,006 35 8egin19 A - southra 7agalog -1.32 60,882 900 20,099 ,899 o!ns. - Dicel 6,825 2.52 524 16,842 22,322 ,322 i str Visayas 11,031 3.15 542 20352 665 21,129 -nion vi Cestral vsayas 17,59 5.10 945 19,99 22874 1700 M_ QL b 9l- Easter 91s vas >,87I . 376 . 20,955 8,699 . ,699 gion I -bøteri Naao 18,244 1.21 166 109,904 20,631 20,631 g s 2,412 6.43 676h,iŠ6 38,25i - ogi.n ci - Biuther Uiadanao 14,463 4,13 451 32,069 940 27,402 2,342 1glin Il - Cifnril sde s 2,646 . 77 ,79 34 01 3- 1,, #t7 tota-f 1610 w6.w. i,373 4,2 ~ 4 7,4 45 Food 4 heverages Prglts 51,827 14.90 1,221 42,446 373 1 12 112,499 7elxtiles, Foototar/Apparellarests, imiiitii itimduats ib,7.6 ,79 72,3ù 25,730 8b,104 ia 834 Lombkr __od2 Cor Products, tëlbirii~ani fjaluris 24 - 5,76. 264 159,86Ý 399 28,5432,222 Pa papr odcs 9280 2.65 201 46,169 900 31,484 32,284 r aiLã, ksd 30,6,.748 63,366 4936 56,92 61,730 alled idastras - - - -- iib~i äi ij~jitidu~ãcts 12,324 9.2 419 77,323 29,721 ~.l,431 p ts 35,43 91012- 538 65,70 -913 77, 7, . WidO 13,9 2Ui1,'ii&i 21,96 bna-atallic ieral products s1,W 1.69 218 26,96 13,643 13,643 Baisi i.Widuilas..............9 ..2.45-----212 . 44,467- 12,I53~ - 12,153~~ ¥w l" hi '. 1176* 11 5.3 -. --- ---6 . ..-... . - kcrhaal/llectrialEqdfopets lscullanouso S31,937 9.12 621 51,099 4,975 5,747 40,922 lotJ iiiifIð - 12- 0;$2 471 ~ 6 . 2,30 ~2320 satan~30 8 0 0,373 41*823 90e65 572 443 - 63 1 4 bl'rPliuiI Coèstlin)1- Clpmb2a.Cou.n 3 . . .-..--... hwt Eaet at" for tté wea 4 much the 'ireatitüfult tt eiitè s prjected WS apraisal rerts. E 11us 1 s i i 1 1 11 111 11 g 11 i 1 1 1 1 e1lj 1 . n an' a u;i au u ffl luftilTø I w-m"1 , FULLY PAto ACCcI~dYS - R0NER AMODNT OP LDAN h l PttPOBE MTURITV -. ~.NI må 5 LINSL CAP L (W). 0255 .-.M.. . ...40,000 5 wc0-25-05 9"fTmw ruWDa& 473.150 3 WC 0-30-06 1,236,950 3 • NC M0-0U VICTORtIA WFU CORP 1,15,400 10 FIXED ABilTU <Fa» -54-¥1 1,090.120 10 PA 04-14-91 751,400 5 WC 04-1q- i .500,000 5 WC 10-14-97 1,500,000 uin . a-sd 1ALIN7, RINO 462,746 7 FA ~ 0-317-Ur ..349,254 7 PA 09-17-07 108,000 7 PA vFYa,-d I ________________300,000 5 NC 09-17--95 FALCON METAL CORP 1,920,456 7 FA 12-09-00 *379,344 7PA . a1-v-UN *RACASA, RODO.F0O 226,500 5 MC 0-4u ..721,121 5 .WC 02-14-B5 ..FBR&WDJ'I..1NC 926,500 10 PA 06-20-90 273,000 3 NC 0-0u JOMION PHILS IND CORP 500,000 5 un "4-"5-u I DA1MARhNAS lUAXI FOODS 117,600 toF10-V9 DAVID, HEGNORI0 364,000 10 en' saA 47,000 5 WC . 07-17-I5 44600 a ru. w-a.-96 DIZON, RICARD>O 6.00 uIv-90 __T___Lt tpa20,500 10 PA 05-21-90 - 92,200 i0 n 4-sw LOPEAPAR ¥,4U. uw -uG 56,610 5 WC 01-30-96 VI AS_a_G|INAD0R 58,217 7 FA 03-16-IB _____3,417 5 WC 03-16-96 - ~W4MAUL -37,900 5 WC 03-11-IS 0 24,954 9 WC 03-11-98 ALICIA (PHIMS> 132,300 7 FA 03-2-0 wc -UhT12U PR~I uÅ ff -w D1.000 5 wC 03-t-~ H nMxHa, Lua va,seem Jb- 33,2= 4 d 03-03-6 * R MIA 131,216 4 mC 0m-22-05 alv,seede 0-J MuuU,DNLDU49v4 a 4 e-e-J- 29,360 10 FA 04-15-91 AL.Ptaj0 UEnWEftfl 1|w3,00 uu ~ -Vqp-d@i 34,000 FR ~ _0-0-_9 u'fa Urmez vr- -6 MIM PAuFIcluv,U m o,~J-BM 90,000 7 FÅ M5-29-00 aU,UUUu wa 09-8~ 550,000 5 dc 03-06-5 KIM, lamEL 29,000 5 dC 09-0~-06 M7IsgZ, AMITO 62,640 10 FA 03-17-90 mV Y -99 o 1 ~ 26,400 5 wC 03-17-5 CAB~A, ELICER 105,000 5 wC 07-02-5~ .teO, DMIFACIO 126,Q00 10 wc 06-17-0 - av.svue avme ~1-.-, 93,000 5 wc 06-19-S6 q708, PA7=CIN3A 18,400 7 FA 07-0-IS 39,000 5 dC 07-0~ LuPE, 1ma8 72,000 10 F 0-22-91 -- 79,000 5 Wc 05-22-S~ LAADRID, ^tMNINB 174,700 10 FA 09-04-91 311,300 10 FA 09-04-91 gP~ LNDa 30,000 7 FA 06-0-~S MM,w -m, m såM24-m3 5 2CO 5 FA 0~-24-~6 3,0 1 PA -g4-91 io Fft0 091 4190 3,400 10 FÅ 0~-4-1 -．·뻐－--,‘뻐－－·＊ 탤 . · .-&&’흽‘.．맥“&*. *&－·－.&-－·－·．*-‘·－.&--&－·－&-.-&*.&&&－·｀&-．…－.－■．....-＊·’ㅑ‘ · ．→ &. ＊… … · ... . . - . . … ，뉴 , . . … , . *&-.&*.-. …‘.-&-．…．.&-&‘…－.--*&‘■－,－··…． .. ... . 11＿긱’【”【’-&& U………7 & . & &-．」긱 I‘뻐‘..．鍈튼！卜．숫．―繫．－饒…변·麻：& l‘숩…， … ；… &(/&,j&(- “奢j」，,:,\ & 。，.--,-...-.--.．·．-,---.－쑈－-.--.,--.,_-., ..-.. . -.-, .&.&,-.&．■－-&,-,-－…·．■－-．·－·’&-&..&...&．∼‘- & 255 Table 5 Page 1 of 2 Acc=M Tftýý TO ramm t~ off~ As DE elm umm i MA1MITT En 1.=-ow a fra 192.9W 10 1-91 2,6m,600 10 left M I-91 PUZM 1~ 14L w~ proff~ O 2,974,175 3 wc 09-3~ UM my Itt pum 1~ plim. 395621~ 10 fra 12-3&-" PHIL. VETO~ ~ Prm"~ 2,=~ 5 de 09-0~ MENNM IRER~ w~ pfuc 716~ 10 PA ~1"1 M.9m 10 FA 091~ ~,400 5 dc ~1~ w~ m~tactur~ 515,000 10 Få 00~ 1 ~ 400 5 me 447~ 5 dc 09-3~ mm, RA Pé~*"9 7w ~ 5 wc 04-0~ 70.100 It PA 21:9k2z- 926,~ 10 FA 04-05-92 1749~ 10--- Få 29:29=2 GAN^ ED ffid P~ *Ina -5 wc 22:9~ FLOM6- -Noa~ Sermmts K~,factmrinc 118,980 10 ra m-1221 m Uffig-Mp, P 0~ MELf-ffiturlm P- et 5 wc 114,966 ff-W-m. CECIUut DI~ P~ W M00 7 5,100 7 på 02-3~ C04*4M 29.000 5 wc 031-13~ IZ7 om I dc 03-13-m U:m 5 wc CY-13~ 966,0m m ~13~ Amma, MC^ 503,6m 10 FR "l 74i4~ av Fob 0~ 1 22.goo lo,- PA ~2"1 femm~9 iwa Mae~ 8~ 143,300 5 wc ILaut~ nM"27-M- u c4ncr~ proc~ 61,9m 10 Fä 0~ 1 2491~ 10 PA 0~ 1 ~TUW 0 m 97-u~ 309000 10 fr* 0~ 1 -256 Table 5 Page 2 of 2 I.ATAN, SUVNS Wead Preun 103100 10 PA 10-12-91 ae2o 2 252,000 10 FA 10-12-91 F~ICl , F C S nt Manuaturtng 54,000 5 w 04-21-66 FAR ST MBA wed Prac!s 156,253 10 wc 09-30-2 BARTOLUÆE AM0 Sar.unte pMafacturE 80,000 4 wC 11-10-5 UMICAE FD PRDUCT Fod Proessing 1,046,040 10 FA 07-.0190 43'95, 10 FA 07-0190 lusI TX~lu T Garmføents Manufrcturing ~~3250 7 FA 07-30-J~ 39,750 7 FA 07-30-~ 7V900 5 EC 0706 PAaZMut-HuuWM~ gol? 84 447,000 5 WC 09-30-7 667,140 10 PA 09-3O-92 MATIC, JEIS Prnt 4100 PA 06-00-6F .4.9vw. .. F 0a 64,000 5 Oc 09-29-66 IQU,qu0 u FR cU-2U-6 vrm~ du, JUMN10 P róC"sun 745,9m 10 " FA 10-23-91 05,000 10 FA 10-23-91 FÅ 10-2- 1 22,000 10 PA 10-23-91 J~RIC IND*L C 120,600 10 PA 02-25-92 1D2,40 10 PR 0-2592 163,000 5 wC 02-25-67 20,000 10 " FA. 02-25-92 Mm e , dm Bm ragessan 12 ~ 19 ' A 05-20-92 149,000 5 wc 0-20-97 225,900 10" PA 05-20-92 MtENT TEEL CWRP Metal Fabricatl 22400 10 PA 03-03-90 592,000 5 wc 03-03-S~ PACIFIC lOCK PRIø. C4nerte Products 909,000 10 PA 09-19-90 1,003,7B 39 FA 09-19-90 IWus.. "wFSe r. r..ouwry auaTsursng /EU 1 P1 0-16-1 1,429,000 10 PA 07-16-91 ~** a wc 07-&&~ ELN PAMIS SS Mtal Fabricat~en 135,000 10 PA 03-31-91 .00W9v a N 031-31~ 1,520,000 10 PA 03-31-91 GIUIEREZ, DpIEL WoSd ProcMsAng 406,600 10 FA 10-27-91 1,619,400 10 PA 10-27-91 0m.OU REVES, VIETA Fo~d Pracusig 1M,000 i wc 0*-25-02 aIua, rus wwremnu hnanu.w.surang - -ar;. , u - - u-e 130,000 5 W 09-06-6 IænENT 7M = SETS Metal Fabricattæ 104,700 10 PA 09-30-91 ~:f,«M aV r" VW-39-VIL 104,700 5 W 09-30-~6 qm ~ e ~ ••．中．.‘•由一→·闢。…。．。→。。二‘．。．。。·嗎‘. . ．•‘…t- 二 一’.-&&&&h由面袖口爾•自由勵曲自面曲纖袖‘’···一付一：& －一．一一二開•一，•綢•馴二‘.&‘一，－··……，&.& _______&__＿一＿＿一＿_:&_.&_.__&.&&”可．，…’ 個口爾．’個口口為闕口口魄口睡開州叫口審州亂一一網”.&&．闢，．闕’•闢－’鬥圈一一．一一 ―·－二豐豐：一萬竺二．·遝巴二裂鳥一豐堅一徑壁．竺聖墾邑二邊竺聖一豐豐墜二巒豐…竺竺竺一 一’二二．:&:．豐”.．一二一‘…‘.，二兀二日計亡．&:.’一’‘一‘二二’.:．……亡 一」黑唱．。一＿＿。．_．…＿’…＿,＿二＿．一，.，……＿＿二＿．、二＿……＿．…… 、＿.，而必囉．。j二躍關刁規礫．。＿__．•團開，＿一，....－一：.＿二，,.__,,__.J.m二＿。～二＿ ,&_.h甲吁甲．：二＿竺豐’·們巒＇雙j豐墜一＿二竺二伶‘合．＿二鬥竺．_．望豐．_．鰓他．_.f州整雙＿二＿ 斗．。．。 ＿一總•．___＿二’＿二＿＿一。＿二＿__，二．_._.__＿二’。．…＿...．……＿＿…＿.-．……＿二＿ ;．一―一，回目·•目劉．k一’·－－一：一，―一·········－·‘·－·－·一·－一·，·，－一－·一一一－一－一，·……，鬥 症面面1一‘一’一’&’一－一’&&&&&&”一一”&－一叩一一－-－一一”一’&&&―一―--,&&‘一‘•―一一一－一一一”“一 一。―,，吃．......－…：：…：,.．…＿．二．：…―．…＿一，二＿＿二＿_._.,.．…，.＿一＿二，._&.＿…：、＿. ，一二一觀j．……！一＿……，一‘”…’.:，必· &.－一7.. ―十鐵紛騙醫·，一婼爛二燾鵝鼾體州艷月h勿：l．彎k黑豐·－··一一一儒計一曰－一丑一二－一． 一麩倡辭訕一一織纖教～驚鵝鼾體H誰醫L州－：一言一擊―，一一鴒爍一嗎計州巒·補一贊豔一 ―一士細腦半一－一濺鸚二森鄴·鏡？個黔物一斗一藝“崙計一一鬥腦奮一識臘－十爍計，·森黝一，. ＿痲日＿______＿一＿·＿__&___＿二＿一＿_＿一＿_＿一＿＿二’一＿…＿&__．…＿._._＿二，__.__．……＿．……，_．認 -I:’袖用．州『－－一”’一勵膩用寫”&‘肱憫瀾頃一可－一－--&“彎兀一“’驢中自廷’‘州面面兀””一‘一祖朧痲一一’&&&”一”&&&&&.-‘、 ―·于”職－·，一」〞’·邊•鳥鰍』一么一：－一，一！鰍·一：·…馴檔為勰偶觀～·：··－－一化’ 一方上礬蹤二日”’一器二一〕”栽戮．皺＿二么數么…響丁〕攣．&&’嗎r叮亡’一日一兀獗翻‘兀轟痲’一方騙必’聶瀾一江 ’〞―一．，一‘···一；.,～·－··”二：―一－···－一一斤→舟····一一····－·－--－一j一：.&－一 壁‘―一”－·····：··，，一訕一“一‘一一一，：··‘一；..-－一·－·－,－·一：·、·一：－·一一 ’奮―叮·豐邑··，·－．…‘·－－一，·····→‘·······，··一：•·－·r······‘→…’一必“ ·．．一－＿然吧卹貝熙荊．．…狗州曦發州中騰二州卑，:．•州啊．劉叩間…：U各各▼t.．神 整豐興胛里中“戶亂•邢謬亂•‘•••”••．．•••總唱卜．鰓•用．歸·輪州馮釦曦瀾 論一－華畫遛弘·一量戰·聖爛個一•P鳥·1.．·韋·季·－－一么劊韶一侖：·綴＿一 :&‘二二兀”于于彎一！.“一州！．巒’州豐竺不一禿．&&!_,.&&！一”才分雙’一訪．:”亡巒：&.”劉： ：二’·．’···．&－···一·‘··一。’卯細馴洽 劊’ 258 Table 6 Page 2 of 8 dit; ti tal ij a , quiz . . ! i i t- - lit I i l l ~Grå jul. -259 - Table 6 Page 3 of8 qq.äa lunn maan iii 0af *en- niel 1 1e amm 1Å vl e.l a .s*3 m] ci" ogr sH~~ ~ ~ 444 d fi om -260- Table 6 Page 4 of 8 SS5 -5 8 04' e . . 5W~ m *2ln e 5 5 5 5 . 5 *5 R:wlallqg qa* vit 4. g 8a *ich. at -il m . . * 5 & O V . mili l t ( $ W-4 ~W s* 8 4 _*** m[- an q* W.k äa a- it* an c21:i *4 ==w 9 wa 34xa iull 113 a 4-v11-11 2r21 a 111111.8 n M,44 V.C är til t.ltlill.1a.."fl. i i 5 58u n su s u in til Refill 51:.,"jwg ci-- ！寫．_!.&&．婦一、一必一•一‘一”一 ’發！．華＊，。。‘，蒙，*，·＊＊·。＊。鳥 ,；·‘.：豔二；一：．汗姿．―·―’。：!!;&’一＼.&&.; ！二呈’呈計個讓唱一‘償馴騙亂言曆編，視蘊！l各l;！·；·〕．,.：丰 !’變里―。。．。必’必一必：&＿一l!:,.!!&; ：。引離唱離·二離亂：法驢黑‘：·’·’&&& ，吋。雜雜糁，.&．粹糁壯翁翁萋．_‘·’·，:: ‘荊―盧轎蒲一芻鹽華‘號戶啊“氫 叢＿1,，。．,，。，,．瀾，，鄴 ．薑’森。l權呈旦雖呈鏟蠱這瞋親建！& 響．,1．瓖蓬實一構．總觀頗藝藝據纏驪萬禹！,&!,.: 召．雙―‘一‘-----－一”迅·＿f&_,& i、’&&&’二藝豐‘絕絕： 倡＿”。·：·i二籐：.11, ‘器。蟾＿__‘·＿。。、訕一i一要·”i言…： ·！！·，&&．屨驗i鳥“。―喜鵝認i!11黔·。！!,-I二，1.,-i：計： 轎‘．編‘膩“一呂叢‘&“必‘。‘才雙！一易！一蘿l一蘊I一”’遷 .1:，〕 …：‘二‘ r;.&．…：:;.; ·j‘一編斗‘t－。坤個．甲－．騙· 、｀.,&&& 、 262 Table 6 page 6 of 8 dag de mlf moj, tik åd final olm EM a Bel MINI i el; i l ii 44. :Lt ä:4 :§¥!d tå -e* d al w ，一．。。。．一一。。。。一。。j二。。一。二。一一一－。．．一。二。．.-.－一一州一．．·一一－一 ‘一．&&&”·’弋”&’一， 曲咸一•騙啊•fl由豳自豳自叔由•細補”&&“一’- ：二個驪黑頗矓口U網叫．..－一，二‘．…＿，。＿．。之一， &－一＿____!_.&.．…＿，…＿.．…CC•二！．韋！．奮•• 個口田．個目朧州網開個既網睡爾．州纔群鐵亂一一－一·一一一一一－ －二，._.&.,，徑藝興…。，,－」賺－.-．神象興二二！騙數一＿煙鱸直一曉磁望馮•啊！州矚．二＿呂祖瞭口．…月口中胤，。一。．鯽個閱～，一•個瀾一•“細 細－一，一一一‘－曲．．一一”一“一一一•鬥鬥卜一 …。．。＇。－ 一一‘-．論“：·二·”么，··一‘·一•；－一 ，一·一為論”媚···一·一〝。“編細〞·嗡一，―·→…紙．州‘膩二ll．滅勰一”萬症一不：&i祈‘一一痲“‘咸．..1一 :’黠亂饗妒··一雖認妝戲·體7&&---－一一彎”·擊一：盆爛－鴿個一〕為j沁痲廳：- ,.，·，·，…，。。一“一系口‘&．畸．．·一。一＇，一，一jh·－．一一－一。。二卜一韋··一。·＇,,－·．一－-－·一網．碼．＇·一一一。．”一，中－ •“•“.&&‘二＿__..－一一 •口騙．開•． ·“甲一“舊自。’&’→‘&&‘一‘&＇一’一，&－一一’”…’“一一·一一，一－-&-―一‘細一一一” -，二， ·勿’‘一””兀”&．煙馴結開騙瀾U螂田鼠－一”&&‘一’一‘一”&&’一―一一’，一―一’一“& 出馳’二’&,’一’一””一－－一一‘一”一一”&&，一一’一’一弋’－一，一－－一一―一一下－--－一一 &－·一一不訕”～啊膩一一－一－一一·－―一－.;.－··－···－·一一－--－一一·－·一―一了‘。·：－·一 一計一一一•勵『一’一”一“&’一～‘一―方－―一鬥才～’一‘一””一”一一―--－一’-－一－一“ 一布頂引目細奮•，&,c？一一一·－―一斗鬥，一一一－一－一斗一一·－．··→－·－－·－－·一：一”一―-－·、－·－·－－一 一－…＿___＿一＿－編必－必州“-．…＿&＿一。一…―一·一·一一．& 一縱；&.‘·”&.＿·．一壯他－一一―－一么二一·， --－一”一覃盔森馮計常實；啊·，一。·．·一，一一。－·－二→·－－一，-－〞－鏽－-，一．參一一‘一喝•。一～·一－一－•－-”••開•“？網吃．開－．一－一·， ”口啊口口個臘口視匯巳闢口。一＿_________＿一＿___._＿…＿.＿震 .&，物論 一一，&’一口纖’丁‘;&‘一‘&‘·才一，－了－-－一”&&&.-－一一－一”一－-－一－一－-－一－－一一一一‘一• ·…斗·→一斤臘他“織一：－一一網．州榭涌必贓“鬥－一斗－〝】…。“：一··一丁一“。單硎“．•膩·一’&&－一 繡開購■口口國膠鳥馴‘．亂綢亂•辭細總”·’·細卜嗡卜個．磚卜＿一 一一訂‘開目口也鰓一一―一口g臘口‘一‘．劉細濱一州唱－,,，•口鬨‘內－－方瀾妒一‘刊‘”婉啊闖鬥，&&－一’一’陶釁嗡細州他面由．‘一“一”一’&- L闢口糰楓口開，•物．.，•黝肩n個二•口個■•瞭開卜個悶。閱口口飼卹。口”闢輿畫翅辟廈纏口馴鑿國睡煙鹽劉亂―一 一’－一r口匯口口口口一’―一兀鬍膩勿”‘啊膩婦一跑牌－甲鬥－一一哺才”‘一薔‘一’～掬F?---－一劉認n田二蒲一州目涌勵個邑細面面面面膠爾「－-, ,‘一•一魚變豐黜馮·一一一構計·么權犢一雜一一·；一濛－拿：才一，&’二編許豔縐驕驚勰雙訟，．····一一 豐、一－杳禺協斤；&：·－一鄴認二論鼾離一－一一一手，·篡勰i么··一翻矯豐黜．誡面“繃瀾面：一－ 杳““一二一妝需騙盔二一j緹奮二涌爛一體，一一一一彎一拿豔靜一：·…。“為。聶議“滷面：--－·－···一“& ；藝‘一一“二認禺么二一唱爛二常爛－器一·－一、一“，·盡一言·霉·－～··一鎖饒紹醫一－一：―一， ’騙＿_＿吵旦！_____．遝趙•徑鬍螂州甌，．州騰＿.&.‘·物黃贊．…，．州隨縱闕露二 ，一”’·樣口馴目自口頗以一”‘鴆j開．.’織鰓．.,．細•一“&U各一卜．&”面哺涌兩磁面酒一‘方 髡’___－…整旦鳥嶼旦．:＿一、．___,＿巒牌戶”竺趙幽．.＿迎L_____．離．_．養．獸抓．＿一＿．一登灑瀾露卹團口＿一＿＿一＿一二＿…：．…州I闢 &&&”一”一“&&.&”一’·“&&&&&―一“.&&&”。‘&:－一‘一援為介．:.｀奮“.1燈 劊” &,:‘二戶‘&.－一和··…。·一鉀二，一～ : . 二‘縐：寫認實“甲－.&.&‘一？了叮一了‘&& :&．叮一二一：‘遝壯·．魚一：壟巡必．韆·二：遛，屋鑿·：巡•·“營kj置上一洹－ ：一：一！n.’型覓熙州→’一，州准·州咖二痲·一一『一，．黝膩－-－一’－緬··一 ，、’，·一一妝籵榆論··－一一纖觀·：綴爛，般一一一‘一一犢一霉一藝一一二·鼠罐瓣鸚昌哥鰍－· ”·一，－一珍躅糟I··－－一黌爛一體編一體一一騙二韋必鳥一一二一耑識織黔，－一一、 －一·一誹躍舞訕→•－一喝爛：譏認一體－-―么鼾一拿一奈－一一腮州．．→·····一 韋蠱糧j··，·遞卹栽即·體二·二·；.．一：言，．華二一‘一縊編品騙…；二 ：一－··…，乎吧一…：一二J學，二鳥巒雙·甩，－一－一才一爭：·奪－－一－‘一他胞袒劉巨亙胞連絕」變黑興：－·····－一“ :－··一一，”甲甲，究，，興鳥二，‘·一一：:”·－··－－一一·－-－·－··－--&－·一一一 ．二＿,.:&:&’響··…＿···？一么一婦－－·一‘→一中一＿·一－·－一二； 一’一不’一豐豐．j&&&’一“;&&&&’一→■．--&-－一一”;&&&’一召一‘&&-－一’一‘一兀”一’－一’一“’一““一． ·曰丰聾龜邊一‘一礬訐轟戴于嘗甲：一！二計一丑一 ,：奪他攤奮一華華／& 一－二． ！甲粚粤F一彎超曰匹馴營響無計髡．:& ·！，日一’:&&&&－一’〕一！&‘一古：&.&&.&’一不一蘇跑！! \ 計兀方＃斗斗很化’．吃二州斤一；t&;&.&,&&i.:.:&:‘于一’！乎。‘一’·“f& &,．浩 二。 、 j }！〕樂”〕 ．陶’. a 6 alag-mom P. Iof-D. y T vU E 1. §min 2- L i!lkikiiiiiit.giiib* 199 tKa ålbaronemag 14 1 swegnummaaX ih kula t rd a a 29m . lem å* iiiäd"m24i, E'i* ffiffifik 13 b* flet, emillt lýattbibdigýmwc' 1% 2 =ide, kie :ýt t jo e osva 991 や --．。―／」／/////＼・―._. 七 &. ・．・・’・． ……’&．・．，一・．,: も .-. ―『‘/-&/-&/&\////&.. 争へ…，_ り曲． &* -&-’し－. …’…！｛…i……‘………’…）- ‘昌‘&., ,. 、 奋 二 、 飞 ，…！．……｛｛…………’… 勺 _’〕｛〕憐〕一‘… ．一、 。心叩自由 273 ATTACHMM 1 [3Devek4)mentBw*of fts- & Apri 1 1990 Comumts Received from DBP Mr. Alexander Nowicki Division Chief Policy Based Lending, Industry Public Utilities and Urban Sectors The World Bank 1016 H Street, M.N. Washington D.C. 20433 U. S. A. Dear Mr. Nowickis This refers to your liecter of 12 March 1990 with accompanying draft copies of the.Project Performance Audit Report an Six DFC and SMI Loans which you furnirhed my office for comments. I as in general agreement with the findings and conclusions of the report. Considering the experiences citedv it will indeed be beneficial it your Bank reviews its policies an coverage of foreign exchange risks and provisioning for lending funds in local currency terms. References that "DBP is expected to do only wholesale operations", as appearing on pages XXVI and XXXI, should be corrected. Our Bank*s intention is to become a predominantly wholesale Bank. We shall, howeve-rp continue to be active in retail bankihg, investment and merchant banking activities as we similarly support the view that a diversified resource and operations bass is essential for a DFC. With respect to the PDCP experience, it would seem to me that their difficulties principally emanated from their reliance on foreign currency operations. The narrowing of their capital base ca as a result of the increase in the magnitude of their debts due to devaluation. Immediately prior to significant devaluations of the peso, PDCP had leverage ratio% comparable to industry. Their shares were actively traded in the market and they had the capability of raising additional capital from the markets. Thank you for soliciting my views on the draft report. Very truly y Z. VI A xec Vice Pr Ident r S in 47a *egic Plannin Center 040 MW W Fft M - 275 - ATTACDMENT 2 PIV=U DEMEOPOWU Caumm hTOf 7K Pw "Is3) S5? asp ee**** I U E~(Jens wlepsemn e fqamadebug ?rVne) "' ~,~, PDCP BuatW% 7W8 ATaLa Avases A&xas Ost P cpc 1100 MaA ann1 PntuseC^NI tow rm HNnj6Punmuee nopce rce mum4ck OVflCM SACOLOD CmU QAVA MA.LO LQA6PI DAuPAN Coaenta Received from PDCP May 10, 1990 The World Bank 1918 H Street, N.W. Washington, D.C. 20433 U. S. A. Attention: Mr. Alexander Nowicki Division Chief Policy-Based Lending, Industry, Public Utilities and Urban Sectors Gentlement With reference to the draft Project Performance Audit Report (PPAR) which you sent us for our comments/review, we wish to inform you that we have no major comments on the draft report. By and large, the contents contained therein are faithful representations of the events, observations, experiences and lessons gained particularly as they relate to the last two loans (1052-PH and 1514-PH) made directly to PDCP by the Bank. Of particular interest to our institution is an item in the report where it made mention of a recommendation by the "Task Force on Bank's Financial Sector Lending Activities" for the Bank to provide funds being on lent to sub-borrowers in local currency with an adequate premium for foreign exchange rate cover. We understand that the recent Bank loan to DBP (APEX II) already follows this recommendation. We view with optimism that a similar arrangement could also be extended directly to privately run DFI's such as PDCP in the near future. Thank you for giving us the opportunity to review the draft report. Our apologies for the belated reply. Very truly yours, President JBV/crg - 277 - ATTACOiMT 3 Page 1 of 5 (CENTRAL SANK OF THE PHIUPPNES MAYKIL.A PILPMNAS Comments Received from CBP April 25, 1990 Nr. Aln r NuNdL DtviiC hdef policy-Hm~ 1ani8 Dustry, P~bi ~tiles and ~n: a ~ %be Wrld Bnk 1818 L. Street, N1. W.ahingten, D.C. 20433 Unte States of ~a Da nr. Ntkd~: ·W are pl~ued to su~t h~azth or nnts «n tha Draft Projeot ~riuias ait sport dhdic yaa furnlwd Central Bank In Jors L. Odia. Jr. ca March 12, 1990, regarding om Agrmni 1727-M,, 2169-PR (SU II and III) and 1984-PR <Apex Laen). % hop~ yoU mill find the s seful and Infnnative fr you pup . Very truly yours, EncL.: a/s IPAGPATULOY AMS KAUNLARAN 1 - MAG -IMPOK SA BANGKO - 279 - ATTACHDENT 3 Page 2 of 5 C1me~NI CE m T Pluin= PEiCMK DiTm= lŒ loan 1727-PM and 2169-PM (LW II and II) 1. Sectdons 7.01 and 8.02(a) of Part I as well as Se. 1, Part III of the report speak highly of the qert-~m of the IG. The IGP Program bas been adju&ed suaoesful bemuse of its strng and .prudnt mnagemt and careful supervision of PMn. Si the IGLP is onsidered as "a 'good ndel for funding mall and udilim scale indutzy," theOf the to the legislative hMeas, for thedr perusal, now that thy are Mdasing a bill on.man r may be hlpfully inf~n- ative. 2. Sec. 2.06, Part I states that "'he IGM is a redismt and guarantee Manisum x x x under whii ten lo~ans x x x are reapu*d& x x x" Mhe IGTZ is not a redis omt facility of the Central Bank. A cuafyi~ lth progra utili~e the special thu~ deposit asm in channel- t4 h" ling 3G fund to endu throug aCreditd financial 2.06 to insti+*ion the 811 I. ca. 3. Sec. 6.05, Part 1 reads: "'he cn exlicit IG m oxpie~t cbjective that was not fulfi~1er under the project was dnnlling of a majority of project funds outside Mtro Manul. The pro- prtion of project funds t to the r swas af w. laur t a epece~ apr mtl 40% va. a goa of 60%). Pe~raps, in retropect, the åbjectiv of 60% aurealitIc. Se. 1.03(d) of Part II also states that the " d prcvte m=e actively the perticipation in the I=F Pregram of PFIs in rural areas, cxxu±dering incentives and poicyr renn1e to effect this." The reent passae of 1epublic Act No. 6810, popularly know as Kalakalan 20, and tha eventual enact=nt of the prpo1 magna narta for Anal1 l m d r~a ameepce to hast~ prmosting the etablst and mmraäin cf smal EntElPr~ in tha regi~ns. 'ese poitive steps will thm help 3Gr attain fully its objective of cmannalling more project funds to .entr- prises outsida Mtro Manla. 4. Under See. 1.03(b) of Part II, "OEW wmuld make the foll~aing P~ n~ n t~uards a mele effective implementation of the prggr a(Par II of th pr*p~d by b) 3GL.and the PFIs shoul mitor the mzgliann• of end-users with. IGW's riequiremt that fia. regularly subit certified/audited finanil ATTACHMW1T 3 -280 - Page 3 of 5 In onnine,~ reguar e-use verificatim surv of projects finan~ rer the IGrB Program, the IG[Z B~=miation Division clesly mcnitors the sumission of all necemsary financal statements and ~ticulously goes over them. With respet to reports not yet ~uheitted at the ~tim of visit, the CB-IGLF sends zmnrera to the participating financial insti- tutions coened. 5. Sec. 1.06 of Part II states: " x x x Under the credit risk guarantee (up to 60% of the loan for amall idustry and 40% of the ban for mim.uinktty), the 2% guarante fe is aboned by the financIng institutin while under the ollatral short guarantee (im~ 25% of the loan), the 2% guarante fee is pas~en to the h=omer and is availabla oly for small industry projects x x x." Ue the Fourth. SI, the guara s m has been revsed by incmasin the covere for rottage/small industries fzm 60% to 80%, and that for the mediu industries fr= 40% to 50%. Itzmy also be pointed out that a study financed by a grant ner the ADi's first Joan to the IGMF is bedng =nr1nta1 for the purpose of ilneralizIng the IGW guarantee s~m.m. 6. Sec. 1.03(e) of Part II ireands that the "NW shioul1 mve quidcly to omkputerie its om acxo*nt~, securitis ontrol, and other reporting requirents." The IGrP is in the last stage of the program prEparation for the ampe*2 uputerization of its operationis. S~n reports.have already been onr zed and further refnmets In the systam are being dise~aa1 with the Naticmal Ojputer Center wh' A devle . the programs. 7. An error was noted in Ame i o page 26 of the report. In the S mrize na1ane Sheets table, Ttal IaWltis should be Th b~ 01,457,189 thousand instead of 01,216,698 ~ · corrected. Iean 1984-PR (Apex Iomn) 1. Sec. 5.09 (as reiterated in Sec. 5.26, 5.32 and 5.44). "'ff use of the Centzal Bank a the dhannel for the apex funds shoeed r~m resuilts. x x xAn the other hand, beane OEU was under the Central Bank, it inplicitly constra<nd DIU's freedm to refuse aceditation to a finance institution, particuarly a Cena~rcial bank, as this was feared to reflect adversely en the public mket per ~ption of suc. an institutlon. -！伽［-[!;.1.1轢’&.& · O C낼 컨청 톨 ATTAOMMI 3 Page 5 of 5 - 282 - autmicmous Unit within the central Bank. It was I al bI e for . I I I - - the Progrm as well as preparing and of lending and other guidelines, publishlMof materials for public 0, etc. 4. Sec. 5.40. " x x x As a result# actual defaults under the Apex IDan were wall and confined mainly to r"t-4wk-mmociated Investmeft houses r In fact, mainly PDCP.0 The summary gives impression that commercial bank box have never default-ad because them banks can always "debit the" clients' working capital accounts" maintained with them as against rxn-bank-associated investment housm, such as the PDCP# that are not autharized to accept deposits. As far as the EFU is oxxxxned, there are no past due Apex loans (exapt the A footnou b" loans with the two closed PrIs now under liquidat(on/receiver- been added to ship),, as it is the practice of the Apex Unit to debit the PM' PaM. 5.40. , deposit account with the Central Bank on dw datest iz=ludiM that of the PDW. As between the PM and aub- bo=cwexs,, the PDCP a-, 1 P r r - - defaults an two to tbrw accounts. It is felte hcwever,, that thJA hqVmmd because as a development bank, the PDCP took greater risks in pursuing its develp4mwital, cbjectives. Of the commercial banks, the WI did have one Apex account turn past due In one perlodj, bft this was soon settled.