Sri Lanka - First and Second Small and Medium Industry and Industrial Development Projects

OMie 1 1j-prt N CE ,y,.II1 FOR OF Report No. 9724 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 942-CE) SECOND SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 1182-CE) AND INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1401-CE) JUNE 28, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EQUIVALENT UNITS (Annual Averages) Sri Lanka Rupee per US$1.00 1978 = Rs 15.61 1979 - Rs 15.57 1980 Rs 16.53 1981 = Rs 19.25 1982 = Rs 20.81 1983 Rs 23.53 1984 Rs 25.44 1985 = Rs 27.16 1986 = Rs 28.02 1987 = Rs 29.44 1988 Rs 31.81 1989 = Rs 36.04 1990 Rs 40.00 FISCAL YEARS Government of Sri Lanka = January 1 to December 31 Commercial Banks = January 1 to December 31 NDB January 1 to December 31 DFCC = April 1 to March 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washngwn, D.C. 2043 U.S.A. Office of Director-Geeral Operations Evaluation June 28, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Sri Lanka First Small and Medium Industries Project (Credit 942-CE) Second Small and Medium Industries Project (Credit 1182-CE) Industrial Development Project (Credit 1401-CE) Attached, for information, is a copy of a report entitled *Project Performance Audit Report on Sri Lanka - First Small and Medium Industries Project (Credit 942-CE), Second Small and Medium Industries Project (Credit 1182-CE), and Industrial Development Project (Credit 1401-CE)* prepared by the Operations Evaluation Department. Attachment This docum has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content mal . A otiherwise be disclosed without Word Bank authoritation. FOR OFFICIAL USE ONLY ABBREVIATIONS BOC - Bank of Ceylon BTT - Business Turnover Tax CBOC - Commercial Bank of Ceylon CBSL - Central Bank of Sri Lanka CDIC - Capital Development and Investment Company COPE - Parliamentary Commission on Public Enterprises DFC - Development Finance Company DFCC - Development Finance Corporation of Ceylon EDB - Export Development Board EPR - Effective Protection Rates FCBU - Foreign Currency Banking Units FIAC - Foreign Investment Advisory Committee FMO - Nederlanske Financierings Maatschappij voor Ontvikkelingslanden NV FRR - Financial Rate of Return FTZ - Free Trade Zone GCEC - Greater Colombo Economic Commission GDP - Gross Domestic Product GOCUs - Government Owned Business Undertakings GOSL - Government of Sri Lanka HNB - Halton National Bank ICICI - Industrial Credit and Investment Corporation of India IDA - International Development Agency IDB - Industrial Development Board IDP - Industrial Development Project IFC - International Finance Corporation IMF - International Monetary Fund LIAC - Local Investment Advisory Committee LOLC - Lanka Orient Leasing Company MISA - Ministry of Industries and Scientific Affairs MLCF - Medium Long Term Credit Fund MOFP - Ministry of Finance and Planning NCB - National Commercial Bank NDB - National Development Bank of Sri Lanka NSB - National Savings Bank PCI - Participating Credit Institution PCR - Project Completion Report PEC - Public Enterprise Cell PED - Public Enterprise Division PFP - Policy Framework Paper PME - Public Manufacturing Enterprises PPAR - Project Performance Audit Report RRDB - Regional Rural Development Banks SEP - Study of Effective Protection SMI - Small and Medium Industries UNDP - United Nations Development Programme WBG - World Bank Group Th*-de **fr it - ar tri-t i '-trihutt n -pd r vt -s d hV r-ir'hnt nqv in th -rfnrf r-A PROJECT PERPORMANCE AUDIT REPORT SRI LANA FIRST SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 942-CE) SECOND SMALL AND MEDIUM INDUSTRIES PRO:ECT (CREDIT 1182-CE) AND INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1401-CE) TABLE OF CONTENTS Page No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . .i Data Sheets . . . . . . . . . . . . . . . . . . . . . . . . . .iii Evaluation Summary . . . . . . . . . . . . . . ....... ix PROJECT PERFORMANCE AUDIT REPORT I. Introduction . . . . . . . . . . . . . . . . . . . . . . 1 II. Overview of Economic Policy Reforms (1978-1989) . . . . . 2 III. The Manufacturing Sector . . . . . . . . . . . . . . . . 5 A. Structure and Performance . . . . . . . . . . . . . 5 B. Small and Medium-Scale Industry (SIMI) . . . . . . . 7 C. The Industrial Finance System . . . . . . . . . . . 7 D. Credit Allocation and Interest Rates . . . . . . . 9 Selective Credit . . . . . . . . . . . . 10 Interest Rate Policies . . . . . . . . . . . . 10 E. Capital Market . . . . . . . . . . . . . . . 11 IV. Evaluation of SMI I (Cr. 942-CE) and SiMI II (Cr. 1182-CE) 11 A. Project Objectives and Scope . . . . . . . . . 11 SMI I . . . . . . . . . . . . . . . . . . . . . 12 SHI II . . . . . . . . . . . . . . . . . . . 12 SHI III . . . . o . . . . . . . . . . . . . . 13 Subproject Conditions . . . . . ... . . . . . 13 B. Implementation Results . . . . . . . . . . . . . . 14 C. The Role of NDB and PCIs . . . . . . . . . . . . . 16 NDB . . . . * . . . . . . . . . . . . . . . . . 16 PCIs . . . . . . . . . . . . . . . . . . . . . . 17 D. Technical Assistance (TA) for SMI . . . . . . . . . 19 E. Sustainability . . . . . . . . . . . ... . . .. 21 Project Benefits . . . . . . . . . . . . . . 21 Sustainability of Institutions . . . . . . . . . 21 TABLE OF CONTENTS (Cont*d) PROJECT PERFORMANCE AUDIT REPORT (Cont'd) Page No. F. Conclusions . . . . . . . . . . . . . . . . . . . . 22 G. Lessons Learned ........ . . . . . . . . . 23 Use of Commercial Bank as Financial Intermediaries 23 Role of the Apex Institution . . . . . . . . . . 23 On-lending Terms . . . . . . . . . . . . . . . . 24 Technical Assistance . . . . . . . . . . 24 V. Evaluation of IDP I . . . . . . . . . . . . . . . . . . . 25 A. Objectives and Design . . . . . . . . . . . . . . . 25 B. Implementation Experience . . . . . . . . . . . . . 26 Credit Component . . . . . . . . . . . . . . . . 26 C. Performance of Financial Intermediaries . . . . . . 27 Development Finance Corporation of Ceylon (DFCC) 27 Ownership . . . . . . . . . . . . . . . . . . . . 27 Institutional Aspects . . . . . . . . . . . . . . 27 Operational Performance . . . . . . . . . . . . . 28 Financial Performance . . . . . . . . . . . . . . 28 Portfolio Management . . . . . . . . . . . . . . 29 Resource Mobilization . . . . . . . . . . . . . . 30 Strategic Planning, Institution Building and IDA's Role . . . . . . . . . . . . . . . . . . . 30 D. National Development Bank of Sri Lanka (NDB) . . . . 32 Operational Performance . . . . . . . . . . . . . 34 Financial Performance . . ........ . . . 34 Institutional Development and IDA's Role . . . . . 35 VI. Evaluation of Industrial Policy Reforms . . . . . . . . . 37 A. Public Enterprise (PE) Reforms . . . . . . . . . . 37 Implementation . . . .. . .. . . . . . . . . . 38 B. Reform of Import Protection . . . . . . . . . . . . 43 C. Export Incentives . . . . . . . . . . . . . . . . . 45 D. Conclusions and Lessons Learned . . . . . . . . . . 45 IDA's Role . . . . . . . . . . . . . . . . . . . 47 APPENDICES I. Impact Assessment of Technical Assistance Under SMI I and II 48 II. Comments Received from National Development Bank . . . . . 55 ANNEXES 1. Interest Rates of Major and Savings Institutions, 1970-89 58 2. Financial Indicators for SMI-I and SMI-II . . . . . . . . . 59 3. DFCC Financial Indicators . . . . . . . . . . . . . . . . . 68 4. NDB Financial Indicators ......... . . . . . . 80 TABLE OF CONTENTS (Cont'd) Page No. PROJECT COMPLETION REPORT (Credit 1401-CE) Part It Project Review from IDA's Perspective . . . . . . . . . 89 1.0 Project Identity . . . . . . . . . . . . . . . . . 89 2.0 Background and Sectoral Content . . . . . . . . . . 89 3.0 Project Objectives and Description . . . . . . . . 90 4.0 Project Design and Organization . . . . . . . . . . 91 5.0 Project Implementation . . . . . . . . . . . . . . 92 6.0 Majot Project Results . . . . . . . . . . ..... 95 7.0 Project Sustainability . . . . . . . . . . . . . . 96 8.0 IDA's Performance . . . . . . . . . . . . . . . . . 97 9.0 Borrower's Performance . . . . . . . . . . . . . . 97 10.0 Project Relationship . . . . . . . . . . . . . . . 98 11.0 Consulting Services . . . . . . . . . . . . . . . . 98 12.0 Project Documentation and Data . . . . . . . . . . 98 13.0 Conclusions and Lessons Learned . . . . . . . . . . 98 PART III: STATISTICAL INFORMATION . . . . . . . . . . . . . . . 101 Table 1 Related Bank Loans . . . . . . . . . . . . . . . . 102 Table 2 Project Timetable . . . . . . . . . . . . . . . . . 103 Table 3 Loan/Credit Disbursements . . . . . . . . . . . . . 104 Table 4 Indicators of Project Implementation and Results . . 105 Table 5 Status of Covenants . . . . . . . . . . . . . . . . 106 Table 6 Use of Bank Resources . . . . . . . . . . . . . . . 111 Table 7 Arrears of Subprojects - DFCC . . . . . . . . . . . 112 Table 8 Arrears of Subprojects - NDB . . . . . . . . . . . 114 Table 9 Cash Collection Performance - NDP . . . . . . . . . 16 Table 10 Cash Collection Performance - DFCC . . . . . . . . 117 Table 11 Balance Sheet FY1983-1989, NDB . . . . . . . . . 118 Table 12 Balance Sheet FY1983-1989, DFCC . . . . . . . . . . 119 Table 13 Income Statements FY1984-1988, NDB . . . . . . . . 120 Table 14 Income Statements FY1983-1989, DFCC . . . . . . . . 121 PROJECT PERORMANCE AUDIT REPORT SRI LANKA FIRST SMALL AND MEDIU 7NDUSTRIES PROJECT (CREDIT 942-CE) SECOND SMALL AND MEDIUM INDUSAIRS PROJECT (CREDIT 1182-CS) AND INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1401-CE) PREFACE This Project Performance Audit Report (PPAR) reviews the First and Second Small and Medium Industry (SMI) Projects and the First Industrial Development Project (IDP-1). The first SMI credit was approved in June 1979, became effective on October 1979 and was closed on December 31, 1985. An undisbursed amount of $0.9 million was canceled. The second SMI credit was approved in September 1981, became effective on May 1982 and was closed in 1989. IDP-I was approved in July 1983 became effective on January 1985 and was closed on September 1989, fully disbursed. The PPAR, prepared by the Operations Evaluation Department (OED), is based on the PCR of the SMI-I credity prepared by the IDF Division, South Asia Project and the PCR of IDP-I (attached) prepared by the Industry and Energ, Division, CDI, Asia Region, the staff appraisal reports, President reports, summaries of the Executive Director's Meetings at which all three credits were considered, project files and discussions with Bank staff. An OED mission visited Sri Lanka in November 1990 to review IDA assistance. The PCR for SMII and IDP-I, prepared by the Bank are satisfactory accounts of the utilization of the credit proceeds. The PPAR focusses on the institution building achievements as well ae on the industrial and trade policy reforms introduced under the three projects. The draft PPAR was cent to the Borrower for comments. The comments received from National Development Bank are reproduced as Appendix II to the PPAR. & PCR: Sri Lanka First Small and Medium Industries Project (SMI), Report No. 6795, May 22, 1987. The PCR for the second SMI project (Credit 1182- CE) is under preparation. However, considerable data for this project is already available and hence this project has been included in the evaluation. PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 0942-CE) BASIC DATA SHEET (US$ mill. .-n) LOAN POSITION As of 03/31/91 Original Disbursed Cancelled Repaid Outstanding Loan 0942-CE 16.00 15.08 0.92 0.30 14.78 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY79 FY80 FY81 FY82 FY83 FY84 FY85 Appraisal Estimate (US$ '000) 180 4.3 10.3 15.1 16.0 16.0 16.0 Actual (US$ '000) 5.8 2.7 8.5 11.1 12.2 13.1 14.7 Actual as Z of Appraisal .03 .63 .83 .73 .76 .82 .92 Date of Final Disbursement: February 4, 1986 PROJECT DATES Original Actual Preparation n.a. 06/00/78 Negotiation n.a. 05/23/77 Board Approval n.a. 06/26/79 Credit Agreement n.a. 07/24/79 Effectiveness n.a. 10/23/79 Closing Date 06/30/84 06/30/85 STAFF INPUTS (st.aff weeke) FY78 rY79 FY80 FY81 FY82 FY88 FY84 FY85 FY88 FY87 TOTAL Preappreisal 7.5 4.6 - - - - - - - - 12.1 Appraisal - - - - - - - * - - - Negotiation - - - - - - - - - - * Supervision - - 20.8 12.5 6.6 8.9 6.0 8.0 4.0 5.2 65.5 Other - 8.8 - 8.8 Total 7.5 8.4 20.8 12.6 6.6 8.9 5.6 8.0 4.0 6.2 81.4 - iv - MISSION DATA Month/ No. of No. of Staff Year Weeks Persons weeks Date of Report Preparation 05/78 3 2 6 06/00/78 Preparation 12/78 4 7 28 02/06/'9 Appraisal 03/79 3 6 18 06/08/79 Supervision I 06/79 2 1 2 08/08/79 Supervision II 08/79 2 2 4 09/26/79 Supervision III 11/79 1 1 1 02/19/80 Supervision IV 04/80 1 1 1 04/28/80 Supervision V a/ 02/81 4 3 12 03/26/81 Supervision VI a/ 11/81 3 4 12 01/14/82 Supervision VII a/ 04/82 3 2 6 04/17/82 Supervision VIII a/ 08/82 1 1 1 08/07/82 Supervisici IX a/ 11/82 1 1 1 11/13/82 Supervision X a/ 03/83 2 1 2 04/19/83 Supervision XI a/ 10/83 2 1 2 19/28/83 Supervision XII a/ 05/84 1 2 2 03/14/84 Supervision XIII a/ 07/84 2 3 6 09/10/84 Supervision XIV a/ 05/85 2 2 4 06/14/85 Supervision XV 11/85 2 1 2 12/26/85 A Joint supervision SMI I (Cr. 942-CE) and SMI II (Cr. 1182-CE). OTHER PROJECT DATA Borrower : The Democratic Socialist Republic of Sri Lanka Executing Agency: National Development Bank (NDB), Development Finance Corporation of Ceylon (DFCC) and other commercial banks FOLLOW-ON PROJECT: Project: Second Small and Hedi%n Industries Amount: US$30.0 million Loan No: 1182-CE Board Date: October 13, 1981 PROJECT PERFORMANCE AUDIT REPORT SRI LANKA SECOND SMALL AND MEDIUM INDUSTRIES PROJE!T tCREDIT 1182-CE) BASIC DATA SHEET (US$ million) LOAN POSITION As of 03/31/91 Original Disbursed Cancelled Repaid Outstanding Loan 1182-CE 30.00 32.31 0.21 0.00 35.84 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY82 FY83 FY84 FY85 FY86 FY87 FY88 Appraisal Estimate (US$ Million) 1.9 8.7 18.7 27.7 30.0 - - Actual (US$ Million) .1 .6 1.7 6.11 14.1 27.5 29.79 Actual as X of Appraisal .5 2.0 5.8 20.4 48.2 91.9 99.3 Date of Final Disbursement: April 14, 1988 PROJECT DATES Ori%inal Actual Appraisal Board Approval 10/13/81 Loan Agreement 02/05/82 Effectiveness 05/05/82 Closing Date 12/31/87 STAFF INPUTS (st0f week) FY80 FY81 FY82 FY88 FY84 FY85 FY88 FY8? FY88 FY91 TOTAL Preappralsel - 28.2 8.2 . . - - - - * 29.4 Appraisal - 26.8 .4 - . - - - - - 28.7 Negotiation - - 2.7 - - - - - - - 2.7 Supervision - - 17.5 8.2 17.1 18.7 12.8 16.2 1.6 .1 88.8 other .1 2.5 6 .1 - , - . *, .Z 8.7 Total .1 55.0 80.0 6.2 17.1 18.7 12.8 16.2 1.6 .1 158.1 - vi - MISSION DATA Month/ No. of No. of Year Weeks Persons Manweeks Date of ReRort Preparation 12/80 2 2 4 01/21/81 Appraisal 01/81 3 3 9 02/25/81 Supervision I /a 02/81 4 3 12 03/26/81 Supervision II /a 11/81 3 4 12 01/14/82 Supervision III /a 04/82 3 2 6 04/17/82 Supervision IV /a 08/82 1 1 1 08/07/82 Supervision V Ia 11/82 1 1 1 11/13/82 Supervision VI /a 03/83 2 1 2 04/19/83 Supervision VII a 10/83 2 1 2 09/28/83 Supervisio: VIII ]a 05/84 1 2 2 05/14/84 Supervision IX a 07/84 2 3 6 09/10/84 Supervision X /a 05/85 2 2 4 06/14/85 Supervision XI 12185 2 1 2 12/26/85 Supervision XII 08/86 2 2 4 08/29/86 Supervision XIII 11/87 4 3 12 11/09/87 /a Joint supervision SMI I (Cr. 942-CE) and SMi II (Cr. 1182-CE). OTHER PROJECT DATA Borrower a The Democratic Socialist Republic of Sri Lanka Executing Agency: National Development Bank (Ntob), Development Finance Corporation of Ceylon (DFCC) and other comercial banks FOLLOW-ON PROJECTt Project: Third Small and Medium Industries Amounts US$20.0 million Loan No.: 1860-CE Board Date: December 15, 1987 - vii - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA INDUSTRIAL DEVELOPMEMT PROJECT (CREDIT 1401-CE) BASIC DATA SHEET (US$ million) LOAN POSITION As of 03131191 Original Disbursed Cancelled Repaid Outstanding Loan 1401-CE 25.00 25.95 0.00 0.00 31.23 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY84 FY85 FY86 FY87 FY88 FY89 Appraisal Estimate (US$ Million) 1.1 5.39 13.0 22.2 25.0 25.0 Actual (US$ Million) 1.6 6.26 18.0 22.2 23.5 26.1 Actual as X of Appraisal 1.45 1.17 1.38 100 .94 100 Date of Final D'sbursement: April 11, 1989 PROJECT DATES Original Actual Preparation 04/81 4/30/81 Preappraisal 08181 9/08/81 Appraisal 11/81 11/24/81 Credit Negotiations 05/83 5/24/83 Board Approval 07/83 7/12/83 Credit Signing 10/83 10/12/83 Effectiveness 01/84 1/05/84 Completion 03/88 3/31/88 Closing Date 09/88 9/30/88 STAFF INPUTS (UTf I weeke) FY79 FY81 FY82 FY88 FY84 FY86 FY8 FY87 FY88 FY89 FY90 FY91 TOTAL Preappraisal .1 2.6 19.8 - - - - * - - 22.0 Appraisal - - 42.9 11.5 - - - - * - - 54.4 Negotiatlon - - - 4.2 1.4 - - - - - - 5.6 Supervision - - 5.3 8.9 28.9 28.6 4.9 7.5 8.4 8.5 6.0 .8 84.8 Other .2 .5 - 8.4 Total .1 2.8 72.7 22.8 25.8 28.6 5.4 7.6 8.4 0.6 6.0 .8 174.7 - Viii - MISSION DATA Month/ No. of No. of Year Weeks Persons Hanweeks Date of Report Preappraisal 09/81 3 4 Appraisal 11/81 3 4 Post-appraisal 03/83 3 2 Supervision I 10/83 1 1 Supervision II 04/84 3 2 Supervision III 07/84 3 3 Supervision IV 09/84 1 1 Supervision V 10/84 2 1 Supervision VI 01/85 1 1 Supervision VII 02/85 1 2 Supervision VIII 11/85 2 1 Supervision IX 03/86 1 1 Supervision X 07/86 3 2 Supervision XI 11/86 3 4 Supervision XII 05/87 3 7 Supervision XIII 08/87 3 5 Supervision XIV 10/88 2 1 OTHER PROJECT DATA Borrower : The Democratic Socialist Republic of Sri Lanka Executing Agency: National Development Bank (NDB), Development Finance Corporation of Ceylon (DFCC) and other commercial banks FOLLOW-ON PROJECT: Projects Third Industrial Development Amount: US$43.80 million Loan No.: 1948-CE Board Dates July 26, 1988 - ix - PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 942-CE) SECOND SHALL AND HEDIUI INDUSTRIES PROJECT (CREDIT 1182-CE) AND INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1401-CE) EVALUATION SUMMARY Introduction more successful than the SMI proj- ects wit. regard to the credit 1. Following the reversal of Sri component, but the TA component Lanka's inward-oriented anti-private aimed at public enterprise reform sector policies in 1977, the Bank did not achieve intended objectives. Group (IDA) initiated a series of credits aimed at assisting the new I. SMI I & SMI II Government to liberalize economic policies further, particularly in Objectives and Setting the areas of industrial and trade policies and the role of the public 2. The overall objectives of sector and to provide investment SMI I and SMI II were to strengthen resources to the private sector. the private sector by assisting This PPAR evaluates the first and viable existing small and medium second Small and Medium Industry scale industrial and service firms (SKI) Projects and the first and new entrepreneurs to expand Industrial Development Project output, employment and exports, (IDP I). These credits were through access to institutional followed by a seLond IDP approved in sources of financial and technical 1986, a third SMI credit approved in assistance as well as assist GOSL in 1987, and a third IDP approved in undertaking trade policy reforms 1988. Although the projects under (paras. 4.01-4.05). Both projects review are traditional lines of had two components: credit through financial intermedi- aries, all three included broader 3. Credit Component (Improving policy reform components in line Access to Credit;. IDA channelled with IDA and GOSL objectives. The credit through the National Develop- SKI projects were implemented with ment Bank (NDB), to four commercial mixed results, particularly because banks and the Development Finance of deficiencies in the implementa- Corporation of Ceylon (DFCC). The tion of technical assistance (TA) aim was to develop the capabilities components. IDP I was relatively of the commercial banks to grant - X - term loans based on project apprais- and extension programs by providing al than on reliance on collateral, advisors to coach regional extension and to induce them to finance SKI. officers, establish a SMI consul- NDB created a special SKI department tancy fund to tap local private ex- - the SKI Fund - to undertake on- pertise, and expand its engineering lending to the intermediaries, service facilities. In line with provide technical assistance, and SKI II's objective of promoting maintain accounts. The credit com- export-oriented SKI, the project ponent included provision of attrac- supported a new agency, the Export tive spreads to the participating Development Board (EDB), in its pro- credit institutions (PCIs), a credit gram of export promotion and supply guarantee from the Central Bank of development in key light industrial Sri Lanka (CBSL), and a special product lines. capital facility for new entrepre- neurs unable to raise adequate equi- Implementation Experience ty. Both credits assisted in the institution building of NDB, and, in 6. SKI I was rapidly committed particular, the formulation of sys- due to strong loan demand although tems and procedures of the SKI Fund. disbursements were delayed by can- cellations and the ethnic conflict 4. Technical Assistance. Under in 1982-83. SKI II was committed the TA component of SMI I, $4 much more slowly due to possible million was provided to employ overestimation of demand by IDA, the local/expatriate advisors to: (a) PCI's growing awareness of the poor reinforce the main Government agency repayment performance of sub-loans (IDB) responsible for promotion and made under SMI I, and a large provision of technical services for increase in the final on-lending SMIs by improving its regional rate from 14Z to 22%-24%. The PCI's extension network, starting a sub- loan approval procedures under SKI I contracting exchange, and establish- were lax and funds may have been ing training and technical service diverted to other uses because of facilities for rubber products, poor PCI supervision (PCR, building materials, foundries and para. 5.06). Subproject cost light engineering subsectors; (b) overruns were quite significant for improve the focus and effectiveness both credits attesting again to the of other SKI technical service agen- PCI's weakness in project appraisal. cies by providing finance for estab- lishing: (i) training programs in Results garment manufacturing; (ii) exten- sion programs in white coir extrac- 7. The two SKI credits financed tion and processing; and (iii) an subprojects mainly in traditional export organization for handloom products/industries -- food process- products; and (c) assist GOSL to ing (27%), construction materials carry out geaeral policy studies on (102), metal, products (82), paper aspects of export incentives and the products (62), etc., with limited tariff system. The impact of these market growth potential. Under policy studies is discussed under SKI I, a large percentage were new IDP I (PPAR, Section 6). borrowers (48%); but mostly expan- sion projects were financed under 5. Under SKI II, the TA program SKI II. Export potential of sub- sought to strengthen IDB's promotion projects financed under both credits -xi - appears rather limited although assisting management in strategic SMI II emphasized the development of planning (paras. 5.26-5.27). Tech- export-oriented investments. nical assistance to the SMI Fund (responsible for administering the 8. The two projects assisted SMI lines of credit) was effective 3,679 subprojects which are in building up staff capability, estimated to have created 36,306 particularly for reviewing subproj- jobs at an estimated investment cost ects above a "free limit" and over- per job of between $1,000-$1,500. all monitoring of credit utiliza- Data on ex-post economic and tion. However, its impact on financial performance of subprojects improving the efficiency of SMI are fragmentary and NDB's estimates lending operations of PCIs has been of IFRR for subprojects financed limited by its own staffing con- under SMI I of 30Z could not be straints. Its involvement in confirmed (PCR, para. 5.08). For sectoral studies on SMI development SMI II a limited survey of 66 has been minimal for the same subprojects undertaken in 1989 reason. The TA fund being managed indicated that about one-third were by the SMI Fund under SMI III has financially shaky because of cost yet to make a noticeable contribu- overruns or poor sales (para. 4.14). tion to generating new types of investment. The effectiveness of 9. Subloan repayment performance this fund would be considerably is generally a good indication of enhanced if local consultants could actual performance. For SMI I, the assist potential SMI to prepare repayment performance has been poor, project proposals for financing by as of December 31, 1985, some 372 of the fund (para. 4.39). This policy subloans (by number) were in arrears is now being implemented. over 3 months and the corresponding principal infection ratio was 76Z. Technical Assistance to IDB and EDB For SMI II, it has been only slight- ly better; as of December 31, 1989, 11. The TA programs directed at about 36Z of loans (by number) were building up IDB's extension in arrears over 3 months and the centers/activities were not particu- correspondLng principal infection larly effective (para. 4.23). The ratio was 40.9%. The average col- impact of the Rubber Product Devel- lection ratio of the PCIs as of this opment Center which was the most date was only 62.5Z. A part of the active was modest. The subcontract- poor recovery performance stems from ing exchange acted as "a broker con- the ineffectiveness of the debt veying marketing information to po- recovery procedures which were in tential suppliers, rather than play- place during this period. The Gov- ing a catalytic role in assisting ernment has recently introduced new SMI to become effective ancillary debt recovery laws to correct this suppliers to large firms. The con- lacuna. sultancy services from IDB also failed to have much impact except in Technical Assistance to NDB and PCIs some cases (e.g., mushroom farming). The only center which has been suc- 10. The technical assistance pro- cessful is the Clothing Industry vided to NDB for institution build- Training Institute (CITI) which is ing was effective in terms of build- involved in the training of garment ing up systems and procedures and workers. - xii - 12. Technical assistance to the performing loans in their portfo- EDB was generally more effective. lios. IDA has proposed the estab- Advisory assistance to EDB for lishment of a debt restructuring improving export policies and agency to deal with the issue and procedures resulted in considerable appropriate recapitalization.1A key improvements in both export issue, however, is whether the PCIs administration and incentives (para. would continue to provide term loans 6.27). to SMI without refinancing by the Government/IDA. If refinancing is 13. Three factors explain the not available, the extent to which mixed performance of the TA program. institutional funds will flow in Firstly, it was overly ambitious, future to this group is uncertain going beyond the management capabil- and is likely to be small; it will ity of IDB. IDA's own limitations depend on reforms to interest rate on supervision prevented it from policies and the pace of institu- close monitoring of implementation. tional strengthening of the PCIs. Secondly, some of the TA activities Both are being addressed by IDA were supply driven rather than based under SMI IV and the proposed FY93 on a careful analysis of market Banking Sector Reform Project. demand (paras. 4.23-4.25). Thirdly, government agencies proved unable to Lessons Learned and Recommendations retain qualified and trained person- nel as experts because of poor com- Use of Commercial Bank as Financial pensation policies. IDA recognized Intermediaries this issue during the appraisal of SMI II but was unable to address it 17. The implementation experience with persistence. in Sri Lanka and elsewhere clearly indicates that unless commercial Sustainability banks are prepared to make a sub- stantial effort towards building up 14. Based on the limited informa- specialized organization structures tion available on actual subproject for lending and servicing SMI loans, performance and repayment records, a the results are unlikely to be sat- fairly large number of SMI subproj- isfactory. This organization struc- ects have doubtful financial viabil- ture has to be decentralized down- ity. wards, at least to the level of major branches and staffed with ade- 15. Sustainability of the TA quately trained individuals. Such institutions also presents a mixed an investment in organization build- picture. Since IDB is a govern- ing would imply that the PCI adopts mental agency, it is not subject to lending to SMI as part of its long- market tests. Nevertheless, a re- term corporate strategy and not as a organization and change in policies transient involvement due to the would be beneficial. EDB is being availability of IDA/World Bank reorganized and refocussed to credit lines. Allowing all commer- enhance its effectiveness. cial banks to participate on the basis that greater competition would 16. The PCIs are generally finan- improve the project impact does not cially viable institutions although seem to be born out by results both BOC and PB, the two government (para. 4.21). banks have high levels of non- - xiii - 18. In SMI lending operations debt service coverage and debt- involving use of multiple commercial equity ratios as otherwise first banks, the World Bank should allow time SMI sub-borrowers may not participation of only those commer- observe the financial discipline cial banks which are prepared to set required. Excessive gearing, as is up appropriate organizational struc- observed in many SMI subprojects, tures and make a long-term commit- increases the vulnerability of ment to SMI lending. subprojects to temporary setbacks which may account for the high level Role of Apex Institutions in SMI of non-performing loans. Lending 21. The SMI Fund should prepare 19. An apex institution has an improved guidelines for PCIs important role in monitoring and detailing appraisal norms possibly promoting SMI lending, particularly by subsectors; further improvements in the early stages. However, the are needed in both appraisal and establishment of such institutions supervision. also entails considerable institu- tion building effort which should be Technical Assistance recognized and provided for in future projects. Additional func- 22. In designing TA programs for tions that can be performed by the implementation by Government agen- apex body include management of a cies, issues of basic management credit guarantee fund which would capabilities of the agencies and benefit from the deeper insight that incentive policies needs to fully the apex institution would have of addressed and resolved before SMI lending and the PCIs capabili- finalizing the program. Also, a ties. The SMI Fund should undertake comprehensive demand analysis should periodically systematic sample be carried out before introducing surveys of SMI borrowers to assess new TA initiatives (para. 4.39). the actual economic impact of the sub-loas. Finally, a SMI fund of 23. The high incidence of project the type established under these failures in the case of new entre- projects can generate significant preneurs as well as the paucity of resources from the "float" arising projects in new technology/new prod- from the differences in the maturity uct areas suggests an acute need for structure of its assets and liabili- technical support for this class of ties. Given the extreme shortage of entrepreneurs including training in equity capital faced by SMI entre- business management. The financial preneurs, particularly new entrepre- institutions may wish to establish neurs, the potential use of some of an entrepreneurial development cen- these resources in equity support ter. run on private lines to deal should be explored. with these needs.2The TA fund in NDB could also provide assistance for On-lending Terms this activity. 20. On-lending terms for SMI sub- 24. There is also a scarcity of borrowers should follow norms for qualified consultants to assist SKI. commercial loans. It is also This deficiency could be met through important that prudent financial training programs for appropriately ratios are observed, particularly qualified individuals who would e - xiv - induced to set up private consulting for management and encouraging ways businesses. The financial interme- to increase private sector partici- diaries could also establish in- pation in ownership and management house technical assistance groups. of PMEs (SAR, para. 3.07). IDA could assist NDB and other financial institutions, to organize Implementation Experience and such training programs by bringing Results in foreign experts to develop and implement such courses. Credit Component II. INDUSTRIAL DEVELOPMENT 26. The credit component of SDR PROJECT (IDP I) 21.5 million was fully committed within the three years envisaged in Objectives and Design the SAR. The TA allocation was also fully committed by the closing date 25. IDP I, the third in the series of September 30, 1988. Disburse- of credits to the GOSL for indus- ments were completed by March 1989, trial development after 1977, was nine months behind schedule. A designed to increase output, employ- total of 127 subprojects were ment and efficiency of both private financed, of which 120 were below and public enterprises through both SDR 0.5 million (PCR, para. 5.4). investment finance and support for Only 13 subprojects were aLove the policy reform (SAR, para. 3.01). It free limit. DFCC on-lent 602 of the comprised a credit component of credit by amount and accounted for SDR 21.5 million (US$23 million) for 642 of the total number of sub- on-lending by the two development projects. finance institutions (DFIs) -- NDB and DFCC -- and a technical assis- 27. Ex-ante ERRs for DFCC's sub- tance component of SDR 1.85 million projects varied between 15? (automo- (US$2 million) aimed at: (a) bile battery) and 50% (textiles). strengthening the system of indus- Ex-post ERRs have not been calcu- trial finance by improving project lated except for only two subproj- promotion, appraisal and supervision ects which ranged from 7? to 8?. In procedures of the two DFIs, ration- terms of financial performance, 68 alizing the interest rate regime for out of 90 DFCC subloans and 32 out industrial lending, and assisting in of 47 NDB subloans were operating establishing an equity fund under satisfactorily and meeting repayment NDB to provide scarce equity obligations on time.81etals, chemi- resources to new private projects; cals, and engineering subprojects (b) assisting in improving trade and accounted for half of the total industrial policies, particularly credit. The project created 3128 with regard to tariff reform and jobs compared to 2,500 estimated in industrial incentives, building on the SAR; the average cost per job the study of effective protection created was Rs. 385,903 (US$12,833) undertaken earlier under the SMI I compared to US$15,000 estimated. Credit (SAR, para. 3.08); and (c) Performance failures have been due assisting in improving the perfor- to weak management and financial mance of public manufacturing enter- problems of borrowing firms as well prises (PMEs) by introducing corpo- as due to the severe civil unrest rate planning, performance incen- prevailing in Sri Lanka for much of tives coupled with greater autonomy this period. Against this back- -xv- ground, subproject performance loans affected by arrears over three cannot be faulted too strongly. months comprise 12.5% of total port- folio as of September 30, 1990. Performance of Financial Given the serious ethnic problems in Intermediaries and the Bank's 1988, this is not unexpected. DFCC Contribution to Institution Building has been transferring 40% of its profit which is tax exempt to a Development Finance general loan reserve which totalled Corporation of Ceylon (DFCC) Rs. 153 million in FY90. The adeq- uacy of this policy should be re- 28. DFCC, established in 1955, is viewed periodically by IDA (para. a private sector institution (but 5.09). subject to considerable Government influence) because of its 39? owner- 31. DFCC, like NDB, is totally ship by BOC And PB, the two large dependent on the Government for both Government banks as well as the foreign and local resources. It has appointment of two other government been unable to raise resources directors on its Board. The pres- locally because of the interest rate ence of two competing banks on the structure. A market for MLT bonds Board has led to some conflicts. does not exist and the long-term DFCC's overall performance in util- loan rates are at present based on izing Bank credits has been satis- short-term rates (average weighted factory. Its procedures are sound deposit rates), resulting in a flat although economic analysis could be yield curve. DFCC's future growth further strengthened, particularly and role in the financial sector market and price trends, in light of will depend on how successfully this the opening up of the economy. resource mobilization issue is ad- dressed (para. 5.10). Floating rate 29. DFCC's investment portfolio loan pricing for working capital comprised 739 projects totalling loans, leases and even investment Rs. 2,409 million as of March 31, projects may allow DFCC to use 1990. Approvals during FY86-FY90 short-term market instruments. DFCC have grown at 27? p.a., higher than needs to adopt more flexible loan that of NDB. Foreign currency based pricing to increase rates commensu- approvals accounted for 55? of total rate with the riskiness of projects approvals in FY90. Loans comprise and entrepreneurs. Other possibili- the bulk of its operations; leasing ties are to link up with commercial and equity investments, currently banks or insurance companies in small, are expected to increase to syndicated financing and deposit 14? of gross approvals by FY95. mobilization. Nevertheless, finan- cial sector liberalization will 30. DFCC is profitable and its increase pressure on the DFIs. financial performance has improved Priority should be given to interest since 1986 due to rapid portfolio rate reform by IDA (para. 3.16). growth, better use of leverage, lower operating expenses and higher 32. IDA has made significant con- earning spread (para. 5.08). Port- tribution to DFCC's institution folio quality has been improving building. DFCC's new strategy since the 1985 collapse of the hotel formulated with T.A. from IDA (para. sector where DFCC had high exposure 5.16) calls for diversification of (33?). Excluding hotel loans, total activities into capital market oper- - xvi - ations, merchant banking, consultan- on equity which averaged 142 between cy, venture capital management, etc. 1980-82 declined to 8.02 in 1990. Diversification is important to due to declining interest spreads. reducing risk and maintaining and NDB's portfolio deteriorated sharply improving profitability and competi- in 1988-89 (infection level of 43Z tiveness. The biggest constraint to in December 31, 1989) but has diversification has been shortage of improved to 162 as of September 30, skilled staff because of uncompeti- 1990, due to vigorous restructuring tive salary scales. This issue is which was facilitated by the of vital importance to DFCC's future improved debt-recovery climate. competitiveness and needs to be However, NDB has benefitted from a addressed by IDA. ten-year tax holiday (expired in 1990) and consequently has not National Development Bank expensed provisions for bad debt but (NDB) treated these as appropriations. This overstates its true profits. 33. NDB, established by the Government in 1979, is a competitor 36. NDB faces similar problems as to DFCC in long-term lending to DFCC in resource mobilization (see industry. NDB operates under the para. 32 above and para. 5.26). It general supervision of MOFP and its needs to explore alternative mecha- Board consists of six officials. nism for raising Rupee resources. Although empowered to finance both public and private sector projects, 37. IDA has played a critical role NDB's lending to public enterprises in NDB's institution building by is small (less than 102 of providing technical assistance since portfolio). its founding (para. 5.27). The assistance has been extremely valu- 34. During 1980-90, gross loan able in all areas, but more so in approvals increased at an annual staff training and in formulating average rate of 172 with approvals strategy and policies. Relationship growth increasing faster in the with IDA may have also fended off second half (202) (para. 5.22). SHI potential interference from Govern- refinance accounts for 202 of total ment. A major current problem approvals. Like DFCC, project loans concerns staffing because of non- account for the bulk of NDB's activ- competitive salary scales. This ities. NDB's merchant banking issue should be addressed early. operations, started in 1988, has GOSL has agreed to privatize NDB made fair progress. But the CDIC, which should facilitate action on established in 1984 by NDB, has so this matter. IDA should encourage far not been effective in providing this move which should help correct equity capital to small firms; more a number of problems. However, the recently it has been playing a resource issue deserves priority useful role in building up the stock attention for privatization to be a exchange. workable proposition. 35. NDB's financial performance Sustainability of PCIs has been satisfactory but lackluster (para. 5.24). It has not used its 38. The two developments banks are capital base to its full potential profitable, well-managed institu- (debt-equity 32t68 in 1990). Return tions, although they have had port- - xvii - folio problems. Their financial corporate plans had been prepared viability is not in question. How- but had minimal impact on changing ever, both DFIs cannot mobilize the relationship between MISA and resources, particularly local cur- PEs (para. 6.10). rency resources, without Government support. Reforms in the interest 41. The firm level consultancy rate regime are necessary for the assistance was rjrn ined to only DFIs to mobilize resources from the three ?Es -- Ceramic, Mineral Sand market. Without these reforms, and Plywood Corporations -- out of their sustainability is an issue. the eight identified during the 1982 There is a high likelihood that appraisal (para. 6.11). The only these reforms will be sustained. study that was assessed as good was that for the Plywood Corporation but Public Enterprise (PE) Reforms even in this case, implementation could not be realized because of 39. IDP-I had a two-pronged ethnic disturbance, loss of key man- approach to improving PE efficiency. agers and labor disputes. Iade- The first involved technical assis- quate follow-up by IDA (para. 6.12) tance to the Ministry of Industry partly accounts for the lack of and Scientific Affairs (MISA) to effectiveness. establish a Public Enterprise Cell (PEC) which would (a) assist PEs 42. Technical assistance to the under its control to prepare PED resulted in the development of a corporate plans and (b) provide standardized financial reporting consultancy service to specific PEs system for the PEs. PED also worked to resolve technical and management towards improving financial problems hindering performance. accounting practices focussing on Corporate plans were intended to valuation of assets with the view replace direct controls with a towards privatization. The substan- contractual system of signalling and tive impact of these measures on performance rewards based on improving PE performance to date is explicit targets. The second prong unclear. However, some of these was assistance to the Public initiatives should be useful inputs Enterprise Division (PED) of the in the propoLed program of privati- MOFP which was responsible for zation of PEs being implemented by improving management information GOSL. systems, performance evaluation procedures, etc., in all PE9 as well Findings and Lessons of PE Reform as serving as the technical arm of the parliamentary Committee on 43. The most important lesson that Public Enterprises (COPE) to enable emerges from this experience at FE it to carry out its monitoring reform is that partial measures such activities more effectively. as strengthening management systems and procedures, devising signalling 40. Results achieved in both areas systems to set targets and monitor were minimal (para. 6.05). Imple- performance, etc., are unlikely to mentation of the relevant tasks set succeed unless the overall economic out under the MISA program was environment in which PEs operate is delayed considerably due to lack of changed. This requires changing the a real commitment on the part of legal, incentive and regulatory MISA officials. By January 1988, 12 framework to expose Ps to market - xviii - competition while simultaneously of high budgetary deficits due and providing management with autonomy its heavy dependence on trade taxes. in operational matters such as product pricing, production levels, 46. Following the deterioration in wages and salaries, staffing levels, macroeconomic indicators in 1987. financial decisions, etc. However, IDA initiated a second study of the even the partial measures could have protection regime financed under led to some tangible improvement if IDP II. On the basis of this it had the full support of senior review, GOSL announced a four-band government officials. tariff system (5Z-15Z-352-50%) to be implemented within two to three Trade Policy Reforms years. IDA endorsed these proposals as a substantial liberalization of 44. The 1977 trade policy reforms the import regime. A 1989 review of led to a substantial liberalization the tariff regime showed that the of the economy but the criteria by average nominal protection to manu- which tariffs were adjusted led to a facturing was 31Z and the average wide dispersion of effective protec- effective protection was 40Z and the tion rates in manufacturing with tariff system still showed a sub- adverse implications for resource stantial cascading structure. How- allocation. Thus, further trade ever, the variance of protection rationalization of the regime was between different branches of manu- needed. IDA tried to promote these facturing was smaller. Moreover, reforms under an adjustment opera- out of a total of 6,634 tariff tion which was not acceptable to positions, 500 product categories GOSL for political reasons. It had were still subject to import licens- to settle for promoting these ing of which 440 were manufactured reforms through technical assistance goods. Finally, the Goverment was to the Tariff Reform Commission still exercising monopoly control (TRC) (later called the Presidential over some imports, e.g., textiles. Tariff Commission) in analyzing the It would thus appear that between incentive impact of the protection 1985-89, the pace of tariff regime under projectlinvestment reduction has been rather modest, operations. This approach, as it although PEs may have become less turned out, was sub-optimal. protected. Nevertheless, GOSL is committed to further liberalization 45. In response to a 1983 IDA of the import tariff regime after study advocating lowering of nominal the four-band tariff system is in tariffs to a uniform !5Z rate over a place. five-year period) and elimination of most export incentives, in 1984, Export Incentives and Promotion GOSL introduced tariff reductions reducing most tariff rates to 47. Technical assistance to the between 5Z and 752 with the average EDB was extremely effective in unweighted nominal protection rate helping it to develop a rational at 312 (para. 6.24). However, export incentive structure based on special tariff protection continued granting exports "extended neutral to be provided to PEs. In status' (para. 6.27). These recoi- retrospect it is clear that GOSL did mendations have been incorporated in not adopt IDA's proposals in light GOSL s Industrial Policy Statement. The appreciation of the real - xix - exchange rate had adverse conse- substantial appreciation of the quences for Sri Lanka's exports and underlying real exchange rate. the signals it gave to export indus- Another constraint to adopting a tries. The export incentives pro- flexible exchange rate policy was vided by EDB partly mitigated the Sri Lanka's large external debt negative effects of the exchange which was mainly a public sector rate appreciation but failed to make liability. Since non-traded goods an appreciable impact on exports. are a major source of Government Moreover, the slow pace of import revenue, a real devaluation would liberalization blunted competitive have conflicted with the objective pressures on domestic firms prevent- of fiscal stabilization and thereby ing efficiency gains which may have exacerbated inflation. Given that affected export performance. This trade taxes amount on average to 40Z is particularly true in the case of of total tax revenues, there was public enterprises. Sustained little leeway for the Government to export growth and diversification reduce import taxes, which undoubt- depends on Sri Lanka's ability to edly adversely affected the pace and produce at internationally -ompeti- extent of liberalization. Thus, the tive costs. The main strategy requirements of fiscal stabilization should be further significant conflicted with import liberaliza- reduction of import protection tion. A thorough tax reform effort coupled with investments of should have accompanied or preceeded sufficient scale and technological the program of import tariff capability to enable competitive reduction. exports. Ability to attract direct foreign investment will be a IDA's Role critical factor in this effort. 49. IDA has played a catalytic Findings on Trade Policy Reform role in fostering trade policy reforms in the post-1977 period. It 48. The main issues which arise in would4 appear that its analysis of reviewing the progress of trade trade liberalization, at least until liberalization concern the pace and 1985, did not fully take into extent of import liberalization that account the fiscal constraints has occurred in Sri Lanka after over arising from GOSL's macroeconomic 13 years of reform effort. To com- policies. Pursuing trade policy ment on this, one needs to examine reforms through project credits did the linkages of trade policies with not allow for adequate monitoring. the overall macroeconomic policies Since 1987, however, IDA has been followed by the Government during more sensitive to the revenue this period. Following the 1977 implications of tariff reform and liberalization measures, the its links to the overall macro- Government adopted an expansionary economic framework. It is likely fiscal policy resulting in very high that the macroeconomi,; parameters budget deficits (1980 deficit was - would have been better defined and 22.2Z of GDP). The expaniionary controlled had the reforms been fiscal policy resulted in e double undertaken under an adjustment deficit inflation rate which the operation which could have allowed a Government sought to control partly faster and deeper liberalization of through a rigid nominal exchange the import regime. rate policy. This led to a - xx - 1.See Sri Lankat Financial Institutions Study, Report No. 9339-CE. February 1, 1991. 2.IDB has established a Center for Entrepreneurship Development and Consultancy Services (CEDACS). However, CEDACS could suffer from the same problems that have affected IDB's other operations. If CEDACS could be operated along private lines with close links to the financial institutions, it could substitute for the proposed center. 3.These numbers refer to subloans rather than to subprojects, some of which have received more than one subloan. In the case of DFCC, some thirteen subprojects had arrears of principal and interest as a percentage of loan balance exceeding 102 as of March 31, 1989; for NDB the corresponding number was nine. PROJECT PERFORMANCE AUDIT REPORT SRI LANKA FIRST SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 942-CE) SECOND SMALL AND MEDIUM INDUSTRIES PROJECT (CREDIT 1182-CE) AND INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1401-CE) I. INTRODUCTION 1.01 Promoting the development of Sri Lanka's industrial sector has been a long-standing objective of the World Bank Group (WBG) since the sector has bee- viewed as an important channel for both employment creation and strengthening the balance of payment position through export diversification. Between 1966-1977, WBG provided four lines of credit to the Development Finance Corporation of Ceylon (DFCC) for assisting private investment proj- ects in industry, tourism and related activities. A supplementary objective was to st-engthen DFCC as an institution.v As standard DFC operations, these loans did not include any broad industrial sector policy conditionali- ty, even though the industrial policy framework during this period was char- acterized by complex and far reaching administrative regulations, high import protection, dominance of public enterprises in most industrial activities and a repressed financial system. 1.02 Following the change in Government in 1977,a new regime of economic liberalization was introduced which start(d to reverse the bias against the private sector. The Government moved str"3ly to revive the economy and the private sector in particular, through the &doption of market-oriented price and trade policies, easing of investment licensing restrictions, the promotion of direct foreign investment in export-oriented ventures, and the broadening of the financial system. Following the change in Government policies, starting in 1979 the Bank initiated a series of loans aimed at developing the private industrial sector through both credit and technical assistance as well as assisting the Government in its efforts to liberalize trade policies and internal regulations, enhance public enterprise efficiency and strengthen the financial sect.r. Between 1979-90, the Bank extended six loans - three for small and medium-scale industry (SMI) development and three Industrial Development Projects (IDP); the most recent loan (an adjustment operation) aims at restructuring and privatizing publicly owned enterprises. Conditionality on broad policy reforms under project loans is rather unusual y Sri Lanka Development Finance Corporation of Ceylon (Credits 68-CE and 742-CE), PPAR No. 6821, June 27, 19M6. - 2 - and it appears that the Bank adopted this approach as the Sri Lankan Government did not feel that the poll ical climate was right for the intro- duction of quick reforms through adjustment operations. This PPAR evaluates the first two SMI loans (Cr. 942-CE and Cr. 1182-CR) and the first IDP (Cr. 1401-CE). II. OVERVIEW OF ECONOMIC POLICY REFORMS (1978-1989) 2.01 The 1977 economic reforms represented a dramatic reversal of the state- oriented import-substitution philosophy that had guided economic management for the previous two decades and resulted in poor economic growth. The thrust of the reforms was to reorient the economy in an outward direction and to reverse the bias against the private sector. The main elements of the reform package were a large devaluation coupled with elimination of the dual exchange rate system, elimination of a great number of import quotas and their replacement by tariffs, easing of exchange controls, decontrol of most product prices and recourse to interest rates to determine credit allocation. 2.02 Between 1978-85, the Government adopted further measures, some of which were supported by the three projects under review, to deepen the market orientation of the economy and strengthen the private sector. On the trade side, liberalization of the trade regime in 1977 was followed by further reforms in 1984 aimed at lowering and reducing dispersion of effective protection rates. The Export Development Board (EDB) was created in 1979 to administer a variety of export incentives aimed at encouraging non-tradition- al exports. A duty rebate scheme and a bonding scheme--whereby imported inputs for exporters are exempted from tariffs--were put into place in 1980. Another measure aimed at encouraging non-traditional exports was the creation of a Free Trade Zone (FTZ) near Colombo in 1979. Foreign owned export- oriented enterprises were encouraged to locate in this zone by making skilled labor available at relatively low cost, and providing free access to imported inputs and generous tax incentives. A new agency, the Greater Colombo Economic Commission (GCEC), was created to manage these incentives and given authority to approve investments in the FTZ. Another agency, the Foreign Investment Advisory Committee (FIAC), under the Ministry of Finance and Planning was given the role of promoting foreign investments outside the FTZ. The strict rules and regulations on private domestic investment approvals enforced by the Local Investment Advisory Committees (LIACs), were also eased. To encourage traditional exports, export taxes on tea, rubber, and coconuts were reduced substantially, from levels in the range of 40-50Z in 1978, to 10-202 in 1985. 2.03 The financial sector also benefitted from the liberalization of economic policies and has been one of the fastest growing sectors of the economy. New foreign banks were allowed to enter the market bringing the number of foreign banks in Colombo from 4 to more than 20. Foreign Currency Banking Units (FCBUs), which are subsidiaries of commercial banks, were allowed to transact in foreign currency with non-resident enterprises, such as those established in the FTZ, and to take foreign currency deposits from - 3 - non-residents, mainly Sri Lankans working abrsad. Two equipment leasing companies were created between 1980-82. 2.04 The economy responded vigorously to these reforms with GDP groMing at between 5Z to 7% between 1978-85 and unemployment declining to 12% in the early 1980s from 262 in 1976. The main areas of growth were in construction, agriculture, garment manufacture and services. Since the mid-1980s, however, slow economic growth and high unemployment have re-emerged as serious prob- lems. There are three reasons for this deterioration of economic perfor- mance: (i) the expansionary macroeconomic policies pursued since 1977 led to unsustainably large deficits in the external and internal accounts; (ii) failure to reduce the public sector's size or address the root causes of its inefficiency; and (iii) the outbreak of the ethnic conflict in 1983, put heavy pressures on the budget, caused output losses, and reduced foreign investment and tourism. 2.05 Despite the 1977 liberalization, the Government's role in the economy increased. The availability of external finance, both from donors and com- mercial sources, led to a massive expansion of the public investment program. Current expenditures increased both as a result of increased public sector employment and of public enterprises' need for budgetary support after they were exposed to market forces and international competition without being given autonomy to make decisions on pricing, procurement and recruitment. As total Government expenditures soared, so did fiscal deficits despite Sri Lanka's relatively high revenue to GDP ratio, which gradually increased from a historical 16-172 of GDP to slightly over 20Z of GDP in the mid-1980s. The fiscal deficit during 1978-87 averaged 14% of GDP, about half of which was financed by grants and concessional loans and the other half by domestic borrowing. At close to one-half of national savings, this level of domestic borrowing has been the main cause for relatively high real interest rates. Commercial lending rates averaged 82 per year in real terms during the last four years. The Government-led expansion in aggregate demand was the princi- pal factor underlying the acceleration in inflation in the first half of the 1980s. Because of an insufficiently flexible exchange rate, inflation led to a gradual appreciation of the real exchange rate. This appreciation impeded a more vigorous development and diversification of the export sector and contributed to a current account deficit which averaged 162 of GDP in 1980-82, with a gradual decline to around 102 of GDP thereafter. 2.06 By 1986, it became clear that Sri Lanka could no longer sustain its high levels of fiscal and external current account deficits in the face of dwindling reserves. In November 1986, the Government articulated a three- year stabilization program which, in turn, led to the first-year PFP (1988- 1990). The program's main objectives were to restore growth, reduce the fiscal deficit to an acceptable level by 1990, and stimulate export-led manufacturing output through trade policy reform and exchange rate deprecia- tion. While adoption of this first-year PFP was seen as a MaRjor breakthrough at that time, its implementation turned out to be a disappointment. With the introduction of the second-year PFP program in mid-1989, overall economic management and performance strengthened. Policy actions and tightened expenditure controls kept the overall deficit in 1989 at 112 of GDP, well within the PFP target of 12.52 of GDP. To complement these measures, the Government also devalued the rupee, from Re. 35/US$ in July 1989 to Re. 40/US$ in September 1989, and tightened monetary and credit policies. Although foreign aid inflows were slightly less than anticipated, the 1989 domestic financing of the budget at 5.12 of GDP was still lower than the PFP target of 6.32; this was also significantly less than the 1988 domestic financing which reached 9.42 of GDP. The stabilization program, however, was not as successful in controlling inflation. Despite the tightening of monetary policy--and partially as a result of the rupee devaluation and elimination of subsidies--inflation accelerated in late 1989. 2.07 Recognizing the importance of furthering the gains achieved thus far in the stabilization efforts, the Government reached agreement with the Bank and the IMF on a third-year PFP. The main macroeconomic objectives over the medium-term are to: (i) accelerate growth to over 52 through 1993; (ii) reduce inflation to 62 by 1993; and (iii) reduce the external current account deficit from about 82 of GDP in 1989 to about 52 by 1993, accompanied by an increase in gross official reserves from the current level of about 1.7 months of imports to 1.9 months. Fiscal constraint is expected to result in the budget deficit declining from about 102 GDP in 1990 to about 9Z in 1991 with further reduction thereafter. The attainment of these objectives will depend upon a gradual diminution of the civil conflict; a stable macroeconom- ic environment including tight fiscal and monetary policies coupled with appropriate exchange rate managetent; the establishment of a consistent enabling environment for the private sector which will promote an increase in private investment and export-oriented output; and a reduction in the size of the public sector and its claims on resources so as to make room for the private sector. 2.0R The Government's program of reducing the size of the public sector comprises measures to reduce the level of central Government expenditures as well as to restructure and commercialize and/or privatize public sector enterprises. The government is already taking steps to privatize and restructure public enterprises. It has divested an auto dealership and two textile mills and is in the process of divesting two public companies (liquid oxygen and ceramics). The Government has also begun a phased implementation to commercialize, restructure or privatize much of its large PME portfolio. Recent measures taken by the Government to promote domestic and foreign investment are expected to contribute to encouraging private investors' participation in PME commercialization, as explained below. 2.09 In December 1989 the Government announced a strategy to promote industrial growth based on the private sector as an engine of growth. The strategy delineates the public and private sectors' respective roles in the country's industrial development, stressing equal public and private sector access to financing, equal pricing flexibility as well as equal effective protection for comparable industries and confirms that all PMEs would be commercialized and privatized wherever possible. It takes into account the need for a transparent, cost-effective and non-discriminatory system of incentives and gives special emphasis to export incentives, development of marketing services, infrastructural support and manpower training. To - 5 - facilitate implementation, the Government has formed a high level comittee to coordinate policy and incentives across ministries. A new Industrial Promotion Act is being formulated on the basis of the Industrialization Strategy. 2.10 The industrialization strategy gives special emphasis to the key rcle that foreign direct investment can play in alleviating domestic shortages of critical factors such as capital, specialized skills, transfer of technology and managerial expertise, and access to foreign markets. To actively promote such investment, the Government has already consolidated all approval procedures in one entity, the Greater Colombo Economic Commission. In late 1989, restrictions on foreign equity investment in existing enterprises and the 100Z tax on transfer of equity shares to foreigners were eliminated. To further emphasize the foreign investment promotion measures announced in the industrialization strategy, the Government is formulating a comprehensive foreign investment strategy that would clearly outline the new, streamlined procedures as well as guarantees afforded foreign investors. III. THE MANUFACTURING SECTOR A. Structure and Performance 3.01 In 1989, the manufacturing sector accounted for 15.3% of GDP compared to 28.4% for agriculture, 48.4Z for services and 8.4Z for construction. The manufacturing sector's share of GDP has declined since 1977 when its share was 23.1? in contrast to the construction and mining sectors (mostly gems) which increased their shares. Its share of the labor force has been steady at about 14?. Currently, the manufacturing sector comprises some thirty publicly owned manufacturing enterprises (PMEs) of which ten are in food, beverages and tobacco products and the remainder in industrial goods; about 500 large scale private registered factories employing 75 workers or more mainly in Colombo; 5000 small and medium-scale registered private factories; some 25,000 dispersed unregistered small and cottage units concentrated in handicrafts and servicest and an estimated 100,000 tiny units employing less than five persons." The private sector is estimated to account for 60% of manufacturing value added and 90? of manufacturing employment. Private firms dominate the food, beverages, tobacco, chemicals, rubber and garments industries whereas PMEs are engaged in more capital intensive operations in textiles, sugar, cement, ceramics, chemicals, petroleum, steel and wood industries. 3.02 Despite a decade of liberalization, PMEs remain an important segment of the economy. However, they contribute less than proportionately to industrial output growth and exports. In 1988, the 20 enterprises which manufacture industrial goods accounted for 33? of the national industrial production or about 3% of GDP and employed about 40,000 people, representing / Based on the Annual Survey of Industries 1988, Department of Census and Statistics. - 6 - 62 of the industrial labor force or about 12 of total labor force. They contributed less than 51 of industrial exports (22 of total exports). PMEs' economic contribution is dominated by three corporations, Ceylon Petroleum, National Textiles and Sri Lanka Cement. In 1988 these contributed about 70% of PME output, or over a fifth of total industrial output. The Textiles and Cement Corporations each contribute roughly 31 of national industrial produc- tion (together accounting for about 11 of GDP). Half of the PME exports were refined oil products from the Petroleum Corporation; the other half were mainly minerals from the Mineral Sands, Mining and Mineral Corporations and textiles from the National Textile Corporation. 3.03 PME production has stagnated since liberalization, in contrast to private sector output. PME value added grew at an annual average of 1.01 in real terms during 1977-88, substantially lower than the growth of manufactur- ing GDP of about 61 annually. Private industries are estimated to have grown at more than 101 a year over the period. Liberalization policies adopted in 1977 spurred the private sector to establish new industries, particularly in textiles (knitting) and garments, which have been the main thrust of private growth. The Government kept PMEs entangled in an array of controls and ia- commercial functions, which were compensated for by high levels of tariffs, market privileges and budget financing. PME financial performance has been poor on average. Aside from the Petroleum, Mineral Sands, Cement Corpora- tions and two textile mills of the National Textile Corporation, PMEs have either been marginally profitable or accumulating losses, and returns on capital have been low or negative. The economic cost of PME inefficiencies is not captured in the budget as the Government practically stopped budgetary transfers to PMEs in 1982. Since then, PMEs have rescrted to running down their production facilities and/or building up arrears with the Treasury and the state commercial banks. 3.04 The stagnation of the PME sector accounts for the structural changes in the manufacturing sector between 1975-87. In 1975, consumer non-durables intermediate goods and capital goods accounted for 501. 32Z and 141 of manu- facturing value added respectively. By 1987, the respective shares were 571, 371 and 61, reflecting the greater dynamism of the private sector which are concentrated in the consumer and intermediate goods subsectors. In addition, the manufacture sector has become much more outward oriented as a result of the trade policy reforms. Overall the share of manufactured exports in manufactured output increased from 91 to 262 in 1987. Nevertheless, only a small group of manufactured products, textiles and garment, leather goods and gems and jewelry have contributed to the export growth, attesting to need for significant improvements in the efficiency of the manufacturing sectors. - 7 - B. Small and Medium-Scale Industry (SMI) 3.05 The SMI GroupV of enterprises is estimated to comprise 902 of private sector enterprises and account for over 70? of employment and 55% of manufac- turing value added (PCR, para. 2.09). SMI firms are concentrated mainly in food and beverages, agro-processing industries, chemicals, rubber, and plastics, garments and leather goods, gems and jewelry, construction material and metal products. Most SMI are oriented towards the domestic market, serv- ing local areas with the exception of SHI firms in garments, leather products and gems and jewelry. The latter industries have emerged as extremely suc- cessful exporters with garments accounting for 57Z of manufactured exports. Foreign technical collaboration and investment has played a key role in the successful expansion of garment exports and to a lesser extent in gem and jewelry exports. 3.06 However, in most other sectors, SMI's serve local and regional markets and their growth potential as suppliers of final consumption goods is limited by the small size of these markets. Most employ traditional technologies which result in low productivity and product quality. The gradual liberal- ization of the trade regime and deregulation of internal investment controls have increased competition, putting pressure on SMI firms to improve effi- ciency, improve quality and reduce cost. New entrants are fewer and growth of the sector is occurring through expansion of successful firms as indicated by the changing nature of the loan applicants under the three SMI credit lines. Nevertheless, the number of SMI firms engaged in activities involving modern technology and higher level skills is very limited. This situation has arisen because of a dearth of trained engineers and technicians and limited access of SMI firms to modern technical know-how. Lack of linkages between small and large firms has been a critical constraint to the growth of SMI in sectors such as engineering products where a large number of SMI firms can generally be found in most newly industrializing countries. C. The Industrial Finance System 3.07 Prior to 1977, the institutional sources of industrial finance were four domestic commercial banks (CBs), DFCC and four foreign commercial banks (FCBs). Traditionally, private industry relied on self-financing for up to 80% of its fixed capital needs and on commercial bank credit to finance work- ing capital, with some rollover for long term investment. Overall, commer- cial bank credit accounted for about 85? of all institutional finance to private industry. Although public sector industrial corporations obtained bank credit, budgetary allocations accounted for 80? of their financial requirements. DFCC was the only source of long term equity and loans, and had a monopoly in foreign exchange lending to private industry. Since 1977, a significant number of new types of financial institutions have joined the system. The expanded system consists of The National Savings Bank (NSB), two f/ Defined as a privately or cooperatively owned enterprise with fixed assets excluding investment in land and building with a book value not exceeiing Re. 4 million. This Ilalt was Re. 1 ml i Ion under the SMi I loan. - 8 - public and two private domestic commercial banks, two industrial development banks, four regional rural development banks (RRDBs), 21 FCBs, 24 foreign currency banking units of the commercial banks, 52 finance companies provid- ing leasing and hire purchase facilities, three major specialized leasing companies, several provident funds and insurance companies and two merchant banks. There are six money brokers who operate ta, the interbank/secondary market. In addition to the institutions monitored by the Central Bank of Sri Lanka (CBSL), there is an active unofficial credit market. 3.08 Commercial banks mobilized more than 50% of total institutional deposits while NSB accounted for about 282 of deposits in 1989. The two Government-owned national commercial banks (NCBs) - the Bank of Ceylon (BOC) and the People's Bank (PB) - dominate the commercial banking system account- ing for approximately 90Z of deposits. Most commercial bank resources come from short term deposits (less than 12 months). Because of the Business Turnover Tax (BTT) and high reserve requirements, and the cost of servicing large non-performing asset portfolios, the NCBs need high lending margins (6-82). 3.09 The non-bank financial institutions involved in providing services to the industrial sector include finance companies, leasing companies and two merchant banks. The merchant banks have been inactive mainly due. to the slow development of the securities markets. However, because of the tax advan- tages of leasing, finance and leasing companies have developed rapidly; at present more than 50 finance companies offer hire purchase finance. Six leasing companies, including Lanka Orient Leasing in which IFC has a share- holding, also provide term financing. These institutions have grown rapidly by offering high interest rates on deposits and lend for consumer goods and transport equipment. 3.10 The commercial (services, trade) sector accounts for over 502 of com- mercial bank lending followed by industry with a share of about 252. This pattern of sector tl distribution of commercial bank credit has remained broadly unchanged between 1980-89. However, the ratio of commercial bank credit to industry as a proportion of its industrial value added is about 38?, considerably higher than the similar ratio for other sectors, pointing to the greater availability of credit for industrial purposes. The bulk of commercial bank lending to industry (652) is short term although the shares of medium term (between one and five years) of 24? and long-term (over 5 years) of 10? are fairly high compared to many other developing countries. As of the end of 1989, private firms accounted for 722 of total industrial credit outstanding from commercial banks with the balance of 282 due from Government corporations. 3.11 Commercial bank lending is highly security-oriented with banks going for either liquid forms of collateral, e.g. documentary bills, trust receipts, pro-notes and bonds or real estate. Such a conservative policy has resulted in small or newer firms having very limited access to commercial bank finance. The Central Bank has been operating a credit guarantee scheme for small and medium scale borrowers under the SMI loans since 1978 but its effectiveness in reducing collateral requirements or increasing the overall - 9 - flow of credit to such firms is questionable. There is a substantial varia- tion in interest rates charged to borrowers depending on the collateral provided; e.g. real estate backed loans carry an interest rate of 16.4Z com- pared to unsecured loans at 21.92 which attests to the reliance on collateral rather than cash flow in lending and pricing decisions of commercial banks. A major problem of new entrepreneurs as well as established private firms is the paucity of equity capital which has resulted in highly leveraged borrow- ing thereby, increasing risks. Although bankers are well aware of this issue, no significant initiative has been taken to address it. 3.12 The liberalization of entry into the banking system for foreign banks after 1977 has resulted in significantly increased competition resulting in pressures on interest margins and profits. The state banks, because of their extensive branch network have been able to maintain a high share of deposits compared to the private domestic banks. Gross interest margins as a percent- age of assets (difference between interest earned and interest paid plus other net income) for state banks declined slightly from 3.32 to 3.22 but substantially for private domestic banks (4.0% to 2.5%). Similarly the decline of profits before taxes and provisions have been sharper for private versus the state banks. Nevertheless, the state commercial banks are believed to have significant levels of non-performing assets. Under the third SM project, IDA funded technical assistance for both the state banks to analyze portfolio quality and restructure their operations. D. Credit Allocation and Interest Rates 3.13 A national credit plan is used by the Central Bank to influence, at the aggregate level, domestic credit allocation by commercial banks but these credit allocation policies do not seem to affect significantly the behavior of lending institutions. The plan is based on estimates of credit availabil- ity derived from the Central Bank's annual monetary programming exercise and takes into account credit ceilings and estimated demand for credit. The projected available credit is then allocated to priority and non-priority sectors. However, the plan's actual impact on credit allocation is probably limited as banks independently decide on the sectoral classification of a particular credit and borrower are often engaged in several sectors and can transfer loan funds between sectors to get around ceilings. Credit ceilings are also used by the Central Bank to limit the volume and allocation of credit. For example, in June 1989, the Central Bank limited the total amount of advances granted and outstanding by commercial banks to the private sector to the level of such advances as of May 31, 1989. However, agriculture, export finance and industry were exempted from the ceiling which again pro- vides room for credit leakage. In addition, to reduce the demand for import credit, banks are required to take a cash deposit equal to the value of a letter of credit (L/C) before opening a letter of credit in favor of an importer. - 10 - Selective Credit 3.14 In addition to influencing credit allocation, through the national credit plan and credit ceilings, the Central Bank directly intervenes in bank lending for priority uses or sectors through rediscounting loans made by commercial and development banks at on-lending rates set by the Central Bank, often at below market rates. However, the volume of refinance is relatively small. Under the Central Bank's medium and long-term credit fund (MLCF), the total amount of refinance granted for industry and the hotel sector in 1989 was Rs. 441 million, compared to Rs. 35 million and Rs. 390 million in 1987 and 1988. The increase in refinancing in the past two years is due to advances to commercial and development banks for rescheduling loans to hotels which were badly affected by the ethnic violence. Interest Rate Policies 3.15 Deposit rates are influenced by the Government indirectly but have not been maintained in real terms at positive levels, on a consistent basis (Annex 1, Table 1). The discount rate of the Central Bank (the Bank rate) has basically ceased to have an influence since 1984 when the discount window was discontinued. Commercial bank rates are influenced by the floor rate on treasury bills established by the Central Bank and the relatively high rate offered by the National Savings Bank (NSB) on time deposits. However, since the Treasury bill rate is not a market clearing rate, it provides a mislead- ing signal to lenders and borrowers. These is a need for a reform of the auction process focussing on the role of the Central Bank as a participant in non-competitive bidding. 3.16 Lending rates are generally freely set by most institutions although the Central Bank reserves the right to set maximum rates. The spread between commercial banks' deposit and lending rates have been fairly high due to high reserve requirements, high operating costs and losses from non-performing loans. The Central Bank publishes a weighted average prime lending rate (AWPR) of commercial banks on a weekly basis but there is a considerable spread in the rates charged by institutions for specific purposes. The AWPR, moreover, reflects the lending rate for short-term loans. The lack of a long-term rate benchmark has created an anomalous situation in the setting of interest rates for medium and long-term maturities. The present system for setting fixed MLT rates for industrial loans is based either on the average weighted prime lending rate minus a spread of 61 or alternatively on the average weighted cost of deposits (AWDR) plus a spread to be determined by the lending institution. Since both benchmarks are related to short term rates, both parties to the loan contract are thus exposed to potentially large interest rate risks. Until market based benchmark rates can be estab- lished for MLT loans, it is imperative to adopt variable interest rates to reduce the potential interest rate exposure. To reduce investor uncertainty, the possibility of introducing rate caps or other such devices needs study. The acceptability of such a system of variable rates needs to be explored but should not pose a serious problem, given that a substantial part of short- term commercial bank lending is rolled over on a regular basis. Moreover, - 11 - without flexibility in rate setting, medium and long-term lenders such as DFCC and NDB are likely to remain dependent on subsidized sources of funding. E. Capital Market 3.17 The market for shares and other securities in Sri Lanka is undeveloped and stocks and debentures have not been significant sources of finance for industry. Although a small number of brokers make a market for shares and about 300 companies are listed, most are closely held or dormant, and trading volume is thin although there has been substantial increase in trading volume in 1990. Development of the market has been hampered on the supply side by the relatively small number of medium and large companies in Sri Lanka and the strong tradition of closely held ownership. On the demand side, interest in investing in shares is low due to relatively high returns available on fixed interest deposits and commercial activities. GOSL has taken steps to revitalize the market through (i) establishing a Securities Council to moni- tor the operations of the capital market, (ii) consolidation of the opera- tions of the country's two stock exchanges which have not operated effective- ly; and (iii) the formation of an equity fund. 3.18 GOSL has been attempting to stimulate greater securities activity and the development of primary and secondary markets in Government instruments by provid-ing tax concessions for companies going public, reforming the system of share underwriting, developing new investment and unit trusts and issuing shares in profitable public sector corporations. This would comple- ment the establishment of the Sri Lanka Capital Development and Investment Company (CDIC) by GOSL, NDB and other Sri Lankan financial institutions, including the state-owned commercial banks, to provide equity to new ven- tures, particularly joint ventures between public corporations and private parties. IV. EVALUATION OF SI I (CREDIT 942-CE) AND SMI II (CREDIT 1182-CE) A. Project Objectives and Scope 4.01 The major objectives of both the SMI projects (as well as the subse- quent SMI III) were to increase output, employment, and exports through assistance to SMI and by addressing constraints hindering their growth, productivity and technological improvements, particularly in subsectors with significant export potential. Both SMI I and SMI II were similar in design and comprised two major components - a credit and a technical assistance component; under both projects, the Bank also included funding to assist GOSL undertake studies on trade policy, industrial incentives, etc. which aimed at broader policy reforms, an unusual feature for a SMI operation. The main features of the two projects as well as SMI III are summarized below. - 12 - SMI I 4.02 Credit Component. Under the SMI I credit component, a separately managed SMI Refinancing Fund (an apex body) within NDB was established to review subprojects, and provide partial refinancing of subloans made to SMIs which met appropriate financial and economic eligibility criteria. Responsi- bility for subproject appraisal, on-lending and supervision was delegated to five participating credit institutions (PCIs): two public commercial banks, BOC and PB; two locally controlled private commercial banks, HNB and CBOC; and DFCC. The project aimed at improving the capabilities of the on-lending institutions to undertake appraisal-based lending by assigning SMI special- ists to headquarters and key branches; providing SMI specialists and manage- ment with training in simplified SMI appraisal and supervision; and introduc- ing systems and tools to facilitate this work; and providing inducements to increase financing of viable SMIs, through provision of attractive spreads, a credit guarantee scheme and a special capital facility for entrepreneurs with subprojects of strong economic merit but which are unable to meet the normal equity requirements. 4.03 Technical Assistance. Under the SMI I TA component, funds were pro- vided to employ local/expatriate advisors tot (a) reinforce IDB's promotion and technical service programs for SMIs by improving its regional extension network, starting a subcontracting exchange, and establishing staff training and technical facilities for rubber products, building materials, foundries and light engineer-ing subsectors; (b) improve the focus and effectiveness of other SMI technical service agencies by providing finance for (i) training programs in garment manufacture; (ii) extension programs in white coir extraction and processing; and (iii) an export organization for handloom products; (c) assist NDB and the PCIs to improve their SMI and general lend- ing operations; and (d) assist GOSL to carry out general policy studies on aspects of export incentives and the tariff system, which affect industrial efficiency, expansion, and export prospects. SMI II 4.04 Under SMI II, the same on-lending structure was kept for the credit compo-nent but greater emphasis was given to assisting export-oriented SMI in light industries deemed to have high export potential. Increased emphasis was given to institution building of NDB and the PC1s through training and consultancy. 4.05 Under SKI II, the TA program sought to strengthen IDB's promotion and extension programs with improved organization and financing for coaching of regional extension officers, a SKI consultancy fund to tap local private expertise, and engineering service facilities. To promote export-oriented SMI, the project aimed at strengthening EDB in its program of export promo- tion and supply development in key light industrial product lines, through practical consultancy and training, sales trips, policy studies and pilot projects; exporters and manufacturers would be major participants in imple- menting these elements. A small amount of funding was earmarked for the - 13 - expansion of successful subsector schemes launched under the first SHI project. SMI III 4.06 Under SMI III, the credit component through the SHI Fund to private sector SMIs remained the same except that eligibility criteria for participa- tion by the banks in the scheme was strengthened and some changes were made in the credit guarantee scheme. The TA component to help GOSL and relevant agencies was redesigned to: (i) improve the efficiency of the financial sector through continued training for the PCIs, and TA was made available to the BOC and PB to develop action programs to improve their overall operating and financial efficiency; (ii) improve the access of indirect exporters to duty drawback and export credit facilities; (iii) improve the efficiency of PHEs through the implementation of action programs developed under ongoing industrial development projects; and (iv) establish a SHI technical assistance grant scheme. SubproJect Conditions 4.07 Under SMI I, US$12.0 million of the proposed credit of US$16 million was to be on-lent by the Government to the NDB via a subsidiary loan agree- ment for the account of the SMI Fund on the following termst (i) the loan to be denominated in Sri Lanka Rupees, with Government bearing the foreign exchange risk; (ii) 9Z) interest per annum; (iii) fixed amortization schedule over 13 years, including four years grace. The SMI Fund provided refinancing to credit institutions for eligible SHI loans on the following terms: (i) refinancing up to 80Z of loan amount; (ii) interest per annum of 102 for loans up to Re. 100,000 (US$6,400), 112 for loans over Rs. 100,000 up to Rs. 500,000 (US$32,000), and 12? for loans up to Rs. 1,000,000 (US$64,000); (iii) term would be parallel to the term of the individual loans, expected to average 5-7 years. The average spread for the SHI Fund was about 2?. 4.08 Under SMI II, the US$28 million subloan component of the proposed credit of US$30 million was to be on-lent by the Government to NDB via a subsidiary loan agreement for the account of the SMI Fund on the following terms: (i) the loan to be denominated in Sri Lanka Rupees, with Government bearing the foreign exchange risk; (ii) initial interest of 11% per annum; (iii) fixed amortization schedule of 14 years, including 4 years of grace. The SMI Fund provided refinancing to credit institutions for eligible SMI subloans on the following terms: (i) refinancing for up to 80Z of loan amount; (ii) initial interest per annum of 13? for loans of up to Rs. 500,000 and 14? for loans of Re. 500,000 to Re. 2 million; (iii) maturity for a maximum of 10 years, including 2 years of grace. The credit institutions made subloans to eligible SMIs on the following terms: (i) maximum sub- project size of Re. 4 million, excluding permanent working capital; (ii) maximum subloan size of Rs. 2 million, including permanent working capital; (iii) initial interest of 18% per annum with review of the interest rate every six months, and automatic revision if commercial bank rates on term loans to large industrial borrowers changed; (iv) up to 10 years maturity, with grace periods of 3 months to 2 years; and (v) sponsors' equity - 14 - contribution of at least 20% of subproject amount. In the event that the final on-lending rate to SMIs changed, NDB's SMI Fund spread would remain at least 2Z to 32 and the PCIs' spreads at least 4% to 52 depending upon subloan size. 4.09 Under SMI III, GOSL would on-lend the project proceeds to NDB for 18 years, including a 5 year grace period, at an initial rate equivalent to seven percentage points below the average weighted prime rate for the commercial banks for short term (i.e. 12 months or less) lending operations. In turn, NDB would refinance PCI operations at the average-weighted prime rate, less six percentage points. The PCIs would relend the proceeds at a rpte, fixed or variable, sufficient to cover their costs of operation and the project risk. Given the spread between the IDA and GOSL on-lending rates, GOSL would bear the foreign exchange risk. On the basis of the then current interest rates and spread requirements, the re-lending rate would be between 132-16%, which compared favorably with the prevailing commercial bank funding of 142-222. The mechanism for establishing interest rates and spreads would be reviewed semi-annually and, if necessary, adjusted based on procedures agreed between GOSL and IDA. The actual rate charged to NDB, and subsequent- ly to the PCIs, was to be amended on January 1 and July 1 of each year to reflect any significant movement in the market reference rate, and to remain positive in real terms vis-a-vis inflation as reflected by the Colombo Price Index. The maximum subproject repayment period would be 10 years, including a 2 year grace period. B. Implementation Results 4.10 The implementation experience of SMI I is summarized in the PCR (p. 15, Report No. 6795); for SMI II the audit mission collected relevant information directly from appropriate banks and agencies. However, the paucity of accu- rate data on the actual performance of subprojects financed raises consider- able doubts on the estimated benefits, particularly with regard to employment generation, one of the cardinal objectives of IDA lending to this group. 4.11 SMI I was rapidly committed due to the large demand for financing from this group although disbursements were delayed due to cancellations and the ethnic conflict. There have been suggestions from knowledgeable sources that the strong loan demo stemmed partly from the substitution of bank financing for financing from ;Uo informal market where the cost of funding was substan- tially higher. The PCI's loan approval procedures were also lax; disburse- ment procedures in many instances did not require payment to suppliers or contractors and the loan funds may have been redirected to other uses because of poor supervision (see also PCR, para. 5.06). The PCI's also actively promoted the first credit line and almost half of the loan amount (49Z) was on-lent to new firms or entrepreneurs. SMI II on the other hand was committed and disbursed much more slowly because of the over-optimistic assessment of loan demand under SMI I, the saturation of loan demand from the traditional sectors, and the PCI's increasing awareness of the poor repayment record of SMI borrowers, particularly new borrowers. The ethnic disturbances added to the problems. - 15 - 4.12 The two SMI projects mainly financed enterprises in traditional !ndus- tries: food processing (272), construction materials (102), metal products (82), printing and paper products (62) and wood industries (5.52) (Annex 2, Table 1). A total of 3679 subprojects were financed (1741 for SMI I and 2491 for SKI II) with an estimated incremental direct employment generation of 36,306 jobs, although the accuracy of the latter figure cannot be confirmed (para. 4.14). Under SMI I, the average subloan size was Rs. 168,000 and 922 of subloan were below Rs. 500,000. Under SMI II, with the increase in sub- loan limit to Rs. 4 million, about 422 of the loan amount went for subloans over Rs. 1 million; the average subloan size was over Re. 400,000 ($20,000) reflecting the larger proportion of expansion projects (Annex 2, Table 2). 4.13 The major concentration of subprojects were in urban areas: Colombo (37Z), Gampaha (182) with smaller subprojects located in smaller towns (Annex 2, Table 3). The sectoral composition and regional distribution of the sub- projects financed reflects the sectoral and regional distribution of existing SMI units, since most of the subprojects were expansions of existing firms. Moreover, in Sri Lanka, as in most developing countries, new SMI entrepre- neurs usually tend to imitate existing SMI firms, leading to concentration in selected industries. Social and cultural factors tend to reinforce such imitative behavior. The lack of effective programs of entrepreneurial development and technical assistance may have compounded these trends. It would not be unreasonable to conclude that the two loans had very limited impact on promoting new technological processes or products or contributed meaningfully to export growth or rural industrialization. 4.14 The lack of reasonably accurate follow-up data on subproject perfor- manc3 has made it difficult to carry out an objective analysis of the bene- fits of the projects. For subprojects under SKI I, a sample survey of some 133 loans indicate that 442 had cost overruns up to 2002. The PCR states that the ex-post internal financial rate of return (IFRR) for subprojects range from 152 to 302 compared to estimated IFRR of between 152 to 502 (average 302) at appraisal (PCR, para. 5.08), however, such estimates were unavailable in the field. The management information system established by NDB for SMI III does not appear to provide systematic information in this area. Given the very poor repayment record of subprojects under SMI I, these estimates of ex-post IFRR appear to be In conflict with the repayment perfor- mance. The PCR also estimates that 202 of the subprojects financed under SKI I contributed directly or indirectly to exports although no data on export performance or productivity is provided. Judging from the distribution of loans in potential export industries this estimate would appear to be on the high side. For SMI II, NDB carried out a sample survey in May 1989 of the actual performance of 66 subprojects; 33 subprojects (502) had cost overruns of between 52 to 200Z, 9 were completed below cost and the remainder (24) were completed at cost. In terms of financial performance, 12 subprojects (182) were operating at a loss or were closed, while 11 (172) had annual net profits as a percentage of investment (APOI) between 02 to 5%. Fifteen subprojects had an APOI of between 52 to 152 while the remainder exceeded 152. It is difficult to generalize from this small and perhaps biased sample but it appears that slightly over one-third of the subprojects were finan- cially shaky, primarily because of cost overruns or poor sales performance. - 16 - The percentage of project costs financed by loans appears very high with most cases falling between 60Z to 902. 4.15 In the absence of reliable data on the ex-post economic and financial performance of subprojects, subloan repayment performance is a good proxy for measuring the actual attainment of the subproject's objectives. For SMI I the cumulative collection ratio has ranged between 66% to 72Z between 1982- 1986 with principal in arrears as a percentage of principal outstanding being 752 as of December 31, 1986 (PCR Annex 7 and 8). The cumulative collection ratio stood at 88.2? in mid-1990 but a significant portion of the arrears (95Z) represent hard core arrears of over 24 installments. The performance of SKI II has been only slightly better. Between 1986-1989, the number of loans in arrears as a percent-age of the total loan portfolio steadily increased from 35? to 60.0? with the principal affected by arrears over five months representing some 41? of total principal outstanding (Annex 2, Table 4). The average annual collection ratio as of December 31, 1989 was only 62.51 with some of the major participating banks showing significaatly lower annual collection ratios (BOC - 50.22; PB - 52.5%) (Annex 2, Table 5). 4.16 The performance of SMI III has been substantially better than SMI II but the trend is nevertheless of concern. However, the new debt recovery law should help banks to deal with problem clients more expeditiously, particu- larly those that are willful defaulters. As of December 31, 1989 some 27? of loans (by number) were in arrears while the principal affected by arrears as a percentage of total principal outstanding was almost 6?, up from 2.8? in the previous year (Annex 2, Table 6). Annual collection ratios for the two major PCI (BOC and PB) were below 80? (Annex 2, Table 7). These trends are disquieting given that the PCIs are now more concerned about portfolio quality than earlier. A survey of projects financed under SMI III indicate that only some 805 out of 1276 (63?) operating projects were performing satisfactorily (Annex 2, Table 8). C. The Role of NDB and PCIs NDB 4.17 NDB was assigned an apex role under both the SMI projects (as well as in SMI III) and benefitted from technical assistance under both loans (paras. 5.27-5.28). The main functions of its SMI Department are to (a) operate a SMI refinancing fund to recycle subloan repayment under the loans; (b) monitor loan commitmeats and utilizations including sectoral exposure limits and provide regular reporting to IDA; (c) review appraisals above the free limit; (d) liaise with the SMI Credit Guarantee Scheme of the Central Bank; (e) train staff of PCIs on project appraisal procedures; and (f) undertake subsectoral studies. NDB received an initial spread of 1? under SMI I which was increased subsequently to 3?; however, under SMI II, the spread was eliminated; subsequently to defray the cost of running the SMI Department, a spread of 1? was provided under SMI III. 4.18 The SKI Department has attempted to upgrade standards of project appraisal of the PCIs by establishing norms for financial parameters, and - 17 - assisting in identifying sources of machinery, etc. Under SMI I, except for DFCC, project appraisal and disbursement procedures of the PCIs were slack and supervision poor (PCR, para. 5.06). Under SMI II, appraisal standards somewhat improved, both through a recognition that the loan program was not a give-away program, better monitoring of subproject appraisals by NDB and an extensive training program for PCI officers funded under the credits. The SMI Department, with the assistance of IDA, has Implemented a quarterly reporting system for the PCIs. The PCI branches provide the basic data directly to the SMI Department which then collates and provides the summary information to the PCI headquarters. This system has enabled NDB to monitor key subloan utilization data as well as most importantly details of collec- tions and arrears in a timely manner. However, a serious weakness of the monitoring system is the lack of an in-buil, mechanim to collect information on all subproject's ex-post economic and financial performance; this prevents an adequate assessment of the true economic benefits of the subprojects. It would be useful if the quarterly reporting system provided data on the total investment cost of subprojects to enable calculation of key economic ratios. PCIs 4.19 The projects initially employed commercial banks with large branch networks for on-lending on the assumption that smaller firms, particularly those located in small town and non-urban areas have better access to the credit lines. In general this assumption appears to have been borne out (PCR, paras. 7.06-7.07) but only two of four commercial banks (BOC and PB) -actively participated in the on-lending operations (Annex 2, Table 8). DFCC, which had minimal participation in !MI I, had the second largest share of subloan approvals in the second operation. However, the average size of its subloans approvals was Rs. 0.9 million compared to Rs. 0.36 million for the other PCIs. Compared to the other PCIs, DFCC's portfolio of SMI subloans (covering both SMI II and SMI III) is in better shape although DFCC has financed comparatively riskier projects (new entrepreneurs, new product areas) than the other PCIs. This reflects DFCC's much stronger project appraisal and supervision capabilities. 4.20 One of the major project objectives was to strengthen the capability of the participating commercial banks in undertaking term financing both for fixed assets and working capital without relying exclusively on collateral. The two state-owned banks set up their own SMI departments and have invested substantial effort in training staff on SKI lendingg but because of staff transfers, promotion, etc. these departments continue to be inadequately staffed. As a consequence, until recently, SMI lending decisions were hig_ y centralized in these departments; individual loans had to be approved at the Assistant General Manager level. Following studies by consultants financed under SMI III, plans are underway to decentralize and delegate such decisions to branch managers. Part of the problems can be traced to the lack of rigor - 18 - of the training programs themselves. Loan supervision is a particularly weak area and there is no systematic monitoring of subproject performance except when the client is not current on payments. The departments also have very little capability, if any, of offering non-financial advice to clients in difficulty. There is also li.'tle evidence that the banks are systemati- cally basing their lending decisions on project appraisal reports and cash flow criteria rather than on security. A conflicting signal may stem from the requirements of the Central Bank's Credit Guarantee Scheme which turns down claims if adequate security has not been taken against the loan. 4.21 An important issue concerning the design of the credit component relates to the eligibility criteria for participation by financial intermedi- aries. Under SM II, the credit component was opened up to all interested commercial banks to encourage competition. However, as the PCR for SMI-I notes (para. 3.15) *this approach hampered the achievement of a uniformly high standard of subproject appraisal and supervision because of the inabil- ity of the banks with low level activity to organize adequately for SMI lending... Limiting the participation in the credit program to PCIs which can meet clearly stated eligibility requirements (i.e. staffing) would facil- itate and improve future SMI operations. This is because lending to SMI raises difficult and very different issues during appraisal and supervision compared to lending to large firms. Acquiring this expertise requires time, capability, and on-the-job training. Experience of commercial bank lending for SMI in other countries strongly support this point. In fact, where commercial banks are significantly oriented towards lending to small enter- prises (e.g. the Citizens National Bank of Korea, or the Halk Bank in Turkey) the results have been very positive. Thus, only institutions which are prepared to make a long term commitment to SMI development through staffing and lending policy should be eligible to participate in future operations. It would be highly desirable if one or both of the state-owned banks were to become more strongly committed towards SMI lending, by building up special- ized capabilities in this area. For example, the ability to provide non- technical business advisory services to help clients in all phases of project development and implementation would augment and complement the financial assistance provided. This could be achieved by selecting initially a few large branches in locations with concentrations of SMI and staffing these with a small group of specialists" who could analyze problems and advise SMI clients. This step would complement the private sector technical assistance initiatives being pursued under SMI III. 1/ About 600 SMI officers were exposed to one and a half days training on appraisal and a equal amount of time on follow-up; 400 were trained for three days on appraisal and one and a half days on follow-up; and only 200 were trained for four days on appraisal and follow- up. & These specialists could be hired as consultants to get around salary restrictions applicable to state banks. Flexible working arrangements may also allow branches to tap specialists who are regularly employed In universities and businesses. - 19 - D. Technical Assistance (TA) for SMI 4.22 Both projects included substantial technical assistance (TA) compcnents to address technological, marketing, managerial and skills problems of SMI in subsectors with strong growth employment and export potential as well as to strengthen the institutional capabilities of the PCIs and NDB. IDA financed equipmeat, advisory inputs, and training to enable the Industrial Development Board (IDB), the main government agency involved in assisting SHI, to establish specialized product development and extension centers in the following areas: rubber products, building materials, and heat treat- ment, common service facilities, and a subcontracting exchange to serve the engineering industries. A Clothing Industry Training Institute (CITI) was also established under the Ministry of Textiles. Under SHI II, the TA compo- nent focused on completion of the initiatives launched under SMI I giving particular emphasis to building up IDB's extension activities at its regional branches through *coaching' of extension officers by specialists as well as expanding the engineering service centers. A technical consultancy fund was also established in IDB to finance the provision of specialized extension services employing private sector consultants (para. 4.31, SAR, SMI II). The component also included technical assistance to the Export Development Board to promote and assist SMI exports in 'light industrial" product lines. 4.23 The TA programs funded under both projects were implemented with rather mixed results. An independent assessment by GOSL of the impact of the tech- nical assistance programs established under the aegis of IDB is reproduced in Appendix I. The Rubber Products Development Center has been the most active of all the extension centers established by IDB but even 'the impact it has had is minimal and the large scale sector is mostly beyond its sphere of influence" (page 3, Appendix I). The subcontracting exchange processed 62 orders worth Rs. 31 million in 1988 but its role has been 'mainly that of a broker conveying market information to potential supplierso. While this is a useful role, the exchange has not worked as a true subcontracting exchange involved in intermediating capacity information between small and larger firms. A major limitation to the functioning of the exchange is the limited number of large engineering industries that require subcontracting services coupled with the small number of SMI engineering firms capable of doing precision work. The consultancy services made available to SMI firms by IDB failed to have much impact except in isolated cases (e.g. mushroom farming). However, the coaching provided to industrial extension officers appears to have produced some benefits in terms of improving their effective- ness but the sustainability of the program is questionable. The only center which has been successful in its mandate is the Clothing Industry Training Institute (CITI), whose main function is the training of garment industry workers for garment firms involved in exports. 4.24 Two factors have affected the successful implementation of the program firstly, the extremely ambitious scope of the overall TA program whose successful implementation required exceptional organizational and management skills on the part of the management of the relevant agencies; secondly, the lack of adequate incentives (salaries, etc.) to IDB's professional staff which made it impossible for IDB to retain staff trained at high cost. Thus, - 20 - in the Engineering Division alone, 13 out of 23 trained officers left the IDB by 1987. It is clear that IDA was aware of the gravity of this problem at IDB and had made it a condition of disbursement that 0IDB would have ratified a statement of policies and would have launched actions on these aspects of IDB's organization, salaries, promotions and training, agreeable to IDA*. To ensure that these policies were actually implemented, IDB was required to submit annual action programs covering organizational and staffing changes and planned Implementation of elements under SMI II for IDA concurrence (para. 4.29, SAR). Unfortunately, it appears that IDA did not ensure through its supervision that the above measures were carried out effectively. 4.25 A fundamental issue that arises in this review concerns the design of the overall TA program. It appears that the various industrial extension centers established under the project, with the major exception of the CITI and the lapidary school were mainly supply driven and not based on a careful analysis of demand for such services from SMI. This appears particularly true of the various engineering service facilities. Moreover, by establish- ing these centers under the ownership and management of the government most likely reduced their market responsiveness. An alternative approach to addressing the TA needs of SMI would be to induce private sector firms to invest in such facilities and subsidizing their use by SMI until they become financially viable. This would have ensured a higher level of operating efficiency as well as subjected the investments to market tests. 4.26 A part of the TA proceeds under SI II was earmarked for the promotion of exports of light industrial products, e.g. rubber, gems and jewelry, etc. (para. 4.33 of SAR) of SMI firms. The Export Development Board was allocated US$800,000 for providing SMI with practical consultancy, training, sales and exposure trips, etc. for export promotion as well as advisory assistance in improving Sri Lanka's export policies and procedures. The EDB's influence on improving export policies and procedures has been quite significant and positive and is discussed more fully in para. 6.26. 4.27 The major uses of the TA funds by EDB under SMI II was for the estab- lishment of the Lapidary Training Center, the Jewelry Training School and the Mushroom Development Center as well as in the provision of training, consul- tancy and market development assistance to SMI entrepreneurs. The Lapidary Training Center, in particular, has been quite active in the training of a large number of gem cutters and polishers and has had a catalytic effect in encouraging the establishment of a number of small private workshops. The / The Export Development Board was established by G08L in August 1979 to promote the expansion of Sri Lanka's exports, particularly non-traditional exports through both improving export policies and procedures, assisting exporters with trade information, and market opening assistance, and assisting in the establishment of export-oriented projects. EDO is financed partly by a surcharge in tariffs applicable to certain imports. Over the decade of the eighties, EDB has grown into a large institution with a wide range of activities stretching from financing of export-oriented projects, administering export incentives programs and promoting non-traditional exports through product development and marketing assistance. A recent evaluation report by the International Trade Center recomends a rationallaation and consolidation of D1B's activities to focus on product and market development involving some priority product areas in order to improve its effectiveness (ITC/DTC/90/1298). - 21 - other two centers have also had some success in diffusing technology and export marketing skills to entrepreneurs. The success of these centers as well as that of CITI suggests that center mainly providing training to skilled workers for specific export industries are likely to be more effec- tive than centers involved in such diverse tasks as product development and consultancy services. The latter tasks in general are more diverse extension experts and require greater skill and experience which may account for their less successful performance. Overall the EDB has been able to develop some degree of expertise in assisting SMI firms in product and market development activities. In contrast to the IDB, EDB's management appears to have been more successful in building up staff with a considerable degree of expertise and professionalism. However, EDB also has been unable to compensate its staff in line with the market which has led to a great deal of turnover .3 well as erosion of staff morale. EDB's management is attempting to deal WLth these issues as part of the rationalization effort underway. E. Sustainability Project Benefits 4.28 Based on the information available from the limited surveys of sub- project performance and the repayment performance of subborrowers, the sustainability of a large segment of subprojects financed under SMI I is doubtful but the situation is slightly better for SKI II. Sustainability in this context refers to the ability of the subprojects to continue to generate expected benefits over their useful life. These benefits include employment, output and profits. Without financial viability it is likely that employment and output levels would not be maintained. Sustainability of Institutions 4.29 The sustainability of the institutions supported through the TA pro- grams also presents a mixed record. The lack of success so far of the vari- ous initiatives supported under the umbrella of the IDB and the serious dif- ficulty of the IDB in retaining qualified personnel makes the sustainability of these initiatives very doubtful. On the other hand, CITI and the EDB have had considerable success in both assisting SKI as well as in overall export promotion. The sustainability of these benefits is more likely, particularly if EDB is strengthened through greater focussing of its core activities. 4.30 With regard to the issue of SMI financing, the sustainability finding is less clear although IDA is embarking on a fourth SKI line of credit. It is not certain that the financial institutions, particularly the commercial banks, have developed either a capability or a sense of commitment in this area that they would continue to finance SHI from their own resources without access to refinance from the SKI department. The PCI's perception, that SHI lending carries high risk and high transaction costs suggests that the volume of SMI financing would decline without support from Government, particularly in the form of refinance at a high spread. DFCC's SKI lending operations, although targeted at the relatively higher end of the SKI range has been more successful in that subprojects financed have a higher chance of viability and - 22 - operations are profitable. However, DFCC's ability to finance SMI lending from its own resources would depend on its ability to mobilize local currency resources at an appropriate cost (para. 5.11). F. Conclusions 4.31 The two SMI projects were implemented with mixed results. On the posi- tive side, the credit financed a large number of subprojects which created a significant number of jobs (even after discounting for job losses due to the subsequent failure or poor operational performance of the borrowers) at a very low capital cost per job of about US$1500). The employment impact of these projects is extremely important in a country with a significant level of unemployment. The projects have also played a critical role in bringing SMIs into the formal financial system and providing them access to commercial bank financing for both fixed assets and working capital. The participating commercial banks, in turn, have also benefitted greatly from the training and technical assistance provided under the loans which have augmented their capabilities. The projects have also helped GOSL to acquire a greater aware- ness of the constraints to the development of the private sector, particular- ly those faced by SMI, and to formulate an integrated policy framework to address these issues (see A Strategy for Industrialization in Sri Lanka, Ministry of Industries, Sri Lanka, December 1989). The TA program for trade policy reforms, in particular, helped to build up a capacity to analyze the trade regime and make appropriate changes. 4.32 On the negative side, the projects have not been able to achieve sub- stantially a number of their objectives. The bulk of the subprojects have been in traditional product areas whose growth potential is limited rather than in products with more dynamic growth prospects. Subprojects have limi- ted export potential, either directly or indirectly and there appears limited scope for establishing inter-industry linkages. The technical assistance components of both loans seem to have fallen far short of expectations and have not achieved any significant results in terms of institutional develop- ment except in a few specific cases. The inadequacy of the TA program is reflected to a large degree in both the nature of the subprojects financed and their poor operating performance (high arrears). 4.33 The objectives with regard to strengthening the commercial banks' abilities to provide term financing to SMI on the basis of project appraisal without resorting to excessive dependency on collateral has been met to a limited extent only. Institutional development in this area appears somewhat below expectations. It appears that IDA may have misjudged the extent and depth of changes required in the commercial banks to reorient their lending practices away from collateral-based lending as well as the limitations in the overall policies and management of the two largest banks stemming from their public ownership. These issues are now being addressed under succeeding loans. - 23 - G. Lessons Learned 4.34 The PCR (Report No. 6795, paras. 7.09-7.14) points out a number of important lessons concerning the eligibility criteria for defining subloan beneficiaries, promoting sectoral and regional diversification of subprojects and financing of new entrepreneurs, constraints in utilizing public institu- tions as delivery systems for channelling technical assistance to SMI and the use of commercial banks as intermediaries for on-lending. Additional findings are discussed below. Use of Commercial Bank as Financial Intermediaries 4.35 The implementation experience clearly indicates that unless commercial banks are prepared to make a substantial effort towards building up a specialized organization structure for lending and servicing SMI loans, the results are unlikely to satisfactory. This organization structure has to be decentralized downwards, at least to the level of major branches and staffed with adequately trained individuals. Such an investment in organization building would imply that the intermediary adopts lending to SMI as part of its long-term corporate strategy and not has a transient involvement due to the availability of IDA/World Bank credit lines. Thus, in SKI lending opera- tions involving use of commercial banks, the World Bank should allow only those commercial banks to participate which are prepared to make a long-term commitment to SMI lending. Allowing all commercial banks to participate on the basis that greater competition would improve the project impact does not seem to be born out by results. Role of the Apex Institution 4.36 NDB's SMI Department has played a useful role in terms of acting as a centralized information collection agency on subloan commitments and disbursements and monitoring the collection performance of the PCIs, setting appraisal norms and improving appraisal standards, and training PCI staff. However, its impact on improving the efficiency of SMI lending operations of PCIs has been limited by its own staffing constraints. Its involvement in sectoral studies on SHI development has been minimal for the same reason. The TA fund being managed by the SHI Department under SMI III has yet to make a noticeable contribution to generating new types of investment. The effectiveness of this fund would be considerably enhanced if local consul- tants could assist potential SMI to prepare project proposals for financing by the Fund. This arrangement would also ensure proper supervision of the use of its proceeds (para. 4.39(c)). 4.37 An apex institution has an important role in monitoring and promoting SKI lending, particularly in the early stages. However, the establishment of such institutions also entails considerable institution building effort which should be recognized and provided for in the project. Additional functions that can be performed by the apex body include operation of the credit guarantee operation which would benefit from the deeper insight that the apex institution would have of SMI lending and the PCIs capabilities. Finally, a SHI fund of the type established under these projects can generate - 24 - significant resources from the "float' arising from the differences in the maturity structure of its assets and liabilities. Given the extreme shortage of equity capital faced by SMI entrepreneurs, particularly new entrepreneurs, the potential use of these resources in equity support should be explored. On-lending Terms 4.38 On-lending terms for SMI subborrowers should follow norms for commer- cial loans as otherwise first time SMI subborrowers may not observe the financial discipline required. It is also important that prudential financial ratios are observed, particularly debt service coverage and debt- equity ratios. Excessive gearing, as is observed in many SMI subprojects, increases the vulnerability of subprojects to temporary setbacks which may account for the high level of non-performing loans. Technical Assistance 4.39 The following points emerge from the reviews (a) As corroborated by the Bank's experience in other devel- oping countries, the use of public sector agencies as delivery channels for technical assistance is fraught with high risk of failure because of the inherent prob- lems of such bureaucratic organizations in performing effectively -- low staff morale and efficiency, inabili- ty to retain trained staff, and inadequate management because of restrictions on salaries and political inter- ference. In this case, the TA components were far too ambitious and did not adequately take into account the constraints arising from limited management capabilities and government regulations; (b) The product centers were set up without an adequate assessment of the demand for their services; in other words, they were supply driven. The training centers for clothing, gems and jewelry were set up in response to clearly identified demand for skilled workers in these industries which were experiencing strong growth from export demand. Consideration should be given to setting up vocational training centers in other indus- tries which have good growth potential. (c) To overcome the limited availability of trained person- nel in Sri Lanka, flexible working and compensation arrangements should be adopted by banks to induce quali- fied technicians and professional managers working in the private sector, universities, etc. to assist SMI on a continuing basis after a loan is granted. The finan- cial intermediaries could also establish technical assistance groups in-house. - 25 - (d) the high incidence of project failures in the case of new entrepreneurs as well as the paucity of projects in new technology/new product areas suggests an acute need for technical support for this class of entrepreneurs including training in business management. Given the shortage of local skills, effective training may require foreign advisory inputs including on-the-job training abroad in relevant industries. The financial institu- tions may wish to establish an entrepreneurial develop- ment center, run on private lines to deal with these needs.ZJ The TA fund in NDB could also provide assis- tance for this activity. (e) There is a scarcity of qualified consultants to assist SKI. This deficiency could be met by training programs for appropriately qualified and interest individuals who would be interested in setting up consulting businesses in the private sector. NDB and other financial institu- tions, with assistance of IDA, could help to organize these training programs. V. EVALUATION OF IDP I A. Objectives and Design 5.01 IDP I, which was the third in the series of credits to the GOSL for industrial development after 1977, was designed to increase output, employ- ment and efficiency of both private and public enterprises through both investment finance and support for policy reform (SAR, para. 3.01). It comprised a credit component (US$23 million) for on-lending by the two development finance institutions (DFIs) - NDB and DFCC and a technical assistance component (US$2 million) aimed at: (a) strengthening the system of industrial finance by improving project promotion, appraisal and super- vision procedures of the two DFIs, rationalizing the interest rate regime for industrial lending, and assisting in establishing an equity fund under NDB to provide scarce equity resources to new private projects; (b) assisting in improving trade and industrial policies, particularly with regard to tariff reform and industrial incentives, building on the study of effective protec- tion undertaken earlier under the SHI-I Credit (SAR, para. 3.08); and (c) assisting in improving the performance of public manufacturing enterprises (PMEs) by introducing corporate planning, performance incentives coupled with greater autonomy for management and encouraging ways to increase private sector participation in ownership and management of PMEs (SAR, para. 3.07). Under the credit component, NDB was expected to finance mainly private ff I0 has estabitshed a Center for Entrepreneurship Development and Consultancy Services (CEDACS). However, CEDACS could suffer from the same problem that have affected IDB's other operations. If CEDACS could be operated along privae lines with close links to the financial Institutions, It could substitute for the proposed center. - 26 - projects; financing of public sector projects was restricted to balancing, modernization and replace)ent except for joint ventures (SAR, para. 3.03). The DFIs were also expected to promote consortium financing Lnvolving a number of financial institutions with the objectives of spreading lending risks, offering a wider menu of financial services, improving appraisal and supervision standards, and providing a mechanism for bringing in investment and pension funds to finance suitable projects (SAR, para. 3.06). The TA component included assistance for the Sri Lanka Capital Development and Investment Company (CDIC), established in 1982 to provide equity finance to new ventures receiving term loans from financial institutions, and to stimulate the growth of the capital market (SAR, para. 3.05). In terms of the financing of industrial projects, IDP I was a typical DFI operation but the noteworthy feature was the provision of financing for studies which allowed IDA to engage in a dialogue to further important policy reforms involving the trade regime and the public enterprise sector. B. Implementation Experience Credit Component 5.02 The credit component of SDR 21.5 million was fully committed within the three years envisaged in the SAR. The TA allocation was enlarged slightly from SDR 1.85 million to SDR 1.865 million and was fully committed by the closing date of September 30, 1988. Disbursements were completed by March 1989, nine months behind schedule. A total of 127 subprojects were financed, of which 120 were below SDR 0.5 million (PCR, para. 5.4). Only 13 subproj- ects were above the free limit. DFCC on-lent 60Z of the credit by amount and accounted for 64Z of the total number of subprojects. 5.03 Ex-ante ERRs for DFCC's subprojects varied between 15Z (automobile battery) and 5OZ (textiles). Ex-post ERRs have not been calculated by DFCC. NDB has calculated ex-post ERRs for only two subprojects which ranged from 7% to 8%. In terms of financial performance, 68 out of 90 DFCC subloans and 32 out of 47 NDB subloans were operating satisfactorily and meeting repayment obligations on time.Y Metals, chemicals, and engineering subprojects accounted for half of the total credit. The project created 3128 jobs compared to 2,500 estimated in the SAR; the average cost per job created was Rs. 385,903 (US$12,833) compared to US$15,000 estimated. Many of the firms in difficulties are in traditional industries and services. Performance failures have been due to -#eak management and financial problems of borrowing firms as well as due to the severe civil unrest prevailing in Sri Lanka for much of this period. Against this background, subproject performance cannot be faulted too strongly. 8 These numbers refer to subloans rather than to subprojects, some of which have received more then one subloan. In the case of DFCC, some thirteen subprojects had arrears of principal and interest as a percentage of loan balance exceeding 101 as of March 81, 1989; for NDB the corresponding number was nine. - 27 - C. Performance of Financial Intermediaries Development Finance Corporation of Ceylon (DFCC) 5.04 As noted above, DFCC's performance In the utilization of the credit has been on the whole satisfactory. However, an important auxiliary objective of IDA was to continue to assist in DFCC's institution building which had been major objectives of the two previous credits through the provision of advisory inputs. This section briefly reviews DFCC's overall development and performance during the implementation of the project (1983-89). Ownership 5.05 Prior to 1983, about 561 of DFCC's shareholding was held by the local private sector, 30% by three foreign investment institutions (IFC, DEG, and FMO) and 142 by two government owned banks (BOC and PB). Following two over- subscribed issues in 1983, which increased its initial capital from Re. 8 million to Rs. 100 million, the two government banks increased their holding to 39Z, the foreign institutions to 32.4% with the balance being held by pension/trust funds, individuals and private and public corporate bodies. Although two directors are appointed by the GOSL, and two more are appointed by government-owned banks, government control or involvement is not overt. However, the presence of the two competitor public sector banks in DFCC's board may not serve DFCC's interests. Greater private sector representation might be beneficial to DFCC in its quest to become more responsive to the market. Institutional Aspects 5.06 As of March 1983, DFCC had a staff of 108, of which 39 were profession- als By 1990, the total had increased to 160, of which 76 were professionals (including 14 management trainees). Considering the sizeable growth in operations, staffing levels have been contained tightly but this appears to have been influenced by a high degree of turnover resulting from both non- competitive salaries as well as other external factors. DFCC has tried to compensate for this attrition through extensive training programs supported by IDA and ADB but success in this regard has been limited. Inadequate availability of qualified staff has been a major factor behind DFCC's failure to implement its strategic plans as well as deficiencies in certain opera- tional areas. A high level of attrition of senior executives has led to weaknesses in overall operations management. However, DFCc's overall opera- tional procedures (appraisal, supervision, dealing with problem projects, etc.) are satisfactory, although some weaknesses, particularly in appraising larger projects, have been pointed out earlier by IDA. A substantive area of weakness is deficiency in economic and sector/subsector studies. This capability will become increasingly important in a more liberalized economy. DFCC is in the process of implementing a broad-based computerized management information system which should enable significant improvements in staff and management efficiency. A fully computerized accounting system is in place. - 28 - Operational Performance 5.07 DFCC's main business involves providing long-term loans to industry (962 of gross approvals in FY90) which is supplemented by equipment leasing and bill discounting operations (the latter to finance permanent working capital). DFCC also engages in a small way in equity investments in compa- nies it lends to. Between FY1982 to FY1987 gross approvals increased by 20% p.a., although approval levels were sharply down in FY1983 due to ethnic disturbances, economic slowdown and DFCC reaching its debt-equity limit of 7:1 (Annex 3, Table 1). During the past four years (FY86-FY90) growth of approvals has increased at an average rate of 27% p.a., attesting to DFCC's success in increasing market share. Until 1982 lending for hotels was a major focus of lending, accounting for 33Z of portfolio. The collapse of the hotel industry in 1983 forced a sharp reduction in lending to that sector which reduced the hotel industry's share in the portfolio to about 12.6? in 1990 (Annex 3, Table 2(a). Food, garments, chemical products, engineer-ing goods and paper and printing accounted for over 60? of gross approvals in FY90 (Annex 3, Table 2(b). As of March 30, 1990, DFCC's investment portfolio comprised 739 projects with loans accounting for 93?, leases 3? and share invest-ments 4? of the total portfolio value of Rs. 2408.8 million. Over the past five years, the share of foreign currency loan approvals have steadily increased and accounted for over 55? of total approvals in FY90 (Annex 3, Table 3). DFCC has continued to finance SMI projects extensively; loans below Rs. 5 million have averaged about 23Z of total approvals between 1983- 89, which reflects the availability of targeted resources under the Bank's SMI credit lines (Annex 3, Table 4). DFCC's future strategy (para. 5.11) calls for a higher growth in financial leasing and bill discounting operations compared to loans, with the share of these non-traditional products increasing to 14? of gross approvals by FY1995 (Annex 2, Table 1). Financial Performance 5.08 DFCr,'s net profit after taxes (NPAT) increased from Rs. 12.5 million in 1981 to Rs. 16.7 million in 1985 and to Rs. 112.1 million in 1990 (Annex 3, Table 5). Profits after tax as a percentage of average total asseti declined from 4? in 1982 to 2.0? in 1984-85 but has improved gradually since then to reach 4.1? in 1990. Similarly, return on average equity has reached 29.2? in 1990. The deterioration in performance during 1984-85 was due to significant increases in levels of specific and general loan loss provisions, and a decrease in net spread (see para. below). In addition, DFCC stopped accruing interest on loans which were overdue by six months or more. Since 1986 the improved financial performance can be traced to the rapid growth of the portfolio, better use of leverage, continuing reduction of operating expenses and a higher earnings spread. The table below summarizes the financial indicators for FY84-FY90. DFCC's balance sheets for FY82-FY89 are summarized in Annex 4, Table 6. - 29 - Summary of DFCC*s Financial Performance and Financial Position - Key Indicators: FY194-FY1990 FY ended March 81 1984 1985 1986 1987 1988 1989 1990 Ratios ToR/*quity ratio 8.8:1 4.8:1 6.2:1 6.7:1 8.4:1 6.4:1 6.5:1 Debt Service coverage (times) 1.1 1.2 1.8 2.0 2.1 2.8 2.4 Return on equity (X) 9.8 10.8 16.8 20.5 23.0 24.6 29.2 Interest spread 6.7 8.4 8.9 4.2 4.8 3.8 4.6 Earnings spread 5.5 4.0 8.8 4.5 5.1 4.2 4.8 Operating expenses/average total asset (%) 1.8 1.3 1.0 1.0 0.8 1.1 1.2 Current ratio (times) 2.1 1.6 8.2 8.2 2.5 3.0 3.1 Collection ratio (X)o 66.3 80.9 78.8 85.1 80.3 78.6 88.7 * Collection ratio after rescheduling and write-offe. Portfolio Management 5.09 DFCC's portfolio was badly affected following the ethnic disturbances in 1983 when the hotel sector collapsed due to the virtual cessation of tourism. DFCC's exposure to the hotel sector constituted 32.6z of its port- folio in 1984; by the end of FY84 over 512 of its total portfolio was affected by arrears (Annex 3, Table 8). In April 1985 (FY86), GOSL provided refinancing of Rs. 14.3 million of DFCC's hotel arrears with funding at 6% interest through the Central Bank which has eased the situation. Partly at IDA's suggestion, DFCC responded aggressively to the deteriorating collection performance (Annex 3, Table 9) by introducing a comprehensive restructuring program covering all projects in arrears over six months. A separate restructuring unit was established to deal with corporate workouts. Never- theless, total loans affected by arrears over three months as a percentage of total loan portfolio stood at almost 20Z as of September 30, 1990. How- ever, if hotel loans, which are covered by the government moratorium are excluded, this percentage reduces further to 12.52 (Annex 3, Table 10). An important issue in this context is DFCC's treatment of hotel loans included in the relief program. DFCC does not consider these loans non-performing and has not made any specific provisions. However, when the program expires in 1993, write-offs will need to be made, the extent depending on the health of these projects. It is difficult to gauge the extent of this write-off now. DFCC has been transforming 402 of its profits which is exempt from income tax to a general reserve for loan losses which totalled Rs. 153 million in FY90. The adequacy of this policy needs to be assessed by DFCC and the Bank on a periodic basis. - 30 - Resource Mobilization 5.10 DFCC's major sources of funds in FY90 were internal cash generation (262), portfolio recoveries (422), local currency loans (8X) and foreign currency loans (242). In the past DFCC was allowed to sell 8-year bonds at subsidized rates (7Z) to local commercial banks which counted as part (up to 1/8th) of their reserve requirements. A total of Ra. 398.6 million was raised. However, with the liberalization of the financial sector, it is uncertain whether DFCC will be allowed to raise funds on concessional terms. DFCC will need to explore alternative mechanisms to raise local currency funds at market rates and utilize these resources in appropriate ways. e.g. switching to variable interest rates for working capital loans may give it flexibility to use resources raised through floating rate debentures. DFCC's ability to utilize resources mobilized on commercial terms and use it with an adequate spread will depend on macroeconomic policies followed by the Government, as well as financial sector liberalization and development. It is likely that while these riforms are being put into place, DFCC will continue to need access to concessional funding for part of its resources. However, diversification of local currency funding sources through new funding instruments as well as corresponding changes in loan and lease pricing should be explored actively. Strategic Planning, Institution Building and IDA's Role 5.11 DFCC's strategic planning and organization structure have been major and continuing foci of attention of both ADB and IDA stemming from concern about DFCC's ability to compete effectively in the changing economic environ- meat. IDA assisted DFCC's management to formulate a strategy statement for the 1982-86 period (SAR, Annex 10), which took into account IDA's suggestions on project promotion, sector studies, diversification of financial services and manpower development needs. IDA felt DFCC should give special emphasis to project promotion. Establishment and adequate staffing of a project promotion unit was made a condition of DFCC's participation in IDP-I. In addition, 24 man-months of advisory inputs was made available as TA for DFCC to strengthen project promotion activities. DFCC, however, did not act on this initiative as it felt that its regular operational staff could undertake promotion work satisfactorily in addition to normal operational activities. It was not until 1985 that efforts were made to recruit staff since staffing the unit became a condition for participation in IDP II. 5.12 Following the economic disruptions in 1983 another strategic study was carried out with the help of consultants (an Asian DFI) at ADB's initiative. Based on the study, DFCC prepared a new strategic plan for the period 1986- 91, which emphasized the need for achieving a more rapid asset growth, while diversifying products and services and improving profitability. The specific proposals for diversification were the provision of working capital loans, financial leasing, agricultural lending, export finance, insurance brokering, money market operations, unit trust management and letters of credit. The new strategy also envisaged diversification of the sources of funds for DFCC so that no one source comprised more than 201 of the total as well as the direct mobilization of local currency resources through the issue of bonds. - 31 - The internal organizational strength was to be enhanced by recruiting addi- tional staff and adding new departments, including departments for economics, development, training, etc. Ambitious financial targets envisaged an annual compounded rate of increase of gross finance approvals amounting to 17.3% p.a., a compounded portfolio growth of 23Z p.a. and growth of assets of 19.4Z p.a. The profitability targets aimed at a profit after tax increasing from Rs. 28 million in fiscal year ending March 31, 1986 to Ra. 123 million in fiscal year ending March 1991. 5.13 As discussed in para. 5.07-5.08, this strategic plan was only partially realized. While the financial indices for 1985/86 and 1986/87 were generally on target, profits were much lower in 1987/88 due to erosion of interest margins. However, the major shortfall was the failure to implement most of the new business initiatives, e.g. unit trust, letters of credit, money market operation, etc. According to DFCC management, the main reason for not being able to implement the strategy was human resource constraints arising from the departure of many senior staff with requisite skills. 5.14 DFCC commissioned yet another strateric study with the help of foreign consultants in 1987 at the instance of IDA (financed under IDP II) to re- assess its competitive thrust, the major rationale being the need for a fundamental reassessment of DFCC's role in the financial system. The consultant's study, which took into account the expected economic develop- ments in Sri Lanka, recommended that DFCC consolidate and improve its existing lending operations and diversify into advisory, consultancy, :,erchant banking and capital market operations. It emphasized that DFCC should focus on human resource development and staff motivation and strengthen its organizational capability to implement the recommendations. 5.15 Based on this new study, DFCC prepared a new strategy statement in 1988 which highlighted three functional areas for intensive development with the assistance of foreign advisors - Corporate Planning and Development, Merchant Banking, and Personnel Development. The strategy also called for changes in the organizational structure to implement the new programs and tasks more effectively. 5.16 The new strategy is under implementation with IDA advisory assistance financed under IDP III. A new Action Plan for 1991-95 has been finalized which identifies major new activities and formulates specific steps to carry these out. The action plan, which is extremely ambitious in scope, not only focuses on the development of new activities, e.g. venture capital manage- ment, property development, unit trust op:ration, provision of consultancy services in privatization and corporate workouts, but also involves the strengthening and improvement oZ a range of internal systems and procedures including appraisal, approval and disbursement of both term loans and leas- ing, legal procedures including collections, management information systems, etc. 5.17 DFCC has also reorganized itself in order to implement the new strategy. The new organization consists of six divisions, viz. Credit, Investment Banking and Promotion, Research and Development, Finance, - 32 - Legal/Administration and Internal Audit. The first three are headed by a Deputy General Manager and the last two by Assistant General Managers. The Credit Division consisting of four Credit Departments, iu responsible for appraisal, implementation and the monitoring of projects. Each Credit Officer is responsible for both appraisal and the monitoring activities of clients. The Investment Banking and Promotion Division covers the functional areas of financial services, advisory services, rehabilitation, business promotion, leasing and insurance services. The Research and Development Division oversees research, development, human resource development and information technology while the Finance Division controls three functions of accounting, loans administration and treasury functions. Finally, the Legal and Administration Division oversees legal, office administration, secretarial and personnel functions and has responsibility for branch operations. 5.18 The new strategy and organization structure seems sound and should enable DFCC to position itself properly to respond effectively to the changing economic situation in the nineties. However, while this strategy appears good on paper, success will depend on its effective implementation. DFCC's previous strategies which share a lot of common elements with the new strategy could not be effectively implemented primarily because of internal human resource constraints, although external factors, particularly the unsettled ethnic problem, were also relevant. DFCC's management is aware of this issue. There is clearly a need for DFCC to offer salaries in line with other private competing financial institutions, including foreign banks in order to attract and retain capable staff. There is also a need for strengthening management practices, particularly performance evaluation and the reward system. DFCC's success in the coming years will primarily depend on how successfully it is able to deal with these issues as well as further policy reforms in both the real and financial sectors in order for it to become financially self-sustain'ig. DFCC actively needs to explore mecha- nisms for mobilizing local currency resources from the market and also charge higher and more risk differentiated lending rates to obtain an adequate spread on its operations. D. National Development Bank of Sri Lanka (NDB) 5.19 Btckground. NDB was established in January 1979,-V with the principal objectives of providing medium- and long-term credit to private and public industries and mobilizing internal and external resources, including stimula- tion of capital markets. It is empawered to offer a wide range of financial services, including direct lending, refinancing, underwriting and financing equity and debenture issues, providiiig guarantees, accepting deposits and issuing letters of credit. NDB's authorized share capital is Rs. 2 billion (about US$50 million), of which Re. 600 million has been paid up.1 Although NDB's Act makes provision for issuing shares to the public, the / Under the National Development Bank of Sri Lanka Act of 1979. L0/ Of this amount, Re. 460 million was In cash and Re. 160 millIon in promissory notes of the NCB*. - 33 - initial issue was taken up by GOSL (672), CBC (17Z) and by People's Bank and the Bank of Ceylon (82 each). NDB enjoys the full support of GOSL, its major shareholder. In accordance with the NDB Act, GOSL bears the exchange risk on NDB's external borrowings has granted NDB a tax holiday for the first ten years of operation and guarantees NDB's borrowings from internal and external sources. NDB is under the general supervision of the MOFP and its adminis- trative budget is subject to the approval of the Minister of Finance and Planning. 5.20 Institutional Aspects. NDB's operations are controlled by its Board of six Directors, all of whom are appointed with the concurrence of the Minister of Finance and Planning. The Chairman of the Board is appointed by the Minister for a period of four years. The Board meets regularly to set NDB's overall operational policies and role in the financial sector as well as to approve all direct lending proposals. The Chairman also acts as the Managing Director. NDB was fortunate in being able to attract and retain a highly experienced and able person as its first Chairman until his retirement in 1990. His replacement is also an extremely well qualified and experienced manager. The present senior management structure has evolved from the recom- mendation of a study financed under IDP II but is yet to be fully implemented because of NDB's inability to attract and retain qualified professionals. There were twelve vacancies out of 26 senior management positions as of December 31, 1990. The staffing problem has been a serious constraint since the early 1980s but has exacerbated as more private financial institutions have entered the market offering higher salaries. Unless resolved, this problem is likely to constrain NDB's ability to become a competitive insti- tution. Recent moves to privatize NDB are a step in the right direction. Nevertheless, the salary issue needs addressing on an urgent basis. NDB's professional staffing levels have not increased significantly since 1985. While this can be viewed in a positive light reflecting increasing staff efficiency, a growing institution like NDB needs to have a reservoir of trained staff to draw upon during periods of stress. 5.21 Policies and Procedures. NDB's operational policies are governed by its Act and more specifically by its Operating Policy Statement which was last amended by NDB's Board on March 5, 1988. Although the amended policy statement provides for an increased focus on expanded operations to develop Sri Lanka's capital markets, the major operational emphasis remains on NDB's role as a project promoter and financier providing financial facilities in local and foreign currency to support the development of public and private industries in Sri Lanka. NDB has been providing assistance through (M) medium and long-term loans for fixed assets and permanent working capital requirements; (ii) refinancing of loans made by other banking institutions through the operation of the SMI Fund; (iii) equity investment; (iv) syndi- cation and underwriting of equity and debenture issues; and (v) equipment financing and leasing activities; and (vi) guarantee operations. However, its involvement to date in equity, underwriting and guarantee operations has been limited in comparison to its project lending operations. NDB's appraisal procedures and project supervision practices are generally satisfactory. - 34 - Operational Performance 5.22 NDB's operational performance is presented in Annex 4, Table 1(a). Net loan approvals including equipment finance increased from Rs. 361.8 million in 1980 to Rs. 1735.40 in 1990 or at an average annual rate of 17?. SMI refinance activities have accounted for about 20? of total approvals between 1979-89 with the share of SMI increasing during the latter half of the decade. Out of the total of 859 projects financed in the decade 1979-89, 676 projects accounting for one-third of direct financing approvals (Annex 4, Table 1(b)) were below Rx. 10 million; another one-third (141) fell between Rs. 10 million - Rs. 25 million while the remaining 42 projects were over Rs. 25 million. The bulk of NDB's direct financing has gone to the private sector. Public corporations and GOBU's accounted for only 41 loans totalling about 10? of total direct funding. In terms of sectoral distribution, metal, chemical and plastic products had the highest share (19.7?), followed by service industries-financial, construction, storage, etc. (19.2?), food, beverage and tobacco (13.1?), rubber products (9.8?) and agri-business (9.1?). The hotel sector accounted for 38 loans comprising 6.3? of total direct financing facilities. Equity financing has comprised on average less than 5% of total approvals and amounted for Rs. 125 million (US$3 million) in 1990 (Annex 4, Table 2). 5.23 NDB's foray into capital market activities was initiated in January 1988 when a new merchant banking unit was established. In 1989 the unit underwrote part of the share issue of Union Assurance Ltd, Seylan Trust Bank, a Venture Capital Investment Company, and a new share trading company. Besides acting as a manager to share or debt instrument issues, the unit has been providing advice relating to preparation of documents, prospectuses, etc. NDB has also been acting as a market maker for shares of selected companies. Financial Performance 5.24 Key indicators of NDB's financial programs and financial position for the period 1984-89 is summarized in the table below. Annex 4, Table 3, pro- vides a 10-year (1980-89) statistical summary of NDB's financial performance. Although asset growth has been respectable, financial performance has been lackluster. Return on equity which averaged 14? between 1980-82 declined steadily to only 8.0? in 1990. Return on average total assets was also 7.62. NDB has an overly conservative financial structure (debt/equity = 39:62 in 1990) and the debt service coverage ratio has been over 3:1. However, declining interest spread has been a factor influencing this performance. Interest spread declined from 6.8? in 1984 to 3.92 in 1989 because of higher borrowing costs (which is linked to the average weighted prime rate (AWPR) and fixed lending rates.w NDB, however, plans to apply variable interest rates based on the AWPR for a wide variety of loans. LJ, Because of its tax free status, NDB has not been expensing provisions. Had NDS expensed provisions of Re. 120 million for bad debt, It would have a n*t loss of 0.65 on average total assets. NDB's provisions as of December 1989, were actually unexpensed reserves. It has begun true provisioning from 1/1/91 following expiration of Its tax holiday. - 35 - NDB: SUMMARY OF FINANCIAL PERFORMANCE AND FINANCIAL POSITION - KEY INDICATORS FY ended 81 Dec. 1984 1985 1988 1987 1988 1999 Ratios: /a Debt/*q-uTty ratio 0.40 0.6 0.81 1.20 1.2:1 1.4:1 Debt service coverage ratio (tlmes) 6.16 4.27 8.49 8.12 12.2 8.9 Return on equity (X) 12.1 10.8 8.7 7.1 8.1 8.0 Intereet spread 6.8 7.2 2.4 2.8 8.4 6.9 Earnings spread 12.2 10.69 7.58 4.49 5.9 6.8 Operating expenses/ average total assets (X) 1.2 1.8 1.2 1.0 1.0 0.9 Current ratio (times) 7.5:1 5.7:1 6.1:1 7.4:1 8.1:1 8.8:1 Collection ratio (f) 68 77 79 80 76 75.6 5.25 Another critical factor affecting NDB's financial results has been deteriorating portfolio quality. After 1984, when arrears were at an all time high, the portfolio gradually improved until 1987; however, the port- folio infection rate has risen from 14% in 1987 to 432 as of December 31, 1989. Tourism, services and other sectors have contributed significantly to the arrears in 1990 whereas manufacturing was the major offender in 1988-89. (Annex 4, Tables 4 and 5). NDB has taken vigorous steps to deal with its non-performing loans through foreclosures and schedule as well as sharply increasing provisions for losses. As a result, the portfolio infection level has improved to 162 as of September 30, 1990 (Annex 4, Table 5). The collec- tion ratio has improved from 762 in 1988 to 90% in mid-1990. In order to assist clients with financial problems, NDB has established a problem proj- ects unit in the operations department. This unit has been actively working at restructuring non-performing projects. 5.26 NDB faces similar problems as DFCC in resource mobilization (see para. 5.10 above) which has made it dependent on official sources of funding. It needs to explore alternative mechanism for raising Rupee resources. However, changes in the interest rate regime is essential for this to take place. NDB needs to price its loans more aggressively because various Government subsi- dies (tax holidays and accounting policies that deferred bad debt expenses) and a large equity base has allowed it to set its interest rates at too low a level. Rationalization of interest rates, a key objective of IDP I, still remains to be addressed. Institutional Development and IDA's Role 5.27 IDA has played a significant role in NDB's institution development over the last ten years starting initially with the two SMI credits at.d later through IDP- I, SMI-III and the subsequent IDP-II and -III credits. A Bank Group staff member was seconded as senior advisor for two years to assist top management in formulating policy and strategy and setting up operations. Technical assistance under the two SMI projects funded consulting assistance from the Industrial Credit and Investment Corporation of India in developing sound systems and procedures and training staff. Under SMI II, technical - 36 - assistance was provided on project appraisal, follow-up and supervision, accounting methods, and revisions to the operating manual. NDB was also assisted in designing and implementing a comprehensive training for staff of the participating commercial banks in term lending to SHI. IDP I provided a senior advisor and a banking advisor to strengthen overall operations and build up NDB's second management tier. The advisor assisted in the estab- lishment of a project promotion unit which unfortunately proved ineffective and was closed down in 1987. The focus of the promotion effort was on marketing, whereas a more deeper approach based on promoting new technologies and linkages with foreign and promising local firms was probably called for. Another area where progress has been limited concerns building up NDB's capacity to undertake sector and subsector studies which was a key objective of IDP I. Strengths in this area would be of great value both in SMI lending as well as in direct lending operations. Given the increasing openness of the trade regime and reduced regulatory control, it is vital that NDB build up its capacity to undertake economic analysis of industrial sectors and subsectors. 5.28 Under IDP II IDA financed a study by foreign consultants to examine NDB's organization, business activities and financial operations and formulate a strategy for its future role in the financial system. The study's recommendations were received very positively by NDB's management and are being implemented with the assistance of foreign advisors financed under IDP III. Corporate planning, capital market activities and human resource development are the areas being strengthened by the consultants. 5.29 There is no doubt that NDB has benefitted enormously from its relation- ship with the Bank Group. Besides the transfer of know-how, skills, poli- cies, procedures, et al, the Bank has always acted as a catalyst to NDB's management, challenging them to explore new initiatives and new mechanisms to improve productivity. Relationship with the Bank Group has helped to shield NDB's management from interference by the Government into the day-to- day management of operations, a problem endemic among public enterprises in Sri Lanka, allowing them to operate in a professional manner. The Bank's regular supervision missions also were a constant stimulus to NDB's manage- ment and staff and enabled the Bank to spot potential problems in advance and get management attention to focus on them. While NDB has made substantial overall progress, the deficiencies in staffing have been a major constraining factor in its overall development and could become binding if not addressed soon. IDA could have taken a firmer stance on this issue much earlier. 5.30 Given the small size of the Sri Lankan economy and the dearth of indigenous technical and marketing know-how, reliance on foreign firms for technology and management know-how to establish export-oriented industries is vital. NDB could have played a more active role in this regard with appropriate IDA support. Finally, in the resource mobilization area, NDB remains overly dependent on official sources of financing for both local and foreign exchange. While raising foreign exchange from market sources might be difficult, NDB needs to explore alternative channels for mobilizing local currency resources, particularly as the money and capital markets are deepening. This area deserves greater attention in its development strategy. - 37 - VI. EVALUATION OF INDUSTRIAL POLICY REFORMS 6.01 IDA's strategy for promoting industrial davelopment in Sri Lanka has focused on assisting the Government to (a) adopt a more outward looking policy regime by reducing import protection and offsetting the bias against exports through appropriate export incentives; (b) improve resource alloca- tion by rationalizing the complex system of export and investment incentives as well as reforming interest rate policies; (c) enhance competition through reduction of barriers to entry, particularly licensing approvals, and facili- tating exit through improvements in debt-recovery laws; and (d) improve public enterprise efficiency through rationalization of rules and policies, physical and financial restructuring, improved performance monitoring and divestiture. IDA has also been assisting the Government in improving the financial system and strengthening the technological and skill infrastruc- ture. The three projects under review assisted the Government in initiating and furthering reforms in three major areas: public enterprise efficiency, import protection, and export policies. These are discussed below. A. Public Enterprise (PE) Reforms 6.02 Following the IDA industrial sector mission of 1978 which examined the factors affecting the performance of public enterprises, the government initiated actions to improve PE performance by entering into management contracts with foreign private firms for five textile firms and establishing new PE ventures only as private or public limited liability companies. These had met with positive results and the Ministry of Finance and Planning (MOFP) was considering various alternatives to enhancing PE efficiency, e.g. a new corporate law for all public enterprises aimed at increasing management autonomy while enforcing higher performance standards. To assist the Government in exploring further initiatives, IDA included a substantial tech- nical assistance component in IDP I for both the MOFP and the Ministry of Industry and Scientific Affairs (HISA), which directly controlled 16 public manufacturing enterprises (PMEs). 6.03 MISA established a public enterprise cell (PEC) to implement its pro- gram of reforms which included assisting management of PEs prepare corporate plans, channelling firm level technical assistance to address specific prob- lems, instituting policy changes affecting PE performance, and initiating pilot schemes to alter ownership and management. The objectives of the corporate planning exerciseiv were to remove external controls over such areas as pricing, procurement, personnel, etc. and replace these with a contractual system of signalling and rewards based on achievement of agreed targets. The firm level assistance had two objectives - firstly to tackle L/ Each corporate plan was to cover the following: (a) key performance targets, concentrating on Improvements in pubile prof Its with agreement on criterion values which would constitute acceptable and outstanding performance; (b) measures to be taken by the corporation to achieve these objectives; (c) criticaI Internal and external problems, and their impact on corporate performance; (d) valuation of assets based upon replacement rather than historical costs; and (*) performance incentives for managers who exceeded the agreed targets. - 38 - specific firm level technical and management problems and secondly to demon- strate the merit of changing the system by implementing pilot changes in some PEs accompanied by loosening of controls. IDA provided two advisors to the PEC for two-year terms (1983-85) to assist in the preparation of the corpo- rate plans. Another 96 man-months of TA were provided to PEs under the control of MISA for the firm level improvements. 6.04 A parliamentary Committee On Public Enterprises (COPE) had been established in 1979 to review the performance of PEs. The Public Enterprise Division (PED) of MOF served as the technical arm of COPE. COPE's report recommended that PED function a the *focal point" on PE matters which transcend the normal supervisory work undertaken by line ministries. In particular, PED was instructed to improve management information and performance evaluation systems, corporate planning, financial policy and structural policy issues in PEs in close cooperation with the line minis- tries. IDP I provided technical assistance and training to PED to strengthen its capabilities to undertake these functions. Arrangements were made under the project to ensure that MOFP and MISA would coordinate their activities to ensure maximum impact. Implementation 6.05 Implementation of the PE reform program was notable by its lack of success: primarily due to the lack of support for the program at the higher levels in MISA and to some extent in the MOFP. The following excerpts from successive IDA supervision reports illustrate the problems encountered. June 1984 "Since the Credit's effectiveness in January 1984, no action of any real consequence has been initiated to meet the requirements of Part C of the Project. Staff changes at the line Ministries and at the Sector Corporations have contributed to the situation, but the delay is due to a lack of real commitment on the part of senior HISA officials, notwithstanding the commitments made at the time of negotiations. This is evidenced by (i) the restrict- ed role of the PEC and the creation of a Progress Review Commit- tee; (ii) the inactivity in recruiting the Corporate Planning and MIS Advisors needed to develop the signallinglincentive system; (iii) the absence of any firm level technical assistance pro- grams; (iv) the proposed reallocation of TA funds for exposure trips and (v) Government's inactivity in relaxing its controls over the autonomy of the SICs'. 6.06 November 1984 *To address the many constraints (e.g. lack of autonomy, frequent management changes, inadequate facilities) to the operating effi- ciency of the State Industrial Corporations (SICs), Part C of Credit 1401-CE incorporated a two-part action program to improve their performance. The first part dealt with units under the - 39 - control of Ministry of Industries and Scientific Affairs (MISA) while the second dealt with units/activities under the control of the Ministry of Finance and Planning (MOFP). As of September 30, 1984 the MIS action program was about 12 months behind schedule. The appointment of Corporate Planners to assist the SICs develop tbir objectives and control systems has not been finalized and this is not likely to be achieved before January 1985. As required, a Public Enterprise Cell (PEC) has been formed, but it has yet to work with the SICs to develop corporate plans and operating strategies. Planned firm level consultancy assistance to the SICs in the areas of (i) personnel policies and performance incentive reviews; (ii) cost accounting and market analyses to enable the corporations to concentrate on competitive products; (iii) assessment of balancing, modernization and replacement, and energy efficiency investment need to improve production performance; and (iv) financial management, have yet to be taken up notwithstanding that the performances of the SICs has continued to deteriorate.0 6.07 "Part C of the project also provided finance for consultancy assistance to the MOFP to (i) improve management information and accounting systems for all public sector corporations, focus on enterprises under supervising ministries other than MISA; (ii) tackle procedural and control issues which cut across public sector enterprises; and (iii) prepare legislation which would facilitate increased private participation in ownership and management of public sector enterprises. As of September 30, 1984 progress has been limited to the training of two officers at the Harvard Institute for International Development, and the participation of a three-member GOSL team in a conference in Yugoslavia on public sector efficiency. This slow progress has been caused in part by internal staff problems arising from the recent ethnic tensions and by the departure of the Director of the Division". 6.08 December 1985 'Notwithstanding GOSL's repeated commitment to improve the performance of the public enterprises and to remove the burden of their support from the Treasury, progress has been limited. Under the MISA Action Program, only the appointment of a Corporate Planning Advisor and preparation of a revised FY86 work program have been actioned. Despite on-going assessments by COPE, ILO, individual Parliamentarians, and Select Committees nothing has been done to develop policy measures to remove operating constraints (e.g. procurement, personnel, investment and pricing policies) or to implement specific firm level rehabilitation/restructuring programs for the eight corporations (Paper, Hardware, Leather, Tyre, Ceramics, Mineral San4s, Salt and Cement) identified during the 1982 appraisal." - 40 - 6.09 "The action program to strengthen the MOFP's traditional function as the advisory arm of the Parliamentary Committee on Public Enterprises (COPE) and to act as financial management advisors to the line Ministries and sector corporations has been imple- mented in part. This has been achieved through (i) improved servicing of COPE requirements, (ii) participation of PED staff in programs focused on public enterprises management and evalua- tion techniques, (iii) provision of marketing consultancy to PEs and (iv) assistance to line Ministries in the preparation of capital/financial restructuring proposals for PE and GOBUs. Action is underway to assess the data processing needs of PED. Key elements of the MOFP program relating to non-MISA corpora- tions, however, still remain unactioned particularly in the development of an integrated MIS, review of controls affecting corporation performance, and corporate planning performance evaluation." 6.10 In spite of all the delays, a corporate planning specialist and a Management Information System (MIS) expert were recruited to implement the TA program. By January 1988, 12 MISA corporations had prepared corporate plans which were in conformity with guidelines, but only one (Tyre) was rated excellent; four were rated good (paper, plywood, salt and mining) while the rest were rated fair or incomplete (2). These plans, however, had minimal impact on changing the relationships between MISA and the corporations. The following comment by the expert advisor is revealing. "It is a common belief that outside consultants can compensate for poor management. Three years of close interaction between the Advisor and the MI Corps have disproved this*. "The Advisor considers that corporate plans in PEs have been beneficial in about half the corporations and would probably be continued in these corpo- rations even if MISA did not require their submission. At the other extreme, some corporations (or rather some Chairmen) have so far treated corporate planning as just a further reporting requirement of the Ministry. As a consequence, plans have been prepared at senior management level with little or no participation by middle or junior management". "Corporations observed that the Ministry does not scrutinize or comment on the plans nor does it use them on progress review meetings. Review comparisons are made with the budget which has hitherto been treated as a separate document and submitted at a different time from the plan". 6.11 Firm level Assistance. The project design included 96 man-months of TA (20 in 1984, 36 in 1985 and 40 in 1986) to MISA corporations. The advisor prepared a list of 16 assignments of which only three were implemented by MISA - ceramics, mineral sands and the plywood corporations. Evaluation studies undertaken both by IDA and GOSL indicate that only one of the assign- ments was reasonably successful, i.e. for the Plywood Corporation. In the case of the ceramics corporation, the TOR was modified and the scope of work substantially reduced, which adversely affected the contributions by the consultant. The TA to the Mineral Sands Corporation fell short in terms of effectiveness, efficiency and impact. The study undertaken by a local firm "was not presented in a form that would enable management to take decisive actions. As a result very few of the recommended actions have been - 41 - implemented and the ultimate impact of the report is probably going to be mini-mall. The consultant's report for the Plywood Corporation was more incisive and an expenditure of Ru. 7.0 million was expected to yield benefit of Re. 11.1 million per year. Unfortunately, the ethnic disturbances coupled with loss of key management and labor disputes prejudiced the final outcome. 6.12 PED ultimately implemented a standardized reporting system for all PE corporations. However, the utilization of the information for decision making has been virtually negligible. Implementation of other elements of the program have been equally ineffective. TA programs at the firm level could have had a more profound impact if IDA supervision was more effective. The following comments from IDA's internal review bring out the main points. 6.13 *If IDA had been more vigilant in supervising the modifications of the consultants' terms of reference in the case of CCC, a compromise might have been reached with MISA to allocate more time to cover the Corporation's marketing aspects. In general, the three TAs reviewed here would probably have been more effective if they had been broken down into distinct phases to take advantage of the Corporations', Government's and consultants' feed- back, learn from experience, and appreciate changes in the economic, politi- cal and managerial context of the corporations. IDA should also ensure that all parties appreciate the time that may be required to achieve the objec- tives, and take steps to maintain TA staff's and the recipient's commitment. To the extent feasible, IDA should ensure clarity of decisions in important steps. In particular, IDA should spend enough time in reviewing/focusing terms of reference and TA performance criteria; making certain that appro- priate and timely organizational and administrative arrangements are made; and accommodating changes made necessary by the project implementation. Finally, goals under TAs should be set up so that they can reasonably be achieved. Similarly, tasks under TAs should be set up at a level of diffi- culty that the recipient feels capable of meeting so that the objectives of the assistance are achieved in a way that instills confidence and a desire to continue the development effort. Governments, organizations and individ- uals need to experience some success in order to maintain commitment toward achieving a meaningful goal. In sum, TA's design is critical to effective implementation and to achieve the level of success that is needed to promote the assisted entity's self-reliance.' 6.14 Because of the lack of substantive progress on PE reforms, the Government proceeded with measures to prepare PEs for sale. In August 1986, GOSL submitted a bill to Parliament to convert Public Corporation and Government Owned Business Undertakings (GOBUs) into public limited companies. With IDA support, a review of PE assets and capital structure was conducted to evaluate net worth and recommend new capital structures. However, neither capital restructuring nor divestiture was implemented. In 1987-88, the reform effort was redirected by the Administrative Reforms Committee which recommended the establishment of a Public Investment Corporation to supervise all government investment in PEs. - 42 - 6.15 These recommendations provided the basis for a new PE reform program under the 1988-90 Policy Framework. The program comprised two parts. First, to convert 16 PMEs whose assets constituted about half of total PME assets (excluding petroleum and cement) into companies under the Companies Act in order to prepare them for privatization. Second, to divest a few PEs to the public. However, implementation of the reforms was again limited under the first-year PFP. A newly established Presidential Commission for Privatiza- tion selected mostly small PMEs for conversion in to public companies on the basis that they were profitable and their equity was small enough to be absorbed by the small domestic capital market. A Bill to Parliament enabling the conversion of Public Corporations and GOBUs into Public Companies was passed. But, with the country beset by wide-spread political violence, no conversions or privatizations took place. 6.16 The piecemeal reforms initiated during the 1980s put PMEs under increasing pressures. Since the Government could no longer postpone essen- tial structural reforms to complement the stabilization program envisaged in the second-year PFP, it requested IDA's assistance to formulate a comprehen- sive program of PME reforms. Two major studies were conducted by IDA in 1989 in furtherance of this objective. A PHE Sensitivity Study focused on the sensitivity of the economic and financial performance of PMEs under the Textile and Industries Ministries to planned changes in the trade regime and expected trends in market conditions. Another study focused on institutional arrangements facilitating PME reform implementation. The latter recommended bringing PMEs, upon conversion, under the purview of a commercially oriented holding entity, accountable to the Treasury. This entity would help PMEs develop and implement individual restructuring plans and adopt commercial business practices. Based on these recommendations, in June 1989 the Finance Minister advised the Cabinet to entrust the restructuring of specific PMEs to a commercially oriented Public Investment Management Board (PIMB), to be established under the Treasury. 6.17 To ensure efficient implementation of policy and enterprise reforms, the Government adopted a four-pronged strategy, consisting of (i) removing remaining specific tariff protection, market privileges and fiscal support for PEs in order to increase the competitive pressures on their operations; (ii) to remove Government regulations over labor, wages, sourcing of inputs and pricing of output through conversion of PMEs into companies; (iii) providing a new institutional framework to supervise and maximize returns on the Government's investment in PMEs converted into public companies and induce those which would continue to be controlled by the Treasury (i.e. majority Government ownership and no private management contract) to adopt an autonomous commercial operating mode, be accountable for performance and adapt flexibly to increased competition; and (iv) converting PMEs into companies and privatizing viable PME activities. These steps specifically entail changing the PMEs' legal status to give them operating autonomy, restructuring their financial structure, privatizing and modernizing viable operations through foreign joint ventures and domestic sales of shares and progressively phasing out non-viable PME activities. - 43 - 6.18 IDA approved a Public Enterprise Restructuring Credit (PERC) in early 1991 to assist the Government in implementing the strategy outlined above for all 14 major PMEs under the two key line ministries responsible for industry, i.e., the Textiles and Industries Ministries. In consultation with the Ministry of Finance, both ministries agreed to relinquish regulatory powers over the 14 PMEs, to progressively remnve price controls on PME outputs as tariffs are reduced, and actively seek foreign direct investment to develop the PME potential for export-led growth. Concurrently, with these regulato- ry, incentive-related and trade reforms, a financial holding company, the Public Investment Management Board, would manage the Government's investment in converted and privatized PMEs on behalf of the Ministry of Finance. B. Reform of Import Protection 6.19 The 1977 reforms to the import regime resulted in a significant liber- alization of the trade regime. Besides a large significant nominal deprecia- tion of the exchange rate, a substantial reduction in import licensing took place. A six band duty system was adopted with rates ranging from zero for essential items, 52 for raw materials and spares, 12.52 to 25% for intermedi- ate goods; 1002 on items competing with domestic production, and 5002 on luxuries. A Tariff Review Committee (TRC) was established in 1978 to hear appeals from industrialists and make modifications. Hoever, the criteria on which the new tariff regime was based led to high protection for some items and very little for others giving rise to potential misallocation of resources. IDA felt that a systematic analysis of the protection regime was in order, particularly to examine the effective protection levels accorded to various activities. The SHI I credit supported a study of effective protection to manufacturing industry (SEP) which was completed in September 1981. 6.20 The SEP was a pioneering study of Sri Lanka's tariff in that it brought out clearly for the first time the relative efficiency of different manufac- turing activities, the linkages between activities and the level of protec- tion which was being provided not only by tariffs but by various other inter- ventions - turnover taxes, export taxes, import duty rebates, etc. It sensi- tized the members of the Presidential Tariff Commission (PTC), the successor to the TRC, to the implication of making various ad hoc changes to the tariff structure. The SEP was particularly useful in pointing out the deficiencies of using tariffs for consumption control objectives. It also included guide- lines for use by the PTC in its appeals functions. The overall impact of the SEP was considerable on policy-makers. 6.21 In response to the pleas of industrialists, between 1977-80, some 584 changes were made by the TRC, but there was little substantive change in the tariff, although the regime became somewhat more complex, a little more dis- criminatory among import substitution activities, and was able to raise some more revenues from a given volume of imports.1V However, between 1980-83, there were two main sources of change to the tariffs requests to the PTC from industrialists for changes and changes introduced by the HOFP for L/ Review of Industry Incent.ves to Sri Lanka. A.J. Cuthbertson, June 1984. - 44 - revenue raising purposes. The PTC approved changes in this period fine tuned protection for public corporations; they did not make for wide-ranging reform. On the other hand the MOFP introduced an across-the-board 52 increase in duties including items previously imported duty free. An IDA review of the protection regime in 1983 concluded that this increase resulted in higher and more disparate protection to industry and so are almost certainly contrary to tariff reform.w 6.22 The 1983 IDA report1V recommended a major reform of the tariff regime by adopting a uniform tariff rate which would meet the objective of neutral- ity of incentives between production for exports and the export market. It recommended the adoption of a 152 uniform tariff rate in two phases over a five-year period with the elimination of all import and export licensing and a maximum tariff ceiling of 60% in the first phase followed by gradual reduc- tion to the target level. It is recommended elimination of most export incentives provided by the EDB. This recommendation, however, was rejected by the government, primarily because of the severity of the tariff reduction and its impart on tax revenues as well as concern about public enterprise's adjustment problems. 6.23 In response, however, the Government introduced a tariff reform package in late 1984, reducing the wide variation in effective protection coeffi- cients to a narrow band between 2.5 and 1.5; before the reform, a coefficient of 5 was frequent. Most nominal tariff rates were reduced between 52 and 752 with some cases at 1002. In numerical terms, to illustrate the magnitude of the change, the previous tariff schedule had tariffs above 752 in 514 tariff categories; the new schedule had 86 only. However, there were a large number of cases where tariffs remained high and unchanged because of representations from public enterprises. Nevertheless, the Bank felt that the covenant of the two projects (section 4.03 of the DCA of Credit 1182-CE and section 4.02 of the DCA of Credit 1401-CE) had been complied with. 6.24 Following the November tariff cuts, IDA continued its dialogue with the PTC stressing to need the pursue subsequent phases of the reform and reexamine numerous exceptions in which the tariff remained unchanged primar- ily because of interventions from MISA. A 1985 assessment of the tariff regime indicated that the average (unweighted) rate of nominal protection was 312 and the trade weighted rate was significantly lower at 182 because fewer imports entered at the higher duty rates. Nevertheless, there were still some 286 items subject to import licensing which included a large number of items produced by public enterprises. 6.25 IDA initiated another review of the import regime in 1987 with the help of a consultant to the PTC financed under IDP II. The PTC's report recom- mended that the maximum protection provided to local industries should be an effective protection rate of 50? and that a four tier tariff structure should be adopted with a minimum rate of 52, a maximum rate of 502 and two interme- diate bands of 152 and 302. This proposal was accepted by the Government. The November 1987 budget speech of the Miniscer of Finance announced that the Lf/ Selected Issues of Industrial and Trade Policies In Sri Lanka Report No. 4795-CE, 1988. - 45 - PTC's proposals would be implemented over two to three years. The 1988 budget reduced the maximum tariff to 602 and also eliminated all export taxes as non-traditional exports. In particular, all licensing that afforded special privileges to public enterprise was supposedly eliminated. 6.26 A 1989 review of the tariff system by consultants showed that the average effective protection was 402 and the tariff system still showed a substantial cascading structure; however, the variance of protection between different branches of manufacturing was smaller. Moreover, out of a total of 6,634 tariff positions, 500 product categories were still subject to import licensing of which 440 were manufactured goods. Finally, the Government was still exercising monopoly control over some imports, e.g., textiles. It would thus appear that hetween 1985-89, tariff reduction has been rather modest, although PEs may have become less protected. C. Export Incentives 6.27 The second item of technical assistance under IDP I was assistance to the EDB for a comprehensive review of its export incentives and policies. The study, carried out by a consultant, was extremely comprehensive and set out a solid basis for guiding Sri Lanka's export promotion effort.1V The study adopted as its guiding principle the general principles enunciated in Rhee's paper "Instruments for Export Policy and Administrations Lessons from the East Asian Experiencem which include granting exports *extended neutral status', equal incentives for all export-oriented activities and automatic access to incentives. The study examined all of the prevailing instruments of export policy (exchange rate, investment incentives, duty rebate schemes, export expansion grants, export financing and credit, export insurance, etc.) and formulated a set of appropriate recommendation taking into account Sri Lanka's longer term export development goals. These policy recommendations were subsequently incorporated in the Government's Industrial Policy Statement (IPS) of 1987 which set out for the first time a comprehensive industrialization strategy for Sri Lanka. Preparation of the IPS was also supported by an IDA consultant. D. Conclusions and Lessons Learned 6.28 The most important lesson which emerges from this review is that attempts at public enterprise reform through partial measures such as strengthening management systems and procedures through corporate planning, signalling systems, performance evaluation based on explicit targets, etc. are unlikely to be successful unless the overall economic environment in which PEs operate is changed. That requires changing the legal and regula- tory framework to expose PEs to competitive market forces, while simultane- ously providing autonomy in operating matters such as pricing, salaries and wages, personnel levels, finance, etc. The proposed reforms aimed at strengthening management systems and policies could have resulted in a measure of positive impact, had the PEs been able to attract capable top 1/ Draft Report of the Special omlttee on Export Incentives and Policies, Export Development Board, Sri Lanka, March 196. - 46 .. managers to implement the proposed changes with the full support of officials at the highest political level. However, even modest improvements could not be realized because of the lack of commitment of relevant officials to the reform measures. 6.29 The main questions which arise in reviewing the progress of trade liberalization in Sri Lanka concerns the pace and extent of import liberal- ization. To comment on this issue, one needs to examine the linkages of trade policies with the overall macroeconomic policies followed by the Government during this period. Following the 1977 liberalization measures, the Government's fiscal policy was expansionary resulting in very high budget deficits (1980 deficit was -22.22 of GDP). A major contributor to the deficit was the Mahaveli project which locked the Government into a massive public investment program. The expansionary fiscal policy resulted in a double deficit inflation rate which the Government sought to control partly through a insufficiently flexible nominal exchange rate policy. This led to a substantial appreciation of the underlying real exchange rate.1V Another constraint to adopting a flexible exchange rate policy was Sri Lanka's large external debt which was mainly a public sector liability. Since non-traded goods are a major source of Government revenue, a real devaluation would have conflicted with the objective of fiscal stabilization and thereby exacerbated inflation. Given that trade taxes amount on average to 40% of total tax revenues, there was little leeway for the Government to reduce import taxes, which undoubtedly adversely affected the pace and extent of liberalization. Thus, the requirements of fiscal stabilization conflicted with import liberalization. 6.30 The appreciation of the real exchange rate had adverse consequences for Sri Lanka's exports and the sgnals it gave to export industries. The export incentives provided by EDB partly mitigated the negative effects of the exchange rate appreciation but failed to make an appreciable impact on exports. Although Sri Lanka was able to generally equalize the incentives for domestic vis-a-vis export sales, this was accomplished at a high budgetary cost. Incentive payments accounted for 82 of import duties and 32 of total tax revenue in 1988. Moreover, the slow pace of import liberaliza- tion may have affected export performance by blunting competitive pressures on domestic firms preventing efficiency gains. This is particularly true in the case of public enterprises, who were able to negotiate special tariff rates with the PTC. Sustained export growth and diversifications will require Sri Lanka to produce at interr,ationally competitive costs. The main strategy should be further significant reduction of import protection coupled with investments of sufficient scale and technological capability to enable competitive exports. Ability to attract direct foreign investment will be a critical factor in this effort. if The real effecti-e exchange index rate (vie-a-vis trade partners) appreciated to 180 (1980100) in the first quarter of 1985 before declining to 100 In first quarter 1987. - 47 - IDA's Role 6.31 IDA has played a catalytic role in fostering trade policy reforms in the post-1977 period. However, its approach has been to rationalize the structure of tariffs. It would appear that its analysis of trade liberaliza- tion, at least until 1985, did not fully take into account the fiscal con- straints arising from GOSL's macroeconomic policies. Pursuing trade policy reforms through project credits did not allow for adequate monitoring and conditionality of macroeconomic parameters relevant to the reform program. Since 1987, however, IDA has been more sensitive to the revenue implications of tariff reform and its links to the overall macroeconomic framework. It is likely that the macroeconomic parameters would have been better defined and controlled had the reforms been undertaken under an adjustment operation. This could have allowed a faster and deeper liberalization of the import regime. - 48 - APPENDIX I Page 1 of 7 IMPACT ASSESSMENT OF TECHNICAL ASSISTANCE UNDER SMI I AND II The Industrial Development Board was set up with the objective of promoting growth and development in the industrial sector. It is essentially a service organization and functions as the premier Extension arm of the Government. It promotes the growth and development of the small and medium industrial sector by giving a package of services ranging from advisory and Extension Services, identicying investment opportunities and viable projects, undertaking feasibility studies to designing factory layout, promoting technical advice and assistance and supply of necessary industrial information and advice and marketing prospects. It is with the objective of improving and strengthening the institutional capability and infrastructure facilities of the Industrial Development Board that various assistance was given under the SMI I and SHI II Programmes by the World Bank, to enable it to perform the services under the SMI Schemes in a very purposeful manner. The assessment of the impact of measures undertaken will involve review of the performance as well as an assessment of quantitative and qualitative impact on the development of the SMI sector. The Institutions that were set up under the SHI Schemes are as follows: (a) Rubber Products Development Centre (b) Heat Treatment Centre (c) Common Services Centre (d) Building Materials Centre (e) Sub-Contracting Exchange In addition to these, a number of Training Programmes and Consultancy Services were made available under this assistance. Rubber Products Development Centre was set up with the World Bank assistance and it rendered services to the Rubber Products Industry in areas such as technical consultancy, quality control and testing and product development, semi-commercial services and it established rapport with large scale manufacturers and other service organizations like Ceylon Institute of Scientific and Industrial Research, Rubber Research Institute, Sri Lanka Standards Institute and Export Development Board in working out a common programme for the upliftment of local rubber products manufacturing industry. APPENDIX I Page 2 of 7 Table 1 Rubber Products Manufacturing Industries According to Scale of Operation ----------------------------------------------------------------- Size of Unit 1977/78 1982/83 1985/86 1987/88 ------------------------------------------------------- w----- w---- Large 12 22 26 30 Medium 05 11 20 18 Small 123 142 86 153 ------------------------- w--------------------------------------- Total 140 175 132 201 ---------------------------- ------------------------------------ The above Table shows the development of the sector over the years. Due to compulsions of competition under the open economy policy of the Government, the Rubber Products industry in the SMI sector obtained assistance from this Centre in technological advice, quality improvement and supply of rare chemicals and correct processing techniques. It assisted them to compete with imported goods and also helped them to diversify into new products. With their assistance a number of SMI units have developed new prnducts such as steering boots, gear boots, suspension bushes and engine mounts for Japanese vehicles, footwear components, adhesives, seals for refrigerators, motorcycle parts, water pump seals, parts of agricultural machinery, underwater equipment and conveyor drive belts. The Extension Services Section of the Centre has popularized techniques of manufacture of items like rubberized coir foam, rubber moulded goods, latex cast products such as masks and toys, latex dipped goods like rubber bands and balloons at a scaled down level using appropriate technology. The quality control sector has launched a Quality Assurance Scheme for a selected group of Rubber products such as automotive parts jointly with the Ceylon Institute of Scientific Industrial Research and Sri Lanka Standards Institute. It also assisted the Sri Lanka Standards Institute in drawing up standards for a number of rubber products such as foam rubber, rubberized coir, PVC coated fabrics, rubber bands and retreading of tires. Several commercial services provided by the Centre namely: (1) production and distribution of rubber compound; (ii) sale of latex (raw and compound); and (iii) sale of raw materials (chemicals and synthetic ribbons has been a great boon to the local small scale industries, so much so tat of the total of 201 rubber based industries in Sri Lanka as 20 SMI depend on this Centre for supply of rubber compound and 20 units for supply of latex and 20-30 units for supply of raw materials. - 50 - APPENDIX I Page 3 of 7 The impact of this Centre is significant in certain product areas such as Rubber Automotives and Machinery Parts, Rubberized Coir, Foam Rubber, Rubber bands, (for local market) balloons and cast products. In addition to the above services rendered, laboratory facilities were made available in developing new products specifically in testing of raw materials, rubber components and finished goods. Although the above services were rendered by the Rubber Products & Development Services Centre of the Industrial Development Board with SMI assistance had some influence on the small scale rubber products industries but an analysis of the overall magnitude of this impact is taken into consideration and a quantitative analysis is made, the impact it has had is minimal and the large scale sector is mostly beyond its sphere of influence. A large number of rubber products that is being imported is still being imported and the local rubber industry has not been able to stem this tide of imports though the raw material is available locally. It is high time that a change of policy to make our rubber industry more self- sustaining is considered. Electroplating Centre. This Centre was commissioned in March 1986. The officers who underwent training under SMI Programme have gathered sufficient experience and knowledge to perform their duties efficiently and to execute external job orders. The training programmes are annually conducted for small and medium electroplating industrialists. On an average of 300 jobs a year are undertaken from industrialists. Common Services Centre - (Matara and Anuradhapura). The Centre at Matara was established in 1982 and a monthly average of 180 jobs are undertaken annually from the industrialists. The training obtained by the OIC (Matara) has enable to carry out his duties efficiently. This Centre has undertaken special work orders such as fabrication of a ruling machine and a stirer. The Small and Medium Industries obtained special services such as Heat Treatment, machining, Fitting. Welding through the CSC workshop. The Centre at Anuradhapura was commenced in 1986. The optimum use of the facilities at this Centre have not been made by the industrialists in the area, as the level of manufacturing activities in the Engineering Industry is fairly low. Engineering Workshop and Foundry. The training obtained by the IDB Officers have enabled to design the manufacture dies, moulds, jigs and small scale machinery to suit local conditions and this service is provided to SMIs as and when requested by the industrialists. The machinery brought under SMI Programme - I & II are being utilized for the above mentioned manufacturing processes to assist the small and medium scale industrialists. The monthly average numbr of jobs undertaken by the workshop and foundry from SMIs are 45 and 10 respectively. The workshop is equipped to undertake heat treatment of dies, moulds, engineering components produced by metal industries. On an average 60 jobs are executed annually for the SMIs. APPENDIX I 51 - Page 4 of 7 Consultancy Services. Consultancy services were made available to the IDB under the SMI I and II programmes in a number of fields to train personnel as well as to improve its extension services. Consultants were engaged to assist entrepreneurs engaged in construction material industry and building material construction. Demonstration centres were established a Lunuwila, Matara, Mahiyangana and Colombo but this apparently did not have any impact and most of these centres have now been closed. Two chemical consultants were engaged to prepare process profiles for the manufacture of 10 chemical items. Although the process profiles were made available on certain products it has not resulted in commercialization. Consultancy services were provided to set up a mushroom spawn unit which was successfully established at Panadura and this has trained a number of entrepreneurs and a large number of entrepreneurs have received assistance and started cultivation of mushroom with the assistance of this Centre. consultancy services were also provided for manufacture of motor spare parts and gravity die casting. A number of sezzinars and demonstrations were conducted in selected areas but this too has not resulted in establishing of industrial units. A report on processing of centrifuged latex was also prepared by consultants and this has been made available to the Rubber Products industrialists. As a whole consultancy services obtained under the SMI I & II Scheme does not appear to have had a sustained impact. Training. Training was also given to a large number of Board employees under the SMI I and II Programmes. Most of these Training Programmes were undertaken in foreign countries and they covered most of the activities of the Board. They were intended to enhance the capacity of the Board's personnel in performing the extension and advisory functions. It is very unfortunate that the IDB was unable to retain the services of most.of the trained personnel in view of the inadequate salary scales paid by the Board. Thus in the Engineering Division alone, 13 officers had left over this period out of the 23 trained personnel. Necessary remedial measures have to be taken to enable the Board to retain the services of trained personnel so that it will have a real impact in its attempt to promote and develop the Small and Medium Industrial sector. Industrial Extension Services. Assistance was given to improve the Industrial Development Board's promotion and extension services with intense field level coaching of its Industrial Extension Officers and to activate the SMI consultancy fund to tap the know-how of the local institutions/private sector industries in solving problems. A one year project was conceived with SMI funding wherein five industrial extension coaches were placed to cover nine regions of the IDB for the purpose of upgrading the capabilities of the IEOs in promoting and rendering assistance to small and medium industries. At the end of the completion of the project. 57 Industrial Extension Officers and 9 Regional Managers were able to improve the extension efficiency by actually promoting new industries and upgrading existing industries apart from fulfilling the training objectives. - 52 - APPENDIX I Page 5 of 7 Further under this programme a project for *on-the-job* training in management consultancy for IDB extension officers were also undertaken and the objectives were to upgrade the capability of management consultancy and to enable officers to provide more effective and meaningful services to the SMi sector. At the end of the completion of the project, 9 Regional Managers and 44 IEOs were trained in this programme. Further, certain officers were given specialized training in the activities of selected Industry subsectors. The following table shows setting up of new industrial units and expansion and diversification of existing units fro the period covered by the SMI I and II Programmes. EXPANSION AND DIVERSIFICATION New Units Existing.Units No. of Investment No. of Additional Year Units (Rs.) Units Investment (Rs.) 1983 98 5,715,050 85 38,641,575 1984 129 13,486,200 121 14,769,350 1985 150 18,988,330 102 7,951,270 1986 295 45,013,150 183 43,448,480 1987 336 44,901,400 187 23,601,560 1988 288 45,987,200 121 16,027,880 Sub-Contracting Exchange. With a view to bolster up the SMI units in the field of marketing, the Sub-Contract Exchange was set up in 1980 with World Bank assistance. The SCX was expected to be the crucial institution through which small industries would be able to participate in the overall export oriented strategy of development. The objectives of the SCX was to assist small scale industries in producing goods under sub-contract to major enterprises and to enable these subcontractors to meet market standards in their production. The establishment of the Sub-Contracting Exchange was designed to increase the capacity of the IDB to provide marketing support for the output of the SMI Sector. The SCX caters exclusively to the SMI sector. The SCX approach to the formation of market/supply links is to ascertain demand and find suppliers to meet this demand. The present function of the SCX is mainly that of a broker conveying market information to potential SMI suppliers. To a limited extent it performs service functions in presenting tenders and quotaticns mainly to Government and parastatal institutions for supply of SMI prouncts. - 53 - APPENDIX I Page 6 of 7 The SCX carries out promotional and marketing activities on the basis of direct contacts with potential customers. However, in procuring orders, SCX does not always receive complete cooperation of buying departments. It does not generally receive preferential treatment at the hands of procuring agencies of the Government though it is a government- sponsored institution. The undermentioned table gives the number of industrialists enrolled and the value of orders executed by the SCX from 1982-1988. No. of Industrialists No. of Value of Orders Year Enrolled Orders in Rs. Million 1982 34 20 4.95 1983 69 22 4.89 1984 113 38 10.12 1985 146 24 17.51 1986 200 18 18.45 1987 251 22 20.44 1988 294 62 31.70 A special marketing assistance programme was drawn up by the Division for the Weboda Blacksmiths with the State Trading (General) Corporation in March 1987 and Rs. 1.6 million worth of orders obtained for agricultural implements and about 40 members of the Weboda Light Engineering Cooperative Society have been benefited. The functioning of the SCX has been subject to several independent assessments and evaluations. On observations made at the time establishment commented on the absence of deliberate procuring policy and programme to provide subcontracting and participation of SMI in Government procurement. It also has problems in developing meaningful relationships between suppliers and potential buyers. In many countries, both developed and developing promotion of this type of activity is carried out through legislative and policy measures. In Japan government organizations and prefectural industries and public corporations are delegated by law to provide small enterprises with opportunities for participation in public. The USA Small Business Act of 1953 declares that government should counsel, assist and protect insofar as possible the interests of small business concerns and ensure a fair proportion of the total purchase and contracts for supplies and services for the government to be placed with the small business enterprises. - 54 - APPENDIX I Page 7 of 7 The Government of India pursues a deliberate and positive policy to encourage the participation of small scale units in government purchasing programmes. It is essential that the Government should accept the social and economic importance of the SMI Sector and make a policy commitment to the development of this sector. It should accept that preferential treatment of this sector is not a deviation from the free enterprise system, as evidenced by vigorous and preferential support provided to this sector in countries such as the USA and Japan. The SCX should be recognized as the mechanism through which preferential participation in certain areas of state procurement could be effected and monitored. The achievements in respect of the objectives are as follows: 1. We have assisted 184 small and medium scale industries who have been introduced to subcontracting markets and many of them have diversified into new products using existing facilities. 2. We have communicated to over 200 Government departments, corporations and large firms in addition to the Federation of Chamber of Commerce and Industry of Sri Lanka the production capabilities of potential small and medium industries subcontractors and have received orders from 40 organizations. 3. While we insist that every industrialist who receives an order through the SCX has the necessary know-how and facilities, we also advise them on how to improve the quality, cut down on unnecessary costs through the use of proper jigs and tools and ensure that specifications and delivery dates are met. (Please see Annex I). IT1I Il ank - APPENDIX II L IIII Jill..l ilIII National Development Bank Page 1 of 3 P 0 Go 025, 40 NAvM Mairtha. Colombo 2. Sri Lanka Teloplione 23900 0 437350 3 Uas 54-202 To-cA 2 399 NDJ CE Office of the Gee al MaO.idt, Tolephomne 6400481 FAX LETTER TO WASHINGTON Our Ref: SMI/345/1 Date : 7 June 1991 Mr George C Maniatis Actinte Chief Policy Bm-sed Lending and Industry Operations Evaluation Dept World tank I;ashington DC 20433 Dear Sir, ProjecL Performance Audit Report on SM! t (0942 Cv) 54I II (1182 CE) A41) TDPI (1401-ri) Thank you for your letter dated 7 May 1991 and the enclosed Report on above subject. Our comments on the above report are given below; 1. ,endin, unler SMI I & II - Section IV a. We are Lu agreemeit with the commentu tadt. Io the report with regard to the shortcomings on SMI I due t- weaknesses of PCIs in Project Appraisal and Supervision and the monitoring system. !Io-.ever. under SMI II '& TII, we were able to overcome rst of these lapeu through the improvements in the guidelines on Project Appraisal norms and supervision. Efficiency of SMI lending operations of PC!s also has been improved by training PCs' staff in SMT lending. Steps are also being taken by the NOR to carry out sectoral studivs to further improve the efficiency of SMI lending operations. b. Weaknesses in monitoring systems due to lack of in-built mechanisms to collect information hae now been rectified by collecting data on *.Ie total investment cost of sub-projects which will enibl" cRlculation of key economic ratings. c. With regard to addition-:! ftnctioni that can be perrorned by the NrSR we are now 'r, 'h-* nr'r s*s of: i, e*amining the potenti.' no of some resources in equity support to SMT entr"preneurs. and ii. undertaking sample surveys of SMI sub-borrowers to assess the actual economic impact of the sub-borrowere - 56 - APPENDIX II Page 2 of 3 2, Wrvaiuation of TDPI - Section V 5.20 Tn;t i t it tot n l A pitt * Approval of Direct Leandii8 proposals above Rs25 Mn is by the Aniard and Approvals below are delegated and reported to Board. * The Chief Executive 1.s the General Manager, a position provided in the nank'n Act of Incorporation. 5.24 Financial Performance * Financial structure with debt/equity or 39/62 appears 'overly conservative'. This is a result of the age of I10B, and the high initial capital contribution from its original shareholders. It is also a result of the policy of building up reserves during its first years of operations covering the tax exempt period. This position is rapidly changing. * Declined interest spread was a function of the mix of funds with a predominance of lower spread credit line funds in the later years. * NT)B has offered variable interest rates to clients with1 the IDP-II credit coming into place, buL IL is the experience of the DFIs that. project customers are reluctant to obtain term loan facilities on variable interest rates. 5.25 The poor portfolio performance was mostly due to the disturbed conditions in the country starting In mid 1983 which after settti.ng down started again in late 1987. After the ctnditions have settled down In late 1989, the portfolio improved and our collection ratio since early 1990 is 9010. We have atso managed to restructure the projects purtfolio badly affected during the disturbed period. 5.27 Tnstittitiontal Development * NT)B's early attempt in project promotion with the help of a Consultant from IDA, Ireland was not a success. Our approach now is differe-it. We are pursuing a more aggressive business development strategy and have set up Merchant Banking and Business Consultancy Units and have already established linkages with foreign and local firms. * Being aware of the significance and importance of economic evaluation and sub vector studies, we have taken steps - 57 - APPENDIX II Page 3 of 3 to establish an economic unit and to recruit it least 9 - " experienced staff. tn thie CARe too, your comments under 5.29 regarding sthfftna iN valid. With the impending privatisAtion of the Rank, we expect more flexibility of action. 5.30 Although not in a very significant way, we have used the TA funds to obtain technical assistance to solve some of our clients' problems. The TD? facilities provided under IDP-TII and SMIT-TV were of some assistance to our clients. We very much regret thL delay in responding to your letter. Yours faithfully NATI2L DEV OPMEN AK (Nie C D Iddamalg neputy Oeneral Manag r (Services) C D I :1e rNIffET RATES OP NAR CREDT »C SAVXNC flBTITUrtfB. 1970-89 1970 178 1980 1981 1982 1988 1914 1985 198 1987 198 1989 Oøvermøn Tre~sury il.a /a 4.78 8.00 13.00 13.00 18.50 12.® 14.00 11.82 11.00 16.AK 1.00 16.5-19.2 18.2-19.4 Cøetrl h Ret. /k 6.50 6.80 12.00 14.00 14.00 13.00 13.00 11.00 11.00 3i 00 10.00 14.0 ~EI5T RATE 12 4the Fined rp~ltø 4.80-4.75 7.00-7.50 20.00 20.00-22.00 15.00-22.00 16.00-25.00 14.00-22.00 12.00-16.00 8.50-14.00 8.80-14.00 9.00-18.50 11.00-20.50 SacTg Deposit* 4.50 8.50 10.00.14.00 10.00-14.00 10.00-14.80 10.00-18.00 10.00-15.00 10.00-13.50 6.00-12.00 1.00-11.00 5.00-11.00 8.00-14.00 soIme intltutimm matiaml Saving hkel oving, Depile 4.00 7.20 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 14.0 12 Kmthe Flaed Depolta 4.80 7.50 20.00 22.00 22.00 18.00 16.00 15.00 13.00 13.00 13.00 10.0 10-Yenr Smin"g Cetificae 8.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 LO1E~ M6TEB Calrcif lnke, 6~Mrd O.80-12.00 1.30-13.00 11.002.00 11.000.00 11.00-80.00 11.00-0.00 10.00-80.00 9.~0-80.00 9.00-2.00 9.0.00 ~ røecured 6.50-12.00 9.10.14.00 19.00-0.00 19.00-92.00 14.00-80.00 11.00-30.00 13.753~.00 15.00-30.00 9.00-.00 9.7~-3.00 13.00-39.00 13.00-3.00 Lane-Teom Credl6 In=titutane ~tote "ertge~ a / 5.00-10.80 8.00-12.00 3.<0-20.00 &.0-20.00 12.00.24.00 12.00-24.00 12.00-24.00 10.00-24.00 8.00-20.00 9.00-20.00 10.00-20.00 16.0-19.0 AgricuIturel and tndustrial Crodil Corpermti~n /& 9.00-12.00 9.00-12.00 lå låt Devel,opmnt Piec C~rporuti1am 9.80-10.50 9.40-12.W0 10.80-17.00 10.80-17.00 12.00-17.00 11.00-14.00 11.00-14.00 14.00-21.00 14.00-10.00 14.00-19.00 14.00-19.00 14.00-19.00 Neoimnl ng b=ser t0en 11.00 6.00.9.00 6.00-9.00 O.00-9.00 6.00-4.00 g.00-9.00 3.00-10.00 3.00-10.00 3.00-10.00 3.00-10.00 3.00-10.00 3.00-10.00 #lbimal Sevinga ak 10.00-12.00 10.00-12.00 9.00-17.00 12.00-17.00 12.00-17.00 12.00-17.00 12.00-17.00 12.00-21.00 12.00-21.00 13.00-20.00 14.00-20.00 14.00-20.00 /l Waistd overog of bli I.mlea.d on tnder. /h kfoto o% hich Central ae" peovdeødvnce te coameiel banko rcur.d by ~*~t Rd oefrent gutren~ uriti~. Winnce facillet for productivo pureem are currmtly ovele, 4 r*eti raging frem 1.S0-19.001. / Itermt ra% »o the C*& yon gevinga Bm^k 0he fast Offica Soaving ank, med the Savling Certifice Fund. /l Om Jerurr 1. 1979, the Agriculturol med Zndustriol Crodit Corporullanø vere amlgømtd into te Stat* Øbr~gge elnk. Surc: Cntrøl lal of Ceylan OQ 0 a i-' ANNE- 2 TABLE 1 - 69 -Page 1 of 9 SUB-SECTORAL CLASSIFICATION - SMI I. I AI III - AS AT 12/81/90 (R. un) SMI I SMI II SMi III TOTAL SUB-SECTOR NO. AMOUNT NO. AMOWT NO. AMOUNT NO. AMOUNT x Cons. Contracting 11 6.0 24 19.6 19 10.1 54 84.6 1.4 Cons. material 272 42.9 172 69.4 271 97.0 716 209.3 8.8 Food processing 474 56.6 665 287.2 556 805.9 1695 649.7 26.7 Garments 89 9.6 187 61.2 240 159.6 466 280.3 9.1 Metal products 215 22.4 211 67.6 230 38.0 656 198.0 7.6 Other agro industries 120 10.1 46 18.2 73 28.0 289 46.3 1.6 Repair workshop 51 4.1 120 29.4 89 27.7 260 81.2 2.4 Rubber products 29 6.6 74 42.7 64 56.0 167 105.5 4.2 Textile 52 7.7 54 88.7 S9 47.4 165 98.8 8.7 Wood products 176 20.4 174 47.9 196 62.4 546 180.7 5.2 Animal Husbandry A Horticulture - - 156 53.2 146 47.6 806 101.0 4.0 Chemical products - - 8 2.8 24 12.5 82 14.8 0.6 Commercial transport - - 210 60.4 221 65.0 431 146.4 5.7 Leather A allied products - - 28 11.1 80 7.6 so 16.7 0.7 Plastic products - - 42 40.9 42 88.3 84 74.2 2.9 Printing A paper products - - 186 74.7 104 63.0 242 187.7 5.4 Others 262 44.0 280 119.2 209 117.8 691 260.6 11.1 TOTAL 1741 229.5 2491 1068.6 2575 1244.5 6607 2682.6 100.0 - 60 - ANNEX 2 TABLE 2 Page 2 of 9 CLASSIFICATION OF SUB-LOANS BY SIZE - SMI I. I AND III - AS AT 12/31/90 (Re. Mn) SMi I SMi II SMi III TOTAL CATEGORY NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT Re 0 - Re 60,000 1101 52.2 807 3.1 291 8.4 1699 48.7 Re 50,000 - Re 600,000 504 110.4 1425 271.0 1471 284.4 3400 665.8 Re 500,000 - Re 1,000,000 186 68.9 484 266.9 886 285.2 819 588.0 Re 1,000,000 - Re 2,000,000 ---- 286 299.4 262 318.4 498 612.8 Re 2,000,000 - Re 4,000,000 - 89 214.2 168 408.1 256 617.8 TOTAL 1741 229.5 2491 1058.6 2575 1244.5 6671 2532.6 EMPLOYMENT GENERATION - SMI I, II AND III - AS AT 12/31/90 SMI I SMI II SMI III TOTAL No. of Job opportunItles 17520 25060 29806 71892 ANNEX 2 TABLE 8 - e1 - Page 8 of 9 DISTRICT-WISE CLASSIFICATION - SUI I. Il AND III - AS AT 12f31/90 (Ns. Mn) SMi SMI_il SUI II TOTAL DISTRICT NO. A~ NO. AVOUNT NO. AVOWRT NO. AMONT 1. Ampara 19 1.9 1 0.1 2 2.0 22 4.0 0.2 2. Aouradhapura 40 3.7 11 36.2 102 28.0 266 62.6 2.6 8. Badulla 6 4.8 6e 11.0 68 18.2 192 29.0 1.1 4. Batticaloa 22 3.7 8 1.6 -- --- 26 6.2 0.2 6. Colonbo 400 8.8 707 409.4 669 417.9 1776 910.9 86.0 6. Galle 76 7.6 246 89.6 208 117.6 628 214.6 8.6 7. Gompahe 218 80.1 815 141.9 88 192.0 910 804.0 14.4 8. Hambantota 87 4.6 66 28.7 44 14.8 147 42.6 1.7 9. Jaffna s1 12.4 6 8.8 8 1.9 60 17.6 0.7 10. Kalutara 67 7.6 90 46.6 119 88.0 266 188.7 6.4 11. Kandy 162 9.4 108 81.6 146 58.6 400 94.0 8.7 12. Kegalle 29 4.6 106 88.8 8 12.0 170 66.8 2.2 18. Kilinochehi -- --- --- ---- -- -- 0.0 14. Kurunegala 177 12.6 148 58.8 278 08.0 698 184.6 6.8 16. Mater& 92 11.6 187 48.4 101 64.8 880 114.8 4.6 16. Mannar 8 1.8 -- ---- -- -- 8 1.3 0.1 17. Matele 68 4.7 29 6.4 29 9.0 111 20.1 0.8 18. Moneragale a 0.2 29 6.8 18 2.8 46 7.8 0.8 19. Mulloltivu 8 0.4 -- --- -- --- 3 0.4 0.0 20. Nuwera Ellys 3 0.7 28 9.1 86 26.4 68 86.2 1.4 21. Polonnaruwa 85 8.6 69 14.9 40 12.1 184 80.6 1.2 22. Puttaim 148 16.6 155 62.7 211 88.7 612 166.9 8.2 28. Retnapurs 22 2.1 101 8.4 91 49.4 214 87.9 8.5 24. Trincoal.e S 2.1 8 0.4 6 2.8 16 4.8 0.2 26. Vavunlye _ 0.9 1 0.8 - __ - 7 1.2 0.0 TOTAL 1741 229.6 2491 108.8 2676 1244.6 607 2682.6 100.0 - 62 - ANNEX 2 TABLE 4 Page 4 of 9 SR1 LANKCA SECOND SALL A EDIUM INDUSTRY PR JCT M In ANALYSIS OF ARREARS LOANS IN ARREARS DEC. 1966 DEC. 1967 DEC. 1968 DEC. 1969 1. Total no. of loans in portfolio 148 2208 2295 2056 2. No. of loans in arrears with 6 or lose than 6 months 865 508 1010 499 8. As a 2 of total loan portfolio 24.41 28.01 44.0S 24.2X 4. No. of loans in arrears over 6 months 168 816 650 787 G. As aX of total loan portfolio 10.91 14.81 28.91 86.81 8. Total no. of loans in arrears 526 624 1560 1238 7. As a X of total loan portfolio 85.85 87.3 67.9z 80.01 PRINCIPAL AFFECTED BY ARREARS 8. Total principal outstanding (Re. In Mn.) 625.4 959.2 970.8 781.1 9. Principal affected by arrears with over 5 mths (Rs. In Mn.) N/A N/A 282.8 811.8 10. As a X of principal outstanding N/A W/A 24.0S 40.91 ACTUAL ANOUIIS IN ARREARS 11. Arrears with 6 or less than 8 months (Re. In Mn.) 5.0 8.1 10.2 9.4 12. As a X of principal outstanding 1.0s 1.01 2.01 1.21 18. Arrears between 7 to 12 months (Re. In Mn.) 8.9 10.7 15.7 18.6 14. As a 5 of principal outstanding 0.51 1.01 1.61 2.2X 15. Arrears over 12 months (Re. In Mn.) 9.8 22.0 54.9 92.7 18. As a X of principal outstanding 1.61 2.85 5.6 12.11 17. Total arrears (Re. In Mn.) 16.2 40.8 69.6 118.6 18. As a X of total principal outatanding 8.01 4.85 9.2X 16.65 -68 - ANNEX 2 TABLE 5 Page 5 of 9 AIMUAL COLLECTION PERFORMANCE BY PCIs as et W06U Jun* 1990 (Ra. MO) 8111 1 DOC, PS COC «4 DFCC sS TOTAL (1) Opening arreåre -Interewt NOT AVA I LABILE -Principal N 0 T A V A I L AB L E (2) Current Duce - Interest - Principal (8) Total dues at the and of the perlod - Inte-est N 0 T A V A I L A B L E 84.6 - Principal 41.7 (4) Col lectlone - Interest 0.8 0.9 0.6 0.4 - - 2.1 - Principal 0.7 1.4 1.- 0.1 - 8.8 (6) Rescheduling - Principal (0) Closing balance duo - Interest 9.6 20.0 1.6 1.6 - - 82.6 - Principal 11.1 22.7 1.8 2.8 - - 87.9 2f.6 47 4 : 70.5 $m11I (1) Opening arreara - Interest 16.2 15.6 4.8 1.8 11.4 - Principal 65.0 26.6 2.4 2.0 24.4 (2) Current Duee - Interest 49.2 24.6 2.6 8.2 - Principal 75.7 50.6 12.8 6.1 (8) Total dues at the end of the period - Interest 67.4 40.0 6.8 4.5 - Principal 180.7 77.1 14.7 10.1 ¶W. =r IM. 4. (4) Collections - Interest 88.8 28.9 8.4 2.6 - Principal 65.4 87.6 9.8 7.1 fi n i. " 2v M n (6) Rescheduling - Principal 0.2 - - - (6) Clowing balance duo - Interest 88.6 16.1 8.4 1.9 - Principal 65.1 89.6 6.4 8.0 (7)(4) / (8) X 100 60.1% 62.5« 59.0% 66.4% ()(6) /)(8) X 100 0.1% - - - (9)(4) + X 100 50.2x 62.6% 69.0% 66.4% 64 - ANNEX 2 TABLE 6 Page 6 of 9 Ott LANKA SECO SM.L AI MDIM DUSRY PROJECT (SM! HI) (CEDIT 10-E) A SIS OF AMEARS LOANS IN AMEARS DEC. 1988 DEC. 1989 1. Total no. of loans in portfolio 299 1009 2. No. of loans in arrears with 6 or lo*e than 6 months --- 194 S. As a X of total loan portfolio --- 19.2X 4. No. of loans in arrears over 8 months --- 76 5. As a of total loan portfolio --- 7.65 8. Total no. of loans in arrears 56 270 7. As a X of total loan portfolio 18.7s 28.75 PRINCIPAL AFFECD BY ARREARS 8. Total principal outstanding (Re. In Mn.) 164.4 628.5 9. Principal affected by arrears with over 5 mths (Re. In Mn.) 4.5 80.4 10. As a X of principal outstanding 2.7X 5.81 ACTUAL AM TS I ARREARS 11. Arrears with 6 or lose than S months (Re. In Mn.) --- 4.8 12. As a 1 of principal outstanding --- 0.81 18. Arrears between 7 to 12 months (Re. In Un.) --- 2.2 14. As a X of principal outstanding --- 0.4 16. Arrears over 12 months (Re. In Mn.) --- 1.4 18. As a X of prinuipal outstanding --- 0.801 17. Total arrears (Re. In Mn.) 0.6 7.9 18. As a X of total principal outstanding 0.4 1.51 -65- ANNEX 2 TABLE 7 Pag* 7 of 9 ANNUAL COLLECTION PERFORMANCE BY PCI a at SOth Juna 1990 (Ra. mn) si 111 BOC P CDOC « DFCC 8S TOTA. (1) Opening arrearg - Intereat 2.1 0.7 - - - 0.5 - Principal 1.8 0.8 0.2 - 0.4 0.2 (2) Current Duc* - Interest 25.0 21.9 4.0 4.7 9.9 - Principal 24.6 16.8 6.8 2.9 6.6 49. WT W.T n. U3. (3) Total duo* at the end of the period - Intereast 27.1 22.6 4.9 4.7 10.4 - Principal 26.9 17.1 6.0 2.8 6.8 m" M-iI. (4) Collectiona - Interest 21.6 17.7 4.6 4.7 9.1 Principal 20.6 12.9 6.7 2.8 6.1 T" 80 rm. 7. r4.2 (6) Reachodullng - Principal - - - - - - (6) Closing balance du* - Interest 6.6 4.8 0.2 1.8 - Principal 6.8 9.0 0.8 0.0 - 1.7 10.~9 M . n. (7)(4) / (3) X 100 79.4% 77.8% 95.8% 100.06 82.56% (8)(6) 1(8) X 100 - - - - - (9) (4) (6) X 100 79.4% 77.85 96.86 100.06 82.6% -8 - ANNEX 2 TABLE 8 Page 8 of 9 PRESENT STATUS OF PROJECTS FINANCED AND REASONS FOR PROJECTS IN DEFAULT SMI I SMI II SMI III Amount In Amount in Amount in No. Re. Mn No. Re. Mn No. Re. Mn Installments in arrears Below 6 Installments 15 0.2 889 6.8 291 4.7 6 - 12 Installments 84 1.8 178 11.8 88 5.1 18 - 24 installments 88 2.8 218 26.8 27 1.6 Above 24 installmen4e 211 94.1 286 69.5 - - TO WY3 n 1-1-27 401T 1 Reasons for Default Willful 141 27 Genuine difficulties 288 97 Disinterest of the Borrower 108 9 Not Indicated/Other 477 268 Under implementation 28 111 Operating at the expected level 788 805 Operating below the expected level 254 98 Abandoned 188 9 Temporarily stopped 72 21 Fully settled 491 15 Not Indicated 405 888 - 67 - ANNEX 2 TABLE 9 Page 9 of 9 NET REFINANCE APPROVALS BY PCI. - SMI I. II AND III - AS AT 1281{90 (Re. Mn) SMI I SMI II SMl III TOTAL PCI NO. AMOUNT NO. AMOUNT NO. AMOUNT NO. AMOUNT Bank of Ceylon 656 88.1 1810 468.8 758 828.1 2726 872.6 People's Bank 896 91.4 722 264.1 1012 864.2 2880 709.7 Commercial Bank of Cvylon Ltd. 115 29.6 90 49.2 89 72.8 294 161.0 Hatton National Bank Ltd. 6 21.7 76 88.2 207 86.9 848 145.8 Development Fin. Corpn. of Ceylon 07 0.8 298 258.8 277 278.7 677 538.8 Sampath Bank Ltd. - - - - 167 107.9 187 107.9 Regional Rural Dev. Bank-Kurunegala - * - - 8 2.7 68 2.7 Solan Bank Ltd - - * * 02 4.7 02 4.7 TOTAL 1741 229.6 2491 1068.6 2676 1244.6 6807 2682.6 ACTUAL. PROJECTION Pinaretli Year 1986/87 1987/88 1988/89 1989/90 30.09.90 1990/91 1991/92 1992/98 1993/94 1994/95 ApprovaI 591.4 407.7 975.9 11M.0 512.0 1510.0 182.0 2382.0 298.0 3899.0 Co~mlt~entwa 828. 561.7 827.9 9~0.9 40.0 1208.0 150.* 18.@ R3M0.4 2989.2 Dmburscmnt 584.9 43.1 713.2 879.4 844.1 1402.7 1~87.4 200.4 2508.5 8150.8 L.AR*e Approvato 42.6 80.7 20.7 74.0 88.0 98.0 188.0 188.0 255.0 40.0 Commitmenta 29.0 32.7 28.8 8.2 45.0 98.0 188.0 18.0 258.0 ~40.0 Olebursementa 28.5 36.8 21.2 50.3 34.5 83.S 122.2 16.7 228.2 301.8 CilM Discounting Approvale 0.0 0.0 0.0 53.3 89.0 50.0 75.0 88.0 100.0 120.0 Commi tento 0.0 0.0 0.0 58.& 89.0 50.0 75.0 8.0 100.0 120.0 Oimburcament 0.0 0.0 0.0 0.0 184.4 50.0 75.0 85.0 100.0 120.0 5hare Investuente Approvala 12.8 10.0 19.9 17.0 8.0 20.0 20.0 20.0 20.0 20.0 Commi timnta 12.8 10.0 19.9 17.0 3.0 20.0 20.0 20.0 20.0 20.0 Disbursamento 8.6 8.9 5.6 19.4 21.6 20.0 20.0 20.0 20.0 20.0 oWher Operationa Approvala 0.0 0.0 0.0 0.0 0.0 185.5 90.0 81.0 100.0 128.0 Cosmi tamnta 0.0 0.0 0.0 0.0 0.0 185.5 96.0 81.0 100.0 125.0 Dimbursementi 0.0 0.0 0.0 0.0 0.0 185.5 96.0 81.0 100.0 125.0 Annuai Orowth Rat* of Totai Approvale 9 17.6 34.3 17.1 80.9 40.1 18.6 22.4 26.1 26.1 DEVAP"Wf IMMH COMPORAION- OFCELON WSINIRAL *kAy fIt7ett API'VALA Pinancial Year 198/04 S 1968/87 9 1967/68 S O / 1909/90 1 80.00.90 9 Agriculture. forestry A fishing 19.0 2.2 21.0 8.2 57.1 8.1 W.1 2.7 29.0 2.2 10.0 2.7 Mining & quarrying 6.8 1.2 7.4 1.1 0.0 0.0 2.0 6.1 6.0 0.8 3.0 0.5 Manufacture of food. baverage and tobacco 188.7 25.2 6.9 18.4 18.4 18.7 181.4 14.9 LJ9.0 21.7 147.0 82.1 anufacture of texti le& 17.8 8.2 21.9 8.4 96.0 8.2 1.6 6.0 78.0 8.6 8.0 1.2 Manufacture of wearing apparel including footwear 10.1 8.8 88.8 8.1 18.9 1.6 67.4 8. 188.6 11.7 86.0 12.5 Manufacture of leather and leather products including footwear 10.9 2.0 8.7 0.9 6.7 1.0 9.8 9.9 5.8 0.4 12.0 1.6 Wood and manufacture of wood products 1.2 0.2 5.9 0.9 8.8 0.6 14.5 1.4 11.2 0.6 80.7 4.6 Manufacture of paper products, printing. publishing and packaging 20.2 8.7 85.4 8.6 84.1 8.9 48.7 4.8 106.0 7.9 42.0 6.8 Manufacture of chemicals and chemical Aroducts other than rubber and plastic products 60.8 11.0 22.9 8.8 88.0 4.0 201.8 19.6 116.8 6.8 26.0 8.9 Rubber product* aenufacture 11.9 2.2 28.4 8.6 8.9 0.7 72.8 7.1 88.0 2.5 12 0 1.6 Plastic producte manufacture 48.8 6.9 61.0 9.4 18.9 2.2 48.8 4.6 84.0 4.1 69.2 6.9 Manufacture of non-matellix aineral product including pottery. china and gies manufacture 29.7 8.4 30.2 4.7 100.0 11.8 48.2 4.2 67.0 6.8 2.0 0.8 Basic metal production 0.0 0.0 47.9 7.4 40.6 4.7 16.1 1.8 8.0 0.6 0.8 0.0 Manufacture of fabricated metal products machinery and equipment including electrical iteas. tranaport equipeent and instrument manufacture 71.1 12.9 2.9 8.7 71.9 8.8 20.9 2.8 107.6 8.1 90.8 1.6 Electricity, gas and water industries 0.8 0.1 80.0 7.7 10.1 1.2 26.4 2.6 1.0 0.1 0.0 0.0 Construction induetries 17.8 8.2 18.0 2.9 8.8 0.6 18a 1.8 81.6 8.9 16.0 2.4 Hotels, restaurant.s and trade 0.0 0.0 4.7 0.7 15.7 1.8 17.1 1.7 81.8 2.4 1210 1.6 Transport, storage and communications 7.1 1.8 29.7 4.8 98.9 10.8 30.8 8.2 91.0 6.6 40.0 6.0 Financing. insurance, real estate, and business services 89.4 12.6 80.8 12.8 178.9 20.6 41.8 4.1 48.0 8.8 80.0 7.8 Comnity. social and persnal services ...LA . 4 ..5J _LA3 ...=U A .....-,2 LU .Ufj2 -A .1 Total 880.0 100.0 648.8 100.0 88.4 100.0 1,016.8 100.0 1,830.8 100.0 686.0 100.0 * 70 *Ne. m1;2aGh AOWIMt PtN&NC CM ATIIPCYLt UFMAlfT AlRilWl TO D Pinancial Vear OWN/8 10/17 1 197/ * Ion./"* S 1909/90 S 30109.90 S Agriculture. forestry A fiahing 8.5 0.0 7.8 0.8 1S.8 0.6 29.9 1.4 52.4 2.0 60.9 9.1 ining A quarrying 7.2 0.6 10.2 0.7 7.0 0.4 4.6 0.2 8.1 0.0 9.7 0.3 Moufacture of food, beverages and tobacco 189.2 18.6 262.0 17.0 837.7 1V.4 808.0 16.3 425.2 16.3 867.0 19.6 Manufacture of tUsti Ies 63.8 5.8 8.S 4.4 8.1 4.5 98.9 4.8 119.4 4.6 127.6 4.4 Manufacture of wearing apparel Including footwear 45.4 4.0 48.0 2.8 77.0 4.2 96.1 4.4 110.7 4.3 130.0 4.8 Manufacture of eather and leather products including footwear 17.6 1.0 22.6 1.5 25.2 1.4 21.2 1.0 44.1 1.7 48.4 1.5 Wood and 40nufacture of wood products 6.0 0.5 7.1 0.8 9.4 0.8 17.1 0.0 26.8 1.1 385.5 1.2 Manufacture of paper products, printing, publial-ing and pecliging 40.5 8.6 96.4 6.2 100.0 5.5 116.0 8.8 148.6 8.6 148.2 5.1 Manufacture of chemicals and chemical products other than rubber and Plastic products 96.0 .7 124.0 8.0 116.6 6.4 147.0 6.7 262.0 10.1 248.1 8.9 Rubber products manufacture 45.7 4.1 86.0 8.6 64.6 3.0 68.0 0.8 98.8 8.8 96.6 8.4 Plastic products manufacture 06.2 8.0 8.8 5.5 91.5 8.0 102.? 4.7 119.7 4.3 112.6 3.9 Manufacture of non-metallis mineral product including pottery, chins and glass manufacture 90.7 6.0 107.8 7.0 110.9 6.2 100.8 0.0 125.0 4.8 168.6 5.7 Basic metl production 0.0 0.0 12.3 0.6 76.7 4.2 84.2 3.8 102.9 4.0 97.4 0.4 Manufacture of fabricated meatl products machinery and equipment including electrical items. transport equipment and instrument manufacture 61.0 7.2 69.7 8.6 117.8 6.4 162. 7.4 172.5 6.6 184.9 6.4 Electricity, gas and water industries 2.9 0.8 86.0 3.8 47.8 2.6 41.9 1.9 48.9 1.7 48.7 1.5 Construction industries 19.1 1.7 26.7 1.7 85.0 1.9 09.2 4.8 79.6 6.1 98.6 V.4 Hotel*. restaurants and trade 276.6 24.6 301.8 19.5 3821.7 17.5 337.7 15.4 327.9 12.6 35.0 12.3 Transport, storage and comynications 9.5 0.8 06.0 2.8 40.4 2.2 96.6 4.8 181.9 6.7 177.4 6.1 Financing, insurance. real estate. and busin*** *ervices 69.7 0.2 118.9 7.5 144.5 7.9 141.6 6.4 154.0 5.2 189.9 4.8 Community, social and pereonal services 4 ....A ..12 ....0J .....J. ...11 -AM -LA --AA .. ...JA Total 1,127.4 100.0 1,544.5 100.0 1,634.8 100.0 2,197.0 100.0 2,601.9 100.0 2,07.2 100.0 -711 19000 00PATW0B ACTUAL PROJECTION Financial Ycar 198/87 1987/88 198/89 1989/90 30.09.90 1990/91 1991/92 1992/98 199/94 1994/95 A. Approva 1. Locel Currency Lamn 898.1 84.4 364.8 88.4 281.2 MO.0 88.0 1121.8 1480.5 1122.5 Lcaoing 42.6 50.7 90.7 74.0 56.0 98.0 18.0 148.0 255.0 340.0 Bill Ditcounling 0.0 0.0 0.0 58.8 69.0 80.0 78.0 85.0 100.0 120.0 Share Inveatuenta 12.8 10.0 19.9 17.0 3.0 20.0 20.0 20.0 20.0 20.0 Other oera&Monå 100,0M3a§ R E. Ma E 448.8 9.1 605.1 679.7 181.2 111.5 1212.0 1495.8 190.5 2427.5 2. Foreign Currency Lmnan 22. 2ZU .mu& 610.8 N .O .29.0 1210.5 1507.5 1878.5 Total Approvalm 648.8 88.4 1018.8 1380.8 862.0 188.5 2211.0 2708.0 8413.0 4304.0 8. Commit0ent. 1. Locri Currency Loana 288.7 315.4 487.2 477.6 205.0 81.0 708.4 897.2 1144.4 1488.0 Loaoing 29.0 32.7 28.8 8.2 45.0 98.0 138.0 188.0 255.0 840.0 Bill Diacunting 0.0 0.0 0.0 58.8 89.0 50.0 75.0 85.0 100.0 120.0 Share Inventmente 12.8 10.0 19.9 17.0 8.0 20.0 0.0 20.0 20.0 20.0 Other Operatione _..Q ._Q.Q ...O -QL -L0 2. -E -M1O.. .J96.0 1M0 825.s 858.1 80.9 60.1 842.0 877.5 1085.4 1271.2 1619.4 2088.0 2. Foreign Currency Lan* 2" 2" &0Z 491.1 2nuO .306, ,.Z92 98.4 10.0 101.2 Total Co=it~nte 587.1 604.4 871.6 1097.4 87.0 1861.5 1884.8 219.6 82.4 8M4.2 C. Diabureme~nta 1. Local Currency Loana 843.8 259.0 471.2 827.0 164.9 88.6 818.8 1085.1 1818.9 1667.9 Leaoing 28.5 386.8 21.2 80.8 84.5 88.8 122.2 168.7 226.2 301.8 Bill Dicounhing 0.0 0.0 0.0 0.0 184.4 80.0 75.0 85.0 100.0 120.0 Share Inveåtmenta 8.8 8.9 5.6 19.4 21.6 20.0 20.0 20.0 20.0 20.0 Other Operation* - _Q.u 00 ,LO- I1A -2~ -JLO 100. .0 880.9 804.7 498.0 596.7 405.4 972.4 1181.7 1887.8 1760.1 24.7 2. Foreign Currency Loan 2cL, M.si SE a 1Z2a2 2Hal .n1n.2 .z273 1121,8 140J Total Dibura..ate 822.0 689.8 740.0 949.1 784.6 1741.8 180.6 2881.1 2981.7 8717.8 -72- ANNEX 3 TABLE 4 Page 5 of 12 0 0 N J Cl 2 lii i li sa a a a 9 !iJi *78 - AMMM AM A DMn3ANW FDOM ONORTI OF CEYLON ACTUAL PROJECTION FY ended 81st Narch 6/87 87/88 88/89 89/90 80.00.90 90/91 91/92 92/98 98/94 94/95 INCOME Interest from loans 158.9 193.9 202.0 210.2 172.8 861.0 497.2 684.8 842.0 1047.8 Dividend income 6.0 8.6 10.8 6.8 5.9 15.7 21.0 26.2 82.0 85.8 Profit on leasing operations 4.9 9.6 9.5 10.8 8.5 26.1 88.9 50.3 69.8 92.0 Recovery of Bad Debts 4.6 6.7 9.4 11.0 8.1 9.0 10.0 12.0 12.0 12.0 Profit on Bill Discounting 0.0 0.0 0.0 0.0 2.7 7.2 18.0 7.5 6.8 10.5 Profit on Property Development 0.0 0.0 0.0 0.0 0.0 7.5 10.8 18.8 20.9 89.4 Income from Venture Capital Co. 0.0 0.0 0.0 0.0 0.0 2.0 2.0 2.0 2.0 Profit or Privatizatlon ...& ....0,& ..... - - 2SA .B. Income from Portfolio 178.4 217.8 231.2 800.8 198.0 426.5 569.6 771j.6 1015.0 1289.0 Surplus Fund Inv. Incom 89.8 37.2 55.6 77.2 24.8 89.9 84.2 48.7 47.0 72 1 tiacellaneous Income 4.8 _ _...A .19.4 .g, -L .9 2.8 24. - 2gg1 Total Income 217.2 259.6 294.8 387.9 231.6 482.2 640.7 846.6 1066.0 1840.5 OPERATINQ EXPES Salaries A overhead expenes 14.1 16.2 25.6 88.4 19.5 46.4 52.8 60.7 69.5 79.1 Bad debts/provision for had debts 25.8 27.1 26.8 26.0 12.1 38.8 86.2 41.8 54.1 6.2 Depreciation ..M JA M .7 aM .2 M.2 1.9 1.7 -MR Total Operating Expensea 41.8 80.1 57.9 86.1 34.1 08.0 99.2 112.9 1385.8 188.1 Operating income before finance charges 175.4 209.5 286.9 821.8 197.5 394.2 541.5 732.7 950-7 1182.4 FINANCE CHAROE Interest on - ADO Loans 24.8 27.8 29.2 85.8 20.4 64.0 121.7 168.1 277.1 885.8 - IDA Loans 27.8 86.7 48.0 68.6 89.6 91.9 149.5 218.6 804.2 409.1 - Other FC Loans 5.9 6.0 9.8 17.8 8.6 16.4 16.0 15.1 18.4 11.8 - Rupee Loan.s1 -AU -MA 57.4 -AM -"A . 2.4 49.0 . Total 119.2 140.7 144.4 177.2 104.8 201.9 861.5 494.2 648.7 689.8 Profit before taxation 56.2 68.8 92.5 144.8 95.2 162.8 180.0 238.5 307.0 842.9 Leee: Taxation ..4 19. ILI .9" 2u A. 4112 . ALA j . Profit after taxation 47.8 88.6 75.4 112.1 84.6 116.3 188.8 187.9 238.4 262.1 APPROPRIATIONS Dividend 12.0 14.0 15.0 20.0 0.0 20.0 20.0 20.0 20.0 20.0 Special reserve 9.0 0.0 0.0 0.0 0.0 Reserve under Intend Rev. Act 18.0 22.0 81.0 51.0 0.0 69.8 71.8 67.0 116.9 187.8 General Reserve & Net Earnings 2u 2LA LI 4L A -MRI 7.8 1Q. l 12ggA Total 47.6 8.8 78.4 112.1 84.6 116.8 186.9 188.0 288.5 262.1 RATIOS Return an average equity (5) 22.2 28.0 24.8 29.2 14.0 24.8 28.7 25.8 28.8 22.7 Return on average total aset (5) 2.8 2.8 8.2 4.1 2.1 8.5 8.2 8.5 8.7 8.8 Adaiiletrative A general expenaef/ everage total easete (5) 0.8 0.8 1.1 1.2 0.8 1.4 1.2 1.1 1.1 1.0 Intereest spread () 4.2 4.8 8.8 4.6 2.8 4.9 4.7 4.8 4.4 4.0 Earning spread () 4.9 8.1 4.7 5.8 8.7 6.1 6.2 6.6 7.0 6.6 -74- ACTUAL PROJECTION FY ended ltet March 44/67 7/n 01/09 49/90 30.0.90 90/91 91/92 92/ 93/04 94/9 ASSETS Investments Foreign currency 548.7 1.204.7 1.800.6 1,501.6 1.767.1 2,095.9 2.881.9 8.815.8 4,105.4 5.0165.4 LAcal currency 678.4 297.8 ag.? a9.4 40.5 824.0 s. 1.o M.9 1.028.8 1,206.9 Working capital 1M.1 161.6 81.8 416.0 377.0 487.8 411.2 447.7 815.7 001.0 Lase: Provision for Bad Debts (20.2) (37.6) (67.2) (57.2) (57.9) Not term portfolio 1.405.0 1,648.9 1,990.9 2,881.6 2.867.4 8,107.2 8.701.1 4,892.4 5,647.4 6,698.8 Share Investments (net) 82.8 89.1 98.7 110.2 180.2 127.4 144.4 160.9 177.4 191.9 Leas*old property 86.6 61.6 61.6 82.9 100.4 106.2 150.6 208.9 206.1 870.7 Bill Discounting 0.0 0.0 0.0 0.0 6.1 11.8 14.0 15.7 18.9 21.6 Unit Trust 0.0 0.0 0.0 0.0 18.1 87.8 98.8 99.8 W9.6 9.6 Venture Capital Company 0.0 0.0 0.0 0.0 0.0 90.0 20.0 20.0 20.0 90.0 Insurance Company 0.0 0.0 0.0 0.0 0.0 2.5 2.5 2.8 2.5 2.5 Property Development 0.0 0.0 0.0 .0 0.0 10.0 2W.0 87.5 80.0 82.5 Privatized Enteprises 0.0 0.0 0.0 0.0 0.0 80.0 90.0 66.0 45.0 45.0 Total investments perkfollo 1,84.8 1,796.9 2,146.4 2.544.7 2.916.2 832.4 4,241.4 8,202.7 6,846.4 7,709.8 Lasm: current portion of loans (289.9) (854.8) (461.2) (80.4) (1.150.0) (1.140.8) (1.844.9) (1.770.0) (2.88.0) (2,828.4) Total 1.34.4 1,442.6 1,665.2 1,666.8 1,768.2 2,861.6 2,986.5 8,42.7 8.991.4 8.88.9 FIE %D NON-CURW ASSEIS Fined Assets (at cost) 86.8 80.2 88.2 57.9 08.6 78.2 76.2 81.8 6.1 91.4 Leas: Accumulated depreciation 7.0 18.4 19.8 20.9 29.4 84.1 48.5 88.6 64.8 78.8 NET FDED ASSES 29.8 36.8 85.9 82.0 8.2 41.1 84.7 27.7 21.8 14.9 Loans to staff 6.6 7.8 8.9 10.0 10.9 10.9 12.8 14.4 17.1 20.4 Special Reserve Fund Investments 18.0 15.0 18.0 18.0 18.0 18.0 18.0 15.0 15.0 18.0 51.1 89.1 59.8 57.0 61.1 67.0 62.0 87.1 88.7 50.8 CUtREfTASSEMS Debtors A deposeit 2.6 8.4 8.9 84.2 80.8 20.8 26.8 28.8 28.8 20.8 Accrued income 14.5 24.8 81.6 88.7 46.8 78.5 106.9 187.0 178.8 218.8 Cash A bank balances 842.8 801.1 824.8 196.6 186.5 76.1 448.9 297.4 420.6 66.1 Current esition of leen portfolio 209.9 854.8 481.2 6859.4 1,150.0 1,140.8 1,344.9 1,770.0 2,386.0 2,826.4 Total Current Assets 649.8 M.6 841.9 948.9 1,866.1 1,818.7 1,919.0 2,22.6 2,977.2 8,248.1 Total Assets 1,984.6 2,190.8 2,868.2 2,666.2 8,198.4 8,787.8 4,677.5 8,718.4 7.022.8 6.684.6 * 75 - nFvFlanne PINarF ranR "i - miA UrFIUt (cont'd) ACTUAL PROJECTION FY ended sat March M/87 6/se ss/80 al90 s0.00.0 0l91 01/92 92/9s es/94 94/0s EWITY AND LIAITIES ElWITY Pald in capial 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 special reserve* 18.0 18.0 15.0 15.0 15.0 15.0 15.0 1s.0 15.0 15.0 IWilding reserve 25.0 25.0 25.0 25.0 25.5 25.0 25.0 25.0 25.0 25.0 Nitervr. under Inland Rev. Act 49.0 71.0 102.0 158.0 153.0 2.8 298.6 890.7 497.6 684.9 General Reserves 42.0 65.0 04.0 135.0 135.0 162.2 210.0 290.6 892.4 497.2 Profit A Lows A/c 1.1 0.6 1.2 1.0 65.9 1.9 1.9 1.9 1.9 1.9 Total 932.1 976.S 857.2 420.9 408.# agM.4 645.5 618.4 1081.9 1274.0 LONO-TEMU LEAMILITIE Government Loans 10.7 8.5 7.5 6.4 6.4 5.8 4.2 8.1 2.0 0.9 CS Refinance Loans 260.9 199.9 288.9 241.0 2A6.5 226.0 217.2 210.9 173.5 188.6 NOg Refinance Loans 181.0 226.5 241.2 260.8 24.8 844.5 488.2 679.4 927.0 1242.6 OFM Development Sonds 396.7 898.7 898.7 896.7 806.7 89.7 896.7 206.7 290.7 2*67 ADS Credit Line 278.5 297.9 860.9 401.8 455.8 885.0 1190.5 1458.8 1672.6 2371.1 IA Credit Line 409.6 84.9 657.9 812.8 941.9 1104.0 1617.0 1758.0 2159.8 2610.8 Fi0 Loans 6B.0 65.2 64.1 57.5 51.1 51.1 44.7 88.8 81.9 25.5 08 Loans 0.0 0.0 191.0 191.0 191.0 191.0 191.0 179.0 158.0 181.0 Customer Deposits 0.0 0.0 0.0 0.0 0.0 25.0 100.0 200.0 800.0 500.0 Leas: Current portion of debts (94.8) (181.8) (202.4) (215.0) (191.0) (242.5) (582.8) (501.2) (784.6) (609.8) Total 1,484.0 1.642.8 1,052.6 2.154.0 2.404.7 2,98.1 8.618.7 4.229.9 5.165.5 6.709.8 OtENr LIAILITIE Sundry Creditors 124.5 118.5 41.9 52.0 59.4 86.1 86.0 85.7 84.7 88.4 Income Tea Payable 7.9 9.4 16.9 2.4 84.8 14.8 24.5 29.2 85.4 88.8 Dividend Payable 12.0 14.0 15.0 12.0 10.1 10.0 W.0 20.0 20.0 20.0 Current Portion of Debt 94.8 181.8 202.4 215.0 101.0 242.5 532.6 691. ' 784.6 609.8 Total 238.7 271.2 276.2 802.8 294.8 802.9 618.8 675.1 324.9 701.0 Total Liability A Equity 1,984.S 2.190.8 2.568.2 2.66.2 8.198.4 3,767.4 4.677.5 5.716.4 7.022.8 8.684.8 RATIOS Current Ratio 2.7 2.5 8.0 8.1 4.6 4.4 8.1 8.8 8.6 4.6 Debt/Equity Ratio 6.7 8.4 6.4 5.5 5.8 6.0 6.4 5.9 5.7 8.7 DEVLOU2T0INNC COMM0at OF CEVLDN tatens Some hef emolication of Funds ACTUAL PROJECTION FY ended 81s 1arch M/7 *7/8 08/89 69/90 a0.09.90 90/91 91/ 2 92/9 9s/94 94/95 0UCE OF 406 Operating income before interest eAp*naea A after ta 166.9 19.8 219.8 821.7 197.5 162.5 100.8 238.5 807.0 842.9 Add: Non-cash expense items 26.8 88.2 82.5 83.0 14.8 41.0 46.4 52.2 68.6 79.0 Leas: Dividend 12.1 f14Ml .11.91 £9.91 ...M . 0 20.0 ..0. 20, .0 Internal fund generation 161.2 218.8 287.8 84.7 212.0 224.1 246.7 810.7 892.6 441.9 PORTFOLIO REcVERIES - Loans 195.2 276.1 842.9 492.7 298.9 618.7 942.2 1062.9 1406.8 1848.9 - Share investments 0.5 2.8 1.0 8.0 1.1 2.8 8.0 5.5 8.5 5.5 -Lewwe amortixation 4.8 11.9 20.3 29.1 7.0 55.1 72.7 101.4 189.9 204.6 - 0ill discounting 0.0 0.0 0.0 0.0 100.5 40.0 72.8 88.3 97.5 116.8 - Property development 0.0 0.0 0.0 0.0 0.0 25.0 85.0 82.5 87.8 112.8 Local - Central Bank 84.0 9.6 12.8 24.6 4.5 0.0 0.0 0.0 0.0 0.0 - Other& 184.8 128.8 66.6 82.6 61.8 176.9 255.0 115.2 809.4 448.1 Foreign - AB/Oovt. 118.1 48.4 64.0 90.5 108.9 469.5 867.5 543.6 680.5 855.0 - IDA ovt. 120.7 182.6 128.7 204.5 151.9 886.8 870.8 848.6 600.5 855.0 - New Credit Line 2.8 - 191.0 - 0.0 - - - - - Others .L .4J - Ll .Z .0 2.9 319 .1...J ...-4.L --LA.J .1 Total 81.8 824.4 1060.6 1264.8 949.6 1958.8 250.8 2850.1 8800.7 4887.2 APPLICATION OP PLAS Loan diabursementse 585.0 548.8 718.2 879.4 546.8 1402.7 1867.4 2008.4 2505.5 8150.5 Leases 28.5 86.8 21.2 50.8 24.8 88.8 122.2 166.7 226.2 801.8 Share Investemnte 8.6 8.9 5.8 19.4 21.1 20.0 20.0 20.0 20.0 20.0 Property Development 0.0 0.0 0.0 0.0 0.0 85.0 80.0 78.0 100.0 125.0 Bill Discounting 0.0 0.0 0.0 0.0 184.4 50.0 75.0 85.0 100.0 120.0 Long-tern debt repayments Local - Central Bank 27.8 80.8 18.5 17.9 9.0 15.0 8.8 6.8 87.4 84.9 - Others 14.5 87.8 56.1 64.9 87.8 68.7 164.1 814.0 829.7 476.0 Foreign - ADB/oat. 25.8 24.0 1.1 50.1 19.4 85.8 85.7 80.9 88.1 8518 - IDA Govt. 18.5 7.8 0.8 49.6 22.8 47.8 57.5 118.2 110.6 127.7 Others 0.2 0.1 - 6.4 6.4 6.4 6.4 18.4 30.4 80.4 Interest payment 119.2 140.7 144.4 177.2 104.8 285.7 866.2 501.9 692.5 981.9 Capital espenditure 11.1 14.2 5.8 2.7 5.7 17.5 8.7 8.9 5.6 6.1 Unitruet Investments 0.0 0.0 0.0 0.0 1.8 78.0 6.0 6.0 0.0 0.0 Venture Capital Company 0.0 0.0 0.0 0.0 0.0 72.5 40.0 0.0 0.0 0.0 Advances to staff A othere 1.0 1.7 2.8 8.7 1.8 8.8 4.8 5.5 6.5 7.4 Increase/(decrease) in net Current assets (2791 2061 ..91A 0,31 M.21 f=.-21 ..19J.OD iW,li1 ( .1 (510.A1 Total 811.8 824.4 1060.6 1264.8 949.6 1988.8 2688.8 280.1 8800.7 4887.2 Debt/service coverage (timaes) 1.9 2.1 2.7 2.8 8.1 2.4 2.8 1.8 1.7 1.6 Interest coverage (ti*) 2.5 2.6 2.8 2.9 8.0 2.0 1.7 1.8 1.6 1.8 . 77 - DEVELOPtN FDAC COPl~ATIM 0 P CEL Ae.wala of Arreara Ab a March 31 1962 19683 194 1988 1986 197 198 1969 1990 30.00.90 Na. of companes in arr"as 108 149 171 164 118 116 126 171 192 240 Total nufber of comanes 304 828 842 88 407 40» 470 498 640 676 Percentage of companies in arrega () 38.9 45.4 50.0 42.8 29.0 26.4 26.8 4.S 80.0 3.8 Aun% in arrears (Ro. mill ion) 1. Principal in apr.re 7.8 24.5 38.1 24.0 838.8 81.3 47.9 78.7 81.5 97.7 2. Interes a arrears 19.4 24.8 33.2 17.2 28.7 29.5 64.1 72.7 64.7 74.0 8. Total principal & intereat in arrearm 37.2 49.8 71.8 41.2 57.0 80.8 112.0 146.4 148.2 172.8 4. Total princieat 4 intreat outatanding of loan in arrears 121.0 185.2 804.1 306.1 168.9 128.0 158.2 358.3 64.6 794.3 5. Totkl loan outatmading (including arreses) 486.6 529.0 5U.B 776.9 1089.9 1425.2 1688.8 2048.1 2408.8 2656.6 6. Tctal outatanding for loans under ropayment 805.0 878.S 424.6 481.8 708.7 899.1 1220.3 1606.0 164.4 1952.6 Percentages 3/5 8.5 9.3 12.1 5.8 5.5 4.3 6.7 7.1 6.1 6.5 3/6 12.2 13.0 16.8 6.4 8.0 6.8 9.2 9.7 7.8 8.6 8/4 80.7 26.6 28.4 13.5 8.7 47.5 70.8 41.4 21.4 21.7 4/5 27.7 35.0 51.6 39.4 16.2 9.0 9.4 17.8 28.4 29.9 4/6 39.7 48.9 71.6 62.6 28.8 14.2 13.0 28.5 86.7 40.7 sy Age af Arrear (IRa. Gi Ilion) Lees than 3 mantho 9.7 5.0 20.9 5.4 14.5 15.5 35.3 45.3 15.9 28.8 8 - 6 monthm 2.1 1.8 2.5 0.8 2.6 2.8 1.5 26.2 6.4 15.8 7 - 12 mønth" 8.8 4.7 10.9 6.4 6.5 6.9 7.8 28.1 22.6 13.7 Over 12 months 2L2 nLi £.uQ M.2 NLA mLi . .,LI -" 10 11. Total 37.2 49.8 71.8 41.2 57.0 60.8 112.0 148.4 148.2 172.8 y Sector (Re. mil lion) Manufacturing 28.8 87.5 89.1 28.2 31.1 32.9 60.8 78.8 82.8 97.5 Tourim 6.8 9.0 26.6 10.3 10.5 14.4 25.8 38.7 81.7 37.2 Agriculture 0.1 0.1 0.1 0.2 0.2 0.6 1.1 1.5 1.4 1.6 Other ..2. ..2. å . 2 1U 1L2 .I -M£ -ni -- Total 87.2 49.3 71.3 41.2 57.0 60.8 112.0 148.4 148.2 172.8 Suboectoral nealyis af manufacturing aector arregsø a at 81 Deceaber 1988 Tetiles and ready-made garmente 12.2 16.2 20.8 12.2 5.7 6.0 10.9 14.2 16.7 19.6 Duilding materiale 2.8 3.1 6.1 2.8 0.1 0.1 1.8 2.4 2.2 2.5 Cheialcal products 2.5 8.3 2.7 2.4 2.8 2.4 4.2 6.5 5.2 6 EngIneering 1.1 1.4 2.8 1.1 2.3 2.4 4.2 6.8 6.0 7 Rubber products 8.8 4.4 2.2 8.8 1.2 1.8 1.8 8.9 3.7 4.8 Food & beverage 0.1 0.1 1.1 0.1 8.9 6.2 11.0 15.0 19.2 22.5 Otherg .å ..-.U .-.U IL" -LU BL Ai 2Ru NA Total 28.8 37.5 39.1 28.2 31.1 32.9 60.5 78.8 a2.8 97.5 - 7n - KI DEVELG~ PM ~ CTI I CEYLOI Caeh Col leelon Påerfrmice Financlel Year 192/88 193/84 1964/88 198/66 19 /«7 1987/88 19ø/89 1909/90 80.09.90 (1) Diance O/F 19.89 24.61 8.24 17.28 28.73 29.84 64.05 72.67 72.40 nstallaen6 17,D gHJI MMl M.9 ". 9LI 47.92 .290 116.40 Total 37.24 49.27 71.m 41.20 57.11 60.18 111.97 146.37 189.80 (2) Due for %hø Year Intereat 82.08 98.52 100.57 121.59 168.62 216.79 221.Ø8 269.00 25.6 Iltal &øn _. " .. .2 i 1g§ 201.10 295.94 U,» 05 §MS N Total 140.45 1a.a 174.70 232.24 &78.72 512.73 590.99 774.15 861.4 (8) Total Du** Int*reat 101.48 119.88 183.81 188.12 192.35 246.8 2M.f 341.67 839.0 nstallmnt 76.24 11. l.27 ~ 248.48 Z2 417 a eZLs 672.2 Tot 177.69 231.68 248.08 278.44 488.88 73.58 702.96 920.52 1070.2 (4) A4Justfent* for Vrit.-off of Int. 8.67 16.29 3.21 1.48 10.19 2.71 18.86 19.47 0 vrit-off & Reached. of nat. 9,6 .J 2L2 "2 HZiE a M Z -.Z0 9 Total 6.02 25.97 30.50 3.88 27.21 5.94 19.25 24.17 0 <5) C~ah Collection Intoret 72.97 ø8.90 118.37 113.66 152.62 179.57 194.45 257.70 809.3 Inatel lmnf .49 8.go _1.0 99.12 1L95.17 2M6S IA291 492.65 §Z-4 Total 1.40 134.80 174.36 212.78 347.79 455.85 37.M8 780.35 8a.a (6) Balance C/F Interet 24.81 33.24 17.28 28.73 29.54 64.05 72.67 64.50 88.70 Inatallent 24,4ø M, UZ DA 2La7 ."Z 2 -2L JM2 81.0 97.7M Total 49.27 71.39 41.20 87.11 60.8 111.97 146.P7 148.00 164.'Å (7) Collection Ratlo Interest - 5 6.9 88.2 86.O 82.7 83.8 78.7 72.8 80.0 77.7 Inotallmt - Z iLA AZ ZLA Z"L 1.2 oEm m.i A oE.A Total - S 71.8 85.8 80.9 78.8 85.1 00.3 78.6 18.7 02.8 - 79- NN I TABLE 10 Page 12 of It- DEVELOPMENT FlANCE CORPORATION CEYLON Sectoral Analysis of Loans Affected by Arrears Over a Months of Interest and Installments as at Sepiember 80, 1090 Loans Total Affeted by Loan Arrears Over Sector Portfolio 8 Month. Percentage Agriculture, Forestry and Fishing 45.48 8.08 17.6 Mining and quarrying 9.82 0.00 0.0 Fooo, Beverages and Tobacco Manufacturing 589.80 21.49 8.9 Textile Manufacture 94.49 19.06 20.1 Wearing Apparel Manufacture 106.90 17.88 16.7 Manufacturing of Leather Products (Footwear and Wearing Apparel) 88,29 9.96 27.4 Wood and Wood Products 86.10 6.60 16.1 Paper Products, Printing, Publishing, Packaging 140.88 10.11 7.2 Chemicals, Chemical Products and Petroleum and Coal Manufacturing 241.14 18.95 5.7 Rubbe Products Manufacturing 69.70 17.42 24.9 Plastick Products Manufacturing 96.24 28.66 24.6 Non-Metalix Mineral Products (Except Coal, Petroleum) Pottery, China, Clas Manufacturing 148.88 9.88 6.8 Basic Metal Production 06.68 68.09 60.1 Fabricated Metal Production Machinery Electrical Items, Transport Equipment and Instrument Manufacturing 171.18 18.97 8.1 Electricity, Gas and Water 42.87 40.88 96.8 Construction 64.00 4.99 5.9 Restaurants, Hotels and Trade 47.09 8.94 19.7 Transport, Storage and Communications 148.51 0.41 0.2 Financing, Insurance, Real Estate and Business Services 114.14 2.67 2.5 Community, Social and Personol Services 45.87 1.72 8.7 SUBTOTAL 2812.94 28.42 12.5 Hotels (Opted for relief) 204.88 226.02 84.4 GRAND TOTAL 2577.82 511.44 19.0 KkTIONA DEOEAPMef OWl meratlonal and Financial Hiehilahes - (1988 - 1990I 1988 1987g 1988 1989 1990 No. Amount No. Amount No. Amount No. Amount No. Amount Loans Including Equipment Finance 112 648.7 189 5869.8 164 1076.5 164 1298.0 161 14ss.4 Equity Investments - 10.g - 86.8 - 69.7 - 82.8 - 127.0 SMI Refinance 712 879.1 627 408.7 8 260.8 851 481.5 1848 619.0 Sus Refinance - - - - - -* - -M 296, Total 824 1038.2 966 1029.6 692 1428.8 1015 1786.6 1880 2488.79 Diabursements LAans Including Equipment Finance 887.4 $16.6 741.2 734.0 1687.2 Equity Investmentse 8.4 14.7 89.5 28.4 87.5 6MI Refinance 277.0 416.7 268.8 266.1 451.8 Bue Refinance ..- Total 822.8 1050.5 1069.2 1028.5 2172.4 Economic Significant of Prolects Groes In* etment Generated: Direct Finance (Re. Mn.) 904.0 923.8 1827.0 1906.8 801.1 SHI Refinance (Re. No.) 738.8 748.8 806.4 874.0 1497.0 Employment Generated: Direct Finance (No.) 2125 2687 8786 8374 4906 SMI Refinance (No.) S897 7449 5205 9855 15578 Financial Hiahlishta Total income (Re. Mn.) 247.6 800.6 867.4 452.8 697.5 Net Profit Before Toa (Re. n.) 108.8 85.5 108.9 109.1 248.1 Net Profit After Tam (Re. N.) 100.8 86.8 103.9 109.1 162.1 Share Holders Funds (Capital & Reserves) (Re. Mn.) 1814.8 1897.0 1478.4 1588.8 1683.6 Total Assete Including pro notes (Re. Mn.) 2584.8 8250.8 8771.8 4182.5 5517.0 Total Portfolio (Loenu A Equity Investments) 202.9 2714.9 8817.8 8786.8 8078.5 Return on average equity (S) 9.9 7.1 6.1 8.0 16.6 Earnings per share (Re.) 24.09 19.00 28.09 24.25 54.04 Book value per share (Re.) 288.86 277.18 294.88 312.09 840.81 Equity debt ratio 49:81 41:89 40:60 88:62 81:69 As the Bank was not liable to pay tax prior to 1990. indicatore for 1990 have been computed on a pre-tax basis for purposee of comparison. These indicators on an after tas bese for 1990 are given below: Return an Average Equity 11.05 Earnings per share Re 386.04 - 81 - ANNEX 4 TABLE 1(b) Page 2 of 7 APPENDIX I Sectoral Classification of Direct Financing Facilities ** pr so aim SECTOR 110 1979-11900 No As M No Re Mn Food, Beverage & Tobacco industries It 204.67 9.9 SO 1.01181 12.3 Agriculture, Agro Business and Fisheries 18 44.64 2.2 6 607.61 7.4 Textiles and Garments 31 19.72 9.4 139 79.28 9.7 Wood & Paper Products 2 35.56 1.7 34 158.38 1.9 Rubber and Leather Products 10 60.37 84 98 089.75 6.2 Metal. Chemical and Plastic Products (including manufacture of labrioated metal products, Machinery and Equipment) 30 758.87 36.5 216 1.0658 23.9 Hotels 3 68.42 3.3 3 453.38 5.5 Service Industries (including Financial Services, CMI Construction. Storage, Transport & Communication) 41 537.47 2.0 162 1,719.70 20.9 Miscellaneous 15 156.28 7.6 154 640.7 10.2 TOTAL 161 2,0m49 100.0 1.016 8214.45 100.0 APPENDIX H Size of Direct Financing Facilities Approved Gron**Apprvae* omla SIZE OF LOAN 1990 1979 *1990 No Ru Mn No A Mn Below Rs 10 Million 114 38.80 78 2.491.0 Between as 10-5 Million 25 36o.i1 168 2.522.27 Above Rs 25 MIllion 22 12688 64 3,200.58 TOTAL 161 2,068.49 1,018 8,214.45 * 62 - An 4 TABLE 2 Page 8 of 7 NATIONAL DEVELOPMENT BANK Portfolio Analysis by Sector Claseificetion (Project A Equipment Financing) (Re M1IlIIon) Jun. 80, 1990 September 80, 19 NO. AMOUNT N NO. AMOUN S Food, Beverages and Tobacco 64 488.6 14.2 64 421.8 12.4 Agriculture, Agro-Business and Fisheries 57 199.2 6.5 58 287.3 7.0 Textiles and Wearing Apparel 79 806.3 10.0 67 841.6 10.0 Wood and Paper Products 26 61.68 2.0 26 a5' 1.9 Rubber and Leather Products 69 190.0 6.2 61 204.19 6.0 Metals, Chemicals and Engineering 141 644.1 17.8 140 749.63 22.0 Hote*Is 31 289.1 9.4 81 285.1 3.4 Services 69 887.7 22.8 97 782.71 21.6 "Iscellaneous 116 867.6 11.9 116 869.98 10.9 Total 661 3066.62 100.0 680 8406.28 100.0 Eqult Investments By Sector Classification (Re. illion) June 80, 1990 September 80, 1990 NO. AMOUNT X NO. AMOUNT 5 Food, Beverages and Tobacco 1 8.5 2.4 1 8.6 2.1 Agriculture, Agro-Bualness and Fisheries 1 22.9 16.6 1 22.9 18.8 Textiles and Wearing Apparel 8 9.0 6.1 8 9.0 5.4 Wood and Paper Product* 0 0.0 0.0 0 0.0 0.0 Rubber and Leather Products 8 9.6 6.6 4 9.6 5.8 Motels, Chemicals and Engineering 6 24.1 18.6 6 19.5 11.7 HoteIs 0 4.8 2.9 1 27.7 18.7 Services 5 44.2 80.2 6 44.2 26.6 Miscellaneous 4 28.9 19.7 5 29.8 17.9 Total 22 148.4 100.0 26 166.2 100.0 NAI ALDEELPPNNBA6 MOSINCOM Intoreat Incoma 118.8 151.7 194.8 228.0 284.7 239.1 292. 874.2 4~0.2 M00.7 öthr Incomo .l .. .u -,M ._" . _u . _M . JQ . g ,JgA J§U Total 120.1 158.9 197.1 231.8 2»9.8 247.6 900.1 867.4 482.8 697,8 LESS EXPENSES Financial charges Incuding provibion for porbfolio lussee 17.4 28.7 68.0 104.8 133.9 116.9 194.0 254.1 812.0 98.I Adminltrntive expen . deprocaton .f aL I .LLX .-1W -ul -M 21.1 29.4 31.4 .1.2 Total 26.2 39.9 82.1 121.0 1m.1 89.8 215.1 288.8 S48.4 4~4.4 PROFIT BEFRE TAX 98.9 114.0 115.8 110.8 100.2 $08.8 88. 108.9 109.1 248.1 LiS: PROVISION FOR TAXATION - - - - - - - - - (81.0) PROFIT AFTER TAX 93.9 114.0 115.8 110.8 108.2 108.8 85.8 10*.9 109.1 162.1 FACILITIES TO MiSTOI L.oan invecteeanta not of proviniona s3.8 883.6 760.4 947.5 1228.6 1778.7 2415.8 28.4 819.0 48~8.1 Ejulty investmenta 0.I8 12.6 .4 4 ....51.1 .. 5 .44 94.0 .,101... .-1.äl Total 894.6 598.2 7^9.8 997.0 1279. 1829.2 2479.7 2989.4 8820.8 4384.2 Cann & term funda at Banka 848.0 406.8 418.1 420.4 487.1 422.0 481.8 314.2 414.7 493.8 Sundry debtora and consamblee 215.1 E14. 29 2 KI Z" 159. ~ 201 AL Total S69.6 021.1 O8.4 649.2 687 7 841.9 818.8 870.4 616.8 716.8 FIXED ASSETS Land, Buildings and Equipment 2.1 2.1 2.1 8.0 10.4 17.9 .4.8 84.1 114.1 126.6 0Tfl NON-CLEN ASSETS AM DIRT T Share at coat in CDIC (Acoociate Co.) - - - 1.0.0 30,0 86.0 85.0 100.0 100.0 100.0 Staff loana 1. &åLI 4.u _§u a.t .5A _" .9 .d Total - 2.0 4.3 18.4 48.4 75.8 107.5 127.4 131.8 137.4 TOTAL ASSEMS 966.S 1221.4 144.8 1070.4 2028.2 2184.3 3010.6 871.8 4187.5 5617.0 LESS LIAILITIES Long-ter. berrowinga 138.0 202.2 897.1 527.7 791.0 1192.8 1742.4 2041.9 2411.3 2470.4 Curront LlsbillIblop _ju _LU -ii _zu i2, 57.. 111.4 2^, 204 ~6. Total 138.8 998.2 399.4 611.0 628.0 1249.8 18.8 2496.0 2681.7 08.4 NET ASSETS å22.7 93.2 1068.2 1114.4 1198.2 1814.8 1397.0 1478.4 188.8 1683.6 CAPITAL AND RESERVES Initial contribution to &har. capita$ 600.0 600.0 600.0 800.0 600.0 600.0 600.0 00.0 600.0 600.0 Rotaened earning2 m2 .411.2 U14.4 .322 714. 797.0 075.4 .j§1. 108..6 Total 22.7 9~0.2 10M.2 1114.4 1195.2 1814.8 1897.0 1478.4 15.8 1688.8 RATIOS *Return on averege *quity (1) 13.00 15.60 13.60 11.60 10.60 9.90 7.10 8.10 8.00 16,56 *Earning per &bara (Ra> 20.87 25.31 25.64 24.81 28.60 24.09 19.00 28.09 24.25 54.04 Sook valuo per ehar* (Re) 149.80 178.14 201.16 214.31 282.27 258.0 I77.18 294.8 312.89 840.81 Equity/Debt ratio 83:17 74:26 9:81 683:87 88:44 49:51 41:59 40:60 38:62 31:69 a Befora Tax NA1iL3ÉDiMLfPtNT 8AM< gialvala of Arrar for P4 - ae. 1990 (Prolect and emulament PingnaIå N. eLe in Arrara (8) 87 47 se 84 cm2 6200 $124 4141 lotal No. of Lonsa n Portfol«o 11 208 298 401 8m0 890 6m8 om8 Percentage of Lomne In Arreare 8 1 23 19 29 45 34 20 22 Amount In Arrgars fRa Milli1n1 Principal ln Arrears 89.27 86.79 68.87 85.87 96.25 160.00 209.25 79.0 Intaros6 In Arreare 61.69 47.37 89.58 57.77 147.85 119.60 6.97 85.81 Total Principal and Interet In Arreara (*) 100.96 84.16 124.92 115.14 248.00 279.60 26.22 114.39 Total Princip! and Intereat Standing of Lmena ;n Arrears 493.586 4M.6 878.55 267.42 918.69 1107.00 615.27 8M.I1 Total to-na Outatanding (Inciuding Arrenro) 997.14 122.98 1604.88 1979.86 2518.42 2118.90 8012.68 4.80 Total Outötandng for Loana Under Repayment 618.50 702.70 922.00 1197.64 1186.20 1692.60 1906.28 1677.04 Total Principal and Interash In Arreara (Doeferred Ces*) 0.00 89.08 84.91 106.05 202.40 182.60 90.48 71.012 a/ 10 7 8 6 10 11 10 a 8/6 16 12 14 10 21 18 16 6 3/4 20 24 88 48 26 25 48 21 4/8 50 26 28 14 87 43 20 16 4/6 80 49 41 22 82 85 92 29 8v SeNtor fRa HillionS Manufacturing 685.47 64.87 82.28 98.95 106.68 116.14 61.31 73.26 Taurlom 35.16 18.87 37.32 8.80 76.47 72.70 92.89 2.06 Agriculture 0.24 0.45 1.28 8.86 13.80 15.00 6.39 2.29 Othera 0,09 0.47 4.14 7.88 47.15 78.60 135.63 31.78 Totäl 100.91 84.16 124.92 115.14 248.80 279.80 296.22 114.39 SubUetoraf Analval of Manufac%uring Arromra Textiles and Ready-made Gärmente 48.06 29.75 40.09 9.71 25.29 85.10 37.48 56.62 atlo and Ceholcala 10.88 14.96 0.38 25.89 17.65 67.60 12.58 8.48 Electrical 0.51 2.92 7.00 7.94 9.24 0.30 0.00 0.0 Rubbar Product 5.25 12.10 28.75 42.88 26.89 11.60 0.73 0.80 Pood and Beverage 0.98 4.84 2.58 9.07 18.38 2.60 3.27 4.14 Wood and Peper 0.00 0.30 0.28 3.48 14.C 1.30 7.35 8.32 Total 68.47 64.87 82.28 1.95 106.8 118.50 61.31 78.26 * Includoo Deferred Caoe. • Excluden Doferred Case. Sun. 90 and Sep. 90 figures *xcludem wr~teof caaea. -86- ANNEX 4 TABLE 6 Påg* 6 of 7 NATIONAL DEVELOPMENT BANK Actual Cach CollectIon Performance for FY84-90 (Ra. M1!Ilon) Jun. ep. 84 19M 188 1987 1988 1989 190 im Arrears at the begInnine (A) Principal 21.61 89.27 88.79 65.87 56.87 6.60 148.84 79.88 Interet 27.87 61.69 47.87 59. 6 _9.77 88.88 110.01 72.28 Total 48.88 100.96 84.16 124.92 116.14 178.98 266.86 152.11 Current Duc. (1) Principal 96.68 162.24 219.28 84.62 440.89 607.92 767.61 744.40 Interest 128.66 169.12 216.05 268.68 887.49 697.65 626.56 849.88 Total 226.32 821.86 486.88 605.28 778.88 1186.47 1888.17 1894.28 Total Collectible (C) u A+B Principal 118.17 191.61 256.07 411.99 496.26 678.62 904.46 824.28 Interest 156.08 289.81 268.42 818.21 897.26 685.88 785.67 722.16 Total 274.20 481.82 619.49 780.20 898.62 1869.40 1840.02 1646.89 Cash Collection (D) Principal 77.65 182.79 174.66 229.87 298.18 848.97 486.66 474.88 Interest 94.84 144.41 162.87 282.92 244.97 880.80 487.6 460.61 Total 171.99 277.20 886.98 462.29 688.10 674.27 878.20 986.44 Foreclosure (E) Princpat 0.00 70.46 88.92 118.46 17.47 Interest ___0.00 ._.86 18.74 0.00 0:00 Total 0.00 0.00 0.00 0.00 126.81 62.68 118.45 17.47 Reschedu l ements (F) Principal 1.26 21.98 16.14 127.26 47.07 128.88 170.02 159.11 Interest 89.08 41.50 25.52 7.61 178.86 114.59 6.95 Total 1.26 60.96 67.84 162.77 64.68 299.68 284.61 226.06 Wrte-Off (0) Principal 0.00 0.00 98.18 188.81 187.66 Interest 0.00 0.00 74.81 2 180:9 Total 0.00 0.00 0.00 0.00 0.00 167.99 284.48 268.46 Arreara at 0*. rnd (H) Principal 89.27 88.79 65.87 66.87 86.60 86.76 48.62 85.27 Interest 61.69 47.87 69.6 6977 88.88 79.04 66_88 .:.7. Total 100.96 84.16 124.92 116.14 178.98 184.80 104.28 98.97 5 Collection Ratlo 68.01 76.71 72.96 80.00 76.00 76.60 89.88 90.48 D/(C-E-F-0) - 86 - ANNEX 4 TABLE 6 Page 7 of 7 NATIONAL DEVELOPMENT BANK Age Analysis of Arrears (Direct Financing) SEP90 Less than 3 Months 17.78 3 - 6 Months 29.41 7 - 12 Months 16.63 Over 12 Months 49.31 Legal Action 1.26 Total in Rs Million 114.39 Arrears as at September 30, 1990 INT. INSTAL TOTAL Performing 11.34 36.13 47.47 Non Performing 23.98 42.94 66.92 Total in Rs Million 35.32 79.07 114.39 - 87 -- PROJECT COMPLETION REPORT SRI LANKA INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1401-CE) June 1990 Industry and Energy Operations Division Country Department I Asia Regional Office - 89 - PROJECT COMPLETION REPORT SRI LANKA INDUSTRIAL DEVELOPMENT PROJECT (IDP) (CREDIT 1401-CE) PART I. PROJECT REVIEW FROM IDA'S PERSPECTIVE 1.0. Project Identity Project Name: Industrial Development Project (IDP) Credit No: 1401 CE RVP Unit: Asia Country: Sri Lanka Sector: Industry 2.0. Background and Sectoral Content 2.1. Policy Context. In 1977 Sri Lanka adopted a bold economic liberalization program after a long period of control and regulation. The reforms of 1977, although radical compared to the inward-looking policies followed by previous governments, still maintained high protection by replacing quantitative restrictions with tariffs and the tariff structure continued to be biased against exports. The IDP was designed to support the ongoing process o5 trade policy reform and initiate a dialogue on reform. The project also sought to improve the efficiency of Sri Lanka's financial market by creating competition between the two participating DFIs, the Development Finance Corporation of Ceylon (DFCC) and the National Development Bank (NDB), and by introducing a mechanism for consortium lending with participation from commercial banks. 2.2. The Industrial Sector. Sri Lanka has a limited industrial base consisting of 29 large public sector corporations, 9,000 small and medium scale registered factories, and approximately 20,000 unregistered small cottage units. The manufacturing sector's contribution to GDP averaged to 14% and accounted for approximately 45% of all exports. According to the latest employment data available (1985), the sector provided about 19% of total employment. Public Manufacturing Enterprises (PMEs) remain a large segment of the industrial sector and contribute less than proportionately to industrial output and exports due to inefficiency. The export base is also narrow, with a high degi:ee of concentration on light industry and the ready made garment sectors. 2.3. In 1978, immediately following Sri Lanka's policy liberalization, the manufacturing sector grew 7.8%, but the growth rate slowed down to 4.6Z in 1979 and 0.8? in 1980 and averaged only 3.3% during 1977-83. This low - 90 - average growth rate concealed divergent trends in different segments. Public corporations' output stagnated with an average annual growth rate of less than 1Z, while output value in private industry, including the rapidly expanding garment export industry, grew at an average annual rate of 7.2% during 1979-1980 and 13Z during the period 1983-1987. Apart from petroleum and the garment and textile subsectors, the other growing product groups have been wood products, non metallic minerals and structural steel. The increase in growth rates in the period immediately following the reforms of 1977 was largely the result of greater capacity utilization in industry made possible by the increased flow of raw materials due to the liberalization of trade. 3.0. Project Objectives and Description 3.1. Project Objectives. The project's objectives were to: (i) Strengthen the operation of the country's two development finance institutions (DFIs) by providing finance to meet their foreign exchange lending requirements and technical assistance for training in project promotion, appraisal and supervision; (ii) Strengthen the system of industrial finance by rationalizing the interest rate structure for industrial lending, assisting in the establishment of an equity fund to be managed by the NDB, and facilitating consortium financing arrangements among the DFIs and other financial institutions; (iii) Improve trade and industrial policies by providing technical assistance to build upon effective protection analyses prepared under previous IDA projects, introduce tariff reforms and undertake a study on industrial incentives; and (iv) Improve the performance of selected PMEs by providing technical assistance to the Ministry of Industries and Scientific Affairs (MISA) to assist them in formulating corporate plans, increasing management autonomy, introducing performance incentives, and encouraging various pilot schemes to increase private sector participation in ownership and management. Legislation was to be prepared to facilitate increased private sector participation in the management and ownership of public enterprises. 3.2. Project Description. The project provided US$25 million equivalent (SDR 23.1 million) in IDA financing, of which US$23 million was for reimbursement of industrial loans disbursed by NDB and DFCC. NDB and DFCC are the only DFIs in Sri Lanka. NDB was established in 1979 to meet the increased demand for term loans and equity participation resulting from the 1977 liberalization. Previously DFCC, which was established in 1955, was the only source of long-term equity and credit, with a monopoly in providing foreign exchange loans to private industry. IDA funds were to cover 1002 of the foreign exchange cost of imported machinery and equipment net of duties and taxes. 3.3. The remaining US$2 million of the credit was to finance technical assistance. IDA funds were to be used to finance the cost of advisors and - 91 - foreign training to (a) continue to strengthen the DFI's term lending capabilities, (b) analyze industrial and export incentives and make needed changes in the tariff structure; and (c) improve efficiency of state industrial enterprises. Technical assistance costs were based on an estimated 298 staff months of consultancy and advisory services, of which approximately 250 staff months were expected to be from foreign consultants, and 155 staff months of foreign training. 4.0. Project Design and Organization 4.1. The project was originally proposed as a sectoral adjustment operation which included a large policy reform program, focussed on trade. Since GOSL did not want to undertake such a high visibility operation for political purposes, IDP was designed as a compromise to support the Government policy reform program and to support the significant policy changes through a rapidly disbursing investment project rather than balance of payments support. 4.2. Access to funding under the credit line was made for the first time on a first-come-first-served basis for commitments and utilization of funds, with no prior allocation. 4.3. The IDP was seen as the integral component of an incremental approach to policy reform through a series of lending operations including Small and Medium Industries (SMI) and Industrial Development Projects (IDPs). The changes in policy were to be incremental and less comprehensive and spread over a longer (i.e. 3-5 years) than normally expected under a sectoral adjustment operation. For this reason, T.A. components in the different projects often supported the same policy reform program or institutions in an incremental manner. Specifically the IDP focussed upon the need for: (a) Tariff Reform. Most tariff revisions since the 1977 liberalization had been ad hoc, and in the direction of greater protection. The project included technical assistance in the implementation of a first phase of tariff reform, by September 30, 1984 (SAR para. 3.08) based on findings of a study financed under the first SHI project. (b) Industrial Incentives Reform. TA was provided for a study of Industrial Incentives to analyze the absolute and relative incentives provided for investment, particularly export-oriented investment (SAR para 3.09). (c) Public Enterprise Reform by providing TA to develop corporate planning and related performance incentives, improve firm-level operations and introduce enabling legislation and pilot schemes to increase private sector participation in ownership and management of public enterprises (SAR para 3.07). 4.4. The institutional arrangements for the T.A. were as follows: (a) work on Tariff Reform was to be carried out by the newly created Presidential Tariff commission; - 92 - (b) the study on Industrial Incentives was to be carried out by a consultant under the Planning Department at the Ministry of Finance and Planning. (c) work on PMEs was to be carried out by a newly created Public Enterprise Cell (PEC) in MISA; and 5.0. Project Implementation 5.1. Introduction. The credit component as well as the institutional strengthening of the DFIs were implemented as planned. In the area of trade and industrial policy reform, implementation of the tariff reform module and the review of industrial incentives were completed with significant benefit. However, implementation of the PME component progressed very slowly and was eventually subsummed under the proposed Public Manufacturing Enterprise Adjustment Credit. Specific details of component implementation are noted below. 5.2. The Credit Component. The credit component of SDR 21.25 million was fully committed within the three years envisaged in the SAR (see also Part III of the PCR). With a slight increase in the technical assistance allocation (from the original SDR 1.85 million to SDR 1.865 million), the total credit of SDR 23.1 million was fully committed by the credit's closing date, September 30, 1988. Actual disbursements vis-a-vis SAR estimates showed lags both during the initial and closing periods of the credit, with an acceleration midway. The credit was fully utilized by March 3, 1989, nine months behind schedule. 5.3. Subprojects Financed. The credit component was to refinance 100% of the foreign exchange cost of subprojects assisted by the DFIs with -he amounts available to the two institutions determined on the basis of actual commitments with no pre-allocation by IDA. The actual pattern of subproject refinancing (in SDR million) was: NDB DFCC Total No. of subprojects financed 46 81 127 Average loan size 186.8 160.5 170.0 Commitments 8.6 (40Z) 13.00 (60%) 21.6 Disbursements 8.0 (41Z) 12.2 (59%) 20.6 DFCC used 60% of the credit by amount and 64% of the total number of subprojects approved by both institutions. 5.4. Subloan Sizes. A breakdown of subloans by size (in SDRs) approved by the two institutions is as follows: - 93 - No. of Subloans NDB DFCC Total Below 100,000 26 43 69 100,001 - 250,000 16 29 45 250,001 - 500,000 - 06 06 500,001 - 1,000,000 03 - 03 1,000,001 - 1,500,000 - 02 02 1,500,001 - 2,000,000 - 01 01 Above 2,000,000 01 - 01 46 81 127 For both DFCC and NDB, the number of large projects requiring prior IDA approval was smaller than anticipated. This was due in part to sluggish demand for investment, particularly for large projects, as a result of the 1986 disturbances. It was envisaged at appraisal that in the case of NDB subloans approximately 40% by number and 70Z by amount would be above NDB's free limit and, therefore, require prior IDA approval. Only four loans accounting for 57Z by amount were actually above the free limit. Inclusive of these four loans, IDA reviewed eight loans approved by NDB. Three of the projects funded by NDB were in the public sector for replacement of equipment and modernization. In the case of DFCC's subloans, it was envisaged that 30Z by number and 602 by amount would be above DFCC's free limit of US$250,000. Only nine loans (11%) accounting for approximately 402 by amount actually exceeded the free limit. 5.5. Financial Performance of DFCC and NDB. The overall financial performance of the DFIs continued to improve during the project period despite the ongoing disturbances. Both institutions stayed well within the debt-equity ratios required (8:1 for NDB and 7:2 for DFCC, Statistical Table 8). NDB's profits after tax have remained at about Rs 100 million for the past five years. DFCC's profits before and after tax exceeded appraisal expectations. However, profits after tax as a percentage of total assets were lower than the appraisal estimates (Statistical Tables 13 and 14). NDB's return on equity has picked up to 82 in 1988 after a decrease from 10.4% to 7.1% in 1987 while both institutions have also maintained satisfactory collection ratios (not covenanted under IDP) over the past three years (Statistical Tables 9 and 10). Although arrears for subprojects financed under IDP is not serious for either DFI (Statistical Tables 7 and 8), arrears in NDB's total portfolio have however increased significantly over the past few years. 5.6. The T.A. Component. In the area of trade and industrial policy reform, the main area of the policy reform program, an advisor worked with the Presidential Tariff Commission to update estimates of effective protection, done in an earlier study financed under the first SMI Project. This study highlighted three major problems in the tariff system: (i) high levels of protection for import-substitution industries and low incentives for export products; (ii) a number of consumer essentials with low effective incentives and high protection for several luxury goods; and (iii) 62 product lines (about 202 of the sample) with negative value-added at world prices. Members of the Commission visited the Tariff Commissions in - 94 - the Philippines and Australia to review tariff reform programs in those countries. 5.7. The second module of the trade and industrial reform program - the study of Industrial Incentives was completed, although in a modified form, focusing upon export policy and incentives and changes needed in the industrial regulatory framework. The work done provided the substantive basis for the 1987 Industrial Policy Statement (IPS), the Government's Export Development Strategy and its Export Policy and Incentive Structure. The review of related industrial incentives for more export-oriented industries was not carried out, although the findings of the task forces involved in the preparation of the IPS (fLnded under the project) were reflected. 5.8. Implementation of the component to improve the efficiency of PMEs quickly highlighted the complexity of the component, the lack of implementing capability in MISA and the lack of support for the program within MISA. The scope of the program was too broad-ranging from firm level studies for a number of large corporations, to formulating and implementing pilot schemes to facilitate the privatization of the ownership and the management of selected PMEs. Eventually implementation of the subcomponent was taken over by the Presidential Committee on Privatization established in July 1987 under other ongoing IDA projects. 5.9. Central to the poor performance of MISA and the PMEs was weak management. Firm level problems such as the lack of financial planning, existence of an irrational product mix, absence of corporate planning and management information systems were symptoms of this weak management. The project recognized this and tried to address it indirectly by creating a public enterprise cell within the MISA to initiate, implement and monitor the public enterprise development program. However, the cell was staffed from within MISA and did not have delegated authority to enforce implementation. 5.10. Of the proposed firm-level studies, only three materialized, viz. those relating to the Ceramics, Mineral Sands and the Plywood Corporations. The study on ceramics proved useful in making cost saving improvements in production, but the Corporation rejected the recommendations on marketing. The study on mineral sands resulted in some minor organizational recommendations which were accepted. The recommendations of the study on plywoods are still under consideration by GOSL. The corporate planning process was introduced into all PMEs with the assistance of external consultants and all corporations have now prepared corporate plans, although their quality varies widely from excellent (Tyre Corporation) to incomplete (Hardware and Ceramics). 5.11. A review of existing systems of controls over public enterprises by MISA was initiated with considerable delay in December 1986. The recommendations from the review were examined and approved by MISA as well as by the Government Committee of Development Secretaries (a committee comprising of Secretaries of key ministries). Changes recommended to the procurement procedures were approved by the Cabinet in December 1988, but subsequently reversed in January 1989. Guidelines on performance contracting were also prepared by the Consultants and approved by the - 95 - coordinating committee, but no further discussion of the proposals took place. Performance contracts for two public corporations (Tyre and Leather) are to be implemented this year. 5.12. Risk Assessment. The SAR correctly identified the risk that a sufficient number of subprojects might not materialize in time for disbursement. The 1986 insurgency did result in sluggish demand for investment in all sector, and slowed disbursements. The SAR also correctly identified the risk of poor implementation of the Public Enterprise Development Program which was the case, due primarily to MISA's weakened commitment during implementation and GOSLs diverted attention to the more important problems of resolving the current security situation. 6.0. Major Project Results 6.1. Objectives. The project was successful in meeting the objectives of fostering industrial investment by providing credit and assisting in the development of the appropriate policy environment. In this regard the fundamental objective of the trade and industrial reform program were achieved, although the benefits expected from the PME component were not achieved. 6.2. Credit Component. The credit line was fully disbursed with 127 subprojects financed in widely diversified manufacturing industry. The 15 "A" Subprojects financed by DFCC showed economic rates of return (ERRs) ranging from 15% for battery manufacture, to 502 for textiles and packing. Post-evaluation reestimated ERRs are not available. During implementation, DFCC supervision indicated that 58 of the 72 completed subprojects are operating satisfactorily and meeting loan repayments. NDB had three "A" subprojects. For one of them (Lanka Tiles) there is a large discrepancy between the appraisal ERR (25Z) and reestimated ERR (7.34%). The second (Colombo Drydocks) has close appraisal and reestimated ERRs of around 8%. The third (Ceylon Tobacco) had a high appraisal ERR of 21.32 but a reestimated ERR is not available. Of the 46 loans approved by NDB, eight were in arrearb as of December 1, 1989. 6.3. The T.A. Program. Overall the TA component achieved very satisfactory results. In the area of tariff reform, the Presidential Tariff Commission updated its Effective Protection Rate (EPR) measurements, taking account of changes in tariff rates. This resulted in the introduction of appropriate changes in the nominal tariff rates. Major elements of the study on Industrial Incentives were completed with the most useful aspects relating to export incentives. In the area of public sector efficiency a Public Enterprise Cell was established to implement a planned program of reform but it has not functioned effectively (para 5.6). Studies of several PMEs were completed but the impact on the enterprises was limited. A measure of success has however been achieved in installing and operating a uniform system of performance reporting. Monthly performance reports are being received on average 18 days after the end of each month. Consultancy assistance has also been extended to seven public corporations to increase the market orientation in their activities, although the effectiveness of this consultancy assistance has been marginal. The consultancy on the two DFIs' operations resulted in significant institutional and operational - 96 - improvements and both institutions are now well equipped to compete in the more opened financial sector. 6.4. Impact of Project. A sectoral analysis of the projects financed reveals that the metals, chemicals (pharmaceuticals and others) and engineering products accounted for about 50% of total credit; other major sectors were food processing which accounted for I?Z of total credit, and the service sector, 152. The majority of the subprojects are located in urban areas as a result of poor infrastructure in rural areas. The direct employment generated from the subprojectz was 3,128 jobs, compared with 2,500 jobs estimated in the SAR. The cost per job created, was about US$12,833 equivalent (RS 385,903), compared with US$15,000 estimated in SAR. 6.5. Improving Financial Sector Efficiency. The innovations (to Sri Lanka) of introducing competitive access to funds created a healthy competition between the two DFIs, as envisaged in the SAR. This modus operandi has been followed in later industrial credit projects and is now standard practice. Earlier IDA assistance to the DFIs was institution- specific. The DFIs have also secured the participation of commercial banks, especially the indigenous commercial banks, in syndicate financing where the DFIs have taken the lead role, sharing their appraisal expertise with the commercial banks. Consortium lending has been effectively introduced into the financial sector, and commercial banks participation in syndicated term loans for the larger projects has become routine. The consultancies to the DFIs have improved the quality of appraisals and helped streamline internal procedures. Project identification and promotion units were set up in both DFIs and these units have completed several sector studies. 6.6. The consultant funded under the project helped draft the charter of the Equity Fund (the Capital Development and Investment Co. Ltd.--(CDIC)) and formulate its initial operational policies and guidelines. CDIC started functioning as an autonomously managed company in February 1986 and has since established its own identity as a source of equity and quasi financing source as well as an underwriter. It works closely with the DFIs in cofinancing projects. At present it has a marketable (listed) share portfolio of approximately Rs 65 million (at cost) and direct investments of approximately another Rs 100 million. 7.0. Project Sustainability. 7.1. General. Overall, except for the PME subcomponent, the project has a high degree of sustainability, both in terms of investment 'subprojects) and policy/institutional development. The approach of including significant policy components in an investment project was found to be effective in achieving dialogue and policy reforms, especially since the government was reluctant to engage in a highly visible sectoral adjustment operation. In terms of overall policy objectives, the approach of successive SMI projects and IDPs, each following the other with an average lag of about eighteen months, has been effective in incrementally improving Sri Lanka's trade, industrial, and financial policy environment and sustaining policy reform. 7.2. Investment. Supervisions by the DFIs report favorably on most subproject operations. Although ex-post ERRs were not available for all subprojects, the ERR of the subprojects studied was generally in the range -97- of 15-50%, and the high collection ratios of the institutions provide a further measure of these investments' viability. The building up of the DFIs institutional capabilities and the use of multiple channels in a single project was an innovation that was to become an entrenched standard feature of subsequent credit operations in Sri Lanka. 7.3. Policy/Institutional Reform. A major aspect of this project's sustainability is related to institution and policy reform. The Presidential Tariff Commission supported by this project and the first SMI project is a good example of institutional sustainability and tariff reform is an ongoing exercise by GOSL. Dialogue on Public Enterprise Policy Reform is being sustained by the recently appraised Public Manufacturing Enterprise Adjustment Credit. 8.0. IDA's Performance - 8.1. In order to change the project design from a structural adjustment operation to a more traditional development project, IDA devoted a considerable amount of direct and indirect staff time to project development. This proved to be effective as the project was successful in achieving the fundamental objective of supporting much needed, significant policy changes although possibly at a slower pace than under a fast- disbursing adjustment operation. 8.2. In most supervision missions, a trade economist was included to ensure that the tariff reform program was maintained properly under the T.A. However, despite the considerable effort devoted by IDA staff to it, the PME program had design and implementation problems (see Lessons Learned) and project supervision should have been more appropriately staffed and focused to enable staff to maintain an effective dialogue with the consultants so that remedial action required to put the component on course could have been taken sooner. 9.0. Borrower's Performance 9.1. Too optimistic an assumption was made regarding the capability of DFIs' staff to appraise large industrial projects, particularly those proposed by large state or multinational corporations. NDB evidenced a lack of commercial orientation, although both institutions gradually developed this. Eventually, commercial banks becane participating credit institutions under subsequent projects. 9.2. Among the elements identified as pre-requisites for the success of the program to improve the performance of PMEs was a strong commitment by the relevant Ministries. Although this commitment was given during the project preparation, it was not sustained during the implementation stage. The risk in this regard due to the entrenched nature of existing controls was recognized in the SAR. The detailed implementation plan worked out during negotiations, reflected apparent commitment by the agencies of the borrower for concrete action. This, however, did not materialize. - 98 - 10.0. Project Relationship. 10.1. The overall relationship between IDA and the DFIs in the implementation of the project was very good. Under the credit component, there was an ongoing dialogue between IDA and the DFIs on policy and procedural issues and IDA worked closely with both institutions to help implement needed changes. This situation was fostered by a continuity of presence of both IDA and DFI officers. 10.2. In the area of trade and industrial policy reform there was also close collaboration with the Borrower, reflected in both the degree of formal and informal contacts between the Tariff Commission, EDB and IDA. This relationship has continued under subsequent projects. Relationship between MOF and IDA was also good and in turn this fostered an atmosphere of constructive review of reform proposals. 10.3. Notwithstanding the limited success of the PME component relationship with MISA also grew and this enabled IDA to make suggestions for industrial policy reform which 'eventually appeared in the Industrial Strategy Statement. 11.0. Consulting Services. 11.1. The quality of the work under the T.A. component varied. The Public Sector Corporation Performance Contract and Monitoring System proposed by consultants was complicated for implementation, and one of the three PHE productivity studies was not useful. The work on trade and tariff reform was of good quality. The effectiveness of the consultancies was also limited by the difficulties encountered in the implementation of the recommendations. Many of these difficulties are traceable to a lack of commitment by the relevant authorities. 12.0. Project Documentation and Data 12.1. For the preparation of PCR, data related to the credit component was available from the DFIs. Considerable difficulty was experienced in obtaining data from other agencies regarding the project's other components. The SAR, which could have provided a useful framework for implementation, was not used extensively by the Borrower in the implementation of the project. 13.0. Conclusions and Lessons Learned. 13.1. The project has two parts: (a) the credit component which met the objective of providing finance for import of machinery and equipment to local industry; and (b) the T.A. program which was successful in strengthening the DFIs and accelerating the impetus of trade reform but less successful in public enterprise reform. The coverage of the study on Industrial Incentives was more limited than anticipated in the SAR. 13.2. In general, the project results show that the project format was effective in achieving significant policy changes through a phased program when there is an understanding between IDA and a Borrower regarding long- term goals and firm commitment by the Government and concerned agencies. - 99 - This was the case of trade policy reform. In the area of public enterprises wnere there was only a limited commitment to reform, more up-front implementation of policy reform should have been required prior to the project. Project performance in this area would also have been enhanced if supervision missions had included specialists in enterprise restructuring. 13.3. Central to the poor performance of the PMEs was their weak management. The project sought to initiate measures to improve this performance within the existing political and procedural constraints. However, the scope of the efficiency improvement program was too wide, and it was to be implemented by existing, weak firm-level managements supported by committees at Ministry level. Against this background more emphasis should have been devoted to the strength ning of MISA's structures and personnel. - 102 - Table 1 - RELATED BANK LOANS No. Loan/Credit Title Purpose Year of Status Approval 942-CE Small and Medium Industries Promote private 1979 Completed Project (SMI) industrial development, 12/80 focusing on SMI's assistance to develop the National Development Bank (NDB) technical and marketing services to key SMI sectors, and policy studies limited to reforms in tariffs and export Incentives 1182-CE Second Small and Medium Provide term funds to viable SMI*, 1991 Completed Industries (SMI-2) Project emphasizing exports, through SMI 6/87 Fund of NDB; training and consultancy for SMI Fund and participating credit institutions (PCIs), -Improvements In the Industrial Development Board (IDB), and assist the Export Development Board (EDS) 1860-CE Third Small and Medium Provide credit to private SMIs, 1987 Ongoing Industries (SMI-8) Project make further contribution to policy reform in the areas of tariff, administration, export promotion, and financial sector operations 1692-CE Second Industrial Development Provide term credit to finance 1988 Ongoing (IDP-2) Project rehabilitation and expansion (BMRE) by private firms and selected public manufacturing enterprises; assist Implementation of reforms in trade policy, industrial incentives, export promotion, public enterprise efficiency, industrial finance, and financial po!icy; technical assistance to development finance contributions, performance monitoring oystem for PMEs, and industrial strategy development - 103 - Table 2 - PROJECT TIMETABLE PLANNED ACTUAL Preparation April 1981 April 30, 1981 Preappraisal August 1481 September 8, 1981 Appraisal November 1981 November 24, 1981 Loan/Credit Negotiations May 1983 Hay 24, 1983 Board Approval July 1983 July 12, 1983 Loan/Credit Signing October 1983 October 12, 1983 Loan/Credit Effectiveness January 1984 January 4, 1984 Loan/Credit Closing September 30, 1988 September 30, 1988 Loan/Credit Completion March 31, 1988 March 31, 1988 Full Disbursement June 30, 1988 March 31, 1989 - 104 - Table 8 LOAN/CRrDIT DISBURSEMENTS A. CUMULATIVE ARD ACTUAL DISBURSEMENTS (US$ million) Appraisal Estimates Actual Fiscal year Quarterly Cumulative X of Estimated Quarterly Cumulative X of Actual and quarter Disbursements Diabursements Total Disbursements Disbursements ------- ----------------------------------------------------------------------------------- FY 84 2 0.2 0.2 0.8 - - 3 0.3 0.5 2.0 0.5 0.5 1.9 4 0.6 1.1 4.4 1.1 1.6 6.1 FY 1 0.7 1.8 7.2 0.4 2.0 7.7 2 1.0 2.8 11.2 1.4 8.4 18.0 8 1.2 4.0 16.0 1.6 6.0 19.2 4 1.3 5.3 21.2 1.2 6.2 28.4 FY 1 1.7 7.0 28.0 1.2 7.4 28.4 2 1.8 8.8 85.2 6.1 12.6 47.9 8 2.0 10.8 48.2 4.6 17.1 66.6 4 2.2 13.0 32.0 0.9 18.0 09.0 FY 1 2.4 16.4 61.6 0.6 18.6 70.9 2 2.5 17.9 71.6 2.0 20.5 78.6 8 2.8 20.2 80.8 0.9 21.4 82.0 4 2.0 27.2 88.8 0.8 22.2 86.1 FY 1 1.8 28.6 94.0 0.3 22.5 86.2 2 0.9 24.4 97.6 C.6 28.1 88.5 8 0.4 24.8 99.2 0.2 28.8 89.8 4 0.2 25.0 100.0 0.2 28.6 90.0 FY 1 - 26.0 100.0 1.4 24.9 95.4 2 - 25.0 100.0 0.4 75.8 98.9 8 - 26.0 100.0 0.8 28.1 100.0 4 - 25.0 100.0 0.0 28.1 100.0 a/ The disbursements were in SDR. Actual disbursements were in historical US$ equivalents, which totalled more than the USS equivalent at appraisal. - 105 - Table 4 : INDICATORS OF PROJECT IMPLEMCNTATION AND RESULTS INDICATORS APPRAISAL ESTIMATE ACTUAL OF X OF PCR ESTIMATE ACHIEVEMENT Indicators 1 NDB and DFCC subprojects All subprojects are In 9OX were to be in manufacturing, manufacturing and they public sector or private are wall diversified. sector, but not in service or commercial undertakings. Indicators 2 Credit was to be disbursed Full disbursement was so fully by June 80, 1988 delayed by nine months Indicators 8 Generation of direct Incomplete data show a 1001 employment was to be 2,500 generation of 2,029 jobs joba with cost per job of and a cost/job of US816,000 equivalent US812,983 equivalent Indicators 4 Technical assistance was Implementation of this 60% to help start reform of - component was only par- public enterprises tiolin general areas. Indicator 5 Technical assistance to Strategy Studies - Staff 90% improve development banks trained In DFCC, NDB subector analysis and project promotion efforts Indicator 6 Estabilshment of new equity Capital Development and In- 100% fund to be administered by dustrial Company established NOS - 106 - Table 5. STATUS OF COVENANTS COVENANT StJECT STATWIIN COMLAHM NDWA 2.01 NOB hall carry out part A and Part 3.1 of N0S retained W.D. Scott to the Project NDB shall employ consultants for prepare corporate strategy. Institutional strengtheninag and train Its staff . NDBPA 2.03(s) NDB shall submit to IDA first three subloons in compliance for approval for public and private Investment, respectively. MDBPA 2.08 (b) NDS shall submit subprojects above free In compliance limit for IDA approval with the following Information sumary description of subproject term and conditions, amortization schedule and g and rconomic Impact calculation NOWA 2.03(c) NDB shall submit free limit subproject for In compliance IDA approval with the following Information: sumaary description of subproject, term end conditions, and amortization schedule. NOWA 2.08(d) NmOrl amortization schedule shall not exceed In compliance. 16 years, with appropriate grace period, with e qualI periodic payments and follow limited ICB procedures for procurement contracts above 112 million equivalent. M)BPA 2. 03 (e) NDB shall not submit subprojects for IDA In compliance approval until It has etlihg abl promotion unit with suitably qualified staff NOWA 2.03(f) NOB shall not submit subprojects after In compliance with IDA Septmer 0, 1N concurrence, Project diwbureements extended by one year due to political disturbances In 1906. NDWPA 2.04 NDB shall enter Into lending greements with In compliance D entered Ito subborrowere with sufficient safeguard Into legal agreements with for Itself and for IDA. Project Completion It. subborrowers Report - submission delayed until March 1og0. NDBPA 2.05 ND8 shall submit to IDA promptly upon their Partial compliance. anc preparation, the plans, report., training maintained proper MIS and program, contract documents and schedules submitted reports generally relating to Part 8.1 of the Project. NDB on time. Project shall prepare project completion report six completion report months after Project completion of Part 9.1 submission delayed till of the Project. March 1990. NDOPA 2.06 N0B shall fulfill Its obligations under the In compliance. NDB subsidiary Loan Agreement NDBPA 2.07 NDB shall cae It. subsidiaries to obeerve In compliance. and perform the obligations of af under the NDB Project Agreement. NDOPA 2.04 NDB shall, at IDAo request, exchange vie In compliance. with IDA regarding the Project's progress, and promptly Inform IDA of major conditions which may threaten attainment of Project objectives. NDBPA 2.01 NDB shall manage its operations and conduct In compliance. Its affairs well and maintain a competent oafP. - 107 - Table 5 PaeiTrT NDPA 8.02 NDB shall not sell or transfer ***ets In compliance. without prior IDA consent except In the conduct of ordinary business, and NDB will take all actions to maintain Its corporate existence NDWA 8.03 NDS *hall Insure Itself appropriately. In compliance. NDBPA 8.04 NDS *hall adopt policy and strategy In compliance. statements satisfactory to INa and establish and maintain a project unit for project Identifcation and promotion staffed with qualified personnel. NDSPA 8.05 NDS *hall complete staffing of Its project In compliance. Identification and promotion unit by March 31, 184 NDSPA 4.01 NDS *hall maintain proper proceduresI records and accounts adequate to monitor and I apIlne record the progress of Part 8.1 of the Project, as well as of each subproject. NDBPA 4.02 NDO shall have Its accounts audited annually In compliance. and furnish IDA copies of Its audited statemeunts no later than six months after end of the fiscal year. Also NDS shall furnish periodic reports to IDA. NDBPA 4.08 5DS's debt to equity shall not exceed 8:1. In compliance. NDBPA 4.05 NDS *hall not prepay any of Its borrowings In compliance. without,ZDA's agreement. DPA 4.06 1DB shall not bear foreign exchange risks In compliance. under the Project. DFCCPA 2.01 DFCC shall carry out Its pert of Part A and In compliance. Part B.2 of the Project. DFCCPA 2.02 DFCC shall employ consultants fr In compliance. DFCC Institutional strengthening and train Its retained Morgan Gr*.nfelt Buaff. to conduct Institutional study. DFCCPA 2.08 DFCC shall suoit subproject above and In compliance. belo frot limit to IDA for authorization of withdrawal undar the credit with the aproprate documentation. oFCC subloane sall not exceed 1 years In maturity and shal shave equal periodic rofpyments, of intfrest and principal. DIFCC hall adopt a poli cy statement and strategy statement by March 81, 194. DFCCPA 2.04 DFCC shall enter into lending goreements In compliance. with Its subborrowere with sufficient safeguards for Itself and for IDA and follow limited IC procedures for procurement contracts above US2 million equivalent. - 108 - Table 6 DPCCPA 2.06 DFCC shall maintain proper procedure. and Partial compliance. DFCC records to monitor progress of Part 0.2 of maintains generally the Project and submit to IDA promptly upon adequate MIS and reports their completion the plans, reports, were submitted generally on documents and schedules relating to Part 8.2 time. Project completion of the Project. DFCC shall submit a Project report on Part 8.2 will not completion report for Part 8.2 of project be submitted until April six months after Its completion. 1900. DFCCPA 2.06 DFCC shall fulfill It. obligations under the In compliance. DFCC subsidiary loan agreement DFCCPA 2.07 DFCC shall cause Its subsidiaries to observe In compliance. and perform the obligations of the DFCC under the DFCC Project Agreement. DFCCPA 2.06 OFCC shall, at IDA's request, exchange views In compliance. with IDA regarding the Project** progress, and promptly inform IDA of major conditions which may thretn the attainment of Project objectives. DFCCPA 8.01 DFCC shall manage Its operatione and conduct In compliance. Its affairs well and maintain a competent staff. DFCCPA 8.02 DFCC shall not **ll or transfer assets In compliance. without prior IDA consent except In the conduct of ordinary business and DFCC, shall take all actions to maintain its corporate existence. DFCCPA 8.08 DFCC shall Insure itself appropriately. In compliance. DFCCPA 8.04 DFCC shall adopt a Policy Statement and a In compliance. Strategy Statement and establish and maintain a unit for project Identification and promotion staffed with qualified personnel. DFCCPA 8.05 DFCC shall complete staffing of its project In compliance. identification and promotion unit by March 81, 1984. DFCCPA 4.01 DFCC shall maintain proper procedures, In compliance. records and accounts adequate to monitor and record Part 8.2 as well as of each subproject. DFCC 4.02 DFCC shall have It. accounts audited In compliance. annually and furnish IDA copies of its audited statements no later than six months after the end of the fiscal year. Also DFCC shall furnish periodic reports to IDA. DFCCPA 4.08 DFCCOs debt to equity shell not exceed 7:1. In compliance. DFCCPA 4.06 DFCC shall not prepay any of its borrowings In compliance. without IDA's agreement. DFCCPA 4.00 DFCC shall not bear foreign exchange risks In compliance. under the Project. - 109 - Table 6 PaeTW OCA 8.08 The borrower shall employ advisors and Partial compliance. Delays consultants to carry out Part C and 0 of the In recruitment of ese Project. advisors and consultants; non-recruitment of some advisors and consultants. OCA 8.08 The borrower shall cause all goods and In compliance. services financed from the credit to be used for the exclusive purposes of the Project. DCA 8.04(a) The borrower shall furnish IDA promptly, Partial compliance. plan*, reports, training programs, contracte Frequent delays In and scheduals on Parts CA 0 of the Project. submission of Information. OCA 8.04(b) The borrower shall maintain adequate records Partial compliance. and submit periodic reports to IDA on Parts Borrower MIS system often C and D of the Project. Inadequate and timing of reports frequently late. DCA 8.06(C) The borrower shall furnish IDA copies of In compliance. contrasts. OCA 8.06(d) The borrower shall furnish a Project Not In compliance. Cotion Report on Parts C and 0 of the DCA 8.06 The borrower shall by November 80, 1OU and Partial compliance. by November 80 of each year thereafter, Borrower and IDA furnish IDA with an annual plan to imp;ove collaborated closely in public Industrial enterprise performance. preparing a Public Ent--op!*-Roticturi no project. DCA 8.06 The borrower shall bear the foreign exchange In compliance. risks under the Project. OCA 4.01 (a) The borrower shall maintain procedures, Partial compliance. records, and separate accounts to monitor Borrowers MIS systm weak. and record procrres of Parts C and D of the Project. DCA 4.01(b) The borrower shall have annual audits of Partial compliance. Project accounts and submit reports. Reports submitted often late. OCA 4.02 The borrower shall furnish IDA a phased Partial compliance. program of tariff reform and begin Delayed Implementation. Implementation by September 80, 1964. OCA 8.01 (a) The borrower to carry out Parts C and r of Partial compliance. the Project with due diligence and Program to Improve public off iciency. enrerprIoo performance C and Incomplete due to lack of borrower consensus and conviction; review of Industrial Incentives was done In the more, limited scope. DCA 3.01(b) The borrower shall cuse NDB and DFCC to In compliance. fulfill obligations under the NDO Project Agreement and DFCC Project Agreement. DCA 3.01(c) The borrower shall onlend Credit proceeds to In compliance. ND and oCC under subsidiary Loan Agreements satisfactory to IDA. - 110 - Table 6 OCA 8.01(d) The borrower shalI not assign amend, In cepiance. abrogate, or waive subsidiary Loan Agreements on any provisions thereof without IDA agreement. - 111 - Table 0. USE OF BANK RESOURCES A. STAFF INPUTS Stags of Project Cycle Actual (Staff Weeks) Through appraisal 76.5 Appreal 18.4 Effectiveness Supervision 79.7 Total 169.6 MISSIONS Month/Year No. of Persons Days in Specialization Rating Type of felld represented problems Preappraisal 9/81 4 15 Economist, Financial Analyst Appraisal 11/81 4 15 Economist, Financial Analyst Post-appraisal 8/88 2 14 Economist, Financial Analyst SUPERVISION Mission 1 16/88 1 4 Financial Analyst 1, 2 Technical, Political Mission 2 4/84 2 14 Financial Analyst/ 1, 2 Technical, Political Economist Mission 8 7/84 8 18 Financial Analyst/ n.a Technical Engineer Mission 4 9/84 1 4 Financial Analyst n.a Technical Mission 6 10/84 1 10 Financial Analyst 2, 2 Political, Technical Mission 6 1/85 1 7 Engineer na Technical Mission 7 2/88 2 7 Economist n.a Technical Mission 8 11/65 1 14 Financial Analyst 2, 1 Technical Mission 9 8/96 1 8 Financial Analyst 2, 1 Technical Mission 10 7/86 2 15 Financial Analyst 2, 1 Technical Mission 11 11/88 4 15 Financial Analyst/ Technical Economist Industry Specialist Mission 12 5/87 7 15 Financial Analyst, 2, 1 Financial, Technical Economist, Market Specialist, Tariff Specialist Misvion 18 8/87 5 15 Financial Analyst, 2 Technical Economist, Engineer Mission 14 10/88 1 10 Economist 2 Technical - 112 - Page 1 of 2 TABLE 7 DEVELOPMENT FINANCE CORPORATION OF CEYLON (DFCC) CR.1401-CE ARREARS OF SUBPROJECTS AS OF MARCH 81, 1989 (Re '000) Loan Balance Interest Instalment Interest and Name of Client as at in Arrears in Arrears Instalment in 81/2/89 as at as a Arrears as N 81/8/89 81/8/89 of Loan Balance ----------------------------------- ------------ --- ---------- --------------- 1. Acme Aluminium Co. Ltd. 9,652 - - 0 2. Acme Aluminium Co. Ltd. 8,589 - - 0 8. Aitken Spence and Co. Ltd. 079 - - 0 4. Aitken Spence (Garments) Ltd. 286 - - 0 5. Aitken Spence (Garments) Ltd. 468 - - 0 6. Aitken Spence (Printing) Ltd. - - - - 7. Alexandra Industries 2,198 - 0 8. Allied Industries Ltd. 110 - - 0 9. Amico Industries 1,080 - 116 11 10. Amico Ind. (Coy.) Ltd. 2,095 - 288 11 11. Asiaknit Lt. - - - - 12. Asiaknit Ltd. - - - - 18. Associated Motorways Ltd. 1,019 18 85 10 14. Associated Motorways Ltd. 277 4 40 18 16. Associated Traders 119 - - 0 16. Band* Metal Industries 166 - 0 17. boto Shoe Company of Ceylon 498 - - 0 18. Beligala Oil Mills 1,907 629 1,192 95 19. C. W. Mackie 1,120 - - 0 20. Ceylon Biscuits Ltd. 897 - - 0 21. Ceylon Glass Co. Ltd. 124 - - 0 22. Ceylon Match Co. Ltd. 1,226 - - 0 28. Ceylon Paint Ind. 1,060 868 446 77 24. Ceylon Papr Sacks Ltd. 1,727 596 880 85 25. Ceylon Tobacco Co. Ltd. 128 - - 0 26. Ceylon Tobacco Co. Ltd. 272 - - 0 27. Ceymac Rubber Co. Ltd. 84 - - 0 28. Chemical Industries 180 - - 0 29. Chemical Industries 256 - - 0 80. Chemical Ind. (Colombo) Ltd. 416 - - 0 81. Colmane Garments Ind. (Pvt.) Ltd. - - - - 82. D.K.W. Plastic Industries 850 - - 0 88. Daintee Industries Ltd. 179 - - 0 84. Dointee Industries Ltd. 8,288 - - 0 86. 0. Samson and Sons Ltd. - - - 86. Eastern Merchants Ltd. 2 - - 0 87. Elephant Lite Corp. Ltd. 28,760 - 8,126 11 88. Glaxo Ceylon Ltd. 184 - - 0 89. Glaxo Ceylon Ltd. 410 - - 0 40. Olaxo Ceylon Ltd. 181 - - 0 41. Oranex (Pvt.) Ltd. 6,900 104 - 2 42. Harris (Ceylon) Ltd. 119 - - 0 48. Harris (Ceylon) Ltd. 99 - - 0 44 Hyluck Garments Ind. Ltd. 1,750 - - 0 45. Hyluck Garments Ltd. 668 - 0 46. Hyluck Garments Ltd. 694 - - 0 47. Jinesena Ltd. 74 - - 0 48. J.B. Fishing Ind. Ltd. - - - - 49. K*lni Cables Ltd. 1,422 - - 0 50. Kundanwals Industries Ltd. 1,867 - 216 16 61. Lake House Investments Ltd. 20 - - 0 52. Lanka Colourphoto Proc. Ltd. 617 - - 0 68. Lanka Spice Ltd. 8,181 85 1,639 54 54. Lanka Tiles Ltd. 40,286 1,027 - 8 55. Lanks Ceylon Ltd. 8s - 0 113 - Table 7/Page 2 of 2 Loan Balance Interest Instalment Interest and Name of Client as at In Arrears in Arrears Instalment in 81/2/89 as at as at Arrears as X 81/8/89 81/8/09 of Loan Balance 68. Lever Brothers (Ceylon) Ltd. - - - 67. Little Lion Associates 678 - - 0 68. Maharaja Organisation Ltd. 8,888 - 91 8 69. Maharaja Organisation Ltd. 6,689 - 178 8 60. Metal Packaging Ltd. 6,688 - 618 8 61. Metal Packaging Ltd. 2,968 - 841 12 62. Moosajee Ltd. 2,985 - - 0 63. MSL Computer Services Ltd. 604 - - 0 64. Negindes Industries Ltd. 8,967 - 456 11 65. Nissof Corrugated Cartons 148 - 0 66. Nissol Corrugated Cartons 1,277 - - 0 67. Orient Garments Ltd. -- - 0 68. Orient Garments Ltd. - - - - 69. Penpals Ltd. 790 - - 0 70. Penpals Ltd. 442 - - 0 71. Perera and Sons Bakers Ltd. 280 - - 0 72. Polypak Industries Ltd. - - - - 78. Polypak Industries Ltd. 228 - - 0 74. Precious Ind. (Pvt.) Ltd. 6,847 - - 0 76. Pure Beverages Co. Ltd. 18,488 - - 0 76. Pure Beverages Co. Ltd. 19,497 - - 0 77. Quick Tea (Pvt.) Ltd. 971 - - 0 78. Ravi Industries 1,077 - - 0 79. Regency Garments 708 - - 0 80. Sri Lanka Asbestos Products 2,777 - 176 0 81. Theranga Textiles Ltd. 1,685 - - 11 82. The Ceylon Brewery Ltd. - - 0 83. Uni Walker Packaging Ltd. 8,890 - - 0 84. United Tractor and Equipment 215 - - 0 8o. Uswatte Confectionery Works 88 - 84 12 86. Vac Pac Service (Pvt.) Ltd. 2,971 - 162 6 87. Verna Ltd. 1,946 - - 0 88. Varna Ltd. 1,928 - - 0 89. W.A. Perera and Co. Ltd. 2,198 - 68 28 90. Wickremasinghe Polythene 2,124 50 2 218,477 2,874 10,540 6.28 - 114 - Page 1 of 2 TABLE 8 NATIONAL DEVELOPMENT BANK (NDB) Cr.1401-CE ARREARS OF SUBPROJECTS AS OF MARCH 81, 1989 Loan Balance Interest in Instalment in Int. and Instal. Client's Name as at Arrears as at Arrears as at In Arrears/Loan 81/8/89 81/8/89 81/8/89 Balance (S) 1. Ceylon Tobacco 15,000,000.00 - 2. Ceylon Tobacco 787,600.00 - 3. Tyre Corporation 16,676,626.00 - 4. Colombo Drydocks 92,011,686.00 7,820,998.28 - 6. Lanka Tiles 26,000,000.00 489,760.01 - Sub Total (A Subprojects) 149,374,810.00 8,260,748.24 6.68 6. Ceylon Leather 1,748,400.00 - 7. Lanka Cement 286,600.00 - 8. Freight Services 176,000.00 - - 9. Sea Lion Express 1,228,615.89 24,769.47 71,131.88 10. Deveo Shows I 66,774.00 - - 11. Deveo Shows II 491,700.00 - 12. Richard PeIrls I - -- 18. Tootal Thread - - - 14. Elephant Lite - - - 15. Tropical Foliage and Flower - - - 16. Alpha 1,067,800.00 - - 17. Singslanka - - - 18. Qunaratna 146,500.00 - - 19. Tieara Garments 8,100,000.00 8,868,082.56 8,100,000.00 20. Richard Peirie II 1,674,760.00 - 21. Sirirl I 777.16 11.01 777.16 22. Colombo Oss Co. - - 28. Modern Tea Packers 1,810,868.64 124,984.64 102,616.88 24. Furnifits 2,200,000.00 48,478.45 - 25. Universal 1,500,600.00 - - 26. Elastomeric III 1,618,702.00 107,674.76 479,695.00 27. Parquet 680,000.00 - - 28. Kelani Printers 5,000,000.00 2,050,818.07 5,000,000.00 29. Asian Electricals 1,107,000.00 - 80. Kandy Tyre House 1,174,000.00 - 81. Naleem Hadjior 6,000,000.00 - 82. Ceylon Leather II 6,671,422.00 - 88 Wijaya Offset 850,000.00 5,287.87 60,000.00 84. Samson Industries I 688,400.00 - - 86. Leatherette 1,895,480.00 - 86. W.M. Mendis 1,820,000.00 22,760.00 850,000.00 87 Huejay Multiflora 4,500,000.00 - 38. Print Care 524,700.00 - 39. Freight Services II 98,100.00 - 40. Sungold 1,760,000.00 - 41. Sigirt I - - - 42. Hettiarachchi 660,000.00 46,750.00 12,600.00 48. SD&CC II 5,616.8d 6,616.88 44. Mascon Industries 1,748,000.00 - - 46. Premedesa Bros. 2,184,000.00 92,820.00 812,000.00 46. Richard Peiris III 166,646.00 - - 47. Central Industries 2,460,116.01 - 20,116.01 Sub Total 8 Subprojects 59,663,467.57 6,887,766.82 14,604,861.80 84.18 TOTAL 209,088,277.57 14,148,509.56 14,504,861.80 18.71 - 115 - Table 8 Page 2 of 2 SRI LANKA NATONAL DEVELOPMENT BANK (NDB) Cr.1401-CE All projects under Cr.1401-CE have been completed and are operating satisfactorily except for the following: (a) Colombo Drydocks - A letter of demand has been sent to the company. Foreigh collaboration is being sought for management and/or equity investment in project. The government has appointed a Committee headed by the Chairman/NDB to hold discussion with a Dockyard in Singapore which has experience/interest in taking up an equity position in the local company and managing/evaluating the dock. (b) Tisara Garments - Project recently rehabilitated by Bank. Company is adhering to revised repayment program. (c) Modern Tea Packers - Factory closed. There is to be a negotiated settlement between the Bank and the client for the sale of the assets to a third party. (d) Furnifits - Due to constraints in financing working capital, the Company is unable to service the loans. A fresh proposal for rescheduling the loan is being worked out. (e) Hettiarachchi & Co. - The factory was gutted by fire in December 1988 and has not been in operation since then. The Bank came to a settlement with the Company where approximately 50% of the amount due to the Bank was paid and the balance was written off. - 116 - TABLE 9 NATIONAL DEVELOPMENT BANK OF SRI LANKA (NOD) CASH COLLECTION PERFORMANCE FOR FY 1988-FY 1988 Re Mn. 12 Months to 81 Dec. 1988 1984 1985 1986 1987 1988 Arrears as at beginning (A) - Principal - 21.51 89.27 86.79 66.87 66.87 - Interest 6.95 27.87 61.69 47.87 69.55 59.77 Total 6.95 48.88 100.96 84.18 124.92 116.14 Current dues (B) - Principal 68.74 96.66 152.24 219.28 846.62 440.89 - Interest 95.69 128.66 169.12 216.05 258.66 887.49 Total 169.88 226.82 821.86 485.88 605.28 778.88 Total collectibles (C) = (A+B) - Principal 68.74 118.17 191.51 256.07 411.99 496.26 - Interest 102.54 168.08 289.81 288.42 818.21 897.26 Total 166.28 274.20 481.82 519.49 780.20 898.62 Cash collections (D) - Principal 42.28 77.65 182.79 174.56 229.87 298.18 - Interest 76.17 94.84 144.41 162.87 282.92 244.97 Total 117.40 171.99 277.20 886.98 462.29 588.10 Write-off - Principal (E) - - - - - 70.46 - Interest - - - - - 56.85 Total 126.81 Rescheduled (F) - Principal - 1.25 21.98 16.14 127.26 47.07 - Interest - - 89.08 41.50 25.62 7.61 Total - 1.25 60.98 57.64 152.77 54.68 Arrears at end (C)-(D+E+F) - Principal 21.51 89.27 86.79 65.87 65.87 85.60 - Interest 27.87 61.69 47.87 69.66 59.77 88.88 48.88 100.96 84.16 124.92 116.14 178.98 Collection Ratio (D/(C-E-F) 70.8 88.01 78.71 72.95 80 76 -117 - TABLE 10 DEVELOPMENT FINANCE CORPORATION OF CEYLON (DFCC) CASH COLLECTION PERFORMANCE FINANCIAL YEAR 1 1982/8 1988/84 1984/86 1986/88 1988/87 1987/88 1988/89 (1) Balance 8/F: Interest 1 19.89 24.61 88.74 17.28 28.78 29.54 64.06 Instalment 17.85 24.46 88.14 28.97 88.88 81.29 47.92 -------------------------------------------------------- TOTAL 87.24 49.27 71.68 41.20 67.11 60.8 111.97 -------------------------------------------------------- (2) Due for the Year: Interest 82.06 98.62 100.67 121.59 166.62 216.79 221.68 Instalment I 68.89 80.88 74.18 110.66 210.10 296.94 869.80 TOTAL I 140.45 182.88 174.70 282.24 878.72 512.78 690.99 -------------------------------------------------------- (8) Tota I Dues: Interest 101.45 118.88 188.81 186.82 192.85 248.88 285.68 Instalment I 76.24 118.82 112.27 184.82 248.48 827.28 417.28 TOTAL I 177.69 281.05 248.08 278.44 485.88 678.568 702.96 ------------------------------------------------- --- (4) Adjustments for: I Write-off of Interest I 8.67 16.29 8.21 1.48 10.19 2.71 18.56 Write-off and Reached. of Int. ( 2.85 9.08 27.29 2.12 17.02 8.28 0.87 ------------------------------------------------ -- TOTAL 6.02 26.97 80.60 8.55 27.21 6.94 19.28 ------------------------------------------------------ (5) Cash Collection: I Interest I 72.97 68.80 118.87 118.68 162.82 179.67 194.45 Instalment I 49.48 85.60 61.01 99.12 195.17 276.08 842.91 TOTAL I 122.40 134.80 174.88 212.78 847.79 455.86 587.86 -------------------------------------------------------- (6) Balance C/F: Interest I 24.81 38.24 17.28 23.73 29.64 64.05 72.67 Instalment I 24.46 38.14 28.97 33.38 31.29 47.92 78.70 -------------------------------------------------------- TOTAL I 49.27 71.88 41.20 57.11 60.83 111.97 146.87 (7) Collection Ratio: Interest - X I 66.90 68.20 88.80 82.70 83.80 78.70 72.80 Instalment - X ( 74.80 67.40 71.80 74.80 88.20 85.20 82.80 0A--1. 1. 180 66----------------------------------------------- TOTAL - U 141.50 180.60 158.60 157.50 170.00 158.90 155.10 -------------------------------------------------------- ---------------------------------------------------------I--- - 118 - Table 11 - BALANCE SHEET FY84-FY88, NATIONAL DEVELOPMENT SANK Re Mn FY ended December 1984 1936 1988 1987 1988 Assets Current Assets Cash & bank balance 428.5 467.1 422 481.4 884.2 Accrued Income 28.3 28.8 29.7 82.5 39.2 Current maturities of loan portfolio 191 276.9 866.7 688.9 819.1 Promissory Notes 150 160 150 150 150 Others 56.8 67.9 109.8 126 226 Total Current asets 358.8 979.2 1078.2 1278.9 1898.8 Loan Portfolio net of current maturities 809.8 1058.8 1612.9 1989.7 2888.9 Equity Investments 67.9 71.8 78.2 88.8 126.8 Total long term Portfolio 887.7 1124.9 1691.1 2078 2612.7 Lose: Provision for losse -68.8 -121.4 -177.8 -286.8 -828.8 Net Portfolio 800.9 1008.5 1418.8 1842.2 2188.9 Net Fixed assets 5.9 10.4 17.8 46.4 84.1 Invest. In associate companies 10 80 55 86 100 Total assets 1870.4 2028.1 8564.8 8250.6 8771.8 Liabilities A Equity Current liabilities Current maturities of Long term debts 22.4 49 72 61 195.8 Accrued Interest 68.1 90.2 49.8 78.7 190.9 Others 28.8 82 67 87.8 68.1 Total current liabilities 118.8 171.2 178.8 172 449.8 Net Term liabilities 447.1 662.8 1070.7 1681.8 1846.8 Total liabilities 680.9 888.5 1249.6 1868.8 2295.9 Equity Paid up share capital 600 600 600 600 600 Reserves & retained earnings 609.6 689.6 714.8 797.2 876.4 Total equity 1109.6 1189.6 1814.8 1897.2 1476.4 Total liabilities and equity 1607.4 2028.1 2664.8 8250.6 8771.8 Ratios Current 7.6:1 5.7:1 6.1:1 7.4:1 3.1:1 Long term debt to equity 0.4:1 0.6:1 0.8:1 1.2:1 1.2:1 Provisions as X of loan 7.7 10.8 11.2 11.4 12.8 and equity portfolio % - 119 - Tab~e 12 DEVELOPMENT FINANE CORPORATION OCEyLON (DFCCV> Prolsered and Audited Balane s~.eta, FY 1983 -19 Yøw Ending Mrh 31 FY 1983 FY 94 FY lff FY 1986 FY 1987 FY 1988 FY 198 pm__ _Aud Pro Aud Prøj Aud Proj Aud Pro Aud Aud Aud Loane 40.3 529.0 603.7 518.8 001.6 778.9 013.2 1.030.7 Ø33.7 1.425.2 1,83.7 2.048.2 Ofinay haEe 25.2 27.7 30.4 36.7 37.7 48.9 44.2 53.1 51.0 61.6 70.0 75.8 Prefernc ~Sharg 32.6 35.1 26.0 30.6 19.5 27.1 13.0 21.4 6.5 20.0 18.5 17.0 FnanclalLeses - - - - - 1.5 - 13.1 - 38.8 61.7 61.8 Subtotal 607.1 501.8 660.1 658.1 658.8 Ø54.4 70.4 1,127.3 601.2 1.544.5 1,834. 2,203.7 Leas Provilons 28.4 23.4 31.1 35.7 32.7 45.2 34.5 0.8 36.6 20.2 37.6 57.1 578.7 568.4 629.0 620.4 62.1 80U.2 835.9 1.126.5 053.O 1.524.3 1.796.9 2,146.6 Current Ase Debtore ost & Acrued Inome 27.6 20.3 36.2 36.8 38.3 11.0 42.7 16.8 47.6 17.1 33.2 3.7 Temporary Inv*stment 4.0 0.2 24.0 70.0 24.0 40.0 14.0 284.0 4.0 321.0 240.0 270.3 Cash~øank Balanes 16.8 6.0 18.5 10.8 27.9 3.3 41.6 14.8 56.8 21.4 52.1 54.0 Current Agst Subtotal 48.4 98.5 78.7 123.6 90.2 54.3 98.3 316.5 108.4 359.5 334.3 360.0 Total Aest 643.3 683.5 738.7 719.1 747.8 898.2 766.4 1.485.2 808.3 1.034.9 2,190.3 2,566.4 LIABILITIES &hwCaptal 60.0 94.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Special Resrv 13.9 15.0 13.9 15.0 13.9 15.0 13.9 15.0 13.9 15.0 15.0 15.0 General and Bulding Re~ev 30.0 33.5 47.0 38.0 62.0 44.5 78.0 81.0 85.0 110.0 161.0 221.0 Profit and Los Blanc 1.3 0.3 1.1 Q.3 0.6 0.5 1.6 0.5 1.5 1.0 0.8 1.2 Total Equity8ubtotal 105.2 143.6 162.0 153.3 176.0 160.0 103.5 196.5 212.4 232.0 276.8 337.2 Lan frm Government 13.0 14.9 12.8 12.8 11.7 11.7 10.7 10.7 9.0 10.7 8.6 7.5 Central Bank Relinan~ 213.0 210.8 238.5 227.0 231.8 219.8 222.4 254.3 211.3 200.9 239.9 233.7 Development Bank - - - - - - - 343.1 - 398.7 398.7 308.7 Bank Lons 21.9 21.4 18.0 14.4 14.2 10.9 10.2 7.6 0.2 5.0 1.2 0.4 IBRD Lons 1.8 1.8 1.1 - 0.7 - 0.4 - 0.3 - - - IDA Lan 122.4 123.3 103.0 119.1 81.9 180.9 01.8 307.4 48.1 409.6 534.0 657.9 ADB First Loan 143.2 142.7 165.8 175.9 148.4 207.2 123.8 186.1 102.1 278.5 297.9 380.9 New FC Loan - - - 35.3 - 60.7 - 62.1 - 64.0 63.9 254.9 IDA/SMI Røinanoe - 0.5 - 0.3 - 8.0 - 44.1 - 131.1 228.0 242.2 Total Long-trm Oebt Subtol 516.8 521.4 539.2 584.8 488.7 099.2 429.1 1.215.4 374.6 1,558.5 1.773.6 2.155.2 Taxes Payable 8.6 - 7.8 2.4 7.3 0.5 7.9 3.1 8.5 7.0 9.4 17.0 SundryCreditore 12.0 17.9 14.7 18.0 16.6 28.5 10.9 58.2 17.5 124.5 116.5 42.0 OMdnd 3.1 0.0 7.2 10.0 7.2 12.0 7.2 12.0 7.2 12.0 14.0 15.0 Current Lablltfe Subtoali 21.3 18.5 29.7 31.0 31.1 36.0 32.0 73.3 33.2 144.4 139.9 74.0 Total UabillI.e 643.3 683.5 73.7 769.1 747.8 8905.2 768.4 1.485.2 800.3 1,934.9 2.190.3 2,568.4 ebtquity Rao 4.91:1 3.63:1 4.48:1 3.81:1 3.9:1 4.37:1 3.52:1 0.19:1 3.10:1 6.72:1 0.41:1 6.3:1 - 120 - Table 18 Income Statements FY 1984-1988, NO FY ending 81 Dec. 1984.0 1985.0 1986.0 1987.0 1980.0 Revenue Interest on loans 134.1 178.9 181.8 209.4 264.6 Interest from SMI loans 18.1 14.1 23.0 41.7 58.7 Interest from fixed deposits 60.8 66.7 54.0 41.6 50.9 Income from equity Investments 0.4 1.6 2.9 1.7 1.9 Other Income 6.9 9.2 11.6 16.0 17.1 285.8 286.6 268.6 809.8 898.2 Operating Expense Interest on borrowings 89.2 62.9 - 84.2 128.9 16.6 Administrative expenses 20.1 24.8 27.7 29.2 88.6 Provision for doubtful accounts 64.8 61.0 82.7 69.6 97.8 Depreciation 0.6 0.6 0.6 0.7 1.6 124.7 169.8 146.2 228.6 269.8 Net income 110.6 106.2 108.4 865.7 108.9 Lees tax Net profit after tax 110.6 106.2 106.4 85.7 108.9 Ratios Return on average equity V a/ 10.4 9.2 9.6 7.1 6.0 Return on average total assets X 6/ 9.6 8.6 8.9 7.5 7.7 Administrative A general expense/ average total assets 1.8 1.8 1.2 1.0 1.0 Interest spread c/ 1.8 2.8 2.4 2.0 8.4 Earnings spread d/ 9.0 7.8 6.8 6.4 6.0 s/ Return on average equity a Net Income before tax & dividend Average equity (without pro note) 6/ Return on overage total assets a Net income # Int. on borrow. Average totel assets c/ Interest spread a Interest from loan - Financ. exp. --se--m-mem-----m---e---------m-mm------ Avg.loon portfolio Avg.Iong term liab. d/ Earnings spread m Int.from total portfolio - Financ.exp.#Div. Avg.& Invst.portfoi Avg.Iong tore - 121 - Table 14 CVELM~r FNANCE cCMPA7IGN 0P CEYLO (DFCC) Projected and Audited Ince~ Ste6eenta, FY 1981-1989 (Re. Million) Yar ended Merch 81 FY 1983 FY 1984 Fy 1985 FY 1986 FY 1987 FY 1988 FY 1999 Proj Aud Proj AU4 Proj Aud Pro Aud Proi Aud Aud Aud Interesl an Le 91.6 82.1 99.4 84.8 108.3 18.0 109.2 114.5 116.5 158.9 192.9 202.0 Leasing Inces - - - - - 0.1 - 1.2 - 4.9 9.6 9.5 Dividend.: Ordinary sheroa 8.4 1.3 8.9 1.8 4.8 3.7 8.7 4.4 6.7 7.7 7.8 10.1 Prøførenu hes 2.7 2.7 2.2 8.0 1.7 1.8 1.2 0.9 0.7 0.8 0.8 0.1 L~Gai feø~ Å *~it~.n% fes 1.2 1.4 10.2 2.2 1.8 2.1 1.4 2.2 1.4 1.9 1.9 1.8 Piued Å cmIl 0pli Intereal 8.8 1.2 8.9 18.1 4.8 18.0 4.S 82.2 5.8 89.6 87.8 55.6 Miacellenee. £no~. 0.4 4.2 0.8 0.6 0.5 1.2 0.7 2.8 0.9 6.9 8.4 18.7 102.6 92.9 111.1 107.2 115.9 111.4 12.0 18M.2 181.5 217.2 259.7 294.$ Intere~6 an: brrolngo fro Ome~le eur~ce 24.6 24.6 80.7 80.2 81.9 29.2 81.1 44.8 80.0 60.8 67.6 57.8 Borvings froe Noaein Souro*s 22.9 23.1 29.7 26.1 22.4 85.9 18.8 41.7 18.4 58.7 78.1 86.9 47.8 47.7 55.2 8M.8 61.7 65.1 61.6 86.8 62.8 119.2 140.7 144.4 11888 FRPZ88.1 45.2 M8.9 50.9 84.2 44.8 81.4 71.7 69.0 98.0 119.0 180.4 Overhadu 7.5 104.0 9.4 9.0 11.7 10.0 14.7 12.1 18.8 14.1 16.8 25.8 Opraciatlon 0.8 0.8 0.8 0.5 1.0 0.4 1.0 2.7 1.1 2.4 6.8 6.0 Pr~ioion/vriff of Dtouful L~»ne mnd 1nVstV n% 22.8 18.1 2.7 21.2 1.6 18.1 1.8 19.8 2.1 25.8 27.1 28.2 Pr~ls bforg Te 24.8 19.4 49.8 20.2 89.9 22.0 48.9 87.4 47.6 86.2 68.8 92.4 Inmeme Tøm 12.8 4.4 19.8 8.7 18.2 8.8 19.8 8.4 21.8 8.6 10.2 17.1 W I E 12.0 18.0 24.0 14.8 21.7 11.7 24.1 82.0 26.1 47.6 88.8 75.3 Statury neserve 1.8 8.0 - - - - - - - - - - 0~her Rumerv. 1.0 9.5 17.0 4.8 18.0 6.6 16.0 20.0 19.0 88.0 45.0 60.0 0IVIdendø (Ca~) .1 2.8 7.2 10.0 7.2 10.0 7.2 12.0 7.2 12.0 14.0 18.0 R47l06 Adeløl~lrevo Eapen~/Avørag Teel mests (M) 1.8 1.8 1.4 1.8 1.4 1.8 2.1 1.2 2.6 1.0 1.8 1.4 Pr~e Prefi/Aversee fuIty (I> 18.9 18.5 21.1 18.6 16.8 14.0 18.8 21.0 16.0 26.2 29.1 82.8 Rate of Dividende (0) 12.0 2.6 12.0 10.0 12.0 10.0 12.0 12.0 12.0 12.0 14.0 18.0 Dividond s Per~ent.s. Me remse (P~l Ratio) 25.1 16.7 80.0 69.0 83.1 89.9 29.9 87.8 27.6 25.2 2.9 19.9