Colombia - Fifth Small and Medium Scale Enterprise Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.13716 IMPLEMENTATION COMPLETION REPORT COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT (LOAN NUMBER 3025-CO) OCTOBER 11, 1994 Public Sector Modernization and Private Sector Development Division Country Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents 1990 US$ 1 = Col$ 508 1991 US$ 1 = Col$ 614 1992 US$ 1 = Col$ 684 1993 US$ 1 = Col$ 789 Fiscal Year of Borrower January 1 to December 31 Abbreviations and Acronyms CFs Financial Corporations CFD Corporacion Financiera de Desarrollo (SME development bank post-privatization) CFP Corporacion Financiera Popular (State-owned development bank; became CFD in 1992) DTF Interest Rate Index ESOP Employee Stock Option Plan FFI Fondo Financiero Industrial (State directed credit line) ICR Implementation Completion Report IDB Inter-American Development Bank IFI Instituto Financiero Industrial (State-owned financial institution) PFIs Participating Financial Intermediaries Proexpo State-owned export promotion agency SAR Staff Appraisal Report SMEs Small and Medium Enterprises  FOR OFFICIAL USE ONLY Table of Contents Page Preface .................................................. i Evaluation Summary ..................... ..................... H Part 1: Project Implementation Assessment A. Project Objectives .................................... 1 B. Achievement of Project Objectives .......................... I Disbursement Profile .................................. 2 Sector Policy Objectives ................................ 2 Participation of Financial Intermediaries ....................... 2 Loan Processing and Technical Assistance to Subborowers .... ....... 3 Impact of the CFD .................................... 3 Financial Objectives ................................... 4 Portfolio Characteristics ................................. 4 Impact on Subborrowers ................................ 4 Rate of Return ...................................... 5 C. Implementation Record and Major Factors Affecting the Project ... ..... 5 Factors Generally Subject to Government Control ................. 5 Factors Subject to Implementing Agency Control ................. 6 D. Project Sustainability ................................... 6 Continuation of SME Lending ............................. 6 CFD Operations ..................................... 6 E. Bank Performance ..................................... 7 F. Borrower Performance .................................. 7 G. Assessment of Outcome ................................. 8 H. Future Operation ..................................... 8 I. Key Lessons Learned ................................... 8 Part 11: Statistical Annexes ...................................... Appendices: A. Mission's Aide-Memoire ......................... B. Borrowers Contribution to the ICR ................... C. Misc. ..................................... D. Map ...................................... This document has a restricted distribution and may be used by recipients only in the performance of their Eofficial duties. Its contents may not otherwise be disclosed without World Banks authorization.   IMPLEMENTATION COMPLETION REPORT COLOMBIA FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT [LOAN NUMBER 3025-CO] Preface This is the Implementation Completion Report (ICR) for the Fifth Small and Medium Enterprise Project in Colombia, for which the amount of US$80.0 million equivalent was approved on March 14, 1989 and made effective on January 25, 1991. Final disbursement took place on June 16, 1993. The amount of US$ 2.90 million was canceled as of February 15, 1994, and US$ 0.88 million canceled as of August 26, 1994, at which time the loan account was closed, several months earlier than the original closing date (6/30/95). The ICR was prepared under the leadership of Susan Goldmark of the Public Sector Modernization and Private Sector Development Division of the Latin America and the Caribbean Region, with the assistance of Adrienne Taptich and Natalia Gomez, and reviewed by Krishna Challa, Division Chief, and Elsie Garfield, Acting Project Advisor. The Borrower -- the Central Bank of Colombia - provided comments that are included in an appendix to the ICR. Preparation of this ICR was begun during the Bank's completion mission, July 18-25, 1994. It is based upon material in the project file, discussions with Central Bank managers, interviews with representatives of all participating financial intermediaries and 14 subborrowers, and financial data provided by the Central Bank, financial intermediaries, and subborrowers. The borrower contributed in the preparation of the ICR during the completion mission by: (i) discussing all major points included in this report; (ii) providing a diskette with subloan information; (iii) assisting in the collection of other data; and (iv) producing its section of the report.   - ii - COLOMBIA: FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT [Loan number 3025-CO] Evaluation Summary Introduction: 1. Four Bank loans totalling US$92.5 million had been made to small and medium enterprises (SMEs) in Colombia during the thirteen years preceding this project. All were intermediated solely by the Corporacion Financiera Popular (CFP), the state development bank established to support SMEs. While these projects succeeded in stimulating growth in employment and improving the quality of CFP's development banking services, they made little progress towards reducing the high administrative cost and low efficiency of CFP services and tackling policies to promote the intermediation of SME loans through a wider network of private and state-owned financial institutions. Project Objectives 2. Objectives: The development objectives of the Fifth Small and Medium Enterprise Project were to increase SME value-added and employment creation by: (i) making changes in public policies and institutional mechanisms influencing SME access to long-term credits; (ii) expanding the number of financial intermediaries making SME long-term loans and the volume of their resources mobilized for this purpose; (iii) simplifying loan processing and increasing technical cooperation to SMEs; and (iv) preparing sector-wide industrial studies and recommendations during Project implementation on policies influencing capital intensity, business establishment, and operations to help promote a neutral policy environment for SME development. The project aimed to support 2,500 SMEs and 2,000 microenterprises. Its objectives were clear and well- focussed. 3. Components and Covenants: The project had three main components: (i) a US$77 million line of credit destined for SMEs; (ii) a US$3 million microenterprise component; and (iii) an SME policy study. Important loan covenants included: (i) a maximum 10% arrears rate on 3025 subloans per financial intermediary; (ii) CFP net profits/average assets not less than 1.6%; (iii) CFP administrative costs/average assets not to exceed 5.5%; and (iv) Guarantor to make equity contributions to ensure that CFP debt/equity not exceed 7.5%. The Central Bank was the Borrower of the loan. Implementation Experience and Results 4. Achievement of Objectives: The project achieved its stated objectives of policy change, commercial financial institution participation, and simplification of loan processing -- all required as loan effectiveness conditions. Sector policy issues included changes in credit regulations to eliminate interest rate subsidies1, extend maturities, expand eligible expenditures, adopt substantially higher automatic rediscount ceilings, simplify documentation, and adopt repayment performance as the key ex-post monitoring criterion. The Central Bank streamlined SME processing and improved its speed in approving loans--from 50 days under the fourth SME loan to 1 day at the time of the completion report. Although the interest rate conditionality delayed loan effectiveness by 18 months, once all policy and processing changes were made, the main project component--the US$77 million line of credit--moved quickly. The line was more than fully committed 1/ The interest rate structure of directed credit was amended so that the Central Bank rediscounted the funds to financial intermediaries at the value of an index of commercial bank deposit rates (DTF) and allowed the intermediaries to onlend the funds to SMEs at rates up to DTF+6.  - iii - (US$94 million) about 1.75 years after loan effectiveness.v Almost 96% of the line was fully disbursed less than two years after loan effectiveness. Thirty-two financial intermediaries tapped the 3025 credit line. The collection rate for almost all participating financial intermediaries was high, ranging from 97% to over 99%. Based in part on its experience with this project, in May 1994, the Central Bank eliminated all caps on directed credit programs. 5. Portfolio Characteristics: A total of 2,188 subloans with an average value of US$34,800 were issued to SME's with average assets of US$23,277. About 42% of subborrowers were classified as new firms that were legally incorporated immediately prior to the subloans. The credit line was used by enterprises in 26 regions throughout the country. Of the firms granted subloans, 80% had asset levels of under US$150,000 at the time of the subloan, and 28% had assets less than US$20,000. As many as 45% of all subloans issued were for less than US$20,000. These indicators appear to demonstrate that the project satisfied its goal of reaching smaller enterprises. Almost 80% of subloans carried the maximum allowable interest rate of DTF+6%. A review of the files and surveys conducted during the completion mission indicate that the credit has had a significant positive impact on employment and sales of participating SMEs. 6. Impact on CFP: CFP, which was the main financial corporation lending to small end medium enterprises, was unable to meet the performance indicators that were set (as a legal covenant) for participating in the project. This helped precipitate the decision to privatize this public sector development bank in April 1992 and change its name to the Corporacion Financiera de Desarrollo (CFD). Authorized capital was doubled from US$7.3 to 14.6 million and, in 1993, the CFD issued an additional US$0.63 million in shares. This increase in equity also caused an improvement in the institution's financial indicators. CFD management has been changed; a new strategy and procedures for lending are being designed and field offices are being fully computerized. In the regional offices, there has been a depoliticization of staff. 7. Other Project Components: The two project components that were not as successful were the microenterprise development facility and the SME sector policy study. The US$3 million originally set aside for the microenterprise component (US$2.9 million for subloans and US$100,000 for technical assistance for microenterprise subloan administration) were moved into the general credit line fund (by amendment letter 5/7/93). Colombian non-governmental organizations designated to use these resources were able to obtain funds on more favorable terms through an Inter-American Development Bank (IDB) project -- in this sense, the corresponding project objective was pursued. By contrast, the preparation of the SME sector policy study required under the loan had no impact on the policy environment. The Central Bank had low ownership of the study since not responsible for the non-financial policies this study was intended to examine and address. 8. Bank Performance: Bank performance in all stages of the project cycle was highly satisfactory. The Bank team designed a project that succeeded in catalyzing improvements in CFD performance, following four projects that were unable to reform the institution. The strategy of introducing competition among financial institutions to improve the efficiency of a Government-owned development bank was an innovative approach which contributed significantly to the achievement of the project's basic development objective (SME sector development) and the success of the project. The inclusion of potential participating financial intermediaries in the preparation phase, through focus groups, contributed to successful implementation. Risks and benefits of the credit were adequately appraised and borrower commitment established. The CFD was appraised thoroughly and eligibility criteria were established for other financial intermediaries. Supervision missions took place once a year, and supervision reports presented salient issues and changes. 9. Borrower Perfornance: The Borrower's performance was highly satisfactory in the various components of loan preparation and implementation. The Central Bank participated extensively in the j / Commitments exceeded the total line amount of US$77 million to take into account potential cancellations.  - iv - preparation phase and demonstrated commitment to the project. It verified financial intermediary compliance with eligibility criteria, disqualifying one institution when necessary. Significant improvements in operational procedures were made by the Central Bank. It sought, as well, to collect data required from financial intermediaries regarding subborrowers on an annual basis. 10. Project Outcome: The project's outcome has been highly satisfactory. The line of credit provided small and medium enterprises in Colombia with access to credit through the commercial branch network as the country was opening its economy, thereby giving these firms resources to take advantage of the new opportunities emanating from the apertura. The policy dialogue on interest rate policy related to this loan, and the conditionalities developed, contributed to Central Bank movement towards reduced rate-setting and increased market-determination of interest rates for all segments of the real sector. Summary of Findings, Future Operations and Key Lessons Learned 11. Future Operations and Sustainability: In early 1994, the Government decided that the Central Bank should no longer engage in rediscounting of credit lines. The unit established to oversee such lines has been largely disbanded, and only a few staff members continue to attend part-time to management of credit line paperwork. Colombia may engage in future line of credit operations through IFI and BANCOLDEX. 12. Continuation of SME Lending: The sustainability of main project achievements is likely. All but two of the financial intermediaries interviewed asserted that they would continue to lend to SMEs out of their own resources.2' Further, one commercial institution has established a line of credit for SMEs from its own resources that would give loans of up to 10 years. The Government-owned financial institution, IFI, has established a US$2.5 million guarantee fund that will guarantee from 30-50% of SME loan amounts. In addition, in 1993, IFI rediscounted about US$20 million through first tier financial intermediaries to SMEs and plans to expand this practice in the future. As financial sector policy reforms undertaken since 1990 have contributed to more competition in the banking sector, financial institutions are likely to expand lending from own resources to SMEs. Many institutions indicated, however, that they will not lend to microenterprises since they believe that these loans carry an unacceptably high level of risk and administrative costs. 13. CFD Operations: CFD viability has increased as a result of the reforms undertaken since its privatization. The institutional culture is changing--both through changes in management, training of personnel regarding new procedures and service orientation, and personnel attrition and turnover. However, arrears remain high and levels of efficiency and profitability remain below industry standards. 14. Lessonsfor Future Projects: The four main general lessons learned from this project include: (i) all key elements needed for project success should be accomplished prior to project effectiveness; (ii) those responsible for implementing a project component must feel ownership; (iii) coordination with multilateral and other funding agencies and the Government on sector policy is important to ensure consistent approaches and avoid duplication of effort; and (iv) maintaining the focus of supervision on achieving broad development goals combined with a degree of pragmatism regarding conditionality can improve project outcome. Important lessons regarding SME sector development include: (i) credit projects can help enable SME's to take advantage of liberalization of the business environment; (ii) fostering a competitive credit environment can be an effective technique to improve the performance of a Government-owned development bank; (iii) heightened competition in the financial sector can lead to greater private sector interest in lending to SME's; and (iv) financial intermediaries should have maximum flexibility to set the appropriate terms, conditions and amortization schedules of SME subloans; more frequent, smaller payments are an important factor to increase repayment rates among smaller enterprises. 3/ The two banks that will not pursue SME lending have developed strategies and procedures to target large firns.   PART I -Project Implementation Assessment A. Project Objectives 1. The development objectives of the Fifth Small and Medium Enterprise Project (SME5) were to increase small and medium enterprise (SME) value-added and employment creation by: (i) making changes in public policies and institutional mechanisms influencing SME access to long-term credits; (ii) expanding the number of financial intermediaries making SME long-term loans and the volume of their resources mobilized for this purpose; (iii) simplifying loan processing and increasing technical cooperation to SMEs; and (iv) preparing sector-wide industrial studies and recommendations during Project implementation on policies influencing capital intensity, business establishment, and operations to help promote a neutral policy environment for SME development. The three main project components were: (i) a US$77 million line of credit destined for SMEs; (ii) a US$3 million microenterprise component; and (iii) an SME policy study. It was anticipated that the project would support 2,500 existing and newly-created SMEs and 2,000 microenterprises.' 2. The operation's fundamental goal of increasing SME value-added and employment by expanding their access to long term credit was clear. Objectives (i)-(iv) were well-defined and targeted to achieving this goal. Promoting SME investments in productive assets by easing financing constraints was fully consistent with the growth-oriented country assistance strategy. The success of the four previous SME credits and domestic directed credit programs in increasing the employment and value added of SMEs suggested that the project's goal was realistic. Further, the strategy to expand the number of participating financial intermediaries (PFIs) reflected a highly realistic view of the weak capacity of the Corporation Financiera Popular (CFP). The CFP had continued to perform poorly despite attempts at institution-building and improving efficiency under the previous four SME credits. The SME5 credit, consequently, sought to encourage commercial financial intermediaries to lend to SMEs, rather than relying only on CFP. 3. The SME5 project design was highly focussed. Only the preparation of a broad study regarding the policy environment for SME development was not directly related to the fundamental objective of the credit. The project was more complex than its four predecessors since several financial intermediaries were involved in the SME lending component and a microenterprise lending component was added. However, because the Borrower (the Central Bank) and participating financial intermediaries had developed a strong capacity to administer such credits, the project's risk of failure was low and no undue implementation burden was created. 4. This project had two significant modifications during project implementation. First, the Bank and the Borrower agreed in 1992 that the privatization of the CFP would be substituted for complying with institutional performance covenants, which CFP was unable to meet, as a condition for disbursement. Second, the US$3 million originally set aside for the microenterprise component (US$2.9 million for subloans and US$100,000 for technical assistance to increase capacity for administration of microenterprise subloans) were moved into the general credit line fund. Colombian non-governmental organizations designated to use these resources were able to obtain funds on more favorable terms through an Inter-American Bank (IDB) project. B. Achievement of Project Objectives 5. The project succeeded in achieving its stated objectives of policy change, commercial financial institution participation, and simplification of loan processing. These were attained as part of the $77 million SME credit line which was the main project component. The two project components that were not as successful were the microenterprise development facility and the SME sector policy  Page 2 study. As mentioned above, the microenterprise component funds were reallocated to the general credit line fund. In addition, the preparation of the SME sector policy study required under the loan did not have any noticeable impact on the policy environment. The Central Bank--which was the implementing institution for this study--was not responsible for the non-financial policies that this study was intended to examine and address. This contributed to low ownership of the study and its lack of impact.2 However, broad policy reforms implemented 1990-91 improved the environment for small and medium business.3 (see para 23) 6. Disbursement Profile: The credit was committed and disbursed very rapidly. The Staff Appraisal Report anticipated that the loan would be fully committed within two years after loan effectiveness and fully disbursed about 4.5 years after effectiveness. Instead, the line was more than fully committed (US$94 million) about 1.75 years after loan effectiveness.4 Almost 96 percent of the line was fully disbursed less than two years after loan effectiveness. The line of credit moved quickly due to: (i) attractive intermediation margins, which encouraged financial intermediary participation and promotion; and (ii) long lending terms (4-10 years), which subborrowers were otherwise unable to obtain. A Government line of credit offering long term credit for enterprise development (FFI) was closed mid-1991, which increased demand for the Bank loan. 7. Sector Policy Objectives: The project did achieve its sector policy objectives with respect to changes in public policies and institutional mechanisms influencing SME access to long term credit. Loan effectiveness conditions stipulated that the Government would put into effect certain financial policies and institutional changes. These included changes in regulations governing Central Bank development credit rediscount facilities to: (i) eliminate interest rate subsidies and expand financial margins to PFIs; (ii) extend maturities and grace periods; (iii) expand eligible expenditures to include imported used equipment; (iv) adopt substantially higher automatic rediscount ceilings and simplify documentation to reduce loan processing time and cost; (v) adopt repayment performance as the key ex-post monitoring criterion; (vi) relax capitalization and production target requirements; and (vii) eliminate the discretionary bases for the cancellation of already approved rediscounts. 8. Further, the interest rate structure of directed credit was amended so that the Central Bank rediscounted the funds to financial intermediaries at the value of an index of commercial bank deposit rates (DTF) and allowed the intermediaries to onlend the funds to SMEs at rates up to DTF+6.5 The prior rate structure provided an insufficient spread to attract PFIs to lend to smaller clients, which were considered to have relatively higher administrative costs and carry greater risk. The policy changes and attractive terms contributed substantially to the rapid disbursement of the line of credit. Based in part on its experience with allowing market defined interest rates within a specified range this project, the Central Bank eliminated all interest rate caps on subloans issued through directed credit programs in May 1994. 9. Participation of Financial Intermediaries: The SME5 credit did achieve its institutional development objective of expanding the number of financial intermediaries making long-term loans to SMEs. A condition of project effectiveness was that the Central Bank would execute participation agreements with at least three PFI's, whose aggregate indicative commitments would exceed at least 40 percent of the loan amount, and with one managing institution for the microenterprise component. The structure of the credit led to a strong increase in the number of participating financial intermediaries in the credit line compared to previous SME credit lines in Colombia--32 banks and CF's used the credit. This meant that SMEs had ready access to this credit line through an extensive network of bank branches throughout the country.  Pag 3 10. It is less clear whether the loan succeeded in increasing the volume of resources mobilized for SME lending since the participating financial intermediaries do not keep records of portfolio development according to client size. However, in the survey of participating financial intermediaries undertaken for this report, two-thirds of the participating banks and financial corporations (CFs) reported that over 80% of SME subborrowers were new clients. Only one bank indicated that most subborrowers (95%) were previous clients. The intermediaries reported that they would have issued loans to these clients, but that the line enabled them to offer funds at longer terms than they would have out of their own resources. At the time of the completion report, most intermediaries' representatives stated that they were willing to use their own resources for SME clients, but only for a 3-5 year term. 11. Loan Processing and Technical Assistance to Subborrowers: Institutional development goals regarding the Central Bank were met. The Central Bank streamlined SME processing and improved its speed in approving loans--from 50 days under the fourth SME loan to 7 days as of the first supervision report. At the time of the completion report, the Central Bank had a one day turnaround. In addition, the loan agreement created a "free limit subloan" procedure, under which financial intermediaries would be allowed to issue subloans for up to US$400,000 without prior approval from the Central Bank. The financial intermediaries were also able to give subloans for restructuring or investing based on financial plans duly submitted without Central Bank approval for amounts of US$250,000 for CFD and experienced CFs, US$120,000 for smaller CFs, and US$80,000 for commercial banks. 12. Commercial financial intermediaries reported that they did not change their own procedures for dealing with SMEs. No steps were taken to decrease paperwork demands or expedite SME loan processing and no changes occurred in the amount of time necessary to approve a loan. However, interviews with a sample of subborrowers indicate that the amount of time taken to process and approve a loan--on average one month--was regarded to be reasonable. Subborrowers and participating financial indicated that in order for the small firms to complete the financial analysis and project documents, the banks would have to provide some guidance in project preparation. No other formal technical assistance was provided to subborrowers. 13. Impact on the CFD: The CFD made important steps forward in institutional development under the loan. When unable to meet the performance indicators that were a legal covenant for participating in the project, CFD was in danger of losing a predominant source of financing. This situation helped to precipitate the decision to privatize this public sector development bank in April 1992 and change its name to the Corporacion Financiera de Desarrollo (CFD). Authorized capital was doubled from US$7.3 to 14.6 million and, in 1993, the CFD issued an additional US$0.63 million. Main investors include the IDB's International Investment Corporation (24.6%), Corferias (0.4%), and the Chamber of Commerce, the Association of Small Industry, an Ecuadoran private bank and other private investors, and various other foundations and cooperatives involved in microenterprise development (total of 33.7%). The government now holds 23% of the shares, and of the seven current CFD board members, only one represents the Government. As a result of the privatization, return on the institution's portfolio has received increasing emphasis. CFD management has devised a new strategy and procedures for lending. 14. The increase in equity caused an improvement in the institution's financial indicators: administrative costs/total assets declined from over 8 percent in 1990 and 1991 to 4.1 % in end July 1992 and 5.39% at end-1993. Net profits to average assets were 0.9% in 1990 and 0.8% in 1991 versus a loan covenant target of 1.6%. This percentage improved to 2.2% in 1992 because (i) CFP dramatically increased deposit taking and own resource lending; (ii) the capital injected through  Page 4 privatization yielded interest returns since not yet relent; and (iii) the institution made financial gains on sale of property. In 1993, as the effects of these extraordinary circumstances subsided, the ratio of net profits to average assets was 1.03, reflecting operational improvements since pre-privatization. The indicator jumped in 1994 due to generalized credit restrictions that inhibited CFD loan issuance. 15. Financial Objectives: The project achieved its financial objectives with regard to financial intermediaries. Thirty-one participating financial intermediaries met and sustained the eligibility criteria.6 These criteria were that intermediaries sign participation agreements, maintain project accounts under sound practices and provide audited financial statements, adhere to subloan terms on rate, maturity, and grace period specified, and maintain a collections rate of 90%. The collection rates for participating financial intermediaries, except CFP, were high, ranging from 97% to over 99%. Non-performing loans were approximately 1% of the CO-3025 portfolio at year end-1993. 16. The quality of the CFD portfolio of World Bank SME5 loans was considerably lower than that of CFD's general portfolio. Arrears for the credit line were 22%, compared to 7.4% for the overall portfolio in 1993, including 3.2% overdue more than 90 days. (The total arrears rate shows improvement, but continues below industry standards.) Since the credit line drew from the same pool of borrowers as other loans, the explanation provided by CFD management is that the SME5 loan amortization schedule was inappropriate for the scale of subborrower. CFP works mainly with microenterprise and smaller-scale clients, who normally repay CFP loans on a monthly or quarterly basis. This repayment schedule fits the cash flow structure of smaller enterprises and the discipline of more frequent, smaller repayments has been found to improve collection rates. Central Bank regulations established for the SME credit line, however, required all PFIs to collect repayments from subborrowers on a semiannual basis to match their own repayment schedule to the Central Bank. 17. Portfolio Characteristics: During the course of the project, a total of 2,188 subloans with an average value of US$34,800 (C$30.81 million) were issued to SME's with average assets of US$23,277 (C$19.20 million). About 42% of subborrowers were classified as new firms that were legally incorporated immediately prior to the loan.' The credit line was used by enterprises in 26 regions throughout the country. Areas of concentration include Santafe de Bogota (658), Antioquia (252), Santander (188), Cudinamarca (125), and Valle de Cauca (125). The financial intermediaries that issued the greatest number of loans were CFD (810), Caja Agraria (481), Banco Ganadero (200), Banco Cafetero (145), and Banco Popular (155). The Banks tended to issue smaller loans than CFs. The agricultural development bank, Caja Agraria, disbursed loans of by far the smallest average value ($19,326), while CFD issued the smallest average loans of all other institutions on average (US$41,527). Several CFs made subloans with values totalling over US$1 million, including Corfigan, CF de Santander, CF Colombiana, and CF Suramericana. 18. Of the firms that granted subloans, 80% had asset levels of under US$150,000 at the time of the loan, and 28% had assets less than US$20,000. A large number of loans were small: 45% of all loans issued were for less than US$20,000. These indicators appear to demonstrate that the project satisfied its goal of reaching smaller enterprises. Almost 80% of subloans carried the maximum allowable interest rate of DTF+6%. Approximately 14% of loans carried rates of 3-5%. The 5% of loans with an interest rate of DTF represent loans to enterprises located in frontier areas (Amazonas, Norte de Santander, Nario, Cesar) in accordance with national law that requires that preferential treatment be given these regions. 19. Impact on Subborrowers: Survey results indicate that the credit has had a significant positive impact on employment and sales of participating SMEs.8 A sample of 53 enterprise subborrowers that initiated operations with subloan proceeds had a combined annual salary expense of US$1.7  PeW s million in the year following the credit. This result may be used to infer that every loan dollar helped to generate 35 cents in salaries in the short term. As the firms were new and did not have regular employees before the loan, the expense represents payment of salaries to employees hired as a direct consequence of the credit. Sales by these firms were also a direct result of the credit. Total 1992 sales of these sampled enterprises were US$19.8 million, averaging US$388,609 per loan. For every dollar of loan to these new firms, US$3.56 in product was sold in the first year of operation. Of this sample, only 3 had no sales in that year. Thus, in general, it appears that the subloans did contribute to production. 20. Another sample of 93 new and existing Bogota firms that received loans with a total value of US$5.55 million from the CFD, selected randomly from CFD files, created or sustained a total of 2,997 jobs-or an average of 32 jobs per firm. Employment creation was higher than projected by loan analysts in conjunction with the entrepreneurs. Annual sales by these firms in were US$28.7 million, with average sales of US$308,576 per enterprise. This implies that each loan dollar helped to support US$5.17 in sales. On average, actual sales were equivalent to sales projected in the financial plans drawn up by the entrepreneur and CFD. Enterprise performance varied due, in part, to the impact of lowering tariffs on the industry or sector. 21. Finally, interviews conducted by Bank staff with 14 subborrowers in Bogota and Cali also indicate that the loan program had, in general, a positive effect. All except three enterprise managers believed that the loan had a direct positive impact on employment.' The 13 functioning enterprises in total, according to managers, had created 323 additional full-time jobs specifically due to the 3025 loan-an average of 25 new jobs per enterprise. Only two enterprise managers said that employment stayed the same or decreased. These 13 enterprises had a total of 485 employees at the time of receiving their loan (37 per firm on average) which grew to 808 employees due to the loan (62 per firm on average). Many of these enterprises had continued to grow after the first impulse of the loan; as of July 1994, the total employment of these 13 enterprises had grown to 1,041. All except one enterprise manager believed the 3025 loan contributed to a significant increase in their production levels, number of buyers, sales, profits and taxes paid. However, many stated that profits did not increase as fast as sales since margins were squeezed through increased competition from imports. The Government lowered tariffs from an effective rate of 70 percent to about 30 percent during 1990- 91. 22. Rate Of Return: The SAR stated that SME loan approvals would require at least an 11 percent financial rate of return. Information on the actual rate of return of subprojects was available in the Central Bank of financial intermediary files only for subloans over US$100,000, which represented 11% S of subloans. However, since subloans were disbursed at a market rate of interest and the portfolio of SME loans is of very high quality, it appears that the financial rate of return on subprojects was adequate. C. Implementation Record and Major Factors Affecting the Project 23. Factors Generally Subject to Government Control: A major economic policy change occurred during the first year of project implementation. Colombia undertook a broad economic liberalization and modernization plan in 1990, known as the apertura, which dramatically changed the business environment in which SMEs were operating. The apertura brought competition from imports, access to capital goods at lower cost, and the potential for export development. The changes resulted in increasing absolute and net entry by SME's. Effects on existing SME's varied by sector. Small and medium firms seeking to take advantage of new market entry opportunities or needing to restructure to improve efficiency in the face of increased competition were able to obtain credit  Page 6 through this project. In 1991, the appreciation of the peso and an increase in interest rates hurt business, particularly exporters or those gearing up to export. 24. Extensive financial sector reforms affected the operations and strategy of participating financial intermediaries. Financial institutions, particularly CFs, were able to offer a wider range of products and competition among types of institutions was increased. The liberalization of the current account gave some large firms access to international financial markets, in which many Colombian banks could not compete. Increased competition for prime clients caused many financial institutions to seek new, smaller-scale clients at the same time that the 3025 credit line became available. 25. Perhaps the most significant factor affecting implementation within the Government's control, which led to an 18 month delay in project effectiveness, was a delay in implementing the financial sector policy changes agreed to during negotiations. However, once these policy changes enabling the project to become effective were enacted, the line of credit was committed very rapidly. 26. The microenterprise component of the project was not implemented because the Government decided to pursue instead a US$15 million IDB microenterprise project. Under the line, the intermediary could borrow funds at DTF-3 and relend to microenterprises at DTF+3. In addition, the intermediary would receive a subsidy of Col$200,000 from the Government for each loan provided through this credit. Consequently, the World Bank line was less attractive than the IDB alternative. 27. Factons Subject to Implementing Agency Control: The high level of commitment of the Central Bank to the project was a major factor in project success. The Central Bank allocation of personnel to a new department created to manage external credit lines facilitated financial intermediary use of the credit line. The newly created external credit line division of the Central Bank, the implementing agency, undertook to streamline paperwork and change procedures to facilitate rapid processing of applications. The improvements reduced financial intermediary administrative costs and enabled the intermediaries to respond more quickly to SME subloan applications by eliminating delays caused by Central Bank processing of loans. D. Project Sustainability 28. Continuation of SME Lending: The sustainability of main project achievements is likely. All but two of the financial intermediaries interviewed asserted that they would continue to lend to SMEs out of their own resources'" because they can earn bigger margins due to SMEs weaker negotiating ability and position. The smaller CFs will continue to work with this market segment since their equity limitations prevent issuing the size of loans large enterprises may need. One commercial institution has established a line of credit for SMEs from its own resources that would give loans of up to 10 years. The Government-owned financial institution, IFI, has established a US$2.5 million guarantee fund that will guarantee from 30-50% of SME loan amounts. Several banks and CF's indicated that they were looking to guarantees, like Proexpo or IFI, to alleviate concerns about inadequacy of SME collateral. In 1993, IFI rediscounted about US$20 million through first tier financial intermediaries to SMEs and plans to expand this practice in the future. As financial sector policy reforms undertaken since 1990 have contributed to more competition in the banking sector, financial institutions are likely to expand lending from own resources to SMEs. Many institutions indicated, however, that they will not lend to microenterprises since they believe that these loans carry an unacceptably high level of risk and administrative costs. 29. CFD Operations: CFD viability has increased as a result of the reforms undertaken since its privatization. As of June 1994, the institution had disbursed US$87.8 million from its own resources,  Pag 7 representing approximately 73% of its total portfolio. In 1991, the CFD (then CFP) issued only 22% of its loans out of own resources, relying mainly on multilateral and domestic credit line facilities. The institutional culture is changing, both through changes in management, training of personnel regarding new procedures and service orientation, and personnel attrition and turnover. The average tenure of personnel has decreased from approximately 10 years in 1990 to 6.23 years in 1994, and the current staff numbers 340. Three of the four vice presidents and 22 of 27 managers are new, hired from private sector financial institutions. In the regional offices, there has been a depoliticization of staff. The automation of all offices is 90% completed, and when completed is expected to lead to a further decrease in staff by 33%. 30. The privatization included an employee stock option plan (ESOP), in which a large number of personnel participated through very small purchases. This employee stake in CFP performance, combined with sale of shares to other major stakeholders in the institution (chamber of commerce, foundations, trade associations) should help institutional sustainability. In addition, with the capital infusion through privatization, institutional finances became adequate to continue operations in the short to medium term. Long term viability will depend on sustained good management of the institution. The management has adjusted its strategy, moving away from financing loans too small to cover costs by setting a minimum loan amount of 50 times the national minimum monthly wage. The maximum loan issued will be US$600,000. The institution intends to create an effective administration to capture savings, further increasing intermediation of loans from savings. E. Bank Performance 31. The Bank performance in all stages of the project cycle was highly satisfactory. The Bank team designed a project that succeeded in catalyzing improvements in CFD performance, following four projects that were unable to reform the institution. The strategy of introducing competition among financial institutions to improve the efficiency of a Government-owned development bank was an innovative approach at the time of the project. The loan was well-designed and an appropriate instrument to support SME growth. The inclusion of potential participating financial intermediaries in the preparation phase, through focus groups, that led to modifications in subloan processing and documentation requirements contributed to successful implementation. Risks and benefits of the credit were adequately appraised and borrower commitment established. The CFD was appraised thoroughly and eligibility criteria were established for other financial intermediaries. 32. Supervision missions took place about once a year, phone contact and correspondence with the implementing agency from headquarters was frequent, and supervision reports presented salient issues and changes. Supervision 590 forms provided an accurate assessment of project implementation progress and problems were realistic and gave appropriate views. Performance indicators were appropriate and facilitated evaluation of project implementation. During supervision, CFD inability to meet performance covenants led to its privatization. A pragmatic approach to applying project conditionality led to a positive outcome in a situation that could have caused loan cancellation. In general, loan covenants were enforced, and Central Bank and World Bank officials exchanged information regularly. F. Borrower Performance 33. The Borrower's performance was satisfactory to highly satisfactory in the various components of loan preparation and implementation. The Central Bank participated extensively in the preparation phase and demonstrated commitment to the project. In its role as implementing agency, the Central Bank verified financial intermediary compliance with eligibility criteria, disqualifying one  Page 8 institution when necessary. Significant improvements in operational procedures were made by the Central Bank. It sought, as well, to collect data required from financial intermediaries regarding subborrowers on an annual basis. The Central Bank complied with all major loan covenants. As the implementing agency, the Central Bank was responsible for the study of policies affecting SMEs and undertook the study internally, as it did not want to use Bank loan proceeds to fund a study that would not necessarily be operationalized. The Central Bank covered mainly those issues under its own purview and within its areas of expertise, such that the document did not have the intended impact. G. Assessment of Outcome 34. The project's outcome has been highly satisfactory. The line of credit provided small and medium enterprises in Colombia with access to credit through the commercial branch network as the country was opening its economy, thereby giving these firms resources to take advantage of the new opportunities emanating from the apertura. The policy dialogue on interest rate policy related to this loan, and the conditionalities developed, contributed to Central Bank movement towards reduced rate- setting and increased market-determination of interest rates for all segments of the real sector. H. Future Operation 35. Not applicable. The Government of Colombia intends to prepay the loan in its entirety, so that there will not be relending to new subborrowers from reflows from maturing loans. Colombia currently enjoys excess foreign reserves and is prepaying some of its World Bank loans. In addition, the Government has decided to phase out the practice of rediscounting credit lines through the Central Bank. The unit established to oversee such lines has been largely disbanded, and only a few staff members continue to attend part-time to management of credit line paperwork. I. Key Lessons Learned 36. The four main general lessons learned from this project include: (i) all key elements needed for project success should be accomplished prior to project effectiveness. While project effectiveness was delayed significantly until conditions were met, these policy changes resulted in quick disbursements and project success; (ii) those responsible for implementing a project component must feel ownership. The Central Bank did an excellent job of managing the SME rediscount facility; however, since it did not have the authority to implement the SME policy study recommendations, it took less interest doing this analysis; (iii) coordination with multilateral and otherfunding agencies and the Government on sector policy (e.g. microenterprise lending programs) is important to ensure consistent approaches and avoid duplication of effort; and (iv) maintaining the focus of supervision on achieving broad development goals combined with a degree of pragmatism regarding conditionality can improve project outcome. 37. Important lessons regarding SME sector development include: (i) credit projects can help SME's take advantage of liberalization of the business environment; (ii) fostering a competitive credit environment can be an effective technique to improve the performance of a government-owned development bank; (iii) heightened competition in the financial sector can lead to greater private sector interest in lending to SME's; and (iv) financial intermediaries should have maximum flexibility to set the appropriate terms, conditions and amortization schedules of SME subloans; more frequent, smaller payments are an important factor to increase repayment rates among smaller enterprises.  page 9 1. See Colombia. Fifth SmaU and Medium Scale Enterorise Proicct, Staff Appraisal Report No. 7493-CO, February 9, 1989. 2. The Central Bank has indicated disagreement with this conclusion, asserting that the study found the environment was favorable to SME development and therefore no actions were needed. 3. For analysis of business environment reforms and remaining private sector constraints, se Colombia: Private Sector Assessment, World Bank Report No. 13113-CO, August 5, 1994. 4. Commitments exceeded the total line amount of US$77 million to take into account potential cancellations. 5. In frontier areas, FFIC directed credit funds were rediscounted to financial intermediarics at DTF-4 as the Borrower's law required preferential treatment for these areas. This was not offered under CO-3025. 6. In 1992, Caja Agraria transferred their 3025 loans to other financial intermediaries, repaid the Central Bank and withdrew from the project because it could not meet the reporting requirements of the line and was undergoing reorganization. 7. This includes firms newly incorporated that had been operating in the informal sector and offshoots of existing enterprises. S. Several methods were used to try to determnine the impact of subloans on small and medium enterprises. First, Central Bank and World Bank staff reviewed over 200 files of new firms that were established at the time of their 3025 subloan; financial statements of 53 of these enterprises were examined to reveal their sales levels and salary expenses after the loan. The other files were discarded since they lacked financial statements of years after the loan. Second, the team examined 93 of the supervision reporting forms of the Bogota branch office of the Corporation Financiera de Desarrollo. These forms include information on: (i) the subloan amount and use; (ii) the loan officer's and subborrower's estimate of the number of jobs to be created and sustained by the loan; (iii) five year projections on the estimated impact of the loan on sales levels; and (iv) actual number of jobs and sales levels created and sustained by the loan determined through supervision visits by the CFD loan officer. Third, the team conducted interviews using a prepared questionnaire with 14 fairly representative subborrowers in Cali and Bogota to gain more in-depth information on the impact of the 3025 subloan on their operations. Results from all three sources indicate that the subloans did have a very positive effect on sales and employment levels. 9. One firm was under Chapter 11, but since this firm had received loans from 33 different financial institutions at the same time (including the 3025 line), its employment data was excluded from the results. 10. The two banks that will not pursue SME lending have developed strategies and procedures to target large firms.   Statistical Tables Page 1 of I Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions Table 1: Summary of Assessments A. Achievement of obiectives Substania artial aNegligible Not plaicabhln Macro policies El Sector policies [1 Financial objectives [] 00 Institutional development 0 LI 0I0 Physical objectives Fl 0] 0l Poverty reduction El El El Gender issues El FL 0l Other social objectives El L El Environmental objectives El LI 0] Public sector management El El El Private sector development El 0 0 Other (specify) L [ [I (Conbinued)  Page 2 of 8 B. Project sustainability Likely Unlikely Uncertain (/y ~~(/) (/) Highly C. Bank performance satisfactory Satisfactory Deficient (/) ~~(v) (V) Identification eti' Preparation assistance [l L L Appraisal itI L L Supervision [Ai] L] Highly D. Borrower Performance satisfactory Satisfactory Deficient (n ~~(/) (b/) Preparation LI LI Implementation LI 0 Covenant compliance [] 2l Operation (if applicable) [n LI Highly . Highly E. Assessment of outcome satisfactory Satisfactory Unsatisfactory unsatisfactory (/t (/) (/) (/) M~L LI OO  Page 3 of 8 Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of approval Status Preceding operations Accelerate small scale industry 1984 Fully disbursed; PCR Report 1. Fourth Small Scale Industry employment creation and value- No. 10152 dated 12/9/91 Project added by increasing access to (Loan CO-2464) credit 2. Development Banking Make longer term financing for 1984 Pully disbursed; PCR Report Project subloans available to No. 10620 dated 4/30/92 (Loan CO-2477) participating financial intermediaries and strengthen institutions implementing financial sector reforms 3. Third Small Scale Industry Accelerate small scale industry 1980 Fully disbursed; PCR Report Project employment creation and value- No.6469 dated 10/31/86 (Loan CO-1834) added by increasing access to credit Following operations 1. Industrial Restructuring and Increase international 1991 In implementation. Approx 40% Export Development Credit competitiveness of industry committed, 8.5% disbursed. (Loan CO- 3321) through a private sector credit program to finance investment and TA at the enterprise level 2. Financial Markets Technical Increase efficient operation of [est. 1994] Appraised 12/93 Assistance Credit (Task fuiancial markets and foster CLMPA205) more effective financial intermediation Table 3: Project Timetable Date actual/ Steps in project cycle Date planned latest estimate Identification (Executive Project Summary) November 1986 November 1986 Preparation May 1987 1986 and June 1988 Appraisal October 1987 July 1988 (SAR 2/9/89) Negotiations November 1988 January 25, 1989 Letter of development policy (if applicable) Board presentation March 1989 March 14, 1989 Signing May 1989 September 22, 1989 Effectiveness June 1989 January 21, 1991 First tranche release (if applicable) Midterm review (if applicable) Second (and third) tranche release (if applicable) Project completion June 1994 July 29, 1994 Loan closing June 1995 August 26, 1994  Page 4 of 8 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ millions) FY 89 FY 90 FY 91 FY 92 FY 93 FY 94 Appraisal estimate 0.3 10.0 28.0 58.0 73.0 80.0 Actual 0.0 0.0 8.0 60.2 75.0 77.0 Actual as % of estimate 0% 0% 29% 104% 103% 96.25% Date of final disbursement 6/16/93 Table 5: Key Indicators for Project Implementation 1. Key implementation indicators in SARI Estimated Actual President's Report 1. Number of participating financial 4 PFI's 32 PFI's intermediaries (PFl's) 2. Number of subproject investments by PFI, # = 2500 SME, 2500 microent. 2144 SME, 0 microenterprisw value of SME subprojects, and interest rates Value = USS 178 millions USS 137 million on subloans Interest Rates = DTF+6.0 max DTF + 3.0 to 6.0 3. Average Central Bank subloan processing Decrease from 50 to 7 days 1 day time 4. SME portfolio annual earnings (not defined in SAR) (data not available from PFI's) performance 98.6% including CFD 5. SME portfolio collections performance Minimum 90% collections for each PFI 99.3% excluding CFD CFD collections = 71 % II. Modified indicators (not applicable) Ill. Other indicators (if applicable) ' In the SAR, this value included USS57 that was to be cofmnanced by the Fondo Financiero Industrial (FFI). As the Government eliminated the FFI in 1991, this quantity has been subtracted from the number given.  Page 5 of 8 Table 6: Key Indicators for Project Operation Not defined with client at the time the project was designed and negotiated, since not standard procedure at the time. Not defined at project completion as Borrower is going to prepay the loan and operations will not continue. Table 7: Studies Included in Project Purpose as defined Study at appraisal/redefined Status Impact of study 1. SME policy environment to analyse policy changes to completed by Central Bank, negligible rcrate a neutral policy 1991 envirnment for SME's  Page 6 of 8 Table 8A: Project Costs Appraisal estimate (US$M) Actual/latest estimate(US$M) Local Forign Local Foreign costs costs Total costs costs Total Item _ _ _ _ _ _ _ _ _ _ _ _ _ I.Credit Program 154.9 80.0 234.9 59.7 77.3 137 2.Technical 0.2 0.2 0.0 0.0 Cooperation I I_I TOTAL 155.1 80.0 235.1 59.7 77.3 137 Table 8B: Project Financing Appraisal estimate (US$M) Actual/latest estimate(US$M) Local Foreign Local Foreign costs costs Total costs costs Total Source _ _ _ _ _ _ _ __ _ _ _ _ _ _ IBRD/IDA 80.0 80.0 77.3 77.3 Cofinancing institutions 97.8 97.8 59.7 59.7 Other extenal sourcs Domestic contributions 57.3 57.3 TOTAL 155.1 80 235.1 137 Table 9: Economic Costs and Benefits The FRR defined in the SAR as a prerequisite to PFI issuance of subloans was 11 %. Financial plans prepared by each of the subborrowers at application showed an FRR of 11 %. Ex post data regarding FRR are not available for subloans. The high collections rate (>99%) on the subloans, most of which carried an interest rate of DTF+6, indicates that the FRR was at least 6% (based on the assumption that the DTF, an index of time deposit rates, approximates the inflation rate.)  Page 7 of 8 Table 10: Status of Legal Covenants Colombia CO-3025 Agree Section Covenant Present Original Revised Description of covenant ment type status fulfillment date fulfillment date Comments Loan 2.03 C 1/31/93 6/30/95 closing date amendment lettcr 1/14/91 3.01(b) Studies/TA CD 9/30/91 SME policy environment study 3.01(c) Project C (throughout) Central Bank (BR) second Implementation tier functions 3.01(g) Project C 6130/91 12/31/92 Subloan applications to amendment Implementation Bank kuer 1/14/91 3.03 Procurement C (throughout) Goods and services procured at reasonable price, timely delivery 3.04 Monitoring C (throughout) BR to suspend participation of PFI if collection < 90% 3.06 Monitoring C bi-annually BR prepare semi-annual project execution report 3.07 Monitoring CD annually BR monitor CFP admin CFP privatized cost targets of 5.5% of since did not avg assets meet targets 4.01 Accounts/ C (throughout) PFPI's maintain Project Audits accounts under sound practice 4.02(a) Accounts/ C annually PFI's project accounts Audits audited by acceptable independent auditors 4.02(b) Accounts/ C (throughout) BRlPFI's maintain records Audits and retain I yr after audit 4.06(b) Institutional NC (throughout) CFP net profits/ avg asss CFP was not less than 1.6% privatized. 5.01(d) Institutional C (throughout) PFI compliance under Participation Agreement 5.01(e) Sector Policy C (throughout) No changes in FFI conditionality: regulations adversely regulation affecting Project Schedule 4, Institutional C (throughout) BR lend to CFP min part 2.1 US$25 mill and max 35% CFP totl commitments 91-2 Schedule 4, Subproject/ C (throughout) Procedures, terms, other subloan criteria conditions of subloans Schedule 5 Subproject/ C (throughout) Criterial characteristics of subloan criteria SME's Guar- 3.02 Institutional C Guarantor make equity CFP antee contributions to CFP to privatizaton ensure CFP debt/ equity led to ratio <7.5% capitalization  Page 8 of 8 Table 11: Compliance with Operational Manual Statements Indicate any significant lack of compliance with an applicable Bank Operational Manual statement (OD or OP/BP): Statement number and title Describe and comment on lack of compliance 1. None Table 12: Bank Resources: Staff Inputs Stage of Planned Revised Actual project cycle Weeks US$ Weeks US$ Weeks US$ Through appraisal n/a 71.1 Appraisal through n/a 13.3 Board approval Board approval n/a 2.8 through effectiveness Supervision 22 22.9 Completion 10 10 Table 13: Bank Resources: Missions Performance rating Specialized staff Stage of project cycle Number of skills represented Implementatio Development Types of Month/ persons Days in field n status objectives problems year Through appraisal 5/87 5 n/a financial analyst n/a n/a banking expert SME expert Appraisal through 10/87 2 12 financial analyst n/a n/a Board approval banking expert Board approval 1 0 financial analyst/ n/a n/a through effectiveness task manager _ Supervision 4/91,12/91 2 12 private sector 1-2 6/93 dvelopment expert, I___________________ ____________ financial analyst Completion 7/94 3 8 private sector 1 dvelopment expert, financial analyst  COLOMBIA FIFTH SMALL AND MEDIUM ENTERPRISE PROJECT (LOAN 3025-CO) COMPLETION REPORT MISSION AIDE MEMOIRE 1. Introduction: A mission of the World Bank composed of Mmes Susan Goldmark, Adrienne Taptich and Natalia Gomez de Pizano visited Cali and Bogota from July 18-25, 1994 to collect information needed to prepare the Implementation Completion Report for the above project. Mission members held meetings with representatives of the Banco de la Republica (BR), all 33 currently participating financial intermediaries (PFI) and some branch officers in Cali and 14 subborrowers. The mission would like to thank Mme Lorena de Moreno, Director of External Credit Lines and Mr. Jesus Prieto Soloraza, Chief of External Lines of the Banco de la Republica (BR) as well as the numerous PFI and enterprise managers who gave generously of their time. 2. Implementation Completion Report: The mission discussed the format and content of the new Implementation Completion Report with Banco de la Republica representatives. We reviewed a draft version of the Banco de la Republica's section of the report as well as the World Bank team's preliminary conclusions on the design, implementation and impact of the credit. No major differences of opinion on these issues were found. The mission also conducted interviews using a structured questionnaire with managers of PFIs to attempt to determine the impact of the project on their operations. The BR agreed to send their section of the report by end-July 1994. 3. Methodology to Determine Project Impact: The mission used several methods to try to determine the impact of subloans on small and medium enterprises. First, BR staff and mission members reviewed over 200 files of new firms that were established at the time of their 3025 subloan; financial statements of 53 of these enterprises were examined to reveal their sales levels and salary expenses after the loan. The other files were discarded since they lacked financial statements of years after the loan. Second, the team examined 220 of the supervision reporting forms of the Bogota branch office of the Corporation Financiera de Desarrollo. These forms include information on: (i) the subloan amount and use; (ii) the loan officer's and subborrower's estimate of the number of jobs to be created and sustained by the loan; (iii) five year projections on the estimated impact of the loan on sales levels; and (iv) actual number of jobs and sales levels created and sustained by the loan determined through supervision visits by the CFD loan officer. Third, the team conducted interviews using a prepared questionnaire with 14 fairly representative subborrowers in Cali and Bogota to gain more in-depth information on the impact of the 3025 subloan on their operations. Results from all three sources indicate that the subloans did have a very positive effect on sales and employment levels. 4. Loan Closing: Prior to the end of the mission, the Banco de la Republica submitted the outstanding documentation needed to close the project to be fowarded to Bank headquarters. This includes a justification for the funds used in the Special Account and the cancellation of the  remainder of these funds. The mission agreed to process these materials in an expeditious manner and consult with management on determining a closing date for the project. 5. Completion Mission Findings: Annex One presents a draft of the mission's preliminary findings on the design, supervision and impact of the project. We request that the Banco de la Republica provide comments on this report by early September 1994 Jusu mark July 29, 1994 Task lager  FROM:BIRF-B.MUNDIRL BOG TO: 202 676 0367 SEP 20. 1994 9:38AR 4381 P.02 NCO t DE LA UIUDlUCA o!UI. 21685 Eurtst de Dog@t&. Ipt 15 de 199 NrALA X PIZM mISnBRR dolu1~ la 1L SVY 3025. ; - S. Om rulaal&i al 1- c ilatlimt Is t,aluma& de is Line UZ1 w 3025 t- Ie sig.mkti m b M I 1. k& i shI @1 tmto m at In qwm *I Mftdi* aectLal s is d a no to LdtoO am .1 oW1t mt, tgLzwtam qua au bajo 4 - dew .1 J* de a u 1m""znDb .l rwo dea UmMite q4imi so tlWW z -