Ecuador - Development Finance Companies Project

fs! l SS P RESTR IRCICTED Report No. DB- 54a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCUION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL AND ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA) ECUADOR November Z7, 1970 Development Finance Companies  CURRECY EC}JIVALENTS Official currency: sucre (SI) SI 25 - US$1.00 S/ 1 - US$0.04 S/ 1,000,000 - US$40,OOO  APPRAISAL OF COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL AND ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINAIICIERA) Table of Contents Page Paragraph BASIC DATA a- b SUIMARY i-iii i - xviii I. INTRODUCTION 1 1.01 - 1.02 II. THE SETTIJNG 1 - 5 2.01 - 2.14 The Economic Environment 1 -2 2.01 - 2.06 Industrial Policy 2 -3 2.07 - 2.05 Industrial Financing 3 -5 2.09 - 2.12 ProsDects for Industry 5 2.13 - 2.14 III. COMISION DE VALORES - CORPORACIOM FINANCIERA NACIONAL 6 - 18 3.01 - 3.47 Ownership and Legal Status 6 3.03 Purpose and Powers 6 3.0o4 Board, Management and Staff 7 3.05 - 3.09 Appraisal and Follow-up 7 -8 3.10 - 3.12 Resources 8 - 10 3.13 - 3.19 Policy Guidelines 10 - 11 3.20 - 3.22 Operations 11 - 14 3.23 - 3.33 Financial Position and Results 14 - 16 3.34 - 3.39 Prosnects 16 - 17 3.40 - 3.44 Conclusions 18 3.45 - 3.47 IV. ECUATORIANA DE DESARROLLO S.A. 7TCOIANIA FINANCIERA) 18 - 30 4.01 - 4.45 Share Capital and Ownership 18 - 19 4.02 - 4.03 Purpose and Powers 19 4.04 Board, Management and Staff 19 4.05 - 4.07 Apparaisal and Follow-up 20 4.08 - 4.09 Resources 20 - 21 4.10 - 4.12 Policies 21 4.13 Operations 22 - 23 4.14 - 4.20 Financial Position and Results 24 - 27 4.21 - 4.32 Prospects 27 - 29 4.33 - 4.40 Conclusions 30 4.41 - 4.45 v. RELATIONSHIP BETWEEN CFN AND COFIEC 30 - 31 5.01 - 5.03 VI. PROPOSED BANK LOAN 31 - 34 6.01 - t.OC VII. CONCLUSIONS AND RECO101ENDATIONS 34 - 35 7.01 - 7.03 ThiF report was prepared by Messrs. Acevedo-Navas and Alland who visited Ecuador in September/October 1970, and is also based on the findings of a previous visit in May/June 1969 by Messrs. Acevedo-Navas, Mustafa and Petzel.   LIST OF ANNEXES COMISION DE VALORES - CORPORACION FINANCIERA NACIONAI 1. Board of Directors 2. Organization Chart 3. Declaration of Policies and Procedures It. Summary of Operations from Inception through June 30, 1970 5. Analysis of Loan Approvals from Inception through June 30, 1970 6. Audited Balance Sheets as of December 31, 1964-66 and June 30, 1967-70 7. Audited Statements of Income and Expenses for Calendar Years 1964-66, Six Months ended June 30, 1967, and Fiscal Years ended June 30, 1968-70 8. Projected Operations 1971-75, Compared with 1970 9. Projected Balance Sheets 1971-75, Compared with 1970 10. Projected Sources and Applications of Funds 1971-75 11. Projected Statements of Income and Expenses 1971-75, Compared with 1970 ECUATORIANA DE DESARROLLO S.A. (COMPAfIA FINANCIERA) 12. List of Major Shareholders 13. Board of Directors lit. Organization Chart 15. Declaration of Policy and Operating Procedures 16. Summary of Operations from Inception through June 30, 1970 17. Analysis of Lending Commitments from Inception through June 30, 1970 18. List of Equity Investments as of June 30, 1970 19. Audited Balance Sheets as of December 31, 1966-69 and June 30, 1970 (unaudited) 20. Audited Sta.tements of Income and Expenses for the Years ending December 31, 1966-69 and for the Six Months ending June 30, 1970 (unaudited)  21. Projected Operations 1970-75, Compared with 1969 22. Projected Balance Sheets 1970-75, Compared with 1969 23. Projected Sources and Applications of Funds 1969-75, Compared with 1969 24. Projected Statements of Income and Expenses 1970-75, Compared with 1969 COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL and ECUATORIPNA DE DESARROLLO S.A. (COMPAIIA FINANCIERA) 25. Schedule of Fstimated Disbursements Under the Proposed Loan 26. Selected Forecast Data  COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL (CFN) ECUATORIANA DE DESAROLLO S.A. (COMPANIA FINANCIERA) - COFIEC BASIC DATA CFN Year of organization - 1964 Ownership (June 30, 1970) - 100% government owned Jan.-June Operations 1968 1969 1970 (in ST3m-Ilion) Approvals Industrial loans 182.3 177.7 118.5 Disbursements Industrial loans 133.7 110.2 69.8 Equity investments 5.6 13.7 6.1 COFIEC Year of organization - 1966 No. of Shares June 1970 Ownership (June 30, 1970) (Sucres 100 par value) % of total Domestic private shareholders 237,839 39.0 Government (through CFN) 51,676 8.5 Foreign owned domestic shareholders 30,448 5.0 Foreign shareholders 289,084 47.5 (of which: IFC (55,000) ( 9.0) ADELA (74A332) (12.2) Total 609,o47 100.0 Jan.-June Operations 1968 1969 1970 (in 1ST_miIUiok) Approvals Financing applications approved 258.3 421.3 213.5 (of which, loan applications approved) (218.6) (133.8) (21.2) Disbursements Loans 191.9 122.1 33.0 Equity investments 3.4 2.3 6.5  -b - CFN COFIEC June 30, June 30, Dec. 31, Dec. 31, Financial Data 1968 1970 1967 1969 (S/ million) Total assets 765.1 881.1 118.6 255.0 Yedium and long-term debt 101.7 175.4 40.8 90.3 Total equity 488.3 558.5 36.3 60.9 Contingent liabilities 30h.1 301.9 42.8 175.0 Medium and long-term debt/equity 0.2 0.3 1.1 1.5 Total debt/equity 1.2 1.1 3.4 6.1 Earnings before interest, tax and provision as % of average total assets 5.1 5.9 2.8 7.2 Financial expenses as % of average total assets o.6 1.2 0.1 3.8 Gross spread 4.5 4.7 2.7 3.4 Administrative costs as % of average total assets 1.6 2.0 3.8 4.o Net profit as % of average equity 6.8 6.5 8.6 16.1 Interest, fees and com- missions as % of average portfolio, incl. contin- gent assets 7.5 8.0 9.3 9.9 Reserves and provisions as % of portfolio, incl. con- tingent assets 4.3 7.0 2.3 1.9 Book value as % of par value 108.9 115.9 100.9 106.6 Dividends as % of par value - - 3.1 10.0  APPRAISAL OF COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL AND ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA) SUMMARY i. The Ecuadorian Government has asked the Bank for a loan to help finance industrial investment. The proceeds of the loan would be used by Comision de Valores - Corporacion Financiera Nacional (CFN), a govern- ment-owned development bank, and by Ecuatoriana de Desarrollo, S.A. (Com- pania Financiera), called COFIEC, a privately-owned development finance company, to finance the investment needs of their clients. ii. Growth in the Ecuadorian economy has been sizeable only since 1950. During the 1960's, growth in GDP averaged 4.8% per year in real terms. Although agriculture remains the mainstay of the economy (one- third of GDP and two-thirds of employment), the share of manufacturing has risen from 15.4% in 1960-62 to 16.9% in 1967-69. iii. As a result of a deteriorating fiscal situation, Ecuador expe- rienced a balance of payments crisis in mid-1970. In August, 1970 the sucre was devalued by 28% and the Government adopted a comprehensive monetary and fiscal program designed to restore financial equilibrium, while permitting some expansion of credit to the private sector to main- tain economic growth. iv. About four-fifths of the credit granted domestically for indus- trial investments is supplied by commercial banks in the form of renewable short-term loans; less than one-fifth is covered by term financing. CFN and, to a lesser extent, COFIEC are virtually the sole providers of term financing for industry in Ecuador. v. CFN was established in 1948 as a Fund within the Central Bank to create and stimulate an open market for government bonds. In 1953, it was authorized to trade in mortgage bonds issued by commercial banks for agricultural and industrial financing purposes. And in 1964, it was transformed into a development bank, authorized to provide term financing directly to industry. vi. Reflecting its background, CFN's operations include trading in government and private securities, loans to the Government and industrial financing. Thus far, CFN has concentrated in building up its loan port- folio. Its investment in the more risky industrial promotions and equities, though increasing, has been small. CFN's development as an industrial fi- nance company has been impressive; from 1964 to June 1970, while the pro- portion of holdings of public sector bonds and loans to the Government decreased from 98% to 37% of the total portfolio, financing of private industrial enterprises (loans, equity investments and holdings of mortgage bonds and cedulas) rose from 2% to 63%. This trend is expected to continue.  - ii - vii. CFN's capital structure is strong. Its main financial resource is its net worth which accounts for two-thirds of the total; paid-in capital is S/ 482 million and total liabilities, SI 839 million. Its entire, tax- free, net earnings are to be retained until surplus equals the authorized capital of S/ 500 million. Besides its rapidly increasing net worth, re- sources include a discount facility with the Central Bank, loans from the Agency for International Development (AID), the Inter-American Development Bank (IDB), Kreditanstalt fur Wiederaufbau (KfW), and credit lines from European financial institutions. Moreover, CFN is the financial inter- mediary for the Bank loan for fisheries development (555-EC). viii. CFN is a well-managed and well-organized development bank. Though wholly-owned by the Government, most of its Directors have been members of the business community. Despite changing Governments, there has been con- tinuity in management; its present Chief Executive has headed the Company (or its forerunner) for twelve consecutive years. CFN has built up a com- petent technical department, and the importance it places on project eval- uation gives reasonable grounds to believe that its investment decisions are based on sound technical and financial criteria. ix. CFN's portfolio appears sound. Arrears are low, companies in difficulties are few and security is ample. Despite low leverage, CFN has attained a fair level of financial return: 6.5% on average net worth. x. Although CFN's near-term liquidity is ample, its security opera- tions, which include its guarantee of repurchase at par upon presentation, could potentially infringe upon its liquidity. In addition, CFN has been carrying the exchange risk on its borrowings from abroad. Arrangements to safeguard CFN from these contingent risks were agreed to during nego- tiations. xi. COFIEC is well known to the Bank Group. Early in 1969, IFC's Board of Directors approved an investment of S/ 5.5 million in its share capital (IFC/R69-7 of February 13, 1969), which was made in April of that year. Thus, IFC became COFIEC's second largest shareholder, with a 9.0% share. IFC is represented in COFIEC's Board of Directors. COFIEC has also participated as financial intermediary on a Bank loan and an IDA credit for livestock development purposes, and will participate in a sec- ond IDA livestock credit approved by IDA's Executive Directors on November 24, 1970. xii. COFIEC's Board of Directors is composed of prominent and influen- tial businessmen and its management is competent. Despite some weaknesses in appraisal and follow-up procedures, the risk of poor investment deci- sions is low in view of the Board's and management's close knowledge of the main clients. COFIEC needs to improve its competence to appraise and follow-up long-term investments. xiii. COFIEC's financial resources include a loan from AID and lines of credit from the US Export-Import Bank and foreign commercial banks. With the AID loan fully committed, COFIEC depends mainly on a second Export- Import Bank loan for its term loans to industry.  - iii - xiv. In less than four and a half years of operations, COFIEC has built up a fair portfolio of loans and equity investments. And, in spite of high administrative costs, COFIEC has achieved a reasonable level of profitability, which it expects to maintain in the future. Reserves, however, are still low and need further build-up. xv. CFN's and COFIEC's operations have been complementary rather than competitive. Thus far, aside from its security operations, CFN has concentrated in term lending, principally for fixed assets. And COFIEC, reflecting the relatively short-term nature of its resource mix, has engaged in shorter term financing, largely for working capital purposes. The proposed Bank loan would provide for a certain degree of competition, but this would not be harmful to either the companies, or to the economy. xvi. Prospects for increasing the volume of operations are good. Underlying this expectation are the relatively short supply of term finan- cing in Ecuador and the Companies' record of increasing commitments. More- over, Ecuador could usefully diversify its economy and opportunities exist for industrial investment, mainly in the processing of raw materials, tex- tiles, livestock, fisheries and tourism. The trend towards sub-regional economic integration (Andean Group) should provide grounds for further ex- pansion and diversification. xvii. CFN's and COFIEC's financial position and prospects were again reviewed after the devaluation of the sucre, which took place on August 16, 1970. The devaluation did not affect the creditworthiness of either com- pany. xviii. CFN and COFIEC are suitable and creditworthy borrowers. A Bank loan of US$8 million would help cover CFN's and COFIEC's foreign exchange requirements to finance the cost of imported goods and services of indus- trial projects for about two years beginning in 1971. The loan would be made to the Government of Ecuador and the Central Bank would act as finan- cial agent. The proceeds of the loan would be made available in sucres to CFN and COFIEC on terms allowing a minimum spread of 3% p.a. The loan would be pre-allocated in amounts of US$4 million to each company. The Bank's prior approval would be required for all projects calling for US$100,000 or more of the loan; and the aggregate "free limit" would be US$1.3 million for each company. Other terms of the loan would be similar to those normally applied to Bank lending for development finance companies, including provision for full commitment charge and a flexible amortization schedule.   APPRAISAL OF COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL AND ECUATORIANA DE DESARROLLO S.A. (CONPANIA FINANCIERA) I. INTRODUCTION 1.01 The Government of Ecuador has asked the Bank for a loan to help finance productive private enterprise. The proceeds of the loan would be made availabe to two development finance companies: the government-owned Comision de Valores - Corporacion Financiera Nacional (CFN) and the pri- vately-owned Ecuatoriana de Desarrollo, S.A. (Compania Financiera), called COFIEC. This report recommends that the Bank should extend a loan of US$8 million to the Republic of Ecuador, to be shared in equal amounts by CFN and COFIEC. The Central Bank of Ecuador would act as financial agent on behalf of the Government. 1.02 Both CFN and COFIEC are known to the Bank Group: CFN is the only financial intermediary under the Bank loan to the Republic of Ecuador (555-EC) for the development of fisheries. COFIEC is one of the partici- pants in a Bank loan (501-EC) and an IDA credit (173-EC) to the Republic of Ecuador for livestock development; IFC has been its second largest shareholder since March 1969 and is represented in its Board of Directors. II. THE SETTING The Economic Environment 2.01 A full analysis of the economic situation appears in 'Current Economic Position and Prospects of Ecuador" (WH-201a), dated August 21, 1970. 2.02 With an average rate of population growth of 3.4% p.a. and a per capita GDP of about US$250, Ecuador remains one of the poorer countries of Latin America. Agriculture is the mainstay of the economy; it employs over two thirds of the labor force and contributes about one third of the national product. Three agricultural commodities - bananas, cocoa and coffee - account for about four fifths of exports. 2.03 Growth in GDP has been sizeable only since 1950, and during the 1960s has averaged about 4.9% per year in real terms. While agricultural output expanded in the 1960s by 2.5% per year in real terms, growth in the smaller, but dynamic manufacturing sector was more rapid: 6.5% per year, although it fell off to 4.4% in 1968 and 3.2% in 1969. The share of manu- facturing in GDP (at factor cost) rose from 15.4% in 1960-62 to 16.92 in 1967-69. Traditional mass consumer industries - food, beverages, tobacco, textiles and clothing - decreased their share in industrial output from 71% in 1957 to 55% by 1966. Detailed information on a comparable basis for later years is not available. There is reason to believe that this trend is continuing; it indicates that, as in other developing countries, industrial growth in Ecuador has gradually moved towards relatively more complex types of manufacturing. -  2.04 Economic growth in Ecuador has taken place within an environment of relative monetary stability and despite political instability. Including the most recent devaluation (August 16, 1970), the sucre has depreciated at a rate equivalent to 3.7% annually in the 1960s, and to 2.4% over the last 24 years. The country has had five different government administrations in the last decade. 2.05 The economic report on Ecuador (prepared before the devaluation) pointed to the deteriorating financial and balance of payments situation and prospects, which threatened the country's monetary stability. The basic reason for the difficulties has been the deterioration of the fis- cal situation which began in 1968, continued in 1969, and brought Ecuador to a balance of payments crisis in mid-1970. It then became evident that a comprehensive monetary and fiscal program was needed to regain finan- cial equilibrium. In August of 1970 such a program was adopted. It con- sisted of the following measures: (a) devaluation from S/18 to S/25 per US dollar and an exchange system reform, including replacement of the dual rate system with a single official rate at the new parity of S/25 per US dollar; (b) reduction or elimination of import sur-charges and gradual elimination of advance import deposit require- ments; (c) establishment of new ad-valorem taxes on traditional exports, ranging from 5% to 15%; and (d) introduction of export subsidies ranging from 2% to 7% on minor agricultural and industrial exports. 2.06 On the basis of this program, the IMF approved a one-year stand- by credit of US$22 million on September 11, 1970. Under the stand-by pro- gram, government recourse to banking system credit will be restricted in order to stimulate a recuperation of foreign exchange reserves while permit- ting an expansion of credit to the private sector, consistent with the needs of a growing economy. Industrial Policy 2.07 Ecuador nas built up and maintains a tradition of private enter- prise. In general, government industrial policies have been directed to- wards economic diversification and the promotion of export-oriented activi- ties. The growth and diversification of industry have been encouraged by relative economic stability and by comparative freedom from excessive govern- ment regulation of private business. Industry has also benefited from favor- able industrial promotion legislation (although recent fiscal difficulties nave led the Government to restrict these benefits somewhat). These factors were reflected during the 1960s in a substantial increase in industrial in- vestment, both domestic and foreign.  - 3 - 2.08 Ecuadorian industry which has to contend with the problem of a small domestic market appears to enjoy a fairly high level of protection. Average tariff protection varies from about 45% to 75%, depending on whether the goods are considered essential or non-essential. However, the Government is aware of the possibility of uneconomic investments which this policy might create and accordingly, under its stimulation, the Develop- ment Center (CENDES), an autonomous agency, has recently initiated a study of the protection applied to industry in Ecuador. The aim of the study is to develop a model for calculating the effect of various types of govern- mental measures on the rate of effective protection, which is expected will constitute the basis for a reconsideration of the system. Nevertheless, as import substitution is likely to continue, there remains a danger that uneconomic projects may be carried out. Consequently, in their review of investment projects, CFN and COFIEC should take into account their economic merit. Industrial Financing 2.09 Up to the establishment in 1969 of stock exchanges in Quito and Guayaquil, there had been no organized securities market. Heretofore, trading had been confined to a limited number of securities (mainly govern- ment and mortgage bonds and shares of a few, well-established enterprises); and, although a large portion of the securities traded has been guaranteed with respect to principal and interest by the issuing commercial banks and in price by CFN (para. 3.24), the volume of trading had been relatively small. Based on this experience, and since price guarantees have been dis- continued by CFN for all private securities, the volume of trading in the newly-established stock market is likely to continue limited. Therefore, the domestic securities market is not expected to be an important source of funds for industry for a number of years. 2.10 Ecuadorian banking statistics classify loans granted as commer- cial, industrial, agricultural and other; figures for credits outstanding are not available. From 1962 to 1969 (see graph on following page), total credit to the private sector increased at the rate of 14% annually. Credit to the industrial sector, with an annual rate of increase of 19%, grew slightly faster than agricultural credit which increased at a rate of 18% annually. Within the industrial sector, credits granted by CFN and COFIEC in 1968 represented 21% of the total. CFN's and COFIEC's share of indus- trial credit in 1969 declined to 15%, reflecting temporary scarcity of re- sources in both institutions. 2.11 The bulk of industrial credit is in the form of short-term loans which may be renewed. Since S/ 63 million of total credits extended by CFN and COFIEC in 1969 (SI 106 million in 1968) was made on terms of 12 months or less, and considering that virtually all the credits granted by the commercial banks were also short-term, the proportion of medium- and long-term credits to total credits to industry was only 12% (16% in 1968). This low proportion indicates that there is considerable room for term financing of industry in Ecuador.  CREDIT APPROVALS OF THE BANKING SYSTEM IN ECUADOR 1962-1970 (MILLIONS OF SUCRES) 15,000 10,000 5,000 __= =CO___ _ = 4,000 3,000 _ _ _ _ _ _ _ _ _ _ 2,000 _.- ~~~~~~AGIUTURE OHRr A,500 _ ___ .__ _ _ __. ____ ____* __ ._ _ __ _ X_C_F_N_, __ 11000 300 ___ _ .' 400 _ _ _ _ _ 2 0 v _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ S e m_ _ _ _ _ _ _ _ _ Scl 150 _ _ _ _ _ 100 _ _ _ _ _ 50 _ _ _ _ _ _ _ _ _ _ 30 _ _ _ _ _ _ _ _ _ Semi -Logorithmic Scale 1962 '63 '64 '65 '66 '67 '68 69 1970 * INCLUDING CENTRAL BANK CREDIT TO COMMERCIAL AND DEVELOPMENT BANKS IBRD/DFC , October 1970 IBRD - 5350 (R)  - 5 - 2.12 Maximum nominal interest rates are fixed by the Monetary Board. From 1948 through 1969, interest on industrial credit was limited to 10%. At the time of the appraisal in 1969 and during negotiations, the Bank pointed out that this rate was low compared with interest rates prevailing in world capital markets; that the low rate was a deterrent to lending to Ecuador since it did not permit a margin sufficient to allow financial intermediaries to cover relending costs and also make provisions for the ex- change risk; and that such low rate could lead to an uneconomic allocation of resources in Ecuador. In January 1970, the interest rate limit was in- creased to 12%. This nominal rate applies to both, short- and long-term lending. This rate still appears somewhat low for long-term loans. How- ever, adjustment in the level of interest rates is usually a gradual pro- cess and it could not be expected that an increase greater than 2% would be made at one time. The actual cost to industry of financing through short- term loans is considerably higher than the nominal rate since applicable fees and taxes have to be paid each time a loan is renewed; taking into con- sideration commissions of 1-2%, tax levies of 1.7% per transaction, and dis- count of the tax levies plus interest for the entire term of the loan, the resulting effective cost of renewable short-term borrowing is in the region of 18-19%. Prospects for Industry 2.13 Over the short-term (1970-71), manufacturing output will probably increase at the rate of growth of 1968-69, or at about 4% per year. How- ever, prospects for industrial production, both for the home and export markets, have been improved by the devaluation, and the level of growth foreseen still allows for substantial industrial investment. Availability of domestic banking system credit to finance this investment will depend on the degree to which the Central Government's deficit is kept under con- trol, and its recourse to banking system credit is avoided. Ecuadorian monetary authorities plan to limit private sector credit expansion to 12% for the 12-month period ending September 1971. However, the elimination of advance import deposit requirements will provide substantial added liquid- ity to the private sector. 2.14 Longer term, although several obstacles to industrialization must yet be overcome - such as those imposed by the small size of the domestic market, the limited capital market and the relative scarcity of trained labor and managerial skills - there is sufficient room for expansion of industry as indicated by an increasing demand for term financing by existing and new Ecuadorian enterprises. Moreover, the level of growth achieved thus far and the trend towards sub-regional economic integration (Andean Group), should provide grounds for further economic expansion and diversification.  - 6 - III. COMlISION DE VALORES - CORPORACION FINANCIERA NACIONAL 3.01 CFN originated in 1948 with the establishment of the Fondo de Regulacion de Valores as part of the Central Bank to create an open market for, and trade in, government bonds. In 1953, this body was made an autonomous agency, the Comision N4acional de Valores, and its functions were broadened to include market operations in mortgage bonds issued by commercial banks to finance industrial operations. In August 1964, CFN emerged in its present form as a result of a further transformation, which enabled it to provide term financing directly to industry. 3.02 Although CFN's evolution was largely inspired by its own management, for the last step, its reorganization as a development fin- ance company in 1964, the Company received the assistance of AID which provided advice and made available long-term funds for term lending to industry, and of the Nacional Financiera S.A. of Mexico which provided technical and organizational guidance. Ownership and Legal Status 3.03 CFN is wholly-owned by the Government of Ecuador. Its opera- tions are governed by its organic law, Decree Law No. 1726 of August 11, 1964, and subsequent amendments. Like other financial institutions opera- ting in Ecuador, CFN is subject to the country's Banking Law and its activities are supervised by the Superintendency of Banks. CFN is exempt from all types of taxes. Purpose and Powers 3.04 In accordance with its organic law, CFN may: borrow in domestic and foreign markets, the latter with the guarantee of the Government; buy and sell government securities; grant medium- and long-term loans for fixed assets without limitation to type of industry; grant short-term loans for working capital, provided CFN is a shareholder in the recipient com- pany; invest in the share capital of "qualified" enterprises, i.e., those expressly classified by CFN's Board of Directors to be of basic importance to the national economy 1/; invest in mortgage and agricultural bonds; underwrite issues of "qualified" private enterprises; issue bonds; guarantee industrial issues; and borrow from the Central Bank against the pledge of securities. 1/ New and existing enterprises, whether private, public or mixed, are eligible to be "qualified", provided: (a) their fundamental purpose is the exploitation of natural resources of basic importance to the national economy; (b) they create, or save, foreign exchange; (c) the Planning Board has given a favorable opinion regarding their priority and benefit to the country's economic development; (d) there is a prior, positive evaluation of CFN's Technical Department regarding the techni- cal, economic and financial feasibility of the project; and (e) they receive favorable votes from at least five of CFN's six Directors.  -7- Board, Management and Staff 3.05 CFN operates under a six-member Board of Directors (Annex 1). The Board determines the Company's policies and approves all transactions involving amounts over S/ 1 million. CFN's organic law provides that Board members be appointed or elected as follows: one member by the President of Ecuador; one member jointly by the Minister of Finance and the Minister of Industry and Commerce; one member each by the Chamber of Industries of the "Sierra" and of the "Costa" regions; one member by the Chamber of Agriculture; and, ex-officio, the General Manager of the Central Bank or his appointee. At present, the two government appointees are members of the private business community and the Chairman of the Board, who is elected by the Board from among its members, is the member cho- sen jointly by the Minister of Finance and the Minister of Industry and Com- merce. The Board appoints the General Manager. It meets once a month. 3.06 An Executive Committee of the Board is composed of the Chairman of the Board, another Board member and the General Manager. It approves transactions ranging in value from S/ 200,000 to S/ 1 million. Invest- ments of S/ 200,000 or less are approved by the General Manager. 3.07 The Company's General Mianager, llr. Luis Ayora, a distinguished lawyer, has headed the institution since 1957 and was previously General Manager of Banco Nacional de Fomento (BNF). He provides competent leadership. Mr. Ayora has the assistance of a Deputy General Manager, HIr. Eduardo Andrade, an economist who is directly in charge of promotions and special studies. The General M4anager is also assisted by a Financial Adviser, itr. Raul Padron, who was retained by CFN after his serving as administrator of a loan to CFN from AID. Two staff departments, Legal and Public Relations, also report directly to the General Manager. 3.08 CFN is also well organized. Responsibility and authority are clearly defined. Functionally, CFN is divided into three departments which handle the technical, financial and administrative aspects of the Company's operations (Annex 2). 3.09 CFN has built up a professional staff of good technical quality, which numbers 37 and includes financial and market analysts, engineers, lawyers and accountants. Most of the senior staff has had previous experience and some came from CENDES, where they had acquired skills in project evaluation. New staff is recruited as the volume of operations calls for it and special emphasis is given to training, both on the job and abroad. Appraisal and Follow-up 3.10 Project appraisals are carried out by Project Evaluation Depart- ment which has a professional staff of two economists, one engineer and 17 analysts. For special market studies, usually those associated with large projects, CFN frequently utilizes the services of outside consultants.  -8- 3.11 Appraisal reports are generally satisfactory. They usually cover the basic and critical aspects necessary to assess the economic, financial and technical viability of projects. They include specific requirements which the borrower must fulfill before disbursements are made. A weakness observed in the appraisals is a tendency to under- estimate fixed and working capital costs which has resulted in frequent cost overruns. The main reason for this is that the engineers generally lack sufficient experience, and consequently do not make realistic contin- gency allowances. This was called to the attention of CFN at the time of the first appraisal mission. Some improvement in this field was noted at the time of reappraisal. 3.12 The Project Supervision Department which was not established until 1968, operates under the direction of an economist. It has a professional staff of four economists and one engineer. Its work consists of controlling disbursement schedules, visiting projects (mainly those under construction or those experiencing difficulties) and analyzing financial information re- ceived from clients. Although loan contracts provide for quarterly financial and operational reporting by borrowers, the flow and quality of such infor- mation is deficient with the result that, in most cases, specific knowledge of the status of projects is confined to information extracted from annual financial statements. This stems principally from the inadequacy or lack of internal control systems in a large number of companies, the scarcity of good accountants and the general reluctance of sponsors to release informa- tion. Notwithstanding, CFN has been advised to increase its efforts to ob- tain prompt, more frequent and adequate information from its borrowers; under the circumstances, however, improvement in the standard of follow-up work is likely to be slow. Resources 3.13 The following table shows the resources utilized by CFN as of June 30, 1970 compared with those as of June 30, 1968 (in SI million): June 30, 1968 June 30, 1970 Amount _ Amount _ Capital paid-in 443.6 60.3 481.7 56.3 Surplus 39.7 5.4 76.8 9.0 Net worth 483.3 65.7 558.5 65.3 Central Bank (short-term) 143.6 19.5 105.0 12.3 AID (long-term) 87.0 11.8 86.9 10.0 IDB (long-term) 11.6 1.6 80.4 9.4 KfW (long-term) - - 2.6 0.3 IBRD (long-term) - - 0.1 nil European banks (long-term) 3.1 0.4 5.4 0.6 Other 7.4 1.0 16.8 2.0 736.0 100.0 855.7 100.0  - 9 - 3.14 The most important financial resource of CFN is its net worth which accounts for almost two thirds of the total. Authorized share capital is set by law at S/ 500 million. In accordance with its organic law, paid-in capital is to be increased from time to time by net profits until it equals the authorized capital. Thereafter, annual net profits are to be allocated to a special reserve until it reaches an amount equal to the authorized share capital. As a result of this capitalization process, CFN's paid-in capital has increased from S/ 393.2 million at December 31, 1964 to S| 481.7 million as of June 30, 1970. In addition, on this last date CFN had surplus and reserves amounting to S/ 76.8 million. 3.15 CFN obtains short-term loans from the Central Bank against deposit of government securities from its portfolio. These loans amount to 70% of the nominal value of the collateral pledged and are made at an interest cost of from 3% to 6% annually. Thus far, there has been no limit for these operations which, in effect, constitute a liquidity resource for CFN. 3.16 In 1962, the Government of Ecuador obtained from AID a loan of US$5.0 million to finance industry. The term of the loan was 20 years, with 4-1/2 years of grace and a cost of 0.75% annually. The former Comision de Valores was made the recipient and user of the funds. To avoid the problem of maintenance of value (exchange risk), a two-step procedure provided that the Government of Ecuador would repay the loan to AID in dollars and would collect from Comision de Valores principal and interest on the loan in sucres, against a fee of 5% annually. The loan agreement provided also that the terms and grace period would be doubled if the loan was transferred to the Company. In 1967, CFN assumed the loan in dollars at 0.75% interest annually and the term was extended to 40 years, including 9-1/2 years of grace. This loan has been fully com- mitted and as of June 30, 1970, the equivalent of SI 86.9 million had been disbursed and was outstanding. 3.17 In June 1967, IDB extended a US$5.0 million loan to CFN. Half of the loan was granted from the Fund for Special Operations, carrying interest at 4% p.a. and half from Ordinary Capital at 6.5% p.a. This loan has also been fully committed. As of June 30, 1970, IDB had dis- bursed funds for the equivalent of SI 80.4 million. The loan is denomi- nated in dollars and CFN relends these funds in sucres, taking on the exchange risk. The term is 15 years, including three years of grace. 3.18 In April 1970, IDB granted CFN a second loan of US$7.5 million. The proceeds of this loan are available for industry, fisheries and tourism development, including pre-investment studies. US$3.0 million was granted from the Fund for Special Operations, carrying interest at 3.25% p.a. plus an annual service commission of 0.5%, and US$4.5 million from Ordinary Capital at 8% p.a. plus an annual service commission of 0.75%. US$5.7 million of the loan is denominated in US dollars, US$1.0 million equivalent in Deutsche mark and US$0.8 million equivalent in Italian lire. CFN relends these funds in sucres, taking on the exchange risk. The term is 15 years, including three years of grace. Up to June 30, 1970, CFN had not initiated disbursements under this loan.  - 10 - 3.19 CFN is the only financial intermediary under the Bank loan to the Government of Ecuador for the development of fisheries (555-EC). Under this loan, US$3.7 million are available to CFN for financing the construction and equipping of purse seiners. On June 30, 1970, this loan had just entered the disbursement stage and only US$6,500 were outstand- ing. CFN has also obtained lines of credit from Swiss and French bank con- sortia for the equivalent of US$2.3 million and US$2.0 million, respectively. These loans are tied to procurement from these countries. The exchange risk on these funds is also borne by CFN. Interest rates vary from 6.0% to 7.5% p.a. depending on the terms of the sub-loans. Only a small portion of the Swiss bank loan (the equivalent of S/ 5.8 million) has been committed to date. CFN has also obtained from the Swiss Government a credit line of US$250,000 for financing pre-investment studies. The cost is 4% p.a. Policy Guidelines 3.20 CFN's operations have been governed by a number of policy and operational guidelines formulated from time to time by its Board of Directors. The main features of these guidelines are: CFN can finance up to 70% of the cost of new projects and up to 100% of expansion projects. (In practice, however, CFN's loans have been in the neighborhood of 40% of total project cost.) Maximum terms for lending are 12 years for fixed assets and five years for working capital. The maximum amount that can normally be lent to a single borrower is S/ 20 million. Guaran- tees on behalf of industrial borrowers can only be issued by CFN to cover suppliers' and other foreign credits, and must be made against real estate mortgages (the commercial value of which must be at least 150% of the guarantee), liens on equipment (125%) or pledge of marketable securities (125%). CFN must maintain a 10% minimum liquidity reserve on the value of securities sold with its obligation to repurchase at par (para. 3.24); funds from this reserve may be invested in highly liquid securities. And, because of the senior nature under Ecuadorian law of debt obligations to the Social Security Fund, CFN will not make loans to enterprises which are in arrears in their payments to this Fund. 3.21 Guidelines did not exist, however, for some important aspects of CFN's operations. For example, there were no policies regarding foreign exchange risk coverage and diversification of the equity portfolio (maximum exposure in equity investments and in a single enterprise). In addition, there was no limitation on total indebtedness by CFN. Since CFN is still young as a development bank, it was considered desirable, as a condition to Bank financing, to agree on a comprehensive statement of policy which would eliminate these shortcomings. Such a statement of policy was discussed during negotiations and the Bank's suggestions were incorporated in its text (Annex 3), prior to adoption by CFN's Board in October 1970. 3.22 As a successor to the Comision Nacional de Valores, CFN con- tinues to engage in bond market operations, mainly for Government secur- ities. However, CFN 's principal function is to provide term financing  - 11 - to industry. Although under its charter CFN can finance public sector projects, it has done little in this field in the past compared to its other activities. It has, in fact, financed only a few infrastructure projects. CFN expects to continue making only a few public sector invest- ments and to limit these to infrastructure projects. Operations 3.23 CFN's operations include loans to the Government, trading in government and private securities, loans to industry, equity investments, underwriting and guarantees (Annex 4). CFN's government financing is in the form of direct loans to the Central Government and of purchases of Central and Municipal Government bonds, the latter issued to finance basic infrastructure projects. While these operations continue to be an important part of the Company's activities, their total value has decreased substantially, both in absolute amount and in relation to the total loan and investment portfolio. As of December 31, 1964, holdings of public bonds and loans to Government amounted to S/ 535.7 million, or 98% of its total loan and investment portfolio; five-and-a-half years later, on June 30, 1970, they amounted to S/ 311.4 million, or 37% of the total. This downward trend is expected to continue since all loan repayments from industrial borrowers (net of loan amortization by CFN) can be used only for industrial lending (para. 3.26). The bulk of direct loans to the Government are due within one year and bear interest varying from 3.5% to 7.0% p.a. Public sector bonds are acquired by CFN at size- able discounts; as of June 30, 1970, these discounts amounted to S/ 25.4 million on an aggregate face value amount of SI 239.6 million, or an average rate of discount of 10.6%. They carry an interest rate of 8-9%. 3.24 Aside from government bonds, CFN's security operations have included the purchase and sale of mortgage bonds (cedulas). The latter have been issued by commercial banks and private enterprises to finance industrial and agricultural projects. Bonds sold by CFN to the public bear its guarantee of repurchase any time at par. On June 30, 1970, there were securities with such guarantee in the hands of the public amounting to S/ 317.1 million, of which S/ 267.2 million were Central and Mlunicipal Government bonds, and S/ 49.9 million, mortgage bonds. CFN does not have to pay for these securities, when repurchasing, an amount more than it invested in them. It has discontinued the price guarantee for mortgage bonds. 3.25 Although CFN's experience indicates that, even in moments of political unrest, the volume of repurchases of bonds has not been critical, this practice could infringe upon CFN's liquidity in the event of a collapse in the bond market. However, considering that the repurchase obligation is largely confined to government securities, that the value of the securities represents a decreasing proportion of the Company's assets (para. 3.23) and that CFN may discount them with the Central Bank (for which purpose so far there has been no limit), this aspect of CFN's near term liquidity need not be of critical concern.  - 12 - Nevertheless, CFii recognizes this problem and, as a result of discussion on this subject during negotiations, has included in its declaration of policies a statement that it will conduct its operations in such a manner as to assure the maintenance of adequate liquidity. In addition, to isolate industrial financing from the effects of market operations, CFN agreed not to use resources from the Fund for Industrial Invest- ments (see para. 3.26) for purposes other than industrial lending; the use by CFN of these resources in market or other operations would con- stitute an event of default under the loan agreement. By implication, if a liquidity crisis did arise from its security operations and default under the Loan were to be avoided, the Government would have to step in, and it is unlikely that the Government would allow CFN to be in default for this reason. Moreover, CFN has agreed to limit its indebted- ness, including its contingent repurchase obligations, to four times its own equity (para. 3.42). 3.26 In 1967, on the recommendation of the Inter-American Develop- ment Bank, CFN set up a Fund for Industrial Investments to separate industrial financing operations from other activities. The Fund does not appear as a separate item in the balance sheet and it is, therefore, a notional account rather than a fund in the real sense. According to CFN Board Regulation No. 16 of May 11, 1967, the resources of this Fund are the entire industrial loan repayments, foreign borrowings for industrial financing, and periodical allocations from CFN's own funds. The purpose of these latter allocations is to ensure sufficient funds to meet the domestic currency requirements of projects; and their amount is determined annually by CFN's Board, not exceeding 30% of the total value of the projects to be financed each year. While the Fund intro- duces a degree of inflexibility in CFN's use of its resources, it seems also to assure a growing evolution of CFN's activity in the direction of industrial lending. 3.27 CFN's industrial lending operations have grown rapidly, as shown in the following tabulation (in S/ million): 1963 1964 1965 1966 1967 1968 1969 1970 (6 mos.) Approvals 5.2 22.1 106.4 109.9 138.0 182.3 177.7 118.5 Commitments n.a. 6.0 56.9 106.6 89.3 145.7 136.0 84.8 From 1963 to June 30, 1970 (Annex 5), CFN approved 319 loans with an aggre- gate amount of S/ 860.1 million. Another 158 loan applications amounting to S/ 386.0 million were reviewed and rejected. Since January 1970, inter- est is set at the legal maximum of 12% p.a., with a commitment fee of 1a p.a. All loans made prior to that date were made at the then maximum legal limit of 10% p.a. Most of the loans (70% by value) have been granted for periods between five and ten years; the larger portion was for financing fixed assets (82%) and the balance (18%) for working capital. CFN's loans are well diversified, with the largest proportion  - 13 - for food processing (28.5%) and textile enterprises (13.2%). Regarding geograpihical distribution, the provinces of Guayas (Guayaquil area) and Pichincha (Quito area) account for 75% of the total, reflecting the prevailing concentration of industry in those areas. Most of the loans (51' by number and 89% by value) were for amounts over S/ 1.5 million and the average size of the loan was S/ 2.8 million. Grace periods vary with the nature of the project and of the assets financed, and range between six months and three years. 3.28 CFN considers equity investments in viable projects when private capital cannot be successfully raised. In accordance with its Declaration of Policies and Procedures, it intends to sell its partici- pations gradually to private investors as market conditions permit it. As of June 30, 1970, CFN's equity protfolio was small. It consisted of shares in six companies, for a total of S/ 31.9 million, or 6.1% of the industrial loan and investment portfolio (3.8% of total portfolio), as follows: % Held as of Name of company ownership June 30, 1970 (S/ 000's) Ecuatoriana de Atun S.A. 51.0 15,300 Desarrollo Agropecuario S.A. 23.9 6,218 COFIEC 8.5 5,168 Hotel Colon Internacional S.A. 15.0 3,324 Bolsa de Valores - Guayaquil 82.5 1,031 Bolsa de Valores - Quito 39.9 811 31,852 Ecuatoriana de Atun and Hotel Colon Internacional were promoted by CFN. Ecuatoriana de Atun, incorporated in the second half of 1968, engages in tuna fishing and canning; it recently started operations and its prospects are considered good. Hotel Colon Internacional opened early in 1968; it receives technical assistance and is admini- stered by Hotel Associates, S.A. (a company formed by Braniff Inter- national, Western Hotels Corp., ADELA and DELTEC); it has had successful operations and is presently being expanded. Desarrollo Agropecuario S.A. resulted from the reorganization of a family agricultural enter- prise which was experiencing financial difficulties; CFN's investment was an important part in the reorganization, which had been initiated by COFIEC, Banco Nacional de Fomento and other important creditors. Prospects are yet uncertain but developments in this company are being followed closely by CFN and COFIEC, which are represented on its Board and have appointed new management. 3.30 CFN has participated successfully in only one underwriting (Fabrica Textil Internacional bonds, totalling SI 38 million, of which  - 14 - it now holds S/ 2.3 million). It has also provided guarantees on b)ehalf of three borrowers for import financing, which as of June 30, 1970 totalled S/ 7.4 million. 3.31 At present, CFN is studying 15 possible industrial promotions, some of which are being carried out in collaboration with CENDES. These projects, which include a cement plant, a small shipyard, tourism ventures and various plants for processing agricultural raw materials, would call for an estimated total investment of about S/ 400 million over the next five years. 3.32 CFN's organic law provides for a special fund to finance "small industry", to which resources of S/ 40 million have been assigned out of capital (SI 20 million until October 1970). This, too, is a notional account rather than an identifiable item in the balance sheet. The fund is used to discount loans or to purchase bonds made or issued by commer- cial banks or private development finance companies in financing fixed and working capital requirements of artisans, in amounts not exceeding SI 200,000 per client. The risk is borne by the original lender. As of June 30, 1970, the amount outstanding of transactions out of this fund was S/ 14.3 million. 3.33 CFN's loan portfolio appears generally sound; the amount of principal in arrears is low, companies in difficulties are few and secu- rity is ample. As of June 30, 1970, arrears of principal in respect of industrial loans, amounted to SI 26.0 million. Most of these arrears were of a temporary nature; only S/ 6.0 million corresponded to defaults outstanding for six or more months; and collections through August 15, 1970 of SI 16.5 million, reduced the arrears to S/ 9.5 million, which represents 2% of the industrial loan portfolio. The total principal outstanding from 13 borrowers in arrears amounted to S/ 37.7 million, or 9.2% of the outstanding loan portfolio. CFN is watching closely four projects which are in difficulties and in which it has a total exposure of S/ 5.5 million, or 1.4% of the total portfolio. Financial Position and Results 3.34 Balance Sheets. In addition to internal auditing, CFN's accounts are subject to periodic review by the Superintendency of Banks and are audited once a year by Price Waterhouse & Co. Until December 31, 1966, the Company operated on a calendar year basis. In 1967, it changed to a fiscal year ending June 30. A new accounting system designed by Price Waterhouse & Co. was installed in mid-1969. 3.35 During five-and-a-half years of operations, CFN's total assets increased from S/ 590.2 million on December 31, 1964 to S/ 881.1 million on June 30, 1970 (Annex 6), representing a rate of growth of 8,, p.a. (3% in fiscal year 1970 and 7% in fiscal year 1969). The larger portion of this growth (59%) was financed with long-term borrow- ings from abroad, which increased by SI 172.9 million over the period.  - 15 - Retained earnings amounting to SI 168.5 million over the same period accounted for 48% of the growth. Although the level of indebtedness has risen steadily, CFN's total liabilities, including guarantees and its bond repurchase obligations, barely exceed its equity; as of June 30, 1970, the total debt/equity relationship was only 1.1:1. Short-term liquidity is ample, reflecting the substantial amount of long-term resources at CFN's disposal and management's prudent handling of the Company's finan- cial affairs. 3.36 Accumulated retained earnings from 1964 to June 30, 1970 amount to S/ 168.5 million. tiore than half of these earnings, SI 88.5 million, has been capitalized. Of the remaining S/ 80.0 million, SI 76.8 million were in a general reserve for contingencies and S/ 3.2 million had been set aside in a provision for possible losses. After allowing for unrealized exchange losses of S/ 72.3 million (see Para. 3.36 below) surplus and reserves are reduced to SI 7.7 million, repre- senting 1.5% of the outstanding loan and equity investment portfolio. While this is a very low level of protection, and reserves should be built up, it should be noted that in the case of CFN, the relative level of reserves is rather artificial; all net earnings are retained and the one shareholder - the Government - may decide whether those earnings remain as surplus or are transformed into share capital. More relevant than the reserve coverage, therefore, is (a) CFN's total equity and (b) its earning power, which currently results in yearly earnings representing about 7% of the loan and equity investment portfolio. 3.37 Earnings. Despite low leverage, in fiscal year 1970 CFN showed net earnings on average capital invested of 4.3%. The net return on average total assets was 4.1% and on net worth, 6.5% (Annex 7). Net earnings on average capital at 4.3% can be characterized as only margi- nal. Since the Company has not classified its receipts and expenses in its accounts in a manner in which the net earnings from each type of operation can be ascertained, it is not possible to state conclusively which operations are less profitable than others. However, the indus- trial loan portfolio, which currently earns a gross return of somewhat more than 10% (somewhat more than 12% for loans granted since March 1970), most probably does net a satisfactory return. Notwithstanding, in view of the relatively low profitability of the corporation as a whole, CFN's Board has declared in the policy statement agreed to during negoti- ations that CFN will charge fees for its capital and services and will otherwise conduct its operations in such a way that it will earn a satisfactory return on the capital it employs. 3.38 Foreign Exchange Risk. In analysing CFN's financial position, special consideration must be given to the foreign exchange risk which the Company has assumed on its borrowings from abroad. Because CFN has operated in an environment of relative exchange stability, has enjoyed concessionary rates of interest and has had sizeable, tax-exempt earnings which it is allowed to retain, it has felt prepared to shoulder the exchange risk. However, as a result of the devaluation of the sucre in  - 16 - August 1970 from 18 to 25 per US dollar, CFN suffered an unrealized exchange loss on its outstanding borrowings from abroad of SI 72.3 million. The provision for exchange losses which has to be established (and which is not reflected in the financial statements as of June 30, 1970, shown in this report) represents less than half (46%) the retained earnings from 1964 to June 30, 1970 of S/ 168.5 million, of which SI 91.7 million had been capitalized, and SI 76.8 million remained as accumulated surplus and reserves. Actual exchange losses, of course, do not occur until the foreign exchange obligations are repaid and this will take many years; the final maturity of the AID loan is in the year 2002. 3.39 During negotiations (which took place in April 1970, that is, before the devaluation of the sucre), the question was discussed as to whether the exchange risk was one which CFN could prudently carry and whether, therefore, its future creditors could prudently accept. On one side was the fact that the risk would stand for many years and that it could not be quantified. On the other hand, CFN's capital base was strong and it had the capacity to build up reserves rapidly, so that a substantial amount of funds could be put aside as provision against exchange losses. Moreover, CFN was a government-owned company, which would not likely be allowed by the Government to fail to meet its obligations. Nevertheless, in order to strengthen CFN's creditworthiness it was agreed: (a) that CFN would declare its intention to conduct its operations in such a manner as to assure the maintenance of the value of its capital; (b) that CFN shall take the necessary steps to protect itself against the foreign exchange risk (which, under present circumstances, means the building up of reserves); and (c) that the loan would be in default if the Government did not compensate CFN for financial losses that might arise by reason of CFN's borrowing operations outside Ecuador. Prospects 3.40 CFN's forecast of operations for the calendar year period 1971-75 (Annex 8) assumes an average increase in total loan and equity investment approvals of 12% p.a. (16% in 1968/69). Loan approvals in 1970 are estimated to amount to S| 238 million and are forecast to in- crease gradually from SI 236 million in 1971 to SI 424 million in 1975. Forecast approvals seem in line with past performance (SI 178 million in 1969) and, in view of projects already under study which total S/ 143.6 million, appear attainable. Forecast loan commitments and disbursements bear a reasonable relationship to approvals and take into account the existing backlogs. Equity investments are projected at S/ 20.0 million p.a. throughout the forecast period. This is a substantially higher level than in the recent past (an average of SI 12.0 million in 1969-70) and reflects CFN's increasingly promotional attitude. Loans to Govern- ment and holdings of government securities are forecast to continue to decrease gradually. Overall, the projections appear reasonable. 3.41 To support forecast operations, CFN assumes a steady increase in foreign borrowings (Annexes 9 and 10), mainly from IDB, KfW and the  - 17 - Bank. Local currency funds are expected to come from loan collections (net of repayments), internal generation and bond flotations. CFN anti- cipates that it will be able to place its own bonds in an amount of SI 30.0 million annually beginning in 1972. However, since the bonds would have to compete with price-guaranteed government securities, the anticipated level of bond placements may be difficult to achieve. 3.42 If suitable financial resources are available and the fore- cast disbursements materialize, annual interest income (including bond discounts) would more than treble over the forecast period; from S/ 46.0 million in fiscal year 1970 to S/ 150.0 million in 1975 (Annex 11). Administrative and general expenses are forecast to increase by 81% during the period, while total assets increase by 100%. This will result in a decrease in their relationship to total assets from the present level of 2.1% to 1.7%, still a somewhat high level; however, this reflects largely the fact that CFN will be building up its follow- up capability. Niet earnings on average total assets would rise from 4.1% in fiscal year 1970 to 4.9% in 1973 and 5.3% in 1975. Despite continued low leverage, return on average net worth would rise from 6.5% in fiscal year 1970 to 10.8% in 1973 and 11.5% in 1975. These levels of earnings should be attainable. Since CFN is allowed to retain its net earnings (para. 3.14), surplus and reserves should increase sub- stantially after the build-up of the authorized capital (S/ 500.0 million) has been completed; surplus and reserves should rise gradually from S/ 80.0 million on June 30, 1970 to S/ 333.0 million in 1975, which would be available for additional provision to cover the exchange risk. This level of protection appears adequate. 3.43 CFN's term debt to equity ratio is expected to rise from 0.3:1 in 1970 to 0.6:1 in 1971, 0.9:1 in 1972 and 1.0:1 in 1975, while total debt to equity ratio would rise from 1.1:1 in 1970, to 1.6:1 in 1971 and remain at that level through 1975. This consistently low indebtedness results from a strong initial equity base and from CFN's ability to retain all of its substantial net earnings. Since CFN's repurchase guarantee on security operations are the equivalent of a current liability and as these operations have been sizeable (represent- ing about two-thirds of net worth), it was considered advisable to include them in total debt for purposes of the debt/equity limitation. During negotiations this limit was set at 4:1, which allows CFN a wide margin for additional borrowing while maintaining its capital structure within a prudent limit. 3.44 CFN's financial projections indicate an ample debt service coverage of 3.0 in 1971 declining to 2.9 in 1972, increasing to 3.6 in 1975 and continuing at satisfactory levels for the life of the proposed loan. This ample coverage reflects largely the long terms and grace periods of CFN's main borrowings (from AID and IDB), which greatly exceed its relending terms.  - 18 - Conclusion 3.45 CFN is a well-managed and well-organized development bank with a satisfactory record in industrial finance for a period of over five years. As a provider of term financing for investment in industry, it is playing an important and increasing role in stimulating economic development in Ecuador. 3.46 Although wholly-owned by the Government, the majority of CFN's Directors are members of the business community; and, despite changing governments, there has been continuity in management; CFN's present General Manager has headed the Company (or its forerunner) without inter- ruption since 1957. The emphasis it places on project evaluation, for which it has built up a competent technical department, constitutes reason- able assurance that CFN's investment decisions have been based largely on sound technical and financial criteria. 3.47 CFN's performance has been satisfactory. During its first years of operation, the Company concentrated on building up its loan portfolio. Involvement in the more risky promotions and equity invest- ments, though increasing, has been small. At this time, there is no reason to doubt the general soundness of its portfolio. Its capital structure is sound, with a large equity base and high liquidity. CFN is a suitable recipient for Bank funds. IV. ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA) 4.01 COFIEC was incorporated under the provisions of the Finance Companies Act of 1965. It received authorization to operate in January 1966 and began operations in Quito in March of that year. Shortly there- after, it opened an office in Guayaquil to serve the "Costa" region. COFIEC was appraised in mid-1968 in connection with an IFC equity invest- ment of US$251,371 (IFC/R69-7 of February 13, 1969), which was made in March 1969. It was also appraised in mid-1969 and in September 1970 for the purpose of the proposed Bank loan. Share Capital and Ownership 4.02 COFIEC's authorized capital is S/ 72 million as a result of the decision the shareholders took in .March 1968 to double the authorized share capital. The purpose of the increase was to secure additional funds and to provide the equity base required to increase borrowings. In 1968, the first S/ 9 million was paid in and a program adopted for the remaining S/ 27 million in three tranches: S/ 11 million in 1969, SI 9 million in 1970 and S/ 7 million in 1971. In 1969, paid-in capital increased by S/ 12.1 million of whiiclh S/5.5 million (44%) came from IFC. On June 30, 1970, paid-in capital stood at S/ 60.9 million and a further increase of S/ 6 mil- lion is in the process of subscription, which is expected to be completed by the end of 1970. The record of capital increases is thus somewhat ahead of the program.  - 19 - 4.03 ADELA is COFIEC'a largest shareholder with a 12.2% participation. IFC is second, with 9.0% (Annex 12). Private Ecuadorian companies and in- dividuals (166 in number), own 39.0% of the shares. The Ecuadorian Gov- ernment through CFN holds 8.5%; and 52.5% belong to 18 foreign, or foreign controlled shareholders, including ADELA and IFC. COFIEC's management takes pride in the fact that, despite the traditional rivalry between the two major industrial centers of Quito and Guayaquil, the company has suc- ceeded in mustering as shareholders some of the most important enterprises in both cities, more or less in equal proportions. Purpose and Powers 4.04 COFIEC's purpose is to assist in the creation, expansion and mod- ernization of private and mixed, productive enterprises in Ecuador. COFIEC may (a) promote, reorganize, lend to and invest in industrial enterprises; (b) purchase, sell and underwrite all types of securities; (c) open letters of credit and provide acceptances and guarantees; (d) borrow and issue bonds; (e) extend technical assistance to enterprises; and (f) promote the partici- pation of foreign capital in such enterprises along with private domestic funds. Under Ecuadorian law, finance companies such as COFIEC may not receive deposits. Board, Hanagement and Staff 4.05 COFIEC's Board of Directors (Annex 13) includes, in addition to representatives of the foreign shareholders and IFC, a selection of ex- perienced executives of major banking, insurance and industrial concerns in Ecuador. The Board usually meets about once a month. It has delegated authority to an Executive Committee to approve loans and investments of up to S/ 3 million each. The Board follows closely COFIEC's operations; its contribution to the Company's investment decisions is substantial because of the Directors' personal knowledge of the business community. 4.06 Dr. Jose Antonio Correa, a distinguished lawyer and diplomat, has been COFIEC's President since its inception. He is elected by the share- holders for a three-year term and may be re-elected. Mr. Cesar Duran Ballen, the Executive Vice President, is responsible for the overall administration of the Company and is de facto manager of the Guayaquil office. At present, Mr. Duran Ballen is also Chairman of the Monetary Board and Chairman of the Board of Directors of the Central Bank. COFIEC's management team is com- petent. The emergence of COFIEC into a financial institution of standing in the relatively short time it has been operating is a measure of the efforts of its President and Executive Vice President. 4.07 COFIEC's senior staff is well-qualified and works within clearly defined areas of responsibility. Staff now numbers 55, including 16 pro- fessionals, evenly distributed between the offices in Quito and Guayaquil (Annex 14). Professional staff includes engineers, economists and analysts for industrial, agricultural and livestock operations, as well as accoun- tants. For legal advice, COFIEC uses the services of outside lawyers.  - 20 - Appraisal and Follow-up 4.08 With the exception of agricultural (livestock) projects, COFIEC has not yet given attention to adopting a satisfactory methodology in ap- praisal of long-term investments. While COFIEC's appraisal of livestock development projects is handled competently by two analysts with extensive experience in agricultural and livestock financing, appraisal reports for industrial loans are thin and tend to focus on the collateral offered. This is partly because industrial lending operations thus far have been mostly in the short-term field, and partly because the company has relied heavily on the Board's and management's intimate knowledge of the business community, and on their close association with the company's main clients. Regular follow-up procedures for industrial loans do not yet exist. COFIEC's knowledge of the status of projects is largely confined to that provided in financial statements which are received about once a year. In general, only when a project is in difficulty or there is a request for rescheduling, does COFIEC's personnel pay visits to obtain up-to-date information. 4.09 COFIEC needs to improve its appraisal and follow-up procedures of industrial projects, particularly in view of the anticipated increase in term financing of fixed assets. To accomplish this, its technical depart- ment will have to be strengthened. Management realizes the shortcomings and, for this purpose, has recently merged the financial departments in Quito and Guayaquil into their respective technical departments. COFIEC intends to strengthen its staff when the Bank loan is assured; its staff development will need careful watching. Resources 4.10 In addition to its net worth, COFIEC's long-term financial re- sources consists of a US$3 million loan from AID, granted in 1966 at 2-1/2% p.a. interest and a term of 20 years, including five years' grace; a US$1.5 million credit line from the Export-Import Bank, granted in 1968 at 6% p.a. interest and a term of 7 years, including two years' grace; and a second US$3 million credit line from the Export-Import Bank, granted in April 1970, at 6% p.a. interest and a term of 6-1/2 years, including 1-1/2 years of grace. Moreover COFIEC participates as a financial intermediary in an IBRD loan of US$4 million and in IDA credits totalling US$11.5 million ex- tended to the Government of Ecuador for livestock development, including the credit approved by IDA's Executive Directors on November 24, 1970. On June 30, 1970, the AID loan, the first Export-Import Bank loan and the IBRD livestock loan had been fully committed. On that date, therefore, COFIEC depended on the second Export-Import Bank loan and on a small balance of the IDA livestock loan for further long-term financing of its clients. 4.11 In short-term resources, COFIEC has had a rediscount line with the Central Bank, the amount of which is adjusted from time to time in proportion with paid-in capital; however, this facility has been suspended since the second half of 1969 as part of the Central Bank's general credit restriction program. In addition, COFIEC has revolving credit lines from twenty foreign commercial banks totalling US$19.5 million, which may be  - 21 - used to grant short-term loans or extend guarantees. On June 30, 1970, 70% of these resources were used; interest on these credit lines ranged from 10.25% to 11.75% p.a. 4.12 The following table summarizes the financial resources used by COFIEC on June 30, 1970, compared to those as of December 31, 1968 (in S/ million): December 31, 1968 June 30, 1970 Amount % Amount _ Equity 47.2 21.3 66.7 14.2 AID loan 62.8 28.3 64.3 13.7 Eximbank - - 23.6 5.0 IBRD/IDA livestock loans 9.4 4.2 11.9 2.5 Total long-term resources 119.4 53.8 166.5 35.4 Short-term loans 75.6 34.0 12.9 2.7 Guarantees nnd acceptances 13.5 6.1 286.1 61.0 Notes receivable discounted and overdrafts 13.6 6.1 3.9 0.9 Total current resources 102.7 46.2 302.9 64.6 Total resources 222.1 100.0 469.4 100.0 Noteworthy during the period is COFIEC's increased use of short-term re- sources, which went up from 46.2% to 64.6% of the total. The reason for this was the lack of long-term resources: COFIEC could not obtain long- term loans from abroad because it could not, and did not wish, to get a Government guarantee. Guarantees and acceptances extended by COFIEC have been included as a financial resource in the above table even though techni- cally they are contingent liabilities and, as such, are carried in COFIEC's books outside its balance sheet. The reason for their inclusion is that they are in fact a substitute for short-term loans from foreign commercial banks (see para. 4.21). Policies 4.13 COFIEC's operations are governed by the Banking Law, the Finance Companies Act, its Statutes and by a comprehensive Statement of Policies and Procedures. This statement (Annex 15) was agreed upon between COFIEC and IFC prior to IFC's investment. It contains all the provisions gener- ally usual to development finance companies associated with the Bank Group. Policy guidelines are generally adhered to. However, although the Statement of Policies provides that COFIEC will not carry the exchange risk on external borrowings, it is in effect carrying it (see paras. 4.25-29).  - 22 - Operations 4.14 Business has grown rapidly. On June 30, 1970, COFIEC had ap- proved financing applications totalling SI 1,186 million (Annex 16). During the last two-and-a-half years (January 1968/June 1970), total approvals in- creased at an annual rate of 75%. Although the bulk of COFIEC's financing has been in the form of loans, their proportion relative to total financing approved has declined dramatically: from 85% in 1968 to 32% in 1969 and to 10% in 1970. This resulted from a deliberate shift in the form of financing, from loans to guarantees. Guarantees outstanding at year end 1968 amounted to S/ 4.2 million compared with SI 280.2 million on June 30, 1970. The reasons for this shift are given in para. 4.21 below. 4.15 Loans. Reflecting a lack of long-term resources, COFIEC's loans have been predominantly short-term; 50.7% of total loan commitments (by value) have been for up to one year and 60.6% for up to two years (Annex 17). During the first half of 1970, however, while the first Eximbank loan was being committed, there was a shift towards longer term loans: during this period, loan commitments for over two years were 48.7% of the total, compared with 37.8% in 1969 and 38.7% from inception through 1969. About two-thirds of the loans (by value) have been for amounts between SI 1.0 and SI 3.0 million. Most loans have been made to manufacturing enter- prises (66.7%) and a reasonable degree of diversification within this sector has been achieved. Indicating a conservative approach, the bulk of loans (88.4%) has been for the expansion and modernization of existing plants and only 11.6% for new projects. In the first half of 1970, however, 31.4% of loan commitments (by value) were for new projects. Of the total amount committed, 52% has been used for the acquisition of fixed assets and 48% for working capital. M4ost of the amount lent has been committed to enter- prises in the Guayaquil (56.4%) and the Quito (32.5%) areas, reflecting the concentration of manufacturing around these cities. 4.16 Guarantees. Guarantees are provided mostly in foreign exchange, and are used mainly for short-term import/export financing. They are se- cured adequately by collateral, usually in the form of real estate mortgages worth at least 150% of the amount guaranteed. 4.17 Syndications. Since 1968 COFIEC has also been active in syndica- tions. It has organized and participated in five of these financing oper- ations totalling US$3.6 million. Its own participation in them amounted to US$550,000; the balance came from abroad. The projects financed in this manner were a vegetable oil refinery, two banana plantations and two highway construction projects. 4.18 Interest, fees and commissions. Loans made with the proceeds of the first Export-Import Bank loan have been made at an interest rate of 9% p.a. and those to be granted with the proceeds of the second Export- Import Bank loan will be made at 10%. All other loans are granted at 12% p.a. since January 1970, when the legal maximum was raised from 10% to 12% p.a. Interest is collected in advance for the entire period for short-term  - 23 - loans; for other loans, every six months, on the outstanding balance. In addition to interest, COFIEC charges commissions and fees as follows: Letters of credit: commission - 4% p.a. opening fee - 1-2% flat Acceptances: commission - 4% p.a. Guarantees: commission - 4% p.a. Loans: commission - 1-2% flat These charges are in line with those levied by other financial institutions in Ecuador. 4.19 Equity Investments. COFIEC's equity portfolio, although beginning to increase rapidly, is still small (Annex 18). On June 30, 1970, it con- sisted of common shares in twelve enterprises, totalling S/ 15.1 million, representing 8.1% of the total loan and equity investment portfolio and 22.7% of net worth. COFIEC has been mildly promotional. Its equity port- folio is well diversified between new enterprises and established companies; it is also well diversified among various types of industries. COFIEC has lost 9% of its equity investment as a result of capital write-downs in two enterprises in 1970. The dividend return on its portfolio has been small: it amounted to only 1.9% in 1969 and to an estimated 1.6% in 1970 of the cost of the portfolio. The return is low despite the fact that over half of COFIEC's portfolio is in the shares of established companies; these compan- ies, although profitable, have been retaining a large proportion of their earnings. 4.20 Quality of Portfolio. On June 30, 1970, total arrears (loans and guarantees) amounted to S/ 38.6 million from 80 clients; the total principal outstanding from clients in arrears was S/ 152.2 million, or 33.8% of the loan and guarantee portfolio. However, the bulk of these arrears was tem- porary; they resulted largely from the moratorium on foreign exchange trans- actions which began in June, prior to devaluation. Eliminating the princi- pal outstanding from clients in temporary difficulty, the rest amounted to S/ 41.7 million, or 9.2% of the total portfolio. Only seven of the borrow- ers in arrears were experiencing serious financial difficulty and four more had a deteriorating financial situation; the amount at risk with these bor- rowers was S/ 18.8 million, or 4.2% of the portfolio. This indicates the fair quality of the loan and guarantee portfolio. Moreover, 98% of the value of this portfolio is secured by mortgages, chattel pledges, bank, personal and other guarantees. On the other hand, 57% of the equity port- folio by value is in well established and profitable companies, 17% is in new companies with attractive prospects, and 26% in companies experiencing difficulty and with uncertain prospects. Overall, the portfolio of ques- tionable value, including S/ 3.9 million for equity investments, is estimated at S/ 22.7 million, equivalent to 4.8% of the total investment portfolio.  - 24 - Financial Position and Results 4.21 COFIEC has had an impressive financial record; its return on aver- age equity has increased steadily until it reached 16.1% in 1969 (Annexes 19 and 20). COFIEC's performance is particularly striking when considering the changing and increasingly difficult financial environment with which it has been faced. In 1969, in addition to a lack of long-term resources, condi- tions in the international monetary markets and within Ecuador itself made it increasingly difficult for COFIEC to provide the kind of financing expect- ed of a development finance company. The cost of short-term foreign bank credit to COFIEC increased beyond its maximum permissible relending rate. Moreover, the inflationary situation and deteriorating balance of payments of Ecuador led the Central Bank, as part of a general credit restriction pro- gram, to suspend COFIEC's rediscount line. In the face of these difficul- ties, COFIEC acted with resourcefulness and flexibility. It resorted to financing in the form of guarantees in foreign exchange, on which it earned a 4% commission. In doing so, COFIEC tapped financial resources which it could not use directly and greatly expanded its operations. Through this mechanism, COFIEC also avoided the foreign exchange risk associated with direct indebtedness in foreign exchange, which a domestic financial inter- mediary cannot, in effect, pass on in Ecuador. Moreover, the compensating balances COFIEC was required to keep with foreign banks in order to carry on the guarantee business had the advantage of further protecting it against the foreign exchange risk. 4.22 In June 1970, prior to the devaluation of the sucre, all foreign exchange funds held within Ecuador had to be turned over to the Central Bank in exchange for local currency at S/ 21.54 per US dollar, and all for- eign exchange funds held abroad by Ecuadorians had to be repatriated and turned over to the Central Bank in exchange for local currency at SI 23.00 per US dollar. At that time, COFIEC had approximately US$1.0 million in such funds, the greater part of which were held abroad. Since these funds were stated in COFIEC's accounts at S/ 22.00 per US dollar (accounting rate), COFIEC realized an actual net gain of S/ 340,000. At the time of devaluation (August 16, 1970), COFIEC had foreign exchange assets in excess of foreign exchange liabilities of US$286,000, which were both also stated in its ac- counts at S/ 22.00 per US dollar. The restatement of the accounts at the new exchange rate resulted in an unrealized net exchange gain of S/ 786,000. The net gain will be realized gradually as COFIEC's borrowers repay their loans and as COFIEC amortizes its own borrowing from abroad. Regarding the effect of devaluation on COFIEC's receivables, borrowers should have no difficulties in repaying their loans at the new exchange rate. Since COFIEC's foreign exchange loans were being disbursed and repaid at the going free market rate (about S/ 22 per US dollar), the impact of the devaluation on its borrowers was not the full 38.9% increase in the cost of buying foreign exchange (from S/ 18 to S/ 25 per US dollar) but only about 14% (from S/ 22 to S/ 25 per US dollar. Moreover, as the free rate was a fluctuating one, Ecuadorian borrowers in foreign exchange are used to changes in the sucre equivalents of their foreign exchange liabilities.  - 25 - 4.23 COFIEC's term debt to equity ratio has remained at 1.5 to 1 since 1968, which is well within the 4 to 1 limit provided for in its Policy Statement. However, since COFIEC has engaged heavily in short-term opera- tions, its total indebtedness, including its contingent liabilities, needs to be considered. Its total debt to equity ratio increased from 4.6 to 1 at the end of 1968 to 6.1 at the end of 1969 and to 7.4 on June 30, 1970. During negotiations, COFIEC concurred in the view that it had reached the limit of prudent overall indebtedness for a development finance company at its stage of development. Accordingly, COFIEC agreed to adjust its opera- tions to remain within a 6 to 1 total debt to equity limit, which implies a reduction of S/71 million in its portfolio. This will not be difficult for COFIEC to accomplish since there is to be a further capital increase of SI 5.1 million in 1971, which, together with growth in retained earnings and intended future increases in share capital, gives it further room for expan- sion of business. 4.24 COFIEC's administrative and general expenses have been unusually high in relative terms; they have ranged from 4.0% to 4.4% of average total assets. If guarantees are included (and there is reason for doing so in COFIEC), the ratio declines to 3.5% in 1968 and 3.0% in 1969, which is still a high level. However, COFIEC has maintained a minimum staffing and does not pay excessive salaries. To bring the proportion of administra- tive expenses to a more reasonable level, COFIEC, therefore, needs to ex- pand its business further (para. 4.38). 4.25 Reserves. Under Ecuadorian law COFIEC must set aside 10% of net profits in a legal reserve until it reaches 50% of paid-in share capital. Moreover, the AID loan contract provides that a bad debt reserve must be set up in yearly appropriations of not less than 2% of the total of COFIEC's equity and loan investments of over one year which have been financed with AID funds. On June 30, 1970, reserves and surplus amounted to about S/ 9.7 million. Of this amount, S/ 3.9 million was in a special reserve to cover losses on loans and equity investments. 4.26 According to the Basic Monetary Law, COFIEC bears a contingent risk on its loans made in Ecuador with the proceeds of borrowings repayable in foreign exchange. Under the law, an Ecuadorian debtor may repay a for- eign exchange loan to an Ecuadorian creditor in sucres at the legal parity in effect at the time the loan was granted. (If the creditor is from abroad, however, the loan is repayable in foreign exchange). Hence, COFIEC is contingently exposed to foreign exchange losses on loans made by it with the proceeds of the AID loan. Loans made with Eximbank funds have been effected through an intermediary abroad and are, therefore, not subject to the foreign exchange risk. 4.27 COFIEC bears two foreign exchange risks: firstly, the present risk (resulting from the August 1970 devaluation) of losing SI 7 per US dollar on foreign exchange loans which borrowers could repay at S/ 18 per IJS dollar, as against the present parity of S/ 25 per US dollar; and sec- ondly, a future risk associated with any future devaluations of the sucre.  - 26 - of course, the extent of any future risk cannot be quantified. COFIEC's total exposure under the present risk is S/ 21 million (equivalent to S/ 7 per US dollar on US$3 million of the AID loan). 4.28 COFIEC recognizes its foreign exchange risk, and agreed during negotiations to maintain a provision for this purpose. For the known risk resulting from the 1970 devaluation, the provision will be calculated by multiplying the risk factor of S/ 7 per dollar by the debt service payments for each ensuing year. The provision for the future risk will be calculated by assuming a notional depreciation of the sucre at 10% a year, which will be cumulative. During the period covered by COFIEC's business forecast (1971-1975) the provisions proposed, in comparison with the surplus, will be as follows (in S/ million): 1971 1972 1973 1974 1975 For present risk 1.8 1.8 1.7 1.7 1.7 For future risk 0.7 0.7 0.8 0.8 0.9 Total 2.5 2.5 2.5 2.5 2.6 Surplus 1/ 12.0 16.9 22.5 28.4 34.8 4.29 According to a regulation recently adopted by the Monetary Board (No. 555 of August 28, 1970) Ecuadorian financial intermediaries would no longer have a foreign exchange risk when making loans within Ecuador denomi- nated in foreign exchange, since the borrowers would have to repay in foreign exchange, or in sucres at the parity in effect at the time of repayment. To remove any possible conflict with the basic monetary law, the Government is considering the enactment of the regulation into law, in suitable form. 4.30 Total surplus and reserves amounted to S/ 9.7 million on June 30, 1970. Leaving out the S/ 2.5 million needed to cover the exchange risk, the remaining surplus and reserves of S/ 7.2 million represent 1.4% of the total investment portfolio. If only the term loan and equity investment portfolios are taken into account, the proportion covered is 8.1%. On the other hand, these reserves and surplus cover only about one third of the portfolio of questionable value of S/ 22.7 million (para. 4.20), indicating that a further build-up of surplus is necessary. Such a build-up is pro- jected by COFIEC, enabling its surplus and reserves to reach a reasonable level by 1973, on the assumption that the proportion of the portfolio which is of questionable value remains the same. 1/ After dividends but before provision for foreign exchange losses.  - 27 - 4.31 Dividends. COFIEC has issued the following dividends: Amount in % of year- From earnings of S/ thousands end capital Payable in 1967 (second year) 1,099 3% stock 1968 (third year) 3,806 8% stock 1969 (fourth year) 5,710 10% cash or stock 1/ While the greater portion of these dividends was paid in stock, which limit- ed the cash payout to 9.5% of total earnings since inception, their early issuance (beginning in its second year of operations) has prevented COFIEC from building up its reserves to a more satisfactory level. As mentioned in the previous paragraph, however, COFIEC's reserves will reach a satisfac- tory level in 1973; this is after assuming that COFIEC pays a 10% cash div- idend annually beginning in 1971. Its dividend policy has been influenced by the consideration that, in order to increase periodically its paid-in capital (para. 4.39), COFIEC needs to establish a dividend record acceptable to the market. This is understandable; however, the building up of protec- tive reserves to an appropriate level relative to the size and status of its portfolio is important, and hence its dividend policy needs careful watch- ing. 4.32 Audit. In addition to the verification of accounts performed by the Legal Auditor (Comisario) and by the Internal Auditor, both of whom are directly responsible to the Shareholders' Meeting, COFIEC's accounts are subject to periodic review by the Superintendency of banks and the company's financial statements are audited once a year by independent pub- lic accountants, Deloitte, Plender, Haskings & Sells. The auditors' reports do not satisfy the Bank's normal requirements for audit reports of devel- opment finance companies. They are prepared in the so-called "short form", are extremely brief, do not contain any details on COFIEC's equity invest- ment, have no information on security pledged for COFIEC's financing, and are not comparable on a year to year basis. Despite the deficiencies in the auditor's reports, analysis of the company's operations and financial statements by the Bank missions have shown the financial statements to be satisfactory. The draft loan documents obligate COFIEC to have annual audits made of its accounts in scope and detail satisfactory to the Bank. 1/ At the shareholders' option; S/ 4,048 thousand (or 71%) was paid in stock.  - 28 - Prospects 4.33 COFIEC's projected operations for the five year period 1971-75 (Annex 21) appear reasonable and attainable. They assume a rate of growth in loan and guarantee approvals of 5% annually from the 1969 level. This compares with actual annual growth of 46% from 1967 to 1969 and 63% in 1968-69. 4.34 Reflecting new long-term resources which COFIEC expects to have available, the structure of its portfolio would change considerably (Annexes 22 and 23). While short-term financing decreases from about four-fifths of the investment portfolio in 1969 to about one-third in 1975, medium- and long-term financing increases from about one-fifth to somewhat less than two-thirds, as shown below: 1969 1972 1975 Short-term loans 35% 18% 28% Guarantees 44% 23% 1% Total short-term 79% 41% 29% Medium- and long-term loans 19% 50% 64% Equity investments 2% 9% 7% Total 100% 100% 100% Equity investments through 1972 are forecast at an annual level of about S/ 13 million, reflecting more of a promotional approach than up to 1970; actual equity investments were SI 3.4 million in 1968 and SI 2.3 million in 1969. The increase appears to be realistic, judging from the amount of these investments made during the first iialf of 1970, which amounted to S/ 6.5 million, or almost half of the investment projected for the whole year. No equity investments are projected after 1972 since COFIEC considers it prudent to keep the level of its equity investments at half its own net worth, which is reached in that year. 4.35 COFIEC's projected balance sheet assumes a rapid increase in long- term borrowing (from S/ 90.3 million in 1969 to S/ 331.5 million in 1972 and S/ 554.2 million in 1975), which COFIEC hopes to obtain through the Bank/IDA in industrial and livestock loans, as well as from the Eximbank (Annex 22). 4.36 Bond placements, a new resource for COFIEC 1/, are assumed at SI 18 million in 1970, rising graudally to SI 36 million in 1975. The 1/ COFIEC has already obtained authorization from the Superintendency of Banks for issuing the bonds.  - 29 - bonds will have a maturity of five years and a coupon of 12%. Borrowers will be given the bonds in lieu of cash. The securities would then be sold in the market (mainly to insurance companies). Borrowers will pay COFIEC a 2% interest-type commission. The bonds are expected to sell at about par. Income from the bonds is taxed at a flat 8%; hence, bonds sold at par will yield 11.4% compared with a current yield of 10.8% for govern- ment bonds. Although COFIEC's bonds should be competitive with government bonds, COFIEC's expectations regarding volume of placement, however, may be somewhat optimistic. In 1971, credit is expected to be tight (para. 2.13). In addition, COFIEC has to establish a reputation and demand for its bonds in a thin market. 4.37 COFIEC's projections show that the profit it has built up in the past will be maintained throughout the forecast period. After-tax earnings are expected to double from 1969 to 1975 (Annex 24) which would permit COFIEC to build up its protective reserves to reasonable levels. Excluding the provision for exchange risk, surplus and reserves are projected to rise from 1.7% of the total portfolio (including contingent liabilities) in 1969 to 7.0% in 1975, or from 8.3% of term loan and equity investment portfolio in 1969 to 10.0% in 1975. The dividend pay-out ratio is the decline from 65% (including stock dividends) in 1969 to 44% (all in cash) in 1975. 4.38 The increased level of business projected would also permit COFIEC to reduce the proportion of administrative expenses to average total assets from 4.0% in 1969 to 3.5% in 1975. This high proportion for administrative expenses is based on COFIEC's projections which assume that salaries, fees and fringe benefits will increase by 157% from 1969 to 1975 while total business will increase by 74%. This assumption appears un- realistic. Moreover, the projected administrative expenses include a large increase in depreciation charges since COFIEC contemplates the con- struction of a new building. However, since COFIEC will occupy only 20% of the space and rent out the rest, only 20% of the depreciation charges projected should be applied to COFIEC administrative expenses for calculat- ing the ratio. Under more realistic assumptions (taking only 20% of the depreciation charges and assuming that salaries, fees and fringe benefits will increase at the same rate as the level of business) the ratio of administrative expenses to average total assets would decline from 4.0% in 1969 to 2.6% in 1975; and, including guarantees in total assets (para. 4.24), from 3.0% in 1969 to 2.5% in 1975. While the ratio is still some- what high, it reflects the fact that COFIEC is still in an initial period in which it needs to build up staff to improve its appraisal and follow-up procedures. 4.39 COFIEC's projections show that the total debt to equity ratio (including contingent liabilities) will not exceed the 6 to 1 ratio agreed to during negotiations (para. 4.23). However, its long term debt to equity ratio would, in 1973, 1974 and 1975, exceed the 4 to 1 limit specified by its policy statement and in the draft loan documents. To  - 30 - stay within the long term indebtedness limitation, COFIEC would have to increase its paid-in capital by S/ 9.0 million in 1973, SI 11.7 million in 1974 and S/ 9.6 million in 1975, equivalent to a yearly increase of about 12%. COFIEC's management is aware of the need for further capital increases to support expanding operations, and does not consider that such increases would be difficult to achieve in view of the moderate amounts and of COFIEC's record of capital increases in the past. 4.40 COFIEC's financial projections indicate a total debt-service coverage above 2.2 times throughout the forecast period. This coverage is satisfactory; it remains satisfactory for the life of the proposed loan. Conclusions 4.41 In four-and-a-half years of operations, COFIEC has emerged as an accepted member of the financial community in Ecuador. Its shareholders include the most important commercial institutions in Ecuador, as well as foreign commercial banks, ADELA and IFC. Its Board of Directors is com- posed of prominent and influential businessmen and its management is com- petent and well-known to the Bank Group. 4.42 Despite weaknesses in appraisal and follow-up procedures, the risk of poor investment decisions is low in view of the Board's and manage- mnent's intimate knowledge of, and close association with the Company's principal clients. However, in the light of the expected rapid increase of business, appraisal and follow-up need to be put on a more organized basis. 4.43 COFIEC has built up a portfolio of loans and equity investment of fair quality and, in spite of high administrative costs, has achieved a reasonable level of profitability. Its reserves are not high, and it needs to give priority to building them up to higher levels. 4.44 Prospects for growing operations are good. The proposed Bank loan would enable COFIEC to convert itself more rapidly into a source of term finance than it could do otherwise. 4.45 On balance, COFIEC is a sound company and a suitable recipient for Bank funds. V. RELATIONSHIP BETWEEN CFN AND COFIEC 5.01 Relations between CFN and COFIEC have been close and apparently cordial. CFN subscribed the largest single portion of COFIEC's share capital at the latter's inception. CFN's General Manager has been an active member of COFIEC's Board of Directors from the start. Frequent  - 31 - consultation and coordination between management and staffs takes place on matters of common interest, such as the interest rate ceiling and commissions applicable to industrial lending in Ecuador, large promotions, borrowers in difficulty and general credit information on clients. 5.02 Although CFN and COFIEC are the only important sources of term financing for industry in Ecuador, their operations have been more com- plementary than competitive; they have, in fact, joined forces in finan- cing a few projects. Thus far, aside from equity financing, in which both companies still have small portfolios, CFN has engaged exclusively in medium and long-term lending in sucres principally for fixed assets. the other hand, COFIEC, given the relatively short-term nature of its resource mix, has had to engage to a substantial degree in short-term financing, and thus, to a large extent, in lending for working capital purposes. 5.03 The proposed Bank loan would bring COFIEC increasingly into term lending operations, which COFIEC desires. It would thus provide for a degree of competition between the companies, but there is no reason to believe that this would be harmful to either company, or to Ecuador. VI. PROPOSED BANK LOAN 6.01 The Companies' 5-year forecasts of operations contemplate size- able increases in their volumes of business, particularly in term lending. This expectation appears reasonable and attainable, both in terms of levels and growth rates. Underlying the Companies' expectations are the facts that term financing for industry has been, and continues to be, in rela- tively short supply in Ecuador and that opportunities exist for industrial investment, mainly in the processing of agricultural raw materials, tex- tiles, timber, livestock, fish products and tourism. Moreover, Ecuador needs to diversify its economy and not all the capital required in this process can be obtained from domestic savings. The Companies' forecasts, therefore, presuppose substantial increases in external support to meet their anticipated industrial financing commitments. 6.02 According to the Companies' forecasts, the projected fund avail- ability and commitments for term financing to industry at the end of 1970 and over the period 1971-72 would be as shown in the table on the following page.  - 32 - CFN COFIEC Total (Calendar years) 1/ 1970 1971-77 1970 1971-72 197 1971-72 Projected Availabilities (in SI million) Share capital increase - 18 10 5 10 23 Recovery of loans 26 148 144 274 170 422 Other, from operations 11 29 (8) (9) 3 20 Present borrowing (balances) IDB 204 - - - 204 - Export-Import Bank - - 90 - 90 - KfW 52 - - - 52 - European banks 30 - - - 30 - IBRD - fisheries 8 63 - - 8 63 New borrowing expected IBRD/IDA livestock loans - - 18 38 18 38 Bond flotations (net) - 55 16 39 16 94 Undisbursed commitments 2/ (89) - (6) - (95) - Total 242 313 264 347 506 660 Projected Connitments Loans: medium & long- term 106 531 95 225 201 756 short-term - - 93 240 93 240 Equity investments 10 4o 14 25 24 65 Total 116 571 202 490 318 1,061 Surplus/(short fall) 126 (258) 62 (143) 188 (401) Surplus/(short fall) - cumulative 126 (132) 62 (81) 188 (213) 1/ CFN's forecast figures shown in Annexes 9 to 11 on a fiscal year basis have been converted to a calendar year basis for purposes of this table. 2/ On December 31, 1969.  - 33 - The table shows that if the projected demand materializes, both CFN and COFIEC would have cumulative shortfalls to meet commitments in 1971-72. CFN's shortfall would be of the order of S/ 132 million(US$5.3 million equivalent); COFIEC's, S/ 81 million (US$3.3 million equivalent); and the combined shortfall, SI 213 million (US$8.6 million equivalent). 6.03 The proceeds of the proposed Bank loan would be available to finance the cost of goods and services required by productive private en- terprises for carrying out specific investments projects. According to the analysis of 319 loans approved by CFN since inception 1/, 64% of the total (by value) was used for the acquisition of machinery and equipment (Annex 5, page 2, breakdown by end use). On the assumption that an equal proportion of CFN's and COFIEC's projected industrial medium and long- term commitments will be needed for the same purpose, CFN's and COFIEC's shortfalls for this type of financing would be as follows (in S/ mil- lion): CFN COFIEC TOTAL 1970 1971-72 1970 1971-72 1970 1971-72 Undisbursed commitments 1/ 89 - 6 - 95 - Medium & long-term loan commitments 106 531 95 225 201 756 Livestock loans - - (18) (38) (18) (38) Industrial loan commitments 195 531 83 187 278 718 Of which: machinery and equipment (64%) 125 340 53 120 178 460 Foreign exchange resource availability 2/ 294 63 90 - 384 63 Surplus/(Deficit) 169 (277) 37 (120) 206 (397) Surplus/(Deficit) - cumulative 169 (108) 37 (83) 206 (191) The Table shows that CFN's cumulative shortfall would be of the order of S/ 108 million (US$4.4 million equivalent); COFIEC's, SI 83 million (US$3.4 million equivalent); and the combined shortfall, S/ 191 million (US$7.8 million equivalent). 1/ On December 31, 1969. 2/ Excluding the proceeds of IDA's livestock development loan which COFIEC expects to commit to cover its projected livestock loans.  - 34 - 6.04 In assessing the shortfalls of CFN and COFIEC the following additional factors need to be considered. Among the projected resources of both companies are sizeable bond flotations (totalling S/ 94 million). These flotations may not materialize to the extent expected because the bonds will have to compete in a thin market with price-guaranteed Govern- ment bonds. Should this be the case, the shortfalls will be correspond- ingly greater. On the other hand, it is necessary to discount the short- falls for possible overlap between the operations forecasted by CFN and COFIEC. On balance, it appears that US$8 million is a fair estimate of the aggregate shortfall until about the end of 1972. A schedule of esti- mated disbursements under the proposed loan is given in Annex 25. 6.05 The proposed Bank loan will be granted to the Government of Ecuador. As in the case of the Bank/IDA livestock development loans, the Government would assume the foreign exchange risk and would make the funds available to CFN and COFIEC in sucres. CFN and COFIEC will receive the funds from the Central Bank of Ecuador at 8-1/4% p.a. (representing the 7-1/4% Bank rate and a 1%" commission for the Central Bank). As they re- lend at 12% p.a. CFN and COFIEC will have a spread of 3-3/4%, compared with the minimum spread of 3% specified in the loan documents. 6.06 Since the use of the Bank loan on a first-come-first-served basis might entail a somewhat acute competition between CFN and COFIEC, prior allocation was considered advisable. This assures to each a por- tion of the loan, which each can commit to projects after deliberate study and careful selection among the best of them. It was agreed during negotiations that the loan will be pre-allocated in amounts of US$4 mil- lion to each comapny. As COFIEC's gap in resources is somewhat smaller than CFN's, COFIEC may take some months longer than CFN to commit the funds. "Free limits" of US$100,000 and "aggregate free limits" of US$1.3 million for each company were also agreed to during negotiations. This means that projects totalling at least slightly over two-thirds of the loan will be subject to prior review by the Bank. The loan documents provide that the conditions of effectiveness and the events of default can, if neces- sary, be applied separately to the two companies. VII. CONCLUSIONS AND RECOMMENDATIONS 7.01 Development of the industrial sector is needed as an important element of Ecuador's overall economic development and diversification. Increased term financing is required to stimulate such development; and foreign credits are needed to meet the gap between the capital required for this purpose and domestic savings available. 7.02 In view of the important and increasing contribution they are making to the development of private productive enterprise in Ecuador, their competent managements, their satisfactory operational standards and their generally sound portfolios, CFN and COFIEC may be considered creditworthy borrowers and suitable recipients for Bank funds.  - 35 - 7.03 A loan of US$8 million is recommended. The loan will be suf- ficient to cover CFN's and COFIEC's shortfalls in meeting the financing requirements for the import component of the cost of private productive projects, over a period of about two years. The terms of the loan should be those normally applied to lending to development finance companies, including the standard commitment charge and a flexible amortization schedule. In addition, as agreed during negotiations, the Bank's prior approval will be required for all projects submitted by CFN and COFIEC calling for US$100,000 or more of the loan; and the aggregate free limit for projects not requiring prior approval will be US$1.3 million for each company.   ANNEX 1 COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL Board of Directors (September 17, 1970) Chairman Jorge Mantilla Ortega Publisher of newspaper Appointed jointly by the "El Comercio" of Quito, Ministry of Industries and ex ambassador, industrialist Commerce and the Ministry of Finance Vice Chairman Enrique Salas Cast illo General Manager of Ecuatoriano- Appointed by the President Suiza de Seguros, Guayaquil and of the Republic Dean of the School of Economics of the Guayaquil National University Francisco Baquerizo Maldonado Deputy General Manager of the (ex officio) Central Bank of Ecuador Alejandro Ponce Henrtques Lawyer, industrialist Elected by the Costa Chambers of Industries Luis Moscoso Vega Farmer, editorialist and college Elected by the Chambers of professor Agriculture of Ecuador Oswaldo Tamayo Benalcgzar Industrialist, ex President of Elected by the Sierra the Chamber of Industries of Chambers of Industries Pichincha IBRD/DFC October 1970  COMISION DE VALORES-CORPORACION FINANCIERA NACIONAL ORGANIZATION CHART (June 30, 1970) BOARD COF DIRECTORS (6 Mernbers) EL, F DINDEPENDENT AUDITOR R g (P~~~~~~~~~~~~~~~~~trice Wvaterhouse & Co.) | | EEUTIVE COMMITTEE F ` ( 3 Mernbers ) SECRETARY_E INTERNAL AUDITORS D (Jose Iturral]de) (BlvrFar FINANCIAL ADVISOR I ~G(ENEPAL MANAGER (Raul Padron )(Luis Ayora A. ) I I PUBLIC RELATIONS l | LEGAL COUNSEL l Otbr7 D o (Adol fo Vel astequi ) ASSISTANT GENERAL MANAGER (Eduardo Andrade Ch.) INDUSTRIAL PROMOTIONS _- AND SPECIAL STUDIES DEPT. TECHNICAL ADMINISTRATIVE FIN. RESOURCES AND BUDGETS ASSISTANT MANAGER ASSISTANT MANAGER ASSISTANT MANAGER (Leo,ooldo Baez) _(Nefson Guerre) _(Cristobaf Flores) L|PROJECT EVALUATION DEPT, |i ACUTN DE. l PRJTSPERVISION DEPT.| _ I FINANCIA~~~~~~~~~~L RESOURCES - TREASURY DEPT. 1 AND BUD~~~~~~~~GET DEPT. LOAN COLLECINDET| l PERSONNEL, FILES AND l GENERAL SERVICES DEPT. | lBRD/IFC October 1970 IBRD-5330 (R) > X  ANNEX 3 Page 1 COPIISION DE VALORES - CORPORACION FINaNCIERA NACIONAL Declaration of Policies and Procedures The Board of Directors of the Comision de Valores - Corporaci6n Financiera Nacional (the Corporation), by virtue of the powers conferred upon it by its enabling legislation, establishes the following policies and procedures which will guide the financial activities and investments of the Cornoration. I. Objectives 1) The fundamental objective of the Corporation will be to assist in the economic development of the country by providing finan- cial assistance to productive enterprises of the private sector and by supporting economic infrastructure projects of the public sector. In addition, the Corporation will stimulate the development of the capital market as an instrument for channelling private savings into productive activities. II. Investment Policies 2) The Corporation will base its investment decisions on sound economic and financial criteria and will finance only technically viable enterprises with good prospect of economic and financial return. 3) Although its operations will be oriented principally to the financing of the manufacturing sector, the company may also finance fisheries, tourism and agro-industrial projects. In no case will the company finance commercial activities or real estate operations. 4) The Corporation will finance the establishment or expansion of enterprises when these are, or can reasonably be expected to be, adequately organized and managed. 5) In selecting projects, the Corporation will take into account the general economic development plans and policies of the country. Consequently, priority will be given to projects which have some of the following features: use of national raw materials; significant use of manpower; saving of foreign exchange through import substitution; production of goods to meet national or foreign demand; participation of a significant number of shareholders; possibilities for training personnel in technical and management matters; or the possibility of development of related industries.  ANNEX 3 Page 2 In harmony with the foregoing, the Corporation will avoid financing enterprises which depend on excessive governmental protection for their profitability, resulting in a negative economic benefit for the country and consequently leading to an uneconomic utilization of mtional resources. 6) When a project conforms to the technical, economic and financial criteria for an investment by the Corporation and is of particular importance for the economic development of the country, but does not arouse sufficient interest in the private sector, the Corporation may undertake it, even if it involves 100% financing by the Corporation. However, the aim of the Corporation, as in the case of normal investments, will be to sell its participation when the project has reached an adequate development and when circumstances permit it to do so on satisfactory terms. 7) In the case of projects which require large investments, the Corporation will seek financial cooperation from other entities, whether national, international or foreign. III. Type of Financing 8) The Corporation will provide the following types of financing: (a) medium and long-term loans; (b) investment in share capital by direct participation, purchase options, underwritings, etc.; (c) guarantees and avals related to the purchase of machinery and/or equipment; (d) rediscounting of loans granted by private banks, the National Development Bank and private financial corporations to small industries in amounts up to S/ 200,000; and (e) other financial operations which are in accordance with the objectives and policies of the Corporation. 9) The Corporation's loans will be principally for the purchase or construction of fixed assets. Notwithstanding, the Corporation may also finance technical assistance and permanent working capital and, exceptionally, seasonal working capital. 10) With its special resources for this purpose, the Corporation shall finance pre-investment studies of projects of the public or private sectors, or of those which can be carried out by the Corporation itself.  ANNEX 3 Page 3 IV. Diversification of Investments 11) With the purpose of maintaining a reasonable level of risk, the Corporation will diversify its investments. 12) The Corporationa normally will not grant to the same enterprise loans for an amount greater than S/ 20 million. For exceptional projects, at the discretion of the Board of Directors, the Corporation may grant loans for larger amounts; but in no case will the total financing to one enterprise, in whatever form, including loans, participation in share capital, guarantees or avals, or a combination thereof, exceed an amount equivalent to 15% of the Corporation's paid-in capital and free reserves. On the other hand, the Corporation will not provide firancial assistance for amounts smaller than S/ 200,000 except in the case of the rediscounts mentioned in sub-paragraph (d) of Section 8, or in the case of pre-investment studies. 13) The Corporation will limit its investment in the share capital of a single enterprise to an amount equivalent to 10% of the Corporation's paid-in capital and its free reserves. The Corporation will also limit the total amount of its investments in the share capital of enterprises to the amount of its own paid-in capital and free reserves. V. Turnover of Investments 14) As the projects in which the Corporation holds shares reach an adequate state of development, and with the double purpose of freeing resources for new financing and of stimulating widespread ownership of securities, the Corporation will sell its share- holdings, when it can do so on satisfactory terms. In the sale of its investments, the Corporation will not only take into account its own interests but also those of the other shareholders and of the enterprises themselves. VI. Relations with Enterprises Financed 15) The Corporation does not intend to acquire control of the enter- prises it finances. Consequently, the Corporation normally will not take up more than 25% of the share capital of the enterprise financed, except in the case of projects undertaken by the Corporation in accordance with the stipulations of point 6 of this Declaration, or as a result of an underwriting undertaken with the expectation that the shares remaining for its account will not exceed the said limit. Notwithstanding, in cases of jeopardy, the Corporation may take whatever measures it deems necessary to protect its interests. 16) In accordance with usual banking practice, the Corporation will require its borrowers to provide and to maintain adequate  ANNEX 3 Page 4 security in its favor; to keep accounting records which reflect their financial situation in accordance with generally accepted accounting principles; and to supply the Corporation with whatever information it may reasonable require to establish the status of their operations and financial situation. The Corporation will take the right to inspect the enterprises it finances as well as their accounting records. 17) All information furnished to the Corporation by applicants or clients will be treated by it as strictly confidential. VII. Financial Practices 18) The Corporation will conduct its operations in such a manner as to assure the maintenance of the value of its capital and of adequate liquidity. The Corporation will charge interest, fees and commissions for its financing and services in such a way that they yield an adequate return on the capital employed. 19) The Corporation will maintain reserves in accordance with sound financial practice. These reserves will be sufficient to cover the risk of loss associated with the size of its portfolio and the status of the projects financed. 20) The Corporation will maintain a reasonable level of administra- tive expenses, consistant with the scope and volume of its operations. 21) The Corporation considers that the total of its liabilities, including guarantees and avals, in whatever form should maintain an adequate relationship with its own capital and free reserves. Consequently, the ratio of liabilities to capital and reserves will not exceed 4:l. VIII. Procedures 22) The Corporation shall maintain the following funds, each with separate accounting and independent resources: (a) Fund for Industrial Investments; (b) Fund for Small Industry; and (c) Fund for Pre-investment. 23) In accordance with its investment policies and to protect its resources, the Corporation, prior to any financing, shall evaluate projects in relation to the market, technical and financial feasibility and the economic benefit for the country.  ANNEX 3 Page 5 24) The Cornoration will not limit itself to evaluating projects which are presented for its consideration. The Corporation, by itself or with the help of consultants when circumstances require it, will identify, study and promote industrial, agro- industrial, fishery and tourism projects of significant benefit for the economy of the country. 25) Procedurally, with respect to matters involving its Directors, officials and employees, the Corporation will abide by the stipulations of Article 50 of its Enabling Law. 26) The Corporation will maintain accounting and statistical records which accurately reflect its operations and financial status in accordance with generally accepted accounting principles and practices. The Corporation will employ the services of a firm of independent auditors of recognized technical and professional competence, who will examine annually the accounts of the Corporation and give an opinion on the financial statements of the institution. 27) The Corporation will maintain a balanced technical and manage- ment organization, with high level personnel which will enable it to carry out market, technical, economic and financial evaluations of the projects it finances, as well as to follow up its investments. 28) As part of its follow-up operations, the Corporation, when it deems it necessary and when personnel availability permits it, will provide technical assistance to borrowing enterprises through the preparation of problem identification and guidance reports, so that these enterprises may contract the specialized technical assistance that may be necessary. IBRD/DFC October 1970   COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL Summary of Operations from Inception through June 30, 1970 (in SI millions) Six Months (Calendar Years) 1963 1964 1965 1966 1967 1968 1969 1970 APPROVALS Industrial loans 5.2 22.1 106.4 109.9 138.0 182.3 177.7 115.5 Equity investments - - 4.5 2.0 5.6 13.7 6.1 Total 5.2 22.1 106.4 114.4 140.0 187.9 191.4 124.6 COMMITMENTS Industrial loans - 6.o 57.0 106.6 89.3 145.7 136.0 84.8 Equity investments _ _ 4.5 2.0 5.6 13.7 6.1 Total - 6.o 57.0 111.1 91.3 151.3 149.7 90.9 DISBURSEMENTS Industrial loans - 5.8 24.7 92.6 98.8 133.7 110.2 69.8 Equity investments - - - 4.5 2.0 5.6 13.7 6.1 Total - 5.8 24.7 97.1 100.8 139.3 123.9 75.9 OTHER OPERATIONS Industrial: Mortgage bonds & cedulas (net) 4.1 1.6 8.2 11.7 (19.2) ( 1.3) ( 0.4) ( o-5) Small industry-discounts (net) - - 4.7 ( 1.6) 7.7 3.0 2.2 ( 1.6) Government: Bonds (net) 318.4 41.1 23.7 38.3 ( 77.9) ( 65.o) ( 34-5) ( 4-5) Loans (net) 215.4 (39.2) ( 9.0) (90.3) ( 66.o) 99.6 (101.3) 62.6 Total 537.9 3.5 27.6 (41.9) (155-4) 36.3 (134.0) 56.0 Guaranteesl/ - - - - 7.4 6.7 5.3 7.4 Repurchase obligations n.a. n.a. 259.3 241.9 267.5 364.1 295.6 301.9 1/ Outstandinr, on June 30, of respective year. IBRD/DRC October 1970   C O M I S I O N D E V A L O R E S - C O R P O R A C I O N F I N A N C I E R A N A C I O N A L Analysis of Loan Approvals from Inception through June 30, 1970 (in S/ million) (6 months) Total Since 1963/1966 1967 1968 1969 1970 1963 No. Amount % No. Amount % No. Amount % No. Amount % No. Amount % No. Amount % By Size (S/million) Up to 0.5 24 6.4 2.6 7 2.3 1.6 18 5.2 2.9 5 1.6 0.9 7 1.4 1.2 61 16.9 2.0 Over 0.5 up to 2.5 52 44.2 10.1 21 26.5 19.2 23 31.4 17.2 36 49.3 27.8 13 17.3 14.6 145 168.7 19.6 Over 2.5 up to 4.5 13 44.0 18.1 12 28.1 20.4 13 37.1 20.4 6 19.6 11.0 9 27.3 23.0 53 156.1 18.1 Over 4.5 up to 6.5 13 47.7 19.6 5 28.1 20.4 2 4.6 2.5 3 15.7 8.8 2 10.5 8.9 25 106.6 12.4 Over 6.5 up to 8.5 4 30.6 12.6 1 7.0 5.1 3 15.0 8.2 1 7.6 4.3 1 7.0 5.9 10 67.2 7.8 Over 8.5 up to 10.5 1 8.6 3.5 1 10.0 7.2 3 29.0 15.9 2 19.9 11.2 2 10.0 8.4 9 77.5 9.0 Over 10.5 5 62.1 25.5 2 36.0 26.1 3 60.0 32.9 3 64.o 36.0 3 45.0 38.0 16 267.1 31.1 Total 112 243.6 100.0 49 138.0 100.0 65 182.3 100.0 56 177.7 100.0 37 118.5 100.0 319 860.1 100.0 By Economic Activity Manufacturing Sector: Food, beverages and tobacco 27 60.6 24.9 17 76.8 55.7 24 62.3 34.2 15 38.2 21.5 9 20.3 17.1 92 258.2 30.0 Textiles and clothing 16 36.0 14.8 12 17.0 12.3 6 14.6 8.0 5 14.7 8.3 6 10.2 8.6 45 92.5 10.8 Paper and printing 10 16.5 6.8 2 10.0 7.2 5 10.8 5.9 2 32.0 18.0 4 4.3 3.6 23 73.6 8.6 Chemicals and Pharmaceuticals 11 29.1 11.9 4 3.8 2.8 4 13.4 7.4 3 15.3 8.6 5 20.2 17.1 27 81.8 9.5 Metals and metal working 18 28.5 11.7 5 12.5 9.1 4 8.6 4.7 6 8.9 5.0 4 5.1 4.3 37 63.6 7.4 Other 17 25.4 10.4 6 6.4 4.6 16 13.9 7.6 12 39.3 22.1 5 52.2 44.1 56 137.2 15.9 Sub-total 99 196.1 80.5 46 126.5 91.7 59 123.6 67.8 43 148.4 83.5 33 112.3 94.8 280 706.9 82.2 Other Sectors: Fisheries 1 2.0 0.8 - - - 1 2.0 1.1 9 15.0 8.5 2 2.3 1.9 13 21.3 2.5 Forestry 1 0.2 0.1 - - - - - - - - - - - - 1 0.2 Nil Mining 2 13.4 5.5 1 3.0 2.2 - - - 1 2.7 1.5 - - - 4 19.1 2.2 Utilities - - - - - - 2 39.2 21.5 - - - - - 2 39.2 4.6 Tourism 9 31.9 13.1 2 8.5 6.1 3 17.5 9.6 3 11.6 6.5 2 3.9 3.3 19 73.4 8.5 Sub-total 13 47.5 19.5 3 11.5 8.3 6 58.7 32.2 13 29.3 16.5 4 6.2 5.2 39 153.2 17.8 Total 112 243.6 100.0 49 138.0 100.0 65 182.3 100.0 56 177.7 100.0 37 118.5 100.0 319 860.1 100.0 IBRDF/OD October, 1970.  C O M IS I 0 N D E VAL OR ES - CO R PO RA C IO N F I NA NC I E RA NA CIONAL Analysis of Loan Approvals fr-m Inception through June 30, 1970 (Continued) (in S/ million) (6 months) Total Since (Calendar years) 1963/1966 1967 1968 1969 1970 1963 No. Amount % No. Amount % No. Amount % No. Amount % No. Amount % No. Amount % By Duration Up to 2 years - - 1 0.4 0.3 2 7.0 3.8 5 6.0 3.4 1 3.0 2.5 9 16.4 1.9 Ova2 2 up to 5 years 24 9.5 3.9 21 55.6 40.3 26 42.8 23.5 15 37.0 20.8 15 43.6 36.8 101 188.5 21.9 Over " 5 up to 10 years 81 185.9 76.3 25 77.0 55.8 37 132.5 72.7 36 134.7 75.8 21 71.9 60.7 200 602.0 70.0 Over 10 7 48.2 19.8 2 5.0 3.6 - - - - - - - - - 9 53.2 6.2 Total 112 243.6 100.0 49 138.0 100.0 65 182.3 100.0 56 177.7 100.0 37 118.5 100.0 319 860.1 100.0 By Location Sierra: Pichincha 55 85.1 34.9 16 26.6 19.3 24 41.4 22.7 21 48.3 27.2 16 31.2 26.3 132 232.6 27.0 Asuay 12 24.4 10.0 1 0.7 0.5 4 8.8 4.8 7 8.7 4.9 1 15.0 12.7 25 57.6 6.7 Other 7 7.0 2.9 2 10.4 7.5 2 5.2 2.9 1 30.0 16.9 3 11.0 9.3 15 63.6 7.4 Costa: Guayas 30 113.4 46.6 26 70.6 51.2 29 105.4 57.8 17 71.0 39.9 15 53.3 45.0 117 413.7 48.1 Manabi 5 10.6 4.3 4 29.7 21.5 4 5.9 3.2 10 19.7 11.1 - - - 23 65.9 7.7 Other 3 3.1 1.3 - - - 2 15.6 8.6 - - - 2 8.0 6.7 7 26.7 3-1 Total 112 243.6 100.0 49 138.0 100.0 65 182.3 100.0 56 177.7 100.0 37 118.5 100.0 319 860.1 100.0 By End Use Machinery and equipment n.a. 191.4 78.6 n.a. 81.0 58.7 n.a. 86.8 l47.6 n.a. 111.4 62.7 n.a. 81.0 68.4 n.a. 551.6 64.2 Buildings n.a. 45.5 18.7 n.a. 16.2 11.7 n.a. 42.0 23.0 n.a. 20.7 11.6 n.a. 15.1 12.7 n.a. 139.5 16.2 Other fixed assets n.a. - - n.a. 1.0 0.7 n.a. 1.4 0.8 n.a. 9.8 5.5 n.a. 0.9 0.8 n.a. 13.1 1.5 Working capital n.a. 6.7 2.7 n.a. 39.8 28.9 n.a. 52.1 28.6 n.a. 35.8 20.2 n.a. 21.5 18.1 n.a. 155.9 18.1 Total 112 243.6 100.0 49 138.0 100.0 65 182.3 100.0 56 177.7 100.0 37 118.5 100.0 319 860.1 100.0 IBRD/DFC October, 1970.  ANNEX 6 COKISION DE VAL0RES - CORPORECION FINANCIEHA NACIONAL Audited Balance Sheeta as of December 31, 1964-66 and June 30, 1967-70 (in S/ million) December 31 June 30 1b94 1965 l9fb 1Yo7 l56b 169 1Si0 ASSETS Cash and bank balances 22.5 19.8 5.8 17.1 13.5 7.0 13.2 Interest receivable 16.7 19.7 20.2 19.6 18.7 25.7 28.3 Financing of Governmentt Government bonds 300.6 324.0 364.3 350.4 261.6 214.9 176.2 Municipal bonds 58.9 59.2 57.2 32.6 58.1 61.1 63.4 Loans 176.2 167.2 76.9 9.2 88.5 70.1 71.8 Sub-total 535.7 550.4 498.4 392.2 4o8.2 346.1 311.4 Financing of Industry: Mortgage bonds and cedulas 5.7 13.9 25.6 17.0 3.6 2.9 4.2 Medium & long-term loans 7.0 35.1 127.1 187.8 291.7 398.0 474.1 Small industry loans - 4.7 3.1 6.1 15.7 17.4 14.4 Equity investments - - 4.5 5.3 7.0 114.5 31.9 Sub-total 12.7 53.7 160.3 216.2 318.0 432.8 524.6 Provision for possible losses - - - - - - (3.2) Fixed assets (at cost) 2.8 3.4 6.3 6.6 7.1 7.6 8.8 Depreciation (2.5) (3.0) (3.5) (3.7) (4.3) (4.6) (5.0) Prepaid expenses and other assets 2.3 4.5 1.9 0.9 3.9 4.5 3.0 Total 590.2 648.5 689.4 648.9 765.1 819.1 881.1 LIABILITIES Accounts payable 0.8 1.4 3.7 3.5 7.5 7.6 16.8 Loans payable: Central Bank 134.4 143.5 93.8 80.5 143.6 115.1 105.0 AID 5.14 14.7 72.8 86.5 87.o 87.0 86.9 IDB - - - - u1.6 53.9 80.4 Swiss bank consortium - - _ - 3.1 5.8 5.1 Sub-total 139.8 158.2 166.6 167.0 2145.3 261.8 280.4 Deferred income 27.7 29.9 27.4 27.1 29.0 26.2 25.4 Paid.in capital 393.2 457.0 457.0 413.61/ 443.6 463.6 481.7 Reserve for contingencies - 2.o 2.0 21.7 39.7 59.9 76.8i/ Unappropriated surplus 28.7 - 32.7 16.0 - - - Net worth 421.9 459.0 491.7 451.3 483.3 523.5 558.5 Total 590.2 648.5 689.4 648.9 765.1 819.1 881.1 CONTINGENT LIABILITIES Guarantees - - - 7.4 6.7 5.3 7.4 Repurchase obligations: Government bonds n.a. 164.4 168.5 194.7 247.9 255.8 263.5 Municipal bonds - - - - - - 3.7 Mortgage cedulas n.a. 94.9 73.4 65.4 49.5 34.5 27.3 Total n.a. 259.3 241.9 267.5 304.1 295.6 301.9 l/ Based on Decree Law No. 1606 of November 1966, a contract was signed in June 1967 with the Ecuadorian Government for the settlement of loans and other accounts payable to CFN. The settlement had the effect of reducing the balance of loans and other accounts receivable frcm the Government by S/ 56.4 million and paid-in capital by the same amount. 2/ Foreign exchange obligations (principally loans and interest) are stated at S/ 18.18 per US dollar. Because of the devaluation of the sucre from S/18 to S/25 per US dollar effective August 16, 1970, ondistributed earnings are overstated by s/68.5 million and certain loans payable are understated by an equal amount. IBRD/DFC October 1970   COMISION DE VAIfORES - CORPORACION FINANCIERA NACIONAL Audited Statements of Income and Expenses for Calendar Years 1964-66, Six Months Ended June 30, 1967, and Fiscal Years ended June 30, 1968-70 (in SI million) 1967 (Fiscal years) 1964 1965 1966 (6 months) FY 1968 FY 1969 FY 1970 INCOME Interest 35.8 42.0 41.5 20.8 44.0 55.8 61.4 Amortization of bond discount 2.1 3.3 3.3 1.5 3.0 4.1 3.9 Other 0.1 0.3 0.5 0.1 0.6 0.8 1.6 Total 38.0 45.6 45.2 22.4 47.6 60.7 66.9 EXPENSES Interest and commissions 4.8 3.5 5.2 2.6 4.3 8.3 10.4 Administrative and general 4.5 4.6 6.8 3.5 10.7 11.8 16.1 Depreciation - 0.5 0.5 0.3 o.6 0.4 0.7 Total 9.3 8.6 12.5 6.4 15.6 20.5 27.2 Operating income 28.7 37.0 32.7 16.0 32.0 40.2 39.7 Provision for possible losses - - - - - - 3.2 Write-off of promotional expenses - - - - - 1.5 Net income 28.7 37.0 32.7 16.0 32.0 40.2 35.0 APPROPRIATIONS Capitalization - 63.7 - 13.0 30.0 20.0 18.1 Reserve for contingencies - 2.0 - 19.7 18.0 20.2 16.9 Unappropriated: surplus period 28.7 (28.7) 32.7 (16.7) (16.0) - - 28.7 37.0 32.7 16.0 32.0 40.2 35.0 IBRD/DFC October 1970  COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL Projected perations 1971 - 1975, Compared with 1970 in S million (Fiscal years) 1970 1971 1972 1973 1974 1975 APPROVALS (actual) Industrial loans 238 236 300 343 384 424 Equity investments 17 20 20 20 20 20 Total 255 256 320 363 404 hhh COMMITMENTS Industrial loans 156 212 270 309 346 382 E-uity investments 17 20 20 20 20 20 Total 173 232 290 329 366 402 DISBURSEMENTS Industrial loans 123 231 262 276 298 329 Equity investments 17 20 20 20 20 20 Total 140 251 282 296 318 349 OTHER OPERATIONS Industrial: Mortgage bonds & cedulas (net) 1 (1) (1) (1) (1) - Small industry - discounts (net) (3) 7 1 1 1 1 Government: Bonds (net) (36) (22) (29) (19) (19) (19) Loans (net) 2 (15') (1) (1) (1) (1) Total (36) (31) (30) (20) (20) (20) Contingent liabilities 302 300 300 300 300 300 IBRD/DFC October 1970 I CZ)  ANNEX 9 COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL Projected Balance Sheets 1971-1975, Compared with 1970 (in S/ million) (Fiscal years) 1970 1971 1972 1973 1974 1975 (actual) ASSETS Cash & accounts receivable 41 49 86 64 76 90 Portfolio: Securities 244 221 191 171 151 131 Loans to Government 72 57 56 55 54 53 Med. & long-term loans to industry 474 648 837 1,016 1,191 1,373 Small industry loans 14 21 22 23 24 25 Equity investments 32 52 72 92 112 132 Sub-total 836 999 1,178 1,357 1,532 1,714 Provision for possible losses (3) (6) (11) (16) (21) (26) Fixed assets 9 9 9 9 9 9 Depreciation (5) (6) (7) (8) (9) (9) Deferred assets 3 5 5 5 5 5 Total 881 1,050 1,426 L11 1,592 1,783 LIABILITIES Accounts payable 17 19 20 22 25 27 Borrowing: Central Bank 105 71 56 8 54 53 AID 87 87 87 87 85 81 IDB 80 136 185 226 231 206 KfW 3 33 53 55 55 53 European banks 5 23 32 26 20 14 IBRD - fisheries Nil 17 49 94 94 91 IBRD - industry _ 10 58 100 97 90 To be arranged - - - - 54 208 Bonds - 30 55 75 90 100 Deferred income 25 231 20 16 14 10 Unrealized foreign exchange loss - 65-J 60 55 49 43 Paid-in capital 482 500 500 500 500 500 Surplus 77 36 85 147 224 307 Net worth 559 536 585 647 724 807 Total 881 1,050 1,260 1,Lvl 1,592 1,758 Contingent liabilities 302 300 300 300 300 300 Unrealized loss of S/ 72.3 million resulting from devaluation of the sucre on August 16, 1970, net of estimated actual loss of SI 3.8 million. IBRD/DFC October 1970  ANNEX 10 COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL Projected Sources and Applications of Funds 1971-1975 (in SI million) (Fiscal years) 1971 1972 1973 1974 1975 SOURCES Internal cash generation 47 50 63 78 83 Loans to Government (net) 15 1 1 1 1 Security operations (net) 23 30 20 20 20 Borrowing from Central Bank 120 105 57 103 102 Long-term borrowing IDB 61 59 57 27 KfW 30 20 2 - - European banks 19 11 - - - IBRD - fisheries loan 17 32 45 - IBRD - industry loans 10 48 43 - Other - to be arranged - - - 54 154 Bond flotations 30 30 30 30 30 Collections on: Medium & long-term loans 57 73 97 123 147 Small industry loans 13 14 15 16 17 Increase in provision for losses 3 5 5 5 5 445 478 435 457 559 APPLICATIONS Increase in working capital 6 36 (24) 9 12 Long-term investments: Medium & long-term loans 231 262 276 298 329 Small industry loans 20 15 16 17 18 Equity investments 20 20 20 20 20 Debt repayments: Central Bank 154 120 105 57 103 AID - - - 2 4 IDB 5 10 16 22 25 KfW - - - - 2 European banks 1 2 6 6 6 IBRD - fisheries loan - - - - 3 IBRD - industry loan - - 1 3 7 Bond amortization - 5 10 15 20 Foreign exchange losses 4 5 5 6 6 Increase in deferred assets 2 - - - Decrease in deferred income 2 3 4 2 4 445 478 435 457 559 IBRD/DFC October 1970  ANNEX 11 COMISION DE VAIORES - CORPORACION FINANCIERRA NACIONAL Projected Statements of Income and Expenses 1971-1975, Compared with 1970 (in S/ nilion) (Fiscal years) 1970 1971 1972 1973 1974 1975 (actuNal) - INCOME From loans 46 66 84 105 130 150 From securities 19 20 17 15 13 12 From equity investments 1 1 4 6 8 10 Other 1 1 1 2 2 2 Total 67 88 1o6 128 153 174 EXPENSES Interest and commissions 10 19 28 35 44 57 Administrative and general 16 19 23 25 26 29 Depreciation 1 1 1 1 1 - -W7- -3w- 77 - -7r Provision for possible losses 3 3 5 5 5 5 Write-off of promotional expenses 2 Net income 35 46 49 62 77 83 APPROPRIATIONS Capitalization 18 18 - - - - Reserve for contingencies 17 28 49 62 77 83 w _ _w IBRD/DFC October 1970   ANNEX 12 Page 1 ECUATORIANA DE DESARROLLO, S.A. (COMPARIA FINANCIERA) List of Major Shareholders (June 30, 1970) Number of Shares X of (Sucres 100 par value) Total I. Private Ecuadorian Shareholders 1. Fabrica Textil La Internacional S.A. 25,559 4.20 2. Banco del Pichincha 22,908 3.76 3. Valpo Investment Company 7,693 1.26 L. Banco La Filantr6pica 6,511 1.07 5. Fernando Lebed 6,206 1.02 6. Inmobiliaria Goncho's, Cia Ltda. 5,800 0.95 7. Banco de Guayaquil 5,734 0.94 8. Laboratorios Life 5,734 0.94 9. CompaMia Ecuatoriano-Suiza de Seguros 5,731 0.94 10. Juan Jos6 Vilaseca 5,414 0.89 11. Ecuatoriana de Aviaci6n S.A. 5,404 0.89 12. Banco de Descuento 5,087 0.84 13. Banco Popular del Ecuador 4,549 0.75 1)4. Durex S.A. 4,252 0.70 15. Charles Conroy 4,152 0.68 16. Esteban Quirola Figueroa 3,913 o.6h 17. Guillermo Vasquez 3,861 0.63 18. Ecuadorian Rubber Company 3,419 0.56 19. Cia Azucarera Valdez S.A. 3,399 0.56 20. Molinos del Ecuador C.A. 3,357 0.55 21. Jose Ant6n Diaz 3,064 0.50 22. Camara de Industriales de Pichincha 2,941 0.48 23. Leopoldo Arteta 2,816 0.h6 24. Banco del Azuay 2,800 0.46 25. C.A. El Comercio 2,782 0.46 20. Morizaenz S.A.C. 2,550 0.42 27. Ecuatoriana de Artefactos S.A. ECASA 2,504 0.41 28. Banco de Machala 2,293 0.38 29. Fosforera Ecuatoriana S.A. 2,293 0.38 30. Industrias Ales C.A. 2,293 0.38 31. Sociedad Agricola e Industrial San Carlos 2,265 0.37 32. CompaRia de Cervezas Nacionales 2,263 0.37 33. Corporaci6n Pesquera Ecuatoriana, COPESA 2,249 0.37 34. C.A. El Universo 2,249 0.3b 35. Francisco Amador Ycaza 2,209 0.36 36. Textiles San Antonio S.A. 2,038 0.34 37. Fabrica de Cigarrillos El Progreso S.A. 2,000 0.33 38. Clan Radio y Televisi6n Cia Ltda. 2,000 0.33 39. Farmacias y Boticas Ecuatorianas C.A. 1,688 0.28 )i0. Soc. Financiera y Comercial del Pacifico 1,395 0.23 hi. Luis Vallejo Araujo 1,386 0.23 42. Litografia e Imprenta La Reforma 1,378 0.23 413. Compa;.Ia Ecuatoriana de Balsa 1,360 0.22 W-t. Cr6ditos Mercantiles C.A. 1,146 0.19  ANNEX 1 Number of Shares % of (Sucres 100 par value) Total h5. Juan H. KrUger S.A. 1,1h6 0.19 46. Oleica S.A. 1,1h6 0.19 47. Jaboneria Asociada S.A. 1,146 0.19 4i8. Cultivo y Extracci6n de, Oleaginosas S.A. 1,1h6 0.19 49. C. Vitral Ltda. 1,145 0.19 5Q. Grace y Cia. 1,133 0.19 51. Industrial Jabonera Ecuatoriana S.A. 1,123 0.18 52. Sociedad General 1,122 0.18 53. Botica y Laboratorios H.G. 1,117 0.18 54. Sintofil S.A. 1,l15 0.18 55. Agustin Febres Cordero Tyler 1,081 0.18 56. Cemento Nacional C.A. 1,038 0.17 57. Francisco Piana Ratto 1,038 0.17 58. Cia An6nima Balda Industrial M rcantil 1,019 0.17 59. Constructora Nacional de Carreteras S.A. 1,003 0.16 60. Ind. Ecuatoriana de Elaborados de Cacao C.A. 1,003 0.16 106 Shareholders with holdings of 1,000 shares or less 29,673 4.87 Sub-total 237,839 39.05 II. Governmental Ecuadorian Shareholder 1. Comisi6n de Valores - Corporaci6n Financiera Nacional 51,676 8.49 III. Foreign-Owned Ecuadorian Shareholders 1. Monolitica S.A. 12,626 2.07 2. Banco de Londres y Mbntreal Ltdo. (Quito) 6,793 1.12 3. First National City Bank (Quito) 5,582 0.92 4. Bank of America (Guayaquil) 5,4h7 0.89 Sub -total 30,I.48 5.00 IV. Foreign Shareholders 1. Adela Investment Company 74,332 12.21 2. International Finance Corporation 55,000 9.03 3. Continental International Finance Corp. 43,588 7.16 4. The Fidelity International Corp. 25,043 4.11 5. Wells Fargo Bank 24,362 4.00 6. Banco Cafetero (Colombia) 21,763 3.57 7. Bankhaus Hermann Lampe 19,881 3.26 8. New York Hanseatic Corporation 10,175 1.67 9. Corporaci6n Financiera Nacional (Colombia) 9,206 1.51 10. American Swiss Credit Corp. 4,400 0.72 4 Shareholders with holdings of less than 1,000 shares 1,334 0.22 Sub-.total 289,084 47.46 GRAND TOTAL 609,0h7 100.00 IBPRD/DFC October 1970  ANNEX 13 Page 1 ECUATORIANA DE DESARROLLO, S.A. (COIeAfIA FI1iANCIERA) Board of Directors (June 30, 1970) Principal Directors1/ Alternate Directors 1. Dr. Josg Antonio Correa3/ Mr. Cesar Durgn Ballen3/ (President) (Executive Vice President) Mr. Marcel J. Laniado de Wind Manager, Banco de Machala, Machala 2. Mr. Guillermo Arango Dr. Jose Camacho Consultant, International Finance Legal Department, International Corporation (Washington, D.C.) Finance Corporation (Washington, D.C.) 3. Dr. Luis Ayora Econ. Eduardo Andrade Ch. General Manager Assistant Manager Comisi6n de Valores - Corporacion Comisi6n de Vlalores - Corporaci6n Financiera Nacional (Quito) Financiera Nacional (Quito) L. Lic. Guillermo Borja3/ Lic. Lenello Bertini Director, Banco del Pichincha Industrialist (Quito) (Quito) Mr. Isidro de Ycaza Plaza Businessman (Guayaquil) 5. Dr. Alberto Di Capua-3/ Ing. Galo Villamar General Manager, Laboratorios General M4anager, Farmacias y Boticas Life (Quito) Ecuatorianas S.A. (Quito) 6. Mr. Rafael Dillon Valdez3/ Mr. Rafael Dillon Balda Manager, AYASA ((Tuayaquil) Mr. Joseph TerraTas Manager, Bank of America (Guayaqui ) 7. Mr. Eugene Gonzdlez Executive Vice President, ADELA (Lima) 8. Mr. Christoph von Malaisg Mr. Kurt Steffen Director, Bankhaus Germann Lampe General Manager, PERUINVEST (Bielefeld, Germany) (Lima, Peru) Mr. Paul E. Hollos President, American Swiss Credit C. Ltd. (New York) 1/ Elected by shareholders. 7/ Appointed by Principal Directors. 3/ Executive Comittee members.  ANNEX 13 Page 2 Principal Directors Alternate Directors 9. Dr. Ernesto Ribadeneiral/ Mr. Jaime Zaldumbide General Manager, La Internacional Vice President, La Internacional S.A. (Quito) S.A. (Quito) - Dr. Teodoro Ar{zaga Vega Lawyer (Guayaquil) 10. Mr. Enrique Salasi/ Mr. Leopoldo Arteta Rivera General Manager, Cia. Ecuatoriano- Manager, Fabrica de Cigarrillos Suiza de Seguros S.A. (Guayaquil) El Progreso (Quito) Mr. Jaime Guarderas Alomia Manager, CTa. Ecuatoriano-Suiza de Seguros S.A. (Quito) 11. Mr. Eduardo Sosa Mr. Patricio Alvarez Drouet President, Cerveceria y Malterfa Manager, Industrias Ales La Victoria (Quito) (Guito) Mr. Jaime Robalino Manager, Industria Maderera Robalino (Quito) 12. Mr. Gerrit E. Venema Mr. William J. Anthony Vice President and Manager, Vice President, The Fidelity Bank Wells Fargo Bank (San Francisco) (Philadelphia) Mr. Gonzalo Ayora Businessman, (Quito) 13. Mr. Juan Josg Vilaseca.l/ Mr. Capitan Cgsar Monge President, Industrial FADESA, Presidents Compafiia de Cervezas IJESA (Guayaquil) Nacionales (Guayaquil) Mr. Mario Ribadeneira Manager, Morisaenz S.A.C. (Quito) 1h. Mr. Joseph W. Welsh Dr. Eduardo Larrea Stacey Vice Chairman of the Board, Conti- President, Bolsa de Valores de Quito nental Bank International (New (Quito) York) - subsidiary totally owned by Continental Illinois National Mr. Sergio Pgrez Bank and Trust Co. of Chicago President, Cremer, Sergio Perez Ltd. (Guayaquil) 15. Mr. Clemente Yerovi Indaburu Mr. Gabriel Roldos Garc4s Former President of Ecuador Manager, Laboratorios Pavil S.A. President, Sociedad Financiera y (Guayaquil) Comercial del Pacdfico (Guayaquil) Mr. Erich 0. Grunebaum Chairman of the Board, New York Hanseatic Corporation (New York) 1/ Executive Committee members. IBRD/DFC October 1970  ANNEX 14 ECUATORIANA DE'DESARROLLO S.A. (COMPANIA hNANCIERA) ORGANIZATION CHART (JUNE 30,1970) SHAREHOLDERS MEETING INDEPENDENT AUDITORS LEGAL AUDITORS (COMISARIOS) Deloitte, Plender, Ney Greno.. Heskings & Sells Luis Endara AUDITOR EXECUTIVE COMMITTEE Jorge Pizoro PRESIDENT LEGAL COUNSEL* JOSE ANTONIO CORREA Juli Corral B. (Quito) Secretaries 2 Rene Garcio Ll.gu.o(Guay.quil) EXECUTIVE VICE-PRESIDENT CESAR DURAN BALLEN Secretaries 2 QUITO OFFICE GUAYACUIL OFFICE ADMINISTRATIVE DEPT. TECHNICAL DEPARTMENT CENTRAL ACCOUNTING ADMINISTRATIVE DEPT. TECHICAL DEPARTMENT OFFICE (Quito) Assistent M-noger- Secretery MANAGER Assitat Manager MANaGER RAUL PAEZ CALLE CARLOS LARREA HOLGUIN Accountant I ALBERTO VILLEGAS MIGUEL BABRA LYON Cosh i or I Agricultyrs l Bookkeepers 2 Assistont M-coger Files & Pesonnel I Engineer I House Kee-pig I Portfolio & Investment Ceshier I FERNANDO GONZALEZ Secretories 2 Control I StEtistics I Assistants 4 Assistonts 2 Secretaries 2 Snoretery I Secretery INDUSTRIAL OPERATIONS Arolyst I Secretory * Outside counselors, 0n a retainer basis.ARCLUL O~tid ti- .s. AGRICULTURAL OPERATIONS A-olyst I Secretory LIVESTOCK OPERATIO NS Anolyst Secretory IBRD /DFC Orroobm 1970 IBRD-5351 (R)   ANNEX 15 Page 1 ECUATORIANA DE DESARROLLO, S.A. COMPANIA FINANCIERA Declaration of Policy and Operating Procedures (Approved by tnie Board of Directors on November 27, 1966) The Board of Directors of COFIEC declares that the following guide- lines on policies and procedures will govern its operations and that modi- fications thereof or departures therefrom will only be adopted by the Board after adequate opportunity has been given to all its members to review and discuss the proposed changes or departures. 1. COFIEC is a development finance company designed to assist in the economic developraent of Ecuador, in particular the industrial sector of the economy a.d such related fields as agriculture and cattle raisin,. To this e-id, it will pursue an agressive policy to promote, finance and otherwise ass-Ist productive enterprises. 2. COFIEC will make its investment decisions only on the basis of sound ilvestment criteria and standards. 3. Subject to the criteria set forth in paragraphs 2 and 9 hereof, COFIEC will select projects on as broad a geographical basis as possible. 4. COFIEC will, as appropriate, make use of the entire range of forms oiL investment. It will give particular attention to its client's needs for equity financing and will provide such equity to the extent consistent with sound financial practice. 5. COFIEC's principal objective is the supply of medium- and long- term Ilna.icin6. Accordingly, COFIEC will increase progressively and as rapidly as its circumstances permit, the proportion of its resources which are devoted to such financing. 6. COFIEC will diversify its financing (except for temporary invest- ment of liquid funds in short-term securities) among different types of industries and different types of financing. a) COFIEC w_ll not normally commit to any single enterprise in whatever forrn, including loans, share capital, guarantees, or any combination thereof, an amount greater than 20% of COFIEC's paid-in share capital, free reserves and unappropriated surplus. b) COFIEC will not commit to any single enterprise in the form o equity more than 15% of GOFIEC's paLd-in share capital, free reserves and unappropriated surplus. c) The aggregate of COFIEC's equity investment will not exceed the sum of its paid-in share capital, free reserves and unappropriated surplus.  ANNEX 15 Pagye 2 Exceotions to rules a) and b) may be made only after special consideration of each case by the Board, and will be confined to enterprises with par- t.cular'Ly sound financial prospects. COFIEC will refrain from takin, a controlling interest in an enterprise or any other interest which would give it primary responsibility for mana ement of an enterprise, except that in the case of jeopardy the Board o, Directors may take such actions as may be necessary to protect COFIEC's interests. COFIEC will not normally take up more than 25% of the votin, shares oI any single enterprise, except as may be temporarily neces- sary in connection with an underwriting commitment undertaken in the ex- pectation that the ultimate investment will be within the limit cited. a. COFIEC will conduct its operations in such manner as to assist in the frowtn of a capital rnarket in Ecuador and, to imnprove facilities for marketing securities, will seek opportunities to underwrite securities, and will revolve its own portfolio whenever it can do so on satisfactory terms. In selling its investments, it will pay due regard not only to its own interests but also to those of the other participants in the invest- mnert and to the interest of the enterprise whose shares are involved. COFIEC will finance only private enterprises which are soundly managed and which appear, on careful economic, financial and engineering invest --ation, to be economically viable and technically feasible. 10. COFIEC will not ordinarily make loan commitments to any one client .or an amount less than the Sucre equivalent of US$20,000 for existing enterprises and US4O,000 Lor new enterprises. 11. COFIEC will not make loans to enterprises which are in arrears it, their tax payments or on paymen,ts of their social security contributions. 12. COFIEC will build up a technically competent staff, capable of carrying out the responsibilities which COFIEC's objectives imply (in- cluding staff skilled in engineering, financial and economic analysis) and able to provide services to clients which those objectives call for. COFIEC will develop arnd maintain adequate systems of project appraisal and fol- low-up and end-use supervision of its investments. Specific and periodic reports prepared in exercise of this control function will constitute the basis for periodic reviews of the investment portfolios by its Board of Directors. 13. COFIEC's operating expenses will be maintained at a minimum con- sistent with the scope of its activities and with the volume of its operations. lb. In accordance with normal business practice, COFIEC will require its borrowers to provide and to maintain adequate security, to keep records a d accounts in accordance with sound accountIng practices and to furnish w. atever inL'ormnation on their operations and accounts COFIEC deems desirable. COFIEC will take the rLght to inspect the enterprises it finances as well as tnleir operations and accounts. Business secrets and other iniormation supplied by appl icants or clients will be treated as confident-ial.  ANNEX 15 Page 3 15. COFIEC will conduct its operations in such a manner as to main- tain the value of its capital and secure a satisfactory profit. It will build reserves consistent with sound financial practice; these will in- clude reserves for bad debts and investment and, in addition, supplementary reserves. Its divide.nd policy will be consistent with the foregoing. 1!". COFIEC wl1l not carry the foreign exchan-e risk on external bor- rowin-s, which it must repay in foreign exchange. It will pass the risk on to its clients or find other suitable means to cover it. 1. COFIEC will not incur, assume or guarantee any debt maturin8 more than one year from the date on which it is originally drawn down or assumed ir, aiter incurring or assuming such debt, the total awount of it then in- curred and outstandin exceeds an amount equal to 4 times the aggregate of COFIEC's paid-in capital, free reserves and unappropriated surplus. 1i. The maturities of COFIEC's assets will correspond with, or be shorter than, the maturities of its liabilities. 19i. The Board of Directors of COFIEC will direct the operations of COFIEC in such a way as to assure uniformity in the application of the policies and guidelines set forth herein. In order to assure the imple- mnentation of this policy by the Executive Committee, the Board will, at each meeting, review the decisions of the Executive Committee in the interim. 20. COFIEC will have its books and accounts audited annually by a firm of reputable independeAt public accountants. IBRD/DFC October 1910   ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA) Summary of Operations from Inception through June 30, 1970 (in S/ thousand) Six Months to (Calendar years) 1966 1967 1968 1969 June 30, 1970 No. Amount No. Amount No. Amount No. Amount No. Amount 1. Applications received:/ 84 112,786.0 178 218,569.4 266 311,229.4 403 522,817.4 195 301,722.4 2. Applications rejectea/ 23 16,112.0 36 15,850.0 34 52,945.0 87 101,537.8 43 88,243.0 3. Applications pendingl/ 2 1,350.0 3 5,000.0 - - - - - 4. Applications approvedL/ 59 95,324.0 139 197,719.4 232 258,284.4 316 421,279.6 152 213,479.4 5. Loan applications approved 39 51,000.3 87 76,437.1 202 218,636.8 140 133,768.9 38 21,182.0 6. Loans contracted 36 40,084.1 79 79,389.3 182 196,613.4 128 100,816.3 41 30,557.7 7. Loans disbursed 37 36,140.0 92 83,323.6 165 191,926.6 172 122,068.8 50 33,012.2 8. Loans partially repaid 3 820.4 44 14,148.7 83 38,584.7 215 88,155.6 74 22,168.9 9. Loans totally repaid 4 8,300.0 23 12,706.1 65 47,159.0 152 81,146.5 63 30,238.0 10. Total repaid (8) + (9) 7 9,120.4 67 26,854.8 148 85,743.7 367 169,302.1 137 52,406.9 Exchange rate difference - - - - - 17,491.5 - (6,217.3) - Money advanced on aval operations - - - - - - - 22,676.3 - (14,725.1) Other loans - - - - - - - 28990.7 11. Loans outstanding at end of period, as in corresponding balance sheet 33 27,019.6 102 83,488.4 202 207,162.8 182 176,388.5 158 _1,259 1/ Including equity investments, acceptances, guarantees and financial agency contracts IBRD/DFC October 1970   ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA) Analysis of Lending Commitments from Irocption through June 30, 1970 (in S/ milijon) Six Months to Total to (Calendar years) 1966 1967 1968 1969 June 30, 1970 June 30. 1970 No. Amount t No. Amount % No. Amount 7 No. Amount % N..unt _ o Amount I. By Size Up to 250,000 4 o.6 1.5 18 3.6 4.5 25 3.6 1.8 50 7.2 7.1 18 2.2 7.2 115 17.2 3.8 250,001 - 500,000 13 4.8 12.0 23 9.9 12.4 59 24.9 12.7 25 9.5 9.4 7 2.8 9.1 127 5-.9 11.6 500,001 - 1,000,000 9 8.2 20.4 17 13.2 16.6 42 35.6 18.1 25 18.9 18.8 11 8.7 28.4 104 84.6 18.9 1,000,001 - 2,000,000 6 11.4 28.4 12 18.8 23.7 32 54.4 27.7 15 23.7 23.5 1 1.8 5.9 66 llo.1 24.6 2,000,001 - 3,000,000 3 9.1 22.7 5 14.7 18.6 18 51.7 26.3 7 18.3 18.2 3 8.5 27.8 36 102.3 22.9 3,000,001 - and above 1 6.o 15.0 4 19.2 24.2 6 26.4 13.4 6 23.2 23.0 1 6.6 21.6 18 81.4 18.2 Total 3 40 1 100 0 79 79.4 100 0 182 196.6 loo0. 128 100.8 100.0 41 30.6 100.0 466 47.5 loo0. II. By Economic Activity Manufacturing Sector Food products and beverages 14 14.4 36.0 22 22.8 28.7 29 22.4 11.4 18 16.5 16.4 3 2.9 9.5 86 79.0 17.7 Textiles and clothing 4 5.7 14.1 5 2.7 3.4 15 14.0 7.1 8 8.4 8.3 3 2.2 7.2 35 33.0 7.4 Paper and printing 1 0.4 1.0 3 0.7 0.9 4 3.6 1.9 4 1.6 1.6 2 0.4 1.3 14 6.7 1.5 Chemicals inc. pharmaceuticals 5 7.4 18.4 7 9.2 11.6 26 32.1 16.3 17 11.8 11.7 4 0.9 2.9 59 61.4 13.7 Metals and engineering 5 6.o 15.1 9 4.8 6.1 28 20.1 10.2 26 13.8 13.7 13 4.5 15.7 81 49.2 11.0 Other 1 1 0 2.5 7 13.0 16.3 16 29.9 15.2 16 18.1 17.9 5 7.0 22.9 45 69.0 15.4 Sub-Total 30 34.9 87.1 53 53.2 67.0 118 122.1 62.1 89 70-2 69.6 30 17.9 58 < 320 298.3 66.7 Other Sectors Agriculture and livestock 2 1.7 4.3 6 5.3 6.7 34 35.6 18.1 22 12.5 12.4 2 0.5 1.6 66 55.6 12.4 Tourism 1 0.3 0.7 - - - 1 2.0 1.0 2 6.o 6.o 1 3.0 9.8 5 11.3 2.5 Other (transp., construction, etc.) 3 3.2 7.9 20 20.9 26.3 29 36.9 18.8 15 12.1 12.0 8 9.2 30.1 _5 82.3 18.4 Sub-Total 6 5.2 12.9 26 26.2 33.0 64 74.5 37.9 39 30.6 30.4 11 12.7 41.5 146 149.2 33.3 Total 36 40.1 100.0 79 79.4 100.0 182 196.6 100.0 128 100.8 100.0 41 30.6 100.0 466 447.5 100.0 III. By Duration Up to 1 year 21 21.4 53.5 44 26.9 33.8 116 105.7 53.8 94 61.1 60.6 22 11.7 38.2 297 226.8 50.7 1 year up to 2 years 7 8.8 22.0 7 7.4 9.3 21 22.6 11.5 6 1.6 1.6 12 4.0 13.1 53 44.4 9.9 2 years up to 5 years 8 9.9 24.5 22 27.1 34.2 33 42.9 21.8 23 31.0 30.8 5 7.3 23.9 91 118.2 26.4 above 5 years . _ 6 18.0 22.7 12 25.4 12.9 5 7.1 7.0 2 7.6 24.8 25 58.1 13.0 Total 36 40.1 loo.0 79 79.4 o1.0 182 196.6 100.0 128 100.8 loo.0 41 30.6 100.0 466 447.5 loo.0 IV. by Location Ouayas 17 23.6 59.0 39 40.6 51.2 96 123.8 63.0 58 50.2 49.8 1l 1i.3 46.7 221 252.5 56.4 Pichincha 17 15.1 35.1 30 27.7 34.9 64 47.2 24.0 55 42.7 42.3 27 13.9 45.4 193 145.6 32.5 Azuay - 7 9.0 11.4 5 7.o 3.6 3 1.9 1.9 1 1.8 5.9 16 19.7 4.4 Los Rios - _ - - - - 7 7.8 3.9 3 1.9 1.9 - - - 10 9.7 2.2 Ianabi 2 2.4 5.9 2 1.1 1.3 4 5.5 2.8 6 3.7 3.7 2 o.6 2.0 16 13.3 3.0 El Oro - - 1 1.0 1.2 6 5 3 2.7 3 o.4 0.4 - - - 10 6.7 1.5 Total 36 40.1 100.0 79 79.4 100.0 182 196.6 loo0. 128 100.8 lo0.0 41 30.6 100.0 466 447.5 100.0 V. By Type of ProJect New projects 5 1.6 4.0 7 12.3 15.5 8 16.8 8.5 5 11.4 11.3 2 9.6 31.4 27 51.7 11.6 Expansion and modernization 31 38.5 96.0 72 67.1 84.5 175 179.8 91.5 123 89.4 88. 39 21.0 68.6 43.9 395.8 s-4 Total 36 40.1 loo.0 79 79.4 loo.o 182 196.6 loo.o 128 100.8 100.0 41 30.6 loo.0 466 L 100.0 VI. End Use Fixed assets 11 8.0 19.9 35 46.7 58.9 78 105.2 53.5 47 58.2 57.7 10 15.6 45.7 181 232.7 52.0 Working capital 25 32.1 80.1 44 32.7 41.1 104 91.4 46.5 81 42.6 42.3 31 16.0 52 3 285 215 8 48.0 Total 36 40.1 10o.o 79 79.4 100.0 182 196.6 100.0 128 100.8 100.0 62 30.6 1Lo. 0 466 447.5 1o0.0 IBRD/OFC October 1970  ECUATORIANA DE DESPRROLLO S.A. (COMPA1IT FINANCTERP) List of Equity Investments as of June 30, 1970 Cost of Shares Held % June 30, 1970 Name of Company Ownership S/ 000's Remarks Ecuatoriana de Artefactos S.A. 20.0 5,839 Manufacturer of regrigerators and household appliances; pays dividends Desarrollo Agropecuaria S.A. 7.4 2,261 1/ Has been recapitalized and management changed Fabrica Textil La Internacional S.A. 1.8 1,783 Ecuador's largest industrial concern; long dividend record Almacenera del Ecuador, S.A. 20.7 1,700 COFIEC promotion; operates bonded warehouses; good prospects CerAmica Modelo C.A. 7.8 1,200 2/ Prospects improved when management assumed by experi- enced Venezuelan ceramic dinnerware manufacturer Sociedad Agricola e Industrial San Carlos S.A. 0.7 1,003 Sugar mill; long dividend record Hotel Col6n Internacional 1.9 603 Profitable venture, presently being expanded Sociedad Ecuatoriana de Carb6n S.A. 5.0 4oo COFIEC promotion in difficulty; COFIEC has taken over management; prospects uncertain Propiedades al Mar 25.0 188 Tourism complex under construction in Guayaquil area Creditos Mercantiles S.A. 0.7 70 Financing agricultural and industrial machinery; good prospects Bolsa de Valores de Ouito 2.0 53 Newly established stock exchange in Ouito Bolsa de Valores de Guayaquil 2.0 12 Newly established stock exchange in Guayaquil 15,112 H 1/ Written down for loss of S/ 1,114,000 2,/ Written down for loss of S/ 420,000  ANNEX l4 ECUATORIANA DE DeARoLLO S.A. (COMPANIA FINMERA) Audited Balance Sheets as of Decenb r 31, 1966 - 69 and Jioe 30, 1970 (unaudited) (in S/ thousand) Dec.3 1966 Dec. 31 1967 Dec. 31 1968 Dec. 31 1969 June 30 1970 C-41 d (aattd) (auted (audited) ud uVited ASS LTS Cash and bark deposits 1,918 9,480 8,387 23,492 15,865 Mortgage bonds 1,724 - 1,480 - 4,284 Interest and other receivables 212 1,940 5,868 5,883 6,495 Letters of credit - 18,421 16,743 34,197 53,137 Sub-total 3,854 29,841 32,478 63,572 79,781 Portfolio Loans - due within 12 months 12,267 34,750 128,935 101,951 97,261 - due after 12 months 1-4,752 48.738 78,228 74,438 73,999 Sub-total 27,019 83,488 207,163 176,389 171,260 14uity investments 1.153 2,895 6.325 l8651 15,112 Total portfolio 28,172 86,383 213,488 185,040 186,372 (less) Reserve for losses - (1.o0O) (1,721) (3.200) (s.50 28,172 85,383 211,767 181,840 182,422 Fixed assets (net) 442 1,786 6,315 7,695 7,947 Deferred assets (net) 1,370 1.540 1,587 1,894 2.872 Total 33.838 118.550 252.147 255.001 273,022 LIABIII I ES Letters of credit 448 18,421 16,743 34,197 44,567 Notes payable to foreign banks 8,015 15,292 75,647 28,257 12,916 Notes receivable discounted 516 2,6531 13,6372, 2,5793 3.9294/ Dividentds payable - 1,4 9,5167/, 3,204- Other-sdort.term liabilities - 2 7,205_ 18,321- 31,689 Deferred earnings 2,674 3,691 14,510 10,940 10,213 Medium and long-term debt AID loan 2,553 40,788 62,818 60,297 64,345 ZKIMBANK loan - - - 17,994 23,654 IBRD livestock loans - - 9,437 12,022 11.867 Sub-total 2,553 40,788 72,255 90,313 99,806 Paid-in share capital 19,616 36,000 45,000 57,099 60,905 Legal reserve 16 315 1,079 2,149 2857g/ Surplus - 5 1.166 1,630 2,936- Net worth 19,632 36.320 47.245 60L078 66,698- Total 33,833 118,550 252,147 255,001 273,028/ Acceptances in sucres - 9,580 9,320 2,147 5,920 Juarantees in foreign exchange 11,418 33,241 4,159 172,866 280,198 1/ Appears as special reserve on COFIFC's balance sheet; was actually paid as a stock dividend in August 1969. 2/ Appears as a special reserve on COFIEC's balance sheet; includes S/1,099,000 frm 1967 and S/3,805,700 from 1968; the latter was paid in March 1970 in the form of a stock dividend. 3/ Appears as a special reserve on COFIEC's balance sheet; includes S/3,805,700 for 1968 and 8/5,710,000 for 1969; the latter dividend was paid in 1970, partly in cash, partly in stock at the shareholders' option. 4/ Includes unpaid balance of 1969 dividend (S/159,000) and estimated pro-rata. 1970 dividend of S/3,045,000. i/ Includes S/151,000 for directors' fees and 3/135,000 for management bonus which appear on COI15C's balance as part of the surplus, sine these amcunts, applicable to 1967, were authorized by Shareholders' Meeting in March 1968. 6/ Includes s/427,000 which appeara on COFIlC's balance sheet as part of the surplus and represents S/228,000 extra bonus to employees and a S/200,000 management bonus, applicable to 1968, but authorized by the Shareholders' Meeting in March 1969. 7/ Includes S/221,000 which appears on COFIEC's balance sheet as part of the surplus, and represents the difference between S/277,000 managemert bonus, applicable to 1969 but authorized by Shareholders' Meeting in March 1970, and between S/56,000 tax credit; the latter is the difference between S/447,000 provision for taxes and S/391,000 in taxes actually paid for 1969 in 1970. 8/ Adjusted for estimated employee profit sharing, management bonus, reserve for losses, legal reserve, dividends and provision for incomwe -ax. IBRD/DFC October 1970  AN=EX 20 ECUATORIANA DE DESAROLLO S.A. (COMPANIA FINANCIERA) Audited Statements of Income and Expenses for the Years EnSding December 31, 1966 - 69 and for the Six Months Ending June 30, 1970 (unaudited) (in S/ thousand) ( six month s) (Calendar years) 1966 1967 1968 1969 1970 (audited) (audited) (autd) (audited) (unaudited) INC UE Interest on loans 1,104 5,161 14,149 19,327 7,411 Fees and commsissiors 569 2,492 5,142 9,126 7,033 Gain on sales of securities (net) - 2 206 16 119 Dividends and interest on securities 236 150 222 165 143 Other 7 3 2 82 12 Total 1,916 7,808 19,721 26,716 14,718 ADhENISTRATIVE AND GENERAL EXPENSES Salaries, fees and fringe benefits 1/ 1,343 2,612 3,962 5,097 2,759 Compulsory profit-sharing for employees- 1 450 992 1,310 708 Bornuses paid to managementl/ - 125 200 277 250 Depreciation and amortization - 200 250 366 241 General, administrative and other 345 1,090 2,141 3,275 2,050 Sub-total 1,689 4,487 7,545 10,325 6,oo8 FINANCIAL EXPENSES Interest and commissions 207 847 5,724 9,277 2,591 Other 4 1 _ - Sub-total 211 918 5 724 9,277 2,591 Total operating expenses 1,900 5,405 13.269 19,602 8,99 Operating income 16 2,403 6,452 9,114 6,119 Provision for income taxes2/ - _ - 391 310 NET INCOME 16 2,403 6,452 8,723 5,809 APPROPRIATION OF NET INCOME Legal reserve 16 299 764 1,070 708 Reserve fQr losses on investment - 1,000 721 1,479 750 Dividends2/ - 1,099 3,806 5,710 3,045 Unappropriated surplus - 5 1,161 464 1,306 Total 16 2,403 6,452 8,723 5,809 1/ Adjusted each year to reflect appropriations made at the ensuing Shareholders' Meeting. / The canpany enjoyed full exemption from income taxes until January 1969. i/ Appropriations for dividends shown for 1967 and 1968 were made as a special reserve; payments, in the form of stock dividends, were made in August 1969 (for 1967) and in March 1970 (for 1968); all but Sh159 thousand of the 1969 dividend (in cash or stock at the shareholders' option) had been paid by June 30, 1970. IBRD/DFC Cctober 1970  ECUATORIANA DE DESAROLLO. S.A.'(COMPANIA FINANCIERA) Projected Operations 1970^75 Compared with 1969 (in S/ million) (Calendar years) 1969 1970 1971 1972 1973 1974 1975 (actual) APPROVALS Loans: Short-term ) 92.8 106.5 133.7 163.3 201.5 243.2 Medium and long-term ) 133.8 97.5 106.8 119.5 137.3 146.7 149.9 Equity investments 2.3 14.5 12.0 13.0 - - - Total approvals 136.1 204.8 225.3 266.2 300.6 348.2 393.1 CONMITMENTS Loans: Short-term ) 132.8 92.8 106.5 133.7 163.3 201.5 243.2 Medium and Long-term ) 94.6 106.5 118.8 136.4 146.3 149.7 Equity investments 2.3 14.5 12.0 13.0 - - _ 135.1 201.9 225.0 265.5 299.7 347.8 392.9 DISBURSEME N S Loans: Short-term ) 92.8 106.5 133.7 163.3 201.5 243.2 Medium and long-term 138.6 99.7 80.5 101.3 127.0 134.0 143.0 9tuity investments 2.3 14.5 12.0 13.0 - - - Total disbursements 140.9 207.0 199.0 248.o 290.3 335.5 386.2 Guar4ntees 175.0 291.6 193,2 123.1 70.0 32.7 9.6 IBRD/DFC October 1970  ANNEX 22 EMUATORIANA DE DESARR0LLO S.A. (COMPANIA FII&NCIERA) Pro,jected Balare Sheets 1970-75, Compared with 1969 (in S/ million) (Calendar years) 1969 1970 1971 1972 1973 1974 1975 (Actual) ASS TS Cash and bank deposits, inc. marketable securities 23.5 21.2 25.9 28.6 30.0 32.6 34.2 Interest and other receivables 5.9 6.o 9-