Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 9236

PROJECT COMPLETION REPORT

PERU

INDUSTRIAL CREDIT PROJECT(LOAN 1358-PE)

DECEMBER 28, 1990

Trade, Finance and Industry DivisionCountry Department IVLatin America and the Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency unit - Inti (I/.)*

Average Market Rates for Period

End of 1976 US$1 = 0.06 IntisEnd of 1977 US$1 - 0.08 IntisEnd of 1978 US$1 = 0.16 IntisEnd of 1979 US$1 = 0.22 IntisEnd of 1980 US$1 - 0.29 IntisEnd of 1981 US$1 = 0.42 IntisEnd of 1982 US$1 - 0.70 IntisEnd of 1983 US$1 = 1.63 Intis

ABBREVIATIONS AND ACRONYMS

BCR - Banco Central de Reserva del Peru (Central Bank)

BIP - Banco Industria del Peru (Industrial Bank of Peru)

COFIDE - Corporacion Financiera de Desarrollo (DevelopmentFinance Corporation)

CONADE - Corporacion Nacional de DesarrolloEPS - Social Property EnterpriLesICSA - Inversiones COFIDE S.A.IDB - Inter-American Development BankPCR - Project Completion ReportPDF - Project Development Fund

PPS - Public Sector Enterprises with Public Attributes

GOVERNMENT OF PERU FISCAL YEAR

January 1 - December 31

*Note: The new Government that took office in 1985 changed the currency

unit from the Sol (S/.) to the Inti (I/.). One Inti is equivalent

to 1,000 Soles.

FOR omaML USE ONLYTHE WORLD BANK

wasv ton. D.C. 20433U.S A

ONte nt O1feit.ciCGf ItOpe,a^uw ivaiMiNim

December 28, 1990

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on PeruIndustrial Credit Project (Loan 1358-PE)

Attached, for information, is a copy of a report entitled *ProjectCompletion Report on Peru - Industrial Credit Project (Loan 1358-PE)'prepared by the Latin America and the Caribbean Regional Office. No audit ofthis project has been made by the Operations Evaluation Department at thistime.

Attachment

IThis document hu a tnsted distribution and may be used by oe is onl inthe perlannauc|od theif offciii duties Its contents may not othenne be dbian witbout Worl Bm autb_nso

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

PERU

INDUSTRIAL CREDIT PROJECT(LOAN 1358-PE)

TABLE OF CONTENTS

Page No.

PREFACE ............................................................. iEVALUATION SUMMARY .................................................. iii

PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .... .......... 1

A. Project Identity . .................................... 1B. Background ........................................... IC. Project Objectives and Description ................... 2D. Project Design and Organization ................. 3E. Project Implementation ............................... 5F. Project Results ...................................... 6G. Project Sustainability ............................... 7H. Bank Performance ..................................... 7I. Borrower's Performance ............................... 9J. Project Relationship ................................. 11K. Project Documentation and Data ....................... 11

PART III. STATISTICAL INFORMATION ................................. 12

1. Related Bank Loans .................................... 122. Project Timetable ................ .. .................. 133. Loan Disbursements ................ .. ................. 144. Use of Bank Resources ................................ 15

ANNEXES

1. COFIDE: Subproject Profile ................................. 172. COFIDE: Subproject Description ............................. 193. COFIDE: Balance Sheets, 1975-1988 .......................... 224. COFIDE: Income Statements, 1976-1983 ....................... 245. COFIDE: Financial Ratios, 1977-1983 ........................ 25

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROJECT COMPLETION REPORT

PERU

INDUSTRIAL CREDIT PROJECT(LOAN 1358-PE)

PREFACE

This is the Project Completion Report (PCR) of the First IndustrialCredit Project in Peru, for which Loan 1358-PE, in the amount of US$35.0million equivalent was approved on December 27, 1976. The project was imple-mented during a period of recession and macroeconomic instability in Peru andthe emergence of the Latin American debt crisis. The loan was closed onJune 30, 1983, one year and nine months behind schedule. A total of US$2.9million was cancelled, mostly reflecting cancellation of subloan commitmentsby subborrowers.

Preparation of this PCR was delayed for two reasons: First, by thetime this operation was about to close, the Bank's staff resources were con-centrated on the preparation of two other loans to COFIDE. Second, followingthe suspension of disbursements, resources for work on Peru were limited.Bank experience in Peru and other countries is that it is usually a mistaketo design successive operations without the benefit of a thorough review ofthe previous operation by a PCR.

This PCR was prepared bv the Trade, Finance and Industry Division,Country Department IV of the Latin America and Caribbean Regional Office.Preparation of Part II was requested from the Borrower. But, given the timeelapsed since closing of the loan and the fact that many of the Borrower'sstaff involved in managing the project have retired or moved to new assign-ments, Part II was not completed.

Preparation of this PCR has not involved a mission to Peru. It isbased, inter alia, on the Staff Appraisal Report, the Loan and GuaranteeAgreements, supervision reports, correspondence between the Bank and theBorrower, and internal Bank memoranda.

This PCR was read by the Operations Evaluation Department. Thedraft PCR was sent to the Borrower for comments, but none were received.

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PROJECT COMPLETION REPORT

PERU

INDUSTRIAL CREDIT PROJECT(LOAN 1358-PE)

EVALUATION SUMMARY

Obiectives

1. This US$35 million equivalent loan to Corporacion Financiera deDesarrollo (COFIDE), had as broad objectives to help improve productionefficiency and overcome Peru's balance of payments constraints by: (i)financing export oriented and efficient import substituting projects fromstate, private and mixed ownership enterprises; and (ii) strengtheningCOFIDE's overall effectiveness as a development bank by strengthening itsresource allocation and mobilization capacity. The use of economicanalysis for Bank financed projects was expected to help COFIDE's resourceallocation ability and have a demonstration effect on other Governmentagencies, thus helping to improve Peru's planning and investment decisionmaking process.

Implementation and Results

2. The loan was approved on January 28, 1977 and declared effectiveon March 30. The actual implementation took longer than planned due to:(i) the economic recession of 1977 - 1979, which caused a slackening ininv'stment demand; and (ii) problems with project design including:reluctance of investors to assume the full foreign exchange risk, and theavailability of competing credit lines denominated in dollars at lowerinterest rates than the Bank loan. Commitments and disbursementsaccelerated in late 1979 as a result of: (i) a temporary economic recovery;(ii) the exhaustion of alternative sources of foreign resources and higherinterest rates on dollar loans that made the Bank loan more competitive(the loan's fixed on-lending rate on dollar denominated subloans had beenreduced from 1ll to 9.752 in 1978); and (iii) COFIDE's greater orientationtowards the private sector since 1978. The loan was closed on June 30,1983, one year and nine months later than initially estimated.

3. COFIDE used US$32.1 million in loan funds to finance 78subprojects, including 15 above the free limit of US$500,000. Sevensubloans amounting to 222 of the loan went to state enterprises, with anaverage loan size of over US$1.0 million compared to US$350,000 for privatesector subloans.

4. It is doubtful whether the loan succeeded in its objective ofimproving industrial efficiency and promoting exports, since the bulk ofcommitments took place during 1979 - 1981, a period characterized in Peruby macroeconomic instability, declining terms of trade and growingovervaluation of the -hange rate. Moreover, a substantial part of the

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loan went to sELte enterprises, less likely tnan private ones to be managedwith efficiency criteria. 3y December 1984, 16 subloans comprising over402 of the loan amount were in arrears.

5. The most critical shortcoming of the loan was probably its failuretc improve COFIDE's resource mobilization capacity. During the life of theloan, over 952 of COFIDE's resources came from external sources. Offeringnegative interest rates in real terms, COFIDE's efforts to mobilize localresources through bond issues met with limited success - although theyrepresented 762 of the resources mobilized locally. Between 1977 and 1982,the period of easy access to petrodollars, COFIDE was able to mobilizeUS$3.1 billion in foreign resources (US$525 million from internationalorganizations). After the onset of the international debt crisis, foreignfinancing for COFIDE plummeted and with the 1983 crisis in Peru, localresource mobilization also dried up.

Findings and Lessons Learned

6. The operation had a major design problem: the selection of COFIDEas the inte-mediary for Bank funds. First, the use of COFIDE asintermediary, to the exclusion of other private and public banks,strengthened the Government's monopoly over term financing. At the time,however, the loan was in line with accepted principles in_the Bank andCOFIDE was a prestigious institution with great influence on economicdecisions. Second, the use of C;.FIDE as intermediary presented a conflictof interest problem. COFIDE was a holding company for a number of stateowned enterprises (thirteen at the time) and the agency in charge ofcoordinating and guaranteeing the finance of state enterprises. The Bankwas, therefore, using as financial iLtermediiry the owner of many of thepotential users of the funds. Third, at appraisal, the Bank did not fullyassess COFIDE's creditworthiness and relied too narrowly on COFIDE's lowdebt/equity ratio as proof of financial soundness. The validity of thisratio for public financial enterprises is questionable, when Governmentsare ready to assume the debts of these institutions.

7. In order to limit the risks of using COFIDE as intermediary, theappraisal mission worked closely with COFIDE on a comprehensive PolicyStatement, focussing on COFIDE's development banking functions, and aseparate Statement of Operations, Policies and Procedures for theadministration of the Bank loan. These statements were designed to isolatethe loan from COFIDE's ownership role and tc safeguard its operationalautonomy. The Bank was overly optimistic abou-r the capacity of agreedpolicies and procedures to safeguard the independence of a public financialinstitution from political influenco~ over its lending decisions. Until1983, institutional issues remained the main focus of Bank supervision,with less attention paid to the underlying financial strength of theinstitution. While the Bank made a considerable supervision effort duringthe implementation of this loan, it had little success in convincing COFIDEto reorient its lending to the private sector and to separate its lendingfurction from its ownership of state enterprises. Some of the Bankrecommendations were implemented in 1981, when a new Government reorganizedCOFIDE with the support of a follow on Bank loan to COFIDE (Loan 1968-PE).

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8. Even if the Bank supervision efforts and t... ggreed policies andprocedures succeeded in limiting political influence on Bank financedsubprojects, these safeguards did not shield the rest of COFIDE's portfoliofrom political influences. In 1975, when the loan was being-appraised, 95Zof COFIDE's portfolio operations were quasi-fiscal in nature, either as anagent of the state or on its own behalf. By 1982, when the Bank loan waslargely committed, 87Z of the operations approved were still quasi-fiscalin nature and COFIDE's portfolio was concentrated on a few stateenterprises (loans and guarantees to one state enterprise - Electro-Peru-accounted for 502 of COFIDE's portfolio and were equivalent to 90? ofCOFIDE's paid in capital and reserves, in violation of COFIDE's operationalprocedures). By loan closing in 1983, COFIDE's financial situation hadbecome critical as a result of: (i) deterioration of its domestic currencybased capital structure under the force of inflation and the growth of itsdollar based liabilities structure; (ii) drastic reduction in f;.reignfinancing; (iii) mounting arrears in its portfolio of state enterprises;and (iv) delays in Government reimbursement of payments made by COFIDE onGovernment's behalf.

9. This loan shows how difficult it is to convert a public entity.which combines the roles of owner and lender to public enterprises, into aneffective financial intermediary with proper financial discipline andindependence from political influence. This loan also shows that it isunrealistic to expect that the use of project evaluation techniques in Bankfinanced loans, would improve investment decision making by Governmentagencies, which is often based on considerations other than efficiency.

10 In providing this loan, the Bank tried to support a newGovernment that proposed to relax some of the pervasive controls on theeconomy imposed by the military revolution since 1968. However, theliberalization policies of the new Government were not far-reaching. Infact, during the life of the loan, the Government maintained its ownershipof productive enterprises through COFIDE, kept interest ratesadministratively fixed and highly negative, and directed credit through acomplex system of priorities. This loan shows the futility of supportingwith Bank loans half-measures of economic liberalization, in the hope thatfurther liberalization steps would be taken during loan implementation. Italso shows that it is difficult for the Bank to react to policy reversalsonce an operation is being implemented.

Proiect Sustainability

10. By the time the loan was closed in mid-1983, the Bank had alreadyapproved two other loans to COFIDE: a follow on loan of US$60 millionequivalent (Loan 1968-PE) and a US$26 million loan for small and mediumenterprises (Loan 2064-PE). These funds allowed COFIDE to continue itsoperations when external resources began to dry up in 1983. However,unable to mobilize local resources, COFIDE's level of operations continuedat a v'ry low level, based on not servicing its external obligations andrelending the funds collected from its clients. Meanwhile, continuedfinancial repression, including highly negative interest rates, hasprolonged the scarcity of term credit for the productive sector in Peru.The expected benefits of the project are, therefore, not being met.

PROJECT COMPLETION REPORT

PERU

INDUSTRIAL CREDIT PROJECT(LOAN 1358-PE)

PART I. PROJECT REVIEW PROM THE BANK'S PERSPECTIVE

A. Proiect Identity

1. Name Industrial Credit Project

Loan Number 1358 - PE

RVP Unit Latin America and the CaribbeanRegion

Country Peru

Sector Finance and Industry

B. Backzroundl

2. During the early 19709, industrial sector investment in Peruincreased rapidly, spurred by a system of import quotas and generous fiscalincentives, as well as the growing domestic demand stimulated by theincome redistribution policies adopted since the 1968 military revolution;Growth of industrial value added averaged 8.6annually in real termsbetween 1968 and 1974, well above the real GDP increase. However, by-1975,when the loan was being appraised, industrial sector growth had sloweddown, as producers were increasingly hampered by shortages of foreignexchange and domestic credit.

3. The major economic objectives of.the:-military government had beento improve income distribution and wealth and- to-decentralize economicactivity away from Lima. Based on the-assumption that unregulated marketforces would not assure the desired socioeconomic development. theGovernment assumed an active role in economic management. The Stateexpanded its control of the country's productive resources through the-creation of public enterprises and the control of domestic and foreigninvestment, and embarked on a fundamental transformation of the ownershipand management structures in the economy, through the creation of newschemes of employee participation. In order to foster industrialdevelopment, the Government established a complex policy frameworkinvolving generous fiscal incentives (up to 852 tax exemptions); importrestrictions (import quotas, prior import authorization, and an averagenominal protection of 90Z); and concessional financing terms. Theincentives were granted on the basis of a priority system in which heavyindustries had first priority, other inputs for industry, agriculture and

1/ Based oji: PERU: Policies to Stop Hyperinflation and Initiate EconomicRecovery. A World Bank Country Study, April 1989

mining as well as essential goods for mass consumption had second priority,and all other industries were considered complementary.

4. This policy framework stimnulated the development of importsubstitution £I_iastries with low domestic value added, low productivity,and low capacity utilization. The cost to the treasury of the incentivesystem became exceedingly high. On the other hand, ope-ating deficits of,;blic sector enterprises, which had increased from 10? in 1968 to 482 in1975, had to be covered with increased foreign borrowing.

5. The new government that assumed control in late 1975 - shortlybefore appraisal - while reaffirming its commitment to the reform programinitiated by the military revolution, took measures to correct some errorsof the previous economic management in the hcpe to stimulate investment,increase efficiency and expand exports. The new economic measuresincluded: (i) reduction of consumer goods subsidies; (ii) increase inincentives to non-traditional exports; (iii) reduction in duty exemptionson imports of capital goods; and (iv).gradual liberalization of pricepolicies--including interest rates and exchange rates. In addition, torestore confidence in the private sector, the Government had promised to:(i) eract legislation guaranteeing the owner's managerial control of theenterprises, limiting workers equity participation; (ii) suspend the laborstability law, pending new legislation; and (iii) reassess the rigidpriority and incentive system. Although by the time of appraisalsignificantly higher interest rates had been authorized for the bankingsystem, they remaine highly negative, and loans from public developmentbanks continued to be determined by a priority system.

6. As a result of these economic measures, and the expected recoveryof mineral prices, GDP growth for the second half of the decade wasexpected to average 52 to 6Z, and industrial expansion was expected tocontribute increasingly to value added, exports and employment. The Bankloan was designed to help achieve this growth level. Contrary toexpectations, however, loan effectiveness in early 1977 coincided with thebeginning of a strong recession that lasted until late 1979. In two years,income per capita dropped 102 cumulative and inflation accelerated fromsingle digit levels to 602 in 1978. In 1979, the economy started growingagain, helped by a stabilization program (1978 - 79) and favorable terms oftrade. The civilian Government that took office in 1980 continued andexpanded the economic liberalization process initiated by the previousGovernment. The recovery was, however, short lived: excessiveinfrastructure investment, declining terms of trade and an increasinglyovervalued exchange rate contributed to macroeconomic instability. Theseproblems were compounded by the drying up of external voluntary lending in1982 and natural disasters in 1983. As a result, in 1983, by the time theloan closed, GDP plummeted by 122 and inflation increased to over 1002. Inresponse, the Government reversed the economic liberalization process.

C. Proiect Obiectives and Description

7. The broad objectives of the loan were to help improve productionefficiency and overcome Peru's balance of payments constraints by: (i)financing export oriented and efficient import substituting projects, and(ii) strengthening COFIDE's overall effectiveness as a development bank by

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strengthening its resource allocation and mobilization capacity. The useof economic analysis for Bank financed projects was expected to helpimprove COFIDE's resource-allocation ability and have a demonstrationeffect -n other Government agencies, thus helping to improve Peru'sproductive sector development planning and investment decision-makingprocess.

8. To -.hieve these ends the loan consisted of a line of credit toCOFIDE of US 35 million equivalent to finance the foreign exchangecomponent of economically efficient projects in the industrial,agroindustrial, mining and tourism sectors. Beneficiaries included state.private, reformed private and social property enterprises (EPS), mostly inthe medium- and large- size range. Loans to EPS enterprises were limitedto no more than US$10.5 million, reflecting the lack of experience withthis type of self-managed firms.

9. The Bank loan to COFIDE was made at a fixed interest rate of 8.7Zper annum. The Bank and the borrower agreed on an effective on-lendingrate of not less than 112 for dollar denominated subloans, with theultLmate borrower bearing the foreign exchange risk, including the cross-currency risk. COFIDE would receive an administrative fee of not more than1.5?. Subloan reinbursements out of the proceeds of the loan, togetherwith the local currency counterpart fund provided by COFIDE, would bedeposited into a special "Development Fund" - a separate accountestablished within COFIDE's financial statements. The operations of theFund were governed by a separa ' Statement of Operations, Policies andProcedures, which established t±e maximum lending exposure of the Fund toany one enterprise (15% of the total resources committed to the Fund) andthe minimum and maximum allowable financial contribution to any one project(25? and 75Z of total project cost, respectively). Under the LoanAgreement, COFIDE could use part of the margin between the Bank's andCOFIDE's lending rate, after deducting the administraLtive fee, to financetraining and technical assistance activities. An amendment to the loanagreement introduced in November 1977, allowed COFIDE to use part of thisspread to contribute to a Guarantee Fund to guarantee loans made to small-scale enterprises and associated technical assistance activities. Anotheramendment in July 1978, allowed COFIDE to reduce the interest rate chargedto no less than 9.75Z per annum in subloans guaranteed by other financialinstitutions, for a fee, provided the interest rate charged to thesubborrower was no less than 11Z. The loan was expected to finance about35 to 50 projects.

D. Proiect Design and Organization

10. The project was designed as a DFC type of operation using COFIDE,an autonomous state enterprise, as a channel. COFIDE's scope and taskswere wider and more complex than those of many DFCs associated with theBank. COFIDE was created in 1971 to serve several purposes: (i) coordinateand guarantee the financing of state enterprises, (ii) mobilize resourcesfor priority projects of state, private, reformed private and so.ialoroperty enterprises, and (iii) act as a holding company for a number ofstate enterprises in the industrial and tourism sector. Its operationswere expected to support Peru's Economic Development Plan.

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11. COFIDE's ownership of state enterprises made it " predominantlyindustrial conglomerate with some development banking functiovs. Thissituation posed the risk. that Batk funds could be given generously torelated companies independently of the economic and financial viability ofthe projects. In order to limit such risk, the appraisal mission workedwith COFIDE in the preparation of a comprehensive Policy Statement focusingon COFIDE's development banking functions, aad a separate Statement ofOperations, Policies and Procedures that wotld govern the operations of theFund. Other protective provisions incorpozated in the design of the loanwere: (i) a loan amount limit of US$4.0 million per sub-loan ardsubborrower; (ii) a total subloan amount limit to EPSs to US$10.5 million;(iii) a relatively low free limit subloan of US$500,000s and (iv) aneconomic evaluation of all projects financed with Bank funds (a specialjustification would be required for projects with ERR below 10?).

12. During loan preparation, Bank staff gave strong emphasis toassessing COFTDE's project evaluation capacity. As the main Governmentinstrument for project financing of state enterprises and one of the mainsources of term finance for private enterprises, COFIDE's decision M.kingcriteria for project financing had a strong economic impact. Prior to theBank loan, COFIDE's appraisal of projects focussed mainly on financial,technical and marketing aspects. Althuugh COFIDE had recently introducedeconomic appraisal on a trial basis, Bank staff found its appraisalcapability sufficiently strong to entrust it with allocating the proceedsof the proposed loan.

13. No specific technical assistance component was designed, but Bankstaff provided teaching material and conducted a seminar on ERRcalculation. It was agreed that during project implementation COFIDE wouldexpand its in-house training capability to include expertise in assessingeconomic efficiency and on establishing and managing EPS financed by partof the spread on foreign currency subloans.

14. At appraisal, COFIDE's financial situation appeared acceptable,although the Bank did not fully assess COFIDE's creditworthiness for lackof reliable audited financial statements. The available financialinformation indicated that, despite increasing foreign bo.rowing since1973, COFIDE's debt/equity ratio was still rather lows 2.7 : 1; assetaamounted to US$359 million equivalent. Since almost 70? of COFIDE's loanportfolio was still in the disbursement and/or grace period stage, arrearage,reschedulings and write-offs had been minimal, although there wassubstantial concentration of potential risk in COFIDE's portfolio. On theother hand, as a result of low local currency interest rates andcommissions on foreign exchange loans, COFIDE's income had been affectedand profitability had been substantially below annual iuflation for severalyears, resulting in an erosion of its capital in real terms. To ensure asound financial structure for COFIDE in the future, the bank and theborrower agreed on: (i) a contractual 5 : 1 debt/ equity limitation underthe Bank loan; (ii) an initial minimum local currency contribution ofCOFIDE to the Development Fund of 2:1; and (iii) agreement on criteria forfuture adjustment of COFIDE's interest rates to reflect market conditions.Although during loan preparation Bank staff discussed at length withGovernment and COFIDE's officials the isEue of negative interest rates, nocommitment was obtained from the Governm_nt to move towarus positiveinterest rates.

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15. Measured against current Bank thinking on credit line lending, theproject had several important design problems. First, the selection ofCOFIDE as the intermediary for Bank funds, to the exclusion of otherprivate and public banks, strengthened COFIDE's monopoly over termfinancing. At the time, however, the loan was in line with acceptedprinciples in the Bank and COFIDE was in the mid seventies a prestigiousinstitution with great influence on economic decisions. Second, the use ofCOFIDE as intermediary presented an additional serious problem: theconflict of interests inherent in using as financial intermediary the headof an industrial conglomerate that included most of the potential users ofthe funds. Third, the Bank did not assess COFIDE's creditworthiness andrelied too narrowly on COFIDE's low debt/equity ratio as proof of financialsoundness. The validity or this ratio for public financial enterprises isquestionable, when Governments are ready to assume the debts of theseinstitutions. Fourth, the adoption of a fixed interest mechanism onforeign currency denominated subloans made the loan insensitive to interestrates shifts on competing international credit lines. The Bank loan wasalso at a fixed rate, which was the standard practice until 1981, when theBank adopted a variable rate in response to the volatility of internationalinterest rates since the late 1970s. Fifth, this loan, together with otherforeign loans to Peru, helped to relieve the scarcity of term financing.By not linking the loan to policy reforms conducive to greater resourcemobilization such as positive interest rates, the loan may have contributedto perpetuate this scarcity.

E. Project Implementation

16. The loan was approved on January 28, 1977, and declared effectiveon March 30. There were no delays in effectiveness, since the onlycondition of effectiveness was the establislu;.ent of the Project DevelopmentFund (PDF) by COFIDE. The actual implementat;.n of the loan, however, tooklonger than planned, so that the original final date for submission ofsubprojects of 30/06/79 had to be extended tw.ice, until 30/09/81. The loanwas closed on June 30, 1983, one year and nine months later than agreed inthe Loan Agreement.

17. Actual disbursements after the first two years amounted to onlyUS$4.1 million, about 20Z of the appraisal estimate. The economicrecession of 1977-1979, together with high liflation rates, caused a slackeningin investment demand. The Bank found that ctner factors contributing tothe low demand for the loan funds were: (i) the reluctance of investors toassume the full foreign exchange risk during d period of high inflation andfast devaluation; (ii) the availability of competing credit linesdenominated in dollars at lower interest raves than the Bank loan, bothwithin COFIDE (from Corporacion Andina de FcG.ento, the US Eximbank, andothers) and in other financial intermediaries (e.g. an IDB dollardenominated credit line through Banco Industrial del Peru, with an interestrate of 1OZ to final borrowers); and (iii) tne private sector's perceptionof COFIDE as a bureaucratic institution geared towards public sector firms.The Bank also felt that COFIDE did not promote the line sufficiently.

18. Commitments and disbursements acceler-ated substantially in late1979, partly as a result of COFIDE's new or.enLation towards the private

L, .1 , .,, * 1, , .,. . . . A I W o .._. ,S.

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sector and a recovery in export-related activities. Other contributoryfactors were the exhaustion of alternative sources of foreign resources andthe substantial increase in world interest rates, that made the Bank loanmore competitive. In early 1978, COFIDE had intensified its promotionalefforts tSo-ounteract the slack in investment demand. It had alsointroduced a mechanism to permit private financial intermediaries tocollaborate in generating, evaluating aid processing investment projects,in return for a service charge. In these cases COFIDE made the loans witha guarantee from the financial intermediary. These measures paid off whenthe economy experienced a mild recovery in 1979. A further element thathelped-to increase commitments was the Bank Board's approval, in March1979, of a special disbursement procedure for DFC loans, providing 501 ofeach disbursement in US dollars. By August 1981, commitments had beencompleted and disbursements had reached US$25.6 million. About 66Z oftotal commitments took place in just two years; but to disburse the rest ofthe loan took an additional one and a half years. When the loan was closedin June 1983, US$2.9 million was cancelled of the original US$35 millionloan.

F. Proiect Results.-

19. Statistics on subloans are shown in.Annex 3. Under the loanCOFIDE financed 78 subprojects, including 15 above the free limit ofUS$500,000; eight of them above US$1.0 million. The average size of thesubloan was US$350,000. About 30% of the loans were for new projects, therest financed expansion or modernization of existing coL anies. Sevensubloans, amounting to 221 of the loan went to state ente-prises. Theaverage size of the loans to state enterprises was over Ua$1.0 million,compared to US$350,000 for private f rms. Despite the Government'sdecentralization objectives, the bulx of the loan (52Z) went to projectslocated in Lima. Projects in two subsectors: chemicals and textilesreceived nearly 302 of the loan. Six enterprises received two loans eachfor a total of US$6.9 million equivalent. There is no information on theevolution of arrears under this loan. However, the available informationshows that by December 1984, 16 subloans comprising 40S of subloan amountsunder this line were in arrears.

20. It is doubtful whether the loan succeeded in its objective ofimproving industrial efficiency and promoting-exports, since the bulk ofcommitments took place during 1979-1981., a period characterized in Peru bymacroeconomic instability, declining terms of trade and growingovervaluation of the exchange rate, and by recession abroad. Moreover, asignificant part of the loan (22Z) went to state owned en erprises, lesslikely than private ones to be managed with efficiency criteria.

21. However, the most critical shortcoming of the loan was probablyits failure to improve COFIDE's effectiveness as a development bank,strengthening its resource mobilization and allocation capacity. Duringthe life of the loan, over 95% of COFIDE's resources came from externalsources. Offering negative interest rates in real terms, COFIDE's effortsto mobilize local resources through bond issues met with limited success,although they represented 76X of the resources mobilized locally - the restwas in the form of capital contributions from the Government. Between 1977and 1982, the period of easy access to petrodollars, COFIDE was able tomobilize US$3.1 billion in foreign resources, mostly from commercial banks

and supplier's credits -- 17 percent (US$525 million) came frominternational organizations, including two Ba,k loans. After the onset ofthe international debt crisis, foreign financ'.ng for COFIDE plummeted. In1983 and 1984, foreign loans to COFIDE amounted to less than 25Z of thefinancing obtained in 1981 and 1982. With tae 1983 crisis, local resourcemobilization also dried up.

22. Another important objective of the ,oan was to improve COFIDE'sproject evaluation capability and through it improve the government'sinvestment decisions. Except for some disagreements about methodologicaldetails, standardization and quality control, Bank supervision missionsfound COFIDE's project evaluations satisfactory. It is interesting thatunder a subsequent operation the Bank felt the need to add a technicalassistance component to improve COFIDE's project evaluation capacity. It isunlikely that economic criteria was consistxitly applied by COFIDE in thefinancing of state enterprises, with resourcee from other lenders, whichrepresented the bulk of its loan portfolio dur..ng the life of the loan. By1983, many of these enterprises had ceased to repay their loans.

G. Praject Sustainability

23. By the time the loan was closed, in 1983, the Bank had alreadyapproved two other loans: a follow on loan c-f US$60 million (Loan 1968-PE)and a US$26 million loan for small and medium enterprises (Loan 2064-PE).These funds allowed COFIDE to continue its c7erations when externalresources began to dry up in 1983. However, uinable to mobilize localresources, COFIDE's level of operations contiltued at a very low level,based on relending the funds collected from its clients instead of repayingits external debt. Meanwhile, continued fina-cial repression, includinghighly negative interest rates, contributed v.c. prolong the scarcity of termcredit in Peru. The expected benefits of the project are, therefore, notbeing sustained.

H. Bank Performance

24. During preparation and appraisal, Bank staff worked with COFIDE ona comprehensive Policy Statement focussing ox COFIDE's development bankingfunctions and a separate Statement of Operations, Policies and Proceduresfor the Development Fund, designed to isolat. the loan from COFIDE's roleas a holding for public sector firms and safeguard the Fund's operationalautonomy, ensure adequate evaluation standatds and promote financialsoundness. The Bank was overly optimistic abDut the capacity of theseagreements to safeguard the independence of the institution from politicalinfluence on its lending decisions.

25. The Bank made a considerable supervision effort with this loan:eleven supervision missions between 1977 and 1984 and a total of 51 staffweeks devoted to loan supervision. Supervision. missions paid closeattention not only to the causes of slow loan utilization, but also to thequality of COFIDE's project approval and sunervislon procedures. COFIDE'sfinancial situation became a focus of Bank supervision in 1983, whenCOFIDE's financial situation had seriously detAriorated. In the course ofthis supervision effort, the Bank made recomnv.oidations to COFIDE and the

Government about the need to increase interest rates and establish a loanindexing system in view of increasing inflation. The Bank alsorecommended, on repeated occasions, that COFIDE discuss with the Governmentthe possibility that the Government would ta;;e the cross-currency risk,charging a fee to COFIDE. Having selected an intermediary with a clearmandate to finance and own public enterprises, the Bank tried throughoutthe life of the loan to convince COFIDE, with little success, to separateits ownership function from its lending activ.4ties and to reorient itslending towards the private sector.

26. The strategy for COFIDE of the civilian Government that tookoffice in mid-1980, was more compatible with the Bank views and the Bankresponded positively to a request for additional loans to COFIDE. Two newloans were appraised in 1981: a Second Industrial Credit (Loan 1968-PE)that would support COFIDE's reorganization Knd divestiture of its equit)holdings; and a Small Scale Enterprise Loan (H.oan 2064-PE) in which COFIDEwould act as the apex for loans disbursed through private financialinstitutions. The opportunity to support lo-.g awaited institutionalchanges in COFIDE probably obscured the fact that preparation and appraisalof these loans coincided with a period of mounting financial difficultiesfor COFIDE due to its excessive lending to public enterprises, and theerosion of its equity base as a result of continued inflation.

27. This project demonstrates important lessons for the design andsupervision during an unstable macroeconomic situation of credit projectsin which Bank lending is intermediated by a D!Lblic institution. Several ofthese lessons have by now been discussed widely within the Bank (see thedeport of the Financial Sector Operation's Task Force issued in August1989).

28. First, this loan shows how difficul: it is to convert a publicentity, which combines the roles of owner anr lender to public enterprises,into an effective financial intermediary with proper financial disciplineand independence from political influence. 'his loan also shows themistake of expecting that .he use of project ovaluation techniques for Bankfinanced subloans would improve investment de. Lsion making by Governmentagencies, which is frequently based on conside:ations other thanefficiency. Even if supervision efforts succeeded in limiting politicalinfluences in Bank financed projects, the ro'e of COFIDE as financial agentand owner of public enterprises contributed to the deterioration ofCOFIDE's overall portfolio, which became increasingly concentrated on a fewpublic enterprises unable to pay back their loans. The Bank should haveunderstood the unavoidable conflict of using COFIDE as direct lender anduse it only as a second-tier bank to retail tne loan through private banks.However, the Bank was not alone in selecting COFIDE as financialintermediary; other international financial institutions providedsubstantial amounts of foreign resources to COFIDE. These loans eventuallycontributed to increase Peru's external debt.

29. Second, this loan shows the futilit"' cf supporting with Bank loanshalf-measures of economic liberalization in the hope that additionalliberalization steps would be taken during loan implementation. Inproviding this loan, the Bank tried to suppolt a new Government thatproposed to relax some of the pervasive conl:r.Ls on trade and industryimposed by the military revolution. However, 1.he liberalization measures

- 9 -

were not far reaching: the Government maintained an important role inownership of basic industries through COFIDE; interest rates wereadministratively fixed and highly negative; end public credit was directedthrough a complex system of priorities.

I. Borrower's Performance

30. Institutional Development. COFIDE's operations have beendominated by its mandate to coordinate and guarantee the financing of stateenterprises, including the holding of shares of some of them. In 1975,when the loan was appraised, about 95Z of its portfo3io operations werequasi-fiscal operations in nature (45X of COFIDE's approved operations wereas agent of the state and 952 of operations ap?roved on its own accountwere with state enterprises). In 1977, COFIDE's shares in four major statemanufacturing and tourism enterprises were transferred to the Government,reducing COFIDE's responsibility to that of Lolding the shares in custody.However, a number of nationalized basic industcies were allocated toCOFIDE. By 1980 a large proportion of COFIDE's resources were still frozenin these equity holdings (36% of COFIDEts total assets were held in thirteencompanies). Moreover, 302 of the loans outstanding and 50Z of theguarantees issued on COFIDE's own account weie to state enterprises. Therole of COFIDE changed little during the life of the loan. In 1982, beforelack of funds drastically reduced COFIDE's operations, 86% of its approvedoperations were quasi-fiscal in nature (57Z of operations were on behalf ofthe Government and 762 of the operation on its own account were with stateenterprises),

31. Changes in the country's economic pclicies at the end of the1970's, including reduced prospects for social property and public sectorparticipation, reduced the priority attributed to COFIDE by the Government.Political weakness translated into weak and su.qrt lived Boards andmanagement teams (four in two years), unable to provide the necessaryleadership to an otherwise able body of professionals. According to a Banksupervision report, this situation had left COFIDE with unclear objectivesand a number of problems that included lack Gf coordination among theinstitution's major operating divisions, insufficient promotion andidentification of private sector projects anu somewhat lengthy andbur aucratic procedures for evaluation and processing of projects.

32. COFIDE was reorganized in late 1979 and a new Statement ofPolicies and Procedures was issued. COFIDE wss again reorganized at theend of 1980 with the creation of the Financial Intermediation Division,which took charge of the operation of COFIDE's foreign credit lines as wellas of several Special Funds previously managed by the Central Bank; a newPromotion Division; and a new Credits Divisiot. for project evaluation andsupervision. In 1981, the new civilian Government reassessed thefundamental role or COFIDE and reorganized it separating its lendingfunction from its hole Ag of public sector enterprises, with the support ofa follow on Bank loan. The Corporacion Nacional de Desarrollo (CONADE) wascreated as a holding company for COFIDE S.A. End INVERSIONES COFIDE S.A.(ICSA). The first, to cont4aue lending operations and the latter to holdthe investments portfolio, including the basic industries. The transfer ofequity holdings to ICSA was on the basis of . loar. of about US$100 millionfrom COFIDE to ICSA (85Z of COFIDE's capital) that wou!A be repaid from the

- 10 -

sale of these firms to the private sector. -{cwever, the expectedreorientation of COFIDE's operations towards the private sector did notmaterialize: in the next two years COFIDE's lending was dominated by loansto public sector enterprises with private attributes (PPs). Loans to theprivate sector declined by an average of 122 per annum while COFIDE'sexposure with public enterprises reached over 852 of its total exposure.On the other hand, the Government's ambiguous position with respect toprivatization made ICSA unable to sell any of its companies and to serviceits debt to COFIDE.

33. Financial Performance. Financial i.nformation on COFIDE between1976 and 1983 is presented in Annexes 4 to 6. The historical informationon balance sheets and income statements is not comparable because severalauditors used different criteria to define and calculate the accounts. Thefinancial ratios were calculated by COFIDE and differ from the auditedaccounts. An analysis of COFIDE's financial position in 1977, when theloan became effective, showed that COFIDE's profits as a percentage oftotal assets were low, even in nominal terms mnd had decreased steadilyover the previous four years to 0.4 in 1976 and a return on average equityof 1Z. This was partly the result of negative interest rates on its localcurrency loans. The attendant erosion of its equity had been partlycompensated by the appreciation of its equity holdings. In mid-1978 andearly 1979, the government increased interest rates from about 16% to 35%,still well below inflation that was running at 60Z per annum. COFIDE'sprofitability increased in 1978, but in a sit.uation of rapid inflation itwas unable to maintain the real value of equ:-:;. As a result, COFIDEexceeded the legal maximum debt/equity ratio uinder the loan and requiredseveral capital contributions from the Government. COFIDE was able to showincreased net profits as percentage of averaEe equity during 1980 and 1981due to higher interest rates in local curren,-: loans (interest rates becamepositive in January 1981, although unable to .:b.arge interest payments inadvance, COFIDE's rates remained lower than tnose of other financialinstitutions) and exchange gains caused by the rapid depreciation of theSol. COFIDE was also able to maintain the resl value of its capitalthrough periodic re-evaluations of its equitv investments. This allowedCOFIDE to keep its debt/equity ratio within --he limits established in thelegal agreements.

34. At the time the loan became fully committed, in 1982, COFIDEexperienced a substantial decline in the real value of its Sol basedassets. To prevent further resource decline and in order to meet thedemand for credit of PPs, COFIDE expanded its foreign credit lines by US$60to US$70 million, mainly through short term borrowing. By August 1982, twothirds of its liabilities were hard currency. more than one third of whichwas short-term debt. Nearly 75% of this amo-nc had been contracted to meetthe investing needs of PPs and public agencies. In 1981 and 1982, lendingto the private sector contracted by 12Z per annum. COFIDE's Sol basedcapital structure deteriorated under the force of inflation and the rapidgrowth of its dollar based liability structure. Between November 1981 andNovember 1982, COFIDE lost 87Z of its capita_ value

35. By loan closing, in mid-1983, COFI.!'s financial situation becamecritical as foreign financing had been drasra.ally cut, public enterpriseswere unable to meet their obligations to CO:YT)E and the Government was slowin reimbursing COFIDE for payments it had m.J: on Government's behalf.COFIDE's major borrower, Electro-Peru was unable to service its US$50

million loan. Lending to this company acco-u ted for 50% of COFIDE's totallending, and its outstanding loan and guaravtke portfolio was equal to90Z of COFIDE's paid in capital and reserves, !.n violation of COFIDE'spolicy of restricting its lending to any sinL'e company to not more than20% of its capital and reserves. COFIDE's financial problems easedtemporarily later in the year when Peru was .:ble to refinance it foreigndebt.

36. It is difficult to analyze COFIDE's arrears situation because ofsuccessive refinancing of many of its loans and because its reportingsystem did not permit a detailed analysis of age of arrears, thedevelopment of arrears over time, or the relationship between arrears andtotal outstanding portfolio for the various categories of loans. Theavailable information shows a steady increase in arrears as percentage ofoutstanding portfolio from 5% in 1978 to 10 inL 1981. During this time,the bulk of the arrears was concentrated in ioans to a handful ofcompanies. By 1984, however, arrears (princ;pil and interest) had climbedto 28Z of outstanding portfolio, whereas over OZ of the portfolio wasaffected by arrears.

J. Project Relationship

37. The project period covered seven year; and both the Bank's projectofficers and COFIDE's management changed several times. These changesaffected continuity in project supervision.

K. Project Documentation and Data

38. During the life of the loan, COFIDE. produced a large number ofdocuments concerning its lending program, soutces and uses of funds,resources applied, and foreign exchange coverage. COFIDE's main financialstatements were, however, inadequate for any cetailed financial analysispurposes. They reflected essentially archaic accounting codes, recordkeeping and procedures used. No basic cost -.ta was available by lendinglines and it was impossible to determine the rtofitability of the severalcomponents of COFIDE's lending activity. Also, COFIDE's voluminousstatements of loans in arrears presented figures that were not consolidatedin such a way as to permit detailed analysis. COFIDE used seven differentexternal auditors. A recurrent problem was the absence of any apparentattempt to reconcile the differences between COFIDE's annual financialreports (which according to some auditors did not follow standardaccounting practices) and the reports prese..ted by the auditors, or tomake compatible the criteria used by the different auditors.

39. The data for the elaboration of this PCR was not readily availablein COFIDE. The information presented in th .s report on subborrowers andloan amounts is based on the Bank's disbursement records and subprojectsfiles.

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PART III: STATISTICAL INFORMATION

1. Related Bank Loans

Year ofLoan Title Purpose Approval Status Comments

Second Industrial To support the 1981 Closed The final closingCredit Project financing of was 12/31/87,Loan 1968-PE manufacturing and two and a half years

tourism projects later than initiallythrough financial contemplated.intermediaries US$20.3 million ofhaving access to loan was cancelled.Bank funds whichCOFIDE would channel.Also to supportmodification of thepublic sectorfinancial system.

Small Scale To finance Small 1981 Closed The final closingEnterprise Project Scale Enterprise was 12131/87,Loan 2064-PE through financial two years later

intermediaries, than initiallywhich will discount contemplated.their loans with the US$.75 million ofSSE unit within the loan wasCOFIDE. US$750,000 cancelled.would be allocatedfor technicalassistance to COFIDE'sstaff and staff offinancial intermediaries.

- 13 -

2. Project Timetable

Date Date Date

Item Planned Revised Actual

Identification(Lending ProgramDevelopment Mission) 7/73 7/73

Pre-Appraisal 6/74 6/74

Appraisal Mission 10/74 10/74

Preparation ofRe-Appraisal 10/75 10/75

Re-Appraisal Mission 12/75 12/75

Loan Negotiations 11/76 11/76

Board Approval 12/27/76 12/27/76

Loan Signature 1/28/77 1/28/77

Loan Effectiveness 1/28/77 3/30/77

Loan CommitmentEnd Date 6/30/79 12/31/80 9/30/81

Loan Closing 6/30/81 9/30/8112/31/816/30/82 6/30/83

Cancellation - - 2/28/83

Comments:The Bank suspended disbursements to Peru on May 5, 1987 based on Peru's

accrued non-payment of obligations to the Bank.

- 14 -

3. Loan Disbursements '

Cumulative Estimated and Actual Disbursements(USS '00)

FY77 FY78 FY79 FY80 FY81 FY82 FY83

Appraisal Estimate 8 21 29.6 36Actual a 0.37 4.1 14.6 24.2 31.7 32.11Actual as X of Estimate 0 2 14 41

Date of First Disbursement: 11/04/77

Date of Last Disbursement: 2/28/83

1/ US$2.91 million was cancelled from the original loan amount of US$35million.

- 15 -

4. Use of Bank Resources

A. Staff Inputs

-------------------------------------------------------------------- __------

Stage of Project Cycle Period Staff Weeks(FY)

----------------------------------------------------------------------------

Through Appraisal 74-75 98.0

Appraisal through Board Approval 76-77 42.5

Board Approval Through Effectiveness 77 4.4

Supervision 77-85 50.9

Project Completion Report 90 6.0------------------------------------------T-----TAL----------20-------.8----

TOTAL 201.8------------------------------------------------------------.---- __---------

- 16 -

4. Use of Bank Resources (cont'd)

B. Missions

Month/ Number of No. Of Staff Dates of Overall Project Types ofActivity Year Persona Weeks Weeks Report Status Rating Problemss

Identification 7/73 2 2 4 8/16/73 -

Pre-Appraisal 6/74 4 2 8 10/10/74 -

Appraisal 10/74 3 3.8 11.4 12/17/74

Preparat'ioi ofRe-Appraisal 10/76 3 3 9 11/12/76

Re-Appraisal 12/75 3 2 _ 12/07/78Subtotal 38.4

Supervision 6/77 2 2.4 4.8 6/10/77 1 0Supervision 11/77 2 .8 1.6 1/3/78 2 oSupervisioti 6/788 2 4 8 7/24/78 2 oAnnual Update n/a n/a n/a n/a 3/19/79 2 oSupervision 8/79 2 2.8 6.6 8/31/79 2 oSupervision 11/79 1 .8 .8 11/28/79 2 oSupervision 3/80 1 .8 .8 3/21/80 1 -

Annual Update n/a n/a n/a n/. 8/08/80 1 -

Supervision/Annual Update 2/81 1 1 1 3/08/81 1 -

Supervision 8/81 1 .4 .4 8/31/81 2 -

Supervision 10/817 1 .6 .6 11/20/81Supervision 2/829 2 1 2 3/04/82 1 -Supervision 9/82 2 2 4 11/19/82 1 -

Annual Update n/a n/a n/a n/a 7/21/84

Subtotal 29.6

TOTAL 87.9

6/ f-financial; m-managerial; t-technical; p-political; o-other

6/ Supervision report indicates Return to HQ as 6/26/77, which iserroneous.

7/ Combined follow-up of Loans 1368-PE and 1988-PE. Estimated time oneach .6 week. Missing Summary Sheet.

8/ Combined follow-up of Loans 1368-PE and 1968-PE. Estimated time oneach 1 week. Missing Summary Sheet.

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Annex 1Page 1 of 2

PERUPROJSCT COMPLETION REPORT

INDUSTRIAL CREDIT PROJECT - LOAN 1358-PE

COFIDE - SUBPROJECT PROFILE(as of 5/05/90)

No. 2 Amount Z(USS' 000)

By Size of Subloan

Up to US$100,000 21 27 1,319,586 4.1US$100,001-US$250,000 22 28 3,806,747 11.9US$250,001-US$500,000 20 26 7,779,986 24.4US$500,001-US$1,000,000 7 9 4,982,548 15.6US$1,000,001-US$5,000,000 8 10 13,987,937 43.9

Total 78 100.0 31,876,804 100.0

By Region

Arequipa 2 3 2,391,312 8Chimbote 3 4 1,945,651 6Cuzco 2 3 919,250 3Huacho 1 1 2,947,841 9Iquitos 2 3 1,161,567 4La Selva 1 1 365,704 1Lima 49 63 16,455,876 52Pisco 3 4 1,547,108 5Piura 2 3 263,778 1Puno 1 1 125,63'. 0Samanco 2 3 1,195,503 4San Ignacio 1 1 503,857 2San Miguel 1 1 54,447 0Talara 1 1 224,802 1Tumbes 1 1 441,800 1Unknown 6 8 1,332,671 4

Total 78 100 31,876,804 100

By Sector

Basic Ind. & Nat'l Defense 1 1 260,581 1Basic Metals 5 6 415,162 1Beverages 2 3 689,548 2Cement 2 3 1,819,846 6Chemicals 9 12 4,586,083 14Clay & Pottery Products 1 1 310,000 1Electric Power 1 1 1,053,787 3Fish 8 10 2,759,066 9Glass Products 4 5 1,914,730 6Iron & Steel 1 1 441,070 1Metal Products 2 3 2,198,542 7

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Annex 1Page 2 of 2

No. Z Amount 2(USS'000)

By Sector (con't)

Mining 4 5 1,773,556 6Other 1 1 175,505 1Petroleum Derivatives 1 1 224,802 1Pharmaceuticals 2 3 573,937 2Photography 1 1 180,716 1Plastic Products 5 6 2,683,436 8Printing and Publishing 3 4 1,114,708 3Processed Food 3 4 508,898 2Rubber Products 3 4 319,620 1Shoes 6 8 638,805 2Textiles 6 8 4,580,373 14Wood Products 5 6 2,451,500 8

Total 78 100 31,876,804 100

By Financing Purpose

New projects 23 29 11,160,109 35.0Expansion 43 55 18,483,824 58.0Modernization 10 13 1,879,258 5.9Unknown 2 3 353,613 1.0

Total 78 100.0 31,876,804 100.0

By Ownership

Private 71 91 24,708,331 77.5Public 7 9 7,168,473 22.5

Total 78 100.0 31,876,804 100.0

Source: Loan 1358-PE subproject files and LDS database.

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Annex 2PERU Page 1 of 3

PROJECT JMPLETION REPORTINDUSTRIAL CR'nIT PROJECT

SUB-BORROWERS FINANCED BY TWO SUBPROJECTS UNDER LOAN 1368-PE

Loan 1 Loan 2

Subproj. Amount Subproj. AmountEnterprise No. Disbursed No. Disbursed TOTAL

Cementos de Lima A-12 1,352,843 B-10 467,003 1,819,846Fabrica de Tejidos la Union A-13 1,233,120 B-4 83,187 1,316,307Quimica Universal B-26 156,466 B-38 71,230 226,686Envasadora de Conservas A-16 1,114,774 B-48 80,006 1,194,780SIDERPERU (power & red. directa) A-li 441,070 A-1i 1,063,787 1,494,867PeruPlast B-8 472,616 B-44 418,000 890,816

TOTAL 4,789,878 2,173,213 8,943,091

PERUPROJECT COMPLETION REPORTINDUSTRIAL CREDIT PROJECT

SUBPROJECTS FINANCED UNDER LOAN 1360-PE

IBRDEmploy- FRR ERR Financing Status

Subproj. Enterprise Sector Purposes ment (X) (%) (USSOOO) (as of Dec. 31, 1984)No.

A-1 Maderms Inambari, EPS Wood Products new 98 21 13 649,788 arrears, leg. actionA-10 Aceros del Sur SA Metal Products new 72 22 25 2,106,042A-1001 Plastimac SA Plastic Products new 34 10.2 1,418,830A-1002 Vidrios Industrials Glass Products expansion 30 627,643A-11 SIDERPERU (Red. Directa) Iron and Steel expansion 37 17 18 441,070 arrears, being refin.A-12 Cementos Lima Cement expansion 21 19 1,352,843A-13 Tejidos Ia Union Textiles expansion 85 19 20 1,233,120 arrears, beina refin.A-14 Quimica del Prcifico Chemicals expansion 30 10 19 2,947,841A-16 SIDERPERU (Power Generator) Electric Power expansion 28 1,063,787A-13 Envasadora de Conservas SA Fish new 2200 33 22 1,114,774 arrears, new ownersA-2 El Chaupe EPS Wood Products new 80 21 13 603,867 arrears, being refin.A-3 Ampolletas y Viales de Vidrio Glass Products new 48 30 22 997,888A-4 Forestal Amazonas Wood Products new 80 40 40 846,436 arrears, being refin.A-6 Metal Trujillo EPS Metal Products new 91 26 93,600A-6 Fabrica do Mechas Mining expansion 12 492,124A-7 CENTROMIN Mining expansion 20 20 924,990A-8 Textiles Amazonas Textiles expansion 74 12 12 2,761,900A-9 Envasadors del Mar Fish new 649 40 14 4686,500 arrears, neow ownersB-1 Industrial Maderera del Orient. Imosa Wood Products modornization 238,2888-10 Cementos Lima Cement modernization 467,0039-1001 Servicios de Persona Lizacion Magnetic Printing and Publishing modernization 14 26 378,7998-1002 Compania Industrial Textil SA -CITSA- Textiles modernization 48,742B-1003 Cables y Conductores de Cobre SA Electrical Machinery modernization 10 148,086B-1004 Industrial Vidrio Neutro SA Glass Products expansion 500 61,484 arrears, leg. actionB-1008 Reencauchadora el Sol SA Rubber Products new 49 246,640B-1007 Templex SA Glass Products new 30 30.6 228,0378-1008 Reactivos Nacionales Chemicals expansion 4 187,361B-1009 MVnerales Santander Mining new 522 230,8118-1010 Ampollas Farmaceuticas-AMFA Pharmaceuticals expans;on 47 373,9378-1012 Max Nieto SA Shoes expansion 20 21,336B-11 Natrogels Chemicals new 46 632,269 arrears, new ownersB-12 Inversiones Nueva York Fish new 184 441,800 arrears, new ownersB-14 Minsur SA Mining expansion 16 125,631 arrears, being refin.8-16 Isosanplast SA Chemicals new 40 70,7409-16 Frigomar Fish neow 18 425,384 arrears, leg. action9-17 Novo Plast Industria LTDA Plastic Products neow 35 225,647B-1 Calzado Duramil del Peru Shoes expansion 20 149,9798-19 Calzado Andino Shoes expansion 10 69,222B-20 Industrial Cacer Plastic Products expansion 12 436,871B-21 Cerverceria San Juan Beverages expansion 20 386,704B-22 PanAm Peru Shoes modernization 0 102,400

0I,

PERUPROJECT COMPLETION REPORTINDUSTRIAL CREDIT PROJECT

SUBPROJECTS FINANCED UNDER LOAN 1350-PE

IBRDEmploy- FRR ERR Financing Status

Subproj. Enterprise Sector Purposes ment (X) (X) (USS000) (as of Dec. 31, 1984)No.

…_________________________________________________________________________________________- -__--__--_____---- ____ - - ______________________________

8-23 Industria Metalurgica Nacional Basic Metals expansion 93,7998-24 Corporacion Commercial Fish new 470 80,7358-26 Quimica Universal Chemicals expansion 12 156,455B-28 CIA Nacional de Cerveza SA Beverages modernization 900 323,8448-28 CIA Oleaginoss Pisco Other expansion 76 176,505B-29 Industria Portofino Shoes new 16 230,0008-3 Manufacturas Metalicas Jospel SA Basic Metals expansion 113,015B-30 Michell A CIA SA Textiles expansion 17 286,270B-31 Rayon y Celanese Peruana Textiles expansion 1010 88,400B-32 Cauchos Sinteticos Rubber Products expansion 36,8808-33 SIDERURGICA del Peru Basic Ind. A Nat'l Defense expansion 280,581B-36 Industrial Punchans Wood Products expansion 274 316,132 arrears, leg. actionB-36 Promociones Petroleras Talar& SA Petroleum Derivatives expansion 19 224,802B-37 Capelladas SA Shoes expansion s0 76,889B-38 Quimica Univeral Chemicals expansion 71,230B-4 Fabrics de Tejidos la Union LTDA Chemicals new 46 83,187B-40 Envasadora San Eduardo SA Fish new 38,7148-42 Alimen Conserveros del Norte SA Fish new 1700 111,173 arrears, new ownersB-43 Qumice Central So Chemicals new 5 120,000 arrears, leg. action8-44 Peruplast SA Chemicals expansion 418,0008-46 Fundicion Ventanilla SA Basic Metals modernizaticn 38,6600-46 Reprox SA Photography expansion 20 180,716B-47 Iberia SA del Offset Printing and Publishing expansion 10 434,296B-48 Envasadora de Conserves SA Fish *xpansion 650 80,006B-49 Jorge Reyna Ullos SA Rubber Products expansion 16 38,200 arrears, leg. actionB-6 Industris Textil PIURA Textiles expansion 163,941B-50 Ladrillera Huachips Clay and Pottery Products expansion 310,0008-51 Lab. Biomont SA Pharmaceuticals expansion 10 200,0008-52 Formas Continues y Derivados SA Printing and Publishing 8 303,6138-53 Ind Electroquimica SA Electrical Machinery expansion 54,447B-64 Tecnics Comercial Peruans SA Plastic Products expansion 10 130,772 being *efinancedB-65 Ind. Metalurgics Nacional SA Basic Metals exapansion 6 60,000 arrears, being refin.B-67 Fundision Ventalle SA Basic Metals expansion s0 121,688B-58 Hugo Barberis SA Processed Food expansion 66 369,462 arrears, being refin.B-6 Nicolini Hnoc Processed Food modernization 39,599B-7 Companis Molinera del Peru Processed Food modernization 99,837B-8 Peru Plast Plastic Products expansion 472,616

TOTALS: No. of Subprojects = 78 Additional Emp. = 10,481 Cost per Job _ USS1,S21 IRDB Tnt. Fin. 31,876,804

Source: LAC Subproject Files Loan 1368-PE amd World Bank LDS X

0'-i

- 22 -

Annex 3Page 1 of 2

PqOJUC C0W'.ZSN aEPyfrQLGTh AL CPrZT PRO.jEi - 0OM 1338-PE

CoeV - COwmAntE 8ALAwEA 94EE$. O9O6R 31. 1981 * OEMC8 31l 1988

:975 :976 197? 1978 1979 1980

A d I t *

ASSETS

Surrent

Cash and bank balances 195.4 '28.1 946.2 2.5,0.9 ,.505.2 8.606.2Interest receivable and other current assets gross 553.1 1.18l.0 2,550.5 7,2'6.1 6,035.1 10,162.:

Leos: Provtsions (5.3) (354.4) (806.9) (2,047.5) (2.106.3) (3,332. ')!bt Interest and other current * elte 547.8 826.6 _.741.7 5198.6 3.928.0 6.629.5

Net current assets 743.2 1,554.7 2,687.9 7,'69.5 1L,434.0 (5.435.7

PortfolLo

Loan portfolio - gross 12,102.3 24.209.6 38.636.5 52,522.2 50,265.8 80.654.0Lese: Provisions (52.9) (70.8) (554.0) (l.532.0) (4,7U.0) (2,033.63

Loan portfolio - net 12,049.4 24,138.8 36,082.5 50,990.2 45,554.8 78,620.4Invest_nt portfolLo - gross 3,284.3 4,358.3 7,922.9 14,624.8 38,174.5 65.920.0

Lese: Provtilona (26.9) (65.1) (173.5) (201.8) (402.8) (1,349.1):nvesacnt Portfole - eet 3.257.4 4,293.2 '.7. 9.L 14,423.0 37.771.7 64.571.6

4et Loan and equity portfolio 15.306.8 28,432.0 45.831.9 65,413.2 83,326.5 143.192.0

2thsr Assets

Studie" - net 43.5 47.3 89.3 83.7 72.3 70.8Fixed assets - nec 30.4 53.0 77.1 146.1 252.9 437.8Other asets 27.1 56.6 215.8 158.$ 98.0 I.438.1

Subtot 111.0 156.9 382.2 388.6 423.2 1,946.7

TOTA.L ASSETS 16.161.0 30.143.6 .- 8.902.0 73.571.3 95.l83.7 ,

LLIILLUMES AND EQUtTy

Cutrent Liabilities

Accounts payable 58.2 L35.0 232.3 1,6".6 1,183.6 3.421.6Interest and cosmaslons payable 391.2 657.8 1,213.2 2,408.8 2,922.6 5,118.4taxes end social security payable Z8.3 94.9 167.9 401.2 712.6 1,105.6Provision for staff composation t'..8 19.4 31.0 39.9 . 50.4 S 83.

Total current liabillties 488.5 907.1 1,644.4 4,494.1 %.869.2 9,731.3

Long-term LIAUilitIeS

Foreign .urrency loAns 5.e83.3 10,955.9 24,578.1 35,349.1 29,471.2 42,.t332Loans fcre Banto Central de Reservas - - 5,487.0 7,387.0 9.936.53ther local zurrency borrowings 4,495.8 j 9255.5 ;897.: 9,287.6 t 3.

Total long-term liabilities 1C,369.: 20.795.6 34,320.6 a7,633.3 48,695.3

Farelsn Ex ance xcn1a .8.6 ... 3 - : 27.2

Eqc4itv

;hare p:ital 5,047.0 39J.33 :0.:52.3 :6.060.9 23.712.8Revaluation *urplIua - 23.. ,:74.5 2,841.5 1..6;7. 30.355.Technical reserve 64.2 98.9 5.0 5.0 Z9.0 "37.4

P Retained earniUs 143.5 239.0 505.2 1,309.3 3.-1C e,2

Total Iqulty 5,254.7 3.393.0 ! .93 .0 20.216.7 41.619.1 67.-6

TOTAL LIABILITUS AN ZQUnT! _16,161.0 30.143.6 8.902.0 73.571.3 9583.

.uarantses oa ran Account 3,353.4 9. 7.9 33.-69.0 54,674.0 65,590.0 tI:.C83.^

RATIOS

rttl Liabilitis 2I /equity 2.7:1 3.8:1 5.4:1 5.3:1 2.9:1 3.3Long-term liabltItie /equity 2.6:1 3.6:1 5.2:1 5.;:1 .,;1 :.9:1Current ratio 1.5:1 1.7:;1 1.6:1 1.7:1 :.3:1 :.6:1Provistio /loan and equity portfolio 'S) 0.5 1.6 3.1 5.1 7.6 .3

Note: i,a eav not add up due to rounding.

*e0t-- The CNis 8ionesti.s qsc Sheo t tSho . weD* e te%s' f!O S. SAR of 2064-Ul.

r,, ' ' ' v:w. . '~~~ . ? :_- ..

PROJFCT C(lMPLETION RFF'ORTINDUSIRIAL CREDIT PROJECT - LOAN 1358 PE

COFIDE - COMPARATIVE bAtAlCE SKETS, DECEMBER 31, 1981 - DECEI4FR 31. 1988

(mrIlions of Intis)

1981 a/ 1982 1983 1984 1985 1986 1987 1988

ASSETS

Current Aoset.Cash and Banks 8.2 11.7 30.6 50.o 263.3 667.5 1,146.3 16,586.6

Negotiable Investments 4.2 4.3 2.6 10.6 - - -

Curr,nt Loans 67.7 144.5 361.3 936.6 1,807.7 1,962.3 7,041.6 63,008.3

Interest. Cosmissions andDividends Ro.ei,able 11.3 37.0 131.3 452.6 - - - (257.8)

Provs;ions for Doubtful Receivables - (9.6) (33.7) (107.6) (341.3) (367.0) (1,397.6) (38,276.7)

Accounts Receivable from Affli;tes - - 14.5 21.4

Other Current A-sets 1.4 5.7 5.5 11.6 - - - -

Sub-total 92.8 193 6 512.1 1,375.2 1,729.7 2,262.8 6,790.3 41,060.4

Accountm Receivable from Afflistes (not eurr - - 178.3 379.1 1,047.0 2.7 4.5

Portfol io InvestentsEquity Investments (less provisions) 10 9 52.3 32.3 35 2 72 0 1,754 5 3,241.4 5,936 1

Long-term toans (less provisions) 186 9 348.4 565 0 1,139.9 2,711.5 2,531.7 6,957 7 43,381.8

Sub-total 197.8 400.7 597 3 1,175.1 2.783 5 4.286 2 10,199.1 49,317 9

Fi.ed Assets (not of depreciation) 0 6 1.6 3.0 6.8 12.5 18.1 38.3 727.0

Oth-r Assets 1.8 3.0 4.1 9.4 1,920.3 2,196.0 7,701.3 23,276.0

TOTAL ASSETS 293.0 598.9 1,294.8 2,944.6 7,493.0 8,765.8 24,733.5 114,381.3

LIABILITIES AND EQITY

Currant Liabilities Accounts Payable 1.4 1.8 13.0 25.2 - - - -

Bank Loans. Bonds, Certificetesof Deposits 53.1 131.6 329.0 904.5 1,599.5 1,713.4 6,756.7 39,901.6

Interest. Commissions and

Dividends Payable 10.9 28.8 73.4 215.9 - - -

Other Payable* 4.3 5.2 4.3 5.2

Sub-total 69.7 167.4 415.4 1,145.6 1,599.5 1,717.7 5,761.9 39,901.6

Long-tore LiabilitiesBank Loans. 8Onds, Certificates'f Deposits

125.5 276.9 641.6 1,313.0 2,797.4 3,503.4 8,691.2 47,735.4

Re, -- cs in Administration 1.2 7.2 2.7 17.2 76.6 65.0 121.0 1,707.0

Provii;ons for Social Benefitsand Other 0.1 0.1 1 9 2.2 4 6 5.3 32.0 89.0

Sub-total 1.3 7.3 4.6 19.4 81.2 70 3 153 0 1,796.0

Other Liabilities 0.2 0.2 0.3 5.4 1,814.9 1,998.7 7,136.3 20,004.2

TOTAL LIABILITIES 196.7 431.8 1,061.9 2,483.4 6,293.0 7,290. 1 21,742.4 109,437.2

Equ i tyCapital 79.7 88 7 97.9 106.1 110.5 127.8 274.6 1,223.8

Reserves 10.8 48.5 126.0 349.7 1,063.3 1,317.2 2,544.8 2,467 7

Revaluation Account 0.4 0.5 1.4 2.6 7.6 1.5 8.9 765.6

Retained Earnings 3.4 9.4 7.6 2.8 18.6 43.5 168.0 487.0

Sub-total 96.3 147.1 232.9 461.2 1,200.0 1,490.0 2,996.3 4,944.1

TOTAL LIABILITIES AND EQ3JITY 293.0 598.9 1,294.8 2,944.6 7,493.0 8,780.1 24,738.7 114,381.3

a/ COFIDE implemented a no. system of accounting during 1981 which did not permit the independent auditors

to esparate the current assets and liabilities from that of th- long-term. The mudit report doss not reflect this problem in the balance sheet. :OM (D

sNote-- Minor discrepancies due to rounding.

X

seNote-- Data is based on the following independent auditors for the corresponding year(s) indicated: T

1980/81 Odia Picasso, Tu-sto y Asociados

L.

1982-84 Benjamin Callirgos y Asociados

0

1985-87 Rodolfo Retarvzo y Asociadom

-1

1988 Alejandro Tuesta y Asociados

Although differenat audtors folloaed d,fferent definitions in their reports an effort wsa ade to standardize the pre..ntat.on of the

drffrere,t accounts for the purposes of Ce-ntructing a comparative balance sh-t table over the l,f- of the loan. 7herefor*, t is

necessary to interpret th., table with cautron

- 24 -

ANNEX 4

PERU

PROJECT COMPLETION REPORT

INDUSTRIAL CREDIT PROJECT - LOAN 1358-PE

COFIDE - INCOME STAT4MENTS: 1976-1983

(in 1,000's of Inti-)

1976 1977 1978 1979 1980 1981 1982 1983

INCOME

Income on Loans

(interest and commissions) 2,003.8 3,812.3 6,702.3 9.387.5 12,036.0 27,566.0 70,725.02 167,189.0

Other Guarantee Commi-sions

and Service Fees 219.4 404.3 700.9 912.1 1,813.0 7,748.0 21,752.0

Interest on Bonds

and Deposit* 11.8 94.0 179.1 970.7 1,993.7 5,339.0

Dividends on Invevtmont

Portfol io 59.2 248.2 1,395.5 1,232.8 1,283.7 2,702.0 4,778.0 3,423.0

Forsign Echange Gains 1,885.8 2,520.6 3,751.0

Other Income 22 4 52.6 69. 567.6 1317,5 2.472.0 10&26.0 27.168.0

TOTAL INCOME 2.097.2 4.426.6 8.750.5 14.745.3 20.063.7 43.643.0 93.877.0 219-532.0

EXPENDrTURES

Interest and Co_m;eiions on

Borrovings 1,131.1 2,324.8 4,289.4 7,072.0 12,250.5 27,138.0 62,781.0 138,454.0

Administrative Eupense. 289.6 345.0 490.5 862.4 1,898.8 4,233.0 7,242.0 14,193.0

Exchange Losses 210.3

Other Epenses 606.0 1,106.r

TOTAL D(PENDITURES 1.420.7 .669.8 4.990.2 7.934.3 14.149.3 31.371.0 70,629.0 153.753.0

Profit before Ta. and Provisions 676.4 1,756.7 3,760.3 6,811.0 5,914.4 12,272.0 23,248.0 65,779.0

Provisions 491.0 1,171.1 2,315.5 3,488.9 1.997.3 4,638.0 10,089.0 53,622.0

P.-ofit before Tax 185. 585.6 1,444.8 3,322.1 3,917.1 7,634.0 13,159.0 12,157.0

To. on Not Worth 121.8 217.9 426.0 844.6 1.361.7 1,944.0 2,935.0 4,582.0

Tax on Income 84.7 150.5 202.6 102.1 74.0 641.0

NET PROFIT AFTSR TAXES 63.6 283.0 868.3 2,274.9 2,453.3 5,616.0 9,583.0 7,575.0

.Note Discrepancies in decimale due to rounding.

ewNote-- 1976 sell y Co.

1977 Alonso Castro y Asocisdoz

1978/79 Pierrend Contodores Publicos Aocicadoe

1980/81 Odin Picasso. Tuesta y Asociados

1982-83 Benjamin Callirgoo y Asoci*dos

- 25 -

ANNEX 5

PERUPROJECT COMPLETION REPORT

INDUSTRIAL CREDIT PROJECT - LOAN 13S8-PE

COFIDE - FINANCIAL RATIOS: 1977-1983

1977 1978 1979 1980 1981 1982 1983

Debt to Equity - Loan AgreementSection 4.06 6 5 6 6 6 6 6

Debt to Equity' 5.4 5.2 6.2 2.9 3.8 4.6 8.2

Current Assets to current Liabilities n/a n/. 6.8 2.0 1.3 1.8 1.2

Profits before Taxes as X ofAverage Total Ass-ts n/a n/. 2.9 2.0 2.4 2.3 0.8

Return on Equity n/a n/a 5.6 3.7 5.8 6.6 3.3

Administrative Expenses as X ofAverage Total Assets n/. n/a 1.0 1.6 1.8 1.4 1.5

Financial Incowe (Net of

financial costs) as X ofAverage Loan Portfolio n/a n/a 26.6 16.0 13.9 10.9 11.4

Arrears as X ofTotal Portfolio 4.1 6.1 6.7 n/a 10.1 n/a n/a

Comment: COFIDE calculated these ratios based on its own accounting records. They do notnecessarily reflect the independently audited balance sheet figures.

1/ Includes contingent liabilities.