Report No. 1145a-PAK FILE COPYAppraisal of the Pakistan Industrial Credit andInvestment Corporation Limited for a TenthLoan PakistanAugust 27, 1976

Industrial Development and Finance DivisionSouth Asia Projects Department

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$1 = Rs 9.9Rs 1 US$o.1O1

ACRONYMS

ADB - Asian Development BankBIM - Board of Industrial ManagementEPB - Export Promotion Bureau

EPF - Equity Participation FundFAO - Food and Agricultural Organization of the

United NationsGOP - Government of PakistanICP - Investment Corporation of PakistanIDBP - Industrial Development Bank of PakistanIERR - Internal Economic Rate of ReturnIFRR - Internal Financial Rate of ReturnKfW - Kreditanstalt fur WideraufbauNCCC - National Credit Consultative CouncilNDFC - National Development Finance CorporationNIT - National Investment TrustNWFP - North-West Frontier ProvinceO-E - Open-end Rotor Spindle OperationPAYE - Pay As You Earn Scheme

PCCC - Pakistan Central Cotton CommitteePFC - Peoples' Finance CorporationPICIC - Pakistan Industrial Credit and Investment

CorporationPIDC - Pakistan Industrial Development CorporationSBP - State Bank of Pakistan

SICs - Small Industries Corporations/BoardsSSI - Small-Scale Industry

UNDP - United Nations Development ProgramUSAID - United States Agency for International DevelopmentWPSIC - West Pakistan Small Industries Corporation

FISCAL YEARS

Government of Pakistan July 1 - June 30PICIC January 1 - December 31

FOR OFFICIAL USE ONIL

APPRAISAL OF THEPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ........................ i - iii

I. INTRODUCTION * .. .................................*** 1

II. ECONOMIC AND FINANCIAL ENVIRONMENT ............. 2

General ......... ............................ 2

Industrial Sector . ... . .... o. . . . . . .... . ... .o... 3

Industrial Policy ...... ... .. .. ..... ...... 4

Industrial Finance .... o.o ............ o 6

III. INSTITUTIONAL ASPECTS ..o... .......... o.. 7

Share Capital and Ownership ... ooo ............ 7

Organization and Staff .......... . .......... 8

Procedures and Standards ...... o..o..oo 9

Operating Policies ... ...................... 10

Relations with Government and Business

Community .... .... . .... 12

IV. RESOURCES AND OPERATIONS ........ ... o.o .... oo. 12

Resource Mobilization . .. ooo ......... 12

Resource Allocation .. o ............ o... 14

Development Impact ................... 15

Vo FINANCIAL ASPECTS . ........ . ..... ..... . . 16

General ....... o ...... o.....o..oo. 16

Assets and Liabilities in Bangladesh . ..... 16Quality of Portfolio ....................... 17

Liquidity .... ................ ....... o* ..o*oo..... 22

Financial Structure .. -o-o-o..... 22

Summary Assessment .o ....... .o.oo . ....... 24

VI. PROSPECTS ........ ............ ........ 24

General Outlook . . ..... ..... ... .. .. * 24

Business Forecasts ..... o.oo ........... 26Resource Requirements ... *........ oooo .... 27

Financial Projections ....... ......... ...... 27

This report was prepared by Messrs. E. Elejalde, D. Brown, N. Fostvedt and

A. Wateler following their visit to Pakistan in January/February, 1976.

This document has a restricted distribution and may be used by recipit, only in the performanceof their oMcial dutis. Its contents may not otherwise be discloed without World Bank authorization.

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VII. PROPOSED LOAN .................. ................ 29

Lending Scheme ............................ 29Main Terms . ........ 29

VIII. RECOMMENDATIONS ...... .................. .. 30

ANNEXES

1. The Textile SectorFigure 1 - Production of Cotton by Years 1947-73Figure 2 - Production of Cotton by Staple Length 1947-73Table 1 - Fiber Characteristics of Cotton Varieties

Recommended for Cultivation in PakistanTable 2 - Overall Commodity Balance of Cotton (Expressed

in Raw Cotton Equivalent)Table 3 - Mill Consumption, Yarn Production, Waste

Percentages, and Normal Consumption, 1960-75Table 4 - World Production, Consumption and Trade in Cotton,

1960-85Table 5 - Spot Market Prices at Karachi - Varietywise

(Annual Averages) 1965-66 to 1975-76Table 6 - Cotton Yarn Prices at Karachi - Countwise (Annual

Averages) 1965-66 to 1975-76Table 7 - Price per Yard of Cloth at Karachi (Annual Averages)

1965-66 to 1975-76Table 8 - Comparative Cost 1960 Model Ring Spindle and Open-

End Rotor SystemTable 9 - Comparative Investment and Operating Costs

- 1976 Model Ring Spindle and Open-End RotorSystem

Appendix I - Proposed Terms of Reference for Textile Study2. Institutions Financing Industry in Pakistan3. Interest Rate Trends4. List of Sharholders as of September 30, 19755. Board of Directors and Executive Committee, as of January 1, 19766. Outline of Business Policies7. PICIC's Proposed Strategy for 1976-788. Main Terms and Conditions for Assistance as of August 16, 19769. Resource Position as of December 31, 197510. Details on Foreign Currency Loans and Credits obtained as of

December 31, 197511. Rupee Resurces and Terms as of D)ecember 31, 197512. Summary of Loan Operations 1958 to December 31, 197513. Summary of Underwriting and Equity Operations-1958 to September 30, 197514. Characteristics of PICIC Operations

Table 1 - Sectoral Distribution of Loan and Equity Portfolioas of September 30, 1975

Table 2 - Comparative Statment of Loans Approved-1958September 30, 1975

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15. Rates of Return for Projects Sanctioned between July 1973 andSeptember 1975

16. Agreement between the Government of Pakistan and PICIC regarding-the Problem of Assets and Liabilities in Bangladesh

17. Trends in Arrears, 1969-7518. Analysis of Arrears over 3 Months as of September 30, 197519. PICIC's Plan of Action on Collections20. Summarized Income Statements, December 31, 1970-7521. Balance Sheets, December 31, 1970-7522. Forecast of Approvals, Commitments and Disbursements, 1976-8023. Projected Foreign and Domestic Currency Resource Position, 1976-8024. Projected Income Statements, 1976-8025. Project Cash-Flow Statements, 1976-8026. Projected Balance Sheets, 1976-8027. Estimated Disbursement Schedule for the Proposed Loan

ORGANIZATIONAL CHART

P.IKISTAN

APPRAISAL OF THE

PAKISTAN T"JDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

SUMMARY AND CONCLUSIONS

i. The Pakistan Industrial Credit and Investment Corporation Limited(PICIC) is the main source of long-term finance to the medium and large-scaleprivate industrial sector in Pakistan. It has applied to IBRD for a $25 mil-lion loan and it also received recently a $25 million loan from the AsianDevelopment Bank (ADB). IBRD and ADB have coordinated in processing theseloans and their approach is consistent in all important issues.

ii. PICIC was established in 1957 with active World Bank Group assist-ance. By 1970, it had become a strong and financially sound developmentinstitution and had contributed significantly to Pakistan's industrial de-velopment. However, over the last five years, PICIC has been through aperiod of quite exceptional difficulty. Initially the problems resulted fromthe separation of Bangladesh with the consequent economic distortions in-cluding the 1972 devaluation which more than doubled the debt service burdenof PICIC's foreign exchange borrowers. Further, PICIC had retained the li-abilities for projects financed in the former East Pakistan, while it hadlost control of the related assets. This was the main reason why IBRD's ninthand last loan to PICIC (961-PAK) was made (in 1973) to the Government ofPakistan (GOP) and administered by PICIC, rather than directly to PICIC, sinceit was not then considered creditworthy. PICIC was in the process of copingwith these problems when, in 1974, the impact of the world recession seriouslyaffected its activities, particularly loan collections. Although some seri-ous problems remain, there has been some recent improvement in PICIC's fi-nancial position and the long-run prospects of solving the remaining problemsare satisfactory, so that PICIC can therefore again be considered creditworthy.This report recommends a $25 million loan direct to PICIC.

iii. After improved performance in FY73, when GDP increased by 7.0% inconstant prices and when the country achieved a balance of trade surplus,Pakistan has since suffered serious balance of payments problems and its eco-nomy grew by only 2.6% in FY75 and an estimated 4%-5% in FY76. This was duelargely to unfavorable weather conditions which affected agricultural produc-

tion, to a large increase in the import bill, and to international recessionwhich affected exports and industrial growth. There is need for additionalindustrial investment to improve growth prospects and export performance.There is also need to improve the private savings rate which has declinedsubstantially from 14.4% of GDP in FY73 to 6.5% in FY75. The industrialsector accounts for 50%-60% of the country's export earnings, and about 15%of GDP and should play an important role in improving balance of paymentsproblems and growth prospects.

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iv. The private sector now owns some 70% of industrial assets comparedwith over 90% in the 1960's. The nationalization of the vegetable ghee in-dustry in September 1973 and of the shipping industry and locally owned com-mercial banks in January 1974 adviersely affected the expected revival inprivate industrial investment. In current prices, private sector investmentsin medium and large-scale indust-7y declined in FY74. Although there was animprovement in FY75, private investment is still below the levels achievedin the early 1970's and full revIval of private sector investment interestwill probably be gradual. GOP expects the role of the private sector inindustrial development to continule to be mainly for export-oriented industriesand those processing indigenous l-aw materials. The public sector largelyconcentrates on import-substitut:on industries.

v. The last two years have been difficult for PICIC. The poor invest-ment climate affected not only it:s lending operations but also its collectionperformance. Further, the loss of a large number of senior staff weakenedits middle management. Neverthe:ess, PICIC's staff remains adequate anda number of steps to strengthen it, outlined in this report, are being takenin connection with the proposed loan. The Managing Directorship is now vacantand IBRD will be consulted on the new selection. After the departure ofPICIC's Managing Director in November 1975, Mr. N.M. Uquaili, an ex-PICICManaging Director, and an ex-Finance Minister, was appointed Chairman ofPICIC's Board. He joined in January 1976 and has started making improve-ments in the organization, in its procedures and standards, and has also beeneffective in improving collections, and solving PICIC's problem of assets andliabilities in Bangladesh (para viii). His leadership will be a key factor inattaining the further improvements needed.

vi. PICIC's loan approvals declined from Rs 490 million in 1973 toRs 315 million in 1975. They arE projected at Rs 350 million in 1976 in-creasing thereafter by about 15% per annum. Foreign currency loan commitments(net) improved from Rs 75 millior. in 1973 to Rs 338 million in 1974 and sta-bilized at Rs 269 million in 197'. Foreign currency loan commitments are pro-jected to be Rs 290 million in 1976, Rs 319 million in 1977 and Rs 333 millionin 1978. To fulfill its commitment program through September 1978 and afteraccounting for other sources of torrowings (ADB, bilateral credits, etc.),PICIC needs an additional $25 million loan.

vii. PICIC remains an efficient institution capable of competentlyallocating and administering IBRI. funds. During 1973-1975, its disbursementsaccounted for 21% of the total private sector investment in medium and large-scale industries. The average ey-ante economic rate of return of its approvedprojects over the last 2-1/2 years is 22%. The average ex-ante financialrate of return is 17%. These prcjects have an average fixed investment perjob created of $12,000. PICIC hes also improved its promotional activities,particularly in the medium-scale sector. However, more promotional work needsto be done to reduce PICIC's finencial exposure in the textile and sugarindustries, which respectively account for 45% and 17% of the outstandingportfolio.

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viii. Overall PICIC's financial position has improved over the last twoyears. Due to GOP arrangements, the uncertainty regarding the status of itsBangladesh liabilities has been removed and PICIC will bear no loss from this.Partly because of a share capital increase during 1974, the capital structurehas improved and PICIC's debt/equity ratio is below the 7:1 contractual limit,which should be retained for the proposed loan. On the other hand, profit-ability declined in 1975 and is not expected to improve substantially over thenext 5 years although it remains at an adequate level of 1.3% (after tax) onaverage total assets. The main problem is the condition of the portfolio, asthe arrears have deteriorated, due mainly to the recent economic and politicaldevelopments. Because of the large accumulated overdues, and as improvementswill depend largely on economic/political developments, it will take some timefor the arrears problem to be fully solved, and without rescheduling they arenot expected to decline in amount before 1978. An analysis of PICIC's portfolioindicates that the long run prospects for collections are good, although thelarge volume of overdues creates some uncertainty. After a careful review bythe auditors, PICIC has increased the provisions for its portfolio, and theseshould be sufficient to cover possible losses.

ix. The low collections also affected PICIC's liquidity, forcing it toborrow from the State Bank of Pakistan (SBP) to service some of its debt. Forthe proposed loan a number of actions, outlined in this report, are beingtaken by GOP and PICIC to improve the financial position and to ensure thatPICIC's liquidity will be maintained. PICIC has a competent and experiencedtop management capable of tackling the problems faced. It is thereforereasonable to assume, as evidenced by the most recent performance under thenew management, that collections will continue to improve and that the arrearsproblem will be solved in the long-run. PICIC's financial projections indicatethat reserves and provisions should remain at about 15% of the total portfolio,and the debt/equity ratio (contractual definition) at about 6.6:1, or slightlybelow the contractual limit. By 1980, PICIC's debt outstanding to IBRD shouldbe the same as at present, $35 million, and should account for 19% of PICIC'slong-term debt outstanding and for 13% of its total assets.

x. A $25 million loan is recommended. The objectives of the proposedloan would be: (a) to help finance economically viable industrial projectscontrolled by the private sector; and (b) to continue efforts to reestablishPICIC's past institutional and financial strength as a promoter of industryand a mobilizer of resources. Up to $0.2 million of the loan would be allocatedto finance the foreign exchange cost of a study of the textile sector, whichis the most important industry in Pakistan contributing over 50% to manufactur-ed exports. The objective of the study would be to determine the strategy todevelop Pakistan's textile industry in order to meet the projected nationalrequirements and to improve its export performance.

PAkI ISTAN

APPRAISAL OF THE

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

I. INTRODUCTION

1.01 The Pakistan Industrial Credit and Investment Corporation (PICIC)is one of the first development finance companies (DFCs) established withWorld Bank Group assistance. IBRD made its first loan to PICIC in 1957, andby now it has made 9 loans for a total of $208 million. During the 1960sPICIC developed into a well managed and experienced DFC and obtained assistancefrom many lenders, including multilateral, bilateral and some private sources.However, the last five years have been exceptionally difficult. A substantialportion of its assets were lost through the separation of Bangladesh, and theGovernment of Pakistan (GOP) had to provide special assistance to enable it tomeet its obligations. Accordingly the last IBRD loan (961-PAK) in 1973 was toGOP to establish a fund administered by PICIC. 1/ A number of industrial en-terprises were nationalized, so that PICIC's sphere of activity in the privatesector was curtailed. It was coping with these problems when, in 1974, it metthe most severe of the post-war world recessions. Pakistan, a relatively openand trade-oriented economy with substantial exports of cotton textiles, wasparticularly hard hit and PICIC, which held an important role in financing thetextile industry, was also seriously affected. Arrears rose very rapidly, andPICIC had to obtain further GOP assistance to maintain its liquidity.

1.02 PICIC's financial position is improving although serious problemsremain, particularly the large volume of overdues in its portfolio. Theseproblems, although difficult, are under control and given reasonable assist-ance and co-operation from GOP, they can be solved. Subsequent sections inthis report describe the effect of these events on PICIC and the steps whichit has taken and is taking to deal with them. These steps have been discussedat length with IBRD and, in effect, they constitute our basis for consideringPICIC creditworthy for the $25 million direct loan here proposed. IBRD andthe Asian Development Bank (ADB) that is also lending to PICIC during thisyear have cooperated in processing these loans, and the approach is consist-ent in all important issues.

1/ Excluding this loan ($25 million) where PICIC bears no liability, PICIC'soutstanding debt to IBRD was $35 million as of December 31, 1975. As ofAugust 13, 1976, $15.8 million out of this latest loan had been disbursed(the loan is fully committed) while less than $1 million remained tobe disbursed under the eighth loan.

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1.03 The objectives of the proposed loan would be (a) to help financeeconomically viable industrial projects in the private sector, which controlssome 70% of industrial assets and is particularly export oriented; and (b) tocontinue efforts to reestablish PICIC's past institutional and financialstrength as a promoter of industry and mobilizer of resources. Up to $0.2million would finance the foreign exchange cost of a study of the textilesector, which is the most important industry in Pakistan and produces over50% of manufactured exports. The objective of the study would be to assistPakistan in determining the strategy to develop its textile industry in orderto meet the projected national requirements and to improve its export perform-ance.

II. ECONOMIC AND FINANCIAL ENVIRONMENT

General 1/

2.01 After an improvement in FY73 when GDP increased by 7.0% in constantprices, Pakistan's economic growth declined to 4.6% in FY74 and 2.6% in FY75.This was due largely to unfavorable weather conditions which affected agricul-tural production and in turn other sectors, and to the international recessionwhich affected industrial growth. Agricultural production declined by 2.0%in FY75 after growing by 1.3% in FY74 and by 1.7% in FY73. Industrial produc-tion declined by 0.6% in FY75, compared with a growth rate of 6.5% in FY74 and9.7% in FY73. Due to better weather, GDP improved in FY76 with estimatedoverall growth at 4%-5%. Industry is estimated to have grown by only 1%-2%(para 2.05).

2.02 Balance of payments current; deficits have expanded in recent years.From a level of $130 million in FY73, the deficit increased to $1,224 millionin FY75,and was about $1,156 million in FY76. This has been due to largeincreases in the price of oil and other imports, while the price of Pakistan'sexports (particularly cotton products) have not increased as rapidly, andactually declined in FY75. In the longer run, the performance of the industrialsector will be a key to improvements in exports. Manufactured commoditiesaccounted for 62% of total exports during FY73, 61% during FY74, and 52%during FY75, the decline being due to the impact of international recession ontextile exports.

2.03 The wholesale price index grew by 20% in FY73, 27% in FY74 and26% in FY75 (2%-4% in FY70 and FY71). The high rate of inflation and thenationalization policy caused private savings to decline from 12% of GDP inFY70 to 6.5% in FY75 (para 2.12). Total savings fell from 13% of GDP to5.6% during the same period. Due to a decline in international prices, toGOP efforts to control monetary expansion, and to stabilization of foodgrainprices, the inflation rate declined substantially during the first half ofFY76, when bank deposits expanded by 24%. This has reduced the liquidity

1/ A more detailed assessment of Pakistan's economy is contained in IBRD/IDA's latest Economic Report No. 1023-PAK of March 1, 1976.

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strain on commercial banks as the ratio of advances to deposits declined from

90% in January 1975 to 77% in September 1975. Estimated inflation for FY76on an annual average basis is 11Z-12%.

Industrial Sector

2.04 The manufacturing sector continues to contribute about 15% to GDP,of which 12% represents medium- and large-scale industry. Since 1973, themajor change in the industrial structure has been the expansion of the publicsector, which now accounts for about 30% of industrial assets. Ownership ofthe 31 private companies in the 10 basic industrial categories 1/ that GOP hadmanaged since January 1972 was officially transferred to GOP in November 1973.The vegetable ghee industry was nationalized in September 1973 and the shippingindustry and commercial banks in January 1974. In July, 1976 GOP took overthe domestic enterprises engaged in cotton ginning, rice milling, and flourmilling. During FY73-FY75 the private sector accounted for about 60% of totalindustrial investment, compared to 90% in the 1960's. Excluding one largepublic sector project, industrial investments by the private sector areexpected to be around 50% over the next 5 years (para 6.01). GOP expects theprivate sector to concentrate on export oriented industries, and the publicsector largely on import substitution.

2.05 Agro-based industries 2/ account for some 60% of industrial value-added. 3/ The poor performance of the agricultural sector contributed to therecent slowdown in industrial growth, as raw materials were not sufficientlyavailable and became more costly. The international recession also affectedindustrial activity. The textile sector, which employs over 35% of theindustrial labor force and usually accounts for about 30% of industrial valueadded, contributing over 50% of manufactured exports, was particularly affected.The crisis in the textile sector was also aggravated by GOP policies overduties and raw cotton prices. However, export duties on yarn and clothwere abolished in August 1974 and raw cotton prices reduced in October 1974.Nevertheless, the revival of this industry during FY76 has been slower thanexpected due to a decline in cotton production and quality resulting fromfloods in Sind province. This, and the slow revival in the world economy,explains the slack industrial growth during FY76 (para 2.01).

1/ The 10 categories are: iron and steel, basic metals, heavy engineering,heavy electricals, motor vehicle assembly and manufacturing, tractorplants assembly and manufacturing, heavy and basic chemicals, petro-chemicals, cement and public utilities.

2/ Such as textiles, sugar, vegetable oil, paper, leather and tobacco.

3/ Chemicals (pharmaceuticals and fertilizers) and engineering industrieseach account for about 10% of industrial value added.

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2.06 Annex 1 provides a background note on the textile sector. Itprojects the availability of cotton, surplus to domestic requirements, tobe exported as lint, yarn, cloth and made-up goods and indicates that thereis a need to improve product quality to obtain better export prices. Italso discusses the need for additional investment, particularly in balancing,modernization and replacement. There is also a need for new spinning capacitybut this should be done selectively, preferably for integrated units. However,while the information available leads to the conclusion that world demandwould provide an expanded market, the analysis does not indicate the mostprobable types, quantities and qualities of yarn, cloth and made-up goods thatwould maximize benefits. The open-end (O-E) rotor system of processing lintinto yarn appears to offer substantial investment opportunities in Pakistan(Annex 1 paras 26-29). However, it also poses questions including whethermarket demand is for yarn or cloth and of what quality and type. To answerthese kinds of questions and to help guide GOP, Pakistan lending agencies andsub-borrowers in the development of the industry, a market study should beexecuted by GOP and PICIC. GOP has asked that up to $200,000 from the propos-ed loan be allocated to finance the foreign cost of such a study, which wouldbe partly undertaken by foreign consultants. PICIC and the Industrial Develop-ment Bank of Pakistan (IDBP) are prepared to cover part of the local currencycosts, estimated at $100,000 equivalent. 1/ It is recommended that up to $0.2million of the loan be allocated to GOP to finance the foreign cost of thestudy under arrangements outlined in para 7.01. Appendix 1, Annex I shows thedraft terms of reference which should be agreed with GOP before loan effective-ness. The contract and appointment of consultants acceptable to IBRD would beconditions of disbursement for that portion of the loan. The study should becompleted by September 30, 1977.

Industrial Policy

2.07 The Fifth Five Year Plan (FY77-81) is still under preparation andshould be available by the end of this calendar year. A draft indicates thatindustrial policy is likely to emphasize: (i) development of basic industriesto achieve self-sufficiency in the not too distant future; (ii) as in previousplans, industries using local raw materials and machinery; (iii) exportoriented and import substitution industries to improve the balance of payments;and (iv) expansion of supply of agricultural raw materials which are directlyconsumed and/or provide inputs to agro-industries. GOP also plans: (i) tocontinue encouraging the development of small industries by integratingmeasures already established to improve credit facilities with its plans toimprove marketing and quality control services, and to increase sub-contractingarrangements; 2/ (ii) to encourage joint ventures with foreign firms, especial-

ly in technologically complex industries like engineering and heavy capitalgoods; and (iii) to enforce direct control on location of private sector

1/ The contribution of PICIC, IDBP and other local agencies will bedetermined by GOP.

2/ Annex 2 para 11 outlines some IBRD proposals to improve credit facilitiesto small-scale industries that might develop into an IBRD/IDA project.

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industries. u Presently, the Provincial Governments clear the location and

sponsorship f all industrial projects. This seems unnecessary for projects

involving expansion, balancing and modernization, and PICIC has raised this

matter with GOP. A decision by a GOP committee reviewing this issue is pend-

ing.

2.08 The revival in private sector investment activity anticipated during

the 1973 appraisal for the last loan was slowed by the 1974 nationalization of

commercial banks. 2/ Some improvement took place during FY75 due to the pro-

mulgation of a set of guidelines for compensation to be paid for nationalized

industries, and to qualified assurances by GOP that there would be no more

nationalization of industries. However, the improvement was limited as there

was still some uncertainty among private industrialists over the extent of GOP

support for their activities. In July, 1976, GOP announced the nationalization

of cotton ginning, rice milling, and flour milling on the grounds that this

would eliminate middlemen, stop adulteration of flour, reduce the percentage

of broken rice, and guarantee remunerative prices for paddy and seed cotton.

Some 2,000 units were affected. GOP emphasized that the decision was linked to

rural equity concerns and did not signal a reversal of policy towards the

private industrial sector. However, this should have a deterrent

effect on private investment despite other actions taken by GOP in favor of

the private sector. 3/ The revival of private sector interest in investment

will probably await the next elections (1977), and will depend on future

actions by GOP. GOP is considering clearing up doubts about the borderline

areas where both the private and public sector can operate (such as engineer-

ing and chemicals). This could induce the private sector to invest more in

these areas. Further, GOP is also considering the possibility of joint

ventures between the private and public sectors. GOP expects the role of the

private sector in industrial development to continue to be mainly for export-

oriented industries and those processing indigenous raw materials, an important

role that deserves the fullest support.

2.09 The direct effect of the recent nationalizations on the proposed

project will be marginal. Those sectors account for only about 5% of private

industrial investments and affect relatively small entrepreneurs who do not

1/ Geographically, some 50% of total industrial production is in Sind,

40% in Punjab, almost 10% in NWFP and less than 1% in Baluchistan.

2/ In current prices, private sector investments in medium and large-scale

industries were Rs 789 million in FY73, Rs 576 million in FY74, and

Rs 900 million in FY75, or 47% of total industrial investment in

medium-and large-scale industries. This compares with large- and

medium-scale private sector investments of Rs 1,200 million (87%) inFY70.

3/ In recent months, GOP took, at PICIC's suggestion, actions to improve

the financial viability of solvent extraction plants, cotton textile

industry, paper industry and export oriented industries (para 5.10).

loom large in PICIC's clientele; only 8 of PICIC's clients out of 257 areinvolved and they account for about 1% of PICIC's portfolio. On the otherhand, the decision may have an indirect impact on PICIC in two ways: (i)demand for PICIC loans may be affected; and (ii) PICIC's collections whichhave been improving, may suffer. However, while there may be a reduction inthe loan demand for new projects, the fund requirements for expansion, modern-ization and balancing should not be greatly affected. PICIC has verified itspipeline of projects and concluded that investment interest is sufficient toutilize fully the proposed loan (paras 6.03, 6.04). Further, provided thatPICIC continues its strong action on follow-up, it should be able to achieveits collection targets, as these were based on a project by project analysisof the repayment capacity of its clients (para 5.12). Moreover the low levelof private industrial investment is affecting prospects for industrial growthand this problem should not be exacerbated through unavailablility to PICIC ofadequate resources for lending.

2.10 After the 1972/73 labor reforms, which provided a number of finan-cial and social benefits for workers, the Industrial Relations Ordinance wasfurther amended in October 1974 to strengthen GOP's and management's abilityto deal with illegal lockouts and strikes and with go-slows, while maintaininglabor's right to freedom of association and collective bargaining. This hashelped to reduce production losses.

Industrial Finance

2.11 Financial Institutions. Annex 2 describes the institutional frame-work for financing industry. PICIC continues to operate in the large andmedium scale private industrial sector, IDBP in the medium and small, andthe recently established NDFC 1/ in the public industrial sector. The mainactivity of these three institutions is long-term lending. Commercial banksprovide primarily short term working capital but they may also provide termfinancing up to a ceiling fixed by SBP 1/ (the Central Bank) for each bank.Securities and capital market activities are mainly undertaken by specializedinstitutions (TCP and NIT) 2/, although PICIC, IDBP and NDFC can also makeequity investments and underwrite public issues. There is now more overlapbetween the lending activities of PICIC and IDBP (medium scale) due to thereduced involvement of the private sector in large scale operations (para2.08). However, the two institutions still play a complementary role and theadditional competition is healthy. Availability of long term funds is ade-quate for the large and medium scale industrial sector, where PICIC operates.However, the institutional framework for financing small scale industriesneeds streamlining (Annex 2 para 6), and the Bank Group is discussing with GOPand IDBP the means to do so.

1/ National Development Finance Corporation (NDFC), State Bank of Pakistan(SBP).

2/ Investment Corporation of Pakistan (ICP), National Investment Trust (NIT).

2.12 Interest Rates and Savings Mobilization. Annex 3 shows the trend

in Pakistan's interest rate structure. After the August 1973 increases,

which included a rise in the liquidity ratio for commercial banks from 30%

to 35%, interest rates were again increased in September 1974 as an anti-

inflationary measure. The SBP discount rate went up from 8% to 9%. The

ceilings on commercial bank lending went up by 1% to 13%. Fixed depositrates were also increased and now range from 8% to 11.75%, compared with

6.75% to 9% in August 1973. However, private savings mobilization declined

from 14.4% of GDP in FY73 to 6.5% in FY75 because of the high inflation rates,

the transfer of resources to the public sector (which has a lower propensity

to save), and the bad investment climate which induced flight of capital

as well as investments in less productive areas (e.g. real estate). Infla-

tion has declined in FY76 and the rate of savings improved (para. 2.03).

2.13 Assuming that GOP limits monetary expansion (projected at 9% during

1976-81), it should be able to keep inflation in line with the international

rate, which is projected at about 8%. With the present interest rate structure,

Pakistan would therefore return to positive real rates of interest; 0-3.5% for

fixed deposits and up to 5% for lending. GOP should pay special attention to

the interest rate structure in view of the need to improve savings rates. 1/

III. INSTITUTIONAL ASPECTS

Share Capital and Ownership

3.01 PICIC's initial paid-up capital was Rs 20 million. It was in-

creased progressively to Rs 66.4 million in 1974. The most recent increase

was made for Loan 961-PAK, primarily to improve PICIC's debt/equity ratio.

This was a rights issue for Rs 10 million in cash during mid-1974 of which

Rs 6.4 million was subscribed; Rs 3.8 million by Pakistani shareholders(60% of their rights) and Rs 2.6 million by foreign shareholders (71% oftheir rights). The depressed stock market explains the discouraging res-

ponse, particularly from Pakistani private shareholders (the issue was at

par while PICIC's share price was below par). The unsubscribed portion,Rs 3.6 million, was made up by GOP in the form of a subordinated loan, as

originally agreed. 2/ Annex 4 shows PICIC's principal shareholders, including

1/ GOP plans to halve its dependence on external financing from 67% in

FY75 to 33% during FY76-FY81 (para 6.02). As discussed with GOP in

connection with the recent Program Loan, Pakistan plans to keep sav-ings rates at 2% above the rate of inflation.

2/ GOP also made an additional subordinated loan of Rs 15 million in

mid-1974 that had also been agreed under Loan 961-PAK. PIGIC's

debt/equity ratio thus fell below the 7:1 contractual limit(para 5.17).

those subscribing to the latest riglhts issue. As a result of the nationaliza-tion of commercial banks, the public sector shareholding has increased to45.4% from 37.9% in 1973. Foreign financial institutions hold 33.1%, Pakistaniprivate investors 18.0%, and IFC 3.5%.

Organization and Staff

3.02 Board of Directors. The Board is competent and experienced. Ofthe 20 directors, 8 (including the Chairman, para 3.03) have joined since1973, but the breadth of background and experience remains basically unchanged(Annex 5). IFC is now represented on PICIC's Board by Mr. Alexander F. Kirk,IBRD's Resident Representative in Pakistan. Although empowered to approveloans below Rs 5 million, 1/ the Executive Committee has not met frequently inthe past. The Board has approved many of these loans, leaving it little timeto discuss policy. The Executive Committee has recently been reorganized andnow consists of the Chairman of the Board, the Managing Director and six otherBoard members. PICIC intends to delegate approval of most loans below Rs 5million and of most administrative Board matters to the Executive Committee toallow the Board more time to concentrate on policy questions and importantproblems.

3.03 Management. The Managing Directorship has been vacant since November1975 when Mr. S. Osman Ali became Governor of SBP. Mr. N.M. Uquaili, an ex-Managing Director of PICIC and an ex-Finance Minister was appointed Chairmanof PICIC's Board in December 1975, and is now also running PICIC's day to dayoperations while a new Managing Dire,ztor is sought. PICIC has agreed toconsult IBRD prior to any changes in or appointments to the position ofPICIC's Managing Director. IBRD would be also consulted on any furtherchanges in the appointment of the Chairman of the Board. Mr. Uquaili hasalready made a positive impact on PICIC's operations. His leadership will bea key factor in attaining the further improvements anticipated during theprogress of this proposed loan.

3.04 Staff. As of January 31, [976, PICIC's total staff numbered 287of whom 119 were professionals. While 33 new professionals were hired duringthe last 2 years, 20 left. Some of them were among PICIC's most experiencedstaff, including its Deputy Managing Director, Chief of Operations, ChiefEngineer, Deputy Chief Economist, and Chief Law Officer. Many were adequatelyreplaced with PICIC's own staff. However, the high turnover has weakenedmiddle management, which will take some time to improve. Nevertheless, thegap left by the departure of the Deputy Chief Economist, who had become

particularly qualified in promotional, work (paras 4.08 and 4.09), must befilled promptly. PICIC is already recruiting a qualified industrial economistfor promotional work and expects to make the appointment by the end of theyear.

1/ Loans below Rs 5 million account for some 60% by number and 15%by amount.

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3.05 The high staff turnover was mainly due to increasing demand for

qualified personnel within Pakistan and abroad, including the Middle East. To

attempt to control the turnover, PICIC is to undertake a comparative study of

its staff benefits and working conditions to provide guidelines for attracting

and keeping good officers. The study will be completed within three months

after GOP's Pay Commission report is published. The Commission is reviewing

the staff benefits of GOP financial institutions, including commercial banks,

and expects to issue its report within the next few months.

3.06 Despite the staff turnover, the quality of PICIC's staff remains

high. There are a number of promising younger professionals and PICIC is

still able to attract good new recruits. On the job training remains ade-

quate and PICIC frequently uses external training facilities (including

EDI) for its senior officers. PICIC also collaborated with ADB in setting up

a development banking course at Karachi during 1975 and started recently

a program to improve the training of its engineers, which includes an exchange

program with non-borrowers to give PICIC's engineers better on the job experi-

ence. PICIC's professional staff is now adequate except for follow-up work

where it has been insufficient for routine visits to all projects, although

PICIC has undertaken to correct this problem (para 3.09).

3.07 Organization. The new Chairman has made a number of organizational

changes (see chart). The most important is the streamlining of follow-up

activities into three departments: Project Implementation, Investment,

and Special Projects. The Project Implementation Department follows-up

projects from sanction to completion, and also attends to letters of credit

and insurance coverage. The Investment Department is responsible for the

follow-up of completed projects and for the management of PICIC's investment

portfolio, including investments in shares and debentures and exercise of

options. The Special Projects Department is responsible for projects facing

serious difficulties or willfully defaulting. 1/ This reorganization permits a

more focussed approach towards follow-up and is justified in view of the

serious arrears problem (para 5.05). However, separation of the above func-

tions, which are somewhat interrelated, may create coordination problems.

Therefore, a senior chief is to be appointed, to whom the heads of these three

Departments would report. Also, the functions of the Internal Audit Depart-

ment are to be expanded to include some evaluation of past operations.

Procedures and Standards

3.08 Appraisal. PICIC's standards for project appraisal continue to be

satisfactory. Its economic analysis of projects has improved, and in a few

1/ The Special Projects Department now handles 85 out of over 300

companies under supervision.

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cases projects have been altered 1/ as a result of preliminary calcula-tions of economic rates of return (which have only been made for the past2-1/2 years). The dialogue with PICIC through the subproject review processfor Loan 961-PAK has been beneficial in identifying and correcting some weak-nesses in PICIC's recent appraisals (e.g. level of contingencies, and incre-mental analysis).

3.09 Follow-up. PICIC's follow-up procedures remain satisfactory, theproblem of overdues being largely due to factors beyond its control (paras

5.06-5.10). However, due to staff shortages (para 3.06), routine work, suchas formal follow-up visits (as contrasted with visits mainly for collections)has suffered. 2/ Therefore, after completing its program to rescheduleprojects in arrears, PICIC will impLement a procedure by which each project isvisited at least once a year, and adequate staff will be allocated for thispurpose. The reorganization of PICIC's follow-up work (para 3.07) shouldfurther improve PICIC's supervision activities.

3.10 Procurement and Disbursement. PICIC generally requires that pro-curement under its foreign currency loans be based on at least three quota-tions from foreign suppliers, and that the final contract be subject to itsapproval. This procedure is appropriate to the nature of PICIC's business.However, to ensure that the best prices are obtained, PICIC's managementhas introduced recently a number of measures including international competi-tive bidding, which will be encouraged in all projects and will be requiredfor the larger ones involving costs of imported machinery of, say, over $2million. Procurement for smaller projects will continue, where appropriate,to be determined through international shopping. Disbursement procedures arealso satisfactory.

Operating Policies

3.11 General. PICIC's Statement of Policies (Annex 6) was last amendedby its Board in January 1974 with the prior concurrence of IBRD. 3/ Before

1/ A proposal to manufacture low price ceramic wares was changed, onPICIC's advice, to manufacture medium and fine quality ceramics.A similar change was made for a project producing coarse yarn.

2/ Recent formal visits to projects are as follows:

In Operation Under ImplementationNo. of No. of No. of No. ofCompanies Visits Projects Visits

1973 224 70 79 581974 220 73 93 421975 (9 mths) 225 51 84 43

3/ There was a subsequent amendment in August 1975 mainly to reflectearlier developments: (i) the separation of former East Pakistan;and (ii) a de facto minimum lending limit for foreign currencyloans in underdeveloped areas of Rs 750,000 compared to Rs 1.5 mil-lion in other areas (Annex 2 para 2).

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the amendment, PICIC's exposure limit in any single transaction was $4 mil-lion and its total commitment in a single enterprise could not exceed theequivalent of 25% of its net worth or $5 million, whichever was lower. Theamendment permits the approval of transactions and commitments exceding theselimits, but only in exceptional cases after a particularly rigorous projectappraisal and close and explicit scrutiny by PICIC's management and Board.PICIC has exceeded the exposure limit in 10 cases, although most resultedautomatically from devaluation. In future PICIC hopes to remain withinthe limit, since it plans to have more joint ventures with foreign investors(para 4.04). This intention is also reflected in PICIC's statement of strat-egy for the next 2-3 years (Annex 7). Other features of PICIC's StrategyStatement are its intention to: (i) confine itself to the financing ofindustries controlled by the private sector; 1/ (ii) increase promotionalactivities (para 4.09); (iii) emphasize the financing of projects that arebased on domestic raw materials or on locally fabricated machinery, exportoriented, and projects that would help raise agricultural productivity;(iv) give preference to financing projects for balancing modernization andreplacement; (v) give priority to improving collections, follow-up, andsolving the staff turnover problem. The Strategy Statement is to be discussedand approved by PICIC's Board of Directors before the proposed loan becomeseffective.

3.12 Terms of Assistance. Annex 8 shows PICIC's present interest ratesand other charges. In line with rising interest rates in Pakistan (para2.12), PICIC's local currency lending rates have gone up from 11.5% and 10% to13% and 12.5% for projects located in developed and less developed areas, res-pectively. Loans for locally fabricated machinery are now given at 9.5%. 2/The foreign currency lending rate has also gone up from 8.5-9.5% to 10.5-11.0%.Assuming inflation of 8% in the long-run, real lending rates are 2.3%-2.8%(plus exchange risk) for imported equipment, 1.4% for local equipment, and

1/ PICIC has considered and rejected (at least for the time being) thepossibility of changing its policies to finance the public sector also,because it anticipates that the private industrial sector will reviveand continue to contribute to Pakistan's economic growth. There is scopein the private sector to develop new export oriented technologicallycomplex industries like mineral processing and electronics, which PICIChopes to be able to promote (para 4.09) through joint ventures withforeign investors and/or arrangements for foreign collaboration.

2/ Loans for financing locally fabricated machinery are made through aspecial refinance facility by SBP (Annex 14 para 6). Since 1972, theon-lending rate was 1.5% above the Central Bank rate or 7.5%, but afterthe interest rate increases in August, 1973 and September 1974 (para 2.12)the scheme became uncompetitive with foreign loans. Thus since October1974 the lending rate for locally fabricated machinery has been 1% belowthe foreign currency lending rate.

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4.2%-4.6% for other local currency loans (land, buildings, etc.) These levelsare adequate, but there is room for a further increase of about 1% so as toimprove PICIC's profitability and the interest rate structure. This matterwill be taken up during the basic economic mission in the context of Paki-stan's overall interest rate structure.

3.13 Previously, the penalty charge on overdues was 2% above the basicloan interest rate. The increases in the Central Bank rate and thus in thecommercial bank lending rates made arrears on borrowings from PICIC lesscostly than commercial bank borrowLngs. Accordingly, PICIC increased thepenalty charge during 1974 to 4% above the interest rate on the loan orabove the Central Bank rate, whichever was higher. The new charge providesa flexible mechanism that will adjust automatically to changes in the CentralBank rate. However, it applies onlLy to new loans, since past loans aregoverned by previous agreements unless rescheduled.

Relations with Government and Business Community

3.14 Relations between GOP and PICIC continue to be close. PICIC isrepresented on 12 important GOP comLmittees concerned with industry. GOP hascontinued to provide PICIC with bot;h foreign and local resources, includingtwo new subordinated loans since 1973. PICIC's Board includes a nominee ofGOP and a nominee of the Provincial Governments. Though operating auto-nomously, PICIC functions within the framework of GOP policies.

3.15 PICIC's relations with other financial institutions remain general-ly good although not as close as before nationalization of the commercialbanks. Commercial banks were slow in honoring guarantees enforced by PICICthat had been given while the banks were in private hands. This problem hasby now been solved (para 5.07). Several banks and insurance companies arePICIC shareholders and represented on its Board. PICIC's relations with itsclients have remained good.

IV. RESOURCES AND OPERATIONS

Resource Mobilization

4.01 PICIC's resources totalled Rs 5.8 billion as of December 31, 1975.Foreign currency resources (Rs 4.9 billion) accounted for 85% of the totalwhile domestic resources provided the balance of Rs 853 million. Annex 9

summarizes its resource position.

4.02 Of PICIC's total foreign exchange resources of $493 million, nineIBRD loans account for 43%, untied loans (ADB and KFW) for 17%, other bila-teral sources for 23%, and several suppliers' credits for 16%. The remain-ing 1% comes from the portion of the share capital paid in foreign currency.

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PICIC's past performance as a mobilizer of resources has been relatively

good. While most of the bilateral/suppliers credits were arranged by GOP,PICIC arranged $29 million in private bank loans and private suppliers'credits. 1/ However, under present conditions, PICIC will probably not be

able to mobilize independently foreign commercial resources for some time, andit will therefore have to depend on allocations from GOP, IBRD, ADB, and KfW.Annex 10 gives details of PICIC's past foreign borrowings.

4.03 Of total rupee resources of Rs 853 million, share capital andreserves account for Rs 301 million (35%), State Bank lines of credit Rs 325million (38%), a USAID loan Rs 30 million (4%), GOP loans Rs 22 million (3%)and PICIC's own debentures Rs 175 million (20%) (Annex 11). PICIC's domesticresources over the next few years are expected to be severely strained (para6.05). At the moment, its prospects of obtaining further funds in the mar-ket are limited, due to the still depressed economic conditions. Neither isthere any potential demand for debentures at any interest rate PICIC couldoffer. Most of the demand for debentures comes from institutional investorssuch as commercial banks, which would have difficulty in purchasing PICIC'sdebentures now that their reserve ratio requirements have increased (para 2.12).Thus PICIC will have to depend on GOP for local currency funds in the fore-seeable future.

4.04 Since 1973 PICIC has approved joint venture projects with otherlocal financial institutions involving purchase of debentures and underwritingfor Rs 6.0 million (7 projects). Participation by the other institutions wasRs 52.0 million. Since inception, 2/ PICIC's involvement in such activitieshas amounted to Rs 93.8 million (39 projects), with participation by otherfinancial institutions of Rs 267.3 million. Up to September 30, 1975, PICIC's

involvement in joint ventures with foreign investors was Rs 510.7 million for33 projects (Rs 82.0 million from 1974 to September 30, 1975 for 4 projects).Participation by foreign institutions was Rs 554.2 million. 2/ In view of itsintention to promote projects that are more complex technologically (para4.09) and to remain within its normal exposure limit, PICIC plans to increasethe number of projects with foreign investment and collaboration.

4.05 Since January 1973, PICIC's approvals of loans, equity investmentand underwriting, have accounted for about 59% of the total investment in theseprojects. This means that every rupee invested by PICIC has generated another

0.70 rupees of additional investments. The relatively high proportion of PICIC

1/ Loans from National and Grindlays Bank ($5.6 million), and UnitedBank of London ($1.7 million). GOP is committed only to provideconvertibility without carrying any credit risk. Private supplier'scredit from UK ($16.6 million), Petromim Saudi Arabia ($3.5 million)and Toyomenka, Japan ($1.3 million). These were obtained prior to 1972.

2/ West Pakistan only, and up to September 30, 1975.

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financing is mainly because of increased costs of imported machinery afterthe devaluation. 1/ In some cases, PICIC financed over 60% of projectcosts, which is excessive. PICIC now follows the policy of attempting tomaximize the sponsor's contribution and insists that normally debt financingin a project not exceed 60% of the project cost.

Resource Allocation

4.06 Overall Operations. Annex 12 gives a summary of PICIC's loanoperations through December 31, 1975. Gross loan approvals were Rs 494million in 1973, Rs 489 million in 1974 and Rs 315 million in 1975. Thereduction in 1975 was because a Board Meeting scheduled for December 1975was not held due to the change in management (para 3.03). Otherwiseapprovals would have slightly exceeded Rs 400 million, still below the levelof the previous 2 years. Commitments and disbursements lagged behind appro-vals due mainly to the bad investment climate, which even induced cancella-tions of earlier commitments in 1974. However, commitments increased fromRs 87 million in 1973 to Rs 352 milLion in 1974, and after the fast growthin 1974, stabilized at Rs 290 million in 1975. Disbursements rose from Rs 54million in 1973 to Rs 320 million in 1975. Due to lack of domestic resourcesand the depressed state of the stock market, underwriting and equity opera-tions (Annex 13) were only Rs 7.7 million during 1973-1975. PICIC's disburse-ments in the period 1973-1975 accounted for about 21% of private investmentin the large and medium scale industrial sector compared to about 17% pre-viously.

4.07 Annex 14 analyzes in some detail the characteristics of PICIC'srecent operations. By sectors, cott:on and other textiles accounted for 36%of approvals during 1974 and 1975, compared with 69% during 1973. Sugaraccounted for 18% and 16%, respectively. The proportional decrease in tex-tiles financing was offset by increases in hotels, ceramics, glass, leatherand rubber projects promoted by PICI]C in an effort to diversify its portfolio.The average size of loans has been about $1.3 million for the past 3 years.There has been some improvement in the geographical diversification of lend-ing, with more activity in NWFP, and PICIC has further diversified itsclientele, and assisted newcomers tco industry. The projects recently fi-nanced should make a useful contribution to the economy (para 4.10).

4.08 Promotional Activities. EICIC's promotional activities includeefforts to achieve a more diversified regional distribution of its port-folio and of its clientele. In addition, PICIC is concerned with itsheavy exposure in the traditional industries, such as cotton spinningand sugar. Since July 1973 its Economic and Research Deparment has

1/ Although it is also explained by lower corporate profitability andby the bad investment climate, which sometimes induced entre-preneurs to attempt to minimize their risk capital contribution.

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conducted a number of studies, most of which have resulted in the promo-tion of projects. 1/ PICIC also commissioned a comprehensive survey of the

hotel industry, conducted by a local consulting firm. As a result, it hasapproved loans to three new hotels. In addition, with PICIC's help, thesugar industry has started to use by-products such as molasses and bagasse.

Other by-products industries developed by PICIC include new pesticides capacity

to use surplus chlorine in a caustic soda plant, and new capacity for manufac-ture of glues and gums from tannery wastes. PICIC also created a promotionalcell in its Project Development Department which has been working on determin-ing the technical and market feasibility of manufacturing chemicals presently

being imported for use in the textile sector. A Promotion Committee to coor-

dinate the promotional work of the Project Development and Economic Depart-ments, with participation by the operational departments, was also created

recently.

4.09 PICIC's recent promotional work has been useful, but has not helpedmuch in diversifying its portfolio by amount. The studies have yielded

projects which are relatively small whereas textile and sugar projects are

quite large, 2/ and there might be opportunities for future investment in

them. Considering the potential field of diversification was narrowed by

the nationalizations and the bad investment climate over the last two years,

PICIC's promotional efforts are creditable. However, it should attempt topromote larger projects 3/ such as mineral processing and electronics wherethere is potential for export, and which can be promoted in the private

sector. This would help PICIC attain better portfolio diversification.PICIC plans to commission studies in these areas to look into the promotional

feasibility and to determine whether the ventures would be justified for

Pakistan in an economic and financial sense.

Development Impact

4.10 During the period 1973 to September 30, 1975 PICIC approved loansand acquired shares and debentures amounting to Rs 1.1 billion, accounting

for 59% of the total fixed investment in these projects. PICIC has estimated

1/ PICIC conducted market studies on the engineering, maize starch, leather,fruit juice, cigarette, ceramics, sanitary wares, terry towels, embroideredcloth, laundry soap, and cotton knitwear industries, and as a result anumber of projects have either been sanctioned or are under preparationincluding: maize starch, cigarettes, leather, soap, hoisery, towels,

tanneries, and shoe manufacturing.

2/ Except for hotels where a number of projects resulted from a studycommissioned by PICIC, although after these projects are completedthere will be no additional market opportunities for hotels.

3/ In its early years, PICIC was instrumental in developing many sectors,for example, cement, paper, and hardboard manufacturing.

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the net annual foreign exchange earnings/savings by these projects, whencompleted, at about $80 million and the contribution to net value added atabout Rs 630 million. The estimated additional direct employment generatedby them is about 15,500. The average cost of fixed investment per job createdis therefore $12,000, indicating a somewhat lower capital intensity than theaverage for World Bank Group assist;ed DFCs of about $18,000. Annex 15 showsprojected rates of return on projects financed by PICIC. Out of the 64 new andexpansion projects financed between July 1973 and September 1975, ex-ante IFRRwas from 11% to 33% (average 17%). For 41 of these, the IERR ranged from10% to 50% (average 22%). PICIC has also continued to make qualitativecontributions to industrial development, such as assistance in projectpreparation (particularly newcomers), industrial studies and other promo-tional activities (paras 4.07, 4.08) and to industrial policy formulation(para 3.14).

V. FINANCIAL ASPECTS

General

5.01 Because PICIC's foreign currency liabilities arising from itsoperations in Bangladesh had not at that time been settled, the last IBRDloan was advanced to GOP to establish a special fund which was administeredby PICIC. The recent arrangements between GOP and PICIC (described below)have removed this obstacle to a direct loan to PICIC. Although PICIC hasother financial problems, it is taking the measures outlined below to over-come them, and these are satisfactory. Accordingly a direct loan to PICIChas been proposed for this project.

Assets and Liabilities in Bangladesh

5.02 Background. At the 1971 secession of Bangladesh PICIC's portfolioin that area amounted to about $73 raillion in foreign currency loans outstand-ing, 1/ and Rs 82 million in rupee 'oans and equity investments (net). To-gether these represented about 30% of PICIC's total assets and about threetimes it share capital and reserves. Although PICIC lost control of theseassets, it retained the liabilities incurred to finance them. PICIC wasunable to service the foreign currency liabilities and GOP agreed to assistunder the arrangements described in para 5.03. On the other hand, GOP dis-claimed any responsibility for the rupee assets in Bangladesh, although itagreed to defer collection of Rs 82 million in subordinated loans to PICICuntil after 1993. PICIC therefore made a provision to cover the possible lossof its rupee assets in Bangladesh. GOP recently agreed to relieve PICIC ofthe risk of possible loss of these rupee assets, which are now deemed to havebeen financed from the GOP loans (para 5.04).

1/ Some $57 million (PICIC figures) was due to IBRD, of which $51 millionwas subsequently transferred to Bangladesh.

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5.03 When Loan 961-PAK was made, the arrangements between GOP and PICIC

regarding its foreign currency Bangladesh liabilities were as follows:(i) GOP would service these liabilities for the time being 1/ although PICIC

would be liable to GOP for the funds so provided; and (ii) GOP would not

require PICIC to repay the amounts GOP serviced until after all foreign

loans obtained by PICIC after 1972 had been repaid, or until PICIC recovered

its assets in Bangladesh, whichever was earlier. The weaknesses of these

arrangements were that: (i) it was not clear how long GOP would continue to

service these liabilities; and (ii) the amounts provided by GOP constituted a

debt, and it was not clear whether GOP would require PICIC eventually to repay

it, and if so, on what terms and conditions. As of December 31, 1975, PICIC's

outstanding liabilities to foreign creditors for Bangladesh projects were

about $11 million. In addition, PICIC owed GOP some Rs 240 million for past

GOP servicing of Bangladesh related foreign liabilities, including interest

and exchange differential. 2/ Further, PICIC could lose Rs 82 million for the

ruppe assets in Bangladesh. These amounts totalling Rs 432 million were then

1.75 times PICIC's net worth. Clearly, PICIC was not in a position to absorb

such a loss.

5.04. After extensive discussions, GOP is now prepared: (i) to continue

reimbursing PICIC for the debt servicing of the foreign currency Bangladesh

liabilities which are still outstanding in PICIC's books for as long as this

is required consistent where appropriate with the debt rescheduling agreements

GOP has finalized with some of its creditors; and (ii) not to require PICIC to

repay it for the reimbursements already made and to be made to PICIC for debt

servicing of PICIC's foreign currency Bangladesh liabilities, nor for the rupee

liabilities to GOP allocated to PICIC's rupee assets in Bangladesh, until

PICIC recovers its assets in Bangladesh and if so, only to the extent of such

a recovery. 3/ In substance, this means that PICIC will never have to bear

any loss from this problem. GOP and PICIC have signed an agreement along

those lines (Annex 16).

Quality of Portfolio

5.05 Loans. Annex 17 shows the development of loan overdues from 1969

to 1975. Towards the end of 1975, 43% of the companies with outstanding

debts to PICIC were in arrears of more than 3 months. Principal and interest

in arrears for more than 3 months totalled Rs 457 million on December 1975

1/ In practice PICIC paid first and was then reimbursed by GOP.

2/ Thus, PICIC's debt burden for the foreign loans it made in Bangladesh

totalled Rs 350 million excluding interest on the $11 million not yet

serviced. The $11 million included some $2.4 million of liabilities

to IBRD which were not taken up by Bangladesh under the Consolidation

Credit.

3/ A similar arrangement has been made for IDBP.

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compared with Rs 308 million in 1973, Rs 235 million in 1972 and Rs 4 mil-lion in 1969. The total principal outstanding on these loans was aboutRs 1 billion or 55% of the outstanding loan portfolio in 1975, compared with60% in 1973, 64% in 1972, and 2% in 1969. Thus, there has been a substantialincrease in overdues, although the proportion of the portfolio affected bythem has remained at about the same level since 1973 and the number of de-faulting companies has declined.

5.06 PICIC's arrears position, which was previously excellent, began todeteriorate in 1971 and more so in 1972 due to the economic recession, theloss to many firms of the traditional East Pakistan market, and the May 1972rupee devaluation, which more than doubled the debt service burden of itsforeign exchange borrowers. Some improvement took place during 1973 andearly 1974 as firms adjusted to the changed circumstances. However, the up-turn stagnated afterwards, 1/ as the effects of the oil crisis, the generalrise in price levels including labor costs, and the crisis in the textileindustry (para 2.05) began to be strongly felt during the second half of1974. In addition, the impact of tnie nationalization of commercial banks inearly 1974 on the investment climate adversely affected PICIC's collectionperformance. PICIC's bargaining power with is clients was reduced, sinceclients were not as interested in neaw loans as before, and some clients becamereluctant to tie up further funds in their industries. 2/ Further, PICIC'sclients that were nationalized did not repay satisfactorily, including thosewhich were performing well. These borrowers accounted for 10% of PICIC's out-standing loan portfolio, but 16% of its arrears as of December 1975. Accord-ingly IBRD asked that for the public sector companies GOP and PICIC shouldagree on a repayment schedule for existing overdues and a guarantee arrange-ment for future overdues. 3/ By mid-June, 1976, of the 14 of these companiesin arrears, PICIC had collected the overdues from 4, finalized reschedulingwith 4, and agreed, but not yet finalized rescheduling with another 2. It hadnot yet negotiated with the remaining 4 for various justifiable reasons(companies were being merged or plants closed). GOP and PICIC have prepared atimetable to settle the remaining problems and PICIC will keep IBRD informedon a quarterly basis. Also GOP has indicated that it will ensure repaymentwithin 12 months of any future default by any public sector company, including

the ones recently nationalized.

1/ While arrears continued to increase, the gap between collections andamount falling due was being narrowed. Total collections (principaland interest) over amounts falling due were 78% in 1971, 42% in 1972,69% in 1973, 65% in 1974 and 68% in 1975. Total collections over amountsfalling due plus overdues were 33% in 1972, 43% in 1973, 36% in 1974 and33% in 1975.

2/ For example, although the textile sector made good profits in 1973,their large dividend payments during 1974, when they were already havingdifficulties, illustrates the entrepreneurs' fear of nationalization.

3/ PICIC had little bargaining power to collect from these clients becauseit cannot take over the assets of a GOP owned company, and they do notnow borrow from PICIC.

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5.07 From 1973 to 1975 PICIC took a number of actions to improve its col-lections. It increased penalty charges, enforced bank guarantees, rescheduledloans where appropriate, issued numerous legal notices, and imposed changes insome projects (for example, new management). Some were unsuccessful. Theincreased penalty charges could only apply to new loans and to old loans afterrescheduling, while the nationalized commercial banks did not honor theirguarantees (para 3.14). IBRD therefore asked GOP to arrange for commercialbanks to honor their guarantees, and they have paid some Rs 40 million sinceDecember 31, 1975. The problem has now been solved, as all PICIC claims havebeen cleared.

5.08 Most of the 1973 and 1974 reschedulings were expected to provide aninterim relief to the client, and were made before the economic and politicalconditions which followed could be predicted. Thus, the reschdulings were inmany cases not adequately tied to subsequent internal cash generations, butinvolved mainly a shift in payments due by one or two years and many of theclients whose loans were rescheduled again fell into arrears. 1/ A number ofPICIC's clients still need further reschedulings. IBRD asked PICIC to pre-pare a detailed plan for each project in arrears. The plan is summarized inAnnex 19, and IBRD will be kept informed of any major changes during itsimplementation that appear likely to influence PICIC's viability.

5.09 The numerous legal notices issued by PICIC were ineffective. Theywere not followed by strong action until 1975, when PICIC took two relativelylarge willful defaulters to court. 2/ Its new Chairman intends to issue legalnotices only when followed by court action. Legal proceedings take a longtime. Thus, such action is both costly and slow, and is used when all othermeans have been exhausted, or in selected cases to demonstrate to otherwillful defaulters PICIC's firm intention to collect. Recovery by courtaction may become easier in the future when a proposed new law, mainly in-tended to speed up court decisions in this type of dispute, is enacted. 3/GOP has confirmed that PICIC's dues will be included under it.

5.10 Annex 18 shows the characteristics of PICIC arrears as of September30, 1975. The textiles sector, which accounted for 45% of PICIC's outstandingloan portfolio, was responsible for 50% of the arrears of more than 3 monthsat that date. Some 69% of the net increase in arrears 4/ from June 1973 to

1/ Annex 17 footnote.

2/ Only 11 cases involving mortgage suits-or liquidation proceedingsfiled by PICIC are pending in the courts. The amount involved isRs 69 million of which the 2 cases mentioned above involve Rs 46 mil-lion (partial payment has already been made in one case).

3/ PICIC's Chairman has proposed to GOP a number of additional legislativemeasures for dealing with defaults.

4/ Taking into account sectors where arrears declined (see Annex 18footnote 3).

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September 1975 is in the textiles sector. PICIC's portfolio prospects arethus directly related to the performance of this sector. The recent poorperformance by PICIC's textile clients is due mainly to: (i) weak exportmarkets because of the international recession; (ii) past GOP policies whichinduced losses during 1974; (iii) high dividend payments during that year dueto fear of nationalization; and (iv) willful defaults resulting from theinvestment climate. However, due to the large accumulated overdues manyof PICIC's loans in this sector require rescheduling. The sugar industryaccounts for 18% of the increase in arrears from June 1973 to September 1975.The problems are mainly due to external factors such as the 1973 floods andthe bad cane crop in 1974 resulting from lack of water. Although GOP controlssugar prices, the industry's long-term prospects are good. The engineeringindustry accounts for 16% of the increase in overdues. Over 80% of thearrears in this industry were by one public sector company which was doingwell and was able to repay. Another public sector cement company which wasalso doing well accounted for over 50% of arrears in the cement, ceramics andglass industrial category. PICIC already agreed on a repayment schedule withthese two companies. Overall, PICIC's portfolio prospects appear satisfactory.Its future performance will depend mainly on the general economic/politicalsituation (para 5.06), and in particular on developments in the textilesector. 1/

5.11 Based on a project by project review of the West Pakistan portfolio,PICIC's auditors have determined that: provisions for possible losses shouldbe increased by Rs 46 million to Rs 66 million. Their review covered theadequacy of PICIC's collateral (all loans are well secured), the long-termrepayment capacity of the clients, and the saleability of the assets. PICIChas increased its provisions to Rs 72 million as of December 31, 1975, 2/and its auditors are therefore satisfied that it is well covered against

1/ PICIC's Chairman also has been advising GOP on policies to be followed forcertain industries including solvent extraction plants and the paperindustry, both of which were suffering from structural problems (thereduction in PICIC's arrears in the paper industry is due to reschedulingin a large problem project). GOP, on PICIC's advice, has liberalizedimport requirements by solvent extraction plants, reduced excise dutiesfor spinning of synthetic fibres to reduce the impact of the shortage ofcotton during 1976, increased custom duties for the import of paper,and increased income tax rebates for exports.

2/ Total provisions are therefore about 4% of the outstanding loan andequity portfolio. However, the real value of the provisions is actuallytwice the amount shown because if a write-off were made, about half of itwould be returned as tax savings (provisions are not tax deductible butwrite-offs are). In addition to these provisions PICIC had not takeninto income about Rs 90 million (interest) up to December 1975 which isalso a form of provision for doubtful loans.

21 -

losses (para 5.19). PICIC will continue increasing its provisions in thefuture by setting aside at least 10% of annual net profits for this purpose.PICIC has also confirmed that these reserves will always be maintained atsuch levels as is considered appropriate by PICIC's external auditors.

5.12 The above proposals (paras 5.06 to 5.11) should help improve thecondition of PICIC's portfolio, as should the reorganization of its follow-upwork (para 3.07). PICIC's new Chairman is now putting considerable pressure ondefaulters, and has achieved a creditable improvement in collections, as shownbelow:

1973 1974 1975 1976----------- Rs million -----------

Seven months dues(excluding overdues) 342.8 348.1 356.5 352.7

Seven months collections /a 222.6 213.8 206.0 260.1Seven months collections/dues 65% 61% 58% 74%Total year collections/dues 69% 65% 68% 80% (Proj

/a During the seven months ending July 31, 1976, collections were Rs 260million, of which Rs 43 million was from commercial banks on accountof guarantees and Rs 33 million from public sector companies. Thecorresponding figures for 1975 were Rs 206 million, of which Rs 5million from bank guarantees and Rs 19 million from the public sector,and for 1974, Rs 214 million, Rs 22 million, and Rs 29 million,respectively.

As shown above, collections, have increased by 26% during 1976 compared with1975. The reason why the ratio of collections to dues for the total year ishigher than for the seven month period is that the bulk of PICIC's billings aremade in January and July, and as of the end of July, much of that month's bil-lings are not yet recovered. Actually, between January and June of 1976, PICICcollected 100% of new billings, compared with around 70% from January to Junein the previous 3 years. Thus, arrears did not increase during the first halfof 1976, and actually declined due to reschedulings. However, as the conditionof the textile sector will improve slowly, the gap between collections andamounts falling due is not expected to be closed until 1978 and thus arrearswould not start reducing (without reschedulings) until then (para 6.07).PICIC has set targets for its future collections, based on the project byproject analysis of its portfolio (para 5.08), and these would form thebasis for monitoring performance during loan supervision. 1/

1/ The targets set are given in Annex 19. See also para 6.07 footnote1 for projected collection ratios.

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5.13 Equity investments. As of September 30, 1975, PICIC's equity port-folio was Rs 76.7 million at cost and consisted of shares in 90 companies.Of these, 37 representing Rs 37.5 million were then paying dividends, 24 (Rs14.7 million) were making profits but not paying dividends and the remaining29 (Rs 24.5 million) were suffering losses. The aggregate market value ofthese investments as of September 30, 1975 was Rs 80 million, slightly abovecost. The dividend yield averaged 9% - 12% before 1970, and improved from4.5% in 1972, to 7.4% in 1973, and 10.9% in 1974 (reflecting mainly largedividends by textile companies in 1974; para 5.06 footnote). It declined to7.7% in the first 9 months of 1975. The prospects for PICIC's equity portfolioare as discussed above for loans, since PICIC has generally made equity invest-ments in companies to which it has also lent.

Liquidity

5.14 Poor collections created serious liquidity problems for PICIC.PICIC was not in a position to service all its debt and had to borrow fromSBP for this purpose. Drawals from SBP totalled Rs 129 million up to December31, 1975, out of which Rs 125 million fell due during 1976. As PICIC will nothave the funds to pay, this has been rescheduled. Additional borrowings ofabout Rs 150 million will be needed to cover projected collection shortfallsthrough 1980 (para 6.05). For this purpose, PICIC has already been assuredthese funds from SBP and GOP has confirmed the rescheduling of the existingSBP debt and the availability of additional SBP funds as needed on adequateterms. 1/

Financial Structure

5.15 Profitability. Annex 20 shows income statements from 1970 to1975. Net profits after tax (before provisions) increased from Rs 34.3million in 1972 to Rs 36.1 million in 1973 and Rs 38.0 million in 1974 butdeclined to Rs 29.4 million in 1975. The relatively slow growth during 1972-1974 was due to reduced income from loans, a result of low disbursements.The decline in 1975 is because PICIC, on the recommendation of the auditors,did not accrue income on nineteen relatively large problem accounts. 2/However, after tax profitability as a percentage of average total assetsremains adequate at 1.3% during 1975 compared with 1.7% in 1974. Adminis-trative expenses remain under control at 0.5% of average total assets. PICICdeclared a cash dividend of 12% in 1973 and of 12.5% in 1974 and 1975. Thelatter represented a satisfactory profit plough-back, although the dividendpay-out was 28%, compared with only 20% in the previous two years.

1/ The proposed terms are discussed in para 6.05.

2/ The interest chargeable to these 19 sub-borrowers (over Rs 20 millionduring 1975) will be kept in a suspense account.

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5.16 Revaluation Surplus. On the devaluation of the rupee in May 1972,a net exchange revaluation surplus of Rs 100 million accrued to PICIC. Thisrepresented a non-operational profit, because its foreign exchange assets atdevaluation were greater than its foreign currency liabilities. The bulk, Rs75 million, resulted from PICIC's meeting its foreign debt obligations as theyfell due at the pre-devaluation rate, while som. sub-borrowers were in arrearswith their repayments to PICIC. The Rs 25 million balance represents PICIC'sforeign currency cash balances held with foreign banks. The Rs 75 million wasreduced to Rs 66 million on the devaluation of the US dollar in 1973. Ofthis, Rs 44 million has been collected and realized as income (and passedthrough the profit and loss account, resulting in a gain of about Rs 20 mil-lion after taxes), and the balance of Rs 22 million remains as a revaluationreserve not yet taken to income. Based on the contractual arrangements withits sub-borrowers, PICIC is confident that it will have no problem collectingthis.

5.17 Capital Structure. Annex 21 shows PICIC's balance sheets as ofDecember 31, 1970-1975. After the 1974 share capital increase and subor-dinated loan, the long-term debt/equity ratio (contractual definition) im-proved to 5.9:1 although it increased to 6.6:1 in 1975 due to the additionalprovisions made for doutful accounts (para 5.11). However, the real capitalstructure (counting subordinated loans as debt, not equity) has improved andthe long-term debt/equity ratio has gone down from 9.4:1 as of end-1974 to7.3:1 as of end-1975. 1/ Reserves and provisions are now 13% of the loan andequity portfolio, compared with 9% in 1974. Provisions account, for 4% of theportfolio compared with 1% previously. However, the existing contractual debt/equity limit of 7:1 should remain unchanged in view of the serious arrearsproblem. GOP intends to provide subordinated loans as needed to keep thedebt/ equity ratio within this limit. Given PICIC's present financial con-dition, it will be difficult to attract investors, so additional share capitalincreases cannot be expected. Although subordinated loans are not as good asolution as share capital, this is the only alternative. 2/ Therefore, GOPhas untertaken to provide subordinated loans for as long as PICIC is not ina position to raise share capital.

5.18 Market Quotation. The book value of PICIC's own shares as ofDecember 31, 1975 was 3.7 times the par value of Rs 10. The market price

1/ This is because Rs 82 million of subordinated loans have beenallocated to PICIC's rupee assets in Bangladesh on which PICIC canbear no loss (para 5.04). Thus the provision for the possible loss ofthe rupee assets has been released, and the subordinated loan transferredto PICIC's Bangladesh liabilities.

2/ In any event, as the present level of subordinated loans vis-a-visequity is not very high, additional subordinated loans can be justi-fied. From the projections (para 6.08) there might be no need forfurther subordinated loans, but as PICIC is close to the limit theiravailability should be ensured.

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during 1975 ranged from Rs 8.65 to Rs 12.50, and was Rs 9.45 on December31, 1975, or 25% of book value. Earnings per share during 1975 were Rs 4.42and the average price/earnings ratio was about 2.3.

5.19 Audit. A.F. Ferguson and Company, and Rahim Jam and Company con-tinue to be PICIC's auditors. In their 1973 and 1974 reports, the auditorsmaintained exactly the same qualification as in 1972 and were again "unableto express an opinion on the adequacy of the provision made for doubtfulaccounts". The auditors were expected to distinguish between the adequacy ofthe provisions for possible losses on PICIC's Pakistan and Bangladesh port-folios. However, they felt reluctant to change the previous all emcompassingqualification while the Pakistan arrears were not improving. They weretherefore asked to make a supplement:ary audit during 1975, and on that basisthe increase in provisions for the FPakistan portfolio was determined (para5.11). Now that the Bangladesh liabilities problem has been resolved, PICIChas obtained a clean certificate for the 1975 accounts, for both the Pakistanand Bangladesh (subject to the formalization of the arrangements discussed inpara 5.04 which was done subsequently) portfolios. The quality and timelinessof submission of the audit reports are satisfactory.

Summary Assessment

5.20 PICIC's financial position has improved since the last loan wasmade in 1973. It will not bear any loss from its Bangladesh foreign liabi-lities, and the expected loss of its Bangladesh rupee assets will not occur.Its capital structure has improved, and its debt/equity ratio is below thecontractual limit. Profitability has declined, but remains adequate. Theprincipal remaining problem is the condition of its portfolio. Althoughprovisions should be sufficient to cover probable losses, the substantial in-crease in arrears also affects PICIC's liquidity. However, GOP has undertakenprovide the necessary funds to cover PICIC's requirements over the next fewyears. An improvement in collections is essential for the long term enhancementof its portfolio and liquidity. The actions that GOP and PICIC are takingare evidence of their intention to solve the problem. PICIC's new managementhas shown its capability, and its eff-orts to date have produced an improve-ment in collections that is likely to continue. Although PICIC still has anumber of problems, the prospects of overcoming them now appear to be con-siderably more promising than they were a year or so ago. Taking all thesefactors into account, PICIC can now be considered as creditworthy for a directloan.

VI. PROSPECTS

General Outlook

6.01 The low level of private investment in the last few years has af-fected prospects for future industrial growth. There is need to increase

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production capacity in agriculture and industry, domestic resource mobili-

zation, and the growth of exports. The proposed loan will help fulfillthese needs. GOP has projected that value added in the large and medium-scale

industrial sector will grow from around Rs 14 billion in FY76 to Rs 28 billion

in FY81 or by 15% in current prices. The following table indicates GOP's

present views on levels of industrial investment for the Fifth Five Year

Plan under preparation (current prices, Rs million):

4th Plan (Actual) 5th Plan (Expected)(FY71 - FY75) (FY77 - FY81)

Amount % Amount %

Large and medium-scale

Public 2,677 30.7 26,500 65.4

Private 4,547 52.2 10,500 25.9

Subtotal 7,224 82.9 37,000 91.5

Small-scale

Public 80 1.0 500 1.3

Private 1,402 16.1 3,000 7.4

Subtotal 1,482 17.1 2,219 8.7

TOTAL 8,706 100.0 40,500 100.0

From the above, private industrial investment is expected to comprise 33%

of the total over the next 5 years compared with 67% in the previous five

years. However, excluding one large public sector project the (Karachi

Steel Mill; Rs 14 billion) the private sector would account for about 50%

of the total investment. GOP expects some 36% of private sector invest-

ment to be in textiles, 16% in other agro-industries (mainly sugar),

18% in fertilizers, 5% in chemicals and 5% in engineering. This sub-sectoral

allocation is largely in line with PICIC's tentative commitment program over

the next two years. 1/ However, such a large increase in private investment

1/ Except fertilizers, which are not in PICIC's program, although PICIChopes also to be involved in this sector. PICIC's commitment program is

based on loans (sanctioned but not yet committed) which are likely to be

implemented, and on solid applications in the pipeline. It expects itsinvolvement in textiles to be mainly for balancing, modernization and

replacement.

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may be optimistic. 1/ There may be financing constraints (para 6.02) andinvestment interest by the private sector has not yet revived. The ex-tent to which the revival will take place will depend on GOP's attitudestowards the role of the private sector (para 2.08) and on GOP's policies ontariffs, pricing and other elements affecting profitability. Plan realizationwill also depend on the extent to which GOP is successful in attractingforeign investment (para 2.07) to obtain access to technology and foreignmarkets.

6.02 GOP has assumed that domestic savings will improve from 6% of GDPin FY75 to 16% in FY81. This would reduce the proportion of overall financ-ing from external sources from 67% in FY75 to 19% in FY81 (33% average forFY76-FY81). The marginal savings rate is assumed at 26%. GOP expects thatthe sponsor's own savings and the capital markets will provide Rs 3.7 bil-lion, or 27% of funds needed for the total private industrial investment(including small-scale), an ambitious objective. PICIC would account forRs 2.4 billion, or 18% (23% of large and medium-scale private investment).The balance would come mainly from commercial banks, foreign investment andother foreign loans, and from IDBP.

Business Forecasts

6.03 Against this background, Ainnex 22 shows the forecast of PICIC'sapprovals, commitments and disbursements for 1976-80. Approvals of foreigncurrency loans are expected to be Rs 300 million in 1976 and to increasethereafter by 15% per annum in nominal terms. 2/ Approvals of local currencyloans and equity investments for the five year period are expected at Rs360 million, or about 15% of total sanctions, the same level as in 1975.Total commitments are expected to grow by 14% annually and to be Rs 2.4billion during the period. 3/ Disbursements are expected to total Rs 1.7billion or about 16% of the private sector investment in large and mediumindustries projected in the Fifth Plan. This is lower than the Rs 2.4 bil-lion expected by GOP. Assuming 70% of GOP's target is achieved, PICIC would

1/ Despite the estimate that over the next 5 years, private investmentin large and medium industry would average Rs 2.1 billion per year,compared with an average of Rs 1.2 billion during FY70-FY72 (whenprices were much lower), and Rs 755 million in FY73-75 (when invest-ment was unduly low).

2/ Applications pending as of end-1975 for foreign exchange loanswere of the order of Rs 800 million, but since investment climate isstill somewhat subdued, and on the basis of a project by project reviewof applications pending and expected new applications, foreign currencyapprovals for 1976 and 1977 (Rs 645 million) appear realistic. There-after, depending on economic conditions and developments in the invest-ment climate, approvals might be higher than projected.

3/ Some 30% of commitments over the next 2 years are expected to befor textiles, mainly for balancing and modernization.

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finance 23% of the total large and medium-scale private investment industry(the level desired by GOP) compared with about 21% in FY73-75. The proj-ection of PICIC's operations is based on what appears attainable at presentconsidering the prevailing economic conditions and investment climate. Thus,for the purposes of financial planning, the more conservative assumptions arejustified.

Resource Requirements

6.04 Foreign. Annex 23 shows PICIC's projected resource positionthrough 1980. Its uncommitted foreign currency resources as of December 31,1975 were $18 million, mostly tied funds. Hence its commitments throughSeptember 1978 are expected to be about $85 million. this leaves a resourcegap of $67 million, of which $15 million are expected to be obtained frombilateral sources and $25 million from ADB. A $25 million loan by IBRD wouldcover the balance of PICIC's requirements and would account for about 39% ofPICIC's commitments between September 1976 and September 1978.

6.05 Domestic. As shown in Annex 23, PICIC's local currency resourceposition will be severely strained during 1976 and 1977 because collectionsare expected to be below repayments, although it should improve thereafter(para 6.07). The gap in foreign currency collections, which should be filledwith SBP funds (para 5.14), is expected to account for about 16% of PICIC'sdomestic fund requirements during 1976-77. Further, as discussed in para5.14, Rs 125 million of previous SBP credits for debt servicing falls due in1976. This debt payment has been rolled-over to 1977 and will continue to berolled-over until PICIC's debt servicing capacity enable it to pay. Actualpayment is expected to be made starting in 1979 over a period of 5 years. Ona 10 year projection of PICIC's collections and debt servicing, the estimatedadditional SBP borrowings needed for debt servicing (Rs 150 million, of whichRs 105 million during 1976-77) could be fully repaid 5 years after being drawn

down. 1/ Redemption of PICIC's previous (1972) debenture issues (finalpayment in 1980) should be as scheduled and would account for 27% of resourcerequirements during 1976-80. Despite the strained resource position, PICICshould be able to make local currency loans, as it has funds from the specialSBP scheme for financing locally fabricated machinery (Annex 14 para 6). 2/Internal cash generation will fund 15% of PICIC's local currency requirementsduring 1976-77, but this should improve to 35% in 1978-80, because debtservicing requirements will decline.

Financial Projections

6.06 Annex 24 shows projected income statements for 1976-80. Whileliquidity will be strained due to the low collections and heavy debt servic-ing, after tax profitability is expected to remain satisfactory at 1.3%

1/ Refer to para 5.14. SBP charges interest at the Central Bank rate.

2/ Present funds are expected to be fully utilized by 1977 but thescheme is expected to be continued by SBP.

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on average total assets. This is the same level attained in 1975 althoughlower than in previous years because realization of the exchange reservewill be completed by 1978 (para 5.16), and PICIC will continue its policyof not accruing income on its problem accounts (para 5.15). However, PICICplans to continue to pay a yearly dividend of 12.5%. This is justified toenable PICIC to maintain the price cf its shares not too far below par (para

5.18) and ease the task of increasing share capital in the future. Further,these dividend payments represent only a 26% - 29% payout ratio, and wouldaccount for only 6% of PICIC's domestic resource requirements over the pro-

jected period.

6.07 Annex 25 shows projected cash flow statements through 1980. Ascollections will only start exceeding new amounts falling due after 1978, 1/and as PICIC's rupee debentures will have to be redeemed through 1980,PICIC's debt service coverage is expected to be marginal at about unity 2/for the projected period. SBP will cover PICIC's shortfalls during thatperiod (para 5.14). Thereafter, liquidity should be satisfactory, asdebentures would be all redeemed, and the bulk of present overdues shouldbe collected after 1980.

6.08 Annex 26 shows projected balance sheets through 1980. Totalassets (excluding those in Bangladesh) are expected to grow from Rs 2.2billion in 1975 to Rs 2.6 billion in 1980 or by 4% per annum. The loan andequity portfolio should grow at about the same rate from Rs 1.9 billion in1975 to Rs 2.3 billion in 1980. The slow growth is due to the relativelylow disbursements vis-a-vis repayments falling due. By 1980, PICIC's debtoutstanding to IBRD should be the same as at present, $35 million (due torepayments), and should account for 16% of PICIC's long-term debt outstand-ing and for 13% of its total assets. Reserves and provisions should remain atabout 15% of the total portfolio, and the total long-term debt/ equity ratioat around 7:1. The debt/equity ratio (contractual definition) is expected tostay at about 6.6:1 or slightly below the contractual limit, so there shouldbe no need for additional GOP subordinated loans (para 5.17). Overall, PICIC'sfinancial position is expected to be satisfactory, subject to the gradualimprovements now envisaged in the arrears position that appear reasonable.Annex 27 shows the estimated disbursetment schedule for the proposed loan.

1/ Collections over amounts falling due plus overdues (33% during 1975)are projected at 37%, 39%, 41%, 43% and 45% during 1976, 1977, 1978,1979 and 1980 respectively. This is equivalent to 68% of amountsfalling due (excluding overdues) in 1975 (actual), 80% in 1976, 95% in1977, 100% in 1978 and slightly over 100% thereafter. PICIC's actualcollection experience for 1976 to date exceeds the assumption made forthe full year.

2/ Except for 1976 when it will be around 0.7:1 because the schedule re-payment of Rs 125 million to SBP, although rolled-over, has been shownfor 1976, and assumed to have been paid by an SBP borrowing of the sameamount.

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VII. PROPOSED LOAN

Lending Scheme

7.01 The proposed loan for $25 million would be made to PICIC. Some

$24.8 million would be on-lent by PICIC to meet the foreign cost of capital

goods and services of sub-projects sponsored by private productive enterprises.

As with other IBRD loans to development finance companies, eligible enterprises

would be broadly defined so as to include not only manufacturing, but also

agro-industries, mining, hotel projects, etc. Up to $0.2 million would be

allocated to GOP for financing the foreign exchange cost of the study of the

textile industry. GOP would pay for the foreign cost of the study by rei-

mbursing PICIC for the interest and principal repayments made on that amount,

including exchange differential.

Main Terms

7.02 Interest. IBRD would lend to PICIC at 8.9% and PICIC would on-lend

to sub-projects at 11.0% with sub-borrowers taking the exchange risk. The

spread of about 2% is adequate. PICIC would review its lending rate period-

ically and revise it if necessary in the light of inflationary conditions and

other factors. 1/

7.03 Amortization Schedule. Loan 961-PAK was for 20 years with a fixed

schedule. PICIC is not expected to make loans above 15 years. Therefore,

allowing for the commitment period, an 18 year flexible amortization schedule

with a 3 year grace period is recommended. When a fixed schedule is used,

it reflects the expected pattern of repayments by sub-borrowers to PICIC.

However, PICIC now prefers a flexible schedule to ensure that repayments to

IBRD are in approximate conformity with repayments by sub-borrowers. The

$0.2 million for the textile study would be repayable up to the eighteenth

year.

7.04 Free Limit. Under Loan 961-PAK the free limit was $3 million for

each project loan, including outstanding commitments to it. IBRD reviewed for

prior approval 41% by amount and 25% by number of the projects financed under

that Loan. The recommended free limits for the proposed loan are: (i) $2.5

million on PICIC's lending to the project; or (ii) $4 million on that amount

including outstanding commitments to the project. Under the proposed defini-

tion, IBRD is expected to review for prior approval the same proportion of

projects as in the past. This is desirable to continue the mutually beneficial

dialogue on project appraisal. However, the new definition would not require

review of small PICIC additional loans unless PICIC's exposure was relatively

high.

1/ An increase of 0.5%-1.0% in the lending rate is expected pending dis-

cussions between GOP and the basic economic mission (para 3.12).

-. 30 -

VIII. RECOMMENDATIONS

8.01 A $25 million direct loan to PICIC is recommended, of whichabout $24.8 million would be for financing the foreign exchange costs ofprojects sponsored by private enterprises. Up to $0.5 million would beallocated by PICIC to GOP for financing the foreign exchange cost of thestudy of the textile industry, to be paid by GOP. Initially, PICIC's on-lending rate would be 11.0% (with the sub-borrowers bearing the exchangerisk). The amortization schedule would be flexible for a period of 18 yearswith 3 years grace (paras 7.01-7.03), and the free limit would be $2.5million for individual PICIC loans or $4 million including outstandingcommitments (para 7.04).

8.02 The following understandings reached during negotiations to im-prove PICIC's position form the basis for recommending the proposed loan:

With GOP and PICIC:

(i) the undertaking of a textile industry study with theagreed terms of reference as a condition of loaneffectiveness (para 2.06);

(ii) IBRD consultation prLor to future changes in PICIC'stop management (para 3.03);

(iii) the solution to the problem of commercial bankguarantees (para 5.0,7);

(iv) the timetable to sett:le existing overdues by public sectorcompanies and the assurance by GOP regarding payment of anyfuture arrears (para 5.06);

(v) the arrangements concerning PICIC's foreign currencyBangladesh liabilities and rupee assets in Bangladesh(para 5.04);

(vi) the inclusion of PICIC under the proposed new lawregarding collection of overdues (para 5.09);

(vii) the rescheduling of PICIC's existing debt to SBPand the availability of additional funds as neededby PICIC on adequate terms for debt servicing(para 5.14, 6.05);

(viii) the availability to PICIC of GOP subordinated loans,if and when needed, to maintain its debt/equity ratiowithin the contractual limit of 7:1 (para 5.17);

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With PICIC

(ix) the increased role of the Executive Committee (para 3.02);

(x) the hiring of a qualified industrial economist, theundertaking of a study of staff benefits, and theincrease in follow-up staff (paras 3.04 - 3.06);

(xi) the organizational changes to coordinate betterfollow-up work and strengthen internal audit(para 3.07);

(xii) the increase in follow-up visits (para 3.09);

(xiii) the approval by PICIC's Board of the Strategy for1976 - 78 as a condition of loan effectiveness(para 3.11);

(xiv) the actions and their timing to be taken from therescheduling study and the targets for future PICICcollections (paras 5.08, 5.12);

(xv) the annual increases in provisions for doubtful accounts(para 5.11);

ANNEX 1Page 1

PAKISTAN

APPRAISAL OF THEPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

The Textile Sector

1. The cotton textile sector includes those industries - private andpublic - that separate the cotton fibers from the seed (ginning); spin thelint into yarn, with or without blending of other fibers; weave the yarn intocloth; treat (finish) the cloth by bleaching, dyeing, printing or other pre-parations; make up the cloth into preliminary or final end-product consumergoods and the marketing of these products. In Pakistan, the cotton textileindustry utilizes over 20% of fixed asset capital and over 35% of the non-agricultural labor force. It produces about 30% of the value of manufactur-ing industry output and accounts for 40-60% of the value of manufactured ex-ports. Raw cotton accounts for 1o%-30% of the value of agricultural exports.The industry has a low capital-output ratio and uses a high labor intensivetechnology. Thus, development of the sector fits Pakistan's factor endow-ments and contributes to the solution of unemployment and income distribu-tion problems.

I. Supply and Quality of Cotton Lint

2. Pakistan's textile industry depends heavily on both the quantityand quality of its domestic supply of cotton. Since 1962-63, areas in cottonhas increased at the rate of 3.5% per year - 3.5 million acres to nearly5.0 million acres. Most of the growth has occurred in the Multan andBahawalpur divisions of the Punjab province and Khairpur division of Sind.Yield per acre has increased at the compound growth rate of 3.2%. Productionin recent years was as follows: (million bales lint @ 392 lbs):

1970/71 3.1 1973/74 3.71971/72 4.1 1974/74 3.61972/73 4.1 1975/76 2.8 Est.

The long range data are given in Figure 1. The growth in output, at therate of 6.7% per year, is due to the increased area irrigated (canal andtubewell) and fertilized and the higher profitability of cotton relativeto maize and paddy. Annual variations in production appear to be a functionof price relationships, area planted, availability of irrigation water andinsect infestation.

ANNEX IPage 2

3. Quality of yarn and cloth are determined in part by cotton varietycharacteristics. Fiber characteristics of each variety are given in Table 1.Staple length data are given in Figure 2. About 85% of the lint has a staplelength of less than 1 inch. It is best adapted for processing into mediumand coarse yarn and cloth and in spin counts of 10s to 30s. From 50 to 55%of Pakistan's cotton is processed as coarse (spin count up to 20), 40 to 50%as medium (spin count of 21 to 30), and 5 to 8% as fine (spin count over 30 1).

4. Fiber qualities vary each year with variety, field conditions underwhich it is produced and ginning operations. Varietal mixtures in the fieldare common because of inadequate arrangements to maintain purity in the fieldand at the gin. The leading Pakistan varieties produce plants with (a)excessive vegetable growth; (b) a high percentage of boll shedding; (c)delayed flowering and bolls with a high percentage of immature seed. Thesevarieties require 170 to 210 days from seed to harvest. Because of the longmaturity, infestation with jassids and pink bollworm is more severe. Whenginned with dull and improperly operated saw gins, the lint carries a highproportion of broken and stained fibers containing a high percentage of neppymaterials (boll chips and fuzzy lint balls). Stained, broken and neppy fibersappear as defects in the yarn and cloth and in combination with the low staplelength, limit most of the Pakistan textile industry to the production ofmedium and coarse yarn and cloth. Whilst there is a market for these items,they sell at price differentials of 20 to 25% below the higher fiber countmedium and fine cottons produced from early maturing varieties adequatelyprotected from insect infestation and properly ginned.

II. The Cotton Textile Industrial Sector

5. At the time of partition in 1947, cotton production was 1.1 millionbales and only 17 textile mills with 177,000 spindles and 5,000 looms wereoperated. It was necessary to import yarn and cloth for domestic require-ments. With various monetary and fiscal incentives provided by GOP, the in-dustrial sector had grown by early 1976 to 144 textile mills with about 3.6million spindles and 30,000 looms. All except 5 or 6 industrial units arein the private sector. Most of the textile mills are located in Punjab andSind. A typical textile mill operates 1 to 3 units of 12,500 ring typespindles to process cotton into yarn. Mills installed in recent years haveadded looms to weave some or all of the yarn into both pure and blendedcloth. A few of the mills with looms have added cloth finishing equipment.Two entrepreneurs have installed equipment that processes lint into yarn bythe open-end rotor technique of spinning. (See para 26.) About 60% of theyarn and 80% of the cloth processed by the industrial sector is exported.

1/ A spin count is the number of hanks or bundles of yarn, each 1,250 yardsin length, required to weight 10 pounds. A coarse cotton used for itemssuch as towels is usually made from 10 to 20 count yarn. A dress shirtis usually made from 30 to 80 count cotton yarn blended with man-madefibers.

ANNEX 1Page 3

6. Many ancillary industries have grown in the wake of development ofthe cotton textile industry. The ginning industry shifted from roller ginsto saw gins in the mid 1960s. The cloth finishing industry has developed toprovide sizing, dyeing, printing, packaging and other services to the in-dustry. A cloth made-up industry has started for hose, shirts, trousers,towels and household items.

7. The cotton textile cottage industry has had a similar phenomenaldevelopment. The shift has been from labor intensive hand looms to about60,000 power operated looms and 5,000 owners, usually 4 to 50 looms ownedand operated by one family. The power looms are usually operated on a customhire basis to convert yarn processed by the industrial sector into low qua-lity-low cost cloth for household fabrics and grain and fertilizer bags forthe domestic market. The power loom industry had its greatest growth afterthe 1971 war, when the import of jute and gunnies from East Pakistan ceased.

8. Man-Made Fibers: Pakistan has an installed capacity to produce3,300 tons of cellulose fibers and 3,800 tons of non-cellulose fibers. Inaddition, about 14,000 tons of man-made fibers are imported each year andused to blend with cotton and to manufacture rayon and nylon fabrics.

9. Output: Since 1970/71, the Pakistan textile industrial sector hasprocessed 800 to 1,050 million pounds of the 1,200 to 1,600 million pounds oflint each year and exported 54 to 67% of the output as lint, yarn and cloth.At the same time, Pakistan consumers have used 7.8 to 9.1 pounds of cottongoods per caput. Manufacturing waste has varied from 18 to 30%. Clothproduction (from the yarn) ranged from 655 to 787 million yards. Details aregiven in Table 2 and 3.

III. Current and Future Market Prospects

10. Supply Projections: GOP's Fifth Plan projects a production of6.1 million bales by 1980-81 and a domestic demand of 2,8 million baleequivalent and an export availability of 3.3 million bale equivalent aslint, yarn, cloth and made-up goods. Likewise, a UNDP-PAO study (CommodityPolicy Study on Cotton - AG:DP/PAK/73/045 - Rome, 1975) projects Pakistancotton production and demand as follows:

1979 - 80 1984 - 85

Low High Low High----------…--million bales------------

Production 5.9 6.1 7.7 8.5Domestic Consumption 2.6 2.8 3.6 4.4Export Equivalent 3.3 3.3 4.1 4.1

ANNEX 1Page 4

At these levels, domestic consumption would range between 12.3 and 13.6pounds per caput in 1979-80 and up to 19.4 pounds in 1984-85 compared withrecent consumption rates of 8.0 to 9.0 pounds per caput. Likewise, exportswould need to expand from the recent level of 2.0 to 2.6 million balesequivalent to 3.3 to 4.1 million bales by 1980 and 1985.

11. Both the GOP and UNDP-FAO projections assume an increase in areaplanted to cotton as a result of water to irrigate over 1.5 million acresadditional net land area when the Tarbela and Mangla major irrigation systemsand completed and from minor irrigation. About 1/3 of the net added kharifirrigated area is usually planted to cotton. They also assume a continuedgrowth in yield per acre resulting from research and improved seed (IDACredit 620-PAK), increased use of fertilizer and plant protection andfavorable benefits relative to maize and paddy. The UNDP-FAO study eva-luated its projections for sensitivity to land and water development stra-tegies and cropping patterns in 50 ecological zones and for changes inprices and benefit-cost relationships.

12. Whilst there is no reason to doubt the above projections - infact, they could be accepted with at least an 80% probability - it appearsmore prudent for development investment purposes to assume a production of5.0 to 5.5 million bales and a domestic consumption of 10 to 12 pounds percaput by 1980-81. These adjustments would result in 3.6 to 4.0 million balesequivalent available for the export market in 1980, and about 5.0 millionbales for export by 1985. Thus, the outlook is for an increase of I to 2million bales for export as lint, yarn or cloth.

l

13. Export Demand for Cotton & Cotton Products: Expansion of thePakistan textile industry depends on increasing export demand from thecurrent 2.0 to 2.6 million bale equivalent level to 3.6 to 4.0 millionbales equivalent per year and on increasing the share of lint processedinto yarn, cloth and made up goods before exporting. The UNDP-FAO projectionof world production, consumption and trade in cotton is given in Table 4.Their projection is that demand for cotton in world trade would increaseby 3 million bales up to 1980 and 3.5 million bales by 1985.

14. About one-fourth of the world cotton production is one inch orless in staple length. Pakistan produces about one-fifth of this supplyand exports over 60% of the short staple cotton (lint, yarn, cloth, etc)that is marketed internationally. Therefore, if the UNDP-FAO projectionsof cotton consumption and world trade are accurate, Pakistan would needto maintain only its 60% ratio of the projected increment in world tradeto find a market for most of its projected increase in production.

15. The UNDP-FAO projections of world cotton production are basedon an increase of 1.2% annually to 1980 and 1.5% from then to 1985. How-ever, world export trade is projected to increase at 3.8% and 5.1%annually for yarn, 3% annually for cloth fabric and 5.0 and 4.6% annuallyfor made-up goods - 1980 and 1985 respectively-in each case. At these

ANNEX 1Page 5

rates, Pakistan could increase its export of lint, yarn and cloth, dependingon the product mix, by 24 to 40% by 1980 and an additional 16 to 25% by 1985and hold its share of internationally traded cotton. This implies theopportunity and need for a substantial expansion in Pakistan's spinningand weaving capacity by 1980.

16. Over 85% of Pakistan's export of lint and over 75% of its yarnare sold to other south and southeast Asian countries - mostly Hongkong,Japan, Indonesia, Burma, Sri Lanka, Thailand, Bangladesh and Singapore.CLoth and made up goods tend to move westward to Middle East, European andNorth American markets. Prices per bale of lint or yarn or per yard ofcloth are 20 to 25% less in the Asian markets than in the Middle East andWestern markets. Low quality of lint, yarn and cloth relative to demand isthe major reason for this price differential (see paras 3 and 4 above). Thehigh dirt and leaf content, short staple, broken fibers and lack of uniformityin the lint deters mill operators from improving yarn and cloth quality. Theuse of antiquated spindle and loom equipment and non-fast dyes also contri-bute to the low quality of yarn and cloth. A substantial opportunity existsfor improving quality of exports and thus earning higher unit prices.

17. Government Tax Policies: Farm gate prices for seed cotton areusually at government supported levels set at about 65% of the price forcompeting comparable quality U.S. New Orleans, Texas Middling or MexicanAcala of 7/8 to 1 inch staple length. The public sector Cotton Export Cor-poration of Pakistan supports farm gate prices. It is the monopoly exporterof all lint cotton. 'ts export price is negotiated with the buyer on thebasis of quality ' ts lint and the New Orleans or Liverpool price of theabove classes. GOP collects a 35% FOB advalorem duty on all lint exportedwhich has the effect of pricing Pakistan lint competitively in most worldmarkets and recovering the "windfall" margin as public revenue. By adjust-ing the advalorem duty rate Pakistan cottons have a substantial priceleverage that should assure an increased share of the international market.

18. In the cottage industry sector, all power looms are taxed at therate of zero per loom per month for the first 4 units, Rs 75 per loom for the5th to 8th unit Rs 800 per month for the 9th to 12th loom and Rs 2,500 perloom for more than 12 looms per owner. The industry is highly decentralized.However, some individuals own many looms under many names to maximize thebenefits of the tax policy. Labor employed, wages paid and custom hire ratesare not taxed or regulated.

19. In the indusrial sector the number of employees relative to thenumber of spindles is determined by law. The law also specifies minimumdaily, monthly and annual wages to be paid, irrespective of quantity orquality of work performed. Textile mill management, under these rules,cannot effectively discipline its labor. In addition, variable rateexcise duties are levied against the yarn, varying with its spindle countand whether used in the domestic market or exported. Also, a tax of Rs 5,000loom per month is levied, regardless of whether it operates or not. Taxescollected on the processing and marketing of cotton constitute an important

ANNEX 1Page 6

source of government revenue. Taxes and the payment of fixed wage ratesrepresent a cost burden that reduces profitability or causes losses forentrepreneurs when the mills are not Fully utilized.

20. Market Organizations and Services: In addition to the CottonExport Corporation mentioned above, GOP sponsors the Pakistan CentralCotton Committee (PCCC) and the Export Promotion Bureau (EPB). The PCCCcollects a tax on all cotton ginned which it uses to finance productionresearch and to provide daily, weekly and longer range market information.The PCCC also operates a training institute for cotton gin and mill operators.The EPB promotes the expansion of export trade. It has a special sectiondealing with cotton and cotton products.

21. The Karachi Cotton Association operates the Cotton ExchangeMarket where it engages in the sale of spot and futures on cotton and yarn.It develops and maintains grade specification standards and arbitrates tradedisputes that may arise between domestic and international buyers andsellers of lint and yarn. Annual average prices for lint, yarn and clothat Karachi are given in Tables 5, 6 and 7.

22. Entrepreneurs in the industrial sector have organized the All-Pakistan Textile Mills Association. This trade agency keeps the membershipinformed of domestic and world market conditions. It represents the industryin dealing with GOP and international trade policy issues. A Design Instituteoperated by the Association assists cloth and make up entrepreneurs designand market new styles. The Power Loom Owners Association assist its mem-bers solve problems dealing with the cottage industry sector.

IV. The Fifth Plan - Textile Sector

23. Ginneries: The existing 400 ginneries have a capacity to ginabout 5.0 million bales of cotton per 120 day ginning season. However, someof the saw gins and all of the roller gins are obsolete. At least 75% of thesaw gins operate with inefficient pre cleaners and dull saws improperlyaligned. By 1980-81, 40 to 50% of the saw gins would need replacement and, togin a 6.0 million bale crop, about 100 new ginneries would be needed. A 12bale per hour high speed saw ginnery with saw de-gummers, sharpeners, pre-cleaners, universal density press and seed de-linter costs about US$400,000(Rs 3.9 million) installed with about half the cost in foreign exchange. Aloan for this type of investment is usually processed by the IndustrialDevelopment Bank of Pakistan (IDBP) which operates in the small-scale sector,rather than by PICIC.

24. Conventional Ring Spindles: GOP's Fifth Plan proposes theaddition of 900,000 spindles, 275,000 in the public sector and 625,000 inthe private sector, and the replacement of 625,000 of the 3.6 millionspindles currently in place. At the rate of 12,500 spindles per mill unit,72 new and 40 replacement units would be required. It is estimated that atleast 50 of the new and 20 of the replacement units would need institutionalfinancing.

ANNEX 1Page 7

25. At current prices, a 12,500 spindle unit has an investment costof about US$5.0 million (Rs 49.0 million). When operated at full capacity(900 8-hour shifts per year) it would process 4.22 million pounds of lint(10,762 bales) and produce 3.86 million pounds of 10 to 20 count yarn. Theoverall capital investment would be US$610 million. The 72 new units wouldadd spindle capacity for 775,000 bales of cotton per year; - only about 40%of the projected increase in lint production. The remainder could be pro-cessed by exceeding 900 shifts per year on the existing spinning mills orit could be exported as lint.

26. Open-End or Rotor Spindles: Conventional ring spindles apply thesame mechanical principle to separate each cotton fiber and spin it intoyarn as was used by the Mohenjodaro settlers of 5000 B.C. Improvements sincethat time ve increased the speed and capacity of a spindle but not themechanics of spinning. About ten years ago a new method of processingcotton fibers, open-end spining was developed. The equipment that performsthis process is now available to the industry. The essential features ofO-E rotor spinning include the feeding of a continuous sliver of cotton lint(with or without man-made fibers for blending) into an opening device thatcontains a spiked roller which opens the sliver so completely that eachfiber can be fed forward individually. An air-stream transports theindividual fibers from the opening roller to the inner surface of a cupshaped rotor which is operated at speeds of 30,000 to 60,000 rpm. Thecentrifugal force of the rotor gathers the individual fibers and spin-twists them into a multi-layered strand which is simultaneously peeledfrom the rotor as yarn.

27. An O-E rotor spindle operation with output capacity equal to aconventional 12,500 spindle mill has an investment cost of US$2.3 million(Rs 22.6 million). The conventional unit would require 600 workers for 900to 1,000 shifts per year; whereas, the O-E rotor spindle unit would operatewith 200 workers. However, economies of scale are such that US$11.7 million(Rs 116.8 million) invested in a 25,000 rotor system would provide 6 timesthe output of a 12,500 conventional ring spindle unit and employ only 426workers. Investment and operating costs are detailed in Tables 8 and 9.

28. The advantages of the O-E rotor system in reducing unit costsare clear. Despite its comparatively higher capital intensity, it alsogenerated higher economic returns (see para 34). O-E rotor spinning hascertain other characteristics of importance to Pakistan's textile industry.The O-E rotor system can be designed and operated to spin long staple fibersand counts of 40 to 100. However, it operates most efficiently withcotton wastes below 1-1/16 inch staple and with yarn counts of 10 to 24and with or without blending of man-made fibers. Most of Pakistan'scotton production and yarns are of these qualties. O-E yarn has a strongertensile strength, takes brigther finishes and produces a more durable cloththan the same cotton or blend processed by a conventional ring spindle.O-E yarns are best used for towelling, denims, knitwear, sheets and sur-gical cloth. Currently O-E yarn is priced at US$372 to US$400 per 400 pound

ANNEX 1Page 8

bale whereas conventional yarn of the same spin count in priced at US$320 toUS$370 per bale. The major reason for this price differential is that O-Eyarn will process into cloth at a lower unit cost, i.e. less thread breakage,faster weaving operation and cloth with fewer defects.

29. O-E rotor equipment requires clean lint to operate successfully.Pakistan lint contains 3 to 5% by weight of dirt, leaf and boll pices andother admixtures. To use the O-E system special lint cleaning equipment mustbe added in the "blow room". Conventional carding and drying equipment can beadapted to O-E spindle operations by adding high speed tandem cards andelectronic control devices.

30. Looms: Yarn must be woven into cloth. Pakistan currently has30,000 looms with a capacity of 1,250 million yards per year in the cottageindustry sector. The Fifth Plan provides for the installation of 30,000additional looms, at least 65% with existing spindle mills in the industrialsector to balance operations and produce cloth of exportable quality. Thecottage industry sector has major problems of quality and efficiency whichwill be attacked by a training and guidance programs.

31. Finishing: After weaving, the cloth is further processed bybleaching, sizing, dyeing, printing and packaging. The Fifth Plan proposesto expand this section of the industry from 1,250 million yards to 1,800million yards capacity. Most of the increase is planned for existing spindleand loom mills in an integrated program to apply modern technology to achieveimproved export quality cloth.

32. Make-up Textiles and Ready Made Garments: By making up cloth intoexportable items, the industrial sector could expand its gross income and thePakistan economy would gain "added value" advantages. The Fifth Plan providesfor additional investments in this segment of the industry; about Rs 70 million(US$7.1 million) for equipment.

V. Investment Implications - PICIC and IBRD

33. Over 40% of PICIC's lending portfolio is to the textile industry.Also, PICIC's overdues problems are largely in this industry. This sectionattempts to evaluate whether under these circumstances PICIC (and IBRD) shouldcontinue to lend scarce foreign exchange resources in this industry; and, ifso, for what purposes and under what conditions.

34. First, financial and economic rates of return were calculated fortypical investments, using for the latter, current border prices for rawcotton and mill output, with the following results:

ANNEX 1Page 9

Rate of ReturnItem and Investment Cost Financial Economic

12,500 Ring spindle mill (Rs 42 mil - FE Rs 27 Mil)

14.5% 17.5%15% sensitivity range ------------------------ 11.9 - 17.4 14.8 - 20.5

Weaving and Finishing Unit (Rs 67 mil - FE Rs 26 mil)16.0 22.0

15% sensitivity range 13.4 - 18.5 19.1 - 25.0Finishing Unit (Rs 18 mil FE 10 mil)

23.4 31.015% sensitivity range ------------------------ 19.3 - 28.1 26.6 - 36.1

25,000 Ring Spindle plus Weaving and Fisnishing Units(Rs 97.5 mil - FE Rs 50 mil)

15.1 19.415% sentivitity range 12.5 - 17.8 16.8 - 22.1

Open-End Rotor System - 2600 (Rs 23 mil FE Rs 16 mil)28.0 38.4

15% sensitivity range ------------------------ 24.9 - 31.4 34.5 - 42.6Open-End Rotor System 25,000 (Rs 117 mil FE Rs 94 mil)

36.7 49.015% sensitivity range ------------------------ 32.9 - 40.8 44.4 - 53.8

35. Both the financial and economic rates of return for each type ofinvestment studied are at acceptable levels. Sensitivity tests determined byadding 15% to costs or deducting 15% from benefits show only a moderateeffect on return rates. However, had 1980 border prices been used, thefinancial and economic rates of return would have been some 35 to 50% higherthan given above.

36. Most of the differences between financial and economic rates aredue to the heavy tax burden paid by mill operators (para 17 to 19). Lint,yarn and loom taxes are designed to equate domestic farm-gate prices andproduction costs with the international competitive market at the border.If and when government fails to adjust tax rates downward in a declininginternational market, mill operations become unprofitable and loan servicecharges become in arrears. The level of taxes relative to the farm gateprice of lint and the international market prices for yarn and cloth andrising labor costs represent the greatest risks of investment in the industry.The situation also provides GOP a strong leverage to maintain a competitiveposition for the industry in the international market.

37. Major Beneficiaries of the textile sector investment would includesmall farmers, tenants and rural village laborers engaged in producing andginning the incremental cotton production and laborers required to operatethe incremental industry capacity added by the investment. Indirect

ANNEX 1Page 10

beneficiaries would include recipients of government revenues collected onthe incremental lint, yarn and cloth production. It is not feasible toproject numbers of beneficiaries. However, most of the tenants, rurallaborers, new textile industry employees and government revenue recipientswould be in the lower 40% of Pakistan's income distribution matrix. Whilstthe 0-E rotor system has a lower capital-output ratio and a moderately highercapital-labor input ratio, it may be appropriate for Pakistan's package ofresources and projected demand for exported yarn and cloth. Without this newtechnology, Pakistan may lose competitiveness in the international cottontextile market.

VI. Recommended Lending Program

38. The following lending strategy for the textile industry seems to bethe most appropriate in connection with PICIC's overall operations and sub-projects financed under the proposed loan:

(a) PICIC, while improving its overdues situation in the textileindustry should continue to lend for the installation of newtextile plants. It requires about 20 to 30 months from thedate of PICIC's Board approval of a textile industry loanto complete construction, procure and install the equipmentand initiate production of yarn and cloth. Therefore, as thereis need for additional capacity by 1978-79 continued investmentin the industry is necessary.

(b) Preference should be given to existing spinning unit borrowers tobalance and modernize equipment, to add weaving and finishingunits, and to replace antiquated ring spindle units. Where ap-propriate, replacement should be with the open-end rotor system.This would permit the industry to gain experience with this process,and possibly to shift its export emphasis to 0-E yarn and cloth,which generates greater value added and better export prices.Further, the financial difficulties recently suffered by the in-dustry due to international recession, were mainly in non-integratedspinning units that lacked flexibility to adjust to changing marketconditions.

(c) For new borrowers, preference should be given to financingintegrated plant operations.

(d) This analysis (paras 10 to 12) projects the availabilityof cotton, surplus to domestic requirements, to be exportedas lint, yarn, cloth and made up goods. It is to Pakistan'sadvantage to gain the added value of exporting cotton as yarn,cloth or made-up goods rather than as lint. Prudent investorswould ask for stronger assurances that world demand wouldaccommodate additional Pakistan cotton, and if so, how

ANNEX 1

Page 11

much and in what form. Information given in paras 13 to 16lead to the conclusion that world demand would provide anexpanded market but the analysis does not indicate the mostprobable types, quantities and qualities of yarn, cloth andmade-up goods that would maximize benefits. The O-E rotorsystem of processing lint into yarn appears to offer substan-tial investment opportunities in Pakistan. However, it alsoposes questions whether market demand is for yarn or clothand of what quality and type. To answer these kinds ofquestions and to help guide GOP, Pakistan lending agenciesand sub-borrowers in the development of the industry, amarket study should be executed by GOP and PICIC. SeeAppendix 1 for more detail and terms of reference.

March 31, 1976

PAKISTANAPPRAISAL OF

PAKISTAN IIJgJSTRIAL CREDIT AND INVEST19hENT CORPORATION

Production of Cotton b,y Years - 1947 - 73

"0-

~~~ ~TotalUpland

50 51 52 53 54 55 56 57 f18 49 .0- 61 62 63 64 65 ff 7 Se 69 -70 nr ni 73 5Y E…A R -

ANNEX 1FIGURE 2

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDrV AN1) lNvh!bTMhU!Ne UUrdurTIOrv

Production of Cotton by Staple length 1947 - 72

13/16" 13/16 }-1/32' I1-tIsto to to1' 1-3/32" 1-15/16"

3000- _ _ __

.0_ _ _ __ _ _ _ ______ __ _ _ _ _ _ _ _ _

2000 -

S _,

40

1000-

. = .

1947/50 1950/55 1955/60 1960/65 1965/70 1970/74Y E A R S

Source Pakistan Control Cotton Committee, Korochlnote: these figures differ slightly fromn those given in Figure 1

March 31, 1976

ANNEX 1TABiLE 1

PAKISTAN

APPRAISAL OFPAKIJSTAN INDUSTRIAL CREDIT AND INVESTAENT CORPORATIC

Finer Characteristics of Cotton Varieties Recomimended for Cultivation in Pakistan

TensileName Staple Strength

Leng(th (00LJer Maturity UniformityCinch) Micronaire in Causticaire Ratio

Upland Types

AC-134 15/16-1-1/16 4.0 - 5.0 94 79.9 78.2B.S.I, 15/16-1 4.0 - 5.0 92 97.6 80.7M-)4 )M-100 ) 15/16-1 4.0 - 4.5 85 81.9 75.2149-F 1-1/32-1-1/16 3.9 - 4.3 95 - 75.2i5S-39 1-3/16-1-5,/16 3.5 - 4.2 87 78.4 75.3MS-40 1-3/16-1-5/16 3.5 - 4.2 91 78.3 74.6H-59-1 1-1,/8 3.5 - 3.7 90 - 78.6

Desi Types

231R 1/2-5/8 7.0 - 9.0 76.5 84.0 80.0D-9 3/8-5/8 7.5 80.0 83.0 80.0T.D.I. 3/8-5/8 7.5 - 10.5 79.5 92.2 80.0

Source: Pakistan Central Cotton Committee and Agriculture Departments of thePunjab and Sind.

March 31, 1976

PAKISTANI

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CCRPORATION

Overal] Commodity Balance of Cotton (Expressed in Raw Cotton Equivalent)(million lb.)

% of Pro-Car- Total Domestic duction End Season Per Caputover Production Tmport Supply Use Exports Exported Stock Domestic Use

(lb)

1?60/(,1 8.6 663.2 2.4 674.2 476.7 163.4 25 34.1 10.41961 /62 34.1 714.2 20.0 768.3 504.7 216.2 30 47.4 10.7196 2/3 47.4 807.6 4.3 859.3 427.3 410.4 51 21.6 8.81963/61[ 21.6 922.7 2.0 946.3 465.3 458.3 50 22.7 9.31964/65 22.7 832.6 2.8 858.1 489.4 353.4 42 1.3 9.61965/66 15.3 913.8 3.5 932.6 550.4 365.0 40 17.2 10.51966/67 17.2 1,021.6 t.7 1,043.5 545.1 440.1 43 58.0 10.11967/68 58.0 1,141.1 2.0 1,201.1 490.8 678.1 59 32.2 8.81968/69 32.1 1.163.1 2.0 1,197.2 584.5 541.7 47 36.5 10.P1969/70 36.5 1,180.7 3.1 1,220.3 732.7 474.7 40 12.9 12.41970/71 12.9 1,196.0 2.0 1,210.9 533.9 649.1 54 27.9 8.81971/72 27.8 1,559.8 2.0 1,589.6 486.0 1,051.8 67 51.8 7.81972/72 51.7 1,5147.2 1.? 1,600.1 564.0 1,001.6 65 26.7 8.71973/74* 26.7 1,450.0 - 1,476.7 594.0 804.7 57 78.0 9.019741/75* 78.0 1,411.0 - 1,L89.0 600.0 800.0 57 89.0 9.1

* Prelininary

M-

March 31,, 1976

AN1NIEX 1

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

Mill Consumption, Yarn Production, Waste Percentages, nd Normal Consumption1960 - 75

Yill & Non-MillYarn Manufacting Non-Mill Cons -

Season Mill ConsumptionI/ Production Wastes., Consumptio nDl

million '000 bales rillionlb. of 392 lb. lb. % '000 bales '000 bales

1960/61 451.9 1,152 360.2 20 1,405 2221961/62 452.7 1,154 367.5 19 1,458 2861962/63 470.1 1,204 384.6 18 1,308 931963/64 514.9 1,313 437.9 15 1,502 1731964/65 523.4 1,335 455.6 13 1,601 2511965/66 508.6 1,297 427.7 29 1,771 2271966/67 537.0 1,369 456.3 28 1,815 1841967/AS 599.4 1,529 495.1 29 1,915 1311968/69 652.8 1,665 526.5 32 2,176 2121969/70 737.9 1,882 602.4 30 2,597 3991970/71 793.7 2,025 669.7 25 2,432 1431971/72 919.3 2,345 745.7 18 2,463 1531972/73 1,036.o 2,6C5 843.0 19 3,033 3901973/74* 1,048.0 2,673 836.5 20 3,490 8171°74/75* 907.0 2,313 635.4 30 3,482 1,169

1/ Cotistics, June 1974, Table 362/ Cotistics, June 1974, Table 323/ Difference between mill consumption and yarn production expressed as

percentage of mill consumption4/ Cotistics, June 1974, Table 10;/ Based on figures in Cotistics, June 197h, Table 10, with recently revised

production figures

* Preliminary

March 31, 1976

ANNEX 1

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

World Production, Consumption and Trade in Cotton, 1960-85

1960 1973 1980 1985… - - - '000 metric tons - - -

Production

Developed countries 3,268 3,111 2,300 2,200Centrally planned countries 2,878 4,141 5,200 5,700Developing countries 3.958 5,742 6,600 30

Total 10,104 12,994 14,100

Consumption (mill)

Developed countries 4,386 4,003 3,650 3,500Centrally planned countries 3,595 4,532 5,500 6,100Developing countries 2,363 4,200 4,800 5,400

Total 10,34 12,735 13,950 15,000

Trade

Raw cotton 3,910 3,964 4,000 3,600Cotton yarn 228 540 700 900Cotton fabrice 859 971 1,200 1,400Cotton garments 174 286 400 500

Total 5TI171 5,76 6,300 6,400

Bale Equivalent (392 lbs) million 29.1 32.4 35.5 36.0

March 31, 1976

AN NEX 1Table 5

PAKISTAN

APPRAISAL OFPAKISTAN INWSrIXTAL CR13EDIT AND INVESI4NT CORPORATION

Spot Market Prices at Karachi - Varietywise(Annual Averages) 1965-66 to 1975-76

Variety 65-66 66-67 67-68 68-69 69-70 70-?1 71-72 72-73 73-74 74-75 5-76

1 2 3 4 5 6 7 8 9 10 11 12

Desai

Sind 1.00 0.95 0.95 1.10 1.16 1.54 1.40 1.64 2.39 2.28 2.27

Punjab 0.96 0.82 0.87 1.06 1.10 1.49 1.34 1.50 2.29 2.22 2.22

Bahawalpur 0.97 0.85 0.91 1.09 1.14 1.52 1.37 1.59 ?.35 2.25 2.24

Source: Kararhi Cotton Association Limited

March 31, 1976

ANNEX 1Table 6

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

Cotton Yarn Prices at Karachi - Countwise(Annual Averages) 1965-_6 to 1975-7l

Count 65-66 66-67 67-68 68-69 69-70 70-71 71-72 72-73 73-74 74-75 75-7t

1 2 3 4 5 6 7 8 9 10 11 12( Rupees per bundle of 10 lbs)

10/1 19.73 20.68 21.49 22.54 22.02 25.03 29.22 45.41 48.57 40.51 45.5(15/1 31.84 38.22 47.91 42.43 46.3,20/1 22.72 22.90 25.61 28.69 29.63 29.95 32.88 55.49 54.45 44.40 48.8'21/1 30.39 33.47 53.88 56.36 45.71 50.330/1 32.25 34.90 38.21 38.78 38.46 41.57 67.02 67.04 54.08 53.9!32/1 28.93 31.73 36.19 40.51 41.17 41.18 43.45 72.68 73.92 58.92 65.840/1 34.55 40.84 46.86 51.49 53.29 51.19 59.23 88.27 98.83 74.48 79.9.60/1 55.32 62.40 75.99 82.00 95.31 87.89 84.79 129.92 163.0910/2 52.11 44.35 50.3'20/2 25.35 25.40 28.03 31.57 31.57 33.01 35.89 56.79 59.47 52.12 56.6'21/2 70.8728/2 80.70 88.19 76.72 77.5.40/2 47.56 86.16 86.1k42/2 120.060/2 95.00 93-73 147.17 178.25

Source: The Pakistan Yarn Merchantst Association

March 31, 1976

ANNEX 1Table 7

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESDYENT CORPORATION

Price Per Yard of Cloth at Karachi (Annual Averages) 1965-66 to 1975-76

Quality 65-66 66-67 67-68 68-69 69-70 70-71 71-72 72-73 7 4-75 75-76

2 3 4 5 6 7 8 9 10 1 2(Rupees per yard)

Long Cloth (96,000)Dawood 2.21 2.32 2.34 2.37 2.40 2.47 2.53 3.44 h.76 4.88 4.80

Drills Sateen WhiteD.C.L. 1.91 2.49 2.95 4.50 3.12 3.31 3.34 4.10 6.08 5.37 3.75

Voiles Sea 4

Breeze 2.90 3.32 3.97 3.55 3.48 3.59 3.53 4.84 7.47 8.13 8.45

Poplines 2 x 2Starlite White 5.31 5.73 6.64 6.52 6.21 6.45 6.25 7.09 7.63 6.54 6.56

Source: Pakistan Cloth Merchants' Association

March 31, 1976

ANNEX 1Table 8

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

ComParative Co0t 1960 Model Ring Spindle and Open-End Rotor system

Ring Spindle(12,500) Open-End Rotor(3,600)Local FE Total Local FE Total

I. Investment ( Rupees Million !Land 0.3 0.3 0.3 0.3

Buildings 4.2 4.2 1.0 1.0Machinery 1.9 27.0 28.9 15.0 15.0Ins - fees 4.7 4.7 1.5 1.5Installation 0.5 0.5 1.0 1.0 2.0Contingencies 3.0 3.0 3.0 3.0

Total 14.6 27.0 41.6 6.8 16.0 22.8

2/II. Gross Revenue (20s)l

5~.2 mil lbs @ Rsb.0 16.7 25.1 41.85.2 mil lbs @ Rs 9.0 11.4 37.4 46.8

16.7 25.1 41.5 11.b 37.4 46.8'

III.Operating CostsLint cotton @ Rs4.0 lb 24.4 23.6Labor - all grades 8.2 2.7Admidnistration 1.7 1.5Sales Exrenses 1.0 1.0

Total 35.1 28.8

IV. Profit Before Taxes 6.7 18.0

Taxes @ As 1.3 lb cotton 4.7 6.22.0 11.8

Depreciatior. (10%) 4.2 2.3Return to Capital - 2.2 9.,

1/ Size of each plant adjusted to produce the same output of yarn.T/ Asswmes 18% cotton waste with ring spindle and 15' waste with O-E rotor system.3/ Assumes 3 8-hour shifts per day and 340 days per year.

March 31, 1976

ANNEX 1Table 9

PAKISTAN

APPRAISAL OFPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

Comparative Investment and Operating Costs - 1976 Model Ring Spindleand Open-End Rotor System

Ring Spindle (25,000) Open-End Rotor (25,000)Local F.E. Total Local F.E. Total

- Rs Millions)

I. Investment

Land 0.5 0.5 0.5 0.5Buildings 10.0 10.0 6.0 6.0Machinery cif 4.0 36.0 40.0 5.0 93.8 98.8Insurance fees 2.6 2.6 6.5 6.5Installation 2.9 2.9 5.0 5.OTotal 20.0- 36.0 56.o 23.0 93.8 116.8

IT. Gross Reven-ue (20s)L/

I,) Ij rl; I lbs e,:s 8.0 37.4 56.2 93.631.1 mil lbs @Rs °.0 57.0 230.0 287.0Total 37.4 56.2 93.6 57.0 230.0 287.0

III. Operating Costs

Lint Cotton @Rs 4.0 lb 1 / 2/ 50.8 150.0Labor - All Grades-

900 @ Rs 40 ea. 12.2426 © Rs 40 ea. 5.8

Administration 2.1 5.4Sales &xpenses 1.6 4.0Total 66.7 165.2

IV. Profit Before Tax 26.9 - 121.8Ex-Taxes @ Rs 1.3lb. cotton 16.6 4.88

10.3 73.0Depreciation (1 0%) 5.6 11.7Return to Capital 4.7 61.3

1/ Assumses 1 5X wastage between lint cotton and yarn and 60% export salesfor the ring spindle and 15," wastage and 80% export sales for the O-E rotorsystem.

2/ Assuimes 3 8-hou1 shifts per da-y (rnd 31L0 days pen .,ear.

March 31, 1976

ANNEX 1APNnT 1FFL

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

Terms of Reference and Other Arrangements for

Textile Industry Study

Purpose

1. The objective of the study shall be to determine the strategy todevelop Pakistan's textile industry in order to meet the projected nationalrequirements as well as to improve its export performance in the foreseeablefuture.

Terms of Reference

2. Pakistan plans to increase substantially its production of cottonover the next five years. Taking into account the presently estimateddomestic consumption requirements, most of the increase in production wouldbe available for export as lint, yarn or cloth. While current projectionsindicate an increase in world market demand sufficient to utilize all ofPakistan's expected increase in production, it is not all clear whetherdemand will be for lint, yarn or cloth and of what form or quality.

3. To realize fully the export potential of its cotton production andtextile industry, thus earning the added value of yarn and cloth processingand of quality improvement, Pakistan should develop a marketing strategybased on potential international demand. Based on the evaluation of theitems listed in the attached Annex, the proposed study would delineate pro-duction targets based on a careful analysis of the projected internationalprice structure and local costs, quantity and quality requirements by sub-products, current and probable protectionist policies of importing countries,and competition from other countries for cotton and cotton substitutes. Thestudy would evaluate the existing textile industry in Pakistan and recommendinvestment and operational changes in cotton lint characteristics, qualityand quantity characteristics of yarn and cloth output, equipment and pro-cessing techniques, marketing arrangements and other actions as needed tooptimize development of the textile industry and its foreign exchange earn-ings potential. The study would focus on demand for lint, yarn and clothin 1980-81 and 1985-86, and would be designed to help answer the above issuesand thus serve as an improved guide to the Government and local financialinstitutions in their development investment program.

Organization

4. The Textile Commissioner of Pakistan would be responsible for theorganization and over-all implementation of the study. He shall be assistedby a Coordination Committee comprised of representatives of the followingagencies/departments:

ANNEX 1APPENDIX 1Page 2

Industries Division (Government of Pakistan, Ministry ofIndustries), PICIC, IDBP, All Pakistan Textile Mills Association,Pakistan Cotton Corporation, Export Promotion Bureau, KarachiCotton Exchange, Cotton Export Corporation, Cotton TextileIndustries Research and Development Centre (CTIRDC), Onerepresentative of each provincial government, The TextileCommissionery, and Team Leader of the Project.

The representative of the Industries Division shall be the Chairman ofthe Coordination Committee.

The Ministry of Industries would engage both domestic andexpatriate consultants as indicated below to complete the study.

5. The following consultants are proposed:

Cotton Lint Market Consultants

Where appropriate, these consultants should use the reportsof previous Cotton Missions to Pakistan.

Pakistani National: This person would be responsible forprojecting supply and quality characteristics of cotton lintproduction in Pakistan. He would assist his co-worker evaluateand project world cotton supplies by major producing countriesand by types and potential markets. He should be experiencedin projecting Pakistan lint production.

Expatriate: This person would assist his co-worker projectsupply of Pakistan cotton and have major responsibilities forprojecting world cotton supplies. He should be experiencedin world cotton production activities and in supply projections.Both lint market consultants would work with the study teamleader in projecting domestic and international demand for lint.

Cotton Yarn and Cloth Market Consultants

Pakistani National: This person and his co-worker would bejointly responsible for evaluating and projecting domesticand export demand for the various types and qualities of yarnand cloth, and other made-up textiles including open-end rotoryarn. EIe should be knowledgeable in the various typesand qualities of lint, yarn and cloth produced in Pakistanand with current and probable export demand for these products.He should be experienced in demand projection techniques.

Expatriate: This person would have joint responsiblity withhis co-worker in executing the above functions. He should beknowledgeable in the types of yarn and cloth demanded in variousinternational markets and experienced in demand projectiontechnioues.

ANNEX 1AppTt 1Page 3-

Cotton Textile Mill Consultants

2 Pakistani Nationals and 2 Expatriates: These persons would bejointly responsible for evaluating the capabilities of thePakistan textile industry in processing the types. qualities,and quantities of yarn and cloth projected by the study. Theywould recommend to the study team improvements and additionsneeded in textile processing equipment and operations tooptimize foreign exchange earnings. They should be knowledgeableand experienced in textile processing equipment, installations andoperations. One of the expatriates assisted by one of the localcounterparts would concentrate on spinning and weaving capabilities,while the other two consultants would concentrate on textilefinishing units.

Study Team Leader

The study team leader would coordinate the work of other membersof the group and would direct the study and preparation of itsreports. He should be a cotton market economist, experiencedwith all phases of cotton production and marketing (domestic andexport) in Pakistan and with economic methodology dealing withsupply and demand projections.

A deputy team leader would assist the team leader plan the studyand execute its analysis. He should be a trained and experiencedcotton textile market economist with detailed knowledge of theinternational markets for cotton and cotton products.

The team leader and deputy team leader may be selected fromthe above members of the study group.

6. It is expected that data collection and field work for the studyshould be completed in about three months. A draft report should becompleted two months later and a final report would require another month.The study would be submitted to IBRD by September 30, 1977.

August 16, 1976

ANNEX 1APPENDIX 1ANNEXURE APage 1

TERMS OF REFERENCE FOR SURVEY OFCOTTON TEXTILE INDUSTRY IN PAKISTAN

1. Growth of domestic consumption of textile products based onprojected economic growth and population increase.

2. Pattern of Consumption in Future

- Substitution by artificial and synthetic fibres.- Variety of cotton cloth for future demand.- Increase in use of ready made garments.

3. Prospects of Export (quantitative & qualitative)

(a) Yarn- Cloth- Made-up textile including ready made garments, terry

towels, hosiery, canvas- Blended fabrics

(b) Export prospects in non-traditional markets

(c) Proportionate growth in export of various textileproducts mentioned above.

4. Growth of Cotton Textile Industry

(a) Present status and effective capacity

(b) Target for productive capacity in spinning, weavingand finishing and financing requirements

(c) Pattern of growth

- Spinning units vs integrated unit- Expansion of organized weaving sector vs

non-mill sector- Expansion of capacity for production of blended

yarn and fabrics- Growth of ancillary industries e.g. garments,

hosiery warp knitting etc.- Appropriate size of individual spinning, weaving

and finishing units- New capacity vs balancing, modernization and replacement- Technology most suited to requirements and resources- Conventional vs Open End Spinning- Other measures for improving productivity- Use of Pay-As-You-Earn Scheme for future development of

the industry.

ANNEX 1APPENDIX 1ANNEXURE APage 2

Raw Material Requirements

- Size of cotton crop and variety of cotton- Demand for synthetic/artificial fibres of

various kinds- Expansion of indigenous production capacity- Improvement of ginning facilities.

ANNEX 2Page 1

PAKISTAN

APPRAISAL OF THEPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

INSTITUTIONS FINANCING INDUSTRY IN PAKISTAN

General

1. While total industrial investment in the medium and large-scalesector has been declining, the proportional financing of this investmentfrom external sources has increased. ICP (para 3) figures indicate thatduring FY74 some 53% of investment was financed from long-term debt, 39%from internal cash generation and 8% from share capital, of which thesponsors contributed 3%, institutional investors 4%, and the public 1%.The large proportion of debt financing started in FY72, the year whenthe rupee was devalued, and when the economic disturbances caused by theBangladesh situation were most strongly felt. During FY71, long-term debtfinancing accounted for 27% of total investment, internal cash generation46%, and share capital 27%, of which the sponsors contributed 13%, thepublic 10%, and institutional investors 4%. The reduced proportion ofequity financing in the more recent years is due in part to reduced cor-porate profitability, and to the recent investment climate which inducedentrepreneurs to minimize their risk capital contribution, but mainly toincreased costs, a result of devaluation and inflation. Regarding smallscale industries, financing from institutional sources has been small.Some 80% 1/ of the resources for small-scale industrial (SSI) fixed invest-ment came from the investor's own or family finds, loans from friends,credits from wholesalers and suppliers, and money lenders. This is because,with a limited amount of resources and due to SSI's lack of collateral,commercial banks in many cases had preferred to finance the larger borrowerswith whom they could realize a greater return on capital at less cost andrisk. This has changed recently as commercial banks have increased theirinvolvement in small industries. However, there are still some cumbersomeadministrative procedures that need streamlining (para 6).

1/ This figure (which is a very rough estimate for 1973) includes unitswith fixed assets of less than $200,000. The larger small units (assetsof $50,000 to $200,000) do not have as much problem obtaining financingas the very small and cottage industries.

ANNEX 2Page 2

Financial Institutions 1/

2. The principal financial institutions providing long-term financefor private industry are PICIC (Pakistan Industrial Credit and InvestmentCorporation) and IDBP (Industrial Development Bank of Pakistan). IDBP isnow fully Government owned, and the Government controls some 45% of PICIC'sshare capital. At the time IDBP was established (1961), the PakistanGovernment decided, to ensure an adequate division of labor, that whilePICIC would concentrate on financing medium and large-scale industries,IDBP would operate primarily in the small and medium-scale sector. Hence,minimum lending limits have been set for PICIC, and maximum limits for IDBP.These lending limits are based on the size of loans. PICIC's minimum lendinglimit is Rs 1.5 million equivalent for foreign exchange (Rs 750,000 in backwardareas) and Rs 2.5 million for rupee loans. IDBP's maximum lending limiton foreign exchange is Rs 3.0 million for limited liability companies and Rs1.0 million for others. Overall IDBP's maximum limits are Rs 4.0 million andRs 1.5 million respectively. These upper limits on IDBP's financing do notapply to certain sectors, including textile loans. Most of IDBP's investmentin SSI is for the larger small industries (assets of $50,000 to $200,000).This is appropriate as commercial banks are in the best position to assist thesmaller SSI due to their extensive branch network and because SSIs need mainlyworking capital. A new financial institution, the National DevelopmentFinance Corporation (NDFC) was established by the Government in January 1973with an authorized and paid-in capital of Rs 100 million. It was created tofinance new public sector industries including those recently nationalizedwhich were previously financed by PICIC 2/ NDFC makes long and short-termloans and also makes equity investments.

1/ Besides these institutions, foreign private investments and loans arealso sources used to meet foreign exchange requirements of privatesector industries. During the first nine months of FY75, Rs 680 mil-lion of foreign loans and investments in the private sector weresanctioned, compared to Rs 496 million for the whole of FY74. Thebulk of these funds were in the form of private loans, and PAYE (pay asyou earn) investments (machinery and equipment imported from suppliers,primarily in Eastern Europe, who are willing to accept payment from theexport earnings of the project).

2/ PICIC is limited by its charter to finance only the private sector.The nationalized industries accounted for about 10% of its financing(by amount). In February 1976, it was decided that Pakistan and Libyawill set up a joint holding company with a paid up share capital ofUS$100 million. The company will initially finance a number of projectsincluding an Investment Banking Corporation. No further details havebeen given as yet, but it is expected that this institution will operatein the public sector.

ANNEX 2Page 3

3. PICIC, IDBP and NDFC can make equity investments and underwritepublic issues. Nevertheless their main financing aevitity is long-termlending. Securities and capital markets activities are undertaken mainlyby Investment Corporation of Pakistan (ICP), a Government-owned institutionestablished in 1966. ICP performs the following major functions: (i) itunderwrites new issues of securities and debentures; (ii) it opens and main-tains investor's accounts for individual investors; (iii) it floats closed-endmutual funds (7 up till now); and (iv) it buys and sells shares on the stockmarket to encourage stability in share prices. Up to March 1975, ICP hadapproved 222 issues of shares and debentures amounting to Rs 1.6 billion, towhich ICP's commitments amounted to Rs 300 million.

4. Another institution playing an important role in channeling fundsfrom the small investor to the stock market is the National Investment Trust(NIT), established in 1962. It promotes sales of units for investment inTrust Funds. As of June 30, 1975 the total investment of the Trust at costamounted to Rs 562.0 million (market value, Rs 536 million) in shares anddebentures of about 260 companies. In recent years, the role that ICP andNIT have played in industrial financing has been limited because of theslump in the stock market. 1/

5. Before 1974 there were 22 scheduled commercial banks in Pakistan(of which 8 were foreign). The Pakistani banks were nationalized inJanuary 1974. 2/ Although professional bankers continued to manage thebanks, GOP assumed control over policy matters. A six member BankingCouncil which reports to GOP, was therefore set up in charge of formulatingpolicy guidelines, coordinating the banks' activities, laying down perform-ance criteria, and evaluating their performance. In April 1974, the BankingCouncil decided to merge some of the smaller banks with larger ones so asto reduce the number of administrative units. According to this reorgani-zation scheme, the nationalized banks are now consolidated into five. Thedistribution of credit is guided by a National Credit Consultative Council(NCCC), set up in 1972 under the sponsorship of the State Bank of Pakistan(SBP; the Central Bank) with representatives of GOP and the private sector.The NCCC makes recommendations to GOP on monetary and credit expansion anddistribution of credit among the various sectors in conformity with theAnnual Plans. It also lays down targets for banks for provision of creditto agriculture, small business, small industry and housing. As ofJanuary 31, 1976 all commercial banks together held demand and timedeposits amounting to about Rs 28 billion and had over 4,600 branches

1/ The general index of share prices was 88.6 in June 1975, 68.6 inJune, 1974, 84.55 in December, 1973 and 100 in 1969-70.

2/ IDBP, the Agricultural Development Bank of Pakistan, and thePunjab Provincial Cooperative Bank were also nationalized.

ANNEX 2Page 4

scattered throughout the country. Commercial banks provide mainly short-term working capital although they can also engage in term financing upto a ceiling fixed by SBP. Industry accounts for some 40% of their lendingactivity. During FY75 commercial banks disbursements to industry were aboutRs 2.4 billion of which some 13% was for fixed investments, and about 20%for SSI. Commercial banks are the main source of financing for SSI.

6. Other institutions which play a role in financing small-scale in-dustries are the Provincial Small Industries Corporations/Board (SICs), thePeople's Finance Corporation (PFC), and the Equity Participation Fund (EPF).The Provincial Small Industries Corporations/Boards are the result of thedisolution of the West Pakistan Small Industries Corporatin (WPSIC), whichtook place in June 1972 when its functions were transferred to the Pro-vincial Governments under the Ministry of Industries and Natural Resources.Thus, the Punjab Small Industries Corporation, the Sind Small Industry Cor-poration, and the NWFP Small Industries Development Board have been created.No corporation has yet been established in Baluchistan where WPSIC's activi-ties are now under the Industries Department, Government of Baluchistan. Inthe same way of WPSIC did in the past, the Provincial Small Industries Cor-porations provide financing to small-scale industries through arrangementswith a consortium of commercial banks and with IDBP. These arrangementsrequiring the small borrower to deal with two institutions have in manycases caused delays due to disagreements between the institutions. 1/ Thoughit is reported that some recent improvement has taken place, a more efficientsystem should be devised (para 11).

7. A new financial institution, People's Finance Corporation (PFC)was also set up (October, 1972), with initial paid-up capital of Rs 50 mil-lion, to augment the availability of credit to small borrowers. PFC providesall types of small loans to customers with net assets below Rs 50,000 to alarge extent for working capital, consumer durables, and some equipment. Atpresent PFC makes extensive use of the branch network of the commercial banks,which process the loan applications on PFC's behalf and forward them to PFC'sheadquarters (Islamabad) for sanction. Since inception, shopkeepers andtraders have received 66% of total gross approvals, transporters (includingtaxis) 7%. Small-scale and cottage industries (including artisans) havesince 1972 received 14% of gross approvals, and 9% for 1975.

1/ The Small Industry Corporations prepare the appraisal report and thecommercial banks/IDBP assess the creditworthiness of the borrower,an exercise which mainly involves an analysis of the borrower's creditstanding and of collateral and securities. Though the functions to beperformed by the Small Industry Corporation and by the commercial banks/IDBP are clearly defined, the commercial banks/IDBP have many timesquestioned the proposed projects on technical financial grounds (par-ticularly in the case of IDBP which is more experienced than thecommercial banks in project appraisal). The interest spread and thecredit risk are shared by the Small Industries Corporations and thecommercial banks/IDBP.

ANNEX 2Page 5

8. The Equity Participation Fund (EPF), owned by the government, andadministered by IDBP, has been reactivated since the loss of its Daccaoffice where most of its activities were concentrated. EFF provides equitycapital to medium and small enterprises in the backward areas of the country.Since January, 1973, when it recommenced operations, to December 31, 1975,EPF had approved financing of 35 projects with total fixed cost of Rs 281million. EPF's contribution amounted to Rs 20.1 million.

9. Insurance companies participate in industrial financing as membersof underwriting consortia and as investors in corporate securities. During1972, the 32 life insurance companies in Pakistan were nationalized and con-solidated into the State Life Insurance Corporation of Pakistan, establishedin November of that year with a paid-up capital of Rs 10 million. As ofDecember 31, 1974 the Life Fund investment portfolio totalled Rs 1.6 billion.Government securities and debentures of Government-owned/controlled-corpora-tions accounted for 31% of this portfolio; shares and debentures of jointstock companies 29%; real estate 8%; loans to policy holders 16%; mortgageloans 2%, and bank deposits 15%.

10. Apart from the above mentioned financial institutions, a number ofother organizations play a role in the promotion and management of publicsector industries. Among them, the Board of Industrial Management (BIM),responsible to the Ministry of Production, oversees the performance of thenationalized units, as well as of the twelve Sector corporations (establishedin July, 1974) which act as holding companies for the individual units. ThePakistan Industrial Development Corporation (PIDC), which previously had theresponsibility of establishing and managing public sector enterprises in cer-tain industrial sectors where private entrepreneurship was lacking, nowoperates as a Sector Corporation. It is responsible for forestry, sugar,and textile projects in the public sector.

Conclusions

11. In terms of the size and diversity of operations, the financialsystem is adequate. Due to the reduced involvement of the private sectorin large-scale operations, there is now more overlap between the lendingactivities of PICIC and IDBP (medium-scale). However, the low level ofprivate investment in recent years cannot be considered normal, and thecompetition is healthy. Moreover, even over the last two years the roleof both institutions has been complementary, with PICIC's average size ofloan at about $1.4 million and IDBP's at $225,000. Further, a merger wouldcreate inefficiencies and divert IDBP from focussing more in the small-scalesector. Nevertheless, some strengthening of institutions concerned with SSIis needed, particularly regarding the financing arrangements between theSICs and commercial banks/IDBP (para 6). It would be better if the two setsof institutions had divided responsibilities, with the SIC providing a rangeof services such as industrial estate management, marketing, distribution,and training, to the small industrialist, 1/ rather than providing finance,which sould be done by IDBP and commercial banks. With their 4,600 branches

1/ At present, these activities are also the responsibility of SICs.

ANNEX 2Page 6

spread accross the country, the commercial banks are best equiped to financethe very small industries (assets of below $50,000), which are more difficultto reach by IDBP. In recent years, commercial banks have been encouraged bySBP and GOP to do so through a small loans scheme introduced by SBP andtargets set by the NCCB. To make foreign exchange available to the verysmall industries through commercial banks, a scheme by which IDBP wouldrefinance foreign exchange loans made by commercial banks to small projects(commercial banks would undertake the appraisal and take the full riskand would be liable to IDBP for the refinance obtained so there would be nooverlap of functions) could be established.

March 31, 1976

PAKTSTAN

APPRAISA1 OF

AV'':TAlC _LD11SThTA& CY? A>D :: 'f A,'L CORPORATION LIMTTEr

INTEREST RATE TRENDS(in percentages)

Before March August September December DecemberDevaluation 1973 1973 1974 1974 1975

STATE BANK'S DISCOUNT RATE 5.00 6.00 8.00 9.00 9.00 9.00

COMMERCIAL BANKS's DEPOSIT RATES

Special Notice Accounts 3-3.25 4-4.25 4-4.25 4 -1h.25 4 -h).25 5 -6Savinrs Deposits hI-it. O 5-5.00 6-6.50 6 -7.50 6 -7.50 6.50-8Fixed Deposits 4.50-6. o 5.50-7.00 6.75-9.00 7.50 - 11 7.50- 11 8 -11.75

COMMERCTAL BANKS LOAN RATES.2-/

Large Banks 9.00 10.00 11.00) 2/ 2 2/ 2/Small Banks 10.00 11.00 12.00) 10-13 10 - 13 10- 13 2

1/ These are maximumn rates.2/ Large and small banks were merged after the January, 1971k nationalization. The 10, ceiling relates

to small loans. The ceiling on these remained unchanged since the March 1973 interest rate increases.

tM,March 31,3 1 976 >

ANNEX 4

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

List of Shareholders as of September 30, 1975

Name of Shareholders

No. ofShareholders No. of Shares Percentage

Foreign shareholders who subscribedin foreign citrrency ***

*International Finance Corporation 233,333*Bank of America (USA) C a210,646

Irving International Financing Corporation(USA) 1o4,166

Continental International Finance Corporation (USA) t49.654*The Commonwealth Devt. Finance Company Ltd. (UK) 117,438*Deutsche Bank A.G. (West Germany) 320 833

6 1,136,07O 17.11Other shareholders holding less than100,000 shares 23 706,632 lo.64Sub-total 29 1,842,702 27.75

Foreign shareholders who subscribed inPakistan currency **

The Chartered Bank (UK) 107,844*The National & Grindlays Bank (UK) 234,792First National City Bank (USA) -133,333

3 757969 7.17Other shareholders holding less than100,000 shares 10 110,655 1.67Sub-total 13 386.1624 8.7Total foreign shareholders 42 2,429,326 36.59

Pakistani shareholders ****State Life Insurance Corporationof Pakistan 1,481,oloHabib Bank Limited 192,729National Bank of Pakistan, Head Office 297,500

**Investment Corporation of Pakistan 224,019*Pakistan Insurance Corporation 228,155**United Bank Limited 126,419*National Bank of Pakistan, Trustee Dept. 419,269

7 2,799,1 144.71Other shareholders holding less than100,000 shares 600 1 241 573 18.70

Total Pakistan shareholders 6 4,210,674 63.41Total PICIC shareholders b79 6,640,000 100.00

* Subscribed in full to rights issue of August 1974** Subscribed in part to rights issue of August 1974*** The following summarizes the outcome of the August 1974 rights issue:

Shares held Rights shares Subscribedon 7/74 offered

Foreign non-resident shareholders 1,633,310 272,222 20'9,392Foreign resident shareholders 537,658. 89,612 48,966Pakistani shareholders 3.829.032 638,166 381,.642

Total 6,000,000 10,OO,00 60° on

March 11, 1976

ANNEX 5

PAKISTAN INDUSTRIAI. CREDIT AND INVESTMENT CORPORATION LIMITED

Board of Directors and Executive Committee(as of January 1, 1976)

Year ofPakistani Directors A pointment Principal Present Position

1. *Mr. M. Uquaili 1975 Chairman, PICIC2. *Mr. Ahinad Dawood 1972 Idistrialis; ChainannDawood 0=aui aE Canpanies3. Mr. M. Shabbir Ahmed 1962 Businessman & Industrialist4. Pir Moharmad Mahfooz 1957 Chairman, Sima Laboratories Ltd.5. Mr. D.M. Qureshi 1975 Chairman, State Life Insurance

Corporation6. Mr. G.M. Adamjee 1973 Industrialist7. *Mr. A. Jamil Nishtar 1972 Managing Director, National Bank

of Pakistan8. Mr. T.A.G .M. Akhtar 1975 Yanaging Directo; Investment Corp. of Fakistan9. Mr. S.M. Rafiq Akhtar 1975 Businessman10.*Dr. Nasiruddin Jogezai 1972 Physician and Surgeon11. Mr. Zahid Bashir 1972 Industrialist12. Mr. K.S. Islam 1975 Managing Director, National Investment

TrustRepresenting Government of Pakistan

13.*Mr. K.U. Faruqui 1973 Joint Secretary, Ministry of Industries14.*Mr. Muizuddin Ahmad 19714 Secretary, Industries, Commerce,

Mineral Resources and Labor Dept.,Govt. of Baluchistan, Quetta

Foreign Directors

15.*Mr. Alexander F. Kirk 1974 IBRD Resident Representative in Pakistan16. Mr. William B. Beam 1972 Senior Vice-President, American Express

Banking Corporation of New York17. Mr. J.G.D. Gordon 1975 Group Managing Director, & Grindla)s Bank,

London18. Dr. Helmut Bending 1975 General Director, Deutsche Bank, Frankfurt19. Mr. Kazuaki Kobayashi 1973 General Manager, Bank of Tokyo, Karachi

Managing Director

20.* Vacant

Mr. Shafique Ahmed (Alternate Directorfor Mr. William B. Beam) 1972 Vice President, Bank of America, Karachi

Mr. Y.G.D. Gordon (AlternateDirector for Mr. D.S. Whittel 1975 General Manager in Pakistan, Grindlay Bank

* Mr. Jost E.C. Hildebrandt(AlternateDirector for Dr. Helmut Manager, European Asian Bank, KarachiBending) 1 973

* Members of the Executive Committee

March 31, 1976

ANNEX 6

Page 1

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LTD.

OUTLINE OF BUSINESS POLICIES

(Approved by the Board on 10/12/1964 and as amended on11/3/1967, 30/9/1967, 7/12/70, 31/1/1974 and 25/8/1975)

1. Objectives of the Corporation

(a) To stimulate the development of the country by providing financefor the establishment of new industries as well as for thebalancing, modernisation and expansion of existing industries,all in the private sector;

(b) To provide finance only for projects economically viable andfinancially sound; and

(c) As far as possible, to assist in broadening the base of indus-trial ownership in the country and thereby develop the StockMarket.

2. These objectives are carried out through:

(i) Investment Policy

(a) Finance are made available only for viable projectswhich will contribute to the economic growth of thecountry and to savings or earnings of foreign exchange.For this purpose all projects are subjected to carefulexamination through qualified staff and only those judgedeconomically viable, technically sound and financiallyprofitable are considered for assistance;

(b) Finance are made available to projects which are inline with the development plans of the Government,preference being given to projects largely based on

local raw materials;

(c) Financing is diversified, as far as possible, both asregard different regions of the country and as regardsdifferent industries and their ownership. Preferenceis given to the financing of projects in the under-developed areas of the country as long as they satisfythe conditions of economic viability and financialsoundness;

ANNEX 6Page 2

(d) In accordance with the normal business practice,adequate security is obtained to cover the loans butin addition the main considerations are soundness ofmanagement and projected profitability of the enter-prise to cover repayments;

(e) The Corporation does not seek any controlling interestin any enterprise financed by it but, consistent with thesafety of its interests, leaves the management and con-trol in the hands of the entrepreneurs;

(f) Even after providing the finance, the projects arecarefully watched and those in difficulties are assistedto the extent possible till the loans are repaid; and

(g) Corporation does not finance working capital requirementsby means of short term local currency loans. This businessis left to the commercial banks. In other respects alsoPICIC does not compete with commercial banks.

(ii) Method of Financing

Corporation provides finance according to the suitability of eachproject, in the form of -

(a) direct loans, mostly in foreign currencies;(b) loans partly convertible into stock;(c) direct equity participations; and(d) under-writing of public issues.

(iii) Size of Loans

(a) As desired and/or approved by Government the Corporationhas reviewed the minimum limit for its lending operations.These minimum limits, except where an enterprise is alreadymortgaged with PICIC for an earlier loan or where per-mitted by Government for special reasons, for the timebeing are Rs 1.50 million for foreign currency andRs 2.50 million for local currency loans. However, forunder-developed areas (which are fully exempt from inci-dence of customs duty on import of industrial plant andmachinery) the minimum limit for foreign currency loansis Rs 750,000.

(b) PICIC shall normally limit its financial assistance inany single transaction to not more than US$4 million.PICIC shall normally limit its total commitment to anysingle enterprise to the equivalent of 25% of PICIC'snet work or US$5 million whichever is the smaller.

ANNEX 6Page 3

For the purposes of this limitation, the term "TotalCommitment" means the aggregate amount of all the out-standing commitments of PICIC in such enterprise plusthe total amount of any proposed new commitment; bothamounts to be determined as of the date such new com-mitment is proposed to be made. The Board may approvetransactions and commitments exceeding these limits inexceptional cases after particularly rigorous projectappraisal and close and explicit scrutiny by PICIC'sManagement and Board.

(iv) Exchange Risk

In granting foreign exchange loans (except in the case of sub-loans from the first IBRD loan to PICIC where the foreignexchange risk is covered by Government) the exchange risk ispassed on to the ultimate borrowers.

(v) Staff Recruitment and Training

(a) In order to strengthen its own management and staff aswell as to assist its clients in the formulation andconduct of their projects, Corporation has continued tobuild up an effective organization and develop an adequatestaff possessing skills in finance, marketing and economicanalysis, engineering, accountancy and law; and

(b) Corporation has been sending out members of its technicalstaff for training at IBRD, IFC, Economic DevelopmentInstitute and other development financing agencies abroad;at the same time Corporation has trained officers ofother institutions and is particularly ready to receivefor training officers from newly established developmentbanks for their initial training.

(vi) Reserves

The Corporation continues to build reserves consistent with soundfinancial practices. In the past the practice has been to placeroughly 50% of the profits to reserves, in addition to capitalgains realised from the sale of investments and intention is tocontinue this policy.

(vii) Broadening Industrial Owernship

(a) In the case of new as well as existing large industrialenterprises, as a condition of financing, Corporationhas required that certain percentage of the share capitalis offered to the general public as a means to broadenthe base of industrial ownership;

ANNEX 6Page 4

(b) The Corporation has, wherever practicable, made directequity investments or obtained conversion rights and thensold some of its investments in the open market to furtherthe growth of the capital market. In selling any invest-ments it pays due regard not only to its own interests butalso to the interests of other participants in such enter-prise as well as to the steady and sound growth of stockexchanges in the country; and

(c) It is the intention that the total equity investmentsin various enterprises, either made directly or acquiredthrough conversion rights, is normally restricted to thepaid-up capital and free reserves of the Corporation.

(viii) Control over the Corporation

The Directors will use their powers to prevent any one person,or company, or group of affiliated persons or companies obtainingeffective control of the Corporation.

March 31, 1976

ANNEX 7Page 1

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Strategy Paper

(to be approved by PICIC's Board)

PICIC's main objective is development financing by way of pro-viding credit facilities, equity support, and other assistance to privateindustries in Pakistan. In view of the important role the private sectorcan play in industrial development, PICIC intends to be guided in itsoperations by the following priority principles over the next 2-3 years.

I. Business Policy

(a) PICIC would confine itself to the financing of industriescontrolled by the private sector;

(b) It is expected that the next Five Year Plan would soonbe announced by the Government setting forth the role andscope of the private sector in the industrial field over theperiod; PICIC would play its due role in the fulfillmentof objectives set out in the Plan;

(c) Every endeavour would be made to diversify PICIC's loanportfolio in terms of industrial classification andgeographical location of projects so that PICIC's expo-sure in any single category of industries such as textilesis not unduly extended and special attention is paid to thedevelopment of industries in comparatively under-developedparts of the country;

(d) Promotional work with special efforts would be undertakento develop non-conventional industries such as mineral proces-sing and electronics, and surveys would be carried out for thatpurpose;

(e) New comers with sound financial backing and suitablebackground would be encouraged to enter the industrialfield;

(f) Consistent with Government industrial policies, and subjectto the sponsors being suitable and credit-worthy, followingtypes of projects will be encouraged:

ANNEX 7Page 2

(i) Projects based on domestic raw materials andagricultural and industrial wastes;

(ii) Projects based wholly or substantially onlocally fabricated machinery;

(iii) Export oriented projects;

(iv) Projects for the manufacture of improved agriculturalimplements and machines suitable for use by smallfarmers to raise productivity of small holdings;

(v) Other projects for raising agricultural productivitygenerally such as manufacture of fertilizers, pumps,sprayers, insecticides, pesticides and herbicides.

(g) Except in very special cases, PICIC's maximum financialexposure limit for individual projects would not be exceeded.For projects requiring larger financing, efforts will be madeto associate other financing agencies such as IFC, CDFCIslamic Development Bank, and other external agencies directlylending to the private sector;

(h) In order to ensure better and maximum utilization of existinginstalled capacities, preference would be given to projectsfor balancing, modernization and replacement of existing unitsand their expansion in appropriate cases;

(i) In view of the present situation in the textile industry,emphasis will be on the financing of their balancing and modern-ization requirements to improve the quality of products andtheir competitiveness for export rather than on new capacity.In order to make possible the maximum utilization of cottonand synthetic yarn and increase exports of finished cloth,new proposals for weaving and finishing would be considered.In addition, those industries which use cotton and syntheticyarn as raw material would also be extended financial assist-ance;

(j) Consistent with Government policies and procedures, foreignprivate investment would be encouraged in fields where tech-nical know how and managerial skills-are needed for thesuccessful operation of a project of national importance(e.g. electronics, mineral processing, etc.). In such cases,if so required, PICIC would help the foreign investors tofind suitable Pakistani partners and in some cases makeequity investment to support the capital base of the project;

ANNEX 7Page 3

(k) PICIC would not take over to run any project but it would helpto bring about change of management where this is essential forthe successful operation of a project.

II. Project Appraisal

(a) The standard of appraisal of projects would be substantiallyimproved and full benefits would be taken from experiencesof those projects which have encountered difficulties. Forthis purpose, the functions of the Internal Audit Departmentwill be expanded to include evaluation of past operations.

(b) In order to increase the sponsor's financial stake inthe project and better protect PICIC financing, the debt/equity ratio for all projects would be improved as much aspossible, and, normally, debt financing will not be exceed60% of the total project cost;

(c) In appraising the projects from new comers or less experi-enced persons, special emphasis would be given to assistingsponsors to ensure adequate managerial and technical line upfor smooth implementation and successful operation of theprojects.

III. Implementation and Follow-up

(a) The functions relating to project implementation, supervi-sion and follow-up have already been reorganized on a morerational basis. It would now be possible to have closerfollow-up and supervision so as to identify and rectifyproblems quickly of the individual projects not onlyduring course of construction but also after completionand production till PICIC funds are repaid. Projects willbe visited at least once a year and more frequently whenloans are in arrears;

(b) New procedures have been devised for the procurement ofmachinery under PICIC loans with a view to ensuringmost reasonable price and checking the possibility of over-invoicing. This includes requiring that purchases be madeon the basis of international competitive bidding, whereappropriate.

ANNEX 7Page 4

IV. Overdues

(a) PICIC is concerned with the problem of its overdues. Inthis regard PICIC will continue to seek assistance fromthe Government if problems arise concerning collectionsfrom units now in the public sector or from commercialbanks for guarantees enforced. Further, Government isconsidering a new law for the speedy recovery of overduesof nationalized commercial banks and the Government hasalready indicated that the new law, when enacted, wouldalso apply to recovery of PICIC overdues.

(b) PICIC has undertaken a project by project study of itsportfolio. On that basis, the targets for PICIC's totalcollections (principal and interest) over the three-yearperiod are as under:

(i) 1976 Rs in '000s

(a) actual up to 31/5/76 168,328(b) projected up to 31/12/76 186,300 354,628

(ii) 1977 373,000

(iii) 1978 391,638

(c) PICIC's Plan of action for solving the problem of over-dues involves the following:

Rescheduling

(i) Rescheduling already agreed to has only been inthose cases where:

- the borrowers have made some down payment.

- have agreed to the revised repayment schedule;and

- where PICIC management is satisfied that theycan be expected to keep to the revised scheduleof repayment.

(ii) In all cases of rescheduling the borrowers arerequired to execute a supplementary loan agreementsetting forth the revised schedule of repaymentand also agreeing to penal interest at the enhancedrate of 4% so as to bring the total interest rate

ANNEX 7Page 5

in line with the interest rate currently charged bycommercial banks, thereby leaving no incentive forwitholding payment.

(iii) This process holds good for the remaining casesas well. The rescheduling program is expected tobe completed in the next 6-8 months.

Legal Cases

(i) Legal action will be taken in extreme cases after avery careful selection so that the impact is felton others.

Other Actions

(i) All other leverages available to PICIC for collectionof dues from sponsors of defaulting companies are nowstrictly enforced. When appropriate, PICIC imposeschanges in some projects (for example, new management)to improve their operations.

V. General

(a) PICIC is conscious of the professional staff turn-over problemspecially after the oil boom in the Middle East Countries. Inorder to tackle this problem, PICIC is already following asystematic policy of fresh recruitments on a periodicalbasis for the development of its professional staff and pro-motions and adjustments so that the vacancies are promptlyfilled in as far as possible from within the organizationwithout adversely affecting the quality and flow of work. Inaddition, it is also planned to review the emoluments of thestaff in the light of prevailing conditions and PICIC'sfinancial position;

(b) Through various Government Committees on which PICIC isrepresented, close contact is kept with various Governmentdepartments and agencies connected with the development ofindustries in the country. Where a particular industrialsector of the country is adversely affected, PICIC takes upthe matter with the Government for appropriate remedialmeasures.

August 16, 1976

ANNEX 8

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Main Terms and Conditions for Assistance(as of August 16., 1976)

Interest rate on rupee loans: (a) 12.5% and 1% p.a; the 12.5% rate appliesto projects located in less developedareas. A 0.5% rebate is given for loanscarrying convertibility features.

(b) 9.5% p.a. in respect of loans for financinglocally fabricated equipment and refinancedunder the special refinancing facility ofup to Rs 50 million extended by the StateBank of Pakistan.

Interest rate on foreign currency (a) 11.00Z p.a. for subloans under latest ADBloans: loan

(b) ln.57 p.a. for all other foreign loans(bilateral).

Commitment charge: 1.5% per annum on undisbursed amounts, com-mnencing 30 days after the date of sanction(60 days in respect of projects in less deve-loped areas). This charge increased to 2%p.a. when the loarn is not utilized I/ within 6months from the date of sanction (9 months inrespect of projects in less developed areas).

Letter of credit opening canmissionr 0.25% of theletter of credit outstanding in tlefirst quarter plus 0.12w% in the subsequentquiarters.

Project examination fee: 0.550 of the financial assistance sanctioned(0.38%if the project will be located in a lessdeveloped area and involves creation of newcapacity requiring PICIC financing up to Rs2.5 million) Tf financial assistance is notsanctioned, the amount received as projectexamination fee is refunded in full.

Underwriting ccmrission: 2.5% of the amount underwritten plus 2.5%of amounts taken up.

Penalty changes: p.a. over the applicable rate of interestor State Bank Rate whichever is the higheron amounts overdue.

Insurance comnission: Marine policies - 15% of the premiumErection policies - 20% of the premiumFire policies - 5% of the premiumAccident policies - 20% of the premium

1/ Letters of credit in respect of foreign currency loans and actual dis-bursement in the case of rupee loans.

August 16, 1976

ANNEX 9

PAKISTAN INDUSTRIAL CREDIT AIID INVESTMENT CORPORATION LIMITED

Resource Position as of December 31, 1975

Domestic Currencv: (Rs million)Equity 228.3Reserves for doubtful accounts 72.6r(overnrent 1 oans 1/ 21*8USATID loan 2/ 30.CRupee debentilres 175 .6State Pank of Pakistan cash credit 3/ ?75.0State Pank of Pakistan credit for lo-al machin /ry V 'o o

Total. domestie currency resources 85s,

Advances to staff 6.71. oans outstanding 6B.5Equity investments 76.7c-overnment securities 11..6Excess of outstanding loans in foreign currercy over

foreign currency borrowings 5/ 334.5-nvestment in other net current assets (except cash)

and fixed assets 1ll1.2 639.2

Domestic currency resources available for disbursement 21L.1Loans and underwritings committed but not d.l-sbursed 26.9

Dor:estic currency resources available for commitment 187.2loans and underwritings approved but not conmiit-ted 1 9.2

lorkestic currency resources available for a )proval and debt servicine 1 ..

iFre-Ign Currenjcy: (' r:illi on)

,hare capital (paid in foreifn c.urrer.;) I, .' loans 20) .0,

&U'ter loansSuppliers' cr edits 7 .1

Total. foreign exchange resources L92.9Loans disbursed: East Pakistani 102.7

,lest Paki stan 337.2 439.9

FI-elgn exehange resources avai ,a) o f- di-stursement `3.0:ioans coruni t.ted hut. not di sb irs -.. 34.6

1Eorepfn exchange resour2--s nvai al: for, o n-itment 18.1Toans approved but not oo 1rit.t.ed 51,.7

Foreign exchange resources available for approval (6*7)I/ Sibnrdi.nated Cto share caci ta !.2/ Subordinated to other de51 .3/ O f which, Rs 129.? r I...i olnI Veeli disbursed.It/C r Tf rl T-S 9. rMi n ! noL } r een disbursed.5/ T1 e arount of' domestic currency -rEcsources PICIC has had to use for payments of

fore-ign ulrrenev borrowmn ,s due to delavs irn repayments hy PTCIiC's clients.

March 31, 1976

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Details on Foreign Currency Loans and Creditsobtained as of December 31 , 1975/

($ million)

Amount Prior approvalNo. of Years of Total East 3/ West Unallocated Interest of sub-projects Repayment

Loans & Lines of Credits Loans Agreement Pakistan Pakistan Pakistan Balance Rate required Schedule

IBRD 9 19U7)-' 208.36 72.89 135.147 0.03 - 714 Over $3.0 million 1962-924(in respect oflast loan)

KFW 9 19o2-1a 70.06 8.24 61.82 1.09 5½ _ 6½ Over DM 2.0 mill- Linked to sub-ion projects

Export Import Bank (USA) 2 1969-70 A .37 0.62 7.75 - 6 $150,000 1972-79(First loan only)

Asian Bank 3 1970-72 15.12 - 15.12 0.19 7½2 No 1974-88Private Banks Loans 3 1970-71 7.33 2.22 5 .11 - 7 No 1973-83

European Loans 1 1962-7rW 51.05 3.26 47.79 6-97 5½ - 8.5 Over L240O.000 1965-2000for 4th UKCredit only

American Loans (US AID) 1 1958-61 21.421 3.70 17.724 - 5 - 5½ Over $250,000 1959-74Japanese Loan- a 1961 -70 31.98 7.46 .2L.52 _ - 6½ No 1967-81

Total Foreign Currency Loans 51 413.71 98.39 315.32 8.28

Suppliers' CreditsEuropean Credit 14 1963-75 62.71 L2.36 58.35 3.03 51x2 - 61x, No Linked to

(Excluding Easter European) Sub-projects

Eastern European Credits 5 1963-70 11.12 - 11.12 - 5½ - &½ No -do-Japanese Credit (TOYOMENKA) 1 1970 1.30 - 1.30 - 6 No -do-

Total Suppliers' Credits 20 75.13 .37 70.77 3.03

Total of Foreign CurrencyLoans and Suppliers' Credits 71 )'8 102.75 386.09 11,31

1/ Out of the total foreign currency borrowings of $2489 million, IBRD accounts for 43%, KfW for 124%, ADB for 3%, loans and

credits received by GOP and relent to PICIC (excluding KfW) for 17%, loans and credits arranged by GOP and allocated to PICIC for 5%,suppliers credits arranged by UOP and allocated to PICIC for 12%, loans froir financial institutions negotiated and obtained by PICIC for 2%

and private suppliers credits arranged by PICIC for )ld O

i/ Net of Cancellation.3/ Actual amount utilized for former East Pakistan.

March 31, 1976

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Rupee Resources and Terms as on December 31, 1975

Year of Amount Interest Total GraceSources/Loans Agree- (Rs in Rate Term Period RepaymentLOANS AND ADVANCES memt million) _ (Years) (Years) Schedule

Government Advances-/21

1st Advance 1957 30.00 Free 30 15 1972-1986,;2nd Advance 1961 29.01 h ho h 1965-2001z/3rd Advance 1967 9.95 5.5o0 h h 1969-2O05i-hth Advance 1968 10.00 6 20 15 198h-1988B-5th Advance 1974 15.00 8.25 -------Not known-----_6th Advance 1974 3.60 8.25 ---------do_-_______Capitalized Interest 6.13

- (total excludes Rs 81.93 millionTotal Government Advances 21.76 allocated to liabilities in Bangladesh

now incorporated into equity)

US AID - PL 48o / 1966 30.00 5.5o 20 10 1976-1986

State Bank of Pakistan

Revolving Cash Credit:

I 1973 125.00 9* 5 - 1976II 1975 50.00 9* 5 - 1980III 1975 100.00 9* 5 - 1980Special Credit for LocalMachinery 1973 50.00 7.50 11 5 1977-1983

Total State Bank Credits 325.00-

Rupee Debentures

1st Series 1971 20.00 7.50 5 5 1976 (oneinstalment)

2nd Series 1972 65.63 8.50F/ 7 3.50 1975-19793rd Series 1972 90.00 9 - 8 3 1976-1980

Total Rupee Debentures 175.63

Total Loans and Advances 552.39

Owners' Equity

Share Capital (in local currency) 1h7 98Reserves 180.027/(includes write-back of Rs 81.93 million

as Bangladesh Rupee assets no longerassiumed to be financed from equity)

Undistrihuted earnings 0.29

Net Owners' Equity 228.29

Reserves for doubtful accounts 72.58

853.26 (* Actual. Bank Rate)

1/ 3uborainatea to ali otner dents and share capital of PICIC.2/ These are original repayment schedules. Government of Pakistan since decided to defer

repnyments of all these loanz upto 199h. Thereafter, Rs 81.93 million transferred toliabilities in Bangladesh and written-h'i7k into PTCIC's reserves.

3/ Subordinated to all foreign currency debts.1/ Total draw down on December 31, 1975 was Rs 138.91 million.7/ Government gives PICIC an interest subsidy of 2% on this debenture issue. Net interest

cost to PICIC therefore amounts to 7%.6/ Government gives PICIC an interest subsidy of 2% on this debenture issue. Net interest

cost to PICIC therefore amounts to 7%.7/ Includes revaluation surplus of Rs 21.67 million not taken to income.

March 31, 1976

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION UIMITED

Summary of Loan Operations j/ 1958 to December 31, 1975kRs in Million)

1958 1958to to

LOCAL CURRENCY 1970 1971 1972 1973 1974 1975 1975

Gross Sanctions 118.97 38.1I 10.)41 38.67 38.53 )0.67 285.39Net Sanctions 2/ 72.31 17.8)4 6.93 21.86 24.35 39.29 182.58Cormitted 52.0h 35.18 8.87 11.93 13.45 21.06 142.53Disbursed 49.85 27.R6 15.18 10.01 5.31 8.74 116.95Repayments 13.24 17.91 3.11 2.32 6.50 5.42 48.50Outstanding (end of period / 36.61 46.56 5863 66.32 65.13 68.45 68.45

FOREIQG CURRENCY Lh/

Gross Sanctions 3,889.17 239.74 31.03 455.28 450.40 274.51 5,30.13Net Sanctions 3,060.26 85.28 6.61 427.30 359.43 271.42 4,210.30Conmaitted 2,895.98 126.87 (24.35) 75.02 338.44 268.70 3,680.66Disbursed 2,342.12 381.26 166.83 43.65 92.78 311.62 3,338.26Repayments 3/ 758.12 10t7.77 106.29 161.89 197.32 19L.73 1,566.12Outstanding(end of periodJ 1,584.00 1,817.49 1,878.03 1,759.79 1,655.25 1.772.14 1,772.14

TOTAL.

Gross Sanctions 4,008.14 277.88 41-44 493.95 488.93 315.18 5,625.52Net Sanctions 3/ 3,132.57 103.12 13.54 449.16 383.78 310.71 4,392.88Committed 2,948.02 162.05 (15-48) 86.95 351.89 289.76 3,823.19Disbursed 2,391.97 409.12 182.01 53.66 98.09 320.36 3,455.21Repayments 3/ 771.36 165.68 109.40 164.21 203.82 200.15 1,614.62Outstanding(aid of perlxd)~ 1,620.61 1,864.05 1,936.66 1,826.11 1,720.38 1.840.59 1,840.59

1/ West Pakistan only.2/ Cancellations are deducted in the year the loan was approved/committed.3/ After deducting payments received in advance.3/ At exchange rate Rs 9.9 = US$1.0.

March 31, 1976

PAKISTAN INDUSThIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Summary of Underwriting and Equity Operations-1958 to September 30. 1975(Rs in thousands)

1958-1969 1969 1970 1971 1972 :1973 1974 Sept. 30.1975 TOTALAmount Amount Amount Amount Amount Amount Amount Amount Amount

UNDERWRITING

Commitments 65,757 13,975 15,200 17,800 _ 600 1,900 - 70,289Take ups 11,151 5,702 3,599 398 - - 477 - 10,969Commitments at the end of period 34,925 13,775 20,925 37,475 9,875 3,550 5,950 - 5,950

EQUITY PARTICIPATIONS

Underwriting take-ups 11,151 5,702 3,599 393 - - 477 - ,144z/Exercise of options 29,758 2,787 15,342 5,627 1,104 3,200 - 2,956 30,724 1/Direct investments 14,075 2,891 2,500 4,038 1,500 500 - - 9,357 1/Purchases 8,635 1L,629 4,018 23,226 - - 583 - 32,506 T/

Total acquisition 63,619 26,009 25,459 33,284 2,604 3,700 1,060 2,956 76,7311/Opening portfolio - 52,077 65,909 80,224 68,856 71,210 73,898 73,775

63,619 78,0B6 91,368 113,508 71,460 7h,910 74,958 .76,731 76,731

Sold during the year (cost) 11,542 12,177 11,144 18,305 250 1,012 1,183 -

Closing portfolio 52,077 65,909 80,224 95,203 71,210 73,898 73,775 76,731Less: Portfolio in Bangladesh 26.347

L/ This column represents the net holdings under the respective portfolio category.

March 31, 1976

ANNEX 1 4Page 1

PAKISTAN II=DUSTRTAL CREDIT AND INVESTMENT CORPORATION LIMITED

Characteristics of PICIC's Operations

1. Sectoral distribution. Table 1 shows the sectoral distribution ofPICIC's outstanding portfolio of loans and equity investments. The distributionhas not changed much since 1973 with the textile sector accounting for 45%. Thesugar industry accounts for 17%, paper (8%), food processing (7%), engineering (65),chemicals (5%), jute (2%), cement, ceramics and glass (2%), minerals (2%) andmiscellaneous industries (5%). Table 2 shows the characteristics of PICIC'sloan approvals. Cotton and other textiles accounted for 36% of total approvalsduring 1974 and 1975, compared with 69% during 1973, and sugar for 18% and 16%respectively. The proportional decrease in textiles financing after 1973 isbecause PICIC since then started to put increased emphasis on balancing andmodernization projects for cotton spinning rather than new projects. The de-crease in financing textiles was partially offset by increases in hotels,leather, rubber products, ceramics, glass and asbestos cement.PICIC's promotional activities are discussed in paras 4z.08 and 4.09 (text).

2. Size of loans. As PICTC operates in the large and medium scaleindustrial sector, the average size of its loans has been relatively high, Rs11.5 million in 1973, Rs 16.1 million 1/ in 1974 and Rs 11.2 million in 1975.However, after adjusting for the 1972 rupee devaluation, the average size wasalready Rs 11 million in 1970. Taking into account the high rate of inflationboth domestically and internationally, the average size of PICIC's loans hasnot grown since then. This is due to the recent nationalizatious which have re-duced the number of large scale industrial projects open to the private sectorand also reflects the hesitation among industrialists to enter into new large-scale ventures (para 2.08 text).

3. Geographical distribution. PICIC has continued its efforts todiversify the regional distribution of its portfolio. Un to June 30, 1973approvals were allocated as follows: Sind 15%, Punjab 44%, NWFP 8% andBaluchistan 3%. Since then to September 30, 1975, the distribution was:Sind 38%, Punjab 48%, NWFP 11%, Baluchistan 1% and Islamabad 2%. The increasedactivity in NWFP is due to PICIC's promotional efforts although the ProvincialGovernment is reserving a number of other potential projects identified byPTCTC for the public sector. The low level of investment in Baluchistan isexplained by the political uncertainty in the region, though the situationmight improve in the longer run due to its potential for mining, which mightattract additional private investment. Between 1973 and 1975, some 60% o? approvals

for new and expansion proj ects were in areas classified as underdevelopedor semi-developed.

4. Diversification of clientele. PICTC's attempts to continue diver-sifying its clientele are also satisfactory. Up to September 30, 1975, PICIChad approved loans in (West) Pakistan aggregating Rs 4.l billion (at the presentexchange rate) for 645 projects and )i51 clients. Some 76% of these clients(compared to 72% as of June, 1973) have received only one loan. Tay amounts,reneat loans as of September 30, 1975 accounted for 275 of total lendinru cormaredwith 30% as of Jurne, 1973. Out of the 89 projects financed by PTCTC dur;nrg1973 to September 30, 1975 5 were new projects (Table 2). 2/ Of these '

1/ The inerease in 197!! is explained by two large sugar projects and 3 hotelprojects.

2/ nBT amrounts, new T)rojects accoint-cd for 9!% in 1971,, 7 i n 197)h and 5? in1975, ex-ansinn nrojects resperti2velyv or )!%, 1hz, and 31<1v and balanrin-and -oderni:ration projects for 2'. 115. and 12d.

A1TEX 14Page 2

projects, 20 were sponsored by newcomers to industry.

5. Maturities of loans. Over 90 (by anount) of the loans approved since1973 have maturities of between 10 and 15 years. Previously, about 65% hadmaturities of between 5 and 10 years and about 305' had maturities from 10 to 15years. The increasing trend in the repayment period of PTCTC's loans is explainedmainly by the reduced proportion of balancing and modernization projects recently

financed. It is also due to a GOP request that PTCIC attempt to shortern thedifference between the maturities of its sub-loans with those of the foreignexchange borrowings by GOP allocated to PICIC, to minimize GOP's foreign exchange

risk. PICIC has by now abandoned this practice and is determining the terms of

its loans on the basis of the nature of the investment -roject and the debt

servicing capability of the enterprise.

6. Local currency financing. Due to resource constraints and to theweak capital markets, PICIC's equity investments were only Rs 7.7 million between1973-75. of which 80% was obtained through exercise of options, 8% through marketpurchases, 6% through direct investments, and 6% through underwriting take-ups.

Its local currency approvals (net) for that period were Rs 86 muillion or 8% of

its total loan approvals. The low proportion of local currency loans is because

most of these funds come from the sponsors' contribution to the project costand also because of PICIC's domestic resource constraints. The bulk of PICIC'slocal currency loans are given out of a special refinance scheme introduced by

SBP in October, 1972. The objective of this scheme is to encoura,e the demand

for locally fabricated machinery. It provides for concessionary financin- by

PICYC and TDBP for local sales and by commercial banks for exports (&TFC alsoparticipates in a similar scheme). PICTC has been allorated a refinance limit

of Rs 50 million, although as the utilization of these funds imriroved recently(1975) it is expected to be increased shortly. ITp to December 31, 1975, PTCTC

had approved loans under this scheme for Rs 76 million, of whieb Rs 35 million

had been committed and Rs 10 million disbursed. The lending rate bv PICIC is

now 9.5% (1% below its foreign currency rending rate) and it. obtains refinance

at 7.5%. The terms of refinance are related to the terms of the loan sanctionedby PICIC subject to a maximur of 10 years maturity, though PICTC may finance fora longer period if found appropriate

March 31, 1976

ANNEX 1Table 1

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Sectoral Distribution of Loan and Equit;y Portfolio as of September 30, 1975(Rs in million)

West Pakistan Only

LOAN PORTFOLIO EQUITY PORTFOLIO TOTAL

Industrial Sector Amount t Anount % Amount %

Jute Processing & Manufactures 33.1 1.9 5.49 7.2 38.59 2.1

Cotton & Other Textiles 805.3 45.4 22.84 29.8 828.14 44.7

Sugar 297.7 16.8 13.06 17.0 310.76 16.8

Food Products & Processing 128.8 7.3 1.76 2.3 130.56 7.1

Engineering 108.2 6.1 5.55 7.2 113.75 6.1

Chemicals & Pharmaceuticals 9h.8 5.3 1.58 2.0 96.38 5.2

Cement, Ceramics & Glass 43.9 2.5 1.00 1.3 44 90 2.4

Board, Paper, Paper Products 138.7 7.8 2.88 3.8 141.58 7.7and Printing

Minerals 3h.2 1.9 10.02 13.1 44.22 2.4

Miscellaneous 89.2 5.0 12.55 16.3 101.75 5.5

Total 1,773.9 100.0 76.73 100.0 1,850.63 100.0

March 31, 1976

PPaSTTAN INIDUSTRIAL CREDIT AND INVESTMEN1T CORPORATION LIMITED

Ccsparative Statement of Loans Approved 1/ 1958 September 340. 1975(Rs in mlon)

1958-7.51958-70 1911972 1973 1974+ IM9 ( .3 (Sept.30)No. Ionouot ~b No. lmilt 76No. Amount 8) No. Amount B o. Amount 8 No. Amount.t30 NO.Aount

SIZE OP LOANS

Below No 500,000 52 23.8 0.7' - 1.5 1.4 - 0.3 2.2 1 2.5 0.5 3 4.1 1.1 - 2.7 0.9 56 34.9 0.8

R. 500,000 to Rs 999,999 98 92.9 2.9 1 1.2 1.2 - - - 2 5.3 1.2 - 1.6 0.4 2 2.3 0.8 103 103.3 2.4

No 1,000,000 to R. 2,499,999 107 210.0 0.6 3 11.1 10.8 2 7.7 57.0 6 13.8 3.1 3 12.6 3.3 6 18.4 6.3 127 273.6 6.2

Rs 2,500,000 to No 4,999,999 112 403.5 12.5 2 10.9 10.6 1 5.5 40.8 8 52.2 1i.6 4 4o.4 10.4 7 26.8 9.2 134 539.3 12.3

No 5,000,000 to REB 9,999,999 95 657.3 '20.3 1 7.0 6.8 - - 5 52.0 1.1.6 6 46.6 12.0 3 39.3 13.4 110 82. 2 18.3

Ns 10,000,000 & above 78 1745.1 54.o 4 71.4 69.2 - - - 17 324.0 72.0 8 281.9 72.8 8 202.8 69.4 115 2625.2 60.0

TOTAL. 542 3132.6 100. 12 103.1 100.0 3 13.5 100.0 39 449.8 100.0 24 387.2 1-00.0 26 2902.3 100.0 '645 4+378.5 100.0

INDUSTRIAL CATANGORY

Jute Proes...ing 5 94.2 3.0 - - - - - - 1 3.5 0.8 - - - - - - 6 97.7 2.2

Cottmon Sd Other Textiles 183 1243.8 39.7 5 74.1 71.9 - 3.0 22.2 21 31-1.0o 69.1 8 125.2 32.3 12 120.3 41.1 229 1877.4 342.9

Sugar 40 632.0 20. 1 3.7 3.6 1 2.0 14.8 3 72.4 16.1 2 4+6.2 11.9 3 78.8 27.0 50 835.1 l9.j

Food Pr~oducts & Processing 81 211.7 6.8 2 10.0 9.7 1 2.0 14.8 1 219 o.6 2 9.5 2.5 1 2.2 0.8 88 238.3 5.4

Engineering 80 208.4 6.7 - - - - - - 2 6.2 1.4 - - - 2 4+.5 1.5 84 219.1 5.0

Chemicals & Pharmaceuticals 1+0 165.3 5.3 2 9.2 8.9 - - - 3 7.9 1.8 1 4.9 1.3 3 26.1 8.9 1+9 213.4 4.9

Cement, ceramics Sod Glass 19 100.6 3.2 - - - - - - 1 17.7 3.9 2 35.8 9.3 3 54.6 18.7 25 208.7 4.8

Paper, Paper Products & Printing 35 235.1 7.5 - 3.0 2.9 - 1.0 7.4 - 0.2 0.1 1 52.0 13.4 - - - 36 291.3 6.7

Inland water transport & shipping 2 80.i 2.6 - - - - - - - - 1 o.4 0.1 - - -- 3 80.5 1.8

M4iscellaneous 57 161.4 5.1 1 3.1 3.0 1 -5.5 _40.8 7 _28.0 6.2 7 1.13.2 29.2 2 5.8 2.0 75 317.0 7.2

TOTAL 542 3132.6 100. 11 103.1 100.0 3 13.5 100. 39 449.8 100.0 24 387.2 100.0 26 292.3 100.0 645~ 4378.5 100.0

GEOGRAPHlICAL SPREAD

Sind 283 1397.7 4+4.6 7 37.7 36.6 1 2.0 14.8 14 186.5 4i.5 13 162.7 42.0 9 116.6 39.9 327 1903.2 43.5

Pnj ab 209 1396.8 44.6 1 38.8 37.6 2 11.2 83.0 15 186.1 41.4 6 165.4 42.7 10 1.43.4 49.1 21+3 1941.7 44.3N.W.F.P. 41 229.4 7.3 3 26.6 25.8 - - - 8 66.7 14.8 5 42.0 10.9 4 23.2 7.1 61 387.9 8.9Baluchistan 6 100.1 3.2 - - - - 0.3 2.2 1 0.3 0.1 - 3.6 0.9 3 9.1 3.1 10 113.4 2.6

Isl smabad (Capital) .2 8.6 0.3 - - - - - - 1 10.2 2.2 - 13.5 3.5 - - - 4 32.3 0.7

TOTAL 542 3132.6 100.0 11 103.1 100.0 3 13.5 100.0 39 1+49.8 100.0 24 387.2 100.0 26 292.3 100. 645~ 4378.5 100.0

NATURE OP PROJECT

New Projects (including expansion) 292 2336.0 74.6 6 45.5 44.1 3 13.5 1,00.0 34+ 440.2 97.9 21 34+5.4 89.2 18 258.8 88.5 374 3439.4 78.6,

Existing Projects 250 796.6 25.4 5 57.6 55.9 - .. - 5 9.6 2.1 3 41.8 10.8 8 33.5 11.5 271 939.1 21.4

TT0~AL 542 3132.6 100.0 11 103.1 100.0 3 13.5 100.0 39 449.8 i00.o 24 387.2 100.0 26 22. 3 100. 0 64+5 4378.5 100.0

NeW Projects (excluding expansion) 218 1908.5 6o.9 4+ 27.4 26.6 2 11.2 83.0 29 424.5 94.4 14 291.0 75.2 1.2 166.9 57.1 279 2829.5 64.6

Balancing, ModernIzation, & Expansion 324 1224.1 39:1 7 75.7 73.4+ 1 2.3 17.0 10 25.3 5.6 10 96.2 24.8 14 125.4 42.9 366 1549.0 35.34

TOTAL 542 3132.6 100 0 1 103.1 100.0 3 13.5 100.0 39 449.8 100.0 24 387.2 100.0 26 292.3- 100.0 64s5 4378.5 100.0

New Companies 176 1.666.3 53.3 4+ 27.1 26.3 1 8.2 60.7 28 421.8 93.8 11 251.2 64.9 12 166.6 57.0 232 254+3.2 58.1

Exisoting Ccumpanies 366 1464.3 46.7 7 76.0 73.7 2 5.3 39.3 11 28.0 6.2 13 136.0 35.1 14 125.7 43.0 413 1.835.3 1+1.9

TOTAL 542 3132.6 100.0 u1 103.1 100.0 3 13.5 100.0 39 449.8 100.0 24 387.2 100.0 26 292.3 1.00.0 6-45 4378.5 100.0

LOCAL VS. FOREIGN CURRENCY:

Local Currency 37 72.4 2.3 3 17.8 1-7.3 2 6.9 51.1 5 21.9 4.9 5 25.0 6.5 2 38.8 13.3 54 182.8 4.2

Foreign Currency 503 3060.2 97.7 8 85.3 82.7 1 6.6 48.9 4 427.9 95.1 19 362.2 93.5 24 253.5 86.7 591 4195.7 95.8

TOTAL 542 313i2.6 100.0 1 13. 0. 3 13.5 100.0 9 449.8 1.00.0 24 387.2 100.0 26 292.3 100.0 645 4378.5 100.0

TERMS OP LOANS:

Up to 5 years - 133.9 4.3 - 12.4 12.0 - 6.9 51.1 - 17.4 3.9 - 1.1 0.3 - 2.5 0.9 - 174.2 4.05 to 10 years 1999.6 63.8 - 42.1 40.9 - 6.6 48.9 - 9.1 2.0 - 34.0 8.8 - 38.5 13.2 - 2129.9 48.6

Over 10 yea's- 999.1 31.9 - 48.6 47.1 - - - 423.3 94.1 - 352.1 90.9 - 251.3 86.0 - 2074.4 47.4

TOTAL -312. 6 100.0 - 103.1 100.0 - 13.5 100.0 - 449.8 100.0 -- 387.2 100.0 - 292.3 100.0 -47. 0.

W-st Pakistan only; figures are shown aE1 the curren. sxchan 6 r rate of is 9.9 a :s$1,0

Mh,rsh 31, 1976

ANN EX 15

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Rates of Return for Projects Sanctioned between July, 1973 and September, 1975

IndustrialCateoUry Financial Rate of Return (%) Economic Rate of Return (fl

No. Min. Max. Average-/ No. Min. Max. Average

Cotton Textiles 19 12.8 32.0 15.1 ll 12 25 17.1

Other Textiles 14 11.5 30.0 16.5 9 10 50 25.3

Brick Plants 5 12.5 21.6 16.3 3 14.5 23.5 18.0(&) Ceramics

Match Factories 2 25.0 25.0 25.0 - - - -

Cigarettes 3 20.5 39.0 30.8 2 25.0 50.0 37.5

Hotels 3 11.6 16.7 13.4 3 16.1 214.14 19.2

Sugar 3 13.5 14.7 114.0 2 28.6 34.0 31.3

Tanneries 3 13.1 16.2 15.1 1 36.0 36.0 36.0

Plastic Products 2 16.4 16.4 16.14 1 26.0 26.0 26.0

Others 12 10.0 30.0 17.3 9 13.0 24.0 17.8

TOTAL 66 10.0 39.0 16.8 141 10.0 50.0 21.6

1/ By number of projects

March 31, 1976

ANNEX 16

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Agreement between the Government of Pakistan and PICIC

Regarding the Problem of PICIC's Assets and Liabilities in Bangladesh

AGREEMENT dated , 1976, between the ISLAMICREPUBLIC OF PAKISTAN (hereinafter called "?the Government") and the PAKISTANINDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED (hereinafter called"PICIC").

The Government and PICIC have agreed as follows:

(a) The Government will continue to provide to the TrustFund established by the Agreement between the Governmentand PICIC dated December 20, 1972, the necessary resourcesto service the external debt liabilities of PICIC whichare still outstanding in PICIC's books in respect ofits Bangladesh assets for as long as this is requiredto be done consistent, where applicable, with the debtrescheduling agreements already finalized.

(b) The Government will not require the Trust Fund or PICICto repay in respect of its Bangladesh assets all or anypart of the resources provided by the Government to theTrust Fund, including any interest thereon, until suchtime as PICIC recovers its assets from Bangladesh, andif so, the Government will only require PICIC to repayto the extent of such recovery.

(c) The Government will not require PICIC to repay all or anypart of PICIC's local currency debts to the Government(Rs 82 million) allocated to PICIC's local currency assetsin Bangladesh including any interest thereon, until suchtime as PICIC recovers the related assets from Bangladesh,and if so, the Government will require PICIC to repay onlyto the extent of such recovery.

This AGREEMENT is supplemental to, and, to the extent necessary,in modification of, the Agreement executed by the parties hereto on the20th day of December, 1972.

IN WITNESS WHEREOF, the parties hereto, acting through theirrepresentatives thereinto duly authorized, have caused this Agreement tobe signed in their respective names as of the day and year first abovewritten.

PAKISTAN INDPJSTRIAL CREDIT AND INVESTNDNT CORPORATION LIMITED

Trends in Arrears, 1969 to 1975(Ps in millions)

I. ARREARS OVER 3 MONTHS

No. of Companies Total Number % of Companies Principal Outstanding Principal and Interest Principal in Arrears Principal OutstandingIn Arrears of Companies In Arrears by Projects in Arrears As $ of Total Affected by Arrears as

As of December 31 (1) (2) in Arrears 2i 1 Interest Total Loar Outstanding % of Total Loans Outstanding

1969 21 223 9 13.41 1.92 1.57 3.49 0.3 2.31970 41 254 i6 24.93 4.74 3.72 8.46 0.7 3.51971 82 263 31 212.36 11.31 13.81 25.12 1.3 25.01972 188 275 68 1,258.13 126.42 109.07 235.49 6.4 63.71973 154 268 57 1,094.27 168.91 139.31 308.22 9.2 59.81974 137, 286 48 1,059.25 239.27 177.47 416.74 13.9 61i51975 116%' 274" 43 1,010.00 261.43 195.21 456.64 14.7 -l4 9

Notes:1. The following shows loans rescheduled by PICIC during the period: * * *

1971 1972 1973 1974 1975 (9 mos.)Number of loans rescheduled 12 2 54 13 10Amount rescheduled 4.74 4.42 82.66 28.23 79.99Principal outstanding of loans rescheduled 150.69 38.67 416.56 105.14 86.10

* The amount in arrears by companies which were allowed rescheduling during 1973-75 was Rs 126 million as of Septmber 30, 1975, which shows that recentreschedulings made by PICIC were not realistic (para 5.08).

2. During May 1972, the rupee devalued from $1 z Rs 4.76 to $1 Rs llOOand then revalued to $1- Rs 9.9 in February 1973.

As of September 30, 1975.

March 31, 1976

PAKISTAN INDUSTRIAL CREDIT AND INVESTMEN CORPORATION 1MUITEDAnmlysis of Arrears overi3 Moth__so& spese 3.11

e (~~~~~~~~~~~~~~Rs In thousands)

A. AOle OF AR2FA2A. AGE OF ARREARS ~~~~~~~~~~Amount In Arrears Principal Principal Outstandng as 5of

io. of p Ccni PrTh6Ipes Interest Total 5 Of Total Outstanding Total Loan Portfolio

I - Loans Ber,%iginSRegul- ly e 156 992,960 55.85

II - Loans in Arrears U6

3-6 months 17.817 15,037 32,854 8.12 84 871 4.776.12 nOntha 52,551 46,747 99,298 24.53 192,835 10.85

12-18 months 68 830 33,101 101,931 25.18 194,538 10.94

18-24 months 33,950 24,938 58,888 14.55 U6,805 6.57

Over 24 months 63,675 48,141 111,816 27.62 195,963 U.02

Total 272 236,823 167,964 404,787 100.00 1,777,972 100.00

B. INDUSTRIAL AND AOGWISE DISTRIBFIYO OF PRINCIL OUWTAZ2ND AFF2TZD BY ARREARSPrincipal Outstnding Affected Principal and Interest inby Arrears as % of Total 1oe8q Arrears as 5 or, Total Loans

24 msoths 12-24 moths 6.12 months 3-6 months Total f of Total bytArre by e e I tT tr : Outstanding by eech Induatryl

Jute Processing - - 14 237 14 237 1.8 42.9 9.7

Cotton and Other Textiles 98,391 157,851 101,116 19,007 376,366 47.9 46.7 25.1

Sugar 37,668 511451 49,732 30,899 169,750 21.6 57.0 20.4

Food Products and Processing 24,875 18,778 11,400 305 55,359 7.1 43.0 22.5

Ensineering 5,299 43,058 3,072 224 51,652 6.6 47.8 40.0

Chemicals and Pharmaceuticals 10 302 7,543 4,026 2,228 24,098 3.1 25.4 27.3

Cemnt, Ceramics & Glas 15,847 7,483 2,408 909 26,648 3.4 60.6 50.1

Board, Paper, Paper Products andPrinting 2,091 4 760 4 639 817 12,306 1.6 8.9 5.0

Transport and Shipping - 50654 8,780 16,245 30,089 3.8 88.o 18.4

Nicellaneous 1,490 15,355 7 662 - 24,5G7 3.1 27.5 5.8

Total 195,963 311,343 192,835 84,871 785,012 100.0 44.2 22.8

C. IDUSTRLAL AIID PROVINCE-WIOG STAT1;IIT OF OVEDaJES

BIND PUNAB BALUCHISTA (~ .FR9NM)N TOTAJL' Principal and Interest in ArrearsPrincipal Intest Picpl IresePerest interest PrincRpa! Interest As S of Totsa

Jute Processing - 1,462 1,786 - - - - 1,462 1,786 0.8

Cotton and Other Textiles 36,114 25,248 64,G89 55,511 5,965 7,248 4,717 3,226 110,885 91,233 49.9

Sugar 1,357 2,162 30,999 24,146 - - 1,174 910 33,530 27,218 15 0

Food Products and Processing 7,428 6,348 8,956 6 282 -- - 16,384 32,630 7.2

Eigineering 2 572 3,384 6,072 2,428 24,660 4,208 - - 33,304 10 020 10.7

Chemicals and Phacmaeuticals 10,333 6,732 6,049 2,784 _ _ 16,382 9,516 6.4

Cement, Ceramics and Glass 784 212 12,765 8,267 - 13,549 8,479 5.4

Board, FPper, Paper Products andPrinting 2,998 3,143 735 43 - - - - 3,733 3,186 1.7

Transport and Bhipping 4,338 1,971 - - - - - - 4,338 1,971 1.6

Miscellaneous 120 609 2,762 1,091 - - 374 225 3,256 1,925 1.3

Total 66,o44 \49,809 133,889 102,338 30,625 11,456 6,265 4,361 236,823 167,964 100.0

115.853 236,227 142.081 10.626 4C,87

% of Total 28.6 58.34 10.4 2.6 100.0

/ This category includes amounts In arrears for less than 3 mouths totalling Rs 100.54 million. The principal outstanding of loans in arrears for less than 3 months was Rs 227.25 million.

I These figures shov the arwears performance of each sector. The sectors where both principal outstanding affected by arrears and principal and interest in arrears an % of principal outtatnding

for each sector have becsme worse relative to the average portfolio re: textiles, engineering and cement. One public sector company which is perfoming well accounts for over 80% of the overdues

by the engineering sector. Regarding cment another public sector sompany accounts for over 50% of the arrears under the cement, ceramics and glans category.The following caopars the overdues situation with that prevailing in June 1973 (RN minion):

Pri93ipal and Interest in Arrears over R monthaJune 1973 September 197'4~ Sep-temer 1975 Inr.. /39 fIe

Jute processing 15.8 3.3 3 3 ( 12.5) ( 8)Cotton and other textiles 94.4 129.5 202 1 107.7 69

Sugar 32.5 44.1 60 8 28.3 18

Food Products nd Processing 26.3 33.3 _9 D 2.7 2

Engineering 18.6 i14.5 24.7 16

Chemicals and Pharmaceuticals 15.6 22.3 10.3 7

Cement, ceramics and glass 11.3 IG 5 I 0 10.7 7

Board, paper, paper products =ad printing 28.3 38.4 t 9 (2L1.) ( 14)Transport and shipping 1.5 8.0 6 3 4.8 3

Miscellaneous 4.3 4.1 5 0.9

Total 248.6 313.8 404.8 156.2 100.0

ANNEX 19Page 1

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

PICIC's Plan of Action on Collections

(a) PICIC has undertaken a project by project study of itsportfolio. The attached tables summarize PICIC's industry-wise projections (based on the total of the individual pro-jections) giving figures of overdues, billing, reschedulingand projected collections for the next 3 years and indicat-ing separately recovery of balance of overdues over theperiod. The -targets for PICIC's total collections (prin-cipal and interest) over the 3 year period are as under:

(i) 1976 Rs in '000s

(a) actual up to 31/5/76 168,328

(b) projected up to 31/12/76 186,300 354,628

(ii) 1977 373,000

(iii) 1978 391,638

(b) PICIC's Plan of action for solving the problem of overduesinvolves the following:

Rescheduling:

(i) Rescheduling already agreed to has only been in thosecases where:

- the borrowers have made some down payment.

- have agreed to the revised repayment schedule;and

- where PICIC management is satisfied that-theycan be expected to keep to the revised scheduleof repayment.

(ii) In all cases of rescheduling the borrowers arerequired to execute a supplementary loan agreementsetting forth the revised schedule of repayment andalso agreeing to penal interest at the enhanced rateof 4% so as to bring the total interest rate in line

ANNEX 19Page 2

with the interest rate currently charged by commercialbanks, thereby leaving no incentive for withholdingrepayment.

(iii) This process holds good for the remaining cases aswell. The rescheduling program will be completed inthe next 6-8 mohths as per the attached tablessummarized below:

(Rs in 'OOOs)No. of AmountCases Rs

Overdues as of May 31, 1976(column 7 of Summary Part-I) 149 604,004

Less: (As per Summary Part-II)

i) Already rescheduled(column 4) 16 125,849

ii) Further propsoed to berescheduled (column 5) 45 350,716

61 476,565

Net Overdues where reschedulingis not considered necessary 88 127,439

(iv) The main difficulty so far has been for reschedulingin the cases of industrial categories generally oper-ating at losses and therefore, facing liquidity problems.These categories are:

- cotton textile industry, more particularly spinningunits;

- solvent extraction plants;

- paper industry; and

- art silk cloth industry.

Even in these sectors some rescheduling plan has beententatively assumed for the purpose of determiningfuture estimates of billings and recoveries. The actualarrangements to be arrived in these cases, may, therefore,differ somewhat but by and large overall recoveries, ifanything, may turn out to be better.

ANNEX 19

Page 3

(v) With a view to improving the viability in these sectorsPICIC management has used their good offices with theGovernment in suggesting suitable policy changes. Inthis effort a measure of success has recently beenachieved. For example, in the case of solvent extractionplants the Government has allowed this industry to importtheir requirements of edible oilseeds (other than cottonseeds) free of any custom duty, produce the edible oilagain without any excise duty and freely sell thesame in the market. As a result, this industry shouldnow be able to operate to full capacity and thus improvetheir profitability and subsequent cash generation. TheGovernment also has taken recently actions to assistthe textile industry, paper industry and export industries.This has provided a basis for discussion with individualborrowers as regards the rescheduling programme concerningthese sectors. Such a dialogue will take place after2/3 months as the impact of the new measures begin tobear fruit. When a particular industry falls in dif-ficulty, PICIC will continue to take up the matter withthe Government for appropriate remedial measures.

Other Overdues

(vi) It will be observed from above that out of 149 casesof overdues, rescheduling is expected in only 61 cases.In the remaining 88 cases the overdues are expectedto be recovered as under:

(Rs '000)

i) During the half year ending 31/12/76 Rs 89,331ii) During the half year ending 30/06/77 29,417iii) During the half year ending 31/12/77 7,523iv) During the half year ending 30/06/78 522v) During the half year ending 31/12/78 74vi) Doubtful of recovery 572

Rs 127,439

These targets are attainable as-they were derived on thebasis of PICIC's analysis of the repayment capacity ofindividual projects, taking into account improvementsmade on PICIC's follow-up work and that all leveragesavailable to PICIC for collection of dues from sponsorsof defaulting companies are now strictly enforced.

ANNEX 19Page 4

Legal Cases

(vii) Pending Decision:

As on 31/5/76 PICIC had taken legal action against elevencases. In the case of normal suits for recovery of debtsthe procedures are presently very time-consuming andexpensive and hence applications filed by PICIC are nowfor the liquidation of the enterprises on the groundthat they are unable to pay their debts. This action hasbeen taken in extreme cases after a very careful selectionso that the impact is felt by others. The primary objec-tive is to force the management to come to terms by arrang-ing some down payment and agreeing to a reasonable re-scheduling programme. This objective is being largelyserved because the managements in these cases have showna desire for a settlement and in 3 cases they have startedmaking some payments through the courts. By and largerescheduling arrangements are expected to be agreed to inthese cases as well after substantial down payment. Thishas been reflected in the case to case study;

(viii) Cases already decided:

There are three enterprises that have gone into liqui-dation not as a result of legal action by PICIC butas a result of action taken by other creditors. Liqui-dators have been appointed. Total PICIC dues againstthese three projects amount to Rs 4.41 million. Exceptin one case where the balance due is Rs 0.494 million(after recovery of Rs 3.5 million) which is shown asdoubtful of recovery, the rest is well secured and isexpected to be recovered in full as PICIC has first chargeon their assets.

(c) PICIC will continue to seek assistance if necessary from theGovernment when problems arise concerning collections fromunits now in the public sector or from commercial banks forguarantees enforced. Further, Government is considering anew law for the speedy recovery of overdues of nationalizedcommercial banks and the Government has already indicatedthat the new law, when enacted, would also apply to recoveryof PICCIC overdues.

August 16, 1976

PAMISTAN DITIhWRIAI. CRDMTT AII IMN:UI3JT OI(rORATION 1317T2)

PR0JiET-wys.E AflJLy3IS (. flj1.lN. & n!.CCV2Ixt.S AS ONIIAY 31. 1976

sJMrY - PAHT-I (rupees in thouegsam)

I ACTUAL BI!L- I TOTAL 'r!'ATI ZNTS| ANCE ES1IrATLO BIILDICS CTIR'AED R NCVMII l~~~~~~~~~~~~~~~~A IMO " S'HC47M DPI I iCUWr ADJ76U17-7T)NTSj3

Nc. f ,U: l CAS3TnICATICO'S OM -1- I AS 197 1-1-197 13i_ t_1- t t-7-77 1 - 1-7-78I31-12-75 TO TILL 1-1-76 TO Ato jto Ito lto lto lto to to to to

I 31-5-1976 31-5-76 [31_&_ TM 31-5-76 31-12-761 26-77 31-12-7?16-78l 31_-7 31-12-76 6-77 31-12-77 430.71 31-12-711 2 3 4 7 9I 11F ii 4 L 15 -16 17

A. fnlrated Tertile Units 71,771 27,491 99,262 21,669 7f,593 30,690 29,827 30,963 31,45t 32,045 15,133 28,855 24,789 28,596 29,482

(3,955) (2,181) (935) (-) H-)B. On-ir.te,-rate4 lJots

iWi Unit Pw81t rto operation 66,827 20,152 86,979 16,565 70,414 21,547 24,690 25,196 25,308 25,308 11,769 21,158 19,804 20,869 20,965prior to Deciber 1971. (6,996) (4,800) (1,082) (_) (-)

ii) Unitl *utabliah.d after 52,147 14,696 66,843 4,853 61,990 15,924 18,619 18,619 18,619 18,619. 5,068 15,151 15,151 * 15,5 15,151Dcember 1971. (5,068) (373) C-) (-) (-)

iii) Units under Implemntation 9,171 5,808 14,979 1,297 13,682 12,021 13,138 15,187 17,498 18,592 8,128 9,21)50,6(4 12,268 13,034

Sub-4otal: On-ixterateid Uuits 128T145 40,656 168,801 22,715 146,086 49,492 56,447 59,002 61,425 62,519 45,524 45,604 90(15.298) (5.173) (1.062) . -) . -

ab-Tota3l Cotton Textiles 199,916 68,147 268,063 44,384 223,679 80,182 86,274 89,965 92,876 94,564 40,098 74,379 70,393 76,884 78,632_ J - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~(19,253) (7.35 ) (2,017) () (-

t II 11,803 5,460 17,263 7,800 91463 59619 6,438 6,268 6,669 6,669 6,182 6,169 5 806 5.786 6,062(2,265) (609) (233) (130) (74)

i lCWCL 13,587 6,467 20,054 5,125 14,929 8,065 6,528 8,045 8,045 8,045 e 749 6,221 6,386 6 386 5,994(2,926) (392) (392) (392) H-)

t SPDCULISE lMILES 3,148 1,963 5,111 t,204 3,907 2,025 1,765 1,765 1,705 1,705 1 710 1,858 1,625 1,565 1,5651817) (- (- W- -

UTE 3,280 6,858 10,138 7,642 2i496 71090 3,485 3,485 3,405 3,485 9,586 348 348 3,485 34e… _ (2.496) (-) (-i

Total: Textile": 231,734 88,095 320,629 66,155 254,474 102,981 194,490 109,528 112,780 114,468 66,325 92,112 87,695 94 106 95,738(27,757) (8,355) (2,642) (522) (74)

I1- SCL7Izr EMRACTICr 19,949 3,332 23,281 100 23,181 3,507 - 5,609 5,609 5,609 637 140 2,804 3,366 3,366

III- F4M; rAMIJFACTUIl13 56,121 8,254 64,375 553 63,822 5,756 5(675 5075 8,475 8,475 203 3)4 3 4

IV - C!I::'CAL & P&RM.ACHMIrCALS 15,824 9,079 24,903 7,355 17,548 8,101 8,794 9,209 8,326 8,137 8,086 7422 7,614 7,998 6,751

Y- POLD PPCTJCTS & ?PC UINDS 14,818 6,767 21,585 6,096 15,489 9,408 8,150 8to86 7,970 7,867 7,587 8,544 7,513 7,286 7,183(2,194) (1,889) (_) (-) (-)

VI. LIU'7 E"! IN8DII 9,154 3,747 A2,901 1,532 11,369 4,468 4,050 4,056 4,090 4,042 4 128 3,391 3,147 3,292 3,244(1,926) (239) (-) (-) (-)

VII- NlIC-ILAN&IUS 34,610 18,024 52,634 12,597 40,037 19,528 20,724 21,809 22,489 523,073 16,8 16,676 18,317 18,65 19,217(5,287) (1,201) (1,095) M- C-

TIZI-LIfAL 5A3Q 43,145 5,618 48,763 2,145 46,618 8,642 4,759 7,207 5,491 10,903 15,993 13 550 4,382 4,569 5,150(15,541) (12,254) (989) (_) _-)

IN- PUBLIC =TCR PRCJFDT3 79,252 17,117 96,369 26,602 69,767 15,295 19,621 19,825 19,758 19,758 31,737 19,593 20 084 20,845 21,232(24,829) (5,336) (2,797) (.. M-)

2 26oA3 73,368 33,524 106,892 45,193 61,699 36,599 37,355 37,353 39,778 39,779 34,724 29,844 29,922 31,694 31,952(9.4

aD TOTL, 577,975 194,357 772,332 168,328 604,004 214,285 213,718 228,457 234,766 242,111 186,30D 191,347 181,65.3 194 310 197,328(89,331) (29,417) (7,52) t522) (74)

NoTxs ridurem within parmthesis under the oolumn -EOIIIIATD R2I0TV0211S" indicate recovery of overaono as per column 7.

NA/on.

PAKIDArA NDUSIT1I,L CRIMIT AN)D fIVTVr,'3TIlT CORPCRATION LIFITUD

REY.OVUTY PLAN CF OV2DBUSS AS c,N mAY 31. 1976(Rupees in thousands)

I-UMMARY - P: R-Il

TOTAL MO~UT ow A'CU)7P L r vl JCV FOIEUZDRI RDECV:MY OF CVTRDUIS 11URIl;

A. Interrated Tertile Units 77,59BL3 PRPOE TO52 3X5 2 1917 93 -- 8

ST!0 DUSTRIAL CLASSIFICATIONS AIflCADYABLjI RLOS!I M TIiOV 3iYO OE- 12:YOFO1976. URN 1*O* ~~~~~~~~~~~~~~AS CN RECMIY WES3I1FROM a1 n6 h76 lot11a1CJ M~AY 31. 97 RNCEALDTO11976 9x76 1nI le 1s 1 n il ot 2nd Rplf

3 6 -4 57- 0 6 1 7 0 9 ~~~~~~~~~~~~~101I- T~rIT:Th CC7icN

A. Ineao etl nt 77,593 - 70,522 3,955 2,181 935 - -

3. Un-inteprated Units

i) Units went into operation 70t414 - 57,536 6,996 4,800 1,082prior to December 1971.

ii) Units established after 61,990 4,863 50,686 5,068 373 -December, 1971.

iii) Units under implesentation 13,682 - 10,448 3,234

Sab-4ot.l2 Un-integrated Units 146,086 4,863 119,670 15,298 5,173 1,082

Sib-Total: Cotton Textiles 223,679 4,863 190,192 19,253 7,354 2,017 - -

STIX 9,463 - 6,152 2,265 609 233 130 74 _

s WCCT LIN 14,929 9,204 1,623 2,926 392 392 392 - _: SPTIIALISED TEITILES 3,907 - 3,990 817

: JUTE 2,496 _ _ 2,496 - ' -

Total: Textiles: 254,474 15,685 201,057 27,757 8,355 2,642 522 74

II- SCI.IT 3CRASTICI1 23,181 - 22,544 637 - - - _ _

III- PAFP~ :A'A!RFATt'RrTrG 63,822 60,025 3,697 100 - - - - _

IV- Clj!C.%If & PIMPJ,ARACM'TICALS 17,548 - 15,789 1,616 143 - - - _

V- itCD PFC1T'r3Ti AID PROCESSIIG 15,489 6,259 5,147 2,194 1,889 - - -

TI- LI' ?r 2I7?1E3lIFG 11,369 - 9,204 1,926 239 - - -

vII- 11:- ILAr!.CUS 40,037 8,738 23,716 5,287 1,201 1,095 - - -

PIII- LGAJ. CAS3T- 46,618 - 17,402 15,541 12,254 989 _ __ 432

IX- PUBLIC 332CR FRCJIICTS 69,767 29,125 7,680 24,829 5,336 2,797 _ _ -

I- SUGAR 61,699 1,635 44,480 9,444 - - - - 140

TOTAL: 604,004 125,849 350,716 89,331 29,417 7,523 522 74 572

Recovery is oonsidered doubtfNl.

IIA/ eq

CD 3

b v

A2i1'N4 zU

FAXISTAN INDWSTRI1L CREDIT AND INVESTMENT CORPORATION LIMITED

Summarized Income Statements. December 31. 1970-1975(Rs in million)

1970 1971 1972 1973 1974 1975----------------Audited----------------- Unaudited

INCOME

Interest on temporaryinvestment and bank deposits 5.53 5.12 12.91 9.19 6.64 5.26

Interest on loans 81.77 70.21 166.34 161.57 150.02 147.55Dividends from investments 4.48 4.72 3.23 5.44 8.05 7.17Capital gains frominvestments 6.61 7.19 - - - -

Miscellaneous income 14.27 13.29 17.15 29.79 35.79 20.62

TOTAL GROSS INCOME 112.66 100.53 199.63 205.99 200.50 180.60

EXPENSES

Administrative expenses 6.48 1 8 . 5 6V 8.00 9.O0- 9.46 10.87Interest paid and otherfinancial expenses 60.97 62.17 125.27 129.48 122.74 118.88

TOTAL EXPENSES 67.45 80.73 133.27 138.48 132.20 129.75

INCOME BEFORE TAXES 45.21 19.80 66.36 67.51 68.30 50.85Income tax 18.32 7.50 32.10 31.45 30.35 21.-40

NET INCOME 26.89 12.30 34.26 36.06 37.95 29.37

Allocation of Net Income

Surplus due to devaluatio/ -_ 93.10 (22.31) (13.39) ( 9.27)Unappropriated profitsbeginning of year 0,21 o.48 0.35 0.36 0.36 0.30Excess tax provision for

previous years 0.60 - - - - -Premium on share issues - 5.00 - - - -Net income 26.89 12.30 34.26 36.o6 37.95 29.37

27.70 17.78 127.71 14.11 24.92 20.40

Reserves 20.97 7.13 98.20 (75.84) 16.85 41.16Provision for doubtfuladvances in West Pakistan - - 20.00 - - 52.58

Provision for loc- cuiaenQyinvestment in East Pakistan - - 2.75 79.18 - (81.93)Unappropriated profitsend of year o.48 0.35 0.36 0.36 0.30 0.29

Dividends 6.25 6.30 6.00 7.20 7.77 8.302/Additional tax for previousyears - 4.00 0.40 3.21 - -

27.70 17.78 127.71 14.11 24.92 20.40

Ratios

Dividend payout (%) 23.2 51.2 17.5 20.0 20.5 28.3Rate of dividend (%) 12.5 12 0 10 0 12.0 12.5 12.5Net profit/Average equity (%) 20.3 14:7- 16.4 16.4 19.6 13.0Profit before tax/averagetotal assets (%) a 3.8 2.55/ 3.8 2.9 3.1 2.3Profit after tax/oeragetotal assets (%)- 2.3 1.91 1.9 1.5 1.7 1.3Administrative expenses/average total assets (%)4/ 0.55 0.73s/ 0.45 0.38 0.43 0.50

1/ Includes donation of Rs 10.0 million to the National Defence Fund.2/ Includes donation of Rs 500,000 to Flood Relief Fund.3/ Provisional.4I/ West Pakistan assets only from 1971 onwards.3/ For 1971, the Rs 10 million donation to the National Defence Fund (footnote 1) was

not included in the calculation of these ratios.6/ Total amount was Rs 100.3 million on the devaluation of the rupee in 1972, of which

Rs 7.2 million was collected and taken through the income statement during thatyear. The reduction in subsequent years represents amounts colrected by PICICwhich are incorporated under net income after providing for tax.

March 31, 1976

glNISt 21

PAKISTAN INDUSTRIAL CREDIT AND INVESTKINT CORPOEATION LIETED

Balance Sheets. December 31. 1970-75

(Es in Million)

ASSETS 1970 1971 1972 1973 1974 1975-- A-----------Audited__________- - ---- Uaun1.ted

Cash snd short-term deposits 57.64 82.16 195.30 59.63 56.96 47.81Goveranent and other securitr,s 25.23 17.41 11.20 23.00 23.65 18.36Accrued interest and charges- 54.34 52.52 211.16 264.22 290.45 289.21Sundry current assets 10.26 9.02 12.41 12.84 15.22 18.32

147.47 161.11 430.07 359.69 386.28 373.70

Local currency loans 2/ 51.92 46.56 64.60 67.70 67.72 68.45Foreign Currney loans- 987.10 802.40 1910.57 1761.98 1655.25 1772.11.

1039.02 848.96 1975.17 1829.68 1722.97 1840.59

Less: Provision fordoubtful advances - - 20.00 20.00 20.00 72.58

Total loano 1039.02 848.96 1955.17 1809.68 1702.97 1768.01

Equity investment (at cost) 80.22 68.85 71.21 73.90 73.77 76.73Fixed assets (Net) 1.10 1.02 0.86 0.79 0.72 0.66Amount receivable fromGovernment of Pakistan - - 81.34 83.38 10.19 -

Assets blocked in ... stPakistas 434.41 492.06 478.08 541.78 372.45

Total Assets 1267.81 1514.35 3030.71 2805.52 2715.71 2591.55

LIABILITIES AND EQUITY

Accounts payable-/ 31.52 29.72 104.79 123.66 115.99 66.93Amount due to Go-ernnent

of Pakistan - - - - - 73.06-Provision for taxes onincone 15.53 11.01 31.36 25.43 12.29 20.11

Proposed dividend 6.25 6.30 6.00 7.20 7.77 8.31

53.30 47.03 142.15 156.29 136.05 168.40

Foreign curr,jnoy long-termborrowings- 962.24 782.00 1798.28 1637.98 1463.17 1437.69

US Aid Rupee loan 30.00 30.00 30.00 30.00 30.00 30.00Rupee debentures - 20.00 185.00 195.00 185.00 175.67Loan from Stote Bask ofPakistan - - 125.00 52.00 50.49 138.91

Subordinated Governmentadvances 79,27 10.91 81.39 83.81 103.69 21.76

Total long-term debt 1071.51 872.91 2219.67 1988.79 1932.35 1803.99

Capital paid-in 50.00 60.00 60.00 60.oo 66.40 66.40Reserves 92.52 99.65 129.99 77.82 107.91 158.35Revaluation reserves - - 67.86 14.19 30.95 21.67Bndistributed earnings o.48 0.35 0.36 0.36 0.30 0.29

Net wrth 143.00 160.00 258.21 182.37 205.56 246.71

Liabilities in res,ectof Fast Pakistan4/ - 434.41 329.34 299.61 275.95 132.66

Loan disbursed by 51Gs-ernnent of Pakistan- - - - 95.08 255.61 239.79

Loan tr be disbursed ba,/Government of Pakistan- - - 81.31 83.38 10.19

Tad Equity 1267.81 1514.35 3030.71 2805.52 2715.71 2591.55

RATIOSLong-term debt/equity-/ 7.5:1 5.5:1 8.6:i 10.9:1 9.4:1 7.3:1Long-term debt/equity

(contractual /) 4.5:1 4.1:1 6.3:1 7.2:1 5.9:1 6.6:1Current ratis_/ 2.8:1 3.4:1 3.0:1 2.3:1 2.8:1 3.9:1Reserves plus provisions as

f of loan and equity portfolio([IP) 8.3 10.9 10.6 7.5 8.8 13.2

Provisions as % of loanand equity portfolio (MiP) - - 1.0 1.1 1.1 3.8

Rook value as , par value 286.0 266.7 430.4 303.9 309.5 371.6

1/ Including interest accrued on guarantees as shown below under-/2/ Including outstanding guarantees as under:

Guarantees 85.49 152.46 414.20 385.47 297.50 251.30Accrued Interest 2.42 3.45 17.16 32.53 i8.90 14.04

3/ Net of Rs 2.75 rnllion prcsided fbr in 1972 and Rs 79.18 nillion in 1973, whichwere written back in 1975 as GOP has agreed to take responsibility for PICIC'srupee assets in Bangladesh

4/ The 1975 figure of Rs 132.7 million includes Rs 81.91 million transferred fromsubordinated GOP advances representing the allocation rade to PICIC's rupee assetsin Bangladesh. Foreign currency liahi] ities in respect of Bangladesh are shownat pre-devaluation rates.These represent reimbursements mode (to be made) to 1ICIC for the servicing offoreign currency Bangladesh liabilities.

6/ Excluding from debt foreign currency liabilities relating to Bangladesh from1971 onwards. Local currency liability also excluded in 1975. The contractualdefinition treats subordinated loans maturing after IBRD debt as equity.

7/ The current ratio should be viewed with caution as the accrued interest undercurrent assets includes substantial arrears. The ratio for 1975 excludes theamount payable to GOP discussed in footnote 8.

8/ This anount refers to funds given by GOP for a payment made by PICIC to IBRD afterthe related liability was taken up by Bangladesh. IBRD will reimburse PICICduring 1976.

March 31, 1976

ANNEX 22

PAKISTAN INDUSTRIAL CREDIT AND IfWESTMENT CORPORATION LIMITED

Forecast of Approvals, Commitments and Disbursements, 1976-80(Rs in million)

1975 1976 1977 1978 1979 1980Actual -- Projected----------------

APPROVALS

Foreign currency loans 271.4 300.0 3h5.0 Wm.0 60.o 530.0Local currency loans 39.3 50.0 58.o 66.0 76.0 88.0

Subtotal 310.7 350.0 403.0 466.0 536.0 618.0Equity inrestments 3.0 1.0 3.0 4.0 6.0 8.0

TOTAL 313.7 351.0 406.0 470.0 542.O 626.0

COMMITMENTS

Foreign currency loans 268.7 290.0 318.5 333.0 L0l.5 463.0Local currency loans 21.1 33.9 37.8 50.6 63.8 73.2

Subtotal 289.8 323.9 356.3 383.6 h65.3 536.2Equity investments 3.0 1.0 3.0 _0 6.0 8.0

Total 292.8 324.9 359.3 387.6 h71.3 5S4.2

DISBURSEMENTS

Foreign currency loansl/ 311.6 258.7 231.3 279.8 320.6 37L.8Local currency loans 8.7 15.9 23.9 31.9 40.3 52.7

Subtotal 320.3 27h.6 255.2 311.7 360.9 427.5Equity investments 3.0 1.0 3.0 4.0 6.0 8.0

Total 323.3 275.6 258.2 315.7 366.9 435.5

1/ Of which Loan 961-PAK.

77.8 120.8 34.2 13.4

March 31, 1976

ANNEX 2

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Projected Foreign and Domestic Currency Resource Position, 1976-1980

1976 1977 1978 1979 1980

I. Foreign ($ million)

Resources available for commitmentat beginning of year 18.0 42.7 15. 51.9 26.3

Less: New comnitments 29.3 32.2 33.6 40.6 46.8

Plus: lew resources:

IBRD 25.0 - 30.0 - 30.0ADB 25.0 - 30.0 - 30.0Ef 6.o - 5.0 7.0 5.0Other Bilaterals/Suppliers (net)l/ ( 2.0) 5.0 5.0 8.0 10.0

Resources available for commitmentat end of year 42.7 15.5 51.9 26.3 54.5

No. of months succeeding year'scommitments 16 6 15 7 13

II. Local (Rs million)

Resources available for disbursementat beginning of year 28.0 28.6 29.1 32.6 33.3

Plus: Sources

Adjuste 4 net profit 11.3 20.4 23.4 28.7 34.1Plus: A (payables-receivables) 17.0 3.3 8.0 9.8 6.7Internal cash generation 20.3 23.7 . T8 40.8Collections (Principal LC) 1705 11.7 12.0 12.4 T1TShare Capital increase - - - - -GOP subordinated loans - - - -SBP cash credits 204.0 25.o 15.0 15.0 15.0SBP scheme for local machinertW 16.0 23.9 31.9 40.3 52.7

Total sources 258.8 84.3 90.3 106.2 122.6

Less: Requirements

Equity investments 1.0 3.0 4.0 6.o 8.0Disbursements of loans 15.9 23.9 31.9 40.3 52.7Repayments (principal LC) 126.4 5.9 9.1 34.1 49.7Redemption of debentures 56.8 36.8 36.8 27.4 18.0Investment in fixed assetp, 0.5 0.5 0.5 0.5 0.5Deficit in FC collections5- 49.3 5.4 ( 3.8) ( 11.1) ( 13.6)Dividends 8.3 8.3 8.3 8.3 8.3

Total requirements 258.2 83.8 86.8 105.5 123.6

Resources available for disbursementat end of year 28.6 29.1 32.6 33.3 32.3

1/ Unutilized portion of an Italian Credit is expected to be cancelled in 1976.These bilateral/suppliers credits are provided to PICTO by GOP at 2% belowPICIC's foreign currency lending rate.

2/ Excluding unutilized portion of SBP cash credits (Rs 146 million) and SBPscheme for local machinery (Rs 40 million) which are taken as sources of funds inthe years they are utilized. Further, it is assumed that no sales of investmentstake place.

3/ Profit before tax and revaluaticn reserve realizations less actual tax paymentduring year plus depreciation. Revaluation reserve realization are not includedsince the interest portion is deducted from receivables and accrued income.

4/ Amount available was Rs 40 million as of December 1975 but it is assumed that anew line of credit would be provided by SBP in 1978.

j/ Difference between collections (principal) of foreign currency loans, andrepayments (principal) of foreign currency borrowings. The 1976 figuresincludes Rs 73 million payable to GOP.

March 31, 1976

ANNEX 24

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Projected Income Statements. 1976-80(Rs in Millions)

1975 1976 1977 1978 1979 1980Unaudited - Projected---------------

INCOME

Income from loans - interest 147.55 156.69 157.65 162.62 171.62 185.73Commitment charges, otherfees, etc. 11.52 11.67 14.03 16.52 19.18 22.18

Income from-loan operations 159.07 168.36 171.68 179.14 190.80 207.91Dividend income 7.17 6.95 7.13 7.44 7.89 8.25Realization of exchangereserve 9.10 8.00 8.00 5.67 - -

Income from short-terminvestments, deposits, etc. 5.26 3.86 4.04 4.23 4.43 4.63Capital gains - - - - - -

TOTAL GROSS INCOME 180.60 187.17 190.85 196.48 203.12 220.79

EXPENSES

Interest and commitmentcharges on borrowings .118.88 124.45 127.01 130.00 134.71 142.61

Administrative and othergeneral expenses 10.87 13.04 15.00 17.25 19.84 22.82

TOTAL EXPENSES 129.75 137.49 142.01 147.25 154.55 165.43

INCOME BEFORE TAX 50.85 49.68 48.84 49.23 48.57 55.36Provision for tax 21.48 21.00 20.50 20.52 19.94 23.14

NET INCOME 29.37 28.68 28.34 28.71 28.63 32.22

Allocation of Net Income

Decrease in revaluationreserve ( 9.27) ( 8.00) ( 8.00) ( 5.67) - -

Net income 29.37 28.68 28.34 28.71 28.63 32.22

20.10 20.68 20.34 23.04 28.63. 32.22

Net increase in reserves 41.15 1 7.42 7.16 9.82 15.48 18.39Increase in provisions ( 29.35)- 4.96 4.88 4.92 4.85 5.53Dividends 8.30 8.30 8.30 8.30 8.30 8.30

20.10 20.68 20.34 23.04 28.63 32.22

Ratios

Dividend payout (%) 28.3 28.9 29.3 28.9 29.0 25.8Rate of dividend (%) 12.5 12.5 12.5 12.5 12.5 12.5Net profit/average equity (%) 13.0 11.4 11.0 10.8 10.3 10.9Profit before tax*veragetotal assets (%)•/ 2.3 2.2 2.2 2.2 2.1 2.2

Profit after tax/averagetotal assets (%)2/ 1.3 1.3 1.3 1.3 1.2 1.3

Administrative exRenses/averagetotal assets (%)Y 0.50 o.59 0.68 0.77 0.84 0.91

1/ Provisions for Pakistan portfolio increased by Rs 56.58 million but provisions forBangladesh portfolio (Rs 81.93 million) were written-back.

2/ Net of assets relating to Bangladesh.

March 31, 1976

ANNEX 25

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Projected COsh-Flow Statements, 1976-80(Rs in millions)

1976 1977 1978 1979 1980

SOURCES

Profit before tax and revaluationresenre realization 41.68 h0.84 l3.56 48.57 55.36

Add back: non-cash items (depreciation) 0.30 0.30 0.30 0.30 0.30Increase in share capital - - - - -Draw down on-SBP cash credits-' 20h.00 25.00 15.00 15.00 15.00SBP scheme for local machine r 15.86 23.85 31.89 4o.33 52.73Foreign currency borrowings2/' 137.95 197.07 266.h9 320.64 374.77

Increase in accounts payable 24.95 1.28 1.49 3.37 2.94Loan collections against -Foreign currency loans 169.31 190.h6 207.11 221.35 230.91Local currency loans 10.48 11.7h 11.98 12.42 14.12

Increase in subordinated loans - - - - -

Total availability of funds 604.53 490.53 577.82 661.98 746.13

USES

Investment in fixed assets 0.50 0.50 0.50 0.50 0.50Disbursement of -

Foreign currency loans2/ 137.95 197.07 266.49 320.6 374.77Local currency loans 15.86 23.85 31.89 h0.33 52.73

Equity investments 1.00 3.00 4.00 6,00 3.00Repayment of borrowings:Foreign currency 1X5.59 195.87 203.27 210.27 217.27Local currency3/ 183.13 2.73 45.86 61.h9 67.73

Increase in receivables, accrued income 7.92 ( 2.04) ( 6.50) ( 6.h5) ( 3.76)Payment of tax 30.61 20.75 20.51 20.23 21.5&Payment of dividend / 8.30 8.30 8.30 8.30 8.30Payment to Government of Pakistan-i 73.06 - -

Total payments 603.97 490.03 574.32 661.31 7!7.08

Cash surplus/(Deficit) o.56 0.51 3.50 0.67 ( 0.95)Opening cash balance 47.81 48.37 48.88 52.38 53.05

Closing cash balance 48.37 48.88 52.38 53.05 52.10

Debt service coverage (Times) 0.72 0.98 1.01 0.99 0.99

1/ To cover debt servicing shortfalls. The 1976 figures include a Rs 125 millionborrowing to repay to SBP the same amount which falls due during that year(reflecting a rescheduling).

2/ Excluding those under the 9th IBRD Administered loan as under120.8 - 3h.22 13.35 - -

3/ Includes repayment of Rs 125 million to SBP during 1976 (footnote 1). The newborrowing of Rs 125 million would be payable in 5 equal yearly installmentsstarting in 1979. Other SBP cash credits for debt servicing would be payable in lumpsum 5 years after the amount is drawn down.

h/ Repayment of foreign currency borrowings has been reduced by same amount (seefootnote 8 Annex 20).

March 31, 1976

AMN 26

PAKISTAN flDUSTRIA. CRISDIT OD DINVESTMT CORPORATiCN LIhIrED

Projected Balance Sheets, 1976-80(Be in llions)

1975 1976 1977 1978 1979 1980Un.adited ----- -Projected------ --------

ISSETS

Cash and short-term deposits 47.81 48.37 38.88 52.38 53.05 52.10Government and other

securities 13.36 18.36 18.36 18.36 18.36 18.36Receivables and accrued iooee 289.21 297.13 295.09 288.59 282.14 278.38Deposits, prepoyments etc. 18.32 18.32 18.32 18.32 18.32 18.32

Total current ossets 373.70 382.18 380.65 377.65 371.87 367.16

Outstanding loans:Foreign currency/ 1772.14 1740.78 1717.39 1806.77 1906.06 2049.92Ds.estic currency 68.145 3.83 85.94 105.85 133.76 172.37

Total loans 1840.59 18 1.61 1833.33 1912.62 2039.62 2222.29Equity investments 76.73 77.73 80.73 84.73 90.73 98.73

Total loans andinvestments 1917.32 1852.34 1911.06 1997.35 2130.55 2321.02

Leduct: Reserve for doubtfulaccounts 72.58 77.54 82.42 87.31 92.19 97.72

Net portfolio 1844.74 1814.80 1831.61 1910.01 2038.36 2223.30Fixed assets (Net) o.66 o.86 1.06 1.26 1.46 1.66

Total assets in EastPakistan_' 372.45 372.45 372.45 372.45 372.45 372.45

TOTAL ASSETS 2591.55 2571.29 2585.80 2661.37 2781.11 2961.57

LIABILITIES AND EQUITY

Tax payable 20.11 10.50 10.25 10.26 9.97 11.57AMont received fromGovernment of Pakistan 73.06 - - - - -

Dividends payable 8.30 8.30 8.30 8.30 8.30 8.30Accounts payable and othercurrent liabilities 66.93 91.88 93.16 91.65 98.02 100.96

Total current liabilities 168.40 110.68 111.71 113.21 _116.29 120.83

Long-tern Senior Debt 1/7eig. our.rr..cy borrwings- 1437.69 1430.05 1431.25 1191.47 1604.84 1762.3hRupee loan from US AID 30.00 28.57 25.7i 22.85 19.99 17.131st debenture isaue 20.00 - - - - -2ld d-oeiture ioue 71.63 is.b8 28.13 9.38 -3rd debenture issue 90.00 72.00 54.00 36.01 18.00State Bark Credit: cash

t redit 129.20 208.20 233.20 248.20 238.20 228.20Loans for local nachinery 9.71 25.57 46.30 71.91 106.02 136.88

Total borrowings senicrto equity 1782,23 1811.27 1818.59 1882.81 1987.05 2111.55

Share capital 66.40 66.40 66.40 66.40 66.1O 66.40Revolu-tico reserve 21.67 13.67 5.67 - - -Reserves, anoppropristedsurplus 231.22 251.60 271.64 292.05 312.38 336.3r

319.29 331.67 343.7' 358.45 378.78 402.7-

Deduct: Proviison fordoubtful accounts 72.59 77.5h 32.12 37.3h 92.19 97.7?

Net Worth 246.71 254.13 261.27 270.11 286.59 301.99Sub-ordinated Governrentsdvar.ces 21.76 21.06 21.76 21.76 21.76 21.76

Total net worth and sub-ordinoted Governmseotadvances 268.47 275.89 283.05 292.87 308.35 326.71

Loans disbursed by Governmentof Pakistan (for Bangladeshliabilitie-) 239.79 239.79 239.79 239.79 239.79 239.79

Liabilities relating tcEast Pakistan:Foreign 50.73 50.73 50.73 50.73 50.73 50.73Local 81.93 81.93 81.93 81.93 81.93 81.93

TOTAL LIiABILITIES ANDEQUITY 2591.55 2571.219 2585.80 2661.37 2781.14 2964.57

RATIOS

Long-term debt/equity 7.3:1 7.2:1 7.0:1 7.0:1 7.0:1 7.1:1Long-tern debt/equity

(oontractualj§/ ~~~6.6:1 6,6:1 6,h:1 6.4:1 6.4:i 6.6:1Current rotio- 3.9:1 3,5:1 3.L1; 3.3:1 3.2:1 3.0:1Reserves and provision as o

of loan and equity portfolio 13.2 11.0 14.5 14.6 14.7 14.5Provisions s 8 of loan andequity portfolio 3.8 4.1 4.3 4.4 1.3 h.2

Book value as , par calue 371.6 383.6 393.5 408.3 431.6 459.3

1/ Eacluding the 9th IBRD administered loon as undar:79.13 199.93 234.15 237.1h 224.53 210.50

2/ In respect of PICIC foreign currency assets in East Pakistan and the correspondingliabilities the amcounts as of December 31, 1975 are left constant throughout theprojected period as these do not affect PICIC's real financial pcsition and it isnot known when a settlement would be reached.

31 Cash credit already obtained/to be obtained for financing short fall in PICIC'srupee resources.

t/ See Annex 20 footnote 7.

March 31, 1976

ANNEX 27

PAKISTAN INDUSTRIAL CREDIT AND INVEST=NT CORPORATION LIMITED

Estimated Disbursement Schedule for the Proposed Loan(US$ million,

Amount

1977 January - March -April - June 0.5 2.0July - September 2.0 8.0October - December 2.5 10.0

Subtotal 5.0 20.0

1978 January - March 2.7 10.8

April - June 2.8 11.2July - September 2.5 10.0October - December 2.0 8.0

Subtotal 10.0 40.0

1979 January - March 2.0 8.0April - June 2.0 8.0July - September 1.7 6.8October - December 1.3 5.2

Subtotal 7.0 28.0

1980 January - March 1.2 4.8April - June 1.0 4.0July - September 0.5 2.0October - December 0.3 1.2

Subtotal 3.0 12.0

Total 25.0 100.0

March 31, 1976

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITEDORGANIZATION CHART AS OF FEBRUARY 7, 1976

IOARD OF DI ECTORS

CECLITIVE COMMITTEE

NM II,-aI,CHAIRMAN

MANAGING DIRECTOR

F - -' D IRECTOR DIRECTOR

| W.h.b Udd.n Sh.I, G H Y ,oH

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DFFICE OFFICE AND STAT ENTATION DEPT DEPTDEPT DEPT,

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