Document of

The World Bank

FOR OFFICIAL USE ONLY

FILE COPYReport No. 2417-PH

PHILIPPINES

STAFF APPRAISAL REPORT

ON THE

SECOND SMALL AND MEDIUM INDUSTRIES

DEVELOPMENT PROJECT

May 18, 1979

Projects DepartmentEast Asia and Pacific Regional Office

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

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CURRENCY EQUIVALENTS

US$1.0 = P 7.40P 1.00 US$0.135P 1 million US$135,135P 1 billion US$135 million

ABBREVIATIONS

ADB - Asian Development Bank

ASM - Annual Survey of ManufacturersBOI - Board of Investment

CB - Central Bank of the PhilippinesCEO - Chief Executive Officer (of IGLF)COE - Census of EstablishmentsCPA32 - Counterpart Project Agreement 32CSMI - Commission on Small and Medium IndustriesDBP - Development Bank of the PhilippinesDCP - Design Center of the PhilippinesDLC - Department of Loans and Credit (of CB)ECA - Economic Cooperation Administration (of the US)ESCAP - Economic and Social Commission for Asia and the PacificERR - Economic Rate of ReturnFCDU - Foreign Currency Deposit UnitsFRR - Financial Rate of ReturnIGLF - Industrial Guarantee and Loan FundMASICAP - Medium and Small Industries Coordinated Action ProgramMOF - Ministry of Finance

MOI - Ministry of IndustryMOT - Ministry of TradeNACIDA - National Cottage Industries Development AuthorityNBFI - Non-Bank Financial IntermediariesNCSO - National Census and Statistical OfficeNEDA' - National Economic and Development AuthorityOBU - Offshore Banking UnitsOIA - Office of the Internal Audit (of CB)PDB - Private Development BanksPDCP - Private Development Corporation of the PhilippinesPISO - Philippine Investments Systems OrganizationPNB - Philippine National BankRC - Review Committee (of IGLF)SBAC - Small Business Advisory CentersSMI - Small and Medium IndustriesSSEs - Small-Scale EnterprisesSTD - Special Time Deposits

,UNIDO - United Nations Industrial Development OrganizationUPISSI - University of the Philippines Institute for

Small-Scale IndustriesUSAID - United States Agency for International Development

FOR OFFICIAL USE ONLY

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FISCAL YEARS

July 1-June 30 (up to June 30, 1975)July 1-December 31, 1975 (interim)

January 1-December 31 (from January 1, 1976)

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

PHILIPPINES

SECOND SMALL AND MEDIUM INDUSTRIES DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

BAS-IC DATA

1. THE INDUSTRIAL SECTOR . . . . . . . . . . . . . . . . . . . . . 1

Recent Developments . . . . . . . . . . . . . . . . . . . . . 1

Structure of Manufactirl.ag Industry . . . . . . . . . . . . . 2Industrial InvestmeaL . . . . . . . . . . . . . . . . . . . . 4Industrial Sector Issues and Policies . . . . . . . . . . . . 4Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2. THE SMALL AND M4EDIIP4 INDUSTRIES (SMI) SECTOR . . . . . . . . . 8

The Role of SMI in the Manufacturing Sector . . . . . . . . . 8Institutional Framework for Assistance to SMI . . . . . . . . 10Prospects for SMI . . . . . . . . . . . . . . . . . . . . . . 14

3. THE FINANCIAL, Sc'OR . . . . . . . . . . . . . . . . . . . . . 15_.. ... .. ...

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 15Profile of Financial Institutions . . . . . . . . . . . . . . 15Financial Markets ........ ... ... .... ... . 17Recent Developments . . . . . . . . . . . . . . . . . . . . . 18Financial Sector Issues . . . . . . . . . . . . . . . . . . . 20

4. THE INDUSTRIAL. GUARANTEE AND LOAN FUND . . . . . . . . . . . . 22

A. Institutional Aspects . . . . . . . . . . . . . . . . . . . 22Charter and Objectives ....... .. ... .. .. . 22Ownership and Adminstrative Arrangements . . . . . . . . 22Organization and Staffing . . . . . . . . . . . . . . . . 23Procedures and Standards . . . . . . . . . . . . . . . . 25Operating Policies . . . . . . . . . . . . . . . . . . . 26The Accreditation Scheme ...... .. .. .. .. . . 27

This report was prepared by Mr. Khalid Siraj, Mrs. F. Khambatta and Ms. K.Brosnan following their visit to the Philippines in November-Decemnbe^ 1973.

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Page No.

B. Operations .. . . . . . . . ... . . . . . . . . . . . 29Volume of Operations ... . . . . ..... . . . . . . 29Characteristics of Operations . . . . . . . . . . . . . . 31

C. Proposed Policy Changes ... . . . . ..... . . . . . . 33Financing of Medium-Scale IndustriesThe New Guarantee Scheme .. 34Interest Rates .. 34

D. Impact of the Bank's Assistance to IGLF . . . . . . . . . . 35Features of Subprojects Financed under BankLoan No. 1120-PHI. 35

Economic Impact of Projects Approved UnderBank Loan No. 1120-PH .. 36

E. Financial Position and Performance . . . . . . . . . . . . 37Financial Position .. 37Financial Results ... . . . . . ...... . . . . . . 38

Audit .... . . . . . . . ...... . . . . . . . . . 38Quality of Porfolio ... . . . . ..... . . . . . . . 39

F. Prospects .... . . . . . . . . . . . . . . . . . . . . . 40IGLF's Business Prospects and Projections . . . . . . . . 40Operational Priorities .. 40Resource Requirements .. 41Financial Projections . . . . . . . . . . . . . . . . . . 41

5. THE MEDIUM AND SMALL INDUSTRIES COORDINATEDACTION PROGRAM (MASICAP) .43

Origin and Aims of the Program . . . . . . . . . . . . . . . 43Organization .43Method of Operation .44Operational Record .44Performance of MASICAP Projects . . . . . . . . . . . . . . . 45Strengths and Weaknesses of the Program . . . . . . . . . . . 45Proposed Changes ... . . . . . . . . . . . . . . . . . . . 45

6. CONCLUSIONS AND RECOMMENDATIONS ... . . . . . . . . . . . . . 47

Objectives and Justification of the Loan . . . . . . . . . . 47Features of the Loan .48Agreements and Understandings Reached at

Negotiations .50Recommendation . . . . . . . . . . . . . . . 51

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LIST OF ANNEXES

1. Members of the Review Committee (RC) as of December 1, 1978

2. Proposed New IGLF Policies

3. List of Accredited Institutions as of December 1, 1978

4. Supporting Tables and Charts

T-1 Regional Distribution of Branches of Accredited FinancialInstitutions as of November 30, 1078

T-2 Summary of Operations, July 1, 1974 - December 31, 1978T-3 Details of Operations, July 1975 - December 31, 1978T-4 Characteristics of STD Approvals by Sector, July 1, 1974 -

December 31, 1978T-5 Characteristics of STD Approvals by Regions, July 1, 1974 -

December 31, 1978T-6 Characteristics of STD Approvals by Size, Purpose and

Maturity, January 1, 1976 - December 31, 1978T-7 Features of Subprojects Financed under IBRD Loan No. 1120-PH

by IndustryT-8 Features of Subprojects Financed under IBRD Loan No. 1120-PH

by Size of Loan and Size of Borrower's AssetsT-9 Features of Subprojects Financed under IBRD Loan No. 1120-PH

by Geographical DistributionT-10 Economic and Financial Rates of Return on IGLF Projects

Financed by PDCP and PISOT-11 Summarized Balance Sheets as of December 31, 1974-78T-12 Summarized Income Statements, CY74-78.T-13 Analysis of IGLF PortfolioT-14 Analysis of Arrears on IGLF Portfolio as of December 31, 1978T-15 Trend of Arrears Between Participating Institutions and

End-Users of IGLFT-16 Projected OperationsT-17 Resource Position as of December 31, 1978T-18 Projected Balance Sheets, December 31, 1979-82T-19 Projected Cash Flow, CY79-82T-20 Projected Income Statements, CY79-82T-21 Status of M4ASICAP Projects, 1973 to September 30, 1978T-22 Summary of MASICAP Projects, 1973 to September 30, 1978T-23 Disbursement Schedule for the Proposed IBRD Loan

C-1 Organization Chart of the IGLF Unit, November 30, 1978C-2 Proposed Organization of the IGLF UnitC-3 Proposed Organization of MASICAP

5. Selected Data and Documents Available in the Project File

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Basic Data

1. Year of Establishment: 1952

2. Ownership: 100% owned by Government

3. Status of IBRD Loan (as of April 30, 1979):Rate of Out-

Project Loan No. Date signed interest Amount /a Disbursed /a standing /a----------- US$ million ---------

SMI 1120-PH 6/5/75 8.5% 12.0 12.0 12.0

4. Operations (P'000)

Loans July-Dec 1975 CY76 CY77 CY78

Approvals 19,035 29,220 20,332 46,989Disbursements 24,295 26,868 21,702 43,779

5. Interest Rates and Charges:

a. Interest rate (current): Ultimate sub-borrower: 12%; intermediary financialinstitution: 7%.

b. Interest rate (proposed): Ultimate sub-borrower: 14.7% - 15% /b; intermediary finan-cial institution: 6.7% on small industry loan and 9% onmedium industry loan.

c. Guarantee fee: 2% of the amount guaranteed

6. Financial Position (P'000)

1974 1975 1976 1977 1978

Total assets 56,010 103,521 122,866 141,817 162,437Long-term portfolio 42,080 79,121 87,051 89,817 113,961Total liabilities 25,783 42,225 58,499 69,176 87,027Long-term liabilities 23,649 40,100 55,097 62,984 80,592Current ratio 11.1:1 19.2:1 14.7:1 11.3:1 12.3Debt/equity ratio 0.8 0.7:1 0.9:1 0.9:1 1.1:1Reserves & provisionsas % of portfolio 2.4 1.3 1.1 1.8 2.2

7. Financial Perfomance (P'000)

Gross income 2,162 2,850 6,983 7,670 10,114Interest income 2,150 2,664 6,251 7,247 9,596Financial expenses 1,951 1.006 2,803 4,922 6,028Net income/(loss) (180) 996 3,071 1,793 2,769

RatiosAs % of avg total assets:Gross income 3.9 3.6 6.2 5.8 6.6Financial expenses 3.5 1.3 2.5 3.7 4.0Gross margin 0.4 2.3 3.7 2.1 2.6Admin. & promotional

expenses 0.7 1.1 1.0 0.7 0.9Net income (-0.3) 1.2 2.7 1.4 1.7

/a IGLF component only. Total loan amount was $30 million, of which $28.3 millionis disbursed and outstanding.

lb Including service charge at 1.5% on small industry loans and 1% on medium industryloans.

PHILIPPINES

THE SECOND SMALL AND MEDIUM INDUSTRY DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

1. THE INDUSTRIAL SECTOR

Recent Developments

1.01 Industrialization has been a prime objective of Philippine economicdevelopment since independence. The industrial sector /1 grew rapidly in thefifties as the Government's import substitution policy, an overvalued exchangerate and low interest rates led to a significant replacement of imports bydomestic production. This was followed by a period of slower growth throughthe 1960s. The economy picked up temporarily in 1972 and 1973 but thisimprovement was short-lived, and growth rates fell sharply as a consequenceof the 1974 recession; the growth rate of gross value added at constantprices in the manufacturing sector dropped from 13.9% in 1973 to 3.5% in 1975rising again to 5.7% in 1976 and 7.5% in 1977.

1.02 The industrial sector contributed 34.7% of GDP in 1977 (see Tablebelow) of which 71% was from manufacturing. The manufacturing sector alsoaccounted for about 30% of fixed investment and 10.4% of total employment.

PERCENT DISTRIBUTION OF GDP BY SECTORAL ORIGIN, CURRENT PRICES

1970 1973 1977

Agriculture, fishery & forestry 27.8 29.3 28.1

IndustryMining and quarrying 2.8 3.4 1.6Manufacturing 22.5 24.7 24.7Construction 3.6 3.8 7.5Electricity, gas and water 0.7 0.8 0.9

Total industry 29.6 32.7 34.7

Services 42.6 38.0 37.2GDP at market prices 100.0 100.0 100.0

Source: National Accounts Staff, NEDA.

/1 The industrial sector includes mining, manufacturing, constructutionand utilities.

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The mining sector was stagnant over the period 1973-77, and comprised only1.6% of GDP in 1977 mainly because of the low world market price of copper.Owing to an increase in the production of nickel and copper and a higherprice of chromite, the mining sector experienced a growth rate of 20% in 1977(constant 1972 prices). The construction sector grew rapidly between 1974-76mainly because of the growth of relatively construction-intensive publicinvestment, but the growth leveled off in 1977 and 1978.

Structure of Manufacturing Industry

1.03 Sectoral Composition. The sectoral composition of manufacturingsince 1970 is shown below:

SECTORAL COMPOSITION OF MANUFACTURING(Value added in P million at constant 1972 prices)

1970 1973 1976 1977Value Value Value Valueadded % added % added % added x

Consumer Goods 6,379 53.9 7,669 50.3 9,184 52.6 9,619 51.2Food 3,552 30.0 3,871 25.4 4,558 26.1 4,814 25.6Beverage and tobacco 1,393 11.8 2,049 13.4 2,415 13.8 2,587 13.8Textiles, apparel and

leather 1,172 9.9 1,410 9.3 1,756 10.1 1,794 9.5Printing and publishing 262 2.2 339 2.2 455 2.6 424 2.3

Intermediate Goods 4,159 35.2 6,174 40.4 6,557 37.5 7,325 39.0Paper and paper products 341 2.9 420 2.8 538 3.1 547 2.9Wood and cork products 497 4.2 627 4.1 558 3.2 714 3.8Chemicals and rubber

products 1,096 9.3 2,232 14.6 2,694 15.4 3,157 16.8Petroleum 858 7.3 1,358 8.9 1,134 6.5 1,069 5.7Nonmetallic mineralproducts 394 3.2 597 3.9 613 3.5 626 3.3

Basic metals and metalproducts 872 7.3 940 6.1 1,020 5.8 1,212 6.5

Durable and Capital Goods 1,029 8.7 1,143 7.6 1,443 8.2 1,567 8.3Machinery 532 4.5 582 3.9 589 3.3 644 3.4Transport equipment 497 4.2 561 3.7 854 4.9 923 4.9

Miscellaneous 256 2.2 266 1.7 297 1.7 282 1.5

Total 11,823 100.0 15,252 100.0 17,501 100.0 18,793 100.0

Although manufacturing value added grew by an average annual rate of 6.8%over the period 1970-1976 the relative sectoral share did not change signi-ficantly. During the first half of the period intermediate goods slightlyincreaser! their share of total value added at the expense of consumer goods,but this trend was reversed and in 19'77 consumer goods accounted for 51.2% oftotal gross value added. The rmajor growth industries were chemicals andrubber products (16.3%), beverages and tobacco (9.2%), and transport equipment(9.3%),

1.04 Export Performance, Manufactured exports grew slowly until thelate 1960s. The 1970 devaluation followed by the floating of the peso,together with the introduction of import duty rebates and the system ofbonded warehouses for exporters, contributed to an increase in the growth ofmanufactured exports in the early 1970s. The most dynamic aspect of thisexport growth has been the rapid surge in exports of nontraditional manufac-tures, especially garments, handicrafts and electronic products, which haverisen from US$226 million in 1973 to $545 raillion in 1976 and $717 million in1977, an annual average growth of 33% during 1973-77./1 The export value ofminerals, particularly copper, increased significantly in the late 1960s andearly 1970s but slumnped in 1975. Increased production of copper and a higherprice for chromite raised the value of mineral exports from $362 million in1975 to US$520 million in 1977.

1.05 Ownership Size and Value Added. The industrial sector is predom-inantly privately owned and generally concentrated in large capital-intensiveunits. In 1975 organized manufacturing units with over 200 employees repre-sented only 2.9% of the total number of registered enterprises but accountedfor over 66% of total manufacturing employment and 72% of valued added.

1.06 Employment Performance. Until the mid-1970s the industrializationprocess did relatively little in terms of employment creation. Between 1960and 1971, employment in manufacturing grew at an annual rate of about 2.5%,fell to zero percent between 1971 and 1973 but rose again to 8% for theperiod 1974-1976. In 1977, some 1.6 million workers were employed in themanufacturing sector. This included an estimated 1 million employed in theunorganized sector in small household and craft operations. In 1977, 50% ofthe employed labor force was in agriculture, 18.5% in services, 12.6% incommerce and 10.4% in manufacturing. Industry is expected to provide a muchlarger proportion of jobs in the future, particularly through increasedexports and the development of cottage and small-scale industry./2

/1 For a detailed discussion of nontraditional exports see IBRD ReportNo. 1765-PH, The Philippines Country Economic Memorandum, October 26,1977, Annex A.

/2 Philippine small and medium industries sector is reviewed in paras. 2.01to 2.15.

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Industrial Investment

1.07 Capital expenditure in the manufacturing sc,-rtor in 1975 increasedby 27% reflecting decisions to expand cacpaclty tal-e-cx in 1 -7° IdiTa 1974 Firom1975 onwards, however, the level, ot new investvmn)t ds r -0- a aOnse_quenceof the 1974 recession. This was reflected in a. drol if i neL;- %roieCLs regis-tered with the Board of Investment (BOI)/1 from 217 in 1974 h(, 152 in 1975and 86 in 1976. Registrations increased again to 142 in 1977, Simultaneously,the number of newly registered btusiness organizations fell. from 49,367 in1974 to 31,136 in 1975 and 30,813 in 1976. Between March and May 1976,investrnent expectations rose as the business community perceived signs ofrecovery in the US and Japanese economies (based on economic data releasedin the first quarter). However, it later became cldmaf thain che world wi-derecovery would be slower than expected. Consequ.ent-ly, growth of expenditureon durable equipment in the manufacturing sector fell to 5% il3 1976 and isnot expected to have grown significantly ill 1977 and i978, i The most notablefeature of investment for the period 1975-77 has hne,r thcl; rapid growth inconstruction which had grown at an annual avverage rate of 10%' for the period1971-74 but rose by 52% in 19175, and by anothe,-r 30% in 192/6 before fallingto 6% in 1977. The growth sectors irn 1977 were mining and quarrying,and utilities which grew at 20% and 17% respectively.

Industrial Sector Issues and Policies

1.08 Development Objectives. In its five ye3ar plan, the Phi lippiaeGovernment has set as objectives for industrial groc)wth emiqployment generation,increased net foreign exchange earnings and greater seJ.f-relianee in commoditysupply. The generation of employment opportunities is probably the highestpriority./2 The estimated growth in the labor force over the nexc decade is3% p.a., and this means that the economy will have to employ annually almost500,000 new entrants into the labor force over this period. Because theagricultural sector is likely to provide fewer nlew jobs annually than in thepast, the provision of more work opportunities in the mainufactur-iLng secto:is crucial. This employment growth can be fostered through developingfurther exports of labor-intensive nontraditiooal- manufac tures, reviving and

sustaining growth in the labor-intensive modern small and rtedi um-industri essector, and expanding the domestic productioni of intermediate goods througl-import susbtittution. At the same time as employmient generation is pucsued,

/1 This Board set up by the Government approves 1ll priva te scctor projactsfor eligibility for assistance under the Investisat and Export IncentivesActs.

/2 A broad growth strategy for Philippine indtstry is doscribed in theIBRD Economic Report, The Philippines: Priorities and Prospects forDevelopment, June 1976.

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there is also a need for investment in a few large capital intensive projectsto deepen the industrial structure and to develop further the country'snatural resources.

1.09 Industrial Incentives. Since 1967 industry has been assistedthrough a wide range of fiscal incentives, mainly for investment. /1 Theindustrial incentives system has been strongly biased in favor of the use ofcapital. For instance, in 1976, 83% of the total estimated amount of taxrelief enjoyed by BOI-approved projects arose from capital-favoring incentives.Policies that have encouraged the use of capital rather than labor includeexemption from import duties on imported capital equipment, accelerateddepreciation allowances on capital investment, and exemption from income taxof funds used in project expansion. Attempts to counterbalance this bias byintroducing incentives for the use of labor in the modern sector have had somelimited success. The Government has introduced some policy changes and iscurrently reviewing the entire incentive system to make it more conducive toemployment, export and the needs of efficient import substitution.

1.10 Export Promotion. Exporters have been assisted mainly throughrebates of tariffs on imported inputs. Exporters may also gain free access toimported inputs by locating in the Bataan Export Processing Zone or by obtaininga licence to operate a bonded warehouse. The Government has recently under-taken further actions to assist exporters: a Philippine Export Council, com-prising both public and private representatives has been established to studyand make recommendations on various aspects of export promotion; variouscredit agencies have been asked to give priority to the financing of exportsparticularly nontraditional exports. Such financing is crucial if the fullexport potential of the Philippines is to be reached. But a more importantand effective policy in the long term would be for the Government to changethe existing system of tariffs and quantitative restrictions on imports fromits strong bias in favor of import substitution to a freer trade regime. Thiswould mean a gradual removal of quantitative restrictions and a leveling oftariffs. A less restrictive trade regime would especially help the smallerand less organized firms which have not been able to benefit from the facili-ties of bonded warehouses and tax and tariff concessions on account of eitherlimitation of size or lack of information.

1.11 Import Substitution and Tariff Reform. The present tariff structurecombined with quantitative restrictions on imports provides relatively highprotection for import substituting consumer goods industries and little or noassistance to producer good and export industries. As a consequence, invest-ment for the production of intermediate goods, particularly in the engineeringsector, has suffered. Furthermore, over-protected import substitutionindustries often produce low quality output which cannot compete in inter-national markets. A tariff reform in 1973 resulted in administrative improve-ments as well as in substantial reduction in the number of tariff categories

/1 There are 24 incentives to enterprises and 12 incentives to investorslisted under the Investment Incentives and Export Incentives Acts.

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and a narrowing of the spread of tariff rates. However, the general alloca-tive effects of the tariff structure remained largely unchanged. Recentstudies of the Philippine tax system by international agencies recommend thechanges in the tariff system, including reducing high tariff levels and easingquantitative restrictions on imports. The Government, recognizing theimportance of consistency between the tariff structure and other investmentincentive programs for Philippine industrial development, is reviewing thetariff system to ensure that it conforms to current development goals and toprovide effective machinery for continued evaluation and flexibility in thefuture. Several important steps have already been taken by the Government,including reducing the number of goods subject to the highest tariff levelsand limiting the granting of tariff exemptions. NEDA has commissioned acomprehensive study, financed by the Bank, to quantify the effects of tariffs,quantitative restrictions, and other tax incentives, and to recommend appro-priate policy changes. This study has been a crucial input into the Bank'sIndustrial Sector Mission that was in the field in February 1979.

1.12 Regional Dispersion of Industry. Manufacturing enterprises areheavily concentrated in Metro-Manila and adjoining provinces. In 1975,Metro-Manila accounted for 52% of all manufacturing establishments employingmore than 10 people, 51% of total industrial employment; 59% of gross valueadded, and 38% of total fixed assets. If adjoining provinces are also in-cluded, these percentages would rise by a further 20-30%. The Government isaware of these problems and has taken several steps to create conditions fora more geographically balanced growth of industry. Some of these measuresincluded BOI's practice of negotiating a project location prior to approval;a ban on the establishment of new nonexport-oriented plants within 50 kilome-ters of Metro-Manila; requirements that financial institutions use at least75% of deposits generated from a province for projects in that province; anda directive to the Developlent Bank of the Philippines (DBP) and the IndustrialGuarantee and Loan Fund (IGLF) that 60% of their SMI financing should be inregions outside Metro-Manila. Despite these measures, however, industrystill remains heavily concentrated in the Metro-Manila area. The Governmentrecently announced the suspension of the 50 kilometer ban for certain classesof industries, and this may lead to a slowdown in the rate at which industryis moving out of Metro-Manila.

1.13 An absolute condition for investments to be directed into desiredlocations is the provision of adequate supporting infrastructue and theavailability of qualified labor. Fiscal incentives without such infrastruc-ture are unlikely to induce many new investments in the outer provinces and,with such infrastructure, may not be needed to a large extent. The Governmenthas launched several programs designed to improve the basic infrastructure inareas outside Metro-Manila: electricity generation projects, road construction,and a 10-year shipping and shipbuilding program are being planned for Mindanaoand the Visayas. These efforts should be extended to other less developedregions as well. To promote areas of industrial concentration away from Metro-Manila, the Government, in recent years, has emphasized the establishment ofindustrial estates and export processing zones. Eight estates are planned bythe Government to be operating or to have feasibility studies carried out by1982. In addition, Government's policy permits privately operated estates.

1.14 The Bank is currently acting as Executing Agency for a UNDP-financedregional study. Heavy emphasis has been placed on regional planning andproject implementation with initial concentration on Region VII - the regionwith the best potential for growth outside Manila. It is expected that thisstudy will lead to projects in Region VII and eventually other regions thatwill encourage the decentralization of industry and employment.

Prospects

1.15 The lackluster performance of the Philippine manufacturing sectorover the past few years has in part been due to slow growth of domesticdemand, overprotectionist economic policies of the Government and slowrecovery of the Philippines' major trading partners. However, prospects forgrowth are good, especially if the Government follows its announced policy oflowering tariffs and easing import restrictions.

1.16 Over the medium-term the Government will be encouraging labor inten-sive export industries. Some capital-intensive projects will also have to beundertaken to bring about greater vertical integration and increase thedomestic value added in processing the country's raw materials. According tothe "Five-Year Philippine Development Plan 1978-1982," manufacturing isexpected to grow at an annual rate of 9% over this period. To achieve thistarget, investment over the five year period will have to grow by 15.5% p.a.or a total P 86 billion; approximately 65% of this investment will go tolarger industries. The key to industrial growth lies in manufactured exports;in particular, nontraditional exports are projected by NEDA to grow by 26.8%p.a. over the next ten years in contrast to a growth rate of 18.8% for totalexports for the same period. Industries with significant export potentialinclude textiles, apparel, leather goods, handicrafts, electronics, chemicals,and goods manufactured from nickel, copper and aluminum.

2. THE SMALL AND MEDIUM INDUSTRIES (SMI) SECTOR

The Role of SMI in the Manufacturing Sector

2.01 Cottage Industries. According to the latest Annual Survey of Manu-facturers (ASM) /1 about 73% of 10,742 manufacturing establishments surveyedin 1974 were cottage industries (5-19 workers) /2 and were engaged in foodprocessing, clothing, footwear, furniture, and handicrafts. They employedabout 13% of the manufacturing labor force but contributed only 2.5% to grossvalue added. However, as the ASM data do not cover establishments with fewerthan five workers, the shares of cottage industries in manufacturing employ-ment and value added are likely to be considerably understated by the abovefigures. The National Cottage Industries Development Authority (NACIDA) esti-mated that there were some 71,000 cottage industry units in the Philippinesin 1975. It was further estimated that they provided direct employment forover 230,000 workers and indirect employment for another 890,000. Based onthese figures, the share of cottage industries in manufacturing employmentwould rise to about 75% and in manufacturing value added to about 8%, orclose to the unofficial estimate of 75% and 10%, respectively, made in1973./3

2.02 Size of the SMI Sector. Establishments with more than 20 workers,which comprise the modern manufacturing sector, accounted for 19% of theunits covered by the 1975 Census of Establishments (COE). In 1975, small-scale firms accounted for 73% of the total number of firms in the modernmanufacturing sector, 18% of total employment, and 10% of value added.Small and medium industries together accounted for 85% of the total number of

/1 ASM is a nationwide sample survey undertaken by the National Censusand and Statistical Office (NCSO) in every year except 1967, 1972, and1975, when the Census of Establishments (COE) was undertaken. The finalreport on 1975 COE is not yet ready.

/2 The NCSO has classified the size of industrial establishments accordingto the number of employees. For purposes of this report, establishmentsemploying 20-99 workers are classified as small industry; those employing100-199 workers, medium industry; and those employming more than 200workers, large industry. This classification has been found to correspondfairly well with the "official" classification based on fixed assets,whereby enterprises with assets of P 100,000 to P 1.0 million aretermed small industries; those with assets of over P 1.0 million toP 4.0 million medium industries; and those with assets over P 4.0million large industries.

/3 This estimate was made by the ILO employment (the Ranis mission) report,Sharing in Development: a Program of Employment, Equity and Growth forthe Philippines (1974).

firms in the modern manufacturing sector, 29% of the labor force, and con-tributed 30% to gross value added. The growth rate of SMI has been uneven.After a modest increase in the mid-1960s, growth in SMI, measured by employ-ment and value added declined during 1967-71. Although official statisticsfor the latest years are not available it is believed that after 1971, SMIexperienced a rapid real growth particularly after 1974 when PhilippineGovernment's SMI development program came into effect.

2.03 Regional Distribution of SMI. Manufacturing activity has alwaysconcentrated around the Metro-Manila area and the adjoining provinces ofCentral and Southern Luzon. SMI tended to concentrate in or near urbanareas, where they were close to sources of raw materials, spare parts, andmarkets. In 1975, an estimated 76% of SMI establishments were locatedin these three regions as compared with 74% in 1971; Metro-Manila aloneaccounted for 63% of all SMI. These three regions were responsible for 78%of employment and 56% of value added generated by all SMI; Metro-Manila'scontributions were 65% and 51%, respectively. Large-scale industries seemedto be less geographically concentrated than SMI; cottage industries alsotended to be more widely dispersed. The Table below gives the contributionof Metro Manila and Central and Southern Luzon to modern manufacturing.

SHARES OF METRO-MANILA, CENTRAL LUZON, AND SOUTHERN TAGALOG (MCS)IN MODERN MANUFACTURING, 1975

(%)

Number of Numberestablishments of workers Value added

SMI in MCS as % of total SMI 75.9 78.1 55.5(of which Metro-Manila) (62.8) (65.0) (50.5)

LSI in MCS as % of total LSI 71.7 62.9 91.9(of which Metro-Manila) (57.2) (46.4) (66.4)

All modern manufacturing inMCS as total of all modernmanufacturing 75.2 67.3 76.5(of which Metro-Manila) (62.0) (51.8) (59.7)

2.04 Role of SMI by Major Industry Groups. While the modern manufactur-ing sector in terms of employment and value added concentrated on the pro-duction of consumer goods, the impact of SMI was greatest in the productionof intermediate goods. In 1975, SMI accounted for 38% of the employmentgenerated in the production of intermediate goods and 27% of value added;comparable figures for the consumer goods industry were 22% and 35% respect-ively. Industries in which SMI contributed more than 50% to employment were:furniture, printing and publishing, and leather products.

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SHARES OF SMI IN MODERN MANUFACTURING EMPLOYMENT ANDVALUE ADDED BY M4AJOR PRODUCT GROUPS, 1968-75/a

Employment Value Added1968 1971 1975 1968 1971 1975

Consumer Goods 27 20 22 17 12 35Food 25 17 27 16 9 13Beverages 17 13 4 12 9 7Tobacco 10 8 7 2 2 2Textiles 10 11 19 10 12 25Footwear and apparel 55 39 29 54 35 31Furniture 73 67 76 77 60 78Printing 56 54 85 41 44 41Leather 100 100 100 100 100 100

Intermediate Goods 39 35 38 34 32 27Wood and cork 35 24 34 36 25 35Paper 50 44 36 45 46 51Rubber 27 33 46 16 19 18Chemicals 41 42 32 34 36 25Petroleum and coal 30 37 17 20 34 9Nonmetallic minerals 26 15 31 16 7 12Basic metals 42 35 43 35 30 25Metal products 41 48 49 42 40 46Miscellaneous 91 77 44 91 84 40

Capital Goods 49 39 35 36 26 18Machinery 80 72 34 76 54 16Electrical machinery 43 34 30 36 23 15Transport equipment 45 35 42 37 24 25

/a Where data available are only partially broken down by size of establish-ments for reasons of confidentiality, estimates have been made.

Institutional Framework for Assistance to SMI

2.05 A Commission on Small and Medium Industries (CSMI) was created in1974 in the Ministry of Industry (MOI) to provide a coordinated, integrated,and comprehensive multi-agency approach to the development of SMI. Twelveagencies /1 are currently represented on the CSMI. However, the member agenciescontinue to operate under their own budgets, which are often subject to other

/1 There have been two major reorganizations of the CSMI since its creation.Some of the 12 member agencies have changed from one reorganization tothe next.

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constraints, and this has prevented the CSMI from playing a more active rolein program formulation and implementation. Since late 1977, the CSMI hasbeen unsuccessfully attempting to get a budget allocation for a number ofmulti-agency programs related to SMI assistance. Despite its constraints,CSMI since m1-d-1977 has played a very active role in the promotion and devel-opment of Philippine SMI. The CSMI has emphasized the importance of estab-lishing links with large industries to encourage subcontracting, transfers oftechnology, and management skills. The CSMI proposes to establish 10,000 newSMI enterprises engaged in manufacturing and industrial services over thenext five years (1978-1983). These establishments are expected to generate250,000 jobs. To attain this objective, the CSMI is developing about 30programs in seven functional aspects of SMI development: enterprise projectdevelopment, entrepreneurial development, innovative financing assistanceprograms, consultancy services, technical assistance projects, regionalpromotion programs, and growth enterprise development.

2.06 Technical Assistance for SMI. As part of the overall program ofassistance for SMI, various Government agencies have programs to train entre-preneurs to assist in project development and to provide consultancy ser-vices. UPISSI has an entrepreneurship development program which focusesprimarily on entrepreneurs in the rural areas. UPISSI is also working withthe Ministry of Education (MOE) to introduce entrepreneurial traininginto the general school curricula, emphasizing in particular, achievementmotivation.

2.07 The Medium and Small Industries Coordinated Action Program (MASICAP)of the MOI assists small entrepreneurs in project feasibility studies and inapplying to financial institutions for loans./1 MASICAP currently has 49field teams (with some 147 staff) operating throughout the Philippines.Since its establishment in November 1973 and until September 30, 1978,MASICAP has assisted 5,300 projects of which 4,090 were submitted to financialinstitutions. To provide operational assistance to SMI, MOI established in1975, with the Bank's assistance,/2 Small Business Advisory Centers (SBAC).One SBAC in each of the 12 administrative regions has been set up to providemanagerial and technical consultancy services to small business enterprises.As of June 1978, the SBAC had a staff of 84. As of the same date, the SBAChad provided extension services to 772 establishments, of which over 86% weremanufacturing units. In addition, the Ministry of Trade (MOT) has organizedthe establishment of Trade Assistance Centers (TAC) to work in coordinationwith the SBAC in providing marketing assistance to small business enterprise.As of June 1978, there were 13 TAC established, with a staff of 251, of which51 were marketing coordinators in the Central Office in Manila while theother 200 were based in 12 regional offices. The TAC have assisted 3,659establishments to date. The Design Center of the Philippines (DCP) and theFood Terminal Inc. (FTI) also provide marketing-related assistance to SMI forproduct design and development, storage and distribution.

/1 A review of MASICAP is given in paras. 5.01 to 5.13.

/2 Under Loan No. 1120-PH.

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2.08 In conjunction with the CSMI, the Economic and Social Commissionof Asia and the Pacific (ESCAP) is attempting to identify growth centers innon-metropolitan areas and specific industries which have significant forwardand backward linkages. Feed mills and cassava have been identified as growthindustries for three pilot areas. ESCAP will provide the funds while CSMIwill be in charge of project management. Assistance in marketing will beprovided by TAC, in finance by MASICAP and in technical matters by theMinistry of Agriculture. ESCAP will also finance consultants to identify newprojects based on cassava and other agro-based industries.

2.09 A CSMI Technology Services Delivery System has been preparedby the United Nations Industrial Development Organization (UNIDO) to transferrelevant technology to end-users in rural areas; the SBAC will be used toeffect the transfer. This project will involve the CSMI and four agencies ofthe National Science Development Board that deal with metals, forestry,science and technology, and food and nutrition. A pilot project is to beconducted in Iloilo.

2.10 Other Programs of Assistance for SMI. These include a collectivemarketing scheme by the MOT to enable SMI to take advantage of economies ofscale in marketing and distribution, a subcontracting promotion program byMOI, and an industrial estate development program by NEDA. In line with itsincreased business orientation, the CSMI has also initiated two programs toencourage more private sector involvement in SMI development. One program isaimed at encouraging successful Manila-based business groups to invest equityand technical resources in rural areas and for experts in management andindustry to assist SMI as sponsor-advisers.

2.11 Financial Assistance to SMI. The two major sources of medium-and long-term credit for SMI in the Philippines are DBP and IGLF, of which DBPis the more important. The volume of term credit provided by both DBP andIGLF increased substantially in 1975 when the Bank's first loan to assist SMI(Loan No. 1120-PH) became available. DBP is now using its third industrialloan (Loan No. 1572-PH), with an SMI component of $29.7 million. Between July1975 and September 1978, total approvals for SMI loans by DBP amounted toP 466.4 million for 1,119 projects. During the same period, IGLF approved384 projects for P 97.8 million./l Private development banks (PDB) have alsoprovided term funds (mostly medium-term) for SMI. However, resource shortageshave led them to concentrate on lending to cottage industries, highly collater-alized projects, and shorter term loans. Although loans made by PDB havegrown by an average annual rate of 25% in 1973-77, this financing covered onlya small fraction of total SMI demand for term credit. Other financial institu-tions, such as the Private Development Corporation of the Philippines (PDCP)and the Philippine Investments Systems Organization (PISO), which operatesmall business programs, have now been accredited by IGLF. By and large,except for DBP, most credit sources for SMI concentrate on the financing ofcottage and small industries while credit availability for medium industriesis relatively restricted.

/1 Details given in paras. 4.19 to 4.28.

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2.12 Short-term financing for SMI remains relatively undeveloped. Atthe end of 1974, the Central Bank (CB) introduced a preferential creditscheme under which commercial banks and thrift institutions could rediscountup to 80% of short-term loans to SMI with CB at a preferential rate ofinterest (5%) for onlending to SMI at 12%. However, the use of this facilityhas been limited because the commercial banks require first mortgages onreal estate collateral. Most SMI borrowers have already mortgaged theircollateral to term lending institutions. The commercial banks, moreover,prefer to deal with larger clients. As the availability of short-term creditfor working capital is particularly important for SMI enterprises, CB isundertaking a study to devise ways to induce the commercial banking sector tolend for SMI. Meanwhile, both DBP and IGLF have increased the volume ofworking capital finance to SMI and have liberalized the terms and conditionsfor such financing.

2.13 Research on the SMI Sector. The CSMI is trying to obtain budgetfunds to conduct a national study on Philippine SMI. Phase I, which is basedon existing sources of data, has already been completed. Phase II, whichwill be the substantive part of the study, will be based on a nationwidesurvey. This has been delayed due to insufficient resources. In the meantime,the International Development Center of Japan (IDCP) has undertaken a two-phasestudy of the SMI sector /1, utilizing most of the data and conclusions of theCSMI study (Phase I). The purpose of this study was to provide the backgroundinformation necessary for technical cooperation between the Philippines andJapan on SMI. UPISSI has, in collaboration with the International DevelopmentResearch Center of Canada (CIDRC), completed a two-volume study on thehistory and development of SMI in the Phiippines./2

2.14 The Bank has also conducted its own studies on SMI in the Philip-pines. In May/June 1978 a consultant studied certain specific industriesin which SMI predominate. The report identified problems and suggested

/1 The first phase of the study was a very detailed analysis of the industrialand geographical distribution, factor proportions and efficiencies, aswell as problems and prospects of SMI, especially in comparison withlarge-scale industry. The second phase, which had already started whenthe appraisal mission was in the field in November, was to focus on somespecific subsectors of SMI.

/2 The report, entitled International Research Project on Small IndustryDevelopment: A Comparative Study, was completed October 31, 1977. Thefirst volume, "Assistance Programs for Small Industries Development inthe Philippines" described the institutional framework for SMI assistance;the second volume, entitled, "Organization for Small Industries Develop-ment in the Philippines: Case Histories," described the activities of thevarious financial and technical assistance organizations dealing withSMI. As with all institutional write-ups, most of the details, especiallyin respect of the CSMI, are already outdated. Nevertheless, the twovolumes are useful as a compendium of past historical happenings andprograms in respect of the SMI sector.

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solutions for firms in the food processing, garment manufacturing, metalproducts and machinery, and furniture and fixture industries. The Develop-ment Policy Staff (DPS) of the Bank has also been doing a study of small-scale enterprises (SSE) in the Philippines in collaboration with the CSMI,which concentrates on factors affecting enterprise formation and growth, andevaluates the credit and technical assistance programs designed to supportSSE.

Prospects for SMI

2.15 The NCSO data on SMI permit only a partial analysis of the SMIsector up to 1975. As the Government's assistance programs for SMI startedonly in 1974, it is perhaps too early for their impact to become manifest inthe 1975 data. Nevertheless, from the increased volume of lending for SMI byDBP, and to some extent IGLF, during 1975-78, the assistance programs havestarted to have some impact. The TAC, while improving domestic acceptanceof SMI products, will also be likely to stimulate exports, particularly withtheir programs to encourage nontraditional exports. The industrial estateprograms should help eliminate some of the infrastructural and supportservices constraints that affect SMI. Economic distortions resulting fromthe Government's industrial incentives and protection policies have beenstudied by the recent Bank industrial sector mission, providing a basis for adialogue with the Government on remedial measures. In conclusion, given theGovernment's assistance programs and the improved policy and institutionalarrangements, the future prospects of SMI appear to be good.

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3. THE FINANCIAL SECTOR

Overview

3.01 In terms of the institutional set-up the Philippines has a rela-tively well developed financial system. The core of the system is the largecommercial banking sector comprising both local and foreign banks. Long-termfinance is provided by three development finance institutions althoughseveral other types of institutions also provide this kind of financing to alimited extent. In late 1976 Offshore Banking Units (OBU) were establishedand the Government relaxed some of of its regulations regarding ForeignCurrency Deposit Units (FCDU). Although two stock exchanges exist, thevolume traded is small and is concentrated in a few issues. The Land Bank ofthe Philippines (LBP) was revitalized by the Government in 1973 to helpimplement the agrarian reform program. The Government has played a majorrole in the development of the rural banks and private development banks.

Profile of Financial Institutions

3.02 Commercial Banks. As of December 31, 1977, the commercial bankingsector comprised 26 privately owned domestic banks, 2 government-owned banksand 4 foreign banks. The government-owned Philippine National Bank (PNB) isthe largest commercial bank and accounted for over 27% of the banking system'stotal assets in 1977. The commercial banks provide industry with workingcapital and trade credits; loans and investments made by commercial banksduring 1977 amounted to P 55 billion.

3.03 Development Finance Institutions. The government-ownied DBP, theprivately owned PDCP and, to a lesser extent, PISO are the major providers oflong term finance. As of December 1977, the total assets of DBP, PDCP andPISO were P 15.6 billion, P 910 million and P 126 million, respectively.

3.04 DBP's funds come from equity contributions by the Government,borrowings from CB, foreign exchange borrowings guaranteed by the Government,deposits primarily from the Government, internal cash generation and the saleof DBP bonds. In the past, DBP securities have carried low rates of interest,but special features such as tax exemption and eligibility for reserve require-ments have enabled them to compete with other securities. DBP supplies creditand extends guarantees to both agriculture and industry which is broadlydefined to include manufacturing, transportation, tourism, public utilities,and professional services. In addition, DBP is in charge of establishing anddeveloping private development banks.

3.05 Although PDCP is defined as an investment bank its main businessis the provision of long-term loans which accounted for 82% of its totalassets as of December 31, 1977; equity investments occupy a relatively minor(4.5%) position. As of the same date, the major source of PDCP's resourceswere IBRD/IFC and ADB loans (68.5%), other long-term liabilities (20.5%) and

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equity contributions (6.6%). PDCP lends primarily for manufacturing andtransportation. Whila some resources go to agriculture the volume lent ismarginal.

3.06 PISO, incorporated in 1974, is privately owned and operates asan investment banking institution. Until recently PISO operated primarilyin the money market but over the last year, as a result of an IBRD loan,has increasingly gone in for term lending. As of December 31, 1977, itsmoney market operations and long-term loans accounted for 74% and 4.2%respectively of its total assets. As of the same date, the sources of PISO'sresources were short-term notes (64%), other short-term liabilities (11%),long-term debt (3%) and equity (22%). PISO lends primarily to manufacturingand service industries and for transportation equipment.

3.07 Private Development Banks (PDB). The 35 PDB have been promotedby DBP/CB in various regions to mobilize local savings and to allocateresources to both agriculture and industry. To date, each PDB has hadhalf of its initial capital contributed by organizers from the privatesector and half by the Government through DBP or the LBP. As of December 31,1977, the total resources of PDB amounted to P 595 million with a depositbase of P 341 million. Loans approved by PDB as of December 31, 1977amounted to P 202.5 million. In terms of sectoral distribution, 40.6% wentfor industry, 35.2% for agriculture and 24.2% for miscellaneous activitiessuch as low-cost housing, vocational schools and commercial loans. In termsof maturity, medium-term loans constituted about half the amount, the otherhalf being equally divided between short- and long-term. In general, the PDBtend to be larger and more sophisticated than the rural banks.

3.08 Rural Banks. Rural banks are unit banks which are municipalityspecific and provide short-term loans primarily to agriculture. The ruralbanking system comprises around 850 privately-owned banks. At the end of1977 their total assets and deposits amounted to P 3.3 billion and P 1 bil-lion respectively. Of the loans made in 1977 by rural banks, 87% werefor agriculture most of which were for seasonal production credits. TheGovernment has actively encouraged the growth of rural banks by providingcounterpart equity contributions, loans and technical assistance, tax exemp-tions and special rediscounting schemes.

3.09 Investment Houses. As of 1977 there were 12 licensed investmenthouses each with a minimum paid-in capital of P 20 million. Most of theinvestment houses are linked to major international financial institutionsand large local commercial banks. Until recently, about 80% of theirrevenues accrued from money market operations with only a small proportioncoming from security trading or the provision of merchant banking services.Owing to the impact of recent regulations on the money market, investmenthouses are trying to provide more merchant banking services.

3.10 Finance Companies. The Securities and Exchange Commission has244 finance companies registered with it. Of these, the 42 largest accountfor 80% of the turnover. At the end of 1977, the finance companies had

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total resources of P 880 million while loans outstanding amounted to P 4.0billion. Most of the finance companies are subsidiaries of major commercialbanks and are engaged in financing the purchase of consumer durables, andproviding short- and medium-term credit to local manufacturers and tradersto finance inventory, receivables and transport equipment. Until 1978finance companies were not covered by CB interest rate ceilings and, consequently,could charge up to 24% a year on discounting of receivables. Under a recentPresidential Decree, financing companies are to be directly regulated by CBwith respect to the interest rate charged on assignment of credit, purchase ofinstallment papers and accounts receivable.

Financial Markets

3.11 The Money Market. The money market comprises basically threesubmarkets: (a) government securities; (b) inter-bank; and (c) inter-company.The government securities market is the principal segment, with the govern-ment being the largest trader. The main securities traded are short-termTreasury Bills, medium-term Central Bank Certificates of Indebtedness (CBCI)and Treasury Notes, and DBP bonds. While direct trading in Treasury Bills isheavy, trading in longer term securities is mainly indirect, i.e., the secur-ities themselves are not traded, but serve as collateral for repurchaseagreements. Participation in the inter-company market is restricted to firmswith prime credit ratings.

3.12 Until January 1976, money market rates were not subject to thestatutory ceilings imposed on bank deposits. Hence there was a rapid growthin deposit substitutes at the expense of traditional bank deposits. In anattempt to mobilize savings through the banking institutions and to increasethe term of these savings, CB introduced a series of new regulations. Some ofthe more important regulations include: raising the interest rate on savingand time deposits and regulating the yield on money market operations; increas-ing the minimum denomination and maturity period of money market operations;and raising the required reserves against deposit substitutes. Finally, inJune 1977, a transaction tax of 35% on interest paid on all commercial paperissued in the primary market was imposed./l The money market appears to beparticularly affected by the transaction tax which is borne entirely by theborrower. As a result of the legislation imposed, the value of depositsubstitutes traded fell by 11.5% during the period March 1977 to March 1978.Over the same period, the volume of savings and time deposits rose by 17.9%and 47.4%, respectively.

3.13 The Bond Market. The private long-term debt market has been practi-cally nonexistent in the Philippines; over the period mid-1967 to mid-1975, noprivate debt securities were issued. Some of the factors discouraging thedevelopment of the market were thought to be: the high rates of return obtainedfrom operating in the short-term market; domination of the term market bygovernment securities placed through coercive marketing techniques or offeringprivileged terms; and the low interest rate charged by government institutionson their long-term peso resources. Recently, the above scenario has changed.

/1 At the same time, a tax was imposed on interest earnings of savingsand time deposits but was levied at 15%.

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First, the new CB regulations have considerably reduced the return frommoney market operations: the short-term money market rate fell to a weightedaverage of 9.8% in June 1978 from an average of 14% in 1977 and significantlymore in 1976. Second, the Government has decided to place its securitieswithout resorting to privileged terms. A recent CBCI issue was neithereligible for reserve requirements nor tax exempt. Third, the interest ratecharged by DBP on the long-term peso loans was raised from 12% in 1975 to14-16% in 1977.

3.14 Partly as a consequence of these changes a bond market beganto develop in 1977. Several issues have recently appeared on the market:a convertible subordinated debenture issue for P 50 million, a preferredshare issue for P 40 million; a premium bond issue for P 20 million; and amortgage bond issue for P 125 million. Most of the issues have been under-written while a few have been private placements. Sale of these issues wasno problem during the first and second quarter of 1978 as the market was thenhighly liquid. However, as the market has become progressively less liquidduring the latter part of the year, the interest rate has risen and it hasbeen increasingly difficult to sell the bonds. Some underwriters haveattempted to establish a secondary market for issues they have underwrittenannouncing that they would buy and sell issues at prices to be posted daily.They are hoping to expand the base of the secondary market by getting otherinvestment houses and traders to participate. If a secondary market operatessuccessfully, a major constraint in the development of the bond market willhave been removed.

3.15 The Securities Market. Over the period January-September 1978 thevolume and value of stock traded on the Manila and Makati stock exchangesincreased by 12.3% and 88.0% when compared to the same period in 1977. Forthe first quarter the pace in stock trading was set by the commercial-indus-trial issues. Oil and mining stock then took over as a result of anticipatedcommercial oil production and the increase in copper prices. There waslittle foreign investment in local shares; according to the CB, for theperiod January to August 1978, foreign investment in local stock was minimal.

3.16 Despite the increase in local activity on the stock market, relativelylittle capital expansion is being financed through the stock exchange. Asupply constraint appears to exist in the case of equity issues as privateowners are unwilling to share control over their enterprises. In 1977, a 5%development tax was levied on closely held corporations to encourage dilutionof ownership. However, to date, the tax has not been sufficient incentive forfirms to go public and other measures may have to be considered to strengthenthe stock markets. While the development tax penalizes closely held corpora-tions, little has been done to give positive incentives to firms to go public.

Recent Developments

3.17 Interest Rate. Until 1976 the yield on money market instrumentswas unregulated while statutory ceilings were imposed on bank deposits.Legislation was enacted in 1976 to channel funds from the money market into

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bank deposits. The legislation was aimed at both the banking sector andnon-bank financial intermediaries. In the case of the banking sector maximumdeposit rates were increased and, for the first time, a distinction was madebetween short- and long-term lending rates. The major changes enacted were:ceilings on loans with maturities of more than 2 years were raised to 19%;secured and unsecured loans of less than 2 years continued to have a ceilingof 12% and 14% respectively, although a service charge of 2-3% could beadded; the maximum yield on money market instruments with maturities of up to2 years, including all charges, was set at 17%; all ceilings on yields ofinstruments with maturities of over 2 years were removed.

3.18 In December 1977 further interest rate legislation was introduced.The major change was a reduction of the effective maximum yield, inclusive ofthe 35% transaction tax and bank charges, from 17% to 16% on deposit substi-tutes with a maturity of two years or less with a further reduction in theyield to 15% effective July 1, 1978.

3.19 In June 1978 financing companies were placed directly under theregulation of CB with respect to the interest rates that could be chargedon transactions involving assignment of credit on the purchase of installmentpapers and accounts receivable. While in the past financing companies couldcharge up to 24% on discounting of receivables, they are now limited to amaximum of 14% while a discount rate of up to 2% a month can be charged onthe factoring of accounts.

3.20 According to a recent CB study, the new interest rate regime has,in part, been responsible for narrower interest rate fluctuations.

3.21 The Recent Growth of Offshore Banking Units (OBU) and ForeignCurrency Deposit Units (FCDU). A significant development in the Philippinebanking system was the establishment of offshore banking facilities inSeptember 1976. The purpose was to develop Metro-Manila as a regionalfinancial center. As of August 1978, aggregate resources of the Philippineoffshore banking system stood at US$1,338 million. Of this total 57% wereoffshore funds, 41% onshore deposits while the rest comprised other liabili-ties. Inter-bank deposit liabilities (offshore and onshore) are the majorsource of funds and account for 99.8% of OBU resources. On the asset side,inter-bank placements amounted to US$1,060 million or 79.2% of OBU funds.Approximately 60% of OBU funds went to the domestic market. Of these funds67.8% went to the domestic inter-bank market while the remaining 32.2% went toresident borrowers./l In terms of maturity, a significant proportion of theloans had a maturity of under a year although, in all probability, a largenumber of these are rolled over. OBU appear to be competing quite effectivelywith both commercial banks and investment houses. Their success lies in boththeir aggressive lending activities and large resource base which assuresregular funding.

/1 Of the loans made to nonbank resident borrowers 45% went to the manufac-turing sector, 29% to public utilities and 15% to mining; the remaining11% going to agriculture, commerce, construction and financial institutions.

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3.22 An FCDU is an accounting unit or department in a local bank orin the local branch of a foreign bank authorized to operate under the expandedforeign currency deposit system. As such, FDCU operate as the domesticcounterpart of OBU. As of January 1978, 17 commercial banks have beenauthorized to establish FCDU. As of December 1977, FCDU had operationsto the tune of $1 billion. The resources of FDCU came primarily from inter-bank deposits and from the foreign currency deposit system. Total 1.oansfrom FDCU amounted to $200 million of which 40% were to domestic institutions.

3.23 While performing similar functions, some differences exist betweenOBU and FCDU. First, FCDU may enter into foreign currency swap transactionswith CB which OBU are not permitted to do. Second, until recently, FCDUwere subject to a 100% identical foreign currency cover requirement on theirloans. This requirement has now been relaxed to 70%; the remaining 30% to beheld in eligible currencies. This relaxation should enable FDCU to be moreactive in foreign currency trading.

Financial Sector Issues

3.24 Capital Allocation. The current interest rate differential betweenthe administered short- and long-term interest rates, especially as theshort-term rate approaches its ceiling, is such that private developmentfinancial intermediaries find it difficult to raise medium- and long-termlocal currency resources for onlending./l However, as the demand for medium-and long-term peso resources exceeds the supply, whatever local currency fundsare available go to prime companies. On the other hand, medium- and long-termforeign exchange resources have been available through DBP, PDCP and, recently,offshore banking units. Hence the paradox that in an economy short of foreignexchange, foreign exchange resources are available while the local currencyresources are more difficult to procure. However, foreign exchange is onlyavailable to procure imported goods and costs much more than local currencyfinancing once the foreign exchange risk is taken into account.

3.25 The Arrears Problem of Government Financial Institutions and CreditPrograms. Government financial institutions account for 42% of the assetsof the banking system while the government sponsored, but privately owned,rural banking system accounts for another 3%. The Government, through specificprograms administered through different types of financial institutions, hasattempted to meet the credit needs of the economy which were not being ade-quately met by the private sector. Most of these programs have faced low loanrecovery rates, threatening the financial viability of the institutionsinvolved. This arrears problem is widespread. At the end of June 1978, 52% ofDBP's loan portfolio was affected by arrears. The comparable figure for ruralbanks was over 90%.

/1 This does not hold for DBP which has access to low cost local currencyfunds.

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3.26 Mortgage Banking. While some form of home mortgage lending isprovided by most existing private financial institutions, there is an absenceof specialized private sector housing intermediaries. Savings and mortgagebanks which were to perform this function are unable to do so owing to theirlimited capacity to mobilize savings. This has resulted in relatively smallannual home mortgage flows and little liberalization of mortgage lendingterms. The establishment of a mortgage bank which would mobilize resourcesfor mortgage loans through the issuance of long-term mortgage bonds has longbeen advocated and has recently been implemented. However, the effectiveyield of mortgage bonds would have to be at least 15%-18%o/1 if they were tocompete with other financial securities. Assuming a spread of approximately3%, the onlending rate would have to be 18%-21%. This might prove difficultgiven the current 19% ceiling on debt instruments with a maturity of overtwo years./2

3.27 Conclusion. There has been a rapid change in the financial environ-ment because of recent legislation: the CB Circulars of January 1976; the taxpackage of July 1977; the interest rate restructuring of December 1977;restructuring of CB borrowing and lending operations in June 1978. In orderto focus on some of the issues raised above and to identify other areas ofconcern in the changing Philippine financial environment, a financial sectormission recently visited the Philippines. It is hoped that this mission willresult in an ongoing dialogue with the Philippine Government on theseand other related issues.

/1 The effective rate on a recent mortgage bond issue was 22% p.a.

/2 While there is a ceiling on the maximum lending rate no such ceilingexists on the rate that can be offered for deposits with a maturityof over two years.

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4. INDUSTRIAL GUARANTEE AND LOAN FUND

A. Institutional Aspects

Charter and Objectives

4.01 The Industrial Guarantee and Loan Fund (IGLF) is not an institutionbut a long term compensatory financing and guarantee fund. IGLF was estab-lished in 1952 under a Counterpart Project Agreement (CPA 32) between thePhilippine Council for United States Aid /1 and the Economic Co-operationAdministration (ECA) of the US./2 The objectives and principles enunciatedin CPA 32, though amended on several occasions, still provide the frameworkfor IGLF's operations. IGLF's basic objective is to provide resources to avariety of financial institutions for onlending to small- and medium-scaleindustry./3 At present, the participating institutions charge the end-useran interest rate of 12% on IGLF loans but pay IGLF an interest rate of 7% onthe 100% compensatory financing provided, leaving the institution with agross spread of 5%. In addition, a guarantee fee of 2% /4 is charged to theend-user by the financial institutions. Criteria governing project selectionare enunciated in CPA 32, and conform with national development prioritiessuch as employment generation, export promotion and geographical dispersionof industry.

Ownership and Administrative Arrangements

4.02 The IGLF is owned by the Government of the Philippines. While thefund is under the overall jurisdiction of NEDA, it is administered by CBon the basis of a Master Agreement, first enacted in 1952 and last revised in1975. At present, CB handles all the operations of IGLF under the supervisionof an inter-agency Review Committee (RC) which advises IGLF on all policyissues. However, the final authority to approve basic policy changes stillrests with the Director General of NEDA.

4.03 Since the Bank first became associated with IGLF in 1975, a numberof changes have occurred in the composition and role of the RC. Initiallythe RC comprised four regular members, one each from NEDA, CB, UPISSI and MOI.Until 1977, RC was essentially a working level committee which met frequently

/1 Predecessor to the National Economic Council which later became theNational Economic and Development Authority (NEDA).

/2 Predecessor to USAID.

/3 Even though its charter allows it to finance medium scale industry, IGLFuntil recently financed small industry only (assets of up to P 1.0million).

/4 Under the terms of IBRD Loan Agreement No. 1120-PH IGLF's financingusing Bank funds carries a 60% automatic guarantee.

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to consider loan approvals. As a result, RC was often bogged down in day-to-dayoperations and was unable to provide IGLF with necessary policy guidance& Inaddition, since representation by member agencies/ministries on RC was at theworking level, the committee was unable to: (a) influence Government policieswith respecL to IGLF; (b) promote the necessary inter-agency cooporation forsuccessful implementation of joint SMI programs; and (c) encourage financialinstitutions to participate in the IGLF programs. Hence, it became necessaryto strengthen RC. The introduction of the accreditation scheme in late 1976resulted in a sharp reduction in the number of projects that had to be vettedby RC (para. 4.12) making it no longer necessary for the committee to meetfrequently. In late 1977, RC was both restructured and upgraded. As shownin Annex 1, the four original member agencies are now represented on the RCat the deputy minister level. In addition, the Director of CB's Department ofLoans and Credit (DLC) which administers IGLF, was appointed Chief ExecutiveOfficer (CEO) of 1GLF and designated as an ex-officio member of RC. In 1978,the membership was further broadened to include a representative from theMinistry of Finance (MOF). The present RC is a high-powered body which hasthe necessary connections to influence the formulation and implementation ofpolices and programs affecting SMI. Given the importance and standing of themembers of RC, it is not possible for them to meet frequently. This, however,is not necessary as, under the accreditation scheme, investment decisions aremade by the accredited institutions and merely reported on an ex-post basis.Moreover, RC is presently formulating guidelines which would delegate author-ity to CEO for most of the routine matters. Once these are implemented, theRC will be able to concentrate on policy issues and other matters ofsignificance.

4.04 In 1976, RC passed a resolution formally creating the IGLF TechnicalCommittee. This Committee comprises a representative from each of the memberagencies. The role of the committee is to brief RC about current operationsand carry out any special assignments given it by RC.

Organization and Staffing

4.05 Organization. The IGLF program is administered by CB's Departmentof Loans and Credit (DLC). This department is also responsible for alldomestic sector lending done by CB. Within DLC a separate unit handlesIGLF operations. An organization chart of the IGLF unit is given in Annex 4,C-1. While the DLC Director oversees IGLF operations, the unit is managed byan assistant director and comprises, for the most part, loan evaluators/exami-ners and data analysts. The current organizational structure does notreflect present needs as it was set up prior to the implementaton of theaccreditation scheme whereby project appraisal and supervision responsibil-ities rest with the accredited institutions. The current organizationalstructure makes it difficult to assign responsibilities between differentmembers in the unit. In addition, as there is no second level management,the assistant director has to oversee all IGLF operations. During negotia-tions an understanding was reached with the Government that the IGLF unitwould be strengthened by adopting a reorganization plan responsive to theoperating demands of the IGLF program. Broadly, the new organizationalstructure (Annex 4,C-2) would comprise five divisions of which two would dealwith the accreditation and sponsorship schemes respectively:

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(a) the Rural Bank Division would deal with all aspects of thesponsorship scheme (para. 4.07); and

(b) the Evaluation and Follow-Up Division would be responsible forall the operations undertaken by accredited institutions such asproject approvals, fund disbursements, follow-up, restructuring,recall, etc.

The three other divisions would be:

(c) the Promotional Division would identify, approach and evaluateinstitutions which might qualify for accreditation, while assistingand training already accredited institutions. This division wouldalso monitor the performance of accredited institutions (para. 4.16).

(d) the Research and Information Division would conduct studies onthe impact of IGLF financing, consider the future needs and direc-tion of the program and would be responsible for meeting allreporting requirements; and

(e) the Accounting Division would do all the bookkeeping and accountingfor the IGLF unit.

The actual implementation of the broad reorganization scheme outlined abovewould be gradual and would depend upon availability of suitable staff.

4.06 Staff. The number of staff in the IGLF unit has shown a secularincrease. The total professional staff rose from 18 (September 1975) to21 (March 1976) and currently stands at 23./i If the IGLF unit is to functionefficiently not only will all the 36 positions currently allocated to the unithave to be filled, but an additional allocation of 10-15 positions will beneeded. All of IGLF's professional staff are college graduates and many havepostgraduate degrees. While the professional caliber of some of the staff isreasonably satisfactory, most would benefit from further training, particularlyin the field of industrial project appraisal and follow-up. UPISSI and otherinstitutions in the country offer training programs suitable for IGLF staff.During negotiations CB's policies and practices for recruiting and maintainingadequate and qualified staff for the IGLF unit were reviewed and found generallysatisfactory.

Procedures and Standards

4.07 Appraisal. IGLF's appraisal procedures have been simplified andshortened since the introduction of the accreditation scheme. Prior to theaccreditation system, the participating financial institutions, after process-ing the loan application at their end, submitted a project study alongwith other requisite papers to NEDA for a cursory examination. NEDA then

/1 Six additional professional staff are on loan to the IGLF unit fromother units in the DLC.

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forwarded the application to the TGLF unit where it was subjected to anotherevaluation procedure including a project visit. The appraisal report pre-pared by IGLF staff was then presented to RC for approval. This longprocedure discouraged a number of small entrepreneurs and financing institu-tions from using IGLF financing. Under the accreditation scheme which cameinto effect in 1976, the accredited financial institution itself appraisesand approves the project. The project, on being approved, is sent to IGLFwhich merely undertakes a desk study to see if the project conforms to itslending guidelines./l If it does, the loan is disbursed immediately./2 Thetime taken by IGLF to disburse under the accreditation scheme varies betweenthree to seven working days compared to a minimum of four to six months underthe old sponsorship scheme. The new procedures appear to be operating satis-factorily as far as IBRD funded projects are concerned. However, rural banksstill operate under the sponsorship scheme. The quality of appraisals variesaccording to the institution. The more active accredited institutions under-take fairly comprehensive appraisals which adequately cover all relevantissues. However, appraisals done by other accredited institutions, partic-ularly commercial banks, are mostly collateral oriented and provide littleanalysis of the project. Such institutions would receive assistance fromIGLF. Owing to the small loans under IGLF, no financial (FRR) or economicrate of return (ERR) was calculated. During negotiations, the Governmentconfirmed that henceforth IGLF would require the accredited institutions tocalculate the ERR and FRR for all subloans in excess of P 1.5 million.

4.08 Supervision. Projects approved by accredited institutions undergoa two-tiered supervision process. First, IGLF staff conduct their own end-use verifications before disbursement of the second installment of the loanand within six months of full disbursement. This supervision is chieflyto guard against diversion of funds by verifying the existence of assetsfinanced under the project. Owing to staff constraints, IGLF is not up todate on its supervision. It is expected that the second tier of supervisionis performed by the financing institution with the aim of helping the bor-rower identify and resolve any production, financial or managerial problems.While some of the accredited institutions perform this type of supervision,others do not. An assurance was obtained during negotiations that in thefuture IGLF would regularly monitor the supervision efforts of accreditedinstitutions, and would provide training in standard follow-up practices andprocedures. The proposed new organizational structure should enable IGLF todo so.

4.09 Procurement and Disbursements. IGLF's procurement procedure issatisfactory. In general, the end-user provides the sponsoring institutionswith a list of items to be acquired. The financial institution checks theprices quoted as also the suitability of the items. The loan is disbursed by

/1 These guidelines deal with variables such as industries eligible forfinancing, the maturity structure of the loan, grace periods andproject location.

/2 Loan disbursement by IGLF is made in two equal installments.

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IGLF on the basis of a declaration provided by the accredited institutionthat items to be financed are both suitable and reasonably priced. Inter-views with the active accredited institutions indicated that this procedurewas being followed. In addition, IGLF's end-use verification (para. 4.08)ensures that the funds have been utilized for the purpose intended. In viewof the large number of projects, the Bank disbursements were made against astatement of expenses provided by IGLF without requiring further documents.A post-disbursement audit carried out by the Bank indicated that this pro-cedure was operating satisfactorily=

Operating Policies

4.10 The broad framework for IGLF's policies is enunciated in CPA 32 andthe Master Agreement (para. 4.01). Over time, however, many of the rules andregulations have changed. The most important changes were made in 1975 whenthe terms of the Bank Loan No. 1120-PH were incorporated. The major changeswere: (a) increasing the interest rate to the participating financial insti-tution from 5% to 7% and to the end-users from 10% to 12%; (b) introducingthe automatic 60% guarantee scheme; (c) adopting the accreditation scheme;(d) allowing for the participation of Non-Bank Financial Intermediaries(NBFI) in the program; and (e) relaxing the debt/equity ratio for projectsbeing financed from 70:30 to 80:20. Over time other policies were alsorelaxed, such as an increase in the grace period allowed on new loans,limited inclusion of medium-scale industries (with assets of P 1.0-4.0 mil-lion) and acceptance, in principle, of foreign banks under the accreditationprogram. A manual on IGLF's policies and procedures, first prepared andcirculated among participating institutions in October 1976 and subsequentlyrevised in August 1978, has operated as a useful guide for the participatinginstitutions.

4.11 While recent policy changes have made the IGLF program more accept-able to participating institutions, particularly the NBFI, other changes arerequired if the program is to reach its full potential. The new policies arespelled out in a Policy Statement proposed to be adopted by IGLF (Annex 2).The major operational policy changes discussed in paras 4.29-33 and 4.44 are:

(a) inclusion of medium-scale industries in the program by raising themaximum loan size from the present limit of P 500,000 to P 2.5 mil-lion (paras. 4.29-31);

(b) increasing the effective interest rate to the end-user of IGLF frorn13.2% to 14.7-15% (para. 4.33);

(c) increase in the interest spread allowed to the participatinginstitutions from 5% to 8% on small industry loans and from 5% to6% on medium industry loans (para. 4.31);

(d) adoption of the new guarantee scheme (para. 4.32); and

(e) introduction of a penalty charge on defaults by end-users(para. 4.44).

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Formal adoption by IGLF of the new Policy Statement is a condition of effec-

tiveness of the proposed loan. Following the adoption of the Statement, IGLFwould prepare by October 30, 1979 a revised manual of its policies andprocedures for the guidance of its own staff and that of the financialinstitutions.

The Accreditation Scheme

4.12 Background. As stated earlier, prior to September 1976, I1,LFoperated a sponsorship scheme. However, during the first Bank appraisal ofIGLF, it was realized that as the level of approvals increased, IGLF staffresources would be unable to cope with the evaluation and supervisionnecessary and, therefore, it was recommended that these funct[ons be decen-tralized. Hence, the accreditation scheme caine into being. Under thisscheme, IGLF operates as an apex institution and delegates all appraisal andsupervision responsibility to the accredited financial institutions. IGLF'sown role is confined to providing guidance, when required, and monitoring theoverall performance of the program. For an institution to be eligible foraccreditation, the following criteria must be met: a minimum net equity ofP 500,000; arrears in excess of 120 days not to exceed 15% of IGLF loansoutstanding; a collection ratio on the IGLF portfolio of no less than 70%;adequate and satisfactory staff to carry out both the institution's normalbusiness and successfully implement a small industry program. Currentlycommercial banks, NBFI engaging in qutasi-banking functions and privatedevelopment banks can apply for accreditation status.

4.13 Progress on Accreditation. After some initial delays the accredi-tation scheme has made progress and appears to be working satisfactorily. Asof November 30, 1978, 20 institutions had been accredited, of which 10 werecommercial banks; 9 were NBFI and one was a private development bank (seeAnnex 3). Applications of six other institutions were pending. Since June1978, IBRD funds have been made available to only accredited institutions.As the rural banks predominantly operate in the agricultural sector mostlymaking short-term loans and the majority of them were unable to meet theaccreditation crtterta, CB and the Bank agreed that rural banks would not beeligible for accreditation but could continue to sponsor projects from IGLFfunds but not from the proceeds of IBRD loans./l

4.14 As of November 30, 1978, out of a total of 73 financial institu-tions eligible for accreditation only 30 had applied. Although the responseto accreditation has not been overwhelming, those institutions that have beenaccredited appear to 17e sound and provide a fairly wide geographic reach.The total number of branches of accredited institutions is 146. Of these,83% belong to commercial banks, the remaining 17% being branches of NBFI.The number of branches per region varies greatly from one each for CagayanValley and Central Mindanao to twenty each for Western Visayas, CentralVILsayas and Southerii MLtdaaiao (see Annex 4, T-1).

/1 Rural Banks can avail themselves of IBRD funds through the IBRD RuralCredit Projects.

4.15 A number of factors are responsible for the apparent lack ofinterest of a number of financial institutions in applying for accreditation.First, the spread and maximum loan size (P 500,000) do not provide institu-tions, particularly commercial banks, with sufficient financial incentive(see para. 4.21). Second, many of the financial institutions are not par-ticularly well informed about IGLF and the accreditation scheme. Third,owing to the vagueness of some circulars and regulations issued by theGovernment/CB regarding money market operations, some financial institutionsmaintain that an IGLF loarn might be construed as a deposit substitute a ndtherefore subjected to these regulations./l However, none of the above prob-lems is insurmountable. The new policy package and the proposed organiza-tional changes would, to a large extent, address the first two problems.During negotiations the Government and CB clarified that the money marketregulations do not apply to IGLF. Some of these clarifications are beingcirculated by CB among financial intermediaries.

4.16 To date, CB has implemented the accreditation program quite satis-factorily. There are, however, a few areas where improvements are needed.While IGLF should apply the accreditation criteria strictly and uniformlybefore granting accreditation status, once accredited, the institution shouldhave greater freedom than it currently appears to receive in the matter ofproject selection and appraisal. Rather than second-guess the accreditedinstitution's appraisal of a project, IGLF should discuss the overall policiesor issues arising from the project, if deemed necessary, on a post-approvalbasis. On the other hand, IGLF does not appear to adequately monitor theoverall performance of financial institutions once accreditation status hasbeen granted. IGLF should keep in close touch with accredited institutionsand periodically review their performance. Continuation of accreditationstatus of an institution should be based on its overall satisfactory perform-ance regarding the standard of appraisal, adequacy of supervision, institu-tional capability and quality of portfolio. At negotiations IGLF's policiesand practices vis-a-vis accredited institutions and plans for their regularimplementation were reviewed and were found satisfactory. Under the neworganization structure of the IGLF unit (para. 4.05) these responsibilitieswould be assigned to one division.

4.17 Participation of Accredited Institutions. As was expected, NBFIhave, in general, been far more active than commercial banks. Over theperiod August 1976-December 1978, NBFI accounted for 71% of loan approvals byaccredited institutions by value. The corresponding figure for commercialbanks was 27%. Among NBFI, PDCP is the most active and is responsible for48.8% by value and 58.0% by number of all loans approved by accreditedinstitutions for the period August 1976 to December 31, 1978. PDCP notonly has long experience in long-term lending but, in addition, has its ownsmall business program and is, consequently, an efficient conduit for IGLFresources. Since mid-1978 PISO and Manphil Investment Corporation have alsobecome active. A number of the other accredited NBFI have recently started

/1 These regulations include a reserve requirement, the minimum size ofdeposit substitutes, registration of the deed of assignment withSecurity and Exchange Commission and a 35% transaction tax.

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SMI lending programs and will expand this program in the near future oncetheir initial phase is successfully completed and the constraints mentionedin para. 4.15 are removed.

4.18 The greater participation of NBFI is likely to continue for atleast two reasons. First, unlike most commercial banks, investment houseshave better expertise for undertaking project evaluation. Second, asinvestment houses do not have access to low cost resources, such as bankdeposits, the risk-return trade off of the IGLF program is more attractive tothem than to their commerical bank counterparts. The introduction of mediumscale industry into the IGLF program along with a higher interest spread onsmall industry loans are likely to make it more attractive to all types offinancial institutions (para. 4.31). It is possible that several new insti-tutions will apply for accreditation. While IGLF should encourage competentinstitutions to apply for accreditation, the quality of institutions accred-ited and the relationship between them and IGLF is far more important to thesuccess of the program than the number accredited. It is expected that whenthe proposed changes in IGLF's policies are implemented, the 20 institutionscurrently accredited will be able to generate sufficient business for IGLF toachieve its projected targets (see para. 4.45).

B. Operations

Volume of Operations

4.19 Until 1975 IGLF provided loans, in the form of special time deposits(STD), and when requested guarantees up to 80% of the loan. In accordancewith an agreement /1 with the Bank, IGLF adopted a new guarantee policy in1975. Under the policy all STD approved were automatically guaranteed up to60%.

4.20 Details of IGLF's operatons from July 1, 1974 to December 31, 1978 /2are given in Annex 4, T-2 and T-3. As of December 31, 1978, cumulativeSTD approvals since the establishment of IGLF in 1952 stood at P 319.0 millionfor 1,032 projects. About 53% of the approvals in value terms and 76% of theprojects, in terms of number, were financed after June 30, 1974. IGLF's pastoperations are characterized by wide yearly fluctuations in the volume of STDapproved:

/1 Under Loan No. 1120-PH.

/2 Until recently, IGLF used to report data on a fiscal year basis(July 1-June 30), but now presents it on a calendar year basis.

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IGLF: TREND OF APPROVALS, July 1, 1974 - December 31, 1978

Period No. STD amount approved(P million)

1952 - June 30, 1974 251 148.8FY1975 349 54.7July - December 1975 91 19MO(annualized) (182) (38.0)CY1976 130 29.2CY1977 71 20.3CY1978 140 47.0

Cumulative total 1,032 319.0

Between 1965-74, IGLF's annual approvals amounted to only P 2-3 million.In 1973 IGLF's procedures and polices were changed resulting in a sharpincrease in the volume of operations in FY75. Owing to institutional andpolicy constraints this new level of operations could not be sustained insubsequent years. The fluctuations in the volume of operations after FY75were brought about by changes in the type of institutions participating inthe program. Until CY76, commercial banks accounted for 50-60% of IGLF'sapprovals, rural banks for 30-40% and other institutions (private developmentbanks and savings and loan associations) for around 10%. In CY78, commercialand rural banks and NBFI /1 were responsible for 27%, 3.4% and 54%, respec-tively of total approvals, the remainder of approvals (16%) coming from PDBand other institutions.

4.21 Several factors have contributed to the changing structure ofparticipating financial institutions. First, most commercial banks find thatthe 5% gross spread is not sufficient to justify the higher costs and risksinherent in SM1I lending. In addition, those commercial and rural banks whichhad, in the past, actively participated in the program began to experience adeterioration in the quality of their IGLF portfolio and faced high arrears /2princially because of weak project evaluation and inadequate supervision.Despite arrears on their own portfolio, the financial institution is expectedto "make good" to IGLF. In the case of commercial banks the process of makinggood ties up their own resources and carries a high opportunity cost./3

/l NBFI were permitted to participate in the program from the thirdquarter of 1976.

/2 Approximately 43.2% of commercial bank loans outstanding were in arrearsas of December 31, 1978.

/3 IGLF loans earn an interest of 12%, while comparable loans made directlyby commercial banks bear an interst of 19%.

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4.22 In July 1976 the Monetary Board restricted rural bank participationunder the IGLF program by requiring that participating rural banks have aminimum paid-in capital of P 500,000. The maximum loan size was alsoreduced from P 250,000 to P 150,000. The above requirements, coupledwith mountLng arrears on rural bank portfolios, have significantly curtailedrural bank participation in the IGLF program.

4.23 For reasons explained earlier, NBFI have been particularly activein the IGLF program and as a result, they have more than compensated for thereduction in approvals by commercial and rural banks. The proposed policychanges (paras. 4.29-4.33) are likely to make the program more attractive tocommercial banks and NBFI. A promotional campaign shall be undertaken byIGLF to publicize these changes.

Characteristics of Operations

4.24 Sectoral Distribution. Normally only manufacturing industriesare eligible for IGLF financing, though some service and tourism projectsalso qualify. Manufacturing activity continues to dominate the sectoraldistribution of IGLF's approvals. In 1978 manufacturing activity accountedfor 94.5% of approvals (by amount) compared to 90.7% in 1977 and 90.9% in1976. Within the manufacturing sector, miscellaneous manufacturers /1received 15.6% of total approvals. Other industries receiving 5% or moreof IGLF's approvals for 1978 are nonelectrical machinery/appliances (12.4%),food and food products (9.1%), wood and cork products (8.1%), textiles (7.8%),apparel/footwear/garmets (7.7%), metal products (7.2%), furniture and fixtures(6.9%) and printing, publishing and allied industry (5.3%). Substantialchange in the overall distribution of approvals in the latest two yearsoccurred in the food and food products sector which increased from 5.8% in1977 to 9.1% in 1978, textiles which increased from 3.5% to 7.8% and printing,publishing and allied industry which increased from 0.9% to 5.3%; the percent-age of total approvals going to the apparel/footwear/garments sector decreasedfrom 10.9% to 7.7%, metal products from 13.9% to 7.2%, electrical machinery/appliances from 6.5% to 2.1% and miscellaneous manufactures decreased from20.6% to 15.6%. Almost all the industrial subsectors financed by IGLF werelabor intensive. Further details of the sectoral breakdown of IGLF's approvalsare given in Annex 4, T-4.

4.25 Regional Distribution. As shown in Annex 4, T-5, the regionaldistribution of IGLF projects has been skewed in favor of Metro-Manila andadjoining provinces. Despite this, the IGLF portfolio is much less regionallyconcentrated than the portfolio of private financial institutions /2 or theoverall distribution of SMI./3 In terms of numbers, the percentage of

/1 Miscellaneous manufacturers comprise handicrafts, agro-business, plasticand rubber manufacturers.

/2 As of March 1978, 86.7% of all commercial bank credit went to Metro-Manila.

/3 As of 1975, the three regions of Metro-Manila, Central Luzon and SouthernTagalog accounted for 76% of all industrial establishments in the SMIsector.

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approvals going to Metro-Manila, Central Luzon and Southern Tagalog was 65.0%for 1978, 71.9% for 1977 and 61.5% for 1976. As of year-end 1978, tworegions, Cagayan Valley, and Western Mindanao, had received no approvalsduring the year. In order to bring about greater regional dispersion, IGLF:(a) has adopted a 40:60 rule with respect to the lending of accreditedinstitutions, namely, no more than 40% (by number) of an institution'slending over a six-month period can go to Metro-Manila; and (b) does notfinance any new project in Metro-Manila unless it is export-oriented. As ofDecember 31, 1978, 36.5% of the year's approvals had gone to Metro-Manilacompared to 35.2% in 1977. One of the reasons for the relative concentrationof IGLF projects in Metro-Manila and adjoining areas is that the more activeNBFI do not have the requisite regional branch network. They are attemptingto deal with this problem by either opening new branches or establishingtie-ups with regionally located financial institutions. Moreover, once thecommercial banks become active, which is expected, the geographic reach ofthe program is likely to improve significantly as commercial banks have awell-developed branch network.

4.26 Size of Loan. The terms of Loan No. 1120-PH provided that theupper limit on IGLF loans could be P 800,000; IGLF, however, has continuedto enforce an upper limit of P 500,000. In June 1978, the Monetary Boardagreed that the P 800,000 limit should be recognized to enable more indus-tries to use IGLF resources and to permit financial institutions to develop amore balanced SMI portfolio; approval from NEDA is pending. As shown inAnnex 4, T-6, the average size of loan approvals has been steadily increasingfrom P 225,000 in 1976, to P 286,000 in 1977 and P 335,000 for 1978.The increasing average size is chiefly attributable to general inflation andto the increased participation of accredited institutions and decreasedparticipation of rural banks. While rural banks largely concentrate onsmaller loans, NBFI and commercial banks prefer to finance larger loans asthe fixed costs of IGLF loan processing tends to be the same so that thereturn to the institution is positively correlated with the size of the loan.The bias against small loans is expected to be reduced by increasing thespread in percentage terms accruing to the financial institution on smallloans (para. 4.31).

4.27 Purpose of Loans and Maturities. In CY78, 82.4% of loan approvalsby value were for fixed assets, leaving 17.6% for working capital financing.In CY77, 73.6% went to fixed asset financing, 25.8% to working capital finan-cing and 0.6% was for other purposes.

4.28 At negotiations for Loan 1120-PH it was agreed that the maximummaturity of IGLF's STD should be 12 years. However, IGLF has continued tooperate on a maximum loan maturity of 10 years and there are relatively fewloans for even that period. In terms of number, working capital loans withmaturities of up to three years accounted for 47.1%, 46.2% and 41.6% in CY76,CY77 and CY78 respectively. Fixed asset loans with maturities for 3-5 yearshave dropped significantly from 32.6% in CY76 to 16.9% in CY78. The drop inthe 3-5 year loan range has been compensated for by an increase in loans inthe 5-10 year range which rose from 20.3% in CY76 to 41.5% in CY78. In 1977,

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IGLF perinitted new projects a one-year grace period for working capital loansand a grace period of two years for fixed asset loans. The current policy ofpermitting no grace period for expansion projects which adversely affectsthe borrower's liquidity often resulting in defaults was reviewed at nego-tiations and it was agreed that adequate grace periods will be allowed on allloans. Further information on the purpose of loans and their maturities isgiven in Annex 4, T-6.

C. Proposed Policy Changes

Financing of Medium Scale Industries

4.29 The Government's SMI program was introduced to encourage the develop-ment of economically viable industries which would contribute to employmentgeneration, export promotion and regional development. Many small enterprisescame into being as a result of this program and have, in the course of fiveyears, progressed from the small to the medium industry stage /2. Theseindustries are in need of further financing if they are to reach their fullpotential and make more efficient use of capital and labor.

4.30 DBP is presently the only institutional source of long-term finan-cing available to medium-scale industries. However, due to institutionallimitations DBP is not able to cater to the credit needs of this entiresector. Consequently, many medium-scale industries are short of long-termresources and, are operating by rolling over short term credit, when this isavailable, or resorting to the curb-market. Clearly both these practices arenot in the best interest of the enterprise concerned. If medium scaleindustries are to be fostered, long-term finance should be made available tothem through IGLF. This move is also likely to reduce the overall riskincurred by financial institutions on their IGLF portfolio, as the probabil-ity of defaults is likely to be lower for medium industry than for smallindustry. This will make the program more attractive to the financialinstitutions.

4.31 Under the new policy framework IGLF would finance both small scaleindustries (loans ranging from P 500,000-800,000) and medium-scale industries(with loans from P 800,000 to P 2.5 million)./3 Loans between P 800,000-P 2.5 million will be restricted to existing enterprises with a potential

/1 Prior to this date a grace period of one year was allowed to new projects.

/2 A medium-scale industry is defined as one with assets of P 1-4 million.According to a recent decison of the Monetary Board (September 1977),IGLF can make loans to export-oriented medium-scale industries, but themaximum loan size is maintained at P 500,000.

/3 Based on the asset limit of P 4.0 million and a debt/equity ratioof 60:40. The same limit applies on DBP's financing of medium-scaleindustries.

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financial institutions do not cater to the needs of medium-scale enterprisesat the expense of small-scale projects. With respect to return, financialinstitutions would be allowed a higher spread (8%) on their small industrylending than on their medium industry (6%) loans. The new guarantee policy,by affecting the risk involved in the two types of loans, will also providecthe necessary incentive (para. 4.32).

The New Guarantee Scheme

4.32 The 60% automatic guarantee scheme was originally devised toencourage financial institutions to lend to undercollateralized clients. Thefinancial institutions, however, have continued to require 100% collaterali-zation, which often results in a fully collateralized client being forced tobear an additional cost./l Moreover the present policy does not distinguishbetween a guarantee for collateral shortage and for credit risk. In future,IGLF will offer two different optional guarantee schenes with the followingfeatures:

(a) Collateral Guarantee will be available for small industry loansonly (up to P 800,000) and will cover the actual collateraldeficiency, up to a maximum of 25% of the loan amount. This fixedabsolute amounit guarantee will cover first losses to the extent ofthe guaranteed amount or the loan amount outstanding, whichever islower. The 2% p.a. guarantee fee charged on the outstandingguaranteed amount will be passed on by the Financial institutionto the end-user.

(b) Credit risk Guarantee will be issued by IGLF for small as well asmedium industry loans to the extent requested by the accreditedinstitution. The guarantee would cover a fixed percentage ofthe loan amount outstanding but would not exceed 60% for small-scale industry loans or 40% for loans to medium-scale industries.In this case, the 2% guarantee fee would have to be absorbed by theparticipating institution.

Interest Rates

4.33 As provided under the Loan Agreement No. 1120-PH, the interest rateon STD charged was raised to 7% for sponsoring institutions and to 13.2%(including the guarantee fee) for subborrowers. These interest rates weredetermined on the basis of the then prevailing interest rate structure whichhas subsequently changed after the amendment of the Anti-Usury Law./2 Theeffective interest rate currently charged by IGLF, although positive consider-Lig thre r~eeret [nflatoa rai>e,/3 is well below the rate charged by other

/1 Under the currenlt policy the 2% guarantee fee is borne by the end-user of TGLF resources.

/2 Until it was amended, the Anti-Usury Law fixed a ceiling of 12% for allsecured loans.

/3 The average inflation rate in the period 1976 to 1978 (September) was8.8%, while the projected inflation rate is 7%.

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financial institutions for long term peso loans to SMI. DBP, the majoralternative source of term financing for small-scale industry, is currentlycharging an effective rate /1 of 14-16% with the average being close to15.5%. The nominal rate charged by private development banks is 19%. Giventhe cost ot comparable alternative financing, the current low level ofinterest charged by IGLF results in two types of distortions: first, betweencredit provided by different types of institutions; second, in overal creditallocation as the rate charged does not reflect the greater inherent risk oflending to undercollateralized borrowers and the higher administrative costper unit lent. The interest rate differential is also partly responsible forthe high level of arrears on IGLF's portfolio (para. 4.43). In addition, itacts as a major disincentive for commercial bank participation in the program(para. 4.21). Under the proposed project, the effective interest ratecharged to the end-user will be raised from the 13.2% currently charged to14.7% (including a service fee of 1.5%) on small industry loans and to 15%(including a service fee of 1%) on medium industry loans. This increase willreduce some of the distortions.

D. Impact of the Bank's Assistance to IGLF

Features of Subprojects Financed under Loan No. 1120-PH

4.34 In 1975 a $12.0 million component was included in Bank Loan No.1120-PH for IGLF/2 which has since been fully utilized by IGLF. Under theBank loan, IGLF financed 393 subprojects for P 119 million /3 ($16.1million) which are estimated to have generated a total investment ofP 227.6 million (Annex 4, T-7).

/1 Originally in 1975, when the Loan No. 1120-PH was made, DBP's interest ratewas 12%. In early 1976, interest on loans not secured by land mortgagewas raised to 14%; the interest rate on loans secured by land mortgageremained unchanged at 12%. In September 1976, DBP introduced a super-vision fee of 2% on all loans over P 150,000.

/2 The $30 million loan included four components: IGLF, $12.0 million;DBP, $15.0 million, the National Electrification Administration's (NEA)industrial rural cooperative program, $2.3 million and MOI's SBAC program,$0.7 million. DBP component has been fully disbursed for SMI projectsdetails of which were reviewed in the "Staff Appraisal Report on Develop-ment Bank of the Philippines" (No. 1972-PH, dated April 21, 1978).Utilization of the NEA component has been slow. MOI's SBAC program hasbeen completed and is working satisfactorily (para. 2.07).

/3 75% ($12.0 million) of this amount is financed by the Bank loan.

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The average subloan size of P 302,700 is higher than that expected atappraisal (P 210,000) owing to the ineligibility of rural banks to use IBRDfunds (para. 4.22). Sixty percent of the projects financed had loans rangingfrom P 200,001-500,000 and received 85% of IGLF/IBRD resources. DespiteIGLF's decision in September 1977 to allow certain medium-scale industries toparticipate in the program, IGLF lending continues to favor small borrowers;those with assets of P 500,000 or less accounted for about 73% of IGLF/IBRDresources while those with assets ranging from P 500,001-P 1 millionaccounted for 23%, and those with assets greater than R 1 million accountedfor 4%. Manufacturing activities accounted for 92.3% of the subloans (vs. 98%expected at the time of appraisal); tourism, other services and constructionaccounted for 3.7%, 3.6% and 0.4% of the subloans respectively (Annex 4, T-8).Within manufacturing, the distribution of Bank funds followed approximatelythe same sectoral pattern as projected at appraisal with two exceptions. Theshare of food processing was only 5.9% compared to 20.2% expected at appraisalwhile miscellaneous manufacturing /1 received 19.9% of Bank funds compared toa share projected at appraisal to be nominal. In terms of regional dispersionthe expectations at appraisal have largely been met. As shown in Annex 4,T-9, Metro-Manila accounts for 37.7% by number (vs. 35.3% projected at thetime of appraisal) and 46.9% by amount of total investment generated (vs.42.5% projected at the time of appraisal). The degree of concentration in theMetro Manila area for IGLF/IBRD financed subloans is greater than for IGLFloans as a whole. This situation has occurred because rural banks, whichnormally finance projects in outlying regions, are not eligible for IBRD funds(para. 4.22). Excluding Metro-Manila, the rest of Luzon accounted for 33.2% ofinvestment (vs. 30% projected at the time of appraisal); the less developedregions of Ilocos and Cagayan Valley received a smaller share than expected.The Visayas received 14.0% of investment as against 15.8% expected at appraisal.Mindanao also attracted less investment than expected (5.9% vs. 12%). Thedistribution of investment is still skewed in favor of the more developedregions.

Economic Impact of Projects Approved Under Bank Loan No. 1120-PH

4.35 On an ex-ante basis, the 393 subprojects financed under the loanas of December 31, 1978, have generated a total project cost investment ofabout P 228 million ($30.8 million). The estimated incremental sales ofthese projects came to P 363.6 million ($49 million) of which export salesaccounted for P 47.8 million ($6.5 million). Firms located in Metro-Manilaaccounted for 59% of the exports; Central Luzon came next with 27%. A littleover 44% of the exports were leather and leather products followed by furni-ture and fixtures with 20%, miscellaneous manufactures with 15%, and footwear,apparel and garments with 11% and none of the remaining sectors accounted formore than 4% of export sales. The 393 projects financed are expected to gener-ate 9,889 new jobs with an investment cost per worker of P 23,012, ($3,110),which is well below the Bank's urban poverty threshold of $3,900 (1978) forthe Philippines. In terms of size of subborrowers, almost 100% of the Bank

/1 Miscellaneous manufacturers comprise handicrafts, agro-business andplastic/rubber manufactures.

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loan went to subborrowers with fixed assets below $250,000 /1 at the time of

application to IGLF.

4.36 In 1978, a special study to evaluate the economic impact of theIBRD/IGLF program on an ex-post basis was conducted. This study /2 foundthat the 187 firms studied directly employed 5,703 workers, or an average of30 workers per firm. A typical industry in this group required an averagecapital investment of P 16,000 ($2,162) per worker. The investmeat cost perworker ranged from P 5,000 ($676) in the case of fiber products to P 73,000($9,865) for rubber products. Among the subsectors, rubber products, coldstorage, feed mills and chemicals were found to be more capital-intensivethan printing, shell products, fiber products and furniture. The laborintensity of the miscellaneous manufacturers group was also very evident sincethis group, comprising small handicrafts and shellcraft employed 16% of allworkers. Net value added by these firmTs amounited to P 30.5 million, corres-ponding to 65% of total IGLF funding. The value added component consists ofwages (68.5%), profit and financial expenses (31.5%) which further reflectsthe labor-intensity of IGLF-financed projects.

4.37 The ratios of net profit to total investment realized in 1977 forthe entire group of 187 firms ranged from 0.7% for rubber products to 101.5%for paper products, the average being 28%. The economic rates of return haveniot been calculated for all the subprojects owing to the smnall size of theloans (para. 4.07). However, on an a priori basis, the economic rate ofreturn is likely to be high given the labor intensity of most projects and

the utilization of local raw materials. The economic rates of return have,however, been computed for a sample of 30 projects and canged from 17.2% fora furniture project to 215.5% for a garment industry (Annex 4, T-10). Theaverage economic rate of return in the sample was 59%.

E. Financial Position and Performance

Financial Position

4.38 Even though IGLF is not an institution but a fund, CB maintainsfinancial statements for purposes of control. IGLF's balance sheets as ofDecember 31, 1974 through 1978 are summarized in Annex 4, T-11. IGLF's totalassets as of December 31, 1978 stood at P 162.4 million, having increasedalmost threefold since December 31, 1974. STD and short-term investmentsaccount for almost 95% of total assets. Investments represent the short-termnplacements of IGLF's liquid resources held to finance Future disbursements ofSTD and possible losses against guarantees. The increase in assets since1974 was almost entirely financed by drawdowns on Bank Loan No. 1120-PH andGovernment funds. As of December 31, 1978 the outstanding balance of the

/1 This is the ceiling suggested in the Bank report "Employment Creationiandli Sn:all-Scale FEnterprise Development" (No. 1543 dated March 22, 1977).

/2 Confined to 187 projects which had received IBRD-IGLF financing as ofJune 30, 1977.

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Bank loan (P 59.6 million) and Government funds (P 75.4 million), inclu-ding retained profits, together accounted for about 85.2% of total assets.The outstanding balance of the US EXIM Bank loan (P 21.0 million) and otherliabilities (P 0.5 million) accounted for the remaining assets. As of

December 31, 1978, IGLF's financial position was strong with a debt/ equityratio of 1.1:1 and a very high current ratio. As of the same date, IGLF'stotal liquid and near liquid assets (cash and short-term investments)covered outstanding undisbursed commitments around 15 times. Provisions forpossible losses are made annually and amounted to P 2.5 million or 2.2% ofoutstanding STD as of December 31, 1978.

Financial Results

4.39 Summarized income statements of IGLF are given in Annex 4, T-12.IGLF derives its gross income in the form of interest on STD, income fromshort-term investments and the guarantee fee, the first two sources account-ing for the bulk of its income. Since currently the spread accruing to IGLFon IBRD funded STD is only 0.625%, their contribution to IGLF's overallprofitability is marginal. However, with the growth in STD the interestincome from them has increased steadily from P 1.0 million in 1974 toP 2.0 million in 1975, P 3.8 million in 1976, P 3.9 million in 1977 andP 4.3 million in 1978. However, the largest contribution to gross incomesince 1976 has come from short-term investments; this element is likely todecline in the future as surplus funds are used for STD financing. IGLF'snet income reached a record high of P 3.1 million in 1976 but declinedto P 1.8 million in 1977 due to: a sharp increase in the interest on theBank loan; and a provision of P 0.6 million made in 1977 for doubtfulaccounts. Moreover, since IGLF's financial statements are prepared on a cashbasis, the increase in arrears was directly responsible for the decrease innet income in 1977. In 1978 IGLF's net income rose to P 2.8 millionlargely owing to higher income derived from STD and short term investments.Overall, IGLF appears to be reasonably profitable.

Audit

4.40 IGLF's accounts are audited every year by CB's Office of the InternalAuditor (OIA) /1 as a part of the general audit of DLC. The Bank Loan Agree-ment No. 1120-PH requires that IGLF's accounts be separately audited; thefirst separate audit report on IGLF was prepared by the OIA on 1977 accounts.While the report provided a basis for an independent verification of IGLF'sfinancial status, it did not focus sufficiently on the quality of IGLF's port-folio. OIA has agreed to address this problem in its future audits. Inaddition, the OIA has agreed, in future, to prepare IGLF's accounts on anaccrual basis so as to more accurately reflect IGLF's financial position.

/1 OIA operates under the functional control of the Commission on Audit, aGovernment body that audits all Government accounts.

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Quality of Portfolio

4.41 IGLF's Portfolio. Between December 31, 1974 and December 31,1978, IGLF's total STD portfolio grew at an average annual rate of about 29%.As of December 31, 1978 STD outstanding amounted to P 114.0 million. Theoutstanding STD were held by: commercial banks (38.6%), rural banks (17.8%),NBFI (25.0%), PDB (13.3%) and others (5.3%). The share of NBFI in theIGLF program is likely to increase in the future while that of rural banks islikely to decline. Arrears on the IGLF portfolio have increased sharply.Over the period, September 30, 1975 to December 31, 1978, IGLF's arrearshave increased from P 1.0 million to P 18.3 million; as percentage of STDoutstanding, arrears rose from 2.2% to 16.0%. Rural banks accounting for17.8% of IGLF portfolio were responsible for 39% of the arrears. Evenallowing for their rather recent participation, the arrears ratio for NBFI isremarkably low (at 0.2%) as is the arrears ratio for accredited banks.Details of IGLF's portfolio are given in Annex 4, T-13 and 14.

4.42 Participating Institutions' IGLF Portfolio. In compliance with therequirement of Loan Agreement No. 1120-PH, CB now collects arrears data onthe IGLF portfolio of participating institutions. As expected, the incidenceof arrears on the portfolio of the participating institutions is much higherthan on IGLF's own portfolio. As of December 31, 1978, total arrearsbetween financial institutions and subborrowers on IGLF loans averaged23.8% of total loans outstanding while 41.9% of the portfolio was affected byarrears (Annex 4, T-15). The arrears ratio varies significantly by type ofinstitutions: rural banks have an arrears ratio of 54.9%, commercial banksof 43.2%, PDB of 26.7% and NBFI of 1.6%. The growing NBFI participationwould result in a better portfolio in the future.

4.43 The deterioration in the quality of IGLF's own portfolio and thatof participating financial institutions is symptomatic of the past andpresent weaknesses in IGLF's operating policies. First, before the introduc-tion of the Bank program, emphasis was placed on increasing the number ofparticipating institutions with little attention being paid to their abilityto handle SMI lending. While this policy was changed with the introductionof the accreditation program (para. 4.12), IGLF will continue to face collec-tion problems on its old portfolio. Second, IGLF does not permit a penaltyrate to be changed to end-users which sometimes results in a willful diversionof funds. Third, participating institutions are normally required to repayIGLF irrespective of their own collection. In the absence of a penalty charge"making good" has a high cost (para. 4.21). Therefore, many commercial banksprefer defaulting on their IGLF loans, particularly as CB has been reluctantto debit the account of a commercial bank in default to IGLF on grounds thatit would discourage commercial bank participation in the program. Fourth,IGLF's policy of not allowing a grace period on loans for expansion projectshas often resulted in borrowers being genuinely unable to repay.

4.44 As the increase in arrears on the IGLF portfolio is a seriousmatter, a number of steps have been proposed to improve the situation. Anunderstanding was reached during negotiations with the Government and CB onan action program to alleviate this problem. The elements of the action

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program are (a) increase in interest rate on IGLF loans (para. 4.33); (b)introduction of a penalty charge of 5%; (c) changing the policy on graceperiods (para. 4.28); and (d) monitoring more closely the quality ofappraisals and supervision done by participating institutions as well astheir portfolio. IGLF is also undertaking a special program of reviewing theportfolio of individual financial institutions and taking the necessaryaction with respect to restructuring, additional financing or foreclosure.Moreover, the lengthy procedures currently followed by IGLF for loan re-structuring are being rationalized (para. 40Q3) Finally, the accounts ofparticipating institutions in arrears shall in future be automoticallydebited by CB after a grace period of 45 days if no remedial plan has beensuggested.

E. Prospects

IGLF's Business Prospects and Projections

4.45 The volume of transactions undertaken by IGLF does not, in any way,reflect the macro-economic demand for long term resources by small-scaleindustry. Until recently institutional problems and inadequate policies haveconstrained IGLF's lending. Most of these constraints have been, or are inthe process of being, removed. The volume of IGLF operations rose signifi-cantly in CY78 and the trend is likely to continue. The inclusion of medium-scale industry is likely to further boost IGLF's operations. Based on theguestimates of the more active accredited institutions, IGLF has projected itsvolume of operations for CY79 to CY82 (Annex 4, T-16). The volume of newapprovals is projected to be as follows:

IGLF: PROJECTED APPROVALS OF STD(P millions)

CY78 CY79 CY80 CY81 CY82(Acutal) ----------(Projected)-----------

Small industry loans 47.0 85.0 91.5 100.6 110.7Medium industry loans /a - 20.0 40.0 44.0 48.4

Total 47.0 105.0 131.5 144.6 159.1

(of which accreditedinstitutions) (45.4) (85.0) (111.5) (122.6) (134.9)

/a IGLF expects to start lending to medium industry under the increasedloan ceiling by mid-1979.

Operational Priorities

4.46 In carrying out its mandate to support efficient small and mediumindustries, IGLF intends to increasingly emphasize project selection . A

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program of cooperation between accredited institutions and CSMI is beinginitiated to ensure that deserving small and medium industries receive thenecessary finance. The export element and employment potential of projectswill be criteria for project financing, but other variables, such as regionaldispersion of investment, value added and use of indigenous material, willalso be considered. IGLF would encourage participating institutions to givepriority to small industries. IGLF also aims at building the organizationalstaff capacity of accredited institutions so that a core of credit institutionsis developed capable of efficiently handling SMI projects. However, IGLF'sfinancing will continue to be confined to manufacturing and some service sectors.

Resource Requirements

4.47 Details of IGLF's resource position are given in Annex 4, T-17.Historically, IGLF's resources have come from USAID counterpart funds,Government contributions, US EXIM Bank loans and, since 1975, the Bank LoanNo. 1120-PH. As of December 31, 1978, IGLF's net resources available forcommitments stood at P 54.7 million. Between January 1979 and June 1981,IGLF's projected new commitments amount to P 305 million /1 which itexpects to meet as under:

P million

Balance resources as of December 31, 1978 54.7New Government contribution 50.0Proposed Second IBRD loan 181.3Internal generation 19.0

Total 305.0

IGLF has fully committed and disbursed the allocation ($12 million) made forit under the first Bank loan. Based on its projected level of new approvalsIGLF would exhaust all its resources in the beginning of the third quarter of1979 when new resources including the proposed Bank loan would be needed.The proposed Bank loan would be used to finance STD to accredited institu-tions. At negotiations, the Government agreed to make needed resourcesavailable to IGLF.

Financial Projections

4.48 IGLF's projected balance sheets for CY79-82 are given in Annex 4,Table 18. The increase in IGLF's STD disbursements, which commenced inFY78 is likely to continue, particularly with the inclusion of mediumindustry financing. Total assets are projected to rise from P 162.4 millionin CY78 to P 337.5 million in CY80, and P 464.8 million in CY82, or anaverage annual growth rate of about 30%. The actual growth rate achieved inthe past five years has been about 25%. The proposed additional contributionof P 50 million by the Government in CY79 will enable IGLF to maintain a

/1 Includes P 51.0 million for rural banks.

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satisfactory degree of liquidity; the debt service coverage is estimated torange between 3.5 times and 3.9 times. IGLF's projected cash flow is given inAnnex 4, Table T-19.

4.49 IGLF's projected income statements for CY79-82 are shown in Annex 4,T-20. The anticipated increase in STD will be reflected in gross incomewhich is projected to rise from P 10.1 million in CY78 to P 22.8 millionin CY80 and P 34.7 million in CY82, raising the net income from P 2.8 millionin CY79 to P 5.6 million in CY80 and P 8.0 million in CY82. Since the fee /1charged by CB for administering IGLF is a major factor affecting the profit-ability of IGLF, an understanding was reached that any increase in the adminis-tration fee will be in line with the actual increase in expenses and withprior consultations with the Bank.

/1 Currenlty it is 1% of the highest outstanding balance of STD and guaranteesin the preceding year.

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5. THE MEDIUM AND SMALL INDUSTRIES COORDINATEDACTION PROGRAM (MASICAP)

Origins and Aims of the Program

5.01 The MASICAP program was established by the Development Academy ofthe Philippines in November 1973, and transferred to MOI in June 1974. Theaim of the program is to stimulate investment in small and medium industriesin regions outside Metro-Manila; this objective is achieved by assisting SMIin the preparation of projects which might be financed from the entrepreneursown resources, or through institutional credit. The program was implementedto address two major constraints affecting SMI: (a) the growing concentrationof industrial investment and output in the M4etro-Manila region, and (b) lackof awareness on the part of most SMI businesses outside Metro-Manila of theinvestment opportunities and credit facilities available to them. The programcomplements the SBAC (para 2.07).

Organization

5.02 The program emphasizes field work and extension services. Atpresent, the MASICAP staff number 147, of whom 137 are field staff orvanizedinto 49 teams of 2 to 3 persons. Each teamn is assigned a specific geographicarea usually comprising 1 or 2 provinces. MASICAP's geographic coverage isextensive and covers almost all the regions of the country except Metro Manila.Each team has a senior team leader in charge of initiating and screeningprojects; the 10 headquarters staff also travel extensively to administer andsupervise the program. MASICAP teams do not haxre permanent office premisesin the regions but use SBAC offices wherever possible.

5.03 A key feature of the staffing policies of MASICAP is the emphasisplaced on the recruitment of students from colleges and universities wishingto participate in the program./l The senior year students recruited tend tohave an outstanding academic record and are given two year appointments witha phased intake of newly trained field staff. Only four positions (all atheadquarters) are permanent. Training to the new recruits is provided bysenior team leaders, and through lectures from representatives of the govern-ment and financial institutions.

5.04 The rationale behind the staffing policy is to maintain a highdegree of motivation in the program. Although not an explicit objective,this staffing policy has been low cost relative to the size and geographicreach of the program. MASICAP services are provided free of cost to the

/1 The students may substitute part of their course work for the field workundertaken with MASICAP.

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end-user. Expenditures in the first five years were P 12.8 million, whichamounts to P 2,500 per project feasibility study conducted or less than 3% ofamounts loaned (or in the process of being loaned) by banks, or less than 2%of the amounts actually invested in the projects.

Method of Operation

5.05 While MASICAP, extends assistance to any small enterprise, priorityis given to investment in the industrial sector. Business is generatedthrough contacts with financial institutions, local businessmen, local govern-ments, and business and trade associations. The decision to accept or rejecta project study is taken by the senior team leader. The average time taken byMASICAP to prepare a project feasibility study is about one man month. Duringthis time, information necessary for a feasibility study is gathered. In addi-tion, the entrepreneur is helped in finance (making cash flow projections,computing working capital requirements and estimating the project's debtrepayment capacity), marketing and accounting. The MASICAP agent alsohelps the entrepreneur in preparing loan requests for institutional credit.

Operational Record

5.06 Since the program began, MASICAP has undertaken over 5,300 feasi-bility studies of which 77% (4,090) were submitted for financing, 11% werediscontinued, 7% were submitted for licenses and 5% were shelved or are stillbeing processed (Annex 4, T-21). Of the 4,090 submitted for financing, 21%(851) were screened and rejected without appraisal by financial institutions;52% (2,135) were appraised and approved; 6% (235) were appraised but rejected;the remaining 21% projects are awaiting a decision. Annex 4, T-22, providessome of this information on a yearly basis, and shows that the pace of theprogram has been maintained. Currently, about 1,200 projects are reviewedeach year which is lower than the peak of 1,525 projects in 1976. Theslowdown has occurred because MASICAP is now concentrating on the smallertowns and villages/l where project generation is more difficult and time-consuming. The average loan and project size of MASICAP clients is F 225,000and P 450,000 respectively; while the volume of lending and investmentgenerated is currently about P 135 million and P 270 million respectively.In general, larger projects are directly appraised by the financial institu-tions, while MASICAP help is sought for smaller loans, where the transactioncost per unit lent is high.

5.07 The major sources of financing for MASICAP-assisted projects havebeen: DBP which appraised 72% (2,336) of the loan requests submitted,/2 IGLFwhich appraised 13% (411), while other financial institutions accounted forthe remaining 15%. The relatively low volume of IGLF financing occurred as a

/1 In addition, MOI no longer includes in MASICAP data (as it did until1976) assistance rendered to very small projects not requiring feasi-bility studies.

/2 As of the end of the third quarter, 1978).

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result of the lengthy processing time taken by IGLF prior to the introductionof the accreditation scheme in 1976. In addition, MASICAP has worked extensivelyon loans which, in general, have been too small to qualify for IGLF financing.

Performance of MASICAP Projects

5.08 A monitoring survey undertaken in 1976 of 50% of MASICAP Projectsfound that while 87% of the projects were still operating, 40% were inarrears by more than three months, and 28% in arrears by more than sixmonths./l There are several reasons for these arrearages. First, MASICAPclients tend to be new businesses with little or no track record and areconsequently much more difficult to assess than the proven businesses withwhich financial institutions normally deal. Recently, it has been decidedthat MASICAP should concentrate more on "growth" enterprises, i.e., thosewhich have been in operation but need financing for expansion; implementationof this decision should reduce the risk of default. Second, at that stagethe financial institutions (especially DBP) were inexperienced in the appraisaland supervision of small loans. Third, MASICAP was also inexperienced, andthere was a tendency for the cash flow projections to be unrealisticallyoptimistic, and consequently the projects were unable to meet their debtservice. Insufficient supervision of MASICAP teams by experienced profes-sionals further contributed to weak project studies. With more experience andthe implementation of the proposed organizational changes the quality ofproject feasibility studies is likely to improve.

Strength and Weaknesses of the Program

5.09 The main strength of MASICAP is the motivation to try and addressproblems which the organized financial sector is unwilling to tackle on itsown. The main weakness of the program has been the lack of experience andcontinuity. The procedure of replacing field staff members after two yearsof service has meant that experience gained has not been retained within theprogram; staff tend to leave the program just when they have developed someexpertise in project identification and knowledge of local conditions. Insome cases, this has adversely affected the quality of projects developed byMASICAP. Unfortunately, MASICAP does not follow-up the projects assisted byit; this is left entirely to the financial institutions. As MASICAP isunaware of the final outcome of the projects developed, the impact of learningby doing is significantly curtailed.

Proposed Changes

5.10 The project aims to reinforce MASICAP by introducing some continuityin its operations. It is proposed to (a) introduce permanent experiencedtechnical staff with nine regional offices to supervise the work of MASICAP

/1 Arrears as a proportion of principal affected was 8% while arrears as aproportion of all MASICAP-generated loans was 4%.

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teams; and (b) involve MASICAP field staff in the supervision of projects.As in the past, a small sample of projects will be monitored annually. Themonitoring will be organized by headquarter's staff who will also performtheir current administrative functions.

5.11 There are to be three permanent staff in each region who will beresponsibile for project identification, feasibility studies and the super-vision activities of the field staff consisting of four to seven teams headedby a permanent senior team leader. The selection and training of staff willbe the responsibility of headquarters. The organizational arrangements areshown in Annex 4, C-3.

5.12 The supervision provided by MASICAP will be on a regularizedbasis /1 and will involve brief but periodic visits to clients havingreceived assistance to discuss progress and problems. To avoid duplicationof efforts, MASICAP's supervision of projects would be closely coordinatedwith the similar activities of the financial institutions. MOI will keepthe Bank informed of its supervision and monitoring activities throughregular periodic reporting.

5.13 Over the two-year period, July 1, 1979 to June 30, 1981, the totalMASICAP cost is estimated at P 8.9 million including the additional capitalexpenditure required to establish the 9 permanent regional offices and per-sonnel and other operating expenses. Of the total project cost, the proposedBank loan would finance up to P 3.7 million, while the balance of theproject cost would be covered by annual budgets of MOI. The Bank loanwould finance 100% of the capital costs relating to imported/locally manufac-tured items such as vehicles, office equipment and furniture and 50% of stafftraining and the salaries of the additional permanent professional staff forthe initial two years.

/1 The monitoring system will be organized separately, and will not involvethe regular MASICAP technical staff in the regions.

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6. CONCLUSIONS AND RECOMMENDATIONS

Objectives and Justification of the Proposed Loan

6.01 Besides resource transfer, the two major objectives of the proposedloan are: continued Bank participation in the Government's SMI program whichis aimed at reducing income disparities; and further developing the expertiseof institutions in SMI project evaluation. From the proposed loan of $25.0million, $24.5 million will be used for onlending by IGLF to the SMI sectorwhile the balance, $0.5 million, will be utilized by MOI for strengtheningM4ASICAP. Over 510 SMI projects are expected to be financed under the loan,with a total investment of about P 325 million.

6.02 A major component of the Government's SMI program has been toupgrade and increase the number of institutions supplying term credit to SMI.Since the Bank's participation /1 in the program in 1975 considerable successhas been achieved. The proposed loan would ensure continued availability ofterm credit to SMI. At present, DBP is the only source of term creditavailable to medium-scale industries. Several of the successful enterprisesnow fall into the medium-scale category. These enterprises will need to befinanced if they are to reach their full potential. Hence, the proposed IGLFloan will provide financing for both small- and medium-scale industries.

6.03 The economic and social benefits resulting from the project arelikely to be substantial, Most significantly, the project will: providecredit to groups that are normally denied access to term credit; generateemployment at a relatively low cost in both rural and urban areas; bringabout a greater regional dispersal of investment; and aid in the institu-tional development of several financial institutions. Since the projects tobe financed cannot, at this stage, be identified it is not possible to make anex-ante analysis of the economic impact of the loan. However, given thehigh level of unemployment in the Philippines, the heavy reliance of SSEs onlocally produced inputs and the low level of protection enjoyed by mostSSEs, the average economic rate of return on investment is likely to besignificant. The average economic rate of return of a sample of projectsunder the first loan was 59% (para. 4.37) and a similar return is likely underthis project.

6.04 In accordance with the Government's social and economic priorities,the loan will be supporting labor-intensive industries. The projectsfinanced under the IGLF loan component will create approximately 11,500 newjobs at an average cost per job of about $3,820. The average cost per jobunder the proposed loan will, inevitably, be higher than under the previousloan ($3,041) as medium-scale industries will also be eligible. However,the cost per job will be far lower than in the Philippine modern industrial

/1 Bank financing for Philippine SMI amounts to $85.0 million.

- 48 -

sector and well within the Bank determined urban poverty threshold for thePhilippines./l Over 65% of the projects under the proposed loan would belocated outside Metro-Manila, thus aiding the geographical dispersion ofindustry.

6.05 Finally, the loan will help develop expertise in project evaluationand preparation. On the institutional side, accredited financial institutionsare building up their expertise in this field. Moreover, a restructuredMASICAP will aid potential end-users in preparing project feasibility studies.A part of the loan will be used to equip MASICAP with a core of permanentprofessional staff in charge of monitoring the program. This is likely toimprove the quality of MASICAP's output which will help in the promotion ofeconomically and financially viable SMI projects.

Features of the Loan

6.06 Purpose. The IGLF loan component would be used to finance fixedassets and the permanent working capital of SMI subprojects. As under theprevious loan, the proceeds of the proposed loan would cover 75% of the finan-cing provided by IGLF to accredited financial institutions while the remaining25% will come from Government funds. The 75% represents the direct andindirect foreign exchange component of these projects./2 In order to ensurethat projects are not concentrated in the Metro-Manila area only, IGLFrequires that accredited institutions approve at least 60% of their loans forprojects outside Metro-Manila. As accredited institutions will now be ableto finance both small and medium industry loans, safeguards in the form ofhigher spreads and guarantee cover for small loans have been provided toensure continued availability of IGLF funds for small projects (para. 4.31).The MASICAP component of the loan amounting to $500,000 will be used by MOIto provide MASICAP with field offices and a core of permanent experiencedstaff who will be responsible for monitoring and upgrading the quality ofMASICAP output. MASICAP is playing a vital role in promoting SSE particu-larly in the less well developed regions. The proposed loan by strengtheningthe supervisory level staff of MASICAP would make it a more effective program.The loan component for MASICAP would be used to finance the direct andindirect foreign exchange cost of capital items (equipment, furniture andvehicles) to be procured locally and 50% of the salaries of the additionalpermanent professional staff and staff training cost for the initial two years.

6.07 Projects Financed and the Bank's Urban Poverty Program. One of themajor objectives in the establishment of IGLF was the promotion of mediumand small-scale industries. However, until recently, IGLF has concentrated

/1 After allowing for inflation, the urban poverty threshold for thePhilippines will be about $4,400 in 1980.

/2 An analysis of the cost of SMI done in 1977 indicated that, on average,the direct and indirect foreign exchange component of projects was about58% in the Philippines. Since it is expected that the accredited financialinstitutions will finance about 75% of the project cost, the 75% of IGLFfinancing provided by IBRD will represent the direct and indirect foreignexchange component of the project.

- 49 -

on small industry only. Under the proposed loan medium-scale industrieswill also be financed. It is expected that about 80% of the IGLF loancomponent will be used to finance small industries and labor-intensive mediumindustries with either fixed assets not exceeding $250,000 or projects withan investment cost per job no greater than $4,400, which is the Bank'sestimated urban poverty threshold for the Philippines for 1980.

6.08 Form of Lending. As in the previous loan, the proposed loan for$25 million would be made to the Government which would relend the proceeds toIGLF ($24.5 million) and to MOI ($0.5 million).

6.09 Currencies and Foreign Exchange Risk. As virtually all the goodsto be financed under the proposed loan would be locally procured, the subloansadvanced by IGLF will be made in local currency. The portion earmarked forMASICAP would also primarily finance local currency expenditures. The foreignexchange risk on the loan would be borne by the Government.

6.10 Amortization Schedule. Since the number of subloans under the IGLFcomponent will be large (about 510), for the sake of administrative conven-ience a fixed amortization schedule stretching over 20 years including afive-year grace period is recommended. The maximum maturity of SMI loansunder the IGLF component would be 12 years including a maximum grace period ofthree years. The shorter maturity of subloans would generate a revolvingfund which IGLF would use for re-lending to SMI on the same terms and condi-tions as the original loan. It is expected that the proceeds of the entireloan would be committed in two years and disbursed within three years of thesigning of the loan (Annex 4, T-23).

6.11 Procurement. The Bank's normal requirements for internationalcompetitive bidding would be inappropriate for application to the subprojectsfinanced under this loan. Procurement procedures prescribed by IGLF foruse by the accredited institutions are adequate to ensure that purchases fromthe subloans are made with due regard to efficiency and economy (para. 4.09).In the case of MASICAP, the Government's procurement procedures which theBank has found satisfactory would be applied for the procurement of capitalassets (office equipment, fixtures and vehicles).

6.12 Free Limit. Considering the large number of subprojects expectedto be financed and the desirability of keeping the processing time of subpro-jects to a minimum, it is recommended that no free limit mechanism be used.Instead, IGLF will periodically submit summary statements of loans approvedas well as copies of appraisals of subloans over P 500,000 which will bereviewed on a post-approval basis. This procedure, which has been used forall Bank funded SMI projects in the Philippines, has proved an effective wayof upgrading the quality of appraisals while keeping the processing time to aminimum.

6.13 Subloan Sizes. Small industry loans will range from a minimumof P 50,000 to a maximum of P 800,000 while medium industry loans will rangefrom P 800,000-P 2.5 million. The present ceiling on IGLF loans would becorrespondingly raised from P 500,000 to P 2.5 million.

- 50 -

6.14 Relending and Onlending Rates. As with the past IBRD loan toIGLF, the Government will re-lend the loan to IGLF at the actual borrowingrate. IGLF would onlend these resources to accredited financial institutionsat 6.7% for small industry loans and at 9% for medium industry loans./l

6.15 Spread to Accredited Financial Institutions under IGLF. Theeffective interest rate to the end-user will be 14.7% (including a servicefee of 1.5%) on small industry loans and 15% (including a service fee of1.0%) on medium industry loans. This would result in a spread to theaccredited financial institution of 8% and 6% for small and medium scaleloans respectively. A higher spread on small industry loans is proposed toencourage accredited financial institutions to lend to small industry.

Agreements and Understandings Reached at Negotiations

6.16 During negotiations the Bank reached agreement:

(a) with the Government on the adoption of new IGLF policies prior tothe effectiveness of the loan (para. 4.11); and

(b) with CB on furnishing the Bank with a periodic summary of loansmade by IGLF along with copies of appraisals of subloans exceedingP 500,000 (para. 6.12), and arrears data on IGLF funded loanbetween financial institutions and end-users (para. 4.44).

6.17 In addition, at negotiations the Bank reached understandingswith the Government and CB on:

(a) further delegation of authority to CEO of IGLF authority to handleroutine matters (para. 4.03);

(b) the reorganization of IGLF unit and appropriate staffing(paras. 4.05 and 4.06);

(c) the calculation of ERR and FRR in appraisal of subloans overe 1.5 million (para. 4.07);

(d) the preparation of a revised policy manual for IGLF (para. 4.10);

(e) an exemption of IGLF financed loans from the requirements set outin CB/Government circulars and regulations governing moneymarket operations (para. 4.15);

(f) an ongoing monitoring of the performance of accredited institutionsby IGLF (para. 4.16);

/1 Based on the Bank's current lending rate of 7.9% this would give IGLF anet margin of 0.8% on small industry loans and 3.1% on medium industryloans financed under the proposed Bank loan; IGLF would use interest-freegovernment funds for financing 25% of each subloan.

- 51 -

(g) a program to review the IGLF's portfolio of participating financialinstitutions (para. 4.44);

(h) the adequacy of CB's fee for administering IGLF (para. 4.49);

(i) the reorganization of MASICAP (para. 5.10);

(j) the subfission to the Bank by MOl of quarterly reports on MASICAP(para. 9.12); and

(k) the use oF at least 80% of the IGLF loan component for financingsuhprojects with: a cost per job created no greater than theBaak's urban poverty guidelines; or with fixed assets at the timeof loani applicatton not exceeding $250,000 (para. 6.07).

Recommendatioa

6.t1 A Bank loan of $25 million, for a term of 20 years including 5 yearsof grace, is recommended to be made to the Government of the Philippines tofinance the IGLF program and the reorganization and reorientation of MASICAP.

- 52 -

ANNEX 1

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Members of the Review Committee (RC) as of December 1, 1978

Name Title Organization

Members

1. Dr. Manuel S. Alba Deputy Director General National Economic &(Chairman of RC) Development Authority

2. Mr. Eugenio Nierras, Jr. Deputy Governor Central Bank of thePhilippines

3. Mr. Rafael A. Sison Deputy Minister Ministry of Industry

4. Mr. Victor C. Macalincag Assistant Minister Ministry of Finance

5. Mr. Paterno Viloria Director University of the

Philippines, Insti-tute for Small-ScaleIndustry

Ex-officio member

6. Mrs. Milagros M. Mijares Director, Department of Central Bank of theLoans and Credit; Chief PhilippinesExecutive Officer, IGLF

AEP Projects DepartmentMay 15, 1979

-53-ANNEX 2Page 1

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Proposed Policy Statement

IGLF's Role

1. The Industrial Guarantee and Loan Fund (IGLF) shall seek toencourage and promote the establishment and expansion of economicallysound small- and medium-sized industries (SMI) in the Philippines that willcontribute to economic development and an equitable distribution of income inthe country. To this end, IGLF will provide assistance in the form of loansand guarantees to SMI. IGLF's Review Committee, in cooperation with theagencies and ministries represented on it and participating financial institu-tions, will also undertake, as and when necessary and possible, specialpromotional campaigns to encourage SMI to make use of IGLF's facility.

Channels of Assistance

2. In order to ensure accessibility to its facility for SMI, IGLFwill use financial institutions as intermediaries. IGLF will encourageparticipating institutions to play an active role in the promotion anddevelopment of SMI and to acquire and develop resources and institutionalcapability.

3. A participating institution must be accredited by IGLF before itcan use the facility. The accreditation criteria will be as follows:

(a) minimum paid-in capital of P 500,000;

(b) sound and efficient management and an adequate number of qualifiedstaff;

(c) capability for undertaking satisfactory appraisal and effectivesupervision of SMI projects;

(d) an overall level of arrearages of over four months not exceeding15% of the total outstanding loan portfolio of the institution;with regard to the institution's IGLF portfolio, for the immdiatelypreceding financial year, loan collections shall be no less than70% of accounts overdue and falling due in that year; and

(e) no arrears outstanding to the Central Bank/IGLF.

4. The types of financial institutions that can apply for accreditationunder IGLF include, but are not restricted to, commercial banks, privatedevelopment banks, non-bank financial intermediaries, and other thrift banks.

-54- ANNEX 2Page 2

5. It is understood that an accredited bank will at all timesmeet the foregoing criteria. IGLF will undertake a review of the performanceof each accredited institution at least once within a 12-month period toensure that the criteria are met.

6. The IGLF will, in addition to monitoring the overall perform-ance of the accredited institution, assist accredited institutions inimproving the quality of their SMI operations. This assistance will be inthe form of, but not confined to, improving the quality of appraisal andsupervision work by divising and installing appropriate procedures andstandards.

7. In view of the nature of their operations and resources, ruralbanks will not be required to be accredited to be eligible for IGLF financing.

Project Selection Criteria

8. Only viable productive SMI projects will be eligible for IGLFfinancing. The factors that will be considered in determining the viabilityof projects will include inter alia: economic, technical and financialviability; impact on the country's balance of payments; regional dispersionof investment; employment impact; equity in income distribution; and compli-ance with the Government's overall economic policies and other regulations.Decisions on the financing of individual projects will be based on overallmerits; non-compliance with any of the aforementioned factors will notnecessarily disqualify a project.

Eligibility Requirement

9. Projects in manufacturing industries and Government-approvedtourist inns outside Metro-Manila will be eligble under IGLF. Total assetsof the applicant firm at the time of applying to IGLF shall be eP 4.0 mil-lion or less.

10. The proceeds of IGLF Loans may be used for financing the purchaseof factory sites, construction of buildings used for business purposes,purchase and installation of machinery, equipment and fixtures and workingcapital. IGLF will not provide assistance for refinancing purposes exceptunder exceptional circumstances.

Financial Policies

11. IGLF's loan assistance will be in the form of compensatory financ-ing provided to participating institutions up to 100% of their loans to SMI.

-55- ANNIEX 2Page 3

Financial Policies

12. The upper limit for this financing is P 2.5 million. IGLF loans upto P 800,000 will be construed as small industry loans and those fromP 800,000 - P 2.5 million as medium industry loans. Medium industry loanswill be restricted to existing enterprises showing satisfactory performance.

13. The participating institutions will charge interest at no lessthan 13.2% per annum plus a service charge of 1.5% per annum on small industryloans and no less than 14% per annum plus a service charge of 1% per annum onmedium industry loans made with IGLF funding and shall be allowed a minimuminterest spread of 8% on small industry loans and 6% on medium industryloans. In addition to setting a higher interest spread on small industryloans, IGLF, in the process of monitoring the performance of participatinginstitutions, shall emphasize the importance of providing finance forsmall industry.

14. The maximum maturity of eligible loans will be 12 years, includinga grace period of up to 3 years. For determining grace period, no distinctionwill be made between new and expansion projects; actual loan maturities willbe determined on the basis of the project's anticipated cash-flow.

15. IGLF will offer the following two optional guarantee schemes:

(a) Collateral Guarantee available for small industry loansto cover collateral deficiency up to an amount equal to 25%of the loan. This fixed absolute amount guarantee willcover first losses to the extent of the guarantee or theloan amount outstanding, whichever is lower; and

(b) Credit risk Guarantee for small and medium industry loans tothe extent requested by the accredited institution covering a fixedpercentage of the loan amount outstanding but not exceeding 60% forsmall industry loans or 40% for medium industry loans.

An individual small industry loan can be eligible for both types of guarantees.

16. IGLF's guarantee fee will be equal to 2% per annum of the outstand-ing amount of the guarantee. The fee on the Collateral Guarantee mentionedin para. 14 (a) above may be passed on by the financial institution to theend-user, but the fee on the Credit-risk Guarantee will be absorbed bythe institutions.

17. IGLF will periodically monitor the quality of participating banks'IGLF portfolio with a view to keeping arrearages as low as possible. Tothis end, IGLF will provide assistance to the participating institutions withregard to the appropriate handling of problem accounts. The participatinginstitutions will be allowed to levy a penalty charge of 5% per annum onamounts in default.

18. Participating institutions are obligated to repay IGLF irre-spective of their own recoveries, but the Central Bank, as administrator of

-56-ANNEX 2Page 4

IGLF may allow deferment of payments in respect of projects in defaultand/or in difficulty provided the institution submits to the Central Bank anappropriate action plan; if within 45 days of original date of payment duethe Central Bank does not receive any specific action plan, the institution'saccount with the Central Bank will be debited to the extent of amount due toIGLF.

19. The Central Bank will maintain IGLF's accounts, observing generallyaccepted accounting principles and have them audited annually by qualifiedand competent auditors.

AEP Projects DepartmentMarch 23, 1979

-57-

ANNEX 3

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

List of Accredited Institutions as of December 1, 1978

Institution Date approved

Commercial banks

1. Philippine Bank of Communications (PBC) Sept. 17, 19762. Rizal Commercial Banking Corporation (RCBC) Sept. 27, 19763. Far East Bank and Trust Company (FEBTC) Dec. 14, 19764. Bank of the Philippine Islands (BPI) Feb. 17, 19775. The Consolidated Bank and Trust Corporation (Solid Bank) March 9, 19776. Allied Banking Corporation (ABC) Sept. 9, 19777. Pacific Banking Corporation (PBC) Sept. 13, 19778. Commercial Bank and Trust Company (CBTC) Dec. 13, 19779. Producers' Bank of the Philippines May 8, 197810. Insular Bank of Asia and America (IBAA) July 14, 1978

Non-bank financial intermediaries

11. Private Development Corporation of the Philippines (PDCP) Sept. 17, 197612. Multinational Investment Bancorporation (MTB) Sept. 17, 197613. Ayala Investment and Development Corporation (AIDC) Nov. 4, 197614. Philippine Investment Systems Organization (PISO) Jan. 26, 197715. State Investment House, Inc. (SIHI) April 11, 197716. Bancom Development Corporation (BDC) May 30, 197717. First Meteo Investment Corporation (FMIC) May 30, 197718. Filinvest Credit Corporation (FCC) Aug. 3, 197719. Manphil Investment Corporation (MIC) April 4, 1978

Development banks

20. Quezon Development Bank July 12, 1978

AEP Projects DepartmentFebruary 15, 1979

-58- ANNEX 4

T-1

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Regional Distribution of Branches of Accredited Financial Institutions,as of November 30, 1978

NonbankCommercial Private devel- financial

Region and province banks opment banks intermediaries Total

I. I1-ss 9 - 1 12Hlorn_s Mortto 2 - 2

La Union 2 - - 2Mt. Province

Subtotal 13 - 1 14

II. _aga&an VolleyCagayan

III. Central LzconBataan 2 - - 2Bulacan I - IPunpanga 5 - 1 6Pangasinan 5 - 1 6Tarlac I - - IZambales I - - I

Subtotal 15 - 2 17

IVa. SOUthern TagalogBatangas 5 - - 5Laguna 2 - - 2Palawan I - - 1Quezon 3 5 - 5Marinduque I - - I

Subtotal 12 5 - 17

V. BicolAl-bay 1 - - ICamarines Norte I - - ICanarines SCr 4 - - 4Catanduanes 3 - 1 4Sorsogon I - - 1

Subtotal 10 - I 11

VI. Western VisayasAklais I - - ICapiz I - - IIloilo 6 - 3 9Negros Occidental 6 - 3 9

Subtotal 14 - 6 20

VII. Central VisayasCcebu II - 5 16Negros Ori-otal 4 - - 4

Subtotal [5 - 5 20

VIII.iastern VisayasLe_y t o 4 -- 4Northbrn Samnr 1 1

Subtotal 5 - - 5

IX. Western Mifdas,aoZamboanga d-bl ior 2 - - 2

X. Northorn MindanaoAgussa del Norte 1 - - IMisanis Oriental 9 - 5 14Surigoo de Nurte 3 - - 3

Subtotal 13 - 5 18

XI. Southern MindanaoDavao del Norte 2 - - 2Davao del Sur 9 - 5 14South Cotabato 3 - - 3Sorigao del Sir I - - I

Slbtutal 15 - 5 20

XII. Central MindanaoNorth Cotabato I - - I

Total 116 5 25 146

AEP Projects DepartmentFebruary [5, L979

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Summary of Operations /a, July 1, 1974-December 31, 1978(F"000)

FY75 July-Dec. 1975 CY76 CY77 CY78Number Amount Number Amount Number Amount Number Amount Number Amount

U.1

STD approved /b 349 54,671 91 19,035 130 29,220 71 20,332 140 46,989

STD released n.a. n.a. - 24,295 148 26,868 108 21,702 - 43,779

STD repaid to IGLF n.a. n.a. - 6,685 956 18,937 1,069 18,887 - 19,684

STD outstanding 430 61,511 542 79,120 679 87,051 734 89,866 850 113,961

/a All STD approved after June 30, 1975 are combined with a 60% automatic guarantee.

/b Since its inception in 1952 up to June 30, 1974, IGLF's total approvals amounted to P 148.8 million(251 loans). Including these IGLF's, cumulative approvals as of December 31, 1978 stood atP 319.0 million (1032 loans).

AEP Projects DepartmentMay 15, 1979

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Details of Operations, July 1, 1975-December 31, 1978(W0O00)

July-December 1975 CY76Home industry /a Small industry /b Total Home industry /a Small industry /b TotalNo. Amt. % No. Amt. % No. Amt. % No. Amt. % No. Amt. % No. Amt. %

STD Approved /cCommercial banks - - - 25 9,630 52.4 25 9,630 50.6 2 90 13.2 43 15,497 54.3 45 15,587 53.4Nonbank financial

institutions (NBFIs) - - - - - - - - - - - - 2 400 1.4 2 400 1.4Private development banks

(PDBs) 5 145 23.0 3 670 3.6 8 815 4.3 2 100 14.6 18 4,880 17.1 20 4,980 17.0Rural banks 17 486 77.0 37 6,734 36.6 54 7,220 37.9 10 443 64.9 45 6,050 21.2 55 6,493 22.2Other institutions - - - 4 1,370 7.4 4 1,370 7.2 1 50 7.3 7 1,710 6.0 8 1,760 6.0

Total 22 631 100.0 69 18,404 100.0 91 19,035 100.0 15 683 100.0 115 28,537 100.0 130 29,220 100.0

STD ReleasedCommercial banks - 50 4.6 - 14,445 62.3 - 14,495 59.7 - - - 42 13,981 53.2 42 13,981 52.0NFBIs - - - - - - - - - - - - 2 200 0.7 2 200 0.8PDBs - 376 34.4 - 1,879 8.1 - 2,255 9.3 3 110 18.8 21 4,302 16.4 24 4,412 16.4Rural banks - 666 61.0 - 5,339 23.0 - 6,005 24.7 9 425 72.6 64 6,310 24.0 73 6,735 25.1Other institutions - - - - 1,540 6.6 - 1,540 6.3 1 50 8.6 6 1,490 5.7 7 1,540 5.7

Total - 1,092 100.0 - 23,203 100.0 - 24,295 100.0 13 585 100.0 135 26,283 100.0 148 26,868 100.0

STD Repaid to IGLFCommercial banks - 28 7.7 - 4,103 64.9 - 4,131 61.8 4 24 2.6 290 12,820 71.1 294 12,844 67.8NBFIs - - - - - - - - - - - - - - - - - -PDBs - 23 6.3 - 624 9.9 - 647 9.7 24 96 10.6 65 1,066 5.9 89 1,162 6.2Rural banks - 312 86.0 - 1,412 22.3 - 1,724 25.8 208 783 86.0 352 3,916 21.7 560 4,699 24.8Other institutions - - - - 183 2.9 - 183 2.7 1 7 0.8 12 225 1.3 13 232 1.2

Total - 363 100.0 - 6,322 100.0 - 6,685 100.0 237 910 100.0 719 18,027 100.0 956 18,937 100.0

STD OutstandingCommercial banks 5 166 3.4 118 44,972 60.6 123 45,138 57.0 6 142 3.1 160 46,133 55.9 166 46,275 53.2NBFIs - - - - - - - - - - - - 2 200 0.2 2 200 0.2PDBs 28 1,064 21.9 38 6,654 9.0 66 7,718 9.8 31 1,078 23.8 56 9,890 12.0 87 10,968 12.6Rural banks 135 3,631 74.7 211 20,809 28.0 346 24,440 30.9 145 3,273 72.2 265 23,203 28.1 410 26,476 30.4Other institutions - - - 7 1,824 2.4 7 1,824 2.3 1 43 0.9 13 3,089 3.8 14 3,132 3.6

Total 168 4,861 100.0 374 74,259 100.0 542 79,120 100.0 183 4,536 100.0 496 82,515 100.0 679 87,051 100.0

ox RlaD I I

CY77 CY78Home industry /a Small industry /b Total Home industry /a Small industry /b TotalNo. Amt. % No. Amt. % No. Amt. % No. Amt. % No. Amt. Z No. Amt. %

STD Approved /aCommercial banks - - - 19 7,741 38.1 19 7,741 38.1 - - - 30 12,540 26.7 30 12,540 26.7NBFIs - - - 25 7,485 36.9 25 7,485 36.8 - - - 71 25,476 54.3 71 25,476 54.2PDBs - - - 7 2,195 10.8 7 2,195 10.8 1 40 57.1 14 4,885 10.4 15 4,925 10.5Rural banks 1 45 100.0 13 1,290 6.4 14 1,335 6.6 1 30 42.9 15 1,553 3.3 16 1,583 3.4Other institutions - - - 6 1,576 7.8 6 1,576 7.7 - - - 8 2,465 5.3 8 2,465 5.2

Total 1 45 100.0 70 20,287 100.0 71 20,332 100.0 2 70 100.0 138 46,919 100.0 140 46,989 100.0

STD Released /aCommercial banks - - - 30 9,166 42.4 30 9,166 42.2 - - - - 11,420 26.2 - 11,420 26.1NFBIs - - - 42 6,022 27.9 42 6,022 27.8 - - - - 23,571 54.0 - 23,571 53.9PDBs - - - 10 3,335 15.4 10 3,335 15.4 - - - - 4,205 9.6 - 4,205 9.6Rural banks 2 75 100.0 19 1,928 8.9 21 2,003 9.2 - 130 100.0 - 1,808 4.1 - 1,938 4.4Other institutions - - - 5 1,176 5.4 5 1,176 5.4 - - - - 2,645 6.1 - 2,645 6.0

Total 2 75 100.0 106 21,627 100.0 108 21,702 100.0 - 130 100.0 - 43,699 100.0 - 43,779 100.0

STD Repaid to IGLF /aCommercial banks 3 8 1.1 308 11,828 65.2 311 11,836 62.7 - - - - 10,997 57.6 - 10,997 55.9NDBIs - - - 41 156 0.8 41 156 0.8 - - - - 1,204 6.3 - 1,204 6.1PDBs 5 20 2.7 105 1,371 7.6 110 1,391 7.4 - 60 10.0 - 1,608 8.4 - 1,668 8.5Rural banks 176 707 95.3 412 4,379 24.1 588 5,086 26.9 - 538 90.0 - 4,255 22.3 - 4,793 24.3Other institutions 1 7 0.9 18 411 2.3 19 418 2.2 - - - - 1,022 5.4 - 1,022 5.2

Total 185 742 100.0 884 18,145 100.0 1,069 18,887 100.0 - 598 100.0 - 19,080 100.0 - 19,684 100.0

STD OutstandingCommercial banks - - - 174 43,605 50.6 174 43,605 48.5 - - - 198 44,049 39.8 198 44,049 38.6Nonbank institutions - - - 40 6,066 7.0 40 6,066 6.8 - - - 119 28,444 25.7 119 28,444 25.0Private development banks 31 1,058 28.3 63 11,854 13.8 94 12,912 14.4 31 1,998 29.4 72 14,138 12.8 103 15,136 13.3Rural banks 132 2,641 70.7 275 20,752 24.1 407 23,393 26.0 132 2,364 69.6 271 17,974 16.3 403 20,338 17.8Other institutions 1 36 1.0 18 3,854 4.5 19 3,890 4.3 1 36 1.0 26 5,958 5.4 27 5,994 5.3

Total 164 3,735 100.0 570 86,131 100.0 734 89,866 100.0 164 3,398 100.0 686 110,563 100.0 850 113,961 100.0

/a P 50,000 or below.7T Over P 50,000.Ic All STD are combined with a 60% guarantee.

AEP Projects DepartmentMay 1, 1979

rDx

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Characteristics of STD Approvals by Sector, July 1, 1974-December 31, 1975(P'000)

FY75 July-December 1975 /a CY76 CY77 CY78No. X Amt. % No. % Amt. x No. x Amt. % No. ¾ Amt. % No. ¾ Amt. %

ManufacturingFood & food products 43 12.3 8,177 15.0 10 10.0 1,486 6.9 16 12.3 3,577 12.2 4 5.6 1,178 5.8 12 8.6 4,295 9.1Beverages - - - - - - - - - - - - - - - - - - - -Tobacco - - - - - - - - - - - - - - - _ _ _ _ _

Textiles 14 4.0 1,215 2.2 9 9.0 1,288 6.0 - - - - 4 5.6 720 3.5 13 9.3 3,680 7.8Apparel/footwear/garments 95 27.2 10,434 19.1 18 18.0 3,220 15.0 29 22.3 5,137 17.6 9 12.7 2,210 10.9 11 7.9 3,597 7.7Wood & cork products 36 10.3 4,998 9.1 9 9.0 2,309 10.8 6 4.6 1,345 4.6 4 5.6 1,480 7.3 16 11.4 3,824 8.1Furniture & fixtures 22 6.3 2,473 4.5 4 4.0 635 3.0 16 12.3 3,679 12.6 3 4.2 1,140 5.6 9 6.4 3,235 6.9Paper & paper products 3 0.9 640 1.2 1 1.0 500 2.3 - - - - - - - - 2 1.4 1,000 2.1

Printing, publishing &allied industry 4 1.1 1,000 1.8 1 1.0 500 2.3 3 2.3 1,360 4.6 1 1.4 190 0.9 6 4.3 2,470 5.3

Leather & leather prod. 4 1.1 910 1.7 2 2.0 480 2.2 - - - - 1 1.4 275 1.3 4 2.9 1,650 3.5Rubber products 1 0.3 500 0.9 1 1.0 200 0.9 2 1.5 773 2.6 - - - - 3 2.1 1,265 2.7Chemicals 1 0.3 500 0.9 1 1.0 500 2.3 4 3.1 870 3.0 2 2.8 746 3.7 4 2.9 925 2.0Petrochemicals 8 2.2 2,350 4.3 - - - - - - - - - - - - - - - -Nonmetallic mineral prod. 16 4.6 1,518 2.8 - - - - 12 9.2 2,451 8.4 3 4.2 369 1.8 4 2.9 830 1.8Basic metal industries - - - - - - - - - - - - - - - - - - - -

Metal products 25 7.2 3,487 6.4 5 5.0 910 4.2 7 5.4 1,375 4.7 8 11.3 2,725 13.4 12 8.6 3,390 7.2Nonelectrical machinery/appliances 21 6.0 2,675 4.9 9 9.0 2,395 11.2 7 5.4 966 3.3 6 8.5 1,828 9.0 14 10.0 5,818 12.4

Electrical machinery/appliances 1 0.3 90 0.2 - - - - 2 1.5 840 2.9 3 4.2 1,322 6.5 2 1.4 1,000 2.1

Transport equipment - - - - - - - - 11 8.5 2,669 9.1 1 1.4 80 0.4 1 0.7 105 0.2

Miscellaneous mfgs. 48 13.8 12,709 23.2 28 28.0 6,062 28.3 8 6.2 1,540 5.3 18 25.5 4,179 20.6 20 14.2 7,305 15.6

Subtotal mfg. 342 97.9 53,676 98.2 98 98.0 20,485 95.4 123 94.6 26,582 90.9 67 94.4 18,442 90.7 133 95.0 44,389 94.5

Construction - - - - - - - - - - - - 1 1.4 440 2.2 1 0.7 500 1.1

Tourism - - - - 1 1.0 500 2.3 5 3.9 2,150 7.4 2 2.8 950 4.7 2 1.4 800 1.7Other services 7 2.1 995 1.8 1 1.0 500 2.3 2 1.5 488 1.7 1 1.4 500 2.4 4 2.9 1,300 2.7

Total 349 100.0 54,671 100.0 100 100.0 21,485 100.0 130 100.0 29,220 100.0 71 100.0 2 100.0 140 100.0 46,989 100.0

/a The totals for July-December 1975 do not agree with those for the same period in Annex 3, T-4 and T-5 due to historical errors which cannot now be recon-ciled.

AEP Projects DepartmentMay 15, 1979

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Characteristics of STD Approvals by Regions, July 1, 1974-December 31, 1978(p'OOO)

Regional distribution FY75 July-December 1975 /a CY76 CY77 CY78Region Location No. % Amt. % No. % Amt. % No. % Amt. % No. % Amt. % No. % Amt. Z

I Ilocos 86 24.7 6,418 11.7 16 16.0 1,059 4.9 5 3.8 1,220 4.2 1 1.4 95 0.5 6 4.3 650 1.4II Cagayan Valley 1 0.3 70 0.1 6 6.0 1,840 8.6 - - - - 1 1.4 450 2.2 - - - -III Central Luzon 41 11.7 8,293 15.2 13 13.0 3,315 15.4 25 19.2 3,232 11.1 9 12.7 3,035 14.9 16 11.4 4,233 9.0IV Metro Manila 53 438 29,256 53.5 43 43.0 11,249 52.4 32 24.6 10,662 36.5 25 35.2 8,765 43.1 51 36.5 22,185 47.2IVa Southern Tagalog } 1 3. , , 5 23 17.7 5,773 19.8 17 24.0 3,389 16.7 24 17.1 6,604 14.0V Bicol 1 0.3 100 0.2 4 4.0 472 2.2 10 7.7 2,195 7.5 3 4.2 770 3.8 4 2.9 1,265 2.7 a,VI Western Visayas 20 5.7 2,920 5.4 2 2.0 380 1.8 11 8.5 1,929 6.6 4 5.6 754 3.7 7 5.0 2,375 5.1VII Central Visayas 36 10.3 5,352 9.8 11 11.0 2,235 10.4 16 12.3 2,421 8.3 6 8.5 1,619 8.0 17 12.1 6,050 12.9VIII Eastern Visayas 8 2.3 862 1.6 2 2.0 265 1.2 - - - - 1 1.4 275 1.3 2 1.4 560 1.2IX Western Mindanao - - - - 3 3.0 670 3.1 1 0.8 420 1.4 - - - - - - - -X Northern Mindanao 1 0.3 400 0.7 - - - - 4 3.1 1,060 3.6 1 1.4 500 2.4 4 2.9 1,050 2.2XI Southern Mindanao 2 0.6 1,000 1.8 - - - - 1 0.8 160 0.5 2 2.8 240 1.2 7 5.0 1,267 2.7XII Central Mindanao - - - - - - - - 2 1.5 148 0.5 1 1.4 440 2.2 2 1.4 750 1.6

Total 349 100.0 54,671 100.0 100 100.0 21,485 100.0 130 100.0 29,220 100.0 71 100.0 20,332 100.0 140 100.0 46,989 100.0

/a The total amounts for July-December 1975 do not agree with those for the same period in Annex 3, T-4 and T-5 due to historical errors.

AEP Projects DepartmentMay 15, 1979

Iz{X

-64- ANNEX 4T-6

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Characteristics of STD Approvals by Size, Purpose and Maturity,January 1, 1976-December 31, 1978

CY76 CY77 CY78No. % Amt. % No. % Amt. % No. % Amt. %

Size of LoanP 50,000 and below 15 11.5 683 2.3 3 4.2 125 0.6 3 2.1 100 0.2P 50,001 - 200,000 65 50.0 7,705 26.4 29 40.8 3,550 17.5 42 30.0 5,050 10.7P 200,001 - 500,000 50 38.5 20,832 71.3 39 55.0 16,657 81.9 95 67.9 41,839 89.1P 500,001 - 800,000 - - - - - - - - - - - -

Total 130 100.0 29,220 100.0 71 100.0 20,332 100.0 140 100.0 46,989 100.0

Average SizeHome industry loans /a 45.5 41.7 33.3Small industry loans7b 248.1 297.2 342.3Overall 224.8 286.4 335.6

Purpose of LoanFixed assets 125 52.7 21,017 71.9 65 54.2 14,969 73.6 136 58.4 38,711 82.4Working capital 107 45.2 8,086 27.7 54 45.0 5,248 25.8 97 41.6 8,278 17.6Other 5 2.1 117 0.4 1 0.8 115 0.6 - - - -

Total 130/c 100.0 29,220 100.0 71/c 100.0 20,332 100.0 140/c 100.0 46,989 100.0

Maturity of Loans

) - 3 years 107 47.1 7,907 27.0 54 46.2 5,324 26.2 96 41.6 8,351 17.83 - 5 years 74 32.6 11,734 40.2 34 29.0 9,021 44.4 39 16.9 10,273 21.95 - 7 years 9 4.0 1,585 5.4 14 12.0 3,354 16.5 50 21.6 17,780 37.87 - 10 years 37 16.3 7,994 27.4 15 12.8 2,633 12.9 46 19.9 10,585 22.5

Total 130/c 100.0 29,220 100.0 71/c 100.0 20,332 100.0 140/c 100 46,989 100

Average Maturity (years)By number 7.6 7.2 7.4By amount 5.1 4.4 5.4

/a P 50,000 or below.

/b Over P 50,000.

/c Individual numbers do not add up to total because of multipurpose loans.

AEP Projects DepartmentMay 15, 1979

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Features of Subprojects Financed Under IBRD Loan No. 1120-PH by Size of Loan and Size of Borrower's Assets(As of December 31, 1978)

IncrementalProjects Total cost IGLF/IBRD employment Incremental sales Averagefinanced of projects resources Investment Export Domestic Total borrower's

Number % Amount % Amount % Number per worker /b Amount % Amount % Amount % assets /a(P'000) (P'000) (P) (P'000) (P'O00) (P'WOO) (P'wOO)

Size of LoanP 50,000 and below 20 5.1 2,073 0.9 1,000 0.8 142 14,599 - - 3,028 1.0 3,028 0.9 103P 50,001 - 200,000 137 31.9 32,692 14.4 7,201 14.5 2,417 13,526 2,788 5.8 74,015 23.4 76,803 21.1 177P 200,001 - 500,000 236 60.0 192,801 84.7 100,753 84.7 7,330 26,303 44,990 94.2 238,757 75.6 283,747 78.0 576p 500,001 - 800,000 - - - - - - - - - - - - - - -

Total 393 100.0. 27,5661 100.0 118,954 100.0 9,889 23,012 47,778 100.0 315j800 100.0 363,578 100.0 413

Size of Borrowers' Assets /aP 100,000 and below 84 21.5 14,889 6.6 3,873 3.3 790 18,846 25,545 53.5 30,394 9.6 55,939 15.4 -P 100,001 - 500,000 192 49.3 101,876 45.1 81,286 69.2 4,187 24,331 5,771 12.1 138,828 44.0 144,599 39.8 -P 500,001 - 1,000,000 102 26.1 83,088 36.8 26,980 23.0 4,485 18,526 8,554 17.9 137,701 43.6 146,255 40.2 -Over P 1,000,000 12 3.1 25,970 11.5 5,300 4.5 368 70,570 7,908 16.5 8,877 2.8 16,785 4.6 -

Total /c 390 100.0 225,823 100.0 117,439 100.0 9,830 22,973 47,778 100.0 315,800 100.0 363,578 100.0 -

/a At the time of loan application to IGLF./b Incremental project cost divided by the incremental number of workers.7T Three subprojects did not report their respective asset sizes and are therefore not included in this distribution.

AEP Projects DepartmentMay 1, 1979

. 4x

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Features of Subprojects Financed Under IBRD Loan No. 1120-PH by Industry(As of December 31, 1978)

IncrementalProjects Total cost IGLF/IBRD employment Incremental sales Averagefinanced of projects resources Investment Export Domestic Total borrowers'

Number % Amount B Amount X Number per worker /b Amount % Amount % Amount % assets /a(P'DDD) (P'OOO) (8) (P'OOO) (P'OOO) (a'000) (P'O00)

Food & food products 27 6.9 11,693 5.1 7.036 5.9 438 26,696 541 1.1 13,327 4.2 13,868 3.8 269Beverages - - - - - - - - - - - - - - -

Tobacco products - - - - - - - - - - - - - - -

Textiles 16 4.1 8,838 3.9 4,591 3.9 455 19,424 1,209 2.5 12,918 4.1 14,127 3.9 786Footwear/apparel/garments 45 11.5 21,387 9.3 12,666 10.6 1,228 17,416 5,364 11.2 30,159 9.6 35,523 9.8 286Wood & cork products 35 8.9 23,527 10.3 9,685 8.1 1,153 20,405 1,899 4.0 34,155 10.8 36,054 9.9 519Furniture & fixtures 26 6.6 17,499 7.6 8,484 7.1 1,148 15,243 9,483 19.8 16,114 5.1 25,597 7.0 479Paper & paper products IPrinting, publishing & } 15 3.8 9,963 4.3 6,205 5.2 414 24,065 - - 18,302 5.8 18,302 5.0 531allied industries I

Leather & leather products 9 2.3 5,640 2.5 3,005 2.5 142 39,718 21,070 44.1 10,034 3.2 31,104 8.6 281Rubber products 6 1.5 4,617 2.0 2,615 2.2 392 11,778 250 0.5 8,919 2.8 9,169 2.5 342Chemical & chemical products 15 3.8 9,800 4.3 4,476 3.8 316 31,013 - - 23,003 7.3 23,003 6.3 512Nonmetallic mineral products 14 3.6 6,040 2.6 2,721 2.3 217 27,834 - - 9,647 3.0 9,647 2.7 221Basic metal industries - - - - - - - - - - - - - -

Metal products 24 6.1 13,860 6.1 7,490 6.3 445 31,146 561 1.2 15,850 5.0 16,411 4.5 420Electrical machinery/

appliances 7 1.8 7,991 3.5 3,422 2.9 105 30,743 - - 4,962 1.6 4,962 1.4 662Nonelectrical machinery/

appliances 40 10.2 28,483 12.9 11,866 10.0 706 41,761 - - 30,645 9.7 30,645 8.4 522Transport equipment 6 1.5 3,596 1.6 1,950 1.6 300 11,987 - - 8,511 2.7 8,511 2.3 510Miscellaneous manufactures 83 21.1 40,404 17.7 23,554 19.9 1,936 20,870 7,213 15.2 69,479 22.0 76,692 21.2 327Tourism services 10 2.5 7,771 3.4 4,400 3.7 181 42,934 - - 5,075 1.6 5,075 1.4 406Other services 14 3.6 5,837 2.6 4,288 3.6 253 23,071 188 0.4 4,700 1.5 4,888 1.3 201Construction 1 0.2 620 0.3 500 0.4 60 10,333 - - - - - - 870

Total 393 100.0 227,566 100.0 118,954 100.0 9,889 23,012 47,778 100.0 315,800 100.0 363,578 100.0 413

/a At the time of loan application to IGLF./b Incremental project cost divided by the incremental number of workers.

AEP Projects DepartmentMay 15, 1979

0.

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Features of Subprojects Financed Under IBRD Loan NO. 1120-PH by Geographical Distribution(As of December 31, 1978

IncrementalProjects Total cost IGLF/IBRD employment Incremental sales - Average

Region financed of projects resources Investment EXPOrt DOmeStiC Total borrowersNo. Name Number % Amount % Amount % Number per worker /b Amount I Amount Y Amount I assets /a

(P,000) (e'000) ( (P') (PW (P'OOO) ('0OOO) (P'OOOT

I IlOCQS 14 3.6 3,641 1.6 2,567 2.2 318 11,450 77 0.1 10,269 3.3 10,346 2.8 440

II Cagayan Valley 1 0.2 696 0.3 450 0.4 36 19,333 - - 154 0.1 154 - 246

III Central Luzon 50 12.7 26,310 11.5 13,295 11.2 1,512 17,008 12,691 26.6 17,915 5.7 30,606 8.4 423

IV Metro Manila 148 37.7 106,743 46.9 54,617 45.9 3,976 26,847 28,220 59.1 161,652 51.2 189,872 52.3 661

IVa Southern Tagalog 60 15.3 37,563 16.5 17,341 14.6 1,766 21,270 1,722 3.6 48,758 15.4 50,480 13.9 511

V Bicol 19 4.8 7,415 3.3 4,602 3.9 602 12,317 1,394 2.9 14,636 4.6 16,030 4.4 263 1

VI Western Visayas 27 6.9 9,211 4.0 5,795 4.9 434 21,224 483 1.0 10,438 3.3 10,921 3.1 247 s

VII Central Visayas 43 10.9 21,345 9.4 11,832 9.9 648 32,940 2,969 6.2 27,942 8.8 30,911 8.5 330

VIII Eastern Visayas 4 1.0 1,337 0.6 885 0.7 38 35,184 - - 712 0.2 712 0.2 226

IX Western Mindanao 2 0.5 1,283 0.6 740 0.6 42 30,548 _ 4,761 1.5 4,761 1.3 214

X Northern Mindanao 10 2.5 4,757 2.1 2,865 2.4 302 15,752 - - 4,735 1.5 4,735 1.3 364

XI Southern Mindanao 12 3.1 5,605 2.5 3,117 2.6 171 32,777 222 0.5 12,296 3.9 12,518 3.4 350

XII Central Mindanao 3 0.8 1,660 0.7 848 0.7 44 37,727 - - 1,532 0.5 1,532 0.4 305

Total 393 100.0 227,566 100.0 118,954 100.0 9,889 23,012 47,778 100.0 315,800 100.0 363,578 100.0 413

/a At the time of loan application to IGLF.lb Incremental project cost divided by the increaental number of workers.

AEP Projects Department

May 1, 1979

1 B

-68-

AMNEX 4T-10

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Economic and Financial Rates of Return on IGLF Projects Financed by PDCP and PISO /a

Type of Total proj. Amount ofproject cost IGLF financing ERR FRR

(F '000) (P '000) (X) Cl)

Food and Food Products1. BSQ Food Industries New 1,296 500 32.5 22.52. Del-Sue Agri-Marina Export New 285 140 108.0 51.63. San Jose Marina Entpr., Inc. Expansion 750 500 90.7 25.8

Textile1. Bitong Textile Industries Expansion 780 500 25.9 20.3

Footwear/Apparel/Garments1. Cora Abella Expansion 300 280 54.2 40.52. Marcia Garment Co., Inc. Expansion 137 100 132.7 73.03. Turtle Jeans Expansion 207 100 215.5 84.74. Japsons Apparel Intl., Inc. Expansion 500 500 53.5 24.55. Britedale Garments, Inc. Expansion 500 500 95.8 39.8

Wood and Cook Products1. Tropical Novelties

& Shellcraft, Inc. Expansion 621 450 52.7 29.92. Agsur Forest Products, Inc. New 616 250 83.7 26.53. CYM Industries New 302 150 106.3 -

Furniture and Fixtures1. Interiors Home Furnishers Expansion 1,436 500 53.7 37.22. Las Islas Construction

& Furnishing Corp. Expansion 500 500 17.2 18.1

Printing, Publishing andAllied Industry1. R.0. Tesoro Sons, Inc. Expansion 400 400 81.3 33.12. Diolosa Publishing

House, Inc. Expansion 500 500 40.4 28.0

Leather & Leather Product1. Rictmark Expansion 470 300 29.3 24.9

Rubber1. Bitanga Manufacturing Corp. Expansion 500 500 35.5 29.3

Chemicals1. Johnson Rubber & Plastic

Products Expansion 300 280 54.2 40.52. Weedcon Philippines, Inc. Expansion 370 370 68.5 41.8

Metal Products1. Alta Metallurgical

Fabricators, Inc. Expansion 808 500 43.9 19.02. VLM Metalcraft Expansion 500 500 39.2 27.03. Mindanao Metalwealth Co., Inc. Expansion 854 450 69.9 31.24. Schneider Parts Mfg. Expansion 726 500 58.2 39.95. AB Industries Expansion 564 500 115.3 82.66. Roxas Parts & Accessories, Inc.Expansion 500 500 72.0 21.07 Fast & Good Spring Mfg. Corp. Expansion 500 500 28.2 18.68 Kar Axes Philippines Expansion 200 200 45.3 21.5

Miscilleneous Manufactures1. Javellana Ice & Cold Storage Expansion 552 500 32.6 24.02. Specialists in Livestock

and Poultry, Inc. Expansion 700 500 65.8 36.8

Weighted average 59.2 32.0

/a Includes a representative sample of PDCP's IGLF projects and all ofPISO's IGLF projects.

AEP Projects DepartmentFebruary 15, 1979

- 69 -

ANNEX 4T-11

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Summarized Balance Sheets as of December 31, 1974-78(P '000)

As of December 31,

1974 1975 1976 1977 1978

AssetsDue from Central Bank 970.6 2,825.3 9,531.3 5,586.1 5,782.6Accounts receivable from:NEDA 276.2 276.2 276.2 276.2 276.2USAID PL480 165.0 205.0 245.0 - -EXIM Bank 900.0 800.0 - - -

Temporary investments 11,617.8 20,294.0 25,762.9 46,089.1 42,417.3Special time deposits outstanding 42,080.3 79,120.7 87,051.0 89,865.7 113,961.2

Total Assets 56,009.9 103,521.2 122,866.4 141,817.1 162,437.3

Liabilities and Net WorthAccounts payable 1,125.0 1,015.8 299.2 819.8 38.1Accounts payable to treasurer ofthe Philippines /a - 77.5 1,898.2 3,441.7 3,445.3

Reserve for deficiencies on EXIMloan amortization 8.1 108.4 203.9 330.7 446.6

Advances for EXIM loan amortization 0.9 0.9 0.9 0.9 0.9

Subtotal 1,134.0 1,202.6 2,402.2 4,593.1 3,930.9

Long-term loans due to EXIM Bank 23,648.7 23,029.1 22,378.3 21,695.2 20,979.1Long-term loans due to IBRD - 17,070.8 32,718.5 41,288.4 59,612.4

Subtotal 23,648.7 40,099.9 55,096.8 62,983.6 80,591.5

Provisions for possible losses 1,000.0 1,000.0 1,000.0 1,600.0 2,505.0

Total Liabilities 25,782.7 42,225.0 58,499.0 69,176.7 87,027.4

Accumulation from counterpart funds 19,000.0 49,000.0 49,000.0 59,000.0 59,000.0Earned surplus 11,227.2 12,218.7 15,367.4 13,640.4 16,409.9

Total Net Worth 30,227.2 61,218.7 64,367.4 72,640.4 75,409.9

Total Liabilities and Net Worth 56,009.9 103,521.2 122,866.4 141,817.1 162,437.3

RatiosCurrent ratio /b 11.1:1 19.2:1 14.7:1 11.3:1 12.3:1Debt/equity ratio /c 0.8:1 0.7:1 0.9:1 0.9:1 1.1:1

/a Interest and commitment fee on IBRD loan.

/b Current assets include due from Central Bank and temporary investments.

/c Accumulated counterpart funds are treated as equity.

AEP Projects DepartmentMay 15, 1979

-70-

ANNEX 4T-12

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Summarized Income Statements, CY74-78(P '000)

1974 1975 1976 1977 /a 1978

IncomeInterest income on STD loans 1,002.1 1,983.3 3,781.9 3,920.8 4,267.7Interest income on temporaryinvestments 1,148.1 680.7 2,469.2 3,326.3 5,328.1

Guarantee fees 10.5 186.0/b 732.3 423.3 518.3

Total Income 2,161.7 2,850.0 6,983.4 7,670.4 10,114.1

ExpensesAdministrative expenses 340.9 559.3 954.0 785.7 1,216.5Interest expense on EXIM Bankloans 951.6 929.0 905.0 879.7 853.3

Interest expenses & commitmentfees on IBRD loans /c - 77.5 1,898.2 3,441.7 4,269.8

IGLF promotional expenses /d 50.0 288.1 155.0 170.2 100.0

Total Expenses 1,342.5 1,853.9 3,912.2 5,277.3 6,439.6

Profit Before Provisions 819.2 996.1 3,071.2 2,393.1 3,674.5

Provision for possible losses 1,000.0 - - 600.0 905.0

Net Profit (Loss) (180.8) 996.1 3,071.2 I,793.1 2,769.5

Ratios at % of Avg Total AssetsGross income 3.9 3.6 6.2 5.8 6.6Financial expenses 3.5 1.3 2.5 3.7 4.0Gross margin 0.4 2.3 3.7 2.1 2.6Admin./promotional expenses 0.7 1.1 1.0 0.7 0.9Net income (deficit) - 1.2 2.7 1.4 1.7

/a For 1977, IGLF accounts were audited by the Office of the Auditor of the CentralBank and an audit report was completed.

/b Includes miscellaneous income of P 23,500.7& Accumalated interest on IBRD loan in respect of 1975 and 1976 was paid by IGLF

in 1977 and charged to earned surplus. To present a comparable picture summari-zations of the past years have been suitably adjusted.

/d Promotional expenses were allocated to NEDA and other non-Central Bank agenciesrepresented at the Review Committee, upon approval of the Review Committee.

AEP Projects DepartmentMay 15, 1979

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Analysis of IGLF Portfolio(P'000)

Loans Loans affectedaffected Total as Z of loans

Total STDs outstanding by arrears Arrears arrears as outstanding-No. of No. of No. of Prin- Interest % of loans By Bybanks projects Amount banks Amount cipal etc. Total outstanding number amount

Arrears of financialinstitutions to IGLF

September 30, 1975 109 n.a. 68,602 n.a. n.a. n.a. n.a. 985. 2.2 n.a. n.a.

March 31, 1977 160 690 88,007 75 28,089 n.a. n.a. 7,510 8.5 53.6 31.9

June 30, 1977 142 702 86,714 82 31,603 7,302 1,687 8,989 10.4 57.7 36.4

September 30, 1977 142 719 87,816 86 27,252 7,835 1,744 9,579 10.9 60.6 31.0

December 31, 1977 144 732 89,866 106 33,132 9,861 2,212 12,073 13.4 73.6 36.9

March 31, 1978 146 747 89,153 113 35,594 11,211 2,509 13,720 12.6 77.4 39.9

June 30, 1978 133 749 92,260 80 36,385 11,808 2,920 14,728 16.0 60.2 39.4

September 30, 1978 132 776 101,274 89 37,253 13,103 3,025 16,128 15.9 67.4 36.8

December 31, 1978 133 687 113,961 94 42,435 14,936 3,336 18,272 16.0 70.7 37.2

AEP Projects DepartmentMay 1, 1979 a

- 72 - ANNEX 4T-14

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Analysis of Arrears on IGLF Portfolio,/a as of December 31, 1978

(P '000)

Loans affectedTotal STDs Loans affected Total as % of loansoutstanding by arrears Arrears arrears as outstanding

Type of No of No. of Prin- In- % of loans By Byinstitutions projects Amount projects Amount cipal terest Total outstanding number amount

Commercial banks 157 44,049 56 15,960 4,986 1,184 6,170 14.0 35.5 36.2

Rural banks 321 20,338 222 .13,707 5,845 1,273 7,118 35.0 69.1 67.4Nonbank-financial

intermediaries 88 28,444 4 1,169 20 39 59 0.2 4.5 4.1Private development

banks 96 15,136 77 9,995 3,839 748 4,587 30.3 80.2 66.0Other banks 25 5,994 12 1,604 246 92 338 5.6 48.0 26.8

Total 687 131 3 42,435 14,936 - 3,336 18,272 16.0 54.0 37.2

Principal Interest, etc. TotalAging of arrears Amount % Amount % Amount %

0-3 months 1,132.0 7.6 355 10.6 1,487 8.1Over 3-6 months 393.0 2.6 111 3.4 504 2.8Over 6-12 months 1,741.0 11.7 468 14.0 2,209 12.1

Over 12-24 months 4,222.0 28.2 1,037 31.1 5,259 28.8Over 24 months 7,448.0 49.9 1,365 40.9 8,813 48.2

Total 14,936 100 3,336 100 18,272 100

/a Arrears of financial institutions to IGLF.

AEP Projects Department

May 15, 1979

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Trend of Arrears Between Participating Institutions and End-Users of IGLF /a

Arrears ratios of reporting Arrears ratios of reporting financialfinancial institutions institutions (excluding rural banks)

Total arrears Loans affected as Z Total arrears Loans affected as Zas % of loans of loans outstanding as % of loans of loans outstandingoutstanding By number By amount outstanding By number By amount

A. Arrears Position by Semester(6/30/76 - 9/30/78)

June 30, 1976 21.4 41.4 55.6 25.4 67.9 64.5December 31, 1976 18.3 52.8 47.6 18.3 53.8 45.5June 30, 1977 24.3 47.8 54.4 23.8 58.5 55.5 4

December 31, 1977 27.3 59.9 62.6 25.2 53.3 60.7June 30, 1978 33.3 60.6 62.0 30.6 n.a. n.a.December 31, 1978 23.8 42.4 41.9 19.2 48.6 41.6

Loans Arrears ratiosLoan amount affected Total arrears Loans affected as Zoutstanding by arrears Arrears as Z of loans of loans outstandingNo. Amt. No. Amt. Principal Interest Total outstanding By number By amount

B. Arrears as of December 31, 1978Commercial banks 85 19,661 52 12,475 6,017 2,472 8,489 43.2 61.2 63.4Nonbank financial institutions 288 32,235 38 4,509 287 236 523 1.6 13.2 14.0Private development banks 57 9,875 32 5,038 1,835 807 2,642 26.7 56.1 51.0Rural banks 188 9,182 137 7,250 3,777 1,262 5,039 54.9 72.9 79.0Other institutions 7 841 6 803 257 110 361 43.6 85.7 95.5

Total 625 71,794 265 30,075 12,173 4,887 17,060 23.8 42.4 41.9

/a These data are based on a quarterly survey which does not consistently reach the same participating institutions from period to period.The absolute figures are therefore not included and the comparison is done on a percentage basis.

AEP Projects Department -zMay 15, 1979 x

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Projected Operations CY 79-82

1978 (Actual) '1979 1980 1981 19821 /a Med-scale/a Sml-scale/a m.dl-scale/a Med-scale/a Sml-scale/a Med-scale>/ Sal-scale> 1Med-sale/

industry industry Total industry industry Total industry industry Total industry industry Total industry industry Total

Approvals

Accreditedinstitutions 45,406 - 45,406 65,000 20,000 85,000 71,500 40,000 111,500 78,650 44,000 122,650 86,515 48,400 134,915

Rural banks 1,583 1,583 20,000 - 20,000 20,000 - 20,000 22,000 - 22,030 24,200 - 24,200

Total 46,989 - 46,989 85,000 20,000 105,000 91,500 40,000 131,500 100,650 44,000 144,650 110,715 48,400 159,115

Disbursements .

Accreditedinstitutions 41,841 - 41,841 63,900 19,000 82,900 71,175 39,000 110,175 79,293 42,800 122,093 86,122 48,180 134,302

Rural backs 1,938 1,938 19,100 - 19,100 20,000 - 20,000 21,900 - 21,930 24,090 - 24,090

Total 43,779 - 43,779 83,000 19,000 102,000 91,175 39,000 130,175 101,193 42,800 143,993 110,212 48,180 158,392

Repayments 19,684 - 19,684 25,071 - 25,071 38,256 3,739 41,995 49,456 11,937 61,393 60,835 18,727 79,562

Oustanding STDs 113,961 - 113,961 171,890 19,000 190,890 224,809 54,261 279,070 276,546 85,124 361,670 325,923 114,577 440,500

/a Loans of P 50,000 - 800,000 are, by difinition, for small-scale industry, while loans of e 800,000 to 2.5 million are for medics-scale industry.

AEP Projects Department

May 17, 1979

-75-

ANNEX 4T-17

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Resource Position as of December 31, 1978

Amount

Original Resources

Subaccount A - USAID counterpart funds (1952) 19,000Subaccount 1 - EXIM Bank loan ICAX 92-1 (1956) 13,045Subaccount 2 - EXIM Bank loan ICAX 92-2 (1957) 14,993Subaccount B - USAID PL-480 (1964) 1,000

Total - original resources 48,038

Less: Repayments as of September 30, 1978 8,059

Net original resources 39,979

New Resources

Subaccount A-1 - National government contribution 40,000/aSubaccount 3 - IBRD loan (US$12 million) 85,000

Total resources raised 164)979

Add: accumulated surplus 16,903

Total resources available 181,882

Less: Outstanding STDs/DS 113,961Unreleased commitments 3,198Minimum liquidity needs 10,000 127,159

Balance available for commitments as of December 31, 1978 54,723

/a Includes component of P 10 million which is specifically earmarked forfinancing export-oriented projects.

AEP Projects DepartmentMay 1, 1979

-76-

ANNEX 4T- 18

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Projected Balance Sheets, December 31, 1979-82(p '000)

Actual Projected1978 1979 1980 1981 1982

AssetsDue from Central Bank 5,783 1,354 1,773 11,059 2,610Accounts receivable 276 276 276 276 276Temporary investments 42,417 68,417 56,417 56,417 21,417Special time deposits outstanding 113,961 190,890 279,070 361,670 440,500

Total assets 162,437 260,937 337,536 429,422 464803

Liabilities and Net WorthAccounts payable 38 38 38 38 38Accounts payable to treasurer of

the Philippines /a 3,445 3,388 6,156 8,796 10,205Reserve for deficiencies on EXIM

loan amortization 448 448 448 448 448

Subtotal 3,931 3,874 6,642 9,282 10,691

Long-Term LoansEXIM Bank 20,979 20,262 19,510 18,722 17,896IBRD 59,612 103,653 171,179 253,107 252,389

Subtotal 80,591 123,915 190,689 271,829 270,285

Provisions for possible losses 2,505 3,505 5,005 7,005 9,505

Total liabilities 87,027 131,294 202,336 288,116 209,481

Accumulated counterpart funds 59,000 109,000 109,000 109,000 134,000Earned surplus 16,410 20,643 26,200 32,306 40,322

Total net worth 75,410 129,643 135,200 141,306 174,322

Total liabilities and net worth 162,437 260,937 337,536 429,422 464,803

RatiosCurrent ratio /b 12.3:1 18.0:1 8.8:1 7.3:1 2.2:1Debt/equity /c ratio 1.1:1 1.0:1 1.5:1 3.7:1 1.6:1

/a Interest payable on IBRD Loan./ b Current assets include due from Central Bank and temporary investments./c Accumulated counterpart funds are treated as equity.

AEP Projects DepartmentMay 17, 1979

-77-

ANNEX 4T- 19

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Projected Cash Flow, CY 79-82(P '000)

1979 1980 1981 1982

Cash Inflow:Beginning Balance 5,783 1,354 1,773 11,059Receipts from operations:

Interest income 14,180 21,427 27,213 31,957Guarantee Fees 866 1,450 2,120 2,748

Repaymenta on Principal on STD 25,071 41,995 61,393 79,562Philippine Govt's contribution 50,000 - - 25,000Draw-downs on IBRD loan 46,246 72,281 87,088 4,877Sale of short-term securities - 12,000 - 35,000

Total Cash Available 142,146 150,507 179,587 190,203

Cash OutflowAdministrative expenses 2,216 2,717 2,874 3,050Doebt service:

Exim Bank loan repayment 717 752 788 826Exim Bank loan interest 821 792 761 729IBRD loan repayment 2,205 4,755 5,160 5,595IBRD loan interest /a 6,833 9,543 14,952 19,001

Loan releases - STD 102,000 130,175 143,993 158,392Investment in short-term securities 26,000 - - -

Total Cash Outlay 140,792 148,734 168,528 187,593

ENDING BALANCE 1,354 1,773 11,059 2,610

Debt service cover (times) 3.5 3.3 3.5 3.9

/a Adjusted for the year and payable amount.

AEP Projects Department

May 17, 1979

-78-

ANNEX 4T- 20

PHILIPPINES

INDUSTRIAL GUARANTEE AND LOAN FUND

Projected Income Statement, CY79-82(P 'o0o)

1978Actual 1979 1980 1981 1982

Income

Interest income on STDs andinvestments 9,596 14,180 21,427 27,213 31,957

Guarantee fees 518 866 1,450 2,120 2,748

Gross income 10,114 15,046 22,877 29,333 34,705

Expenses

Administrative expenses 1,217 2,216 2,717 2,874 3,050Interest expenses

EXIM Bank 853 821 792 761 729IBRD loans /a 4,370 6,776 12,311 17,592 20,410

Provision for possiblelosses on guaranteed loans 905 1,000 1,500 2,000 2,500

Total expenses 7,345 10,813 17,320 23,227 26,689

Net Income 2,769 4,233 5,557 6,106 8,016

Ratios as % of averagetotal assets

Gross income 6.6 7.1 7.6 7.6 7.8Financial expenses /b 4.0 4.1 4.9 5.3 5.3Gross margin 2.6 3.0 2.7 2.3 2.5Administrative expenses 0.9 1.0 0.9 0.7 0.7Net income 1.7 2.0 1.8 1.6 1.8

/a Including commitment charges./b Including provisions for possible losses.

AEP Projects DepartmentMay 17, 1979

-79-ANNEX 4T-21

PHILIPPINES

MEDIUM AND SMALL INDUSTRIES COORDINATED ACTION PROGRAM

Summary of MASICAP Projects, 1973 to September 30, 1978

Decision Stage No. of Projects

A. Projects on which MASICAP Committed toProvide AssistanceCompleted and submitted for financing or licensing 4,466Discontinued during feasibility study 573Shelved or still in process 271

Total 5,310

B. Assistance Rendered (completed projects)Submitted for financing 4,090Submitted for licensing 246Other 130

Total 4,466

C. Status of Projects Submitted for FinancingApproved 2,135Disapproved 235Withdrawn without appraisal 851Still awaiting decision 869

Total 4,090

D. Status of Projects Approved for FinancingMoney released 1,890Money awaiting release 191Project dropped by proponent 54

Total 2,135

AEP Projects DepartmentFebruary 15, 1979

-80-

ANNEX 4T-22

PHILIPPINES

MEDIUM AND SMALL INDUSTRIES COORDINATED ACTION PROGRAM

Status of MASICAP Projects, 1973 to September 30, 1978

1973 1974 1975 1976 1977 1978/a Total

A. MASICAP Commitments 13 364 1,398 1,525 1,050 960 5,310

Of which:- discontinued 2 93 105 173 150 50 573- completed or in process 11 271 1,293 1,352 900 910 4,737

B. Submitted for Financing orLicensing 3 219 1,264 1,264 925 791 4,466

Of which:- withdrawn without appraisal 0 27 154 291 236 143 851- approved 1 48 563 864 544 491 2,511- disapproved 0 1 43 106 62 23 235- awaiting decision (year end) 2 143 504 3 83 134 869

C. Status of Projects Approvedfor Financing or Licensing 1 48 563 864 544 491 2,511

Of which:- dropped by payment 0 3 8 13 19 11 54- awaiting release 1 12 68 76 21 13 191- released 0 33 487 775 504 467 2,266

/a First three quarters only.

AEP Projects DepartmentFebruary 15, 1979

-81-

ANNEX 4T-23

PHILIPPINES

THE SECOND SMALL AND MEDIUM INDUSTRIES DEVELOPMDENT PROJECT

Disbursement Schedule for the Proposed IBRD Loan /a(US$ million)

Disbursements by quarter Cumulative disbursementsIGLF MASICAP Total IGLF MASICAP Total

1979October-December 2.55/b - 2.55 2.55 - 2.55

1980January-March 1.50 0.10 1.60 4.05 0.10 4.15April-June 2.40 0.10 2.50 6.45 0.20 6.65July-September 2.50 0.05 2.55 8.95 0.25 9.20October-December 2.50 0.05 2.55 11.45 0.30 11.75

1981January-March 2.95 0.05 3.00 14.40 0.35 14.75April-June 2.95 0.05 3.00 17.35 0.40 17.75July-September 2.95 0.05 3.00 20.30 0.45 20.75October-December 2.95 0.05 3.00 23.25 0.50 23.75

1982January-March 1.00 - 1.00 24.25 0.50 24.75April-June 0.25 - 0.25 24.50 0.50 25.00

/a Assuming that the loan would become effective in September 1979.

/b Includes a backlog of undisbursed commitments.

AEP Projects DepartmentFebruary 15, 1979

-82- ANNEX 4C-1

PHILIPPINESINDIUSTRIAL GUARANTEE AND LOAN FUND

Organization Chart of the IGLF Unit as of November 30, 1978

IIIGLF Unit Secretary

Assistant Di rector (1) | (a 1

Jw_Special Loan Officer ( I Division Chief Coordinating Assistant

Staff icer (11)(1) (1 ]

Supervising loan Clerical StaffEvaluator (1 l(6)

Loan Investigators Loan Evaluators &(2) Examiners-/ (15)

SuLmmary of StaffProfessionals 23Data/Account Analysts& Bookkeeperrs 6

Secretarial 1

Total 30

;1/ InclhLiles an Industrial Engirneer

VVorld Bank-- 20052

ANNEX 4C-2

- 83 -

PHI LIPPINESINDUSTRIAL GUARANTEE AND LOAN FUND

Proposed Organization of the IGLF Unit

Director

IGLF UnitAssistant Director

IEResearch andRura Bank Di son E on l Foloa l l Accounting Dv son

Division Ohief up Division Promotiona DhivisiontonDvsinDiiin he

DvsnCifDivision ChieDvsnCef Division Cheff

Pofessional & Professional & Professional & Professional & Professional &Clerical Staff Clerical Staff Clerical Staff Clerical Staff Clerical Staff

World Bank - 20051

PHI LIPPINESMEDIUM AND SMALL SCALE INDUSTRIES COORDINATED ACTION PROGRAM

PROPOSED ORGANIZATION

NATIONALCOORDINATOR

ASSISTANTNATIONAL

COORD INATORS

| MASICAP F l MASICAP F l MASICAP MASICAP MASICAP MASICAP A A ATECHNICAL . TECHNICAL | TECHNICAL TECHNICAL TECECHNICAL NICAL TECHNICAECHNCHNICAL TECHNICAL

_ STAFF l _ STAFF L STAFF _ S'AFF STAFF STAFF STAFF STAFF STAFF

STL ~~~STL STL STLSTSLSLSTS| North West-| 4 North East- So-th-ern STL wer No hr Southe.rn Southwest-

rer Luron c err Lazon L.- Tagalog Bi-o V-sva mm a | =ieda

-|TEAM 1 l - TEAM 1 TEA 1| TEAM 1 TEA| TEAM 1 TEA TEA 1 TEAM 1

TEAM 2 I I TEAM 2 ! TEAM 2 I TEAM 2 T]A 2 TEA 2 TEA 2EA

FEAW11~~~~AM 'EA!LM2 I:X3 TEM3 CEAM 13N1 1I M

-= i E1 L - 1

AM4~~ -EV.1 4 TEM4TA

{2777 isS Id TiL [311-

onEEak 20t11

-85-

ANNEX 5Page 1

PHILIPPINES

Industrial Guarantee and Loan Fund

Selected Data and Documents Available in the Project File

Reference No. Title

Section A: Selected Reports on the Philippine Industrial, SMI andFinancial Sectors

Al: "Review of the Philippine Economy," Bancom, Quarterly Reportsfor 1978.

A2: "Philippine Industry and Development," BOI, Volumes I and II,4th Quarter 1976 and 1st Quarter 1977.

A3: "Investment Opportunities in the Philippines," BOI, August 1977.

A4: "Questions and Answers on Foreign Investments in the Philippines,"BOI, August 1977.

A5: "Data on BOI Approved/Registered Project," BOI, 1977.

A6: "28th Annual Report 1976," and "29th Annual Report 1977," CB.

A7: "Fact Book on Philippine Financial System 1977," CB.

A8: "Countryside Development Program," CSMI, September 1978.

A9: "Development Plan to the Year 2000," DCP, (undated).

AIO: "Sharing in Development: A Program of Employment Equityand Growth for the Philippines," ILO, 1974.

All: "Industrial Development in Southeast Asian Countries: Small- andMedium-Scale Industries - Republic of the Philippines - Phase I,1977/78," International Development Center of Japan.

A12: "Investment Guide 1976," Manila Stock Exchange, 1976.

A13: "Development Digest," NEDA, April 1976.

A14: "Agreement in Asian Preferential Trading Arrangement," NEDA/APO,1977.

A15: "Journal of Philippine Statistics," NEDA/NCSO, Fourth Quarter1976.

-86-

ANNEX 5Page 2

A16 "Study of the Commercial Banks in the Philippines, SGV Group,1976 and 1977."

A17, "Doing Business in the Philippines." Manila, SGV Group,February 1977.

A18: "A Study of the Philippine Small- and Medium-Scale Industries,"UPISSI, May 1977.

A19: "An Analysis of the Impact of Thirteen Training Programs onEntrepreneurship Development Conducted in 1973 and in 1974-75(Phase I)," UPISSI, April 1977.

A20: "International Research Project on Samll Industry Development: aComparative Regional Study, Phase I. Volumes I and II," UPISSI,October 1977.

A21 "Vital Statistics of Philippine Small-Scale Industries,"UPISSI, 1975.

A22- "Report of the 1978 Review Mission to the Private Develop-ment Corporation of the Philippines," World Bank, November 1978.

A23- "Employment Creation and Small-Scale EnterprisesDevelopment" World Bank, Report No. 1543, March 1977.

A24- "The Philippines: Priorities and Prospects for Develop-ment," World Bank, 1976.

Section B: Selected Reports and Studies Relating to_IGLF

Bi. Annual Reports of Accredited Institutions, 1977.

B2- "Audit Report, 1977," IGLF.

B3 "Operating Manual," IGLF, August 1977.

B4 "Economic Impact Study," IGLF, 1978.

B5: "Report on the Administration of IGLF " IGLF June 1978.

B6: "Appraisal of a Small- and Medium- Industries DevelopmentProject," World Bank, Report No. 667-a-PM April 1975.

B7: "Report of the 1977 Review Mission to IGLF." World Bank, August 1977.

B8: "Report of the 1978 Review Mission to ICLF," World Bank, August 1978.

-87-

ANNEX 5Page 3

B9: "Developing a Technology Service Delivery System for RuralSmall and MAedium Industries in the Philippines," CSMI, 1978.

B10: "CSMI Regional Councils to Coordinate Delivery of GovernmentResources of Direct Assistance to SMI in the Countryside,"CSMI, October 1978.

Bll: "Financial Analysis of Selected Industries," MASICAP, (undated).

B12: "MASICAP Quarterly Report, Third Quarter 1978," MASICAP,October 1978.

B13: "Draft Project Document for the Establishment of Pilot Projectsin Support of Industralization in Non-Metropolitan Areas(Phase I)," Economic and Social Commission for Asia and thePacific, March 1978.

Section C: Selected Working Papers and Tables Prepared by Appraisal Mission

Cl: "MASICAP Budget Estimates," December 1978.

C2: "MASICAP Projects, 1973-78," MOI.

C3: "Summary, Monitored Results of 1976," MASICAP.

C4: "Expenditure on MASICAP Program, 1974-78," MASICAP.

C5: "Organizational Structure of MASICAP," MASICAP, 1978.

C6: "Profile of MASICAP Projects, 1973-78," MASICAP.

C7: "Salary Scales: SBAC," 1978.

C8: "Summary of Discussions with Financial Institutions."

C9: "Financial Institutions Pending Accreditation."

CIO: "Accredited Institutions Ineligible for IGLF Funds due to Arrears."

ClI: "STD Approvals by Accredited Institutions."