FILE COPY Ecuador: Appraisal of the Third Development ... · APPRAISAL OF THE THIRD DEVELOPMENT ......

Report No. 1298b-EC FILE COPYEcuador: Appraisal of theThird Development Banking ProjectDecember 9, 1976

Projects DepartmentLatin America and the Caribbean Regional Office

iOR O W:hLA. USE ONLY

Document of the World Bank

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

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CURRENCY EQUIVALENTS

All currency amounts are quoted inSucres (SI) and US Dollars (US$)

US$1 - SI 25.0Sf 1 US$0.04S/ 1,000,000 US$40,000

LIST OF ACRONYMS

AID - Agency for International DevelopmentBCE - Banco Central del EcuadorBNF - Banco Nacional de FomentoCAF - Corporacion Andina de FomentoCOFIEC - Ecuatoriana de Desarrollo S.A. - Compania FinancieraCV-CFN - Comision de Valores - Corporacion Financiera NacionalDFC - Development Finance CompanyFNII - Fondo Nacional de Inversion IndustrialFONADE - Fondo Nacional de DesarrolloFONAPRE - Fondo Nacional de Pre-inversi6nFOPEX - Fondo de Pron-ocion de ExportacionesIDB - Interamerican Development BankIESS - Instituto Ecuatoriano de Seguro SocialJUNAPLA - Junta Nacional de Planificaci6nKfW - Kreditanstalt fflE WiederaufbauPEFCO - Private Export Funding Corporation

FISCAL YEKAR

January 1 to Decenber 31

FOR OFFICIAL USE ONLY

ECUADOR

APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT

TABLE OF CONTENTS

Page No.

BASIC DATA ON DFCs i

SUMMARY AND CONCLUSIONS ............................... ii-iv

I. INTRODUCTION ......................................... I

The First and Second DFC Loans (721-EC and 930-EC) 1

Objectives of the Proposed Loan .... .............. I

II. THE ECONOMIC SETTING .................................. 2

General Outlook ................................... 2

Industrial Sector ................................ 3The Financial Sector ............................. 5

Country Economic Policies, Interest Rates and theAvailability of Industrial Credit .... .......... 6

III. CV-CFN - PAST PERFORMANCE AND PROSPECTS .... ........... 9

Organization, Management and Staff .... ........... 9Policies and Procedures .......................... 9

Operations and Performance ..... .................. 10Prospects ........... ............................. 11

IV. COFIEC - PAST PERFORMANCE AND PROSPECTS .... ........... 12

Organization, Management and Staff .... ........... 12Policies and Procedures .......................... 12Operations and Performance ....................... 13Prospects ........................................ 14

V. PROPOSED BANK LOAN .................................... 15

VI. AGREEMENTS REACHED DURING NEGOTIATIONS .... ............ 18

This report is based on the findings of an appraisal mission composed ofMessrs. C.W. Ludvik, A. Cracco, T. Hutcheson and E. Jurgensen, of the DFCProjects Division, LAC Regional Office, which visited Ecuador during April/

May and July 1976. The report was prepared by Messrs. Ludvik, Hutcheson andJurgensen.

This documwnt h a tatrkted ditubution and may be usWd by recipients only in the performAnceof their official dute. It contents may not otheirwise be disclosed without World Bank authoriation.

TABLE OF CONTENTS (Continued)

LIST OF ANNEXES

GENERAL

1. Interest and Rediscount Rates2. Arrearages of Selected Banks and Financieras3. The Financing of Gross Domestic Investment, 1970-1974

COMISION DE VALORES-CORPORACION FINANCIERA NACIONAL

4. Past Performance and Prospects5. List of Board Members and Alternates as of April 29, 19766. Declaration of Policies and Procedures7. Organization Chart8. Audited Balance Sheets, 1972-19759. Audited Statements of Income and Expenses, 1972-197510. Summary Breakdown of Loans Approved During the 1972-1975 Period11. Summary of Subloans Approved under Loans 721-EC and 930-EC12. Equity Portfolio as of December 31, 197513. List and Characteristics of Foreign Loans and Credit Lines -

December 31, 197514. Operational Strategy and Financial Objectives for 1977-8115. Projected Industrial Operations - 1976-8016. Projected Balance Sheets 1976-1980, Compared with 197517. Projected Statements of Income and Expenses 1976-1980, Compared with 197518. Projected Sources and Uses of Funds, 1976-198019. Projected Gap in Foreign Exchange Resources, 1976-198020. Past and Projected Financial Ratios, 1972-1980

ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA)

21. Past Performance and Prospects22. List of Board Members and Alternates as of December 31, 197523. List of Major Shareholders as of December 31, 197524. Declaration of Policies and Operating Procedures25. Organization Chart, March 31, 197626. Summary Breakdown of Loan Approvals During the 1972-75 Period27. Summary Breakdown of Loan Approvals Under World Bank Loans 721-EC and

930-EC28. Equity Portfolio 1972-7529. Operational Strategy and Financial Objectives for 1976-8030. Projected Operations 1976-1980, Compared to 1974 and 197531. Projected Balance Sheets 1976-80, Compared with Audited

Balance Sheets 1972-7532. Projected Income Statements 1976-80, Compared with Audited

Income Statements 1972-75

TABLE OF CONTENTS (Continued)LIST OF ANNEXES (Continued)

33. Projected Sources and Applications of Funds34. Projected Gap in Foreign Exchange Resources Over the Period 1976-198035. Past and Projected Financial Ratios, 1972-1980

THE PROPOSED LOAN

36. Possible Participants in the Proposed Loan37. Estimated Schedule of Disbursements of the Proposed Loan

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ECUADOR: APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT

Basic Data on DFCs, as of December 1975

CV-CFN COFIEC

Established 1964 1966

Number of Shareholders I/ 323Net Worth (S/ million) 981.2 184.1Shareholdings as % of Total Share Capital

1. Private Ecuadorian Shareholders - 51.62. Public Ecuadorian Shareholders - 6.03. Foreign Controlled Ecuadorian Shareholders - 4.54. Foreign Shareholders - 30.25. IFC - 7.7

Assets (S/ million)

Total Assets & Guarantees 3,184.2 1,745.5Total Loans 1,934.9 838.4Loans Maturing After 12 Months 1,441.5 368.2Equity Investments 585.5 28.8Other Portfolio 473.6 732.7Net Working Capital 391.6 279.0

Liabilities (SI million)

IBRD 221.7 327.5Other Foreign Sources 739.0 49.4Bonds 452.6 90.3

Equity

Total Debt/Equitv 2.2 7.0Equity Portfolio as % of Net Worth 59.7 15.6Book Value as % of Par Value 127.8 130.7

Total Income (S/ million) 255.3 131.2Net Income (S/ million) 74.3 32.1Net Income as % of AverageNet Worth 7.9 19.3Total Assets 2.6 2.1

General Expenses as % of Average Total Assets 2.5 2.0Dividends - -

1/ Government owned

- ii -

SUMMARY AND CONCLUSIONS

This report appraises a third project to assist Comision de Valores -Corporacion Financiera Nacional (CV-CFN), Ecuatoriana de Desarrollo, S.A. -Compania Financiera (COFIEC), and newly established DFCs that meet criteria

for qualification, in providing long-term financing for the foreign exchangecosts of industrial projects. A loan of US$26 million to the Republic ofEcuador is proposed. By making this loan the Bank would assist the parti-cipating DFCs in providing long-term financing on reasonable terms, therebyreducing industry's reliance on short-term credit, strengthen the DFCs' capa-bilities to appraise and supervise projects, and enhance the financial system'sability to mobilize medium- and long-term domestic resources. Furthermore,the Bank would aid Ecuador in developing policies to promote its capitalmarket.

ii. Before 1970, Ecuador was among the least developed countries inLatin America. The discovery of oil in 1971 and the subsequent increase inworld oil prices opened up bright prospects for economic growth. High oilrevenue expectations triggered consumption patterns which soon proved to ex-ceed the responsiveness of domestic supply and the country's foreign exchangepayment capacity to import. Furthermore, actual oil revenues declined afterJuly 1974 and estimated reserves were revised downward. The impact of thesedevelopments and of international price movements was reflected in a suddenincrease in inflation to an annual rate of nearly 24% in 1974 and in a fallin foreign exchange reserves.

iii. In mid-1975, the Ecuadorian Government instituted restrictive mone-tary measures, re-established prior import deposits, and curtailed publicexpenditures. Legal reserve requirements and ceilings on credit expansionrestrained commercial bank credit. These measures and moderating interna-tional inflation helped to reduce the rate of domestic inflation to less than16% in 1975 and to perhaps 10% in 1976.

iv. Industry accounts for about 17% of GDP and agroindustries make upalmost two-thirds of the sector's output. Exports are only 8% of industrialproduction. The sector receives fairly high protection from tariffs and im-port quotas and a number of major consumer goods are subject to price control.Nevertheless, there are unmistakable signs of industrial vitality and the out-look for the continued rapid growth of the sector is bright.

v. The demand for industrial credit rose considerably as a result ofthe oil boom which spurred a doubling of gross domestic investment between1972 and 1974. While the DFCs provide only about 3% of the financing ofgross domestic investment, they have increased their participation in totalindustrial credit from 14% in 1972 to 29% in 1974, CV-CFN's share rising from5% to 17% and COFIEC's from 9% to 12%. The commercial banking system hastraditionally met the financing needs of industry with short-term credit.Except for direct foreign credit, the industrial sector relies almost ex-clusively on CV-CFN and COFIEC for their medium- and long-term credit needs.

- iii -

As the Central Bank (BCE) restricted commercial bank credit in 1975, industryturned to alternative sources for its credit needs, predominantly foreignshort-term financial and suppliers' credits, often channeled through orguaranteed by commercial banks and DFCs.

vi. The ability of the DFCs to mobilize additional domestic medium-and long-term resources, particularly in the case of private DFCs, had beeninhibited by the regulated interest rate and commission structure whichdid not allow an adequate financial spread on the intermediation of domesticlong-term resources but rather favored intermediation of short-term externalresources. Industrial demand for working capital and the need to protectits capital against erosion during a period of high inflation led COFIEC toengage heavily in profitable commercial-type operations based on short-termforeign resources. The viability of the private DFC system (COFIEC and thenew DFCs) as development banks depended on changes in the interest ratestructure which would make medium- and long-term lending at least as attract-ive as short-term lending. Ecuadorian monetary authorities have recognizedthis situation and, as a result, the Government raised the effective interestrates for medium- and long-term credit.

vii. Both COFIEC and CV-CFN concentrate their lending on industry,yet there are many differences between them. CV-CFN, the government-ownedDFC, operates with a relatively large equity base and low leverage and itsprojects are relatively large. Its total assets as of December 31, 1975amounted to US$117 million equivalent. In recent years, CV-CFN has signifi-cantly upgraded the quality of its staff, strengthened its project appraisalcapacity, increased the effectiveness of its supervision and improved itsoperating procedures. It has been fairly active in promoting new projects andin providing technical assistance to firms in its equity portfolio.

viii. COFIEC, in contrast, is widely owned by private local and foreigninvestors, IFC holding 7.7% of the shares. It has had difficulty at times inmaintaining its level of operations within the debt-to-equity limitation setin agreement with the Bank, currently 7:1. COFIEC's operations, in additionto those with the industrial sector, include livestock, construction, trans-portation and commerce. It generally finances smaller firms and projects thandoes CV-CFN. Its equity portfolio is small, 1.8% of the total portfolio, butmoderately profitable. The increasing emphasis on short-term operations andthe need to hold down costs strained the capacity of its staff and resultedin some deterioration in its appraisal capacity and, in particular, in thesupervision of its portfolio.

ix. The proposed loan of US$26.0 million would be channeled throughBCE, as the government fiscal agent, to be relent to CV-CFN, COFIEC and newDFCs that qualify. The Government would assume the foreign exchange riskthrough its agent, BCE, who would pass to the participating DFCs a variablefee of 1.75% p.a. or 2% p.a. for this coverage. Bank funds would be availableto industrial enterprises for the financing of foreign exchange costs of equip-ment and permanent working capital, through either loans or equity investments.

- iv -

The proposed loan would be repayable within 15 years on a composite amortiza-tion basis including 3 years of grace. Bank funds would be relent at effec-tive interest rates ranging beween a minimum of 13% p.a. to a maximum of 16%p.a., depending mainly on the term of the subloans.

x. The proposed loan would be allocated as follows: US$13 millionto CV-CFN, US$10 million to COFIEC, and US$3 million to the new DFCs thatqualify. Should no new DFC qualify under the proposed loan, the portionassigned to them would become available to CV-CFN and COFIEC in equal amounts.The loan would include provision for reimbursing COFIEC up to US$1 millionfor approved disbursements made between January 1, 1977 and the date of theloan agreement.

xi. Provided the agreements listed in Chapter VI are reached, theproject is suitable for a Bank loan of US$26 million on the terms and condi-tions listed in Chapter V and supplemented in Chapters II, III and IV.

ECUADOR


I. INTRODUCTION

The First and Second DFC Loans (721-EC and 930-EC)

1.01 Comision de Valores-Corporacion Financiera Nacional (CV-CFN), agovernment-owned DFC, and Ecuatoriana de Desarrollo, S.A.-Compania Financiera(COFIEC), a privately owned DFC (IFC owns 7.7%), participated in two previousBank DFC loans to the Government in 1970 and 1973 of US$8 million and US$20million, respectively. Under the two Bank loans US$27.8 million had beenapproved for subloans by June 30, 1976, for a wide variety of industrialprojects, over half being for industries based on agricultural and forestryraw materials. 1/ The average economic rate of return on subprojectssubmitted for approval was over 30%. The total project cost per job createddirectly by Bank-financed subprojects was US$15.9 thousand. Furthermore, 49%of the amount approved has been for subloans oriented mainly to substituteimports and 34% has been for projects which have had both import substitutionand export characteristics. Taken together, the two DFCs have increased theirparticipation in total industrial credit from 14% in 1972 to 29% in 1974, ofwhich over two-thirds has been in the form of medium- and long-term credit.The DFCs' capabilities to appraise and supervise industrial projects also werestrengthened significantly during the commitment of the two Bank loans,although some backsliding has occurred recently in COFIEC (para. 4.03). Thus,previous Bank loans have largely met two of their objectives: (i) to providelong-term financing to industry on reasonable terms to cover foreign exchangecosts of efficient investment projects; and (ii) to strengthen COFIEC andCV-CFN's appraisal and supervision capabilities, with particular emphasis onassessment of the economic merit of projects. Progress toward meeting theBank's third objective--promoting a change in the structure of industrialfinance by substituting long-term funds for short-term credits--whilenoticeable, was inhibited by constraints on the DFCs' ability to mobilizelong-term resources (para. 2.13).

Objectives of the Proposed Loan

1.02 The proposed loan of US$26 million would be relent by the Governmentto CV-CFN, COFIEC, and other newly established DFCs (para. 2.15) which meetthe criteria for participation in the loan. CV-CFN would be allocated US$13million of the proposed loan, COFIEC, US$10 million, and other qualifyingDFCs, US$3 million. The Bank would also help the Government in identifying,selecting, and implementing policies conducive to the long-term development ofEcuador's capital market. Thus, the Bank and the Government would exchangeviews on the terms of reference and the qualifications of experts who would

1/ Food, beverages, tobacco, textiles, leather products, wood products, andpaper.

- 2 -

carry out capital market studies, offer comments on the research scope andmethodology, and give technical advice on the resulting regulatory proposals.Hence, by making this loan, the Bank would accomplish the following:

(a) continue to provide long-term financing to industry on reason-able terms to cover foreign exchange costs of efficient invest-ment projects for the expansion of existing firms and theestablishment of new enterprises;

(b) strengthen further the capabilities of Ecuadorian DFCs toappraise the financial and economic merits of industrial proj-ects and to supervise projects they finance;

(c) promote a change in the structure of industrial finance by sub-stituting long-term funds for short-term credits;

(d) enhance the ability of the Ecuadorian financial system tomobilize resources for medium- and long-term lending throughdiscussion with the Government on (i) improving the termstructure of interest and commission rates; (ii) ensuring theprivate DFCs a reasonably attractive effective spread betweenthe cost of their domestic borrowing and lending; and (iii)limiting the involvement of DFCs in short-term operations;

(e) contribute to the development of Ecuador's capital market.

1.03 This report is based on the findings of an appraisal mission composedof Messrs. C.W. Ludvik, A. Cracco, T. Hutcheson and E. Jurgensen, of the DFCProjects Division, LAC Regional Office, which visited Ecuador during April/Mayand July 1976. This report was prepared by Messrs. Ludvik, Hutcheson andJurgensen.

II. THE ECONOMIC SETTING

General Outlook

2.01 The economic situation and prospects of Ecuador have been modifiedsince 1972 by the emergence of oil as a major source of exports and of publicsector revenues. The subsequent increase in world oil prices boosted furtherthe prospects for economic growth and industrialization. On the basis ofcurrent export prospects, moderate capital inflows, and an adequate policy tochannel oil revenues into industrial investment, Ecuador's economy may grow atabout 7% per annum through 1980. Oil exports are not expected to increaserapidly after 1976 and the expansion of the economy will continue to requireadditional net external borrowing through 1980 to help finance developmentprojects. Since oil revenues accrue entirely to the public sector, growthprospects are ultimately dependent on how the Central Government and otherpublic agencies use their resources in expenditures and transfers to theprivate sector.

2.02 The advent of oil has brightened prospects but it has also brought

to light the need for institutional adjustmenits without which the new revenues

would fail to impart a new dynamism to the economy. While in the past the

role of the public sector in the economy has been modest, the Government is

aware of the need to adapt the institutional structure to the new circum-

stances and is setting up the required framework for a rational allocation

of the new revenues. Among these, there is need to provide appropriate tax,

credit and price incentives to increase private investment and savings, and

to improve the institutional and financial framework within which these re-

sources-will be transferred to priority industries.

Industrial Sector

2.03 The Industrial Sector Report on Ecuador of June 1, 1976, (1186-EC),

indicates that industry has grown rapidly in the 1965-75 decade, averaging

9.4% per annum compared to 5.4% for GDP. Still, the sector accounted for only

17.2% of GDP in 1974 at current prices and for only 11.5% of total employment

in the country, reflecting its incipient development and the limited size of

the market. Recent rapid economic growth has stimulated investment in indus-

tries serving the local market, including consumer goods, construction mate-

rials, and some simple capital goods. The expansion in capacity, however,

does not yet appear to be reflected in changes in output due to problems that

include a shortage of skilled technical and managerial personnel. Present

production rates are mostly the result of a better utilization of previously

existing capacity.

2.04 The structure of industry is consistent with Ecuador's level of

development. It is concentrated in consumer goods (60% of total value added

is represented by food, beverages, tobacco, clothing, shoes, and furniture);

the manufacturing establishments are relatively small and family oriented

(only 74 manufacturing enterprises had a gross value of output exceeding US$2

million in 1973); domestic manufacturing linkages are limited to agricultural

and forest materials and non-metallic minerals; and it is highly dependent on

foreign raw materials and technology (49% of the sector's raw material require-

ment was imported in 1973). Manufactured exports represented only 8% of the

gross value of the sector's output in 1973 and are composed of such traditional

items as sugar and related products, and processed cacao. Of the total indus-

trial employment, 75% is in small and handicraft enterprises that generate

only 30% of the value added in the sector. In spite of these characteristics,

recent years have shown unequivocal signs of an emergent industrial vitality,

with growth particularly marked in branches supplying the construction indus-

tries (plywood, cement, glass, metal bars, etc.) and some simple mechanical

engineering industries. The expansion of the industrial sector between 1973

and 1975 (11% p.a.) has been higher than the growth target set in the 1973-

1977 Development Plan. In the context of Ecuador's favorable position within

the Andean Common Market, the industrial sector expanded its exports of manu-

factured products including some advanced ones such as domestic appliances and

metal products. Ecuadorian exports to Andean Pact countries of 37 selected

industrial products increased from US$5 million in 1970 to US$17.4 million in

1974.

- 4 -

2.05 Comprehensive industrial development laws have been in force sincethe first law was enacted in 1957; modifications have been introduced period-ically, and in 1973 a major revision was undertaken which emphasized regionaldecentralization of new industry. Another feature of the 1973 investment lawwas the expansion of a limited direct incentive system for non-traditionalexports which had been instituted in 1971. Under the new system, incentivesare given to manufactured exports in accordance with past performance up toa maximum of 15% of the gross value; non-processed, non-traditional agricul-tural exports receive a fixed subsidy of 4%. Furthermore, the new incentivesvirtually eliminated the restrictions on imports of raw materials and capitalgoods, opened somewhat the policy towards foreign investment, and exoneratedsmall- and medium-sized industries and artisan activities from taxes andtariffs. Imports were considerably liberalized in 1973 but the subsequentre-emergence of the foreign exchange gap led, in mid-1975, to an increase intariffs, some prohibitions on imports of consumer goods and a selective tariffsurcharge of 30%, as well as an increase in prior deposits.

2.06 Existing tariff regulations, price controls, and incentive legisla-tion may result in some distortions by stimulating investment in ineffecientindustries. Besides weakening the tax base and distorting the allocationmechanism, these features tend to favor capital-intensive industries. Also,a number of major consumer goods are subject to price ceilings and pricesupports especially in the case of sugar, plywood, soybeans, vegetable oilsand related products. Scarcities and overproduction of the commoditiesaffected result from prices that are too low or too high. A dialogue betweenthe Bank and Ecuadorian public institutions that influence the industrialsector has started on the basis of the findings put forward in the IndustrialSector Report. Views have been exchanged on the diagnostic aspects of thereport and on the industrial implications of the existing schemes on tax in-centives, tariff protections, price controls and export promotion. The Bankwill continue intensifying these discussions with a view to contributing topositive revisions of these policies. In the context of the proposed loan,the above analysis supports the need to calculate economic rates of return onthe larger investment projects in the sector (paras. 3.03 and 4.03).

2.07 The principal areas of potential growth are being examined in lightof Ecuador's need to develop industries that provide wide employment oppor-tunities leading to an improvement of income distribution and to a reductionof regional disparities. Attention should be focused on the agroindustrialsector oriented to exportable products, on the small-scale and artisan industryand, also, on the economically efficient import-substitution industries. Agro-industries with particular expansion possibilities are sugar refining, fishproducts, fruit and vegetable processing, forestry, as well as some non-foodagroindustrial products. Industries related with construction, such as cement,glass, ceramics, structural steel and hardware, offer good possibilities tosubstitute imports. On the basis of the past performance of the DFCs, it isexpected that the proposed loan will be largely used by agroindustries andefficient import-substitution industries.

-5-

The Financial Sector

2.08 Four components can be identified in the financial system of Ecuador:

(a) The Monetary Board, the highest monetary authority, whichregulates the volume and distribution of money and credit.

(b) The banking system, which is made up of the Central Bank (BCE),

the commercial banks (18 national and 4 foreign), and the National

Development Bank (BNF), a public institution primarily oriented

toward agriculture and small enterprises. BCE, with assets in 1974

almost equal to the sum of the commercial banks combined, adminis-

ters eight financial funds that provide rediscounting facilities to

commercial and development banks and keeps the accounts of the

National Investment Fund (FONADE). The latter fund receives a

portion of the Government's tax receipts in oil exports, and its

resources are allocated by an interministerial commission to

developmental projects of top priority.

(c) Other financial intermediaries, which include the DFCs, savings

and loan associations, cooperative banks, insurance companies

and the Ecuadorian Social Security Institute (IESS).

(d) Ancillary organizations such as stock exchanges, special funds,

and the unsupervised market. Both Quito and Guayaquil have had

stock exchanges since 1970 but they are still in their infancy.

Special funds include the Export Promotion Fund (FOPEX), admin-istered by CV-CFN, and the National Preinvestment Fund (FONAPRE),

set up to finance feasibility studies. The unsupervised market

is small, in the opinion of public officials and bank represen-

tatives.

2.09 The most striking change in the financing of gross domestic invest-

ment (GDI) between 1970 and 1974 is the increase in the participation of the

Central Government from less than 1% to 28% (Annex 3), due largely to oil

revenues. Little of this amount has been directly channeled to the non-

petroleum industrial sector. In addition, BNF's share in the financing of

GDI rose from 1% in 1970 to 10% in 1974, with nearly all of the increase

channeled to the agricultural sector. The share of GDI financing provided

by commercial banks and DFCs increased from 9% to 16% in the same period (a

seven-fold increase in absolute terms). This change in financial flows is

largely explained by GDI increasing much faster than corporate financing

out of internal cash generation and, also, by the decline in direct foreign

investment levels since 1970-71, when the bulk of investment for oil exploit-

ation took place.

2.10 The commercial banking system has traditionally met the financing

needs of industry with short-term credit while CV-CFN and COFIEC, within their

resource constraints, have provided term loans to medium- and large-sized com-

panies. Except for direct foreign credit, the industrial sector relies almost

exclusively on the two DFCs for their medium- and long-term credit needs.

-6 -

While the DFCs finance an average of only about 3% of GDI, they haveincreased their participation in total industrial credit from 14% in 1972to 29% in 1974, CV-CFN's share rising from 5% to 17% and COFIEC's from 9%to 12%. 1/

Country Economic Policies, Interest Rates and the Availability of IndustrialCredit

2.11 High oil revenue expectations triggered consumption patterns whichsoon proved to exceed the responsiveness of domestic supply and the country'scapacity to import. Furthermore, actual oil revenues declined after July 1974and estimates of reserves were revised downwards. The impact of these devel-opments and the rapid increase in import prices was reflected in an accelera-tion in inflation to an annual rate of 23.4% in 1974, in a difficult fiscalsituation, and in a drastic fall in foreign exchange reserves.

2.12 To counteract these developments, in mid-1975 the Ecuadorian Govern-ment instituted restrictive monetary measures to contain aggregate demand,reduced oil taxation, increased prior deposits on imports, and reduced publicexpenditures. Commercial bank credit was curtailed by higher legal reserverequirements and ceilings on credit expansion. These measures and a modera-ting rate of increase in import prices helped reduce the rate of inflation to15.7% in 1975 and perhaps 10% for 1976, but at the same time they aggravateddistortions in industrial financing.

2.13 Prior to the recent modification of the interest rate structure inthe country (para. 2.16), prevailing interest rates inhibited the ability ofprivate DFCs 2/ to mobilize domestic medium- and long-term resources. Theofficial maximum lending rate affecting all credit operations in the countrywas 12% irrespective of maturities (Annex 1). Higher effective interest ratescould be obtained by commercial banks through devices such as compensatingbalances, discounting, and advance interest payments, making their short-termcredit carry an effective interest rate of 14% to 16%. On credit from externalsources, which industry has used extensively in recent years, the financialintermediary can pass on the actual cost to the borrower and charge a commis-sion of up to 4% on short-term financial instruments such as letters of creditwith refinancing, acceptances, and guarantees. In contrast, long-term creditfinanced by private DFCs (COFIEC) with domestic bonds provided only a 2% in-terest rate spread through allowable commissions.

2.14 Given the past interest rate and commission structure, a private DFCsuch as COFIEC, which must maintain an attractive real return on its equity,

1/ Banking statistics show credit extended rather than credit outstandingto each sector, thus overstating the relative importance of shorter termcommercial bank operations.

2/ CV-CFN can issue tax-free domestic bonds, therefore its cost of raisingfunds is lower than the cost to private DFCs.

had little alternative but to base its operations on the type of short-term

external resources on which a high commission could be charged (letters of

credit, acceptances, guarantees). This was possible since DFCs were exemptfrom the credit restrictions imposed on commercial banks. Thus, the interest

structure, the restrictive credit measures on commercial banks, the exemptionof DFCs from credit restrictions and the profitability of commercially orientedactivities together caused COFIEC to turn to short-term operations. Under

the interest and commission structure existing before November 1976, a privateDFC could not realistically be expected to fulfill its developmental purpose,except to the extent that it had access to long-term resources such as the

Bank loan. CV-CFN did not have to face this dilemma because of its access

to subsidized resources. However, due to the smaller likelihood of getting

new capital contributions of the same magnitude as in the past (para. 3.11),

it also would have been adversely affected by the previously existing inte-

rest rate regulations (para. 3.13).

2.15 Several new DFCs are in operation or in the process of being estab-

lished (Annex 36), partially in response to the Government's emphasis on re-

gional decentralization and to tax and other incentives, but also in response

to the credit restrictions on commercial banks. While the creation of new DFCs

may have positive institutional effects within the financial system in Ecuador,these institutions should be directed at mobilizing resources for long-term

industrial financing rather than expanding commercial operations.

2.16 The future viability of the private DFC system (COFIEC and the newDFCs) and the effectiveness of CV-CFN depended on changes in the interest rate

structure which would make medium- and long-term lending at least as attractiveas short-term lending. Ecuadorian monetary authorities have recognized this

situation and on November 9, 1976 the Monetary Board issued Resolution No.

927-76 which introduced a graduated structure of allowable commission chargeson medium- and long-term lending. According to the new regulations both the

banking system and DFCs are allowed to charge, in addition to the (unchanged)12% interest rate, the following maximum commissions on new contracts:

Commission on:Loans financed Loans financed with

Original final maturity with bonds other resources

More than 3 years and up to 5 years 2.5% 2.0%

More than 5 years and up to 8 years 3.5% 3.0%More than 8 years 4.5% 4.0%

The new interest and commission structure provides both the public and privateDFCs with a reasonable effective interest rate spread. Given the current11.9% market rate on bonds issued by private DFCs, the average of the maximumallowable spreads on term lending financed with these instruments is 3.6 per-

centage points. An additional attractive feature of the new structure ofinterest rates is its adequate term differentiation between medium- and long-term operations. It also reduces the interest rate differential between

- 8 -

short- and long-term lending and between types of operations. In particular,the effective spread on term lending financed with bonds will range between3.7% and 4.2% given the current 12% market rate for these instruments(Annex 1).

2.17 While the new rate structure does not provide financial inter-mediaries with a clear premium for medium- and long-term lending compared toshort-term operations, it does represent a major step toward equalization ofthe financial return on the two types of operations. The Government agreedwith the Bank's view that without a premium for medium- and long-term lending,it is necessary to restrict the short-term operations of DFCs to insure thatthe primary emphasis of their operations will be in medium- and long-termlending. So long as no adequate regulations prevent DFCs from assuming anoverly commercial orientation, short- and medium-term operations, i.e. allportfolio operations with original final maturities of less than 5 years, ofthe DFCs participating under the proposed loan would be limited to four timestheir equity. An agreement to this effect was reached with CV-CFN, COFIEC andthe Government regarding new DFCs during negotiations.

2.18 Although the new commissions and the proposed restriction on theshort-term operations of DFCs are essential first steps in the Government'sefforts to foster the capital market, Ecuadorian monetary authorities alsoagreed with the Bank that these actions have to be complemented with moreextensive research and, possibly, with other institutional modifications.Consistent with this view, the Bank and the Government agreed during nego-tiations that the latter would carry out such specialized studies to provide atechnical basis to identify, select and implement capital market policiesconducive to channeling a substantially large share of domestic savings intolong-term industrial financing. Specifically, the Government intends to (i)review and update past studies on the Ecuadorian capital market, (ii) conductnew studies as necessary, and (iii) prepare selective legislative and regu-latory proposals. New regulations on DFC operations, further studies onthe interest rate structure, as well as research on new and improved financialinstruments, on private savings and its intermediation, on a wider distribu-tion of ownership of firms, and on a better functioning of the secondarymarkets, are considered priority topics.

2.19 For the purpose of carrying out the capital market studies,a capital market office would be created by the Government in the near future.This office would be headed by a coordinator who would prepare a work programand seek the manpower necessary to ensure an adequate implementation of suchprogram. An agreement on this setup was reached with the Government duringnegotiations. Accordingly, the Government would afford the Bank a reasonableopportunity to comment on the qualifications and terms of reference of theexperts who would carry out the studies, and on the resulting regulatoryproposals before their enactment. 1/

1/ In response to requests from Ecuadorian authorities in the past, IFC hascontributed to the analytical groundwork related to the development ofthe Ecuadorian securities market. For the purpose of commenting on therecommendations resulting from the technical studies, the Bank would seekthe counsel and cooperation of IFC.

- 9 -

III. CV-CFN - PAST PERFORMANCE AND PROSPECTS 1/

Organization, Management and Staff

3.01 CV-CFN is a wholly government-owned DFC that, although orientedtoward the private sector of the economy, broadly reflects the social andeconomic objectives of the Government. Seven of the nine members of theBoard are ministers of state and the Chairman is appointed by the Presidentof Ecuador. The Corporation's top managers are talented and professionallyinspired and the staff is well qualified and motivated.

Policies and Procedures

3.02 CV-CFN has conducted its operations according to its Declaration of

Policies and Procedures. However, in view of the Corporation's larger rolein promoting Ecuadorian exports and of the fund for this purpose set up

outside of but associated with CV-CFN (FOPEX), an agreement was reached duringnegotiations to specifically incorporate this activity in the Declaration ofPolicies and Procedures, with due regard to the fund's autonomy, before

disbursement for subprojects submitted by CV-CFN.

3.03 CV-CFN has adequate methods to appraise projects. However, in orderto detect investment in inefficient industries, the economic rate of returnwould be calculated on all projects involving a total investment aboveUS$500,000 equivalent, whether or not financed with Bank funds. This under-taking, which in the previous loan was limited to Bank-financed projects only,was confirmed during negotiations. The project supervision procedures andreports are also adequate but a supervision manual would facilitate thisfunction. Along this same line, a manual for disbursement procedures wouldfacilitate the application of the Corporation's strict disbursement rules andconditions. An agreement that both of these manuals would be submitted to theBank for approval within six months of loan signing was reached duringnegotiations. With regard to procurement, CV-CFN's engineers satisfy them-selves of the technical adequacy of the equipment financed. In the case oflarge imports of used equipment, management requests the opinion of an inde-pendent technical authority. The project and control departments of theCorporation review the reasonableness of the prices of the goods and services

procured.

Operations and Performance

3.04 The operations have expanded rapidly, with 1975 loan approvals reach-ing S/ 1.4 billion. Increasingly, a large proportion of the loans has beenfor sizable and long-term operations, but also for working capital. Dueto the relatively large size of CV-CFN's past subloans, it was agreed to limitsublending of Bank funds to individual firms to a maximum of US$3 millionequivalent. Although four-fifths of its lending is still concentrated in the

1/ This chapter is a summary of issues discussed in Annex 4.

- 10 -

two major economic poles of the country, the industrial diversification of theportfolio is considerable. Industries processing agricultural raw materialsaccounted for 38% of total loans. Equity investments constitute an importantpart of CV-CFN's activities, largely as a result of its own promotional effort.A considerable proportion of these investments, however, is concentrated in afew firms. CV-CFN also administers five special public funds but theircombined resources represent less than 5% of the Corporation's assets.

3.05 Foreign loans constituted an important source of funds of the companybetween 1972 and 1975, but most of the Corporation's expansion was financedwith bonds and domestic credits. Bank resources were used to finance 30.3% ofan aggregate project value of US$44.6 million equivalent.

3.06 Portfolio quality and audit. As of March 31, 1976, 3.1% of theportfolio was in arrears above three months (up from 2.3% at the end of 1974),representing 10.5% of the clients. Even though these percentages reveala slight deterioration of CV-CFN's portfolio compared to previous years, thereare strong indications that this change is of a temporary nature related to ageneral lack of liquidity throughout the economy. Furthermore, managementis aggressive in pursuing accounts in arrears. Although estimated lossesare covered by provisions, the safety margin for future eventualities issmaller than in the past. Therefore, an understanding was reached duringnegotiations that provisions as a percentage of portfolio would be increasedfrom 1% to at least 1.5% by the end of 1978. CV-CFN's accounts are satis-factorily audited annually by Price Waterhouse and Co.

3.07 Profitability and financial condition. In 1975, 71% of total reve-nues came from loans, and the average return on assets was 9.1%. Net incomewas 2.6% of assets, which was also the average for the last five years.CV-CFN's annual return on equity averaged 6.1% between 1968 and 1975. In realterms, however, the profitability has been negative. Three main factors haveled to CV-CFN's negative real return on equity. First, the company has allo-cated more resources to low-yielding assets than it has borrowed on a subsi-dized basis. Second, the debt-to-equity ratio has been relatively low (1.5on the average and 2.2 at year end 1975). Third, inflation has been excep-tionally high during this period. The erosion of CV-CFN's capital base wasoffset by an infusion of fresh capital in 1974.

3.08 Even though the Corporation's liquidity has declined, its positionis still adequate considering the predictability of its financial flows,its access to rediscounting facilities at BCE, and the favorable relationbetween the maturities of its loans and borrowings. An improved budgetarymechanism, however, should ensure against occasional liquidity constraints.An understanding concerning the implementation of such a system was reachedduring negotiations. Because CV-CFN carries the exchange risk on its foreignborrowings other than the Bank loans (US$29.6 million equivalent in 1975), andhas sustained losses (Annex 4, para. 23), an agreement was reached with theGovernment, as in the case of the Second DFC Loan, on protecting CV-CFN'scapital from possible exchange losses that exceed CV-CFN's net profits and

- 11 -

free reserves. In addition, it was agreed with CV-CFN during negotiations

that foreign exchange losses (profits) would be treated as an expense (income)

in the year in which foreign currency rates change. This accounting practice

departs from the current one which treats foreign exchange losses (profits) as

assets (liabilities) subject to gradual amortizations.

Prospects

3.09 Operations and resources. The Corporation's forecast operations are

reasonable, consistent with its strategy, and well within its handling capa-

city. The volume of loan disbursements is expected to grow at 12% p.a. be-

tween 1977 and 1980. The project pipeline submitted to the Bank in February

1976 contained 80 loans amounting to almost S/ 700 million; three-quarters

of this amount would go to existing firms and the balance to new enterprises.

3.10 Equity investments are expected to more than triple by 1980, with

more than one-third of the expansion going for companies promoted by the

Corporation. CV-CFN also plans to take more active steps in developing the

capital market in Ecuador. Possible plans include setting up one or more

equity funds with its own portfolio, assisting new DFCs, issuing financial

instruments with new features, and also increasing somewhat their current very

small short-term portfolio, which is well below the maximum agreed with CV-CFN

and the other participating DFCs (para. 2.17). Some of CV-CFN's envisaged

roles would eventually require changes in its Declaration of Policies and

Procedures. Therefore, it was agreed that any change in the Declaration wouldhave to be acceptable to the Bank.

3.11 Planned operations for 1976-80 call for S/ 13.6 billion of indus-

trial financing. While most of the required resources would be generated

internally (retained earnings and loan amortizations), one-fourth would come

from foreign sources (US$137 million). CV-CFN has already arranged credits

in the amount of US$59 million, leaving a foreign exchange gap of US$78 mil-

lion through 1980 (Annex 4, para. 28). The proposed loan would cover 17% of

this gap. The Corporation's projections include systematic equity additions

from the Government of S/ 300 million starting in 1977. Although management

still considers these capital increases as resource targets, their amounts are

subject to reductions.

3.12 Financial projections. The Corporation's operating plan, if

realized, would more than triple assets by 1980 and satisfactory financialpositions would parallel this expansion. To cope with a possible equity

restriction, it was agreed at negotiations to raise the overall debt-to-equity

limit from 4:1 to a still reasonable 6:1 ratio. This change would be incor-

porated in the Corporation's Declaration of Policies and Procedures as a

condition of disbursement for CV-CFN financed projects.

3.13 CV-CFN projects a contraction in net income as a percentage of

assets from 2.3% average in the past to 1.5% in the next five years. This

- 12 -

fall is largely explained by an increase in financial expenses. However,

the new minimum commissions agreed with "he Bank (para. 5.05), which are

expected to be applied also to loans `lanced from non-Bank sources, would

eventually increase CV-CFN's financial ;-ead by 1.6 percentage point, raising

the expected average return on equitv' ro'l 6.4% to 12.6%. A slightly higher

leverage would increase the profitaib,ity further. In contrast with the

negative returns in the past, the projected real return on equity would rise

to 5.2%.

IV. COFIEC - PAST PERFORMANCE AND PROSPECTS 1/


4.01 COFIEC is widely owned by some 300 private institutions and indivi-

duals, CV-CFN, and IFC. The President is responsible to the Executive Com-

mittee of the Board of Directors for management of the Company. Some con-

flicts exist between central administrative functions and the Quito regional

functions, but management is delineating responsibilities by introducing

changes in the organization, departmentalization, and job descriptions of the

Company. These changes were reviewed at negotiations and an understanding

was reached on putting them into effect within six months of loan signing.


4.02 COFIEC has generally conducted its business within the framework of

its Policy Statement. In view of its need to mobilize long-term resources for

long-term lending, COFIEC would remove from the Statement the 4:1 limitation

on its long-term debt-to-equity ratio, but the Company would remain subject to

an overall debt-to-equity limit (para. 4.09 and 4.14). It would likewise

introduce a limitation on short- and medium-term operations (para. 4.12), and

any further change would have to be acceptable to the Bank. These changes

were agreed upon during negotiations.

4.03 The Company's ability to appraise projects has shown continuing

improvement during the commitment of the Second DFC Loan, although there has

been some backsliding recently. COFIEC's follow-up on loans has been uneven,

although in important cases it has been very good. More clearly defined

responsibilities should improve supervision. Aware of the need to strengthen

both appraisal and supervision, management has been taking steps to these

ends. An understanding concerning their full implementation within six months

of loan signing was reached during negotiations (Annex 20, para. 5).

Appraisal capacity will need to be strengthened as well, in order to extend

the calculation of the economic rate of return to a larger number of projects.

1/ A more detailed discussion of COFIEC's part performance and prospects is

set out in Annex 21.

- 13 -

Under the proposed loan, this calculation would be made for all projects

involving an investment in excess of US$500,000 equivalent or more than

US$250,000 equivalent for Bank-financed projects. Agreement on this point

was also reached at negotiations.

4.04 COFIEC's disbursement procedures are adequate. To satisfy itself

that items procured are competitive in price, it requires evidence that its

clients have canvassed alternatives and it ensures the suitability of the

items procured.


4.05 Operations. In spite of inflation COFIEC has been able to almost

double the real value of its portfolio since 1972, with the term structure of

its operations mirroring that of its resources. Disbursements for letters of

credit and guarantees make up 63%; loans 36%; and equity investment only 1%

of total disbursements. The sectoral distribution of COFIEC's lending is well

diversified, with industries processing agricultural and forestry raw materials

receiving almost half of its industrial credit.

4.06 Resources. COFIEC's medium- and long-term resource availability

has been about as forecast. The principal sources have been Bank DFC loans,

equity increases, bond issues, and loans from IESS and AID. To maintain

profitability the Company had to mobilize a greater volume of short-term

resources than expected, mainly by drawing on foreign bank lines of credit to

finance letters of credit and guarantees.

4.07 Financial conditions. COFIEC's financial statements are satisfac-

torily audited by Price Waterhouse & Co. and the audits now include an assess-

ment of the provisions for portfolio losses. While still considered adequate,

provisions have fallen as a percentage of portfolio and currently barely exceed

estimated losses. COFIEC's arrears have increased to 5.2% of portfolio, from

3.6% in 1974, as a result, among other things, of tight credit throughout the

economy stemming from Central Bank restrictions (para. 2.12). In light of

these circumstances COFIEC's management has undertaken a program for increasing

provisions for bad debts, and a timetable for putting it into effect was agreed

upon during negotiations (Annex 21, para. 16).

4.08 Maintaining adequate liquidity has been a continuing problem for

COFIEC, notwithstanding its practice of matching loan repayments by its clients

with payments to its creditors. The Company has recently centralized the

management of its lines of credit in a new resources department and this

should aid in liquidity management.

4.09 COFIEC has had difficulty in maintaining its level of operations

within the debt-to-equity limitation set in agreement with the Bank. In

addition, there had been discrepancies with COFIEC as to the inclusion of

refinanced letters of credit in the definition of debt. Under the proposed

loan the outstanding amount corresponding to such transactions would be

- 14 -

included in the debt-to-equity calculation and an agreement was reached

with COFIEC during negotiations on a full accounting disclosure of these

transactions. To avoid forcing a reduction in COFIEC's operations, however,

an increase in the debt-to-equity limitation from 7:1 to 8:1 was agreed

upon at negotiations, representing de facto only a slight increase in

leverage.

4.10 Profitability. Inflation has had a debilitating effect on COFIEC's

profitability. In 1973-75 the average real return on equity was negative.

To deal with this, the Company was under pressure to increase short-term

operations, its most profitable lines, and to cut costs. In so doing, the

gross spread was maintained in the range of 4.4% to 4.9% of assets, while

administrative expenses and provisions were reduced, perhaps too rapidly, to

2.3% of assets. The flexibility of COFIEC's management prevented a more pre-

cipitous fall in real profits at the expense of downplaying COFIEC's role as a

development bank.

Prospects

4.11 The following is based on projections made by COFIEC; they are

somewhat conservative since they do not fully reflect the new possibilitiesthat are opened to the Company by the new commission structure (para. 2.16)

and the agreements reached on COFIEC's financial policy during negotiations.

The projections are consistent with COFIEC's newly prepared Strategy Paper

(Annex 29).

4.12 The rapid growth of the Ecuadorian economy is creating new demands

for COFIEC's services. Through 1978, total disbursements are projected to rise

at almost 9% p.a. in real terms and the Company expects long-term lending to

grow faster than any other type. These projected operations, while represent-

ing an improvement over recent years, would nevertheless result in COFIEC

having only about one-third of its portfolio in long-term operations by 1978.

But in view of the new commissions the Company believes that it can increase

its long-term activity still more (to 50% of its portfolio in 1978) and reduce

its short- and medium-term operations to no more than four times equity by the

end of 1978. An agreement on this limitation was reached during negotiations

and the end of 1978 was set as a deadline for achieving it.

4.13 Resource requirements. To meet its clients' needs for short- and

medium-term financing, COFIEC will continue to rely on foreign lines of

credit, BCE discounts and acceptances, and loans from IESS and AID. It will

supplement them by issuing medium-term financial certificates. Together,

additional short- and medium-term resources would make up about half of the

total resources needed through 1978. Long-term resources would come from

much larger bond sales, equity increases (mainly from retained earnings), and

the proposed loan. Total foreign exchange needs during 1976-80 come to US$46

million but the Company has identified new resources of US$8 million, leaving

a gap of US$38 million. The US$10 million portion of the proposed Bank loanallocated to COFIEC would fill only 26% of the projected foreign exchange

- 15 -

gap and the remainder would be filled mainly by using bond sales to purchaseforeign exchange and by other foreign borrowings. Thus, any substantialshortfall from COFIEC's ambitious resource mobilization program would resultin curtailed lending.

4.14 Financial projections. According to its projections, COFIEC'sassets will grow at 10% p.a. in real terms through 1978 and, allowing forrevisions to reflect the limit on short- and medium-term operations, long-termoperations would comprise over one-half of the total portfolio in 1978 asagainst 28% in 1975. After 1978, growth would slow down in line with slowergrowth in equity. To avoid forcing COFIEC to hold back its mobilization oflong-term resources, the 8:1 debt-to-equity limit could be raised in steps to10:1 after periodic reviews which should satisfy the Bank that: (a) short-and medium-term operations do not exceed four times equity; (b) portfolioquality is satisfactory; (c) liquidity management, appraisal capacity, andsupervision have improved to the satisfaction of the Bank; (d) most of theadditional resources will be mobilized domestically by issuing bonds, finan-cial certificates, or similar instruments. Agreement on the application ofthese criteria was reached during negotiations.

4.15 The gross spread is projected to remain around 4.4% of assets andadministrative expenses would rise as more resources are devoted to appraisaland supervision, but the new commission structure should allow the spread toincrease to around 5%. Profitability nevertheless would remain modest. Thenominal return on equity would be in line with the recent past but COFIECwould be making a sizable contribution to the long-term financial needs ofEcuadorian industry. Due to lower projected inflation, the real return onequity would average around 11% p.a. compared to negative returns of the lastthree years.

V. PROPOSED BANK LOAN

5.01 The project. The proposed loan of US$26 million to be granted tothe Republic of Ecuador would be channeled through BCE as the governmentfiscal agent 1/ to be relent to CV-CFN, COFIEC and new DFCs which meetthe qualification criteria (para. 5.02). Bank funds would be available toqualifying industrial enterprises whether privately or publicly owned, forthe financing of foreign exchange costs of equipment and permanent workingcapital, through either loans or equity investments. The proposed loan wouldbe repayable within 15 years on a composite amortization basis including 3years of grace. The terminal date for submission of subprojects would be June30, 1979, the closing date for disbursements, June 30, 1981. (Annex 37).

1/ BCE's function is to act as the Government's financial agent with res-ponsibility limited to handling disbursements and repayments of subloans.

- 16 -

5.02 Participation of new DFCs. The Bank will determine which of the newDFCs meet the requirements for participation in the proposed loan through areview of qualifying DFCs in the second semester after loan signing. In orderto qualify for review, new DFCs would have to meet the following conditions:

(a) minimum paid-in equity of S/ 20 million (US$800,000);

(b) total debt-to-equity ratio not greater than 4:1;

(c) a loan portfolio that includes at least five developmentlending operations having original maturities greater than5 years; and

(d) short- and medium-term operations would be limited to fourtimes equity.

The Bank's review of the qualifying DFCs would focus on (i) the adequacy ofmanagement and administrative procedures, (ii) the overall financial andeconomic soundness of the institution, (iii) the capability to prepare,evaluate, and supervise investment, and (iv) the size and characteristics ofthe project pipeline. Two or three new DFCs may be expected to qualify forreview. All subloans made by new DFCs would be subject to approval by the Bank.New DFCs would enter into a Project Agreement with the Bank substantially alongthe lines of those signed with CV-CFN and COFIEC.

5.03 Allocation of loan. In line with the expected volume of operationsof each DFC, the proposed loan of US$26 million would be allocated as follows:US$13 million to CV-CFN, US$10 million to COFIEC, and US$3 million to the newDFCs that meet the requirements for participation. The allocation of the US$3million to the new participating DFCs would be determined, after exchangingviews with the Government, by the Bank on the basis of its reviews of theseDFCs to take place not later than March 31, 1978. Any portion not assigned tothe new DFCs would become available to CV-CFN and COFIEC in equal amounts.Any amounts uncommitted by the DFCs six months before the end of the commit-ment period could be reallocated among them by the Bank after consultationwith the Government.

5.04 Free limits. The following free limits and aggregate free limitswould assure Bank review of a reasonable portion of the financing undertakenwith Bank funds by each institution.

CV-CFN COFIEC New DFCs- - - - -u $ - - - - --US$…

Free-limit 1,000,000 750,000Aggregate free-limit 8,000,000 5,000,000

- 17 -

5.05 Interest rates. Commissions at a rate ranging between the maximaallowed under Resolution No. 927-76 and one percentage point below thosemaxima (para. 2.16) would be added to the 12% interest rate. Thus, dependingon the term, and on each DFC's policy, Bank funds from the proposed loan wouldbe available to the ultimate users at effective costs ranging between 13% p.a.and 16% p.a. During negotiations, an agreement was reached with the Governmentthat neither the interest rate nor the schedule of commission charges would bealtered without the Bank's concurrence prior to the closing date of theproposed loan. At the present and expected annual inflation rates, theseinterest rates would be substantially positive in real terms. Subloans withoriginal final maturity of 5 to 8 years would provide the DFCs with effectivespreads on Bank funds ranging from 3.55% to 4.30%.

5.06 Fiscal agent and guarantee fee. BCE would continue as fiscal agentfor the entire proposed loan. As the Government's agent, the BCE would chargea fee for foreign exchange coverage and minimal administrative costs of 2%.However, this fee would be reduced to 1.75% in the case of subloans on whichthe DFCs charge the minimum commission for that type of loan as agreed withthe Bank (para. 5.05).

5.07 Subloan conditions. The DFCs will set subloan terms and graceperiods in accordance with the subprojects' financial requirements but, inany event, final repayment would be made within 15 years of the signing ofthe proposed loan, including grace periods not exceeding 3 years.

5.08 Disbursement and procurement. Disbursement and procurement pro-cedures would be according to the standard practice for DFC lending used inprevious loans to Ecuador. Disbursements channeled to the DFCs through BCEwould be made for 100% of the foreign expenditure component of the sub-projects. As requested by COFIEC, the loan would include provision forreimbursing COFIEC up to US$1 million equivalent for approved expendituresmade between January 1, 1977 and the date of the loan agreement. As agreedwith COFIEC during negotiations, retroactive financing would probably belimited to only two subprojects.

5.09 Project benefits and risks. A principal benefit of this project isthe creation of an appropriate term differentiation in the interest rates onmedium- and long-term lending with Bank funds. These rates are likely toserve as a benchmark and to be widely used in medium- and long-term lendingin Educador. It is understood that CV-CFN will apply the rates agreed to withthe Bank on all its lending, and it can be assumed that the private DFCs willnot charge less than CV-CFN. In light of the term structure of the DFCs'lending portfolio, the average of the minimum spreads under the new interstrate structure would be about 3% p.a. This interest rate structure shouldremove a major obstacle to the mobilization of long-term resources for industry.The program of capital market studies would build on this change to introduceeventually further institutional improvements in the intermediation of privatesector savings into productive investment.

- 18 -

5.10 The economic benefits of subprojects financed under the proposedloan are expected to be similar to those of the first two DFC operationsas summarized in para. 1.01. That is, (i) an average internal economic rateof return of about 30% is expected for projects benefiting from the loan, (ii)about one-half of the Bank resources would be for industries with backwardlinkages in the agricultural and forestry sectors, and (iii) some 80% of thesubloans would be oriented to substitute imports and/or expand exports. Also,no significant change in the wide subsector distribution of subloans isexpected. Based on the experience of the two previous DFC operations, thedirect employment generated by the subprojects is expected to be modest, butthe indirect employment effect is expected to be substantial due to theirextensive linkage with highly labor-intensive sectors. In implementing theproposed project, the Bank would encourage DFCs to place more emphasis on thedomestic material component and the employment creation of their subprojects.Subloan terms are expected to be similar to those under the two previousloans, ranging between 7 and 12 years, with an average life of 9 years.In connection with the proposed loan the reporting requirements of the parti-cipating DFCs to the Bank would be strengthened in order to obtain informationuseful to determine the economic impact of subloans and of the operationsof the DFCs in general, and to have a better basis for financial and indus-trial policy discussions with the Government in the future.

5.11 The proposed project would assist in further institutional upgradingof CV-CFN and COFIEC and help in the early phase of establishing a country-wide system of development banks. The project, as designed, does not involveany special risks.

VI. AGREEMENTS REACHED DURING NEGOTIATIONS

6.01 During negotiations, agreements were reached with:

(a) The Government of Ecuador on:

(i) carrying out capital market studies (paras. 2.18 and2.19);

(ii) protecting CV-CFN's capital against future foreignexchange losses that exceed its net profits and freereserves (para. 3.08).

(iii) conditions for the new DFCs to participate in theproposed project and to use Bank funds (paras. 2.17,5.02, 5.03 and 5.04);

(iv) maintenance of the interest rates and commissions onDFC lending (para. 5.05); and

- 19 -

(v) the fee to be charged by the Central Bank for theforeign exchange risk and administrative costs(para. 5.06).

(b) CV-CFN on:

(i) limitation of short- and medium-term operations(para. 2.17) and increase in the debt-to-equity limitto 6:1 (para. 3.12);

(ii) changes in the Declaration of Policies and Proceduresto specifically incorporate the activities of FOPEX(para. 3.02), and the need for any further changes to beacceptable to the Bank (para. 3.10);

(iii) calculation of the financial and economic rates ofreturn on all subprojects involving an investment inexcess of US$500,000 (para. 3.03), and limitation ofsublending of Bank funds (para. 3.04);

(iv) submission of satisfactory supervision and disburse-ment manuals within six months of loan signing(para. 3.03), and implementation of an improved cashbudgeting system (para. 3.08);

(v) increased provisions for doubtful accounts as a percent-age of total portfolio (para. 3.06), and accountingtreatment of foreign exchange losses and gains(para. 3.08); and

(vi) free limits (para. 5.04) and relending terms (paras. 5.05and 5.07).

(c) COFIEC on:

(i) implementation of the plan of reorganization (para. 4.01),and completion of the plan to strengthen the appraisaland supervision staff (para 4.03);

(ii) changes in the Declaration of Policies and Procedures toremove the limit on long-term borrowing, and the need for

any further changes to be acceptable to the Bank (para. 4.02);

(iii) calculation of the financial and economic rates of returnon subprojects involving an investment in excess ofUS$500,000 for non-Bank-financed subprojects or US$250,000for Bank-financed ones (para. 4.03);

- 20 -

(iv) a program to increase provisions for bad debts (para. 4.07),

and limitation on short- amd medium-term operations(para. 4.12);

(v) full accounting disclosure of refinanced letters ofcredit, increase in the debt-to-equity limit to 8:1(para. 4.09), and criteria for subsequent increasesin the debt-to-equity limit (para. 4.14); and

(vi) free limits (para. 5.04), retroactive financing (para.5.08), and relending terms (paras. 5.05 and 5.07).

6.02 The introduction of the changes in CV-CFN's and COFIEC's Declara-

tions of Policies and Procedures agreed upon during negotiations (paras. 3.02,3.12 and 4.02) would be a condition of disbursement for the subprojects sub-

mitted by each institution.

6.03 With the above agreements, the proposed project constitutes asuitable basis for a Bank loan to Ecuador of US$26 million equivalent on the

terms and conditions listed in Chapter V and supplemented in Chapters II, III

and IV.

ANNEX 1Page 1

ECUADOR - APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT

INTEREST AND REDISCOUNT RATES(nominal annual rates in percent)

Before Before SinceJan. 75 Aug.'76 Aug.'76

I. CREDIT RATES

A. Central Bank

1. To Commercial Banks

a. Discount rate 8 8 8b. Agricultural, fisheries and artisan

credits (redisc.) 8 6 6c. Industrial credits (redisc.) 8 7 7d. Commercial credits (redisc.) 8 10 10e. Special advances 5 7 7f. Advances to cover reserve requirements 10 12 12

2. To National Development Bank (BNF) and CooperativeBanks for Rediscounts and advances

a. Agricultural, fisherie? and artisan credits1/ 4 3 3b. Small-scale industry32 7 3 3c. Commercial credits 8 10 10

3. To Public Sector Finance Corporation

a. Industrial rediscounts and advances - 7 7b. Rediscounts FOPEX _ 4 4

4. To Private Sector Finance Corporation

a. Rediscounts and advances 9 8 8

5. To Financial Institutions through Fondos Financieros

a. General rediscounts -3 3b. Rediscounts under Livestock Development Program - - 7 7

6. To Private Individuals

a. Direct credits and discounts 12 12 12

1/ Including rediscounts of credits to Empresa Nacional de Almacenamientoy Comercialization (ENAC).

2/ Regulation 755 of January 1975 set this rate at 4%; however, regulation781 of July 1975 set it at 3% and extended it to Commercial Banks.

j Fondo de Promocion de Exportaciones.Including private Financieras.

ANNEX 1Page 2

Before Befot~e SinceJan. '75 Aug.'76 Aiag.'76

7. To Private Individuals through Fondos Financieros

a. Agricultural, fisheries, artisans - 7 7b. Industry for purchase of agricultural raw

materials _ 7 7c. Other industrial credit - 8 8d. Advances for future exports 6 6 6e. Reliquidation after export failure 12 12 12

8. To Public Sector

a. Central Government 3 3 3b. Others 5 5 5

B. Commercial Banks

1. Ordinary loans 12 12 122. World Bank DFC loans 13 13 133. Bond financial loans j 14 14 144. Overdue loans 14 14 145. CV-CFN through FOPEX 8 86. CV-CFN on rediscount of credits to small-scale and

artisan industries:Commercial Banks - 5 5BNF - 3 3

7. Letters of credit and guarantee of foreign loans(commission) 4 4 4

C. National Development Bank and Cooperative Banks

1. Agricultural credit (max.) 8 9 92. Small-scale and artisan industries (max.) 10 9 93. Commercial credits (max.) 12 12 124. ENAC - 4 4

D. Fondos Financieros 4/

1. Credits under Livestock Development Program 5- 12 122. Other lending operations - 9 9

1/ Including private Financieras.2/ Including 1% inspection commission.3/ Including 2% commission on bond issue.:/ Commercial and Development Banks have access to this mechanism.:/ For credits of more than S/ . 625,000 (222-EC).

ANNEX 1Page 3

Before Before SinceJan.'75 Aug.'76 Aug.'76

E. Commissions

1. On foreign guarantees and letters of credit 4 4 4

2. On Loans (on balance outstanding for the

indicated period)(a) Less than 3 years - - 0

(b) More than 3 years but less than 5 years - - 2

(c) More than 5 years but less than 8 years - - 3

(d) More than 8 years - - 4

II. DEPOSIT RATES

A. Pass book savings

1. Commercial Banks 6 6 6

2. Savings and Mortgage Banks

B. Deposits with Commercial Banks

1. 31-180 days, maximum interest 7 7 7


3. Over 360 days, maximum interest' 9 9 9

C. Deposits with Savings and Mortgage Banks



3. Over 360 days, maximum interest 10 10 10

B. Government Bonds, Cedulas Hipotecarias, and

securities issued by stock companies 1/ 12 12 12

Source: Monetary Board Resolutions.

1/ May be sold at discount for higher effective yield.

ANNEX 1Page 4


Maximum Effective Interest Rates, Resulting from

New Commissions

Loan maturity, Loans financed Loans financed withYears with bonds 1/ other resources

1 12.5 12.0

2 12.5 12.0

3 12.5 12.0

4 14.5 14.0

5 14.5 14.0

6 15.5 15.0

7 15.5 15.0

8 15.5 15.0

9 16.5 16.0

10 16.5 16.0

11 16.5 16.0

12 16.5 16.0

13 16.5 16.0

1/ No bonds of less than 5 years have been issued.

LCPDFOctober, 1976


Arrearages of Selected Banks and Financieras

Portfolio Arrears Arrears as %

Millions of SI % Millions of SI % of PortfolioIncrease Increase

1974 1975 1974 1975 1974 1975

BNF 4,344.2 5,990.5 37.8 524.3 920.9 75.6 12.1 15.4Previsora 2,334.2 3,307.0 4.6 285.8 322.9 12.9 12.2 9.8Pichincha 1,762.7 2,067.5 17.2 68.3 68.7 0.5 3.9 3.3Descuento 1,032.0 1,392.5 34.9 135.4 141.0 4.1 13.1 10.1Filantr6pico 1,330.7 1,333.5 0.2 185.3 257.2 38.8 13.9 19.3Guayaquil 959.9 1,273.3 32.4 73.4 96.8 31.8 7.6 7.6COFIEC 1,084.0 1,291.1 43.8 38.8 66.9 72.4 3.6 5.2Paclfico 527.5 1,079.5 104.6 17.9 44.6 149.1 3.4 4.1America 577.1 813.7 40.9 9.3 19.8 112.9 1.6 2.4Territorial 262.4 406.6 54.9 11.9 17.1 43.6 4.5 4.2Azuay 292.9 402.4 37.3 21.9 13.5 -38.4 7.5 3.3

Cooperativas 97.7 130.5 33.5 3.7 9.3 151.3 3.8 7.0SGC 106.4 126.2 18.6 17.6 8.4 -52.3 16.5 6.7

Total 14,711.7 19,614.3 33.3 1,393.6 1,986.5 48.9 9.4 10.1

LCPDF

nctober, 1976 z

ANNEX 3ECUADOR: APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT

The Financing of Cross Domestic Investment, 1970-1974 1/(S/million)

1970 1971 1972 1973 1974Amount % Amount % Amount % Amount % Amount %

Direct Financing

Depreciation 2,354 .34 2,804 .26 3,185 .30 3,790 .26 4,434 .18

Retained Earnings 300-/ .04 400-/ .04 5041/ .05 1,662-/ .11 1,800-/ .08

Households (Equity to new 4/ 4/ 3&4/ 3&4/ 2&4enterprises) 189- .03 148- .01 110-.01 568- .04 750 -. '03

Direct foreign investment 2,215 .32 4i,05 .37 5,107 .48 1,357 .09 1,925 .08

Subtotals 5,058 .73 7,404 .68 8,906 .84 7,377 .50 8,909 .37

Intermediation

Banking System (Net)

Central Bank 269 .04 60 .01 - 98 -.01 1 - 349 .01

Commercial Banks 378-/ .05 601 .05 971 .09 1,527 .10 2,405 .10

BNF 1002/ .01 200 .02 241 .02 797 .05 2,430 .10

DFCs

CV-CFN-/ 39 .01 294 .03 15 - 279 .02 1,150 .05

COFIEC-/ 178 .03 -67 -.01 242 .02 218 .01 349 .01

Subtotals 964 .14 1,088 .10 1,371 .13 2,822 .18 6,683 .27

Central Government Saving 6/ 2 .00 63 .01 643 .06 1,712 .12 6,701-/ .28

8/Others- __9212 -_13 _2914n. 22 -326 -.03 2,883 ,20 1,974 .08

Total equal Gross DomesticInvestment 6,936 1.00 10,995 1.00 10,594 1.00 14,794 1.00 24,267 1.00

1/ Source (when not otherwise mentioned): Boletin del Banco Central del Ecuador, January-April 1975.

2/ Estimated by mission on the basis of past growth rates.

3/ Source: Carta Economica. CEDE, May 1975, P.2.

4/ Source: Sintesis 1964-1974, Superintendencia de Companias, 1974.

5/ Source: Industrial Sector Report No. 1186-EC.

6/ Source: Economic Memorandum Report No. 1033-EC and IMF's Consultation Paper, October 1974, for 1970 data.

7/ Government savings are net of CV-CFN's equity increase (S/250 million) and of oil resource transfer to BNFthrough FONADE (S/502 million).

8/ Residual item.

LCPDFOctober, 1976

ANNEX 4Page 1

ECUADOR - APPRAISAL OF THE THIRD DEVELOPMIENT BANKING PROJECT

COMISION DE VALORES - CORPORACION FINANCIERA NACIONIAL

Past Performance and Prospects


1. Comision de Valores - Corporacion Financiera Nacional, CV-CFN, is a

wholly government owned DFC, the first such financial institution in the

country. It is oriented toward the private sector of the economy broadly

reflecting the social and economic development objectives of the Government.

Nevertheless, CV-CFN has operated in the past with a large degree of autonomy

from the public sector.

2. The Board of Directors is composed of nine members, seven of whom are

ministers of state and the other two are non-voting members representing the

private sector (Annex 5). The Chairman of the Board is appointed by the

President of Ecuador. An Executive Committee formed by two board members and

the General Manager of the Corporation is the operational authority of the

Board.

3. As a result of its growth and scope of operations, CV-CFN instituted

in 1974 and 1975 a reorganization program leading to a more effective integra-

tion and decentralization of activities. Even though the reorganization was

paralleled by considerable personnel changes at the second and third manage-

ment levels, the first results of an internal evaluation study on the new

organization are very satisfactory. Job descriptions clearly define the lines

of responsibility and authority for most positions and they are compatible with

the internal decision processes and information available for each major

operation.

4. CV-CFN is headed by a general manager who (ieleg.ates considerable

administrative authority to the assistant general manager. The organization

is centered on the finance and promotion departments (Annex 7). The finan-

cial manager is in charge of accounting, budgets, treasury and control, as well

as of resource management and project supervision. The promotion manager is

responsible for project evaluations, economic studies, project promotion and

export promotion. The sections of administrative services, human resources,

organization and methods, and data processing constitute another department

that reports directly to the assistant general manager. The general manager

can approve operations up to S/ 5 millions.

5. The staff has been growing steadily since 1972 (139 employees)

reaching a total of 206 at the end of 1975 and the proportion of professionals

has increased from 41% to 48% over this period. In spite of the influx of

relatively young and inexperienced technicians, the new staff has been effec-

tively integrated into the operations and their identification with the company

ANNEX 4Page 2

is strong. This may be explained by the competitive salary scale, parti-cularly for low and medium-level positions, as well as by the good in-housetraining program for the junior staff. Most of the staff is located in theQuito headquarters but the three branches in Guayaquil (17 employees), Cuenca(8 employees) and Manta (4 employees) have also increased their staff since1972.


6. CV-CFN has conducted its operations according to its Declarationof Policies and Procedures (Annex 6). However, in view of the Corporation'slarger role in promoting Ecuadorian exports and of the fund for this purposeset up outside but associated with CV-CFN (FOPEX), an agreement was reachedduring negotiations to specifically incorporate this activity in theDeclaration of Policies and Procedures before disbursement for subprojectssubmitted by CV-CFN.

7. Appraisal. With a total staff of 17 professionals (10 economists and7 engineers) in the project evaluation department, C\-CFN handled satisfac-torily its 103 lending operations in 1975. The methods used to evaluate thetechnical, marketing, financial and social dimensions of projects are adequate.However, in order to prevent investment in inefficient industries (para. 2.06)the economic rate of return would be calculated on all projects involving atotal investment above US$500,000 equivalent. This undertaking, confirmedduring negotiations, would strain somewhat the capacity of the current eva-luation team but it is expected that CV-CFN will have staff throughly preparedto carry out this task.

8. Supervision. Project supervision procedures are adequate and thefollow-up activities cover a wide range of clients and situations. There are15 persons carrying out these activities in the department of portfoliocontrol who completed 293 visits in 1975, almost as many visits as the numberof clients; 120 of these visits were to clients in arrears. The supervisionreports to management are adequate but they could be improved if the informa-tion flow from borrowers were more timely and if a supervision manual wereavailable. The Corporation is now preparing a supervision manual which shouldbe completed within six months of loan signing. An understanding to thiseffect was reached during negotiations.

9. Disbursement and procurement. CV-CFN is strict in defining and en-forcing conditions for disbursements. A manual for disbursement procedureswould, however, facilitate applying these rules and would speed up operations.An understanding that CV-CFN will submit such a manual within six months ofloan signing was reached during negotiations. On procurement, CV-CFN doesnot require international competitive bidding but engineers on its staffsatisfy themselves of the technical adequacy of the equipment and machineryfinanced. In the case of large imports of used equipment and industrialplants, management requests the opinion of an independent technical authorityon the prices and the technical conditions of the equipment. The project and

ANNEX 4Page 3

control departments of the Corporation also review the reasonableness of theprices of the goods and services procured.


10. Resources. Foreign loans have constituted a major source of fundsof the company between June 1972 and December 1975; 30.4% of the increase inassets was financed with funds from the Bank, Interamerican Development Bank(IDB), Andean Development Corporation (CAF), USAID, and Kreditanstalt furWiederaufbau (KfW) (Annex 13). The domestic capital market was used tofinance 21.4% of the Corporation's expansion through the issue of bonds, 20.8%of the new resources were other domestic term borrowing and 15.2% came froma new government contribution to equity; profits retained during the period(9%) and miscellaneous credits (3.2%) made up the balance.

11. CV-CFN has had access to three Bank loans. After a slow start inutilizing resources under the fisheries loan (555-EC), the Corporation committedand disbursed US$1.7 by the end of 1975. On July 1, 1976, CV-CFN requested theBank to cancel the balance of its share under this loan (US$.3 million). Itsshare of US$4.0 million under the first DFC loan to Ecuador (721-EC) was fullycommitted and disbursed before the loan's closing date of March 31, 1976.Commitments under loan 930-EC reached US$9.4 million of which USS5.1 wasdisbursed as of June 30, 1976. Disbursements are expected to be completedby mid-1977.

12. Loans and operations. CV-CFN has continued expanding rapidly. In1975, the volume of loans approved (S/ 1.4 billion) was equal to the totalamount approved during its first twelve years of operations as a DFC from1964 through 1972. Increasingly, a large proportion of the loans has beenfor sizable and long-term operations. Of the loan volume approved in 1975,64% was for loans of S/ 25 million or more and 73% had terms of 5 years orlonger (Annex 10). In spite of this trend, CV-CFN has also lent more forworking capital purposes. In fact, between 1972 and 1975, 20.9% of theamount approved was for working capital financing while this percentage hadbeen only 13.7% until 1972. Lending is still concentrated in the two majoreconomic poles around Quito and Guayaquil, which acounted for 80.5% of theamount approved in the 1972-75 period. The portfolio is considerablydiversified across industries with cement, ceramics, glass and other non-metallic-mineral products accounting for 30% of the loans approved since1972 (Annex 10). industries processing agricultural raw materials such asfood, beverage, tobacco, textiles, leather products, wood products and paperaccounted for 38.4% of total loans.

13. Bank resources were used to finance 30.3% of an aggregate projectvalue of US$44.6 million equivalent. The industrial sectors benefittingfrom Bank loans were primarily the textile, garment, leather and hotel in-dustries, which used 71% of the proceeds. The average size of these subloanswas US$1.0 million. More than 80% of the firms that used Bank funds had

ANNEX 4Page 4

more than US$2 million in total assets although 41% of Bank money was used tofinance new enterprises. The average maturity of the subloans was 8.9 years(Annex 11). Due to the relatively large size of CV-CFN's past subloans,it was agreed to limit sublending of Bank funds to individual firms to amaximum of US$3 million equivalent.

14. About one-fifth of CV-CFN's 1975 assets represented equity invest-ments after an almost six-fold expansion since 1972 (Annex 8). More than 60%of these investments is in two cement companies and one sugar company(Annex 12). The balance is largely made up by equity participations in CAFand in fertilizer, tuna, tea, steel and hotel firms. Also, the company hasimportant equity interests in three private finance companies and it is themajor stockholder in the Guayaquil and Quito stock exchanges. Of the 37companies in which the Corporation has an equity participation, 11 reportedprofits in 1975, 6 reported losses, and the other 20 were still in the pre-operating stage. Due to the extensive Ecuadorian practice of not paying cashdividends and to the fact that no divestments have taken place, cash returnson CV-CFN's investments have been rare.

15. A third category of operating activities carried out by CV-CFN isrelated to the administration of special funds set up by law, mostly with thecontribution of public funds in order to provide resources for specific pur-poses (para. 22 of Annex 6). There are five funds with aggregate resourcesamounting to almost S/ 150 million. Two funds, FOPEX and the Counterpart forBasic Investment, have their accounting separate from CV-CFN.

l6. Since inception, CV-CFN has had a fiduciary role in the placementof government and municipal bonds, and certain mortgage bonds issued bycommercial banks, whereby CV-CFN buys the bonds at a discount and sells themto third parties at par with the obligation to repurchase them on sight forthe same price. As of December 31, 1975, the Corporation held S/ 155.6million of these securities in its portfolio. CV-CFN does not expect toperform this underwriting role in the future.

17. A final group of lending activities carried out by CV-CFN consistsof extending letters of credit and guarantees on loans given to its clientsby other financial institutions. At the end of 1975, CV-CFN had S/ 267.9million in guarantees outstanding.

18. Audit. CV-CFN's accounts are satisfactorily audited annually byPrice Waterhouse and Company. The long-form report includes a judgement onthe adequacy of provisions for expected portfolio losses and a statement onCV-CFN's exposure to foreign exchange risk.

19. Portfolio quality. As of March 31, 1976, total arrears amountedS/ 105.0 million or 4.3% of the lending portfolio. 1/ The proportion of theportfolio in arrears above three months was 3.1% (up from 2.3% at the end of

1/ Lending portfolio is defined her as Loans (net) + Small IndustryRediscounting + Guarantees.

ANNEX 4Page 5

1974), representing 10.5% of the clients. Only six clients accounted for 59%of the arrears and total rescheduling and refinancing during 1975 represented5.0% of the average portfolio. Even though these percentages reveal a slightdeterioration of CV-CFN's portfolio compared to previous years, there arestrong indications that this change is of a temporary nature rulated to ageneral lack of liquidity throughout the economy (para. 2.12). An analysis ofthe borrowers experiencing difficulties and a review of the guarantees backingup the exposed loans, the quality of the supervision, and the actions taken bymanagement (33% of the amount in arrears is in judiciary process) indicate thatpossible losses are to be covered by provisions (S/ 19.6 million). Becausethe safety margin for future eventualities is smaller than in the past,however, it was agreed to increase provisions as a percentage of portfoliofrom the current level of 1% to not less than 1.5% by the end of 1978.

20. Profitability. In 1975, 71% of total revenues came from loans(Annex 9) which yielded 10.6% on the average amount outstanding. The profit-ability of marketable securities (bonds and financial certificates) was 8.6%,commissions on guarantees and other operations were 2.9% of the amount out-standing and equity investments yielded 10.5% (an unusually good year forthese assets). The average return on assets was 9.1%, and net income overassets was 2.6%, which was also the average for the last five years (Annex 20).

21. CV-CFN's return on equity between 1968 and 1975 has averaged 6.1%.In real terms, profits have been consistently negative, inflicting a cumula-tive erosion on the Corporation's equity base of 26.3% during the last fiveyears. This has occurred in spite of the Corporation's tax exemption, 1/ itsrather satisfactory level of administrative expenses given the extent of itsdevelopmental and public activities (2.4% of average total assets during thelast five years), and the adequate productivity of its personnel in key func-tions. Three main factors have determined CV-CFN's negative real return onequity since 1971. First, the Corporation has allocated to assets of low finan-cial profitability (equity investments, equity investment projects, exportpromotion fund, rediscounts of credits to small-scale and artisan industries)more resources than it has borrowed on a subsidized basis. Second, the debt-to-equity ratio (average of 1.5) has been relatively low. Third, inflationhas been exceptionally high during this period. The erosion of CV-CFN'scapital base has been offset by an infusion of fresh capital in 1974 (para.10).

22. Financial condition. Even though the Corporation shows a pastdecline of its liquidity position in terms of its current ratio (2.0 at theend of 1975) (Annex 20), its position is still adequate considering the pre-dictability of its financial flows and its access to rediscounting facilitiesat the Central Bank. However, occasional liquidity constraints could be

1/ CV-CFN does not pay taxes on its income, it is exempted from all stateand municipal taxes on its transactions, and the interest paid on bondsissued by the Corporation is also tax-free to the bond holders.

ANNEX 4Page 6

avoided with an improved budgetary mechanism. An understanding concerning theimplementation of such a system was reached during negotiations. CV-CFNhas amply met the legal requirements of maintaining in cash and other liquid

assets at least 5% of the outstanding bonds (government bonds, municipal bondsand own bonds) and mortgage bonds issued under an automatic repurchase agree-ment. At the end of 1975, a total of S/ 737 million was exposed to thisagreement. As to the relationship between lending and borrowing terms, CV-CFNhas obtained on the average almost one year more in maturity from its creditorsthan it has given to its clients.

23. With respect to financial risk, past returns have shown littlevariability (Annex 20). Likewise, the risk implicit in an unexpected dete-rioration of its portfolio seems to be well within the limits of financialsoundness (para. 19). However, because CV-CFN carries the exchange riskon its foreign borrowings (with the exception of Bank loans) this riskconstitutes a potential source of loss. As of December 1975, liabilitiesdenominated in foreign currencies and exposed to exchange risks amounted toUS$29.6 million (US$31.8 millon in 1974) and the losses due to exchange ratefluctuations were S/ 20.4 million (SI 31.6 million in 1974). Under currentaccounting practices, foreign exchange losses on the outstanding long-termloans are treated as an asset subject to gradual amortizations. In view ofthe nature and the dimension of this risk, agreement was reached with CV-CFNduring negotiations on treating foreign exchange losses (profits) as anexpense (income) in the year when they occur. Furthermore, as in the caseof the second DFC Loan to Ecuador, an agreement was reached with the Govern-ment on restoring CV-CFN's capital to the level existing prior to exchangelosses that exceed CV-CFN's net profits and reserves.

Prospects

24. Forecast of operations. The Corporation's forecast operationsare reasonable, consistent with its strategy, and well within its handlingcapacity. 1/ The amount of industrial loans approved is expected to reachS/ 1,764 million, an almost 27% increase with respect to 1975. The projectpipeline submitted to the Bank in February 1976 contained 80 loans amountingto S/ 698 million, of which S/ 356 million was for projects intended toincrease exports and to substitute imports. Of the total pipeline, 24% wasrequested by new enterprises, 75% was to increase the capacity of existingfirms, and 1% was for modernizing plants and other purposes.

25. Equity investments are expected to more than triple by 1980 (atcost). Of the SI 1,298 million total equity addition, 35% will be for newcompanies promoted by the Corporation (15 of these are already identified),

1/ Company forecasts are based on the interest rate structure prevailingin Ecuador at the time of the appraisal mission. The projectedprofitability is expected to improve (para. 31) with the applicationof the new commission charges (paras. 2.16 and 5.05) but the compo-sition and level of operations will remain essentially unaffected.

ANNEX 4Page 7

5% will be for new companies in which CV-CFN does not plan to be promotion-

ally involved and the balance (60%) represents capital expansions.

26. According to the strategy document submitted to the Bank (Annex 14),CV-CFN foresces a wider role in developing, evaluating, financing and givingtechnical assistance to large publicly sponsored projects and companies.CV-CFN has already started with this developmental function in the cement and

the sugar industries but more sizeable projects are envisaged in other sectorsof the economy. The current Declaration of Policies and Procedures, however,contains reasonable safeguards against developments in these activitiesthat may unbalance CV-CFN's use of resources, operations, productivity andprofitability in a way that may be detrimental to the soundness of the insti-tution as a financial intermediary. Since some of the Corporation's eventualroles would require changes in its Declaration of Policies and Procedures, itwas agreed during negotiations that any such change would have to be made withthe Bank's concurrence.

27. CV-CFN also plans to take more active steps in developing thecapital market in Ecuador. Specific possible plans include setting up oneor more equity funds within CV-CFN which would be based on the Corporation'sportfolio, participate in the creation of--and provide assistance to--the new

DFCs, issue more bonds, introduce instruments with variable returns, elimi-nate the repurchase agreements, issue securities in the Eurobond market, andengage more heavily in short-term operations. The volume of the short-termoperations, however, would be well below the maximum that would be agreed withCV-CFN and the other participating DFC's (para. 2.17).

28. Resource requirements. Planned operations for 1976-1980 call forS/ 13.6 billion of industrial financing (Annex 15). Projections indicatethat internally generated funds (retained earnings and loan amortizations)constitute increasingly the major financing source (Annex 18), representingan average of 39% of the amount needed during the period (50% in 1980). Thebalance is expected to be obtained from direct loans of domestic institutions(16%), domestic bond issues (11%), fresh capital increases (9%), and foreigncredits (25%). About 43% of the foreign exchange need (US$137 million) iscovered by undisbursed funds of loans already available (US$58.8 million),leaving a foreign exchange gap of US$78 million through 1980 (Annex 19). Theproposed Bank loan would cover 17% of the foreign exchange gap and the balanceis expected to come from a loan from IDB and an eventual bond issue in foreignmarkets in 1980.

29. Of the domestic resources to be tapped, two need new tax legislationor special by-laws to be issued by the Central Bank. First, a National Fundfor Industrial Investment (FNII) would be formed with contributions by non-institutional investors who would get tax benefits for their contributions.Second, new mechanisms for bank acceptances and rediscount operations arealso expected to be used extensively by CV-CFN in the future. The Corpora-tion's projections include systematic equity additions from the Government

ANNEX 4Page 8

of S/ 300 million per year starting 1977. 1/ Although management stillconsiders these capital increases as part of the Corporation's resourcetargets, their amount and timing are tentative and subject to reductions.Debt instruments could be used to offset possible shortfalls in new capital,leaving the institution's lending program unaffected.

30. Financial projections. The Corporation's operating plan, ifrealized, would increase assets more than three times by 1980 and satisfac-tory financial positions would parallel this expansion. Thus, the currentratio will remain at around 2.0 although dipping somewhat during the fastexpansion of 1976 and 1977, and the maturity ratio between loans and creditswill be even more favorable than in the past. Furthermore, the debt-to-equity ratio is expected to vary between 2.9 and 3.8 during the projectedperiod. To cope with a possible equity restriction, CV-CFN requested, and theBank agreed, that the current overall debt-to-equity limit be raised to 6:1.This increase is reasonable and it would not result in a deterioration of theCorporation's financial condition.

31. CV-CFN projects a deterioration in net income over assets from 2.3%average for the last four years to 1.5% in the next five years (Annexes 17and 20). This reduction is largely explained by an increase in financialexpenses. However, the new commissions (para. 2.16), the structure of minimumcommissions (para. 5.05) which the Bank expects will be charged on all termlending and a slightly higher leverage would improve the profit picture.Firstly, based on the 1975 portfolio composition the new commissions wouldeventually increase CV-CFN's financial spread by 1.6 percentage points.This change in rates would increase CV-CFN's expected average return onequity from 6.4% to about 12.6%. Secondly, if the debt-to-equity ratio iskept at its 1976 level (3.8 rather than 3.4), return on equity would increasefurther to about 13.2%. Thirdly, since inflation is expected to decline, theprojected real return on equity would rise to 5.2% in contrast with thenegative returns in the past. 2/

1/ Authorized capital was increased from S/ 500 million to S/ 2,000 million inMay 1976.

2/ These projections assume that commissions are fully incorporated in theloan portfolio. Given the term structure of CV-CFN's outstanding port-folio and the projected approvals, the full impact of the commissionswould take place after 1980.

ANNEX 5


COMISION DE VALORES - CORPORACION FINANCIERA NACIONAL

List of Board Members and Alternates as of April 29, 1976

Principal Directors Alternative Directors

Dr. Carlos Arizaga VegaChairman of the Board and President

President of AYMESA

Ing. Galo Montaho Perez Subsecretary of the Ministry of Industry,

Minister of Industry, Commerce Commerce and Integration

and Integration

Econ. Ce'sar Robalino Subsecretary of the Ministry of Finance

Minister of Finance

Coronel Rene Vargas Passos Subsecretary of the Ministry of National

Minister of Natural Resources Resources

Coronel Oliverio Vasconez Subsecretary of the Ministry of

Minister of Agriculture Agriculture

Econ. Danilo Carrera Drouet Deputy General Manager of the Central

General Manager of the Central Bank of Ecuador

Bank of Ecuador

Econ. Alfonso Arcos Technical Director of the National

President of the National Planning Planning Board

Board

Ing. Pedro Pinto RubianesGeneral Manager of Fabrica Textil

San Pedro

Dr. Alejandro Ponce HenriquezRepresentative of the Chambers of

Industries of the "Costa"

LCPDFOctober 1976

ANNEX 6Page 1

ECUADOR


COMISION-,,9VALORES - CORPORACION FINANCIERA NACIONAL

Declaration of Policies and Procedures(Approved on September 30, 1970 and amended on June 5, 1973)

The Board of Directors of the Comision de Valores - Corporacio'nFinanciera Nacional (the Corporation), by virtue of the powers conferred uponit by its enabling legislation, establishes the following policies and pro-

cedures which will guide the financial activities and investments of theCorporation.

I. Objectives

(1) The fundamental objective of the Corporation will be to assist inthe economic development of the country by providing financialassistance to productive enterprises of the private sector and bysupporting economic infrastructure projects of the public sector.In addition, the Corporation will stimulate the development ofthe capital market as an instrument for channeling privatesavings into productive activities.

II. Investment Policies

(2) The Corporation will base its investment decisions on soundeconomic and financial criteria and will finance only technicallyviable enterprises with good prospect of economic and financialreturn.

(3) Although its operations will be oriented principally to thefinancing of the manufacturing sector, the company may alsofinance fisheries, tourism and agro-industrial projects.In no case will the company finance commercial activities orreal estate operations.

(4) The Corporation will finance the establishment or expansion ofenterprises when these are, or can reasonably be expected tobe, adequately organized and managed.

(5) In selecting projects, the Corporation will take into accountthe general economic development plans and policies of thecountry. Consequently, priority will be given to projectswhich have some of the following features: use of nationalraw materials; significant use of manpower; savings offoreign exchange through import substitution; production

ANNEX 6Page 2

of goods to meet national or foreign demand; participation ofa significant number of shareholders; possibilities for trainingpersonnel in technical and management matters; or the possibilityof development of related industries. In harmony with the fore-going, the Corporation will avoid financing enterprises whichdepend on excessive governmental protection for their profit-ability resulting in a negative economic benefit for the countryand consequently leading to an uneconomic utilization of nationalresources.

(6) When a project conforms to the technical, economic and financialcriteria for an investment by the Corporation and is of parti-cular importance for the economic development of the country, butdoes not arouse sufficient interest in the private sector, theCorporation may undertake it, even if it involves 100% financingby the Corporation. However, the aim of the Corporation, as inthe case of normal investments, will be to sell its participationwhen the project has reached an adequate development and whencircumstances permit it to do so on satisfactory terms.

(7) In the case of projects which require large investments, theCorporation will seek financial cooperation from other entities,whether national, international or foreign.

III. Type of Financing

(8) The Corporation will provide the following types of financing:

(a) medium and long-term loans;

(b) investment in share capital by direct participation, purchaseoptions, underwritings, etc.;

(c) guarantees and avals related to the purchase of machineryand/or equipment;

(d) rediscounting of loans granted by private banks, the NationalDevelopment Bank and private financial corporations to smallindustries in amounts up to S/ 200,000; and

(e) other financial operations which are in accordance with theobjectives and policies of the Corporation.

(9) The Corporation's loans will be principally for the purchase orconstruction of fixed assets. Notwithstanding, the Corporationmay also finance technical assistance and permanent workingcapital and, exceptionally, seasonal working capital.

ANNEX 6Page 3

(10) With its special resources for this purpose, the Corporationshall finance pre-investment studies of projects of the publicor private sectors, or of those which can be carried out bythe Corporation itself.

IV. Diversification of Investments

(11) With the purpose of maintaining a reasonable level of risk, theCorporation will diversify its investments.

(12) The Corporation normally will not grant to the same enterpriseloans for an amount greater than SI 20 million. For exceptionalprojects, at the discretion of the Board of Directors, theCorporation may grant loans for larger amounts; but in no casewill the total financing to one enterprise, in whatever form,including loans, participation in share capital, guaranteesor avals, or a combination thereof, exceed an amount equivalentto 15% of the Corporation's paid-in capital and free reserves.On the other hand, the Corporation will not provide financialassistance for amounts smaller than S/ 200,000 except in thecase of the rediscounts mentioned in sub-paragraph (d) ofSection 8, or in the case of pre-investment studies.

(13) The Corporation will limit its investment in the share capitalof a single enterprise to an amount equivalent to 10% of theCorporation's paid-in capital and its free reserves. TheCorporation will also limit the total amount of its investmentsin the share capital of enterprises to the amount of its ownpaid-in capital and free reserves.

V. Turnover of Investments

(14) As the projects in which the Corporation holds shares reach anadequate state of development, and with the double purpose offreeing resources for new financing and of stimulating wide-spread ownership of securities, the Corporation will sell itsshareholdings, when it can do so on satisfactory terms. In thesales of its investments, the Corporation will not only takeinto account its own interests but also those of the othershareholders and of the enterprises themselves.

VI. Relations with Enterprises Financed

(15) The Corporation does not intend to acquire control of the enter-prises it finances. Consequently, the Corporation normally willnot take up more than 25% of the share capital of the enterprisefinanced, except in the case of projects undertaken by theCorporation in accordance with the stipulations of point 6 ofthis Declaration, or as a result of an underwriting undertaken

ANNEX 6Page 4

with the expectation that the shares remaining for its accountwill not exceed the said limit. Notwithstanding, in cases ofjeopardy, the Corporation may take whatever measures it deemsnecessary to protect its interests.

(16) In accordance with usual banking practice, the Corporation willrequire its borrowers to provide and to maintain adequate securityin its favor; to keep accounting records which reflect theirfinancial situation in accordance with generally accepted account-ing principles; and to supply the Corporation with whatever in-formation it may reasonably require to establish the status oftheir operations and financial situation. The Corporation willtake the right to inspect the enterprises it finances as well astheir accounting records.

(17) All information furnished to the Corporation by applicants orclients will be treated by it as strictly confidential.

VII. Financial Practices

(18) The Corporation will conduct its operations in such a manner asto assure the maintenance of the value of its capital and ofadequate liquidity. The Corporation will charge interest, feesand commissions for its financing and services in such a waythat they yield an adequate return on the capital employed.

(19) The Corporation will maintain reserves in accordance with soundfinancial practice. These reserves will be sufficient to coverthe risk of loss associated with the size of its portfolio andthe status of the projects financed.

(20) The Corporation will maintain a reasonable level of administra-tive expenses, consistent with the scope and volume of itsoperations.

(21) The Corporation considers that the total of its liabilities,including guarantees and avals, in whatever form should maintainan adequate relationship with its own capital and free reserves.Consequently, the ratio of liabilities to capital and reserveswill not exceed 4:1.

VIII. Procedures

(22) The Corporation shall maintain the following funds, each withseparate accounting and independent resources:

(a) Fund for Industrial Investments;

ANNEX 6Page 5

(b) Fund for Small Industry; and

(c) Fund for Pre-investment.

(23) In accordance with its investment policies and to protect itsresources, the Corporation, prior to any financing, shallevaluate projects in relation to the market, technical andfinancial feasibility and the economic benefit for the country.

(24) The Corporation will not limit itself to evaluating projectswhich are presented for its consideration. The Corporation,by itself or with the help of consultants when circumstancesrequire it, will identify, study and promote industrial, agro-industrial, fishery and tourism projects of significant benefitfor the economy of the country.

(25) Procedurally, with respect to matters involving its Directors,officials and employees, the Corporation will abide by thestipulations of Article 50 of its Enabling Law.

(26) The Corporation will maintain accounting and statistical recordswhich accurately reflect its operations and financial status inaccordance with generally accepted accounting principles andpractices. The Corporation will employ the services of a firmof independent auditors of recognized technical and professionalcompetence, who will examine annually the accounts of the Cor-poration and give an opinion on the financial statements of theinstitution.

(27) The Corporation will maintain a balanced technical and managementorganization, with high level personnel which will enable it tocarry out market, technical, economic and financial evaluationsof the projects it finances, as well as to follow up its invest-ments.

(28) As part of its follow-up operations, the Corporation, when itdeems it necessary and when personnel availability permits it,will provide technical assistance to borrowing enterprisesthrough the preparation of problem identification and guidancereports, so that these enterprises may contract the specializedtechnical assistance that may be necessary.

LCPDFOctober 1976

ECUADOR-APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT


ORGANIZATION CHART

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MANAET MA.AS

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DEPT DEP D-T T DSERVICES DEPT E & T DN EALATA A DRA N A|FT

Februal V. ]97f~~~~~~~~~~~~~~~~~~~~~~~~~~~~~INi zrS A NMALISSAN SS E WA CT AIDNSU|ANC

FAD,UDT IOTA~~~~~~~~~~~~~~~~~~.

ECUADOR - APPRAISAL OF THE THIRD DEVELOPNENT BANKING PROJECT ANNEX 8COMISION DE VALORES - CORPORACION FINANCIERA NACluNAL

Audited Balance Sheets, 1972-1975(in S/ million)

1972 1973 1974 1975June 30 ___Dec._31 Dec.31 Dec.31

ASSETS

Current Assets:Cash and bank deposits 50.5 30.7 28.9 65.8Marketable securities 238.8 202.2 160.1 155.6Loans (Net) 167.1 210.5 322.8 493.4Interest and other receivables 16.0 16.7 65.7 64.4Prepaid expenses 1.5 2.0 2.5 6.1

Total Current Assets 473.9 462.1 583.5 781.7

Long-term Assets:Loans maturing after 12 months 558.1 729.3 1,149.6 1,441.5Equity investments (Net) 101.5 138.1 443.3 585.5Fixed assets and equipment (Net) 6.2 24.6 32.3 36.2Equity investment projects 11.8 24.4 35.1 30.1Export promotion fund 20.0 20.0 20.0Other assets 5.9 4.7 4.0Deferred charges .1 26.6 33.2 17.3

Total Long-term Assets 667.7 968.9 1,718.2 2,134.6

Total Assets 16431.0 2,301.7 2,916.3

ITABILITIES

Current Liabilities:Central Bank 8.0 38.3 93.2 29.1Current maturity of long-term credit 11.7 40.2 78.4 147.6Bonds and short-term obligations 18.0 20.7 26.2 40.0Counterpart fund for basic investments 27.7 1.7 71.6 24.2Export promotion fund - 5.5 28.3 57.0Other liabilities 33.3 42.7 57.3 92.2

Total Current Liabilities 98.7 149.1 355.0 390.1

Long-term Liabilities:Credits maturing after 12 months 439.2 654.3 915.7 1,132.4Bonds and other obligations 58.7 26.7 141.0 412.6

Total Long-term Liabilities 497.9 681.0 1,056.7 1,545.0EquityPaid-in capital 500.0 500.0 747.5 767.7Retained earnings 55.0 100.9 142.5 213.5

Net worth 555.0 6oo. 890.0 951.2Total liabilities and equity j,151.6 1,431.0 2,301.7 2,916.3

Guarantees 20.5 21.4 155.9 267.91,172.1 1,452.4 2,457.6 3,184.2

LCPDFOctober, 1976

ECUADOR - APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECTCOM¢SION DE VALOIRES - CORPORACION FINANCIERA NA-CIO-NALAudited Statements of Income and Expenses, 1972 - 1975

FY72 FY73 FY74 FY75IN COME (15 months)

Interests 63.8 125.1 120.4 181.4Dividends in equity investments - - 2.7 54.1Profits from other securities 20.5 24.4 12.6 1G.6Discount on bonds 5.6 5.5 11.6 3.0Commissions and other 4.0 3.2 3.3 6.2

Total 93.9 158.2 150.6 255.3

EXPENSES

Interests and commissions 31.L 64.5 68.2 99.3Administrative and general 28.4 49.3 37.6 70.3Depreciation .9 1.8 1.2 1.4Provision for possible losses 2.0 3.0 2.0 10.0

Net income before foreign exchange adjustments 31.2 39.6 41.6 74.3

Foreign exchange adjustments (9.0)- 6. _3 __

Net income 22.2 45.9 41.6 74.3

Retained earnings at beginning of period 30.3 55.0 100.9 142.5Adjustment or devaluation loss accounted for in FY 1971 2.5Adjustment for stock dividends considered as income in previous years (4.3)Adjustment for previous depreciation over charge .9Retained earnings at end of period 55.0 100.9 142.5 213.5

1/ Extraordinary loss due to revaluation of debt expressed in European currencies rn, SwF,I.it)2/ Extraordinary profit due to revaluation of debt expressed in US dollars (S/1.0 million) and excess

liabilitty adjustment in F11972 (S/5.3 million).

LCPDF

October, 1976

ANNEX 10EC'JADOR - APPRAISAL OF THE THIRD DEVELOPMhENT BANKING PROJECT

COMISION DE VALORES - CORPORACTION FINANCIERA NACIOHALSume ry Breakdown of Loans Approved During the 1972-75 Period

(8/ nillion.)

1972 - 1973 1974 1975BY AMON! _ _ No. r Amount % No. % Amount 7 No. % Aoo.nt % RN. % Anount t

Under to S/ 1.0 mill. 22 33.3 11.9 3.9 13 16.7 9.9 2.8 17 14.8 12.1 1.1 12 11.6 9.5 0.7S/ 1.0 million to S/ 2.0 million 14 21.2 18.8 6.2 23 29.5 33.9 9.7 15 13.0 21.6 1.9 14 13.6 24.0 1.7s/ 2.0 milli-o to s/ 4.0 million 10 15.2 31.8 10.5 18 23.1 50.9 14.6 24 20.9 76.2 6.9 19 18.4 63.2 4.6S/ 4.5 million to s/ 6.0 million 7 10.6 30.3 10.1 2 2.6 9.2 2.6 19 16.5 83.7 7.5 14 13.6 73.3 5.3SI 6.0 million to S/ 10.0 million 4 6.1 29.9 9.9 7 9.0 54.0 15.5 10 8.7 70.0 6.3 17 16.5 143.8 10.3S0 10.0 million to S/ 14.0 million 1 1.5 12.5 4.2 9 11.5 97.0 27.8 6 5.2 34.6 3.1 6 5.8 57.3 4.1S/ 14.0 million to S/ 18.0 million 4 6.1 51.2 17.0 3 3.8 33.0 9.5 5 4.3 67.5 6.1 5 4.9 62.0 4.5SI 18.0 nillio- to S/25.0 million 1 1.5 20.0 6.6 3 3.8 61.0 17.5 4 3.5 90.0 8.1 5 .4.9 71.5 5.1O0or S/ 25.0 million 3 4.5 95.3 31.6 - ------ 15 13.1 654.7 59.0 11 10.7 885.7 63.7

T 0 T A L 66 100.0 301.7 100.0 78 100.0 348.9 100.0 115 100.0 1.110.4 100.0 103 100.0 1,390.3 100.0

BY DURATION _

Under to I year 2 3.0 3.1 1.0 - - - - 12 10.4 85.5 8.0 19 18.4 73.6 5.3From I to 2 years 4 6.1 2.3 0.8 2 2.6 2.8 0.8 15 13.1 71.7 6.4 14 13.6 36.7 2.6From 2 to 5 years 23 38.8 27.1 9.0 32 41.0 142.3 40.6 36 31.3 190.1 17.1 24 23.3 270.2 19.4From 5 to 7 years 13 19.7 34.4 11.4 19 24.4 45.8 13.1 19 16.5 119.7 10.8 18 17.5 259.7 18.7From 7 to 9 years 10 15.2 63.2 20.9 16 20.5 61.5 17.6 22 19.1 299.9 27.0 16 15.5 392.3 28.2From 9 to 11 years 14 21.2 171.6 56.9 9 11.5 97.7 27.9 11 9.6 340.5 30.7 12 11.7 357.8 25.8Fron 11 to 13 yearn - - - - - - - - - - - - - - - -Over 13 years - - - ------- -

Te 0 T A L 66 100.0 301.7 100.0 78 100.0 350.1 100.0 113 100.0 1.110.4 100.0 103 100.0 1,390.3 100.0

BY PROJECT LOCATION

Sierra 44 66.7 187.6 62.2 45 57.7 166.8 47.8 74 64.3 691.3 62.2 69 67.0 468.6 33.7Picbi-nha 34 51.5 97.7 32.4 36 46.1 122.7 35.2 58 50.4 625.6 56.3 51 49.5 348.3 25.1A..ay 2 3.0 14.5 4.8 1 1.3 0.8 0.2 7 6.1 20.1 1.8 7 6.8 23.8 1.7Others 8 12.2 75.4 25.0 8 10.3 43.3 12.4 9 7.8 45.6 4.1 11 10.7 96.5 6.9

Costa 21 31.8 108.8 36.1 31 39.7 177.9 51.0 40 34.8 413.8 37.3 34 33.0 921.7 66.3Cnayas 14 21.2 57.9 19.2 21 26.9 144.0 41.3 33 28.7 380.3 34.2 32 31.1 761.7 54.8Manabi 2 3.0 7.5 2.5 8 10.2 30.4 8.7 4 3.5 6.1 0.6 - - -Others 5 7.6 43.4 14.4 2 2.6 3.5 1.0 3 2.6 27.4 2.5 2 1.9 160.0 11.5

Oriente 1 1.5 5.2 1.7 2 2.6 4.2 1.2 1 0.9 5.4 0.5 _ - _ -T O T A L - 66 100.0 301.7 100.0 78 100.0 348.9 100.0 115 100.0 1,110.5 100.0 103 100.0 1,390.3 100.0

FINAL USE 1 _-)

M-chi-ery end Equipoent 43 48.3 234.0 77.6 46 45.1 190.8 54.7 56 38.9 573.5 51.6 56 47.5 963.2 69.4Buildinss 22 24.7 35.2 11.7 27 26.5 38.7 11.1 34 23.6 205.2 18.5 23 19.5 215.2 15.5Others Fined Assets 4 4.5 6.6 2.2 2 1.9 8.7 2.5 3 2.1 18.7 1.7 1 0.8 1.0 0.1Working Capital 20 22.5 25.9 8.6 27 26.5 110.7 31.7 51 35.4 313.0 28.2 38 32.2 208.9 15.0

T 0 T A L 89 100.0 301.7 100.0 102 100.0 348.9 100.0 144 100.0 1.110.4 100.0 118 100.0 1390.3 100.0

1) Numbnr of Credits

BY TYPE OF ACTIVITY 1)

130 Fishing 1 1.5 1.7 0.6 2 2.6 4.4 1.2 2 1.7 5.4 0.5311 Food 16 24.3 34.1 11.3 10 12.8 61.5 17.6 15 13.1 37.6 3.4 19 18.5 104.6 7.5312 Minoellaneo.S Food 5 7.6 10.4 3.4 5 6.4 9.9 2.8 4 3.5 27.3 2.5 3 3.0 76.0 5.5313 BRveragas - - - - - - - - 1 0.9 27.0 2.4 1 1.0 4.5 0.3314 Tob...o - - - - 2 2.6 2.5 0.7 1 0.9 0.7 0.1 - - - -321 Tentilue 9 13.6 16.5 5.5 10 12.8 56.8 16.3 19 16.5 183.2 16.5 16 15.5 101.7 7.3322 Ga=oent Industry - - - - 1 1.3 1.9 0.5 2 1.7 0.

70.1 - - -

323 Leather Products 1 1.5 0.3 0.1 1 1.3 1.5 0.4 2 1.7 10.3 0.9 3 3.0 6.3 0.4324 Shoes - - - - - - - - - - - - I 1.0 2.8 0.2331 Lueber and Cork 5 7.6 65.8 21.8 4 5.1 17.0 4.9 3 2.6 51.0 4.6 4 3.9 130.4 9.4332 Fornitore Induntry - - - - 1 1.3 0.8 0.2 3 2.6 12.1 1.1 3 3.0 11.3 0.8341 Paper and Paper Prod-cts 2 3.0 29.5 9.8 2 2.6 13.3 3.8 3 2.6 32.2 2.9 5 4.9 68.0 4.9342 Printing - - - - - - - - 5 4.4 52.1 4.7 5 4.9 15.3 1.1351 Indostriel Chenielo I 1.5 1.8 0.6 2 2.6 3.8 1.1 - - - - 4 3.9 37.1 2.7352 Other Chenical Products 6 9.1 15.9 5.3 4 5.1 5.5 1.6 9 7.8 72.0 . 6.5 2 2.0 11.6 0.8355 Robber Prodocts 1 1.5 12.5 4.1 5 6.4 7.9 2.3 1 0.9 0.6 - - - -356 Plastic Products 6 9.1 27.5 9.1 2 2.6 26.0 7.5 4 3.5 10.6 0.9 5 4.9 31.5 2.3361 Ceramic & Porcelain Prodocts 1 1.5 2.0 0.7 - - - - 2 1.7 31.4 2.8 3 3.0 34.0 2.4362 Glaes and Glaes Pr-d-cts - - - - - - - - 3 2.6 29.5 2.7 1 1.0 9.5 0.7369 Other b on-Metelir Minereln 1 1.5 3.4 1.1 4 5.1 25.0 7.2 7 6.1 249.7 22.5 8 7.8 562.5 40 5371 BRsin non-Steel Industry 1 1.5 27.2 9.0 1 1.3 11.0 3.2 4 3.5 17.5 1.6 2 2.0 15.0 1.1381 Metal Products 5 7.6 36.4 12.1 10 12.8 50.7 14.5 6 5.2 24.3 2.2 6 5.8 37.5 2.7382 Machinery - - - - - - - - 1 0.9 0.2 - 2 2.0 19.3 1.4383 Electric Prod-cts 1 1.5 3.0 - 3 3.8 5.0 1.4 7 6.1 65.2 5.9 4 3.9 68.9 5.0384 Transport Eqaipoent - - - - 1 1.3 10.0 2.9 2 1.7 15.0 1.3 1 1.0 4.0 0.3390 Mis.ellae.nos M.n.factoring 1 1.5 4.9 1.6 3 3.8 8.8 2.5 3 2.6 11.0 1.0 2 2.0 12.0 8.9610 Whnlesale BRsiness - - - - 1 1.3 3.0 0.9 - - - - - - - -632 Hotels 3 4.6 8.8 2.9 4 5.1 22.7 6.5 6 5.2 142.8 12.9 3 3.0 26.5 1.9

T 0 T A L 66 100.0 301.7 100.0 78 180.0 348.9 100.8 115 108.0 L ll O.A 100.0 I03 1.Q,i 13290.3 100.0

1) According with CIIU

LCPOFOctober 1976



Summary of Subloans Approved under Loans 721-EC and 930-EC

(S/ million)

No. 7. Amount % No. 7. Amount ah

BY AMOUNT BY TOTAL PROJECT COST

Under S/ 1.0 million - - - - Under S/ 6.0 million 2 15.4 8.5 .8

S/ 1.0 million to S/ 2.0 million 1 7.7 1.8 .5 From S/ 6.0 to S/ 10.0 million 2 15.4 19.9 1.8

SI 2.0 million to S/ 4.0 million 2 15.4 6.4 1.9 From S/ 10.0 to S/ 20.0 million 1 7.7 10.7 .9

S/ 4.0 million to S/ 6.0 million 2 15.4 10.5 3.1 From S/ 20.0 to S/ 35.0 million 1 7.7 24.2 2.2

S/ 6.0 million to S/ 10.0 million - - - - From S/ 35.0 to S/ 55.0 million 1 7.7 51.5 4.6

S/ 10.0 million to S/ 14.0 million 1 7.7 12.0 3.6 From S/ 55.0 to S/ 75.0 million 2 15.4 120.2 10.8

S/ 14.0 million to SI 18.0 million 1 7.7 18.0 5.3 Over S/ 75.0 million 4 30.7 878.8 78.9

S/ 18.0 million to S/ 25.0 million - - - -

Over 6 46.1 288.4 85.6

T O T A L 13 100.0 337.1 100.0 T O T A L 13 100.0 1,113.8 100.0

BY MATURITY BY SOURCE

Under 3 years - - - - CV-CFN's own funds 98.7 8.8

From 3 to 5 years 1 7.7 12.0 3.6 IBRD Loan 337.1 30.3

From 5 to 7 years 3 23.1 8.1 2.4 COFIEC 50.0 4.5

From 7 to 9 years 4 30.8 127.5 37.8 Other financial institutions 145.0 13.0

From 9 to 11 years 5 38.4 189.5 56.2 Subborrower 424.0 38.1

From 11 to 13 years - - - - Suppliers' credit 42.0 3.8

Over 13 years - - - Other sources 17.0 1.5

T O T A L 13 100.0 337.1 100.0 T O T A L 1,113.8 100.0

BY SIZE OF FIRM (Total Assets) BY CV-CFN PROJECT PARTICIPATION

Under S/ 5.0 million - - - - Under 207. 8 61.5 60.3 61.1

From S/ 5.0 to S/ 10.0 million 2 15.4 19.6 2.5 From 20%h and 30th 4 30.8 32.2 33.6

From S/ 10.0 to SI 15.0 million 1 7.7 12.2 1.5 From 307 and 40% - - - -

From S/ 15.0 to S/ 20.0 million 1 7.7 18.0 2.3 From 40%. and 50a 1 7.7 5.2 5.3

From S/ 20.0 to S/ 30.0 million - - - - Over 50% - - - -

From S/ 30.0 to S/ 50.0 million 2 15.4 78.6 9.9 T 0 T A L 13 100.0 98.7 100.0

Over S/ 50.0 million 7 53.8 663.1 83.8

T 0 T A L 13 1oo.0 791.5 100.0 BY INDUSTRY

BY NATURE OF FIRM Textile, garment, and leather 5 38.4 147.3 43.7

Basic chemicals and chemical products

New enterprise 4 30.8 139.7 41.4 derived from oil and coal 2 15.4 20.4 6.1

Existing enterpriseS 9 69.2 197.4 58.6 Non-metallic mineral products other

T 0 T A L 13 100.0 337.1 100.0 than oil and coal 1 7.7 26.4 7.8

Metal products, machinery and equipment 3 23.1 45.5 13.5

BY PURPOSE OF PROJECT Other manufacturing 1 7.7 5.7 1.7

Restaurants and hotels 1 7.7 91.8 27.2

Mainly import substitution 7 53.9 136.5 40.5 T 0 T A L 13 100.0 337.1 100.0

Mainly export orienited - - - -

Import substitution and exports 5 38.4 108.8 32.3 BY LOCATION

Other (Tourism) 1 7.7 91.8 27.2

T 0 T A L 13 100.0 337.1 100.0 Sierra 8 61.5 271.2 80.4

Costa 5 38.5 65.9 19.6

T 0 T A L 13 100.O 337.1 100.0

LCPDFOctober 1976


COMISION DE VALORES - CORPORAC1ON FINANCIERA NACIONALEquity Portfolio as of December 31, 1975

(in S/ thousand)

Total Paid-in DividendsCapital of 7. Number of Investment Earnings (Losses) per Share 7. Return on Received Nominal Value

Company ___Company O_wned Shares Held at Cost (Sucresl Inveatment in 1975 of Share(197C7 (1975)

Companies Reporting Proftts in 1975

Bolsa de Valores de Guayaquil 2,500 77.8 19,452 1,945 46,7 42.1 46.7 100Bolsa de Valores de Quito 5,000 32.2 16,086 1,609 56,9 45i2 56.9 - 100Corporacion Andina de Fomento 625,000 5101- 37,200 3,100--COFIEC 140,924 6.0 85,293 8,529 22.7 15.9 22.7 - 100Desarrollo Agropecuario, S.A. 32,943 25.1 12,350 8,274 21,0 12.8 3.1 - 670Ecuatoriana de Atu'n, S.A. 48,057 51.0 245,106 24,511 10.5 4.0 10.5 - 100Cemento Chimborazo, S.A. 50,000 .9 4,497 450 14.0 (8.0) 14.0 - 100Fertilizantes Ecuatorianos, S.A. 90,000 27.8 25,000 25,000 241.6 220.4 24.2 - 1,000Cemento Nacional C.E.M. 368,795 51.0 1,880,854 188,085 14.1 15.6 14.1 20,526 100Hotel Colon Internacional 96,235 15.0 - 14,437 957,4 203.7 33.2 - -Semillas Certificadas C.E.M. 6,941 28.8 20,000 2.000 18.93/ 18.9 - 100

Companies Reporting Losses in 1975

Alambres Galvanizados Ecuatorianos S.A. 45,000 20.0 9,000 9,000 (161,8) (3.8) (16.2) 1,000Azucarera Tropical Americana, S.A. 135,000 81.7 146,990 129,490 (444.4) 1,123,7 (59.2) 33,210 750Banharina C.E.M. 8,203 48.4 39,690 3,969 (22.6) (14 .5)4/ (22.6) 100Relojera Andino Suiza, S.A. 8,000 8.0 640 640 (263.9) (26.4) 1,000Industria Acero Cotopaxi, S.A. 36,000 43.0 15,4646/ 15,464 (213.1) (161.4)5/ (21.3) 1,000Te Zulay S,A.C. 36,523 51.7 - 18,870 (116.8) (95.8) (11.7) -

Companies Under Construction

Tabla Rey 53,615 9.3 500 5,000 10,000Cementos Selva Alegre 75,140 45.9 34,471 34,471 1,000CItricos Bolfvar, S A.-/ 16,000 55.1 8,816 8,816 1,000Cronos del Ecuadorl' 10,000 15.0 1,500 1,500 1,000Ecuatoriana de Sanitar,os, S.A. 22,482 13.3 3,000 3,000 1,000Financiera del AustroZ 50,000 20.0 100,000 10,000 100Financiera de Guayaquil7/ 50,000 6.0 30,000 3,000 100Ganaderfas Ecuatorianas, S.A. 3,851 26.0 1,000 1,000 1,000Industrial Forestal Cayapas 13,097 22.9 3,000 3,000 1,000ISKRA-Herramientas Electromecanicas- 15,000 51.0 7,650 7,650 1,000Lotizacion Industrial Los Pascuales 10,000 50.0 5,000 5,000 .1 1,000Onapress del Ecuador S.A. 11,100 33.3 3,661 3,661 1,000Optimus Andina, S.A.-/ .1 10,000 32.5 3,245 3,245 1,000Poliqufmicos del Ecuador, S.A.- 15,000 10.0 1,500 1,500 1,000Colombo Ecuatoriana 1,690 10.0 1,500 1,500 1,000Procesadora del Caucho, S.A.7/ 13,860 75.5 10,460 10,460 1,000Parque Industrial de Cuenca7/ 31,470 15.9 500 5,000 (4.5) 10,000Uniwald Andina, S.A. 6,963 14.4 1,000 1,000 1,000Cementos Cotopaxi 3,800 25.0 950 950 1,000Cementos Manabf 875 22.9 200 200 1,000

/ One type "A" share at US$1,000,000 and 100 type B shares at US$5,000 each. EPS correspond to type B stock.2 501 shares at nominal value of S/5,000 and 23,864 shares at nominal value of S/500. Per share information is based on the number of shares at S/500.3/ Fiscal year 1975.4/ Operations started in March 1974.5/ Operations started in April 1974.6/ Three type of shares at nominal values of S/50,000, S/10,000, and S/1,000. Per share information is based on the number of shares at S/1,000.7/ Information is based on subscribed capital.

LCPDFOctober 1976

ECUADOR - APPRAISAL OF THE THIRD DEVELOPMENT RANKING PROJECTCONISION DR VALORES - CORPOR4GION FINANCIERA NACIONAL

List and Characteristics of Foreign Loans and Credit Lines - December 31 1975(in thousand of indicated currency)

Grace AuditedTotal Amount Available for Term Period Interest Cocoitmeot Fee Service Fee Amount Amount Dutstsodicg

Date Currency Amount Disbursed Disbursement Years Years - % % Outstanding (US$ thousand)

Loans

AID 518/L-014 7/20/62 us$ 4,650 4,650 - 40 9 1/2 .75 - 4.345 4,355IDB 133/SF-EC 7/11/67 US$ 2,500 2,500 - 15 3 1/2 3.25 - 751- 1,458IDB 143/OC-EC 7/11/67 US$ 2,500 2,500 - 15 3 1/2 6.50 - - 1,458IDB 188/OC-EC 4/14/70 US$ 2,700 2,700 - 15 3 8.00 - - 2,332

Lit 500,000 500,000 - 15 3 8.00 - 5OS' Lit 431,818 ? 16833DUl 3,660 3,660 - 15 3 8.00 50!- DM 3,163 |

IDB 235/SF-EC 4/14/70 US$ 1,500 1,500 - 20 5 3.25 - 751' 3382/ |IDB 23

3/oC-EC 9/29/72 US$ 10,000 10,000 - 15 3 8.00 1.25 9,301-

IDB 1183/SF-EC 12/15/72 us$ 90 90 - 16 3 2.00 - - 72

IBRD 555-EC 9/5/68 us$ 2,3103/ 2,310 - 20 6 6.25 .75 -4 1,563721-BC 2/5/71 US$ 4,00%-3 4,000 - 13 1 7.25 .75 .5Oj/ 3,283 8,867930-EC 9/14/73 US$ 9,400- 4,021 5,379 12 3 7.25 .75 1.75- 4,021

Suisse Banks 6/8/67 gvF 912 912 - 10 1 1/2 Floating6/ - - 201 201

CAF Nomina dal 50 5/26/72 US$ 42 42 - 6 - 6.00CAF Te Zulay 5/26/72 US$ 250 250 - 10 - 8.50CAF Salve Alegre 5/26/72 us$ 200 200 - 6 _ 6.00 JCAF FANAVISA 5/26/72 US$ 800 800 - 10 - 8.50CAF SALCO 5/26/72 US$ 120 120 6 - 8.50CAF Papeles 11/5/73 US$ 25 25 6 1/2 2 6.00 1.00 ) 2,371CAF Ind-co No. 1 2111174 us$ 3WO 300 -8 2 8,50 31 1.00 CAF Indaco No. 2 9120/74 US$ 258 258 - 8 2 8.00 / 1.80/CAF FORESA 8/21/74 US$ 708 708 - 8 1/2 2 8 00 I 001CAF Cemeoto "A" 8/26/75 US$ 5,658 - 5,658 8 2 1/2 Floating? 1'00 o!CAF Cemento B'. 8/26/75 us$ 5,342 - 5,342 7 2 1/2 8.00 1 00-'/CAF Dentex 12/10/75 us$ 168 168 7 2 8.00

KfW 10/9/69 DM 8,000 8,000 - 20 61/2 5.509/ -qKfW 12/21/72 DM 10,000 7,431 - 30 10 1/2 6.00 - J 5,800

Swiss Bank Corporation 11/8/72 US$ 3,000 3,000 - 4 1.5+LIBOR

Chase Manhattan Bank uS$ 5,070 - 5,070 4 1 1/8+LIBORPrivate Export Funding Corporation 8/29/75 US$ 3,380 - 3,380 6 9.50EXIMBANK J US$ 5,070 - 5,070 8 8.00 -

Credit Lines

IESS Loans 413 - 420 (Between 9/26/73 Sucres 150.000 150,000 - 4 1 8.00 1.00 119,547and 4/25/74)

Los.s 429 & 435 10/28/74 Sucres 100,000 100,000 - 4 1 9.00 - 100,000 12,782Loen 443 8/1/75 Sucree 100,000 100,000 5 - 10.00 92,050

CAF 7/31/75 US$ 6,000 - 6,000 2 5X,S%92% 1,00_/FONAPRE 21/28/75 Starer 1,000 1,000 8 1/2 2 3.50 1.00 -

1/ Payable on undisbursed portion of total conitments.2/ The equivalent of US$4,337 of this liability is expressed in six other foreign currencies._/ Amount of total IBRD loan allocated to CV-CFN.4 A one-time fee to cover foreign exchange risk; payable to the government.5/ Fee to cover foreign exchange risk; payeble to the government.6/ .75+(discount rate of Swiss National Bank); minimoum rate - 6.75%.7/ .5 +(CAF's own cost of borrowing).8/ Charged only when actual disbursaemnts and plann-d diebursements differ.9/ 4.00% interest is cumulative until an undefined date.

LCPDFOctober 1976

ANNEX 14Page 1

ECUADOR

APPRAISAL OF THE THIRD DEVELOPMENT BANYKING PROJECT


Operational Strategy and Financial Objectives for 1977-81

(May 1976)

GUIDELINES ON INSTITUTIONAL POLICY FOR 1977-81

1. OUTLOOK FOR INDUSTRY IN THE ECUADORIAN ECONOMYTY

1.1 The economic policy of the Ecuadorian State will, in the mediumterm, seek to control the causes of domestic inflation (affecting the mass ofthe people) and will tend to make more selective use of the resources gene-rated by the petroleum sector in order to prevent the channeling of theseinto speculation and luxury consumer goods. Parallel efforts will be made tostrengthen the activities of the National Development Fund (FONADE) throughthe financing of major projects having a priority bearing on economic andsocial development, giving preference to the infrastructure of the agricul-tural sector and to physical infrastructure, education and health programs.

1.2 The implementation of the industrial programming resulting from theintegration process in which Ecuador is participating will have a positiveimpact on the establishment of a number of basic industries that can con-tribute to the development of the country's scientific and technologicalinfrastructure, such as: engineering; petrochemical; automotive; iron andsteel, pulp and paper, electronics and telecommunications, shipbuilding,pharmaceuticals and chemical (pigments, pesticides, glass and industrialchemicals).

1.3 The formation of new development centers that will facilitate theexpansion of the domestic market, permit higher incomes and improvements inincome distribution and open up potential additional sources of employmentand prospects of a more efficient use of human, natural and capital resources,will have an especially important role to play through the programming ofthe establishment of new industrial complexes in various provinces, e.g.,petrochemicals in Esmeraldas, automotive in Manabi, precision engineering inAzuay, glass in El Oro, electronics in Cotopaxi, Chimborazo and Tungurahua,etc.

1.4 Similarly, the formulation of an integrated development policyfor exports of non-traditional products in which the Ministry of Industry,Trade and Integration is currently engaged, with a view to expanding anddiversifying the market for our goods and maximizing the efficient use of

ANNEX 14Page 2

our productive resources through better economies of scale, will be thedriving force behind an increase in production in terms of both qualityand skill, the extension and rational integration of many industrial plants,the generation of foreign exchange and the strengthening of the balance ofpayments and the net international monetary reserve.

1.5 In the same way, so far as the country's economic situation willallow, continuing importance will be attached to the import substitutionmodel, although this has now been reoriented to the processing of agricul-tural raw materials and minerals and such basic industrial products aspaper, chemical products, etc., in which a high content of domestic inputscan be included so as to enable the country to make optimum use of its ownresources and generate substantial and real savings in foreign exchange.

1.6 The future industrial development of the country will require, overthe next five years, a significant injection of resources to meet the needsof this sector in addition to the estimated level of investment of US$2billion envisaged in the COFIEC document entitled "A View of EcuadorianIndustry" (Vision sobre la Industria Ecuatoriana), together with technology,managerial skills and technical assistance in specific fields.

2. ROLE OF THE NATIONAL FINANCE CORPORATION IN THE FUTURE OF INDUSTRY

2.1 The role of CV-CFN, as industrial development bank and State invest-ment agency, will continue to be to give unqualified support to the country'ssocio-economic development through financial assistance to productive enter-prises in the private and public sector, the strengthening and expansion ofthe domestic capital market, the promotion of economic infrastructure projectsin the public sector and the provision of advisory and intermediary services

in the area of external credits. To achieve these objectives the institution:

2.2 Will cooperate with the Government in the execution of priorityproductive investment programs for industry that are to strengthen anddevelop the national economy by means of the effective provision of allthose services for which it is responsible in its capacity as financingagent.

2.3 Will participate on behalf of the Government in the promotion, for-mation and capitalization of such State and mixed enterprises as have prioritystatus in the development of the industrial infrastructure and also in suchprojects resulting from the integration process as are similar in characterto the above.

2.4 In this context major importance will be attached to agro-industrialprojects, in view of their impact in terms of increases in consumer goods,price stability and the generation of forward and backward linkages.

ANNEX 14Page 3

2.5 Will operate the machinery for the identification, selection andclassification of investments with a view to the start-up of those projectsvital to manufacturing development in each industrial branch, placing theemphasis on the establishment of industrial estates and the introduction ofnew production structures (rationalization, integration, supplementation,etc.), technology, incentives for industrial development, the administrationof selective interest rates and coordination with regional developmentprograms.

2.6 Will strengthen the development of the national capital marketthrough the presentation in draft form of proposals for legal reforms to thepublic authorities; the issue and systematic placement of a series of securi-ties under its own name, both in the domestic and external markets, in orderto channel public savings into the operation and expansion of manufacturingactivities; the promotion of underwriting procedures; and collaboration in theestablishment of a number of regional or specialized financing intermediariesto perform specific economnic functions.

2.7 Will negotiate with the proper authorities with a view to the intro-duction of a series of reforms, whose primary purpose will be the reformula-tion of laws on the monetary and exchange system, general banking laws,company law, the commercial code, the civil code, income tax, etc. with aview to creating new financial roles and laying down guidelines for generalproduction development policies.

2.8 will continue to give positive support, both in terms of its finan-cial resources and its technical personnel, to the training of corporate offi-cials at the managerial level through various bodies and programs operatedby the Business Craduate School of the Pontifical Catholic University ofEcuador, the Ecuadorian Development Foundation (FEDESARROLLO), the BusinessTraining Center (CEFE) and the Guayaquil Center for Executives.

2.9 11ill continue to implement the Regional Development Plan in the lessdeveloped provinces of the country through research, promotional activities,technical assistance and a selective financing policy for new projects.

3. PROJECTIONS OF THE INSTITUTION'S FINANCING OPERATIONS

3.1 The financial assistance provided by the Corporation through itsvarious mechanisms corresponding to end-use, term, interest-rate andguarantees, will assume the following form:

3.2 Industrial credits will continue to represent the most importantcategory due to their annual average growth rate, their high proportion ofthe volume of financing and the socio-economic benefits they bring to thecountry. Expecially important here are projects contributing to the inte-gration process and such others as make the maximum contribution to theEcuadorian economy.

ANNEX 14Page 4

3.3 FOPEX, in addition to performing its current services, will tendto bring other new mechanisms into being and to further the introduction ofexport insurance. The Corporation, with support from the Government, hopesthat by 1982 it will be financing 30% of the total volume of the country'snon-traditional exports.

3.4 Pre-investment and project promotion will seek to take positiveadvantage of the productive initiatives associated with petroleum develop-ment, the decisions of the Cartagena Agreement and the machinery for theidentification, selection and classification of investments and regionaldevelopment.

3.5 The Corporation, in its equity participation in companies, willtend to concentrate on participation in the state and mixed corporations ofvital importance to the country's development that can assure an adequateeconomic return on the investment. In addition, as the Corporation is re-quired to participate in companies with social objectives, the Governmentwill be predisposed to establish a special fund for this purpose as well asto obtain funds from established companies of recognized financial solvency.

3.6 Lastly, efforts will be made to strengthen the Rediscount Fund forSmall and Craft Industries in order to increase the specific limits to whichloans are subject, cover new ground and expand its activities to thoseprovinces with the lowest level of industrial development.

3.7 The role of the Corporation, in view of its prestige and financialstanding abroad, will be to:

- Negotiate and obtain credits from public and private institu-tions in order to meet the installation and expansion needsespecially of the country's major industrial projects;

- Channel external savings into investments of national importancein the form of major specific projects;

- Introduce new forms of technology;

- Expand markets to meet the growing needs of theindustrial sector;

- Replace suppliers' credits and the technological stringsattached to these.

3.8 Underwriting operations will be promoted and effected as a contri-bution to the development of the capital market and to the improvement offinancial and accounting practices in beneficiary firms.

3.9 The machinery of guarantees and bonds will be extended so as to makeavailable to entrepreneurs guarantees of performance and reliability and allforms of bank guarantee.

ANNEX 14Page 5

3.10 In order to ensure efficient and speedy financial operations,methods of evaluation, procedures and decision making will be kept undercontinuous review so as to maintain these systems best suited to the inter-ests of users and to the objectives of the institution. Here, a major rolewill be played by the branches of CV-CFN at the regional level.

4. RAISING OF FUNDS

4.1 To facilitate the financing of Ecuadorian industry, the Corporation,under the provisions of its Organic Law, will:

4.2 Issue fixed- and variable-income securities for placement on boththe domestic and international markets on the basis of its standing as afinancial institution.

4.3 Making use of its extensive investment portfolio in fisheries,agro-industrial, timber, fertilizer and electrically-operated machine toolenterprises, hotels, financial services, etc., proceed to establish andmanage various investment funds (open-ended, closed-ended, fixed-incomeor fixed- and variable-income), in order to channel its resources into thefinancing of new projects.

4.4 Expand its capital to S/ 2 billion through the capitalization ofits net annual earnings and of grants to be sought for this purpose fromthe Government.

4.5 Issue letters of foreign credit through the establishment of agenciesin financial institutions of international standing.

4.6 Enter into negotiations with the Central Bank for utilizing themachinery of bank acceptances.

4.7 Obtain further loans on favorable terms from domestic and inter-national institutions with a view to replacing the use of suppliers' creditsin the industrial sector and compensating for the limitations on the forma-tion of domestic savings.

4.8 In this connection action will also be taken to promote the channel-ing of funds from the Andean Development Corporation (CAF) into the implemen-tation of specific and integration projects.

5. ADMINISTRATION AND FINANCIAL CONTROL

5.1 To make sure that investment decisions are invariably based onsound economic, social and financial principles the Corporation will seek toensure that:

ANNEX 14Page 6

5.2 The short, medium and long term investment portfolio is diversi-fied; guarantees and bonds are provided; rediscount loans are made to smallmanufacturers; loans are made for the promotion of exports of non-traditionalproducts with a view to keeping risks at a reasonable level.

5.3 Provision is made for the maintenance of the value of its capitalassets and for an adequate degree of capital liquidity through the timelycollection of maturities, supervision of the progress of borrowing firms andthe auditing of accounts. At the same time it will continue to maintainreserves to cover exchange risks and portfolio losses.

5.4 An adequate ratio is ensured between its total liabilities (includingguarantees and sureties of all kinds) and its capital assets in accordancewith the provision of Ecuadorian law.

5.5 An adequate return is ensured on its financial operations through theperiodic analysis and programming of its operating and administrative costs,for which purpose the Corporation will negotiate with international agenciesand with the Ecuadorian Monetary Board, the grant of preferential interest-rates that will enable it to establish reserve funds to cover monetary fluc-tuations, protect its portfolio from the impact of inflation and imposespread levels that are consistent with the economic development sought bythe Corporation.

6. INSTITUTIONAL ORGANIZATION

6.1 To ensure an effective and timely response to the needs generatedby the buoyancy of the Ecuadorian economy, CV-CFN, as an industrial develop-ment bank and financial agent for the State, will take the following basicmeasures to ensure that the organizational, functional and operational capa-city needed is available:

6.2 See that its institutional growth is flexible, harmonious, balancedand sound.

6.3 Formulate and design manuals, guidelines and procedures for theoperation of the institution that will guarantee the necessary flexibilityand security.

6.4 Create the conditions needed to provide the personnel of theinstitution with professional standards, promnote their interests and furnishopportunities for their personal and social development.

6.5 Encourage and promote working conditions that make for a broadinterdisciplinary participation in and contribution to the conduct ofbusiness in the institution.

ANNEX 14Page 7

6.6 Encourage the introduction of mechanized systems and, in general,of those modern administrative procedures that can best serve the Corpora-tion's operational needs.

6.7 Develop the management information system needed for effectivedecision making.

LCPDFOctober 1976

ANNEX 15


COMISION DE VALORES-CORPORACION FINANCIERA NACIONAL

Projected Industrial Operations 1976-80(in SI million)

1976 1977 1978 1979 1980

APPROVALS

Industrial loans 1,764.o 1,986.0 2,231.0 2,506.0 2,814.0Equity investments 181.7 188.8 370.1 19.8 124.9

Total Approvals 1,945.7 2,174.8 2,601.1 2,525.8 2,938.9

COMITMETITS

Industrial loans 1,508.0 1,700.0 1,912.0 2,148.0 2,414.0Equity investments 154.5 187.8 342.9 72.4 109.2

Total Commitments 1,662.5 1,887.8 2,254.9 2,220.4 2,523.2

DISBURSEMENTS

Industrial loans 1,839.4 1,387.0 1,553.0 1,739.0 1,948.0Equity investments 115.9 179.5 304.2 140.0 100.0

Total Disbursements 1,955.3 1,566.5 1,857.2 1,879.0 2,048.0

LCPDFOctober, 1976

A '1EX 16

ECUADOR - APPRAISAL OF THE TH:RD DEVELOPMENT BANKING PROJECT


Projected Balance Sheets 1976-1980. Compared with 1975

unau d 1976 1977 1978 1979 1980ASSETS (unaued

Current Assets:Cash and bank deposits 65.8 98.4 129.0 162.5 187.3 209.5Marketable securities 162.8 104.1 65.7 41.5 26.2 16.6Loans (current maturity)

Industrial 502,1 474.5 782.9 1,128.9 1,335.8 1,545.8Small industry 24.1 25.2 26.1 27.5 28.4 29.0

Govermnent and other 5.6 3.2 2.8 3.0 4.1 1,5

Accounts receivable 23.2 3.8 1.9 1.9 1.9 1.9

Total Current Assets 783.6 709.2 1,008.4 1,365,3 1,583.7 1,804.3

Long-term Assets:Loans with non-current maturity

Industrial 1,385.9 2,852.4 3,587.4 4,213.0 4,807.5 5,372.0Small industry 29.3 34.2 38.1 40.5 42.1 43.2

Government and other 14.6 11.4 8.6 5.6 1.5 -Equity investments 590.9 732.9 964.9 1,348.9 1,638.9 1,888.9Projects under study andpromotion 28.7 21.6 48.1 75.3 48.3 36,3

Export promotion fund 20.0 20.0 20.0 20.0 20.0 20.0Other Assets 58.7 58.7 58.7 58.7 58.7 58,7

Fixed assets (net) 35.6 65.3 175.1 314.6 376.8 375.7Total long-term assets 2,163.7 3,796.5 4,900.9 6,076.6 6,993.8 7,794.8Provision for doubtful loans

and investments (less) (24.6) (40.6) (53.3) (66.9) (77.8) (88.1)

lotal Assets 2,922.7 4,465.1 5,856.0 7,375.0 8,499.7 9,511.0

LIABILITIES

Current Liabilities:

Domestic credit 116.7 103.2 125.9 170,4 282.1 323.7Foreign credit 60.3 180.4 252.1 282.4 335.1 358.2Bonds 40.0 60.0 65.0 70.0 72.0 40.0Short-term obligations 154.3 136.4 120.5 106.5 94.1 83.1Other liabilities 25.4 22.9 20.7 18.7 16.9 15.2

Total current liabilities 396.8 502.9 584.2 647.9 800.2 820.2Long-term liabilities

Domestic credit 232.0 585.3 1,102.0 1,902.0 2,208.4 2,439.2Foreign credit 900.1 1,654.6 1,923.5 2,224.1 2,541.0 2,912.9Bonds 412.6 687.0 822.0 752.0 680.0 640.0

Total Long-term Liabilities 1,544.7 2,927.0 3,847.5 4,878.2 5,429.4 5,992.1

EquityPaid-in capital 767.7 767.7 1,067.7 1,367.7 1,667.7 1,967.7Retained earnings 213.5 267.5 356.6 481.3 602.4 731.0

Net worth 981.2 1.035.2 1,424.3 1.849.0 2,270.1

2,698.7

Total Liabilities and Equity 2.922.7 4.465.1 5,856.0 7.375.0 8.499.7 9.511.0

Guarantees 267.9 501.8 672.2 764.7 816.2 886.7Total Portfolio (Net)l/ 2,815.8 4,615.0 6,049.7 7,485.2 8,616.7 9,699.0Total Assets and Guarantees 3,190.6 4,966.9 6,528.2 8.139.7 9,315.9 10,397.7

1' Includes all loans, equity investments, export promotion fund, and guarantees.

ICPDFOctober 1976

ANNEX 17



Projected Statements of Income and Expenses 1976 - 1980, Compared with 1975

1975INCOME (actual) 1976 1977 1978 1979 1980

Interests 189.8 323.2 466.0 593.3 693.- 785.7Dividends 54.1 15.4 20.0 25.0 30.0 32.0Commissions - 7.8 11.9 14.6 15.8 17.0Other 11.3 9.4 12.9 16.1 18.7 21.0

Total 255.2 355.8 510.8 649.0 758.1 855.7

EXPENSES

Administrativeand General 60.7 95.3 125.0 155.0 180.0 200.0Interest on:Domestic credit 34.6 32.0 57.1 100.4 160.8 197.3Foreign credit 53.7 110.3 158.4 184.8 212.5 243.0Bonds 11.0 40.4 62.1 62.8 59.4 56.1Depreciationand other 10.9 7.7 6.4 7.4 13.4 20.3

Total 170.9 285.7 409.0 510.4 626.1 716.7

Operating Income 84.3 70.1 101.8 138.6 132.6 139.0Provision forDoubtful Accountsand Investments 10.0 16.0 12.7 13.6 10.9 10.2

NET INCOME 74.3 54.1 89.1 125.0 121.7 128.8

LCPDF

October, 1976

ANNEX 18

EC'jADOR - APPRAISAL OF TIE THIRD DEVELOPMJ.NT BA':JING PROJECT

COMISION DE VALORES - CORPORACION FINANCIERA NtACIONAL

Projected Sources and Uses of Funds, 1976-1980(in S/ million)

1976 1977 1978 1979 1980

Beginning Working Capital 386.8 206.3 424.4 717.4 783.5

SOURCES

Net Income 54.0 89.1 124.7 121.1 128.6

Depreciation 3.4 4.1 4.5 9.8 16.1

Provisions for Doubtful Loans and Investments 16.0 12.7 13.6 10.9 10.2

Total Funds from Operations 73.4 105.9 142.8 141.8 154.9

Equity increases - 300.0 300.0 300.0 300.0

D)omestic creditsCredit from TESS 200.0 200.0 100.0 - -

National Fund for Industrial Investments 16.5 52.6 70.4 138.5 154.5

Bank acceptances 100.0 100.0 200.0 - -

Rediscounts 140.0 240.0 300.0 100.0 100.0O

Subtotal 456.5 592.6 670.4 238.5 254.5

Bond issues 349.8 250.0 300.0 350.0 300.0

Foreign creditsCredits available (Annex 13 ) 938.4 241.1 225.0 62.5 -

New creditsDeutsch Sudamerikanische Bank - 125.0 8.0 117.0 -

Suisse Banks - 154.9 - 125.0 -IDB - - - 297.5 202.5

IBRD - - 300.0 25.0 -Bond issues - - - 527.5

Other - _ 50.0 25.0 -

Subtotal 938.4 521.0 583.0 652.0 730.0

Equity sales - - - - -

Amortization of loans 401.1 681.0 957.8 1,177.1 1,414.0Sale of fixed assets - =_- _ - _

Total Sources of Funds 2,219.2 2,450.5 2,954.0 2,859.4 3,153.4

USES

Loan disbursements 1,869.4 1,417.0 1,583.0 1,769.0 1,978.0

Equity investments and new projects 134.9 258.5 411.2 263.0 238.0

Amortization of credits 287.0 378.0 452.8 617.3 681.8

Bond redemptions 75.4 65.0 70.0 72.0 40.0

Fixed asset purchases 33.1 113.9 144.0 72.0 15.0

Total Uses of Funds 2,399,7 2,232.4 2,661.0 2,793.3 2,952.8

Net Change in Working Capital (180.5) 218,1 293.0 66.1 200.9

Ending Working Capital 206.3 424.4 717.4 783.5 984.4

LCPDFOctober 1976

ANNEX 19


COMISION DE VALORES - COXPORACION FINANCIERA NACIONAL

Projected Gap in Foreign Exchange Resources, 1976-,98o(in S/ millian; 1US$ = S/25)

1976 1977 1978 1979 1980

Funds Available for Disbursements

IBRD 82.5 30.0 - -IDB 80.0 150.0 15o.o 62.5KfW 25.0 - - -

AID - - -CAF 237.5 62.5 75.0 -

Deutsch Sudamerikanische Bank 125.0 - - -Chase Manhattan Bank 127.5 - - -PEFCO 85.0 - - -

EXIMBANK 127.5 - - -

Subtotal 940.0 242.5 225.0 62.5

Projected Disbursements 940.0 520.0 582.5 650.0 730.0

Gap in Foreign Exchange Resources - 277.5 357.5 587.5 730.0

LCPDF

October. 1976

ECUADOR - APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECTCOM2ISION DE VALORES - CORPORACION FINANCIERA NACIONAL

Past and Projected Financial Ratios, 1972-1980

1972 1973 1/ 1974 1975 1976 1977 1978 1979 1980June 30 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 31

Income Statement as a % of Average Total Assets

Income 8.1 12.1 7.7 9.1 8.7 8.9 8.8 U.7 8.7Financial expenses 2.7 4.9 3.5 3.5 4.5 4.8 4.7 5.0 5.0Spread 5.4 7.2 4.2 5.6 4.2 4.1 4.1 3.7 3.7Administrative expenses 2.5 3.9 2.0 2.5 2.5 2.3 2.2 2.2 2.2Prov is ions .2 22/ .1 .4 .4 .2 .2 .1 1Net income

2 7 3.0- 2.1 2.6 1.3 1.6 1.7 1.4 1.3

Other Financial Ratios

Growth of total assets (,) 3/ 1.3 23.9 69.2 29.6 56.0 31.4 24.7 14.5 11.6Growth of total assets (real %) -6.1 9.7 37.1 12.0 43.1 21.7 16.5 7.0 4.3Total debt/equity 1.1 1.4 1.8 2.2 3.8 3.6 3.4 3.1 2.9Ca,s. and marketable securities/current liabilities 2.9 1.6 0.5 .6 .4 .3 .3 .3 .3Current assets/current liabiliti' 4.8 3.1 1.6 2.0 1.4 1.7 2.1 2.0 2.2Short-and medium-term operations- equity .4 .5 .6 .8 1.4 1.4 1.2 1.1 1.1Total loans/loans due within one year 4.3 4.5 4.6 3.9 6.8 5.5 4.7 4.5 4.4Total liabilities/current liabilities 6.02/ 5.62/ 4.0 5.0 6.8 7.6 8.5 7.8 8.3Earnings before interest, depreciation and 2.0- 1.7- 1.6 1.9 1.4 1.4 1.4 1.3 1.3

provisions/financial charges 2/Net income/total income (/%) 33.2- 25.0-a' 27.6 29.1 15.2 17.4 19.3 16.0 15.0Break-even assets/total assets -/ 50.1 57.7 49.5 52.3 68.8 61.8 58.5 62.8 64.2Elasticity of return on equity 6/ 4.2 3'4 3.6 3.4 6.6 5.7 5.2 6.2 6.6Return on equity (.) 5'72/ 6 82/ 5.6 7.9 5.4 7.3 7.6 5.9 5.2Return on equity (real 7,) -2.0?' -5.4- -14.4 -6.7 -4.2 - .6 .6 -1.0 -1.7Inflation 7/(%) 7.9 12.9 23.4 15.7 10.0 8.0 7.0 7.0 7.0

1/ The period ending 1973 covers 18 months2/ Before foreign exchange adjustments3/ Assets include guarantees4/ Loans and guarantees with original maturities of less than five years, Letters of Credit, and Acceptances; short-and medium-term loans were estimated using the past average

proportion of loans in this category (28.7% for 1972-1975).5/ Administrative expenses, depreciation, provisions/spread6/ Percentage change of return-on-equity/percentage change of return-on-assets7/ Inflation rates for years 1976-1980 were estimated by the mission.

LCPDFOctober, 1976

ANNEX 21Page 1

ECUADOR: APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT


Past Performance and Prospects

Organization

1. Ownership and Board of Directors. COFIEC shares are widely held bysome 300 institutions and individuals (Annex 23). Its 15 member Board ofDirectors represents local and foreign private shareholders, CV-CFN, andIFC. IFC's director takes an active part in Board discussions. The Boardhas the exclusive prerogative to set policy, to approve loans greater thanSI 18 million, and to authorize investing in shares, emitting bonds, andwriting off bad debts. Seven directors and COFIEC's President make up theExecutive Committee, which authorizes loans greater than S/ 10 million, up toS/ 18 million, makes Deriodic reviews of COFIEC's portfolio, and recommendsBoard actions (Annex 22).

2. MIanagement and staff. The President of COFIEC is responsible for itsmanagement. COFIEC's operations are divided between its Quito and Guayaquilregional offices, each headed by a regional manager. The juxtaposition ofpersonnel responsible for central administration with those responsible forQuito regional office operations has resulted in some confusion of thesefunctions as reflected in the organization chart (Annex 25). COFIEC's manage-ment recognizes this problem and is introducing changes in the Company'sorganization, departmentalization, and job descriptions in order to delineateresponsibilities. These improvements were reviewed during negotiationsand an understanding was reached on putting them into effect within sixmonths of loan signing.

3. Since 1972 COFIEC's staff has increased at an average rate of 9% p.a.,reaching 71 in March 1976. National headquarters and the Quito regional officeemploy 20 professionals, and the Guayaquil regional office employs 15 profes-sionals. The Guayaquil staff are mostly new and, while quite capable, theylack experience in term lending. COFIEC's management is taking steps to cor-rect this weakness (para. 5).


4. Policy Statement. COFIEC conducts business within the framework ofthe Declaration of Policies and Operating Procedures shown as Annex 24. Inview of its projected increase in long-term lending, COFIEC has agreed toeliminate Article 17 of the Declaration, which limits the amount of long-termdebt it may assume to 4 times its equity, but the Company would remain subjectto an overall debt-to-equity limit (para. 21). A new Article 17 would limitoperations with an original maturity cf less than 5 years to no more than 4times equity. These changes were agreed upon at negotiations.

ANNEX 21Page 2

5. Appraisal. Subprojects submitted to the Bank under the second

loan have shown a continuing improvement and project appraisal is becominga tool of management's decision making in Bank-financed subprojects. However,appraisal capacity has deteriorated somewhat recently, as appraisal staffhave been drawn into short-term operations (para. 10). This deteriorationwould have to be reversed for COFIEC to carry out its program of long-termlending (para. 25). To strengthen COFIEC's appraisal capacity, managementis preparing a plan whose principal elements are as follows: (a) hiringadditional staff for appraisal and supervision; (b) having a senior projectanalyst participate in the EDI development banking course; (c) holding a shortcourse in project appraisal for the Guayaquil staff; and (d) continuingon-the-job training by interchanging staff members between the Quito andGuayaquil regional offices. The carrying out of the plan was well under way bynegotiations and an understanding concerning its completion was reached then.

6. Supervision. COFIEC's follow-up on loans is uneven. Supervisionplans are often not carried out due to other demands. In many cases super-vision is limited to checking guarantees securing loans. When COFIEC's expo-sure in a firm is large or where problems have come to light, however, super-vision is very good. This uneveness shows that COFIEC has not devoted suffi-cient resources to supervision rather than that it lacks understanding ofadequate project follow-up procedures. Additional staff (para. 5) and moreclearly defined responsibilities (para. 2) can be expected to improve super-vision substantially.

7. Economic rate of return. Because of existing distortions in domesticprices, COFIEC calculates the economic as well as financial rate of return onprojects receiving Bank-financing of more than US$200,000. Under the proposedproject the Company would extend this calculation to all projects involving aninvestment in excess of US$500,000 equivalent or more than US$250,000 equiva-lent for Bank-financed projects. Agreement on this point was confirmed atnegotiations.

8. Disbursement and procurement. COFIEC's disbursement procedures andcontrol of investment expenditures are adequate. In regard to procurement,COFIEC does not generally require competitive bidding for projects it finances.By requiring evidence that the client has canvassed alternatives, the Companysatisfies itself that the machinery and equipment to be bought meet the tech-nical requirements of the project and are competitive in price. The companyreviews its clients' judgements on technical aspects to ensure the suitabilityof the items procured for the subprojects.


9. Resources. COFIEC's medium and long-term resource availability hasbeen about as expected at the time of the second DFC project. As of June 30,COFIEC had committed the US$8.0 million allocated to it under the second DFCproject and US$2.5 million of the US$4.0 million available to either COFIEC orCV-CFN on a first-come first-served basis. Of the total committed, US$9.6million had been disbursed with the remainder expected to be disbursed by the

ANNEX 21Page 3

end of 1976. Use of the Bank's livestock loans reached S/ 38 million.

COFIEC has been able to sell more of its 5 to 10 year bonds than expectedand their amount outstanding stood at S/ 90 million in December 1975.IESS has made three 4-year loans totaling S/ 150 million and the company

continues to have the use of the roll-over of a 20-year loan from USAID (1975balance: S/ 49 million). Finally, stockholders' equity has more than doubledsince 1972, and amounted to S/ 184 million in December 1975.

10. In order to maintain profitability (para. 17) and to satisfy demandsfor working capital finance growing out of the industrial boom, COFIEC hadto mobilize a much greater volume of short-term resources than had been

expected. COFIEC obtained short-term financing from the Central Bank throughrediscounts and acceptances amounting to S/ 114 million by 1975, where vir-

tually none had been contemplated in 1972. Short-term loans from foreignbanks rose to over S/ 45 million, but in 1975 they were reduced to S/ 34million. Drawings on foreign bank lines of credit to finance letters of

credit and guarantees have risen rapidly to S/ 732 million in 1975 from

only S/ 338 million in 1972.

11. Operations. In spite of inflation, 1/ COFIEC has been able to

increase the real value of its portfolio by 41.8% since 1972. The termstructure of operations mirrors that of the resources available. In 1975,after virtual full commitment of the second DFC loan, approvals of loans

fell to S/ 529 million from S/ 697 million in 1974, although disbursementscontinued rising from S/ 405 million to S/ 460 million. In 1975 loan dis-

bursements, including short-term loans, made up only 36% of total disburse-ments, letters of credit and guarantees 63%, and equity investments theremaining 1% (Annexes 26 and 27).

12. The sectoral distribution of COFIEC's lending is well diversified

and has remained relatively stable between 1972 and 1975, with manufacturingclaiming about 60% of total credit extended. Within manufacturing, industriesprocessing agricultural raw materials 2/ have received 47% of total financ-ing in the last 3 years. The average size of loan approval in 1975 was S/ 1.1million. The provinces in which Quito and Guayaquil are located received 89%of total financing.

13. As of December 31, 1975, the equity portfolio came to S/ 29 million,about 1.8% of total portfolio. In light of the difficulty in achieving profit-

ability in its equity portfolio (para. 18), COFIEC is being cautious in newstock purchases (Annex 28).

14. Audit. COFIEC's financial statements are audited annually by Price

Waterhouse and Company. No report in recent years has had any qualification.

1/ Totaling 61.2% in 1972-75.

2/ Food, beverages, tobacco, textiles, leather products, wood products and

paper.

ANNEX 21Page 4

The scope of these audits has improved and is satisfactory. The audits nowinclude an assessment of the adequacy of the provision for expected port-folio losses and a statement of COFIEC's exposure to foreign exchange risk.

15. Portfolio quality. Loan principal in arrears in December 1975was S/ 67 million, 5.2% of portfolio, an increase from 3.6% in 1974. Theproportion of clients in arrears above three months was 12.6%. Two factorslargely explain this increase. First, the Central Bank's tighter control ofcredit (para. 2.12) resulted in many firms finding difficulty in paying theirbanks. In a sample of 13 of the largest banks, arrears increased from 9.4% ofaggregate portfolio in 1974 to 10.1% in 1975 (Annex 2). Second, COFIEC's newmanager in its Guayaquil regional office has taken a much tougher standagainst refinancing loans in arrears, thereby flushing into the open addi-tional delinquent accounts. This new policy, an easing of credit in 1976, andimproved supervision (para. 6) should allow COFIEC to reduce arrears to a morecomfortable level.

16. At year-end 1975, COFIEC estimated probable portfolio losses atS/ 24.9 million, almost as much as the provision for bad debts, S/ 28.8 mil-lion. Although considered adequate by COFIEC's auditors, provisions as aproportion of total portfolio (including guarantees) have fallen since 1971,and in 1975 stood at only 1.8%. In light of these circumstances, COFIEC'smanagement has taken the following steps to strengthen the portfolio: (a) in-creased the monthly allocation to the provisions account from S/ 350,000 toS/ 450,000, as an interim measure; (b) set as a goal the maintenance of theprovisions account, net of currently estimated losses not written off(S/ 25.7 million), to 0.8% of loan and guarantee portfolio by 1978 and to 1%by 1979; (c) begun a program of writing off recognized portfolio losses; and(d) decided to increase the monthly allocation to the provisions account toS/ 600,000 starting Janaury 1977. An agreement on these measures was reachedat negotiations.

17. Profitability. Inflation in Ecuador in 1973-75 had a highlydebilitating effect on COFIEC's profitability. In 1973-75 the real returnaveraged -0.7% despite being higher in nominal terms than expected (Annex 35).To prevent a more precipitous shortfall in real profits, COFIEC was underpressure to concentrate on its most profitable operations and to cut itscosts. To do this, the company increased considerably its guarantee and letterof credit operations on which commissions of up to 4% could be charged.These operations constituted its only readily available resources.

18. Interest and commissions made up 92.2% of total income in 1972-75.(Miscellaneous income and earnings on fixed income securities accounted for4.0% and equity investments for 3.8%). Although the rate of return on theequity portfolio has been improving in nominal terms, it has not yet equaledthe return on COFIEC's own equity. The gross spread has remained in the4.4 - 4.9 range. Administrative expenses and provision for losses have beenreduced, perhaps too rapidly, from 2.9% of average total assets in 1972 to2.3% in 1975. The flexibility and imagination of COFIEC's management during

ANNEX 21Page 5

this difficult period permitted COFIEC to raise its rate of return on equity,in nominal terms, to 19.3% in 1975 compared with an average of 14.4% in thethree preceding years, but at the expense of being fully able to play itsunique role as a development bank.

19. Financial condition. Maintaining adequate liquidity has been aconstant problem for COFIEC. The problem became particularly acute in 1971and 1974, and COFIEC is not yet able to maintain desired levels of compensat-ing balances with correspondent banks. The acid test (cash and marketablesecurities/current liabilities) was below projected levels in 1973-75,averaging 8.4%. In long-term lending COFIEC manages liquidity by matchingloan repayments by its clients with payments to its creditors. As providedin its Policy Statement, COFIEC does not bear any foreign exchange risk in itslending.

20. To improve liquidity management COFIEC has recently centralized themanagement of its lines of credit in a newly created resources department(previously each regional office managed its own lines). These efforts andthe prospect of higher earnings (para. 31) should permit an increase in theCompany's degree of liquidity.

21. Leverage. Under the Second DFC Project, COFIEC at times had dif-ficulty in maintaining its level of operations within the Bank-imposed 7:1debt-to-equity limit. Letters of credit converted into debt were notconsidered in calculating the debt-to-equity limit. Under the proposed loan,letters of credit, when used and refinanced by drawings on a foreign bankline of credit, would be considered as debt. However, to avoid forcing areduction in COFIEC's operations, the debt-to-equity ratio would be raisedfrom 7:1 to 8:1. This change, agreed upon at negotiations, representsde facto only a slight increase in leverage. Furthermore, COFIEC agreedduring negotiations to record the refinanced letters of credit in a separatebalance sheet account. In the future, an increase in leverage to 10:1 willprobably become feasible (para. 30).

Prospects

22. The following section is based on projections made by COFIEC beforeand during the appraisal mission in April/May 1976. While reasonable in theirown terms, they do not reflect the new possibilities that have been opened tothe Company by the recent change in the interest rate and commission structure(para. 2.16), nor do they reflect agreements reached during negotiations toincrease the level of provisions for bad debts and to limit short- and medium-term operations. The projected balance sheets and income statements shown inAnnexes 31 and 32 are the Company's projections.

23. Strategy. COFIEC's future operations will be guided by its "Opera-tional Strategy and Financial Objectives" (Annex 29). It sets out severalimportant goals as follows: (a) to seek diversified resources so as to avoidundue dependance on any one source and, in particular, on the Bank; (b) to

ANNEX 21Page 6

maintain the current emphasis on industrial lending (around 60% of port-folio); (c) to define within the industrial sector the most advisable sub-sectors for lending; (d) to increase its equity portfolio; and (e) to empha-size provision of financial services such as cash management, collections, andtechnical assistance. The efforts COFIEC is making to improve its organiza-tion, staff, supervision and appraisal capacity and the Government's newinterest and commission rate policy should enable the Company to successfullycarry out this strategy.

24. Operations forecast. Ecuador's current rapid growth in GDP iscreating rising demand for COFIEC's services. During 1976-78, when the bulkof the proposed Bank loan would be disbursed, COFIEC has projected totaldisbursements rising at 17.4% p.a.--8.7% p.a. in real terms, 1/ a levelof demand that seems reasonable (Annex 30). Since early 1975 COFIEC hasreceived 48 requests for term loans whose foreign exchange component aloneexceeds SI 500 million. Although loans would not result in every case, therequests indicate a strong demand for term financing. Consequently, COFIECexpects disbursements for long-term loans (5 years or longer) to rise fasterthan any other type of operation, totalling S/ 870 million in the 3-yearperiod. Short- and medium-term loans and acceptances would grow slowly, butfrom a large base, and total S/ 905 million. The guarantee portfolio wouldcontinue to grow moderately. Disbursements for equity investments wouldremain at about the 1975 level.

25. These projected operations would result in an improvement over thelast several years but they would, nevertheless, result in COFIEC having onlyabout one-third of its portfolio in long-term loans and investments by 1978.At the time they were made, these projections represented, in COFIEC's view,the maximum feasible amount of long-term operations consistent with evenmodest profitability. But in view of the need of COFIEC's clients for long-term finance and of the new interest rate and commission structure, the Companybelieves that it can increase its long term activity to 50% of its portfolioby 1978. In line with this shift in its operations, a limit on short- andmedium-term operations of no more than 4 times equity to be achieved by theend of 1978 was agreed upon at negotiations.

26. Resource requirements. To meet the projected demands of its clientsfor short-term financing through 1978, COFIEC would rely mainly on foreignprivate banks' lines of credit for guarantees and letters of credit whoseamount outstanding would rise modestly to S/ 1,145 million in 1978. AddingCentral Bank rediscounts and acceptances of S/ 140 million in 1978, short-termresources would account for 47% of the total. Medium-term resources fromAID, IESS and the issue of financial certificates would reach S/ 161 million,6% of resources. The principal source of long-term finance would be theissue of bonds, followed by Bank DFC loans and drawings on the Bank's live-stock loans. The Company would also increase its equity from SI 184 millionto S/ 345 million. Long-term resources and equity in 1978 would thus cometo S/ 1,290 million, 47% of the total.

1/ Assuming that inflation remains at around 8% p.a. through 1978.

ANNEX 21Page 7

27. The new interest rate structure should make it feasible for COFIECto issue the domestic bonds required for its projected volume of long-termlending. Nevertheless the challenge of selling approximately S/ 465 millionin bonds (cumulative, gross of amortizations) during 1976-78 should not beunderestimated. To the extent the Company is less successful in mobilizinglong-term resources, lending would have to be curtailed. To meet thelimitation on short- and medium-term operations, COFIEC, in addition tomobilizing term resources, would have to use its own internally generatedresources almost exclusively for term lending and might need to lend somemedium-term resources at long-term.

28. The cumulative foreign exchange needs for long-term financing during1976-80 comes to US$46 million but the company has identified new resourcesof US$8 million, leaving a foreign exchange gap of US$38 million. TheUS$10.0 million portion of the proposed Bank loan allocated to COFIEC wouldfill only a part of the gap and the remainder would be met by using otherlong-term resources, mainly from bond issues to purchase foreign exchange inthe open market and by other foreign borrowing.

29. Financial projections. According to its projections, COFIEC's opera-tions would produce a growth in assets from S/ 1,746 million in 1975 toS/ 2,922 million in 1978, an average 10% p.a. in real terms. By the endof 1978 short- and medium-term operations would not exceed S/ 1,381 million,4 times equity, compared to S/ 1,153 million in 1975; while long-term loansoutstanding would rise from S/ 418 million to S/ 1,035 million. Investmentsin shares would reach S/ 53 million but would still make up only 1.8% of totalportfolio, the same percentage as in 1975. Thus, long-term portfolio wouldbe 40.7% of total portfolio in 1978, against only 27.9% in 1975. However, inlight of the new interest rate structure and the agreed-upon limit on short-and medium-term operations, the Company would be able to increase this pro-portion to over one-half provided it leverages itself to the maximum extentpermitted.

30. After 1978, projected growth in assets would slow down to under6% in real terms in line with a slower real growth in equity. To avoidforcing COFIEC to hold back its mobilization of long-term resources forlong-term lending, it would become desirable to relax the 8:1 debt-to-equityratio limitation. The Bank would carefully monitor COFIEC's organization,operations, resource mobilization and financial condition and, if it meets theBank's criteria, the debt-to-equity limitation would be allowed to rise insteps up to 10:1. A relaxation of this ratio would be conditioned on COFIECmeeting the following criteria: (a) short- and medium-term operations do notexceed four times equity; (b) portfolio quality is satisfactory and netprovisions for bad debts have reached the targets agreed to with the Bank(para. 16); (c) liquidity management, appraisal capacity, and supervision haveimproved substantially; (d) an equivalent increase in lending can not beachieved by capital subscriptions; (e) most of the additional resources willbe mobilized domestically by issuing bonds, financial certificates, or similarinstruments. Agreement on these criteria was reached during negotiations.

ANNEX 21Page 8

31. In the period 1976-78 COFIEC projects the gross spread to remainaround 4.4% of assets. Administrative expenses would rise as more resourcesare devoted to supervision and appraisal and net income would, therefore,fall from the 1975 level, 2.1% of assets, to around 1.8%. However, the newcommission structure will begin contributing to income in 1977 and the grossspread could rise to around 5%. Profitability, nevertheless, would be modest.The nominal return on equity would be about in line with the recent past but,because of lower expected inflation, the real return on equity would improve,to about 11% compared to -0.7% in 1973-75 (Annex 35).

ANNEX 22Page 1



List of Board Members and Alternates as of December 31, 1975

Principal Directors -/ Alternate Directors -

Dr. Jose Antonio Correa 2/ 'r. Marcel J. Laniado de Wind(President) Manager

Banco del PacificoMr. Gustavo Arango Bernal (Guayaquil)RepresentativeWells Fargo Bank Mr. Gonzalo Ayora(Bogota, Colombia) (Quito)

Dr. Luis Ayora Lic. Jose Iturralde Arteaga(Quito) Secretary

Br Comision de Valores -Lic. Guillermo Boria Corporacion Financiera NacionalManager (Quito)Sub-America, Compania de Seguros(Quito) Econ. Colon Valarezo Pineda

3/ DirectorDr. Alberto Di Capua - Department of Evaluation of ProjectsPresident Comision de Valores -Ecuatoriana de Artefactos S.A. Corporacion Financiera Nacional(Quito) (Quito)

Mr. Cesar Duran Ballen Ing. Galo VillamarGeneral Manager ManagerBanco de Guayaquil Farmacias y Boticas Ecuatorianas C.A.(Guayaquil) (Quito)

Dr. Justo Garcia Rayneri Econ. Jaime Aspiazu Seminario(Miami, Florida) Manager

Banco de GuayaquilMr. Gerhard Kappelhoff-Wulff (Guayaquil)RepresentativeBankhaus Hermann Lampe Mr. Fernando Lebed Segal(Buenos Aires, Argentina) Manager

Guayaquil Plywood S.A.Dr. Rafael Montejo (Guayaquil)RepresentativeAdela, Compania de Inversiones Dr. Edgar Teran Teran(Bogota, Colombia) (Quito)

Dr. Ernesto Ribadenieira - Mr. Jaime ZaldumbideGeneral Manager Vice PresidentF'abrica Textil La Internacional Fabrica Textil La Internacional(Quito) (Quito)

ANNEX 22Page 2

Principal Directors Alternate Directors-/

Econ. Enrique Salas-/ Mr. Alonso SalgadoGeneral Manager ManagerEcuatoriano-Suiza de Seguros Laboratorios H. G.(Guayaquil) (Guayaquil)

Mr. Eduardo Sosa -/ Ing. Leopoldo ArtetaPresident ManagerCerveceria y Malterlia La Victoria Fgbrica de Cigarrillos El Progreso(Quito) (Quito)

Mr. William Termyn Mr. Jaime Guarderas AlomiaVice President ManagerContinental Illinois National Bank Ecuatoriano-Suiza de Segurosand Trust Company of Chicago (Quito)

(Chicago, Illinois)3/ Mr. Patricio Alvares Drouet

Mr. Juan Jos'e Vilaseca - ManagerPresident Industrias Alex C. A.Industrial FADESA, IJESA (Quito)(Guayaquil)

3/ Mr. Jaime RobalinoMr. Clemente Yerovi Indaburu - Manager(Guayaquil) Industria Maderera Robalino

(Quito)

Dr. Eduardo Larrea Stacey(Quito)

Mr. Mario RibadeneiraManagerMoris'aena S. A. C.(Quito)

Mr. Capitan Cesar MongePresidentCompaiiia de Cervezas Nacionales(Guayaquil)

Mr. Gabriel Roldbs GarcesCommercial ManagerEmpresa El'ectrica del Ecuador(Guayaquil)

Dr. Carlos de la Torre Reyes -/DirectorDiario El Tiempo - Editorial La Union(Quito)

1/ Elected by Shareholders2/ Appcinted by Principal Directors3/ Members of Executive Committee

LCPDFOctober, 1976

ANNEX 23Page 1



List of Major Shareholders as of December 31, 1975

Number of Shares % of(Par Value = S/100.0) Total

I. Ecuadorian Shareholders

a. Private Ecuadorian Shareholders

Banco del Pichincha 76,758 5.45Ingenieros Nacionales Constructores Asociados 66,669 4.73Fabrica Textil La Internacional S.A. 49,628 3.52Inmobiliaria Italia S.A. 47,532 3.37Banco Popular del Ecuador 19,350 1.37Rafael Valdez Murillo 17,846 1.27Banco de Guayaquil 16,369 1.16Panamericana del Ecuador S.A. 16,237 1.15Fernando Lebed 15,375 1.09Banco de los Andes 11,500 0.82Durex S.A. 11,299 0.80Companlia de Seguros Ecuatoriano-Suiza S.A. 10,809 0.77Ecuatoriana de Aviaci6n 10,765 0.76Juan Jose Vilaseca 10,565 0.75Ecuatoriana de Artefactos S.A. (ECASA) 9,505 o.67Laboratorios LIFE 9,343 o.66Gonzalo Corres Escobar 7,638 0.54Seguros Rocafuerte S.A. 7,387 0.52C.A. El Comercio 6,498 o.46Antonio Granda Centeno 6,450 o.46Martin Klein 6,45o o0.46Andres Klein 6,450 o.46Roberto Isaac Klein 6,163 o.44Banco del Azuay 6,100 0.43Compania Azucarera Valdez S.A. 5,929 0.42Guillermo Vasquez 5,720 0.41R. T. Limitada 5,555 0.39Continental Seguros Generales 5,311 0.38Fabrica de Cigarrillos El Progreso S.A. 5,296 0.38Jose Anton Diaz 5,136 0.36Fosforera Ecuatoriana S.A. 5,108 0.36Leopoldo Arteta 4,913 0.35C. Vitral Ltda. 4,530 0.32Industrias Ales C.A. 4,143 0.29Sociedad Agricola e Industrial San Carlos 3,956 0.28Cerveceria y Malteria La Victoria S.A. 3,898 0.28Rodrigo Jacome Moscoso 3,765 0.27C. A. El Universo 3,589 0.25Esteban Quitola Figueroa 3,568 0.25

ANNEX 23Page 2


Banco de Nachals 3,396 0.24Corporaci'on Pesquera Ecuatorians COPESA) 3,331 0.24Francisco Amador Yceza 3,271 0.23Farmacisa y Boticas Ecuatorianas C.A. (FYBECA) 3,184 0.23Sociedad Hijas del Coraz6n de Maria 3,127 0.22Textiles San Antonio 3,018 0.21Compaflia Ecuatoriana de Pavimentos S.A. (CEPA) 2,835 0.20Prefectura Apostolica de Aguarico-Mision Capuchina 2,822 0.20Alberto Aviles Capeda 2,580 0.18Juan H. Kruger S.A.C. 2,480 0.18Creditos Mercantiles del Ecuador C.A. (CREMER) 2,335 0.17Rosa Pasternak de Zoldan 2,329 0.17Oswaldo Tamayo Benalcazar 2,300 0.16Hidalgo & Hidalgo Cia. Ltda. 2,280 0.16Leonor Rosales de Elizalde 2,280 0.16Maquinarias y Equipos Gamma S.A. 2,280 0.16Industrial de Gaseosas Cia. Ltda. 2,280 0.16Fincom Servicio C.A. 2,230 0.16Litograffe e Imprente La Reforma 2,203 0.16Amazonas CompaPi An6nima de Seguros 2,158 0.15C. A. Balda Industrial Mercantil 2,006 0.l1Bolsa de Valores de Quito C.A. 1,992 0.14Esco S.A. 1,899 0.13Banco Sociedad General de Cr4dito 1,813 0.13Harry Klein 1,772 0.13Astra C. A. de Comercio y Construcciones 1,756 0.12Jos; PePnafiel Escalante 1,750 0.12Orfa Salgado de Penafiel 1,750 0.12Agustin Febres Cordero Tyler, Herederos 1,730 0.12Erik Sonne 1,691 0.12Francisco Piana Ratto, Herederos 1,659 0.12Predios Cia. Ltda. i,605 0.11Constructora Nacional de Carreteras S.A. 1,603 0.11Celopiast S. W. Civil e Industrial 1,528 0.11218 Shareholders with fewer than 1500 shares each 88,698 6.29

Subtotal: 727,389 51.62

b. Governmental Ecuadorian Shareholders

Comision de Valores-Corporacion Financiera Nacional 85,293 6.05

Subtotal: 85,293 6.o5

c. Foreign owned Ecuadorian Shareholders

Banco de Londres y America del Sud Ltdo. 12,076 0.86Bank of America 11,527 0.82First National City Bank 10,989 0.78

ANNEX 23Page 3


Molinos del Ecuador C. A. 6,840 0.49Banco Internacional 5,300 0.38Companlia Ecuatoriana de Balsa 2,175 0.15Sintofil S. A. 2,010 0.14Grace y Cia. 1,678 0.1212 shareholders with less than 1500 shares each 10,345 0.73

Subtotal: 6 2,940 4.46

II. Foreign Shareholders

Adela Investment Company S. A. 145,314 10.31Continental International Finance Corp. 138,068 9.80International Finance Corporation 108,301 7.69Wells Fargo Bank Int. Corp. 47,256 3.35Bankhaus Hermann Lampe 37,985 2.70Banco Cafetero 34,286 2.43Corporacion Financiera Nacional (Colombia) 14,488 1.03R N Y C Securities Ltd. 6,290 0.453 shareholders with less than 1500 shares each 1,630 0.11

Subtotal: 533,618 37.87

GRAND TOTAL 1, 409,240 100.00

LCPDFOctober, 1976

ANNEX 24Page 1


ECUATORIANA DE DESARROLLO, S.A. (COMPANIA FINANCIERA)

Declaration of Policies and Operating Procedures(Approved by the Board of Directors on November 27, 1968 and

Modified on May 30, 1973)

The Board of Directors of COFIEC declares that the following guide-lines on policies and procedures will govern its operations and that modifi-cations thereof or departures there from will only be adopted by the Boardafter adequate opportunity has been given to all its members to review anddiscuss the proposed changes or departures.

1. COFIEC is a development finance company designed to assist in theeconomic development of Ecuador, in particular the industrial sector of theeconomy and such related fields as agriculture and cattle raising. To thisend, it will pursue an aggressive policy to promote, finance and otherwiseassist productive enterprises.

2. COFIEC will make its investment decisions only on the basis ofsound investment criteria and standards.

3. Subject to the criteria set forth in paragraph 2 and 9 hereof,COFIEC will select projects on as broad a geographical basis as possible.

4. COFIEC will, as appropriate, make use of the entire range offorms of investment. It will give particular attention to its client'sneeds for equity financing and will provide such equity to the extentconsistent with sound financial practice.

5. COFIEC's principal objective is the supply of medium- and long-term financing. Accordingly, COFIEC will increase progressively and asrapidly as its circumstances permit, the proportion of its resources whichare devoted to such financing.

6. COFIEC will diversify its financing (except for temporary invest-ment of liquid funds in short-term securities) among different types ofindustries and different types of financing.

(a) COFIEC will not normally commit to any single enterprisein whatever form, including loans, share capital, guarantees,or any combination thereof, an amount greater than 20% ofCOFIEC's paid-in share capital, free reserves and unappro-priated surplus.

ANNEX 24Page 2

(b) COFIEC will not commit to any single enterprise in the

form of equity more than 15% of COFIEC's paid-in share

capital, free reserves and unappropriated surplus.

(c) The aggregate of COFIEC's equity investment will noL

exceed the sum of its paid-in share capital, free reserves

and unappropriated surplus.

Exceptions to rules (a) and (b) may be made only after special consideration

of each case by the Board, and will be confined to enterprises with parti-

cularly sound financial prospects.

7. COFIEC will refrain from taking a controlling interest in an

enterprise or any other interest which would give it primary responsibility

for management of an enterprise, except that in the case of jeopardy the

Board of Directors may take such actions as may be necessary to protect

COFIEC's interests. COFIEC will not normally take up more than 25% of the

voting shares of any single enterprise, except as may be temporarily neces-

sary in connection with an underwriting commitment undertaken in the expec-

tation that the ultimate investment will be within the limit cited.

8. COFIEC will conduct its operations in such manner as to assist in

the growth of a capital market in Ecuador and, to improve facilities for

marketing securities, will seek opportunities to underwrite securities, and

will revolve its own portfolio whenever it can do so on satisfactory terms.

In selling its investments, it will pay due regard not only to its own

interests but also those of the other participants in the investment and

to the interest of the enterprise whose shares are involved.

9. COFIEC will finance only private and mixed ownership enterprises which

are soundly managed and which appear, on careful economic, financial and

engineering investigation, to be economically viable and technically feasible.

10. COFIEC will not ordinarily make loan commitments to any one client

for an amount less than the Sucre equivalent of US$20,000 for existing enter-

prises and US$40,000 for new enterprises.

11. COFIEC will not make loans to enterprises which are in arrears in

their tax payments or on payments of their social security contributions.

12. COFIEC will build up a technically competent staff, capable of

carrying out the responsibilities which COFIEC's objectives imply (including

staff skilled in engineering, financial and economic analysis) and able to

provide services to clients which those objectives call for. COFIEC will

develop and maintain adequate systems of project appraisal and follow-up

and end-use supervision of its investments. Specific and periodic reports

prepared in exercise of this control function will constitute the basis for

periodic reviews of the investment portfolios by its Board of Directors.

ANNEX 24Page 3

13. COFIEC's operating expenses will be maintained at a minimum con-sistent with the scope of its activities and with the volume of its opera-tions.

14. In accordance with normal business practice, COFIEC will requireits borrowers to provide and to maintain adequate security, to keep recordsand accounts in accordance with sound accounting practices and to furnishwhatever information on their operations and accounts COFIEC deems desir-able. COFIEC will take the right to inspect the enterprises it finances aswell as their operations and accounts. Business secrets and other informa-tion supplied by applicants or clients will be trated as confidential.

15. COFIEC will conduct its operations in such a manner as to maintainthe value of its capital and secure a satisfactory profit. It will buildreserves consistent with sound financial practice; these will include re-serves for bad debts and investment and, in addition, supplementary reserves.Its dividend policy will be consistent with the foregoing.

16. COFIEC will not carry the foreign exchange risk on external borrow-ings, which it must repay in foreign exchange. It will pass the risk on toits clients or find other suitable means to cover it.

17. COFIEC will not incur, assume or guarantee any debt maturing morethan one year from the date on which it is originally drawn down or assumedif, after incurring or assuming such debt, the total amount of it then in-curred and outstanding exceeds an amount equal to 4 times the aggregate ofCOFIEC's paid-in capital, free reserves and unappropriated surplus.

18. The maturities of COFIEC's assets will correspond with, or beshorter than, the maturities of its liabilities.

19. The Board of Directors of COFIEC will direct the operations ofCOFIEC in such a way as to assure uniformity in the application of thepolicies and guidelines set forth herein. In order to assure the implemen-tation of this policy by the Executive Committee, the Board will, at eachmeeting, review the decisions of the Executive Committee in the interim.

20. COFIEC will have its books and accounts audited annually by a firmof reputable independent public accountants.

LCPDFOctober, 1976

ECUADOR-APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECTECUATORIANA DE DESARROLLO S A. ICOMPANIA FINANCIERA)

ORGANIZATION CHART, MARCH 31, 1976

~~es_ 54540,;,,1

| EIX .1.1151.1. '1' O1-____-

l1,01104flb00 I80ST410 1511444004 08404A

.000 ERTll0 554400 0411(4 E . .... I .,,

DEPARTMENT~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4510 D .. 10LI.1L.IT 0.ll,.. 4500N11 ,04.l00000100044 4 _A / 0 _ , 7 S r 0SL 40000

ANALST9 1 S tX T w 1 | tHEU4T 1 | RFkIIT s | H X |~~~~~~~~~~~~~~~~~~~~~~~~~IE"T"'0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L }!I N '<- A AI'A 3l

ANNEx 25Page 2



Key to Organization Chart

1. Board of Directors See Annex 19

2. Executive Committee See Annex 19

3. PRESIDENCY Dr. Jose Antonio Correa Escobar (President)Maria Amelia Maldonado Carbo (Secretary)

4. External Auditor Price Waterhouse & Co.

5. Internal Auditor Econ. Ernesto Davalos Salazar (Auditor)Fabian Cevallos Endara (Assistant)Patricia Flor Rubianes (Secretary)

6. Advisors Econ. Gustavo Bravo Rivera (Fiscal)Dr. Rafael A. Tera'n Varea (Legal)Dr. Julio Corral Borrero (Legal)

7. REGIONAL MANAGER Econ. Oscar Mora Cardenas

7.1 Legal Department Dr. Patricio Borja Maldonado (Lawyer)Lcdo. Rodrigo Valdez Valdez (Assistant)Maria Mercedes Carrasco Toral (Secretary)

7.2 Credit Department Vacant (Chief)Maria de los Angeles Mena R. (Secretary)Alexandra Isch de Arias (Secretary)Adriana Bermeo Bardagi (Secretary)

7.3 Supervision and Ing. Santiago Pizarro Alverez (Chief)Investments Econ. Eduardo Paredex Acevedo (Analyst)

7.4 Industrial Projects Ing. Ramiro Leo'n Paez (Chief)Econ. Cesar A. Ledrn Mendieta (Analyst)Olga Polit Macias (Analyst)

7.5 Livestock Projects Ing. Miguel Angel Vega (Chief)

7.6 Operations Department Vacant (Chief)Ernesto Chiriboga B. (Portfolio)Susana Varea Maldonado (Supervisor)Blanca Ayllon Perez (Loans & Guarantees)Ana Felix de Abdo (Letters of Credit)Jaime Jose Ordonez M. (Billing)

ANNEX 25

Page 3

Romelia Larrea de Burbano (World Bank)Maria Sol Villagomez L. (Files)Mo"nica Apunte Franco (Secretary)

7.7 Resources Department Econ. Radl Daza Martinez (Manager)Mariana Avila Orejuela (Assistant)Beatriz Troya (Secretary)Vacant (Accountant)Ivan Almeida (Accounting

Asst.)Diego Galarza (Machine

Operator)Marcfa Chaco'n (Statistics)

8. GENERAL SECRETARY Dr. Carlos Larrea Holguin (General Secretary)Adriana Escobar Cisneros (Secretary)Miran Endara Ldpez (Secretaria)

8.1 Files Leonor Murgueytio Yepez (Chief)Maria Eulalia Lozada D. (Assistant)

8.2 Securities Vacant

8.3 Personnel Josefina Penaherrera

8.4 Medical Services Dr. Marcelo Aguirre (Doctor)Dr. Alfonso Arcos (Dentist)

8.5 General Services Amparo Fegan (Receptionist)Jose Ricardo Maldonado (Driver)Marcelina Parra (Maintenance)Victor Melo (Door Keeper)Flavio Martinez (Messenger)Jorge Eduardo Maldonado (Messenger)Manuel Sosapanta (Messenger)Ivan Moya (Messenger)

9. TREASURY Vacant (Treasurer)

9.1 Cashier Facundo Suarez (Chief)Lilian G. de Zurita (Secretary)

10. REGIONAL MANAGER Angel TorrezVacant (Secretary)

10.1 Securities Junia de Curlizer

10.2 Treasury John Taylor

ANNEX 25Page 4

10.3 Personnel Desiree Vergara

10.4 Lawyer Rdmulo GallegesHilda de Ycaza (Secretary)

10.5 Lawyer Antonio ArosemenaMariela Guerreros (Secretary)

10.6 Credit Department Carmen de Garcfa (Chief)Hugo Zambrano (Financial

Analyst)Johnny Salguero (Financial

Analyst)Carlos Salgado (Financial

Analyst)Vacant (Financial

Analyst)George Neal (Livestock

Analyst)Yolanda Dutuzaka (Asst. Analyst)Eliza Weray (Secretary)

10.7 Accounting Department Victor Hugo Alleivar (Chief)Elmer Taylor (Machine Operator)Carlos Mite (Accounting Asst.)Jenny de Tello (Accounting Asst.)Priscilla Wagner (Accounting Asst.)Vacant (Accounting Asst.)

10.8 Operations Department Teresa Acaituri (Chief)Flor Maria Reyes (Deputy)Vacant (Portfolio)Norma de Castillo (Cashier)Cecilia Bastidas (Operations Asst.)Dolores Vasquez (Operations Asst.)Jose Calderon (Operations Asst.)Patricia de Barriro (Receptionist)

LCPDFSeptember, 1976

ECUADOR - PRIAPFTETO. EEOMN AKN 0031I47

1972 ____L973 ~~~~~~~~~~~~~~~174 1971

No. 7, AnBont 7, ~~~~ ~~ ~ ~~~~~~No. 7, A,ount 1,No. 7. doonoo T No. A-ntno I

Uip to SI 2.0 million 26 56.5 25,012.8 20.2 SI 60.3 41,159.9 9.3 N73 BI.5 252,079.6 36.3 409 07.2 274,0009 51.00/2. elIBo to I/ 4.0 nill-o I 21.7 26,714.9 21.6 tI 13.3 30,419.4 6.9 409 10.7 134,301.3 19.3 38 8.1 L08,963.1 20.60/4.0 ollno Co I/ 6.1 nilElno 4 0.7 20,025.0 16.2 2 2. ~ 9,310.0 2.1 1 5 3.2 78,740.4 14.3 II 2.4 54,478.5 1R.3

SI 6.0million to B! 10.0 nlio 5 LBS9 36,020.0 29.1 N 6.0 41,752.0 9.4 11 2.4 96,754.4 13.9 B 1.7 60,043.2 11.4B! 1B.B iLliEne to 1/ 14.0 million.. - - - A 0.9 41,040.0 N.9 3 0.6 31,000.0 1.9SI 14.0 million Co Si 18.0 miIo 1 2.2 16,I0H.H 12.9 4 4.3 64.SOB.I 14,N 6 1.3 93,600.0 13.3- -B! 19.0 illo to Sf25.B oilBion- - - 9 I0.i 200,:170.0 45.2 - - - -

Mrmie.n 0/ 21 B million- - 2 2.- 60_010 ) _126_

Total 46 WMR. 123,7_72.7 100.1 03 00.1 4i,_94.7 101.0 439 100.0 6~97,333. 7 100.0 469 100O 52 8. 100.1

HI Prolor orLo

Sierra

Plohiorba 30 69.3 01,367.6 65.7 19 71., 293,601.8 64.0 211 46.1 390,474.0 14.6 220 46.9 269,501.7 21.0Tongora.. h.. - - 6 1.3 7,201.3 1.0 N 1.1 10,023.0 2.0Cotopani 5 lB 9 4,806.6 3.9 3 3., 3,939.3 0.9 2 0.4 21,700.0 3.1 7 1.5 8,752.5 1.6Carh . 883 07I 1.7 719.5 0.2 4 0.9 2,139.0 0.3 N 1.1 3,360.9 8.6

2 24. 89,013 07.- - - 2 0.4 1,000.0 0.1 2 0.4 2,170.8 0.4Imbabora 1 2.2 1,200.0 1.0 - - 2 0.4 781.2 0.1 2 0.4 1,966.4 1.4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 04 72. 0I 0. 196.4o.

Thimb-r..o - - - - - - 5 1.1 11,230.0 1.7 5 E.1 1,704.6 0.3itney ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~ ~~~~~~~~~- . - 1 1.2 B,ROI.0 1.7- 1 0.2 622.3 0.1Penmcee ~ ~~~~~ ~~~~~~~~~ ~~~ ~ ~ ~~2 4. 3 J. 385.2 1._I________ __

Sob-Total 41 89.2 90,637.7 79.7 64 77.1 296,260.0 66.8 232 50.6 423,073.3 60.9 247 N2.7 298,513.5 36.6

CocoA

Gaan2 4.3 15,420.0 12.2 12 14.3 128,658.7 29.0 203 44.3 234,916.5 33.0 205 43.5 202,607.7 39.3Inner.ldan ~ ~~~~~ ~~~~~~~~ ~~~ ~ ~ ~~2 4.3 9,333.0 7.5 4 4.0 6,595.0 1.3 9 2.0 29,946.2 4.3 6 1.3 12,337.3 2.3

Manebi - - - - - - 3 2.7 268.2 - 2 0.4 8,200.0 1.6~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.4 820.0LLot lion 1 ~~~~ ~~~~~~ ~~~~~ ~~~~~~~2_2 360.0 0.3 3 3.6 .. _..4.,.Z ,. _ 2.7 11 2.4 _...2..7 .0 X 1010 _2.1 7,2-27. 0 1.4

Hub-Total N 10.8 23,113.0 20.3 19 22.9 147,043.7 33.2 226 49.4 272,238.4 39.1 222 47.3 230,472.2 43.6Total 46 109.0O 123,_772.7 100.01 83 1-00-0 .. 4At43 04 10.04510 0.0 673337 10849 1Q. 0.

By_Tyc f Artotiit

Agtoutore., sod Li-metonk IS 32.6 15,492.0 12.5 0 9., 18,260.3 4.1 48 20.3 63,034.16 9.0 47 11.0 46,817.3 8.8Pinhi,g - --- - - - 29 6.3 19,934.6 2.9 28 6.0 28,432.8 5.4Emplootmtr- of mine and qoarnLon - - -- . 1 0.2 125.9 - 1.1 4,i50.3 8.8

... f-tori.g r~d-tti- 29 62.1 746l,j. __ 5 31_ 65. 17 .7 70. 6 5 _ 40_6 627.B 69.9 243 51.8 345_981, N

-Food.toffn 7 15.3 28.480,0 23.0 7 0.4 4 63,90.R 9.9 35 7.6 78,944.8 11.3 25 2.3 27,5232 3.2- lenereaca - - ~ ~ ~ ~ ~ ~~~~~ ~~~~~~~~ ~~~- - 1 1.2 7,980.0 0.6 30 6.6 30,319. 4.3 11 2.4 14,175.8 2.7

-Tobar- - - - 1 1.2 800 - .E 6,500.2 0. N ' 1.1 7,508.0 1.6-T.otilee 1 28.3 39,263.0 31.7 15 18.2 82,705. 10.7 49 10. 9950 8.6 32 6,8 48,9. .-Leaerth--- - - - - 2 0.4 2,080.N 0.3 1 R,2 600.0 0.1- BnemBik -- -- - - - 2 0.4 3,326.3 8,8 4 RB8 12,700.0 2.4L-Lober 2 4.3 2,4089.0 2.0 6 7A2 12,995.0 2.9 15 3.3 29,636.9 4.3 17 3.6 21,292.5 4.0

-F onit-r 1 1.2 200.0 0.2 3 6.1, 1,450.0 0,3 1 0,2 100,3 C - 6 1.3 1,239.2 0,2- Paper - - - - - - - - 4 0.9 6,621.0 1,0 5 1.1 11,608.0 2,2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 .9 ,65. 10 1 1160 02

- PrIntIng ~ ~~~~~ ~~~~~~~~ ~~~ ~ ~~2 4,3 9,250.0 7.5 7 N.. 76,b46.7 17.2 11 3.3 23,974.7 3.4 17 3.6 1,9. .-Chbre,OrlP-ndo-m - .2 2.4 235.0 0.1 21 4,6 32,109.0 4,6 29 3.2 47,234,6 8.8-PIatI and robber prod-lt 1 2.2 1,600,0 1.3 2 2.4 20,000.0 4.5 12 2.6 35,481.8 5.1 9 1.9 16,578,5 3,1

- o- ern nieaa- -- 1 1.2 8,ROO.R 1.8 6 1,3 17,784.0 2.6 8 1.7 11,077,3 2,2-Metal prod-nta N 43 S.101.R 4.1 4 4.8 28,ROO.0 6.3 33 7.2 58,263.3 8._4 32 6,8 48,764,2 9.2-MOahinery leere.pting eetil)- -- ---- - - - - 2 2.4 1,708. 0 0.3-Henbi-ey, aoenre,& o1LerirIc agp1.a-re 1 7.3 5,988. 4.8 3 3., 37,500.0 6.5 26 5.7 73,412.2 10.3 22 4.7 33,649.5 6.4-Cen-teortion of tr'anaportatlon material - -- - 8 1.7 5,950.2 0.9 8 1.7 12,300,0 2.6

M fne_aMno.- Endoetolee - . - - - -- 4 0.9 28,250.1 2.9 10 2.2 9,227.3 1,0

Conafrontion 2 4.3 16,016.7 12.9 14 16 9 98,174.0 22.1 46 10,0 62,091.6 8.9 72 15.6 61,493.N5 11.6Tran-porttion- - - - 2 2.4 8,800.0 2.9 22 4.9 30,829.8 4.4 24 5.1 12,153.2 2.3leroloe - - - 4 4.3 4,236.3 0.9 0 1.7 3,788.8 0.9 23 4.9 16,284.931

T. ti.. ~ ~ ~~~~ ~ ~ ~~~~~~~~~~~~~~~~- - - - 2 0.2 2,508.0 0,Ontepe~~~~~~~~~~f1ed - - . 1 2.2 250.0 0.1 36 7.9 30.,293,.fl 4.4 26 5.5 11,173.8 2.1~~~~~~~~~~~~~~~~~~12 .1 16 7~9 __0 9_226 1 1-12

Total 46 100.1 123.772,7 108.0 83 101.0 443.3l4.~~~~4.3 100.0 650 100,0 897.,. 10070100.00669 1108.8_328.981,7§100.8

LC PDFlottbeo, 1976

ECUADOR - A kPr.AISAL OF T1•T fIiLTkD DEVELOPMENT BANKING PROJECT

ECIJATORIANA DE DESAKROTOL S.A. (COM1'A IgA FINANCTEWA)

Summary Breakdown of Ln-sn Approvals UnderWorld Batik Loans 721-EC and 930-EC

(SI [hoisaiuls)

721-£t 930-EC 721-EC and 930-EC9Y AMOUNI

U> X AMOUNT W No. % AMOUNT X ,o. X AMOUNT X

up to SV. 1.0 million 1 5.9 697.9 0.7 -- -- -- __ 1 1.8 697.9 0.2S/. 1.0 million to S/. 2.0 million 4 23.5 5.952.7 6.0 6 15.9 10.308.1 4.O 10 18.2 ,6.260.8 4.5S/. 2.0 million to VI. 4.0 million 3 17.6 7.489.2 7.5 14 36.8 41.225.3 15.9 17 31.0 418.714.5 13.6W/. 4.0 million to 5/. 6.0 million 3 17.6 i6.782.2 16.8 4 10.5 20.780.1 8.0 7 12.7 37.562.3 10.45/. 6.0 mIllion to Si. 10.0 million 4 23.5 29.097.0 29.0 6 15.8 45.027.2 17.4 10 18.2 74.124.2 20.6VI. 10.0 million to 57. 14.0 million -- -- -- -- 1 2.6 10.987.5 4.2 1 1.8 10.987.5 3.1S/, 14.0 million to 5V. 18.0 million -- -- -- -- 5 13.2 76.526.3 29.5 5 9.0 76.526.3 21.3S/. 18.0 million to SV. 25.0 million 2 11.9 39.981.0 40.0 1 2.6 24.393.0 9.4 3 5.5 64.374.0 17.9More then 5/. 25.0 million -- -- -- -- I 2.6 30.261.1 11.6 1 1.8 30.261.1 8.4

TOTAL 17 100.0 lOe.0.o 100.0 38 I5O 100.0 3s9,08.6 100 00100.0

BY DIPATION

up to 3 years t 5.9 5.940.5 5.9 -- -- - 11' 1.8 5.940.5 1.7From 3 tO 5 years 3 17.6 8.471.3 8.5 12 31.6 39.476.6 15.2 15 27.3 47.947.9 13.3Frsm 5 tO 7 years 5 29.4 9.275.3 9.3 12 31.6 52.654.0 20.3 17 30.9 61.929.3 17.2Frora 7 to 9 years 3 17.6 18.001o.6 18.0 6 15.8 59.407.6 22.9 9 16.4 77.409.2 21.5Frca 9 to 11 years 5 29.4 58.311.3 58.3 8 21.0 107.970..4 41.6 3 23.6 166.281.7

4 6.3

TOTAL 17 100.0 100.000.0 100.0 38 100.0 259.508.6 100.0 SS 100.0 3 52.L 6 100.0

Br NATURE Of ENTERPRISE

New Enterprise 2 11.8 14.919.5 14.9 15 39.5 116.945.3 45.1 17 30.9 131.864.8 36.7Exlstlng Enterprise 15 88.2 85,080.5 85.1 23 60.5 1142.563.3 54.9 38 69.1 227.643.8 63.3

., 1Z. ;2 . 1_ g22 1= s8 100.!3 "21°2S25°8L60 100.0 -5j5 -22L28 .1228O.6 100!.SI E5PA BY PROJECT LOCATION

PIhi ncha 11 64.7 53-730.5 53.7 19 50.0 109.364.8 42.1 30 54.5 163.095.3 45.4Azuay -- -- -- -- I 2.6 7.523.5 2.9 1 1.8 7.523.5 2.1Cotopaxl -- -- -- 3 7.9 18,805.3 7.2 2 3.6 18.805.3 5.2Loja 1 5.9 6.683.2 6.7 - - -- 1 1.8 6.683.2 1.8Imbabura 1 5.9 697.9 0.7 - ' 1 1.8 697.9 0.2

COS TA

Guayas 3 17.6 29.909.5 29.9 13 34.2 114.855.6 44.3 16 29.2 144.765.1 40.3 On,Esmeraldas I 5.9 8.978.9 9.0 2 5.3 8.959.4 3.5 3 5.5 17.938.3 5.0 Other -- -- -.- - -- -- I 1.8 -

17 100.0 100.000.0 Wo.O 38 100.0 259.508.6 100.0 55 100.0 359.508.6 100.0

BY PROJECT ORIENTATION - 721-EC 930-EC 721-EC and 930-EC

No. % AMOUNT ,A Mo. X AHOUNT X No. % AMOUNT %

Exclusively Import SubstitutiqnOrlented 8 47.1 37.886.0 37.9 21 55.3 164.632.9 63.4 29 52.7 202.518.9 56.3Exclusively Export Oriented - -- -- 2 5.3 21.490.0 8.3 2 3.6 21.490.0 6.0Both Im,port Subst. and Export Oriented 7 41.2 54.443.0 54.4 9 23.7 51.948.7 20.0 16 29.2 1'5.391.7 29.6Others 2 11.7 7.671.0 7.7 6 15.7 21.437.0 8.3 8 14.5 29.108.0 8.1

17 100.0 100.000.0 100.0 38 100.0 259.508.6 100.0 55 100.0 359.508.6 100.0

BY PPE OF ACTIVITY *

Alln-entos 4 23.5 34.622.8 34.6 8 21.1 52.998.2 20.4 12 21.8 87.621.0 24.4Textil 7 41.2 38.016.6 38.0 6 15.8 71.259.7 27.5 13 23.6 109.276.3 30.3talzado -- -- 1 2.6 3.032.3 1.2 1 1.8 3.032.3 0.8Padera 1 5-9 8.978.9 9.0 * 4 10.5 13.897.2. 5.4 5 9.1 22.876.1 6.41!-prentiS B 5.9 2.667.8 2.7 4 10.5 15.400.0 5.9 5 9.1 18.067.8 5.0Prod.ctus Qulmicos -- -- 1 2.6 1.929.4 0.7 1 1.8 1.929.4 0.5Prod,ctos P1A,ticos y de Caucho -- -- - -- 1 2.6 3.902.8 1.5 1 1.8 3.902.8 1.1Hinerales no Hethllcos 2 11.7 8.142.3 8.1 3 8.0 13.812.0 5.3 5 9.1 22.014.3 6.1Prd.,dcto. HeCtAiicos -- -- 7 18.5 62.018.0 23.9 7 12.9 62.018.0 17.3?aq8inarlas. artefactos y arttcul9s elEct. 1 5.9 5.841.6 5.9 1 2.6 15.000.0 5.8 2 3.6 20.841.6 5.8ConstrucciSn I 5.9 1.730.0 1.7 -- -- -- -- 1 1.8 1.730.0 0.5Transporte -- -- -- -- I 2.6 3.079.1 1.2 1 1.8 3.079.1 0.9Servicios -- -- -- -- 1 2.6 3.119.1 I.t 1 1.8 3-19- 0.9

1009 100 .000.0 0oo.0 1°°= .0 _29.508.6 100.0 10D=0.0 355o8.6 100.0

BY IOTAL PROJECr COST

Up to 6 million 3 17.6 11.442.2 1.0 9 23.7 46.712.5 3.1 12 21.8 58.154.7 2.2FrcLm S/. 6 million to SJ. 10 million 2 11.8 17.711.9 1.6 5 13.2 39.454.6 2.6 7 12.7 57.166.5 2.2FrL(n S/. 10 miillion to S/. 15 million 2 11.8 27.424.8 2.4 4 10.5 48.874.9 3.3 6 10.9 76.299.7 2.9Fr,u S/. 15 mnll Ion to S/. 20 million 1 5.9 17.936.0 1.6 3 8.o 52.049.1 3.5 4 7.3 69.935.1 2.7From S/. 20 millIon to S/. 25 million 1 5.9 20.164.6 1.8 . 4 10.5 85.218.5 5.7 5 9.1 105.383.1 4.0Fr cm S/. 25 million to S/. 35 million -- -- -- -- i 2.6 30,890.0 2.1 1 1.8 30.890.0 1.2Froa S/. 35 million to S/. 55 millon 3 17.6 129.601.2 11.4 4 10.5 174.599.5 11.7 7 12.7 304.200.7 11.6Frum S/. 55 million to S/. 75 milion 2 11.8 134.822.5 11.9 1 2.6 70.261.0 4.7 3 . 5.5 205.083.5 7.8Fore than SI. 75 million 3 17.6 774.996.0 68.3 7 18.4 946.567.2 63.3 10 18.2 1.721.563 2 65.4

.17 100.0 L_ 992 100.0 6.0 100 .... .. . . 100.

BY TOTAL PROJECT FINANCING

COFIEC 263.900.3 23.3 38 275.862.5 18.5 55 539.762.8 20.5Fondos Proplos 17 705.850.0 62.2 38 849.529.8 56.8 55 1.555.379.8 69.2CV. CFht. 7 24.650.8 2.2 6 101.118.0 6.8 13 125.768.8 4.8Otros _i 139.698.1 12.3 20 _ 268.117.0 17.9 31 - 407.815.1 15.5

i-di

1.134.099.2 100.0 1.494.627.3 100.0 2.628.726.S 100.0 0

.. .......... ....... ....... CD . - '

J ,CPDF October, 1976


ECITATORIANA DE DESARROLLO S.A. (COMPARIA FINANCIERA)

Equity Portfolio, 1972-75

1973 1974 1975Portfolio Portfolio

Comllpanly Dec. 31, 1972 Purchases Sales Purchases Sales Purchases Sales Dec. 31, 1975

Intetuational, S.A. - - - - 5,875.6 5,875.6 -

Ecuatoriana de Artefactos 5,834.7 2,685.5 664.2 1,779.5 261.6 5,424.5 - 14,798.4Cergi-niica Andina, C.A. 612.5 812.5 - - - 162.5 - 1,787.5Soc. Agric. e Ind. San Carlos 499.2 - - - - - - 499.2

Creditos Mercantiles 70.0 21.0 - - - - - 91.0Soc. Ecuatoriana de Carb6n 400.0 - - - - - - 400.8Desarrollo Agropecuario 2,261.3 - - - - 2,261.3Bolsa de Valores Quito 50.0 - - 50.0 - -- - 100.0Bolsa de Valores Guayaquil 50.0 -- - - - - 50.0Almacenes de Ecuador 1,700.0 - _ 477.1 - - - 2,177.1

hlotel Col6n 602.5 123.7 - 0.3 - 857.5 - 1,584.0Cementos Ecuatorianos - 6,000.0 2,490.0 - - - 750.0 2,760.0S.A. El Comercio - 500.0 - 78.1 - - - 578.1Ganaderias Ecuatorianas - - - 25D.0 - - - 250.0Hlormigones Comprimidos, S.A. - - - 750.0 - - - 750.0Cia. de Servicios Agroindust. - - - - - 250.0 - 250.0Rlinc6n Servicios 500.0 - - - - - - 500.0Propiedades del Mar 250.0 - - - 250.0 - -

OMEGA 400.0 - - 400.0 - -

Banco de Guayaquil 1,897.4 - - - - - 1,897.4 -

P'orLfolio at end of year 15,327.6 22,316.1 24,789.5 28,836.6 28,836.6Average Portfolio 18,821.9 23,552.8 26,813.1Dividends 1 1,928.9 2,735.6 4,811.9 zRetUrn on Portfolio- %) 10.2 11.6 17.9

I/ I)oes not include gains on sales of investments.

LCPDF?October, 1976

ANNEX 29Page 1


ECUATORIANA DE DESARROLLO, S.A.(Compania Financiera)

Operational Strategy and Financial Objectives for 1976-80(April 1976)

During its first 10 years COFIEC has created a financial and opera-tional base that should be refined, consolidated and expanded in 1976-80.

1. With regard to financing, we undertake to seek a better balancebetween internal and external resources to the end of using the former tothe maximum extent possible. To this effect resource mobilization instru-ments have been designed such as bonds, financial certificates, and internalloans, although the current rigid structure of commission rates makes thismobilization policy difficult. We likewise undertake to seek an adequatebalance between lines of external resources so as not to depend excessivelyon either international intergovernmental organizations or on privateforeign banks.

2. With regard to the terms of COFIEC's operations, we believe thatit will be possible to reverse the proportion of 60% short- and medium-termand 40% long-term operations that has resulted from the difficulties COFIEChas faced in obtaining long-term resources during its first 10 years. Never-theless, experience has shown that industrial enterprises require integratedfinancing that permits the acquisition of fixed equipment payable at longterm as well as provision of adequate resources for working capital. Thereseems to be agreement in financial circles about the difficulties that alack of working capital can cause firms.

3. With regard to operations, our efforts to date have resulted informing a group of project evaluators of high quality in the Quito officeand a group in the Guayaquil office that, although less experienced, has thepotential of achieving equally high quality. Training will be conductedboth within the country and by spending staff members abroad so as to main-tain high professional standards. The operations departmeni-s are operatingefficiently and with adequate controls. Putting into effect the operationsmanual will constitute a key element in the systematization of methods andprocedures.

4. Efforts in the next five years be directed at re-enforcing theeffectiveness of supervision and control of loans and investments and at creat-ing, technically equipping, and fortifying the treasury and administrativedepartments that must operate autonomously and efficiently, given the volumeof the Company's business.

ANNEX 29Page 2

5. With regard to objectives, these must be constantly adjusted to thechanging situation of the Ecuadorian economy. But the following may well bedefined as basic objectives:

(a) We maintain as first priority the financing of the industrialsector (which currently makes up 62.4% of operations out-standing) and as second priority the livestock sector. Theanalysis and projections of industrial development made byEngineer Galo Montano and Edwardo Wygard and the Round Tableheld subsequently, will permit a definition of the most advisablesectors within the large scope of manufacturing industry;

(b) It is to be hoped that the problems which have made vigorousinvestment activity difficult will be overcome and that inthe next 5 years the volume of COFIEC's investment in enter-prises will be greater. Everything seems to indicate thatthe legal and economic bottlenecks are being identified andthat there is a political will to modernize the law and tocreate incentives for investment; and

(c) We undertake as well to emphasize provision of services suchas cash management, collections, and technical assistance, bothbecause of the need that enterprises have of these services andbecause they will be profitable to COFIEC.

6. With respect to the amount of capital, COFIEC intends to grow bycapitalizing its reserves at the rate of 15% of capital p.a., a conservativegoal that can be revised if it turns out that the demand for credit is greaterthan can be provided by the banking and financial system, by new banks andfinancial institutions that may be established and by the growth of the capitalbases of existing banks.

LCPDFOctober, 1976

ANNEX 30


ECUATORIANA DE DESARROLLO S.A. (COMPARIA FINANCIERA)

Projected Operations 1976-1980 Compared to 1974 and 1975(S/ millions)

Actual Projected1974 1975 1976 1977 1978 1979 1980

APPROVALS

Loans 697.3 529.0 479.0 688.0 842.0 900.0 1,003.0

COMMITMENTS

Loans 386.3 484.1 438.0 630.0 770.0 824.0 915.0

DISBURSEMENTS

T.oqnq 2/ 404.5 460.1 417.0 598.6 732.5 783.0 872.9(short- and medium-term) (292.2) (238.6) (374.5) (388.0) (452.9)(long-term) (124.8j (360.0) (385.0) (395.0) (420.0)

Guarantees 503.5 603.0 770.0 730.0 688.0 697.0 714.0Letters of Credit 270.8 309.6 442.0 553.0 608.0 686.0 774.0Acceptances 126.7 65.9 180.0 200.0 220.0 240.0 260.0Equity Investments 3.4 12.6 14.7 8.0 11.0 14.5 18.0

TOTAL DISBURSEMENTS 1,308.9 1,451.2 1,823.7 2,089.6 2,259.5 2,420.5 2,638.9

Equity Divestments 0.9 8.5 1.5 3.0 5.0 8.0 9.5

1/ Projected loan commitments equal 85% of year's projected approvals.2/ Projected loan disbursements equal 96% of year's projected commitments.

LCPDFOctober, 1976

ANNEX 31

ECUADOR - APPRAISAL OP THE THIRD DEVELOPMENT BANKING PROJECT

ECUATORIAMA DE DESARROLLO, S.A. (COMPANIA FINAN8CTARA)

Projected Balance Sheets 1976-e0 CcoaPred vith Audited Balance Sheets 1972-75

1972 1973 1974 1975 1976 1977 1978 1979 1980(audited) (audited) (audited) (audited) (Projected) (Projected) (Projected) (ProJected) (Projected)

ASSETS

Current Assets (except loansdue within one year)

Cash and Securities 76.8 62.9 72.9 70.6 69.6 88.1 91.0 65.6 76.1Receivables and Other 13.5 13.7 17.8 34.7 35.8 40.0 45.0 50.0 55.0Letters of Credit ' 54.5% 133 7 (124.4 279.° 400.0 90.0 100.0 120.0 150.0Refinanced letters of Credit (

1 3 71 K l 7 __ 1, _ 410.0 450.0 500.0 500.0

Total Ctrrent Assets 144.8 210.3 215.1 385.2 505.4 628.1 686.0 735.6 831.1

portfolio

Short Tenm Loans 115.6 136 7 386.7 353.1 461.4 546.9 579.9 609.4 799.1Median and Long-tern Loens 170.4 i/ 162.1 V 267.5 485, 485.4 708.0 994.5 1,126.3 1,228.0

(of which due within 1 year) (n.1.) (n.e.) (n.a.) (117.2) (82.6) (107.1) (151.7) (208.1) (237.5)Equity Investments 15.3 22.3 24.8 28,8 42.0 47.0 53,0 60.0 68.0

Minus Provision for Bad Debts (18.2) (21.8) (24.9) (28.9) L23.3) (23.1) (26.5) (28.5) (30.1)

Total Portfolio 293.1 299.3 654.1 838.4 965.5 1,278,8 1,600.9 18_56.2 2,065.0

Fixed Assets 1.9 4.6 3.1 10.9 12.0 34.0 34.0 35.0 36.0

Deferred Expenses2/ 9.4 9.3 23.5 58.2 100.0 36.0 6.5 7.0 8.0

Short Tert Guarantees 325.2 455.8 429.8 452.0 550.0 450.0 400.0 340.0 350.0

Redion Tern Guarantees - - - - - 100.0 195,0 340.0 410.0

Total Assets and Contingencies 764.4 979.3 14.22,9 1,7 4 3,313.9 8

LIABILITTES

Current Liabilities

Accounts Payable 43.2 33.2 43.1 59.0 35.0 37.0 38.0 39.0 40.0Sank Loans 3.0 4.5 45.9 34.0 40.0 40.0 30.0 25.0 25.0Rediscounts 4.5 0.2 17.5 42.6 48.0 50.0 55.0 60.0 70.0Ac-eptancies 4.5 8.0 43.6 71.8 85.0 80.0 85.0 90.0 OO.0Other 5.0 5.1 11.5 15.5 35.0 12.0 10.0 8.0 8.0Letters of Credit 54.5 133.7 124.4 279.9 400.0 500.0 550.0 620.0 700.0

Total Current Liabilities 114.7 184.7 286.0 502.8 643.0 719.0 768.0 842.0 943.0

Medium and Long Tenm Liabilities

AID 63.6 58.9 54.2 49.4 44.7 40.0 35.3 30.6 25.9Eximbank 35.1 22.6 8.4 -4- -IBRD and other Livestock 26.6 30.5 34.6 38.2 70.0 104.5 143.1 183.6 222.7IBRD and other DFC 86,2 76.4 161.2 289.3 324.2 377.6 434.3 575.1 711.8Bonds 13.5 33.1 87.0 90.3 103.2 296.3 458.1 482.1 465.0IESS - - 113.3 124.9 105.6 76.7 45.3 15,4 -Financial Certificates - - - - 20.0 50.0 80.0 90.0 100.0Bank Loans 10.6 5.8 3.1 13.7 - -

Total Medium and Long TernLiabilities 235.6 227.3 461.8 605.8 667.7 942.1 1,196.1 L.376.1 1,525.4

(of which due within I year) 78.3 78.6 52.0 73.6 117.8 158.2 193.5 225.0 269.6Guarantees 325.2 455.8 429.8 452.8 550.0 550.0 595.0 680.0 760.0Deferred Income 4.9 5.1 11.5 15.6 16.0 17.0 18.0 19.0 20.0

Stockholders' EquityCapital 72.0 90,0 120.0 140,9 200.0 230.0 265.0 305.0 350.0Legal Reserve and Other Reserves 3.6 4.7 6.2 8.1 17.8 21.2 25.5 30.2 35.3Retained Earnings 13.3 16.8 21.8 35.1 38.4 47.6 54.8 60,8 66.4

Total Stockholders' Equity 88.9 111.5 148.0 184.1 256.2 298.8 345.3 396,0 451.7

Total Liabilitiesand Contingencies 764.4 979.3 1.325.6 1,745.5 2.9 2,526.9 2 3.313,8 3.700.1

I/ Current portion of long-term loans included with short-tern loans,2/ Includes construction in progress.

LCPDFOctober i976


ECUATORIA DE DESORROLLO S.A. (COMPANIA FINANCIERA)

Projected Income Statements 1976-80 Compared With Audited Income Statements 1972-75 1/

1972 1973 1974 1975 1976 1977 1978 1979 1980(audited) (audited) (audited) (audited) (Projected) (Projected) (Projected) (Projected) (Projected)

Income

Interest 21.4 27.0 48.0 84.5 98.4 122.3 162.8 198.0 227.0Commissions 18.3 21.4 26.4 39.7 39.3 47.9 55.6 62.5 69.0other 5.0 5.4 6.6 7.0 7.8 14.3 15.0 10.7 11.4

Total Income 44.7 53.8 81.0 131.2 145.5 184.5 233.4 271.2 307.4

Operating Expenses

Financial ExpensesCommissions 2.1 1.3 3.1 2.4 2/ 2/ 2/ 2/ 2/Interest 9.8 12.6 27.1 53.6

Total Financial Expenses 11.9 13.9 30.2 56.0 62.4 80.6 111.5 133.6 150.9

Administrative ExpensesSalaries 6.9 7.8 9.4 12.1 14.7 17.6 21.2 25.4 30.6Profit Sharing 3.6 4.3 5.3 8.5 9.2 11.5 13.5 14.7 16.1Taxes except Income Tax, Amortization,Depreciation and Other 1.5 3.0 3.4 3.0 4.6 7.4 8.6 10.4 12.5General Expenditure 3.2 3.5 4.9 6.9 8.3 10.0 12.0 14.4 17.3

Total Administrative Expenses 15.2 18.6 23.0 30.5 36.8 46.5 55.8 64.9 76.5

Provision for Bad Debts 4.0 3.6 4.2 3.9 4.5 4.8 5.4 6.0 6.6

Total Operating Expenditures 31.1 36.0 57.4 90.4 103.1 131.9 172.2 204.5 234.0

Net Before Tax 13.6 17.8 23.6 40.8 41.8 52.6 61.2 66.7 73.4

Income Tax (provision and adjustmentfor prior years) 2.4 3.1 4.5 8.7 7.8 10.0 14.7 16.0 17.7

Net Income 11.2 14.7 19.1 32.1 34.0 42.6 46.5 50.7 55.7

Disposition of Net Income

Stock Dividend 11.1 10.1 12.6 16.8 30.0 34.5 39.8 45.8 52.5Legal Reserve 0.8 1.1 1.5 1.9 3.4 4.3 4.7 5.1 5.6Retained Earnings 10.4 3.5 5.0 13.4 0.6 3.8 2,0 0.2 2.4

Total Net Income 11.2 14.7 19.1 32.1 34.0 42.6 46.5 50.7 55.7

1/ Totals may not add due to rounding.2/ Not shown separately

LCPDF

October 1976

ANNEX 33


ECUATORIANA DE DFSARROLLO S.A. (COnMPAIA FINANCIERA)

Projected Sources and Applications of Funds

(Millions of Sucres)

1976 1977 1978 1979 1980

Liquid Assets atBeginning of the Year 70.6 69.6 88.1 91.0 65.6

SOURCES OF FUNDS

Net Income 34.0 42.6 46.5 50.7 55.7Allocation to Provisions 4.5 4.8 5.4 6.0 6.6Amortization 1.1 2.7 2.8 2.9 3.0New Capital 38.0 -- -- -- --Issue of Bonds 30.0 220.0 215.0 100.0 115.0Sale ofEquity Investments 1.5 3.0 5.0 8.0 9.5

LOANS

- World Bank and other Livestock 35.0 40.0 45.0 50.0 55.0- World Bank 930-EC 59.8 -- -- -- --- World Bank DFC III -- 100.0 125.0 25.0 --- Other Industrial Loans -- -- -- 200.0 250.0- IESS 30.0 -- -- -- --

Letters of Credit 120.1 100.0 50.0 70.0 80.0Loan Repayments 79.5 127.6 169.2 226.2 280.9Issue of Financial Certificates 20.0 30.0 30.0

30.0 40.0

Increase in Deferred Income 0.4 1.0 1.0 1.0 1.0Increase in Other Liabilities 0.4 -- -- 4.0 21.0Decrease in Other Assets -- 42.0 29.5 --

TOTAL SOURCES 454.3 713.7 724.4 793.8 916.8

APPLICATION OF FUNDS

Disbursement of Medium andLong Term Loans 189.8 442.5 496.4 474.8 452.A

Investment in Stock 14.7 8.0 11.0 14.5 18.0

AMORTIZATION

- AID 4.7 4.7 4.7 4.7 4.7- EXIMBANK 2.8 -- -- -- --- World Bank and other Livestock 4.0 5.5 6.5 9.5 15.9- World Bank Industrial Loans 24.9 49.7 65.3 104.3 113.4- Other Industrial Loans -- -- -- 10.0 37.5- IESS 24.3 28.9 31.4 29.9 15.4- Bonds 17.1 26.9 53.2 76.0 132.1

- Financial Certificates - - - 20.0 30.0

Letters of Credit 120.1 100.0 50.0' 70.0 80.0Writing off Bad Debts 10.0 5.0 2.0 4.0 5.0Increase in Other Assets 42.9 -- -- 1.5 2.0Decrease in Other Liabilities -- 24.0 1.0 -- --

TOTAL APPLICATIONS 455.3 695.2 721.5 819.2 906.3

Increase (Decrease) inLiquid Assets (1.0) 18.5 2.9 (25.4) (10.5)

LCPDFOctober, 1976

ANNEX 34


ECUATORIANA DE DESARROLLO S.A. (COMPAfiIA FINANCIERA)

Projected Gap in Foreign Exchange Resourcesover the Period 1976-19b0

(Sf millions)

1976 1977 1978 1979 1980

Funds available for disbursement& beginning of period 59.8

Funds obtained fordisbursement during the period

Livestock 35.0 25.0 25.0 25.0 25.0

Loan repayments 28.9 58.3 85.2 110.6 140.8

Total fTnds available fordisbursement 123.7 99. 11S.2 140.6 165.8

Use of funds available fordisbursement during the period

Projected loan disbursementduring the period 94.8 225.0 275.0 275.0 275.0

Loan repayments 28.9 58.3 85.2 110.6 i4o.8

Total projected foreign exchangeneeds 123.7 283.3 360.2 385.6 415.8

Gap in foreign exchangeresources - 200.0 250.0 250.0 250.0

LCPDFOctober, 1976

ANNEX 35

ECUADOR - APPRAISAL OF THiE THIRD DEVELOPMENT BANKING PROJECT


Past and Projected Financial Ratios 1972-1980

1972 1973 1974 1975 1976 1977 1978 1979 1980

Income Statement as % of AverageTotal Assets

Income 6.7 6.2 7.0 8.5 7.5 7.9 8.6 8.7 8.8Financial Expenses 1.8 1.6 2.6 3.6 3.2 3.5 4.1 4.3 4.3Spread 4.9 4.6 4.4 4.9 4.3 4.4 4.5 4.6 4.5Administrative Expenses 2.3 2.1 2.0 2.0 1.9 2.0 2.0 2.1 2.2Provisions for Bad Debts 0.6 0.4 0.4 0.3 0.2 0.2 0.2 0.2 0.2Net Income Before Taxes 2.0 2.0 2.0 2.7 2.2 -. 2 2.2 2.2 22 2.1 2.1Taxes 0.4 0.4 0.4 0.6 0.4 0.4 0.5 0.5 0.5

Net Income 1.7 1.7 1.7 2.1 1.8 1.8 1.7 1.6 1.6

Average Total Assetsl/ 670.6 891.7 1,151.5 1,535.6 1,939.2 2,329.9 2,724.7 3,118.1 3,506.9

Other Financial Ratios

Growth of Total Asset/ 40.1 28.2 35.4 31.7 22.2 18.5 15.7 13.4 11.7Growth of T tal Assets (real) (%) 29.8 13.6 9.7 13.8 12.1 9.7 8.1 6.0 4.4Total Debt- Equity 7.6 7.8 8.0 8.5 7.3 7.4 7.5 7.4 7.2Cash and Market9le Securities/Current

Liabilities (.7) 1/6/ 14.8 8.7 9.5 6.9 5.3 6.6 6.7 4.7 4.9Current Assets - /Current Liabilities- -Short- and Medium-term Operations 2/ /

Equity 11 1/ 5.6 6.5 7.0 f.5 7.1 5.L 4.8 4.5 4.0Total Loan- / Loans/ dye within one year 1.4 1.3 1.3 1.6 1.4 1.8 2.2 2.4 2.4Total Debt- / Debt- due within one year 1.4 1.3 1.7 1.8 1.6 2.1 2.5 3.0 3.0Earnings before Interest, Depreciation& Provisions/Ffnancial Charges 2.4 2.5 1.9 1.7 1.7 1.7 1.5 1.5 1.5

Net Income/Total Income 25.1 27.3 23.6 24.5 23.4 23.1 19.9 18.7 18.1

Breakeven Assets/Total Assets34/ 0.59 0.56 0.54 0.46 0.50 0.49 0.50 0.52 0.53Elasticity of Return on Equity- 4.0 3.7 4.2 4.1 4.3 4.3 5.2 5.4 5.5Return on Equity (%) 14.0 14.7 14.7 19.3 15.4 15.4 16.4 13.4 13.1Return on FEuity (real) (%) 5.7 1.6 -7.1 3.1 4.9 6.8 6.9 6.0 5.7Inflation - 7.9 12.9 23.4 15.7 10.0 8.0 7.0 7.0 7.0

1/ Includes guarantees.2/ Loans and guarantees with original maturities less than 5 years, letters of credit and acceptances: 1972-75, long-

term loans assumed to be greater than 5 years.3/ Administrative Expenses Provisions/Spread.4/ % change in return on equity with respect to % change in return on assets.5/ Rate of increase in consumers price index.6/ Including current portion of long-term liabilities.

LCPDFOctober, 1976

ANNEX 36


Possible Participants in the Proposed Loan

Authorized Current

Name Location capital Characteristics Status

(million S/)

ECUFINSA Guayaquil 60 Private company. Major In operation

promoter: Banco La since Jan.

Previsora. General 1976.

Manager: ErnestoIntriago.

Financiera Guayaquil n.a. Private company. Major In the pro-

Guayaquil promoter: Banco cess of in-

Guayaquil. Possible corporation.

president: Cesar Duran

Ballen.

Financiera Cuenca 100 Private/public company. In the pro-

del Austro Major promoters: CREA cess of hir-

S.A. and CV-CFN. Possible ing a general

president: Enrique manager to

Arizaga Toral. start operat-ing in thesecond halfof 1976.

FINANSA Quito 60 Private company. Major In the pro-

promoter: Bco. Popular cess of hir-

and Bco. Pacifico. ing person-

General Manager: Fer- nel will start

nando Aspiazu Seminario. operationsin the secondhalf of 1976.

COFINPE Guayaquil n.a. Public company for small Feasibility

enterprises. Ministry of study.

Industry and Commerce and

CV-CFN.

LCPDF,August, 1976

ANNEX 37


Estimated Schedule of Disbursements of the Proposed Loan

IBRD Cumulative DisbursementsFiscal Year Quarter Ending at End of Quarter (US$ thousands)

1977 June 30, 1977 1,200

1978 September 31, 1977 2,300December 31, 1977 4,600March 31, 1978 9,200June 30, 1978 15,100

1979 September 31, 1978 20,600December 31, 1978 22,700March 31, 1979 23,800June 30, 1979 25,000

1980 September 31, 1979 25,600December 31, 1979 26,000

LCPDF

October 1976

IBRD- 12618- roo' - 7700 7500' 7300 DECEMBER 1976

DoA

: ECUADOR

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