Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16663 IMPLEMENTATION COMPLETION REPORT ISLAMIC REPUBLIC OF PAKISTAN THIRD SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) June 2, 1997 Private Sector Development and Finance Division Country Department I South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Currency Unit - Pakistan Rupee (Rs) (annual average) Rs. Per US $ 1.00 US $ Per Rs.1.00 1987 17.399 0.0574 1988 18.003 0.0555 1989 20.541 0.0486 1990 21.707 0.0460 1991 23.801 0.0420 1992 25.083 0.0390 1993 28.107 0.0355 1994 30.567 0.0327 1995 31.643 0.0316 1996 36.079 0.0277 ABBREVIATIONS ABL Allied Bank Limited ADB Asian Development Bank CLA Corporate Law Authority DFI Development Finance Institution FBS Federal Bureau of Statistics FSAL Financial Sector Adjustment Loan FSDIP Financial Sector Deepening & Intermediation Project GON Government of Netherlands GOP Government of Pakistan HBL Habib Bank Limited IBRD International Bank for Reconstruction and Development IDBP Industrial Development Bank of Pakistan L/C Letter of Credit LMM Locally Manufactured Machinery MCB Muslim Commercial Bank NBP National Bank of Pakistan NCB Nationalized Commercial Bank NDFC National Development Finance Corporation PBC Pakistan Banking Council PCI Participating Credit Institution PFI Participating Financial Institution PICIC Pakistan Industrial Credit and Investment Corporation. SBP State Bank of Pakistan TA Technical Assistance FISCAL YEARS GOP - July I to June 30 HBL, ABL, UBL, NBP, MCB, PICIC - January 1 to December 31 IDBP and NDFC - July 1 to June 30 Vice President Mieko Nishimizu Acting Director Fakhruddin Ahrned Division Chief Marilou Uy Task Manager : Shideh Hadian FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT ISLAMIC REPUBLIC OF PAKISTAN THIRD SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) TABLE OF CONTENTS Page No. PREFACE EVALUATION SUMMARY ............................................i PART 1: PROJECT IMPLEMENTATION ASSESSMENT ...................... ......................I A. Statement/Evaluation of Objectives .I B. Achievement Of Objectives .3 C. Major Factors Affecting The Project .6 D. Project Sustainability .8 E. IBRD's Perforance .8 F. Borrower's Performance .9 G. Assessment of Outcome .10 H. Follow-Up/Future Operations .10 I. Lessons Learned .11 PART II: STATISTICAL TABLES Table I Summary Of Assessments .12 Table 2 Related Bank Loans/Credits .13 Table 3 Project Timetable .14 Table 4 Loan/Grant Disbursements: Cumulative Estimated And Actual .14 Table 5 Key Indicators For Project Implementation .15 Table 6 Key Indicators For Project Operation .16 Table 7 Studies Included in Project .................. 16 Table 8A Project Costs ........................................... 16 Table 8B Project Financing ............................................ 17 Table 9 Economic Costs and Benefits ............ ............................... 17 Table 10 Status of Main Legal Covenants ........................................... 17 Table 11 Compliance With Operational Manual Statements .................................... 17 Table 12 Bank Resources: Staff Inputs ............. .............................. 1 8 Table 13 Bank Resources: Missions ........................................... 18 This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ANNEXES Annex I Sub-Loan Approvals, Disbursement & Refinanice .................................. 19 Annex II Sub-Project Characteristics .......................................... 20 Annex III Sub-Project Geographical & Sub-sectoral Distribution ........................... 21 Annex IV Analysis of Data by Type of Business, Sub-Loan terms, Sub-Loan Amount, Value of Total Assets & Fixed Assets ................. 22 Annex V Employment Analysis .......................................... 23 Annex VI Sub-Projects Financed Under Teclhnology and Productivity Fund (TPF) ..................... 24 Annex VII PCIs Staff Training.............I ....... 25 APPENDIX Appendix A Aide-Memoire .26 Appendix B Project Review From Borrowers Perspective .31 Map IMPLEMENTATION COMPLETION REPORT ISLAMIC REPUBLIC OF PAKISTAN THIRD SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) PREFACE 1. This is the Implementation Completion Report (ICR) for the Third Small Scale Industries Project (Ln. 2839) in the amount of US$54 million IBRD Loan and Netherlands Guilders (NLG) 25 million Grant from the Netherlands Government for sub-projects and technical assistance approved on June 16, 1987 and made effective on March 8,1988. The Dutch Grant was subsequently reduced by canceling NLG 12.88 million from the sub-loan component of the Grant, as the progress of utilization was slow and funds were otherwise available under the Loan. The project closed as originally scheduled on December 31, 1995. Final transaction under the Loan took place on May 6, 1996 with total disbursement of US$21.47 million at which time a balance of US$32.53 million was canceled. Final transaction under the Grant took place on August 27, 1996, with total disbursement of NLG 6.21 million at which time a balance of about NLG 6.0 million was canceled. 2. The ICR was prepared by Ainul Hassan Qureshi, Projects Advisor, Resident Mission in Pakistan and reviewed by Ms. Marilou Uy (Division Chief) and Mr. Fakhruddin Ahmed (Project Adviser). The Borrower provided comments that are included as appendix to the ICR. 3. Preparation of this ICR was begun after the Bank's final supervision an completion mission, December 1995/January 1996 by collecting data from the concerned institutions. Writing of the report started in July, 1996 due to late receipt of the data and other engagements. The ICR is based on the Staff Appraisal Report, Loan Agreement, Supervision Reports and other material in the project files. The Borrower contributed to the preparation of the ICR by preparing the data on different components of the project, preparing own evaluation and commenting on the draft ICR. IMPLEMENTATION COMPLETION REPORT ISLAMIC REPUBLIC OF PAKISTAN THIRD SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) EVALUATION SUMMARYl Introduction 1. Four Bank Loans and two IDA Credits totaling US$ 278 million had been approved for the development of small, medium and large scale industries in Pakistan during five years preceding this project (Table 2). These Loans and Credits provided term loans to manufacturing industries and, through technical assistance, supported the Government's policy reform programs, and aimed at strengthening and improving the sector as a whole. Project Objectives 2. The Third Small Scale Industry Project (SSI-Ill) aimed at supporting the Government's efforts to increase the contribution of SSIs to employment, production and exports. The project shifted financing from IDA to IBRD in the SSI sector, while continuing to provide a line of credit through the Nationalized Commercial Banks (NCBs) as the Participating Credit Inistitutions (PCIs) with the assistance of the Industrial Development Bank of Pakistan (IDBP) as the apex institution (para. 8). At the time of project appraisal, the Bank's choice in selecting the PCIs was limited to the NCBs (para. 34). The project also delivered technical assistance to strengthen the institutions whichi were providing financial and managerial assistance to the sector. Specifically, the project aimed at: (a) increasing lending to SSIs; (b) strengthening the financial institutions involved through technical assistance, training and improvement of operating systems and procedures; (c) developing a strong export marketing infrastructure through promotion of export houses; (d) improving efficiency of industrial units through technology upgrading programs; and (e) improving the accuracy and reliability of SSI statistics for policy and development strategy formulation. The Technical Assistance (TA) components included training for NCB staff; financing of a sector study to evaluate the impact of various interventions, including the first two Bank-finaniced SSI projects; a Technology and Productivity Fund (TPF) to upgrade the SSIs' efficiency and quality; and improving the accuracy and reliability of SSI statistics for future policy and strategy formulation. 3. SSl-III complemented the Bank's previous industrial sector operations and was in line with the priority objectives of the Government of Pakistan (GOP) and the Bank's Country Assistance Strategy. The project objectives and timing were right for the GOP's policy reforms and development priorities in Pakistan's Seventh Five-Year Plan (1988-93). The amount of the Loan was realistic when the project was designed, based on the possible resource gap for SSIs (para. 5). However, contrary to the experience of rapid disbursement under the first two projects, a seven-year implementationi period was allowed, based on international experience for similar projects. 4. The Government of the Netherlands (GON) provided NLG 25 million (about US$12.5 million) as grant under the same project, of which NLG 10 million was for TA and the remainder for subloans. The TA part of the grant was allocated to: (a) TPF for disbursement on a matching grant basis to Provides cross-references to paragraphs from Part I of fCR. - ii- eligible private industrial units for approved technology and productivity subprojects; (b) training of PCI staff and consultancy; (c) promotion of export houses; and (d) improvinig small industry statistics through assistance to the Federal Bureau of Statistics and a sector study. Thus. with thle Bank Loan of US$ 54 million, the total amount available under the project was US$66.5 million. However, after disbursement of NLG 2.1 million under the Dutch grant, GON canceled the remaininlg NLG 12.9 millioni under the subloan component due to slow implementation and because other funds were available under the Bank Loan. The allocation for the TA remained unaffected. Implementation Experience 5. SSI-III project became effective before SSI-11 Credit had been fully utilized. Therefore, SSI-III funds were not utilized until 1991 due to availability of funds uLnder the Second SS1 credit line. Disbursements under SSI-II had also slowed because of competition from the Government's subsidized credit programs (e.g., locally manufactured machinery) and adverse economic conditionls (paras. IS and 16). 6. In late 1980s, a combination of adverse domestic and external factors resulted in a decline in Pakistan's growth rate to about 4 % and led to sluggish industrial investment activities, in particular in the textile industry. Adverse weather conditions and a viral attack on the cotton crop resulted in decline in wheat harvest and cotton crop failure. Bad cotton crops for three consecutive years (1992-1994) resulted in a critical shortage of cotton, more than 100 percent increase in prices, and slow down activities in the textile industry. Economic recession in major markets for Pakistani exports and intenisified competition from its trading competitors were added to the country's domestic problems. The political turbulence in 1993 and later the law and order situation in Sind Province, particularly Karachi, adversely affected economic activities in general and the performance of the industrial sector in particular. Most of the industrial units, and particularly those in the textile sector, faced liquidity problems and suffered losses, and many closed down. Implementation of all the project components, therefore, proceeded slowly (para. 29). 7. Due to slow progress, the project was restructured in 1992/93 and its implementation commernced in September 1993. The delay of about two years was due to GOP's extended review of elements of restructuring, particularly, increase in the on-lending rate to the sub-borrower and the lengthy procedure for amending Loan Agreement (paras. 18 and 46). The revised allocation of funds and changes in the terms and conditions were: (a) US$4 million of Bank fuLnds for export house development subprojects was reallocated to the subloan component, increasing it to US$54 million; (b) the rate of interest from GOP to the PCIs was increased from 9.25 percent to 12 percent, based on the Treasury Bill rate, and the interest rate applicable to on-lending by the PCIs to sub-borrowers was increased to a minimum of 16 percent and a maximum of 18 percent; (c) the maximum subloan amount was increased to US$600,000, denominated in dollars instead of Rupees, but 50 percent of the subloans were to have been less than US$300,000; (d) the maximum percentage of a subloan which could be used for buildings was 25 percent except for hospitals, clinics, hotels etc., which had a maximum of 50 percent; (e) amortization periods were set at a minimum 5 years and maximum 10 years, including a maximum of 2 years grace; (f) subloans which lhad been approved but remained entirely initialized for 12 months from the date of sanctioni would automatically be canceled; (g) PCIs could use the State Bank of Pakistan's credit line for locally manufactured machinlery for co- financing, instead of using their own funds; and (h) the maximum investmenit per job was doubled to PRs 400,000 (para. 18). 8. Four main issues impaired project implementation: (a) the chanige of the apex institution from Pakistan Banking Council (PBC) to IDBP due to inability of the forner to handle project funds under its charter (revised under the Financial Sector Adjustment Loan (FSAL)); (b) the low subloan recovery rates and high level of infection of the NCB's portfolio of arrears; (c) competition from cheaper and simpler credit lines from State Bank of Pakistan (SBP); and (d) competition from an Asian Development Bank (ADB) - II - credit line which had similar terms but greater flexibility in application. Due to unsatisfactory performance of IDBP as the apex agency, the Bank agreed to the appointment of a consulting firm finianced under the project to help IDBP in its apex functions. This firm worked for two years, ulltil the project closed, and its performance was mixed. While they did some useful work on project promotion, their record keeping of subproject processing at the PCIs could have been better. The NCBs did not properly appraise and monitor the SSI sub-loans and therefore had recovery problems. The Bank took actions to address the problem of non-performing loans. It suspended further commitments to four of the five NCBs under the SSI-IlI Project because of low recovery rates for subloans provided under SSI-II and SSI-I. The suspension of the NCBs' participation, which happened during implementation of SSI-III forced some of the PFIs to improve their recovery rates somewhat. However, only Allied Bank succeeded in regaining participation after being suspended for about two years (paras. 25 and 26). Muslim Commercial Bank withdrew from the Project after privatization (para. 38). 9. The Bank received annual audit and quarterly project progress reports only after considerable delay. Although the NCBs complied with the auditing and accounting covenants defined under the Loan Agreement, their financial statements were never audited in accordance with internationally accepted auditing standards. Therefore, the accounts did not truly reflect weaknesses in the NCBs' financial performance. The Bank introduced prudential regulations through SBP under FSAL (paras. 7 and 15). However, under FSAL, the NCBs were not bound to issuinlg their formal anllual reports in accordance with these regulations. Likewise, IDBP did not forward the audit reports of the Statements of Expenditures within the time limits specified in the Loan Agreement (para. 24). Results and Performance 10. The Loan was only 40 percent utilized by the closing date of December 31, 1995. The project closed with an undisbursed balance of US$32.53 million whichi was canceled. Compared to quantitative lending objectives set at appraisal, the project may be viewed as unsuccessful. However, the development objectives were met to some extent and the NCBs were relatively successful in committing and disbursing the funds to SSIs. Thus, there was improved access to institutional credit by SSIs, employment generation, capital formation, and improved SSI statistics. Many of the SSIs improved their technology through access to the Dutch Grant (para. 22). The reduced investmenit amount (about US$85 million actual vs. US$170 million planned) created about 15,000 jobs throughi 267 sub-projects against 28,000 estimated at appraisal. Twenty-four percent of the subprojects were in the textile sector, accounltilng for 32 percent of total investment. Average investment size over the 267 subprojects finaniced was PRs 9 million, and 78 percent of the subprojects were new. The NCBs performed poorly in terms of loan recovery rates. The failure rate increased as 60 percent of the subprojects had gone into arrears, excludinig 4 percent of those which had been closed down. Apart from the general situation outside the control of the PCIs and the sponsors, interviews of sub-borrowers indicated an inadequate level of permanienit working capital due to the NCBs' inappropriate appraisal standards, lack of monitoring and follow-up supervision from NCBs, delays in subloan approvals, lengthy and complicated subloan appraisal procedures and lack of support services (para. 26). Due to the above mentioned implementation performance, project outcome is considered as marginally unsatisfactory (para. 39). Performance under the Technical Assistance Component 11. Technology and Productivity Fund (TPF): Start of disbursements was delayed by about three years, and commitments were slow in the beginninlg. The main reason for delay was that the eligibility criteria for technology subprojects were not understood by potential beneficiaries and the financial intermediaries. The Bank spent a lot of time explaining and had to be particularly careful to avoid misuse of the grant funds. Only IDBP channeled the TPF grant to the SSI firms. The other PCIs did not take - iv - sufficient interest because most of their clients were large industries. A consultant was appointed to assist the DFIs in identification of eligible subprojects for TPF scheme (para. 22). Althouglh, only about NLG 1.0 million was utilized for 40 subprojects under TPF, the scheme is considered a great success and the methodology which has been developed can be replicated. 12. About 550 of the PCIs' middle and senior managers and branc1h officers were trained. The training consisted of a basic program for staff new to project financing and an advanced program for more senior staff. However, the training programs were more on an ad lhoc basis and not in line with the overall objective of the institutions' human resources development needs (para. 20). 13. SSI Statistics: The sector study analyzed the impact of various interventions in the SSI sector, including the first two SSI projects, in terms of employment, output, exports and other economic objectives, assessed whether credit access for small industries had improved and identified remaining problem areas which required adjustments in policy and strategy. The findings of the study indicate that the growth rate for the sector over the period needs to be revised to 4.7 percent from 8.4 percent estimated by the Federal Bureau of Statistics (FBS). Labor productivity in the large industry sector was 6 times greater than in small and microenterprises and the contribution of the latter was less thani one percent to government revenues. Access of small and microenterpreneurs to formal credit did not improve, nor were the Government's policies perceived as any more supportive. Lastly, the FBS moved slowly in implementing the cornponent involving the hardware (cartographic equipment) for statistical analysis (para. 21). The component was, however, completed satisfactorily along with trainin1g of FBS staff in Singapore. Bank and Borrower Performance 14. Performance of the Bank and GOP was satisfactory in identification, design, and preparation of the project. However, the borrower's implementation performance is not considered satisfactory due to 60% of the project funds remaining undisbursed; PCIs poor performance in loan recovery; and deficiencies in GOP's macroeconomic policies (paras. 15 and 38). The Bank's supervision is considered marginally satisfactory. Bank should have supervised the project more frequently during the difficult period covering the restructuring process (paras. 33 and 34). Lessons Learned and Recommendations 15. Essential conditions for success of this type of operation are: * Efficient and stable financial intermediaries and Governmenit commitmelnt to a sound macroeconomics policy (based on a stable political system) and providing a supportive environment for industrial development (para. 44). * Financial intermediaries to be selected carefully to ensure that they are finanicially viable and are professionally managed without outside interference. In case of SSI-Ill, the Bank's choice was limited to the NCBs when the project was appraised (para. 44). * Selection of an apex agency to be done with great care to ensure that it has an efficient organizational set up (para. 43). A reputable private sector organizationi is more suited as it can support implementation with an adequate incentive and accountability system. Performance criteria to be clearly defined (as experience with the apex consultinig firm unlder the project has been mixed). v - * The Bank to provide technical assistance and increase its supervision intenisity wheni problems arise during project implementation and ensure allocation of greater resources for supervision (para. 45). * The need for project restructuring to be identified as early as possible and implemented expeditiously. In the case of SSI-III, the process of restructuring took about two years, although actions for restructuring were initiated soon after problems were identified (para. 46). * GOP and the Bank to review the relevant procedures for amending Loan Agreements in order to streamline them (paras. 18 and 46). * Finally, the Bank may wish to consider the possibility of identifying a project based on the experience gained from the success of the Technology and Productivity Fund. Pakistan's industry, and the SSIs in particular, should upgrade efficiency and the quality of their products in order to survive in an environment of international competition. A project could be based on the replicability of the pilot implemented under SSI-III (para. 42). IMPLEMENTATION COMPLETION REPORT ISLAMIC REPUBLIC OF PAKISTAN THIRD SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Statement / Evaluation Of Objectives 1. Project Objectives. The Third Small Scale Industries Project (SSI-III) was designed to build on the success of the first two projects and continue supporting the Government of Pakistan's (GOP's) strategy for SSI development. Although it focused on the efficient delivery of financial resources, project scope was expanded to include upgrading of the prevailing backward technology and low quality and improving export marketing services. Specifically, the project was aimed at: (a) encouraging increased lending to SSIs; (b) strengthening the financial institutions involved through technical assistance, training and improvement of operating systems and procedures; (c) developing a strong export marketing infrastructure through promotion of export houses; (d) improving the efficiency of industrial units through technology upgrading programs; and (e) improving the accuracy and reliability of SSI statistics for policy and development strategy formulation. 2. Project Description. The project consisted of: (a) a US$57.5 million line of credit to the five Nationalized Commercial Banks (NCBs) to finance subloans for fixed investment and permanent working capital; (b) technical assistance (TA) of US$2 million for training and staff development for participating financial institutions; (c) TA of US$5 million for the establishment of export houses; (d) TA of US$1.5 million for upgrading technology and productivity of SSIs; (e) TA of US$0.5 million to the Federal Bureau of Statistics (FBS) to improve SSI data collection, processing and analysis; and (f) a sector study to analyze the impact of the first two projects and other interventionis in the sector. The Government of the Netherlands (GON) provided a NLG 25 million grant to support all the TA components and portion of the subloan component over and above US$ 54 million IBRD Loan. 3. Evaluation of Objectives. Policy Context. In 1986, at the time of project appraisal, GOP was continuing to attach priority to the SSI sector not only because of its importance in supporting industrial development objectives, but also because of its beneficial impact on social objectives. Generally, small firms had been found to be less affected by economic and political changes due to their greater flexibility with regard to labor employment, production and compliance with Government regulations. SSIs were contributing 4.7 percent of Gross Domestic Products, 27 percent of industrial value added and 30 percent of manufactured exports, and employed about 2 million workers in over 100,000 establishments. They specialized in processing local raw materials such as cotton, construction materials and food. They were also active in exports such as carpets, ready-made garments, sporting goods, cutlery and surgical instruments. The SSIs were, however, characterized by low productivity and quality as they concentrated on producing for the rural market. Techlnical and marketing services were found to be deficient, particularly for exports. Only direct exporters were entitled to export incentives. Very small companies were trying to export despite lack of expertise and marketing institutions. They were generally labor intensive, with average capital output ratio of about 0.8 (versus 1.0-1.5 for large industry) and an investment per job of about US$1,800. These and other characteristics suggested that there was considerable scope for improving labor productivity without sacrificing labor intensity. - 2 - 4. At the time of project appraisal, the Government defined small industry units as enterprises with fixed assets (excluding land and buildings) of PRs 10 million or less. This was revised to PRs 20 million in 1992. GOP allowed SSIs to be set up and operated with little regulation. Except for perrnission for location in accordance with zoning regulations, licensing was not required. GOP arrived at a policy decision that credit to SSIs should be provided at interest rates which were positive in real terms and market-based. The interest rate for industry was minimum of 14 percent p.a. for term lending. 5. Sector Development Objectives: The project was to dovetail with GOP's strategy for the sector in making fixed asset loans (including loans for permanent working capital) more readily available to small industries, thus reducing their dependence on the informal sector financing. The credit was to fill a significant portion of the resource gap for SSI lending. The SSI growth rate was estimated at 10 percent (GOP estimated 12 percent) and credit requirements were estimated at PRs 2.8 billion for FY88-90, of which the Bank Loan of US$54 million was designed to cover 30 percent, approximately equivalent to the foreign costs. The project gave 7 years for disbursements based on intemational experience with similar loans for SSIs. In order to encourage the Participating Credit Institutions (PCIs) to become independent in SSI financing, the cofinancing for the NCBs was increased from 20 percent under SSI-I and 30 percent under SSI-II to 40 percent under SSI-I11 to enhance commercial bank financing to the SSI sector. 6. It was expected that the project would serve agroindustries, light engineering, textile prodlucts and food processing. Substantial capacity expansion was expected in rice and flour milling, oil extraction, and ice and cold storage for the fishing, poultry and cash crop sectors. Project opportunities were also identified in handling, storage and processing of fruits and vegetables for domestic and export markets. Growth was expected in the power loom industry, which accounted for 15 percent of past SSI investments, and garment manufacturing for export using both local cotton and imported blend fabrics. 7. The Bank's Industrial Strategy: The Bank's strategy was to support the industrial sector, mostly through credit projects and related institutional development in support of the private sector. The strategy for the SSI sector developed over time. A series of industrial sector projects were approved by the WSorld Bank starting early 1980s in order to provide investment credit through commercial banks and development finance institutions to small, medium and large scale industries (Table 2). These projects also aimed at improving the institutional capacity of channeling credit institutionis, developing and strengthening the institutional framework and expanding the efficiency of the SSI sector. In 1988, GOP and the Bank started a review of the financial sector, whichl eventually led to the Finanicial Sector Adjustment Loan (FSAL) in 1989. This project aimed at strengtlhenling the banking system and introducing prudential regulation through SBP. Since then, the Bank's strategy has included financial and industrial policy reforms as part of credit line projects. 8. Project Design: The project was designed to move away from subsidized lending to the SSI sector, based on IDA financing in the case of the first two SSI projects. IBRD financing was to be onlent to the sub-borrowers at market rates, fixed at 14 percent at appraisal with a provision for revision on a yearly basis to remain market based. The Pakistan Bankinig Council (PBC) was selected to be the apex agency for the project instead of the Industrial Develop-ment Bank of Pakistan (IDBP) as in the case of the first two projects. The PCIs were to continue to be primarily responsible for appraisal, supervision and collection of subloans and the apex agency was to help the PCIs to improve their appraisal and supervision of subprojects and arranging the staff training. Additional tasks of disbursements and collection and progress reporting were assigned to the apex institutioni. - 3 - 9. Onlending terms and conditions for subloans. The interest rate was raised from 14 percent to 16-18 percent after restructuring of the project in 1993 (para. 1 8). The subloanis were repayable over a maximum of 10 years including a maximum of two years of grace. Not more thani 20 percent of the subloan amount under a subproject could be spent on buildings, except in case of hiotels, hospitals and clinics where the limit was 50 percent. Subprojects were to be labor intenisive with a maximum investment per job created of PRs 200,000 initially (revised to PRs 400,000 after restructuring). Subproject maximum debt/equity ratio was 70/30. 10. Organization of Export Houses. This componenit supported organizatioin of five medium- scale export houses, provision of training, establishment of overseas offices and promotional activities, and provision of permanent working capital loans on a long-tern basis. The Export Promotion Bureau (EPB) was designated to prescreen applicants for the export houses based on1 criteria laid down in the project, and the NCBs were to appraise the subloan proposals and submit them to the Bank for clearance. 11. Technical Assistance. Technology and Productivity Fund (TPF): Under the project, efforts were made to address some of the needs of the SSIs whichl became apparent from the experience under the first two projects. Thus, a component was added under which a Fund was created to provide partial grants (50 percent cost sharing) through the three largest Development Finance Institutes (DFIs) to private industry to finance viable technology subprojects. The scheme included technical consulting services/training programs, and dies and small R&D projects whicih either introduced new technology or improved an existing one in private industry. This scheme was done on a pilot basis with responsibility for developing detailed procedures for utilization of the fund being with the DFIs. The National Center for Technology Transfer (NCTT) was designated to monitor performance and conduct a detailed study on cost and benefit analysis. Detailed analysis of TPF performance could not be undertaken by NCTT as the institution was abolished by the Government of Pakistan. However, a summary review was carried out by another consultant. He found that the beneficiaries had used the funds under TPF satisfactorily and their performance had improved generally in accordance with the TPF subproject projections. 12. Improvement of SSI Statistics. The Federal Bureau of Statistics (FBS) was using an average growth rate between FY77 and FY81 and compounding it by a fixed rate of 7.3 percent to arrive at annual growth rates. This methodology was, as expected, found to be providing inaccurate information and was thus unreliable. Under the project, a component was designed to support FBS's plan to conduct a first-ever census of all large, small, and household establishmenits in both urban and rural areas. Such census would be repeated every five years, while durinig the interveniing years sample surveys would be conducted of only small and household manufacturing industries. This approach was to provide a database and generate more reliable annual statistics. Funds were provided for hardware, software and training to strengthen FBS's ability in statistical and economic analysis. 13. Training Programfor PCIs. Under past SSI projects, the Bank had provided funds to PBC and the PCIs to assist them in building capability for project finanicing througlh staff training and systems improvement, and in developing a healthy project pipeline througlh subsector analysis. Under this project, training programs on project appraisal and supervision for branch officers dealing with industrial finance, particularly SSIs, were to be prepared by PBC in consultationi with the NCBs. B. Achievement Of Objectives 14. Project Implementation and Results. The overall implementationi of the SSI-111 project was not fully satisfactory in achieving its main objectives and in utilizationi of the funlds. A number of factors contributed to the deficient implementation of this project. - 4 - 15. Changes in the Environment: Project implementationi was spread over about eight years. This period witnessed far reaching changes in the macroeconomics field, the political arena, industrial policy and also the financial sector. These resulted in deregulation, privatization, reduction of subsidies and reduction in duties and taxes. Two of the participating NCBs were privatized, the Muslim Commercial Bank (MCB) in 1992 and Allied Bank in 1993. Import duties were reduced from an average of about 200 percent to about 100 percent. State Bank of Pakistan (SBP) introduced prudential regulations for the commercial banks, as recommended uinder the FSAL. However, many of the legal reforms for improving loan recovery were not implemented. GOP forcefully implemented its targeted credit policy and subsidized loan programs through a set of incenitives and sanctionis. In a further effort to encourage new lending programs for the industrial sector, the financing of locally manufactured machinery (LMM) scheme was introduced in 1986. This program, with subsidized lending rate, appeared to undermine the gains towards a more market oriented interest rate regime and negatively affected project disbursements. This potential risk was clearly identified in the Staff Appraisal Report. Therefore, at negotiations, GOP had assured the Bank that these schemes would involve small amounts and would be phased out. In practice these rates were gradually increased to 13 percent over the period of the Loan. Lastly, inflation during the period remained mostly above 10 percent and the rupee was devalued from about PRs 16 to PRs 32 per US Dollar. 16. Slow Project Implementation. After appraisal in July 1986, furtlher project processing was slow due to structural changes over the first two credits. The major chaniges comprised the shift from IDA to IBRD lending, an increase in PCI cofinancing and an increase in the interest rate. These changes were introduced in order to move towards market rates and improve sustainability. Thus, project negotiations were held nearly a year after the appraisal and the Loan became effective nine months after Board approval (Table 3: Project Timetable). Furthermore, SSI-III project became effective before SSI- II credit had been fully utilized. Therefore, SSI-111 funds were not utilized until 1991 due to availability of funds under the Second SSI credit line. 17. PBC advised that it would not be able to perform the apex role as it, not being a bank, was not legally authorized to handle funds under the project. This resulted from PBC's charter being amended under FSAL. It took 15 months to agree and theni formalize nominiationl of IDBP as the new apex a,gency. The delay was due to GOP reviewing the consequences of a chanige and then agreeing on an adequate service charge to be paid to IDBP and finally, amendinig the Loan Agreement accordingly. The delay in shifting the apex role was considered instrumental in losing the momentum that was created at the time of appraisal. Furthermore, IDBP's ineffectiveness in refinancinig and monitoring the PCIs further exacerbated the slow utilization of the Loan. This, along with transfer of early disbursements to the Second SSI project (being still ongoing), were the main reasons for the delays in disbursements under the project until 1991. In 1992, utilization of the funds tapered off due to a slowdown in investment resulting from recession. Soon thereafter, the textile industry started facing a crisis caused by an enormous rise in the price of local cotton. Disbursements reached only US$10 million by 1992 and remained mostly unchanged for the next year. Around this time, the Asian Development Bank (ADB) also came out with a project for US$50 million for the SSIs based on largely similar terms and conditions. Their project also remained unutilized for the same reasons for some time. However, ADB restructured their project quickly and, with some flexibility in application, the project was fully committed by about 1993. Lastly, various supervision missions visited the EPB to seek their involvement in implementation of the export house component. Initially, they appeared interested. However, no actions were taken to define the criteria for selection of sponsors for export houses. In 1992, the Bank missions found it difficult to even meet the concerned officials. Further efforts in this regard were therefore abandoned. - 5 - 18. Project Restructuring: As project implementation was slow, the Bank proposed cancellation of the project during the March 1991 Country Implementation Review. The Government, however, requested that the Bank review the project one more time and assess whether the project could be redesigned. As a result, the Bank commissioned two local consultants to carry out a detailed study, surveying a sample of sub-borrowers as well as the operations of each intermediary. The consultant's report and the November 1991 supervision mission's findings confirmed that there was a great need for the SSI fund but the intermediary institutions were not able to deliver the fund efficiently. The Bank suspended non-performing PCIs, declared the project a problem project and decided to review the project implementation performance periodically within one more year. As the desired outcome was not achieved during the interim period, the Bank proposed cancellationi of the project. However, after discussion with the GOP, the Bank decided to restructure the project to bring it in line with the realities as many changes had taken place since the project was appraised in 1986. The elements of the restructuring were prepared in December 1992 which were discussed with GOP by a mission in early 1993 and agreement reached. Thereafter, the draft amendment to the Loan Agreement was sent to GOP in April 1993 and signed by the GOP in September 1993. The major changes under restructuring comprised: (a) raising the interest rate to the sub-borrower from l 4 percent to 16-18 percent; (b) increasing eligibility of subprojects with regard to labor intensity froimn investment of PRs 200,000 to PRs 400,000 per job; (c) allowing financing under LMM scheme as part of PCI cofinancing; (d) amortization period of subloans to be minimum of five years; (e) subloan size was increased to a maximum of US$600,000; and (f) appointment of private sector apex consultant to assist IDBP. The restructuring became effective in September 1993 and funds were reallocated accordingly. The allocation for the export houses was canceled and the entire amount was reallocated to the subloan component. Under the Dutch Grant, after utilization of NLG 2.12 million for subloans, the remaining allocation of NLG 12.88 million was canceled by the Netherlands Government due to slow utilizationi. The allocation for the Technology Fund was raised from US$1.5 million equivalent to US$2.5 million equivalent. Other allocations remained the same. 19. The credit component financed 267 SSI units. The total investmenit made was US$85 million against US$170 million planned, of which IBRD contributed US$21.5 millioni (US$50 million planned). Based on estimates at the time of subproject appraisal, the investments yielded approximately 15,200 jobs or just over half the 28,000 expected at the time of project design. The average subloan size was PRs 3.9 million (US$100,000) and the average fixed cost per job was PRs 160,000 (US$4,000). Financing mainly went to textile sector (33 percent), light enginieerinig ( I 0 percent), ice and cold storage (9 percent), grain milling (6 percent); and printing, publishinig and packing, food processing and dairy farming (4 percent each). About 208 of the subprojects were new; the remainder was balancing, modernization, replacement and expansion. Geographic distributioll of workers employed indicates 62 percent in Punjab, 31 percent in Sind, 6 percent in Northwest Frontier Province and only 0.6 percent in Baluchistan. Disbursements were generally in the same proportion (details are provided in the Annexes). 20. Technical Assistance Components. Training qf/Credit officers: The objective of improving the appraisal and supervision capacities of the NCBs was partially achieved. Training was used on1 an ad hoc basis, usually to reward senior employees or managemenit. The misuse of the training funds resulted in the low quality of subproject appraisal. About 550 officers of the banks were trained by arrangements made by Pakistan Banking Council. This has helped improve the capacity of the PCIs to extend finance to industry and, particularly, the small sector. 21. SSIStatistics: A sector study was carried out to determine clhanges in the sector due to the impact of the first two projects and other interventions by GOP. Care is needed in interpreting the data - 6 - as the definition of microenterprises and small-scale industry used in the study is different from the basis used for the SSI projects. Nevertheless, one of the results of the improvements in statistical data has been the reconsideration of the growth rate which the national planninlg committees use for the sector. The study reports that the Committee on National Accounts has now agreed to change the official growth rate from 8.4 percent per year to 4.7 percent per year. This revision has serious consequences which touchi upon all statistical data for the sector, much of which was based on extrapolations of the growth data. While the sector has gradually increased the number of jobs (from approximately 34.6 percent of total employment in 1981 to 38.3 percent in 1991), its contribution to GDP has only increased from 41.5 percent to 42.7 percent in the same period. Extending the analysis to capital productivity and capital/labor ratios, the study shows that labor productivity in the large-scale sector is 6.5 times higher than in the microenterprise and small-scale industry sector. For 1989/90, on average, one worker generated PRs 114,000 value added a year in large-scale industry as compared to PRs 18,000 in microenterprises and small-scale industry. Due to the significantly lower capital investments in microenterprises and small-scale industries, capital productivity was found to be almost identical. Lastly, the study found that infrastructure support for the sector is mixed; while over 80 percent do benefit from electricity, a more in-depth analysis shows that access to telephone services is difficult. Only 6.5 percent of micro and small enterprises are able to get financial services, of which only 17 percent obtained credit from Pakistan's commercial banks, and an additional 0.4 percent received funds from Provincial Government programs. 22. Technology and Productivity Fund (TPF): Utilization was initially slow. The DFIs did not take sufficient interest because they did not know how to handle grant funds and there was nothing in this scheme to benefit them. Nevertheless, IDBP cooperated extensively, being familiar with small indusitry for which purpose it was initially founded. Documentation to satisfy eligibility criteria and procedures for approval and execution were introduced. To help the DFIs identify potential beneficiaries, a private sector consultant was employed. A substanitial breakthrough was seen in 1994 as the eligibility criteria under the TPF grant were better understood by the participating institutions (particularly IDBP) and the potential beneficiaries. About US$0.8 million were committed for fifty six TPF subprojects. However, only US$0.6 million for 40 subprojects could be disbursed as the project closed on December 31, 1995. All the disbursements have been througlh IDBP. C. Major factors Affecting The Project 23. The Factors Generally Under the Implementing Ageencies' Control. The Apex Institution. Experience with IDBP as the apex institution was not entirely satisfactory. IDBP neither kept appropriate records of amounts disbursed and subprojects refinaniced, nor perforned follow-up audits and professional scrutiny of subproject appraisals. IDBP did not effectively and efficiently perform its role because of lack of adequate and competent staff and frequenit chaniges at the top management. IDBIE, with the Bank's clearance, engaged a private sector consultinig firn (Finanicial and Management Services (FMS)) to perform the apex functions under their supervision. FMS came onl board from January 1994 and their contract ended with the project closing. FMS maniaged to improve the performance of the apex only partially. Their performance regarding record keeping was better than IDBI"s but they did not provide the Bank much analysis of implementationi progress. FMS did not have much success with improving the PCIs' loan recovery. 24. Poor project management by IDBP was also reflected in noni-complianice with the reporting and auditing requirements. The Bank seldom received audited anlual reports and quarterly project progress reports on time. The NCBs submitted their audited finanlcial statements with considerable delays. The NCBs, however, complied with the auditing requirements as agreed under the - 7 - Loan Agreement. They were not required to furnish long-forn audits. Althoughi the external auditors never qualified the NCBs' financial statements, their accounts were not audited according to international auditing standards and guidelines. 25. Low Recovery Ratio. The major problem encouLntered was the low recovery rates of subloans by the NCBs and high level of infection of their portfolios by arrears. As of March 1993, about 216 projects had been closed down and another 137 projects were not servicing their debts. Four of the five NCBs were suspended from making new commitments under the project because they were recovering less than 75 percent of SSI-I and II subloans. IDA could not suspend the NCBs under SSI-I1 earlier because of the lack of covenant. The suspension of the NCBs under SS-I-ll resulted in greater efforts to improve collection performance ratios, althouglh, with limited success. One of the suspended PCIs (Allied Bank) was reinstated for meeting the recovery ratio requirement again after two years. During this period, only one PCI remained eligible. Loan recovery has been a serious problem in Pakistan's banking system (which has one of the lowest recovery rates in Asia). 26. The high level of PCIs non-performing loans can be traced back to political interference, weak management, lack of accountability, and absence of professional motivation. An analysis of the NCBs' low recovery rates revealed the following problems faced by the entrepreneurs: (a) inadequate investment amount; (b) delays in subloan approval resulting in higher project cost and corresponding increase in the sub-loan amount not being made available to theem; (c) poor finanicial and marketing planning and poor financial control, leading to cost overruns and caslh shortages; and (d) inadequate subproject monitoring and supervision by the NCBs. Investmenit amounts were inadequate because the NCBs arbitrarily cut down subloan size (by about 25 percent) based on the assumption that sub- borrowers had inflated investment costs (reflected their experience witlh over-invoicing in big projects such as sugar mills). Sub-borrowers used funds earmarked for working capital to finance investments in fixed assets as the loan amounts approved by NCBs were not adequate to sustain viable subprojects. The second issue mentioned above relates to cost increases. Subproject cost estimates were derived from feasibility studies that were one or two years out of date and were not revised during or after the delays in subloan approval. The NCBs' inspections were limited to rare visits during initial stages of the subprojects and lacked assessments on current or projected finanicial and operational performance. 27. Shortfall in Loan Utilization: The agreed decentralizationi of appraisal and supervision functions did not take place and additional branches for SSI lending were never designated. In retrospect and based on data obtained, it emerges that failure of the NCBs to effectively decentralize their approval procedures negatively affected project implementation and reduced the NCBs' interest in successfully providing long-term resources to SSIs. Habib Bank decentralized part of its operations which resulted in a reduction of approval time to a maximum of 2-3 months after loan application and an improvement in the quality of appraisal. Other reasons were that: (a) the NCB branclhes were not familiar with SSI lending procedures and to avoid making mistakes, the branchles simply did not process subloan applications; (b) subloan appraisal procedures were lengthy and complicated; and (c) there were no proper technical personnel within the NCBs to adequately appraise subloan applications. 28. Frequently changing government policies made investmenit planninig and project financing difficult for the business community in Pakistan. Profitability of some subprojects was adversely affected by changes in government policies which were not foreseen in the subprojects' feasibility studies and financial planning. Several other factors also affected PCI financial performance and loan recovery rates, including: (a) political interference in managerial appointments and lending decisions; (b) absence of transparent and consistent accounting and auditing standards which would have provided lenders with reliable and timely information on the borrower's creditworthiiness; (c) lack of effective - 8 - subproject appraisal and supervision; and (d) lack of an effective legal framework to ensure speedy and impartial settlement of claims. 29. Factors Not Generally Subject to Government Control. The economy of Pakistan generally remained in recession, with the exception of short bursts of improvement in 1989 and 1991. The country's growth rate on average was about 4 percent per annium and could not achieve the structural transformation needed. This was mainly due to a sharp decline in agricultural output. Adverse weather conditions and viral attacks on the cotton crop resulted in a decline in the wheat harvest and cotton crop failure. Bad cotton crops during 1992-1994 resulted in critical shortages of cottoIn, imore than 100 percent increase in prices, and a slow down of activities in the textile industry. Economic recession in major markets for Pakistan's exports and intensified competition from its trading competitors were added to the domestic problems. In the early 1990s, political turbulence in the country and later the law and order situation in Sind Province adversely affected economic activities, particularly the performance of the industrial sector. Most industrial units, in particular those in the textile sector, faced liquidity problenns and had losses, and many closed down. D. Project Sustainability 30. Enterprises. The project contributed to the expansion of the SSI sector. The SSI manufacturing sector's share of value-added increased from 27 percent at the time of project appraisal to nearly 33 percent in 1992. However, several enterprises have faced problems (about 40 percent have gone into arrears and 10 percent have been closed down). Thus, the project sustainability is uncertain. The technology subprojects have been highly successful and the feedback from them has been that they benefited from the assistance provided under the Dutch Grant and improved their profitability and exportability. In fact, the pilot could now be replicated on a larger scale. 31. Participating Financial Institutions. The project only partially succeeded in improving the appraisal and supervision capacities of the NCBs which have based their lendinig decisions on collateral they can seldom realize, rather than subproject viability and cash flow. However, the project clearly contributed to increasing the access of SSIs to the formal financial sector. The NCBs are now lending their own long-term funds to the SSI sector. According to information provided by SBP, credit extended to the SSI sector (measured as the increase in the outstanding amount) by commercial banks increased from about PRs 1.7 billion to PRs 4.5 billion from FY 87 to FY95. This includes financing from foreign credit lines. Even in dollar terms it is significantly positive. 32. The NCBs' and DFIs' portfolios of both small and large loans have generally been deteriorating (paras. 25 and 26). This has been mainly due to internal operational deficiency of these institutions and weaknesses of the financial system as a whole. This is a cause for concern and the main impediment in achieving sustainable and efficient market-based credit allocation through the financial system to the growth sectors. E. IBRD's Performance 33. The Bank's performance could have been better. The capacity of the apex agency's consultant was overestimated. Their contract should have been on yearly basis, renewable on good performance rather than for two years up to the closing date. SSI-III was intenided to build a strong foothold for the SSIs in the NCBs' domestic lending, which could have been fully achieved with a strong, efficient and effective apex agency. The Bank should have worked more closely with the NCBs to design and supervise implementation of the training for credit officers and provide follow-up supervision and - 9 - guidance to assist credit officers in applying their knowledge. However, only after 1994 did the Bank maintain good lines of communication among IDBP and the NCBs. 34. The Bank's supervision missions for SSI-III were combined with otlher operations in the financial sector and inadequate time was allocated to the project. The supervision missions should have devoted more time to reviewing the overall financial situation of the NCBs and assessing the impact of non- financial constraints on the development of SSIs. It is recommended that the Bank focus on the financial viability of institutions and be very selective initially (the Bank did not have much choice when the project was appraised as all the banks were in the public sector), as well as devote more attention to financial sector policy reforms which would not only strengthen institutions but also allow them to operate in a more efficient and effective financial framework. 35. The project closed as scheduled, although the utilization rate hiad improved. The main reason for not acceding to GOP's request for extension was that only one PCI remained eligible. However, the grant, which was also being utilized rapidly, could have been extended if it had not been tied entirely to the Loan Agreement. An arrangement similar to the Industrial Investment Credit (IIC-III) project, where TA under IDA had a different closing date, could have been more beneficial. F. Borrower's Performance 36. During Appraisal, GOP correctly analyzed the sector's need for credit and certain policy impediments such as protection through high import duties. Unfortuniately, during implementation the Government decided to take a different route than that agreed during appraisal because it believed that the problem was more related to the level of interest rates than access to credit. The introduction of heavily subsidized credit schemes undermined this loan and represented a departure from the objectives of establishing market-based interest rates. This was corrected very slowly. Furthermore, GOP could have been more prudent in sequencing credit lines from other sources (e.g. ADB) for the same target group, unless it was done on cofinancing basis. 37. During project implementation, the Government started to reforn the financial sector by introducing prudential regulations and moving to a more market-based structure (para. 40). Furthermore, the Government's commitment to the SSI sector helped in partial success of the project. However, the tardiness of IDBP and the NCBs in sending reports and complying with the rules and regulations, as agreed in negotiations and laid down in the Loan Agreement have adversely affected the project implementation performance. 38. Participating Institutions 'Performance: The PCIs' interest in this project was noticeably lower as compared with the first two projects, mainly due to the increased 40 percent cofinancing requirement from their own resources. Since their cofinancing was counted within the credit ceilings of the banks, they preferred extending short term working capital finance over long term fixed investment project finance. The reasons included higher margins and lower risks associated with short-term financing. This was one of the reasons that the PCIs did not concenltrate sufficiently on simplifying their loan sanctioning procedures for term lending. Recovery ratios under the first two projects also started to deteriorate. Four of the PCIs, therefore, had to be suspended in 1991, with only Habib Bank remaining eligible. Efforts at improving recoveries remained only partially successful as only Allied Bank managed to improve to the extent that it became eligible again in 1994. MCB, which was privatized in 1992, decided to withdraw from the project advising that after privatization they would be concentrating on recoveries from the bigger industries. In addition to the factors mentionied above, several other - 10- factors (as mentioned in para. 28) adversely affected the PCIs' financial performance and their loan recovery rate. Lastly, the Apex and the PCIs were continuously late in submitting audit reports. G. Assessment of Outcome 39. Development objectives of this project were achieved in some areas (increased SSI investments and capital formation in various SSI subsectors, increased access to institutional credit by SSIs through the banking system and employment generation in the sector). However, the overall implementation of the project was somewhat deficient due to several factors: (a) low utilization of the credit funds; (b) weaknesses in the financial sector and regulatory environmenit in which the PCIs operate; (c) lack of autonomy and accountability in the NCBs; (d) poor financial performance of the PCIs, in particular their low loan recovery rate; (e) changing apex institutionis and poor project monitoring and management by the apex agencies; and (f) uncertainity about the project's sustainability. H. Follow-Up/Future Operations 40. The broader issues affecting the financial sector were addressed under the FSAL which was approved, soon after the SSI-III project, in 1989. The reforms supported by FSAL included: improvement in government debt management, reduction of segmentation by raising concessional interest rates and limiting directed credit schemes, strengthening of the banking system by strengthening prudential regulations and institution building, and development of capital markets. In order to continue and expand the reform process started under FSAL and support the GOP's strategy for macroeconomics and financial sector reforms, the Board approved three more projects following SSI-III. In January 1989, the Board approved the IIC-III project to assist the GOP in meeting its objectives of further increasing the role of the private sector and accelerating the growth of capital markets. In April 1991, the Bank approved a microenterprise project with the objective of further supporting the Government in its continued efforts to strengthen Pakistan's financial system and link it to the productive sectors of the economy. The main objective of the project was to increase productivity, growth, and employment in the microenterprise sector by providing credit investment througlh bank and noni-banik finanicial institutions and linking them with larger businesses. 41. In November 1994, the Board approved the Finanicial Sector Deepening and Intermediation Project (FSDIP). This project was built oni experience gained unlder previous Loans and Credits, and focuses on: (a) maintaining the momentum for improving and deepeninlg the financial system and promoting new financial instruments; (b) strengtlheninlg the institutionial, regulatory and legal framework; and (c) completing key reforms in privatization. GOP is committed to continuing reform of the financial and industrial policy under this project. The medium-term Bank Group assistance strategy includles, among other things, establishing a more competitive environmenit for private sector investment and accelerated growth. To this end, the Bank Group will contilnue to help Pakistan to further broaden financial instruments available to private businesses, to provide insurance coverage for private financial institutions, and to improve financial intermediation for micro and small-scale enterprises through a microcredit operation. 42. Under the SSI-111 project, the TA program was well conceived and designed. The objectlives were largely achieved. The TPF component was also implemented successfully, although the funds available could not be fully utilized. It can be replicated on1 a larger scale. Therefore, based on the experience gained, the Bank may consider a project for improving industrial efficiency and quality of products for Pakistan. This would provide some of the needed inputs to help Pakistan face the challenges and be able to compete in international markets. As a first step, a detailed study may be - 11 - carried out of the impact of the technology subprojects on the beneficiaries whiclh may form the basis for a future operation. I. Lessons Learned 43. Selection of the PCIs is very important. They should be interested and be good financial performers. An efficient and effective apex institution is crucial to the success of this type of project. When designing projects, the Bank should agree on performance criteria and sanctions in case of non- performance and during project implementation, it should provide adequate technical assistance to potentially weak apex institutions and continually supervise and monitor their work. Furthermore, when defining the project's covenants, the Bank should take into account that financial markets and policies may change, particularly when it is pressing for financial reforms. It should not confine its evaluation and supervision to the narrow window of its own loans but look at the financial viability of intermediaries. 44. The success and sustainability of Bank financial/industrial intermediation operations both in term lending and institutional development depend to a large extent on the Government's implementation of elements of a prudent financial sector policy and on the establishment and enforcement of proper institutional, regulatory, and incentive frameworks for the financial institutions and the private sector. The financial viability of the credit institutions and their internal operating efficiency such as strong management, effective loan recovery, and systematic appraisal and timely supervision of financed subprojects should be given due attention (under this project financial intermediaries had to be selected from the NCBs as banks in the private sector at the time did not exist). In Pakistan, the quality of the NCBs' portfolios deteriorated partly due to political interference and frequent changes in their top management. As long as the risk of government intervention in the internal operations of financial institutions exists, the Bank should not channel its intermediation loans through the government-owned financial institutions, and should insist on financially sound capital structure of subprojects, their profitability and satisfactory rates of return. 45. Effective and timely monitoring and supervision of the project by both the Bank and the borrower is integral to the success of projects. Considering the shortcomings of the financial system and the prevailing political and economic difficulties in the country, the Bank should have supervised the project more closely and provided adequate staffing for close monitoring of the participating credit institutions and the financed subprojects. Until 1994, supervision of this project was combined with that of other projects, resulting in inadequate attention and time allocation to the SSI-III project even though it was a problem project. 46. The experience under SSI-III project shows that the Bank's procedure for formalizing and implementing restructuring through amendment in the Loan Agreement is lengthy. There is, therefore, a need to review this procedure and explore possibilities of simplifying it. - 12- Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Macroeconomics policies () () () (1) Sector Policies () () (/) () Capital Market Policies () () () (/) Financial Objectives () (/) () () Institutional Development () (/) () () Physical Objectives () () () (1 Poverty Reduction () () () (/ Gender Concerns ( ) ( ) () (v) Other Social Objectives () () () (/) Environmental objectives () () () (1) Public sector management () () () (/ Private sector development () (/) () () Other - Employment () ()(( Generation B. Project Sustainability Likely Unlikely Uncertain () () (ii) C. Bank Performance Highly Satisfactory Deflcient Satisfactory Stsatr &kn Identification () (/) () Preparation assistance () (/ Appraisal () (i) () Supervision () Marginally (V) () D. Borrower performance Highly Satisfactory Deficient Satisfactory Preparation () (/) () Implementation () () (/) Covenant Compliance () with some delay (/) () Operation (if applicable) () () () E. Assessment of outcome Highly Satisfactory Unsatisfactoy Highly Un- satisfactorv satisfactory ( ) ( ) marginallyV) () - 13 - Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of Status Approval Preceding Operations To promote access of credit to the small industry 3/81 Closed 1. First Small Scale sector by improving the capacity of the nationalized on Industry Project commercial banks. 12/31/85 (SSI-I) Credit 1130- 1 Pak 2. First Industrial To help GOP improve the credit delivery system 2/84 Closed Investment Credit and focus on the institutional restructuring of PICIC on (IIC-I) Loan 2830/ and IDBP. 12/31/90 Credit 1439-Pak) 3. Second Industrial To assist GOP develop the capital market, improve 1/86 Closed Investment Credit credit delivery for industrial finance and continue on (IIC-II) Loan 2648/ institution building for PFIs. 12/31/92 Credit 1646-PAK) 4. Second Small Scale To promote investments in promising SSI sub- 6/84 Closed Industry Project sectors and improve productivity of existing SSI on (SSI-II) Credit 1499- units. 6/30/92 Pak Following Operations To assist in meeting the objectives of increasing the 1/89 Closed 1. Third Industrial role of private sector and accelerating the growth of on Investment Project capital markets, through institution building and 6/30/95 (IIC-III) Loan policy changes _ l 2. Financial Sector To assist the GOP in financial sector reforms: 3/89 Closed Adjustment Loan gearing credit allocation to market signals, on (FSAL) Loan 3029- improving health and efficiency of banking system, 6/30/92 Pak and creating more efficient Government debt system. 3. Microenterprise To provide funds to the microenterprises; to 4/91 Closing Project. Loan 3318- strengthen the capacity of the PCIs; to catalyze date is PAK NGOs' financial and technical support services for 6/30/98 microenterprises; to provide TA to microenterprises; and to help develop businesses owned by women. 4. Financial Sector To provide term finance for all economic activities; 11/94 Closing Deepening and to continue and expand the reform process started date is Intermediation under FSAL; and to support GOP's strategy for 12/31/99 Project (FSDIP) macroeconomic and financial sector reform. Loan 3808-PAK - 14 - Table 3: Project Timetable Steps in project cycle Date planned Date actual/ latest estimate Identification 1985 Preparation 1985 Appraisal April 1986 April 1986 Negotiations October 1986 May 1, 1987 Letter of development policy (if applicable) NA NA Board presentation December 1986 June 16, 1987 Signing August 1987 September 10, 1987 Effectiveness December 1987 March 8, 1988 First tranche release (if applicable) NA NA Midtenm review (if applicable) NA NA Second (and third) tranche release (if NA NA applicable) Project completion June 30, 1993 December 31, 1995 Loan/C'redit closing December 31, 1995 December 31, 1995 Table 4: Loan/Grant Disbursements: Cumulative Estimated and Actual US$ Million FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal 6.0 18.4 30.2 38.3 44.8 49.7 52.9 54.0 estimate 1/ Actual " 0.04 0.1 5.1 9.8 10.0 18.3 21.3 21.5 Actual as % of 0.70 0.5 17.0 25.6 22.3 36.8 40.3 39.8 estimate Grant-Actual 2' 0.0 0.0 0.0 1.3 2.0 3.1 3.3 3.4 " Loan component. 2v Netherlands Grant component. Disbursements were not estimated at Appraisal. Date of final disbursement: For Loan: May 6, 1996 For Grant: August 7, 1996 - 15 - Table 5: Key Indicators for Project Implementation I. Key implementation indicators in SAR/President's Report Estimated Actual 1. Sub-project financing; and 1. Utilization of a total of 40%/o of the Loan was Disbursements. US$57.5 million for disbursed (see table 4); increasing capital and employment impact was employment in the private significant with 15000 jobs sector. Employment created. generation was estimated at 28000. 2. PCI, financial perforrnance 2. Human resource 2. The objective was partially in credit lending and development; improving the achieved; however, PCI's compliance with the project's credit lending and loan arrears rose in 1993-94; their eligibility criteria including portfolio of the PFIs; financial performance collection performance. compliance with the financial weakened; PCIs' loan covenants (Min. required recovery rate dropped below recovery rate was 75%). 75%, particularly of three out of the five. 3. Sub-projects performance 3. Satisfactory repayment of 3. Unsatisfactorily achieved. loans. PCI's were able to recover only about 65-70% of the sub-loans. II. Modified indicators NA NA ]m. Other indicators (if NA NA applicable) l - 16 - Table 6: Key Indicators for Project Operation I. Key operating indicators in Estimated Actual SAR/President's Report 1. PFIs lending procedures 1. Only limited implementation. simplification 2. PFIs' Institutional 2. Training of PFI staff. 2. About 550 staff were trained. LDevelopment However, had limited impact II. Modified indicators (if NA NA applicable) m. Modified indicators for NA NA future operation (if IL-applicable). Table 7: Studies Included in Project 1. SSI Sector Study: This was completed satisfactorily. Table 8A: Project Costs Appraisal estimate (US$ M) Actual/latest estimate (US$ M) Item Local Foreign Local Foreign costs Costs Total Costs Costs Total 1. Sub-projects 116.0 55.0 171.0 62.1 22.6 84.7 Investment 2. Technical 5.5 3.5 9.0 2.3 2.3 Assistance TOTAL 121.5 58.5 180.0 62.1 24.9 87.0 Note: Actual Rupee costs converted to US$ based on average exchange rate during the utilization period. - 17- Table 8B: Project Financing Appraisal estimate (US$ M) Actual/latest estimate (US$ M) Source Local Foreign Local Foreign Costs Costs Total Costs Costs Total IBRD Loan 5.0 49.0 54.0 21.5 21.5 Netherlands Govt. 3.0 9.5 12.5 3.4 3.4 PCI 42.0 42.0 14.7 14.7 Private Sector 70.5 70.5 47.4 47.4 GOP 1.0 1.0 TOTAL 121.5 58.5 180.0 62.1 24.9 87.0 Table 9. Economic Costs and Benefits Expost data regarding FRR and ERR are not available for the sub-projects Table 10: Status of Main Legal Covenants Agree- Section Covenant Present Original Revised Description of covenant Comments ment type status fulfillment fulfillment date date l Loan 4.01(a) Accounting C throughout PCI, and IDBP to maintain the project procedures and records adequate life to monitor the operations and expenditures of the project Loan 4.01(b) Accounting CD 6 months PFIs to have the records of There were Audit after each financial statements and that for delays FY special account in accordance with sound accounting practice applied by independent auditors; submitted to the Bank within 6 months after each FY Loan 4.02 Financial CD Annually Government to review and Implement adjust if necessary, the interest ed with rates for sub-borrower to remain delay consistent with market rates. C = Complied with CD = Complied with after delay CP = Complied with partially Table 11: Compliance with Operational Manual Statements There was no incidence of non compliance with Operational Manual Statements - 18- Table 12: Bank Resources: Staff Inputs Stage of Project cycle Planned Revised Actual l______________________ Weeks US$ Weeks US$ Weeks US$ (000) Through appraisal 90.6 218.6 Appraisal through Board 6.2 15.4 Approval Board approval through NA NA effectiveness Supervision 131.1 251.8 Completion 15.5 28.4 Total 243.4 514.2 Table 13: Bank Resources: Missions"1 Stages of Month/ No. of Days Specialized Types of Project Cycle Year Persons in staff skills Performance Problems Field represented l Implementation Development Status Impact l Through appraisal 10/85 Project brief l ____________ _________ __________ prepared Appraisal through 04/86 5 20 Financial, Project Appraised NA Nil Board approval Economist, Technology l ____________ _________ __________ ________ Specialist l Board approval 10/87 2 5 through effectiveness l Supervision 11/87 2 5 Problem Project in The Recession in 07l88 2 17 1991. Restructured development economy, 07/88 2 17 in 1993. objectives met competing credit 03/90 3 16 Implementation significantly lines not 10/91 4 12 improved end 1994 envisaged at l 10/91 4 12 Appraisal, PCIs 01/92 4 8 lack of adequate interest and 01/93 4 17 deterioration in 05/95 2 15 PCIs collection performance __________ ~10 /95 2 10 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Completion 12/95 2 10 Marginally Satisfactory satisfactory The SSI-I],I missions were, in general, combined with those of other Bank's intermediation operations at that time. No record is available as how the time/number of staff was split between the projects. Therefore, time for supervision missions, spent on the SSI-III w;as less than time indicated above. -19- ANNEX I SUB-LOAN APPROVALS, DISBURSEMENT AND REFINANCE (Rs. in million and %) No. of Sub-Loan Approvals Cases % Amount % Allied Bank of Pakistan Ltd. 29 10.1% 179 14.7% Habib Bank Limited 149 51.9% 751 61.8% Muslim Commercial Bank Ltd. 13 4.5% 46 3.8% National Bank Oo Pakistan 31 10.8% 69 5.7% United Bank Limited 65 22.6% 169 13.9% Total 287 100.0 1,214.9 100.0% No. of Sub-Loan Disbursements Cases 'C/O Amount % Allied Bank of Pakistan Ltd. 23 8.6% 140.8 13.7% Habib Bank Limited 135 50.6% 607.6 59.1% Muslim Commercial Bank Ltd. 13 4.9% 44.1 4,3% National Bank of Pakistan 31 11.6% 66.8 6.5% United Bank Limited 65 24.3% 168.9 16.4% Total 267 100.0% 1,028.2 100.0% No. of IBRD Refinance Cases % Amount 0 Allied Bank of Pakistan Ltd. 23 8.6% 87.950 14.5% Habib Bank Limited 135 50.6% 354.160 58.4% Muslim Commercial Bank Ltd. 13 4.9% 26.000 4.3% National Bank of Pakistan 31 11.6% 37.3 10 6.1% United Bank Limited 65 24.3% 101.320 16.7% Total 267 100.0% 606.740 100.0% - 20 - ANNEX II SUB-PROJECT CHARACTERISTICS: Consolidated Actual Rupees Particulars Numbers (Million) Total No. of Sub-Projects Financed 267 Total Investment 2,413.726 Total Amount Advanced by PCIs 1,035.028 Funded by the Bank 608.647 Average Size of Sub-ProjectProject 9.040 Average Size of Sub-Loan 3.877 No. of Jobs Created 15,216 Avg. No. of Jobs per Project 57 Investment per Job 0.159 Projects in Arrears (excl. closed) 145 282.128 Closed Projects I i 29.444 Total in Arrears 160 311.572 New Projects financed 208 745 Existing Projects financed 31 128 Geographical Disribution of Jobs | ~~~~~~~~~~~~Employmientl | ~~~~~~Number of Worksers in Generaited Percentage| Balochistan 98 0.6% N.W.F.P. 998 6.6% Punjab 9.373 61.6% Sindh 4,747 31.2% Totall 15.2 16 100.0%| Sub-Sectoral Distribution Disbursemielti Sector No. of Projects Amount in Rs. Textile 65 33 1 Leather Goods. Tannerv 9 28 Sports Goods I 10 Light Engineering 26 95 Oil Extraction 13 15 Cotton Ginning 2 1 31 Ice and Cold Storage 9 17 Marble Processing 1 4 Printing Publishing and Packing 12 39 Poultrv Farm and Feed 4 3 Soap and Detergent 1 2 Fruit, Vegetable, Food Processing 8 Dairy Farming and Bakery 19 41 Hotel 9 40 Rice, Flour and Dal Milling 20 67 Miscellaneous 55 298 Totall 267 1,028 ANNEIX III SU13-lPROJECT GOGIRAPH-IICALAND ANI) SUB-SECTORAL DISTRIBUTION (lRs. nililioll) PuIinj a b Lou ns Sinll il ..Loans N%VFP Loan s B|: Bc ii ist:hu Loan s Total Loan s Ap)proved i Disb u rsed Aplprovedi Disbursed Approvedl Disbursed Approved Disbtirse(i Approved Disbtirsed Consolidatted Sector No. Amouint No. Amouinit No. Amount No. Amokint No. Amouint No. Amounit No. Amount No. Amount No. Amount No. Amount 'I'extile Weaving 10 4-t.804 10 43.504 10 59.176 1() 58.013 20 103.980 20 101.517 Fillishing 1 6.300 1 3.978 1 6.300 1 3.978 Ready-Made Garments 3 16.186 2 13.544 6 15.115 6 15.1 I 9 31.301 8 28.659 Specialized'I'extilcs 29 0.196 26 0.161 10 38.288 10 36.088 39 234.375 36 197.286 Sub-lotal 42 0.257 38 0.218 27 118.879 27 113.194 69 375.956 65 331.440 I.eather Goods, Tannerv 6 21 522 6 20.896 2 2.752 2 2.752 1 3.878 1 3.878 9 28.152 9 27.526 Sports Goods I 9.970 1 9.970 1 9.970 1 9.970 I.ight Engineering Stcel [U:-toltiwl{/ 5 Ij.430 5 15.430 5 15.430 5 15.430 ,avam>lr3g Flectrical 1 1.600 1 1.600 2 1 6.650 1 1. 55( 3 18.250 2 2.150 Workshop 4 11.286 4 11.286 1 0.700 1 (0.700 5 11.986 5 11.986 Nuitsand IBolts 1 2.252 1 2.252 1 2.252 1 2.252 t W\ires and cables 2 7.51)0 2 7.50(1 1 1.183 1 1.183 3 8.683 3 8.683 Agriculti mal Impleniclits I L.j()() I I.5()() 1 2.1511 1 2 1511 2 3.65j( 2 3.651) Auto ';arts IS -17.318 Ij 47.318 7 35-103 6 19.3(03 I 8.0-13 I 8.043 23 90.764 22 74.664 Sobl-Totals I11 48.21 1 6 4X.218 7 35.0(13 6 1).3(03 8.(-I3 1 8.11043 24 ')1.664 23 75.564 Oil FmIracltioi 1-1 2-1 935 13 15.319 t 4 2-1.931 13 15.3-19 Cottion ilinin I') 25.21-1 19 25.156 1 4.0()0) I -1 1)1101 21) 29.214 21) 2').156 Ic an1d Cold Sjora'eC 1) 18.7021 9 16.714 3 13.373 13 32.0)75 9 16.714 Mlalbe P'rocessing I 3.853 1 3.853 I 3.853 I 3.853 I'riiiliig l'bl)IislVjjgwand I1 39.913 11 37.958 I (1.9511 I 11.9'91 12 410.863 12 38.9(1O I'otiltrv Farm and Fecd 1 10.0)20 1 2.51() 3 2.i.10 4 12.560 3 2.540 Soap and Deltergent I 1.60() I I .(()0 1 1.600 1 1.600 Fral. Vegetoble. 1Food I 4.5411 1 *J.264 1 3.490 1 3.490) 2 8.0)30 2 7.754 rocessing, Dairy Farming and Ilakery 4 9.987 4 9.066 14 31.646 14 3 1.598 1 0.600 1 0.600 19 42.233 19 41.264 I lotel 9 40.7(05 9 40.370 9 40.705 9 40.370 Rice Folor and Dlal NMlitIng 12 25.686 I 1 22.60)2 8 3-1.9'1() 8 3-1.940) 1 9.1t)() 1 9.1()() 2 1 69.720 20 66.642 Nliscaellaneolus 38 159.235 35 134.645 21 171.859 17 119.382 7 52.811 6 46.076 2 19.415 2 19.415 68 403.320 60. 319.518 Total 18-1 6950.37 173 60)3.()-13 89 33-1.523 81 33.1523 12 77.922 il 71.187 2 19.415 2 19A.415 287 1.214.856 267 1.028.168 - 22 - ANNEX IV ANALYSIS OF DATA BY TYPE OF BUSINESS, SUB-LOAN TERMS, SUB-LOAN AMOUNT, VALUE OF TOTAL ASSETS AND FIXED ASSETS No. of| E ~~Analysis of Data Sub-Projects Percentage | Type of Business Entity Public Limited Company 1 0.4% Private Limited Company 128 47.9% Partnership 87 32.6% Sole Proprietorship 51 19.1% Total 267 100.0% Maturity Date of Sub-Loans Maturity Date <= 5 Years 3 1.1% Maturity Date > 5 and <= 6 Years 25 9.4% Maturity Date > 6 and <= 7 Years 34 12.7% Maturity Date > 7 and <= 8 Years 60 22.5% Maturity Date > 8 and <= 9 Years 38 14.2% Maturity Date > 9 Years 107 40.1% Total 267 100.0% Valtue of Sub-Loans Total Loan <= 200,000 4 1.5% TotaLl Loan = 200,001 - 500,000 14 5.2% Totail Loan = 500,001 - 1,000,000 35 13.1% Totcl Loan = 1,000,001 - 1,500,000 36 13.5% Total Loan = 1,500,001 - 3,000,000 61 22.8% Total Loan > 3,000,000 117 43.8% Total 267 100.0% Value of Total Assets Total Assets <= 200,000 1 0.4% Total Assets = 200,001 - 1,000,000 6 2.2% Total Assets = 1,000,001 - 1,500,000 21 7.9% Total Assets = 1,500,001 - 3000,000 36 13.5% Total Assets = 3,000,001 - 4,000,000 54 20.2% Total Assets > 4,000,000 149 55.8% Total 267 100.0% Value of Fixed assets Total Assets <= 200,000 0 0.0% Total Assets = 200,001 - 1,000,000 8 3.0% Total Assets = 1,000,001 - 1,500,000 12 4.5% Total Assets = 1,500,001 - 3,000,000 37 13.9% Total Assets =,3,000,001 - 4,000,000 34 12.7% Total Assets > 4,000,000 176 65.9% Total 267 100.0% -23 - ANNEX V EMPLOYMENT ANALYSIS No. of Sub- Amount % of Total Employees Projects (Rs million) Loan Consolidated Up to 20 Workers 42 42 4.1% 20 to 50 Workers 107 288 27.7% 51 to 100 Workers 84 461 44.43 Over 100 Workers 34 247 23.8% Sub-Total 267 1,038 100.0% Allied Bank Ltd. Up to 20 Workers 4 3.750 2.5% 20 to 50 Workers 4 13.600 9.2% 51 to 100 Workers - 11 88.568 60.0% Over 100 Workers 4 41.768 28.3% Sub-Total 23 147.686 100.0% Habib Bank Ltd. Jp to 20 Workers 17 i7.677 2.93 20 to 50 Workers 51 157.041 25.8% 51 to 100 Workers 47 279.366 46.0% Over 100 Workers 20 1'3.524 25.3% Sub-Total 135 607.608 100.0% Muslim Commercial Bank Ltd. Up to 20 Workers 1 0.890 2.0% 20 to 50 Workers 5 16.289 37.03 51 to 100 Workers 5 !3.253 41.4% 5ver 100 Workers 2 8.614 19.63 Sub-Total 13 44.051 100.0% National Bank of Pakistan 'o to 20 Workers 45496 7.9 20 to 50 Workers 22 50.453 72.7% 51 to 100 Workers 5 13.445 19.43 Dver 100 Workers 0.0% Sub-Total 31 69.394 100.0% United Bank Ltd Uo to 20 Workers 16 14.541 9.6% 20 to 50 Workers 25 53.217 29.7% 51 to 100 Workers 16 61;124 36.2% Over 100 Workers 8 43.CC5 25.53 Sub-Total 65 168.887 100.0% - 24 - SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) ANNEX VI SUB-PROJECTS FINANCED UNDER TECHNOLOGY ANlD PRODUCTIVITY 8IUN (TPF) (US Dollars) Serial No. Name of Project Approval No. Amount Disbursed 1 International Polymer (Pvt) Ltd. TD-ID-01 22.229.00 2 Mark Corporabon TD-ID-06 4,648.22 3 Siddicci Fashions TD-ID-02 22,061.12 4 Maqi Chemical Ind. TD-ID-04 22,208.14 5 Syed Machinery (Pvt) Ltd. TO-ID-05 18,389.72 6 B.M.W. Industries (Pvt) Ltd. TD-ID-15 4,230.27 7 Sigma Industries (Pvt) Ltd. TO-ID-13 39,409.70 8 B.F. Sajjad Brothers TD-ID-11 10,379.80 9 Plastech Autosafe TD-ID-14 25,000.00 10 Providence Engg. TD-ID-12 21,732.71 11 Asia Classic TD-ID-18 9,082.33 12 B.M. Hoeopathic Pharmacy TD-ID-29 20,262.45 13 Nazia Plastic TD-ID-21 11,555.00 14 Federal Engg. TD-ID-09 14,497.94 15 Hira Fuse Collar TO-ID-15 5,944.24 16 Motor Palace TD-10-26 4,020.73 17 Studio 9 TD-ID- 2,814.51 16 Shalimar Engineering Works TD-ID-27 6,664.30 19 Sangeen Enterprises (Pvt) Ltd. TD-ID-25 9,023.13 20 Mian Brothers Engg. TD-1D-28 8,141.96 21 Chughtai & Co. TD-1D-23 21,017.85 22 Myco Paint (Pvt) Ltd. TD-ID-33 19,831.42 23 Industrial Engg. Services TD-ID-36 24,357.13 24 Bio Sabarkx TO-ID-39 22,504.22 25 Glassic Malamine Corporation TO-10-41 14,393.93 26 Ahmed Brother Rubber TD-ID-42 10,024.62 27 Spectrum Chemicals TD-ID-54 20,822.99 28 Dynamic Sports (Pvt) Ltd. TD-ID-46 5,187.66 29 FBM Engg. TD-ID-26 14.978.46 30 Estand Tobacco (Pvt) Ltd. TD-10-06 1,187.78 31 Tahir Engg. Industries TD-10-07 3.935.02 32 Sira Engg (Pvt) Ltd. TD-ID-53 22,650.36 33 Continental Air System TD-ID-35 20,290.33 34 General Water and Engg. TD-ID-37 8,532.61 35 Brothers Paper (Pvt) Ltd. TD-10-40 21,877.54 36 Accutech Ltd. TD-10-038 22,382.46 37 Medican Hospital TD-ID-047 5,562.42 38 Plastech Autosafe TD-10-055 16,597.59 39 Cast Master Co. TD-10-051 10,882.40 40 Danish Food (Pvt) Ltd. TD-ID-017 7,383.11 Total 577,000.00 - 25 - ANNEX -VII PCIs STAFF TRAINING PCI Staff Trained ABL 106 MCB 61 NBP 91 UBL 126 IDBP 1 6 PICIC 1 8 NDFC 9 PBC 5 HBL 113 Total 545 - 26 - APPENDIX - A 12 February 1996 PAKISTAN THIRD SMALL SCALE INDUSTRIES PROJECT (LOAN 2839-PAK) The World Bank's Supervision and Implementation Completion Report (ICR) Mission Aidle-memoire 1. A World Bank mission comprising A.H. Qureshi, Projects Adviser visited Karachi, Lahore and Peshawar during end November and December, 1995 to supervise and start ICR preparation concerning the Small Scale Industries III (SSI-III) project. 2. While the mission concentrated mainly on the performance of the two remaining pre- qualified PCIs namely, Habib Bank Limited (HBL) and Allied Bank Limited (ABL), meetings were, also, held with the management of National Bank of Pakistan (NBP) and United Bank Limited (UBL), which had earlier been suspended for not maintaining their eligibility criteria. As the project closed on December 31, 1995, the mission held detailed discussions with the Industrial Development Bank of Pakistan (IDBP) - the Apex Agency, their consultant - Financial and Man-agement Services (FMS) and the PCIs (including MCB which had withdrawn from the project after suspension) on the problems faced during project implementation and the lessons learnt to be included in the ICR, in addition to any remaining issues which needed to be addressed before the closing date. 3. The mission visited 5 sub-projects in Lahore and one in Peshawar. In Karachi, sub-projects were not visited due to the unsatisfactory law and order situation. The mission would like to place on record its appreciation for the co-operation and assistance extended to it by all the institutions visited. This aide-memoire, the last on the project is brief as the reasons for slow disbursement were reviewed extensively during the previous mission (June 1995) and the same issues still existed and, therefore, not being repeated here keeping in view the project closing on December 31, 1995. Nevertheless, for easy reference these are included as Annexure- 1. BACKGROUND 4. The SSI-III Project, comprising US $ 54 million was approved by the Bank on June 16, 198,7, and became effective on March 8, 1988. The Government of Netherlands (GON) co-financed Nlg 25 million (about US$ 12.5 million) as grant under the same project, of which Nlg 10 million was for technical assistance and the remainder for sub-loans. Thus, total funds available under the Project were $ 66.5 million. However, concerning the allocation for sub-loans under the Dutch Grant, after disbursement of Nlg 2.122 million, remaining Nlg 12.878 million were canceled by the Netherlands Government due to slow implementation and, also, funds being available under the Bank's Loan. The allocation for the TA remained unaffected. 5. Disbursements were slow for several reasons (see Annex- 1), and as a result the project was restructured in February, 1993. Its implementation was, however, delayed till September 1993 due to delay in reaching full agreement with GOP on the revised interest rates for the sub-borrowers. It was further modified based on the recommendations of the October 1994 supervision mission. Utilization improved beginning late 1994 after ADB's credit line had been fully utilized and the restructuring measures became effective. - 27 - RECENT PERFORMANCE 6. The Bank has disbursed US $ 21.27 million as of December 6, 1995, while total commitments amount to about US $ 27 million. The PCIs approvals and disbursements under the project amount to Rs 1,307 million and Rs 1,029 million respectively and the details are shown in Table-I below: Table -1 PCIs approvals and disbursements as of May 20. 1995 (Rupees Million) Approvals Disbursement PCI Subprojects Amount MRsO Subprojects Amount (Rs) HIBL 150 762.96 135 601.17 ABL 32 250.28 23 150.15 NBP 31 69.39 31 65.47 MCP 13 44.05 13 44.05 UBL 66 178.25 66 168.93 TOTAL 292 1307.22 268 1029.00 7. Outlook for utilization of the project funds: About $ 18 million have been disbursed so far by IDBP for sub-project refinance to the PCIs. IDBP is arranging refinance of another $ 3 million. Discussions with the PCIs indicate that about 12-15 sub-projects may not be fully disbursed as they are unlikely to be completed by the closing date. Thus, total disbursement under the project is unlikely to exceed $ 25 million. The PCIs suggested that final phases of construction of the sub- projects under implementation be allowed to be completed upto March 1996 to be finally disbursed upto April 30, 1996. They, also, suggested that delivery of equipment by March 31, 1996 against L/Cs established before the closing date should be considered as eligible expenditure and reimbursement be allowed to the PCIs upto April 30, 1996. The mission clarified that this is not permissible under the rules and that such financing would need to be provided by the PCIs. 8. Recoveries: The recoveries as of June 30, 1995 reported by the PCIs still eligible follow in table-3 below: Table-3 Recoveries of the PCIs% Project Habib Bank Allied Bank SSI-I 81 97 SSI-II 78 72 SSI-III 55 73 Average 71.3 80.7 - 28 - The mission was concerned to note that HBL's recovery perfonnance had not improved despite their management's assurances during the previous mission. The main reasons indicated included Karachi situation and economic recession in the country, particularly in the textile sector which accounts for more than half of the industry in Pakistan, while the legal system for recovery of over due loans remained ineffective. 9. An analysis of an FMS report indicates that HBL has the largest share at 59% of the disbursements. Regional share indicates Punjab at 54.4 %, Sind at 30.25 %, NWFP at 1 1.1 % and Baluchistan at 4.2 %. Sub-loan size distribution indicates that 77.9 % were for above Rs 3 million and 0.7 % for sub-loans up to Rs 0.5 million. As usual, textile sector led with 33.5 %, followed by services and miscellaneous with 21.3 % share in the funding. Please refer to Annexure-II for furtlher details. TECHNICAL ASSISTANCE 10. The Dutch Grant (Nlg 10 million): The Bank has disbursed NIg 6 million (including Special Account) for TA. While, IDBP is still working oni some of the details, estimates of cc'mmitments and disbursements are shown in Table-4 below: Table-4 Dutch Grant Technical Assistance commitments and disbursements US $ million Commitment Disbursement Technology & Productivity Fund (TPF) 825,000 390,000 Federal Bureau of Statistics (FBS) Training & Consultancy: a) Apex consultant (FMS) 260,000 228,000 b) TPF consultant 40,000 38,000 c) Sector study 237,000 138,000 d) Training 248,000 321,000 Total 2,237,000 1,465,000 11. Federal Bureau of Statistics: After extensive delay, The Director General, FBS advised that an agreement has been reached with the supplier of the cartographic equipment for payment of the difference resulting from the exchange rate fluctuation amounting to US $ 77,300. This amount will be in addition to US $ 350,000 already disbursed and will be considered as part of their alllocation of US $ 0.5 million. Arrangements have been made for payment of this amount. The cartographic equipment imported earlier has now been unpacked and commissioned. 1.2. Training: PCIs staff training had been discontinued earlier as the staff trained was generally not being posted in positions where they could apply the skills learnt. Training courses during second half of 1995 were restarted at the National Institute of Bankinig and Finance, Islamabad which has high class facilities available and assurances had been received from the PCIs that they - 29 - which has high class facilities available and assurances had been received from the PCIs that they will utilize the staff after training in the relevant fields. 552 officers of the banks were trained by Pakistan Banking Council and National Institute of Banking and Finance. This has helped in improving capacity of the PCIs in extending finance to industry and, particularly, the small sector. For more details, please refer to annexure-III. 13. Sector study: ISSAS have completed the study for improving SSI statistics and submitted their report. Arrangements are being made for final payment. 14. Technology and productivity fund (TPF): A substantial further breakthrough has taken place as the eligibility criteria under the TPF grant are better understood by the participating institutions (particularly IDBP) and the potential beneficiaries. 56 TPF sub-projects for US $ 0.82 million have been committed and are mostly under implementation. About US $ 0.4 million have been disbursed. All the sub-projects disbursed so far have been through IDBP for which they need to be congratulated. TPF consultant, Mr. Ghulam Kibria, whose contribution was found commendable, has actively helped IDBP in identifying eligible sponsors. Other eligible institutions, particularly, PICIC and NDFC have not disbursed to any sub-project, although, two sub-projects of NDFC were approved by the Bank. The PCIS (banks), which were made eligible over two years ago have, also, not contributed anything to this component of the project. The mission estimated that about $ 0.7 million is likely to be disbursed against TPF allocation of $ 2.5 million. ICR PREPARATION 15. The Ministry of Finance is requested to prepare Part-II for the ICR providing the Borrower's review of the project performance by end of January 1996 for incorporation in the ICR. ??? while, the mission requested IDBP anid the participating institutions to provide detailed information on sub-project characteristics including size of sub-loans, sub-sectors, employment generated, export performance where applicable, geographical distribution, new project or BMR, commercial performance and loan repayments. The information requested is expected to be received in February 1996. CONCLUSIONS 16. Out of $ 54 million available under the project, not more than about $ 25 million are likely to be disbursed. From the Dutch Grant of NIg 10 million for technical assistance, not more than about Nlg 5 million are likely to be utilized. Thus, funds utilization under the project is unlikely to exceed 50% of the total available. However, many of the development objectives under the project have been achieved through improving access of small industry to institutional finance. A detailed review of the project's performance will be presented in the Implementation Completion Report (ICR) around the middle of the current year. GOP is requested to forward its own review of the project performance for incorporation in the ICR as Part-LI by end of February, 1996. 17. At the wrap up meeting held on January 11, 1996 the Ministry of Finance proposed that the Bank consider extending the last date for disbursement of April 31, 1996 to allow for delayed deliveries against letters of credits established before the closing date. The Mission clarified that this is not possible under the rules, however, any specific cases may be referred to the Bank for review. - 30 - Aide-Memoire Annexure-l The PCIs, potential sub-borrowers and others concerned indicated following reasons for slow disbursements: i) Competition from cheaper funding e.g., State Bank of Pakistan's facility for Locally Manufactured Machinery (LMM) at 13% (having been gradually raised from 3% in the eighties). ii) Competition from lines of credit simpler to apply for and involving less sub- project conditionalities and procedures e.g., Asian Development Bank's parallel credit line and Opec Fund credit. iii) Cumbersome application formats and appraisal and approval procedures followed by the PCIs. iv) Lack of adequate marketing effort by the PCIs in term financing generally. v) Lack of a conducive industrial environment obtaining in the Country. Among these may be listed such factors as: (a) Over involvement of GOP departments and functionaries, (b) Inconsistent GOP policies applicable to trade and industry, (c) Increasing competition from imports due to reduction in tariffs, and (d) the general lack of sponsor interest in industry due to disturbed conditions in Karachi. vi) Increased collateral requirement of the PCIs due to the high default rate of repayment by sub-borrowers. vii) Slump in the cotton textile industry, which has been one of the major areas of industrial growth. viii) Low maximum fixed cost per job allowed under sub-project eligibility even though it was raised to Rs. 400,000 under the restructuring. -31 - APPENDIX- B PROJECT REVIEW FROM BORROWERS PERSPECTIVE SSI-III had the following specific objectives: 1. Promote the development of SSI units preferably those which are export oriented and/or are efficient in import substitution by providing finances for long term requirement. 2. Increase the availability of development credit for SSI units. 3. Identify and assist those sub-sectors which have indicated growth potential. 4. Promote development of SSI units based on local raw materials. 5. Suggest policy reform in order to encourage greater efficiency in SSI sector. 6. Provide special assistance in promoting S51 projects in under-developed areas. 7. Provide finance to SSI sub-projects with high financial and economic 8. Strengthen the financial institutions involved in SSI lending through technical assistance training and improvement of operating systems and procedures. 9. promote a financial environment which encourages the financial institutions to expand their SSI lending by allowing them to mobilize appropriate resources and operate profitably on their SSI portfolio. 10. Establish a stronger export marketing infrastructure through the promotion of export houses. 11. Improve efficiency of Industrial Units through a program of technology transfer and 12. Improve the accuracy and reliability of SSI statistics for policy and development strategy formulation. 2. The credit of US $ 54 million extended by IBRD for the development of SSI sector through the network of Banks (PCIs) at the rate of 14% per annum was approved by World Bank on June 16,1987 and became effective on March 8, 1988 with the credit termination date of December 31, 1995. However, due to slow utilization, the loan was restructured by the World Bank which was finally approved by GOP on September 27, 1993. The total amount of refinance paid to PFIs as on December 31, 1995 was 20.61 million while commitments were more than US $ 27 million. However, the total amount of utilization as on April 30, 1996, the account closing date, was US$ 21.164 million which comes to 39.19% of the total amount of credit line (project loan). 3. Besides the second portion of this credit was Dutch Grant. Dutch Government extended a grant of DFL 25 million equivalent to US $ 12.5 million through World Bank out of which US $ 7.5 million was earmarked for project financing and remaining US $ 5.00 million was earmarked as Technology Assistance component for consultancy services. Technology and Productivity Fund and improvement in statistical data of Federal Bureau of Statistics Government of Pakistan . Out of US $ 7.5 million technical assistance component, only US $ 1. 099 million was utilized by 14 projects and the remaining US $ 6.401 million was suspended by World Bank on February 22, 1994. However, out of technology assistance component of US $ 5 million, the total utilization was 3.171 million which comes to 63.40%. since the date of initial loan agreement to the terminal date, the credit line remained problematic due to the following reasons: a) The onlending interest rate of World Bank loan was enhanced from 14% to 18%. Therefore, clients opted for general advance to avoid cumbersome procedure of World Bank credit line. b) The credit was in US dollars while its utilization was in Pak Rupees. The rupee has depreciated by over .56% since the effectiveness of the credit line (Rs 17.5 $1 to Rs 34.5 $1). As such the amount of rupee loans required to be approved and disbursed is continuously increasing restricting the blending and limit. - 32 - c) Availability of cheaper line of credit to PCIs from the SBP for LMM and availability of ADB credit No.902-Pak on softer terms and conditions. d) Delay of nearly one and a half years in the finalization of changes related to terms and conditions pertaining to sub-projects and sub-loan sizes and the rate of interest etc. and blending of LMM loan etc. e) A large number of cases involving substantial amount. sanctioned under World Bank loan were transferred to ADB credit as these cases exceeded eligibility criteria and the World Bank had not enhanced the size of the loan. f) The major impediments which made the prospective borrowers to abandon the loan proposals was lengthy and cumbersome loan application forms prescribed earlier. g) Eligibility of only two PCIs as others were debarred in Nov., 1991. h) Cost per job was restricted to Rs 0.20 million which was enhanced in late 1994 to i) Despite best efforts by GOP/lDBP, World Bank had not allowed extension in the terminal date by which many cases which were approved by the World Bank just before the terminal date could not get financed under this credit due to shortage of time. j) The T.A. component of Dutch grant was passed on to the sub-projects as a grant, however, GOP insisted on its repayment with interest. This issue was resolved after a long period which delayed the utilization of T.A. component. 10. For the improvement in the utilization of credit line following measures were taken: a) Revised and more simplified formats of Preliminary Detailed Loan Application Forms prepared by FMS approved by PCIs were printed and supplied by PCIs to all their field offices for supply to their clients. b) Systems of loan approvals and documentation leading to quicker disbursement of loan proceeds were also improved c) PCI's Head Offices issued comprehensive instructions to their delegated offices/branches efforts to build a pipeline of projects which could be appraised speedily and loans; approved and disbursed. In this context, certain indicative targets were also given by PCIs to their Phase/field offices d) Publicity campaign was also launched elaborately to attract prospective clients through print and electronic media (TV). e) Respective Chambers of Commerce and Industry were also contacted by senior executive of PCIs to obtain their cooperation for early utilization of the credit line. f) M/S Financial & Management Service (Pvt) Ltd., (FMS) a renowned consultant were also engaged. FMS set up arrangements with HBO and ABLE under which implementation of previous decisions and progress under each head were reviewed by the Policy Adviser and Team Leader of FMS with the Presidents and Senior Executives at least once a month. MAP SECTION IBRD 16248R4 64 68° T A J I K I S T A Nj: CHI NA PAKISTAN .* ,/ -36° NATIONAL CAPITAL c r a CITIES AND TOWNS I. NATIONAL ROADS PRIMARY AND SECONDARY ROADS RAILWAYS + AIRPORTS Chosodpprome ine of Control - - PROVINCE BOUNDARIES IVN shemo INTERNATIONAL BOUNDARIES (- - l ,rad RIVERS Rocwlpnd JAMMU and KASHMIR 32- dha 32° -28- K JXc , //2° R EPU BL IC OF '-*Pj I W DP ' ,J Wi { \ '< ~~~~~~~~~~~~~~~~~~~~~0 50 100 150 200 250 ( N°/ 3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~terc infonr,t.owoshoh i,nLE 24 00 77is ~nog, do not AFGlEB o1 NISaAN o4 Dhe porldpan- ro 7~~~~~~~~~2 lot~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~ERAY19