Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No.3116-PO PORTUGAL STAFF APPRAISAL REPORT ON A SECOND LOAN TO BANCO DE FOMENTO NACIONAL December 12, 1980 Industrial Development and Finance Division Projects Department Europe, Middle East and North Africa Regional Office 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 EQUIVALENTS 1976 (yearly average) 1 US dollar = 30.00 escudos 1 escudo = 0.033 US dollar 1977 (yearly average) 1 US dollar = 38.23 escudos 1 escudo = 0.026 US dollar 1978 (yearly average) 1 US dollar = 43.90 escudos 1 escudo = 0.023 US dollar 1979 (yearly average) 1 US dollar = 48.90 escudos 1 escudo = 0.020 US dollar 1980 (April) 1 US dollar = 49.31 escudos 1 escudo = 0.020 US dollar 1980 (October) 1 US dollar = 50.42 escudos I escudo = 0.02 US dollar (In the report the exchange rate used for conversions is 1 US dollar = 50.0 escudos). GLOSSARY OF ABBREVIATIONS BFN Banco de Fomento Nacional CGD Caixa Geral de Depositos EDP Electricidade de Portugal EEC European Economic Community EFTA European Free Trade Association EIB European Investment Bank FGRC Fundo de Garantia de Riscos Cambiais (Exchange Risk Guarantee Fund) GFCF Gross Fixed Capital Formation IERR Internal Economic Rate of Return FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY APPRAISAL OF BANCO DE FOMENTO NACIONAL PORTUGAL Table of Contents Page No. I. INTRODUCTION ............................................ 1 II. THE ENVIRONMENT . 1 A. The Economic Setting .. 1 B. The Manufacturing Sector .. 2 C. The Financial Environment. 5 III. BFN's STRUCTURE.. 7 A. Legal Basis and Ownership .. 7 B. Board and Committees .. 8 C. Organization .. 8 D. Management and Staff .. 8 E. Objectives .. 9 F. Policies .. 9 C. Appraisal and Supervision Procedures . .10 H. Promotional Activities ..11 I. Procurement.. 13 J. Disbursement ..14 IV. BFN's OPERATIONS .14 V. BFN's FINANCIAL SITUATION .15 A. Financial Position and Profitability . .15 B. Debt/Equity Ratio ..16 C. Audit . .16 D. Portfolio and Arrears ..17 VI. PROSPECTS ....... 20 A. The Environment ..20 B. BFN's Role ..21 C. Projected Profitability and Financial Position .21 D. Projected Debt/Equity Ratio . .22 VII. THE LOAN - ITS OBJECTIVES, JUSTIFICATION AND FEATURES .... 22 VIII. RECOMMENDATIONS .24 This report was prepared by Messrs. William J. Hayden, Abdul Haji and Geoffrey Gowen. 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. Table of Contents (Continued) Page No. ANNEXES 1. Structure of Lending Rates Established by Banco de Portugal ........................................ 25 2. Balance Sheets - 1975-1979............................. . 26 3. Arrears as at December 31, 1979 ......................... 27 4. Actual and Projected Operations, 1977-1984 ............ 28 5. Projected Income Statements - 1980-1984 ....... ........... 29 6. Projected Balance Sheets - 1980-1984 ......... ...... 30 7. Projected Cash Flow Statements - 1980-1984 .................. 31 8. Expected Disbursement Schedule . .32 9. Selected Documents and Data Available in the Project File ... 33 APPRAISAL OF BANCO DE FOMENTO NACIONAL PORTUGAL I. INTRODUCTION 1.01 This report appraises Banco de Fomento Nacional (BFN) for a second IBRD loan of $100.0 million. The report is based on an appraisal mission to Portugal in March/April 1980. The major objective of the proposed loan is to support the development of medium sized economically viable projects in the private and mixed sectors with emphasis on fostering industries with export potential. The Bank's first loan to BFN of $50.0 million was made in 1977 and was fully committed on schedule by December 1979. 1.02 BFN was incoporated in 1958 as a Portuguese development bank. Since then it has established itself as a sound development bank and has built up a strong appraisal capability, particularly for industrial proj- ects. Its major problem is the substantial amount of arrears in its port- folio due mainly to the profound changes in the economy resulting from the revolution of April 1974. II. THE ENVIRONMENT A. The Economic Setting I/ 2.01 In the five-year period preceding the revolution of April 25, 1974, Portugal's real GDP grew at an average annual rate of 7%, sustained by a relatively high rate of gross fixed capital formation (GFCF), averag- ing some 21% of GDP, and accompanied by a strong export growth of 9% p.a. in real terms. In 1973, GDP at market prices was US$11.4 billion equiva- lent, total GFCF, US$2.3 billion equivalent, and exports, US$1.7 billion equivalent. The 1974 revolution resulted in profound changes, reflected in substantial shifts in the ownership of capital assets; some sectors (basic industry, energy, water, banking, insurance, public transport and communi- cations) were nationalized by the State and others, such as agriculture, were partially (but crucially) affected. In addition, Portugal's revolu- tion brought with it rapid social and political change, labor unrest and a rise in people's expectations. The oil price increase of end-1973, the 1/ See "An Updating Report of the Portuguese Economy" (Report No. 2214-PO dated September 7, 1978) for a comprehensive picture placed in histori- cal perspective, of the problems confronting the Portuguese economy both at the macro-economic and the sectoral levels. -2- return of more than half a million Portuguese from the overseas colonies, and the recession in OECD countries created further stresses on the economy's ability to maintain private consumption and meet the investment needs of the economy. By 1977 there were substantial deficits on the external current account (US$1.5 billion) and the domestic budget (7% of GDP), and levels of inflation increased to more than 20% while open unemployment amounted to over 300,000 (about 8% of the labor force). 2.02 In growing recognition of the need for structural change to adjust to the new environment, and to the consequences of continuing high deficits on its external accounts, the Government in 1977 began to draw up a program with the assistance of the IMF to "dampen" the rate of economic growth and switch expenditures to production for export. Focussing on increased interest rates, stringent credit policies and exchange rate adjustments, the policy package implemented enabled the current account position to be reduced from a deficit of US$1.5 billion in 1977 to US$800 million in 1978. This was achieved with only a 2% drop in the growth of GDP (from 5.3% in 1977 to 3.2% in 1978). These policies were continued during 1979 and resulted in further improvements: commodity exports grew at about 25% in real terms (to US$3.5 billion), imports increased at only 5% (to US$6.0 billion); workers' remittances expanded by 46% (to US$2.4 billion) in 1979, all leading to a small surplus in the external current account of about US$150 million despite the substantial oil price increase during the year. B. The Manufacturing Sector 1/ 2.03 Manufacturing is the leading sector in the Portuguese economy and, in 1978, accounted for about 38% of GDP, 24% of employment, 37% of total investment, and almost 90% 2/ of merchandise exports. Manufacturing output grew at an average annual rate of around 11% between 1963-1973, and led the rapid growth of the Portuguese economy during this period. This growth was concentrated in a relatively small number of the large enter- prises that enjoyed privileged access to credit and to foreign technology while the vast majority of small and medium enterprises were given little assistance and few incentives to modernize and expand. The growth was also attributable to low wages, low prices of raw materials and energy, preferential markets for Portuguese exports in the former colonies and protective tariffs. The resulting industrial structure proved 1/ A detailed description of the Portuguese manufacturing sector is given in the report entitled "Manufacturing Export Industries in Portugal" (Report No. 1695(a)-PO, dated December 27, 1977). An investment strategy for the sector focussing on state owned enterprise is presented in "Portugal - Priorities for Public Investment" (Report No. 2883-PO dated July 18, 1980). 2/ If wines and processed food are excluded the share of exports would drop to about 80%. -3- particularly vulnerable following the 1974 revolution, because of the loss of export markets, and changes in the structure of domestic markets due to the redistribution of income. 2.04 On the supply side, labor relations deteriorated sharply immedi- ately after the revolution leading to strikes, absenteeism, lock-outs and indiscipline in a number of factories. With the sharp rises in Portuguese wages, controlled domestic prices and little adjustment of the exchange rate till 1976, industrial profits fell sharply. Many firms suffered severe losses which could only be compensated through the liberal provision of credit through the banking system. These losses could not be reduced through a reduction in the labor force because of the very restrictive laws on dismissals. When demand revived, entrepreneurs were not willing to add new workers, because they could not be dismissed if demand fell. In some instances there was also the fear that any enlargement of the labor force might shift the balance within the factory towards control by trade unions. As a result of these factors many firms remain in serious financial difficulty creating a serious arrears problem for the banking system (para. 5.07). 2.05 The post-revolution wave of nationalizations placed the large industrial groups in the steel, oil refining, chemicals, cement, shipbuild- ing, tea and tobacco industries under state control. The public manufac- turing sector now accounts for about 12% of output and 10% of exports. This action also resulted in "mixed" sector in which the Government acquired shares in over 1,300 companies, which were owned by banks and other enterprises that had been nationalized. The state administration had initially neither the experience nor the organizational mechanisms to deal with these new sectors cf the aconomy. To compensate for the sluggishness of private investment that resulted from the prevailing confusion and uncertainty, the Government since 1976 has embarked on an ambitious program of public investment in industry, that continues to concentrate on the SINES industrial zone. It also initiated legislation in mid 1977 to restore confidence in the private sector. The legislation defined the armaments, petroleum, petrochemical, iron and steel, fertilizers, and cement industries as basic national industries reserved to the public sector; left the private sector free to invest in all other industries; revised the foreign investment law to provide greater assurance to foreign investors; eased the laws for labor dismissal; and provided for the finan- cial rehabilitation of firms faced with a heavy debt burden. The rehabili- tation legislation allows an economically viable yet financially .roubled enterprise to obtain consolidation of its old debts, new loans at subsi- dized rates and other financial and fiscal benefits by committing itself to certain production, productivity and financial targets. Though investment climate problems remain (para. 2.08), these actions, together with other measures, have brought about a considerable recovery of confidence in the private sector. 2.06 Manufactured Exports. Manufactured exports (which constitute almost 90% of total exports) grew at a rate of 12% per year in real terms - 4 - from 1963 to 1973, and some 45% of the manufacturing output was exported though mostly to its protected colonial markets. Leading were the tradi- tional export industries (textiles, clothing, wine, canned fish, cork and pulp and paper) as well as metal products and machinery. Exports declined sharply, however, following the events in 1974, due to the loss of markets in the former African colonies, the unstable situation in Portugal, and the recession in the OECD countries to which Portugal exported 78% of its total exports in 1973. By 1976 exports were 35% lower (in constant dollar terms) than in 1973. Portugal's export performance has dramatically improved during the last two years, showing growth rates in volume terms of 26% in 1978 and 28% in 1979. This improved performance resulted largely from better utilization of existing capacity and reflected the Government's short-term stabilization measures which have improved export competitive- ness (para. 2.07). However, the Portugese economy remains relatively inward looking. Exports as a percent of GDP were only 13% in 1978 but rose to 17% in 1979. This is low, however, compared to other peripherally located smaller countries in the EEC. In volume terms, exports in 1979 were only 30% higher than in 1974 and remained concentrated in traditional industries; 33% textiles, clothing and leather; 14% wine, processed fish and vegetables, and 16% cork products, pulp and paper and wood industry related chemicals. Metal working and engineering industry products were only 18%. 2.07 Cost Competitiveness and Incentive Structure. Between the end of 1973 and the middle of 1977, cost competitiveness of export industries deteriorated by 10% to 20% as a result of sharp cost increases and a decline in productivity. The incentive structure was strongly biased toward production for home markets based on the arbitrary tariff structure inherited from the previous regime and the further imposition of import surcharges, which were not offset by significant export subsidies. Since mid-1977 due to the devaluations of the escudo, a decline in real wages, and improvements in productivity, cost competitiveness of exports has improved by 60-100% relative to 1973 with respect to Portugal's principal competitors (Spain, Greece and Italy). Import surcharges have been sub- stantially reduced, and rationalization of the tariff structure is planned. In July 1980 the Government introduced a new investment scheme of fiscal (various tax reductions, accelerated depreciation and amortization) and financial (interest rate reductions, capital grants) incentives that seeks to promote the expansion of certain priority sectors, growth in less developed regions and the development of exports. As part of an effort to improve the present administrative procedures, it also provides for one contact point between the investors and the Government, which in most cases would be the institutions providing term financing. There is still a need for an increased effort and a more coordinated approach from Government institutions in promoting industry, restructuring for entry into the European Economic Community (EEC) (para. 6.02), and developing export promotion activities (para. 6.01). For the past year the Ministry of Industry has been conducting a comprehensive study as part of the prepara- tion for Portugal's entry into EEC (para. 3.21). The Bank has financed two studies that address this problem in the textile and engineering industries -5- (para. 3.22) and provision is made under this loan to extend BFN's participation (para. 3.21). 2.08 Investment Climate. Despite the recent improvements in the investment climate real fixed capital formation is only 2% above 1974 levels reflecting continued sluggishness of private investment in the face of uncertainty about whether improvements will continue. Further progress is needed in several critical areas. One is in labor relations where equitable provisions clarifying the rights and duties of workers and management still need to be established covering working conditions, dismissals, absences from work, and the role of workers' commissions. The next important area is payment of compensation for nationalized companies. Although a framework to compensate owners has been established, issuance of specific regulations has been postponed, and the proposed long repayment period and low interest rates of the bonds to be used substantially reduce the compensation. Finally, the area of price controls where, despite substantial relaxation over the last four years, the existing price control administration remains slow, bureaucratic, and often unpredictable. C. The Financial Environment 2.09 The principal institutions of the Portuguese financial system are Banco de Portugal (The Central Bank), nine commercial banks, Caixa Geral de Depositos (CGD) which is the major savings institution, Instituto Financeiro de Apoio as Desenvolvimento da Agricultura e Pescas(IFADAP), the specialized institution for agriculture and agro-industry credits; and Banco de Fomento Nacional (BFN), the major industrial development bank which is the Droposed intermediary for this loan. Additionally, there are some 200 minor savings and cooperative banks, three foreign and commercial banks whose activities are mostly concentrated on foreign trade operations, and a number of insurance companies and small financial institutions. All Portuguese owned financial institutions, with the exception of the small savings banks, were nationalized in 1975. CGD has always been public. The nationalized banks retain, nevertheless, considerable autonomy. 2.10 In 1978, US$2.8 billion was used for the following types of investment financing: medium-term loans (1-5 years) 49%; long-term loans (more than 5 years) 21%- self-financing, 20%; other (includes shares and external credits) 10%. i/ About 30% of this investment was for manufacturing including mining. BFN and CGD, which are the main institutions which financed industrial term investment, held respectively 38% and 32% of the total medium and long-term loans to the manufacturing sector at the end of 1978. BFN is the leading institution best equipped to appraise industrial projects, a capability that has been strengthened by the Bank's first loan to BFN (Loan No. 1432-PO). Commercial banks, whose authority to lend for one year was extended to ten years by legislation in 1977, now account for 30% of medium and long-term industrial loans. Their 1/ Working capital rolled over is estimated at an additional 5 to 10% of the total. industrial term lending will grow, particularly to small and medium size projects where project appraisal capability is less critical, because of a legal requirement to devote part of their longer term deposits (greater than 180 days) to medium and long-term credits, and because of the changing structure of deposits which requires commercial banks to secure the higher yields permitted on longer term lending. There remains a general need to improve domestic resource mobilization for long term investment, especially to provide equity financing. Recently the Government has enacted a law providing for the establishment of private investment companies with authority to provide medium and long-term credit facilities and equity investments. 2.11 Interest Rates. The interest rate structure, which was tradi- tionally low before the revolution, was permitted to increase only slowly after the revolution despite accelerating inflation. The six increases which took place between April 1974 and the beginning of 1978 were not able to eliminate the gap between rates of interest and inflation. As part of the stabilization program agreed with the IMF, a new and significant increase in the interest rate structure was introduced in May 1978 which was applied to all outstanding deposits and loans (Annex 1). Though inflation abated from the 1977 level (27%) in both 1978 and 1979, interest rates have remained narrowly negative. An expected further decline of inflation in 1980 to under 20% will bring interest rates to positive levels. The Government does not wish to raise interest rates for fear of further discouraging private sector investment. Furthermore, Portuguese interest rates are now competitive internationally is evident from the present high level of banking liquidity and the slowdown in applications for term lending. 2.12 Interest Rate Subsidies. Prior to July 1980, the structure of interest rates was modified by subsidies from the Central Bank funds depending upon the purpose of the loans. Established in 1977 when interest rates began to rise and when the investment climate was unfavorable, these subsidies were designed to stimulate industrial investment and channel it to activities with significant impact on balance of payments and employment creation. Although subsidies affected about 10% of loans generally, BFN estimates that about 40% of its borrowers were eligible for an interest subsidy reflecting the fact that it finances higher priority projects. Under the new fiscal and financial investment incentive system introduced in July 1980 (para. 2.07), project eligibility and the level of subsidy are governed by a project's export competitiveness, and its location in regions and sectors with high priority. BFN estimates that on average the interest subsidy aspect of the scheme will reduce the effective interest rates by 2% to 8% depending on the nature of the investment. It will be financed directly from Government revenues and therefore will not have any impact on the interest rate structure and resource mobilization capability of individual banks. The new scheme is to be welcomed; it appears likely to have a significantly greater impact than the past scheme at a time when - 7 - investor confidence needs bolstering, and does so in a way that signifi- cantly removes possible distortions in the cost of capital. 2.13 Foreign Exchange Risk. The Central Bank must authorize all foreign borrowings, which it does with a minimum of formalities. With a few exceptions, all foreign exchange transactions must also be channeled through the Central Bank. Investors are required to finance with foreign borrowings (or foreign lines of credit through financial intermediaries) 80% of the cost of foreign equipment purchases exceeding Esc. 30 million (US$600,000 equivalent). To reduce the adverse impact on industrial investment of the exchange risk associated with foreign borrowings, in a context of high uncertainty on the timing and magnitude of future deprecia- tion of the Escudo, the Government established in February 1977 Fundo de Garantia de Riscos Cambiais (Exchange Risk Guarantee Fund - FGRC) under the supervision of the Central Bank. The Fund covers the exchange risk associated with foreign borrowings that finance projects of national interest. It is financed by payment of a fee representing the difference between the domestic long term interest rate (presently 22.25%) and the rate on foreign borrowings and the commission (2-3%) for the intervening financial intermediary. The rate of interest paid to the Fund ranges from 5.25% to 13.25% depending on the interest rate on the foreign borrowing. Coverage is extended for only one year at a time and is renewable at the option of the Fund. Although the viability of the Fund has not been evaluated, it is intended to be self sufficient and to date its annual revenue has been sufficient to meet its annual guarantee payments. The first BFN loan was covered under the Fund and the Government intends to include this loan. iII. BFN'S STRUCTURE A. Legal Basis and Ownership 3.01 BFN was established as a development bank in the form of a joint stock company by a decree-law issued in November 1958 and began operating late in 1959. This statute was later modified by Decree-Law 513/77 dated December 14, 1977 to implement a new management system in line with the law nationalizing credit institutions under Decree-Law No. 729-F/75. No change was made in BFN objectives except that resulting from the decolonization of the former overseas territories where BFN had been operating. BFN is presently drafting a new statute with the objective of codifying existing law and no major changes are proposed. 3.02 BFN was nationalized in March 1975 in conjunction with the nationalization of other domestic credit institutions. Prior to nationalization, the Government was the major shareholder, holding over 30% of BFN's equity. The Portuguese commercial banks were also large share- holders. Compensation to former private shareholders has not yet been paid (para. 2.08). -8- B. Board and Committees 3.03 BFN's Board of Management consists of six members including the President. The members are full-time officials and are appointed for renewable terms of three years by the Council of Ministers on the proposal of the Minister of Finance. The Board is empowered to manage the organiza- tion and meets in regular session at least once a week and in special session whenever convened by the President. The Board is jointly res- ponsible for the overall management policy but in addition, each of the five ordinary members is responsible for various departments within the organization. Five of the six members have been in office since 1976. 3.04 The Commission of Control is composed of three members, two appointed by the Minister of Finance and one appointed by the staff of BFN. The Commission is responsible to ensure that the laws and regulations are being complied with, to review financial statements and budgets and to draw the attention of the Board to all relevant matters. The Commission may be assisted by outside experts and has engaged Price Waterhouse and Co. to audit the financial statements (para. 5.05). 3.05 The Minister of Finance is empowered to exercise a broad supervi- sion of BFN, he receives its annual budget and must approve its annual report and accounts. In addition, the Commission of Control submits an annual report for his review. C. Organization 3.06 BFN operates through its Head Office located in Lisbon and three regional offices in Lisbon, Porto and Coimbra. In addition, BFN has a branch office in each of the 17 district capitals on the mainland as well as on the islands of Azores and Madeira. At present, all projects and credit appraisal work is undertaken from the Head Office but BFN has recently decided that projects and credits under Esc. 10 million (US$200,000) will be appraised by the regional offices as a first step to give greater emphasis to the regional character of its operations. The regional offices are responsible for supervising the branches in their district. The branch offices' main activity is the collection of deposits from local residents and disbursement of funds to borrowers on the instruc- tion from the Head Office. Recently, the branches have become actively involved in the collection of arrears (para. 5.13), and in project promotion (para. 3.19). D. Management and Staff . 3.07 BFN's President and the five Directors have extensive experience in banking and Government service and continue to provide effective leader- ship and competent management. BFN's middle staff are qualified, experienced, and highly motivated professionals and are responsible for the efficient operation of the organization. - 9 - 3.08 At the Head Office, BFN has a staff of about 540, of whom 172 are professionals. The district and branch offices employ another 250 persons. Substantial strengthening of the professional staff has taken place since the first BFN loan, particularly in the Development Service and Data Processing Departments. The Development Services Department was expanded to enable BFN to make a more extensive appraisal of its projects, particularly the economic evaluation. Additional professional staff were engaged for the Data Processing Department to install and operate a computer system. Initial problems have been experienced with the system in processing the deposits accounts but these are being resolved. When the computer system is fully operational, it should help considerably in improving the present inadequate management information system especially in connection with arrears (para. 5.13). BFN is adequately staffed and does not experience undue difficulties in recruiting and retaining quali- fied professionals except for engineers with broad management background. E. Objectives 3.09 BFN's objectives are broadly defined in its Statute as promoting the development of the country and assisting the Government in implementing its economic and financial policies. To achieve these objectives, BFN is empowered to grant medium- and long-term loans, provide guarantees, subscribe to equity, bonds and securities and to undertake other appropri- ate operations. BFN is authorized to operate in the private industrial and agricultural sectors and in the public sector. Emphasis is placed on stimulating savings and channeling them to productive investment. F. Policies 3.10 Though BFN has no formal policy statement, most of the topics usually covered by such a statement are included in its Statute. The Statute provides that BFN is to finance technically and economically feasi- ble investment projects of economic importance. The guidelines established for lending operations require that the cash flow generated by the project should be sufficient to meet debt service, equity should constitute at least 33% of total asset value after completion of the project and that adequate security representing at least 70% of the loan should be secured. In line with the present Government's policy, BFN has recently "informally" adopted the following investment priorities: (a) exportoriented projects and credit for export of capital equipment; (b) industrial restructuring in preparation for entry to the EEC; (c) development of poorer regions; and (d) establishment of skilled labor-intensive industries. BFN continues to maintain its autonomy in reaching investment decisions. 3.11 No provision is made in BFN's Statute governing the diversifica- tion of risk but BFN has maintained a prudent policy in this respect with regard to loans to private and mixed enterprises. They have also main- tained a wide distribution of funds in the private industrial sectors with a maximum commitment of 5% per annum in the machinery sector. However, in the public sector, BFN has some significant exposures. The largest - 10 - exposure is with the Electricidade de Portugal (EDP), the national electric company (Esc. 10.8 billion or US$216 million). This exposure represents about 20% of BFN's portfolio and has increased by about 3% since 1976. EDP is a competently managed company with a sound financial policy and has obtained in 1976 a sixth Bank loan for power development. Debt service on the BFN loans is paid on schedule. BFN's exposure with the Portuguese Railways (CP) and Setenave (shipyard) at Esc. 3.2 billion and Esc. 1.6 bil- lion respectively (US$64 million and US$32 million) represent about 5% and 2-1/2% of BFN's portfolio. These companies are in serious financial diffi- culties and payment of debt service is in arrrears. BFN's loans are covered by guarantees, usually from the Government. Proposals for the settlement of future debt service for these and other public companies are outlined in paragraph 5.09. 3.12 BFN's Statute requires that three reserve funds be maintained: the legal reserve fund, the special reserve fund and the guarantee reserve fund. In addition to these mandatory reserves, BFN maintains a provision for doubtful debts which represented over 8% of BFN's portfolio as at December 31, 1979. The auditors are satisfied that this provision, together with reserves, Government and other guarantees and mortgages, are adequate to cover BFN's exposure. 3.13 Under the first Bank loan, BFN was required to maintain the medium and long-term debt/equity ratio below 6:1. BFN's debt/equity has remained well below this target and had a ratio of 4.5:1 at December 31, 1979. G. Appraisal and Supervision Procedures 3.14 BFN makes three types of loans: loans for capital investment, referred to as direct credits, loans to enterprises to finance production and sales on credit to other Portuguese firms, and loans to producers of Portuguese goods for export. These latter two types of loans, jointly referred to as indirect credits, are usually made only to heavy equipment manufacturers and building contractors (para. 3.17). Equity investment is marginal and usually consists of investments in Government companies such as Parempresa (para. 5.13). No expansion in equity investment is planned in the immediate future. 3.15 The appraisal of direct credits is undertaken by the Development Service Department. This Department has been strengthened substantially in the past three years and now has a staff of 54, including 37 professionals, in the Head Office, and 20 staff including 11 professionals in the three district offices. BFN's appraisal of projects has improved considerably since the first Bank loan. Appraisal is undertaken by a two-man team, a technician and economist/financial analyst, which reviews on site the company's proposals and prepares a report. The appraisal report is reviewed in detail by the Section Chief, Department Director and at least two Board Directors. The Credit Council reviews all loan proposals and may approve loans under Esc. 20 million ($406,000). All other loans must be approved by the Board. In the case of large public sector projects - 11 - co-financed with other financing sources, BFN relies to a great extent on the studies carried out by the sponsoring agencies and technical minis- tries. In reviewing these reports, BFN maintains an independent judgment on the projects' suitability for BFN financing. Government guarantees are sought when the financial position of the entity requires it. 3.16 The Internal Economic Rate of Return (IERR) is calculated for all projects over Esc. 150 million ($3 million) and for all Bank financed proj- ects over Esc. 30 million ($600,000) and a preliminary IERR, using standard indices, is undertaken for other BFN projects estimated to cost between Esc. 50 million and Esc. 150 million ($1.0-3.0 million). Projects with an IERR of less than 10% are not considered for financing. BFN has rejected a number of projects on this ground particularly in the public sector. In addition, BFN staff has been playing a leading role in conjunction with Banco de Portugal in implementing the IERR evaluation for major projects financed by the commercial banks. In order to further strengthen BFN's evaluation process, an understanding was reached during negotiations that BFN will calculate the IERR for all manufacturing, mining, agro-industries and fish processing projects estimated to cost Esc. 100 million ($2.0 million) or more. For other projects (above $500,000 cost) a simplified benefit cost ratio based on the Government's new incentive scheme will be calculated. This system is satisfactory for projects of this size. BFN capability to evaluate the sales potential and marketing aspect of export projects will be improved under the export investment promotion program (para. 3.20). 3.17 A substantial part of BFN's lending, 43% of approvals or 28% of disbursements, is for indirect investment credits. The processing of these credits is undertaken by the Special Credit Operations Department which has a professional staff of ten. The appraisal is generally limited to check- ing the adequacy of the security offered and the creditworthiness of the borrower. 3.18 Project supervision is undertaken by the Control and Inspection Department in addition to its other major duties of following up on arrears and evaluation of the creditworthiness of proposed borrowers. The supervi- sion and collection of arrears is undertaken by a professional staff of 20, including 6 engineers, assisted by 20 support staff. Improvements have been made in supervision during the past three years and BFN is fully informed of the status of all its major clients. Financial and technical assistance has been provided to a number of its clients. However, BFN is aware that further improvements are required in supervision if the present arrears situation is to be brought under control. A new Director has recently been appointed and is presently involved in reorganizing the Department with a view to further improve the monitoring of its borrowers (para. 5.13). BFN has agreed to continue this reorganization. H. Promotional Activities 3.19 BFN's promotion activities are undertaken by two departments, the Promotional Service Division of the Development Services Department and the - 12 - Economic Studies Department. The Promotional Services Division was established two years ago and the staff of two professionals undertake direct promotion of BFN services to industry in close cooperation with BFN's regional managers. This represents a marketing approach to invest- ment banking that is relatively new in Portugal and has expanded BFN's contacts with private firms in the investment community and helped to maintain its pipeline at a time of investor caution. The Economic Studies Department is concerned with general promotion and the conduct of sectoral and special studies. Prior to the revolution this department pursued an active program to develop projects (often with foreign investors) through in-depth sector studies that enabled BFN to develop a detailed knowledge of firms and the problems in specific industries. Significant developments in automobile parts and shoe industries resulted from this effort. This department's effort now emphasizes general promotion including organizing trade missions, promoting contact between Portuguese and foreign firms, and general statistical surveys, but specific industry promotion capability is hampered by a lack of qualified staff. 3.20 BFN feels that there is a need to expand its promotional activi- ties particularly at the present time when its major constraint to expan- sion is the lack of economically viable projects. A Bank consultant with the appraisal mission reviewed BFN's work in this field and formulated a number of proposals for strengthening this activity with special emphasis on the promotion of export-oriented investments. BFN reviewed these proposals and prepared an Action Plan to revitalize its project promotional role particularly in the export field. The Plan provides for expansion of the staff of the Economic Studies Department and training of promotional and appraisa'l staff in export promotion and evaluation of export marketing aspect of projects. The Plan was reviewed during negotiations and will be conducted in four six-month phases commencing January 1, 1981. The first phase will focus on several promising industries (cork products, ferrous and non-ferrous metal foundries, telecommunications/electronic equipment) selected by BFN from the Government priority list. Particular emphasis will also be placed on resin derivatives based on prior research undertaken by BFN which indicated that a substantial opportunity exists to upgrade existing exports. In addition to making contacts with industry, BFN anticipates that the promotional effort will involve the provision of technical assistance on a selective basis and the preparation of pre- feasibility studies, drawing on the resources of Portugal's technical agencies (FFE, IAPMEI, LNETI) and consultants. BFN will prepare an evalua- tion of the program upon the completion of each stage, which together with the plans for the succeeding phase will be submitted to the Bank for review and comment. In the context of its review of sub-projects, the Bank will provide technical assistance to build up BFN's institutional capability to advise and evaluate various aspects peculiar to export-oriented projects. To enable the Bank to review in detail a larger number of export projects than would otherwise be the case, BFN has agreed to allocate 50% of the proposed Bank loan for export-oriented projects in the form of a best efforts clause. The definition of export-oriented projects in this context is projects for which it is expected that the equivalent of not less than - 13 - 20% of output to be generated by the project can be exported. Appraisal reports will be expected to present adequate proof of exportability (market study, prior successful exports, orders in hand, etc.). 3.21 Another major activity which BFN plans to promote is industrial restructuring in preparation for Portugal's entry to the EEC in 1983 (paras. 6.02 and 6.03). In support of this objective BFN has agreed to prepare a study by September 15, 1982, which will identify specific firms that need restructuring assistance and provide the basis for an action pro- gram to assist those firms. The precise scope and focus of the study will be decided in the light of the findings of the Ministry of Industry study on the impact of Portugal's entry to the EEC, which is now in its final stages of preparation (para. 2.07). 3.22 The focus of the above study will also take into account the findings of the studies recently commissioned by the Government that address the restructuring problems in two subsectors. One is a study of the textile sector, financed by the United Nations Industrial Development Organization and the Bank under the Small and Medium Industry Development Project (Report No. 2312-PO, dated April 24, 1979, para. 5.30), which is now being reviewed. The other is a study of the engineering industry whose timing and terms of reference have been agreed to in the context of the Mechanical Industries Project (Report No. 2846-PO, dated May 30, 1980, paras. 2.15-2.17). Bank funding up to a level of $1.0 million could be made available under this loan for financing the foreign exchange cost of the investment promotion program and this study. Bank financing would provide for about 8 man/years of consulting services at an estimated cost of $9,500 per man/month including fee, overhead and expenses and the cost of foreign training for BFN's staff. However, it is expected that the Government and BFN will secure alternative financing from the EEC and/or the European Free Trade Association (EFTA) and if so, the $1.0 million will be used to finance sub-projects. 3.23 In order to improve the diversification of its portfolio, BFN proposes to undertake a pilot study to identify and support investment opportunities in small industrial enterprises in a predominantly agricul- tural area. Assistance will be given in preparation of projects and special arrangement for financing and guarantee terms will be designed to suit the local conditions. I. Procurement 3.24 BFN has no published guidelines on procurement. In the case of large investment projects (about $2.0 million) BFN's clients ask for bids from qualified national suppliers, generally on the basis of specifications prepared by engineering firms. In the case of smaller projects, quotes from several sources are collected. In all cases, BFN's engineers check the appropriateness of the production method, the reputation of the supplier and the competitiveness of the prices against their own experience with similar projects before approval is given. If BFN's engineers are not - 14 - satisfied that prices are reasonable the borrower is required to secure additional quotations. These procedures are satisfactory. J. Disbursement 3.25 Disbursements are made only after invoices and other documents are checked and after it has been verified that the goods being paid were those orginially approved as part of the project. The disbursement procedures are satisfactory. a IV. BFN'S OPERATIONS 4.01 BFN's main operations involved term lending which accounted for over 97% of its portfolio on December 31, 1979. The granting of guarantees and equity investment represents only a small percentage of BFN's operations. 4.02 During the two years ending December 1979, BFN's loan approvals increased in nominal terms by 75% to Esc. 28.4 billion ($568 million), representing an increase of about 8.5% in real terms, but the number of loans decreased 15% to 593. The average size of the loans made during the same period doubled to Esc. 47.9 million ($0.96 million) or an increase of about 32% in real terms. The fall in the number of loans processed was divided equally between the industrial and agricultural sectors and to a large extent was due to the increased activity of the commercial banks in term lending, particularly to the small and medium sized projects (para. 2.10). 4.03 The division of BFN loan amounts between loans for capital invest- ment and indirect loans to finance production has remained relatively con- stant at about 65:35 of approvals. BFN estimates that its 1979 investments were divided equally between the public sector and the private sector (including the mixed sector). This represents a considerable increase in the percentage of approvals to the public sector over the 1976 level of about 25%. A major part of the public sector lending was in the form of indirect loans for the acquisition of capital goods. 4.04 The geographic distribution of BFN's investment is skewed in favor of the three industrial districts on the western coast. Over 80% of BFN's approvals in 1979 were for projects in Lisbon (61%), Setubal (12%) and Porto (8%) and this reflects the 1977 and 1978 pattern. The balance of investment of less than 20% was committed in the remaining fifteen districts and the two offshore islands, where about 57% of the population reside. BFN now proposes to undertake a pilot study with a view to securing a more equitable geographic distribution of its portfolio (para. 3.23). - 15 - 4.05 The percentage of Portugal's gross fixed capital formation (GFCF) financed by BFN has fallen from a peak of 8.8% in 1975 to 6.8% in 1978. Preliminary figures for 1979 indicate that this trend has been arrested and that a marginal increase of 0.1% was achieved. The increased activity of the commercial banks is responsible in part for this decline (para. 4.01). A further consequence of this, together with inflation, has been a decrease in the amount of loans made by BFN under Esc. 25.0 million ($0.5 million) from 20% of its investment in 1977 to 10% in 1979 and a corresponding reduction in the number of these loans from 604 to 455. 4.06 BFN's processing of the previous Bank loan was satisfactory. The loan was committed on schedule after an initial delay in effectiveness and an extensive industrial and geographic distribution was achieved with some 87 sub-projects. Seventy of the sub-projects were under the free limit of $600,000 and accounted for $13.0 million or 26% of the loan. The 17 sub-projects above the free limit had satisfactory IERRs ranging from 16% to 40%. About 50% of the loan was committed in the building materials, paper products and electro/mechanical sectors. The projects financed were estimated to provide about 2,600 new jobs and provided work for a substan- tial number of idle or underemployed workers in the enterprises involved. In addition, a number of the sub-loans financed replacement of obsolete equipment. 4.07 In addition to its own portfolio, BFN has a managed funds portfolio of about Esc. 4.8 billion. The main components of these funds are loans from EFTA and Government funds made available to Portuguese nationals displaced from the former colonies. BFN undertakes the appraisal, supervision and collection of debt service for these funds and receives a management fee of 0.75%. V. BFN'S FINANCIAL SITUATION A. Financial Position and Profitability 5.01 BFN's balance sheets for 1976-1979 are shown in Annex 2. BFN's total assets increased from Esc. 33.3 billion ($1,052 million) 1/ in 1976 to Esc. 62.4 billion ($1,182 million equivalent) by the end of 1979. Loan portfolio, which constitutes about 82% of its assets, increased from 1/ Rate of exchange $1 = Esc. 31.69. - 16 - Esc. 28.4 billion ($900 million) 1/ to Esc. 51.2 billion ($1,024 million) over the same period. About 50% of the growth has been financed through the increase in demand and time deposits (which more than doubled from Esc. 11.6 billion in 1976 to Esc. 26.0 billion by 1979), foreign debts (Esc. 8.0 billion) and the remainder through increases in local borrowing and equity. 5.02 BFN's profitability continues to be relatively low: income before provisions and taxes which amounted to Esc. 1.1 billion (i.e. 28.2% of average equity) in 1976 increased to Esc. 1.3 billion (18.8% of equity) in 1978 but reduced again to Esc. 1.1 billion (14.1% of equity in 1979). This was due to a reduction in BFN's average spread on borrowed resources from 4.4% in 1976 to 3.9% in 1978 and to 2.3% in 1979 and reflected the higher interest payable on deposits given in part at the expense of the bank's spread. Administrative expenses have remained at a satisfactory level of between 0.6% and 0.8% of BFN's total assets. 5.03 About 80% of BFN's operating profits until 1978 and 70% in 1979 were retained as provisions against losses. Net income in 1979 amounted to Esc. 156 million (2.1% of average equity) compared to Esc. 103 million (2.7% of average equity) in 1976. Slightly more than half of BFN's net income was paid out as dividends in 1977-1978, representing a return of about 1.6% of share capital in those years. BFN's overall profitability is low compared to other DFCs and reflects the Government decision to limit the interest spread of banks in conjunction with increased interest rates to borrower during the past three years (para 6.06). B. Debt/Equity Ratio 5.04 BFN's total debt (i.e. including short-term borrowings) to equity ratio increased from 5.5:1 in 1977 to 6.8:1 in 1979. Under the first Bank loan, BFN is required to keep its medium and long-term debt within six times its equity. The ratio under this definition, though increasing from 4.0:1 in 1976 to 4.5:1 by the end of 1979, has remained well within the agreed limit. Financial projections indicate that BFN is likely to require additional capital sometime in 1981, to keep within the present limit which is proposed to be continued under the second loan (para. 6.08). C. Audit 5.05 BFN has engaged Price Waterhouse and Co. to undertake a full audit of its annual accounts since 1976. This audit has been satisfactory. Agreement was reached during negotiations for BFN to continue to use an independent auditor satisfactory to the Bank for future annual audits of its accounts. 1/ Rate of exchange $1 = Esc. 31.69. - 17 - D. Portfolio and Arrears 5.06 BFN's portfolio at December 31, 1979 amounted to Esc. 60.5 billion ($1,210 million). BFN had the financial risk on Esc. 55.8 billion (92%) and the balance of Esc. 4.7 billion represented funds managed by BFN on behalf of the Government. BFN's risk portfolio was made up of loans (98%) and equity investment (2%). 5.07 The confusion and uncertainty in the public and private sectors and the loss of the former colonies resulting from the 1974 revolution has created a serious arrears problem for the Portuguese banking system including BFN. More recently, the restrictions on credit, introduced in 1978, resulted in additional problems for firms depending on the local market, particularly those connected with the construction industry. A summary of BFN'F arrears is shown in Annex 3. The arrears position has continued to det. iorate each year, rising from Esc. 2.8 billion (9.9% of portfolio) in 1976 to Esc. 8.1 billion (15.2% of portfolio) in 1979. Loans representing 20% of the principal outstanding are affected by arrears. The one encouraging feature is that the arrears, as a percentage of BFN's portfolio, decreased from 16.7% in 1978 to 15.2% in 1979 and the percentage of the number of loans in arrears decreased from 28.6% to 24.5% during the same period. This reflects an improvement in the economy and indicates that the peak may have passed. 5.08 BFN's classification of arrears is unsatisfactory as it does not analyze arrears in accordance with the sector ultimately responsible for non-payment. Loans made indirectly 1/ to the public sector and former colonies are classified as private sector and private companies controlled or operated by Government are classified as public sector. A preliminary reclassification of arrears as of December 31, 1979 by sector ultimately responsible for payment is summarized below. Esc. billion Loan portfolio 53.2 100 ARREARS Public sector 2.9 5.5 Ex-colonies 3.1 5.8 Private sector 2.1 3.9 8.1 15.2 1/ These loans are made jointly to the manufacturer and user of capital equipment. Under the loan agreement the two parties are jointly and severally liable for payment but in practice BFN must look to the user, usually a public sector company, for payment. - 18 - 5.09 In the public sector, four major public companies are responsible for over 80% of the arrears as of December 31, 1979. However, the arrears position in this sector is understated as BFN has made substantial resched- uling with little prospect of receiving payment under the revised schedule. In all, about ten major companies in the public transport, shipping and shipbuilding sub-sectors are involved. The majority of these companies are in serious financial difficulties and depend upon Government subsidies to meet their debt/service obligations and in some cases to meet part of their operating expenses. BFN has provided direct and indirect loans to these companies to meet their capital investment program, usually subject to the guarantee of the Government. BFN estimates that the debt service required to meet the 1980 liability of companies in default in the sector is about Esc. 2.0 billion ($40 million) compared to the payment of Esc. 1.1 billion received in 1979. Current Government plans provide for the rehabilitation of the four major public sector companies, two during 1981 and two in 1982. In the light of these plans BFN has agreed to use its best endeavors so that by December 31, 1981, the total public sector arrears shall not increase beyond those outstanding as of December 31, 1980, and shall make all efforts to achieve progressive improvements thereafter. 5.10 The ex-colonies arrears are in respect of loans made directly and indirectly to private companies and local government agencies in the former colonies prior to their independence in 1974. About 57% of the loans were made in Angola and 40% in Mozambique. BFN has a Government guarantee for about 30% of the loans outstanding but the Government is unwilling to pay this amount at present as it wishes to have the original lender involved with the Government in any future negotiations. No progress has been made in negotiating a settlement of these accounts during the last three years. These arrears are projected to grow by about Esc. 0.5 billion per annum and BFN is unable to take any action on its own to settle these accounts. In view of the Government wishes to maintain BFN as a party to possible future negotiations, no covenant is recommended but the matter will be reviewed with the Government during project supervision. 5.11 BFN's major arrears in the private sector have their origin in industrial unrest, the price control and labor laws enacted after the 1974 revolution and the general slowdown of economic activities in a number of subsectors. Over 60% of the arrears in this sector are in respect of loans made prior to 1975. In addition, the majority of loans in arrears were made to firms involved in the Government's programs of "State Intervention" and economic-financial rehabilitation. The "State Intervention" program authorized the Government to appoint managers to firms with serious finan- cial or labor problems. Nine of BFN's major borrowers with arrears of Esc. 0.6 billion ($12 million) 1/ are involved in this program and five of them have now been returned to their former owners and discussions are under way for the return of the others. The economic-financial rehabilitation program provided for viability contracts whereby economically viable yet financially troubled firms may obtain consolidation of their existing debts, new loans 1/ Some indirect loans to the public sector are included in these figures. - 19 - at subsidized rates, and fiscal benefits, by committing themselves to certain agreed targets. About 460 enterprises applied for viability con- tracts prior to the closing date of December 31, 1978 and about 130 were signed by March 1980. Included in this process are about 75 of BFN's bor- rowers with arrears of about Esc. 1.4 billion ($28 million). 1/ An integral part of these programs is that the firms are protected from legal action by their creditors while involved in the program. 5.12 In May 1979 the Government established a private company, Parempresa, with the Portuguese banks as shareholders to administer the via- bility contract program and to extend the program to other viable private firms in financial difficulty. Parempresa is the successor of Parageste, which formally administered the viability contracts, and commenced opera- tions in October 1979; in March 1980 it had a professional staff of four- teen. The firm is authorized to reschedule existing debts, grant interest rebates and recommend exemption from taxes as part of a program for the financial rehabilitation of private firms. The process of completing a viability contract is very complex and time consuming as the agreement of the owner, member banks and the Government must be secured before the con- tract can be finalized. BFN projects that about 50% of their borrowers who applied for viability contracts will finalize their contracts in 1980, 25% in 1981 and the remaining 25% in 1982. Under law, the principal creditor was responsible for preparing the initial proposal for the old viability contracts under Parageste, and Parempresa itself is responsible for prepara- tion of new viability contracts. As BFN is the principal creditor in very few of these cases, they are limited in the action they can take to effect improvements in this area. 5.13 To deal with the arrears on other accounts, BFN is presently reorganizing its procedures under the direction of a new Director appointed in December 1979. Responsibility for loan supervision by district has been delegated to individual staff, statements of account are being sent to bor- rowers and branch managers one month before payment is due, bank managers contact the borrowers prior to due date, and if payment is not received on time, the manager is required to contact the borrower immediately. BFN agreed to continue this reorganization until all branches are covered. In addition, legal proceedings are being used more actively with the work undertaken by BFN's legal department instead of private lawyers. Borrowers in arrears are charged an additional 2% interest and lose all benefits under the Government's investment incentive scheme. In 1981, BFN plans to com- puterize its borrowers' accounts and this should assist in providing more prompt information and detailed analysis of arrears for management. BFN believes that progress can now be made in reducing the private sector arrears and during negotiations agreed on a best efforts basis to reduce arrears on loans presently in arrears by at least 20% in each of the three years 1981-83 and that arrears on all other loans shall, at no time, exceed 6% of the outstanding loan amounts. In addition, an understanding was reached with BFN and recorded in Agreed Minutes of Negotiations that they 1/ Some indirect loans to the public sector are included in these figures. - 20 - will continue to implement the reorganization of the collection of arrears and supervision of projects. 5.14 Over 95% of BFN's equity portfolio of Esc. 1.1 billion (1.8% of total assets) is invested in nationalized companies and companies operating in Angola and Mozambique. The value of this portfolio depends ultimately on the compensation to be paid by the Government (para. 2.08) and on future negotiations between the Portuguese Government and the Governments of Angola and Mozambique (para. 5.10). We plan to continue to discuss this matter with the Government but do not propose any covenant. VI. PROSPECTS A. The Environment 6.01 Medium and Long-Term Outlook. The success of short-term stabil- ization policies in 1978 and 1979 (para. 2.02) should lay the basis for increased growth in Portugal in the next decade. A gradual policy of economic expansion should be possible and it seems likely that Portugal can double its per capita income by the year 2000, implying an average annual growth rate of 4.5% per year for the economy over this period. During the next five years (1980-84) a GFCF increase at an annual rate of 6% is needed to sustain this growth rate and exports need to expand at 8% per year. This is achievable but requires exploitation of Portugal's comparative advantage. In general terms, the strategy for the eighties must center on the expansioti of investment in light industry, agriculture, tourism and housing construction, in which the private sector will play a primary role. The development of basic industrial projects which yield adequate economic rates of return on the basis of the price and marketability of their output (together with the modernization and expansion of supporting infrastructure) is also needed. In this context, manufacturing, which must also grow at 6% per year, will continue to play a leading role, based substantially upon the expansion of exports. This requires exploiting specific natural resources (wood and agricultural products), Portugal's proximity to Western Europe, North Africa and the Middle East, and most importantly the continued avail- ability of skilled labor at relatively low cost. Its ability to do so will be crucially affected by the prospects -- and pitfalls -- posed by Portugal's prospective entry into the EEC to which 57% of industrial exports are already directed. 6.02 EEC and Restructuring. Under various agreements with the EEC com- mencing in 1973, Portugal has reduced its tariff barriers and since 1977 gained full entry for its manufactured products except for recently negotia- ted quotas on certain textiles, clothing and paper products. The December 1979 protocol, reflecting Portuguese concern that its industry is not yet ready to compete freely in the EEC, suspends further tariff reduction until formal entry into EEC, now scheduled for 1983. Thereafter Portugal expects to have seven to ten years to bring its external protective structure in line with the EEC. A few of Portugal's most promising export industries, - 21 - primarily in the wood products and related industries (cork, pulp and paper, wood-based chemicals) are relatively efficient now and need to focus primarily on developing markets. But for the balance, both "traditional" exporting industries such as processed fish, wines, textiles and clothing as well as the growingly important engineering sector which now accounts for 18% of exports (from 6% in 1963), growth of exports and survival in home markets requires measures which will significantly reduce costs and increase efficiency. These measures include: upgrading and expanding raw material availability (in agro-industries); plant modernization, and consolidation of smaller units, especially in textiles, furniture and agro-industry, and the provision of certain types of infrastructure and service industries. There is a pervasive requirement for upgrading management, especially at middle levels. Also needed, particularly in the engineering industries, is export marketing assistance to identify foreign market opportunities and assist firms to adapt and improve product design for the more sophisticated markets to which Portuguese exports must increasingly be directed. 6.03 For restructuring to take place and lead to cost competitiveness within the EEC, a strong infusion of financial and technical assistance will be required. The program and institutional framework for these purposes, especially for smaller and medium-sized industry where the greatest needs are felt, is largely in place though it does not always work well because of problems of coordination, red tape, lack of adequate salary structure, etc. However, the ultimate success of the effort rests on the capability of the Government to maintain an effective incentive structure (para. 2.08) and to improve the investment climate (para. 2.09). B. BFN's Role 6.04 BFN plans to maintain its position as the leading institutional development bank in Portugal and to stem the erosion of its share of lending of GFCF (para. 4.05). BFN projects to increase its share of GFCF financing from 6.9% in 1979 to 7.3% in 1980 and to maintain it at 7.5% from 1981 onwards. The two proposed promotion studies (paras. 3.20 and 3.21) should enable BFN to increase its financing of export and restructuring projects particularly medium-scale projects. In addition, a reduction of the liquidity position of the commercial banks is expected towards the end of 1980, which should enable BFN to recover some of its share of small-scale projects. C. Projected Profitability and Financial Position 6.05 BFN's Projected Operations Income Statements and Balance Sheets and Cash Flow Statements for 1980-84 are shown in Annexes 4 through 7. As a result of the expected increase in BFN's level of operations and a slightly higher debt-leverage, operating income (before provisions and taxes) as a percentage of average equity should improve steadily from about 15.3% in 1980 to 20.0% by 1984. BFN however expects to continue to retain sub- stantial portions of its earnings (about 61% overall) as provisions against losses. Net return on BFN's equity is, as a consequence, not expected to increase beyond 3.0-3.5% over the next five years. - 22 - 6.06 BFN's spread has been declining since 1976 (para. 5.02) and is projected to stabilize at about 2%. The projections are conservative and annual interest of Esc. 270 million on loans in arrears, for which BFN has not adequate security, has not been included. Inclusion of this amount would increase the spread by about 0.3%. The commercial banks have an advantage over BFN in this regard as interest is not paid on current account balances. During negotiations we reviewed with the Government measures to improve BFN's spread and an understanding was reached to increase BFN's spread on the proposed second Bank loan by 0.25% to 3.0%. It was further agreed that other measures to improve BFN's profitability would be reviewed in the future. 6.07 Total assets are expected to increase from Esc. 70.2 billion (US$1.4 billion) in 1980 to Esc. 132.3 billion (US$2.6 billion) by 1984. The growth in BFN's loan portfolio is expected to be financed mainly through increases in time deposits and additional foreign currency borrowings. Foreign debt outstanding is expected to increase from Esc. 16.4 billion (26.6% of total debt) in 1980 to Esc. 45.1 billion representing 38.6% of its total borrowings outstanding at December 31, 1984. D. Projected Debt/Equity Ratio 6.08 BFN's current long-term debt is limited to six times its equity under the Loan Agreement for the first Bank loan. BFN's overall financial position has generally remained satisfactory and its profitability and growth have been generally in line with our expectation at the time of the first Bank loan. On the other hand, the arrears problem continues to be serious (para. 5.07). During negotiations it was agreed that the present debt/equity ratio of 6:1 would remain unchanged at present but would be reviewed from time to time to determine whether improvements with respect to BFN's profit margin and arrears would permit establishing a higher ratio. 6.09 For BFN to remain within the 6:1 limitation, the projected level of borrowings over the next five years would require additional equity invest- ment by the Government of Esc. 1.0 billion ($20 million in 1981), and Esc. 1.5 billion ($30 million) in each of the following three years. Agreement was reached with the Government to provide the funds necessary to enable BFN to maintain the agreed debt equity ratio. VII. THE LOAN - ITS OBJECTIVES, JUSTIFICATION AND FEATURES 7.01 The objective of the proposed $100.0 million loan to BFN would be: (a) to support the development of medium-sized economically viable manufacturing projects in the private and mixed sectors, with special emphasis on fostering industry with export potential; - 23 - (b) to assist BFN in strengthening its export investment promotion and service capability; (c) to contribute to Portugal's industrial restructuring in preparation for entry into the EEC; and (d) to improve BFN's arrears position. 4 In addition, the loan would continue the institution building assistance started under BFNI to further improve its appraisal capability, particularly in evaluating the marketing aspects and economic return of projects. 7.02 Due to the many internal problems which have affected the Portuguese economy during the past six years, little preparation has been undertaken to prepare industry for entry to the EEC. The needs of the private and mixed industrial sectors for replacement and modernization of equipment are widespread and the scope for export promotion and development is substantial. It is essential that action be taken now if Portugal is to avail of the opportunities that EEC membership will provide. Recent Govern- ment policy towards these sectors has to some extent created a more favor- able investment climate. The proposed loan should enable BFN, as the only development bank in Portugal, to spearhead the necessary changes. The proposed loan would also complement the Bank assisted SMI Project (Loan No. 1701-PO), which became effective on August 29, 1980, and provided a line of credit of $33.0 million through the commercial banks for financing SMI projects with special emphasis on export-oriented and labor intensive projects or projects in less developed regions. 7.03 BFN is a sound development bank and has performed satisfactorily under the previous loan. BFN has a significant exposure and substantial arrears in its public sector portfolio. However, BFN has Government guar- antees covering the major part of these loans and this problem is expected to be resolved during the next few years through the rehabilitation programs under consideration by the Government (para. 5.09). Economic conditions in Portugal have improved substantially during the past three years and so there are no special risks associated with this project. 7.04 The proceeds of the proposed loan will be used to finance the for- eign exchange cost of directly imported goods and services as well as the estimated foreign exchange component of locally procured imported goods (estimated at 50% on average) and of locally produced goods (35%) for manu- facturing projects in the private and mixed sectors receiving direct credits from BFN. In addition, the loan will cover the foreign exchange cost of BFN's programs to strengthen export investment promotion and of a study of industrial restructuring in preparation for Portugal's entry into the EEC (estimated at $1.0 million). Industrial sub-loans are limited to a maximum of $5.0 million equivalent and a free limit of $1.5 million. In lieu of establishing an aggregate free limit, it is proposed that BFN agree to submit full documentation for between 12 and 15 major projects, whether above or below the free limit, to the Bank for review. - 24 - 7.05 The usual adjustable composite amortization schedule is proposed so that repayments to the Bank by BFN are matched by repayments BFN receives from its borrowers. The maximum term for individual sub-loan should be 12 years. The latest date for submission of sub-projects to the Bank for review is proposed as December 31, 1983 and the closing date for disburse- ment June 30, 1985. Other terms proposed for the loan are those normally applied to DFC borrowers. The estimated schedule of disbursement is shown in Annex 8. VIII. RECOMMENDATIONS 8.01 During negotiations, agreement was reached with BFN on the following: (a) BFN will calculate the IERR on all projects in the manufacturing, mining, agroindustries and fish processing sectors estimated to cost over Esc. 100.0 million and a benefit cost ratio based on the Government's new incentive scheme for all other projects in these sectors (para. 3.16); (b) impiementation of an agreed investment promotion plan (para. 3.20), and study of industry restructuring requirements in preparation for Portugal's entry to EEC (para. 3.22); (c) allocate 50% of the proposed Bank loan for export-oriented projects in the form of a best efforts clause (para. 3.20); (d) BFN to use its best endeavors so that by December 31, 1981, the total public sector arrears shall not increase beyond those out- standing as of December 31, 1980 and shall make all efforts to achieve progressive improvements thereafter (para. 5.09); (e) BFN, on a best efforts basis, to reduce arrears on private sector loans presently in arrears by at least 20% in each of the three years 1981-83 and that arrears on all other private sector loans shall, at no time, exceed 6% of the outstanding loan amounts (para. 5.13); (f) BFN will not exceed a debt/equity ratio of 6:1, using the defini- tion of debt and equity incorporated in the first BFN loan (para. 6.07); and (g) BFN will submit 12-15 projects for Bank review (para. 7.04). 8.02 During negotiations, agreement was reached that the Government will make the necessary contribution to BFN's equity to maintain the 6:1 debt/equity ratio (para. 6.08). 8.03 With agreement on the issues set forth in this report, the project is suitable for a Bank loan of $100.0 million to BFN. - 23 - (b) to assist BFN in strengthening its export investment promotion and service capability; (c) to contribute to Portugal's industrial restructuring in preparation for entry into the EEC; and (d) to improve BFN's arrears position. In addition, the loan would continue the institution building assistance started under BFNI to further improve its appraisal capability, particularly in evaluating the marketing aspects and economic return of projects. 7.02 Due to the many internal problems which have affected the Portuguese economy during the past six years, little preparation has been undertaken to prepare industry for entry to the EEC. The needs of the private and mixed industrial sectors for replacement and modernization of equipment are widespread and the scope for export promotion and development is substantial. It is essential that action be taken now if Portugal is to avail of the opportunities that EEC membership will provide. Recent Govern- ment policy towards these sectors has to some extent created a more favor- able investment climate. The proposed loan should enable BFN, as the only development bank in Portugal, to spearhead the necessary changes. The proposed loan would also complement the Bank assisted SMI Project (Loan No. 1701-PO), which became effective on August 29, 1980, and provided a line of credit of $33.0 million through the commercial banks for financing SMI projects with special emphasis on export-oriented and labor intensive projects or projects in less developed regions. 7.03 BFN is a sound development bank and has performed satisfactorily under the previous loan. BFN has a significant exposure and substantial arrears in its public sector portfolio. However, BFN has Government guar- antees covering the major part of these loans and this problem is expected to be resolved during the next few years through the rehabilitation programs under consideration by the Government (para. 5.09). Economic conditions in Portugal have improved substantially during the past three years and so there are no special risks associated with this project. 7.04 The proceeds of the proposed loan will be used to finance the for- eign exchange cost of directly imported goods and services as well as the estimated foreign exchange component of locally procured imported goods (estimated at 50% on average) and of locally produced goods (35%) for manu- facturing projects in the private and mixed sectors receiving direct credits from BFN. In addition, the loan will cover the foreign exchange cost of BFN's programs to strengthen export investment promotion and of a study of industrial restructuring in preparation for Portugal's entry into the EEC (estimated at $1.0 million). Industrial sub-loans are limited to a maximum of $5.0 million equivalent and a free limit of $1.5 million. In lieu of establishing an aggregate free limit, it is proposed that BFN agree to submit full documentation for between 12 and 15 major projects, whether above or below the free limit, to the Bank for review. - 24 - 7.05 The usual adjustable composite amortization schedule is proposed so that repayments to the Bank by BFN are matched by repayments BFN receives from its borrowers. The maximum term for individual sub-loan should be 12 years. The latest date for submission of sub-projects to the Bank for review is proposed as December 31, 1983 and the closing date for disburse- ment June 30, 1985. Other terms proposed for the loan are those normally applied to DFC borrowers. The estimated schedule of disbursement is shown in Annex 8. VIII. RECOMMENDATIONS 8.01 During negotiations, agreement was reached with BFN on the following: (a) BFN will calculate the IERR on all projects in the manufacturing, mining, agroindustries and fish processing sectors estimated to cost over Esc. 100.0 million and a benefit cost ratio based on the Government's new incentive scheme for all other projects in these sectors (para. 3.16); (b) implementation of an agreed investment promotion plan (para. 3.20), and study of industry restructuring requirements in preparation for Portugal's entry to EEC (para. 3.22); (c) allocate 50% of the proposed Bank loan for export-oriented projects in the form of a best efforts clause (para. 3.20); (d) BFN to use its best endeavors so that by December 31, 1981, the total public sector arrears shall not increase beyond those out- standing as of December 31, 1980 and shall make all efforts to achieve progressive improvements thereafter (para. 5.09); (e) BFN, on a best efforts basis, to reduce arrears on private sector loans presently in arrears by at least 20% in each of the three years 1981-83 and that arrears on all other private sector loans shall, at no time, exceed 6% of the outstanding loan amounts (para. 5.13); (f) BFN will not exceed a debt/equity ratio of 6:1, using the defini- tion of debt and equity incorporated in the first BFN loan (para. 6.07); and (g) BFN will submit 12-15 projects for Bank review (para. 7.04). 8.02 During negotiations, agreement was reached that the Government will make the necessary contribution to BFN's equity to maintain the 6:1 debt/equity ratio (para. 6.08). 8.03 With agreement on the issues set forth in this report, the project is suitable for a Bank loan of $100.0 million to BFN. PORTUGAL Structure, of Ceci_6Raes hstatihed-l ky-rscs do Port,11a4 (Effective since Mac 8, 1978) (In perceentae) Received bv the Credit Institution Mximum Rate ta be harged h Credit chticer- fram Santa de Portugal From 180 davs Prom 1 year to 0ror 2 nears to or Government I/ Up Ce 90 days From 90 to 180 days ta 1 vear years _5 ars con 3 ;oars 1. Ordinary Operations - 18.25 18.75 20.01 20.50 21.21 22.21 2. lavestmest credit for ) TypeI Tvpe 0T Le I Tvpe TI Type l Tpe 11 agriculture and ease- ) amnont cf interest rebate - - 10.(0 05.00 10.75 15.75 11.75 1f.75 factaring industries, ) depends opon projects' - 12.00 15.00 12.75 195.7; 1 1. 73 If .5 tourism and inter- ) economic viability. l- - 10 56.00 14.75 16.75 15.75 17.75 national transport .00 17.00 16.75 12.75 17.25 19.75 - ).50 19.00 19.75 1;.;5 20.75 20.75 3. Credit for storm da-iuge 12.00 - - - F.50 0.25 4. Credit for the re-tructuring A degree 2/ 5.50 - _ 15.(0 15.70 16,, of econ-ically viable B degree 2/ 7.0(1 _ - 13.00 1/.25 15.25 enterprises in fianaciai C degree 2/ 2.50 - _ 12.00 1?.75 15.75 difficulty (in co-juncticn D degree 2/ 10.50 - - - 10.00 10.75 with viabillzatior agreemcnt) Poblic ente-prises < 4.00 - - - Ž 16.50 *]7.25 -18.25 (a) (b) (c) Up tc yr. 12<4yr. (a) () (c) (a) (b) (C) 5. Export credit 3/ 1st vr. 5.50 5.50 5.50 - - 15.00 15.00 15.00 15.75 15.75 15.75 2nd yr. - 3.50 3.50 - - - 17.00 17.00 - 17.75 17.75 3rd yr. - - 2.50 - - 08.00 - 18.75 4th yr. - - 2.50 - - - 19.00 - 1F.75 6. Personal Credits - - - 27.25 28.25 29.0O N,et ... i j'1I, 9eos1cg credit 4/ Value of the Cost per square 7 of lomin31 Iccocooc hb Ildiig _ eter g-arantee Time (er) Rate 1st sehedule 4.50)During the -Up to Esc. 1.6 mil,io -Up to Esc. 11 thousand 85% <20 20.00 2nd schedule 3.50)first five -From Par. 1.6 millrs -From Esc. 11 ta 13 802 <18 21.5n )years of to Ec. 1.8 sileon thousard 3rd schedule 2.50)the Irae -Over But. 1.8 s111ice -Over Ear. 15 theusand 75, q15 22.00 1/ This amcuat is designed to insure that the credit institution receives am interest rate equivalent to that for erdianry operations. This annount is received irrespective of whether or not the credit operetion is rediscausted with Banco de Portlgel. 2/ Teis degree refers to the extent of the filancial difficulties of the enterprises. 3/ Operutioms concerniny preparation and carryleg out of fire orders. 4/ Masimum amount of the Ioan: Es. 1.5 million. EMENA/TDF Mac 1980 26 - PORTUGAL - BFN ANNEX 2 Balance Sheets -- 1976-1979 (in Millions of Escudos) -------------Audited------------- 1976 1977 1978 1979 CURRENT ASSETS Cash and deposits 842 1,617 3,145 2,666 Interest in arrears 1,179 1,777 3,285 3,990 Portuguese state 92 139 854 111 Other current assets 1,002 1,922 4,816 4,444 3,115 5,455 12,100 11,211 INVESTMENTS Loans outstanding 1/ 28,362 34,856 41,535 51,224 Less provisions (1,436) (2,422) (3,445) (3,938) Equity investments 1,171 1,244 1,067 1,079 Less provisions (143) (42) (42) (42) Bonds and Debentures 246 197 196 178 Portuguese state and other 253 242 221 200 28,453 34,075 39,532 48,701 FIXED ASSETS (Net) 143 170 237 806 ANGOLA AND MOZAMBIQUE BRANCHES 1,626 1,674 1,733 1,704 TOTAL ASSETS 33,337 41,374 53,602 62,422 CURRENT LIABILITIES Demand deposits 603 581 1,469 2,403 Time deposits (not exceeding 1 year) 623 1,651 3,177 6,242 Centaal Bank (discounting facility) 10,554 7,466 9,687 9,217 Accrued interest 525 734 1,265 1,899 Other current liabilities 1,106 812 1,223 3,243 13,411 11,244 16,821 23,004 MEDIUM AND LONG-TERM LIABILTIES Saving deposits 135 138 142 208 Time deposits (more than 1 year) 10,218 12,160 13,749 17,225 Local Borrowings: Government and Central Bank 1,882 575 - - Debentures 369 313 1,127 1,394 Others 795 5,787 6,745 2,379 Foreign loans and debentures 1,962 5,029 7,873 11,149 Less exchange differences - (434) (1,097) (1,181) 15,361 23,568 28,539 31,174 DEFERRED INCOME AND TAXES 173 543 828 512 EQUITY Capital 2,500 4,000 5,300 5,300 Portuguese State 679 685 692 695 Resevves 1,031 1,213 1,268 1,581 Revaluation reserve - - - Retained earnings 182 121 154 156 4,392 6,019 7,414 7,732 TOTAL LIABILI.IES AND EQUITY 33,337 41,374 53,602 62,422 ruarantees outstanding 2,156 2,486 3,241 3,346 1/ Of which in,arrears 1,599 2,526 3,658 4,330 EMENA/T-hn Julv 1980 - 27 - ANNEX 3 BANCO DE FOMENTO NACIONAL Arrears as at December 31, 1979 (Escudos billion) 1976 % 1977 % 1978 % 1979 % Loan portfolio 28.4 100 34.8 100 42.3 100 53.2 100 Arrears Public sector 1.3 4.6 2.1 6.0 3.9 9.2 4.3 8.1 Private sector 0.9 3.2 1.3 3.7 2.0 4.7 2.3 4.3 Ex-colonies 0.6 2.1 0.9 2.6 1.2 2.8 1.5 2.8 2.8 9.9 4.3 12.3 7.1 16.7 8.1 15.2 Increase in arrears - 53.6 132.6 14.1 as a percentage of previous years's arrears No. of loans 1,594 100 1,956 100 2,266 100 3,007 100 No. of loans in arrears 603 37.8 551 28.2 647 28.6 737 24.5 EMENA/IDF June 1980 PORTUGAL - BFN Actual and Projected Operations, 1977-1984 (Million Escudos) ---------ACTUAL ------ ---------------PROJECTED ------------------ 1977 1978 1979 1980 1981 1982 1983 1984 APPROVALS Investment Credits 9,797 13,392 16,065 19,424 21,901 26,186 29,511 32,409 Production/Sales Credits 4,393 5,094 5,778 8,726 9,839 11,764 13,259 14,561 Export Credits 2,025 6,849 6,549 7,270 9,710 12,110 14,545 16,980 Equity Investments 1,074 2 6 - - - - - TOTAL APPROVALS 17.289 25.337 28.398 35.420 AA4150 50.060 5.3J5 6,5 COMMITMENTS Investment Credits 7,721 8,646 11,825 13,176 14,854 17,762 20,016 21,982 Production/Sales Credits 2,790 2,552 4,536 5,124 5,776 6,908 7,784 8,548 Export Credits 554 1,459 1,741 2,000 2,670 3,330 4,000 4,670 Equity Investments - - - - - - - - TOTAL COMMITMENTS 11,065 12,657 18,102 20,300 23,300 28,000 31,800 35_,2o DISBURSEMENTS Investment Credits 7,343 7,828 10,196 12,325 14,900 17,625 20,250 22,575 Production/Sales Credits 2,115 2,267 3,366 4,375 5,100 5,875 6,750 7,525 Export Credits 406 1,309 823 1,500 2,000 2,500 3,000 3,500 Equity Investments 1,074 2 5 - - - - - TOTAL DISBURSEMENTS 10,938 11,406 14,390 18,200 22,000 26,000 30,000 33,600 EMENA/IDF May 1980 - 29 - PORTUGAL - BFN ANNEX 5 PROJECTED INCOME STATEMENTS -- 1980-1984 (In Millions of Esc.) 1980 1981 1982 1983 1984 INCOME Income from loans 11,930 14,942 18,059 21,551 25,367 Commissions and other income 197 249 294 340 385 Total Income 12,127 15,191 18,353 21,891 25,752 EXPENSES Interest payable 10,315 13,03G 15,606 18,455 21,578 Staff expenses 379 465 560 650 770 Other administrative expenses 179 236 308 411 512 Depreciation 45 65 85 115 145 10,918 13,796 16,559 19,631 23,005 INCOME BEFORE PROVISION AND TAXES 1,209 1,395 1,794 2,260 2,747 Less Provisions against losses 700 795 1,094 1,460 1,847 INCOME BEFORE TAXES 509 600 700 800 900 Income tax 259 300 350 400 450 NET INCOME 250 300 350 400 450 RATIOS Gross Income as a percentage of average total assets 18.8% 19.7% 20.1% 20.6% 20.8% Income as a percentage of 1/ average loans outstanding 20.6% 21.0% 21.1% 21.1% 21.1% Interest paid as a percentage of average total borrowing 1/ 18.6% 18.9% 19.1% 19.3% 19.5% Administrative expenses as a per- centage of average total assets 0.9% 1.0% 1.0% 1.1% 1.2% Income before provision and taxes as a percentage of - Average total assets 1.9% 1.8% 2.0% 2.1% 2.2% - Average equity 15.3% 16.2% 17.7% 19.0% 20.0% Provisions against losses .s a percentage of operating profits 57.9% 57.0% 61.0% 64.6% 67.2% Net Income as a percentage of - Average equity 3.2% 3.5% 3.5% 3.4% 3.3% - Share capital (year-end) 4.7% 4.8% 4.5Z 4.3% 4.2% Year-end provisions as a percentage of loans and equity portfolio 6.7% 6.6% 6.7% 6.9% 7.4% 1/ The Fund from the Government for Refugee Rehabilitation included in BFN's pro- jected Balance Sheets have not been taken into account for calculating these ratios, since income on these funds is not included in BFN's projected income. EMENA/IDF Jully 1980 - 30 - ANNEX 6 PORTUGAL - BFN Projected Balance Sheets -- 1980-1984 (in Million of Esc.) 1980 1981 1982 1983 1984 CURRENT ASSETS Cash and deposits 2,710 3,140 3,650 4,180 4,680 Other current assets 615 690 785 920 1,085 3,325 3,830 4,435 5,100 5,765 INVESTMENTS Loans 67,936 81,496 96,785 113,956 132,341 Equity portfolio 1,647 1,650 1,650 1,650 1,650 less provisions (4,688) (5,483) (6,577) (8,037) (9,884) Others 1,000 1,030 1,060 1,090 1,120 65,895 78,693 92,918 108,659 125,227 FIXED ASSETS (Net) 1,025 1,200 1,295 1,340 1,35 TOTAL ASSETS 70,245 83,723 98,648 115,099 132,347 CURRENT LIABILITIES Demand deposits 2,900 3,500 4,100 4,700 5,300 Time deposits (less than one year) 7,747 10,340 12,600 14,950 17,510 Central Bank and other short-term borrowings 10,488 9,831 8,913 10,301 11,055 Other current liabilities 695 656 727 808 899 21,830 24,327 26,340 30,759 34,764 MEDIUM AND LONG-TERM LIABILITIES Saving deposits 300 360 425 490 550 Time deposits (more than one year) 20,534 23,560 27,400 31,050 33,990 Bonds 2,784 2,939 2,799 2,482 2,700 Other local borrowings 380 410 480 550 620 Foreign loans 16,396 22,881 30,201 36,985 45,087 40,394 50,150 61,305 71,557 82,947 EQUITY Share capital 5,300 6,300 7,800 9,300 10,800 Portuguese State-Special a/c 737 757 777 797 817 Reserves 1,734 1,889 2,076 2,286 2,569 Retained earnings 250 300 350 400 450 8,021 9,246 11,003 12,783 14,636 TOTAL LIABILITIES AND EQUITY 70,245 83,723 98,648 115,099 132,347 Guarantees outstanding 2,900 3,100 3,300 3,500 3,700 Long-term debt and guarantees/equity (IBRD definition) 5.4:1 5.8:1 5.9:1 5.9:1 5.9:1 Total borrowings/equity 7.7:1 8.0:1 7.9:1 7.9:1 8.0:1 EMENA/IDF June 1980 - 31 - PORTUGAL - BFN ANNEX 7 Projected Cash Flow Statements_-- 1980-1984 (in Millions of Esc.) 1980 1981 1982 1983 1984 SOURCES OF FUNDS Foreign loans: IBRD (I & II) 65u 1,800 1,200 1,600 1,450 EIB 720 574 - - - Kreditbank 3,890 - - - - Kreditanstalt 75 200 200 180 - French Government loan 955 870 - - - Credit Commercial de France 210 210 210 420 - Union Bank of Switzerland 100 100 100 - - Banco Exterior de Espanc 50 50 - - - International Market Borrowings - 2,500 2,500 - - Other (unidentified) foreign loans - 1,536 4,890 8,300 10,310 6,650 7,840 9,100 10,500 11,760 Local currency borrowings: Issue of bonds 1,440 500 500 765 1,200 Net increase in saving, time and demand deposits 7,135 6,279 6,765 6,665 6,160 Loan collections 7,084 8,440 10,711 12,829 15,215 Increase in Share Capital - 1,000 1,500 1,500 1,500 Provisions and retained earnings 1,020 1,085 1,436 1,855 2,345 TOTAL SOURCES 23,329 25,144 30,012 34,114 38,180 USES OF FUNDS Loan disbursements 18,200 22,000 26,000 30,000 33,600 Repayment of borrowings>- Bonds 50 345 640 1,082 982 Foreign loans 181 1,355 1,780 3,716 3,658 Addition to fixed assets 266 240 180 160 1.60 Net change in current and other assets and liabilities 4,632 1,204 1,412 (844) (220) 23,329 25,144 30,012 34,114 38,180 EMENA/IDF June 1980 - 32 - ANNEX 8 BANCO DE FOMENTO NACIONAL Expected Disbursement Schedule ($ '°°°) FY 1981 January 1 - March 30, 1981 - April 1 - June 30, 1981 - FY 1982 July 1 - September 30, 1981 4,000 October 1 - December 31, 1981 5,000 January 1 - March 31, 1982 6,000 April 1 - June 30, 1982 7,000 FY 1983 July 1 - September 30, 1982 7,000 October 1 - December 31, 1982 8,000 January 1 - March 30, 1983 9,000 April 1 - June 30, 1983 9,000 FY 1984 July 1.- September 30, 1983 9,000 October 1 - December 31, 1983 9,000 January 1 - March 30, 1984 8,000 April 1 - June 30, 1984 7,000 FY 1985 July 1 - September 30, 1984 6,000 October 1 - December 31, 1984 6,000 100,000 EMENAA/IDF November 1980 - 33 - ANNEX 9 PORTUGAL APPRAISAL OF BFN-II PROJECT Selected Documents and Data Available in the Project File A. Selected reports and studies on the sector and subsector A-1 Manufacturing Export Industries in Portugal (IBRD Report No. 1695(a)-PO, dated December 27, 1977). A-2 Portugal - Priorities for Public Investment (IBRD Report No. 2883-PO, dated February 29, 1980). A-3 Macroeconomic Situation in 1979 - Ministry of Finance and Planning. A-4 Current Export Aid Measures in Portugal, International Trade Centre. A-5 Proposed Incentive System - Draft Decree. B. Selected reports and studies relating to the project B-l Submission of Banco de Fomento Nacional on Second Project, November 23, 1979. C. Selected working papers and tables C-1 Promotion of export-oriented Investment Projects by BFN, J.T. Kerrigan (Consultant), April 1980 C-2 Organization Chart of BFN C-3 Summary of Operations 1974-79 C-4 Analysis of Approved Loans 1971-79 C-5 Distribution of Approved Direct Credit Loans by Size of Project 1975-79 C-6 Sectoral Analysis of Portfolio as of December 31, 1979 C-7 Analysis of Arrears in Loan Portfolio, 1976-79 C-8 Equity Portfolio as at December 31, 1979 C-9 Income Statements 1976-79 C-10 Sector Analysis of Sub-Projects Financed Under BFN-I Loan C-lb BFN Export Promotion Action Plan