Document of The World Bank F£IL. E COpy FOR OFFICIAL USE ONLY Report No. 2106-KO KOREA STAFF APPRAISAL REPORT ON THE KOREA DEVELOPMENT FINANCE CORPORATION October 16, 1978 East Asia and Pacific Projects Department Industrial Development and Finance Division 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 US$1.00 = W 485 W 1 = US$0.0021 W 1 million = US$2,062 W I billion = US$2.06 million ABBREVIATIONS ADB - Asian Development Bank APCO - Asia Pacific Capital Corporation Ltd. BOK - Bank of Korea CNB - Citizens National Bank DEG - Deutsche Entwicklungsgesellschaft EPB - Economic Planning Board ERR - Economic Rate of Return FRR - Financial Rate of Return GNP - Gross National Product IFC - International Finance Corporation TRF - Industrial Rationalization Fund KDB - Korea Development Bank KDFC - Korea Development Finance Corporation KDLC - Korea Development Leasing Corporation KIFC - Korea Investment and Finance Corporation KIST - Korea Institute of Science and Technology K-TAC - Korea Technology Advancement Corporation MIB - Medium Industry Bank NIF - National Investment Fund RCB - Regional Commercial Bank USAID - United States Agency for International Development FISCAL YEAR January 1-December 31 FOR OFFICIAL USE ONLY KOREA KOREA DEVELOPMENT FINANCE CORPORATION TABLE OF CONTENTS Page No. BASIC DATA . . . . . . . . . . . . . . . . . i - vi 1. THE INDUSTRIAL SECTOR .1.. . . . . . . . . . . . . . . . . . . . Contribution to the Economy . . . . . . . . . . . . . . . . . . Structure of Industry. 2 Geographic Distribution. 3 Financial Structure of Enterprises . . . . . . . . . . . . . . 4 Trends in Industrial Investment . . . . . . . . . . . . . . . . 4 Industrial Policies . . . . . . . . . . . . . . . . . . . . . . 5 Prospects ..... . . . . . . . . . . . . . . . . . . . . . . 6 2. THE FINANCIAL SECTOR ... . . . . . . . . . . . . . . . . . . . 8 Institutional Setup ... . . . . . . . . . . . . . . . . . . . 8 Capital Market .... . . . . . . . . . . . . . . . . . . . . 10 Interest Rates and Monetary Policy . . . . . . . . . . . . . . 11 3. THE KOREA DEVELOPMENT FINANCE CORPORATION (KDFC) . . . . . . . . 13 A. KDFC's Role in the Economy .13 KDFC in Perspective .... . . . . . . . ....... . 13 KDFC's Role within the Financial Sector . . . . . . . . . 13 Economic Impact of KDFC's Lending . . . . . . . . . . . . 15 Influence on Project Design and Technical Assistance . . 19 Resource Mobilization .... . . . ..... . . . . . . 19 Promotional Activities .... . . ...... . . . . . 21 Development Strategy .... . . . ..... . . . . . . 26 B. Institutional Aspects .... . . . . . . . . . . . . . . . 26 Functions, Legal Status, Ownership, Organization and Staff . . . . . . . . . . . . . . . . . . . . . . . 26 Operational Policies .. .28 Project Appraisal and Supervision . . . . . . . . . . . . 28 Procurement and Disbursement . . . . . . . . . . . . . . 30 This report was prepared by Messrs. T.N. Dinh, Robert Poldermans and Stewart Wallis following a field appraisal of KDFC in April 1978. This document has a restricted distribution and may be used by recipients only in the performance I of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -2- Page No. C. Operations . . . . . . . . . . . . . . . . . . . . . . . . 30 Overall Lending Operations . . . . . . . . . . . . . . . 30 Characteristics of KDFC's Lending Operations . . . . . . 31 Investment Operations ..... . .. . . . .. . . . . . 33 Utilization of Bank Loan No. 1461-KO . . . . . . . . . . 33 D. Financial Position. Performance and Resources . . . . . . . 34 Financial Position ...... . . .. . .. . . .. . . 34 Financial Performance ..... . .. . . . .. . . . . . 35 Quality of Portfolio . . . . . . . . . . . . . . . . . . 36 Resources and Terms and Conditions of Lending . . . . . . 37 Audit . . . . . . . . . . . . . . . . . . . . . . . . . . 38 E. Prospects and Resource Requirements . . . . . . . . . . . . 38 Business Forecasts ...... . . .. . .. . .. . . . 38 Financial Forecasts ..... .. . .. . . .. . .. . . 39 Won Resource Position and Requirements . . . . . . . . . 39 Foreign Currency Resource Requirements . . . . . . . . . 39 F. KDFC's Future Directions . . . . . . . . . . . . . . . . . 40 4. THE PROPOSED BANK LOAN ...... .. .. . ........ . . 41 Recommendations and Justification . . . . . . . . . . . . . . . 41 Main Features of the Loan . . . . . . . . . . . . . . . . . . . 42 Agreements and Understandings Reached at Negotiations . . . . . 44 LIST OF ANNEXES 1. Board of Directors 2. Statement of Operational Policies 3. Statement of Development Strategy for 1978/79 4. Supplementary Tables and Charts T-1 Rates of Interest in Korea as of June 30, 1978 T-2 Share of KDFC's Disbursements in Manufacturing Sector Fixed Investment 1971-77 T-3 Partial Economic Indicators of Projects 1968-77 T-4 Partial Economic Indicators of Projects (Disaggregated) 1976/77 T-5 Degree of Export Orientation of Projects 1973-77 T-6 Proportion of Total Project Costs Financed by KDFC, by Industry, 1975-June 1978. T-7 ERRs and FRRs on a Sample of 73 KDFC-Financed Projects T-8 Major Technologies Introduced via KDFC's Projects, 1977 T-9 Summary of KDFC's Joint Financing Operations 1968-June 1978 T-10 Characteristics of 1977 Loan Approvals under the RCB Scheme of Cooperation -3- T-11 List of Shareholders T-12 Third KDFC Share-Capital Increase Plan, October 1978 T-13 Staff Position of KDFC, and Recruitment Plan 1978-82 T-14 Summary of Operations, 1968-June 1978 T-15 Sectoral Distribution of Loans Approved (Consolidated) 1968-77 T-16 Sectoral Distribution of Loans Approved (Disaggregated) 1968-77 T-17 Characteristics of Loans Approved 1968-77 T-18 Repeat Loan Operations T-19 Characteristics of Investment Operations 1968-77 T-20 Sectoral Distribution of Loans and Investments Outstanding as of December 31, 1977 T-21 Subprojects Financed under IBRD Loan No. 1461-KO T-22 Audited Balance Sheets 1974-77 T-23 Audited Income Statements 1974-77 T-24 Summarized Cash Flow Statements 1974-77 T-25 Collection Performance and Arrears, 1974-June 1978 T-26 Statement of Resources T-27 Terms and Conditions of KDFC's Borrowings T-28 Forecast of Approvals, Commitments and Disbursements 1978-82 T-29 Projected Balance Sheets 1978-82 T-30 Projected Income Statements 1978-82 T-31 Projected Cash Flow Statements 1978-82 T-32 Resource Position and Requirements T-33 Commitments and Disbursements of Proposed Loan C-1 Organization Chart 5. Documents and Related Data in Project File KOREA KOREA DEVELOPMENT FINANICE CORPORATION Basic Data (as of December 31, 1977 unless otherwise stated) 1. Year of Establishment: 1967 (April) 2. Ownership Number of Subscribed capital shareholders (Won million) Percent Domestic Shareholders Commercial banks 6 466 9.3 Securities companies 24 395 7.9 Insurance companies 12 518 10.3 Private corporations 69 1,119 22.4 Individuals 266 764 15.3 Subtotal 377 3,262 65.2 Foreign Shareholders IFC 1 526 10.5 Others 10 1,212 24.3 Subtotal 11 1,738 34.8 Total 388 5 000 100.0 - ii - 3. Operations (as of June 30, 1978)/a 1968-74 1975 1976 1977 Jan-Jun 1978 Total Approvals Domestic currency loans (Won million) 5,914 502 450 1,490 1,160 9,516 Domestic currency convertible debentures (Won million) 1,410 180 610 480 80 2,760 Domestic currency equity investments (won million) 1,899 349 1,029 887 451 4,615 Foreign currency loans ($'000)105,290 42,891 61,537 70,010 44,543 324,271 Total/b (Won million) 50,924 21,833 31,934 36,811 23,294 164,796 Commitments Domestic currency loans (Won million) 5,914 502 350 1,490 1,110 9,366 Domestic currency convertible debentures (Won million) 1,310 250 440 680 - 2,680 Domestic currency equity investments (won million) 1,169 764 1,334 416 780 4,463 Foreign currency loans ($'000) 92,579 41,614 68,055 69,031 44,436 315,715 Total/b (Won million) 44,677 21,317 35,131 36,066 23,441 160,632 Disbursements Domestic currency loans (Won million) 5,599 402 538 852 990 8,381 Domestic currency convertible debentures (Won million) 1,310 250 440 480 - 2,480 Domestic currency equity investments (won million) 1,169 764 1,062 633 440 4,068 Foreign currency loans ($'000) 83,489 23,683 64,928 42,706 46,919 261,725 Total/c (Won million) 49,206 12,791 35,589 30,961 40,179 168,726 /a This summary table includes KDFC's own operations as well as projects jointly financed with the RCBs and foreign commercial banks. /b Exchange rates used were: US$1.00 = W 281.9 in 1968 US$1.00 = W 398.5 in 1973 = W 305.2 in 1969 = W 485.0 in 1974, 1975, 1976 and 1977 = W 317.4 in 1970 = W 374.1 in 1971 = W 399.7 in 1972 /c For any given year, the "won equivalent" disbursement figures are calculated by using the year-end spot exchange rate of the won against each of the various foreign currencies disbursed in that year, and adding the change, denominated in won, of outstanding foreign exchange loans which are due to movements in all exchange rates in that year (see Annex 4, Table 14). - iii - 4. Status of Loans (cumulative to June 30, 1978) Domestic currency Foreign currency (w million) ($ thousand) Approved 9,516 324,271 Committed 9,366 315,715 Disbursed 8,381 261,725 Outstanding 3,111 212,041 5. Earnings Record Year ending December 31 1974 1975 1976 1977 Net profit as % of average equity 15.8 18.6 18.7 20.1 Income from loans as % of average 10.7 11.1 10.8 11.6 loan portfolio Book value as % of par value 203.0 212.0 192.0 218.0 Cash dividend as % of par 10.0 10.0 20.0 20.0 Stock dividend as % of par 10.0 10.0 - - Cash dividend payout ratio (X) 32.9 27.1 48.5 48.6 Return on total assets /a 7.0 8.0 7.4 9.0 /a Net income before tax and interest expenses to total assets. -iv - 6. Financial Position (W million) end December: 1974 1975 1976 1977 end June 1978 Total Assets 44,163 53,034 87,835 109,885 133,130 of which loan and investment 40,143 47,947 77,232 99,205 122,370 portfolio /a Long-Term Debt Won subordinated loan 2,025 2,025 2,025 1,991 1,958 Foreign currency loan 35,204 42,579 71,213 92,809 115,106 Total long-term debt 37,229 44,604 73,238 94,800 117,064 Equity 6,077 6,993 9,581 10,886 11,126 Current Ratio /b 1.8 1.7 1.5 1.4 1.3 Long-Term Debt Equity Ratio 6.1 6.4 7.7 8.7 10.5 Reserves & Provisions as % of 9.1 9.2 7.2 7.3 6.4 Portfolio Debt Service Cover Ratio /c 1.4 1.3 1.3 1.3 1.2 Interest Cover Ratio /d 1.6 1.5 1.4 1.4 1.4 /a Net of allowance for losses but including current portion of portfolio. lb Including current maturities of loans and debt. /c Profit after tax and interest charges and noncash charges and loan collections to interest charges and repayments of borrowings. /d Net earnings before interest, tax and depreciation to interest charges. 7. KDFC's Interest Rates and Charges (as of June 30, 1978) (i) Interest rate on domestic currency loans (Y) 20.5-21.0 (ii) Interest rate on foreign currency loans (%) IBRD 10.2-10.6 ADB 10.6 IFC syndicated loan /a spread of 1.25 over average borrowing cost APCO loan LIBOR + 3% (iii) Penalty charges 25% p.a. on overdues (iv) Commitment charges 1.5% p.a. on undisbursed amounts /a Borrowing cost is as follows: A loan: 10.75% B loan: LIBOR + 2% C loan: 9.95% 8. Status of IBRD loans as of June 30, 1978 (in US$ thousand) Loan Date Date Rate of Onlending T,nqn /I Dis- Out- /b number signed effective interest rate amount Committed bursed standing 529-KO 01-01-1968 02-29-1968 6.5-7.0% 10% 4,950 Fully cmtd. 4,950 300 622-KO 06-26-1969 09-09-1969 6.5% 10% 19,726 " " 19,726 3,000 735-KO 05-17-1971 07-29-1971 7.25% 10% 29,125 " " 29,125 15,800 905-KO 06-13-1973 09-10-1973 7.25% 10% 39,608 " " 39,608 30,100 1145-KO 07-23-1975 09-05-1975 8.5% 10.2-10.75% 55,000 55,000 54,200 52,800 1461-KO 06-30-1977 09-15-1977 8.2% 10.2-10.6% 70,000 55,300 22,500 22,500 Ia Net of cancellations. /b Amount outstanding to IBRD. - vi - 9. IFC Investment Summary as of June 30, 1978 (in US$) Investment no. Date approved Amount No. of shares /a 129-KO January 30, 1968 702,042 192,500 259-KO July 24, 1973 (exer- 356,207 141,165 cise of rights) 352-KO August 19, 1976 (exer- 291,222 140,660 cise of rights) 406-KO May 26, 1978 (exercise 1,075,971 520,770 of rights) Stock dividend - 156,705 Total commitments 2,425,442 1,151,800 Less: Amount undisbursed 1,075,971 520,770 Sale of fraction shares on stock dividends 16 - Sale to DEG 262,377 105,000 Held by IFC as of June 30, 1978 1,087,078 526,030 Return on IFC investment to June 30, 1978 Profit on equity investment: Profit on sales of shares 262,623 Cash dividends received 886,863 Total 1,149,486 /a Par value of KDFC shares changed from W 5,000 to W 1,000 in February 1977. 1. THE INDUSTRIAL SECTOR Contribution to the Economy 1.01 Since the early 1960's, manufacturing has been the fastest growing sector in the Korean economy. Over the last five years, its growth reached nearly 20% p.a., almost twice as fast as the 11.5% growth of aggregate GNP. The industrial sector, which accounted for 12% of GNP in 1961, reached 30% in 1977. Manufacturing contributed 43% of the increment in GNP over the last decade rising to 52% during the past five years. Manufactured products represented 89% of commodity exports in 1977, compared with 82% in 1965 and 60% in 1960 (and 85% in the first half of 1978). Industry has provided about one third of all jobs created since 1963 and as much as 47% over the period 1971-75; with approximately 2.9 million people employed, the industrial sector accounted for 21% of the total population employed in 1977 (and 23% in the first half of 1978) against 11% in 1966. One notable feature of Korea's rapid industrialization is that it has substantially contributed to the improvement in the country's income distribution which is now among the most equitable in the developing world. 1.02 Manufactured exports have been the principal engine of growth of the Korean economy and the beneficial impact of the orientation towards labor-intensive exports can be seen in the factor proportions and efficiency of factor use in Korean manufacturing. The sector is typified by low capital/ output and capital/labor ratios and high rates of growth of productivity. The unlagged incremental capital/output ratio in the manufacturing sector was 1.3 (in 1970 prices) during 1965-76 and there has been no perceptible increase in the ratio during the last five years despite the increased relative importance of steel, petrochemicals, shipbuilding and machinery industries. This reflects not only the pattern of industry with heavy emphasis on labor intensive goods but also low construction costs and high rates of utilization of capacity reflecting in turn good management and organization. After falling between 1960 and 1966, the average cost of job creation in manufacturing industry during the last decade has been stable at about $5,000 in 1975 prices reflecting both changes in output mix and produc- tivity improvement within existing industries. The high and sharply increas- ing level of labor productivity has been a fundamental strength of the Korean development process. Real wages costs still appear quite competitive inter- nationally. Manufacturing wage rates in Korea are about one-fifth of those in Japan, lower than in Taiwan, Hong Kong and Singapore and higher than in the Philippines, Malaysia and Thailand. In contrast, productivity levels compare very favorably with the latter countries and are probably not too far behind that of Japan in the traditional industries. The efficient use of capital and the steady improvement in labor productivity have enabled the Korean economy to maintain a GNP growth rate of nearly 11% p.a. during the last decade while investing only about 26% of GNP on average. 1.03 Recent Performance. The Korean economy recovered remarkably well in 1976 and 1977 after the recessionary period of 1974-75. The performance of the manufacturing sector was particularly impressive with a 26% real growth of value added in 1976,/1 and 12% in 1977. Exports increased by /1 Compared to 13% in 1975. - 2 - more than 40% in volume in 1976 and by about 32% in 1977, reaching US$10.0 billion in that year (and at least US$11.0 million is estimated for 1978). This growth in exports was led by a strong demand for Korea's traditional export products such as textile yarns, fabrics and clothing which maintained a share of about 35% of total commodity exports. Korea's efforts at reducing the concen- tration of its exports towards the US and Japan have met with considerable success in recent years; in 1977 the combined share of the US and Japan dropped to 52% (and in early 1978 was only 49%) from a level of 70% in 1974, essentially as a result of the development of new markets in Europe (particularly Germany, France and the United Kingdom) and the Middle East. Commodity exports to the Middle East, earlier negligible, amounted to more than US$ 1.04 billion in 1977. In 1977, Korea won construction contracts, mostly in the Middle East, worth about US$3.5 billion (including the cost of materials and equipment supplied from Korea). Structure of Industry 1.04 The following table shows the changes in the sectoral composition of the manufacturing sector between the years 1971 and 1976. Table 1.1: VALUE ADDED IN MANUFACTURING /a (W billion) 1971 1976 Value Value Growth rate Added % Added % % L.ight Manufactures Food, beverages, tobacco 191.0 29.0 301.4 18.1 9.5 Textiles, footwear, leather 150.4 22.8 560.0 33.7 30.1 Wood, furniture, paper printing 48.1 7.3 77.6 4.7 10.0 Rubber, clay, glass, stone products 40.5 6.1 78.0 4.7 14.0 Plastics 9.5 1.4 16.0 1.0 11.0 Subtotal 439.5 66.7 1,033.0 62.1 18.6 Heavy Manufactures Chemicals, petroleum and coal 117.4 17.8 213.7 12.9 12.7 Basic metals, metal products 22.3 3.4 70.7 4.3 21.0 Machinery (including electrical) 35.6 5.4 208.9 12.6 42.5 Transport equipment 28.1 4.2 91.7 5.5 26.7 Subtotal 203.4 30.8 585.0 35.2 23.5 Miscellaneous Industries 16.3 2.5 44.4 2.7 22.2 Total 659.2 100.0 1,662.4 100.0 20.3 /a At 1970 constant prices. - 3 - Light manufactures have declined from 67% of total manufacturing value added in 1971 to 62% in 1976. while heavy manufactures have risen from about 31% to 35% over the same period. In coming years, the Government intends to encour- age more skill-intensive subsectors such as machinery and electronics where Korea enjoys a competitive advantage over other developing countries because of its skilled labor resources. This deepening of the Korean industrial structure represents a major objective of the Fourth Five-Year Plan (1977-1981) and is expected to result in a relative reduction in the share of light industries in manufactured exports and output. Geographic Distribution 1.05 In 1975, (based on the October 1975 census) approximately 27% of the population of Korea lived in the cities of Seoul and Pusan; the Province of North Gyeongsang where Taegu, the third major industrial city, is located, accounted for another 14% of the population. The following table shows that the regional distribution of industry and industrial employment is also skewed in favor of Seoul and Pusan. Table 1.2: GEOGRAPHIC DISTRIBUTION OF INDUSTRY (Percent) 1971 1975 No. of estab- No. of Value No. of estab- No. of Value lishments workers added lishments workers added Seoul and Pusan 30.3 45.4 45.2 33.4 45.6 36.5 Other Regions 69.7 54.6 54.8 66.6 54.4 63.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Report on Mining and Manufacturing Survey, EPB 1975. There was little change in the geographic dispersal of industrial employment in Korea between 1971 and 1975; Seoul and Pusan remain by far the largest industrial centers. The Government, however, has become increasingly aware of the need to achieve, through a wider geographic dispersal of industries, a better distribution of employment opportunities and a reduction of the congestion and overcrowding in Seoul and Pusan. The Government has been promoting the development of industrial centers outside these two areas principally through the establishment of free trade zones and industrial estates. Major examples of this policy are the iron and steel plants in Pohang, the petrochemical complex in Ulsan, the integrated chemical industry in Yeosu, and the machinery center at Changwon. The Saemaeul Movement, initiated in 1971, also aims at creating industrial employment opportunities in rural areas and at reducing the disparities of income between urban and rural areas. Financial Structure of Enterprises 1.06 The interest rate structure and slowdown in economic activity during the period 1970 to mid-1972 had resulted in a deterioration of the financial position and structure of Korean enterprises. Companies had become highly dependent on the high cost, short-term "curb-market" for their finan- cing. To improve their situation, a Presidential Decree of August 1972 froze all loans from the unorganized money market and new measures were adopted which lengthened maturities of certain loans, reduced interest rates to 16.8% p.a. and converted loans from shareholders into equity. These measures as well as the remarkable performance of the Korean economy in 1973 resulted in a considerable improvement of the financial position and performance of Korean enterprises. The aggregate debt/equity ratio of manufacturing enterprises fell from 3.9:1 to 3.1:1 in 1972 and 2.7:1 in 1973. The average interest rate on borrowings of manufacturing enterprises concurrently declined from 13.4% to 8.6%. Profitability improved markedly with net profits increasing from an average of 1% of total assets in 1971 to 7.9% in 1973. However, with the quadrupling of oil prices at end-1973 and sharp increases in the costs of raw materials, enterprises were again subject to considerable financial strains. Capacity utilization declined and costs of production increased substantially. In an effort to sustain economic activity and employment, the Government helped finance the buildup of manufacturing inventories. Enter- prises had to resort to increased borrowings and the aggregate debt/equity ratio increased to 3.2 in 1974 and 3.6 in 1976. Profitability decreased with net income declining as a percentage of total assets from 7.9% in 1973 to 5.7%, 3.9% and 4.6% respectively in 1974, 1975 and 1976. There is, however, some evidence that with the upturn in economic activity from the end of 1975 the financial structure and performance of Korean enterprises have improved. Trends in Industrial Investment 1.07 Fixed capital formation in the manufacturing sector amounted to W 805 billion in 1977, (equivalent to 20.1% of gross domestic capital formation in that year), which represented a 20% increase over the 1976 level of W 667 billion, which in turn, was 33% over the 1975 level of W 499 billion (all in current prices). In terms of constant 1970 prices, the real increase in fixed capital formation was nearly 12% between 1976 and 1977. During the Fourth Five-Year Plan period the growth rate of GNP is expected to be 9.2% per annum with mining and manufacturing growing at 14.2% p.a. Total gross fixed investment is projected at W 18,000 billion /1 for the Plan period with manufacturing accounting for 28.3% by the end of the Plan period. /1 At 1975 prices. -5- Industrial Policies 1.08 Over the past ten years, industrial incentives in Korea have been highly responsive to particular and changing circumstances, and varied with Government policies and priorities for industrial development. These policies aimed, with variable emphasis, at the promotion of export industries, geo- graphic dispersal of industry, assistance to small and medium industries and, more recently, investment in heavy industries. 1.09 A comprehensive incentive system was established during the first half of the 1960s which generally favored the promotion of exports over import substitution. The main elements of the incentive package included unrestricted access to, and tariff exemptions on, imports of raw materials and capital goods, generous waste allowances in determining duty-free raw material imports; direct and indirect tax reductions; access to subsidized credit for working capital and fixed investment; and rate subsidies on certain inputs. Key import substi- tuting industries received protection from imports through tariffs and quanti- tative import controls. Estimates of effective subsidy rates show, however, that export activity was generally favored over import substitution. The international competitiveness of Korean industry had substantially improved between 1970 and 1973 partly due to successive devaluations of the won, and the Government consequently decided to reduce export incentives. Preferential rates of corporate income tax were abolished and interest rate subsidies were also reduced. In 1975, tariff exemptions on imported inputs were abolished in favor of a system by which the tariff on imported inputs is paid at the time of impor- tation and rebated at the time of export. Tariff exemptions on imports of machinery and equipment by export industries were abolished in 1974;/L payment of custom duties can, however, be stretched over a three-year period. 1.10 While key import substituting industries have been granted many of the preferences given to exporters, production for domestic sale has generally been subject to higher duties, taxes and interest charges compared with rates charged to exporters but has nevertheless benefited from tariffs and restrictions on imports. Over the last few years there has been a modest decline in tariff rates,/2 and an increase in reliance on import restrictions, as a means of affording protection to domestic producers particularly in the case of capital goods. However in 1977 the Government relaxed some of these restrictions as part of an import liberalization program./3 As a counterpart for the protection afforded to domestic producers through import controls, the Government in 1976 established price controls for major commodities./4 /1 Only in the case of capital goods imported under foreign capital financing is there still complete and automatic exemption from tariffs. /2 The average tariff rate which remained roughly stable between 22% and 24% in 1969 to 1972, rapidly declined to about 12.8% in 1975. /3 The number of prohibited items has declined from 77 in 1968 to 66 in 1975 and to 60 in 1977 while items subject to import restrictions increased from 398 to 597 in 1976 but were reduced again to 456 in 1977. /4 In March 1976, the Government enacted the Price Stabilization and Fair Trade Law. -6- Prospects 1.11 Export orientation has been the dominant feature influencing the structure and rate of expansion of the manufacturing sector. Export growth has been accompanied by a policy of selective import-substitution which has helped the aggregate dependence upon imported intermediate inputs and capital goods remain at roughly the same level over the last decade. Although import substitution has played a significant role in some sectors and over specific time periods, its contribution to the growth of manufacturing output has been very limited. It is estimated that over the period 1960-68 domestic demand contributed some 60% to the growth of manufacturing, while export expansion and import substitution contributed respectively 38% and 2%. The emphasis given to exports of light manufactures has resulted in a rather high degree of dependence upon imports as a source of raw materials and inter- mediate inputs, as is reflected in the fact that the domestic value added content of Korea's exports is only about 50%. While it is clear that Korea's poor natural resource endowment limits the scope for backward linkages, there is a real need for Korea to undertake a deepening of its industrial structure. Awareness of the desirability of deepening Korea's industrial structure was present in the formulation of both the Second and Third Five-Year Plans and lies behind the decision to build the first integrated steel mill and petro- chemical complex. The long-term plan covering the decade up to 1981 which was published by the Economic Planning Board (EPB) in 1973 emphasized the accelerated development of the heavy and chemical industries as a critical element of Korea's future industrialization. The 1973-74 economic setbacks have rendered a reexamination of this long-term development plan necessary and while, in the fourth Five-Year Plan, emphasis remains on developing heavy industry and on increasing the domestic content of exported manufactures, some heavy capital and energy-intensive projects have been deferred or cancelled altogether. 1.12 Along with the general objectives of further strengthening Korea's balance of payments and maintaining a rapid growth in employment, a major goal of the Fourth Five-Year Plan's industrial policy is to achieve a structural shift within the manufacturing sector towards more skill intensive sectors such as machinery and electronics where Korea enjoys a competitive advantage over other developing countries. 1.13 Over the five-year period of the Plan (1977-81) the GNP is expected to grow at a rate of 9.2% p.a. fueled by a 16.5% annual growth in the volume of manufactured exports. The mining and manufacturing sector which in 1977 accounted for 30% of GNP (at current market prices) is expected to increase at 14.3% p.a., a higher rate of growth than that of GNP, which would bring the contribution of the mining and manufacturing sector to 41% of GNP by 1981. It is expected that some 55% of the two million new jobs to be created during the Fourth Five-Year Plan period will be in the mining and manufacturing sector. As in previous years, Korea's economic development would essentially be export-led, the ratio of commodity exports to GNP which reached 27% in 1975 and nearly 32% in 1977, would rise to 42% by 1981. However, compared to their real growth rate of 32% p.a. - 7 - over the period of 1967-75, exports are projected to increase at a more modest 16.8%. p.a. The Plan is based on the assumption that Korea's exports of textiles, clothing and other light manufactures have a limited growth potential and are subject to encroachment by other developing countries. Korea's comparative advantage will, therefore, increasingly lie in industries which require more skilled labor and greater industrial sophistication such as machinery, elec- tronics and shipbuilding. The real growth of exports of these products would be around 30% p.a. over the 1976-81 period. The share of manufactures is expected to rise from about 85% of total merchandise exports in 1975 to 92% by 1981. In order to sustain the projected GNP growth rate of 9.2% p.a., gross fixed invest- menat would need to rise at 7.8% p.a. In relation to GNP, the projected invest- ment is slightly lower than in the Third Plan period (26.2% of GNP as against 26.9% during the 1972-76 period). The share of manufacturing investment in total gross investment is projected to increase by only 2% from its average share of 24.6% during the Third Five-Year Plan to 26.5% during the Fourth Five-Year Plan. The shift in Korea's export strategy towards more skill-intensive exports is reflected in both the planned structure of industrial output and in projected investment allocations. The share of heavy and chemical industries is expected to rise from 43% of total value added in manufacturing in 1975, to nearly 52% by 1981. Investment in light industries is expected to decrease from 40% of total investment outlays in the manufacturing sector over the Third Plan period to 36% over the next five years; conversely, investment in the heavy and chemical industries such as basic metals and chemicals would be reduced in relative terms from approximately 75% of investment outlays in heavy and chemical industries over the Third Plan period to 61% over the Fourth Five-Year period in favor of investment in machinery and electronics which would increase from 25% to 39%. 1.14 The Plan's estimate of total investment required for the expansion and restructuring of Korea's industrial sector has been set at around $ 10.5 billion over the 1977-81 period. There are grounds for believing, however that Korea's investment needs for 1977-81 may have been underesti- mated, while the domestic savings target (which calls for an increase in the proportion of domestic savings to GNP from 16.3% in 1970 to 27.1% in 1981) appears somewhat ambitious. The conjunction of these two possibilities would lead to a continued reliance on substantial inflows of foreign capital. The Korean Government has in recent years undertaken a major effort to mobilize domestic resources. Toward that objective, the Government established in 1973 the National Investment Fund (NIF), which is expected to finance a sizeable portion of the investment needs of Korea's major industries. The NIF was conceived as an important supplement to various programs of domestic savings mobilization, and particularly as a source of funds for long-term investment, primarily for plant and equipment. The NIF derives its funds from a variety of sources including the national savings associations; pension funds; postal savings; deposits in banking institutions (20% of which must be invested in NIF bonds); savings funds; and NIF's bond sales to the public. The Government has also embarked on a comprehensive capital market development plan, including the restructuring of the Korean Securities Financing Corporation and the development of new financial institutions such as merchant banks and the Korea Export Import Bank. Over the period 1977-81, - 8- the Plan expects domestic funds to provide 63% of the aggregate investment in manufacturing and foreign capital to provide the remainder. About three quarters of this foreign investment is expected to be directed to the heavy and chemical sectors. 1.15 The Bank has worked closely with the Government in the formulation and implementation of industrial policies and is in basic agreement with the main thrust and priorities of these policies, including those contained in the Fourth Plan. 2. THE FINANCIAL SECTOR Institutional Setup 2.01 The financial sector of Korea consists of the Bank of Korea, Deposit Money Banks and nonmonetary financial institutions. The Bank of Korea performs regular central banking functions, including the supervision of commercial banks. 2.02 Deposit Money Banks include commercial banks and specialized banks. Commercial banks receive most of their funds through deposits from the public. They can make all kinds of loans but have traditionally concentrated on short-term lending although term financing through roll-over of short-term loans is common. There are 5 nationwide commercial banks, 10 banks with localized operations and 21 branches of foreign banks which together had 693 branches/offices around the country at end-1976 (all these fall into the category of "commercial banks"). Four of the five nationwide commercial banks are fully controlled by the Government which, under Korean law, automatically receives majority rights if its holding in a nationwide bank is 10% or more. The fifth bank is controlled by the semi-official Korean Traders Association. All commercial banks are subject to control and supervision by the Bank of Korea while specialized banks are directly controlled by the Ministry of Finance. The specialized banks were all established under a Special Banking Act and are subject to only a few specific Articles of the Bank of Korea Act and General Banking Act. Specialized banks are government- controlled and/or owned. As their name implies, they were founded for particular purposes or sectors (such as small-scale industry financing or agricultural financing) and government funds constitute a substantial part of their financial resources in addition to resources raised otherwise, the bulk of which consists of deposits raised from the public, hence their categor- ization as Deposit Iloney Banks. Specialized banks include the Korea Exchange Bank, which was established in 1967 mainly to relieve the Bank of Korea of commercial foreign exchange business, the Medium Industry Bank which extends financial and technical assistance to small and medium-scale industries, and -9- which has so far received two Bank loans totalling US$85 million,/l the Citizens National Bank (mainly for mobilizing small savings and financing household loans and small enterprises), the Korea Housing Bank, the National Agricultural Cooperative Federation (NACF) and the National Fisheries Cooperative. 2.03 Besides the above-mentioned banking institutions which, with the BOK as supervising agency, constitute the "Monetary System," there are several nonbanking financial institutions, namely: (a) development finance institu- tions; (b) savings institutions; (c) life insurance companies; (d) investment companies; and (e) Merchant Banks. The development finance institutions comprise the Korea Development Bank (KDB) which so far has received three Bank loans totalling US$252.5 million, the Korea Development Finance Corporation (KDFC) to which Bank Group assistance, including IFC, amounts to US$240 million to date, the Land Bank and the Export-Import Bank. Savings institutions comprise some 1,200 authorized credit unions (at end-1976) and 211 mutual savings and finance companies. Five life insurance companies operate in Korea, in addition to the Postal Life Insurance and the Educational Insurance Company. Investment companies include the Korea Securities Finance Corporation which is the principal organization for securities financing in Korea, ten short-term finance companies /2 and the Korea Investment Trust Corporation which is specialized in the establishment of investment trust funds. In addition, three leasing companies have been established over the last few years as joint ventures between Korean and foreign investors. The Merchant Banks are the latest arrivals on the Korean financial scene. Five such banks have so far been established; the Korean Merchant Banking Corpo- ration (KM4BC); the Korea-Kuwait Banking Corporation; the Saehan Merchant Banking Corporation; the Korea-French Banking Corporation and the Asian Banking Corporation. As of December 31, 1977 these merchant banks had total assets of W 56.8 billion (US$117 million) and issuance of their own commercial papers accounted for 70% of their funds raised while discounting of commercial papers accounted for 75% of their operations. 2.04 As of December 31, 1977, total loans outstanding to the manu- facturing sector by all banking institutions in Korea including KDB amounted to W 3,115 billion or US$6.4 billion equivalent. (By May 31, 1978, this had grown to W 3,548 billion or US$7.3 billion equivalent.) About 73% of December 31, 1977 total of W 3,115 billion was for operating funds, mainly supplied by commer- cial banks. The largest supplier of equipment loans (i.e. term loans) is KDB which, as of December 31, 1977 had an outstanding portfolio in the manufacturing sector of W 452 billion (US$932 million), about 53% of the outstanding medium and long-term credit by banking institutions to the manufacturing sector as of that date. /1 Please refer to report No. 1797-NO dated November 30, 1977: Staff Appraisal Report on the Medium Industry Bank. /2 Including the Korea Investment Finance Corporation (KIFC). - 10 - Capital _Market 2.05 The Korean Stock R4arket was moribund for many years but showed signs of life in 1972. Before then the yields on stocks were considered unattractive as both savings accounts of commercial banks and the "curb market" gave higher returns. The market was also thin because closely held companies were reluctant to go public. With the mid-1972 economic boom and the adoption of new financial measures by the Government (para. 1.06), the public showed growing interest in the stock market. The curb market was severely checked as a result of the August 1972 measures and with decreasing interest rates offered by commercial banks, yields on stocks became attractive. In addition, the overall investment climate became more favorable after August 1972, and the campaign for more stock listings and for companies to go public was intensified. The result was a large increase in stock exchange activity in the second half of 1972 and in 1973. In 1974, however, the growth of trading activities on the exchange slowed down considerably due to the gloomy business outlook; new stock listings, however, continued to rise reaching almost W 500 million at the end of 1974. The following table summarizes the stock exchange activity over the last six years (figures are shown as of the end of each period): Table 2.2: STOCK ACTIVITY 1971-1977 No. of Capital of Market value of No. of listed shareholders listed stock listed stock companies (in '000) (W billion) (W billion) 1971 50 81.9 141.4 108.7 1972 66 103.3 174.3 246.0 1973 104 200.0 251.6 426.2 1974 128 199.9 381.3 532.8 1975 189 290.7 643.4 916.0 1976 274 568.1 1,153.3 1,436.1 1977 323 395.3 1,492.4 2,350.8 With the general improvement of the business climate and improved export prospects, trading picked up again around mid-1975 and for the year as a whole the number of stocks listed almost doubled. 2.06 At end-1976, the general stock price index stood at 415.3, an increase of 8% only during the year, compared with a 44% gain a year earlier. On the other hand, the issuing market was very active during 1976 as a result of the Government's efforts to promote the "going public" of privately-held companies. The number of listed companies increased by 85 to 274 in the year and a total of W 263 billion was mobilized through the capital market, a 69.5% gain over the previous year. During the year, the number of shareholders increased substantially. Over the years, the ownership structure has broadened, though as at December 31, 1976, about 63% of all shareholders still held less than 100 shares each and accounted for only 0.84% of all shares - 11 - outstanding. The importance of the Government as a shareholder of listed companies also decreased; while the Government (including public bodies) held about 39% of the total number of listed stocks in 1970, its holdings had declined to 16% by December 31, 1976. The proportion held by banking institu- tions also declined from 15% to 8% during the same period. 2.07 During 1977, the capital market exhibited a highly active perfor- mance in response to the Government's vigorous efforts to promote the going public of privately held companies. The supply of capital through the stock market to business firms during the year totalled W 363 billion, which exceeded the year's target of W 320 billion. Of this, W 44 billion was through public offering of equity shares, W 142 billion through share capital increases of listed companies, and the remaining W 177 debentures. The volume of transactions in the secondary stock market expanded by 119% during 1977, recording the trade volume of W 1,375 billion (1,271 million shares) and the number of listed companies on the Korea Stock Exchange increased by 49 to 323. The stock price index rose by 21.3% to 504.1 at end 1977, largely led by the substantial gain in prices of stocks of those companies engaged in construction services, automobile manufacturing and cement industries. 2.08 The rapid increase in the volume of operations on the Stock Exchange had rendered certain improvements necessary. Among others the call market has been replaced by a continuous auction market, investment trust companies have been established, and the information system greatly improved. Several weaknesses remain, however. One of the more important problems lies in existing laws which stipulate that new equity issues have to be at par irrespective of the market price of stocks. These regulations are currently under review by the Government. In addition, gradual internationalization of the domestic stock market is being initiated by the Government. Interest Rates and Monetary Policy 2.09 The Government through the Monetary Board determines interest rate ceilings on deposits and loans which apply to all banking institutions. Although private specialized financial institutions such as KDFC or the short-term finance companies are not legally bound, in practice, they too have to follow government policies. The development of Korea's interest rate structure has, between 1968 and 1973, seen a continuous reduction in both deposit, and lending rates. The lowering of the rates coincided with the Government's success in gradually bringing inflation down until late 1973. With the emergence of the oil crisis and worldwide inflation, Korea' price structure was particularly hard hit because of its high foreign trade dependence. Wholesale prices are estimated to have increased by nearly 80% between the end of 1973 and the end of 1975. While the Government selectively increased interest rates at the end of 1974,/L a general increase of interest rates was postponed because enterprises were already facing severe financial /1 Raising rates on time deposits for over three months and over six months from respectively 12% and 13.2% to 15%, and preferential rates for loans from the NIF and IRF from 9% and 8% respectively to 12%. - 12 - strains and the Government hoped to succeed in bringing inflation under con- trol. During the year 1976, wholesale prices are estimated to have increased only by 12.1% on an annual basis. 2.10 On August 2, 1976, the Covernment made ain extensive upward adjust- ment in and revision of the interest rate structure in order to contain excessive loan demand and to better allocate funds. Prior to this date, Korean commercial banks had already resorted to various practices which resulted in increased collateral requirements and higher effective lending rates for their less creditworthy borrowers. Such practices included the collection of interest in advance, the establishment of compensating balances on time deposits or even the opening of installment savings accounts which are used both as collateral and sinking funds. The August 1976 measures acted to ratify and further rationalize this system of differentiating between borrowers on the basis of the risks involved. It led to a system whereby (a) the interest rates on working capital loans vary according to the credit standing of the borrower and (b) interest rates on equipment loans vary according to the loan maturity. The Korean financial authorities established a list of criteria for enterprises to qualify as a prime borrower which has helped reduce the need for subjective judgments on the credit- worthiness of borrowers. This introduction of a prime rate system for working capital loans and of differential rates according to loan maturities for equipment loans constitutes an important step towards improving the overall allocation of funds to industry. 2.11 Effective July 1, 1977, the Government replaced the previous excise business and consumption taxes by the value added tax (VAT) system, all goods and services being assessed at a flat rate of 10%. There was some apprehen- sion amongst the general public that the new taxation system might result in an increased tax burden on industrial enterprises and consequently in sharp rises in the cost of living. While the Government did not subscribe to this thinking it decided to introduce various anti-inflation measures to moderate the possible adverse impact of the new tax system. These measures included: (a) a lowering of bank lending rates by 1% on July 1 and a further 1% on October 1; time deposit rates were also lowered by 1.8% as from October 1, 1977; (b) the Government realigned and announced the prices of 851 major commodity items, pegged the maximum permissible price levels of major daily necessities and froze public utility rates until further notice; (c) easing of import restrictions as discussed in para. 1.10; and (d) measures to restrict growth of money supply including issuance of treasury bills and repayment of some Government borrowings from the Bank of Korea. During 1978, the Government continued with its active interest rate policy and in June raised the general level of the structure of interest rates, chiefly as a countercyclical measure, deposit rates being raised to 18.5% and onlending rates to 19% or higher. 2.12 The rate of increase of wholesale prices in 1977 was 10.1% and the growth of domestic money supply 40.7%. The targets set for 1977 as a whole were a 10% limit to wholesale price increases and about a 25% limit to domestic money supply growth. The money supply in the foreign sector more than doubled in 1977 and in the last quarter of 1977 the Government introduced various measures to curb its growth. Foreign banks were instructed in early December to freeze their won loans at their October 1977 level; reserve requirements for foreign currency deposits have also been established and enforced. Further measures have also been taken to curb money supply growth in the domestic sector; however, price controls were partially eased in two stages on August 1, 1977 and December 1, 1977. Interest rates as of June 30, 1978 are shown in Annex 4, T-1. - 13 - 3. THE KOREA DEVELOPMENT FINANCE CORPORATION A. KDFC'S ROLE IN THE ECONOMY KDFC in Perspective 3.01 KDFC was established in 1967 with the active assistance of the Bank Group. Its operations, although having grown rapidly, remain small relative to the economy as a whole. As of end-1977 its outstanding loan portfolio of W 100.6 billion (US$207 million) represented about 1.6% of the total outstanding loans - both short- and long-term - extended by all banking institutions in Korea./I In the particular field of term finance, however, KDFC's lending is considerably more important, accounting for about 8% of all medium- and long-term equipment loans outstanding to the manufacturing sector as of December 31, 1977. KDFC's cumulative disbursements to the manufacturing sector amounted to W 82 million (US$170 million) over the period 1971-77, representing about 2.7% of the total fixed investment in that sector (see Annex 4, Table 2)./2 Considering that KDFC financed an average of 38% of total project costs over those seven years, KDFC-supported projects have in aggregate accounted for about 7.0% of total manufacturing fixed investment. Over the three years 1975-77, KDFC's cumulative disbursements for nonmanufac- turing activities represented 1.3% of total non-manufacturing fixed invest- ment. Therefore, with KDFC financing an average of 59% of total project costs in this sector between 1975 and 1977, KDFC-supported projects have in aggregate accounted for about 2.2% of total non-manufacturing fixed invest- ment. Apart from its financing activities, KDFC makes valuable qualitative contributions to the industrial sector through its high operational standards (para. 3.37), its efficiency as a resource allocator, and its extensive promotional activities. KDFC's Role Within the Financial Sector 3.02 KDFC's Articles of Incorporation stipulate that the purpose of its establishment is to provide medium- and long-term financial assistance to the private sector, particularly the foreign exchange requirements of manufactur- ing and processing industries./3 While there is some degree of overlap /1 By comparison, KDB accounted for 16% of all outstanding loans. /2 Subsector figures indicate that KDFC's disbursements as a proportion of fixed,investment during 1971-77, were as high as 11.6% for metal products industries, 4.5% for textiles, and 4.2% for the machinery and equipment industries. /3 Some nonmanufacturing activities are also included, such as transport, tourism, services, commerce, fisheries and large-scale commercially- oriented agriculture. However, trade, real estate and small-scale agriculture are excluded. The scope of KDFC's activities is further elaborated in Annex 2. - 14 - between the activities and clientele of KDFC and those of the other indus- trial finance institutions operating in Korea, there is nevertheless a distinction in lending emphasis, each institution fulfilling somewhat dif- ferent functions and aiming at different sectors of the economy. The Korea Development Bank (KDB) is the main source of industrial finance in Korea for both the public and private sectors,/1 and it is largely used by the Government as the executing agency of its industrial policies. Consequently, KDB finances, inter alia, large Government non-manufacturing activities such as power and transportation projects./2 The Medium Industry Bank (MIB) confines its financing to small and medium industry,/3 particularly the modern medium-sized firms, while the Citizens National Bank (CNB) caters mainly to the unorganized sector of small-scale enterprise, providing consumer loans and small domestic currency loans to firms of an individual, household, or cottage type./4 There is no overlap between the activities of CNB and KDFC. Although KDB and KDFC are similar in some respects, KDB, unlike KDFC, provides the large majority of its loans for financing domestic currency requirements. Furthermore, both KDB and MIB, again unlike KDFC, allocate a much higher proportion of their total lending operations to working capital financing, a reflection of the fact that they are allowed to accept domestic currency deposits, which KDFC is not./5 In conclusion, the scope of KDFC's operations is clearly different from that of MIB, and some- what more restricted than that of KDB. /1 KDB's loan portfolio outstanding as of December 31, 1977, was W 1,008 bil- lion (US$2 billion), of which 10.4% was foreign currency lending, 89% for equipment financing and 46% for the private sector. By comparison, KDFC's loan portfolio outstanding as of the same date was W 101 billion (US$207 million), of which 92% was foreign currency lending, 96% equip- ment financing and 100% for the private sector. /2 The non-manufacturing sectors accounted for 55% of KDB's outstanding portfolio at end-1977. /3 Defined by the Small Industry Basic Act (amended in 1977) to include manufacturing enterprises with up to 300 regular employees or total assets of up to W 500 million (US$1 million). MIB's loan portfolio outstanding as of end-1977 was W 305.4 billion (US$630 million). /4 CNB provides only domestic currency financing, up to a maximum of five years for enterprises employing up to 100 persons. The maximum loan size is W 30 million (US$62,000). /5 In addition, KDB is empowered under the General Banking Act to mobilize domestic currency resources by issuing bonds (Industrial Finance Debentures) for relending purposes, which KDFC, established under the Commercial Code, is not. - 15 - 3.03 Because of its large domestic currency financing and its extensive involvement in the non-manufacturing sectors, KDB remains by far the largest source of term finance for industry, the value of its 1977 loan approvals being 9.8 times larger than KDFC's. However, in the particular field of foreign exchange financing, KDFC's importance comes close to, and indeed may exceed, that of KDB. /1 Economic Impact of KDFC's Lending 3.04 Annex 4, Tables 3 and 4, summarize the partial economic indicators of the 344 subprojects financed by KDFC between the start of its operations in 1968 and end-1977. The aggregate investment cost of these projects is estimated at about W 360 billion (US$740 million), of which KDFC financed W 135 billion, or 38%./2 3.05 Scale of Output and Value-added of KDFC Projects. In 1976, KDFC financed 65 projects with a total project cost of W 93 billion (US$193 mil- lion) which were expected to generate incremental annual sales of W 162 bil- lion (US$333 million) and incremental annual value-added of W 52 billion (US$108 million). In 1977, it financed 62 projects with a total project cost of W 89 billion (US$183 million) which were expected to generate incremental annual sales of W 127 billion (US$261 million) and incremental annual value- added of W 49 billion (US$101 million). On an incremental basis, aggregate value added per employee in the projects financed by KDFC increased between 1976 and 1977 to a level of W 9.34 million per employee. This was associated with a 4% decline in the capital:labor ratio (approximated by fixed assets per employee) between these two years, which is a favorable development as on certain restrictive assumptions such an increase in value added per employee would be expected to be associated with an increase in the capital:labor ratio. Similarly, on an incremental basis the aggregate value added:fixed assets ratio marginally increased between 1976 and 1977, i.e. the aggregate incremental capital output ratio decreased. The disaggregated data of Annex 4, Table 4 shows that the projects financed under KDFC's scheme of cooperation with the Regional Commercial Banks (RCBs, see para. 3.28) per- formed particularly well, as while total project costs decreased by 17% to W 4.8 billion between 1976 and 1977, incremental annual value added increased by 34% which was associated with increases of 180% in value added per employee /3 and 60% in the value added:fixed assets ratio. A KDB's cumulative foreign currency loan commitments from 1975 to 1977 were US$199 million equivalent, compared with KDFC's US$179 million. /2 On an approval basis. /3 Which was associated with only a 76% increase in fixed assets per employee, therefore implying a relatively greater contribution from labor inputs to final output. - 16 - Via KDFC's subloan to KDLC in 1976 (para. 3.19), 28 leasing subprojects were financed in 1976 and 1977 generating a further W 37 billion (US$75 million) in incremental annual sales and W 10 billion (US$21 million) in incremental annual value-added. 3.06 Employment Creation. At end-1977, KDFC's 223 clients employed about 240,000 people, or 2.2% of the total employed labor force in Korea. More significantly, KDFC's manufacturing clients employed nearly 7% of the 3 mil- lion people employed in the manufacturing sector in 1977. Between 1968 and end-1977, it is estimated that KDFC-supported projects created about 32,000 jobs./l For all KDFC's projects, the average fixed investment cost per incremental job (excluding permanent working capital costs) was US$21,500 in 1975; US$25,400 in 1976; and US$24,500 in 1977. There are, however, three significantly different lending activities included in this overall average, which, when examined separately, indicate that the labor intensity of projects selected for financing in fact varied substantially. In 1976, KDFC started lending to smaller projects through its scheme of cooperation with the RCBs (para. 3.28), and these projects showed a fixed investment cost per incre- mental job of US$7,200 in 1976 and US$12,800 in 1977. In addition, KDFC's subloan of US$5 million to KDLC in 1976 indirectly supported 28 leasing subprojects at an average fixed investment cost per incremental job of US$10,600. Consequently, the "KDFC-proper" (exclusive of both KDFC-RCB projects and KDLC projects) fixed investment costs per incremental job were US$31,200 in 1976 and US$26,200 in 1977./2 On the whole, the KDFC-financed projects do not appear unduly capital intensive considering that, firstly, KDFC was set up to operate primarily in the medium to large-scale sectors of industry and, secondly, KDFC has, in line with Government policy, recently financed a number of shipping, chemicals, and metals projects which are relatively capital intensive. However, KDFC acknowledges the importance of, /1 This excludes an estimated 1,800 jobs created in 1976 and 1977 by KDLC's leasing subprojects, assisted by KDFC's US$5 million subloan to KDLC. /2 Despite definition and data problems, tentative estimates of "fixed asset and permanent working capital" costs were made and the addition of estimated permanent working capital costs increased the costs per job created as follows: 1976 1977 KDFC KDLC RCB KDFC KDLC RCB proper proper Total fixed assets and permanent working capital; (i) W million 78,604 11,229 5,592 76,311 - 4,615 (ii) per incremental job (W'000) 18,229 6,245 4,000 16,615 - 6,950 (iii) per incremental job (US$) 37,585 12,880 8,250 34,260 - 14,330 - 17 - and explicitly analyzes, the employment impact of its projects, and it has initiated the RCB scheme (para. 3.28) in order to reach smaller (more labor- intensive) borrowers. But even for these KDFC-RCB projects the fixed invest- ment cost per job created is increasing, which is partly due to the growing overall scarcity of labor (especially of skilled labor) which has led some investors to sponsor projects which were more labor-saving and more capital-intensive than they would otherwise have chosen to undertake. Regarding income distribution, KDFC has allocated its financial assistance to projects for which labor's share of value added has been increasing /1 in recent years, reaching about 30% in 1977. 3.07 Size and Diversity of Operations KDFC's loans have increasingly been for amounts above W 1 billion (US$2 million); between 1968 and end-1977, a cumulative total of about 35% was above this amount. However, 214 of the total 356 loans made by KIbFC from 1968 to end-1977 were for amounts below W 300 million (US$600,000). Furthermore, in spite of a strong 'one-bank' tradition amongst Korean borrowers and bankers alike, only 77 (or 34%) of KDFC's clients received repeat loans over this period (Annex 4, Table 18), reflecting KDFC's continued efforts to broaden its clientele, diversify into new priority sectors and extend its financial assistance into new areas via initiatives such as the RCB scheme, a strengthened Project Promotion Department, and, for the future, a branch in the Busan area (see Annex 3). 3.08 Contribution to Exports. On the whole, KDFC's portfolio reflects an emphasis on export-oriented projects, with estimated annual export sales of US$ 650 million representing 44% of incremental annual sales) resulting from all KDFC-financed projects between 1968 and end-1977. Over the last 5 years, heavily export-oriented projects (those exporting over 50% of their output) accounted for 46% of IDFC's loan approvals by amount (Annex 4, Table 5). However, in 1977 this proportion declined slightly to 40% and export sales as a proportion of the incremental annual sales generated by KDFC's projects also declined, to 20%. These reductions are mainly attributable to KDFC's recently increased support of priority projects in metals, construction, chemicals, paper and marine transport /2 industries, which are relatively more domestic market oriented. Furthermore, the level of imports associated with KDFC's recent projects (both for fixed assets and raw materials) declined between 1976 and 1977 but by a smaller amount than the above-mentioned decline in exports. Therefore, the main result of this recent sectoral re-orientation has been a short-run decline in the net annual balance of payments effect of KDFC-financed projects which was down to US$40 million in 1977 (from US$160 million in 1976). /1 The average monthly earnings of incremental jobs arising from KDFC-financed projects was (all in '00Q); W 150 in 1976 and W 220 in 1977, compared with sectoral averages of W 50 and W 70 respectively for those years. /2 Invisible export earninas are not included. - 18 - 3.09 Sectoral Distribution. It is noted in para. 3.43 that the sectoral distribution of KDFC's projects is broadly in line with current Government priorities. KDFC's allocations have recently increased to metals, chemicals, transport equipment and consruction industries. While KDFC acknowledges the importance of the domestic machinery and electronics industries for employ- ment creation and import substitution, (as stressed by the Government in the FFYP), its efforts to increase its assistance to these sectors have so far been only moderately succesful. This is mainly because machinery projects generally required large financing amounts and consequently were beyond KDFC's financing capacity, while most electronics projects have been estab- lished as joint ventures with foreign investors, thus typically leaving limited scope for KDFC's involvement. 3.10 KDFC's financing share of total project costs was above the 38% average in metal and nonmetallic mineral products, paper industries, fisheries and transportation services, while it was well below average in chemicals and construction /1 (Annex 4, Table 6). 3.11 Regional Distribution. The geographical distribution of KDFC's projects (para. 3.46) is broadly in line with the slow evolution of indus- trial dispersal throughout Korea as a whole. KDFC is contributing to the decentralization of investment from over-crowded industrial centers by actively supporting the Government's emphasis on developing planned indus- trial zones (e.g. Changwon's machinery center, chemicals at Yeosu, elec- tronics in Kumi, petrochemicals and shipbuilding in Ulsan and iron and steel at Pohang), as well as by continuing with the RCB scheme, designed to assist small and medium scale enterprises in the less developed areas of the country. 3.12 Economic Rate of Return Analysis. Since June 1973, KDFC has generally carried out an economic analysis of projects which required more than US$1 million in foreign currency financing. Annex 4, Table 7 summarizes the ERRs for all the 73 KDFC-financed projects for which these indicators have hitherto been calculated. All but three of these projects had ERRs in excess of 15%, the three exceptions being transport equipment projects. The ERRs were as high as 60-80% for eight projects, three of which were for tex- tiles. The average ERR was 32.3%. In addition, all but one of the projects had FRRs above 15%, the one exception being a steel manufacturing and rolling project which offset its low FRR with an ERR of 47%, attributable to its import substitution impact. Seven projects had FRRs above 40% with an average FRR for the whole sample of 27.2%. KDFC has clearly allocated its funds to projects which are both financially and economically viable. Furthermore, in the case of more than half (38) of these projects the FRR was in varying degrees lower than the ERR, which suggests that these projects contributed more in economic benefits to Korea as a whole than accrued as appropriable financial benefits to the projects themselves, thereby again illustrating the generally high degree of export-orientation of KDFC's projects. /1 Which is to be expected on grounds of high project costs. - 19 - Influence on Project Design and Technical Assistance 3.13 KDFC continues to encourage project sponsors to approach it at an early stage of project formulation so as to enable it to make substantive contributions to project design. There have to date been numerous instances where KDFC has been successful in directly or indirectly introducing early modifications in project design which were subsequently implemented by the projects' sponsors. In several cases KDFC's recommendations have aimed at increasing the equity base and generally strengthening the financial struc- ture of the borrower, which, besides improving the client's debt-servicing capacity, also represented a useful contribution to domestic resource mobili- zation. Acting more broadly as a development institution, KDFC has gone beyond financial matters per se and provided advice and consultancy services relating to: (a) technical design, choice of technology and selection of machinery; which has included such matters as domestic or foreign procurement, second-hand or new machinery etc; (b) market analysis and production plans; where KDFC has, in particular, frequently advised on production capacity and product-mix; and (c) corporate organization and legal structure; for which KDFC has often recommended the establishment of subsidiaries to implement projects. 3.14 KDFC is also sustaining its efforts to introduce new technologies via its projects so as to expand the range and improve the quality of prod- ucts made in Korea, and, at the same time, promote the growth of forward and backward linkages in the industrial structure. In 1977, KDFC financed seven such projects which introduced technologies (and products) altogether new in Korea. More than 20 man-years of training abroad was involved (espe- cially in Japan which supplied six of the new technologies), and in reverse, nearly 14 man-years of technical assistance in Korea was associated with the seven projects (Annex 4, Table 8). Resource Mobilization 3.15 KDFC's resource position is analyzed in para. 3.59. As of December 31, 1977, KDFC had W 27.4 billion available for approval, of which 91% (or US$51 million) were foreign exchange funds and 9% (or W 2.4 billion) were domestic currency resources. In early 1978 the rate of approvals was extremely rapid, and as of June 30, 1978, KDFC had only W 7.1 billion remaining available for approval, of which 57% (or US$8.5 million) were foreign exchange funds and 43%`(or W 3.0 billion) were domestic currency resources. 3.16 Between 1968 and 1977, KDFC had mobilized a cumulative total of US$331.2 million /1 in foreign currency resources. The breakdown was as follows (further details in Annex 4, Table 26): /1 Net of cancellations. - 20 - Actual loan amount (US$ '000) A. Official sources: (i) World Bank (6 loans) 218,409 65.9 (ii) ADB (2 loans) 70,000 21.2 (iii) USAID 2,892 0.9 Subtotal 291,301 (88.0) B. Commercial sources: (i) Caterpillar loan 79 - (ii) IFC syndicated loan 17,800 5.4 (iii) DEG loan 2,000 0.6 (iv) APCO loan 20,000 6.0 Subtotal 39,879 (12.0) Total 331,180 100.0 Apart from the relatively small USAID and Caterpillar loans, KDFC relied exclusively on the Bank for foreign currency borrowings until the first ADB loan was signed in September 1974. KDFC's efforts to expand its resources with foreign commercial borrowings suffered from a twofold constraint particularly during 1974/75; namely the shortage of medium- and long-term funds in the international capital markets and also Korea's limited ability to borrow in those markets because of its temporary balance of payments difficulties. Hence, KDFC was not able to raise its first commercial loan until 1976, when nearly US$20 million was raised by IFC/DEG /1 on KDFC's behalf. In 1977 a further US$20 million foreign commercial loan was raised via APCO./2 KDFC's performance in mobilizing foreign commercial funds is satisfactory, taking into account the difficulties inherent in this type of resource mobilization, and the fact that KDFC has had only ten years of operation. KDFC plans to raise foreign commercial borrowings in increasing amounts (para. 3.66), but these will continue to be limited because of the /1 The IFC syndicated loan amounted to US$17.8 million, of which US$8.9 mil- lion was on IFC's own account, and a further US$8.9 million from eight international banks and institutions. The DEG loan of US$2 million was made in parallel with the IFC loan. /2 Asia Pacific Capital Corporation Ltd, a company associated with the First National City Bank (FNCB) of New York. Eight international banks participated in this syndicated loan. - 21 - difficulties inherent in obtaining them in sufficient amounts at reasonable cost, and also because of KDFC's need to match the maturities of its borrowings and its loans, which is only partially possible with commercial borrowings as they are generally available for a period of 6 to 8 years, while 46% of KDFC's loans are for terms exceeding 10 years (Annex 4, Table 17). Foreign commercial borrowings will make up a gradually increasing proportion of KDFC's overall resources, but they cannot obviate KDFC's need for funds from official sources such as the Bank in the foreseeable future. Finally, it should be noted that KDFC has helped mobilize a further US$90 million in foreign currency resources via its joint financing operations (para. 3.23). 3.17 KDFC does not have access to domestic currency deposits, nor to the various Government subsidized funds (such as the NIF), nor is it able to issue bonds for relending purposes. Consequently KDFC's domestic currency financing has been limited. KDFC's domestic currency resources have, however, been built up from W 3.35 billion /1 at its establishment to W 15.4 billion as of end-June 1978, of which W 11.1 billion was equity. KDFC is in the process of doubling its share capital (para. 3.33) by a further W 5 billion, which represents a substantial effort at domestic currency resource mobili- zation. KDFC has broadened its equity base mainly to enlarge its capacity for raising additional foreign currency loans rather than increasing its domestic cdurrency operations. Finally, at the project level, KDFC has played a useful role in mobilizing domestic savings by requiring its borrowers to increase their equity contributions (para. 3.13). Promotional Activities 3.18 As a private development finance institution, KDFC has endeavored to contribute to the realization of the Government's economic plans and policies. Its financial operations have deliberately encouraged, inter alia: (a) the promotion of export and import substitution industries; (b) the diversification of sectoral and geographical distribution of industries; (c) the creation of additional employment opportunities, where appropriate; (d) the diversification of clientele through the financing of new ventures and broadening of share ownership; (e) the provision of managerial and technical/project-design assistance to clients; and (f) the mobilization of domestic and foreign currency resources. KDFC's performance in achieving these objectives via its financial operations has been discussed in paras. 3.04 to 3.12. As a development institution, KDFC has gone beyond the provision of financial assistance and increasingly undertaken broader promotional activities. KDFC's Development Strategy Statements for 1976-77 and 1977-78 have outlined its specific promotional objectives and the insti- tutions and mechanisms through which they were to be pursued. These objec- tives - which on the whole focus on the same elements as outlined in a-f above - can be consolidated as follows: I /1 Consisting of W 1.35 billion paid-in share capital and a W 2 billion Government loan. - 22 - (i) development of the Korean financial system; (ii) intensification of efforts to mobilize foreiQn currency resources; (iii) development of industrial linkages; and (iv) diversification of KDFC's portfolio. KDFC's record in implementing these developmental objectives via its pro- motional activities has been remarkable. These activities are discussed below. 3.19 Korea Development Leasing Corporation (KDLC). As a contribution to the development of the Korean financial system [(i) in para. 3.18], and as a supplement to its own development banking activities, KDFC promoted and jointly established KDLC with the Orient Leasing Co. Ltd. (OLC) of Japan in February 1975. KDLC has an authorized share capital of W 3 billion of which W 1.8 billion (US$3.7 million) was paid-in; domestic shareholders hold 51% of its shares, foreign shareholders 49%; KDFC is the largest shareholder with a share of 30.8%, OLC holds 29.0% and IFC 10.0%. 3.20 KDLC writes financial leases for a wide range of industrial, agricultural, transport, construction, educational and medical equipment (as well as for the real estate necessary to operate such equipment) and issues guarantees on international leasing contracts. Its operations since its establishment have grown rapidly. As of end-March 1978 KDLC had written 186 lease contracts amounting to W 25 billion (US$52 million). This heavy demand for leasing is partly the result of tax and tariff advantages granted by the Government to lessee and lessor alike. But, more significantly, the heavy demand for leasing is mainly attributable to the fact that many small- and medium-sized firms lack an adequate equity base (high debt:equity ratios) and the required collateral to obtain medium- and long-term finance, and thus are unable to purchase equipment outright. In contrast, lease financing is unrelated to the lessee's capital base as the ownership of the financed equipment remains with the lessor, and therefore the lease instrument has enabled small- and medium-sized enterprises to overcome this borrowing constraint and obtain what in effect amounts to an unsecured loan. Indeed, in 1977 the major portion of KDLC's business was with these companies, 67% of KDLC's leases and 52% of its lease amounts being contracted with small and medium-sized firms. The rapid growth of leasing, besides alleviating this borrowing constraint, has also contributed to the development of the domestic capital goods industry [(iii) in para. 3.18] by increasingly leasing equipment procured in Korea; KDLC increased its domestically procured equipment from 16% of total equipment purchased in 1976 to 24% in 1977. 3.21 On the whole it is evident that the lease instrument is especially well suited to some of the present needs of Korean industry, and KDLC's per- formance in the context of this rapidly growing market has been satisfactory (it attained a leasing market share of 49.2% in early 1978). Its main constraint has been, not lack of demand, but shortage of funds, and therefore - 23 - in 1976 KDFC requested, and the Bank approved, a US$5 million subloan to KDLC out of the fifth Bank loan (No. 1145-KO) to KDFC. This subloan has now been fully allocated by KDLC to 28 leasing projects over the period 1976-78; of which 31% were for textiles and 26% for the food and beverage sector; and which in aggregate created 1,800 jobs at a fixed investment cost per incre- mental job of US$10,600./1 KDLC has also secured further foreign currency resources including an IFC-syndicated loan of US$15 million. 3.22 Korea Investment and Finance Corporation (KIFC). Under the sponsor- ship of KDFC and IFC, KIFC was established in 1971 for the purpose of dealing in all kinds of short-term credit instruments, underwriting and distribution of corporate securities. Its establishment represented the first step in displacing the unorganized "curb market." KIFC was the first institution to operate under the Short-Term Financing Business Law of 1972, and subsequently 10 other short-term financing companies were established in 1973, 1974 and 1977. The short-term financial needs of Korean industry are considerable, the level of demand has therefore been high and the growth of operations rapid, the 11 companies having a combined portfolio of discounted notes outstanding of W 613 billion (US$1.3 billion) as of end-1977, of which KIFC accounted for W 58 billion. KIFC's performance has been satisfactory, net income after tax amounting to W 2.8 billion in 1977, representing 94% of average equity. 3.23 Joint Financing and Resource Mobilization. Apart from indirectly mobilizing domestic currency resources by requiring its borrowers to increase their equity contributions (para. 3.13), KDFC has arranged joint financing for 20 projects between 1968 and end June 1978 with the dual objective of mobilizing foreign currency resources [para. 3.18(ii)] as well as enabling KDFC to participate in the financing of projects too large for it to finance alone. KDFC's own foreign currency financing of these 20 projects amounted to US$34 million while the other financiers contributed US$90 million (Annex 4, Table 9). Nearly half of these joint financing schemes involved new indus- trial ventures. IFC participated in the financing of 3 of the 20 projects. The level of joint financing activity increased markedly in 1977 during which 8 of the 20 projects were financed, involving US$15 million in KDFC financing and US$19 million from other sources. In addition KDFC assisted Korean enter- prises to borrow directly from foreign financiers in 1977; the Sam Yang Tire M4anufacturing Company Ltd. borrowed US$3.7 million from Trident International Finance Ltd (Hong Kong) via KDFC's intermediation. 3.24 While the level of KDFC's joint financing activity of recent years represents a substantive contribution to foreign resource mobilization, the Goverment's recent restrictions on the borrowing of foreign currency by corporations from abroad will most probably reduce this level in the immediate future. Therefore KDFC intends to increase its joint financing with domestic banks and foreign banks operating in Korea, and also to actively support the recent Government emphasis on the promotion of joint industrial ventures. In /1 For a more complete analysis of KDLC's subprojects financed via KDFC's 1976 subloan, see Annex 4, Table 4. - 24 - this connection, KDFC entered into a Cooperation Agreement with the Belgian Corporation for International Investment (SBI) in April 1978, designed to promote joint ventures and long-term financing of manufacturing and agro- industrial projects. 3.25 Development of Industrial Linkages [para. 3.18 (iii)]. KDFC's promotional efforts in this field basically involve two activities: the Korea Technology Advancement Corporation (K-TAC), and KDFC's assistance to the machinery industries, particularly the encouragement of subcontracting arrangements within that sector. 3.26 K-TAC was established in 1974 under the joint sponsorship of KDFC and the Korea Institute of Science and Technology (KIST), with the objective of promoting the commercial exploitation of the patents and technical proc- esses developed by KIST. In 1976, K-TAC promoted two new projects for bronze powder and cordierite saggar production, both with KDFC's assistance in the form of loans and equity participation. Progress has been satisfactory, the latter project is already profitable in its first operating year, and the former project will be spun off as a separate legal entity within 1978, as planned. More recently, FIST has developed a new manufacturing technique for Vivatax, a raw material for a fungicide, which K-TAC intends to establish as a project at an estimated cost of US$2.5 million. It is presently being ap- aised by KDFC. More generally, the scale of future K-TAC activities will be increased as it intends to become involved in the promotion of direct transfers of advanced foreign technologies into Korean industry by, inter alia, estab- lishing new joint-enterprises and seeking KDFC's financial assistance, in addition to its present promotion of KIST's technical inventions and modifi- cations. 3.27 In line with recent Government policies, KDFC has given high prior- ity to the machinery industry, especially to the small- and medium-sized producers as most of the large scale machinery projects are beyond KDFC's financial and technical reach. In 1977, 4 machinery projects and 18 mach- inery-related capital goods projects were approved, involving respectively US$3 million and a total of US$22 million in foreign currency financing. In some cases, KDFC has also been assisting the domestic machinery sector indirectly by financing the foreign currency component of domestically procured capital goods;/l about US$9 million of Bank Loan No. 1461-KO was utilized in this manner in 1977, as well as a further US$6 million from the second ADB loan. Through its financial support of this sector, KDFC has increasingly noticed instances where the successful development of large- scale machinery projects is hindered by, inter alia, insufficient subcon- tracting arrangements. In the future KDFC therefore intends to stress the promotion of subcontracting, particularly examining the possibility of manufacturing components and parts for its machinery and automobile clients on a subcontracting basis, thereby stimulating small and medium scale activity and strengthening industrial linkages. /1 A percentage of 60% representing the estimated foreign exchange com- ponent of domestically manufactured capital goods is eligible for financing under the (sixth) IBRD Loan No. 1461-K0. - 25 - 3.28 KDFC-RCB Assistance to Small Industries in Less Developed Areas. In order to diversify its portfolio [para. 3.18(iv)] in terms of geographical distribution and a broader clientele, KDFC signed cooperation agreements with four /L of the ten Regional Commercial Banks (RCBs) between August 1975 and December 1976. The basic objective of this scheme is to channel foreign currency funds (provided by KDFC) to projects identified and appraised by the RCBs along guidelines (which are detailed and appropriate) issued to them by KDFC. The RCBs finance the domestic currency requirements and assume respon- sibility for the supervision of projeces. KDFC has specified US$500,000 as the normal ceiling on foreign currency loans to any single enterprise under this scheme. 3.29 In 1976 an amount of US$5 million was allocated by KDFC from the fifth Bank loan to finance 18 KDFC-RCB projects. In 1977 an amount of US$4 million from the second ADB loan went to 12 KDFC-RCB projects. A further US$7 million out of the sixth Bank loan is expected to be fully committed to KDFC-RCB projects by end-1978. Partial economic indicators for these projects are summarized in Annex 4, Table 4; 40% of the 1977 loans (by amount) went to borrowers with total assets of W 500 million (US$1 million) or less; 83% to borrowers with less than 200 employees; 70% to new projects; and 24% to the metal products sector, 27% to textiles and 23% to the dairy products sector (Annex 4, Table 10). 3.30 Via this scheme, the RCBs can participate in different projects (i.e. those requiring foreign currency financing) and simultaneously broaden their clientele, and their staff have received training in appraisal tech- niques at KDFC (eight officers, two from each RCB, attended a course at KDFC in 1977). For KDFC, this scheme has had an immediate impact on the geograph- ical and clientele diversification of its portfolio, without the need to first set up a branch network. It has also increased its interaction with other financial institutions [para. 3.18(i)], and most importantly, it has provided a channel through which it can extend foreign currency financing to small scale borrowers in less developed areas However, it is not entirely without problems, for instance, the Chunbuk Bank, being located in a prin- cipally rural area has not yet been able to identify a suitable project for financing under this scheme./2 3.31 KDFC has also pursued the diversification of its portfolio by continuing to support projects in the agro-industrial sector; in 1977 total loans of US$2.1 million were approved for 5 dairy projects, and a W 200 million convertible debenture subscription was approved for the Dong Yang Farm Company (for viticulture and hops). /1 The four Regional Commercial Banks were: Bank of Busan, Daegu Bank, Chunbuk Bank and Kwangju Bank. /2 The Chunbuk Regional Study (see Annex 3) is specifically charged with identifying suitable projects in this region; it should be completed in mid-1978. - 26 - Development Strategy 3.32 Having made substantial progress in achieving the development objectives outlined in its previous Development Strategy, KDFC has adopted a new Development Strategy Statement for 1978/79 (Annex 3) which covers five main areas: (a) a study to be carried out in close consultation with the Bank Group to identify the various options for future diversification and expansion of IDFC's functions and operations, in the context of the rapidly changing and growing Korean economy (paras. 3.67 to 3.69); (b) project promotion and resource allocation; specifically continuing to finance small scale and/or labor intensive projects via the RCB scheme, placing increased emphasis on subcontracting arrangements especially in machinery and related industries, and intensifying efforts to establish jointly with DEG an engineering and consulting firm (as a separate legal entity) to undertake feasibility studies and provide advisory services for both public and private enterprises; (c) resource mobilization; KDFC will endeavor to raise US$250 million foreign commercial funds between 1978-82 so as to gradually reduce its dependence on official sources, and will mobilize domestic currency resources via its planned W 5 billion share capital increase; (d) research activities focussing on the Chunbuk Area Study; and (e) KDFC will strengthen and adapt its organi- zation by increasing the staff of its Project Promotion Department and consider establishing a branch in the Busan area in the near future. The precise form, magnitude and speed of implementing these various development activities will be closely linked with the ultimate conclusions of the Special Study on KDFC's future role. B. INSTITUTIONAL ASPECTS Functions and Legal Status, Ownership, Organization and Staff 3.33 Functions and Legal Status, Ownership and Share Capital. KDFC is a privately owned corporation established under the Korean Commercial Code. Its main objective is to assist the development of private productive enter- prises, thereby supporting the development of the Korean economy. Apart from IFC (holding 10.5%), no single shareholder owns more than 4% of the share capital. KDFC's ownership is therefore reasonably broad based./l The 11 foreign shareholders (including IFC) accounted for about 35% of KDFC's paid-in share capital as of December 31, 1977. Apart from IFC and the German Development Corporation (DEG) which is a semi-public institution, the foreign shareholders are commercial banks mostly from the US and Japan (Annex 4, Table 11). KDFC's present authorized capital is W 10 billion. KDFC's initial paid-in share capital of W 1.35 billion in 1968 had increased to W 5 billion by end-1977 through stock dividends and two rights issues in 1973 and 1976. The Board of Directors decided in February 1978 that KDFC will increase its share capital by a further W 5 billion (to a total of W 10 billion) in 1978, in order to strengthen its equity base and correspondingly its borrowing capacity (further details in Annex 4, Table 12). /1 Particularly among the 377 domestic shareholders, of whom only 8 hold more than 1.75% of KDFC's shares. - 27 - 3.34 Management and Organization. KDFC has a 13-member Board. The Korean directors are all leading members of the financial and business community. Five directors, including IFC's representative (Mr. N. Nishihara) represent the foreign shareholders. Mr. C.S. Hong, a prominent industrialist and former Chairman of FKI,/1 who has been the Chairman of the Board since KDFC's establishment in 1967, resigned the Chairmanship in May 1978, while continuing to serve as a Director. He was succeeded as Chairman by Mr. C.H. Kim (previously the President of KDFC). Mr. B.E. Kim (former President of the Korea Exchange Bank) was elected as President. KDFC's high managerial standards are expected to be maintained. Between Board meetings, authority to conduct KDFC's operations and approve loans and investments under US$5 million is delegated to an Executive Committee consisting of four board members (with the Chairman and President as ex officio members). KDFC's President has been given authority to approve loans and investments up to US$500,000 under KDFC's scheme of cooperation with the RCBs. KDFC remains one of the best managed DFCs with which the Bank Group is associated, and it has considerable depth at the management level. The Board and Executive Committee are listed in Annex 1. 3.35 Staff. A breakdown of KDFC's staff, which numbered a total of 135 at end-March 1978, is provided in Annex 4, Table 13. The quality of KDFC's professional staff, both in terms of academic and professional background, remains excellent at all levels. This is reflected in the consistently high standard of KDFC's operations. KDFC has endeavoured to maintain its salaries at roughly comparable levels with equivalent positions in private industry and at slightly higher levels than other financial institutions in Korea. Nevertheless, staff turnover accelerated markedly in recent years, with nine professionals leaving in 1976, another nine in 1977 and a further six leaving by end-March 1978./2 The main reason for these high rates of turnover seems to be the attraction of more rapid promotion prospects in fast-expanding industry (particularly attracting KDFC's junior officers), rather than comparative salary levels per se. KDFC is not the type of institution which could or should match such rates of personnel promotion, but in an effort to meet the competition from industry, KDFC has recently expanded its fringe benefits package, which now includes staff housing loans /3, family medical insurance and subsidized recreational opportunities. In addition, staff training abroad is being considerably expanded, and it is expected that eight professionals will receive overseas training /4 in 1978. As a result of _1 Federation of Korean Industries. /2 Excluding for all three years the professional staff made available to KDLC and KIFC. /3 This represents a very strong incentive given the rapid inflation in house prices and difficulty of obtaining sufficient financing from the Korea Housing Bank. /4 Two staff members are going to the Industrial Bank of Japan for one month, other training arrangements remain to be finalized. - 28 - these added incentives, future staff turnover is expected to subside. So far, staff turnover has had no noticeable adverse effect on the quality of KDFC's operations, which is due to KDFC's basic staff strength, and also because the turnover has not involved KDFC's key staff. Moreover, KDFC has had no difficulty in recruiting new staff /1 of a similarly high quality. KDFC intends to recruit 13 additional professionals in 1978. KDFC's recruit- ment plan to 1982, detailed in Annex 4, Table 13 is adequate. Besides intensified foreign training, KDFC is also stepping up domestic and in-house training, especially focusing on project appraisal techniques, finance, management, law, taxation and accounting. These courses have also occasion- ally involved the RCB's staff. Operational Policies 3.36 The Statement of Investment and Operational Policies (Annex 2), adopted in 1967 and subsequently amended on seven occasions, sets out the guidelines for KDFC's operations. There have been no substantive changes since the previous Bank appraisal. The Statement outlines the usual finan- cial prudence limits. Paragraph 10 specifies that KDFC's maximum financial exposure (including loans, share capital and guarantees or any combination thereof) in any single enterprise will not normally exceed 25% of KDFC's paid-in capital, free reserves and the subordinated Government loan. As of December 31, 1977 KDFC's normal exposure limit defined in this manner stood at W 2.72 billion, and this limit had been exceeded in only four cases up to that date. In three cases the excess was small (ranging from W 5.8 mil- lion to W 119.8 million) and in only one instance was the excess large (W 1.16 billion). The increase in KDFC's paid-in share capital currently underway will eliminate these few instances of excess exposure altogether. In addition to the general Statement of Investment and Operational Policies, KDFC has outlined its more specific development objectives for the immediate future in the Development Strategy covering 1978/79 (Annex 3). Project Appraisal and Supervision 3.37 Project Appraisal. The procedures, quality and ex-post accuracy (para. 3.38) of KDFC's appraisal work continue to be of a very high standard. KDFC's appraisal methods and reports are frequently used as models and training materials by other Korean institutions as well as some overseas DFCs. Technical, marketing, management, financial and economic matters are usually analyzed thoroughly. KDFC's economic analysis is sufficiently sophisticated, and since June 1973 ERRs have been routinely calculated for projects seeking foreign exchange financing in excess of US$1 million, irrespective of the source of financing. The coverage of KDFC's project appraisal is being further expanded and refined by explicitly focusing on energy matters, such as total requirements, possible alternative energy sources, and energy-saving techniques and designs. In addition, the possible /L A recent selection in 1977 showed a ratio of three applicants per avail- able position. - 29 - adverse ecological implications, if any, of a proposed project are evaluated in accordance with the Pollution Prevention Act of 1971, and the Environment Conservation Act of 1977. Of particular relevance to its appraisal techniques and standards are the continuing close links which KDFC maintains with the Korean Institute of Science and Technology. Furthermore, the proposed establishment of the Engineering Consulting Firm (Annex 3) will provide KDFC with another source of expertise, particularly in the appraisal of technical aspects in the preinvestment phase. It is therefore expected that the high standards of KDFC's appraisal will not only be maintained but actually be further improved. 3.38 Supervision. The Operations Department, numbering 21 professionals, is responsible for project follow-up activities.J/ KDFC's supervision proce- dures are systematic and thorough. The subborrowers' reporting require- ments are comprehensive and are used by the Operations Department as a basis for an annual follow-up report on each project which analyses, inter alia, sales, market shares, price trends and financial performance, particularly liquidity and earnings. In addition, actual project costs /2 and benefits are collected and used to calculate ex-post FRRs and ERRs, which are compared to the ex-ante appraisal estimates. A small sample of such comparisons was as follows: FRR ERR Projected Actual Projected Actual 1. Ihn Sung Fisheries - - 24.0 20.2 2. Dongsue Shipping 23.9 17.4 23.9 17.4 3. Dong Yang Tinplate 50.0 33.5 53.0 39.7 4. Korea Ferrite 30.5 30.4 29.8 29.8 5. Tao Young Shipping - - 22.0 21.9 6. Ilshin Spinning 44.2 50.3 44.4 50.5 7. Young Poong Mining 33.4 42.1 71.3 60.4 8. Kimpo Ceramics 22.3 24.0 27.6 25.5 9. Chonju Paper 15.8 16.5 23.7 22.1 A high degree of predictive accuracy is indicated by these figures, reflect- ing the high standard of appraisal work. This predictive accuracy is even more remarkable when it is considered that the ex-ante estimates were made in a period of sharply fluctuating prices and trade flows. /1 KDFC intends to reorganize its departmental structure and functional responsibilities in the second half of 1978 (Annex 5). /2 A study of a sample of 19 recent subproject for which implementation was completed in 1976 and 1977 showed 12 cases of cost underrun ranging from 0.1% to 10%, with an average of 4.5% , and 7 cases of cost overrun ranging from 0.1% to 19%, averaging 7.3%. - 30 - Procurement and Disbursement 3.39 KDFC's procurement and disbursement procedures are designed to ensure an efficient and appropriate use of funds. KDFC normally requires a reasonable degree of competition, involving a comparision of at least three quotations from potential suppliers. In 1977, the equipment requirements under 26 loans, involving about US$26 million in KDFC financing, were procured in this manner. Occasionally KDFC insists on international competitive bidding, and in 1977 two loans involving US$5.4 million used this method of procurement. More frequently, and particularly for expansion projects, the specifications and technology of existing equipment effectively compels the procurement of new equipment from the same supplier. In 1977 such conitractual procurement was made for 38 loans involving nearly US$39 million. In all cases of project procurement the merits of the various alternative methods and offers are evaluated jointly by the subborrower and the Operations Department. The final procurement contract is subject to KDFC's approval and disbursements are subsequently authorized against submission of satisfactory documents and progress reports on project implemen- tation. KDFC closely monitors the procurement process and also collects exten- sive data on the actual expenditure of its loans. C. OPERATIONS Overall Lending Operations 3.40 The scope of KDFC's operations, particularly its clearly distinct role vis a vis the functions of other development finance institutions operating in Korea, has been outlined in para. 3.02. KDFC's financing opera- tions fall into two broad categories: (a) medium- and long-term capital (equipment) loans in foreign and domestic currency; and (b) domestic currency investments in equity shares and convertible debentures. KDFC's guarantee operations are negligible. KDFC's operations, up to June 1978, are summarized in Annex 4, Table 14. Cumulative commitments from KDFC's inception to June 30, 1978 stood at W 160.6 billion (US$331 million) of which foreign currency lending accounted for 89.7%, domestic currency lending 5.8%, equity investments 2.8% and convertible debentures 1.7%. Cumulative disbursements from 1968 to June 30, 1978 stood at W 168.7 billion/l and the total amount outstanding as of June 30, 1978 amounted to W 123.9 billion. Equity and debenture investments are discussed in para. 3.48. 3.41 Foreign Currency Lending Operations. Cumulative foreign currency loan approvals over the 1968-June 30, 1978 period amounted to US$324.3 million representing 348 loans. Again on an approval basis, KDFC's foreign currency lending in 1977 was US$70.0 million, an increase of 14% over the 1976 level of US$61.5 million, which itself was 43% greater than the 1975 total of US$42.9 million. This year-to-year comparison is slightly distorted by the unusually rapid growth in the 1976 foreign currency loan approvals which was partly the result of the availability of the US$20 million IFC-syndicated commercial loan. This particular instance in 1976 underlines the more /1 For the method of calculating "won equivalent" disbursements, see Annex 4, Table 14, footnote f. - 31 - general point that the year-to-year growth pattern has been irregular through- out because the level of approvals has typically been a direct function of resource availability. The delayed effectiveness of the ADB loan in 1974 and the joint availability of the first ADB loan and fifth Bank loan for part of 1975 are therefore clearly reflected in the sharp fluctuations of KDFC's approval figures for those years. Similarly, the simultaneous effectiveness in late 1977 of the sixth Bank loan of US$70 million and the APCO 11 syndi- cated commercial loan of US$20 million can be expected to increase the growth rate of foreign currency loan approvals for 1978. (The half year figures to June 30, 1978 confirm this expectation, with approvals of US$44.5 million so far). 3.42 Domestic Currency Lending Operations. As KDB and MIB are statutorily authorized - unlike KDFC - to accept domestic currency deposits and issue domestic currency bonds for resource mobilization purposes, KDFC considers that these institutions are better equipped to handle domestic currency lending. In contrast, KDFC concentrates on foreign currency lending and considers its (limited) domestic currency financing as an ancillary service to its borrowers of foreign currency. Hence KDFC's domestic currency loans accounted for only 5.8% of its total financial assistance from 1968 to June 30, 1978. Over this period, cumulative domestic currency loan approvals amounted to W 9.5 billion (US$19.6 million) involving 96 loans. Characteristics of KDFC's Lending Operations 3.43 Sectoral Distribution. Annex 4, Tables 15-16 summarize the sec- toral distribution of KDFC's loan approvals for the period 1968 to 1977. Only one sector exceeds 20% of KDFC's total loan portfolio (metal products, machinery and equipment, with 21.9%), reflecting KDFC's policy to achieve and maintain a diversified sectoral distribution of its portfolio. The three largest recipients of KDFC loans were metal products, machinery and equipment (21.9%), textiles, wearing apparel and leather (18.3%) and marine transporta- tion services (17.8%). In 1977, textiles financing declined abruptly com- pared with 1976 (from 26% to 5%), while the share of metal products more than doubled between 1976 and 1977 (from 16% to 36%). 3.44 Annex 4, Table 16 presents the sectoral distribution of KDFC's approvals at several levels of disaggregation. On a cumulative basis the manufacturing sector accounted for 66% of KDFC's approved loans up to end- 1977, nonmanufacturing accounting for the remaining 34%. Within manufactur- ing, the three industry groups had the following shares of KDFC loan approvals on a cumulative basis to end-1977: capital goods industries 26.4%, consumer goods industries 22.7% and intermediate goods industries 16.6%. This distri- bution is essentially the result of events in 1977, when loan approvals to consumer goods industries (notably textiles) declined to one-fifth of the 1976 level, while the share of both other industry groups in KDFC's loan portfolio continued to grow rapidly. On a cumulative basis, chemicals and metal products are the two largest subgroups of heavy industries in KDFC's manufacturing sector portfolio. Within nonmanufacturing, transportation (mainly marine shipping) is the largest subgroup, accounting for 19.5% of KDFC's total financing. /1 Asia Pacific Capital Corporation, Ltd, affiliated to FNCB of New York. - 32 - 3.45 Size Distribution. Annex 4, Table 17 (Section C) summarizes the size distribution of KDFC's lending from 1968 to end-1977. On a value basis, the shift towards lending to projects requiring large amounts of financial assistance continued in 1977, when about 75% of KDFC's lending was allocated to projects of more than WI 500 million (US$1 million), reflecting the growing size of investment projects in Korea. However, based on the number of loans, more than 50% of KDFC's loans in 1977 were for W 300 million (US$0.6 million) or less, a situation basically unchanged from 1976 and not significantly different from the entire ten years of operations between 1968 and 1977./j This shows that KDFC, in accor7dance with the Government (and its own) develop- ment strategy, is continuing its efforts to at least partially cater for the needs of small- and medium-scale firms as an addition to its main business focus of lending to relatively large industrial enterprises. The average Size of KDFC's lending /1 (excluding the KDFC-RCB loans) was US$1.14 million per project in 1976 which increased to US$1.38 million per project in 1977. Under KDFC's scheme of cooperation with the RCBs, 18 loans were made in 1976 at an average of US$280,000 per project, and another 12 loans averaging US$320,000 per project in 1977. It is apparent, therefore, that the average magnitude of all KDFC loans per project (US$0.8 million in 1974, US$1.0 million in 1975, US$0.9 million in 1976, US$1.1 million in 1977) obscures the diversity of KDFC's lending operations and more especially the allocation of loans to small- and medium-scale enterprises through its hitherto limited, but quali- tatively useful, cooperation effort with the RCBs. /2 3.46 Geographical Distribution (Annex 4, Table 17, Section D). Exclud- ing the fishing and marine transport industries, the share of the Seoul area in KDFC's financing declined from 26% in 1968-72 to 20% in 1968-77. Con- versely, the Kyung-Gi province surrounding Seoul has increased from 11% to 22%. The Busan area has maintained a fairly constant level of about 7% throughout, while its surrounding area, South Kyung-Sang Province, marginally increased its share from about 4% to 6%. The North Kyung-Sang Province, which includes Taegu, the third major industrial region in Korea, and an important textile area, has maintained its share of about 10%. The geo- graphical distribution of KDFC's projects conforms with the general objective of wider industrial disperal throughout Korea as a whole. 3.47 Repeat Loans. Annex 4, Table 18 summarizes KDFC's repeat loan operations since its inception, and indicates that KDFC has been reason- ably successful in diversifying its clientele. As of end-1977, subborrowers receiving more than one loan accounted for 34% (by number) of KDFC's 223 clients, while the equivalent end-1976 figure was 37%. Repeat loans (by amount) represented about 55% of cumulative loan approvals since IKDFC's inception, which again, is ansimprovement on the end-1976 level of 59%. /1 Excluding US$5 million subloan made in 1976 to ICDLC, which was on-lent to a total of 28 projects at an average lease amount of W 87 million (US$180,000). KDFC's lending to KDLC is also a worthwhile and effective method of meeting the needs of small- and medium-scale enterprises. /2 As these calculations are made in current prices, it could be argued that by number of loans, KDFC has actually increased the proportion of small loans (W 300 million or less) over time (if expressed in constant prices). - 33 - About 24% (by amount) of KDFC's repeat loans have been allocated to textiles, 18% to marine transportation and a further 16% to metal products, machinery and equipment. Investment Operations 3.48 A summary of KDFC's investmentl operations is presented in Annex 4, Table 19. Between 1968 and end-1977 convertible debentures and equity par- ticipations accounted for only 4.6% of KDFC's total financial assistance, and 18% and 27% respectively of KDFC's total domestic currency approvals (W 15.2 billion), the remaining 55% being domestic currency loans. KDFC is giving increasing priority to these investment activities because it con- siders them to provide potentially substantial, even disproportionate, assistance to the establishment and successful development of enterprises. In accordance with this objective, KDFC had by end-1977, selected 26 compa- nies for equity investments,/l 17 of which were not listed, 3 were operating at a loss in- their initial start-up phase, and 5 were in the preoperating stage. Generally KDFC makes its equity investments (like its domestic currency loans) as a supplement to foreign currency loans, and at end-1977 the 26 companies in its investment portfolio had received loans totaling W 17.8 billion (US$37 million) from KDFC. Utilization of Bank Loan No. 1461-KO 3.49 As of June 30, 1978, KDFC had committed US$61.9 million of the proceeds of the sixth Bank loan (US$70 million) for 38 subprojects. These Bank resources constituted about 92% of KDFC's total financial assistance (US$67.6 million) to these sub-projects, which itself financed about 31% of the US$220.6 million total project costs (of which 52% was foreign exchange). KDFC's subloans ranged in size from US$92,000 to US$7.6 million (for petro- chemicals) with an average of US$1.3 million./2 By amount, the chemical/ petrochemical and paper industries accounted for about 36% of KDFC's approvals, but by project, fisheries (including deep-sea fisheries) and metal projects were the most numerous. Twenty-one of the subloans were for expansion purposes, nine were new projects and six were repeat projects (nearly all fisheries). Financial rates of return are satisfactory, ranging from 15% to 44%, with an average of about 25%, while the ERRs range from 15% to 68%, averaging nearly 30%. Further details are summarized in Annex 4, Table 21. 3.50 Preliminary estimates indicate that 2,884 incremental jobs will be generated by these subprojects at a fixed investment cost per- job ranging /1 KDFC outstanding equity investment portfolio in these 26 companies at end-1977 was W 4.2 billion. /2 Excluding three subprojects (petrochemical, chemical and paper) which are unusually capital intensive and therefore misleadingly distort the average subloan size. - 34 - from US$3,000 to US$234,000 (marine transportation), with an average of US$30,300 /1 (see para. 3.06 for a comparison with all KDFC's projects). On the whole, this level of average fixed cost per incremental job reflects the fact that KDFC was set up primarily to operate in the medium- to large-scale sectors of industry and that in recent years it-has, in line with Government policy, financed a number of projects in priority sectors which are generally capital intensive (e.g. chemicals, marine transportation and metals). In addition, this average fails to reveal the successful efforts that KDFC has been making to meet the financial needs of some smaller, typically more labor intensive, enterprises via its RCB scheme and leasing projects through KDLC. D. FINANCIAL POSITION, PERFORMANCE AND RESOURCES Financial Position 3.51 Assets. Balance sheets for the years 1974 to 1977 are summarized in Annex 4, Table 22. As of December 31, 1977, KDFC's total assets stood at W 109.9 billion (US$227 million) following a reasonably steady /2 annual growth of 35% since 1974 (and reaching W 133.1 billion by June 30, 1978). Current assets amounted to W 20.2 billion (or 18% of total assets) having increased at the same annual rate as total assets (and stood at W 22.4 billion on June 30, 1978). The 1977 growth in total assets was almost entirely due to the rapid increase in the foreign currency loan portfolio from W 71.2 billion (US$147 million) in 1976 to W 93.0 billion (US$ 192 million) in 1977. Consequently KDFC's foreign currency loan portfolio /3 accounted for 85% of total assets in 1977 compared with 81% in 1976 (and had increased to nearly 87% in the first half of 1978). 3.52 Liabilities and Equity. Of KDFC's total assets at December 31, 1977, 77.0% were financed by long-term liabilities, 13.1% by current lia- bilities (84.5% by total foreign currency borrowings), and 9.9% by equity. The growth in KDFC's foreign currency loan portfolio in 1977 was 30%, almost entirely financed by foreign currency borrowings in that year. In 1977, total foreign currency borrowings accounted for 98% of KDFC's total long-term debt, a marginal increase compared with 1976. KDFC has made satisfactory progress in diversifying its foreign currency resources; its outstanding borrowings from the Bank have decreased as a proportion of its total foreign currency debt from 97% in 1974 to 63% in 1977 (and to 58% at June 30, 1978). KDFC's domestic currency borrowing consisted of a Government subordinated loan of W 2,025 million, which KDFC started repaying in 1977. /1 Again excluding the three large capital intensive subprojects which, if included, would raise the average fixed investment cost per incremental job to US$43,500. /2 The growth in total assets in 1976 was disproportionately large following a bunching of approvals and disbursements during 1975 and 1976. /3 Including the portion of loans due within one year. - 35 - 3.53 KDFC's net worth stood at W 10.9 billion at end-1977, an increase of 14% over the 1976 level. Paid in share capital amounted to W 5 billion /1 and reserves and retained earnings accounted for the remainder, W 5,886 million (representing 54%). By June 30, 1978, KDFC's net worth had increased to W 11.1 billion. 3.54. Liquidity and Debt:Equity Ratio. KDFC's current ratio showed a marginal decrease from 1.5 in 1976 to 1.4 in 1977 (and to 1.2 at Juie 30, 1978), still leaving KDFC with a comfortable liquidity position. The long-term debt: equity ratio increased from 7.7:1 in 1976 to 8.7:1 in 1977 because the growth rate of KDFC's disbursements and foreign currency indebtedness (30% p.a.) exceeded the growth rate of its net worth (14% p.a.). However, this 8.7:1 ratio is still well within the contractual limit of 10:1 /2 and, in addition, the future ratio will be significantly reduced following the completion of the planned W 5 billion share issue in late 1978. KDFC's debt service coverage remained at 1.3, the same level as in 1975 and 1976, and is satisfactory. Financial Performance 3.55 Earnings. Income and cash flow statements, and indicators of financial performance are summarized in Annex 4, Tables 23-24. Gross income for 1977 amounted t6 W 11.4 billion (US$23 million), with net income reaching W 2.06 billion (US$4.24 million) in 1977. Net income has grown at an average annual rate of 31%'between 1974 and 1977. Net return on net worth was 20.1% in 1977 compared with 18.7% in 1976 and 15.8% in 1974. The level and growth of KDFC's net income continues to be satisfactory. KDFC has also continued to maintain stringent expenditure controls and has achieved a further relative reduction in administrative expenses, which represented only 1.1% of average total assets in 1977 /3 (compared with 1.6% in 1974). This is illustrative of KDFC's sustained operational and managerial efficiency. Tables 23-24 also present June 30, 1978 figures which, while half year figures should be interpreted with caution, provisionally indicate that KDFC's 1978 performance will show satisfactory growth. 3.56 Share Prices and Dividends. In February 1977, the shareholders approved an amendment to KDFC's Articles of Incorporation which increased the number of authorized shares of common stock from 1 million to 10 million and split each outstanding share of common stock 5 for 1. The new par value of KDFC's shares is therefore W 1,000 per share, and at December 31, 1977 the book value of these shares amounted to 218% of par value. Only 7.1% of the average number of KDFC's outstanding shares were traded in 1977, and the quoted price of KDFC shares has fallen from W 2,140 /4 in early 1974 to W 1,110 in January 1978. /1 An increase of a further W 5 billion in share capital is in process. /2 Agreed during the negotiations for the Sixth Bank loan in 1977. The long-term debt:equity ratio increased to 10.5:1 by mid-1978 which was strictly temporary and will fall to approximately 7.5:1 after the completion of the W 5 billion rights issue of late 1978. /3 This level compares favorably with the administrative expenses of deposit money banks in Korea, particularly, of course, those with an extensive branch network. /4 Based on the new par value of W 1,000 per share. - 36 - 3.57 From 1968 to 1975, KDFC declared a dividend of 10% in cash and 10% in stock (with the exception of 1973, when a 15% cash dividend was declared). Since the November 1976 rights issue, KDFC has declared a 20% cash dividend annually. The payout ratio remained at a moderate 48.6% in 1977, virtually unchanged from 1976. Quality of Portfolio 3.58 Annex 4, Table 25 summarizes KDFC's collection performance and arrears situation over the last four years. KDFC's portfolio remains of exceptionally good quality, and KDFC's performance in collecting loans is outstanding. KDFC experienced its first arrears problems in 1972 with six loans in arrears for more than three months at the end of that year. The financial measures enacted by the Government in August 1972 coupled with KDFC's intensified collection efforts had by end-1973 reduced the number of loans in arrears to only two. No loan was in arrears for over three months at end-1975, end-1976 and end-1977. Collection ratios on principal and interest over the last four years ranged from 98.0% to 100%, reflecting a nearly perfect performance. Since its establishment in 1968, KDFC has had to foreclose mortgages L] on two loan accounts in 1974 and 1975, incurring a loss of W 88 million which was written off. No loan reschedulings were made by KDFC in 1976 and 1977./2 On the whole, therefore, it is very clear that the quality of KDFC's portfolio and the success of its collection efforts have been, and continue to be (as indicated by mid-1978 figures), excellent. However, with W 42 billion (representing 43%) of KDFC's outstanding loan portfolio in 1977 still in the grace period, and with the increasing number of clients and loans, some arrears are likely to re-emerge in the future. KDFC has made provisions for doubtful accounts in 1977 of 1.4% /3 of the incremental loan portfolio. Cumulative provisions for losses amounted to W 1.5 billion as of end-1977,/4 which /1 In line with a practice followed by Korean commercial banks, the great bulk (80%) of KDFC's loans (as of end 1977) were secured by payment guarantees from commercial banks, and only 20% by mortgages on "real" properties. KDFC requires bank guarantees if: (a) the applicant's assets have already been pledged to other banks; (b) the applicant has a short history and appears financially weak; and (c) when KDFC finances vessels for marine transportation or deep-sea fishing. /2 In 1975, the repayment schedules of three loans with a total principal outstanding of W 1 million (US$2,000) were extended by one year. /3 Based on estimated aggregate portfolio risk. Provision expenses under 2% of the incremental portfolio benefit from tax exemption. /4 Insofar as these provisions have historically not been required they represent "hidden" earnings and if regarded as such would substantially increase KDFC's net income. - 37 - together with free reserves accounted for 7.3% of the total portfolio; a level which is more than adequate. The exceptional soundness of KDFC's portfolio is attributable more to the quality of its appraisal and follow-up work, to its ability to identify and remedy problem projects at an early stage, and more importantly, to the recent strength of the Korean economy, than it is to any overly conservative lending policy on KDFC's part. Resources and Terms and Conditions of Lending 3.59 Resources. KDFC's resource position as of June 30, 1978 1 is shown in Annex 4, Table 26. As of that date, KDFC had mobilized total resources of W 176.0 billion (US$363 million) of which 8.7% were domestic and the remaining 91.3% foreign currency resources. At the same date, total domestic currency resources amounted to W 15.4 billion of which W 5 billion (about 32%) was share capital; reserves and noncash charges accounted for 40% and 15% respectively; and the Government subordinated loan accounted for the remaining 13%./2 As of June 30, 1978, KDFC's domestic currency resources available for commitment amounted to W 3.45 billion. KDFC had mobilized total foreign currency resources of US$331 million as of June 30, 1978, of which 66% was from the Bank, 21% from ADB, 12% from commercial sources (a 1976 IFC-syndicated loan of US$17.8 million with a simultaneous US$2.0 mil- lion loan from DEG, and in 1977 an APCO-syndicated loan of US$20.0 million) and a further 1% from USAID. KDFC intends to increase its foreign commercial borrowings in the immediate future starting with a planned US$30 million in 1978 (see Annex 3). In the first six months of 1978 the rate of disburse- ment and commitment of foreign currency lending has been high so that as of June 30, 1978, a balance of only US$16 million was available for commitment and only US$8 million was available for approval. On current trends, therefore, KDFC's foreign currency resource position is increasingly tight and the proposed US$30 million commercial loan will be required by the second half of 1978 and will need to be supplemented by additional foreign currency borrowings by end-1978. 3.60 Terms and Conditions of Lending. The terms attached to KDFC's own borrowings, and its relending rates are summarized in Annex 4, Table 27. Although the Government does not formally regulate the level of interest rates charged by KDFC, these are expected to be in line with those of other financial and banking institutions in Korea. On the domestic currency side, KDFC's on- lending rate for medium and long-term loans now stands at 21%, while 20% is charged for priority projects. This represents slightly hig1er rates than the domestic currency interest rates of other financial institutions in Korea (Annex 4, Table 1). On the foreign currency side, KDFC's standard on-lending rate is 10.6% at present, with slight differential rate variations being applied depending on the credit standing of the borrower and KDFC's evaluation of the project's contribution to the economy. Despite an average rate of inflation of 11% (wholesale prices) over the last three years, the on-lending rate of 10.2- 10.6% p.a. can be considered positive in real terms because the subborrower /1 For comparative purposes, the December 31, 1977 figures are also shown. /2 KDFC is not at present authorized to accept domestic currency deposits, nor to issue bonds for resource mobilization and relending purposes. - 38 - bears the full foreign exchange risk./l This on-lending rate is also in line with those charged by KDB on comparable foreign currency loans. On the subloans financed from the proceeds of its foreign commercial loans, KDFC charges a floating rate with a spread of 1.25 percentage points above its average borrowing rate. With its increasing foreign currency borrowings from commercial sources, KDFC's interest spread has been reduced to an aggregate level of 3.0 in 1977 from 3.9 in 1974. For all its foreign currency loans, KDFC passes on the foreign exchange risk to the subborrowers. Audit 3.61 KDFC's accounts have been audited in accordance with international accounting standards by the Samil Accounting Corporation, a member firm of the Coopers and Lybrand Group. Their reports meet the Bank Group's require- ments. KDFC's accounts have always been certified without qualification. E. PROSPECTS AND RESOURCE REQUIREMENTS Business Prospects 3.62 The outlook for the Korean economy in general and the manufacturing sector in particular remains favorable;/2 GNP is expected to increase by 9.2% annually, with a growth rate of 14.2% p.a. in the manufacturing sector. The growth of the economy will continue to be mainly export-led; exports of goods and services are projected to increase 16.8% annually with manufactured exports providing 94% of incremental exports over the period 1977-81. An annual increase in gross fixed investment of 7.8% is required to sustain this rate of GNP growth, and manufacturing investment is projected to account for 26.7% of total investment expenditures during the Fourth Plan period (an increase from the manufacturing sector's 24.6% share during 1972-76). Struc- tural changes within the manufacturing sector will continue with further increases in the investment share of the heavy and chemical industries, for which KDFC has already expanded its financial assistance (para. 3.43). 3.63 In this macro-economic context, and within the limits of its assumed domestic and foreign currency resource availability, KDFC has projected over the period 1978-82 total commitments of W 342.2 billion (US$705 million) and total disbursements of W 328.4 billion (US$677 million). KDFC's commit- ments are expected to increase at an average rate of 20.3% per annum and its disbursements are expected to increase at an average annual rate of about 22%. Assuming an average rate of inflation of about 9% per annum for this period, the real growth rate of KDFC's disbursements would be about 13% per annum. /1 This cost has been substantial, and consists of the depreciation of the Won against the U.S. dollar (from W 269 = US$ at end-1967 to W 485 = US$1 since 1974 to 1978), and the depreciation of the Won vis a vis the strong currencies disbursed under the Bank loans (which account for the larger part of the more recent Bank loans). Both these items are quantified by the "won equivalent" total disbursement figures of Annex 4, Table 14, Section F (see footnote f) with particularly the depreciation of the Won against the strong currencies increasing the indebtedness, in Won, of the subborrowers to KDFC. /2 Fourth Five-Year Plan 1977-81. - 39 - As the annual real growth rate of gross fixed manufacturing investment for the Fourth Plan period is projected to be 8%, the share of KDFC's disburse- ments in total gross fixed capital formation will therefore be roughly maintained (or marginally increase) at about 3% (see Annex 4, Table 2). KDFC's projected approvals, commitments and disbursements for the period 1978-82 are presented in Annex 4, Table 28. The achievement of this target increase in business volume depends primarily on KDFC's capacity to raise additional borrowings, which in turn,will depend on KDFC's capacity to continue to raise additional equity capital. Financial Forecasts 3.64 KDFC's financial performance and structure are expected to remain quite satisfactory over the next five years (Annex 4, Tables 29-31), with net income increasing from W 2.1 billion in 1977 to W 6.8 billion in 1982. However, net income is expected to marginally decline as a percentage of average equity owing to equity expansion and a slight reduction in the interest spread resulting from increased commercial borrowings. KDFC's debt service coverage is expected to remain satisfactory (at about 1.2 to 1.3) as is the interest cover ratio (at 1.4). KDFC envisages continuing with its usual policy of declaring a 20% dividend consisting of 10% cash and 10% stock, although in 1978 and 1981 a 20% cash dividend will be declared as KDFC expects to increase its paid-in share capital by W 5 billion and W 5.9 billion respectively in those years. Won Resource Position and Requirements 3.65 KDFC's resource projections are shown in Annex 4, Table 32. Cumulative domestic currency commitments for the period 1978-82 are expected to reach W 41.2 billion thereby increasing as a proportion of KDFC's total commitments from 7% in 1977 to 14% in 1982 (largely because of the increasing availability of domestic machinery and equipment). In order to meet this expected level of commitments KDFC plans to increase its paid-in share capital by W 5 billion in 1978 and W 5.9 billion in 1981; and KDFC proposes to issue bonds for W 1 billion in 1980 and W 2 billion in 1982. Cash generated by operations, net Won loan collections and disposal of equity investments are expected to provide the remaining domestic currency resource requirements. KDFC is at present examining various additional methods of mobilizing Won resources, particularly in connection with the study on its future role (paras. 3.67-3.68). Foreign Currency Resource Requirements 3.66 Annex 4, Table 32 shows that KDFC's total cumulative foreign cur- rency commitments are projected at US$620 million between 1978-82. As of end-1977 KDFC's uncommitted foreign currency resources stood at US$59.9 mil- lion (consisting of US$48 million from IBRD, US$7.0 million from ADB, and US$4.9 million from the second commercial loan) which had declined to US$16.5 million by end-June 1978 and is expected to be fully committed early in the second half of 1978./l Over the five-year period 1978-82, KDFC /1 KDFC's third foreign commercial loan of US$30 million, in process, is expected to cover KDFC's foreign currency resource requirements until around end-1978. - 40 - envisages mobilizing US$610 million in foreign currency borrowings of which US$360 million (including the proposed US$100 million Bank loan), represent- ing 59% of the total, will be from official sources,and US$250 million or 41% of the total from commercial sources. This target level of foreign commercial resource mobilization (broken down as follows: US$30 million in 1978, US$40 million in 1979, US$50 million in 1980, US$60 million in 1981, US$70 million in 1982) should be considered satisfactory. Indeed it appears ambitious but should be attainable given KDFC's financial and institutional strength, provided that the situation in the international capital markets does not deteriorate. No other DFC presently borrowing from the Bank has managed to rely on foreign private resources to an extent approximately equal to that being envisaged by KDFC. F. KDFC'S FUTURE DIRECTIONS 3.67 In 1977, KDFC completed its first decade of operations, during which its overall performance had been, by any standard, highly successful. Nevertheless, KDFC's management at that time began to think hard about KDFC's future directions. The general economic environment in which KDFC operates has changed beyond recognition since KDFC's inception in 1967. The indus- trial sector has expanded and matured. The financial sector of which KDFC is a part has become more complex and more competitive. The extraordinary growth of exports, which has fueled economic growth, has transformed Korea's economic and financial relationships with the rest of the world. Changed internal and external circumstances have created challenges for KDFC and, at the same time, new opportunities for expanding its activities and diver- sifying its services. 3.68 Accordingly, KDFC commenced in 1977 a re-examination of its role as a financial institution in Korea's rapidly developing industrial society. This includes, among others, a review of the legal framework within which KDFC operates, with a view to proposing such changes as may be appropriate; of KDFC's corporate objectives, policies and operations, with a view to the expansion and diversification of KDFC's activities; of its internal organi- zation and staffing in order to enable KDFC to handle efficiently more and different types of activity; and of the means of mobilizing domestic finan- cial resources. Some of these matters will call for action in due course from the Government, which has already shown its interest in, and support of, KDFC's purpose in undertaking these studies. KDFC's studies will bear fruit, not suddenly and quickly, but gradually. Views are still being formulated and evolving, and various parties will need to be consulted before definitive decisions are taken. It is likely, however, that the studies will result, broadly speaking, in the gradual transformation of KDFC from an institution concentrated largely on relending borrowed foreign exchange into a more diver- sified, multi-purpose financial institution capable of providing clients with a full spectrum of financial and advisory services, of promoting enterprises as well as financing them and of acting flexibly to meet the changing require- ments of the economy. - 41 - 3.69 The Bank and IFC are collaborating with KDFC in this on-going consider- ation of KDFC's future. At KDFC's request, the Bank is making available the services of a consultant (Mr. William Diamond) to advise KDFC on that matter. 4. THE PROPOSED BANK LOAN Recommendations and Justification 4.01 KDFC's performance continues to be highly satisfactory from both the developmental and institutional points of view. The Bank Group's asso- ciation with KDFC since the latter's inception in 1967 has been productive and mutually beneficial. With its high operating standards in all stages of the loan cycle, KDFC has been a remarkably efficient intermediary for allo- cating funds to Korea's key industrial sector, and has also provided an effective mechanism for allocating Bank funds to projects smaller than those the Bank could finance directly. Through KDFC as an intermediary, Bank Group resources (totaling US$238.2 million as of June 30, 1978, on a commitment basis and including the IFC-syndicated loan of 1976) have been efficiently allocated to 248 projects which are economically and financially viable in the manufacturing, agro-industrial, transportation and construction sectors of the Korean economy. KDFC has also achieved considerable success with its innovative and varied promotional activities (paras. 3.19-3.31). It is expected that over the period of commitment of the proposed loan KDFC will achieve further progress from both the institutional and developmental points of view. 4.02 A Bank loan of US$100 million is recommended which is expected to finance about 44% of KDFC's estimated foreign currency commitments over a two-year period from January 1, 1979. As KDFC has financed an average of 38% of total project costs (Annex 4, Table 3) between 1968-77, the Bank loan is expected to assist in the financing of projects with an estimated total cost of about US$260 million. In the past, KDFC's subprojects have yielded substantial economic benefits; ERRs on a large sample of KDFC-financed projects ranged from 11% to 76% (para. 3.12) with an average of 32.3%. In addition, 46% of KDFC's financing between 1973-77 was allocated to projects exporting more than half of their total incremental sales (Annex 4, Table 5). The subprojects to be financed by KDFC under the proposed Bank loan are expected to yield similar economic benefits. It is also expected that KDFC will make a subloan of up to US$10 million to KDLC (para. 3.19) which will be of particular assistance to small- and medium-scale enterprises. Similarly, as with the two previous Bank loans a proportion of up to 10% of the proposed loan is expected to be utilized by KDFC for financing small-scale enterprises in less developed areas under the scheme of cooperation with the RCBs (para. 3.28). Taking into account these varied lending activities (i.e., including lending through KDLC and the RCBs), the proposed loan will finance projects creating about 10,000 jobs./I /1 Based on projections of the fixed investment costs per incremental job indicated in Annex 4, Table 4. - 42 - Main Features of the Loan 4.03 Component for Financing Medium-Sized Labor-Intensive Projects. While its main business is the provision of finance to relatively large enterprises, KDFC has in recent years made a deliberate effort to provide financial assistance to small- and medium-scale (often labor-intensive) enterprises through its scheme of cooperation with the RCBs (para. 3.28) and its subloan to KDLC (para. 3.19), as well as, less significantly, through its own operations. This is consistent with the Government's current emphasis on assisting small-scale enterprises (in terms of total assets) and the Bank's objective of contributing to the financing of relatively labor-intensive investment projects (as measured by the capital:labor ratio). In order to further these objectives it is recommended that a component of US$20 million (or 20% of the proposed loan amount) be earmarked for financing specifically: (a) enterprises with fixed assets not exceeding US$750,000; or (b) projects generating employment at a fixed investment cost per job not greater than US$12,500. The proposed US$750,000 fixed assets ceiling is well within the W 500 million (US$1 million) limit under Korea's official definition of small and medium industries. The proposed US$12,500 capital:labor limit is much higher than the Bank's UPP threshold for Korea of US$5,120 (1976 prices) but is nevertheless considered appropriate because of the increasingly scarce availability of certain categories of labor (especially skilled) in Korea, and also because KDFC's commitments under the proposed loan will take place in 1979/80 so that an inflation factor must be taken into account. Based on an analysis of the available data on recent subprojects, KDFC is expected, with a reasonable but not excessive effort on its part, to be able to fully utilize the special component as described above. 4.04 Financing of KDLC. Under the fifth Bank loan (No. 1145-KO) of US$55 million to KDFC, a subloan of US$5 million was made by KDFC to KDLC the bulk of which was utilized to finance leasing projects for small- and medium-sized enterprises (para. 3.21). As these leasing subprojects have generated substantial economic benefits (especially in terms of employment), it is recommended that KDFC be authorized to make a further subloan of an amount up to US$10 million to KDLC under the proposed Bank loan in the form of a subproject loan. (This subproject will exceed the proposed free limit referred to in para. 4.07 and therefore will require the Bank's review prior to approval). 4.05 Financing of Foreign Exchange Component of Domestic Equipment. Apart from direct imports, it is recommended that IDFC be authorized to use the proceeds of the proposed loan to finance the foreign exchange component of domestically manufactured or procured capital goods, estimated at 60%. About US$9 million (or 13%) of the sixth Bank loan (No. 1461-KO) was utilized for this purpose in 1977, and this proportion is expected to increase slightly under the proposed loan, thereby further enhancing KDFC's current efforts to inten- sify its assistance to the Korean machinery industry (para. 3.27). 4.06 Relending Rate. KDFC expects to onlend the proceeds of the pro- posed Bank loan at an average interest rate of 9.5% p.a. (assuming a Bank lending rate of 7.35%). This rate will give KDFC a spread of 2.15% (average) - 43 - which would be more than adequate to cover the cost incurred by KDFC in pro- cessing foreign currency loans. This rate is also in line with those charged by other development finance institutions in Korea (e.g., KDB, MIB). In prac- tice, KDFC will apply differential rates of interest according to their judgment of the subproject's contribution to the economy, credit standing of the borrower, and KDFC's own developmental objectives. KDFC intends to charge these differential rates of interest as follows; loans for small and labor-intensive enterprises at BIR /1 plus 1.75% p.a.; loans secured by a bank payment guarantee and the KDFC-RCB loans at BIR plus 2% p.a.; loans secured by collateral at BIR plus 2.25% p.a.; and loans for procurement of locally manufactured equipment at BIR plus 2.5% p.a. The spread will, therefore, range from 1.75 to 2.5 percentage points. Provided that the rate of inflation is maintained within 7% p.a. as projected in the Fourth Plan, KDFC's onlending rates would represent positive real rates of interest. However, should the inflation rate exceed Fourth Plan projections /2 then adjustments in the won/foreign currency (dollar) rates could be expected to take place (as occurred in the past; see para. 3.60) which, considering that subborrowers bear the full foreign exchange risk, would increase the effective cost of borrowing and maintain the interest rate at a positive level. Over the period 1960-76, when inflation averaged 15% p.a., the depreciation of the won vis-a-vis the dollar averaged 7% p.a. 4.07 Free Limit. In view of KDFC's high appraisal standards and the proven ability of its management and staff, it is recommended that the free limit be increased from US$2.5 million (under the previous Bank loan No. 1461-KO) to US$4.0 million. It is estimated that under this proposed free limit about four to six projects accounting for about 25% of the total loan amount would still require Bank review prior to approval. As with the previous Bank loans there would be no aggregate free limit, and no ceiling on the size of individual subloans is necessary as KDFC's Operational Policy Statement specifies that KDFC's total financial assistance to any single enterprise will not normally exceed 25% (or US$5.6 million at end-1977) of KDFC's net worth (para. 3.36). 4.08 Debt:Equity Limit. It is recommended that the contractual limit on KDFC's long-term debt, set at ten times its net worth under the previous Bank loan agreement, be maintained. According to KDFC's projections, which take into account prospective shale capital increase including the one for W 5 billion to be implemented in 1978, this limit will be sufficient to accommodate KDFC's proposed additional borrowings over the next five years. 4.09 Amortization Schedule. As is usual with Bank loans to DFCs the proposed loan would have a flexible amortization schedule which would sub- stantially reflect the aggregate of the repayment schedules of the individual subloans made by KDFC. The loan is expected to be fully repaid within 17 years including a grace period of 3 years. The estimated disbursement schedule is presented in Annex 4, Table 33. /1 Borrowing interest rate. /2 Latest estimates do indicate an increase in the expected rate of inflation (up to about 9% p.a.). - 44 - Agreements and Understandings Reached at Negotiations 4.10 During loan negotiations, agreement was reached on: (a) a component of US$20 million under the proposed loan for financing enterprises with fixed assets not exceeding US$750,000 or projects that would create additional employment at a fixed investment cost per job not exceeding US$12,500 (para. 4.03); (b) the maintenance of the long-term debt:equity limit at 10:1 (para. 4.08); (c) the financing of 60% of the cost of domestically procured capital goods representing the estimated foreign exchange component of such goods (para. 4.05); and (d) a free limit of US$4.0 million on subprojects (para. 4.07). 4.11 In addition, the following matters were reviewed, and understandings reached with KDFC (as recorded in the agreed minutes): (a) KDFC's objectives outlined in its statement of Development Strategy (para. 3.32); and (b) KDFC's onlending (by way of subloans) of an amount up to US$10 million of the proposed loan to KDLC (para. 4.04). ANNEX 1 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Board of Directors (Elected at the Shareholders' Meeting Held on February 24, 1978 and Further Meeting of May 9, 1978) DIRECTORS Representing Korean Shareholders *Chin Hyung Kim Chairman, KDFC *Bong Eun Kim President, KDFC *Chai Sun Hong Former Chairman, KDFC Tai Sup Choi Chairman, Hankuk Glass Industry Co., Ltd. Yong Joo Kim Chairman, Chongbang Co., Ltd. Sung Taek Suh President, Seangyong Cement Industrial Co., Ltd. *Soo Kon Pae President, The Commercial Bank of Korea, Ltd. Chi Bok Kim President, Dainan Fire & Marine Insurance Co., Ltd. Representing Foreign Shareholders Naokado Nishihara Special Representative in the Far East, International Finance Corporation *Taichi Morikawa General Manager, Seoul Office, The Bank of Tokyo Christopher S. Malone Assistant Vice President & Representative, United California Bank, Korea Representative Office James R. Medley Manager, Seoul Branch, The Chartered Bank H. Leigh Durland Vice President & General Manager, Tokyo Branch Office Irving Trust Company AUDITORS Bong Jai Kim Chairman, National Federation of Medium Industry Cooperatives Byung Hi Chang Chairman, Young Poong Trading Co., Ltd. * Also Executive Committee Members. ANNEX 2 Page 1 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Statement of Investment and Operational Policies (Approved at the Board of Directors' Meeting on April 25, 1967. Amended at the Board of Directors' Meetings on February 29, 1968; February 26, 1973; February 26, 1974; December 17, 1974; June 19, 1975; July 23, 1976; and June 1, 1977./1) The Korea Development Finance Corporation, whose main objective is to promote the expansion of private enterprise in the Republic of Korea, will be guided by the policies set forth below: I. The Scope of Investment Activities (1) KDFC will invest only in productive enterprises. While its primary activity will be manufacturing and processing industry, it may invest also in other types of enterprises, including transport, tourism, and large-scale commercially-oriented agriculture. How- ever, trade, real estate and small-scale agriculture will be excluded. (2) KDFC will finance only private enterprises which are properly organized and managed. KDFC will not invest in undertakings which are Government-owned and operated, but a Government holding of not more than 15% of the voting stock of a private enterprise shall not make such enterprise ineligible for financial assistance from KDFC. KDFC will finance both new enterprises and existing ones for expan- sion or improvement. (3) In its operations, KDFC will give due regard to the Government's general economic plans and policies. The following categories of industries will receive high priority, in accordance with the government's economic policies and objectives: (a) export industries; (b) import-substitute industries; (c) industries producing raw materials and other intermediate goods necessary for production of export commodities and import- substitutes. (d) indigenous local industries which have special advantage in comparative costs and potential marketability in foreign markets; and /1 KDFC intends to revise (in consultation with the Bank) the Statement of Investment and Operational Policies to accommodate the conclusions and recommendations of the Special Study on its future role (paras. 3.67-3.69). ANNEX 2 Page 2 (e) participation or assistance in the turnover of the government- owned industries to private ownership. (4) KDFC will assist private enterprises in the following ways: C (a) medium- and long-term loans; (b) equity participation (through underwriting, conversion rights, direct participation in share capital or otherwise); (c) guarantee of payment for machinery and equipment imported or otherwise; (d) guarantee and underwriting of corporate securities; (e) technical and managerial consultant services; and (f) any other appropriate manner. (5) KDFC will seek through its operation to broaden the ownership of private securities in Korea. (6) KDFC's financial assistance will be primarily for expenditures for fixed assets. KDFC will, however, consider requests for permanent working capital in conjunction with its financial assistance for such capital expenditures. (7) KDFC will study periodically the trend of overall industrial devel- opment and investment opportunities in the private sector in cooperation with research institutes for promotion of new enter- prises or expansion of the existing ones. TI. Basis for Investment Decisions (8) KDFC will make investment decisions only on the basis of sound investment criteria and standards, and will provide financial assistance only to those projects which are financially and economically sound and technically feasible. Special attention will be given to the ability of management and the profitability of the enterprise. III. Diversification of Portfolio (9) KDFC will diversify its portfolio in order to maintain a reason- able level of risk. (10) KDFC will not provide financial assistance of less than the won equivalent of US$50,000. The maximum financial commitment in whatever form, including loan, share capital or guarantee or any combination thereof, that KDFC may make to any single enterprise will not normally exceed 25% of the total of KDFC's paid-in capital, free reserves and Government loan of 1968. ANNEX 2 Page 3 (11) IKDFC will not commit to any single enterprise in form of share capital more than 10% of KDFC's paid-in capital and free reserves. The aggregate equity investment of KDFC at any time will not exceed the total of its paid-in share capital and free reserves. (12) In undertaking large-sized projects, KDFC will seek cooperation with other financial institutions, both domestic and foreign. IV. Turn-Over of Portfolio (13) In order to recover its resources for new commitments and to encourage widespread ownership of private securities, KDFC will revolve its portfolio whenever it can do so on satisfactory terms. In selling an investment it will pay due regard not only to its own interests but also the interests of the participants in such investment, and also to the interest of the concern whose shares are involved. V. Relationship with Enterprises Financed (14) KDFC will not take a controlling interest in any enterprise in which is has invested, or any other interest which would give it primary responsibility for management, except that in the case of jeopardy, it may take such action as may be necessary to protect its interest. To this end it will not take up more than 25% of the share capital of an enterprise, except as the result of an underwriting commitment undertaken in the expectation that the investment would in fact be within the limit cited. (15) In accordance with normal banking practice, KDFC will require its borrowers to provide and to maintain adequate security, to keep records and accounts in accordance with sound accounting practices, and to furnish whatever information on their opera- tions and accounts KDFC deems desirable. KDFC will take the right to inspect the enterprises it finances as well as their operations and accounts. (16) Business secrets and other information furnished by applicants or clients will be treated as confidential. VI. Financial Guidelines (17) KDFC will lend and invest its resources in such a way as to main- tain the value of its capital. KDFC will pass to its clients any foreign exchange risk it assumes or find other suitable means to cover it. (18) KDFC will not incur any debt in excess of ten times the aggregate of its paid-in capital and free reserves. ANNEX 2 Page 4 (19) KDFC will maintain accounting records adequate to reflect its business operations in accordance with sound and generally accepted international accounting practices and standards. KDFC will employ qualified and independent public accountants to audit its books and certify the accounts annually. VII. Profits and Their Distribution (20) KDFC will seek to develop earnings sufficient to cover expenses and taxes, to provide reserves adequate to the size and risks of its portfolio and to protect its equity against erosion and to pay satisfactory dividends. It will seek profits on its equity investments and will impose interest rates, fees and other charges for its loans and services which will permit it to achieve that level of profitability. It will build and maintain reserves consistent with sound financial management. It will set aside each year from net income before tax the amount required by law as the legal reserve. In addition, it will accumulate other reserves, including reserve for losses, as considered prudent by the Board of Directors. VIII. Staff (21) KDFC will build up a technically qualified staff capable of carrying the responsibilities which KDFC's objectives create, and able to provide the services to clients which those objec- tives call for. IX. Revision of Policies (22) Any proposal to revise this Statement of Investment and Operational Policies shall be considered by the Board of Directors only after each member has been given an adequate opportunity to study and comment on the proposal, and it shall be approved at a meeting of the Board of Directors by two thirds of all directors. ANNEX 3 Page 1 KOREA DEVELOPMENT FINANCE CORPORATION Outline of Development Strategy for 1978/79 Background 1. In April 1976 KDFC, in consultation with the World Bank, adopted a Development Strategy Statement for 1977/78 outlining several specific develop- mental objectives and activities apart from its normal financing operations. On the whole, these objectives continue to be successfully implemented by KDFC (see also Chapter 3, Section A), including, inter alia: (a) continuation and expansion of KDFC's program of cooperation with the Regional Commercial Banks for financing small scale enterprises especially in less developed areas; (b) continuation of assistance to the Korea Technology Advancement Corporation (K-TAC) for the purpose of commercially exploiting Korean technological inventions and adaptations; (c) intensification of KDFC's efforts to improve project design via its technical assistance services; and (d) further progress on the establishment of an engineering and con- sulting firm in collaboration with DEG (as a separate legal entity, not a department of KDFC). New Objectives 2. KDFC intends to consolidate its previous achievements, including those noted above, as well as to further enhance its development impact during 1978/79 by focusing on the objectives outlined below. (a) Special Study on KDFC's Future Role. KDFC intends to complete a special study presently being undertaken in close consultation with the World Bank, which aims to examine in detail the various pos- sible options open to KDFC regarding its future role as a develop- ment finance institution. In particular, the possibilities of diversifying its financial services, of expanding its operational activities in parallel with the changing needs of the rapidly growing Korean economy, and of securing a stable basis for the mobilization of adequate domestic currency resources will be examined. (b) Project Promotion - Resource Allocation. (i) KDFC will endeavor to assist some small scale enterprises (in terms of fixed assets) and labor-intensive projects (in terms of capital:labor ratio) via its ANNEX 3 Page 2 own operations as well as continuing to do so in colla- boration with the RCBs and via subloans to KDLC; (ii) KDFC will emphasize the active promotion of subcontracting arrange- ments, thereby enhancing the linkage effects between small and large scale enterprises, especially in the machinery and related industries; (iii) KDFC will intensify its efforts to establish an engineering and consulting firm on a joint venture basis with foreign institutions (principally DEG) to provide a variety of engineering and consulting services to Korean enterprises. (c) Resource Mobilization. (i) KDFC will attempt to raise additional private funds, both foreign and domestic, in order to gradually reduce its dependence on its traditional, official sources of funds (mainly IBRD and ADB); (ii) KDFC will intensify its efforts to mobilize foreign commercial funds through the international capital markets, thereby reducing its dependence on its traditional sources of funds. Over the period 1978-82 KDFC will endeavor to raise a total of US$250 million from foreign commerical sources, specifi- cally US$30 million in 1978, US$40 million in 1979, U$50 million in 1980, US$60 million in 1981 and US$70 million in 1982; (iii) KDFC will also attempt to raise domestic currency resources through further share capital increases (the next share issue of W 5 bil- lion is scheduled for completion in late 1978), and will examine the possibility of issuing bonds for resource mobilization purposes in the context of the study presently being undertaken on KDFC's future role. (d) Organization. (i) KDFC will reinforce and expand the Project Promotion Department to enhance its effectiveness in contributing to the future expansion of operations and promotional activities; (ii) KDFC will consider in depth the merits of setting up a regional office in the Busan area, particularly to assist in the diversification of the regional distribution of KDFC's portfolio, and extend financial support to more small scale enterprises. (e) Training and Research. (i) KDFC will increase the participation of its staff in relevant training courses provided by domestic and foreign institutions; (ii) KDFC will continue with its research activities, and expects the final report on the Chunbuk province, a study undertaken jointly with the Asian Research Center of the Korea University, to be completed in June 1978. The study should, inter alia, identify suitable projects for that hitherto less developed area. ANNEX 4 Table 1 Page 1 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Rates of Interest in Korea as of June 30, 1978 (percent per annum) A. Commercial Banks Deposit Rates a. Time deposits Over 3 months 15.0 Over 6 months 17.1 Over 1 year 18.6 b. Installment savings Over 1 year 13.2 Over 2 years 14.2 Over 3 years 15.2 c. Wage Earners' Savings Scheme /a over 2 years 22.8(14.2) Over 3 years 23.0(15.2) Over 5 years 27.0(17.2) Lending Rates a. Operating funds Ordinary loans Prime enterprises 18.5 Other enterprises 19.0 Commercial Notes Prime enterprises 18.5 Other enterprises 19.0 Overdraft Prime enterprises 20.5 Other enterprises 21.0 b. Term loans Less than 3 years 18.5 3 to 8 years 19.5 Above 8 years 20.5 c. Export finance 9.0 d. National Investment Fund 16.0 /a Figures in parentheses show the basic interest rates payable by financial institutions; the remainder is subsidized by Government. ANNEX 4 Table 1 Page 2 Up to 3 3 to 8 Over 8 years years years B. Korea Development Bank Capital Loans /a Government Funds 13.5 13.5 13.5 Machine Industry Promotion Funds 15.0 16.0 17.0 Special Equipment Funds 15.0 16.0 17.0 Internal Funds (priority industries) 15.0 16.0 17.0 Internal Funds (nonpriority industries) 18.5 19.5 20.5 Foreign Commercial Funds /b 12.0 12.0 12.0 Working Capital Loans /a Government Funds 14.0 14.0 14.0 Machine Industry Promotion Funds 15.0 15.0 15.0 Special Equipment Funds 15.0 15.0 15.0 Internal Funds (prime clients) 18.5 18.5 18.5 Internal Funds (other clients) 19.0 19.0 19.0 Foreign Commercial Funds /b 12.0 12.0 12.0 National Investment Fund /a /c 15.0 16.0 - Tourism Development Fund /a Ic 19.0 19.0 19.0 Industrial Rationalization Fund Ia Direct Loans 15.0 16.0 - Through banking institutions 13.5 14.5 - Government Special Fund Loans /a /d 6-11.5 6-11.5 6-11.5 Foreign Currency Loans Foreign Commercial Funds /e 9.0 9.0 9.0 USAID (3rd loan) 10.0 10.0 10.0 KfW (4th loan) 9.0 9.0 9.0 ADB (5th loan) 9.65 9.65 9.65 IBRD (2nd loan) 9.5 9.5 9.5 Penalty rate on overdue loans 25.0 25.0 25.0 Ia In domestic currency. /b Exchange risk passed on to borrowers. /c Capital and working capital loans. /d For power development, shipbuilding, coal mining, public utilities, maritime transportation, railways and roads. /e Export Industries only. ANNEX 4 Table 1 Page 3 C. Medium Industry Bank Internal Fund Loans Small- and medium-industry loans 18.5 (prime enterprises) Small- and medium-industry loans 19.0 (other enterprises) Government Funds Equipment loans 13.5 Cooperatives 13.0 Working capital loans 14.0 Foreign Loan Funds USAID and OECF, Japan 8.0 Exim Bank Japan 8.25 KfW 9.0 ADB 10.9 IBRD 9.9 D. Korea Development Finance Corporation Medium- and Long-Term Domestic Currency Loans Projects with payment guarantee by financial institutions 20.5 Others 21.5 Foreign Currency Loans IBRD 10.2 to 10.6 ADB 10.6 IFC syndicated loan 1.25% spread over average borrowing cost APCO loan Libor + 3% AEP Projects Department September 29, 1978 ANNEX 4 Table 2 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Share of KDFC's Disbursements in Manufacturing Sector Fixed Investment 1971-77 Gross fixed KDFC dis- capital for- bursements /b Share of mation (W bln: (W bln: KDFC dis- current prices) current prices) bursements Industry branch /a 1971-77 1971-77 x Manufacturing Loans Food, Beverages & Tobacco 275.4 6.8 2.47 Food 171.2 1.6 0.93 Beverages & tobacco 104.2 5.2 4.99 Textiles, Apparel & Leather 585.8 26.b 4.54 Wood and Wood Products 51.6 0.8 1.55 Paper and Printing 90.6 1.5 1.65 Chemicals, Petroleum, Coal & Rubber 587.8 9.4 1.60 Chemicals 343.8 6.1 1.77 Petroleum & coal 184.9 0.9 0.48 Rubber 59.1 2.4 4.06 Nonmetallic Minerals 165.5 7.4 4.47 Basic Metals 592.3 5.6 0.95 Metal Products, Machinery & Equipments 661.9 19.1 2.89 Metal products 54.3 6.3 11.60 Machinery & equipment 99.4 4.2 4.23 Electrical & electronic machinery & equipment 180.7 4.3 2.38 Transport equipment 327.5 4.3 1.31 Other Manufacturing 67.5 0.1 0.15 Equity Investments and Convertible Debentures /c 5.0 Total Manufacturing 3,078.4 82.3 2.67 Nonmanufacturing Fisheries n.a. 2.8 n.a. Transportation services n.a. 17.0 n.a. Others n.a. 4.8 n.a. Total Nonmanufacturing n.a. 24.6 n.a. Total n.a. 106.9 n.a. /a Korean standard industrial classification. /b Varying exchange rates applied according to year in which disbursements were made. /c Breakdown by industry branch not available. AEP Projects Department September 29, 1978 ANNEX 4 Table 3 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Economic Impact of KDFC-Financed Projects /a Partial Economic Indicators of Projects 1968-72 1973-74 1975 1976 1977 1968-77 No. of projects /b 100 72 45 65 62 344 Total project costs (E Won million) /c 43,767 81,781 51,396 93,397 88,797 359,138 Amount of KDFC financing (E Won million) /c 20,435 27,180 21,304 30,295 35,445 134,659 Share of KOFC financing (%) 46.7 33.2 41.5 32.4 39.9 37.5 Incremental anntual sales (Won million) /d 98,390 220,596 110,138 161,566 126,670 717,360 Incremental annual value added (Won million Id 27,549 61,767 38,489 52,306 49,098 229,209 Increase in fixed assets (Won million) 36,936 59,782 46,066 70,227 62,499 275,510 Additional employment (number) /d 9,016 7,104 4,419 5,710 5,257 31,506 Additional annual payroll (Won million) /d 6,293 5,854 6,589 10,448 14,021 43,205 Incremental annual gross exports ($'000) /d 125,525 232,475 52,439 189,838 52,230 652,507 Net annual balance of payments effect (net foreign exchange earnings and savings) ($'000) /d 78,185 150,815 60,465 158,406 40,058 487,929 Memorandum Items Sales per additional employee (Won '000) 10,913 31,052 24,924 28,295 24,095 22,769 Value added per additional employee (Won '000) 3,056 8,695 8,710 9,160 9,340 7,275 Fixed assets per additional employee (Won '000) 4,097 8,415 10,425 12,299 11,889 8,745 Fixed assets per additional employee (UTS$) /e 12,208 19,049 21,495 25,359 24,513 18,031 Annual payroll per additional employee (Won '000) 698 824 1,491 1,830 2,667 1,371 Ratio of sales to fixed assets 2.66 3.69 2.39 2.30 2.03 2.60 Ratio of value added to fixed assets 0.75 1.03 0.84 0.74 0.79 0.83 Ratio of value added to sales 0.28 0.28 0.35 0.32 0.39 0.32 Export share of sales (%) /e 42.8 46.6 23.1 57.0 20.0 44.1 Payroll share of value added (F) 22.8 9.5 17.1 20.0 28.6 18.8 /a Based on projections made in project appraisal reports; loans to KDFC's Employees Fraternity Association in 1973, 1974 and 1976, and equity investment and debenture financing are excluded. This table covers all KDFC and RCB projects, KDLC is treated as one subproject. These are disaggregated in Table 4. /b Net of projects subsequently withdrawn. /c W?on equivalent at varying exchange rates. /d The magnitude of all these items is based on estimates of full capacity operations. /e Applying average exchange rates for 1968-72 and 1973-74; for other years US$1.00 = W 485.0. AEP Projects Department September 29, 1978 ANNEX 4 Table 4 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Economic Impact of KDFC-FinancedPrtoects /a Partial Economic Indicators of Projects 1976 1977 KDFC KDLC RCE KDFC KDLC RCB No. of projects /b 46 28 18 50 - 12 Total project costs (Won million) /c 85,248 12,956 5,713 84,043 - 4,754 Amount of KDFC financing (Won million) /c 25,393 2,436 2,466 33,581 - 1,864 Share of KDFC financing (%) 29.8 18.8 43.2 40.0 - 39.2 Total fixed assets and permanent working capital (Won million) 78,604 11,229 5,592 76,311 - 4,615 Incremental annual sales (Won million) /d 148,946 36,601 12,620 108,705 - 17,965 Incremental annual value added (Won million) /d 47,221 10,024 5,085 42,282 - 6,816 Increase in fixed assets (Won million) 65,328 9,286 4,B99 58,391 - 4,108 Additional employment;/d 4,312 1,798 1,398 4,593 - 664 Of which: (i) Skilled 1,216 468 200 1,209 - 156 (ii) Unskilled 2,483 1,266 1,105 2,802 - 459 (iii) Administrative 208 15 37 306 - 31 (iv) Engineers 405 49 56 276 - 18 Additional annual payroll (Won million) /d 8,986 4,412 1,462 11,991 - 2,030 Incremental annual gross exports (US$'000) /d 170,983 23,124 18,355 40,692 - 11,538 Incremental imports (US$'000) /d (i) Fixed assets 83,000 12,049 5,084 65,226 - 3,913 (ii) For raw materials 57,447 12,905 5,091 34,321 - 1,721 Net annual balance of payments effect (net foreign exchange earnings and savings) (US$'000) /d 143,596 11,718 14,310 31,564 - 8,494 Memorandum Items Sales per additional employee (Won '000) 34,542 20,357 9,027 23,668 - 27,056 Value added per additional employee (Won '000) 10,951 5,575 3,637 9,206 - 10,265 Fixed assets per additional employee (Won '000) 15,150 5,165 3,504 12,713 - 6,187 Fixed assets per additional employee (US$) 31,237 10,649 7,225 26,212 - 12,757 Fixed assets and permanent working capital per additional employee (uS$) 37,586 12,877 8,247 34,257 - 14,331 Annual payroll per additional employee (Won '000) 2,084 2,454 1,046 2,611 - 3,057 Ratio of sales to fixed assets 2.28 3.94 2.58 1.86 - 4.37 Ratio of value added to fixed assets 0.72 1.08 1.94 0.72 - 1.66 Ratio of value added to sales 0.32 0.27 0.40 0.39 - 0.38 Export share of sales (%) 55.7 30.6 72.5 18.2 - 31.1 Payroll share of value added (%) 19.0 44.0 28.8 28.4 - 29.8 /a Based on projections made in project appraisal reports; loans to KDFC's Employees Fraternity Asaociation in 1973, 1974 and 1976 and equity investment and debenture financing are excluded. /b Net of projects subsequently withdrawn. /c Won equivalent at US$1.0 = W 485.0. /d The magnitude of all these items is based on estimates of full capacity operations. AEP Projects Department September 29, 1978 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Degree of Export Orientation of KDFC Projects (Approved in 1973-December 31, 1977) ($ thousand, W million) 1973 /d 1974 /d 1975 /b 1976 /d 1977 Cumulative total Loan amount Loan amount Loan amount Loan amount Loan amount Loan amount Categories /a No./c $ W No./c $ W No./c $ W No./c $ W No./c $ W No./c $ W No exports (less than 5%) 19 8,593 1,143 16 10,762 1,060 26 25,320 322 16 13,157 150 21 22,998 360 98 80,830 3,035 Some exports (5M-25%) 4 2,467 320 4 2,957 - 4 3,866 - 6 4,623 - 4 9,960 70 22 23,873 390 Export-oriented (25%-50%) 1 - 200 - - - 4 3,505 - 6 6,277 40 9 9,240 350 20 19,022 590 Heavily export-oriented (over 50%) 17 19,653 - 11 10,029 700 11 10,200 180 37 37,480 260 28 27,812 710 104 105,174 1,850 Total 41 30,713 1,663 31 23,748 1,760 45 42,891 502 65 61,537 450 62 70,010 1,490 244 228,899 5,865 /a x of export sales out of total incremental sales. /b The increased proportion of "no export" projects in 1975 was due to the fact that substantial amounts of financing approved during the year were for machinery and related industries and for agricultural projects in accordance with KDFC's recent developmental strategy. (Of the US$25,320,000 and W 322 million approved for "no export" projects in 1975, US$16,833,000 were for machinery and related industries, and US$80,000 and W 300 million were for agricultural projects.) /c Number of projects. /d Loans to KDFC Employees' Fraternity Association are excluded. AEP Projects Department September 29, 1978 X KOREA KOREA DEVELOPMENT FINANCE CORPORATION Proportion of Total Proiect Costs Financed by KDFC, By Industry (Million won equivalent) 1975 1976 1977 1978 (6_monthsŽ Project KDFC Project KDFC Project KDFC Project KDFC Industrial classification cost financing % cost financing % cost financing % cost financing % Agriculture & forestry 1,527 320 21.0 201 172 85.6 2,144 1,069 49.9 - - - Mining & quarrying 1,420 647 45.6 - - - 1,488 630 42.3 - - - Manufacturing Food 1,804 852 47.2 1,716 385 22.4 - - - 3,995 1,843 46.1 Beverage & tobacco - - - - - - - - - - - - Textile 14,791 5,626 38.0 18,701 7,783 41.6 5,351 1,754 32.8 1,557 758 48.7 Wood & wood products - - - - - - - - - - - - Paper & printing - - - - - - 3,551 1,655 46.6 14,257 3,540 24.8 Chemical 1,545 489 31.7 2,441 989 40.5 21,400 4,470 20.9 28,527 4,204 14.7 Petroleum & coal - - - 1,741 737 42.3 - - - - - - Rubber - - - 2,149 1,116 51.9 - - - - - - Nonmetallic mineral products 2,711 1,405 51.8 1,270 435 34.3 2,991 2,067 69.1 3,592 1,610 44.8 Basic metals 2,177 1,283 58.9 32,803 1,940 5.9 - - - 853 371 43.5 Metal products 1,397 651 46.6 14,688 2,866 19.5 10,823 4,816 44.5 7,511 3,695 49.2 Machinery 6 equipment 1,861 1,004 53.9 3,488 1,545 44.3 4,011 1,639 40.9 995 437 43.9 Electrical & electronics 2,691 1,787 66.4 1,212 237 19.6 3,249 1,264 38.9 1,269 459 36.2 Transportation equipment 8,732 3,613 41.4 - - - 12,625 5,116 40.5 - - - Other mfg. industries 22 22 100.0 804 341 42.4 - - - - - - Subtotal (Mfg.) 37,731 16,732 44.3 81.013 18,374 22.7 64,001 22,781 35.6 62,556 16i917 27.0 Fishery 977 807 82.6 - - - 4,524 2,811 62.1 3,510 2,071 59.0 Construction - - - - - - 8,179 2,563 31.3 162 124 76.5 Transportation 5,664 2,532 44.7 9,763 9,392 95.6 8,461 5,591 66.1 7,024 3,153 44.9 Banking - - - 2,420 2,420 100.0 - - - 500 500 100.0 Other services 4,077 266 6.5 - - - - - - - - - Total 51,396 21,304 41.5 7 30295 32.4 8,797 35,445 39.9 73,752 22. 765 30.9 AEP Projects Department September 29, 1978 '03. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ["3 ..--. P 030~~~..PPPw ~~~ 0-E'.0- 3 o o Zo ..~P, o o O o oo ! o o * o o o -. 333303'003o'o03 133'3 - 30 - 0 --- --- --- - - -3 03 - 3 - -030 1 03 000.003333000 30 - 303 3.3..3.. .. .. .. .. . . .1 . . 33. 3 . . . -333 - 0 3 31-3 3-333-330.0 0 . - .0 3 .0 0-. .0j '33 3 03 3~~~~~~~~~~~~~~~~~~~~2 t ; . .. .. .. .. .. . . . 0 . 033. '0.0-.3.0.300. . . O O O OO .30 33.-o oo.-3'.l3o.. 03333-33330300030 00 000~073 03' '300Z0030000000003 0-0 0333300 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Major Technologies Introduced via KDFC-Financed Projects (In 1977) Technician trained in foreign countries and visiting foreign Techniques employed technician (man-month) Applicant Project products or developed Origin of techniques provided Trained Visited Korea Vilene Co., Ltd. Nonwoven interlinings Dry process Japan Vilene Corp., Japan 30 20 Hankuk Diesel Kiki Co., Ltd. Fuel injection equipment High precision machining Diesel Kiki Co., Ltd., Japan 48 1O for diesel engines & assembling techniques Samsung Electric Parts Co., Ltd. VHF & UHF tuner DY and FBT High precision machining Sanyo Electric Co., Ltd., Japan 70 40 for color TV receiver & assembling techniques 11 Shin Tongyangcom, Ltd. Crystal filter & 40- High precision machining Toyo Communication Co., Ltd., Japan 10 2 channel SSB transceiver & assembling techniques Mobil Korea Lube Oil Industrial, Inc. Petroleum lubricating oil Continuous blending system Mobil Petroleum Co., Inc., USA 10 5 Chin Yang Machinery Co., Ltd. Precision measuring tool Machining & fabricating Tsugami, Japan 20 20 Kumbo Chemical Co., Ltd. Rubber chemicals Chemical reaction Ouchi-Shinko, Japan 60 36 Total 248 133 AEP Projects Department September 29, 1978 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Summary of Joint Financieg Operations, 1968-June 30. 1978 (Wo aillion:IJS$ tho..sond) KDFf financing Other financing Totol assets Employment before Name of client firs /a Main business Project prodo,ct S W S W /b Financing partner before project (W) project (persona) Renarks 1. Hankuk GIass Ind l. Co., Ltd. Sheet glass Shuet glass 396 300 1,700 - Chase Manhattan Ba-k 3,572 1,181 2,124 - Toyo Menka 2. Daehan Synthetic Fiber Co., Ltd. Textile Polyeater - 300 4,275 - US ERin Bank 3,377 297 3. Sinde-Ricoh Co. * Copying m/n Copying r/c - 60 - 35 Ricoh of Japan 134 89 4. KIFC Financing Short-term - 288 - 260 IFC - - Re- financing 65 Bankers International 65 Goldman, Sachs 6 Co. 65 Nomura Securities Co. 65 PICA 5. Han Kook Titanium Ind l. Co., Ltd. Titanium dio-ide Titanium dioxide - 350 - 90 Meiji Sangyo Co. of Japan 939 50 6. Han Un Dae Development Co., Ltd. Hotel service Hotel service 1,300 169 3,450 - IFC - - New 1,700 - PICA 50D - American Hotel Co. 300 - American Pacific Corp. 150 - Stolte Inc. 7. Korea Vilene Co., Ltd. Textile Nonwoven fabrics 633 163 - 75 Japan Vilene Co. - - New 25 Freudenberg & Co. ew S. Korea Hi-Dap Co., Ltd. * Wood 6 wood Dap-resis & wood 481 130 - 104 Fuji Kobunshi - - N- products products 9. Chonju Paper Mfg. Co., Ltd. Paper Newprint 1,282 - 8,458 - Eacher Wyss Co. 7,245 620 10. KDLC Financing Lease financing - 551 - 525 Orient Leasing Co. - - New 75 PICA 75 Baring Sanwa Multinational, Emc 11. Saehan Motors Co., Ltd. Automobile Truck cabs 6 car 3,500 - 2,660 - FNCB 58,584 3,633 body shells 12. Korea Zinc Co., Ltd. Zinc refinery Zinc ingots 4,000 485 13,000 1,940 IFC - - New 13. Pu.as Steel Pipe Ind'l. Co., Ltd. Steei pipe Steel pipe 2,000 - 5,950 - Bank of America 14,098 1,011 - 14. Kwang Jin Electronic Ind'l. Co., Ltd. Electronic Telephone carrier 291 - - 207 FPjitzu Limited 202 154 - equipment 15. Korea Napsum Co., Ltd. Tentile Nylon textured yarn 2,000 - 3,037 - Nissbo Iwai 17,680 852 - 16. Han Yang Hoosing 6 Construction Co., Ltd. Construction Domestic construc- 2,500 - 1,400 - French Ei-In Bank 23,042 664 - tion works 17 Samwhan Corporation Construction Domestic 4 overseas 2,450 - 3,475 - Bank of Tokyo 46,678 5,586 - con..trurtion works 18. Kneho Chemical Co., Ltd. Petrochemical Phenol, aceton & 4,880 475 7,933 - Japan Rain Bank - - Nle rubber chemicals 2,158 - M.arubeni Hong Kong 1,933 - Citibank Seoul 19. Korea Synthetic Rubber Co., Ltd. Pntrocbehical Polybutadine rubber 7,600 - 26,069 - Japan Exim lank 12,758 270 20. Kwang Jin Electric Indl1 Co., Ltd.* Ele. eqsipment Telephone carriers 740 100 - 100 Fijiteu Ltd. 2,536 316 Total 34_053 3.371 90,272 3,761 /a With the reception of client firms marked with an , all firms listed above al. received funds (not indicated) from a local joint financing partner. Lb Represent equity inve-tsents. AEP Projects Departnent September 29, 1978 ANNEX 4 Table 10 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Characteristics of 1977 Loan Approvals Under the RCB Scheme of Cooperation (In US$'000) No. Loan amount % A. Characteristics of Loans Purpose New project 8 2,708 70 Expansion 4 1,135 30 Total 12 3,843 100 Size (in US$'000) Below 200 3 391 10 201-300 3 801 21 301-400 1 332 9 401-500 5 2,319 60 Total 12 3,843 100 Sectoral Distribution Textiles and wearing apparel 3 1,041 27 Dairy products 3 901 23 Electronic products 2 560 15 Metal products 2 940 24 Plastics 1 260 7 Transportation 1 141 4 Total 12 3,843 100 B. Characteristics of Project Sponsoring Firms /a Assets Size (in W million) Below 200 1 294 13 201- 500 2 592 25 501-1,000 3 1,187 50 1,001-1,500 1 141 6 Above 1,500 1 150 6 Total 8 2,364 100 Sales Volume (in W million) Below 200 1 294 12 201- 500 _ _ _ 501-1,000 4 1,532 65 Above 1,000 3 538 23 Total 8 2,364 100 Number of Employees Below 200 6 1,963 83 201-500 1 141 6 Above 500 1 260 11 Total 8 2,364 100 /a Excluding 4 newly established firms. AEP Projects Department September 29, 1978 Annex 4 Table 11 KOREA KOREA DEVELOPMENT FINANCE CORPORATION List of Shareholders (as of December 31, 1977) No. of No. of /a % of shareholders shares held total Domestic Shareholders Insurance companies 12 517,975 10.35 Commercial banks 6 465,960 9.31 Securities companies 24 394,403 7.88 Private corporations 69 1,119,310 22.39 Individuals 266 764,322 15.31 Subtotal 377 3,261,970 65.24 Foreign Shareholders International Finance Corporation 1 526,030 10.52 Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) GMbH . 1 173,420 3.47 The Bank of Tokyo, Ltd. 1 152,040 3.04 The Industrial Bank of Japan 1 152,040 3.04 Bank of America 1 125,755 2.52 Citibank Overseas Investment Corporation 1 125,755 2.52 Deutsche Bank A.G. 1 122,600 2.45 United California Overseas Investment Corporation 1 100,600 2.01 The Chartered Bank 1 98,100 1.96 Iriving International Financing Corpo- ration 1 89,820 1.79 Bank of Montreal 1 71,870 1.44 Subtotal 11 1,738,030 34.76 Total 388 5,000,000 100.00 /a As the par value is W 1,000 per share, the number of shares is equivalent to value expressed in W '000s. AEP Projects Department September 29, 1978 Annex 4 Table 12 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Third KDFC Share-Capital Increase Plan /a; Number of Shares to be Offered to Foreign Shareholders (as of February 28, 1978) No. of No. of % of new /c Share Share pro- shares total shares proceeds ceeds /d held /b shares offered in W '000 in US$ Foreign Shareholders International Finance Corporation 526,030 10.52 520,770 520,770 1,078,199 Deutsche Gesellschaft fur Wirtschafliche Zusammenarbeit (Entwicklungsgesellschaft) GMbH 173,420 3.47 171,686 171,686 355,458 The Bank of Tokyo, Ltd. 152,040 3.04 150,520 150,520 311,636 The Industrial Bank of Japan 152,040 3.04 150,520 150,520 311,636 Bank of America NT + SA 125,755 2.52 124,497 124,497 257,758 Citicorp Overseas Investment Corporation 125,755 2.52 124,497 124,497 257,758 Deutsche Bank A.G. 122,600 2.45 121,374 121,374 251,292 United California Overseas Investment Corporation 100,600 2.01 99,594 99,594 206,199 The Chartered Bank 98,100 1.96 97,119 97,119 201,075 Irving International Financing Corporation 89,820 1.79 88,922 88,922 184,104 Bank of Montreal 71,870 1.44 71,151 71,151 147,311 Subtotal 1,738,030 34.76 1,720,650 1,720,650 3,562,426 Domestic Shareholders 3,261,970 65.24 3,229,350 3,229,350 6,686,025 KDFC staff /e n.a. n.a. 50,000 50,000 103,519 Subtotal 3,261,970 65.24 3,279,350 3,279,350 6,789,544 Total 5,000,000 100.00 5,000,000 5,000,000 10,351,970 /a Full payment for new issued shares is planned by September 29, 1978, with the share certificates actually issued on November 1, 1978. /b Par value of W 1,000. /c Based on an allotment of 0.99 shares for each share presently held; new shares also planned for a par value of W 1,000. /d Based on the Foreign Exchange Bank's buying rate of US$1 = W 483.00 as at February 28, 1978. Actual E$ proceeds will vary with the buying rate applicable at time of payment. Ie Fifty thousand shares are to be preferentially allocated to KDFC employees under the employee stock ownership plan. AEP Projects Department September 29, 1.978 Annex 4 Table 13 KOREA KOREA DEVELOPMENT FINANCE CORPORATION A. Staff Position of KDFC Actual Estimated 1975 1976 1977 1978 3/31 1978 1979 1980 1981 1982 Executives 3 3 4 4 4 4 4 4 4 Managers 4 6 7 7 7 7 7 7 7 Subtotal 7 9 11 11 11 11 11 11 11 Professional staff Economists 3 4 4 4 5 6 6 6 7 Financial analysts 9 9 11 10 13 15 16 18 19 Marketing analysts 8 8 9 10 10 11 12 13 13 Engineers 8 9 10 10 11 11 12 12 13 Financial accountants 3 3 5 5 6 6 7 7 8 Loan officer in charge of follow-up 10 12 13 11 18 20 22 25 27 Others 17 19 20 17 22 24 24 26 28 Subtotal 58 65 72 67 85 93 99 107 115 Nonprofessional staff 22 28 43 44 44 44 44 44 44 Lower staff (drivers, messengers, etc.) 11 11 13 13 13 13 13 13 13 Subtotal 33 39 56 57 57 57 57 57 57 Total 98 113 139 135 153 161 167 175 183 B. Professional Staff Recruitment Plan, 1978-82 1978 1979 1980 1981 1982 Appraisal Staff Financial analysts 2 2 1 2 1 Economists 1 1 - - 1 Market analysts 1 1 1 1 - Engineers 1 - I - 1 Subtotal 5 4 3 3 3 Others Accountants 1 - 1 - 1 Officers in charge of follow-up 5 2 2 3 2 Officers in charge of general affairs 2 2 - 2 2 Subtotal 8 4 3 5 5 Total 13 8 6 8 8 AEP Projects Department September 29, 1978 KORdA KOREA DEVELOPMIENT FINANCE CORPORATION Summary of Operations, 1968-77 /a (As of June 30, 1978) 196B-72 1973 1974 1975 1976 1977 Total 1978 (6 an) Total '68-mid-78 No. 6mount No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount No. ount No. mount A. Domestic Currency Loans (W million) lb Approvals 35 2,491 11 1,663 13 1,760 5 502 5 450 17 1,490 86 8,356 10 1,160 96 9,516 Commitments 34 2,421 12 1,733 13 1,760 5 502 4 350 17 1,490 85 8,256 10 1,110 95 9,366 Disbursements - 2,366 - 1,563 - 1,670 - 402 - 538 - 852 - 7,391 - 990 - 8,381 Repayments - 967 - 509 - 431 - 6b7 - 1,107 - 1,182 - 4.883 - 387 - 5,270 Outstanding at year end - 1,399 - 2,453 - 3,692 - 3,407 - 2,838 - 2,508 - - - 3,111 - - B. Domestic Currency Convertible Debentures (W million) Approvals 8 1,200 - - 3 210 3 180 4 610 5 480 23 2,680 1 du 24 2,760 Commitments 8 1,200 - - 2 110 2 250 4 440 7 680 23 2,680 - - 23 2,680 Disbursements - 1,200 - - - 110 - 250 - 440 - 480 - 2,480 - - - 2,480 Repayments - 125 - 129 - 153 - 98 - 42 - 131 - 678 - los - 784 Conversoin into investment - 250 3 400 - - - - - - - 219 - 869 1 30 - 899 Outstanding at year end - 825 - 296 - 253 - 405 - 803 - 933 - - - 797 - - C. Domestic Currency Equity Investment (W million) Approvals 4 616 4 231 12 1,052 6 349 9 1,029 10 887 45 4,164 7 451 52 4,615 Commitments 4 616 2 62 11 491 7 764 8 1,334 10 416 42 3,683 8 780 50 4,463 Disbursements - 616 - 62 - 491 - 764 - 1,062 - 633 - 3,628 - 440 - 4,068 Debenture converted - 250 - 400 - - - - - - - 219 - 869 1 30 - 899 Sales of equity investment - 50 - - - - - 148 - 122 - - - 320 - - - 320 Outstanding at year-end /c - 816 - 1,278 - 1,769 - 2,385 - 3,325 - 4,177 - - - 4,647 - D. Domestic Currency Guarantees Approval 1 30 - 2 424 - - 3 454 - - 3 454 Outstanding … _ _ _ _424 - 424 - - - 424 E. Foreign Currency Loans (USD'000) Approvals 82 50,829 34 30,713 28 23,748 43 42,891 67 61,537 61 70,010 315 279,728 33 44,543 348 324,271 Commitments 76 41,678 36 33,882 24 17,019 41 41,614 55 68,055 63 69,031 295 271,279 32 44,436 327 315,715 Disbursements - 37,289 - 11,991 - 34,209 - 23,683 - 64,928 - 42,706 - 214,806 - 46,919 - 261,725 Repayments - 2,629 - 2,807 - 6,965 - 5,988 - 9,876 - 13,114 - 41,379 - 8,305 - 49,684 Outtiandiug at year ead - 34,660 - 43,844 - 71,088 - 88,783 - 143,835 - 173,427 - - - 212,041 - F. Total (W milli.o equivalent) /d Approvals /e 129 22,251 49 14,133 56 14,540 57 21,833 85 31,934 93 36,811 469 141,502 51 23,294 520 164,796 Commitments Ie 122 18,765 50 15,297 50 10,615 55 21,317 71 35,131 97 36,066 445 137,191 50 23,441 495 160,632 Disbursements /f - 20,100 - 7,541 - 21,565 - 12,791 - 35,589 - 30,961 - 128,547 - 40,179 - 168,726 Repayments - 2,554 - 2,360 - 3,529 - 4,786 - 6,237 - 8,459 - 27,925 - 16,054 - 44,779 Outstanding at year end - 17,546 - 22,727 - 40,763 - 48,768 - 78.120 - 100,622 - - - 123,947 - /0 This table includes KDFC's own operations us well an projects jointly financed with the Regional Commercial Banks and foreign commercial banks; the loan to KDLC is treated as one subproject. /b Excluding loans to KDFC employees. Ec including a stock dividend fE W 398 million: W 9 million from -ong A Pharna.eoti-al Co., Ltd. in 1973 W 141 million from Chun Jo Paper llfg. Co., Ltd. in 1975 W 25 million trom Hanyang Food Co., Ltd. in 1975 W 76 million from Ran Knk Tire Mfg. Co., Ltd. in 1976 W 33 million from Lucky, Ltd. in 1977 W 114 million from Nan Kuk Tire Mtg. Co., Ltd. In 19/1 /d Eicluding .uarasntm operations. /e Exchange rate applied: US$1 - W 281.90 for 1968; W 305.20 for 1969; W 317.40 for 1970; W 374.10 for 1971 W 399.70 for 1972; W 398.50 for 1973; W 485.00 for 1974, 1975, 1976 and 1977. /f In any gives year, the won equivalent disbursement figures are caloulated by taking the year-nsd spot exchango rate of the won against all the various foreign currencies actually disbursed to KDFC's subborrowers in that year, and adding the change in the son value of KDFC'a outstanding foreign currency loan portfolio which is due to the exchange rate movements in that year. In a period of dollar (and won) depreciation, the won equivalent disbursement figures are there-ore much larger than the woe equivalent approvals and commitments, which are calculated via one singie dollar-won .echange rare (soe le). The won equivalent disbursements figures use specific exchange rates for each foreign currency disbursed and outstanding and espressos disbLrsemests and the outstanding foreign currency loan portfolio in won equivalents at current rates in any given year thereby providing an indicator of the cost (in won) of the foreign enchange risk tO KDFC'n subborrowrs.e AEP Projects Department 0- October 16, 1978 KOREA DEVELOPMEN PI.-OCE COROrMToO5~ 1W illitol 0000 1960-7 2 _ 1 9 73 9 7 4 1975 - _____ 19361977C,laieTta DodoatrOos No. 0 9 Total 5 No.0 $ Tonal 0 so. 0 D Total I No.E $ Total 7 so. 0 'Total I No. 0 5 TotED I No. 0 $ Torof I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-jj t N.. W $ .,. 00 70 EN~~~~~~~~~~~~~~~~~~~~~~~~~~~ 10 00 EW 5 OOrlccloora ~~~~~~ ~~~~~~~1 130 - 137 0.6 1 - 123 49 0.4 2 300 4D 320 1.5 I 356 173 0.6 3 50 7,101 1,069 3.0 10 480 2,620 1,741 1.3 Eiohta5 ~~~ ~~~~~~~~~ ~~~15 - 11,667 4.569 22 .4 7 5,030 7,004 14.4 3 - 1,166 839 3 . - - 3 - 5.795 2,811 7.9 26 - 24,158 10,192 7.6 810000 & qartg5 320 819 563 279 - - -…I - 1,314 637 3.0 - - - - - 2 -1,298 630 1.9 9 320 3.431 1,950 1. rood 6 baeas9 05 4,549 1,597 7.8 6 200 3 ,1636 1,649 11.9 3 - 7 ,7 30 1 ,3709 10.0 4 - 1,737 8572 4 .0 1 - 793 384 1.3 - - - - - 23 285 13,073 5.810 0. 'IEorDIEs, orarlto apparel & 7~~ ~~3 660 0, 29 7 3, 323 16.3 9 - - 4,331 31.2 5 737 2 ,082 1,760 13.2 11 00 11,434 5,623 76.04 26 260 10,311 7,793 23.7 9 70 3,472 1,794 5.0 02 1,9780 3166 2456 1. 0004 4 -oo ps-doct I 4179 128 0.6 1 -10.067 192 1.4 1 00 - 00 0.6 - - .. - - - - -3 80 900 40D 0. raterIbpaparp -d-ce - - - .. 01 L - 2,012 976 7.4 - - - - - - - - - - 1 000 3,7000 1,655 4.7 3 200 3,012 2,631 2. robber I lat pcot 11 266 3.834 1,573 7 .7 3 750 070 9 37 6.7 3 310 1,965 1,243 9.5 2 - 1,0DB 489 2 .3 6 - 5,9860 2,842 9.4 0 60 9,093 4,470 17.6 33 1,436 77,730 11,574 9. -oatll loccroor 9--150 3,07 , 15 .7 2 100 03 32 2.5 0 250 0,507 2,375 17.9 I 100 7,690 1,405 6.6 36 9 435 1.4 0 120 4,014 2,067 5.0 32 670 15.827 7,789 5,1 Io-I -asa. 3 200 3, 761 :1,59 7.1 - 7,76 030 6.0 2 25 502 493 3.7 3 - 2.645 1,283 6.0 1 - 4,000 1.40 6.4 - - -- - 10 48 2,9 610 41 eqotpsoso ~~~ ~~~~~~~~~~21 660 5,090 2,1644 12.9 6 61 3 57 2 841 6.1 7 20 2,673 1,31,7 9.9 0 - 14,147 7,055 33.1 14 090 9,502 4.799 15. 22 99 74,630 12,835 36.2 76 2,373 317,914 2049 2. StntsroesI- 323 9 . 1,549 6 17 4.4 2 - 613 09 7 2.3 4 22 887 4572 2.1 6 - 534 261 8.6 5 00 8,685 4,409 12.4 2 122 1,4 .9 . Total M29 2,4.91 50_829 20_735 100.3 4 2 1.663 30 J3j 1 l02~ 10t. 0 36L,~102 t _24it2A _2 A 100. 0 4 7 502 428981 21 304 100.0 65 9,50 61,2137 30_205 i00Q0 6401A12070t,0Qm 35.44 5 l4. 35 8.356 279_720 134.653 .l-~ o-h-ogo coco s,ptlid: 0501.00 0 781.00 to 1969; 0 305.20 In 1969; 0 317.40 to 1900, 0 374. 17 to 1971; W 399. 70 io 1972, 0 399.50 in 1973;W 0485.0 io 1974, 1975, 1976 atd 1977 . c-mba 79, 5078 mPid 01800.19800 FI841C COMUN TION J353gj,33fj~w of asa Aeeesd he of December 31. 1977 J 1868-72 1~~~~~~~~~~~~~I9 7 3 197419 75 1 9 7 6 9 7 70oltv oa No. 9 begat No~~ ~~ ~~~~~~.8 $ Total I Wo 1 8 oTaL1 0 No.. W $ Tota 5 No.. Toclho 1 ot1 o Food, baoerage & tobacco ~~~~9 85 4,549 1,597 7 .8 6 200 3,636 1,649 11.8 3 - 2, 738 1,328 10.0 4 - 1, 737 852 0.7 1 - 79 3 385 1.3 - - - - - 23 285 13, 4'3 S,8fl 1 4.3 * leather ~~~ ~~~~~~~23 660 8.297 3. 303 16.3 9 - 10.567 4 ,331 31.2 5 750 2, 08,2 1,740 13.3 11 NI 11,434 5,626 26.4 76 260 15. 511 7 ,7 83 75. 7 8 70 3 ,4 77 1,754 5.0 8 2 1,8 20 5153 24,SI- 18. I=ttogpoS lhlo - - - - - - - - - - I - 282 136 10 - - - - - -…- 22 73 0. t.bol1 32 g4 12.846 1.11O 1.1 15 flQ 14.5033 5.988 43.0 N 750 5. 102 3jj 72 4. 3 11 60 13. 191 AA418 30.4 77 260 16.304 6.168 2 7. 0 8 70 3.472 1. 754 5.3 106 2,175 05 416 10 22. Woold Iooodpro-o-t I 419 128 0.8 1 481 192 1.4 I 80 0 - 1 0.Q- - - 3… I00 47 . P er p_pepeooce … …… … ……2 2,02 976 7.3 - - - - - 1 200 3o000 1,635 4.7 3 200 5,012 2.637 2.7 -t.cl,rbber I pl-cire 11 24 3.834 1,573 7.7 3 750o 470 937 6.7 5 310 1.965 7,763 9.5 2 1,008 489 2.3 5 4 31 21751 7.0 8 609.03 14 470 12. 34 7,408 27,7111 0,83 I. Noo-ellt itoerl rrodoc- N 750 3,007 1,155 5.7 2 108 633 357 2.5 6 MS 4. 587 7,373 17.9 6 100 7,690 i,409 6.9 3 - 896 435 1.4 6 120 4,314 2 ,06 7 5.6 32 62 0 15,827 7,8 . tolt-ta 21 AM 7.260 2.834 14.0 4 850 1.584 1.481 10.6 16 540 8.564 4.694 35.3 0 100 3.698 1.894 8.9 9 - 6,5 _,27 7 10.8 20 380 1t.107 S. 192 23.2 73 2L306 4 3,969 22._QA i Oeelo rale 3 ~~~~~~~~~~~ ~~200 3:761 1.,539 7.6l 1 - 2,082 830 60 2 256 58 2 49~3 3.31 3 2:,645 1.783 6.0 1 - 4,000 1,340 6.4 - - - - - 10 450 12,990 6105I 4.,5 ealprdoct 8 315 284 1.336 6. 466 572 694 5.8 1 L117 77 4. 3 .43 65 7.0 8 50 3.906 2,069 9.4 1I 490 8,919 4.616 13.6 36 2,306 70,743 10,934 8. Matblnery lead. elecortcall ~~4 1IN 1.156 538 2.6 … … … … … … … … 2 2 ,069 1. 004 4.7 3 140 2,998 1,545 5.1 4 150 3,070 1,639 4. 6 13 47 0 3,193 4, 726 3.3 eppleoc- & eopla 9 ISO 1.808 770 3.a 1 147 167 1 .0 4 20 1.496 746 5.6 1 - 3,685 1,787 8.4 7 - 490 2737 0.8 5 050 2,091 1, 264 3,6 72 597 9,5~70 4,951 3. Or-ep-rteqatp.etlt … … … … … … … … … … … … … … … … 2 - '.450 3,6 13 37.0 - - - - - 2 17,55n 5,116 14.4 4 - 1800 6,2 . Sobtot-I 24 810 9.651 4.203 28.5, 7 613 2.654 1.671 12.0 7 270 3.175 1.818 13.6 UI . .192 8.338 39.1 It 190 13.194 6 .588 21.7 22 890 2,.630 12. 63 36.2 85 2823 70 4964j 35.445 2. D.5 ..1 ......loeoMli. l.damtrlom fb- -- - - 1 22 - 22 0.1 7 - 703 341 1.1 - = - - 3 22 70 36 . TSol0 fa Idotrr 77 2.041 29.757 11.979 58.8 28 1.6b3 18,741 9.132 65.6 30 1.360 16.841 9.7282 73.2 25 2-02 3: .081 16,732 78.5 52 4L50 36_957 18,374 60,6 45 1_340 44- 709 22 761 64.3 267 7,256 180_086 6876 6. flebeh,.e14 238 77.647 4.688f 22.8 8 5,153 2.053 14.8 5 3"I ] :3706 I.l127 53 1 - 36 17 2 0.6 8 5 0.~96 3.880 10.9 36 480 76,778 1.3 60 lOoo oryINs 5 328 819 583 2.3I……… …… I ,14 647 3. I 1,98 630 1.8 8 370 3, 431 1,860 2.3 coaatrocnlwo … … … … … … … … … … … … … … … … … … - - - - - - - - 3 -5,785 2,563 7.7 3 - 5,285 7.563 1.9~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 5!8 2, 6 72 - 5,95 2,63 1. &-arh-.lnl S 8,263 3.075 15.1 4 5,270 2.100 15.2 6 200 6.907 3, 550 76.8 4. 5,201 2.532 11t9 7 -19,235 9,379 311. 6 100 23,322 5,531 15.8 37' 300 321 2677 9. Naoklng&teaaoe …… …… …… …… …… …… - - - - 4,89 2,20 6. - - - 5 - 4,8 ,2 . Thre LostI 1.308 518 3. 7 40 14 0 O.9' - -… - 7 Q 77 . Other I 323 99 0.5 I 249 99 0.8 I 169 77 0.4 - …3 - 747 27 . Total Noofe, lndamtiee 25 4.50 11.072 !,46 481.4 14 - 11,972 4.770 34.4 6 200 6.907 3.550 26.8 12 300 8.810 4_572 21.5 13 - 24,588 11.921 39,4 19 ISO0 25,801 12,664 35 .7 89 J,10Q 292143 4393 1 1040 TOTAL 102 2.491 50.829 2 0.4 35 1080A 42 1.663 30.713 13.902 100.0 36 1.760 23. 748 13.278 100,0 47 50-2 42.891 71.304 -100.8 6-5 450 61. 537 30.295 1130.0 94 1,490 70.010 39,445 100.0 356 8,356 77 2 3 5 0. t-Oahan"e rate epplied: 659k.00 -6281.90 for 1968; 0 305.20 for 1969; 8 317.40 far 19701 W 374.10 for 19711 W 399.70 for 19721 10 388.30 for 1973; Id 485.07 for 1974, 1975, 1976 sod 1973. Note: hie tale coore 04C' a ow operectoo cc onlI we project jatnly ftn..o.ed mith the 800e sd forego t-nr-tL1 beke; the I.a. to OLC Ls treatd hEP Proje- DePortmen lepte-he 29, 7978 S-tgal h6oxJw4ioo 0 1.0. Aotoovd 8a o Doo... bg 31. 19177 I I 6 8 - 7 2 I 8 7 3 1 9 7 4 1 9 7 5 1 9 7 86 0 ___9 7 ~7 C0010 00 ..T.tl I ft. . ...Id.oaoo 8.00 N.. 00 6.001 0-0,.O A.C -Noo Good. IoduOtoi.o Ioad bevoso.Itbao- 9 85 6.569 1.587 7.8 6 208 3.636 1.649 11.8 3 - 2 .738 1.328 10.0 4 1.757 852 40. 0 - 793 385 1.3 - - - -- 23 29 5 73, 4773 5,077 4,3 T.001. 000208 p-.1 & iohr23 660 8.297 3. 313 16.3 9 10.867 4.331 31.2 5 750 2,082 7,768 13.3 01 80 11.434 5.6 26 28.7, 26 260 15,511 7 .7 83 25.7 8 70 3,4 72 1,754 5.0 82 1.020 57,063 24.357 7 19.3 001o110g&7o6010fl105 … … … … … … … … … … … I 0- 82 136 1.0 … … … … … ……--…- -280 I34 0.I 346001,0 3~~~~~~~2 jii1.5646 AOIj 24.1 1- 200 18.503 S. 888 43j0 750 5. 102 3.224 2.6.3 15 8013.191 6.478 30.4 27 2680 6 0 .6 77 0 7 3.47 2 1,.754 5.0 106 2. 105 65,4187 3.4 7. 8. lOeo -aO od. lndottOo OOodAOI OdpOdO, Al81 128 8.6 1 481 182 1.4 1 08 s0 0.8 …… …… …-3 s0 900 40 .3 Popo- & _7od-oo0 - -…… … … … … … … … … …- - 2 - 2,872 976 7 .3… …… …… … - - 200 3,000 1.655 4. 7 3 200 5.772 2.631 2.7 Cho.3-a., -088- A ploI-1, 11 286 3.836 1,573 7.7 3 758 478 837 6.7 9 318 1.965 1.263 9.5 2 1,708 489 :3.3 5431 713 77 8 6 .9 ,7 02.6 3 ,0 770 1.3 . I -oen&ol ……… …… ……… ……… …I1,309 737 0.4 - - - - - I - I07 037 0.5 too6a -Ioloa prodo.- N 158 3.807 1.155 5.7 2 108 633 352 2.5 6 158 4. 567 2.375 17.9 6 100 2.690 14,65 6.6 3 896 435 1.4 6 120 4,014 1,067 3.8 32 620 03,927 7.789 3.0 Sobto-l 21 AM 7.260 2.856 16. 6 858 7586 1.681 13.6 14 568 8.564 4.694 35~o ! 0 3.698 1.894 8.9 9 6.756 ._2 7 10.8 0 5 380 14a107 403$92 23.1 7 3 2.306 4 3.969 22.394 16.6 0.017 80001, ~~~~~~~~3 280 3.761 1.598 7.6 1 2.LOW 838 6.8 2 258 502 483 3.7 3 - 2,645 1.283 6. 0 I - ,000 0,840 6.4 - - - - - 00 450 12,990 6. 003 4.5 8.-I POodo-. 8 3ON 2,926 1.338 6.5 5 666 572 886 5.8 1 - 1.177 571 4.3 3 - 1,343 651 3.0 8 50 5.806 2.866 9.4 77 490 8.919 4.816 03.6 36 0,306 20,743 107,934 8.0 8-b.o600 (os-l. oosl ) 4 [88 2,134 538 2.6 … … … … … … … … … … 7 -- - 2.069 1.004 41.7 3 140 2.898 1.545 5.1 4 750 3,070 1,639 4 .6 13 470 9.193 4,726 3. 5 ll.-I-801 -hc61007, 0PP..t.., Iploo.6opl. 9 18 1,808 770 3.0 0 147 167 1.8 4 20 1.496 746 5.6 7 3.685 t,787 8.4 2 - 490 037 0.0 5 250 2,091 1,264 3.1 22 59 7 9.5 70 4,957 3.7 T000-0800-009018000 … … … … … … … … … … … … … … … - 2 - ?.450 3.673 17.3 - - - - - 2 00,550 5,116 14.4 4 - 78.300 A,729 6. 5 7060001 26 888 9 651 64283 205S 7 613 2 694 2.671 1208 7 278 3.175 16918 13.6 II - L .192 8-338 39.1 17, 90 13.194 6_588 21117 00 90 24630 12835 36.2 05 2 82 3 7, 00 49635 45 __ .. . . . . .000 -000 Lb 2010 ………… 7 0 - 2 0.7 2 - 703 341 7.! - - - - - 3 22 7-03 363 0. To-a 28f0. lnoo1o 77 2.041 29. 157 11.979 58.6 28 2.683 18. 741 8.132 63.6 30 1.568 16.841 9.728 73.2 35 '2032 3..081 16 732 78.5 52 450 36.957 18.374 60.6 45 1 .340 4_ ?0 2,8 64. 3 267 7.256 $80,5$6 88.726 65.9 68000.111. foety 6 0768.01,0 ~~~ ~~~~~~14 130 11,667 4,689 22.9 8 5.153 2.853 16.8 5 300 7,706 1.127 5.3 7 - 356 172 0.8 R 50 7,7396 3,880 10.9 36 480 26,7 70 21.931 8.9 8007086 qooroylnO ~~~~~~5 320 819 583 2.9 … ……… ……… 1.314 647 3 .3 - 2 - 0, 98 830 1. 9 320 3,431 1.863 .3 CoooOoooOIoO … … … … … … … … … … … … … … … … … … … … … … - - - 3 - 5,785 7,563 7.2 3 - 3,285 2,563 7.9~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3 5,25 , 63 1. 3 5,85 2,63 1. T-W-1 rtti.a (Intl .--008 6 ,.oo.6oo01n68 S ~ ~~~~~ 8,263 3.075 15.1 4 5.270 2,100 15.1 6 280 6,907 3.1550 26.8 4 2,221 2.532 77.9 7 19,235 9,329 30.8 6 770 77,322 5.591 75.8 32 300 56.218S 26,7177 19.5 OaOllogIlO.oOOooO … … … … … … … … … … … … … … … … … … … … … - - - - - -- - - - 5 - 4,989 2,420 8.0 - - - - - 5 - 4,99 2,420 7.8 00,0060000100 7 ~ ~~~~~~ ~~~~~~~~~ ~ ~~~~~ 1.309 5t8 3.7 408 1- 0.9 - -…3 N .0 712 0.5 00600 1 ~ ~~~~ ~~~~~~~ 323 99 0.5 I 249 99 3.8 I 169 72 0.4 - -…-3 - 741 270 0.2 70018 f0,. 008000710 25 650O 2.012 0.456 41.4 14 - 11977 4. 770 34.6 6 280 6.907 1.558 26.8 13 300 8.810 4. 572 21.5 13 - 24.560 114921 39.4 19 750 75 871 12_664 35.7 89 71310 99.142 45. 933 34.7 1GRA0D TOTAL 102 2,491 50 829 20.455 1ifoQ 4L2.10463 34.713 13.902 180.8 346 1,760 23.7748 13 278 100.0 67 501 42.801 2 1. 304 7n0t0 65 450 61.537 30.295 .7.73.o 69 1_490 70qlO 31,445 170.0 336 9_316 279_428 034_659 700.0 -h..l600. I000 .11104: 059100 - 828.90 -0 1968; 0 3-5.0 0f- 1869; R 317.60 00- 1978; 8 376.10 IOr 19711 8 395.70 for 79721 0 390.0 800 1973; 8485.010 70- 974.!1875. 1976an 17 ft mldo 8010000O.oolor.. anI!~ d -rloNo-h ...... Noe: m.1 00610 06 D00 170, 200ooaO-oa .1 70.- 1.ijoO ly flnoocod vIl 0h. SIGN'. 008 for-Ig. - -rl1 books; h6. loa 00 1811 10 , a AlP P-030-1 DePootU S.,,-b- 09, 1978 ANNEX 4 Table 18 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Table of Repeat Loans /a (As of December 31, 1977) Cumulative No. of No. of No. of loan amount clients projects loans (W mln equivalent) Percent Total approvals of which: 223 344 356 134,659 100.0 First loan to clients 223 223 223 61,141 45.4 Repeat loans to clients of which: 2nd loan 46 43 46 37,028 27.5 3rd loan 17 29 34 15,576 11.6 4th loan 9 25 27 12,389 9.2 5th loan 2 8 8 3,978 2.9 6th loan 1 4 5 1,645 1.2 More than 6th loan 2 12 13 2,902 2.2 Subtotal of repeat loans 77 121 133 73,518 54.6 /a Exchange rate applied: US$1.00 = W 281.90 for 1968 US$1.00 = W 399.70 for 1972 W 305.20 for 1969 W 398.50 for 1973 W 317.40 for 1970 W 485.00 for 1974, W 374.10 for 1971 1975, 1976 and 1977 AEP Projects Department September 29, 1978 ANNEX 4 Table 19 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Characteristics of Equity Investments and Debenture Subscription Approved. 1968-77 /a (in 1W million) 1968-72 1973 1974 1975 1976 1977 Cumulation total No. Amount 2 No. Amount % No. Amount 2 No. Am.ount X No. Amou6t 0 No. Amount No. Amount 0 A. Sie Distribution Below 100 2 118 6.5 3 62 26.8 12 460 36.5 7 243 45.9 8 323 24.5 8 310 19.8 40 1,516 22.2 100-200 6 660 36.4 1 169 73.2 2 251 19.9 2 286 54.1 1 100 6.9 3 382 24.4 15 1,848 27.0 200-300 3 738 40.6 - - - … … … … … - 2 531 36.9 2 400 25.5 7 1,669 24.4 Over 300 1 300 16.5 - - 1- 551 43.6 - - - 1 485 33.7 1 475 30.3 4 1,811 26.4 Total 12 1,816 100.0 4 231 100.0 15 1,262 100.0 9 529 100.0 12 1.439 100.0 14 1,567 100.0 66 6,844 100.0 B. Geographical Distribution Seoul area 6 694 38.2 1 12 5.2 4 784 62.1 2 63 11.9 4 681 47.3 2 103 6.6 19 2,337 34.1 Busan area 2 340 18.7 1 169 73.2 1 74 5.9 - - - - - - - - - 4 583 8.5 Kyu.ggi-Do 2 412 22.7 2 50 21.6 6 197 15.6 4 326 61.6 2 20 1.4 6 517 33.0 22 1,522 22.2 Kyungsangbuk-Do - - - _ _ 1 50 4.0 2 90 17.0 1 50 3.5 1 200 12.8 5 390 5.7 Ryungsangs a=-Do - - - 1 33 2.6 - - - 3 570 39.6 1 30 1.9 5 633 9.3 Chungchungn.-Do - - - 1 60 4.8 - - - - - _ _ _ 1 60 0.9 Chungchungbuk-Do 1 250 13.8 - -… - - - - - - - - - - - - - 250 3.6 Chungnam-Do 1 120 6.6 - - - - -1- 50 9.5 1 60 4.2 2 599 38.2 5 829 12.1 Chunnabuk-Do - - - - - 64 5.1 - - - 1 58 4.0 1 68 4.3 3 190 2.8 marine transportation - - - - - - - - - - - - - - 1 50 3.2 1 50 0.8 Total 12 1.816 100.0 4 231 100.0 15 1.262 100.0 9 529 100.0 12 1.439 100.0 14 1,567 100.0 6S 6.844 100.0 C. Sectoral Distribution I. Manufacturing Industries A. Consumer Goods Industries Fond, beverage & tobacco 1 100 5.5 - -… - - - - - - -OO 1.5 Textile, wearing apparel & leather 2 268 14.8 2 50 21.6 3 33 2.6 1 10 1.9 3 70 4.9 3 326 20.8 14 757 11.0 Printing & publishing - - - - --- - - - - - - - - - - - - - Subtotal 3 368 20.3 2 50 21.6 3 33 2.6 1 10 1.9 3 70 4.9 3 326 20.8 15 857 12.5 B. Intermediate Goods Industries Wood & wood products - - - - - - 1 50 4.0- - - - - - - 50 0.7 Paper & paper products 1 250 13.8 - - - 1 64 5.1 - - 1 58 4.0 - - - 3 372 5.5 Chemicals, rubber 6 plastics 3 380 20.9 1 12 5.2 3 160 12.7 1 23 4.3 3 649 41.4 11 1,224 17.9 Petroleum & coal - Nonmetallic mineral products 2 400 22.0 - - - 2 133 10.5 2 70 13.3 2 310 21.6 2 40 2.6 10 953 13.9 Subtotal 6 1,030 56.7 1 12 5.2 7 407 32.3 3 93 17.6 3 368 25.6 5 689 44.0 25 2.599 38.0 C. Capital Goods Industries Basic metals - - - - - 1- 50 4.0 1 40 7.6 1 485 33.7 - - - 3 575 8.4 Metal products - - - - - - 2 70 5.5 - - - 2 150 10.4 - - - 4 220 3.2 Machinery (excl. elec.) 2 130 7.1 -… … … … … … … … … … … … … …2 130 1.9 Electrical machinery, apparatus,appliances & supplies - - - - - 1 150 28.3 - - - 1 63 4.0 2 213 3.1 Transport equipment - - - - - 1 136 25.7 - _ _ 2 236 15.1 3 372 5.4 Subtotal 2 130 7.1 - - - 3 120 9.5 3 326 61.6 3 635 44.1 3 299 19.1 14 1,510 22.0 S. Miscellaneous MfRg. Total Mfg. Industries 11 1,528 84.1 3 62 26.8 13 560 44.4 7 429 81.1 9 1.073 74.6 11 1.314 83.9 54 4.966 72.5 II. Nonmanufacturing Industries Agriculture, forestry 6 fisheries … … … … … … … … 2 100 18.9 2 85 5.9 1 200 12.7 5 385 5.7 Mining & quarrying - Electricity & waterworks Construction Transportation (incl. storage & warehousing) - - - - - - - - - - - - - - - 1 50 3.2 1 59 0.7 Banking & insurance 1 288 15.9 - - - 2 702 55.6 - - - 1 231 19.5 1 3 0.2 5 1,274 18.6 Hotel & tourism - - - 1 169 73.2 - -… - … … … … … … … … 1 169 2.5 Other … … … … … … … … … … … … … … … … … … - - Total Nonmfg. Industries 1 288 15.9 1 169 73.2 2 702 55.6 2 190 18.9 3 366 25.4 3 253 16.1 12 1,878 27.5 GRAND TOTAL 12 1,816 100.0 4 231 100.0 15 1,262 100.0 9 529 100.0 12 1.439 100.0 14 1,567 100.0 66 6,844 100.0 la Includes convertible debentures. AEP Projects Department September 29, 1978 ANNEX 4 Table 20 KOREA KORPA DEVELOPMENT FINANCE CORPORATION fecto-al Distribution of Loans and Investments Outstanding as of December 31, 1977 Loans Investments Foreign currencY Won currency Equity investment Convertible debenture ionds Total No. of No. of No. of No. of No., of No. of clients Amoount clients Amount clients Amount clients Amount Clients Amount clients Amount 1. Manu.factu,ing Industries A. Consumer Goods Industries Food beverage & tobacco 12 4,174 1 32 1 100 - - - - 14 4,306 Text le wearing apparel & leother 45 20,942 5 459 5 239 - - 2 250 57 21,890 Printing & publishing 1 111 - - - - - - - I 111 Subtotal 58 25,227 6 491 6 339 = - 2 250 72 26,307 b. Intermediate Goods Industries llood wood products 1 192 1 37 1 44 - - 3 273 Paper paper p-odo-t. 2 819 - - I 372 - - - - 3 1,191 Chenicals, robber & plastics petroleum & coal 14 5,742 5 350 3 658 1 30 . - 23 6,780 Nonmetallic oioeral oroducts 13 5,335 4 178 3 293 1 88 1 194 22 6,088 Subtotal 30 12,089 10 565 8 1,367 2 118 1 194 51 14.332 C. Capital Goods Indnstries dastc metals 4 4.327 2 132 2 514 - - - - 8 4,973 Metal products 18 6.929 6 438 2 60 - - I 36 27 7,433 Machinery, exl. electrical 4 979 2 250 - - - - - - 6 1,229 Electrical machinery, apparatus appliances & suppli-s 7 3 ,49 2 136 1 213 - - - - 10 3.368 Transport equipment 3 1,781 1 140 1 172 - - I 100 6 2,193 Subtotal 36 17,165 13 1.036 6 959 = 2 136 57 19,196 D. Miscellaneous .. efg. Industries - - - - - - - - Total nfg. industries 124 54.380 29 2.092 20 2.665 2 118 5 580 180 59.835 II. Nonmauf-acturin Industries Agrtcuiture, forestry & fisheries 19 6,5n4 3 350 2 150 2 Z35 - - 26 7,239 Mining & quarrying 1 827 - - - - - _ _ 1 827 Flectricity & ater works - - - - Construction Transportation (icl. storage & warehousing) 18 19,046 1 57 1 50 - _ _ _ 20 19,153 Banking & insurance 1 2,174 - - 2 1,152 - - - - 3 3,326 Rotel & tourisr 1 825 - - 1 169 - - - - 2 994 Other 4 356 - - - - - - - - 4 356 Total nonofg. industries 44 29,732 4 437 6 1.521 2 235 - 56 31.895 Grand Total 168 84.112 33 2.499 26 4,186 4 X 5 580 236 91,730 fa /a Incluldinq stok dividends of 9 million received in 1973, and excluding loans to KDFC's eMpIoy.es (U 5] million outstanding as of December 31. 1977). Thin differs from Tables 14 and 19 due to exchange rate fluctuations, but the sectoral distribution remains basically unaffected. AEP Projects Dlepartment September 29, 1978 ANNEX 4 Table 2 1 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Subprjects Approved or UnderConsiderationforPEnanc RUnder L-on 1461-KO, as of Joe 30, 1978 (U5 '000) locresental Incremental Cost Foreign Nave of -oopany Type of industry Type of Project Coot KDC Fi .a. Iig Rate of return (I) enport job Per osner project Local Foreign Total IBR80 FinancIal Ec.onoic soles creation job snip (ES) ($) (ES) WS) ($) (nomber) (S) (Z) A. Approved by IBRD Da. Han Paper-Beard Co., Ltd. Paper E 4,419 3,300 3,712 3,300 20.8 41.4 4,214 120 39 - Dong WEn Precision Machine Mfg. C.. Ltd. Metal E 866 1,410 1,410 1,410 27.9 42.0 - 30 53 - Sajo 1ndostrial Co., Ltd. Fisheries E 1,706 1,437 1,437 1,437 19.3 17.9 1,5d1 58 46 - Hlan Yang Hoosing & Construetion Co., Ltd. Constr-ction E 1,438 3,900 2,500 2,500 - - - 6U 74 - Dong Win Indstrial C... Ltd. Deep-sea fisheries. R 968 2,180 2,180 2,180 18.8 16.8 1,577 - - - Hanil Cement Mfg. Co., Ltd. Nonmetallic E 650 2,260 2,404 2,260 - - - 16 161 - G.n Song Chenical Co. Glass cloth E 401 185 247 185 - - - 64 7 - Doe Won Sa Co., Ltd. Metal N 1,778 850 1,056 850 - - - 100 19 - Korea Iron & steel Co., Ltd. Metal 8 6,695 3,500 3,706 370 43.3 35.4 - 35 162 - O-Yang Fisheries Co., Ltd. Deep-sea fisheries R 946 2,178 2,178 2,178 - 18.5 - - - Tong Yang Shipping Co., Ltd. Marine transpnrtation E 402 3,400 3,400 3,400 22.8 27.4 - 22 155 Kom Ho Chemical Co., Ltd. Chemical. N 15,156 16,904 5,880 4,880 35.0 29.0 - 204 30 Shiv Song Engineering Co., Ltd. Construction N 860 335 335 335 - - - 40 22 Yong Nan Carbonic Co., Ltd. Chemical N 597 428 490 428 - - - 30 27 Sam Whan Corporation Construction E 4,406 5,925 2,450 2,450 - - - 160 54 Chin Yang Machinery Co, Ltd. Metal N 1,181 1,950 1,950 1,950 44.5 47.2 1,039 260 1O - Sedae Paper Mfg. Co.. Ltd. Paper E 19,099 10,000 7,000 7,000 23.8 16.8 - 190 95 - DOe HR Industrial Co., Ltd. Fisheries R 986 2,255 2,255 2,255 17.0 15.0 1,601 - - Korea Synthetic Rubber Co., Ltd. Petrochemical N 26,329 30,669 7,600 7,600 15.3 29.8 - 170 183 50 ICC Transportation Co. Transportation E 216 230 230 230 21.2 68.3 - - - - Don San Mfg. Co, Ltd. Machinery 0 542 400 400 400 - - - 90 8 - Dae Song Rope Mfg. Co., Ltd. Rope making E 193 243 243 243 - - 1,336 20 16 - Seosgshin Fisheries Co., Ltd. Fisheries R 70 188 188 188 - - 15 - - - Shin Shus Prefab Co., Ltd. Nonmetallic N 3,234 1,830 2,450 2,450 29.5 39.4 - 80 45 - Se Yang Fisheries Co., Ltd. Deep-sea fisheries R 493 1,127 1,125 1,127 16.8 15.2 793 - - - Dong bang Forwarding Co., Ltd. Others E 473 501 500 500 - - - 107 9 - Lotte Moolsan Co., Ltd. Metal N 234 347 347 347 - - - 25 20 04 Koou Chang Trading Co., Ltd. Fisheries E 619 1,500 700 700 - - 700 92 22 - Dong Myng Metal Co., Ltd. Basic metal E 1,097 662 662 662 - - - 95 16 - Nai Yang Dairy Products Cs., Ltd. Agriculture E 4,437 3,800 3,800 3,800 19.9 25.9 - 210 33 - Kwang Jin Electronic Ind., Co.Ltd. Electronic E 1,669 947 946 740 - - - 200 11 - Ihl Shib Heavy Equipment Co. Ltd. Construetion E 79 255 255 255 - - - 6 56 - Seshin Precision Co., Ltd. Metal N 499 380 442 380 - - 1,103 210 4 - Tae Yeon Moolsan Co. , Ltd. Tentils 0 97 92 92 92 - - - 63 3 - Dong Yang Preeioson Machine Tool Machinery E 608 500 500 500 - - - 20 34 - Ssang Yong Shipping Co., Ltd. Marios transportation E 1,798 6,150 1,000 1,000 18.5 27.1 - 27 234 - Dai Han Ink & Paint Mfg. Co., Ltd. Plastics E 322 487 652 487 - - - 30 21 - Jedong Industries Co., Ltd. Nonmetallic E 1,346 996 870 870 - - 50 44 - Subtotal (38) 106,931 113,700 67,594 61,939 13,959 2,884 B. Under Processing Se II Sa Co., Ltd. Plastics E 110 260 260 260 Hasil Express Co., Ltd. Transportation E 920 3,000 3,000 3,000 Sam Bn Shipping Co., Ltd. Marine transportation E 186 750 750 750 Kok Bo Transportation Co., Ltd. Transportation E 401 500 500 500 Taeyang Metal Ind. Co., Ltd. Metal E 2,986 1,800 1,800 1,800 Don San Ceramics, Co., Ltd. Nonmetallic E 1,005 921 500 500 Subtotal (6) 5,608 7,231 6,810 6,810 Total 112,539 120,931 74,404 68,749 AEP Projects Department October 16, 1978 ANNEX 4 Table 22 KOREA .KOREA DEVELOP15ENT FINANCE CORPORATION Audited Balasnc Sheets 1974-1977 (in W million) As of June As of December 31 1974 1975 1976 1977 30, 1978 ASSETS Current Assets Cash in bank .5 demand deposits 35 21 2,492/b 139/b 12 Time deposits matCaIng within one year 743 606 1,038 1.325 1,283 Aocr-ed interest 1,064 1,317 2,407 3,846 4,660 Other current .stets /a 1,710 2,799 3,526 3,596 3,110 CGrrent portio- of .ass & debentures 4,638 6,176 8,007 11,327 13,289 Total ourrent assets 8,190 10.918 17.470 20,233 22,354 Time deposits rentrioted for employees' severaece pay 125 - - - - PORTFOLIO Domesti cuerency loann 3,692 3,407 3,073 2,559 3,636 Foreige currency leans ISHD Ioans 33,933 35,257 48,768 58,899 67,282 AD8 louns - 6,391 11956 23,630 29,43i AID oo.se 1,090 906 703 479 384 Caterpillar I.as 26 17 9 - - IFC less - - 8,648 8,779 8,899 SEG loan .- 1,070 1,202 1,215 APCO loan - - - - 8,182 Subtotal 35,049 42,571 71,154 92,989 115,393 Debentures 253 405 803 933 489 Equity ivnvstmeet 1,777 2,394 3,333 4,186 4,655 Total portfolit L. 40.771 48.777 78,363 100,667 124,173 less: Allowance for losese 628 830 1,131 1,462 1,803 Current portion 4,638 6,175 8,007 11,327 13,289 Net portfolio 35,505 41,772 69,225 87,878 109,081 Other assets Pieed assets (set) 343 344 1,140 1,773 1,695 Total assets 44.163 53,034 87,835 109,84 133.130 LIABILITIES Caurent Liabilities Abooed intereet and -oomitnent fees 558 829 1,698 2,675 3,354 Deferred income 70 148 219 320 357 Acoroed expeses. 103 294 2,855 /b 917 918 Correct eaturity of term debt 3,929 5,004 6,806 10,225 12,060 Total current liabilities 4,660 6,275 11,578 14.137 16.689 Employees' severance liability 126 166 244 287 312 Borrowinss Domestica rrency borrowigsR 2,025 2,025 2,025 1,991 1,958 Foreign currency borrowings 1BRD leans 33,998 35,076 48,527 58,296 66,525 ADB loans - 6,391 11,956 23,625 29,431 AID loans 1,179 1,090 995 895 843 Caterpillar loa 27 22 17 11 11 IPC loss - - 8,648 8,779 8,899 DEG laos - - 1,070 1,202 1,215 APCE loan - - - - 8,182 Subtotal 35,204 42,579 71,213 92,808 115,106 Total lone term debt 37,229 44.604 73_238 94,799 117.064 Less: Correct portion of term debt 3,929 5,004 6,806 10,225 12,060 Net Song term debt 33,300 39,600 66,432 84,574 105,004 STOCKHOLDERS EQUITY 6hare capital 3,000 3,300 5,000 5,000 5,000 Legal . enerve 600 700 1,070 1,770 2,500 Retained Earnings Voluntarily appropeiated 1,500 1,700 1,900 2,000 2,300 Unappropeiated 977 1,293 1,611 2,116 1,326 Total stockholders e"uity 6.077 6.993 9,581 10,886 11.126 Total liabiltties b equity 44,163 53,034 87_835 109_884 133.131 Costiegest Siabilities (guarantees) - 424 424 424 424 Ration Corcentr . to i/d 1.8 1.7 1.5 1.4 1.3 Debt/equity ratio L 6.1 6.4 7.6 8.7 L0.5 Reserves and provisions an % of portfolio /f 9.11 9.2% 7.2% 7.3% 6.4% /s Including tarketable securities. Lb Including foreign currency deposits sitb Korea E-change 8enk far later disbursement in as asoust of W 2,475 million for 1976, and other deposits tar 1977. Is These figures differ slightly compared with the 'outstanding at year end' figures of Anoes 4, table 14 (Section F) because thebe accounts include a few minor loan adjus-ments for project cost overruns and underruss. /d Taking ourrest maturities of loans and debt into account. Is Including contingent liabilities under term debt. The figuoe of 10.5 foe part of 1978 is tenporary and will fell to below the 10:1 limit followng completion of the W 5 billion share capital issue in October 1978. If Total portfolio including guarantees. AEP Projects Deportment September 29, 1978 ANNEX 4 Table 23 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Audited Income Statements 1974-1977 (in W million) As of June Year ended December 31 1974 1975 1976 1977 30, 1978 Income Interest income and commitment fees on loans 3,244 4,732 6,591 9,923 6,420 Dividend income 188 266 394 467 450 Income on commercial paper 209 268 447 602 290 Interest on deposits 202 204 208 387 207 Total 3,843 5,470 7,640 11,379 7,367 Expenses Interest and charges on borrowings: Domestic currency borrowings 81 81 81 81 44 Foreign currency borrowings 1,812 2,841 4,190 6,868 4,527 Commitment charges 93 104 287 251 137 Subtotal 1.986 3,026 4,558 7,200 4,708 Salaries & other personnel expenses /a 268 346 472 631 331 Administrative and general expenses 268 305 356 492 277 Provision for losses 162 202 301 331 341 WEite offs 39 49 - - - Other expenses 26 30 20 1 27 Total expenses 2,749 3.958 5,707 8,655 5.684 Net earnings before tax 1,094 1,5t2 1,933 2,724 1,683 Provision for corporate income tax 182 296 385 668 444 Net income 912 1,216 1,548 2,056 1,239 Retained earnings carried forward 65 77 63 60 87 Total 977 1.293 1,611 2,116 1.326 Appropriation /b Cash dividend 300 330 751 1,000 - Stock dividend 300 330 - - - Legal reserve 100 370 700 730 - General reserve 200 200 100 300 - Unappropriated 77 63 60 86 1,326 Total 977 1,293 1,611 2.116 1.326 Percentate of Average Total Assets 1. Gross income 10.8 11.2 10.9 11.5 6.1 2. Financial expenses 5.6 6.2 6.5 7.3 3.9 3. Gross spread (1-2) 5.2 5.0 4.4 4.2 2.2 4. Administrative expenses 1.6 1.4 1.2 1.1 0.5 5. Provisions 0.6 0.5 0.4 0.3 0.3 6. Income tax 0.5 0.6 0.6 0.7 0.4 7. Net income 2.5 2.5 2.2 2.1 1.0 Net Profit as 1 of Average equity 15.8 18.6 18.7 20.1 11.3 Share capital 30.4 36.9 31.0 41.1 24.8 Other Ratios Income from loans as Z of average loan portfolio 10.7 11.1 10.8 11.6 6.0 Cost of term-debt as % of average term debt 6.8 7.4 7.7 8.6 4.4 Interest spread 3.9 3.7 3.1 3.0 1.6 Cash dividend as 1 of par 10.0 10.0 20.0 20.0 - Stock dividend as % of par 10.0 10.0 - - - Payout ratio 32.9% 27.1% 48.51 48.6% - Book value as 1 of par 203.0 212.0 192.0 218.0 223.0 Earnings per share (average 304.0 374.0 412.0 411.0 248.0 outstanding) /c (W) Interest cover ratio /d 1.6 1.5 1.4 1.4 1.4 Debt service cover ratio /e 1.4 1.3 1.3 1.3 1.2 Return on total assets (1) /f 7.0 8.6 7.4 9.0 4.7 /a Including allowance for employees' severance pay. /b Appropriation is subject to approval at the shareholder's general meeting held in the first quarter of following year. /c Reflects the par split in shares from I to 5 in February 1977. /d Net earnings before interest, tax and depreciation to interest charges. /e Profit after tax and interest charges and noncash + loan collections to interest charges + repayments of borrowings. /f Net income before tax + interest expenses to total assets. AEP Projects Department September 29, 1978 ANNEX 4 Table 24 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Summarized Cash Flow Statements 1974-1977 (in W million) As of June As of December 31 1974 1975 1976 1977 30, 1978 SOURCES Operations Net income 912 1,216 1,548 2,056 1,239 Noncash charges 264 302 388 548 484 Subtotal 1,176 1,518 1.936 2,604 1,723 Issuance of shares for cash - - 1,370 - - Drawdown on foreign currency borrowings 19,134 11,304 33,637 28,689 27,079 Collections Domestic currency loans 431 687 1,067 1,489 495 Foreign currency loans 2,945 3,853 5,066 7,037 4,715 Convertible bonds and debentures 153 98 42 131 136 Subtotal 3,529 4,638 6,175 8,657 5,346 Disposition of equity investments - 148 122 - - Disposition of fixed assets 40 36 87 13 21 Increase in payables 200 540 3,502 (861) 689 Total sources 24,079 18,184 46.829 39,102 34,858 USES Increase in fixed assets 28 49 891 820 31 Disbursements Domestic currency loans 1,670 402 733 975 1,264 Foreign currency loans 19,294 11,375 33,649 28,873 27,119 Bonds and debentures 110 250 440 480 - Subtotal 21,074 12,027 34,822 30,328 28,383 Disbursement of equity investments 491 764 1,062 633 469 Repayment of borrowings Domestic currency borrowings - - - 34 34 Foreign currency borrowings 2,641 3,929 5,004 7,092 4,782 Subtotal 2,641 3.929 5,004 7.126 4,816 Employees' severance pay - - - - - Payment of dividends 324 300 330 751 1,000 Increase in receivables (572) 1,205 2,249 1,798 160 Increase in deposits for employees' severance pay 50 (125) - - - Increase (decrease) in cash 4 (14) 2,471 (2,354) (1) Write offs 39 49 - - - Total uses 24,079 18,184 46,829 39,102 34,858 AEP Projects Department September 29, 1978 ANNEX 4 Table 25 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Collection Performance 1974-1977 /a A. Collection Ratio (in W'OOO) Amount due during the year Overdues Maturing during the yr. Total due Principal Interest Principal Interest Principal Interest Total 1974 24,520 12,695 3,576,517 2,301,783 3,601,037 2,314,478 5,915,515 1975 71,769 34,929 4,566,288 3,536,612 4,638,057 3,571,541 8,209,598 1976 - 23,895 6,212,031 4,385,307 6,212,031 4,409,202 10,621,233 1977 37,269 22,529 8,556,852 5,891,907 8,594,121 5,914,436 14,508,557 1978 /b 68,436 19,836 5,350,689 5,305,757 5,419,125 5,325,593 10,744,718 Actual collection Collection rate Principal Interest Total Principal Interest Total 1974 3,529,268 2,279,549 5,808,817 98.0% 98.5% 98.2% 1975 4,638,057 3,547,648 8,185,705 100.0% 99.3% 99.7% 1976 6,174,762 4,386,673 10,561,435 99.4% 99.5% 99.4% 1977 8,525,685 5,894,600 14,429 275 99.2% 99.7% 99.4% 1978 /b 5,346,133 5,296,031 10,642,164 98.7% 99.4% 99.0% B. Status of Portfolio (in W million) Year ending December 31, 1974 1975 1976 1977 End June/78 Amount % Amount % Amount % Amount % Amount % Principal outstanding 38,954 100.0 46,383 100.0 75,029 100.0 96,481 100.0 119,518 100.0 Of which: In grace period 22,468 57.6 24,923 53.7 44,073 58.7 41,819 43.3 65,808 55.1 Repaying regularly 15,612 40.1 21,053 45.4 47,220 62.9 54,278 56.3 53,344 44.6 In arrears 914 2.3 407 0.9 382 0.5 384 0.4 366 0.3 (Over 3 months) (591) (1.5) (-) (-) (-) (-) (-) (-) (-) (-) C. Arrears (in W million) Year ending December 31, 1974 1975 1976 1977 End June/78 Over Over Over Over Over Total 3 mo Total 3 mo Total 3 mo Total 3 mo Total 3 mo Number of loans in arrears 3 2 1 0 1 0 1 0 3 0 Amounts in arrears 106.7 96.0 23.9 - 59.8 - 88.2 - 106.5 - Of which Principal 71.8 71.8 - - 37.3 - 68.4 - 73.0 - Interest 34.9 24.2 23.9 - 22.5 - 19.8 - 33.5 - /a Loan and debenture portfolio. /b January-June 30, 1978. AEP Projects Department October 16, 1978 ANNEX 4 Table 26 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Statement of Resources As of June 30, 1978 As of December 31, 1977 Local currency resources (W thousand) (W thousand) Share capital 5,000,000 5,000,000 Reserves and retained earnings 6,126,168 4,886,285/a Net stockholders' equity 11,126,168 9,886,285 Government subordinated loan 1,957,500 1,991,250 Add-back: Noncash charges (depre- ciation, provisions, etc.) 2,329,402 1,879,187 Total local currency resources 15,413,070 13,756,722 Less: Local currency loans outstanding 3,327,653 2,559,027 Bonds and debentures outstanding 797,000 933,000 Equity investments 4,655,322 4,186,047 Fixed assets (at cost) 1,908,979 1,903,000 Subtotal 10,688,954 9,581,074 Equals: Available for disbursement 4,724,116 4,175,648 Less: Undisbursed commitments 1,275,000 1,159,109 Equals: Available for commitment 3,449,116 3,016,539 Less: Uncommitted approvals 412,457 581,508 Local currency resources available for approval 3,036,659 2,435,031 Foreign currency resources /b (US$) (US$) IBRD loans 218,409,355 218,409,355 ADB loans 70,000,000 70,000,000 IFC loan 17,800,000 17,800,000 DEG loan 2,000,000 2,000,000 AID and Caterpillar loans 2,971,025 2,971,025 APCO loan 20,000,000 20,000,000 Total foreign currency resources 331,180,380 331,180,380 (= W 160.6 billion) (= W 160.6 billion) Less: Total loans disbursed 261,724,551 214,806,118 Equals: Resources available for disbursement 69,455,829 116,374,262 Less: Undisbursed commitments 52,951,189 56,472,925 Equals: Resources available for commitment 16,504,640 59,901,337 Less: Uncommitted approvals 8,054,000 8,450,000 Foreign currency resources available for approval 8,450,640 51,451,337 Total resources (W thousand (W thousand equivalent) /c equivalent) /c Total resources 176,035,554 174,379,206 Available for disbursement 38,410,193 60,617,165 Available for commitment 11,453,866 32,068,687 Available for approval 7,135,219 27,388,929 /a After deducting 1977 cash dividend (W 1 billion). /b Net of cancellations. /c Exchange rate applied: US$1 = W 485.00 AEP Projects Department September 29, 1978 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Terms and Conditions of Long-Term Borrowings as of June 30, 1978 Maximnum Loan amount Outstanding /a duration for WJon in US$ in Date of loan Repayment Borrowing subborrower Limit on Free limit Procurement Source of funds Original Actual million thousand agreement schedule rate (X) Onlending rate (x) (years) subloan ($'000) tied or not I. Foreign currency -- (US$'000) -- USAID 5,000 2,892 894 1,843 1968.1.1 1972-84 6.0 10 15 n.a. 100 tied IBRD Ist loan 5,000 4,950 39 81 1968.1.1 1970-80 6.5-7.0 10 15 n.a. 100 not 2nd loan 20,000 19,726 708 1,460 1969.6.26 1971-80 6.5 10 15 n.a. 300 3rd loan 30,000 29,125 7,423 15,306 1971.5.17 1973-86 7.25 10 15 n.a. 500 4th loan 40,000 39,608 14,532 29,963 1973.6.13 1975-87 7.25 10 15 n.a. 750 5th loan 55,000 55,000 24,797 51,127 1975.7.23 1977-88 8.5 10.75-10.2 15 n.a. 2,000 6th loan 70,000 70,000 8,869 18,287 1977.6.30 1980-94 8.2 10.6-10.2 15 n.a. 2,500 ADB 1st loan 30,000 30,000 12,878 26,553 1974.9.2 1977-89 7.5-8.75 10 15 n.a. 750 not 2nd loan 40,000 40,000 12,807 26,407 1976.8. 12 1980-91 9.2 11.1-10.2 15 n.a. 1,500 Commercial Caterpillar 5,000 79 11 23 1969.3.15 1973-79 7.0 10 5 n.a. - loan IFC loan 17,800 17,800 8,633 17,800 1976.5.25 1978-84 A: 10.75 Borrowing 7 n.a. - B: Libor + 2% rate + 1.25% - C: 9.95 DEG loan 2,000 2,000 970 2,000 1976.5.26 1978-86 10.25% Borrowing rate + 1.25% 10 n.a. - APCO loan 20,000 20,000 8,182 16,870 1977.9.13 1980-84 Libor + 1.75% Borrowing rate + 1.25% 7 n.a. - II. Domestic Currency -- (W mfllion) -- Govt loan 2,025 2,025 1,958 4,037 1967.1.19. 1977-2006 4% /a Exchange rate applied US$1.00 = W 485.00. AEP Projects Department September 29, 1978 ANNEX 4 Table 28 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Forecast of Approvals, Commitments and Disbursements, 1978-82 (W million, $'000) 1977 1978 1979 Actual 1st half 2nd half 1st half 2nd half 1980 1981 1982 Approvals Domestic currency: Loans 1,490 1,300 2,550 2,700 2,400 5,300 8,400 10,000 Equity investments 887 270 430 415 285 850 1,000 1,250 Convertible debentures & bonds 480 210 490 415 285 850 1,000 1,250 Subtotal 2,857 1,780 3,470 3,530 2,970 7,000 10,400 12,500 Foreign currency loans 70,010 45,452 44,548 46,000 59,000 125,000 145,000 165,000 Total (E$) 75,901 49,122 51,703 53,278 65,124 139,433 166,443 190,773 Commitments Domestic currency: Loans 1,490 1,050 2,400 2,750 2,450 5,200 8,000 10,100 Equity investments 416 702 390 440 305 815 980 1,250 Convertible debentures & bonds 680 140 470 440 305 815 980 1,250 Subtotal 2,586 1,892 3,260 3,630 3,060 6,830 9,960 12,600 Foreign currency loans 69,031 43,982 45,920 39,548 61,000 124,000 144,000 162,000 Total (E$) 74,363 47,883 52,642 47,033 67,309 138,082 164,536 187,979 Disbursements Domestic currency: Loans 852 720 2,835 2,850 2,550 5,000 7,200 10,300 Equity investments 633 300 686 490 345 765 920 1,250 Convertible debentures & bonds 480 - 430 470 345 765 920 1,250 Subtotal 1,965 1,020 3,951 3,810 3,240 6,530 9,040 12,800 Foreign currency loans 42,706 49,158 58,297 38,920 39,548 114,000 133,000 161,000 Total (E$) 46,758 51,261 66,443 46,776 46,228 127,464 151,639 187,392 AEP Projects Department September 29, 1978 ANNEX 4 Table 29 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Proiected Balance Sheets (as of December 31) Actual 1977 1978 1979 1980 1981 1982 -------------------- (W million) ---------------------- ASSETS Current assets Time deposits 1,348 2,888 2,110 2,056 3,579 3,222 Short-term investments 3,421 5,776 4,221 4,113 7,157 6,445 Accrued interest receivables & others 4,137 4,184 4,907 5,836 6,927 8,543 Subtotal 8,906 12,848 11,238 12,005 17,663 18,210 Loans & Investments Domestic currency loans 2,559 5,244 9,957 13,837 18,674 25,084 Foreign currency loans 92,989 134,322 160,432 200,105 241,068 288,517 Equity investments 4,186 5,052 5,667 6,447 7,534 8,916 Convertible debentures & bonds 933 1,073 1,631 2,019 2,334 2,927 (Provision for losses) (1,462) (2,098) (2,556) (3,195) (3,872) (4,676) Subtotal 99,205 143,593 175,131 219,213 265,738 320,768 Net fixed assets 1,774 1,649 1,527 1,428 1,336 1,257 Total Assets 109,885 158,090 187,896 232,646 284,737 340,235 LIABILITIES & EQUITY Current liabilities Corporation income tax payable 499 287 547 689 616 923 Accrued interest payable 2,675 3,296 4,096 4,657 5,520 6,938 Other current liabilities 738 500 700 800 1,000 1,200 Subtotal 3,912 083 5,343 6,146 7,136 9,061 Borrowings Domestic currency borrowings 1,992 1,925 1,857 2,790 2,722 4,655 Foreign currency borrowings 92,808 134,456 160,728 200,460 241,538 288,879 Subtotal 94,800 136,381 162,585 203,250 244,260 293,534 Employee's severance liability 287 359 431 503 575 657 Equity Share capital 5,000 10,000 10,000 11,000 18,000 18,000 Reserves & unappropriated surplus 5,886 7,267 9,537 11,747 14,766 18,983 Subtotal 10,886 17,267 19,537 _2,747 32,766 36,983 Total Liabilities & Equity 109,885 158,090 187896 232,646 284,737 340,235 Contingent liabilities (guarantees) 424 424 424 424 424 424 RATIOS Current ratio la 1.4-1 1.7:1 1.4:1 1.4:1 1.4:1 - Debt/equity ratio /b 8.75:1 7.92:1 8.34:1 8.95:1 7.47:1 7.95:1 Reserves & provisions as of % of total portfolio 7.3 6.4 6.8 6.7 6.9 7.3 /a Taking current maturities of loans and debt into account. /b Including contingent liabilities in term debt. AEP Projects Department September 29, 1978 ANNEX 4 Table 30 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Projected Statement of Income 1978-1982 (For the years ending December 31) Actual 1q77 1978 197q 1980 1981 1982 ------------ (unit: million won) ------------ Income Interest & commitment income from loans 9,923 12,825 17,686 21,969 26,884 32,374 Dividend income 467 715 773 889 1,185 1,340 Other income 989 1,105 1,299 1,241 1,340 2,018 Total Income 11,379 14,645 19,758 24,099 29,409 35,732 Expenses Interest and charges on borrowings: Domestic currency borrowings 90 80 76 74 272 268 Foreign currency borrowings 6,859 8,994 12,416 15,195 18,557 22,034 Commitment charges 251 434 557 543 593 607 Subtotal 7,200 9,508 13,049 15,812 19,422 22,909 Personnel expenses 474 638 835 1,086 1,411 1,834 Administrative expenses 650 861 1,038 1,234 1,505 1,840 Provision for losses 331 636 458 639 677 804 Total Expenses 8,655 11,643 15,380 18,771 23,015 27,387 Net earnings before tax 2,724 3,002 4,378 5,328 6,394 8,345 Provision for income tax 668 621 858 1,118 1,175 1,511 Net Income 2,056 2,381 3,520 4,210 5,219 6,834 Reserves and retained earnings brought forward 3,830 4,886 6,017 7,537 9,547 12,149 Total 5,886 7,267 9,537 11,747 14,766 18,983 Appropriation Cash dividend 1,000 1,250 1,000 1,100 2,617 1,800 Stock dividend - - 1,000 1,100 - 1,800 Reserves and retained earnings carried forward 4,886 6,017 7,537 9,547 12,149 15,383 Percentage of Average Total Assets 1. Gross income 11.5 10.9 11.4 11.5 11.4 11.4 2. Financial expenses 7.3 7.1 7.5 7.5 7.5 7.3 3. Gross spread (1-2) 4.2 3.8 3.9 4.0 3.9 4.1 4. Administrative expenses 1.1 1.1 1.1 1.1 1.1 1.2 5. Provisions 0.3 0.5 0.3 0.3 0.3 0.3 6. Income tax 0.7 0.5 0.5 0.5 0.5 0.5 7. Net income 2.1 1.8 2.0 2.0 2.0 2.2 Net Income as 7 of Average equity 20.1 16.9 19.1 19.9 18.8 19.6 Year end share capital 41.1 23.8 35.2 38.3 29.0 38.0 Other Ratios Income from loans as C of average loan portfolio 11.7 10.9 11.4 11.4 11.4 11.3 Cost of term debt as T of average term debt 8.6 8.2 8.7 8.6 8.7 8.5 Interest spread 3.1 2.7 2.7 2.8 2.7 2.8 Cash dividend as 2 of par 20.0 20.0 10.0 10.0 20.0 10.0 Stock dividend as x of par - - 10.0 10.0 - 10.0 Payout ratio 48.6 52.5 28.4 26.1 50.1 26.3 Book value as x of par 217.7 172.6 195.4 206.8 182.0 205.5 Earnings per share (average outstanding) W 411 W 238 W 352 W 383 W 290 W4 380 Interest cover ratio /a 1.4 1.3 1.4 1.4 1.4 1.4 Debt service cover ratio /b 1.3 1.2 1.2 1.2 1.2 1.3 Return on total assets Ic (1) 9.0 7.9 9.3 9.1 9.1 9.2 Ia Net earnings before interest, tax and depreciation to interest charges. lb Profit after tax + interest charges + noncash charges + loan collections to interest charges + repayments of borrowings. Ic Net income before tax + interest expenses to total assets. AEP Projects Department September 29, 1978 ANNEX 4 Table 31 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Projected Cash Flow Statements (For the years ending December 31) Actual 1977 1978 1979 1980 1981 1982 - ---------- (W million) - - -------- ---- SOURCES Operations: *Net income 2,056 2,381 3,520 4,210 5,219 6,834 Add back noncash charges (depreciation, provisions, etc.) 548 951 783 970 1,015 1,151 Subtotal 2,604 3,332 4,303 5,180 6,234 7,985 Increase in share capital - 5,000 - - 5,900 - Drawdown on foreign currency borrowings 28,689 52,115 38,057 55,290 64,505 78,085 Issuance of bond - - - 1,000 - 2,000 Collections: Domestic currency loans 1,489 870 687 1,120 2,363 3,890 Foreign currency loans 7,037 10,782 13,095 16,657 25,106 32,333 Convertible debentures & bonds 350 290 277 377 605 657 Subtotal 8,876 11,942 14,059 18,154 28,074 36,880 Disposition of equity investments - 150 200 200 250 250 Disposition of fixed assets (net) 13 1 4 3 7 7 Total Sources 40,182 72,540 56,623 79,827 104,970 125,207 USES Increase in fixed assets 757 39 35 43 41 43 Disbursement of loans: Domestic currency loans 975 3,555 5,400 5,000 7,200 10,300 Foreign currency loans 28,872 52,115 39,205 56,330 66,069 79,782 Convertible debentures & bonds 480 430 835 765 920 1,250 Equity investment 853 1,016 815 980 1,337 1,632 Subtotal 31,180 57,116 46,255 63,075 75,526 92,964 Repayments: Domestic currency borrowings 34 67 68 67 68 67 Foreign currency borrowings 7,093 10,467 11,785 15,558 23,427 30,744 Subtotal 7,127 10,534 11,853 15,625 23,495 30,811 Payment of employees' severance 63 80 100 120 140 150 Increase (decrease) in receivables (822) 47 723 929 1,091 1,616 Increase (decrease) in payables 861 (171) (1,260) (803) (990) (1,925) Payment of dividend 751 1,000 1,250 1,000 1,100 2,617 Increase (decrease) in deposits & short-term investments 265 3,895 (2,333) (162) 4,567 (1,069) Total Uses 40,182 72,540 56,623 79,827 104,970 125,207 AEP Projects Department September 29, 1978 ANNEX 4 Table 32 KOREA KOREA DEVELOPMENT FINANCE CORPORATION Resource Position and Requirements 1978 1979 1980 1981 1982 A. Domestic Currency (W million) Uncommitted Won Resources 3,016 6,440 3,903 3,886 8,117 (opening balance) Cash generated from operations /a 2,333 3,057 4,183 5,141 5,375 Share issue for cash 5,000 - - 5,900 - Bond issue - - 1,000 - 2,000 Net won loan & debenture collections /b 1,093 896 1,430 2,900 4,480 Disposal of equity investments 150 200 200 250 250 Subtotal 11,592 10,593 10,716 18,077 20.222 New commitments 5,152 6,690 6,830 9,960 12,600 Uncommitted won resources (closing balance) 6,440 3,903 3,886 8,117 7,662 B. Foreign Currency (US$'000) /c Uncommitted resources 59,901 99,999 89,451 95,451 71,451 (opening balance) Proposed IBRD loan /d 100,000 - - - - Other official loans /d - 50,000 80,000 60,000 70,000 Commercial loans /e 30,000 40,000 50,000 60,000 70,000 Subtotal 189,901 189,999 219.451 215,451 211,451 New commitments 89,902 100,548 124,000 144,000 162,000 Uncommitted resources 99,999 89,451 95,451 71,451 49,451 /a Includes net profit after dividend payment, net disposition of fixed assets and noncash charges including provisions for losses. /b Won loan and debenture collections net of repayments of domestic currency borrowings. /c Total foreign currency borrowings 1978-82 amounts to US$610 million. /d Total official borrowing 1978-82 amounts to US$360 million (including proposed US$100 million World Bank loan), representing 59% of total foreign currency borrowings over the period. /e Total commercial borrowings 1978-82 amount to US$250 million representing 41% of total foreign currency borrowings over the period. AEP Projects Department September 29, 1978 ANNEX 4 Table 33 KOREA DEVELOPMENT FINANCE CORPORATION Estimated Commitments and Disbursements of IBRD US$100 million Loan /a (In US$ million) Commitments Disbursements CY Amount % /b Amount % /b 1979 1st quarter 5.5 5.5 2nd quarter 16.5 22.0 - - 3rd quarter 16.8 38.8 5.5 5.5 4th quarter 17.6 56.4 16.5 22.0 End-1979 56.4 56.4 22.0 22.0 1980 1st quarter 17.3 73.7 16.8 38.8 2nd quarter 16.5 90.2 17.6 56.4 3rd quarter 9.8 100.0 17.3 73.7 4th quarter - - 16.5 90.2 End-1980 43.6 100.0 68.2 90.2 1981 1st quarter - - 9.8 100.0 2nd quarter - _ 3rd quarter 4th quarter - _ End-1981 - - 9.8 100.0 /a Assuming that the proposed loan becomes effective early in the first quarter of CY 1979. /b Percentages are cumulative. ANNEX 5 KOREA KOREA DEVELOPMENT FINANCE CORPORATION A. General Reports and Studies on the Sector or Subsector The relevant sector reports are kept in the KDB Project file. Please see report entitled Staff Appraisal Report on the Korea Development Bank, May 1, 1978, Annex 5. B. General Reports and Studies Relating to the Prolect. B-1 Korea Development Finance Corporation. Annual Reports 1974-77. B-2 Korea Development Finance Corporation. Audited Financial Statements 1974-77. B-3 Korea Development Finance Corporation. Monthly and Quarterly Progress Reports, 1975-78. B-4 Korea Development Finance Corporation. April 1978. B-5 Korea Investment and Finance Corporation. Annual Reports 1974-77. B-6 Korea Development Leasing Corporation. Law on the Promotion of Leasing Industry and Monthly Operating Report. C. Selected Working Papers. C-i Analysis of Foreign Exchange Component of Domestically Manufactured Machinery. C-2 Data on Procurement by Country of Origin. C-3 Proposed changes in KDFC's Organizational Structure. C-4 Proposed changes in KDFC's Articles of Incorporation and Operational Functions. KOREA KOREA DEVELOPMENT FINANCE CORPORATION Organization Chart (As of June 30, 1978) r Auditors | 2 Memnbers i Board of Directors 13 Members | Executive Committee | | 4 Members l | President l | B.E. Kim l investm,ent Approisai Department Project Promotion Office Internal Auditing Office Operations Department Accounting Office Adm,inistration Deptme nt Pia-nin & Fle,'serh Department Manage, iK. Kanq Manager C.S Park M anager M.J Y, aagr Y.S Kim Manager S.J. Oh Manager C K. Me, Manage, O.H gong Appraisal of Lean, & Investm,ent identification & Decelop- Internai Auditing of Impiementation of Ap- Generai Accountin,g Personnel Operational Pianning& Ptjec:ts inrit of Nem Projects Operations proved Loans & in- Receijt & Payment Officiai Doc,um,ents & |d-etn Tne ciriat Fn,asibiiity Study & Promotion of Joint yen- Internai Auditing of vnettments (mnci. of Cash Seals Reno-nc Mobiiizatiun T-hnicai Assistance toes with Foreign Accounting issuance of Payment Tas Accounting Shareholders Rein- Anai-sis of the Corp.a- Appraisal of Coiiateran & investors Matters Assigned by the guarantee) Loan Accounting tions tions Potfoifgo Security CoIiaboration with President Foilow-up of Approved Briling & Collec- Execution of Gene.rl Adin-stration of Board Other Matters Related to Regional Banks Loans & ln,estments sion of Loans & Admin. Expense Affairs Appraisal of Loan & Invest Incremental Loans & Loan Repayments Budget Legal Affairs meat Projects Inoestments Mgmt. of Liquid Procurement & Main- Pubihc Relations Disposal of Security Funds tenance of Com- Preparation of Annual & & Collateral Loan & Investment panY Assets Other Operations Report Management Assistance Statistics Stcretarial & Industrial & Economic Cleri.cal Researc h & Publication Matters Otherwise thereof Prescribed Maintenance of Library Professionais 20 Professionals B Professionals: 2 Professionals. 13 Professionals- 5 Professionals 8 Professionals 11 Others B Others 1 Others: 1 Others: 8 Others: OtDe 32 Others 3 World Bank - 19506