PROJECT COMPLETION REPORT PHILIPPINES PISO DEVELOPMENT BANK · PDF fileproject completion report philippines - piso development bank ... piso development bank (loan 1555-ph) project

Document of

The World Bank

FOR OMCIAL USE ONLY

Repo No. 6006

PROJECT COMPLETION REPORT

PHILIPPINES - PISO DEVELOPMENT BANK(FORMERLY, THE PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION)

(LOAN 1555-PH)

December 27, 1985

IDF DivisionEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

Currency unit - Peso (P)

FISCAL YEAR

January I - December 31

EXCHANGE RATES

1978 US$1 = P 7.381979 US$1 = P 7.381980 US$1 = P 7.511981 US$1 = P 7.901982 US$1 = P 8.541983 US$1 = P 11.11

ABBREVIATIONS

ADB - Asian Development BankDBP - Development Bank of the PhilippinesDFU - Development Finance UnitERR - Economic Rate of ReturnEVP - Executive Vice PresidentFRR - Financial Rate of ReturnGNP - Gross National ProductIGLF - Industrial Guarantee and Loan FundLBP - Land Bank of the PhilippinesMSLA - Market Savings and Loan AssociationOFC - Operations and Finance CommitteePCR - Project Completion ReportPDB - Private Development BankPDCP - Private Development Corporation of the PhilippinesPISO - Philippine Investments Systems OrganizationPLC - PISO Leasing CorporationPNB - Philippine National BankSAL - Structural Adjustment LoanSGV - Sycip, Gorres, Velayo and Co.

FOR OFCIAL USE ONLY

PHILIPPINES

PISO DEVELOPMENT BANK (LOAN 1555-PH)


Table of Contents

Page No.

PREFACE . .............. .................. 4..............

BASIC DATA SHEET ............. ......................................

HIGHLIGHTS ......... ...............

1. INTRODUCTION .... 1

2. ENVIRONMENT .... 2

3. PISO DEVELOPMENT BANK. ... 4

4. LOAN OBJECTIVES ................................ ... 5

5. UTILIZATION OF LOAN 1555-PH ................................. .. 5

Resource Transfer ............... 5Subproject Characteristics .. 6Operational and Economic Performance of Subprojects . . 8Status of Subloans ......................... ....... 9

6. INSTITUTIONAJ. DEVELOPMENT. ............................ IO

Institutional Aspects ................... 10Standards and Procedures ....................... .13Resource Mobilization ............................. 15

7. OPERATIONAL AND FINANTCIAL PERFORMANCE OF PISO BANK . 16

Operational Performaace ..................... 16Financial Performance ..................... 18

8. CONCLUSIONS ............. ............................... '9

This document has restricted distribution and may be used by recipients oniy in the performance oftheir ofrlcial duties. Its contents may not otherwise be disclosed without World Bank authorization

LIST OF ANNEXES PAGE NO.

1. Schedule of Estimated and Actual Disbursements 252. List of Subprojects, Commitment Dates and Amount of

Disbursement 263. Sectoral and Geographical Distribution of Subprojects 274. Characteristics of Subprojects Financed under Loan 1555-PH 285. Reasons for Delays in Completion of Subprojects 296. Financial Performance of Subprojects 307. Economic Performance of Subprojects 318. Current Status of Subloans, as of September 30, 1983 329. List of Shareholders, as of September 30, 1983 3610. Manpower Turnover and Breakdown of Manpower Complement 3711. Projected and Actual Lending Operations, 1978-81 3812. Summary of Operations, 1978-September 1983 3913. Characteristics of Loans ADproved, 1979-September 1983 4014. Projected and Actual Balance Sheets, 1978-81 4115. Summarized Balance Sheets, December 31, 1978-82, and as of

Septenber 30, 1983 4216. Projected and Actual Income Statements, 1978-81 4317. Summarized Statements of Income and Unappropriated Retained Earnings

for Years ended December 31, 1978-82, and as of September 30, 1983 4418. Collection Performance, 1979-September 1983 4519. Analysis of Loans in Arrears, 1979-September 30, 1983 4620. Comparative Statement of Arrears Position, 1979-September 1983 47

Attachments

A. Comments Received from PISO Bank 48B. Comments Received from the National Economic and Development

Authority 54

PHILIPPINES

PISO DEVELOPMENT BA?( (LOAN 1555-PH)


Preface

This project completion report (PCR) presents a review of the firstBank loan made to PISO Development Bank (formerly, Philippine InvestmentsSystems Organization) for US$15.0 million approved in April 1978. After ran-cellation of US$0.506 million, the loan was fully disbursed in April 1984.

This PCR was prepared by the Bank's East Asia and Pacific RegionalOffice on the basis of a mission to the Philippines, and a draft PCR andadditional information furnished by PISO Development Bank. Comments receivedfrom PISO Bank and the Government have been taken into account in finalizingthe report and are reproduced as Attachments A and 3, respectively, to thePCR.

This project has not been audited by the Operations EvaluationDepartment.

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PHILIPPINES



HIGHLIGHTS

1. This report covers experience under Loan 1555-PH for US$15.0 millionmade by the Bank to PISO Development Bank (formerly, the Philippine Invest-ments Systems Organization) through the Philippine National Bank (PNB). Theobjectives of the loan were (i) to transfer foreign exchange resources topromote mainly industrial projects undertaken by private enterprises, and(Hi) to develop the capacity of PISO, a private firiancial institution, toinitiate and expand its medium- and long-term lending operations.

2. The loan had mixed success in achieving its objectives. Over 90% ofloan funds were disbursed one year before the original closing date. Subproj-ect performance was below what had been expected; while six of the twelvesubprojects financed under the loan were operating satisfactorily, four wercnot in operation anq two w-re operating poorly with major difficulties (paras.5.05-5.07 of PCR).1 PISO Bank, however, was successful in adapting itsinstitutional/corporate structure to the changing regulatory environment(para. 3.01 of PCR), expanding its medium- and long-term lending activities,and in mobilizing domestic currency resources (paras. 7.01 And 7.02 of PCR).

3. The major institutional development under Loan 1555-PH was iheconversion of the Philippine Investments Systems Organization (PISO) fromt aprivately-owned Philippine investment house to a thrift bank - in December1981 PISO merged with PISO Development Bank, a private development bank tPara.3.01 of PCR). PISC•s conversion into a thrift bank increased its capabilityto mobilize domestic currency resources and its ability to provide a fv11eJ-range of financial services to its clients.

4. The quality of PISO Bank's portfolio has been steadily deteriGra -ngsince 1979 when the total arrears represented less than 0.1% of outstaudi-ngloan portfolio; as of September 30, 1983, the corresponding figure was 9.3%.Cash collections on PISO Bank's medium- and long-term loans have also droppedprecipitously - from 98% in 1979 to 69% In 1983. While the woridw'de econo cerecession and the Philippines internal financial di_ficulties have resultedin a number of PISO Bank's clients facing liquidity problems, thus contribut-ing to its deteriorating collection performance and rising arrearages, part ofthis decline could be attributed to certain institutional deficIencies, i.e.,in particular, unrealistic operational performance expectations based on

1/ See Attac.iment A, page 1.

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optimist.tc apprafsals,.i! and weak/inadequate project supervision andmonitoring. Recently initiated improvements and strengthening of PISO Bank-sDevelopment and Corporate Banking Group (for appraisal) and Project ManagementDepartment (for supervision) are intended to correct these deficiencies(paras. 6.09 and 6.11 of PCR).

.5. Regarding lessons learned tinder Loan 1555-PH, it is difficult togeneralize given the economic and political conditions which have prevailedduring project implementaLlon. The recession since 1979 certainly has had anadverse impact, not only on the subprojects financed under Loan 1555-PH, buton all of PISO Bank's operational lending activities; such problans arewidespread in the Philippine financial sector. PISO Bank's experience underLoan 1555-LH sugge ts the need to strike a better balance between rapidportfolio growth h 3 and tighter risk control in order to ensure aninstitution's continued and lasting financial soundness. At the same time,however, it also needs to be recognized that small and medium-sized financialft,LItUtIOfnS such as PISO Bank are severely affected by major economic andfUnancial developments (such as those which occurred in the Philippines) overwhich they have no control. A positive lesson learned is that under suchcircumstances, an institution like PISO Bank must adapt Itself quickly anddecisively if it is to survive.

2! PISC sank, however, feels that this conclusion may be undulv Influencediy b½insight, and thaL at the time appraisals were made, the adverseeconomic niLtuation' which later developed could not be fereseen(Attachment AF page 2).

3/ ror 1i'fsl banKc-s views on this aspect refer to Attachtment k, page 3

PHILIPPINES



1. INTRODUCTION

1.01 This project completion report reviews Loan 1555-PH, the first loanmade by the Bank to the PISO Develo9ment Bank (formerly, the PhilippineInvestments Systems Orga;ization) ..1 In addition to the $15.0 million underLoan 1555-PH, PISO Bank .:L has received a subsidiary loan of $40.0 million(including $24.0 million of Bans funds) under Loan 1984-PH which was made tothe Central Bank (CB) of the Philippines in 1981.

1.02 Basic data on Loan 1555-PH is given below.

4/ The Bank loan to PISO Development Bank was through the PhilippineNational Bank (PNB). Under Philippine law, the Government couldguarantee a loan to a public entity only.

5/ In December 1981, the Philippine Investments Systems Organization (PISO),a privately-owned Philippine corporation, merged with the PISODevelopment Bank, Inc. (formerly Market Savings and Loan Association), aprivate development bank. On March 31, 1983, the Bank authorized thatall reference to PISO in the Loan Agreement, Project Agreement andGuarantee Agreement for Loan 1555-PH shall be reference to the PISODevelopment Bank, Inc. (PISO Bank). However, in this PCR, reference toPISO refers to the pre-merger investment house.

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Table 1.1: BASIC DATA FOR LOAN 1555-PH

Loan amount ............ ... $15.0 millionBoard approval ............... April 27, 1978Loan signing ....... .. ....................... May 8, 1978Effectiveness ........... ... .. ......... May 12, 1978Free limit ......... -.......... $0.75 millionAggregate free limit .............. $5.0 millionInterest rate ......................... 7.5% to PNB, the borrower;

8.25% to PISOScheduled closing date ..... ............ December 31, 1982Actual closing date ......................... December 31, .983Amount disbursed ........................ $14.5 million /aAmount cancelled ...... *..*.............. $0.5 million

/a "A" Subloans $10,499,701.07"B" Subloans $3,994,501.39

Total $14,494,202.46

2. ENVIRONMENT

2.01 During the 1970s, the Philippines followed a m-ch more dynamicgrowth-oriented development strategy than in the past. The growth rate of GNPwas raised from 5% in the 1960s to almost 7% at the end of the 1970s.Recently, however, the world recession has been reflected in the domestic eco-nomy. The second round of oil price increases and the resulting upsurge ininflation, together with declining commodity prices and export demand, explainthe recessionary conditions which have recently prevailed in the Philippinesand which have severely curtailed industrial investment for the past fewyears. Real GNP fell from almost 7% in 1977 through 1979, to an estimated2.5% in 1982.

2.02 During the 1970s, manufacturing industr' as a whole grew only atabout the same rate as GNP; manufactured exports, nowever, grew dramaticallyduring the decade in response to various export promotion measures introducedin the early 1970s. Towards the end of the 1970s and through the early 1980s,as industrial sector growth deteriorated markedly, it was increasingly recog-nized that the industrial sector was facing some major structural problems.Past trade, financial and industrial policies geared to support import substi-tution and capital intensive industries resulted in low efficiency and misal-location of investment. Such export growth as did occur took place largelyoutside the main policy regime through export processing zones and bondedwarehouses. In order to correct the import substitution and capital-intensivebiases of previous industrial and trade policies and to promote those indus-tries having a comparative advantage, the Government developed a ohased policyreform program to be implemented over a five-year period. The first phase,which was started in 1980, has focused on a major tariff reform/trade liber-alization program and export promotion measures. The second phase, currently

being implemented, includes: a fundamen'val reform of industrial incentivesand promotion policy; further measures for the ongoing trm-e policy reform;and policy reforms for the energy vector and public resource management. Tosupport the Government in its first phase of policy reform, the Bank 6 pprovedin September 1980 a $200 million Structural Adjustment Loan (SAL I).6Support by the Bank of the second phase y} reforms was provided tinder a$302.3 million SAL II, approved in 1983._

2.03 In conjunction with the trade and industrial policy reforms, in19P0-81, the Government introduced a comprehensive set of banking anid finan-cias sector reforms. These reforms included: liberalizing banking regula-tions to allow different types of financial institutions to undertake expandedactivities, thereby increasing competition within the financial sector; andlifting interest rate ceilings for loans over two years maturity, resulting inpositive real interest rates for the first time since 1978. These reformsaimed at increasing savings and the availability of term-finance, and reducingfragmentation and Inefficiency in financial Institutions. The reforms weresupported by the Bank-s Industrial Finance Project (Loan 1984-PH), approved inMay 1981.

2.04 In retrospect, the 1978-83 period during which the project wasimplemented was both a turbulent time for PISO Bank and a period of basicstructural adjustment in the economy. The financial sector reforms hastenedPIS0 to pursue the conversion into a private development bank in order toenhance its competitive posture. The decline in the economy, starting in 1979following the second round of oil price increases and the ensuing interna-tional recession, had a major impact on the corporate sector as a weak demanddepressed domestic, and subsequently foreign, sales and borrowing costs rosesharply as a result of higher interest rates and exposure to foreign exchangerisk during a period of substantial devaluation of the peso. The corporatesector was rendered even more vulnerable by the previous macroeconomic policyregime which had encouraged the growth of many inefficient firms which couldnot survive the general economic deterioration and the increasing competitionfrom foreign firms permitted by even the gradual liberalization of the traderegime. The severe financial distress in the corporate sector has, in turn,seriously weakened Philippine financial institutions, Including PISO Bank,which have also been affected greatly by the effects of devaluation andgeneral instability in the financial system.

6/ Loan 1903-PH: Staff Appraisal Report (No. P-2872) dated August 21, 1980,on the Structural Adjustment Project - Philippines.

7/ Loan 2266-PH: Staff Appraisal Report (No. P-3389) dated April 1, 1983,on the Second Structural Adjustment Project - Philippines.

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3. PISO DEVELOPMENT BANK

3.01 Background and Role of PISO Bank. PISO was incorporated on March 1,1974, as a privately-owned Philippine corporation, one of the few Investmenthouses which was nnt dominated by the interests of any particular shareholdinggroup. The ba;tking and financial sector reforms of 1980/81 (para. 2.03),which encouraged the evolution of more viable financial institutions withlarger capital bases through mergers/consolidations/additional capital infu-sion, resulted in increased competition among financial institutions. Thesedevelopments led to PISO's decisicn to convert into a thrift bank which wouldmake it more competitive and expand its orientation towards long-term develop-ment financing. On December 14, 1981, PISO merged with PISO Development Bank,Inc. (PISO Bank), a private developtent bank _ This legal change incorporate character, from an investmeut house to a private development bank,resulted in foregoing certain investment house functions such as guarantees,firm underwritings, and equfty investments in non-allied undertakilg".However, PISO Bank assumed PISO-s long-term operations, syndications andunderwriting/private placements, mergers/acquiAitions, consultancy, insurancebusiness, standby domestic t/Cs (in lieu of guarantees) and trust operations(in lieu of investment management). At the same time, PISO benefitted fromactivities attendant to a development bank such as raising peso resourcesthrough checling accounts, savings and time deposits, and normal bank lendingoperations.

3.02 In terms of resources, PISO Bank ranks as the largest private devel-opment bank (PDB) in the country. As of September 30, 1983, its total resour-ces of P 853.2 million and equity of P 87.2 million accounted for 17.82 and14.1% of the total resources and equity, respe.-tively, of all PDBs in thePhilippines. PISO Bank remains committed (as was PISO prsir to the merger) tothe development of productive ventures and income-generating projects under-taken by privately-controlled business enterprises in the various sectors ofeconomic activity, and, ds a result of the merger, is able to provide a fullerrange of financial services to its clients.

3.03 'Background to Bank's Relations with PISO Bank. At the time ofappraisal, the Development Bank of the Philippines (DBP) and the PrivateDevelopment Corporation of the Philippines (PDCP) were the main providers oflong-term financing in the country. Given the likely rate of growth of indus-trial investment at that time, and the need to diversify long-term sources of

8/ PISO Development Bank was originally established in 1968 under the nameof Orient Savings and Loan Association and was later renamed MarketSavings and Loan Association (MSLA). In July 1980, MSLA shareholdersentered into an Investment Agreement with PISO and other institutionalinvestors to increase MSLA capitalization to P 25 million, broaden owuer-ship, professionalize management and expand operations as a first steptowards the conversion of MSLA into a development bank. On November 6,1981, MSLA was renamed PISO Development Bank. In this PCR, reference toPISO refers to the pre-merger investment house.

funds so as to establish a more competitive financial market, the Governmentwas encouraging the diversification of such sources in both the public andprivate sectors. Special emphasis was placed on building up the long-termdevelopment financing capability of investment houses. As PDCP had so farbeen the sole private financial institution to receive development assistancefrom either the Bank or the Asian Development Bank (ADB), the Government feltit was opportune for the Bank to assist an additional institution in theprivate sector. The choice of PISO was based on the assessment of: (a) itswillingness to develop its long-term financing capabilities furthier; (b) itsownership pattern, which, unlike all other investments houses in thePhilippines, did not reflect 'captivity" to a single family-dominated businessgroup; (c) its present sixe and stage of growth; (d) capable management andstaff; (e) Institutional emphasis on corporate client services; and (f) PISO'sgenerally good record of responsible corporate behavior and prudent financialmanagement.

4. LO-N OBJECTIVES

4.01 Bank Loan 1555-PH to PISO addressed two basic objectives:(a) transfer of resources for the development of the industrial sector; and(b) development of PISO's capacity to mobilize and allocate long-term funds toa wide range of development-oriented investments. PISO's performance inutilizing Loan 1555-PH is discussed in Chapter 5. The specific institution-building objectives under the Loan are listed in para. 6.01 and PISO-sperformance in achieving these objectives is reviewed in Chapters 6 and 7.

5. TJTILIZATION OF LOAN 1555-PH

Resource Transfer

5.01 Rate of Utilization. Annex 1 compares actual and estimated dis-bursements for Loan 1555-PH. PISO Bank committed the Bank loan unexpectedlyfast, within 15 months af;er effectiveness, compared to the originalprojection of 24 months.2'/ Ninety-two percent of the loan was disbursed byyear-end 1981, and 932 by the original closing date of December 31, 1982.However, delays in three subprojects resulted in an extension of the closingdate to December 31, 1983. One subborrover eventually cancelled US$500,000 ofits subloan. With this cancellation, Loan 1555-PH was fully disbursed onApril 4, 1984.

5.02 Fund Allocation. As summarized in Annex 2, Loan 1555-PH was used tofinance four "A" subprojects ($11.0 million) above the free limit of $750,000and eight "B" subprojects ($4.0 million) below the free limit. The averagesubloan size for the twelve subprojects was $1.25 million, with the corre-sponding figure for the four "A' subloans and the eight "B" subloans being

9/ The National Economic and Develepment Authority attributes thisperformance in part to PISO's modular organization which encouragedcompetition in the marketing of PISO's services (Attachment B, page 1).Also refer para. 6.04.

$2.75 million and $500,000, respectively. The Bank reviewed in detail allfour of the "A" subprojects. Although the four "A" subloans exceeded PISO'snormal single enterprise investment exposure limit (an amount equivalent to25% of its net worth), three were approved as PISO had secured adequatecounterguarantees and one was treated as an exception for justifiablereasons. With the exception of one subloan of US$2.0 million for financingpermanent working capital, all loan proceeds were used for financing fixedassets acquisition.

Subproject Characteristics

5.03 The table below summarizes data on the subprojects financed underLoan 1555-PH, while Annexes 3, 4, 6 and 7 present detailed information on thecharacteristics of these subprojects.

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Table 5.1: SUMMARIZED DATA ON SUBPROJECTS

Estimated /a Actual

Number of Subprojects 12"A" subprojects -/b 4"B" subprojects -7F7 8

Average subloan size ($ million) -/b 1.25

Nature of SubprojectNew -/b 1Expansion or modernization 11

Total Project Cost (P '000) Ic 372,817 473,713

Total PISO Financing (P '000) /c 106,379Bank funds ($ million) 15.0 14.5/dPeso funds (P 000) 3,6507WPISO financing as % of total cost /c 22.5

Total incremental employment /e 2,391 2,250

Investment cost per job (f '000)/e 152 207

Total Sales (P '000) /e /f 203,069 177,872

Total Profit (loss) (P ;OOO) /e /f 12,687 (10,486)

Total Exports (P '000) /e /f 49,739 38,676Exports as % of total saies /e /f 24.5 21.7

Ia Based on either estimates made at the time of Bank appraisal or containedin subproject appraisal reports prepared by PISO.

/b Since PISO did not have a history of long-term lending, it was difficultto estimate the number and size distribution of subloans at the time ofloan appraisal.

Ic Excluding the two subprojects never implemented.7Wd Including the two subprojects never implemented.7-e Excluding the four subprojects which were not implemented or ceased

operations shortly after completion./f Based on second full year of operation (does not include the two

telecommunication subprojects).

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5.04 Sectoral and Regional Distribution (Annex 3). Of the twelve sub-projects financed under Loan 1555-PH, two involved telecommunications (45X ofdisbursements), nine involved manufacturing (52% of disbursements), and oneinvolved shipping (3% of disbursements). The nine manufacturing subprojectsrepresented eight different subsectors. Eight of the subloan approvals (for$5.75 million) were for subprojects located in Metro Manila, two (for $6.5million) were for telecommunications operations which, while based in MetroManila, operate on a nationwide basis, and the remaining two (for $2.75 mil-lion) were for subprojects located in Northern Mindanao. Thus, almost 82% ofsubproject financing provided under Loan 1555-PH was concentrated in MetroManila. The substantial exposure in telecommunications reflected in greatpart PISO's recognition of the lower borrower risks involved-L - telecom-munication companies in the Philippines charge their customers on a cost-plusbasis regulated by the Government, providing in effect a guaranteed return.In addition, investment in the two telecommunication subprojects was seen asproimoting regional development and the dispersal of industry by making avail-able a faster and more efficient telecommunications system between remoteareas and the traditional commercial and industrial centers of the country.

Operational and Economic Performance of Subprojects

5.05 Operational Results. Operational data on the subprojects financedunder Loan 1555-PH are provided in Annexes 4, 6 and 7. Total cost of the tensubprojects implemented was P 473.7 million compared against an original esti-mate of P 372.8 million (Annex 4). H-ever, this overall cost overrun isattributable to two subprojects with cost overruns of 41X (f 91.4 million) and40% (f 10.0 million), respectively. Both subprojects encountered delays incompletion of over twenty months causing substantial cost escalations. Theremaining eight subprojects were completed with negligible variance in projectcost. Only four subprojects were completed on schedule, and six subprojectsexperienced delays ranging from five to thirty months. The primary reasonsfor these delays (Annex 5) can be summarized as follows: changes in specifi-cations (two projects), technical difficulties (one), change in location (one)and overoptimistic schedules (two). Two subprojects never commencedoperations due to management and financial problems of the subborrowers.

5.06 As of September 30, 1983, eight of the ten subprojects implementedas originally planned were stiil in operation (Annex 6). Of these eight sub-projects, two had exceeded (or nearly achieved) their respective sales targetsduring the first two-years of operation and were operating profitably; the twotelecommunication subprojects, while performing reasonably well, had not yetoperated for two full years; another two had operated with some difficultyduring the first two-years; the remaining two had operated poorly with majordifficulties. Of the two subprojects which were not in operation, one wasbeing foreclosed and another was managing to service its financial obligationswith the assistance of its sister companies (and was studying the viability ofrecommencing operations). Data on actual sales for the first and second yearof operations are available for six of the ten completed projects. Actual

10/ For PISO Bank's comments see Attachment A, page 4.

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aggregate sales for the first year of operations exceeded PISO's appraisalestimates, thanks to one large subproject whose actual sales exceeded by twotimes estimated sales because of further expansion undertaken without PISOfinancial assistance. For the second year of operations, actual aggregatesales were 12X below estimated sales. Four of the six subprojects showed aprofit in their second year of operations. On an aggregated basis, however,the six subprojects showed a second-year operating loss of P 10.5 million, dueto two subprojects whose losses amounted to P 13.5 million. In sum, of thetwelve subprojects financed, six were either not in operation or facing severefinancial problems.

5.07 Economic Performance. Details of the economic performance of thesubprojects financed under Loan 1555-PH are presented in Annex 7. Of the foursubprojects which included an export component when originally appraised,three are operating with actual export sales comparing favorably with originalestimates (P 41.9 million actual compared to P 36.6 million estimated for thefirst full year of operation, and P 38.7 million compared to P 49.7 for thesecond year). Total export sales for the first two years of operationsaccounted for 19.5% of total sales, only slightly below the projected 23.9%.Based on the data available for the eight projects completed and operating, atotal of 2,250 jobs (or 94.1% of appraisal estimates) were created at anaverage cost per job of P 207,000, or US$22,574.L11 This relatively lowaverage cost per job .2/ under Loan 1555-PH is reduced further - to US$6,104 -if the two capital-intensive communications subprojects are not included inthe computation. Ex-post ERRs were calculated for five of the subprojects.One had a negative rate of return with the other four ranging from 14% to67%. The ex-post weighted average ERR for the four was 26.1%, compared to anex-ante weighted average of 46.6%. Ex-post FRRs were calculated for seven ofthe eight subprojects currently in operation. While the FRR for one of thesubprojects was negative, the remaining six subprojects had FRRs ranging from11% to 45%, with a weighted average of 13.3% (compared to an ex ante weightedaverage of 19%).

Status of Subloans

5.08 As of September 30, 1983, nine of the twelve subloans were inarrears (Annex 8), reflecting poor operational and financial performance ofseveral of the subprojects discussed in para. 5.06. Total arrears of prin-cipal and Interest amounted to P 21.4 million, representing 16.9% of the totaloutstanding subloans under Loan 1555-PH. One major account in arrears offeredto prepay the whole subloan (but current Central Bank regulations precludedany prepayment), four were making arrangements for settlement of arrears, twowere being studied for possible restructuring/rehabilitation, and two wereunder foreclosure proceedings.

11/ Based on 1982 exchange rate of P 9.17 = US$1.00.

12/ Under Loan 998-PH, the average cost per job created was P 273,000 (orUS$32,000); under Loan 1190-PH, P 253,000 (or US$29,800).

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6. INSTITUTIONAL DEVELOPMENT

Institutional Aspects

6.01 The institution-building objectives under Loan 1555-PH focussedon: (a) the strengthening of capitalization and the broadening of owneiship(more specifically: (i) an increase in PISO's net worth by P 10 million beforeloan effectiveness; (ii) a reduction in foreign ownership to 30% or less;(iii) the maintenance of the maximum holding of a single domestic investor to15% or less of PISO's total share capital; (iv) public listing of PISO'sshares on the stock exchange; and (v) the divestment of the Land Bank of thePhilippines' (LBP) holdings of PISO shares); (b) the revamping of PISO'sorganization along functional lines; (c) an increase in staff; (d) the for-mulation and adoption of a Policy Statement and a Corporate StrategyStatement; (e) improvement in economic evaluation of projects; and (f) adop-tion of liquidity and debt-servicing policies. Viewed against the aboveinstitution-building objective of supporting PISO's strategy of graduallybecoming an institution financing a wide range of development-oriented proj-ects set out under the Loan, accomplishments and shortcomings are discussed inparas. 6.02 through 7.17.

6.02 Capitalization and Ownership. Prior to loan effectiveness in 1978,PISO increased its paid-in capital by P 8.0 million, with a paid-in surplus ofP 2.0 million. Consequently, PISO's paid-in capital together with paid-insurplus increased to P 33.6 million by the end of 1978. With additionalincreases in paid-in capital in 1980 (by P 3 million), 1981 (by P 30 million),and 1982 (by P 10 million), PISO Bank's paid-in capital as of September 30,1983, was reported to be P 76.4 million consi7ting of P 51 million of commonshares, P 3.6 million of preferred shares,13 and P 11.8 million of paid-insurplus ... However, the above reported 'paid-in" capital includedsubscriptions receivable on common shares of P 10.3 million. Thus, PISOBank's paid-in capital increased, in effect, to P 66.1 million (net of subscriptionsreceivable), up from P23.6 million at end-1977 when Loan 1555-PH wasappraised. While the increase in share capital has been substantial, the needfor further strengthening of its equity base still remains (para. 7.10).

6.03 The diversification of PISO Bank's ownership, discussed duringnegotiations, has been pursued (as reflected in the number of shareholders -see Annex 9), but without much success. Due largely to the depressed con-dition of the Philippines' capital market, neither the public listing of PISOBank's shares on the stock exchange nor the divestment of Land Bank of thePhilippines' equity interests in PISO Bank has materialized. The single

13/ Consisting of P 3.6 million to be redeemed in 1986 and P 10 million,subscribed and paid by DBP, which is redeemable by P 1 million annuallystarting in 1993.

141 The bulk of this resulted from the reduction of par value of commonshares outstanding at the time of merger.

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shareholder ownership ceilings of 15% and 30% (as % of total share capital)for domestic and foreign shareholders, respectively, have been adhered to withthe exception of the Develoiment Bank of the Philippines which holds PISOBank's preferred shares representing 15.5% of PISO Bank's total share capi-tal. PIS0 Bank remains committed to dispersal of ownership under its policystatement and corporate strategy statement; however, it is unlikely that anymajor breakthrough will be achieved until the condition of the Philippineeconomy and stock market significantly improves.

6.04 Organization, Management and Staff. Prior to its conversion into aprivate development bank, PIS0 instituted certain organizational changes. Themost significant of these was the installation in 1979 of a modular organiza-tion consisting of five operational centers (also called modules and managedas profit centers) and three support units. Each of the five modules coveredalmost the entire spectrum of PISO's operational functions and operatedindependently. Thus, this system encouraged competition among the fivemodules for the marketing of PISO's services, including long-term projectlending, for basically the same group of targetted clients. While theseorganizational arrangements seem to have reflected PISO's efforts to achievethe operational targets incorporated in its Corporate Strategy Statement, thissystem ran counter to the revamping of PISO's organization along functionallines suggested at the time of appraisal of Loan 1555-PH. Moreover, thissystem of emphasizing and rewarding the marketing of loans was partly, if notmainly, responsible for the uneven quality of PISO's appraisal reports and thelack of rigorous analysis of and critical judgment on clients' projectproposals (para. 6.09). PISO operated under this organizational setup untilthe 1981 merger (paras. 3.01 and 3.02) which required certain adjustments inthe organization resulting from the Introduction of new functions andactivities and the realignment of some responsibilities. In December 1982,PISO Bank reorganized itself on a functional basis. Further adjustments wereintroduced in 1983 to deal with managerial positions vacated by six key seniorofficers who left PISO Bank; the impact of these resignations on PIS0 Bank isdiscussed below.

6.05 The Chairman/President of PISO Bank succeeded in building up a coreof experienced senior officers by 1982. However, in 1983, the Executive VicePresident (EVP) - a second line-of-command below President but above ExecutiveDirectors - left PISO Bank to assume the presidency of a commercial bank.Five other senior officers also left PISO Bank to join la;ger institutions:two Executive Directors (in charge of the Finance and Control Group and theBranch Banking Division); one Vice President (in charge of the TreasuryDivision); and two Assistant Vice Presidents (in charge of the ControllershipDivision and the Strategic Planning and Development Group). The departure ofthese six key officers made PISO Bank-s middle management somewhat thin. PISOBank instituted the following interim arrangements to ensure continuity ofoperations: (a) the functions of the EVP were to be discharged by an

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Operations and Finance Committee (OFC) chaired by an Officer-in-Charge ;15/(b) the Executive Director position in charge of the Finance and Control Groupwas to be abolished and its functions were to be distributed among theremaining groups while the Controllership and the Treasury were to reportdirectly to the OFC; (c) the Branch Banking Group was to be directly super-vised by the officer mentioned in (a) above; and (d) one Assistant VicePresident was transferred to the Strategic Planning and Development Group.

6.06 The above interim arrangements, although appropriate as a temp 'rarymeasure, have not been entirely satisfactory, particularly in view of t ieedfor a senior financial officer. Given PISO Bank's perception that a leanermanagement structure is more appropriate for the time being and its intentionto fill most of the managerial vacancies through internal promotion, as andwhen lower-level staff developed the requisite capabilities, the interimorganizational arrangements could be prolonged even at the expense of itsoverall organizational efficiency. The Bank should continue to closelymonitor the devel rpl ents on PISO Bank's management situation and its organiza-tional structure.

6.07 Staffing. Between 1977 and the time of its merger with PISO Bank inDecember 1981, PISO's staff increased from 55 (38 of whom were professionals)to 95 (80 professionals). As of September 30, 1983, PISO Bank's total staffnumbered 239, 105 of whom were professional. The Branch Banking Group (whichincludes the staff of PISO Bank's 11 branches, all of which are located inMetro Manila) accounted for almost 51% of all bank employees. Twelveprofessional staff (including the two division heads) were involved in projectappraisal, although only one was an engineer by training (para. 6.09). TheProject Management Department is responsible for project supervision; however,with only seven professional staff (including the department head), the unitwas understaffed and requires strengthening (para. 6.11). Management hasindicated its intention to expand the technical expertise of its appraisalgroup and to iucrease its supervision manpower (para. 6.09 and 6.11). Asindicated in Annex 10, the rate of turnover among professional staff continuesto be a problem. While there was steady improvement between 1978 and 1980(with the annual turnover rate falling from 31% to 7%), the turnover rateincreased to 19% in 1983 (as of September 30). With higher positions andbetter salaries being offercd to experienced and qualified PISO Bank staff(the primary reason for staff resignations), PISO Bank management feels thatturnover is an extremely complicated situation not likely to be readilyresolved.

15/ Thls officer was also in charge of the Development and Corporate BankingGroup as well as the Branch Banking Group. He was promoted to the EVP inlate 1984.

16/ The interim arrangements have since been regularized and filled.

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Standards and Procedures

6.08 Operating Policies and Corporate Strategy. PISO Bank's PolicyStatement and Statement of Corporate Strategy, both adopted in March 1978,were last amended January 8, 1982 and February 25, 1982, respectively, toreflect the change in its status from an investment house to a private devel-opment bank. PISO agreed, during negotia ions of Loan 1555-PH, to use as aguideline a 10% margin for the current,2A' debt-service and interest coverageratios. PISO (pre-merger) and FISO Bank have generally complied with the pro-visions of its Policy Statement. There were, however, transactions wherePISO's Board decided, as exceptions, to exceed the single enterprise exposurelimit (25% of its net worth) in view of the back-to-back bank guarantees thatwiere available for the amounts in excess of the limit. PISO was generallysuccessful in pursuing its corporate strategy for 1978-80 under Loan 1555-PH,particularly its operational strategy (paras. 7.01, 7.08 and 7.09) and itsfinancial strategy (paras. 7.08 and 7.12), with significant effort made inimplementing its promotional strategy, mainly through active participation inthe Industrial Guarantee and Loan Fund (IGLF) program.

6.09 Project Appraisal. Plans for improving PISO's economic evaluationof subprojects, discussed and agreed upon during negotiations, were subse-quently implemented. However, the methodology used for ERR analysis was foundInappropriate in some cases. For instance, PISO s appraisal reports on twoexpansion subprojects financed under Loan 1555-PH did not contain incrementalanalyses of the expansions proposed. Moreover, the poor actual performance ofsubprojects discussed In paras. 5.05 to 5.08 suggests that PISO-s appraisal ofsubprojects tended to be optimistic (particularly about estimates/evaluationof project implementation timetables, contingency provisions for possible costoverruns, and market prospects), although subproject performance was alsoadversely affected by the poor economic conditions prevailing when theprojects were completed or being implemented. Although PISO's appraisalstandards have been generally satisfactory, the quality of subprojectappraisal reports under Loan 1555-PH varied. The uneven quality of theappraisal work might be attributed to several factors: (a) the system ofencouraging competition among the five modules noted for the marketing ofloans as discussed in para. 6.04, apparently without adequate safeguards forensuring project appraisal quality; (b) the consequent lack of industryspecialization among appraisal staff (the internal competition for expandingclientele did not offer adequate opportunities for appraisal staff to deepentheir knowledge of specific industries through industry specialization);(e) the lack of engineering expertise for undertaking in-depth technicalanalysis; and (d) an inadequate feedback mechanism between the project super-vision units and the project appraisal units. In an attempt to ensure andimprove the quality of its project appraisal, several steps have been taken.In 1981, PISO established a Credit Review Section which provides an indepen-dent review of the appraisal report for each project proposal and brings out

17/ The minimum current ratio of 1.1:1 requirement was substituted by theCentral Bank's minimum reserve requirements after PISO's conversion intoa thirft bank (para. 7.11).

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issues of concern involved in the project proposal. The appraisal report,together with the Credit Review Section's comments on it, are then submittedto the Management Credit Committee for consideration. PISO Bank has recentlymoved towards industry specialization by virtue of the backgrounds of thedivision heads and their respective staff. In addition, PISO Bank introduced,in 1983, the concept of penalizing 'he various profit centers for their non-earning assets with a view to motivating them to ensure that their earningassets keep on earning. PISO Bank has very recently established a TechnicalEvaluation Department (para. 7.16). To foster closer interaction between theproject appraisal units and the supervision units, PISO Bank has also recentlyexpanded the membership of the Receivables Management Committee to include thehead of the project appraisal group (para, 6.11).

6.10 It should be noted that in a number of projects which PISO Bank hasfinanced (especially those large projects registered with the Board ofInvestments), project design had already been formulated and/or procurementarrangements already made with suppliers, prior to the client's loan applica-tion with PISO Bank. Therefore, there was, in fact, little or no chance forPISO Bank to influence the choice of project design, i.e., machinery andequipment, process and technology, suppliers, etc. There is a need for PISOBank to beco-.e involved earlier in the project cycle if it is to be able toinfluence project design.

6.11 Project Supervision. Alon ith the increase in PISO's term loanportfolio, it was recognized in l980'!_1 that PISO should: (i) prepare adetailed project supervision manual; (ii) prepare and adopt a comprehensiveproject supervision plan; and (iii) appoint qualified staff in adequate num-bers for prcject supervision work. Progress made by PISO on the above aspectswas ,eviewed at negotiations of Loan 1984-PH in early 1981 and was foundsatisfactory. Subsequently, however, implementation of items (ii) and (iii),which need to be reviewed and modified continuously in the light of theportfolio situation, does not seem to have received adequate attention fromPISO-s management due, apparently, to management's preoccupation with thedelicate negotiations and implementation of PISO s merger into PISO Bank.This matter was raised by the Development Finance Unit (DFU) of the CentralBank of the Philippines during its performance evaluation of PIS0 Bank in1982. By 1983, when a joint IBRD/ADB/DFU mission visited PISO Bank, it becamemore apparent that PISO Bank, handicapped by inadequate staff strength in itsproject supervision unit, was not able to fully follow the supervision proce-dures (e.g., monitoring cf clients, compliance with reporting requirements,regular project visits, regular internal reporting) as prescribed in its ownsupervision manual. To improve its supervision work, PISO Bank has recentl':(i) increased the staff strength of the supervision unit by four to a total ofelevent (ii) established a problem project management group ("Curative Grovp")with four professional staff within the supervision unit; (iii) formed aReceivables Management Committee to enable immediate action on various issuesconcerning its borrowers; and (iv) encouraged the participation of appraisal

18/ Staff Appraisal Report (No. 3331-PR) dated April 7, 1981, on theIndustrial Finance Project (page 97).

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units in collection and supervision efforts to somewhat alleviate thesupervision unit-s workload through the introduction of a reward/penaltysystem (para. 6.09). These are steps in the right direction. However, It isunlikely that any major improvements in collection performance and porttolioquality will be achieved until the country's economic situation significantlyimproves.

Resource Mobilization

6.12 Domestic Currency. Until 1981, PISO relied essentially on itsequity (about P 70 million) and funds from the Central Bank's IGLF (aboutP 24 million, net of repayments) to meet its long-term domestic currencyrequirements. Following the December 1981 conversion Into a thrift bank,retail deposits became a main source of domestic currency r sources, growingfrom only e 13 million at year-end 1981 to P 290 million / as ofSeptember 30, 1983. The retail deposit level represented over 55% of totaldomestic currency resources, or 38% of PIS0 Bank's total liabilities andshareholders equity, at end September 1983. In addition, PIS0 Bank's trustfund (off-balance sheet) operations have steadily increased from P 65 millionin 1981 to P 261 million as of September 30, 1983. Funds raised from trustfunds and retail deposits have largely been used for working capitalfinancing. PISO Bank's achievement in deposit mobilization is commendable,although its deposit level has subsequently fluctuated widely for reasonsbeyond PIS0 Bank's control.

6.13 Foreign Currency. With the exception of two medium-term lines ofcredit ($500,000 each) from the Continental Bank International (Pacific) andRainer National Bank in 1975 and 1976, PISO Bank's foreign currency resourcescame from official sources, i.e. the Bank ($15 million under Loan 1555-PH and$40 million through the Central Bank under Loan 1984-PH), ADB ($15 million in1979 and $25 million in 1981), and US Eximbank ($1 million in 1975). Itshould be noted that the $40 million allocation for PISO Bank under Loan1984-PH includes $16 million representing that portion allocated from theCentral Bank's own commercial borrowings. During the appraisal of Loan1984-PH, it was determined that thi Central Bank would be able to commandbetter terms and conditions for borrowing from foreign markets than would theprivate institutions on their own. Since this proved to be particularly truein the Philippines, and as long as this approach continues, the e is no strongincentive for PISO Bank to try tapping the international financial market.Also, given PIS0 Bank-s financial condition and the country-s overall debtsituation, it is, at best, doubtful that institutions like PISO Bank will beable to raise resources from the markeL at reasonable cost. In addition, PISOBank was active in managing/arranging syndications for financing developmentprojects costing about $23 million during 1979 through 1983, therebyindirectly mobilizing foreign currency resources of about $21 million forthese projects.

191 Reported total deposits of P 348 million less interbank borrowings ofP 58 million.

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7. OPERATIONAL AND FINANCIAL PERFORMANCE OF PISO BANK

Operational Performance

7.01 Overall Operations. PISO's actual level of overall operations forthe period 1978-81 compared to projections at the time of approval ofLoan 1555-PH are presented in Annex 11. In 1978 and 1979, total approvals,commitments and disbursements for all operations closely matched appraisalestimates. In 1980, total approvals reached P 398 million, in large part dueto the sharp increase in syndication operations totalling P 295 million.Thus, PISO's operational objective, as incorporated in Its Statement ofCorporate Strategy for 1978-30, to provide aggregate long-term financingassistance totaling over P 350 million annually (on an approval basis) by 1980was achieved. However, its strategy to achieve a balance between direct long-term loans and other iorms of term financing during .he period 1978-80 wasrealized only in subsequent years along with the decrease in syndicationoperations. In 1981, however, total approvals, commitments and disbursementsfell far below appraisal projections - in most instances, by half, due to thegenerally deteriorating economic/investmeut climate. Regarding PISO's foreignexchange lending operations during 1978-81, actual approvals and commitments,except in 1978, were considerably below projections. Actual foreign currencydisbursements never exceeded projections; total disbursements during 1978-81amounted to only 45% of the original estimate (P 158.6 million against P 354.3equivalent).

7.02 PISO Banlks operations for the six-year period 1978-1983 (as ofSeptember 30) are summarized in Annex 12. After its conversion into a thriftbank in December 1981, lending operations increased significantly. Total loanapprovals in 1982 amounted to P 385.7 million, compared to P 129.8 million in1981. Most of this increase was attributable to local currency lendingresulting from PISO Bank's ability, as a thrift bank, to mobilize domesticcurrency resources through its deposit-taking function. In the first ninemonths of 1983, local currency loan approvals totalled P 160.9 million. While1982 foreign exchange loan approvals of P 124.3 million showed a slightimprovement over 1981 (P 100.9 million), only one such approval (for P 12.3million) was made during the first nine months of 1983, reflecting the growingaversion of creditworthy subborrowers to assume the foreign exchange risk inthe face of continuing peso depreciation. Syndications by PISO Bank totalledP 119.2 million in 1982 and P 52.0 million in the first nine months of 1983 -somewhat below the P 191.0 million average for the period 1978-81. In July1982, PISO Bank was granted authority to also undertake trust operations whichamounted to e 261 million as of September 30, 1983.

7.03 Equity Investments. With only one equity invesvment of P 2.25 mil-lion outstanding as of September 30, 1983, PISO Bank's direct equity invest-ment operatioas account for only a very small proportion of its total opera-tions. PISO took the lead in establishing PISO Leasing Corporation (PLC) in1979, taking a 27.3% equity interest in the corporation. (The InternationalFinance Corporation has participated in PLC in the form of equity totalling$210,000 and loans totalling $10.0 million - $5.0 million of which is undis-bursed.) PLC was organized primarily to provide lease financing for indus-trial, agricultural and business equipment, machinery and plant facilities,

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and related auxiliary services. PLC's operations seem to have been satis-factory with adequate profits of P1.3 mlllion In 1980, P 1.4 million in 1981,and P 1.6 million In 1982 and 1983. As a thrift bank, PISO Bank is nowallowed to make equity Investments only in allied .ketivities.

7.04 Guarantee Operations. PISO extended four guarantees for P 46.2 mil-lion in 1979 and three for P 18.7 million in 1981, mostly in conjunction withits syndication operations. PTSO Bank's four remaining outstanding guaranteesas of September 30, 1983, amounted to P 15.0 million. These accounts wereassumed by PIS0 Bank at the time of the December 1981 merger; as a thriftbank, PISO Bank is no longer authorized to extend guarantees.

7.05 Syndications and Underwriti per ttions. Through Its syndicationoperations, which PISO Bank has undertaken since 1975, it is able to maximizeits assistance to clients with viable projects given its exposure limits for asingle borrower as established in its Policy Statement. Although PISO Bankhas been successful in syndicating loans, the number and amounts have fluctua-ted from year to year (ranging from two in 1981 to six in 1978; from an aggre-gated total of P 74.2 mil'ion in 1981 to P 295.1 million in 1980). Thisdecline largely reflected the depressed investment climate in the country.While syndications remain an important operational activity, they have, overthe years, played a smaller role in PISO Bank's overall operations. Durilngthe period 1975-77, syndications comprised 90% (by amount) of total approvals;for the period 1978-81, 46X; and for the period 1982 - September 1983, 23%.Except for 1979, firm underwritings and private placements have not been amajor operational activity. Since the December 1981 merger, PISO Bank is nolonger authorized to undertake either of these functions.

7.06 Loan Characteristics. A detailed summary of the characteristics ofterm loans approved by PI50 Bank during the period 1978-S7ptember 1983 isprovided in Annex 13. Loans to the manufacturing sector have dominated PISOBanks lending operation over the past six years, accounting for 56.0% oftotal approvals (by amount). Subsectoral emphasis, however, has changed overthe years: between 1978-80, more than half of loan approvals (by amount) wentto the paper, rubber, chemical and metal subsectors; since 1981, the foodprocessing subsector received the largest share. Public utilities and ser-vices have accounted for another 32.0% of total approvals over the past sixyears, with miuing activities utilizing the remaining 12.0%. Over 70% ofloans ap,roved (by number and amount) i'n 1982 and 1983 (through September)went to 4lients located in Metro Manila, with more than 95.0% of the loansapproved'(by amount) being allocated to expansion projects. This represents areversal in the trend set during the 1979-81 period towards greater regionaldispersal and participation in new projects, which may be explained by PISOBank's deteriorating profitability (para. 7.12) and portfolio quality (para.7.14) which have resulted in efforts to minimize risks, especially thoselnherent in undertaking both new project financing and project activitiesoutside Metro Manila.

7.07 Over the 1978-80 period, the size of the average project loandecreased steadily from P 4.8 million to P 2.6 million; since 1981, however,that average has steadily increased to P 6.0 million for the first nine monthof 1983. While inflation and depreciation of the peso have contributed to the

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Increase in average loan size, PIS0 Bank has gradually shifted to makinglarger-size loans. During 1978-80, the number of loans of over P 7.0 millionaccounted for only 11% of all loans approved; in 1981, the respective figurewas 24.5%; in 1982, it was 30%; and for the first nine months of 1983, it hadreached 38%. Before PISO0s conversion into-a private development bank,foreign currency loans (by amount) accounted for almost 90% of all loansapproved. After the conversion, with PISO Bank able to mobilize domesticresources through its deposit-taking function, foreign exchange loans, as apercentage of all loans approved, dropped to 32% in 1982 and to only 7% forthe first nine months of 1983. This precipitous drop was marked by anincreasing reluctance on the part of enterpreneurs to undertake projectsrequiring substantial foreign exchange in light of the successive deprecia-tions of the peso which began in 1982, the risk of which is passed on to theborrower by PIS Bank. The maturity structure of loans approved by PISO Bankhas substantially changed, reflecting the increase in working capitalfinancing funded by deposits: for 1978 and 1979, all but two of the fiftyloans (or 96%) approved by PISO had a maturity of five years or more; incontrast, of the 99 loans approved from January 1, 1982 through September1983, only 38 (or 38.0%) did.

Financial Performance

7.08 Financial Position. PISO's projected and actual balance sheets forthe period 1978-81 are presented in Annex 14; audited balance sheets for theperiod 1978-82 are given in Annex 15. As an investment house (1978-December 13, 1981), PISO achieved a significant growth in total assets ofapproximately 35% per annum, although this vas less than the 50% per annumoriginally projected. While overall growth was less than anticipated, PISOdid achieve its objective of placing increased emphasis on long-termlending. By December 13, 1981, its proportion of long-term loans to totalassets had increased from 2% in 1976 to 48%. Since 1977, PISO's level ofshort-term investments had remained relatively constant; as a proportion oftotal assets, however, short-term investments declined from 74% in 1977 to24%. By December-1981, 59% of PISO's assets were financed by long-term debtand equity compared tc only 25% in 1977.

7.09 After PISO's conversion into a thrift bank in 1981, its total assetsincreased by 61% in 1982. For the first nine months of 1983, total assetsincreased by a moderate 23% (annualized). The considerable slowdown ingrowth, in most part, was attributable to the rising economic and financialcrises besetting the Philippines. The series of peso devaluations during theyear made foreign currency loans especially unattractive to investors. Thechange from an investment house into a development bank did not result in anymajor change in the composition of PIS0 Bank's assets. As of September 30,1983, PISO Bank-s long-term assets accounted for 53% of total assets; short-term investments accounted for 20% (well-below the 35% maximum embodied in itsCorporate Strategy for 1982-86). It is worth noting that, both as an invest-ment house and a thrift bank (after the merger), PIS0 Bankos total asset sizehas doubled every two years, largely reflecting the dynamic management team ofPIS0 and its corporate strategy emphasizing growth. However, while the recordof asset growth has been impressive, one may argue, with the benefit of hind-sight, that a more conservative growth strategy might have resulted in better

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control of portfolio quality. Such an argument, to an extent, makes sensegiven the need for strengthening PISO Bank's project supervision unit and itsactivities. On the other hand, in defense of PISO Bank, one can argue thatPISO Bank could not afford to ignore the opportunity for significant growthduring 1978-82 gizen an environment of uncertainty which has adverselyaffected the banking system since 1983.

7.10 The bulk of the increase in PISO Bank's assets were funded bydeposits and long-term borrowings. PISO Bank-s performance in mobilizingdeposits has been remarkable. The deposit level rose from a mere e 19 millionjust after the merger in 1981 to P 318 million at end-1982. However, PISOBank's deposit level fluctuated widely during the first three quarters of1983, reflecting the unstable environment which developed that year. Due to heavywithdrawals by institutional depositors, total deposits fell to P290 million(net of interbank borrowing of P 58 million) by end-September 1983 and PISOBank became a net borrower in the interbank market that month.

7.11 Capital Structure and Liquidity. PISO Bank's paid-in capital as ofSeptember 30, 1983, was P 66.1 million (para. 6.02) compared to P 31.6 millionin 1978- total equity increased from P 40.1 million in 1978 to P 76.9 mil-lion. 2u Notwithstanding these almost two-fold increases, total equity as apercentage of t tal assets fell from 20.1% to 9.0%. PISO Bank's total debt/equity ratio - increased steadily from 4.2:1 in 1978 to 10.2:1 as of Septem-ber 30, 1983, as against the contractual limit of 10:1 agreed to with the Bankunder Loan 1555-PH. PISO Bank's long-term debt/equity ratio stood at 5.4:1 asof September 30, 1983, as against the contractual limit of 6.0:1 under thesubsidiary Loan Agreement for Loan 1984-PH. As a result of the peso devalu-ation of October 4, 1983 (to P 14.00:$1.00 from the previous P 11.00:$1.00),and with its projected increase in volume of operations, PISO Bank needs toincrease its equity substantially to comply with these contractual limits.PISO Bank recognizes this situation and is exploring a number of ways toexpand its equity base. As recorded in the agreed minutes of negotiations forLoan 1555-PH, a minimum current ratio of 1.1:1 was accepted. As an investmenthouse, PISO maintained this ratio. Upon its conversion into a thrift bank,the Bank agreed to substitute the minimum current ratio with the CentralBank's minimum reserve requirements - particularly in view of the term-transformation being promoted by the Philippine authority and IBRD. However,during September 1983, PISO Bank experienced a liquidity problem - as ofSeptember 30, 1983, net borrowings in the interbank market amounted to P 34million, implying that it was relying on borrowing from the interbank marketin order to meet reserve requirements imposed by the CB. Three factors havecontributed to this situation: (a) the withdrawal of institutional deposits;(b) the sudden curtailment of rediscounting facilities under the Central Bankand the Development Bank of the Philippines (while PISO Bank had alreadyadvanced its own funds); and (c) the deterioration in PISO Bank's collection

20/ This figure differs from PISO Bank's equity of P 87.2 million shown inAnnex 15, which included subscriptions receivable of P 10.3 million.

21/ Total debt includes outstanding quarantees.

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performance (see para. 7.14). PISO Bank is exploring a number of ways toincrease its equity base and to improve its liquidity position (para. 7.16).

7.12 Profitability. PIS(-s projected and actual income statements forthe period 1978-81, and audited income statements for the period 1978-82 arefound in Annexes 16 and 17, respectively. While actual financial results werefar below appraisal expectations, they were still reasonable during the period1978-80. Since 1981, however, PIS0 Bank has experienced a serious decline inprofitability. Net income for 1981 (premerger, i.e., as of December 13), 1982and 1983 (as of September 30) was below 1978, 1979 and 1980 levels. Theannual return on average equity for the years 1978-1980 averaged almost 15.0%;for the period 1981-September 1983, the corresponding figure was only around5.0%. Low profitability was due mainly to (a) the increase in financialexpenses as a result of costly short-term borrowings, (b) the increasing levelof accounts in arrears on which interest could not be accrued, and (c) nega-tive interest spreads on certain loans the Central Bank or Development Bank ofthe Philippinres was unable to refinance. In addition, as PISO Bank hasemphasized in its draft PCR on Loan 1555-PH, 1981 and 1982 was 'the time whenconsiderable corporate energy had to be spent realizing the organization andoperation of the two independent entities (PISO and PIS0 Bank) and thrashingout...certain transitional merger issues." PISO Bank has also conceded thatorganizational changes and branch expansion after the merger were sometimesimplemented at the sacrifice of its short-term profitability. PISO Bank hasnot paid op3t any dividends since 1980 in an effort to weather the recessionand the impact of the merger. PIS0 Bank's action plan includes certainmeasures to improve its profitability (para. 7.16).

7.13 Audit. Sycip, Gorres, Velayo and Co. (SGV) have been the externalauditor of both PISO and PISO Bank. Their reports on the 1978-1982 financialstatements were without qualification.

7.14 Quality of Portfolio. As shown in Annex 18, PISO Bank's loancollection performance since 1979 has steadily deteriorated. Cash collectionson PISO Bank's medium/long-term loans declined from 98% in 1979 to 68% in1982. For the first three quarters of 1983, collections amounted to only 62%of amounts falling due. Annexes 19 and 20 summarize the status of PIS0 Bank'stotal loan portfolio for the period 1979-September 1983. Due to the deterior-ation in collection performance, arrears, which represented less than 0.1% (orP 0.1 million) of PISO's outstanding loan portfolio in 1979, rose to 9.3% (orP 49.7 million) of outstanding loan portfolio as of September 30, 1983.Principal affected by arrears also increased: from less than 0.2% of totalprincipal outstanding in 1979 to 18.3Z as of September 30, 1983. Moreover,as of September 30, 1983, 50% of all arrears were those of more than twelvemonths; of the P 97.6 million principal outstanding affected by arrears, 87%of that amount was affected by arrears of mure than twelve months. The world-wide economic recession and the country's internal financial difficulties haveresulted In a number of PIS0 Bank's clients facing liquidity problems, thuscontributing to PISO Bank's deteriorating collection performance and increas-ing level of arrearages. Also, inadequacies in project appraisal and super-vision discussed in paras. 6.09 and 6.11 seem to have contributed to thisproblem.

- 21 -

7.15 As of December 31, 1983, total provisions for doubtful accountsamounted to P 44.9 million or 8.4% of total loan portfolio. The Central Bankand PISO Bank's auditor (SGV) considered the accumulated provisions adequate.

7.16 PISO Bank's Action Program. Since 1983, the Philippines hascontinued to suffer a severe economic recession. The industrial investmentclimate remains poor and the corporate sector continues to experience seriousfinancial difficulties, the impact of which has had a continued adverse effecton PISO Bank. Following a joint IBRD/ADB/Central Bank DFU supervision missionin 1984 and a series of discussions between the Bank and PISO Bank, PISO Bankformulated an action program for dealing with a number of key issues.Measures already taken or being taken under this program are briefly outlinedbelow. On Organization and Staffing, PISO Bank has recently established aTechnical Evaluation Department with five staff (three of whom are engineers -an additional engineer is to be added) to strengthen its capability ofevaluating the technical aspects of projects, and appointed threedivisional/group managers. It is actively considering the desirability ofreinstating the position of Chief Financial Officer. PISO Bank is alsoclosely monitoring staff movement and is intensifying manpower training. (Thestaff turnover rate dropped from 11% in 1983 to 9% in 1984.) On procedures,PISO Bank, in addition to the establishment of the Technical EvaluationDepartment, has decided to assume a highly-selective lending stance as well asimprove the quality of security on existing loans. It is reviewing andupdating its existing project supervision manual to reinforce supervisionactivities, and has organized a task force to review the various systemsbankwide for streamlining operations and facilitating computerization of thepreparation of financial reports. Measures for improvement of portfolioquality, liquidity and profitgbk,lity include: (a) aggressive collectionefforts (the collection ratia!_ has reportedly improved slightly from 69Z in1983 to 72% in 1984 despite harsh economic conditions); (b) adoption of apolicy requiring that term loans be made only with matching funds (such asADB, Central Bank/Apex, IBRD and IGLF funds) and not with deposits; (c) saleof some deposit-funded loans, if necessary, to other financial institutions;(d) emphasis on mobilizing collateral banking business, including compensatingbalances on the part of borrowers; and (e) introduction of new product linesfor increasing income and deposits (PISO Bank's deposits have increased from P280 million at end-1983 to P 309 million at end-1984; its net profit increasedfrom Y 6.5 million in 1983 to about P 7.4 million in 1984). Regarding equitybuild-up, PISO Bank is actively exploring (a) a further issuance of preferredshares (P 6 million redeemable preferred shares were issued in 1984), and(b) raising of long-term subordinated loans (from either a bilateral ormultilateral institution).

7.17 Under the above action program, PISO Bank has been exploring thepossibility of prepaying foreign currency loans that have been foreclosed andforeign currency loans of certain clients who wish to prepay. PISO Bank hasrepeatedly requested of its major creditors (including IBRD) either substitu-tion of the debt/equity ratios with the statutory risk assets ratio or certain

22/ For amounts falling due during the year.

- 22 -

changes in the definition of debt. This request has not been accepted on thegrounds that the current ceilings remain appropriate for an institution ofPISO Bank-s size and age, particularly given the current unstable financialsector conditions in the Philippines. For this and other reasons, PISO Bankis now actively pursuing a strategy of consolidation.

VIII. CONCLUSIONS

8.01 Despite the problems currently facing PISO Bank, it has proved to bea reasonable choice as an institution with which the Bank to be associated.It has been capable of adapting itself quickly to a changing environment, asreflected in the significant institutional and organizational changesintroduced during the recent past (para. 3.01 and 6.04-6.06). It has beensuccessful in achieving remarkable portfolio and asset growth during theperiod 1978-83. Its total asset size doubled every two years and reachedP 853 million as of September 30, 1983; its loan portfolio grew from P 14 mil-lion in 1978 to P 535 million (83% of which was medium and long-term loans).Since its conversion into a thrift bank in December 1981, it has been able tomobilize deiosits totalling P 290 million as of September 1983. Perhaps mostimportantly, PISO Bank has so far survived a series of crises of confidencewhich have shaken the financial sector in the Philippines since 1981. Thisdemonstrated resiliency, which reflects the quality of PISO Bank's managementand PISO Bauk's serious efforts to implement the action program attacking thecurrent difficulties and weaknesses, justifies past and continued Bank supportto the institution.

8.02 PISO Bank's present difficulty in meeting the covenanted debt/equityratios discussed in para. 7.11 was l3rgely caused by a series of depreciations/devaluations of the peso (from f 8 = $1 in 1981, to P 14 = $1 in 1983, and toP 20 = $1 in 1984) and the unsettling impact of a series of crises in thefinancial system since 1981 which have made it difficult for PISO Bank toraise the substantial amount of additional equity needed to match the increas-ing level of liabilities resulting from the peso devaluations. PISO Bank-sless-than-satisfactory liquidity situation was partly caused by developmentsoutside of PISO Bank's control, as discussed in para. 7.11, but also by lowloan collections. In retrospect, the deteriorating trend of portfolio qualityand the resulting weak profitability since 1981 (discussed in paras. 7.12 and7.14) might have been arrested, to some extent, had PISO Bank more rigorouslyevaluated the projects it financed during the earlier years of rapid growthand spent more corporate resources (in terms of manpower and top management'sattention) on project supervision. It appears that the Bank also could havereviewed subprojects more critically, with a view to improving PISO's projectappraisal standards, and drawn to PISO's attention, in stronger terms, theneed for strengthening project supervision.

8.03 Specific steps for institutional improvements sought under Loan1555-PH (para. 6.01) have been largely implemented with one exception. PISOBank made some progress in increasing its share capital, though the need for afurther strengthenir,g of its equity base still remains an important issue.The diversification of ownership has been pursued but without much success,due largely to the depressed condition of the Philippines capital market.

- 23 -

The most important and positive institutional development during theimplementation of Loan 1555-PH was the conversion of PISO (an investmenthouse) into PISO Bank (a thrift bank), given its success in depositmobilization. Without this conversion, the institution might have been inworse shape financially, since all loan collection shortfalls would have hadto be met with costly short-term borrowings instead of less costly deposit6.If PIS0 Bank can be blamed for inadequately managing its rapid portfoliogrowth, particularly during the transitional period of merger, it should begiven credit for having initiated and completed the conversion into a thriftbank. In fact, PISO Bank has already become a model for other investmenthouses in the Philippines to seriously consider following, though theviability of small/medium size banks in the country has yet to be fullytested.

8.04 The performance of PISO Bank in achieving the objective of resourcetransfer under Loan 1555-PH has been mixed. While over ninety percent of theloan was disbursed one year before the original closing date, the performanceof the twelve subprojects financed was below what had been expected. Foursubprojects were never implemented or ceased operations shortly afterimplementation. Of the eight subprojects presently in operation, six areoperating without any serious difficulties and with reasonable prospects forthe future. The remaining two subprojects are currently operating with veryserious problems. While this less-than-expected performance can in large partbe attributed to the adverse economic conditions prevailing in the countrysince 1979, optimistic appraisal assumptions and projections coupled withweak supervision are also contributing factors. PISO Bank has recently takenseveral steps to improve its project appraisal, and recent efforts tostrengthen its supervision unit are a positive development (paras. 6.09, 6.11,and 7.16).

8.05 The lessons learned from the Bank's experience with PISO Bank duringthe period under review are:

(a) striking a balance between rapid portfolio growth and tighter riskcontrol is an esential element for ensuring/maintaining aninstitution's lasting financial soundness. While PIS0 Bank wassuccessful in achieving its growth objective, it could have donebetter in the area of risk control through more rigorous projectappraisal and supervision. The Bank could have been more critical inreviewing subprojects with a view to improving PISO's projectappraisal standards, and drawn to PISO's attention, in strongerterms, the need for strengthening project supervision;

(b) a small/medium size financial institution such as PISO Bank isvitally affected by changes in its environment. Although PISOBank's competitive position and its resiliency to weather a seriesof external shocks have been enhanced through its conversion into athrift bank, its liquidity situation, portfolio quality, and itsability to raise additional capital were severely affected bydevelopments outside of its control; and

- 24 -

(c) small/specialized financial institutions such as pre-merger PISO(investment house), which tend to have more difficulty than largerand diversified financial institutions in effectively competingduring periods of economic distress and in an environment ofincreasing competition, must adapt themselves quickly and decisivelyto such conditions if they are to survive.

- 25 -ANNEX 1

PHILIPPINES



Schedule of Estimated and Actual Disbursements(US$ million)

Estimated Actual Cumulative Cumulativeamount per amount actual X ofyear /a per quarter disbursements total loan

1979let qtr 1 146,443.48 146,443.48 1.02nd qtr 4,400000.00 4,283,811.66 4,430,255.14 29.53rd qtr } 3,407,768.42 7,838,023.56 52.24th qtr } 1,796,002.45 9,634,026.01 64.2

19801st qtr } 863,807.82 10,497,833.83 70.02nd qtr } 8,200,000.00 336,277.15 10,834,110.98 72.23rd qtr } 863,979.22 11,698,090.20 78.04th qtr } 115,121.13 11,813,211.33 78.8

19811st qtr } 364,462.65 12,177,673.98 81.22nd qtr } 2,400,000.00 1,198,931.20 13,376,605.18 89.23rd qtr } 152,463.24 13,529,068.42 90.24th qtr } 425,010.27 13,854,078.69 92.4

19821st qtr } 98,972.91 13,953,051.60 93.02nd qtr } _ 1,816.95 13,954,868.55 93.03rd qtr } 7,971.35 13,962,839.90 93.14th qtr } 44,777.61 14,007,617.51 93.4

19831st qtr I - 14,007,617.51 93.42nd qtr } - 237,613.62 14,245,231.13 95.03rd qtr } - 14,245,231.13 95.04TH qtr } - 14,245,231.13 95.0

1984lt qtr } - 14,245,231.13 95.02nd qtr 1 - 248,971.33 14,494,202.46 96.6

/a From Supervision Report dated May 20, 1980.

- 26 - ANNEX 2

PHILIPPINES



List of Subprojects, Commitment Dates and Amount of Disbursement

Equivalentdisbursement Amount of

Approval Disbursement (P'000) loan approvedName of subproject /a date (US$) lb Ic (US$'000)

"A' Subprojects

A-1 Philippine Telephone &Telegraph Corp. 10/02/78 3,499,268.55 25,807 26,645 3,500

A-2 Republic Telephone Co. 10/19/78 3,000,432.52 22,128 25,905 3,000A-3 Rubberworld Philippines, Inc.} 02/12/79 2,000,000.00 14,830 14,830 2,000

1 08/18/80 - - - 500/dA-4 Ferro Chemicals, Ind. 05/09/79 2,000,000.00 14,830 14,836 2,000

Subtotal "A" Subprojects 10,499,701.07 77,595 82,216 11,000

"B" Subprojects

B-i Eastern Paper Mills, Inc. 07/14/78 500,012.39 3,688 3,711 500B-2 Pacific Rayon Mfg., Inc. 07/14/78 750,000.00 5,531 5,561 750B-3 Analu Mfg., Inc. 08/11/78 150,000.00 1,106 1,119 150B-4 Floro Enterprises, Inc. 09/15/78 150,000.00 1,106 1,140 150B-5 Filipinas Eslon Mfg., Inc. 11/27/78 750,000.00 5,531 5,727 750B-6 Transpacific Towage, Inc. 01/10/79 450,000.00 3,337 3,337 450B-7 Delta Motor Corp. 01/10/79 500,000.00 3,708 4,708 500B-8 Pangarap Gas Storage Corp. /e -------------------- - Cancelled ----------------------B-9 Superior Pharmacraft, Inc. } 07/06/79 500,000.00 3,708 3,713 500

} 08/18/80 244,489.00 1,858 2,005 250

Subtotal "B" Subprojects 3,994,501.39 29,573 31,021 4,000

Total 142494,202.46/d 107,168 113,237 15,000

/a "A" subprojects are those for which the amount of the subloan exceeded the free limit ofUS$750,000.

/b Based on the exchange rate prevailing at the time of commitment.77 Based on the exchange rate prevailing at the time of each individual disbursement.7W Cancelled as of November 11, 1983.Te A US$750,000 commitment for Pangarap Gas Storage was subsequently cancelled due to the

100% participation of the Government, making the subproject ineligible for Bank loanfinancing.

PHILIPPINES



Sectoral and Geographical Distribution of Subprojects

Sectoral Distribution

No. Name Sector Location

A-1 Philippine Telegraph & Telephone Corp. Communications NationwideA-2 Republic Telephone Co. Communications NationwideA-3 Rubberworld Philippines, Inc. Manufacturing (footwear) Metro Manila 9

A-4 Ferro Chemicals, Inc. Manufacturing (iron and steel) Northern Mindanao

B-1 Eastern Paper Mills, Inc. Manufacturing (paper and paper products) Metro ManilaB-2 Pacific Rayon Mfg., Inc. Manufacturing (wearing apparel) Metro ManilaB-3 Analu Mfg., Inc. Manufacturing (footwear) Metro ManilaB-4 Floro Enterprises, Inc. Manufacturing (photo finishing) /a Metro ManilaB-5 Filipinas Eslon Mfg., Inc. Manufacturing (pipes) Northern MindanaoB-6 Transpacific Towage, Inc. Water transport services Metro ManilaB-7 Delta Motors Corp. Manufacturing (transport equipment) Metro ManilaB-8 -------------------------------------------------- Cancelled ----------------------------------------------B-9 Superior Pharmacraft, Inc. Manufacturing (drugs and medicine) Metro Manila

Ia Floro Enterprises, Inc., is highly diversified with operations that cover manufacturing as well as service sectors.Project financed by the Bank funds covered the manufacturing sector, involving the expansion of its white papersensitizing production.

PHILIPPINES

PIS0 D8VYLOPMENT BANK (LOAN 1555-PH)

PROJECT COWPLETION REPORT

Characteristics of Subprojects Financed Under Loan 1555-PH

Nature PIS0 financing Pro >ct Completion dateof sub-- Project cost ('000) IBRD Total Z of actual Difference lbSubproject no./borrower Sector project /a Est. Actual Overrun ($'Q00) Peso (P'000) proj. cost Est. Actual (months)

"A" SubprojectsA-1 Philippine Telegraph & Communtcations E 45,380 44,472 (908) 3,499 - 26,645 59.0 02180 02/82 24Telephone Corp.A-2 Republic Telephone Co. Communications E 224,473 315,825 91,352 3,000 - 25,905 8.2 08/80 01/83 30A-3 Rubberworld Philippines, Manufacturtng E 27,000 28,125 1,125 2,000 - 14,830 52.7 01/79 01179 0Inc. (footwear)A-4 Ferro Chemicals, Inc. Manufacturing e 25,000 35,000 10,000 2,000 - 14,836 42.4 04/79 12/80 20

(iron & steel)

"B" SubprojectsB-1 Eastern Paper Mills, Inc. Manufacturing E 5,500 5,500 - 500 - 3,711 67.5 07/79 051S0 10

(paper)B-2 Pacific Rayon Mfg., Inc. Manufacturing E 6,868 6,868 - 750 - 5,561 81.0 12/78 1'/78 0

(wearing apparel)0-3 Analu Mfg., Inc. Manufacturing E 2,625 2,625 - 150 - 1,119 42.6 10/78 10/78 0

(footwear)B-4 Floro Enterprises, Inc. Manufacturing (photo E 3,975 /c /c 150 - 1,140 /c 12/78 /c /c

finishing paper)B-5 Filipinas Ealon Mfg., Manufacturing N 8,125 7,261 (864) 750 - 5,727 78.9 09/79 05/80 8Inc. (pipes)B-6 Transpacific Towage, Inc. Service (water E 4,163 4,163 - 450 - 3,337 80.2 12/78 05/79 5

transport)B-7 Delta Motors Corp. Manufacturing E 23,683 23,874 191 500 - 4,708 19.7 09/79 09/79 0

(transport eqpt.)B-8 Pangarap Gas Storage Co. - - -- Cancelled …B-9 Superior Pharmacraft, Manufacturing E 14,400 Le Ic 745 3,650 9,368 /c 1979 IC IcInc. (drugs & medicine)

Total /d 372,817 473,713 106,379 22.5

/a N = New; F - Expansion.7Gb Refer to Annex 5 for explanation of delays in completion.7W- Project never commenced operations.T7 Total does not include data for subprojects whIch never commenced operations (B-4 and 8-9).

- 29 -

ANNEX 5

PHILIPPINES



Reasons for Delays in Completion of Subprojects

A-1 Philippine Telephone and Telegraph Corp. - The two-year delay in the com-pletion of the project was brought about by overoptimistic evaluation ofthe project implementation schedule as acknowledged by the firm. Noextraordinary delays were encountered to pinpoint areas of fault as theprocurement and installation of the equipment were considered normal inthe business.

A-2 Republic Telephone Co. - Evaluation of the schedule of the expansionproject was overly optimistic. Delays were primarily caused by the pro-longed contract negotiations between Retelco and the supplier, causingdelays in the opening of the LICs and the staggered delivery of theequipment. The delivery of the balance of the equipment was also delayeddue to the firm's delay in payment for the first shipment of equipment(the contract stated that payment should be made one year after theequipment has performed satisfactorily). The merger of Retelco with PLDTcaused further delays as PLDT was reluctant to certify the satisfactoryperformance of the equipment Retelco acquired. Completion of the projectwas attained in January 1983.

A-4 Ferro Chemicals, Inc. - Delay in the procurement of equipment was broughtabout by delay in the opening of the L/Cs. Furthermore, when the equip-ment arrived, it was the start of the rainy season which hampered theconstruction of the furnace. Even upon completion, commercial operationscould not be initiated as a new law was passed which imposed stricterstandards on antipollution devices. The project was delayed for20 months.

B-1 Eastern Paper Mills, Inc. - Although the project was physically completedas scheduled, commercial operations did not start until ten months afterthe projected date due to technical problems encountered in the produc-tion of linerboard. Commercial production of linerboard was short-liveddue to stiff competition, price undercutting and the availability ofcheaper, imported linerboard.

B-4 Floro Enterprises, Inc. - While acquisition and installation of the fixedasset component of the project proceeded as scheduled, the expansion pro-ject never started commercial operations due to marketing and financialdifficulties.

B-5 Filipinas Eslon Manufacturing, Inc. - Completion of the project wasdelayed by eight months as brought about by the firm's decision to relo-cate the expansion project in Mindanao (in lieu of Metro Manila) whereits existing operations and source of raw materials were located.

B-6 Transpacific Towage, Inc. - Changes in the specifications of the tugboatto make it adaptable to island shipping delayed the delivery of thevessel from Japan to the Philippines by five months.

B-9 Superior Pharmacraft, Inc. - Like Floro Enterprises, the fixed asset com-ponents of the project proceeded as scheduled. However, the expansionproject never started commercial operations due to management andfinancial problems.

PllI1.IP,)INES

~'I SO )VI'ELOPMENT BANK (1.0AN 1555-P1)

PRo JEtT (:GIPlMFTIUSN REPORT

Finaincial Performance of Subproje.'tS

Prolit beforoNet earnings -is a k jrovkilor:a. as a ? of

fT I1 Sailus (8"l)n() /a Profit (loss) (WO00) /a of average net .4orth /h avprnra to)ta] aasets lbFirst yeir Second ye-ar Flrst year Second year First yeir Secoind gear Fir-t ve@Y Second yearof !kill of full of full of fult of full of fttil of tull of full

op ra io ns o1'eratt,Ins operatinns operations operattions cpoer,tions operttlona operattonsSubproject noIbo,rro,'.r F-S. A. tuaI Est. Actual Est. Ac tual E st. Actual Est. A tual Ent. A, tual 1t. Actual Fst. Actual

A-) Philippine Telegr.iph &TeI.ephone Corp. 18,944 * 1$,139 * 3,161 * 5,564 * 8 * 4 * 10 * 1) *

A-2 Republic Telephone Co. 37, 93: * .44,188 * 10,032 * 11,1]2 * 12 * 11 * * 6 *A\-3 Rubberiorl.t Ptsii1ppines,;

Inc. 6',)S9' A2,!56 62,652 57,923 4,664 1,919 4,940 2,061 27 15 22 14 1i 3 1i 6A-4 Ferro Chemlcals, tr-. 14,157 2't,2Yo 27,951 15,233 1.865 (84) 4,282 (3,045) 38 (0 .3) 43 (9) 22 (0. A) 29 (3)

Subtotl "A" Suihprovjects lc 76,8R)9 82,456 41,h603 73,156 6,S29 1,835 9.222 (984)

8-1 Eastern Paper Mills, Inr,. 6,408 + 13,484 + 718 + 1,748 + 3 + 6 + 2 + 5 +B-2 Pacific Rayon 'tfg., Tno. 12,594 1,281 12,591 5,176 ?,720 34 2,733 114 3R 4 27 9 33 3 27 4S-3 4nalu Mfg ., Tnr. 4,1191 + 4,hO2 + 372 + 446 + 40 + 31 + 23 + 23 +B-4 Floro Enterprises, In-. 6,912 + ',6411 + 701t + 863 + 30 + 28 4+ 19 + 26 +B-5 Filipinas Eslon Mf8., tn-. 4,368 1,374 S,328 2,040 319 268 494 120 3 2 4 /d 6 5 7 IdB-6 Transpacific Teaagp, Inc. 295 1,500i 311 3,500 45 728 52 7f64 40 8 33 *4 21 7 24 48B-7 Delta Motjrs Corp. 64,35, 145,601( 94,237 94,000 513 (4,700) 1,186 (10,500) 12 M13) 17 (37) t 3 2 3B-8 Pagsarip Cas Stor.age Corp. --------------------------------------------------------- Cancelled ---------------------------------------------------…--#-9 Superior Phdrmacrafts, Inr. 1,919 + 5,426 + 21l + 489 F 7 + IC + 21 + 24 +

Sthbt-tal "B" Suh,r,)jecta Ic 81,609 1S3,755 11 .466 10i4,7th 3,593 (3,670) 4 (9,02).

Total /c 158,418 23h,211 203,0169 177,872 10,122 (1,835) 13,687 (tO,486)

* M #o f,ill yeAr of operations as imiplementation of the project was delayed.Project ttas either not implementedt or ceased operations shortly after Implenentation.

/a Based on subproject performance.

lb Net earnings and profits are hased on coinsolidated operattons. ProfIt hefore provtsion are those befoire interest and taxso.

/c Does nut include d,. ta for subprojet-ts 4hitlh were not implemented, veased opernting shortly af rer implementation or art, not yet operatlonal for one fullvear.>

z/d Net earnings as -jell as average net worth Iq negative.

"1S' DlEVELMIPt.NT HANK (W.uA'i I -S -PH4)

PROJEIJ:: (.1 PI-v ritoS KEP(RT

.. conmni Perforum - oI Subpr,tJeL t .

In<--st:r-lt~ V Fnnnv I1 41 -,,omrti

X' 'p.rts Fxplo(li) Fxp(lrts zi' " I of s1-.i- 1n. rr,"l-,t t. I p, sri r rat. '.f rntr o)fFi rst *--*r Second y'.lr F Frst ye.ir Seo.'od Xoar empl 11,1lt VI' rt I-s.r (') rotnwr,, t7f

Subbpro. e. : ". 'h.-rr .. r '.0. 4 to:11 E.1 * A. tuil Fs t 4tu.l41 P.,t. Atu- 1 t.t . A.I, ti P .t.* *\tw 41 Fs1r .4. .( i.qi E.ct. ACt ia 1

A-I Philippite T,'legrtpl A

Te:.'-plhon. (:,rl'. * * * a* n. 1. ;34 1,9< 1' 17 * . .N-2 R ' I .,p ll i,. * * * 374 137 hll 9 g7 t t 1 2 n.. n.a.A-3 Pubhhe sor Id P¢,, I Ipp in s,

Inc. ?-, 5 2';,79 2', lu 23 1 714 32 A s 32 4.1 1,4'Wt 1,410 19 2'1 I ?9 44 34A-4 Fe rro M-. ,n. I 1-1<- . 4,177 I9,9 ' 2,' 4 1i 1 4, 47' 1 Oil 95 111)( 94 3b 9% A3l 3419 3s' 1 47 1 4

S.hth. t 1 "'A S I" rAj". _i 1,91r t41,94 A l 49,0111 37,414(1 4i.5 49.7 9." 41.S 3RrRl9 1 ,R9 j7 2 ? 1

B-I FEA,t--rn Pa 1r, 1 r , In.. 4 t 'I + 'I + ': + 3 I 4 + 37 4B-2 Pic-ific Ra 'o,, Mt:. , In. 1,748:4 9?S/h I ,738!h 1 ,036'h 14.b 2Ptb 14lu 213/b 46 S'l 149 17 411 19 F,2 328-3 %na l u %f( ., In,. 1,117 +- 1,? 2 + 27 + 27 3e 6 + 13 + 3.1 + 79 4

B- 4 clor 4 Ent1-ri.r e%, In,. " + '+ :' .'+ ; + 79S . AS + 13 +B- 5 Ft Ilipinas E lon Mtf,;.'. Irn, I II I I I) I I ( 11 31 262 234 '1 'u's;. 31 neg.B-6 rryn'.patcIf ic Th...g.', fnc. '- 131 4 11 ; I I193 I16 IH6 4S 23 64B-7 DoZtt 'ot .rs Corp. ' 3 II '' I' I (1 . 61 'n11) $6 Fi1 .?2 '.a. 19q 'o.'H-8 Piogar4p Ga-; StLr.lX.- Cor,'.. - - - - - - - - -___.__._- - - - - - - -- d-------------------------------------------------B-9 Stperi.,r Pharmricr:aft, 1 . I + I + + .J 4 42 + 341 + 14 * ?S +

SI,b0t, to I S.,h ,r.. j+ t '. 1 7314 9:S 1,734 I,'1t 2. t 1.t. 1.6 I.I' S":' 1 44 1''9

T.tal /a In,4. 4 1,9'15 9,719 34,h77 2'3.1 I7.7 ,4 '1. 7 2,391 ,2,2 232 2117

1 - f i vI i r of op.-rol t'lflm1 , i np l'n'.it.(t 1oO '.4 t h' p fro feo t wIA' .ll'I Vk-d.+ = ,Pr"J' t AO.1 i L fw r o lr iMPI-hkll0 1t P-I 4'r I4-h . 1. a- o r Lr .p 'I'¶r't-, I ft a'r 'p' rit 'n ,tf(t'ml,Ir l ' 1.t L i o

/b wDire, t a. tt io.1 . o-t.' .a r ,r 'i:'hir:r '- t -; v lh 44.1 - r- . o.'t I 'r.-,n t -1 -,4i-t, .r - .t I -i rd , l. rt i: 4't t--r i I .i w r r 1. r.

Xb I ricoo t r-x, vt t I. c, 1.*L t.. nma; ic lt, I ot t, r I g rn vi Ih .11 o-d V .. If i,,K R.4v¢. , sr .,d,t,. t i x,,r f) *rp,r prid-t

f:

- 32 -

ANNEX 8Table I

PHILIPPINFS



Current Status of Subloans, as of September 30, 1983

Present arrears Arrears asLoan amount (principal and of out-outstanding interest) standing

Subproject no./borrower (In P) /a - loan amount

A-1 Philippine Telegraph 6Telephone Corp. 31,544,716.47 264,740.40/b 0.8

A-2 Republic Telephone Co. 28,636,315.84 --

A-3 Rubberworld Philippines,Inc. 15,484,045.88 --

A-4 Ferro Chemicals, Inc. 20,276,305.20 7,636,653.67/c 37.7

B-1 Eastern Paper Mills, Inc. 2,717,154.79 --

B-2 Pacific Rayon Mfg., Inc. 6,198,204.60 1,124,700.07/d 18.18-3 Analu Mfg., Inc. 1,344,367.46 1,027,199.447e 76.4B-4 Floro Enterprises, Inc. 783,264.22 371,058.857T 47.4B-5 Filipinas Eslon Mfg., Inc. 7,320,531.78 3,088,976.557e 42.2B-6 Transpacific Towage, Inc. 359,512.78 359,512.787j 100.0B-7 Delta Motors Corp. 4,684,434.60 4,000,829.56/h 85.0B-8 Pangarap Gas Storage Corp. Cancelled …--B-9 Superior Pharmacrafts, Inc. 7,450,467.15 3,539,703.28/f 47.5

Total 126,799.321.15 21,413,374.62 16.9

/a Based on the exchange rate of P 11.302 - US$1.00.

/b PT&T's arrears stemmed from its nonpayment of some charges billed to themwhich they were questioning. The matter was being resolved and paymentwas expected before the end of 1983.

/c The reason for delay in the paymett of arrears was Ferro Chemical'srequest for pretermination. The firm was informed that current CB regula-tions precluded any prepayment. Payment of arrears was expected in Decem-ber 1983 as committed by the client.

/d Payment of arrears was expected In Decewoer 1983 when the firm would bereimbursed by ADB for the funds it had aivanced for the purchase ofmachinery for an ADB expansion project.

/e Under study for possible restructuring/rehabilitaLion.

/f Under foreclosure proceedings.

gUnder an offsetting arrangement with Transpacific Towage for some serviceswhich PTSO Bank contracted, it erroneously billed and offset against theirIBRD accounit charges which were not contracted b) PISO Bank. Negotiationswere being pursued to correct the error and payment was expected to bemade before December 1983. The account is fully matured.

/h An offsetting arrangement was agreed upon and the documents were beingprepared. Full liquidation of arrears was expected before the end of theyear.

-33-ANNEX 8Table 2Page 1 of 3

PHILIPPINES



Status and History of the 'Ielve Subprojects

A-1 Philippine Telegraph & Telephone Corp. (PT&T) - PTUT's completion of itsexpansion project was delayed for two years. However, segments of theproject were made operational as soon as they were delivered and ins-talled. In the last two years of operations, the firm's consolidatedstatements showed gains of P 241,000 in 1981 and P 6.5 million in 1982.The corporation's lower than expected profit in 1981 was attributed tothe acquisition of a small telecommunication firm-operating nationwide.Said acquisition was part of management's plan to penetrate further out-lying areas of the country.

A-2 Republic Telephone Company (Retelco) - Although the completion ofRetelco's expansion project was delayed by 30 months, it is wortlwhile tonote that some segments of the project were operational as far back as1980 and 1981. The firm, however, has been up to date in the servicingof its loan account. Retelco's merger with Philippine Long DistanceTelephone Co. (PLDT), the largest telephone company in the Philippines,on February 14, 1981, not only beefed up the company's contribution tothe socioeconomic development of the country but was also in accordancewith the Government's efforts in rationalizing the telecommunicationsindustry. The merger minimizes cutthroat intraindustry competition andrationalizes the nationwide development/dispersion of telephone facil4

ties. As a public utility, the firm is ensured modest margins In itsoperations and continued survival through Government assistance andincentives.

A-3 Rubberworld Philippines, Inc. - The firm is maintaining its leadership inthe country's footwear industry. This company has remained in PISOBank's list of prime accounts since its availment of the IBRD facility.As of end-1982, the firm's current ratio stood at 1.33x while total lia-bilities to total net worth was at 2.5x. Sales have grown at an annualrate of over 12X; gross and net margins for 1982 were 31X and 4.3X, res-pectively.

A-4 Ferro Chemicals, Inc. - Due to its linkage to the steel industry, theproject suffered as a result of the prolonged recession. Further, fre-quent power interruptions in the Mindanao region affected the company'soperations. However, as of September 1983, the firm managed to reachbreakeven sales and the rest of the year was expected to show brighterprospects. It is expected that with the revival of the steel industry,the company will fare as was originally projected. The proponent hasoffered to prepay its loan, but CBP approval seemed remote. As such,Ferro Chemicals, Inc. agreed to update its loan account before the end ofNovember .1983.

- 34 -ANNEX 8Table 2Page 2 of 3

B-1 Eastern Paper Mills, Inc. - Due to the prevailing depressed market forkraft paper, the firm suspended operations in December 1982. However, ithas managed to service its obligations, including the IBRD loan, throughthe assistance of its sister companies. With the Government's strictclampdown on importations, it is expected that the firm will once againregain its competitiveness since its raw materials are all availablelocally. The firm is currently evaluating the situation, in consultationwith its creditors, to ascertain the continued viability of its opera-tions. The firm plans to resume operations in 1984 upon the exhaustionof its finished goods inventory and the expected stabilization of themarket.

B-2 Pacific Rayon Manufacturing, Inc. - The company's cash flow has been cri-tically affected due to difficulties encountered in the collection of itsreceivables. This was further compounded by the depletion of the firm'sworking capital, as it temporarily used its own funds to acquire machin-ery and equipment for its second expansion project which is to be fundedthrough PISO Bank's ADB facility, disbursements of which have beendelayed. The firm, however, has been paying its arrearages on a monthlybasis. With the disbursement of the ADB funds expected before the end ofNovember 1983, the firm's cash flow was expected to normalize. Further-more, with the brightening prospects for garment exports, collection ofthe firm's receivables was expected to normalize.

B-3 Analu Manufacturing, Inc. - The untimely demise of the firm's presidentand founder created succession problems in that the children were ill-prepared to take over the management of the firm. Furthermore, the ram-pant smuggling of designer shoes from Hongkong and Taiwan, coupled withthe proliferation of cheap imitations of designer shoes, spelled disasterto what was considered to be a good market for name-brand ladies shoes.The real estate mortgages have been foreclosed while the chattel mortga-ges had already been scheduled for legal action sometime in November orDecember 1983.

B-4 Floro Enterprises, Inc. - The project was never implemented. Primaryreasons which lead to the dissipation of the firm's working capital werethe unprofitable performance of three of its operating divisions(opthalmic, computer and photographic/sunglass divisions) and the hiringof expatriates as required by their licenses which resulted in oppressiveoverheads. Furthermore, the firm's decision to hasten its inventorybuildup of computers as a hedge against price increases and the pesodevaluation backfired when computer sales slumped and it was left withcostly, nonmoving finished goods inventory. Also, stiff competition fromimported brands affected the project's viability. Some real estate -

mortgages have been foreclosed, to be followed by the balance which arestill under legal proceedings.

- 35 -

ANNEX 8Table 2Page 3 of 3

B-5 Filipinas Eslon Mfg., Inc. - Malversption by the firm's key operatingofficers affected the firm's competitive advantage and working capitalposition. Rehabilitation plans are presently being studied by the credi-tors.

B-6 Transpacific Towage, Inc. - The firm has performed better than expectedin the past few years with trends indicating further positive growth.The firm's rapid growth has been brought about by the increase in bothdomestic and international shipping activities in the country. Sinceinterisland shipping is still undoubtably the cheapest means to transportfood, raw materials and finished products in the archipelago, anyincrease in shipping activities favorably affects the firm. To cope withthe increasing demand for towage and salvaging operations, the firm has,in the past four years, acquired five new tugboats, a floating crane andseveral barges. These acquisitions were funded tbrough PISO Bank's ADBrelending facility, a lease facility with PISO Leasing Corp., anotherprivate development finance institution, and internally generatedfunds. Increases in oil prices are not expected to adversely affect thefirm, as cost escalations are passed on directly to its customers.

B-7 Delta Motors Corp. - Overextended borrowings and unhealthy intercompanytransactions jeopardized the firm's financial position. This was furtheraggravated by the failure of the Government's PTMP (Progressive TruckManufacturer's Program) of which the firm was a member. While said pro-gram was supposed to provide an incentive for truck manufacturers interms of high tariffs on imported, brand-new and rebuilt trucks andbuses, this was not the case. The firm i8 presently being operated by amanagement committee composed of PNB (the major creditor), the proponentsand their Japanese partners. Arrangements regarding the payment of thefirm'r arrearages and continued servicing of the firm's loan with PISOhad been finalized and were in the documentation stage.

B-9 Superior Pharmacraft, Inc. - Internal strife (between the major officers/shareholders) destroyed what was once a profitable pharmaceutical opera-tion. The result was a siphoning of company funds for personal gain andthe appointment of personal representatives in the management of the cor-poration which, in turn, led to overlapping and conflicting interests.The assets of the firm have since been foreclosed.

-36- ANNEX 9

PHILIPPINES

PISO DEVELOPMENT BANK.(LOAN 1555-PH)


List of Shareholders (as of Ser:ember 30, 1983)

Number of AmountName of shareholders Nationality shares (Pesos) z

Common Shar4holdersBarfel Development Corp. Filipino 2,258,058 4,516,116 6.98Castro, Cresenciano de Filipino 124,615 249,230 0.39Chemical Industries of thePhilipines Filipino 1,919,593 3,839,186 5.94

Chiongbian, Albert Filipino 298,830 597,660 0.92Chiongbian, Edbard Filipino 179,295 358,590 0.55Chiongbian, Henry Filipino 209,181 418,362 0.65Chiongbian, Victor S. Filipino 448,243 896,486 1.39Dynetic Retirement Plan Filipino 200,000 400,000 0.62Gatmaitan, Andres Filipino 608,464 1,216,928 1.88Insurance Builders, Inc. Filipino 1,318,410 2,636,820 4.08Johnston, Elizabeth Filipino 179,295 358,590 0.55Land Bank of the Philippines Filipino 3,118,654 6,237,308 9.65Lex Development Corporation Filipino 618,260 1,236,520 1.91Philippines First Insurance,Inc. Filipino 2,073,987 4,147,974 6.41

Private Investment Co. forAsia (PICA) Panamanian 7,444,893 14,889,786 23.03

Tanco, Eusebio Filipino 868,515 1,737,030 2.69Telectronics System, Inc. Filipino 100,000 200,000 0.31Vision Insurance Consultants Filipino 153,000 306,000 0.47Wellington Ty & Co. Filipino 1,800,000 3,600,000 5.57William Lines, Inc. RetirementFund -Filipino 80,312 160,624 0.25

Young, Elena Filipino 179,295 358,590 0.55Wellington Ty & Bros., Inc. Filipino 466,940 933,880 1.44Others Filipino 874,052 1,748,104 2.70

Subtotal Common 25,521,892 51,043,786 78.93

Preferred Shareholders0. Ledesma & Co., Inc. Filipino 905,500 3,622,000 5.60Development Bank of thePhilippines Filipino 2,500,000 10,000,000 15.46

Subtotal Preferred 3,405,500 13,622,000 21.07

Total 28,927,392 64,665,786 100.00

ANNEX 10-37-

PHILIPPINES



Manpower Turnover and Breakdown of Manpower Complement

Resignation of Year-end head count Turnover rate ofprofessional staff Total Professional /a professional staff

1978 13 62 42 311979 11 73 54 201980 5 86 69 71981/b 9 95 80 111982 16 221 92 171983/c 20 239 105 19

By Professional Background

Year-end 1978 1979 1980 1981/b 1981/d 1982 1983/c

Engineers 7 7 8 12 8 7 15Accountants 10 14 19 20 60 66 70Financial analysts 8 12 18 19 50 69 74Economists 9 9 11 10 18 20 25Lawyers 2 2 2 2 2 3 3Other professions 16 16 10 10 10 17 17Secretaries /e 10 13 10 13 14 15 16Vocational collegeundergraduates - - 8 9 36 24 19

Total 62 73 86 95 198 221 239

/a Generally, professional staff is comprised of those in Job Class VI andabove. Also included here are analysts/traders in lower levels.

/b Premerger, as of December 13.

/c As of September 30.

/d Postmerger, at year-end.

/e Most of the support staff are college graduates.

- 38 -ANNEX II

PHILIPPINES



Projected and Actual Lending Oerrations, 1978-81(P'OOO)

Year ending December 31 1978 1979 1980 1981Projected Actual Projected Actual Projected Actual Projected Actual/a

Approvals

Foreign currency loans (pesoequivalent) /b 63,750 88,125 120,000 100,040 142,500 46,178 172,500 110,926

Local currency loans 7,000 3,870 10,000 7,730 13,000 25,250 16,000 18,900

Guarantees 8,000 - 8,000 26,250 8,000 31,875 8,000 18,000

Equity investments - - - 2,250 - - - -

Underwriting/private place-ments 12,000 23,500 14,400 152,800 17,400 - 20,800 9,700

Syndications 150,000 121,325 172,500 87,250 198,400 295,112 228,100 74,250

Total Approvals 240,750 236,820 324,900 376,320 379,300 398,415 445,400 231,776

Commitments




Gtuarantees issued 6,000 - 8,000 26,250 8,000 31,875 8,000 15,000

Total Commitments 48,750 91,995 134,300 136,270 155,200 103,303 188,200 106,179

Disbursements




Guarantees issued 2,000 - 7,800 26,250 8,000 - 8,000 18,750

Total Disbursenents 13,800 6,886 95,500 08,820 142,800 56,125 167,800 70,174

/a Prior to 1981, for PISO; 1981, for PISo Bank.

/b For projections, an exchange rate of P 7.50 = US$1.00 was use.{; for actuals, the following exchangerates were used: 1978 - P 7.5; 1979 = P 7.415; 1980 = P 7.6; 1981 -P 8.2.

-39 ~ ANNEX 12

PHILIPPINES



Summary of Operations, 1978-September 1983(P'OOO)

Year ending December 31 1978 1979 1980 1981 /a 1982 1983 /bNo. Amount No. Amount Ilo. Amount No. Amount No. Amount No. Amount

Approvals

LoansLocal 10 3,870 17 7,730 17 25,250 19 18,900 63 261,345 28 160,907Foreign 9 88,125 14 100,040 11 46,178 14 110,926 7 124,336 1 12,320

Equity investments - - 1 2,250 - - - - - - - -

Guarantees - - 4 26,250 4 31,875 3 18,000 - - - -

Underwriting/placements 4 23,500 6 152,800 - - 4 9,700 - - - -

Syndications 6 121,325 5 87,250 4 295,112 2 74,250 5 119,200 1 52,000

Total Approvals 29 236,820 47 376,320 36 398,415 42 231,776 75 504,881 30 225,227

Commitments

LoansLocal 9 3,870 17 7,730 17 25,250 19 18,900 53 244,895 24 143,275Foreign 11 88,125 14 100,040 11 46,178 11 72,279 9 76,816 4 17,632

Equity investments - - 1 2,250 - 2,250 - - - - - -

Guarantees - - 4 26,250 4 31,875 2 15,000 - - - -

Total Commitments 20 91,995 36 136,270 32 103,303 32 106,179 62 321,711 28 160,907

Disbursements

LoansLocal 3 1,500 13 6,100 20 14,815 17 13,710 17 133,114 25 65,305Foreign - 5,386 9 74,220 13 41,310 22 37,714 28 89,073 6 73,370

Equity Investments - - I 2,250 - - - - - - - -

Guarantees - - 4 26,250 - - 3 18,750 - - - -

Total Disbursements 3 6,886 27 108,820 33 56,125 42 70,174 45 221,187 31 138,675

/a Prior to 1981, for PISO; 1981 and thereafter, for PISO Bank.

/b As of September 30.

- 0 AN 13

P3SO DmELOePM,T UNF (LOAN 1 5S-Ph)

PxROJCT COMPLETZON REPORT

Gh,racterlstics of Laaas ADroved, 1978-Septeptber 1983* _ _ ~~~(8'O00)

3978 1979 3980 19R1 1982 - l8a8 az of tX i t ot t of of

Rn. Anount total Sn. Amo.nt total No. Amount total No. Aoout total So. Anount tot.1 'lo. Amo-o,. t1t.a

Sectoral O)stribu"tlohitufattortog

F,od nao-,e,ct.rrS I 50W G1.S 3 1,5to 1.4 2 3,550 5.0 9 41.900 12.t 13[ 03.88t 26.9 14 70.242 43. STexttle products ' 5.625 6.1 - - - 2 5.0S 0 7.1 2 1,200 0.9 -_ _ _ _ _Apparel and other ft1tshed products 2 1.000 1.1 1 400 O.t - - - - - - .1L,xber and wood prod-ct. - - 2 850 0.7 1 1,400 2.0 1 800 0.6 2 3.700 I.t _ _ _vurnlt.re *nd fixtor.. - - - -- - - - 8,100 2.1

Paper and paper prodocto 2 4.,75 5.1 1 500 0.S 2 7,525 30.5 -

te.th-r ind leather prA.doer 1 1,125 1.2 1 503 0.5 - - _Ithber prodortt 2 35,501) 16.9 3 22.875 21.2 2 7.525 30.5 - - - I 1.6S0 n., _ _ _fhe,hl.03 prod,IctE 5.995 6.5 2 4,630 4.3 3 5,800 8.1 3 5.310? .1 7 40,40m1 In.5 4 53,500 3'.9

*b.c3

tndustrles - - S 7.165 6.7 8 13,150 i8.4 7 6,950 5.4 2 11.764 3.1 t 3,5330 , .9Other. 4 ,50nn 1.6 7 26,850 26.8 2 1,100 ,5 2 1.2on 0.9 7 36,966 9.6 - -

%Nototal Man.fact-.rlng I5 36,120 39.2 23 67,270 62.4 12 45,100 65.1 24 57,350 44.2 40 206.411 53.5 20 125.92 72.'.

E.tlxtt,e Iod,,st,rl-- - - 2 22,SQ0 2v. 1 2,500 3.3 3 24,005 26.0 - - - - -PN.hlc .1tilitles and -re"vces s 55.875 60.8 6 18,000 1 3 23.828 33.4 6 46,671 35.8 14 115.911 30.1 7 47,59S 27.5ftfterI - - - - - - - - - 16 63,539 16.4 2 743 n.1

.tal 19 91,995 100.0 31 107,770 .0 28 71,428 100.0 33 129.826

t00.0 70 385.681 100.0 29 11,Z?27 ln3.'

hegtooMetru 830 13 12 83,87, 91.2 14 41,465 42.2 18 45,000 63.0 15 42,575 32.9 54 264,998 68.7 22 131.4b5 77.)t,,-o4 And MIt. Fro,,I..c - - - I 500 0.5 2 2,500 3.5 - - - I 300l 0,1 - - -Ceotrol t4-0 6 2,sno 2.7 6 t4.2e' 13.5 - - - 6 3n.950 23.8 5 19,900 5,2 - - -Soother. Tagalog - - - 8 29,90. 27.7 5 9,100 12.7 6 7,700 5.5 1 16.20n 4.2 3 sO f..tX.rtl,eaftern Mindanao I 5,625 6.1 2 17.625 16.3 I 4S275 6.3) 3 21676 16.7 3 305,42 7.9 2 2.192 1.4V3s.yas - - - - - - 2 3),553 14.8 1 4,425 3.4 3 46.4.30 12.0 2 13 3."n 7.56e,tero Mindldaoo - - _ _ _ _ _ _ - 2 22.500 17.3 1 7,26R 1.9 2 24.32n 14.0

T,tal t9 91,995 30n.0 31 107,770 100.0 2R 71,428 300.0 33 t29,826 100.0 70 385,681 13).n 29 171,227 3no0.

Type of Projectt:, Z 3.875 4.2 16 16,165 I3.0 5 12,1S 0 17.0 1In *9.605 38.2 4 25.525 6.6 2 I.SOO 0.9Expaosior. 17 M.R120 95.8 ?5 91,605 85.) 21 59,278 87.0 23 80,221 63.8 SO 296.837 17.0 25 ;71,487 99.0oth., _. - _ _ - 36 65.339 16.4 2 240 A.t

Total 19 91,995 300.0 31 1n7,770 1304.3 28 71,428 300.0 13 129.926 £00.0 70 385,6RI 100.0 29 173,227 I0'..n

Sti. of I-ra,l5p to ' 0.s5 .1 I3I.. 3 R70 0.9 A 1.23.) 1.1 I 95O I3.S 3 1,200 (.9 24 65.443 17.0 a 1,507 .0p 1. 5 01!31cr - P 1.0 o3ll13o 6 1,000 3.3 13 6.500 6.0 4 31350 4.4 It 8.700 6.7 4 2,230 n.6 - - -

Y !.. .10a1It - p 2.5 atI3It3 3 S,625 6.1 3 7.290 6.7 33 26,700 37.6 7 11,163 8.7 16 31,975 8.3 7 t4,SSO R.4f 3.5 .IlIto. - P 7.0 dil10n 5 18.750 32n.4 6 12,a40 30.5 7 33.128 46.4 4 1t,05n 12.4 5 22.300 5.8 J 14.850 8.6P 7.0 .111t1- - p 35.0 .111t3n I 35,03n 16.1 5 fn.0f01 55.7 1 7.51m I3n.5 8 92,513 71.3 17 3R7,733 48.7 10 112.321 64.4Over P 35.0 ,,ll1o- 2 48,75v 53.0 - - - - 4 76,002 19.7 1 30,0no 17.3

Totat i9 91,995 t04.0 33 3074770 300.0 2n 7i,429 100.0 33 129,826 300.0 70 3R5,641 3010.0 2° 173,227 t00.

6,erage sire of bce. 4.,R2 7,4S6 2.551 3.93$4 55O 5.973

type if loa6Forelgo crrre-ey 9 88.125 95.8 15 103,514n. 92.8 it 46, 78 64.6 14 1133,926 S., 7 124, 33 32.2 1 12,120 7.1Doartiz currency 10 3,870 4.2 t7 7 73n) 7.2 37, 25,250 35. 139 38,900 34.6 61 261.345 67.8 28 !61.9;17 92.9

Total 19 31,§9S 2o 1 33 ".7,770, 3.0 28 71,42R 0ln.r. 33 129.826 100.- 70 385,681 300.0 29 173,227 300.0

34.torlt? of 3.0cc,Le-8 than I yT.r - … … … … … … … … … … …56 199,943 51.8 7 53,130 30.73 - S yeara _ 2 Asti 0.8 3 300 *I.3. 4 6,000 3.1 4 40,525 10.7 14 59,957 34.85 - 7 yeore 11 30,995 37.n 16 32,945 37.n a 16.75n 23.5 S 3,750 2.5 9 12,800 3.3 5 23,800 11.57- IC ear. 4 11,625 13.6 4 19,575 1R.2 10 21,700 3a.4 14 53.853 4I.S 18 98.593 25.6 3 36.320 23.3oier In years 4 h9,375 75.4 9 74,4r3n 69.0 r, 32,678 45.7 30 68,243 52.5 3 13,820 8.8 - - -

Toral 39 91,995 1o.0 11 107,770 300.0 28 713428 033.0 33 t29,826 100.0 70 385,681 100.0 29 713,227 100,0

c As of S pt-oobev 3r.

41 -

ANNEX 14

PHILIPPItS

PI15 DEVELOPMENt 2WP8 (LOAN 1555-PO)

PROJECT COlPLETIOtl REPORT /

Projected end Actual Balance Sheets, 1978-81

19'7 1978 1979 1980 1981Actlual ProJeeted Actual Projected Actual Projected Actual Projected ActuaL/a Pre-ergerlb

AssetsCurrent AssetsCash 12,028 8,200 28,863 9.07S 20,845 9,950 19,239 11,025 3S,72S 31,117Short-term Investments /c 93,110 140,106 139,318 157,048 88,686 177,600 63.298 216,542 70,586 99.244Loans receivable - current portlon /d

Foretgn 3.455 9,034 7,477 10,846Peso 405 859 5,390 5,774

Subtotal loons recetvable-current portion 1,779 3.929 3,860 7,521 9.893 18,991 12,867 39.306 16,620 15,341

Accrued lncowe receivable 4,546 4,981 5,270 6,617 12,279 7,585 12,607 8,990 8,177 9,'22Other current assets 7,504 12,987 10,340 14,917 10,25n 17,t36 17,757 19,688 56.159 63,231Provision for doubtful accounts - - - - - (8,800)

Total purrent Asset 118,9b7 170,203 187,651 194.978 141,953 231,262 125.768 295,551 187,497 211,416

Long Term seetsLoans receIvable

Foreign 8,198 78,296 124,791 150,411Peso 1,745 7,445 24,153 119,682

Less: allowanee for doubtful atcconts (1,700) (3,000) (4,200) '25,970) (5,500)

Subtotal loans receivable 5,1 12,664 8.263 91,630 82,741 206,766 144,944 326,693 244,122 182,756

Equity investments - - 2,250 - 2,250 - 2,250 8,046Lels: all vance for doubtful accounts - - - - - - - - - -Property and equipFent (net) 725 908 1,231 1,200 1,535 1,600 1,S82 1,700 3,955 1,734Other assets 520 1,980 2,339 2,058 2,805 2,176 2,284 2,341 15,277 5,391

Totel Long-term Assets 6.562 15.S52 11.813 946888 89,331 210,342 151,060 330,736 21,482 197,927

Total Assets 125,529 185,755 199,464 289,866 231,284 441,604 276,828 626,285 453,101 409,343

Llabilitlem snd Stockholders' EquityCurrent Liabilties

Deposit lisbilitiesDeand - to -Savings - - - - - - - - 9,49 -Time -_ _ _ _ _ _ 9,660 -

total _ - - - - - 19,168 -

Accounts payable aad accrued expenses 8,842 11,886 7,400 13,669 12,798 15,719 7,440 18,077 16,280 14,231Short-term borrowings 83,480 117,995 140,197 136,151 84,808 154,307 80,415 176,760 156.703 1M3,131Loans payable - current portion 1,215 3,199 2,52Z 5,957 9,073 15,740 10,931 34,11R 16,657 1,094

Total Current LiablittIes 93,537 133,080 100,126 155,777 106.679 18i,766 98,786 228,955 208,808 168,456

tong-et, LriabilItiesForeign currency loans 7,529 73.757 111,666 150,411 147,187Peso currency loans 1,746 7,013 17,867 24.950 23,663

Total Long-Term LiabIltties 4,190 12,534 9,275 89,n71 80.,770 202,661 129,533 321,478 175,361 170,850

Stockholders' ISquityPaid-in caoital 23,609 31,587 31,610 38,595 31,752 38,595 36,749 55,854 54,668 57,202Paid-Ln surplus - - 2,00n - 2,011 - 2 - 11,761Reserves and unappropriated su plus 4,193 6,554 6,453 6,423 10,072 14,582 11,758 19,998 2,504 12,835

Total Stockholders' E.quity 27,802 40,141 40,06} 45,018 43,835 53,177 48,509 .5,852 68,932 70,037

Total Liabtlittes and Stock-holder Equity 125,529 185,755 199,464 289,866 231.284 441,604 276,828 626,285 453,101 409,343

G lenm LabiltcIesGuarantees outstaditng 6,605 7,888 9,466 9,612 3,520 15,527 1,125 20,850 22,354 22,354

/a Covers combined conditions of PISO Banic and PISO as of December 31, 1981.

/b Covers conditton of PISO as of December 13, 1981, prior to werger.

It Projecttons ace net of provisions for doubtful accounts.

/d Inc2udtr.g short-term loans.

- 42 -

AMMU88 15

PRIPIM.1818

PtSO DBVStWtN? 11N1 (LOAN 1555-Pl)

F80tECS COWItON RZPORtt

Scmatred Wlantc aeets, December 11 1978-82. *nd a, of Septembe . 1963

fanudttedAudited AudIted Adtted preoraer Audited Audited UrAudited

1918 1979 t980 1981 2 191l lb 1982 1983

Assetscurrent Assets

CasS 28.863 20,845 19.239 13,177 35.255 34.632 44,1N9InvestaoOt tn bonods. notes nd stocks 119,318 8s.688 61.298 99.244 70,586 98.,19 1671361Current portion of loans receivable /c

Feso 405 859 5,390 4,494 5.774 137J394 91.248Foreign currency lnane 3,455 9.034 7,477 tQ.846 10,846 25,468 25,468

Subtotal current portion 3,860 9.893 12.867 15,340 16,620 _62,862 116,716

Less: Allowance for doubtlal accounts - - - 8.8ft0 - 7.946 2,822

Net Loans Receivable 3,880 9.893 12.867 6.540 16,620 I1se916 113,894

Accrued Income receivble 5.270 12.279 12,607 9.222 8.177 26.060 38,354Pr.paid expenses and other current aasets 1.3s0 10.250 17,757 63.233 56.859 63,605 33.802

Total Current Assts 187,651 141,453 12.5,76 211,416 187.497 371.610 398W000

Long-Term Loan, ReceivableFeen I7nan 1,745 7,445 24.353 37,845 119,682 81'577 129,723Foreign currency Inoans 8.198 78,296 124.791 150.411 150,411 218,113 288,375

Subtotal long-tem Inans receivable 9.943 85,741 149,144 188.2S6 270e093 301,890 418,098

teess Allowance for doubtful accounts 1,700 3,000 4,200 S,500 25,971 14,728 10.110

Net Lomng-Term Loans Receivable 8.243 g2,714 164.944 182,756 244,122 287,162 407,988

Equtty anveatent and debt securities - 2.250 2.250 8,046 2,250 2.250 2.250Leg: Allowance for decline In market value of investment - - - - - -

Net Investeente - 2250 2.250 6.046 2.250 2,250 2.250

Otbet AssetsProperty and equtpment (net) 1,231 1.315 1.582 1,734 3,955 4,315 S.7276cqutred aserse - - - - _Property under lease (net)Other "smets 2,339 2,80S 2.284 5.391 15,277 58.270 39,252

Total Assets 199.464 231,284 276.828 409,343 453,101 729.607 853,217

LiUbilittes and Stockholders' Equity7rrent Liabiltites

Dpostt lieblittiesDemnd - - - 10 74.641 97,786Savingsg - 9,498 58,020 Sl123Tise - 9.660 185.698 198,792

Total - - - 19,168 318,359 347,701

Accounts payable snd eccrued expenses 7.400 12,798 7.440 14.231 16,280 17.169 19,445Ourrent portion of loan payable 2.529 9.073 10.931 1,094 16,657 25.468 79,586Short-taer borrowings 140,197 84,808 80.415 151.131 156,70:. 29.648 -

Total Current Liabilities 150,126 106.679 98.786 168,456 208,8Q0 390.644 446,732

Long-Tare Loans PayablePean currncy loane 1.746 7,013 17,867 23,366 24,950 18,648 42,379Foreign currency loan 7.329 73.757 11t.666 147,187 150,411 2$77281 276,948

Total LorgTerm Loene Ftyable 9,275 80,710 129,533 170,850 175,361 255,929 319,327

Stockholders' EquityPaid-tn capital 11,610 31,752 36,749 57,202 54.668 64,668 64.668Capital paid in excess of par value 2.000 2,011 2 - 11.761 11.761 11,761Retained earninga 6,453 10.072 11.758 12.835 2,504 6.605 10.729

Total Stocbholders' Equity 40.063 43,835 48,509 70,037 68,932 83,034 8t,158

Total Ltabtilties and Stockholders' EFutty 199.464 231,284 276.828 409.343 45M101 729,607 853,217

Continagent LiabtlttiesOnarantees outstandIng 9.466 3.520 1,125 22.354 22,1354 19.415 15,028

gUtiosCurrent ratio 1.253 1.33x 1.27x 1.26x 0.90x 0.91N 0.91xShort-term debt/equity ratio 3.75x 2.43x 2.04x 2.41x 2.22x 4.70x S.13xLong-term debtlequity ratio /d 0.53x 2.13x 2.92x 2.77x 3.11x 3.62x 4.75xTotal debt/equity ratio /e 4.21z 4.36x 4.73x 5.16x 7.44x 8.02x 8.968Debt service cover 3.8x 3.9x 1.9x 1.1 1.3x 1.6x 1.5xLiquid aegets/total assets 0.84 0.47 0.30 0.32 0.22 0.18 0.25

/a PISO' condition as of December 13, 1981./bCovere combined conditione of PISO Bank and PISO as of Decenber 31.1981.7 7ncluding abort-tare Ioans.

Including current aturtties of long-term debt pls outstanding guarantees.ie Including outstandtng guarantee.

WIEX 16-43 -

PISO DVSPm RANK (LONS 1555-PH)

PROJUCT ConPL8TloU RPORT

ProlecLed and Actuat Income Suttemnta, 1978-81(9'000)

1978 1979 1980 1981 IaPrjeaeted Actual Projected Act"a Projected Actual Pro .tet Actual Premergr

IncoeInterest income from:

Short-term taveastmeta, money merkatoperations 9,160 7,349 10,745 11,853 12.050 9,747 1S,.31 3,419 8,561

Long-term loans 1,607 496 8,696 7.346 24.Z03 13,859 42,330 4,734 27,784Dividend incom. fees. cqtnofstiw and other

Income 2,854 4,278 4,149 4,789 5,015 5,953 5.94S 1,651 3,932

Total tncoe 139821 12.123 23.590 23U988 41,268 29.559 6S.506 9,804 40,217

WxpensesOperating expenses /b 4.648 4.357 5.799 7,021 7,221 8,366 9,072 4.45j 7,850

Iacome Before tntereat and Other Inpen es 9.l73 7.766 17,791 16,967 34,047 21,193 54,434 5,348 32,427

Provision for doubtful accounts 2,000 2,000 2,400 2.500 3,200 4,000 4,000 365 3,300interest and otder expenes 750 1,249 5,739 9,188 16,968 9,433 29.782 3,092 25,782

taco*e Before Taxes 6.423 4,517 9,652 5.279 13,879 7.760 20,652 1,891 3.345

Taese end licen"se 1.746 - 12,050 - 2,367 - 4.082 315 Provisioa for income tax z112)/, (875)Ic 227 (128)/c 588

Net taVninas for the Peritd 4.677 4.62S 7.602 6.154 11.512 7.533 16.570 1,704 2,757

Ia The audited statemant of earnings for 1981 reflects the combined earitgs and expenses of Philippine Investments System Organization (PISO)from December 14-31, 1983 and PISO Bank from January to December 31. 1981. Prmerger data (unaudiced) reflect operations of PISO fromJanuary to December 13, 1981.

tb Operating expenses coasist of menpower cost. transportation Ard travel. represeatetion expense, deprecitation and amortiacton, printing andother supplies, postage, cable and tolephoan, Ilght and water, advertising and promotion, professional fees, charitable coatributions, andmiscellaneous expenses.

/c Tax credits due to substantial tax-free income generated.

-44~ -AN1 17

PHI.EtPPtINS

Pl'sJ tUP14r.AtPWA BANK (LOAN LWi'-P),)

P1Wt IFVT . lIi EW; kIFPt1NT

beSrvts-d ntrnet .;t oWv;wrr d(ld UAqptqsr,,t10(d k-taiard c'ar.iknast-r rhe Yinr v bitn.- ta I,abec 11, 3978-Ri. and oal*fbepcee6crS3 1s8

Unanudi tedAuldterd AtdtCt, Au-Jted eremSrger Audtted Aadited Itnaudlted

147k7 19?g 19983 1981 1981 ta 1982 1983

Intert.. I. .. tr.Ow .-lgttr t1.-n. 49i 7,346 tl,S49 23,544 4,734 42.206 54,499|1. L.r-s. lt. l u.qttt k.t .. 'r a l l nt .v o td shrt-terM o,bI,tav,ts ,340 11,t57 9, :1.7 8,Shl 3,420 20.357 8,025(.,nlOt.'t'.niz g,t l te,. -Mtticaentx, 'etc. 3,146 4.789 5,StS 6,9tq 1.014 8,122 9,953Other l-t..nt, 8112 t 418 1.582 636 6hS15 5,674

.tdq.t (."m, 12,123 23,§98 < 9,559 4ft, 277 9.104 77,400 28.151

FL .. c~ hpel ,nq Ftnatnrt itt t',j,tmflWS

lnt~r :t on t.--ttrwinrgLng -t-rrn m 4,87h 4,191 14.35', 1,515 20,746 16,453

51-rtit -t"rr t1249 4.312 1,'42 11,526 1,577 31,301 37.102fvi~t'., I. doubtful Acn-..uts Z,.o 4,5114000 4t 1 1' 365 1,793iinK chtfg4c and .t:mttment e.petw.. - - - - - - -

T.,t.,l I.t q..a1,6 13.4!1 79,082 3.457 53.840 53,555

t e l a.] Ad1,l1int ,tit-e Exp..sesSa1.ries and ortlec pZr..u,nel exprnses 4,(.7 S,9/: I ,t - 2,357 9.435 8.650D:pr. ItatLl.. Al 15) ,) . - 336 819 2,033Ot,et -svens.-e 1,t12 1, Pt9h !,645 - 1,763 7,704 9,237

Total Genralr1 and Ad,inlstrative Expenses 4,377 7, 021 It16#. 7.850 4.456 17,958 19,920

Total Expenses 7,.(1, 18,l9 I 2 36-.92 7,913 71,798 73.475

(let ILcome bel" Taxes .. 1 .279 7j'i. 3,343 1.891 5.602 4,676

taxes a,.4d Iltcens,', . 315 - -

Pr.vistO, tor inecome tax 114, 3a1 4 J,t 58se (128) 1,501 1,238

Ne-t I,-ene u} 6,t54 i,z3 2,757 },704 4.101 3.438

UInappruprtated tetafned earnints Ja bit t l onng 3>f ,ricw, 3,a993 6,453 10,072 - 800 2.504 7,291VbEat,.ing, .Approprt.ted tor repAiMent . lou- - - - - -Cash dt.vdenda (1,369) (2,$34) (I1, 7) -

Stu j. dividends - - (2,760) - - - -Reversal of ,pproprlatlon for CnotLigenltes '00 - - -"0

Unappropriated Retalarnd Karnlgs x4 tEnd of the Year 6,43l 10,072 11,754 Z 2.504 6.605 10,729

Percenrag. .,t AvLraAe T.oLat A-.eta 162,497? 215,174 Z54,056 343,086 364,964 591,354 791,412cross Iincome 7.4 11.1 11.6 11.7 2.7 13.1 13. 2LcFinancial expenses 2.0 5.4 5.3 8.5 t.0 9,1 9.067tross spread 5.4 5.7 6.3 3.2 1.7 4.0 4.17w

AgintIatrcttvle expenses 2.6 3.3 3.3 2.3 1.2 3.0 3.47;k1rovision for doubtful a,co.,tq 1.2 1.2 1.8 1.0 0.4 0.3lneure tax (M0ob) (0.4) C.1 0.2 (0.4) 3.2 0.2/cMet Ineome 2.8 2.9 3.0 0.8 0.5 0.7 0.67;

Net Income as a P'ercentage ,f;Average equltt l3.6 14.7 16.3 4.7 2.9 5.4 5.

4/c

Share capttal 16.8 19.4 22.0 5.9 3.7 6.9 i.677

la Covers operatlons of PISO Bank from January I - lec,hez II, 198) and VISO ftSe D)ecember 14-11, 198t. Unaedited preerger covers operattons ofP1l f r,,s Janory to Dv.eaehr II, 1981.

/b Err.oueous .. d3ust.ent s.,de ti retain,ed earntog,. a3 ftAinisc:

Beginning hal ance 6,61(5Add/lesa a.4justaeots 714

(48)FrnAnng SRInsee 7 ld§.

_Antuialtzed.

- 45 -ANNEX 18

PHILIPPINES

PIS0 DEVELOPMENT BANK (LOAN 1555-PH)


Cotlection PerformanceA 1979-September 1983 la lb

Amount falltng due Amount Z of collection onduring the year actually amount falling due

(including past due) collected (including past due)

1979PWincipal 1,814 1,814Interest 2,013 1,925

Total 3,827 3,739 98

1980TrFincipal

Past due 4 3Current 4,472 3,588

Subtotal 4,472 3,588 80

InterestPast due 88 -Current 11,909 11,656

Subtotal 11,997 11,656 97

Total 16,469 15,244 93

1981Principal

Past due 884 434Current 6,105 3,715

Subtotal 6,989 4,149 59

InterestPast due 341 174Current 16,971 16,234

Subtotal 17,312 16,408 95

Total 24,31J1 2n,557 85

1982'rFinc.pal

Past due 7,05hCurrent 18,619

Subtot;tI 25,675 13,713 53

interestPast due 6,476Current 27,455

Subtotal 33,931 26,803 79

Total 59,606 40,516 68

September 30 1983TnctpaIPast due 11,962Current 36,54h

Subtotal 48,508 23,568 49

InterestPast due 7,128Current 46,088

Subtotat 53,2_16 32,9hS 62

Total 1r1,724 56,533 56

la Medtum- and long-term loan portfolto only.7r 1979-81, for PISO; 1982 and thereafter, for PISO Bank.

- 46- ANNEX 19

PHILIPPINES



Analysis ef Loans in Axrears, 1979-September 30, 1983 /a(P7000)

December 31 Sep 301979 1980 1981 1982 1983

Clients in ArrearsTota client portfolio 70 89 206 684 675

Number of clients in arrearsunder 3 months 1 3 - 12 26As X of total clients 1.4 3.4 - 1.8 3.9

Number of clients in arrearsfor more than 3 months - 2 7 234 192As % of total clients - 2.2 3.4 34.2 28.4

Total clients in arrears 1 5 7 246 218As % of total clients 1.4 5.6 3.4 36.0 32.3

Principal Affected by ArrearsTotal principal outstanding 95,634 162,011 203,596 464,752 534,814

Principal affected by arrearsof less than 3 months 145 2,633 - 13,119 8,660

As X of total principaloutstanding 0.2 1.6 - 2.8 1.6

Principal affected by arrearsof more than 3 months - 1,962 3,769 54,629 88,988As % of total principaloutstanding - 1.2 1.8 11.8 16.6

Total principal affected byarrears 145 4,595 3,769 67,748 97,648As Z of total principaloutstanding 0.2 2.8 1.8 14.6 18.3

Principal affected by arrearsof more than 12 months - - 3,534 12,764 84,656As % of total princtpaloutstanding - - 1.7 2.8 15.8

Actual Amounts in ArrearsArrears of less than 3 months 88 1,030 1,189 6,071 9,228As % of total principaloutstanding 0.1 0.6 0.6 1.3 1.7

Arrears of more than 3 months - 195 2,555 16,393 40,431As % of total principaloutstanding - 0.1 1.2 3.5 7.6

Total arrears 88 1,225 3,744 22,288 49,659As X of total principaloutstanding 0.1 0.8 1.8 4.8 9.3

Arrears of more than 12 months - - 1,286 6,214 25,095As Z of total principaloutstanding - - 0.6 1.3 4.7

Ia 1978-81, for PISO; 1982 and thereafter, for PISO Bank.

47 AME~~~~~~~~~~~~~~~~~,N'FX 20

PHtLIPPINES

PESO DEVELOPMENT SANK (LOAN 1555-PH)


Comparative StAtement of Arrears Position, 1979-September 1983

As sf Wcember 3t 1979 1980 19M1 19R2 1983 laNumber of Number oif Number of Number of Stember o,fborrw ers Amotnt borrcwers Amount borrowers Amount burrwers Amount htrrowers Amount

Portfollo Status (PrincipalOutstanding)

Total Loan Portfolio

In gr4ce period 18 95,634 24 106,139 25 7 23596 98,230 69 157,666In repayment 52 65 55,872 181 609 364,271 596 372,254tinder litigation - - - - - - - - I' 4,894

Total 70 95,634 89 162,011 206 203,596 684 464,752 675 534,813

Of which affected byarrears over 3 months - - 2 1,962 6 3,769 214 54,629 192 AR,988

Restructured Loans IncludedIn Total Loan Portfolio

In grace period - - - - - - - - -In repayment - - - - - - - 1 1,190Under litigation - - - - - - - - - -

Total - - - - - - - - 1 1,190

Arrears Over 3 Months

Regular Loans

Pritcipal - - 3 182 21 1,651 219 11,140 205 22,317Interest - - 22 13 28 9n4 222 5,253 166 18,114

Total - - 195 21555 40,431

Selected Ratios (%)

Principal affected byarrears to principaloutstanding - 1.21 1.85 11.75 16.64

Principal drrears to prin-cipal outstanding - (.12 0.81 2.40 4.17

Total Arrears over 3 monthsto principal outstanding - 0.76 1.25 3.53 7.60

/a As of September 30.

- 48 - Attachment APage 1 of 6

COMMENTS FROM THE BORROWER

. MPISO Building. 853 PasaV RoadMakat. 3117. PhilippnesMCC PO 8ox 2270

Victot S. Barrios Telephones 818.1173. 818 5602Chairman and President Z88i 691 to 695

Cable PISOPHIL. MantiaTelex 63237 P)SO PN

October 18, 1985

Intemational Bank fco Reconstructionand Developwnt

1818 H.. Street, ii.W.Washington, D.C. 20433U.S.A.

Attention: Mr. Yukinori Watanabe)irectr, ariations ttValuation Departnent

Gentlemen:

We read with interest tne Project Cinpletiom Report cn PISO Bank-

Loan 1555-PH. We found the report very amprehensive and exhaustive.As requested, we would like to share with you some thoughts on certainitems covered in the report. For easy reference, we have indicatedthe pertinent paragraph number where we have some ecmments.

hIGHLIGSiar. Tio.

2 We wish to add that the unsatisfactory performance of the(Noted in PCR, page six subprojects was brought about by a number of factorsii, footnote 1) prinarily the worldwide recession, aggravated by the

extrenly unfavorable developments in the Philippineecmoncny.

4 There are t1ree important points which we would like tobring up and these are:

a. Our discussions with our clients and our own assess-ment indicate that the main reason for the severeliquidity and, in scme cases, solvency problems ofa number of PISO's clients is the material1y adverseenvironment which characterized the Philippineecocnmy during the last few years. As can be gleanedfrom the economic indicators presented in Schedule 1,the country's economic condition during the last fewyears has been the worst ever in recorded history.


("Overly" has been deleted b. We take strong exception to the observation that thein PCR. PISO Bank's appraisals of the projects were "overly optimistic"observation is noted in and that consequently, "unrealistic operationalPCR, page iv, footnote 2.) performance expectations" were made. We wish to point

out that the projection on the operational and financialperfori ce of a number of subp jects appear to be"overly optimistic" when ompared to the projects t

performance during the last few years because thePhilippine eoonomy covering this period nas been ina major slump. The scenario has changed significantlyfrom the time the appraisals were made - 1979-1981, inthe case of IBRD projects The political and econamicproblems the country has been experiencing during tnelast few years are grave, with severe market ccntractioncoupled with high inflation rates, high interest costs,and labor instahility. No one could have foreseen acrisis of this magnitude.

c. Developnent projects, involving new enterprises or newentrepreneurs, such as those financed in line withencouragement from multilateral institutions, are highlyvulnereble to pressures from the econmic environment.These companies do not have the necessary ingredientsfor resiliency. Their markets a not yet well establishedand manageient experience and expertise is untested. Inontrast, established firms are able to withstand outside

pressures and adapt easily to the changing environmentbecause of their inherent strength and depth of resources.

($5.5 million (or 37.9%) of loan This has been the main reason for pursuing lendingsproceeds under Ln. 1555-PH did in re7at.'ely larger and established firms. We would havefact go to two telephone wanted to include m3re of these types of accounts in ourcompanies which are considered portfolio as additional buffer in case of adversity andlow-risk borrowers by PISO Bank. unexpected difficult times such as that experienced by theIn addition, all but one of the Ph.iliopines in recert years. It will be noted that thesetwelve subprojects financed firms omntinue to perform well even under adverse cond.tions.under Ln. 1555-PH(accounting for Hbwever, our multilateral creditors were not too95% of loan proceeds) were enthusiastic about these types of loans.undertaken by established firms(refer to Annex 4). As indicated in In 1980, we had seriously considered a $5.0 millionAnnex 13, the vast majority of IBRD loan to the largest telephone company, a low riskfunds approved during the period borrower. However, we were dissuaded frcm pursuing1978-Sept.1983 went to establish- the project given the issues, relating to establisheded firms for expansion purposes, businesses, surrounding the oorparable subproject financed.with public utilities accountingfor 32Z of total funds approved(also see para. 70.06 of PCR).)


We also presented in 1981 a proposal to anothermultilateral creditor for a $2.0 million loan to theleading diversified construction company (the only majorone still making money'- The proposal was notfavorably acted upon by the multilateral institutionwidch deemed the company nondevelopmental in nature.

If these two loans were granted, they wouldrepresent a substantial portion (approximately 13%)of our portfolio and would have significantly improvedthe portfolio's overall quality and performance. Itwill be noted that these two companies continue to beamong the prime borrowers with excellent paymentrecord.

In early 1984, we started to consider grantingso-called non-risk loans (secured by deposits orcomparable assets), as given the harsh economic conditions.However, our creditors disoouraged us fron givingthese types of loans, since these were not deemeddevelopmental and we were urged to absorb credit risks.If we had been allowed to pursue these loans withprime collaterals, the quality of our portfolio wouldhave greatly improved.

We wish to emphasize, however, that we continueto actively pursue small and medium sized loans todevelopment projects. As shown in Annex 13 of yourreport, 63% of the loans granted (in texms of number)during the period 1979-1983 were either small ormedium sized with amounts of P3.5 million or less.

S One of the major points raisea in this paragraph and(The PCR covers the period 1978- in a few other sections in the report proper was thatSeptember 1983, during which time the growth of PISO's portfolio was very rapid. Wethe substantial increase in PISO/ wish to clarify this point and state that a substantialPISO Bank's portfolio was not portion of the increase in the portfolio was broughtbrought about by asset revaluatioa about by asset revaluaticn due to the sucoessivedue to successive increases in the increases in the foreign exchange rate, during theforeign exchange rate. In US$ period 1982 to 1984. The corresponding growth ratesequivalent, loans receivable in- (net of the increase due to revaluation) are ascreased from 0.96 million as of follows:December 30, 1977, to 48.14 millionas of September 30, 1983.)


Pbrtfolio Growth(Amhnts in P000)

Actial EjSUMS Revaluation AdiustedEj&!msLparr,Receiv- GrowM Adjustnent Loars eceiv- Grwth

able Rate (Cumulative) able Rate

1981 286,713 - - 286,713 -

1982 464,752 62.1% 14,057 450,695 57.2%1983 661,432 42.3% 95,795 565,637 25.5%1984 861,389 30.2% 255,907 605,482 7.0%

Avenage Annual GrowthRate 44.3% 28.3%

The above figures wold show that the recent realgroth in PISQ's portfolio has, in fact, been nmderateat 28.3% per year n the average.

REPORT PROPERPar. No.

5.4 The two teleccmummcation coapanies referred to and}Rlbberrld, Phils., Ir&., a large footwear company,which are clients of PISO, are good examples ofestablished firms serving as PISO's "saving grace"in these difficult times.

6.04, 6.09 The modular type of organization was implementedprimarily to enoourege campetition among the differentmarketing groups. PISO was aware of the fact thatalthough the nxduiLar type of organization encouragescompetitior., this might be achieved at the expenseof output's quality. As a safeguard, therefore,the Management Investment Committee (MIC) wasconstituted. The MIC is a camittee ocomposed of topmanagement people, including the heads of thedifferent operating groups. It is charged withreviewing all project appraisal reports and approvingthe corresponding loan proposals prior topresentation to the Board.

Attachment A-52- Page 5 of 6

6.05, 6.06 As indicated by the 1984 Joint IBRD/ADB/Apex JointMission in its Aide Memre, the interim arrangementinstituted after the departure of the six keyofficers of PISO have since been regularized. Ihemajor positions vacated have been filled throughinternal pramotions and new recruits.

We thark you for the opportity of sharing cur thoughts an someof the points raised in your repot.

Best regards.

Very truly yors,

cc: Mr. Placido MapaPresident, Philippine Natioral Bank

Mr. Eduardo CorpusAsst. Director-General, National Ecomanic

and Developnent Authority

Mr. Antonio MunozHead, CB-Apex


SCBEDULE 1

PHILIPPINESSelected Eccatcamic Indicators

1979 1980 1981 1982 1983 1984

Real GNP (1979=base)Level (F' Million) 88,736 92,629 96,041 97,539 98,767 93,345Grxwth Rate 6.82% 4.39% 3.68% 1.56% 1.26% ( 5.49%)

Real Per CapitaGNP (1972=base)Level (FP Millicn) 1,844 1,917 1,939 1,912 1,899 1,795Growth Rate 4.09% 1.75% 1.15% (1.39%) (0.68%) (5.48%)

Real GNP of Manufac-turing Sector(1972-base)Level (t Million) 22,239 23,175 23,959 24,535 25,108 23,732Growth Rate 5.36% 4.21% 3.38% 2.40% 2.34% (5.48%)

Real GNP of ConstructionSector (1972-base)Level (P Million) 7,121 7,139 7,830 8,079 7,689 6,214Grcwth Rate 20.43% 0.25% 9.68% 3.18% (4.83%) (19.18%)

Real Gross DbmsticCapital Formation(1972-base)Level (F Million) 26,336 26,609 27,220 26,267 25,029 15,462Growtih Rate 14.06% 1.04% 2.30% (3.50%) (4.71%) (38.22%)

Xnflation Rate-Philippines-All Items(1978-100)Index I17.5 138.9 157.1 173.2 190.5 286.4Annual Rate 17.5% 18.2% 13.1% 10.2% 10.0% 50.3%

Unemployment Rate(4th Quarter) 3.5% 4.3% 5.2% 4.4% 4.6% N.A.

Underemployment Rate(4th Quarter)(Underemployed aspercentage of employed) N.A. 10.8% 15.6% 17.2% 15.5% N.A.

Sourzes of Data: Philippine Statistical Yearbook 1984The National Income Accants CY 1982-1984Current Labor Statistics, Labor Statistics Service,Ministry of L-Ibor and E£ployment

Attachment BPage I of 2

REPUBLIC OF THE PHIUPPINESNATIONAL ECONOMIC AND DEVELOPMENT AUTHORITYc W) NEDA sa Pasg, Amber Avenue

Pasig, Metro Manila

Cable Addros: NEDAPHIL

COMMENTS FROM THE BORROWER TPOs." 419-G.3 toC 5

S November 1985

Mr. Yukinori WatanabeDirector, Operations Evaluation Dept.The Wlorld Bank1818 H Street, N.W.Washington, D.C., U.S.A. 20433

Dear Mr. Watanabe:

Re: Project Completion Report - Philippines: PISO DevelopmentBank (Loan lSSS-PH)

Thank you for sending us a copy of the abovementioned report and forIlowing us to give our comments.

Overall, we think that PISO has performed very well relative to theexperience of other DFIs and in the context of the extremely un-favorable economic environment over the last four years, and further,considering that it is the first Bank loan to PI90 and that PISO under-went a major reorganization during the period of project implementation.

Rate of Utilization (Para. 5.01)

PIS0 Bank was able to comit the Bank loan nine months ahead of theexpected full disbursement period. We think that this unexpectedly

(Noted in PCR, fast perfonmance could be related to the modular organization whichpage 5, encouraged competition in the marketing of PISO's services, including

footnote 9.) long-term project lending (para. 6.04). The PCR, hewever, identifiesthis to be the main reason for the uneven quality of PISO's appraisalreports and the lack of rigorous analysis of and critical judgment onclients' project proposals. Based on Annex 8, Table 2 (Status andHlistory of the Twelve Subprojects), there seems to be validity inthis view. Hfiowever, it is not only the project proposal per se thatneeds closer review but also the overall robustness of the proponent.

(Regional diver-sificatin was On Sectoral and Regional Distribution (Para. 5.04)

objective in Eighty-two per cent (82%) of the subproject financing was concen-PISO's Policy trated in Metro Manila. This would be expected if PI9Q operationsStatement, and were largely in or around iMetro M4anila. There appears to be nowas noted in particular concern at appraisal for efforts at regional dispersalparas.3.05, of investment or mention in the PCR of the extent of PI90's branch4.34 and 4.36 operations outside Metro Manila.

of the SAR).(The lack of branch operations outsideMetro Manila has been incorporatedin PCR, para. 6.07)

55 _ Attachment BPage 2 of 2

Project Appraisal (Para. 6.09)

The PCR observed that PISO's appraisal of subprojects tended to beoverly optimistic (particularly about estimates/evaluation of projectimplementation timetables, contingency provisions for possible costoverruns, and market prospects). Again, while the factors identifiedto be contributory to the uneven quality of appraisal may be valid,certain factors may be largely unforeseeable such as those associatedwith delays. In fact, reasons given for the delays are conmonly en-countered in public investment projects as well despite prior expe-riences of executing agencies.

Conclusions (Para. 8.02)

We agree with the PCR that the Bank also could have reviewed sub-projects more critically at appraisal and during supervision consis-tent with the provisions of the Loan Agreement (Article II, Sec. 2.02(a), (b); Sec. 2.04 (a), (b); and Article IV, Sec. 4.01 (a).)

We hope that the above comments will be useful for the final evaluationof the project.

Best regards.

Very truly yours,

AssiZstant Diredtor-General

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PROJECT COMPLETION REPORT PHILIPPINES PISO DEVELOPMENT BANK · PDF fileproject completion report philippines - piso development bank ... piso development bank (loan 1555-ph) project