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The World BankFOR OMCIAL USE ONLY

Report No. 6518

PROJECT COMPLETION REPORT

PAKISTAN: PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (PICIC)

(CREDIT 1019-PAK)

December 1, 1986

Industrial Development and Finance DivisionSouth Asia Projects De?artment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$ 1.00 = Average 1980 Rs 9.90US$ 1.00 = Average 1981/84 Rs 12.30US$ 1.00 = Average 1984/85 Rs 14.80

ABBREVIATIONS

ADB - Asian Development BankBEL Bankers Equity LimitedBMR - Balancing, Modernization and ReplacementDFI - Development Finance InstitutionGOP - Government of PakistanIDBP - Industrial Development Bank of PakistanIiC - Industrial Investment CreditHOI - Ministry of IndustryNCTE - National College of Textile EngineeringNDFC - National Development Finance CorporationOED - Operations Evaluation DepartmentPBC - Pakistan Banking CouncilPCR - Project Completion ReportPICIC - Pakistan Industrial Credit and Investmeat CorporationPPAR - Project Performance Audit ReportTIRDC - Textile Industry Research and Development Center

FISCAL YEAR

PICIC January 1 - December 31GOP January 1 - June 30

THE WORLD BANK FR oF US ONYWashington. D.C. 20433

U.S.A.

Ofic of DMect(*-CewiOpwatwo tvattFn

December 1, 1986

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report - Pakistan: Pakistan Industrial Creditand Investment Corporation (PICIC)(Credit 1019-PAK)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report - Pakistan: Pakistan Industrial Credit and InvestmentCorporation (PICIC)(Credit 1019-PAK)" prepared by the South Asia RegionalOffice. Under the modified system for project performance auditing furtherevaluation of this project by the Operations Evaluation Department has notbeen made.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their oMcial duties. Its contents may not otherwise be disclsed without World Dank authorization.

FOR OMCIAL USE ONLY

PROJECT COMPLETION REPORT

PAKISTAN: PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (PICIC)(CREDIT 1019-PAK)

TABLE OF CONTENTS

Page No.

PREFACE ***********..................................................***,***** i

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

HIGHLIGHTS .............................. ........................ iv

I* INTRODUCTION .* .......................*.................. 1

II. THE ENVIRONMENT 1

- General ..** ......*........................................ 1- The Industrial Sector 2........... .......*......... ... 2- The Financial System .......................................0 3

III. PICIC'S ROLE AND BANK GROUP OBJECTIVES ..................... 5

- Background ...... .�.. 5- Objectives of Bank Group Assistance ................ 5

IV. UTILIZATION OF THE IDA CREDIT ...**.*......* ....... *. 7

- Rate of Utilization *....................................... 7- Subproject Review Process 9........... ........... .. 9- Characteristics and Performance of Subprojects.............. 10

V. INSTITUTIONAL ASPECTS ,...............................e 11

- Background ...... 11- Major Institutional Problem Areas * ......................... 12- Institutional Achievements .............................,.. 13- Future Challenges ,......... 14

VI. OPERATIONAL AND FINANCIAL PERFORMANCE .... 1....6..............

- Operational Performance ......... ........................... 16- Financial Performance and Prospectso... ................... 16

VII. SUMMARY AND CONCLUSIONS ................. .................... 18

This document has a restricted distribution and may be used by tecipients only in the perfotmanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ANNEXES Page No.

1. Estimated and Actual Disbursements .............................. 212. Subprojects and Disbursements ................................... 223. Characteristics of Subprojects ................................. 234. Subproject Cost and Financing Summary ........................... 255. Procurement Procedure Review .................................... 286. Summary of Appraisal Review Process ............................. 307. Financial Performance of Subprojectso............................. 318. Economic Performance of Subprojects ............................. 329. PICIC - Projected and Actual Lending Operations 1979-1984 ....... 3310. PICIC - Balance Sheets 1980-1984 ............................... 3411. PICIC - Income Statements 1980-1984..............................* 3512. PICIC - Summary of Resource Mobilization 1980-1984 .............. 3613. PICIC - Summary of Collections and Arrears....................... 3714. PICIC - Comments Received from the Borrower ...................... 38

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PROWECT COMPLETION REPORT

PAKISTAN. PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (PICIC)-(CREDIT 1019-PAK)

PREFACE

This report reviews the implementation of Cr. 1019-PAK, which was theeleventh lending operation of the Bank Group for private industrial sectordevelopment in Pakistan, in which the Pakistan Industrial Credit and Invest-ment Corporation (PICIC) was the single intermediary. The report coversthe period from 1980 to 1985, during which disbursements under this Creditwere made. The IDA Credit of US$40.0 million was approved on May 30, 1980,declared effective on October 29, 1980, and disbursed until October 28, 1985.An undisbursed amount of US$3.2 million was cancelled on December 20, 1985.

The previous Project Completion Report (PCR) on Loans 961-PAK and1326-PAK, was included in a Project Performance Audit Report (PPAR) datedOctober 28, 1983. Subsequent lending operations for industrial investment,in which "CIC is a participating financial institution, (subject tospecific eligibility criteria) are the two Industrial Investment CreditProjects (IIC I and II) which are still under implementation. This PCR,therefore, covers the last lending operation with PICIC as single inter-mediary; it was prepared by the Industrial Development and Finance Divisionof the South Asia Projects Department based on a draft PCR prepared byPICIC and supplementary information, supplied by PICIC after the review ofthat draft by Bank Group staff. Comments received from the Borrower havebeen taken into account as appropriate in finalizing the report and arereproduced in Annex 14.

This project has not been audited by the Operations EvaluationDepartment.

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PROJECT COMPLETION REPORT

PAKISTAN: PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (PICIC)(CREDIT 1019-PAK)

BASIC DATA SHEET

KEY PROJECT DATA

Item (US$ million)

Credit Amount 40.0Disbursed 36.8Cancelled 3.2Repaid to IDA NilOutstanding to IDA 36.8

Economic Rate of Return (Subproj.) 16%-35% (Appraisal Estim.)Financial Performance (Subproj.) Generally UnsatisfactoryInstitutional Performance Improved

OTHER PROJECT DATA

Item

First Mention in Files 05/01/79Negotiations 04/07/80Board Approval 05/15/80Loan Agreement Date 05/30/80Effectiveness Date 10/29/80Original Closing Date 03/31/84Actual Closing Date 03/31/85

Borrower GOPExecuting Agency PICIC/MOIFiscal Year of Borrower 6/30Fiscal Year of DFI 12/31Follow-on Project Name Industrial Investment Credit I

Loan Number Credit 1439/Loan 2380Amount (mill. US$) 100.0Loan Agreement Date 01/84

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MISSION DATA

No. of No. of ReportMission Month Year Staff Weeks Date

Appraisal may/June '79 2 2 04/22/80Supervision Sept/Oct. '80 1 2 11/21/80Supervision August '81 2 1/2 09/17/81Supervision October '81 2 1/2 12/10/81Supervision 1/ April '82 2 1 06/17/82Supervision 1/ March '83 2 1 12/30/83 2/Supervision 1/ August '83 2 1/2 12/30/83 2/Supervision November '83 1 1/2 12/07/83Supervision August '84 1 1/2 10/15/84Supervision 1/ January '85 2 1 03/12/85Supervision 1/ June '85 2 1 10/10/85 3/PCR Mission October t85 1 1/2 PCR

1/ These supervision missions were part of missions on previous and suboequentlending operations involving PICIC; time shown is proportionate toCr. 1019-PAK.

2/ Staff Appraisal Report IIC I.

3/ Staff Appraisal Report IIC II.

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PROJECT CqoHPTION REPOtT

MAZISTAN:_ ?AKISTA INDUSTuIAL CEDIT AND INVMSlKENT CORP9MATION (PICIC)(CRBDT 1012-PAR)

HIGHLIGHTS

The Bank Group's eleventh direct lending operation to PICIC,Cr. 1019-PAK for' US$40.0 million for financing of private industrial sectorprojects, was made in May 1980 against a background of fundamental problems,which had developed in the late 1970s. During those years, Bank Group assis-tance had been aimed at re-establishing PICIC's institutional and financialstrength, through close consultation with the Goverwment of Pakistan (GOP).This collaboration resulted in the resolution of problems related to the lossof PICIC's assets in Bangladesh, systematic monitoring of PICIC's collectionefforts and GOP actions designed to provide an improved legal framework forthe resolution of PICIC's arrears problems. Additionally, under the previousdirect loan to PICIC (1326-PAK) action was taken to assist PICIC and GOP indeveloping rehabilitation schemes in the textile sector, vhich constituted asignificant part of PICIC's portfolio arrears (para. 12).

The objectives of Cr. 1019-PAK were:

(a) to strengthen PICIC's competitive position by broadening itsresource base in local currency, diversifying its lending activity,restructuring its organization and upgrading of staff (para. 13);

(b) to transfer recources in support of improved private industrialinvestment activity, following GOP's new economic policies(paras. 2 and 13); and

(c) to support specific follow-up work based on the findings of the"Werner Study" of Pakistan's Textile sector (para. 12).

The resource transfer was achieved at a slower pace than anticipated,the selection of subprojects vas more varied and did rot--contrary toexpectations-include a substantial portion of textile rehabilitotion andnew textile projects. This reflects more a misreading of actual subsectoralcredit demand and sources of financing than a wrong selection process byPICIC, which in fact, was able to utilize Bank Group funds for a moredesirable diversification of its portfolio (paras. 15, 16 and 35).Subproject experience has been mixed. Long implementation delays, costoverruns, and lower than expected operating results plagued many of thesubprojects financed. Some have had positive results, while others are stillunder implementation. Kajor factors affecting this performance were bothinternal and external to the subproject. Internally, they were handicappedby sponsors" delay in completing legal formalities and implementing theprojects according to schedule. Externally, they suffered from the de-linking of the rupee from the US dollar, which increased most local costs and

affected adversely some foreign costs. Finally, in some cases market condi-tione and the effects of local aud internatlonal ecoomic developments weremisjudged at appraisal. Less than satisfactory resource management on thepart cif PICIC, with respect to the IDA Credit, resulted in cancellation ofUS$3.2 million despite an extension of the closing date by one year(paras. 15-16). Except for insignificant disbursement of funds for twotraining institutes, utilization of the technical assistance component fortextile training by GOP was not achieved. The Bank Group clearly misjudgedthe readiness of all parties required to move ahead on textile training toimprove labor productivity, and output quality within the prescribedimplementation period (paras. 17-18).

The institutional objectives of restructuring PICIC's organization,consolidating its financial position and arresting the deterioration in itsloan portfolio as well as in its staff resources, were achieved during theperiod 1981-84. Strong support from GOP and increasingly more cooperativeinterplay becween PICIC and the Bank Group in the resolution of criticalmuana.ement issues contributed to a fundamental institutional turn-aroundduring this period. Organizational changes subsequently made, have beensteps in the right direction (paras. 29 and 31). In the area of financialviability, PICIC's financial position since 1984, including its collectionperformance, has considerably improved. Old arrears, which are adequatelyprovided for, are beginning to become less important to PICIC's financialstatus (paras. 34-37). PICIC's participation in the subseqn:ent multi-institutional Industrial Investment Credit Project (IIC-I - Ln. 2380/Cr. 1439-PAR) approved in December 1983, has so far been encouraging.PICIC's managesent should now be able to move from crisis management tostrategic management. PICIC's internal organizational improvements have madesufficient progress to pursue business promotion with a more diversifiedclientele. This will require further strengthening of management systems andstaff resources. Continuation of competent management with clear operationalgoals is a prerequisite for PICIC's full recovery from past weaknesses. Thestrategy study to be financed by the Bank Group under the second IIC projectwill be useful for ongoing efforts of GOP, PICIC and the Bank Group to bringthe process of PICIC's institutional rehabilitation and restructuring to amore advanced stage than was possible during the implementation period ofCr. 1019-PAK (para. 33).

Several lessons can be learned from this project:

- Fundamental changes in the institutional structure and managementapproach of established government-controlled institutions, can onlybe achieved through strong commitment and support on the part of thegoverAment aud require substantial supervision efforts on the Mart ofthe Bank Group;

- Multi-institutional lending operations are a more effective vehiclefor the broader institutional and sectoral objectives, for which thisparticular project could only play a transitional role;

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Significant preparatory work is required for sector-wide trainingprograms and more than general goverment commitment and privatesector interests are required for their execution; and

Appropriate development of project implementation and follow-upcapacity of individual financial institutions, remains an importantobjective of industrial development lending operations and continuesto require serious attention during supervision (para. 45).

PROJECT CONPLETLON REPORT

PAKISTAN

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (PICIC)

(CREDIT 1019-PAK)

I. INTRODUCTION

1. Since the start of its relationship with the Pakistan Industrial Creditand Investment Corporation (PICIC) in 1957, the Bank Group has provided it witheleven loans/credits totaling US$273 millions, with important industrialdevelopment effects. In October 1983, the Bank's Operations EvaluationDepartment (OED) issued a Pro3ect Performance Audit Report (PPAR) covering thetwo previous loans to PICIC (Loans 961-PAK and 1326-PAK). This report coversthe period of the Bank Group's relationship with PICIC from 1980 to 1985 andfocuses on PICIC's institutional performance and the implementation of sub-projects and technical assistance financed under Cr. 1019-PAK. Subsequently,starting with the First Industrial Investment Credit (Ln. 2380/Cr. 1439-PAK)made in 1983, the relationship of the Bank Group was broadened to includesdevelopment finance institutions (DFI's); and comnercial banks in multi-institutional lending operations. The period covered in this report, therefore,represents a transition period, in which institutional objectives were parti¶llyaddressed in Cr. 1019-PAK and partially in more broadly designed operations andpolicy dialogue under the subsequent Industrial Investment Credits, prepared andapproved from 1983 to 1985.

II. THE ENVIRONMENT

General

2. Beginning in the late 19709, GOP embarked on a program of reforms toachieve financial stability, high growth and revival of private sectorconfidence. Progtess during the Fifth Plan (FY79-FY83) was considerable despiteadverse external factors, including a world recession, a 30Z dec.£e in theexternal terms of trade, and the Afghanistan crisis with its attendant require-ments for increased defense and refugee expenditures. GOP restored financialdiscipline by reducing budget deficits and bank borrowings and by enforcingstricter monetary policies. Improvements in financial management were combinedwith price adjustments, aimed at correcting economic distortions and a programof longer-term reforms in key productive sectors. As a result of these actions,GDP growth averaged over 6X; inflation rates declined gradually, private sectorconfidence increased, and a manageable balance of payments situation wasmaintained. Growth performance was good in industry, agriculture, energy andexports.

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3. Pakistan's steadily improving economic performance was interrupted inFY84, due to an unexpected downturn in agriculture and migrant remittances, andthe carry-over of inflationary pressures from PY83 with inflation levelsincreasing from 5.21 (FY83) to 91 (FY84). GDP growth in FY84 slowed to 3.51as a result of a 6.21 fall in agricultural value added caused by adverse weatherand pest attacks. However, manufacturing grew by 8.3% and services by 6.2%.Fixed investment rose by 6.51 with private investment increasing by 11.51.Budgetary policies in FY84 continued to be prudent. Current revenues and expen-ditures both increased by 201. As a result of stagnant exports and lowerremittances, the balance of payments deteriorated, leading to a reserve drawdownof US$113 million. Yet, considering the importance of agriculture, the achieve-ment of creditable growth in PY84 poinzs to resilience in Pakistan's economicstructure, which is partly the result of recent Government efforts to beginremoving structural imbalances in the economy.

The Iadustrial Sector

4. Government policies have contributed significantly to the recovery ofthe industrial sector. Since 1977, GOP has given greater emphasis to the roleof private industry. This policy shift is reflected in GOP's decisions todivest a number of industrial units, which were nationalized in 1972, openrestricted induastrial categories to private investment, and restrict publicsector invevtment to completion of ongoing projects and balancing and modern-ization needs. GOP has also relaxed investment sanctioning requirements andother industrial controls, and has increased investment and export incentivesfor private industry. The improved policy environment has been responsible fora resurgence of private sector confidence, which has led to growth in output andinvestment. Although in 1983 the poor cotton crop affected textile exports,with a few exceptions oth(r manufactured exports recorded strong growth. DuringFY84, manufacturing value added growth slowed to 8.31 in real terms compared toan average of 10.41 over the previous five years, due to sluggish growth intextiles, public enterprises and exports. Private industrial investmentachieved record growth, while public investment fell sharply, continuing thedecline characteristic of recent years. The performance of public manufacturingenterprises remained substantially better than during the late 1970s, althoughproduction growth and profits declined in FY84. Output growth was strong,especially in cement, some agro-processing and chemicals. Notwithstandingimproved industrial performance during this period, there remain importantstructural problems. High levels of protection and domestic regulations con-trolling new investments have limited industrial competition and the developmentof an industrial structure and import of foreign technology which retains con-siderable elements of inefficiency.

5. In July 1984, GOP issued a new Industrial Policy Statement (IPS). TheIPS reemphasizes the Government's commitment to a mixed economy, with theprivate sector as the "engine of growth" and the public sector as investor ofiast resort. The IPS emphasizes the need to rationalize the tariff structureand continue a realistic exchange rate policy to improve resource allocationand strengthen competitiveness of industry. Investment sanctioning limits were

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raised from Re 60 million to Rs 300 million in project size, and from Rs 30million to Re 50 million in foreign exchange requirements. The IPS also estab-lished standard, more liberal terms for obtaining foreign private loans andsuppliers' credits as well as for payment of technical fees and royalties. Allagreements conforming to these terms will be approved automatically and needonly be registered with the State Bank. Although improved industrial perfor-mance in the eighties has been noteworthy, sustained growth will depend oncontinued improvements in the incentive structure, including reduction in thelevel of protection, effective management of public enterprises, the developmentof the capital market and further relaxation of government controls. Inaddition, attention needs to be given to infrastructural deficiencies, espe-cially in energy, which are a major cause of project delays and low capacityutilization.

The Financial System

6. The financial system in Pakistan has evolved rapidly since independencein 1947. It consists of: five nationalized commercial banks (NCBs); seventeenforeign commercial banks (FCBs); four specialized financial institutions; ninedevelopment finance institutions (DFIs); several insurance companies; two leas-ing companies; two stock exchanges; and a housing finance corporation. TheState Bank of Pakistan (SBP), the central bank, directs and regulates the fina.a-cial system within overall policies set by GOP. The Pakistan Banking Council(PBC) oversees and coordinates the activities of NCBs and fulfills many of thefunctions previously discharged by commercial bank shareholders. The Ministryof Finance monitors the operations of the other financial institutions. Whiledomestic currency for term financing has not been a constraint in recent years,industrial investment has been hampered by weaknesses in the financial deliverysystem. The Bank Group' s assistance has, therefore, been increasingly linkedwith efforts to expand the number of channels for industrial finance, toencourage competition amoug various financial institutions and to strengthenindustrial lending capabilities of major financial intermediaries. With theaccelerated pace of industrial investment since 1981, most investments have beenfinanced through debt due to lack of equity finance from the formal capitalmarkets and a continuing reluctance of entrepreneurs to provide adequate equitycontributions for longer-term industrial investments. New pragmatic financingmodes are now being introduced as part of the Islamization process, 1/whichcould significantly improve the proportion of risk-bearing capital in industrialinvestments.

1/ As of July 1985, Pakistan's financial system and all domestic currencytransactions are based on new financing modes consistent with Islamicprinciples. Interest rates have officially been removed from the system.New financing arrangements, proposed or in operation, relevant to industrialfinance include: (i) mark-ups, a sale with a profit margin, which variesaccording to the term; (ii) Term Finance Certificates (TFCs), which would bebonds with a risk premium; (iii) Musharikas, designed to meet working capi-tal needs, in which profits are shared according to a pre-agreed formula;(iv) Modaraba companies, which operate as investment funds in accordancewith Islamic tenets; and (v) hire-purchase and leasing.

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7, Notable changes in the industrial financing system during the lastdecade have included: the creation of a number of non-bank financialinstitutions; the decline in the relative importance of established DFIs; andthe emergence of the NCBs as a force in term lending. Initially, the IndustrialDevelopment Bank of Pakistan (IDBP) and PICIC were the main institutions,providing term financing for private industrial development. However, in 1982the National Development Finance Corporation (NDFC), which was established in1974, was allowed to expand its clientele to include large- and medium-scaleprivate firms as well as public sector enterprises, to which it had previouslyexclusively extended its assistance. Among the DFIs, NDFC is now the largestindustrial lending institution in Pakistan. Other institutions such as BankersEquity (BEL) and the three joint venture companies (PAK-SAUDI; PAK-LIBYA andPAK-KUWAIT) also increased their role in term financing for private industrv.Due to historical developments, different legal structures and changing govern-ment policies, the DFIs became excessively compartmentalized and were con-strained in the range of financial services, which they could provide toindustrial clients. In response to Bank Group recommendations, GOP took anumber of measures during 1983-84 to rationalize previous government regulationsaffecting business activities of DFIs. This has strengthened the competitiveelement and provided sounder financial bases for PICIC and IDBP. As a result,the efficiency of the industrial credit delivery system has improvedconsiderably. New lending instruments under the Islamic system have provided agreater variety of financial assistance for private entrepreneurs and the effecthas been a more market-oriented approach to pricing of capital. Although someuncertainties remain about the evolution of the system, it appears that, on thewhole, Islamization is having a beneficial impact on the financial system.

8. The Bank Group's approach to industrial lending has now shifted fromindividual relationships with the DFIs (as reflected in the eleven direct lend-ing operations to PICIC, of which Cr. 1019-PAK was the last) to a focus on theindustrial finance system as a whole. The multi-institutional approach allows abroader and more effective policy dialogue with GOP. This also benefits theindividual institutions. Some of the recent improvements in regulations affect-ing DFIs have been brought about by a concerted effort to integrate the DFIsmore with the new financial system. In the case of PICIC, this meant, for4nstance, permission to participate in the interbank market to strengthen itslocal currency resource base; which in turn now enables PICIC to make workingcapital loans, and to offer a broader spectrum of assistance to its clients.

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III. PICIC's ROLE AND BANK GROUP OBJECTIVES

Background

9. PICIC was one of the first DFIs established with Bank Group and IFCassistance. The Bank made its first loan to PICIC in 1957. During the 1960s,PICIC developed into a well managed and experienced DPI. However, during the1970s, PICTJ faced a number of significant operational problems which affectedits viability. In 1974, a substantial portion of its assets were lost throughthe separation of Bangladesh, while repeated nationalizations affected nega-tively the investment climate and curtailed significantly its sphere ofactivity. In ad,ition, the repayment ability of many of PICIC's clients wasseverely reduced by the effects of the 1972 devaluation, which more than doubledtheir obligations. In 1974, Pakistan's commercial banks and life insurancecompanies were nationalized. This indirectly affected PICIC's character as aprivate institution as 49Z of its issued capital was for all practical purposescontrolled by GOP. The main effect of this was not necessarily direct govern-ment intervention in operational management, but more the impact of publicsector regulation in areas such as salary schemes for PICIC staff, cumbersomemanagement appointment procedures, and a resultant management approach ofincreasing reliance on the government as the problem solver for the institution.The deterioration in PICIC's operation was compounded in late 1974, by the poorinternational market for the important textile sector, which constituted asignificant part of PICIC's portfolio.

10. The tenth loan to PICIC (Ln. 1326-PAK), which brought the total amountprovided by the Bank Group to US$233 million, was made in 1976. During thepreparation and implementation of that loan a number of steps were agreed withPICIC and GOP, which inter alia focused on the problem of PICIC's liabilitiesregarding Bangladesh and improvement in PICIC's loan collections, necessary torestere PICIC's long-term creditworthiness. The Project Performance AuditReport (PPAM) on Loans 961-PAK and 1326-PAK of October 28, 1983, noted thatthese objectives were only achieved in part with PICIC's strategy of emphasizinglegal action against defaulters in the face of a legal environment unfavorableto creditors proving to be self-defeating and limiting collections. The con-tinuation of Bank Group support for PICIC through Cr. 1019-PAK was, therefore,based on the e.,pectation that GOP actions, beneficial to all financial institu-tions in Pakistan, would be taken to substantially improve PICIC's collections.

Objectives of Bank Group Assistance

11. In retrospect, it may appear that the juncture for a shift to multi-institutional lending linked to policy reforms at the sectoral level shouldalready have been reached in 1980 when Cr. 1019-PAK was made. While the creditwas a single institutional loan, the project had broader objectives relating to:(i) institutional reform linked to legal and sectoral reforms beyond individualinstitutions; (ii) assistance for rehabilitation in textiles; and (iii) resourcetransfer to private industry. However, it was premature to propose a multi-

institutional loan at that time, because it takes continuous involvement at theinstitutional level as well as at the macro-economic level to build theappropriate platform for effective dialogue at the sectoral level. This wascertainly true, given the circumstances in Pakistan's industrial and financialsector during the 1980-83, when encouragement of new, more liberal policiesrequired continuation of resource transfers through established institutionslike PICIC. The broader platform for policy dialogue was established in 1981,concurrently with the first Small-Scale Industry Project (Cr. 1113-PAR), whichinvolved the commercial banks as well as an established DFI (IDBP); and with thefirst Industrial Investment Credit (Ln. 2380/Cr. 1439-PAK) in 1983, whichstarted a series of policy-oriented lending orerations with multi-institutionalscope and specific technical assistance for organizational systems studies,staff training assistance and subsector studies.

12. The provision of US$40.0 million to PICIC under Cr. 1019-PAK, wasdesigned to provide US$37.0 million for Rubloans to private sector projects witha high degree of financial and economic viability. The main objective of theCredit, rested on the assessment that Bank Group resource transfer was neededthrough PICIC to support the improvement in the private sector investmentclimate following GOP's new economic policy. Continued Bank association withPICIC was expected to give the Bank Group an opportunity to actively engagePICIC's management in a process of institutional reforms to strengthen itsoperational system, which had become cumbersome, due to decision making proces-ses overly dependent on Board-level management consensus. Additionally,association with PICIC in selecting and appraising subprojects was expected tocontribute to further improvements in PICIC's appraisal capacity. A furthereffort was made to relate part of the projects' objectives to GOP's program forrehabilitation of the textile sector, prepared in response to the Bank-financed"Werner Study" on Pakistan's textile sector carried out under Ln. 1326-PAK.Specific follow-up to this sector work was included in the Credit, in the formof technical assistance for textile training as a separate US$3.0 millionproject component. 1/ In addition, financing of BMR textile projects wasassigned sectoral priority for the subloan component. The credit also includedfunding for a textile specialist to upgrade PICIC's activities in this sectorand to coordinate it with GOP's textile training program.

13. With respect to PICIC's future role in the evolving financial systemin Pakistan, it was recognized by the Bank Group that further strengthening ofits management system, active involvement of PICIC in arranging local currencyfinancing for its clientele, and more active promotion of investment oppor-

1/ It was also recognized at the time of appraisal that the urgent need fortextile training was closely related to labor-relations problems. GOP hadwanted an action program for management training, supervisor training andoperator training. With assistance from UNIDO and IL0, GOP had resolved toestablish and reorganize training institutions. Cr. 1019-PAK was to providesome funding for specific training programs of these institutions.

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tunities in key industrial sectors with rehabilitation and modernizationrequirements, would be necessary first steps in reactivating PICIC's role asthe private sector catalyst that it had prominently played in the 19609. Thechanged circumstances in Pakistan's financial sector also meant that PICIC'srole as an active participant in a more competitive environment--without cleardemarkation of areas of activity for individual financial institutions--wouldhave to be based on competitive strength rather than on a narrowly definedcharter. The objectives of Cr. 1019-PAK partly reflected these requirements.

14. It was also recognized that a start needed to be made to link widerinstitutional reform objectives and rehabilitation efforts in specificindustrial subsectors to GOP action programs. Cr. 1019-PAK, therefore, provideda link to subsequent multi-institutional lending operations, which address theneed to rationalize the structure of the DFIs and commercial banks, and to buildon policy changes relating to broader developments in the credit and capitalmarkets and specific industrial subsectors. In this sense, the broader in3titu-tional and sectoral objectives of Cr. 1019-PAK, have been carried over intosubsequent lending operations; their achievement needs to be judged in a longertime frame than that pertaining to the eleventh and last lending operation withPICIC as single intermediary institution.

IV. UTILIZATION OF THE IDA CREDIT

Rate of Utilization

15. Commitment of the credit component proceeded satisfactorily and fundswere fully comitted on schedule. However, subsequent sponsor withdrawal andexchange rate fluctuations left US$3.2 million to be cancelled. Disbursementswere also mixed. PICIC's projected and actual disbursements under Cr. 1019-PAlare shown in Annex 1. One year after effectiveness of the Credit only 14X hadbeen disbursed against estimated 21X; disbursements only picked up in the secondyear and three years after effectiveness, had reached 83% as against an adjustedthe original estimate of 951. In January 1984, an amount of US$2.25 million,earmarked for technical assistance to GOP for textile training, was reallocatedfor subproject lending to PICIC; increasing the amount available to US$39.25million. However, despite several extensions of the closing dates for submis-sion of subprojects and for disbursements only US$36.7 million was disbursed bythe effective closing date of September 30, 1985. Neither PICIC nor theMinistry of Industry were able to fully disburse the amounts made available fortechnical assistance, despite an extension of the disbursement period by twenty-one months. On closing, US$114,000 had been disbursed for technical assistanceto two textile training institutes--the Textile Industry Research andDevelopment Centre (TIRDC) and the National College of Textile Engineering(NCTE).

16. In the case of subproject financing, the underutilization of the Creditreflects slow disbursement and realization of foreign-exchange savings during

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project implementation, which left funds that could not be recommitted for newprojects within the available time for disbursement. The fact that threeprojects were authorized, but were not ready for disbursement by the finalclosing date in December 1985, indicates the need for more effective projectprogress monitoring on the part of PICIC to avoid leaving scarce IDA resourcescommitted without actual need. Development of appropriate statistical datasystems and monitoring procedures could significantly improve PICIC's resourcemanagement.

17. In the case of the training component, the original project conceptincluded the use of US$3.0 million for modernizing five existing traininginstitutions, and providing teaching aids and payments to foreign consultantsfor services to PICIC and to the Ministry of Industry (MOI). However, MOI didnot utilize the amount earmarked for advisory services to prepare a textiletraining program. In January 1983, after a delay of two years, MOI submitted atraining proposal prepared by the Textile Industry Research and DevelopmentCenters (TIRDC). IDA found that proposal unacceptable because of the timeneeded to disburse the funds, and because it involved institutions other thanthose that had been appraised for the purpose of the Credit. The trainingproposal also lacked a clear assessment of the training needs and priorities inthe textile sector. The Bank, therefore, in August 1983 decided to send at theBankis expense a training expert to Pakistan to redesign the training program,taking into account changes in circumstances that had taken place sinceappraisal in 1980. As a result of this reassessment a revised technical assis-tance allocation of US$750,000 was made for use on a 50:50 basis by TIRDC andthe National College of Textile Engineering (NCTE) on a 50:50 basis. Theremaining US$2.25 million was reallocated for on-lending by PICIC to privatesector mills f,r textile training expenses; which again proved to be a non-realizable objective. The private mills were not prepared to borrow from PICICfor training expenses, even at a concessional 3% rate of interest with a 7-yearsrepayment period. This led to the final reallocation of the US$2.25 million forsubproject lending referred to in para. 15.

18. The amounts re-allocated to TIRDC&and NCTE were also not fully utilizeddue to an arduous and lengthy process of preparing procurement documents in theSupplies Department of MOI. Out of the total allocation of US$750,000 onlyUS$114,000 was disbursed for a few items for laboratory equipment for TIRDC andNCTE; before the extended closing date of the Credit--other items had to becovered under other credits on an exceptional basis. The tangled history of thetraining component resulted in an unfortunate failure to provide any substantialassistance for textile training despite considerable effort and greatflexibility in subproject formulation on the part of the Bank Group. The mainfactor responsible for this failure was the lack of commitment to serious train-ing efforts on the part of the private textile mills and the OI. In the caseof the mills, this is related to the hesitancy of private owners to modernizethe labor force under present conditions in the sector. In the case of MOI, thedifficulty of executing a relatively small procurement program through MOIreveals the need to find more effective administrative arrangements for suchprojects in the future. It also shows that it is necessary to address training

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on a sector-wide basis outside a single lending operation in the context of aclearly defined GOP action program that includes other policy changes for afully coordinated subsector strategy.

Subproject Review Process

19. Thirty-six subprojects were approved under the subloan component of theCredit. Of these, 26 subprojects were approved by PICIC under the free limit 1/and were reviewed by Bank staff prior to approval. Disbursements of US$36.7million were made for 32 subprojects and 4 subproject authorizations totalingUS$2.1 million were cancelled at a later date; in three cases this reflecteddelays in the readiness of the projects for disbursement before the extendedclosing date and in one case withdrawal by the project sponsors. Prior Bankreview covered 28% of all subprojects financed and 66% of the total amount offinancing made available under the Credit. This is consistent wit'1 the expecta-tions at the time of appraisal with respect to the extent of prioz Bank reviewof subprojects (about 30% by number and 60% by amount). Although PICIC'spipeline at the time of appraisal included a large number of textilesubprojects, many were financed under other lines of credit or were withdrawn bytheir sponsors. Thus, only three textile subprojects were reviewed by Bankstaff with 25% of total financing for A-projects, which was considerably lessthan the 75Z of A-project financing expected to be related to the textile sectorat the time of appraisal. The total amount of assistance for textile projects,including subprojects approved under the free limit, was about 29% of the totalauthorized loans. Although 10 textile subprojects were included in the projectsubmissions under the Credit, the intended focus on financing textilerehabilitation and expansion/ modernization was not achieved, because the amountof funds used for this purpose was far smaller than had been expected. Bankreviews of only three textile project proposals also did not offer much oppor-tunity for more than routine analysis applied to any other subsector; thesereviews did not reveal any significant f4atures. Post implementation data onsix of the ten textile projects financed reflect mixed subproject results--threeare incurring losses and three are achieving higher financial results thananticipated. Three are still under implementation or in their first year ofoperations, and there is no available data on one subproject. On the otherhand, during 1980-1984 PICIC financed 18 other textile projects using a Chineseline of credit for eight subprojects, rupee funding from the SBP for threesubprojects, and other foreign currency lines of credit for seven othersubprojects. Fifteen projects were in spinning by way of addition or replace-ment of spindles, two were in weaving and one in garment manufacture; elevenprojects are operating satisfactorily, five projects are still to be completed,one is seriously delayed, and one has operating problems. Overall, it appears

1/ The free li^;t was US$6.0 million (aggregate assistance to each respectivecompany) except for textile projects. The free limit for textile BMRprojects was set at US$1.5 million; new subprojects in the textile sectorwere all subject to prior Bank review.

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that PICIC's experience in financing textile projects in recent years has shownpositive results. It is also apparent that the demand for foreign currencyfinancing for textile projects is relatively reduced, vis-a-vis the availabilityof domestic currency lines and the demand for Chinese equipment which is repor-tedly compatible with the quality of Pakistan cotton.

20. A summary of the overall experience with subproject operations is givenin Annex 6. Cnly four of the nine subproject proposals submitted to IDA priorto 'pproval were acceptable without additional information. Major weaknesses,however, were reflected only in two of the five subproject proposals on whichquestions arose during the review; these related to the financing plans, themarket forecasts and the project cost estimates of one new polyester plant and atextile BMR project. Economic rate of return estimates for the nine reviewedA-projects ranged from 161 to 35%; the financial rates of return were estimatedto be in the range of 15Z to 34Z. The selection of subprojects and the prepara-tion of project appraisal reports generally reflected an improving capacity ofPICIC's staff to appraise projects in a wide range of subsectors competently andwith meticulous detail. However, weaknesses in analysis, and realistic assess-ment of implementation time and market prospects continue to exist. Follow-upmonitoring and systematic processing of feed-back information during implementa-tion still needs to be improved, although PICIC has now taken action to addressthese concerns and they will be reviewed also during a forthcoming organizationand systems review under Cr. 1646-PAK.21

Characteristics and Performance of Subprojects

21. Distribution of subprojects among industrial subsectors is summarizedin Annex 3; it reflects a healthy diversification of portfolio additions with29Z for the textile sector, 23X for engideering and related products industries;17% for cement, ceramics and glass; and 14% for the chemical and petrochemicalindustry. The remaining 17% were in processing of agricultural and foodproducts, and in the manufacture of leather, rubber and paper products as wellas in the printing sector. The geographical distribution reflects continuingconcentration of projects in the provinces of Punjab (40%) and Sind (341); theshare of project finance of Baluchistan (241) is mostly accounted for byprojects in the industrial areas around Karachi.

22. Five of the thirty-two subprojects financed have not yet been completed.Only one project was completed on schedule; five projects had delays of sixmonths or less, six projects suffered delays of up to twelve months, and twelveprojects had implementation periods of more than twelve months up to three yearsin excess of original estimates. The aggregate average cost overrun was 291against appraisal estimates since one third of the total number of projects werecompleted within the original cost estimates. For the nine A-projects costoverruns ranged from 19% to 93% for seven projects; only two A-projects werecompleted without cost overrun. PICIC's role of financing of actual projectcosts ranged from 211 to 63% for A-projects and from 11% tL' 791 for B-projects.Only in three cases were other than IDA resources used for PICIC financing of

1/ For PICIC's views see Annex 14, para. 5.

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the projects to complement the financing plans. In 10 projects, PICIC had toreschedule repayments of its loans.

23. The post-implementation performance of the subprojects financed, revealsai mixed, but generally favorable industrial development impact. Since 8 of the32 projects financed are still in the implementation stage, the data base is notyet complete. Production datt on 20 projects indicate that the actual aggregatevalue added amounted to Rs 545 million compared to an estimated Rs 525 millionfor all 32 projects at the time of approval. Average initial capacity utiliza-tion was 70%, compared to an estimate of 65%, and the composite export figurefor half the numbe- of export-oriented subprojects was about 70% of theappraised estimate for all projects with export components. The total employ-ment created by 27 projects was 3,416 jobs, against an estimated 3,466 jobs, forall 32 projects financed. The total sales of 15 projects exceeded the estimatedsales for che same number of projects at the time of appraisal by 24%. On theotherhand, aggregate financial results of the majority of completed projectswere less favorable than had been foreseen, at the time of appraisal. Fiveprojects operated at a loss, while the 10 profitable projects had an averageyield on equity of 23%, as against the estimated average of 19% at the time ofappraisal for all subprojects. PICIC's ability to utilize performance data onsubprojects for comparative assessment of management and sector performance isstill limited. Appropriate development of monitoring systems and systematicassessment of client company performance in comparison to appraisal estimatesand sector data require more attention from PICIC's management. Improvements inthis area could significantly contribute to a more informed advisory role ofPICIC's staff with special sector emphasis; however, as noted in para. 20 above,these issues will be focused on during an organizational/systems review to beinitiated in November 1986.1/

V. INSTITUTIONAL ASPECTS

Background

24. During the 1960s PICIC's position as the premier supplier of long termforeign exchange resources for industrial investment in Pakistan became firmlyestablished. PICIC supported the development of new investment in such sectorsas cement, sugar and textiles. However, the 1970's were exceptionally difficultfor Pakistan and its institutions. PICIC was directly affected by the separa-tion of Bangladesh in 1971, the drastic devaluation of the Rupee in 1972, thenationalization of major private industries (including the commercial banks) aswell as the external shock of the increase in world oil prices and subsequentworldwide recession with its impact on Pakistan's textile export industry. Thetextile industry accounted for 401 of PICIC's portfolio, ant PICIC's clientsfound it difficult to meet the drastically increased obligations for foreigncurrency loans for which they were bearing the exchange risk.

V For PICIC's reaction see Annex 14, paras. 6-8.

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25. The difficult period of the 1970's tested the original concept ofPICIC's establishment as a DFI with the primary objective of financing theforeign exchange component of fixed investments in the private industrialsector. Although PICIC's charter was designed to allow it to function morebroadly in capital markets and in extending non-financial assistance toindustry, the major function of providing foreign exchange resources dominatedthe orientation of its management in the adverse circumstances of that period.At the same time, as PICIC became a captive of the problems resulting from theeconomic dislocation of the 1970's, its role in industrial finance also began tochange because of new circumstances in the financial and industrial environmentsof the late 1970's and early 1980's. The preeminence of institutional foreign-exchange onlending was reduced due to availability of suppliers' credit andincreasing inflows of workers remittances from the Middle East. At the sametime, new requirements for export financing and a broader range of financialservices, including provision of working capital funds, cash management servicesand leasing arrangements, evolved in the late 1970's, in the context of a revi-talized and more growth oriented private industrial sector. New financialinstitutions with broader mandates (such as NDFC, BEL, Pak-Libya, Pak-Saudi andPak-Kuwait) became active, while the commercial banks began to participate interm-lending and development of new Islamic financial instruments. PICIC'sshare of total industrial financing consequently dropped from about 20% in 1970to around 3% in 1982/83.

Major Institutional Problem Areas

26. The primary objective of Bank Group assistance to PICIC in the late1970's was to help restore its creditworthiness. As the PPAR ofOctober 28, 1983 pointed, this objective was accomplished when PICIC wasprotected from losses related to assets in former East Pakistan and when itsequity base and liquidity position were buttressed by infusions of governmentand State Bank funds. What remained as a serious financial problem at that timewas the high level of arrears on PICIC's portfolio, which continued to challengeGOP and PICIC management in subsequent years. As of June 30, 1984, PICIC'stotal arrears were Rs 1.58 billion, almost 50% higher than one year earlier, dueto a particularly bad year in the cotton sector in 1983. The Bank Groupexpressed its disappointment about the low collection rate of 52% of currentbillings and pointed out to GOP and PICIC that drastic measures were required toprevent PICIC from failing in its efforts of becoming a more vibrant and com-petitive financial institution again.

27. In reviewing PICIC's institutional performance, the Bank Group notedthat not enough attention had been paid to organizational matters and to therecovery effort; this was partly attributed to a prolonged period in 1981 whenthe position of Managing Director had remained vacant and to the fact that theinitial major concern for the Managing Director appointed late that year hadbeen to step up collections. For a considerable time, the Bank Group had alsourged GOP and PICIC to rationalize the management structure to improveBoard/Management interaction. It was further noted that PICIC did not havesufficient experienced junior level staff to fill higher level management

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positions. It was agreed with PICIC management that next to a more intensiverecovery effort, rationalization of PICIC's organization was the most urgenttask.

Institutional Achievements

28. Institutional achievements were the result of a concerted effort by GOPand the Bank Group, tolether with the As4an Development Bank (ADB), in a tripar-tite effort, to revitalize PICIC's managerial capacity, restore its financialhealth and provide the basis for more active participation of PICIC in thecountry's industrial development process. Changes in PICIC's management at theChairman's and Managing Director's level in April 1984, offered an opportunityfor renewed recovery and reorganization efforts. PICIC also participated in themulti-institutional Industrial Investment Credit (IIC) under which eligibilityfor access to Bank Group funds was conditioned by meeting specifically agreedcollection targets. Semi annual review meetings on collection performancecontributed to a more effective monitoring of progress in this area and offeredregular opportunities for discussion of specific actions to improve PICIC'sfinancial performance.

29. The unwieldy structure and composition of PICIC's Board, and some lackof clarity in the decision-making process, had for a long period adverselyaffected the effectiveness of PICIC's management. However, action by GOP tostrengthen the authority of PICIC's Executive Committee and that of the ManagingDirector removed previous operational difficulties.

30. GOP's contribution to the resolution of legal disputes on repaymentobligations of PICIC's clients, and the formation of a committee on sick unitswith effective decision making power, highlights the importance of stronggovernment commitment to,these institutional rehabilitation efforts. In mid-1984, the new appointees for the positions of Chairman and a Managing Director,therefore, found an improved, more effective management structure with increasedloan approval authority for the Executive Committee, now headed by the ManagingDirector as Chief Executive of PICIC. A number of other organizational changessucceeded in streamlining project approval processing. In addition, a SpecialProjects Department was created in December 1981 to analyze and restructureproblem projects. The department prepared relief packages for consideration bythe newly established GOP Committee On Sick Units (Beg Committee) and maintainedclose relations with the Pakistan Banking Council (PBC) and other financialinstitutions to ensure adherence to and fulfillment of various provisions andclauses of relief package agreements by the respective industrial units. Withrenewed management efforts to focus on the arrears problem these institutionalmeasures began to have a positive impact on the collection performance in thesecond half of 1984 (see para. 36).

31. In the personnel area, PICIC introduced new procedures with systematicperformance evaluation of staff, specific attention to career development andnew training efforts. These measures did arrest the previously alarming profes-sional staff turnover, which had been between 10% to 17Z p.a. during 1980-82 and

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subsequently was brought down to around 5.0% by 1983-84. The current situationappears to be stable as PICIC's management has brought a more forward lookingapproach into the institution that opens new prospects for junior level staffwith career expectations. Further progress depends on a systematic effort toupgrade the competence of PICIC's staff and to modernize systems and procedures.An Inspection and Systems Department was created in 1984 to evaluate, correctand improve existing operating procedures. The department is also monitoringimplementation of procedures by the operating departments; this will increas-ingly have an impact on the consistency of approach to operational processes inthe institution. Another area in which considerable progress has been made isthe computerization of accounts which was accomplished in record time and with ahigh degree of innovative skill. Further improvements in management systems,particularly on the project appraisal and monitoring side, can be achieved bydeveloping appropriate computerized processes for these activities based orin-house experience. PICIC's management is presently giving high priority tothis task.

Future Challenges

32. PICIC's management must now move from crisis management, throughconsolidation, to strategic management. During the last few years it has beenrecognized by GOP and PICIC management that PICIC will have to diversify andexpand its activities to strengther its competitive position. Based on a moreconsolidated financial position, a rationalized management structure, moremodern management processes, and higher quality professional staff withbroadened project experience, PICIC could play once again a leading role inprivate sector industrial financing. GOP's future role vis-a-vis PICIC shouldallow the full exercise of professional management to-reinforce its role as aninstitution with private sector objectives. PICIC's internal managementimprovements have made sufficient progress to set the sights of management on amore active strategy of business promotion. A new Planning and DevelopmentDepartment has been created to prepare project profiles for new and non-conventional projects. A Central Promotional Committee headed by a SeniorExecutive Vice President has been formed to direct the effort of diversifyingPICIC's project portfolio. For more effective coordination of appraisalactivities the Economic and Research Department and the Engineering Departmenthave been placed under the Executive Vice President in charge of the ProjectsDepartment. The Project Appraisal Committee has been reconstituted with areduced membership to achieve a prompter and more efficient decision makingprocess.

33. The results of PICIC's participation in the first multi-institutionalIIC Credit have been encouraging. They reflect continuing improvements inproject selection as well as a satisfactory rate of approvals, in terms of boththe rate of participation compared to that of PICIC's competitors and the rateof increase in PICIC's own lending activities (para. 35). Under the second IICProject, which was approved in January 1986, technical assistance funds arebeing provided to PICIC to carry out an organization study and product diver-sification assessment. Terms of reference for the study have been reviewed by

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IDA, invitations to bid have been issued by PICIC, and commencement of the studyis a condition of PICIC's participation in the Project. Establishment of anequity financing function would be considered under that study.

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VI. OPERATIONAL AND FINANCIAL PERFORMANCE

Operational Performance

34. PICIC's projected and actual lending operations for 1979-84, are sum-marized in Annex 9. Total annual approvals of foreign exchange loans, which atthe time of appraisal of Cr. 1019-PAK were expected to reach Rs 818 million byDecember 31, 1983, were only Rs 612 million at that date. Commitment in foreignexchange for 1983 totaled Rs 304 million equivalent against a forecast of Rs 686million; disbursements in foreign 3xchange totaled Rs 173 million equivalent asagainst Rs 550 million forecast in 1979. The pace vf operations only picked upin 1984 when it finally reached the levels of project approvals anticipatedearlier. Commitments and disbursements continued to lag behind due to a periodof unexpectedly slow business development for which the bad cotton year of 1983is only a partial explanation. A more important reason for the disappointingbusiness performance of PICIC during 1980-83 is the change in the environmentdescribed in paras. 7 and 8, PICIC's internal management problems and the narrowfunding base limiting its lending activity to foreign exchange loans for whichdemand was not as active, because of more ample alternative foreign exchangesources, such as supplier's credits and free foreign exchange from workers'remittances. During 1980-83, PICIC's cumulative project approvals, increased by48; this annual average increase of 16 projects stands out against a subsequentincrease in 1983-84 by 37 projects, with a total of Rs 1.0 billion of approvedassisLance, of which 12.6% was in local currency.

35. The year 1984 therefore marked a significant turning point in lendingactivity after three years of slow growth. There was also a notable shift inthe flow of assistance to the chemical and petrochemical group of industrieswhich in 1984 accounted for 50% of total assistance against only 15% in 1984.The share of assistance to the enginering sector increased in 1984 from 11% to17%, and that to the cotton textile industry from 4% to about 15%. Assistanceto food products and processing including the sugar industry, which hadregistered over 30% of total assistance in 1983, dropped to about 5% in 1984.The major share of projects approved were new projects or expansion of existingunits. Commitments and disbursements under Cr. 1019-PAK, could not benefit fromthis renewed lending activity because of the approaching closing date (March 31,1985).

Financial Performance and Prospects

36. PICIC's financial performance during .1980-83, was severely affected byits poor collection performance which reduced its liquidity position. In 1981,arrears reached Rs 1.5 billion (67% of PICIC's portfolio). Following the badcotton year of 1983 and the heavy proportion of loans to cotton textile manufac-turing enterprises, which were hit by drastic, unexpected price increases in rawmaterial, another peak in arrears was reached in June 1984, as of that datearrears were 50% higuer than at the same time in the previous year and againreached Rs 1.5 billion. However, in the second half of 1984, PICIC's renewed

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recovery efforts began to show results. Collections laiich had been 35% ofbillings in the early 1980s reached 73%. With strong support from GOP, the BankGroup and the Asian Development Bank (ADB) during the collection reviewmeetings, PICIC managed to reduce its arrears to Rs 1.1 billion or (35% ofportfolio as of December 31, 1984. If this rate of improvement in the collec-tion effort is sustained, PICIC's portfolio will become less and less affectedby problem projects of the 1970's. However, restructured projects could becomeproblematic, particularly if the economy slows down and working capital creditis tightened. PICIC needs to remain vigilant in the area of old and possiblenew arrears. Collection efforts on overdue accounts, particularly pre-1980s,should be carefully monitored, and liquidation proceedings should be pursuedagainst unviable firms. Cases under litigation reached a peak at the end of1981 with Rs 1.0 million in that category corresponding to 45 projects. Sincethen, 24 cases involving about Rs 700,000 have been resoled, while only 4 newcases have been added for Rs 86,000. Nevertheless the remaining 25 casesinvolving Rs 600,000 include, hardcore defaulters, which have been able to delaylegal proceedings. In 1985, the Legal Department was temporarily placed underthe Executive Vice President Projects for a reorganization and two additionallawyers were recruited for more rigorous pursuit of these difficult cases. Tocover potential write-offs PICIC has provided Rs 227 million and has accruedabout Rs 600 million of interest on overdue accounts. These amounts are con-sidered adequate.

37. Summaries of PICIC's financial statements are given in Annexes 10 and11; these show that PICIC's net profits after tax have increased from Rs 38million (FY80) to Rs 62 million (FY84), or by 10% p.a. Total assets haveincreased from Rs 2.4 billion (FY80) to Rs 3.9 billion (FY84) and with theimproved profitability the rate of return on assets increased from 1.3% (FY80)to 1.7% (FY84) which is satisfactory. PICIC's return on equity improved from 9%(FY80) to 12% (FY84) and dividend payments were restored with the result thatPICIC's share prices have increased from Rs 6 per share (FY80) to Rs 10 pershare or par (FY84). PICIC's debt service coverage of 1.2, and debt/equityratio of 6:3 are satisfactory.

38. PICIC's strategy for the future is aimed at further improving itsprofitability by stabilizing its term lending activities at a level of Rs 1.0billion p.a. and building up its working capital loans from around Rs 620 mil-lion at present to Rs 2.0 billion by FY88. Foraign exchange lending is expectedto be about US$ 60.0 million p.a. during 1986-87 with funds provided from theBank Group's second IIC project and from ADB lending. (A summary of PICIC'sresource mobilization for 1980-84 is given in Annex 12.) The achievement ofPICIC's medium-term objectives is not only sensitive to overall economicdevelopments in Pakistan, but will also depend on further improvements inPICIC's management systems and staff resources. Continuation of competentmanagement with clear operational goals and strong leadership are vital to theinstitution's full recovery from its past period of weakness. Conditionality ofaccess to Bank Group funds under the second IIC project is therefore based onunderstandings with GOP that there is a need for the continued presence of anexperienced banker as PICIC's Managing Director.

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VII. SUMMARY AND CONCLUSIONS

39. The long relationship of the Bank Group with PICIC spans a period ofalmost three decades. During this time, the original concept of support fora typical private DFI with a major share of financing of private sectorindustrial development in Pakistan was severely tested. After an initial periodof very successful operations during the 1950's and 1960's unforeseeable politi-cal and economic disruptions eroded PICIC's financial health and the capacity ofits management to restore the institution to its former prominent role in thenewly developing financial sector environment of the late 1970's. In view ofthese adverse circumstances, continuing resource transfers in support ofindustrial development based on renewed private sector confidence in response toGOP's economic policies could no longer be channeled through conventional DFIcredit line lending operations, without extensive Bank Group involvement ininstitutional rehabilitation. Increasingly this required linkage of such lend-ing operations to sector reform programs, both in the financial sector and inspecific industrial subsectors such as textiles, in which PICIC had a majorstake.

40. First steps in this direction were taken in conjunction with the ninthand tenth lending operation involving PICIC as single intermediary (Loan 961-PAKand 1326-PAK), when agreements were reached with GOP to resolve the problem ofPICIC's liabilities in Bangladesh. In addition, steps were initiated to restorePICIC's long-term creditworthiness through appropriate responses from GOP toPICIC's other institutional problems, particularly in the area of arrearscollections. It was recognized later that without changes in PICIC's approachto the recovery effort and without strong support from GOP, PICIC would not beable to extract itself from its structural problems and become a viable andcompetitive institution again. PICIC's strategy of emphasizing legal actionsagainst defaulters in the face of a legal framework unfavorable to creditorsproved to be self-defeating and the arrears problem began to worsen. At thesame time, increasing reliance of PICIC's management on GOP as problem solverfor the institution had a paralyzing effect on its capacity to meet the challen-ges of a more competitive financial environment, in which provision of foreign-exchange resources to industrial enterprises was no longer the most essentialbanking service required.

41. The need for continuous involvement at the institutional level convincedthe Bank Group in 1980 to extend a last credit line to PICIC as a single inter-mediary with a major objective of providing foreign-exchange resources to meetexpected demand for high priority projects identified by PICIC. At the sametime, a broader platform for policy dialogue with GOP was established in 1981concurrently with the first Small-Scale Industry project (Cr. 1113-PAK) whichinvolved commercial banks as well as an estaolished DFI (IDBP), and subsequentlyin 1983 with the first Industrial Investment Credit Project, (Ln. 2380-PAK/Cr. 1439-PAK) which started a series of policy-oriented lending operations with

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multi-institutional scope and specific technical assistance for institutionalupgrading in the whole financial sector, as well as provision for subsectoralstudies. Cr. 1019-PAK, therefore, fulfilled a transition role in Bank Groupassistance to the financial institutions and to private sector industrialdevelopment. Its major objective of resource transfer was combined with con-tinuation of efforts to address PICIC's institutional problems in the context ofGOP's programs for institutional reform in the financial sector; for resolutionof the collection and arrears problems through rehabilitation and restructuringof sick units as well as reforms of relevant legal processes. The credit wasalso designed to contribute through resource transfer and technical assistanceto first steps in the rehabilitation and revitalizing of the textile sector. Inthis specific sector the need for follow-up in support of GOP actions had beenrecommended in the "Werner Study" of the textile sector, carried out under Loan1326-PAK to PICIC.

42. The period 1980-83 proved to be a more difficult one for the implementa-tion of these objectives than had been anticipated. PICIC's lending activitydeveloped at a much slower rate than had been forecast; its managerial problemsbegan to exacerbate the institutions' structural financial weakness at a time,when strong innovative leadership was required to meet the challenges of adrastically changed environment in the financial sector. PICIC, for a time,became the captive of its past difficulties. In addition, in 1983, its strongexposure to adverse developments in the textile sector again made it clear thatmore fundamental changes in business strategy and management approach wererequired to make PICIC a competitive, more solidly based financial institutioncapable of playing a substantial role in promoting future private industrialinvestment in promising sectors of Pakistan's economy.

43. The achievements under Cr. 1019-PAK. are not evenly spread over theimplementation period, nor do they apply to all of the wide range of objectives.The resource transfer objective was achieved at a slower pace than had beenexpected. The selection of subprojects was more varied and did not, as had beenintended, include a substantial portion of textile rehabilitation and new tex-tile projects. The subproject experience has had an overall positive develop-mental impact but individually there have been difficulties. Long implementa-tion delays, cost overruns and lower than expected operating results charac-terize many of the subprojects. In some cases, positive results, even in excessof anticipated performance, were obtained. Other projects are still underimplementation. There is unfortunately a clear indication that PICIC's follow-up procedures and monitoring systems are still inadequate to provide up-to-dateinformation on project performance. This deficiency has also contributed toless than satisfactory resource management with respect to the IDA Credit ofwhich US$3.2 million had to be cancelled. Utilization of technical assistancefor textile training by GOP was not achieved, except for an insignificant dis-bursement of funds for two training institutes. The major reason for this wasthe lack of commitment on the part of GOP and the private sector mills to aclearly defined textile training program as part of a sector-wide rehabilitationprogram. The Bank Group clearly misjudged the readiness of all parties to moveahead with textile training programs as recommended in the "Werner Study". It

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also under-estimated the purely administrative constraints in the Ministry ofIndustr" to prepare and implement such a programs including the procurement ofequipment.

44. The institutional objectives of improving PICIC's managerialcapabilities, further consolidating its financial position and arresting thedeterioration in its loan portfolio as well as in its staff resources werepartly achieved during 1980-84. In fulfillment of its agreements underCr. 1019-PAK and in the wider context of the subsequent multi-institutionallending operations GOP support for required institutional improvements in PICICwas obtained. The most significant change occurred in 1984 with appointment ofa new management for PICIC, giving greater authority to a competent banker asmanaging director. The organizational changeslsubsequencly made have been stepsin the right direction. PICIC's financial performance since 1984 has beensteadily improving. Collection performance has improved, and old arrears, whichare adequately provided for, are beginning to become less important to PICIC'sfinancial status. PICIC's participation in the subsequent multi-institutionalindustrial investment credit project has so far been satisfactory, although itsfollow-up activities in the new environment have yet to be fully tested.However, it remains important that PICIC's management move toward strategicplanning. PICIC's has made sufficient progress in internal management improve-ments to pursue a more active strategy of business promotion with a more diver-sified clientele. This will, however, require further strengthening of manage-ment systems and staff resources. Continuation of competent management withclear operational goals is a prerequisite for PICIC's full recovery from pastweaknesses. The organization and strategy study to be financed by the BankGroup under the second IIC project will be useful for ongoing efforts of GOP,PICIC and the Bank Group to bring the process of PICIC's institutionalrehabilitation and restructuring to a more advanced stage than was possibleduring the implementation period of Cr. 1019-PAK.

45. Several lessons can be learned from this project:

- Fundamental changes in the institutional structure and managementapproach of established government-controlled institutions can only beachieved through strong commitment and support on the part of the govern-ment and require substantial supervision efforts on the part of the Bankaroup;

- More preparatory work is required for sector-wide training efforts andmore than general government commiLment and private sector interest arerequired for their execution; and

- Development of project implementation and follow-up capacity ofindividual financial institutions through appropriate monitoring systemsremains an important objective of industrial development lending opera-tions and continues to require serious attention during supervision.

June 30, 1986

- 21 -

ZlOJICT COM&=ZIO 3POR

PAUISTAN- IND RI&L CRDIT AND= 2INUSIUNT gomatIom (PICIC)

(CRCDIT 09tK

Schedule of tattuted & Actual OUrtorlv Disburacmuts (18$ milliU2)

Estimted ActualQu rt. Cusul. Cuq l. uK.Cx ul

(as S of (as S oftotal) total)

lot Quarter - - - - -

2ad Quarter - - - - -3rd Quarter 0.50 - - -

4th Quarter Ian-3.50 j.£

1981

lot Quarter 3.00 -lad Quarter 3.50 1.2783rd quarter 4.00 3.9374th Quarter 3A 50 AK l4 L0Zi5 1

17.50 3 7.266 12.6

lot Quatr 3.00 2.232lad Quarter 3.50 9.6583rd Quarter 3.50 2.8564th Quarter LaD 4 l. i18L85

30.50 8A 26.116 0.6A

lst Quarter 2.50 2.0012ad Quarter 2.00 2.0463rd Quarter 1.00 0 5974th Quarter -AI0 6 5Q 1 146 5 790

37.00 Lff 31.906 86HA

lst Quarter - 0.9642ad Qurter 1.7153rd Quarter - 0.2364th Quarter - 0.9o 3a5

35.781 iLL

lot Quarter 0.4862ad Quarter 0.2733rd Quarter 0 .2874tiA Quarter - - 1046

36 .827 99i

1. Projected disbuvrsmat figures are based on the original allocationof 18$37.00 aillioa to PICIC and the completion of the ame was estimatd tocoincide with the original closing date of disbursements undr the eeditwhich was March 31, 1"4

- 22 - AJgl 2

PROJECT COMPITION REPORT

PALISTAN INDUSTRUIL CREDIT ANDINVESTMENT CORPORATION (PICIC)

(CREDIT 1019-PAR)

List of Sub,roiects and DisbursementsStatus of Funds as at November 30, 1985

Subtrgiect Coeav

A-1 United Woolen Mills Ltd. 1,640,135.47A-2 Pioneer Cables Ltd. 3,145,652.33A-3 Rupali Polyester Ltd. 4,396,761.00A-4 Baluchistan Glass Ltd. 3,654,716.73A-S Treet Corp. Ltd. 2,894,023.39A-6 Rashid Textile Mills Ltd. 2,094,805.69A-7 Chaudhry Textile Mills Ltd. 2,255,967.73A-8 Bata Pakistan Ltd. 1,718,314.39A-9 National Tiles and Ceramics Ltd. 2,563,978.10

3-1 Philips Electrical Industries-PA 1,278,480.85B-2 Lyra Shoe Co. Ltd. 123,736.57n-3 S.G. Rayon Mills Ltd. 532,000.00B-4 Fatech Textile Mills Ltd. 1,231,736.40B-5 Alia Industries Ltd. 0.00B-6 Khavaja Tanneries Ltd. Multau 143,949.733-7 Hilal Tanneries Ltd. 189,245.19B-8 Universal Chemical & General Mills Ltd. 199,587.82B-9 Pakistan Cycle Industrial Coop. 560,720.05B-10 Khyber Wood Processing 178,637.40B-11 Habib Arkady Ltd. 1,859,412.30B-12 Metalex Corp. Led. 97,556.29B-13 Khyber Spinning Co. Ltd. 608,685.08B-14 Sapphire Textile Mills Ltd. 821,842.62B-15 Mogul Tobacco Ltd. 223,398.00B-16 Lever Bros Pakistan Ltd. 305,299.70B-17 Jubilee Paper Boards Mills Ltd. 1,185,718.84B-18 Nephew and Nephew 294,561.01B-19 Nabeel Fibres Ltd. 285,871.65B-20 Moonlite Pak Ltd. 412,033.62B-21 Bisvil Spinners Ltd. 745,089.83B-22 Atlas Battery Ltd. 346,258.36B-23 Syed Match Co. Ltd. 184,S5OO.OOB-24 Pioneer Cables Ltd. 540,683.49C-001 National College of Textile Engineering 53,285.22C-002 Textile Industry Research & Dev. 60,323.12

Total Disbursement 36,826,967.37

Balance Undisbursed 3,173,032.03

Total Credit 40,000,000.00M. _ _=

23 -

Psgo 1

PIOECT COMPLETION REPOR

PKISTN IMNUSTRIL CREDIT ANDVES N CPRATION (PICIC)

(CDl2Z4 1012-AV)

Characteristitcs of Sub-jro0ect linjancd Uuder IDA Loan No. 1019-PAh

(U$8 in #000)

No. of1. gtsre of Poects: t- Pereatate

Now 11 18128 46.72Existing L4 206,0 53.28

Total: 38798 10O.0

2. Sectoral Distribution:

Agricultural & forest Products 1 195 0.50food Products 4 Processing 3 2653 6.84Paper, Paper Products 6 Printing 1 1186. 3.06Textile - i) Cotton Textile 4 6405 16.51

ii) Juts Manufacture - - -iii) Other Textiles 7 4682 12.07

Leather & Rubber Products 4 2175 5.61Engineering 8 9098 23.45Chemicals & Petro-Chemicals 5 5619 14.49Cement, Ceramics and Class 2 6785 17.47Minerals - - -TourismMiscellaneous Products

Total: i 3879 100.00

3. Geoaranhical Ristribution (Province-Wise):

Sind 16 13245 34.14Punjab 12 15610 40.23M.W.F.P. 3 602 1.55Baluchistan 4 9341 24.08Capital Area - -

Azad Kasbmir -

Total: I 38798 100.00

- 24 -

AUI*3Page 2

(US$ in '000)

4. Nature of Projiets: Proisets AmoQs Perc.ata

Up to 1 millior 22 7785 20.071-2 Nillion 4 5414 13.96

.2-3 Xillion 5 11271 29.053-4 Million 3 9931 25.604-5 Million .4397 11.32

Total: au 38728 100.02

5. Duration of Loans

1-6 Years 1 185 0.486-8 Years 6 2252 5.808-10 Years 9 6786 17.4910-12 Yeai3 1. 29575 76.23

Totel: , 38728 100.00

6. Sub-Borrovirs Total ssets: (Rs in million)

Up to 1 million (Rupee) 9 45.18 3.1110-20 Million 4 53.27 3.6620-30 Million 2 48.29 3.3230-40 Million 4 134.20 9.2340-50 Million 6 221.32 15.23Above 50 Million it 9S1.40 65.45

Total: 2 1453.66 l22.01

7. Sub-8orrovers &MlovUent: (US$ in '000)

Up to 50 Workers 16 8461 21.8151-100 Workers 6 3307 8.52101-200 Workers 5 16101 41.50Over 200 Workers 8 10222 28.17

Total: a 38798 100.0

PIaJICT COMLIrTIOl mOI

fAK ATAN ID IAL CUtPI MIYISEThIU COSidI&TioI (flCIC)

(C4tDIT 1019-PAR)

Saboroiect Cost *Nd fi"eciea Su_ri (as in '000)

ftolect Coet_ __ _ _ _ ICICI UC___ __fxissl.e ti Q£_

*1. Stb-Project Mature of Over- Other 2 of Actual Differecce

llo. Sab-foraognre -__ S_b_rokcts S*tiNated Act'Al -- T_n* #sfh.D.ALI_ c otcl,S9ilkiJljSg4itSl_ (tbMoahL

L~~~~-------- -- --- ---- _ _--_---.*-__s _L -- ---- 8 ------- 9 ------- m --------- u ---- _1 ------- It_______ __

A- sSSl-POnCTS

I. United Woolen Hills Ltd. - A - 01 1ew 17710 92242 14532 25936 25934 28.12 J.AY '82 Oct. '83 15 sntbt

(Pa iste Wlool scourlia" Nd 18.70?

pressing Co. Ltd.)

2. Pioneer Cables Ltd. A - 02 New 75000 74453 (547) 31580 31560 42.42 April '82 Sept. '82 5 Montbe

Sawing

3. tippei eolyester Li ited A - 03 ev 101000 349985 48985 48990 44990 32.66 Oct. '82 Jan. '83 3 Noutbs

48.52

4. Zslucbiatan Glass Ltd. A - 04 as, 87500 110000 22500 40745 40745 37.04 Jan. '62 tereb '83 14 outbs

2s.7n2

S. Treet Corporation Limited A - 05 apnslpotia 60000 116096 56096 39795 39795 34.28 Jan. '84 Jan. 8S 12 Montbe

93.52

6. Rerbid Textile Kills Limited A - 06 0S P 26700 54700 28000 26S00 26500 48 .45 Oct. '82 Dec. '83 14 onths

104.871

7. Cbhadbry Textile Millo Ltd. A - 07 DM" 35I00 44063 10983 28987 28987 62.93 Oct. '82 oct. '83 12 nontbs

31.002

B. gets Pkietan Limited A - 06 ELpsesion 8350O 1121SS 2844S 22445 1492 23937 21.34 Dee. '83 april '85 16 Montbe

34.32

9. Rational Tiles * Ceraeice Lt4. A - 09 New 88000 122022 - 40035 7205 47240 38.71 may '82 -

0

-26- ANNEX 4Page 2 of 3

a 'A A a c * ci !t M4- 4 4 4 " ^ j Z~~~ ~ I4 I

* ~~~~~~~~~~~~~~~~~~~~~~*4 #A

|, 11 -- i | y 4~~~~~~~~m t ! Zc - I *4 #4 *4 . *4 *4 4 *4 *4 *4~ti I I g

1{lW ~ ~ ~ 4 4' *4 'S 3 C

1 1as 1~~~a

't U. oH 0 0 * - *4 *4 80 * 8 -| ^ - S > Z ¢ S ^ s ^ bS 4 4

p. ## * ^ w 2 a 0 -j ^ - i t S ^ *, " 0 5 -, o v

i 't * i * r " 3 *4 i -*

40~~~~~~~~~~~~~~~~~~~.

i~~ ~~~ *4 8 *4 , i ° E f

S~~~~~ 5 t * 4fi fi f 0I a *4 - S"

~~~~~~~*4j *4 - *4 i4 f p * *4 p. O

: t tz s . i 3 . i3 li f i i f 34 0 . p.

2 . " ^ ^ ^~4 * *4 - X o. Gb

(a. in '000)

_ olect Coat = ItcIc VnAiuGic ._ _ f t ii,ssS t.p ia3LZ

Sl. Iob-Prejece Ibtuto of Ovet Otoer S of Actual Differeace

lb .. StaBorrow. __ ______ llo. __ Suburolecte s Qitu ctul rua* --- I __to ssto tub

X __} ___, 4 , ______ s __- 7 _____1t * -___2 ___]° __ 11 ______ 12 _ L} -L - - ---------

14. Vo&hl Tobeeco Co. Ltd. i - 15 "xpasioon 500 4107 (1493) 2250 2250 5.78 Oct. '8I Jan. '83 aS laltbe

saw iog

IS. Lever Brotbere Limited B - 16 Expeasion 20000 10450 (9550) 3447 3447 32.49 Joa. '83 Iarch '84 14 bathe

Sewing

13. Jubilee Paper Bord Nhlli Ltd. - 17 66500 91104 - 14700 2800 1750li 19.21 April '83

17. Nephew * Nephew Limited a - 1 w 7500 19012 13512 3S89 3589 18.88 Jan. '82 Oct. '82 9 booths

153.491

18. Ilbeel Fibres Limited ** a - 19 New 23670 MA44 17174 2860 6994 9854 24.13 Oct. '82

72.53Z

19. Iloalite (takiettm) Lisited a - 20 Exapeeion 3003 2852 I I5S) 2067 2067 72.48 N.A. Dec. '85 No Sched4el

Sewing wee prepered

20. Bievil Spieere Ltd. a - 21 gxpasnion 22400 15026 - 10308 10308 68.60 Jan. '85 - -

21. Atlas Blottery Ltd. a - 22 Capepeion 16229 16800* - 11893 3000 14893 88.65 Jan. '85 -

22. Syod Hateb Compeay Limited B - 23 OUN" 3750 298 - 39 - 1958 - Jan. '85

23. Pioneer Cable. Limited * - 24 - aspeaciom 11000 - A 7512 - 7512 - Jan. '85

24. Souvenir Tobacco Co. Ltd. a - 25 *SNa 14516 - * - 6016 - 6016 - July '79

25. Precisiom Diemd tool Ltd. a - 26 New 6500 - - 3000 S00 3500 - Jan. '85

26. Iboolite (Pakistan) Limited B - 20 Ixpoecioa 7600 IS538 7938 3245 - 3245 20.88 July '82 July '83 12 bootbh

_ _ ___ ___ _____ _____ __ I___ ___ __ --- ----------1- - - __ - - - _

* vpto 4ate cost of the project as the projecte are *till under implemantatioa.

C Scop* of tbe project bee cbang*4 substantially.

0

- 28 - Page I

PROJ=CT COMPLETION REPORT

PJAKISTAN INUSTRIAL -CREDIT ANDINVESTMENT CORPORATION (PICIC)

(CREDIT 1019-PAX)

*Procurement Procedure Review

Si. Sub-Project Procurement Procedurek.L Sub - Borrowers No. Followed

1. International Floor Coverings Ltd. A - 1 PP-I/77(Formerly United Woolen Mills Ltd.)

2. Pioneer Cables Limited A - 2 PP-1/77

3. Rupali Polyester Limited A - 3 PP-1/77

4. Baluchistan Glass Limited A - 4 PP-1/77

5. Treet Corporation Limited A - 5 PP-I/77

6. Rashid Textile Mills Limited A - 6 PP-I/77

7. Chaudhry Textile Mills Limited A - 7 PP-1/77

8. Bata Pakistan Limited A - 8 PP-I/77

9. National Tiles & Ceramics Ltd. A - 9 PP-I1/77

10. Philips Electrical Industries of B - 1 PP-1/77Pakistan Limited

11. Lyra Shoes Company Limited B - 2 PP-I/77

12. S.G. Rayon Mills Limited B - 3 PP-VII/81

13. Fateh Textile Mills Limited B - 4 PP-I/77

14. Khawaja Tanneries Limited B - 6 PP-I/77

15. Nilal Tanneries Limited B - 7 PP-1I/77

16. Universal Chemical & General Mills Ltd. B - 8 PP-II/77

17. Pakistan Cycle Industrial Co-operative B - 9 PP-I/778ociety Limited

ANNEX 5Page 2

- 29 -

18. Khyber Wood Processing Co. Ltd. B - 10 PP-VII/81

19. Habib Arkady Limited B - 11 PP-1/77

20. Metalex Corporation Ltd. B - 12 PP-11/77

21. Khyber Spinning Company Ltd. B - 13 PP-1/77

22. Sapphire Textile Mills Ltd. B - 14 PP-1/77

23. Mogul Tobacco Company Limited 3 - 15 PP-Vul/8l

24. Lever Brothers Pakistan Ltd. B - 16 PP-II/77

25. Jubilee Paper Board Mills Limited B - 17 PP-V$I/8l

26. Nepbew & Nephew Limited B - 18 PP-11/77

27. Nabeel Fibres Limited B - 19 PP-11/77

28. Moonlite Pakistan Liaited B - 20 PP-11/77

29. Bievil Spinners Limited B - 21 Single Bid

30. Atlas Battery Limited B - 22 PP-1/77-81PP-I(a)/84

31. Pioneer Cables Limited B - 24 PP-I(a)/84

32. Syed Match Company Limited 3 - 23 PP-I(a)/84

1. PP-1/77 requires international Bidding.

2. PP-1I/77 requires competitive quotations from at least 3 sources.

3. PP-VII/83 is applicable to the procurement of second baud/reconditioned machinery.

4. PP-It()/84 requires competitive quotations from at least 3 sources.

5. PP-I(b)/84 requires competitive quotations from at least five sourcesof which atleast 3 should be from three different countries.

6. PP-I(c)/84 requires international bidding through advertisement inat least two newspaper.

Source: PICIC

tit 0~~~~~~~1

o __ tg ot 3t~ a aeS " ° "y I" t 0

0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0*a0 32~~~~~~~~~~~~~~~~~~~~~~-

3r~~~~~~~~~~~~~~r t

- .fl..e-~-- ------ --- ------------ … -

O - -______________ _--- -i

0 * 0 b v da.%

0 #4 is N4 N4 U N -

(St .....e .ee e... ..--------......------* u-* * o__________________________

.. ee.e.ee --- # .e - .. ee.e.. -

#4 o s@______________________ N

PAISAN JUDI 8ItL CtEDIT AtDImVESTl~UT COB0a7103 (PICIC)

(CaurP 1019-P)

Subproject Financial Performance Summary (Completed Projects)

lMet Earoings tlouths ofsales ( a. rupees) As S of Equity Project 2 Cost

Subprojects Textile (T) Type get. Act. + s Bet. Act. Cesparis. Delay Overrun

A-2 Pioneer Cables now 56.5 18.6 - 67 20.7 13.6 Lower 5A-3 Rupali Polyester new 43.7 29.6 - 32 19.6 Lose Lcwer 3 48.5A-4 laluchistan Class sew 38.3 29.2 - 24 34.0 Loss Lower 14 25.7A-? Cbandhry Textile T anl 40.4 44.4 + 10 10.2 Loss Lower 12 31.0

3-1 Pbilips glectrical Exp. 198.3 261.7 + 32 13.3 13.9 Higher - -5-2 Lyre Shoe Co. lip. 16.1 14.2 - 12 13.9 3.2 Lover 14 -3-3 S.G. Rayon Hills T lxp. 38.8 29.1 - 25 29.4 18.3 Lower 6 224.33-4 Fateb Textile T lxp. 240.0 460.0 + 92 9.4 45.0 Higber 15 -

5-6 ibavaja Tanneries BlD 17.3 23.2 + 34 41.0 4.4 Lover 5 -

3-7 Vital Tanneries B35 76.8 68.5 - 11 27.1 16.4 Lower I 0.5

1-9 Pakistan Cycle BII 119.5 161.9 + 35 10.7 8.0 Lower 12 105.0

5-13 ibyber Spinning T 151 15.9 5.2 - 67 4.2 Loss Lower 22 9.25-14 Sappbire Textile T exp. 170.7 216.6 + 27 9.9 23.1 Higher 20 11.0B-15 Kogul Tobacco Bxp. 133.6 124.3 - 7 31.2 Loss Lower 15

5-18 Nephew & Nepbew T New 20.9 32.8 + 57 12.1 68.7 Higber 9 153.5

- -------- -- - ------------ - - ----------------

Source: PIC1C - Annexure 11PCI - Annexure VIII

M

PROJ3C1 CoKPtElIOU REPORTPAKIbSTAN INDUSTRzAL CREDIT MID INvEsIENT CoRSiRATroN LIMITED

ECONMHIC PERFORfANCt OF SUB-PROJECT UNDER-CREDIT 1019-PAK

;| Capacity Uti- Exports Export as Incremental :'Cost/Job lalue AddedSub-Borro.era by SuD- lization (C) (b in million) s of sales hEmPloy et ('s in mtllioni's in million)ledustrlal Project &el- lEsti-tl ; jeaes- !Ata IS9ti_ -sti-'Csteor. No T,oeatcon aia [Actual mte A _ ctual lcatc lActual mate _iActual IiatO !Attusl _ate lActuals .2 s # l S 6 7 8 i 9 tO 10 11 i 12 ; 1!1 14 1l

AGRICULTURAL & FOREST PRODUCTRhybev Wood Processing Co. Ltd. B-10 Peshawar 60 N.A. Nil til 1il rtl 24 50 0.225 .1I12 11.743 2.( 18FOOD PRODUCTS & PROCESSING:

Habib Arkady Limited 3-11 Hub-Chowki 70 - Nil Kil t:il il 260 250 C.7j6 r.ios 56.r.50tVogul Tobacco Co. Ltd. B-15 Karachi 50 40 N.A 0.560 N.A 0.450 20 20 r .4455 2.2' n 90.5804PAPER. PAPER PRODUCTS & PRIMNTIrN rJubilee Paper & Board M111i Ltd. B-17 Gujranwala 50 - til till tNil il zis - ;. _ G.*. 1TEXTILES:

Cottont

Sapphlre Textile Mills Ltd. 8-14 Kotri 70 86 133.035 166.984 3ci.o30 ?7.1CO 326 375 .141 .. I ) i3."6 56.925Fateh Te xttle Mills Ltd. B -4 Hyderabad 60 N-A. 37.710 N.A. 15.710 U.A. 55 55 D.;7 *54 + . 43.600Resbid Textile Mills Ltd. A-6 Karachi 80 33 55.478 22.269 s2.v/0 21.53 - - - - I4.530 16.737Chbudbry Textile Mills Ltd. A-? Lahore 85 83 7.418 11.037 id.350) :5. Co nrl i:il :1 itl .a. 25.j20Noollan & Others:

international Floor Coverints Ltd A-1 Karachi 6, 74 16.o0o Nil 3n.140 .tl 130 7? 0.$93 *).ro64 Ž5.519 9.398Khyber Spinning Co. Ltd. B-13 Lnhore 50 60 1.736 t'tl 11.oon gil 77 112 o.l64 1.lS c.;,-70 1.342Nephew & Nephew Limited 8-18 Hyderabad 70 70 20.380 32.780 UCA).O00 1(416.'O 375 730 1s.i24) {.. .7.i)o 14.740

- 33 -M!B9

PROJCT CO)GLETION REPORT

PARISTAN IIIDUSTRIAL CR1DIT ANDINVESTmENT CORPORATION (PICIC)

(CREDIT 1019-PAK)

(Rs in million)

Years ended PROJECTED UD ACTUAL LENDING OPERATIONSDecember 31, 1979. 192! 1981 1982 1983 194

P1...... A P A ... L A ,P A P A P A

.APPR2VALS

Forein Currency N.A. 354 473 372 568 335 681 256 818 612 N.A. 874

Local Currency N.A. 26 4Q _23 49 _1 _U 26 7 N.A. 126

Total 380 513 395 617 383 742 363 895 838 1000

COMI ITHNTISIIT

Foreign Currency N.A. 73 238 4 680 388 684 292 686 304 N.A. 264

Local Curreucy N.A. 4 _a j _j _a _j _j _a _j N.A. 112_

Total 77 261 10 716 408 725 321 738 351 416

Foreign Currency N.A. 226 112 86 262 174 407 284 550 173 N.A. 240

Local Curreucy N.A. 3 9 _A 29 _a _6 _U _4 _8 N.A. MA

Total 229 121 90 291 189 443 299 594 231 374_m _m ma _m am mu . ma . _ m

- 34 - AVU XL.I

PROJECT COMPLETION REMPOR

PARISTAN INDUSTRIAL CREDIT ANDINVESTMENT CORPORATION (PICIC)

(CXE'DtT 1019-PA)

Balance Sheets (1980-1984) 1/(as million)

1980 1981 1982 1983 1984Assets

Cash and short term deposits 97 80 115 120 123Securities 19 14 7 20 21Sundry current assets 25 23 70 103 115Accrued interest 507 535 570 645 637Loan portfolio (gross) 1,793 1,811 2,425 2,639 3,167

Less: reserves (94) (99) (104) (224) (238)Loan portfolio (nee) 1,699 1,712 2,321 2,415 2,929Equity investments 98 97 104 105 110Fixed assets (net) 1 1 1 4 5

Total assets 2,646 2,462 3,188 3,412 3,940

Liabilities and NetWorth

Current liabilities 74 87 221 164 172Long term borrowings 2,001 1,985 2,484 2,780 3,253Total liabilities 2,075 2,072 2,705 2,944 3,427

Paid-up capital 92 92 110 110 110Reserves-retained earnings 279 298 373 358 403Metworth 371 390 483 468 513

Total liabilities and networth 2,446 2,462 3,188 3,412 3,940#ain sam - amss ufass

Long term debtsquity ratio 5.4 5.1 5.1 5.9 6.3

1/ Assets and liabilities in East Pakistan are excluded.

Source: PICIC.

- 35 -

,A,N= 1 ,

PROJ;CT COMPLUTIQN REZORT

PARISTAN SNRYSTRIAL CREDIT ANDINVESThgf CO lRTow (PICIC)

(CtEDIT lQ19-LAX)

tncoCe StateMents (1980-1984)

1980 1981 1982 1983 1984tacome-__

Interest income 190 174 205 258 316Comnitment fees 9 25 25 48 23Income - short-term investmeAts 12 12 10 10 10Income - equity investments 9 15 20 22 43

Total income 220 2 H 392

Expenses

Interest on borrowings 151 155 183 222 254Commitment fees - - - -Adintistrative expenses 21 19 21 25 22Depreciation - - - 1 1Provision for doubtful debts 4 2 9 20 16PortfoLio write-offs - - 11 20

Total expensos -176 1t 213 2-79 313

Bet income 44 SO 47 59 79Less: income taxes (6) (12) (15) (16) (17)

NeFItacome (after taxes) 38 38 32 43 62

Dividend - - 11 14 16

RatiosHet profit/avg. networth (1) 9.0 10.0 7.3 9.0 12.6Met profit/avg. total assets (t) 1.1 1.3 1.0 1.3 1.7Long term 4ebt/equicy ratio 5.4 5.1 5.1 5.9 6.3Admin. esp./avg. total ssets 0.7 0.7 0.7 0.7 0.6Adaim. exp./avg. Loan portfolio (2) 1.2 1.1 1.0 1.1 0.8

Source: PtCC.-

- 36 _aDx.L 12

PROJECT COMPLETION REPORT

P4RISTAN INDUSTRIAL CREDIT ANDIjNVESMNT CQ^OPOATION (PIcIc)

(CREDIT 1019-PAR)

Sumuarv of Resource Mobilization - 1980-1984

Amount inForeign US$ Interest

Year of Currency Equiv. Maturity RateAOIrgval o0urce (Million) (million) (Years (2)

FOREIGN CURRENCY

1980 Asian Development Bank US$40.0 40.0 17 8.101980 French Government FFr. 5.6 0.6 15 8.5-8.81982 French Government FFr.10.5 1.1 15 8.51982 French Goverment Ffr.27.0 2.9 15 8.51982 L.f.V Germany DM 15.0 4.9 26 8.01983 Asian Development Bank US$45.0 45.0 15 10.51983 F.M.O. Netherland DFLl5.O 4.3 16 8.51984 I.B.R.D/IDA US$18.0 18.0 15 10.0

AMDUNT IN RUPEESLOCAL CURRENCY (Million)

Credits for Local MachinerY

1981 State Bank of Pakistan Rs 11.0 a - 6 years 6.51981 State Bank of Pakistan Rs 10.8 a - 6 years 6.51982 State Bank of Pakistan Rs 60.0 a - 8 1/2 years 6.5

1983 State Bank of Pakistan RslOO.3 a - 8 1/2 years 6.51984 State Bank of Pakistan 0s139.4 a - 8 1/2 years 6.5

Loans for Short-term Isvestment

1983 State Bank of Pakistan Rs25O.0 a - January 1989 10.01983 State Bank of Pakistan Rs843.5 a - June 1988 10.01984 State Bank of Pakistan Rs25O.0 a - Dec. 1989 10.00

- 37 - ANNEX 13

PROJECT COMMLETION REPORT

PAKISTAN INDUSTRIAL CREDIT AND INVEST ErT CORPORATION LIMITED

CREDIT 1019-PAN

Surnarv of Collections and Arrears

A4earv Posit&onAs Percentage

of TOt81 LOar.E Collection PercetageTc-al Arrears Net As against As against

D a t e j j 11 ) Oross, Of Pzov±sioa billiL_ total dues

December 31, 1980 1121*7 440 465; 34% 24*

December 31, 1981 1259*2 47ji 49S 40, 19;.

December 31, 1982 1151.2 41Z 42$; 50 20;*

Deceaber 31, 1983 983.2 325 3 37* 39St

December 31, 1984 1023*1 31 33), 43b 34,*

December 31, 1985 1079*5* 25' 271% 655,37)

* haeod on flixed parity rates

Notes Seudiag 1DD-961-PA 04b-Loan..

Collection Performance

Year C tionTarat Actual Colletion % of Target.a iMillion)1Jan -June/July-Dec7 Total

1981 340.0 174.2 176.3 350.5 103.1

1982 360.0 203.4 202.3 405.7 112.7

1983 427*0 220.5 219.8 440.3 103.1

1984 460.0 202.0 282.4 484.4 ICS.3

1985 500.0 261.9 276.5 538.4 107*7

- 38 of 6

PAKLSTAN INDUSTRIAL CREDIT& INVESTMENT CORPORATION LMITED

State Life Buildln& No. 1TEMLPHONES: 226361 10 LINES L I. ChUndrir Road Kaahi. TELEX: PICIC PK 2'0P.O. BOX NO. WSO KARACHI-2. CBLE 'TICCORP"

COMMENTS RECEIVED FROM THE BORROWER

No. PD/473/86 September 14, 1986

Mr. George Maniatis,Acting Division Chief,Operations ivaluation Department,The World Banks1818 H Street, N.W.,v.ashington D*C. 20433sU. S. A.

Dear Sir,

Project Completion Report onIDA-Credit-1019-PjiK

Please refer to your letter of August 8, 1986enclosing draft copy of the Project Completion Reportprepared by the South Asia Regional Office of the bankon IDA-Credit 1019-PAK.

We have gone through the report in context ofthe objectives laid down by the bank for the credit andenclose our comments on observations made in the report*

Yours jaithfully,

ASHFA 211RDI )DEPUTY MANAGING DIRECTOR

Encl: As stated above.

- 39 - ANNE( 14Page 2 of 6

PROJECT COMPLETION REPORT

PAKISTAN INDUSTRIAL CREDIT ANDINVESTNENT CORPORATION (PICIC)

(CREDIT 1019-PAK)

PCR Reference

1. The draft of the Project Con;letion Report on IDA-Credit-1019-.FA

prer4red by the South Asia Regi.onal office of the ba.rYk has been gone

through in the context of objectives laid dor.n for the credit at the

time of preypar&tion of aFyraisal re-ort by the bank. The observeations

of the rerort tre positive relating to sters taken ty Y*ICIC and GOP

for the institutional rehabilitation and orvanizstional strengthening.

This has contributed significantly towards FICIC's financial revival

and achievem.ent of coll'ction tarre-t6 throu& out and aided in overcomi

arrear problems inspite of certain unfavourable internal and external

factors which prevailed during the period and w.hich were beyond the

control of PICIC. -NoWeverg our comments on those arOas of the project

imFlementation w-ich in the views of PCR remained below the expectatio3

level are given below :-

2. Project Completion beport mentions that one year after the /Para. 15.Adju.sted to

effectiveness of the cr--dit, actual disbursements were only 20v of the reflectchange in SAR

credit amount compared to 50 estimated at the time of app.raisal. In projections.

this context, it is mentioned that the disbursement estimates of the

World Bank report were based on the assumption that the earlier effect:

neon of credit would result in starting of disbursements froa the thir

quarter of the year 1980, whereas the credit-line actually become sUe.

on October 29#1080* We suggest that it would be appropriate to-cOMpare

projected disbursements during the first four quarters wiQk actual dil

burseoments of the first four quarters after the credit becae eoffeetiv,

Similar comparison should be made for the remaining quarters as is don.

for the following estimated and actual disbursementsssa

0........

- 40 - ANNEX 14Page 3 of 6

(us$ Million)

CumulativeEstimated % of Actual % ofDisburse4mnts Total Disbursements Total

ist Four Quarters 10.00 27.0 5.215 14.1

2nd Four Quarters 24.00 64.9 22.012 59.7

3rd Four Quarters 35.00 94.6 30.760 83.1

Last Two <Juarters 37.00 100.0 32.870 89.00

3. The above comparison depicts that actual disbursements proceeded /PCRpara. 15

satisfactorily and only 11% of thA original credit amount was left for

disbursement by the original closing date of disbursement. The disbursement

of this amount could have easily been effected by the closing date had the

decision to revert implementation of the projects by the project proponents

not been so late leaving no time for the diversion of undisbursed funds to

alternate projects. Non-completion of the requisite formalities for the

effectiveness of loan by some projects and simultaneous availability of funds

under IIC-1 from the World Bank and Development Finance Project from the

Asian Development Bank where access to the pool money was subject to the

full commitment of initial allucatiou was also a contributing factor for

non-ut-;lization of undisbursed amount. We also submit that total amount

available under the credit was committed for the projects without leaving

any amount for exchange fluctuations which could have been on either side

and which was difficult to project. The actual disbursements however resultet

in saving of an amount of USM 3.09 million equivalent since US$ became strong

during the period. You would agree with us to suitably amend the remarks in

PCR regarding less thou satisfactory resource management in view of the

fact that it was not possible to calculate saving3 from exchange fluctuation;

till disbursements,

4. Project Completion Report mentions that only tbreetextile sub-

projects were reviewed by the bank with 25% of the total financing

AIINEX 14- 41 - Page 4 of 6

for A*projects as compared to ?5% of A-Project. financing expected to/PCR para. 19modified to

be relbted to the textile sector at the time of appraisal. It would be/ reflectexistence of

appreciated that appraisal estimtes of the bank were based on the pipeline andalternative

backlog of projects which were awaiting allocation of funds at the time/ sources offinancing.

of the sypraisal of IDA Credit-1019-PAK and which besides other textile

projects also Included three textile projects namely Firdous Spinning

and Weaving Mills, Crescent Textile Mills Limited and Dawood Cotton

Mille i4mited involving an aggregate amount of USM 7.128 million. The

first two projects were later on withdrawn by the sponsors whereas the

project of Dawood Cotton Mills Limited was implemented under Chinese

Credit since it involved expansion of cotton spinning capacity for the

project for which Chinese LIne of Credit was available and PICIC was

restricted by the GOP to finance any expansion in cotton spinning under

the credit. Pegarding seven textile projects approved by 'ICIC during

1980-1984 and which were fi#anced from the sources other than the Chinese

Credit, It i. mentioned that out of these two were financed out of IDA-

Credit-1019-PAI while one project was issued repayment guarantee in

favour of Islamic Development Bank. Out of the remaining four project6,

Coe project was not eligible for financing under IDA-Credita1019-PAE

whereas the remaining three projects were approved during the third and

fourth quarters of 1984 and it was estimated that these projecrs would

not be able to utilize the funds by the closing date of disbursements

If allocated funds under IDA-Credit-1019-PAK. However, these projects

were financed from the World Bank funds under Industrial Investment

Credit-I.

ANNEX 14- 42 - Page 5 of 6

5. It would not be correct to assume that PICIC follow-up, /PCR para. 20indicates

monitoring and processing of feed-back information system is not that PICIChas not taken

contributing sufficiently towards efficient and better implementation action toaddress the

of the projects and fails to enhance the capabilities of the weaknessesnoted.

appraisal staff by not imparting knowledge about actual implementation

;roblemr. This observation has parhaps been made becuse of the

non-availability of certain data in case of some projects. This non-

availability of data in certain cases is attributed to the fact that

the compilation of information for PCR was started well before the

closing date of disbursement of credit, when some of the projects

were still under implementation. The information desired for the

PCR from the staff concerned with the implementation of the project

were such which are normally extracted from the Completion Reports

prepared on the sub-projects which is normally prepared one year after

the commencement of the commercial operations of the projects. It

would be appreciated that FICIC's project follow-up and feed-back

system is efficient and systematic to provide relevant information

to the appraisal staff with regular preparation of the quarterly

progress reports on projects under implementation besides completion

reports. Quarterly reports are prepared by the implementation staff

in association with technical staff whereas people from the Economic

and Research Department are also associated -in the preparation of

completion report. PCR is circulated to all the concerned including

appraisal people for having feed-jack for future appraisal works.

6. On the observation concerning realistic assumptions for market

forecast, it is mentioned that to achieve more appropriate results

.... /.**.

ANNEX 14Page 6 of 6

43 -

from the market forecast, PICIC apart from historical growth rate /PCR - paras21-23. The

of domestic demand and past growth rate of exports also employs weaknessesidentified in

certain other measures for forecasting the market for a product. PICIC's opera-tions will be

For instance such macro variables as the growth of GNP, per capita reviewed inthe process

income, the population growth rate, the rate of urbanization and of an insti-tutional

other applicable variables are also being correlated while projecting/ review tobe carried out

the future demand. under LN2648-PAK.

7. Market report on PICIC projects has now been segregated into /PCR -paras. 21-23

two parts viz, macro analysis and micro analysis. The macro part of

the market report deals with the demand/supply position of a product

from the national point of view whereas the micro part deals with the

ecoromics of the firm. It deals with the price competitiveness of a

firm's products with the similar products and attempts to analyse the

consumer response and the marketing strategy of the firm. This part

also deals with the project locatJon from the point of view of its

nearness to raw-material centres and markets. In all import substiutior

project,calculation of Domestic Resource Cost ratio has also been

included.

8. Regarding PCR's observations concerning assessment of realistic /PCR -paras. 21-23.

implementation time, it is mentioned that PICIC realizes its importance

for the implementation of the project with lesser cost over-runs and

better results and has started giving due considerations to the factors

like size of the project, proposed location, Government approval if

required, technology involved and status of the arrangement of

remaining foreign and local currency requirements of the project*.