R E S T R I C T E D

R e p o r t N o.T.O.215 a

This report was prepared for use within the Bank. In making itavailable to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF

THE PAKISTAN INDUSTRIAL CREDIT AND

INVESTMENT CORPORATION LIMITED

September 17, 1959

FILE COPYDepartment of T echnic al Operations

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CURRENCY EQUIVALENTS

U.S. $1.00 - 4.762 Rs.

1 Rupee - U.S. $0.21

Rs. 1,000,000 - U.S. $210,000

TABLE OF CONTEiTS

Paragraphs

Summary and Conclusions i - vii

I. Introduction 1

II. General 2

III. Past PerformanceOperations to Date 3 - 6Foreign Currency Loans 7 - 8Rupee Loans 9Size and Terms of Loans 10 - 1.Equity Participations 12Operating Methods 13 - 15IBRD Loan Operations 16 - 19

IV. Management and Organization 20 - 23

V. Investment Program and Financing PlanCredit Demand 24 - 26Three-Year Investment Program 27 - 28Estimated Foreign Exchange Lendings 29 - 30Proposed IBRD and DLF Financing 31 - 32Estimated Rupee Investments 33Estimated Rupee Resources 34 - 35Financial Position 36 - 37

VI. Economic Justification 38 - 39

VII. Earnings Prospects 4o - 42

VIII, Conclusions and Recommendations 43 - 44

ANNEXES

I. Sumnary of Loans in Foreign Exchange Sanctionedby PICIC up to May 31, 1959

II. Loans in Foreign Exchange approved or UnderConsideration by the Bank for Financingfrom IBRD Loan Funds (as at September 14, 1959)

III.A)Investment Program 1959-1961B)Estimated Foreign Exchange Requirements and Resources

IV. Financial Forecast 1959-1961V. Pro-Forma Balance Sheets

VI. Earnings Forecast 1959-1961.

APPRAISAL REPORT ON THE

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

SUMMARY AND CONCLUSIONS

In little more than one and one-half years of operations, PICIChas established itself in business and has good prospects for a consider-able expansion of its operations in the foreseeable future0

ii. The Corporationts main activity so far has been in the field offoreign exchange financing. Of the total loans approved through May 31,1959 of Rs, 56 million, Rs. 37 million were in foreign exchange, mainlyfor modernization and rationalization of existing industries (balancingequipment), and to a smaller extent for new projects, in the textile, sugar,food processing and small mechanical, chemical and manufacturing sectors.Loans in rupees have developed slowly, due to the present easy moneysituation and the keen competition on the part of the local private andGovernment financial institutions in this field. PICIC has also acquireda small number of attractive equity participations in the form of optionrights or direct subscriptions which have been arranged as part of largerfinancial transactions involving loans in foreign exchange.

iii. Since early 1959 there has been a marked revival of investmentactivities in Pakistan, reflecting the increased confidence of businessin the new Government's economic policies. This development, and thecountry's continued stringent foreign exchange situation, have resultedin considerable demand for foreign exchange financing from PICIC, whichat present is practically the only source of such financing for privateenterprise. PICICts foreign exchange operations have been considerablyfacilitated by the recent announcement of the Government's Short-Term Plan,which enables the Corporation, without reference to the Government, tofinance imports of capital goods for the sectors of industry listed inthe Plan.

iv. Based on the present and prospective credit demand, PICIC hasestimated that its lendings in foreign exchange over the next two and one-half years will be increased to about four times their present total, andthat an estimated $20 million will be needed to meet the requirements ofthis lending program through 1961. Rupee investments are expected toincrease only moderately with equity participations taking an increasinglyimportant share in the total.

v. In its first fiscal year, PICIC earned a nominal net income ofRs. 04 million (after tax) which was carried forward to the next year.Concurrently with the expanding loan portfolio, earnings over the nextthree years are expected to increase at an accelerated rate, and netprofit should be sufficient to pay a small dividend after modest alloca-tions to reserve. No account has been taken in these estimates of thepotential income (tax free) from capital appreciation on sales of PICIC'sequity investments, which wiill be set aside in a special reserve.

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vi. PICICts organization is still in a formative stage. To carryout its investment program as planned, the Corporation w.ill have to takeimmediate steps for strengthening its staff and further developing itsorganization. The final success of the operation will largely depend onthe arrangements now being made for a permanent managerial set-up tosucceed the present General Manager after his departure planned for thespring of 1960. The Bank's continued assistance to PICIC and close follow-up on its operations is essential for realizing these objectives.

vii, It may be concluded that PICIC's investment program, callingfor an additional $20 million in foreign exchange financing, is a suitablebasis for a Bank loan of up to $10 million. Assuming that the remaining$10 million is provided on medium term by the CLF, it would be appropriatefor the final matuxrity of the loan to be 10 years (subject to extension inappropriate cases) with a three year period of grace.

Is INTRODUCTION

1e The Pakistan Ihdustrial Credit and Investment Corporation (PICIC)has asked the Bank for a loan of up to $10 million to replenish its foreignexchange resources. It has also requested a loan in the same amount fromthe Development Loan Fund (DIF). PICIC has previously received loans of$042 million each from the Bank and the DLF. Both loans are expected to befully committed before the end of this year. This appraisal is based oninformation submitted by PICIC and on investigations of the Corporationtsoperations and its future prospects with particular reference to the re-quested Bank financing, carried out by a member of the Bankts staff in thefield from May 1 to May 18.

II. GFIERAL

2, PICICts principal objectives are to assist in the creation, ex-pansion and modernization of small and medium-size enterprises in the privatesector of Pakistants industry and to encourage private local and foreigncapital participation in their financing. PICIG was incorporated on Sep_tember26, 1957 and started operations on December 2, 1957. The Corporationhas an authorized share capital of Rs. 150 million ($31.5 million). Itspaid-in capital is Rs. 20 million ($4.2 million), consisting of tm millionordinary shares, of which Rs. 12 million have been subscribed by Pakistanishareholders and the balance mostly in foreign exchange by U.S., Canadian,U.K. and Japanese private interests. On December 17, 1957, PICIC obtaineda 30-year advance from the Pakistan Government of Rs. 30 million ($6.3million) free of interest with repayments to start in the 16th year.PICICts present capital resources, including the aforementioned IBRD andDLF loans (equivalent to Rs. 40 million), therefore amount to Rs. 90 million($18.9 million).

III, PAST PERFORMANCE

Operations to Date

3. Within the relatively short period of little more than one andone-half years, PICIC has established itself as a lending organization andappears to have good prospects of expansion.

4. From its inception through May 31, 1959, the Corporation hassanctioned 67 loans for a total of Rs. 56 million. Tn addition, in con-junction with some of its larger credit operations, it has acquired smallamounts of equity participations and option rights.

5. The status of PICICts loans as at May 31, 1959 was as follows:

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Total LoansSanctioned Contracted DisbursedNo. MiL.Rs. NoQ Mil.Rs. Mil.Rs.

Local currency 25 19 20 15 7Foreign currencies 42 37 28 26 2

Total 67 56 48 41 9

6. There have been no defaults in payments of principal or intereston PICIC's loans to date.

Foreign Currency Loans

7. To date, PICICts main activity has been in foreign exchange loansfor financing imports of machinery, equipment and technical services, Upto May 31, 1959 the Corporation had sanctioned 42 loans for a total of 37.7million equivalent in foreign exchange, allocated in approximately equalamounts to the IBRD and DLF loans. Much of the remaining $0.7 million avail-able under the two loans will probably be utilized before the end of1959, for the financing of projects presently under active considerationby PICIC.

8. A summary of the foreign exchange loans approved by PICIC throughMay 31, 1959 specified by sectors of industry and sources of financing isgiven in Annex I. Apart from one new sugar mill and a number of projectsfor small and medium-size new plants, the financing was for modernizationand rationalization and, to a lesser extent, for expansion of existingindustries. The main beneficiaries of the financing were the sugar andtextile industries which received 4C1..0 and 32% of the total respectively.The remaining 28% was for a number of projects mainly in the food process-ing, chemicals and pharmaceuticals, mechanical, glass and ceramics andmiscellaneous small manufacturing industries.

Rupee Loans

9. Rupee lendings have developed slowly showing an average rate ofincrease of approximately Rs. 1 million per month. The easy money situationand keen competition of the local financial institutions, private andGovernment, have been the main factors responsible. The large amount ofprivate capital, which has come out of hiding following the stern measurestaken by the new Government against tax evasion, have added to the presentmoney supply. Consequently, the demand on PICIC for rupee loans has beennegligible, and the Corporation's investments have been limited to smallloans or refinancing of loans previously made by the Pakistan IndustrialFinance Corporation (a Government-owned institution) interlinked withforeign currency loans to the same borrowers, These latter transactionshave been considered necessary by PICICIs management for consolidating theborrowers' financial position or making adequate security arrangements toprotect the CorporationTs investments.

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Size and Terms of Loans

10 In size, PICICts loans range between Rs. 100,000 and Rs. 2n5million ($21,000- $525,000) and in an exceptional case (Crescent SugarMill) amounted to Rs. 10.7 million ($2.25 million); a majority are foramounts less than Rs. 500.000 ($105,000).

11. The terms of the loans vary from 5 to 10 years, including graceperiods of 1 to 3 years. The Corporation at present charges an interestrate of 6% - 6-2% (in exceptional cases 72%) on its rupee loans and 7% -712% on its foreign exchange loans (against interest paid on the IBRD andDLF loans at 5-3/4% and 5% respectively). In addition, in connection withits foreign exchange loans, PICIC sometimes charges a commission on "turn-over" of 1/16 to 1/3 of one percent of the borrowerts total annual salesup to a maximum amount equal to 2% - 3% of the amount of the loan outstand-ing eflfectively increasing the interest rate to at least 81%, in some casesto as high as 10 B .

Equity Participations

12. PICIC's equity investments, so far, have been mainly in the formof option rights and direct subscriptions, usually arranged for in conjunct-ion with foreign currency loans. The option arrangements often provide forshare options on 50% of the loan at par or the approximate market value.In cases where the shares have a limited market-ability sometimes repurchasearrangements at a premium are provided for. iJhile as yet small in volume,these operations represent an important source of potential revenue forthe Corporation in the form of tax free profits from capital appreciation.

Operating Methods

13. As noted above, PICIC has frequently made additional charges inconnection with its foreign exchange loans. These transactions have theeffect of substantially increasing the actual or potential return on theCorporationts investments. The Bank is reviewing these policies which haveraised some local criticism with the management of the Corporation.

14. As regards PICIC's operational procedures, it should be notedthat the Bank for some time has been concerned Trith the considerable timelag between approval by PICIC of loans and the signing of the loan contractsand disbursement of the loans. This has been particularly marked in regardto loans in foreign exchange. This time lag can be explained in part byPICIC's past practice of considering as approved (sanctioned) loans whichin effect have been approved only in principle. Several other factors havealso been responsible, some of which were outside the Corporation's control,eog. the time involved in obtaining Government consent (import and foreignexchange license and capital issue permit), and the delays on the part ofthe borrowers in completing technical and financial arrangements requiredby the project. At the beginning, considerable time was required in workingout satisfactory arrangements for submission of projects and appropriatecontractual arrangenents with the ultimate borrowers.

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15. Various measures have been taken recently, which may be expectedto result in an acceleration of PICICts lending procedures:

a) under the new Short-Term Plan, recently announced by the Govern-ment, no import and foreign exchange licenses will be requiredin respect to projects in the sectors of industry covered bythe Plan (see paragraph 25);

b) PICIC has decided that it will give more active assistance toits borrowers in the study and presentation of projects and willwithhold its approval (sanction) of a project until all itsmajor technical, financial and legal aspects have been firmlyestablished and agreed upon with the borrowers;

c) a standard form of Heads of Agreement has been prepared byPICIC and is being reviewed by the Bank, which will serve as abasis for future loan contracts with its borrowers;

d) PICIC's professional staff is to be reinforced to cope with theexpanding operations,

IBRD Loan Operations

16. Up to May 31, 1959, PICIC had sanctioned 15 projects for financingfrom IBRD loan funds in the total amount of $3.8 million. As of September14, the Bank has credited to the loan account an amount of $3.3 million inrespect to 12 projects. Of the remaining three projects, requiring a totalcredit of $0.5 million, two are awaiting IBIRD approval, subject to receiptof additional technical and financial information and one is in the processof preparation for presentation to the Bank.

17. Of the 15 projects sanctioned by PICIC for financing under theBank loan, 7 are for modernization and rationalization of the textileindustry and one for a new sugar mill; they represent about 42% and 30%orespectively of the funds allocated from the Bank loan to date. Theremaining 7 projects are for smaller investments in the mechanical,chemical, vegetable oil, packaging, wool scouring and pressing, andceramics industries. Most of the projects for which credits have beenapproved by the Bank are in an early stage of construction. Progress ingeneral has been satisfactory; the combined total amount disbursed orcommitted under letters of credit by the Bank in respect to these projects,as of September 1i, 1959, was $l.46 million.

18. PICIC at present has available from its foreign shareholders'capital subscriptions an amount in foreign exchange equivalent to $1.2million (@o.63 million and E0.2 million) which it can use for interimfinancing of its foreign exchange loan operations. Although under exist-ing foreign exchange regulations, these foreign currency holdings shouldhave been surrendered to the Central Bank, the Corporation has been per-mitted to retain them in current operations.

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190 In financing industrial projects under the Bank loan, PICIC hasgiven consideration to the economic merits and the technical and financialsoundness of the projects as well as to the security of its investments.The study of the projects and their presentation to the Bank still leaveconsiderable room for improvement. However, considering the short timeof PICICts activities and the particular local conditions in Twhich itoperates, progress to date may be considered satisfactory. In the appraisalof projects, the Corporation has made extensive use of the services of con-sultants and of other outside assistance available from Government agenciesand foreign technical missions. In this way it has been able to cope withthe growing amount of credit applications, while still in the process ofbuilding up its organization and staff.

IV. MAINAGEM1UT AND ORGANIZATION

20. PICIC at present has a Board of 14 Directors of which 10 representthe Pakistani shareholders, 3 the foreign shareholders and one the PakistaniGovernment. Because of the departure of the American Director earlier thisyear, a new foreign shareholders' representative has to be nominated to theBoard. The Chairman of the Board has a wealth of business experience andenjoys an excellent reputation in the local business community.

21. In matters of policies as well as operations, the Chairman andthe Board have relied heavily on the competence and initiative of theGeneral Manager, who has been in charge of operations since the start.The General Manager has been resourceful in getting the Corporation inoperation quickly, and has conducted its business with energy, imaginationand a keen sense for profitable business. He is assisted by a capableJoint General Manager with commercial and central banking experience, whohas a good knowledge of local business conditions and has particularlybeen instrumental in establishing good contacts with the Government,

22. The Corporation has its head office in Karachi and maintains twobranch offices, one in Dacca, East Pakistan, and one in Lahore, WestPakistan. In the short time of its activities, PIGIC has been able tobuild up a small organization which has stood up well to the many problemsencountered. The present professional staff of 11 (including the twbranch managers) consists of 2 engineers, 4 financial officers (with bank-ing, accounting and general commercial backgrounds), 1 legal counsel, 1secretary, 1 bookkeeper and 2 junior administrative officers. With thispersonnel and extensive outside assistance from consultants, Governmentagencies and foreign technical missions, the Corporation has been able tohandle its rapidly growing business. It is now intending to further buildup its organization and strengthen the professional staff by hiring anexperienced all-round engineer and an industrial economist.

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23. These measures should help PICIC cope with its rapidly expandingbusiness and increase operating efficiency. The eventual success of theoperation will depend on the arrangements, as yet to be made, in regardto the Corporation's future management. The present Chairman intends toresign in the near future, and discussions are under way wzith a suitablecandidate who would assume his office on a full time basis. The presentGeneral Manager will leave in the spring of 1960 and arrangements are nowbeing discussed for a successor. It is important that the new GeneralManager should receive firm guidance and full support by the Chairmanand should be assisted by an able Deputy General Manager. At this stageof rapid growth and changes in management. PICIC needs advice and activeassistance in matters of policies and operational procedures. PICIC hasrequested the Bank that, for a limited time period, it provide a consult-ant to render such services to the Corporation.

V. INVESTMhNT PRCOGRAM AND FINANCING PLAN

Credit Demand

24. There has been a steady demand on PICIC for loans in foreignexchange, Recently the flow of loan applications has assumed an acceleratedrate which seems to be due in part to the increased confidence of businesscreated by the Governmentts economic policies favorable to private enter-prise and in part to the pent-up demand for foreign imports resulting fromthe stringent foreign exchange situation*

25. PICIC's management is anxious to take full advantage of thissituation and increase the rate of its foreign exchange lendings, whichhave now been facilitated by the Government's new Short-Term Plan. ThisPlan lists investment targets in priority sectors of private industrywithin which PICIC may make investments in foreign exchange without refer-ence to the Government, Total investments envisaged under the Plan overan 18-month period ending June 30, 1960 amount to $63 million (Rs. 30crores) equivalent in foreign exchange, of which about 60% has been al-located for imports of miscellaneous equipment for modernization andrationalization of existing enterprises (balancing equipment) and thebalance for new projects. Since most of the current credit demand quali-fies under this Plan, PICIC, while free to make its own selection of projects,will be relieved of the time consuming licensing procedures previously re-quired, and will be able to step up considerably the rate of its loan oper-ations.

26. Rupee investments are expected to continue at their present lowlevel unless some of the management's plans can be r2alized providing foran active participation of PTCIC in the transfer of the financing ofcertain industrial enterprises of the Government-owned Pakistan IndustrialDevelopment Corporation (PIDC) to private business. Because of the un-certainty of these transactions, however, no account has been taken ofthem in the Corporationts investment program.

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Three-Year Investment Program

27. PICIC's management has prepared an investment program for theyears 1959, 1960 and 1961, a summary of which is given in Annex III. Thisprogram has been based on an evaluation of the amount of applications pre-sently on hand and in prospect. Depending on future investment activitiesand credit demand of the private sector of industry, the program may varyin its size and composition, but medium-term credits in foreign exchangefor balancing equipment and small new industrial projects may be expectedto take the major share.

28. The program represents a considerable expansion of PICIC's creditactivities over the next two and one-half years, which will put additionalresponsibilities on its management and staff. Its timely execution willdepend on the steps taken by PICIC in strengthening its staff and organiz-ation.

Estimated Foreign Exchange Lendings

29. During the three-year period, the Corporation expects to makeloans in foreign currencies totalling $24.2 million. Of this amount, $16million are estimated to be medium-term for the importation of balancingequipment (including $4 million for the textile industry) and for smallnew industrial projects mainly in the processing and manufacturing sector.The remaining $8.2 million are estimated to be long-term for largerprojects for industrial expansion and new industrial enterprises.

30. The estimated foreign exchange requirements and resources ofthis program over the three-year period are summarized in Annex III. Com-mitments in foreign exchange are estimated to increase from $t4.8 millionat the end of 1958 to $29 million at the end of 1961. The proposed newfinancing of $20 million together with the first IBRD and DLF loans ($8.4million) would cover estimated loan commitments through 1961 but for asmall balance ($0*6 million). New foreign exchange funds would have tobe raised during 1961, to cover this balance and to provide for furthercredit expansion in 1962 and after.

Proposed IBRD and DIF Financing

31. Of the $20 million new financing requested, about 2/3 would befor medium-term loans for imports of balancing equipment and for smallnew plants, and 1/3 for long-term loans for larger projects. Under acombined IBRD-DLF? loan operation a DLF loan would best serve the medium-term requirements. An IBRD loan should be sufficiently flexible to covermedium-term as well as long-term financing. On this basis new IBRD andDLF loans of up to $10 million each would appear to be justified byPICICts present lending program through 1961.

32. PICIC's management has proposed that the new DLF loan, similarlyto the first loan should be medium-term (five years) repayable in rupees,the foreign exchange risk to be carried by the ultimate borrower. Underthe present IBRD loan, the Government has guaranteed the foreign exchangerisk. PICIC, however, has found it difficult to avail itself of this

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guarantee, because of the preferential treatment this would give to borrowersunder the Bank loan as against borrowers under the DIF loan, and in fact, inrecent loans has placed the foreign exchange risk on the borrower. Under theproposed new Bank loan, the Government would not assume the foreign exchangerisk, which would be passed on to the ultimate borrowers 0

Estimated Rupee Investments

33. The rupee requirements of the three-year program are shown inAnnex III Rupee investments during 1959-1961 are estimated at a totalof Rs. 48.1 million representing an average rate of investment of aboutRs. 16 million per year, as compared to Rs. 12 million in 1958. Equityinvestments are expected to represent approximately 20% of the total,asagainst 6% in 1958. About 62% of the loans wjould be medium-term for smallerprojects, mostly for renewals and replacement, and 38% long-term for largerprojects.

Estimated Rupee Resources

34. The estimated requirements and resources available for financingPICICts investment program over the three-year period 1959-1961 are shownin Financial Forecast Annex IV.

35. Available rupee funds from paid-up capital and the Governmentadvance (Rs. 14.5 million) together with the anticipated cash inflow fromloan repayments, sales of securities and investments, and net operatingprofit (Rs. 50.8 million), would be sufficient to cover estimated rupeerequirements for loan disbursements, amortization payments on the firstDLF loan, and an annual dividend of 4% (totalling Rs. 61.8 million)Liquid rupee resources at the end of 1961 would amount to Rs. 3.5 million.This represents a modest operational balance, which would have to be sup-plemented by new funds, as and when required by a further expansion ofthe PICICts rupee investments. The management of PICIC believes, thatany additional rupee funds, if required, could be obtained on loan froman allocation of ICA counterpart funds. It should be noted, however, thatafter consummation of the proposed new loans of $20 million, PICIC underits present debt/equity limitation of 3 to 1, would have left only a slimmargin for further borrowings. (See paragraph 37). Consequently, inmeeting any future substantial financing requirements, the Corporationwould have to raise additional equity as well as loan capital.

Financial Position

36. PICIC1 s financial position after implementation of the programat the end of 1961, would compare to the actual position, as at the endof 1958, as follows (see Pro-Forma Balance Sheets 1959-1961 in Annex V):

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As at December 31, 1958 1961 1958 1961-Mil.Rs.- - Mil.Rs 6-

Assets Liabilities

Rupee loans 5 29 Share capital, surplusForeign currency loans - 119 and reserve 21 23Equity investments 1 11 Government advance 30 30Temporary investments in IBRD - First loan - 20

Government bonds and DIF - First loan - 10industrial debentures 30 - IBRD and DIF proposed

Other Assets 5 new Loans - 80Cash and Banks 15 5 Other liabilities - 6

Total LiabilitiesTotal Assets 51 169 and Equity 51 169

37o On the assumption that of the $20 million (Rso 95 million) proposedadditional borrowings in foreign exchange, $16.8 million (Rs. 80 million)will have been utilized at the end of 1961, PICIC's total indebtedness (ex-cluding the Government advance and after repayment of part of the first DIFloan), as of that date, would amount to Rs. 110 million. Under its Articles,the Corporation may borrow an amount equal to three times its share capital,Government advance and surplus and reserves, which at present represents amaximum borrowing power of Rs. 153 million.

VI. ECONOMIC JUSTIFICATION

38, Lendings in foreign exchange, from the beginning, have been amajor function in PICICts operations. The deterioration in Pakistan'sforeign exchange position in the past two years has caused the Governmentto tighten up its foreign exchange regime, resulting in drastic cuts inimports, including capital goods. PICIC, because of its access to IBRDand DIF financing has been in a unique position of providing financing tothe private sector of industry for imports of machinery and equipment, other-wise unobtainable. Through its assistance the Corporation has enabled theindustry to carry out urgently needed rationalization and modernization ofits plant and equipment, and has made possible substantial investments(about 2 times its own contribution) in small and medium size projects fornew industries which promise considerable benefits to the economy in theform of additional savings or earnings of foreign exchange.

39. The Pakistan Government recognizesPICIC's important contributionin the field of foreign exchange financing and has assigned it a key role inthe implementation of the Short-Term Plan for the private sector. The re-quired additional financing would enable PICIC to extend and intensify itsforeign exchange operations to the benefit of the industry and the economyas a whole.

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VII. EhRNTI'TTS PROSPECTS

40. PICICts earnings forecast for 1959-1961 compared to actual resultsfor the first fiscal year ended December 31, 1958, is shown in Annex VI, Inthe first 14 months of operations, the Corporation earned a net income (aftertax) of Rs. 0.4 million ($0.08 million) derived mainly from interests onbank deposits and on temporary investments in Government securities. Con-currently with the expanding loan portfolio, PICICIs earnings over the three-year period are expected to increase at an accelerated rate. The margin onforeign exchange loans, at PICICVs present rate of inte?rest of 7S-% has beenestimated as l-% on the proposed Bank loan and 2J% on the DIF loan, assumingan interest rate of 6% and 5% charged on the two loans respectively. Inaddition, allowance has been made for a substantial increase in fees andcommissions, largely in respect to assumed supplementary charges on loansin foreign exchange, representing an additional return on these loans ofbetween V% and 3%.

41. Despite the expected increase in PICIC s earnings, net income fromoperations, due to high taxation (60%) wrill grow only slowly. It is estimatedto increase from Rs. 1.05 million ($0.22 million) in 1959 to Rs. 2.1 million($W.46 million) in 1961, representing a return on share capital and Governmentadvance of 2.1% and 4.2% respectively. The combined net profit from opera-tions over the three year period is estimated at Rs. 4.8 million, half ofwhich is expected to be distributed in annual dividends (4%o) and the restset aside to reserve. Accumulated reserves at the end of 1961 are estimatedat Rs. 2.9 million ($0.61 million), representing 1.7% of total investments.

142. It should be noted, however, that no account has been takcen inthe above estimates of profits derived from the sale of investments, whichrepresent a potential source of income expected to grow rapidly as PICIC'sequity participations are being expanded, and a market for the share issuesof new enterprises has been developed. In accordance with prudent financialpolicies, PICICs management intends to set aside any profits realized fromcapital appreciation on these investments to a special reserve for investmentfluctuations.

VIII. CONCLUSIONS AID RECOMENDATIONS

43. In the light of the above, it may be concluded that:

(1) PICIC is in a sound financial position and its investmentprogram over the next two and one-half years will recauirean additional $20 million of financing in foreign exchange;

(2) This program provides a suitable basis for a second loan fromthe Bank of up to $10 million. Assuming that the remaining$10 millior is provided on medium term by the DLF, it wouldbe appropriate for the final maturity of the loan to be 10years (subject to extension in appropriate cases) with athree year period of grace.

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44, The Bank should continue to take an active interest in PICIC'soperations and the direction of its investment program, and should assistthe Corporation in developing an efficient organization and qualifiedpersonnel.

P I C I C

SUMMARY OF LOANS IN FOREI,GN aCCHANGE SAICTIONEDBY PICIC UP TO MAY 31, 1959

(by Sectors of Industry and Sources of Financing)

A 1 1 o c a t i o nTotal Loans IBRD Funds DLF Funds

Amount Percent Amount Percent Amount Percentftho3is. of Total (thous. of Total (thous. of Total

IndustrZy Nwuber U Amount Number U.S. $. Amourt Number U.S.$). Amount

Textiles 11 2,426 31.6 7 1,597 42.1 4 829 21.4

Sugar 4 3,045 39.7 1 1,125 29.6 3 1,920 49.5

Mechanical engineering 1 250 3.3 1 250 6.6 - - -

Food processing 6 588 7.7 1 178 4.7 5 410 10.6

Paper board, woodworking 4 108 1.4 - - - 4 108 2.8

Chemicals, phamaceuticals 6 325 4.2 2 162 4.3 4 163 4.2

Glass and ceramaics 2 131 1.7 1 74 1.9 1 57 1.4

Other 8 801 10.4 2 410 10.8 6 391 10.1

Total 42 7,674z/ 100.0 15 3,796 100.0 27 3,878 100,0

1] Four additional ap Dlications, for the sum of $579,000 were under ccnsideration by PICIC.

HX

ANNEX II

P I C I C

IL.A1S IN FOREIGN ZXCHIXNGE APPROVED ORTMER COM IDMATOn E BAUh FOR

FflNTANCHTh1G ROM DIBRD LI 4 UIDS-(as at September 14, 1959)

AmountProjects (Thous. U.S.$)

Projects Approved by Bank:

Hilal Tanneries Ltd. 37Packages Ltd. 158Crescent Textile Mills Ltd. 264Dadabhoy Ceramic Industries Ltd. 74D. B. Walker & Co. Ltd. (wool scouring and pressing) 252Crescent Sugar Mills & Distillery Ltd. 1125Batalla &Egineering Co. (Pak) Ltd. 250Ahmed Bawany Textile Mills Ltd. 250Gul Ahmed Textile Mills Ltd. 210Colony Textile Mills Ltd. 295Jupiter Textile Mills Ltd. 157Valika Textile Mills Ltd. 210

Sub-Total 3,282

Projects Under Bank Consideration:

Chemicals Corporation of Pakistan Limited 125Punjab Vegetable Ghee & General Mills Ltd. 178

Sub-Total 303

Projects not yet submitted:

Star Textile Mills Ltd. 211

Grand Total 3,796

P I C I C AMEX IIIA) INVESTDNET PIROGRAM 1959-1961

Up to Dec.31, 1958 Three jyear Z,am Grand(actual). 1959 19 60 -161 Tobal Total-------------- million… ---------------

Foreign Exchang e LoansBalancing equipment and small

projects 2,18 5.25 4.8o 6.oo 16,05 18.23Iarger projects 2.57 1.00 3,20 4,o00 8.20 10.77Total foreign exchange commitments 4.75 6e25 8*00 10.00 24.25 29.00

Disbursementsa/ - 8.02 7.78 9.20 250oo 25.00

----------------- million Rs* ---- …----Rupee Investments(i) Loans

Balancing equipment andsmall projects 10,07 9,89 6.00 8.00 23e89 33.96

Larger projects 2,00 1030 1loOO 2.00 14e30 16.30

12.07 11.19 17oOO 100 00 38.19 50,26(ii) Equity Investments 0.80 2,50 3.20 4.20 9.90 10.70

Total rupee cormitments 12.87 13.69 20,20 14.20 48,09 60.96

Disbursanents%'/ 5.80 14.56 12.90 22.70 50.16 55.96

B) ESTflIATED FOREIGN EXCHANGE REQUIRMFNTSAND R.:S00RCES 1559.19(.l

(cumulative figures)up to Dec,31, 1958a2,) 1959 1960 1961… ------- …million ------

RequirementsCommitments 4.75 11.00 19.00 29.00Disbursements - 8.02 15.80 25.OO

ResourcepVI3hD and DLF Icans 8,40 8,)40 8,40 8.40Proposed new financing - 20.00 20.00 20.00

8.40 28,140 28.140 28.40Balance (Shortfall)

Commitment basis 3.65 17.40 9140 (0.60)Cash basis 8.40 20,38 12.60 3.14o

i/ Estimated rate of disbursementsForeign exchange loans:

Comnitments thirough December 31, 1958: 90% in 1959 and 10% in 1960in subsequent years: 60% in year of coymitment and

40% in following year,Rupee loans:

Commitments through June 30, 1959: actual figuresit after June 30, 1959: 50% in year of commitment and

50% in following year'.Equity investments:

Commitments 1959-1961 100% in year of commitment./ Excluding $1.2 million equivalent foreign exchange from foreign shareholders'

subscriptions

ANNEX IV

P I C I C

FINANCIAL FORECAS' 1959-1961Tmillion currency units)

1959 1960 1961Fore- Fore- Foreign Local ign Local ign LocalCurr- Curr- Curr- Curr- Curr- Curr-encies ency Total encies ency Total encies ency Total

REQUIR]DENS $ Rs. Rs. $ Rs, Rs. $ Rs. Rs,

Disbursements:Loans 8.02 12,06 50.25 7.78 9.70 46.75 9,20 18.503/62.31Equity Participation - 2.50 2.50 - 3.20 3,20 - 4.20 4.20

Maturing Debt (DLF) - 2o00 2.00 - 4.00 4,00 _ 4.00 4°OoDividends - - - - .80 e80 .80 e 3

Total Requirements 8.02 16e56 54.75 7.78 17.70 54.75 9.20 27.50 71,31

RESOURCES

IBRD Loan No. 185 4.20 - 20.00 - - - - - -DLF Loan No. 15 4.20 - 20e00 - - - - - -

Proposed New Financing:Drawings on IBRD Loan - - - 4.20 - 20.00 4.20 - 20e00

it It DLF it - - - 4.20 - 20.00 4.20 - 20.00

Repayments by Borrowers - 50 .50 - 5.53 5.53 f 10*20 10.20

Sales of Investments - 4.73 4h73 - 15.0O 15,00 - 10.00 10.00Surplus from Operations

(after tax) - 105 1.05 - 1,71 1.71 - 2*10 2.10

Total Resources 8.40 6.28 46.28 8.40 22.24 62.24 8.40 22.30 62.30

BALANCE (Shortfall) foryear 038 (L0,28) 8.47 0.62 4,54 7.49 (0.80) (5.20) (9.01)

,ash and Banks: 2Beginning of year - 14.46?- 14.46 .38 4.18 5.99 100 8.72 13.48End of year .38 4.18 5.99 1.00 8.72 13e48 20 3.52 4.47

/ Includes estimated Rs. 10 million convertible debenture loan to Joint SteamerCompanies.

#/ Includes $1.2 million equivalent foreign exchange from foreign shareholderstsubscriptions.

ANNEX V

P I C I C

PRO-FORMA BAIANCE SHEETS(Plillion Rupees)

Year ended December 31, 1958 1959 1960 1961(actual)

ASSETS

Temporary Investments in GovernmentSecurities and Debentures 29.73 25.00 10.00 -

Assistance to Industries:Equity Participations e80 3e30 6.50 10.70Loans in Rupees 5.00 17,06 26.76 45h26Loans in Foreign Currencies - 38e19 75.24 119,05

35,53 83.55 118o50 175,01

Less: Repayments by Borrowers - 50 6.03 16,23

Total Investments 35.53 83.05 112.47 158.78

Fixed Assets (Net) .11 20 o25 .30

Interest accrued etc. .52 1.75 2.50 5.25

Cash and Banks 14.46 5.99 13.48 4.47

Total Assets 50.62 90.99 128.70 168.80

CAPITAL AND LIABILITIES

Share Capital (Paid-Up) 20.00 20.00 20.00 20.00

Government Advance 30.00 30X00 30X00 30.00

Reserves and Surplus .40 .65 1,56 2.86

BRD Loan No. 185 - 20.00 20,00 20.00

DIF Loan No. 15 - 18.00 14i00 10.00

Proposed Loans - IBRD - - 20.00 40,00- DIF - - 20.00 40.00

Liabilities and Provisions .22 2034 3.L4 5e94

Total Capital and Iiabilities 50,62 90.99 128.70 168.80

AJEX VI

_P I C I C

FARNINGS FORECAST 1959-1961kmillion Rupees)

1958(actual14 months) 1959 1960 1961

EENDPITRES

Salariea2/ e40 ,44 54 60Other Administrative Expenses 38 el. ,Lb6 .18Directors' Fees and Expenses .04 .04 fo4 0o4Audit, Legal Fees and Depreciation .02 O4 004 04Income Tax _ .36 1,32 2., 343

Total Expenditures 1,20 1099 2485 4r71

IMC OME Interest on:Securities .80 o85 .93 .50Bank Deposits *71 G34 420 .10Rupee Loans .07 o80 1.20 1.90Foreign Currency Loans (Gross) - 139 3,90 8.35

1.58 3,38 6,23 10.85

Less: Corimitinent Charge and Intereston Borrowings - .55 2.10 4.88

1.58 2.83 4.13 5097

Dividends received 3/ - .17 e33 .54Fees and Sundry Commissions .02 .04 1o0 .30

Total Income 1.60 3.04 4.56 6,81

NIET INCOME (after tax)v 0.40 1eO5 1.71 2.10

APPROPRIATION OF NKE' INCO14E

Balance from previous year - o20 .25 .96Net Income for year .4o0 1O5 1.71 2.10

.40 1.25 1.96 3.06

Appropriation to Reserve .20 t2O .20 100Distribution of Dividen ' - .80 .80 .80Carry over to next year 20 .25 .96 1.26

.40 1.25 1.96 3.06

See Footnotes to Earninas Forecast on next page.

ANNEX VI

Page 2

P I C I C-

EARNINGS FORECAST 1959-1S61

ASSUMPTIONS

2/ Salarie7' assumed gradual increase in personnel over 3 year period,including 3 senior professional staff members.

2( Income Tax: calculated on all income other than dividends received(Which is tax free) at prevailing rate of 6O%G

/ Interest and Dividends received: Return on various investments estimatedas follows:a) Government securities and industrial debentures:

average rate 4-3/4% in 1959 and 412% in 19i0/61b) Bank deposits 2% as at presentc) Rupee loans 62,%; foreign exchange loans 72-% and commit-

ment charge J$ as at presentd) Dividends on shares: assumed average rate 5%.

i Interest paid: Assumed 5% interest on proposed second DLF loan and 6%interest and 3/h% commitment charge on proposed secondIBRD loan of 10,0 milaicn each.

2 Net Tneome: does not include profits from capital appreciation(estimated to be realized on sales of investmernts), which

will be set aside to special "Investment Fluctuation Re-serve".

6 Dividends Paid:assumed distribution each year of 4% dividends starting1959.