WOBLP BANI(K~mr rIS NRuwnber- Ton

ione Reflectcons on toneWVorld B3anlc's Exper'ience wi'thDevelopn-tent Finance Cornpanie

7kep3rdted from V;t-niQ-, ard PctkIRch ,W"Ockly

VclWre VWS2, uqmrnaIo £3, RevWatw of Mare!3eiader i. June 193

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World Bank's Experience with DevelopmentFinance Companies

William Diamond

Ravi Gulhati

Reprinted from Economic and Political Weekly, Vol VIII, No 23, Review of Managemeat, June 1973.Pagination as in original, advertisements excluded.

Some Reflections onthe World Bank's Experience

with Development Finance CompaniesWilliam Diamond and Ravi Gulhati

It is muich easier to evaluate the performance oJ ani indli'idual dei'elopmmIentfinance compa/nI)y (DFC) thalnthat of the entire group of DFCs associated with the Wortld Bank. The heterogenieity of this group of DFCs andthe diversity qf their en iirni,nental and institutionial characteristics makes genieralisationis abouit t&h.ir perfor-mance very difficult. So also does ilht shifting posture of the World Baik, whose own basis of ()wa liaion haschanged.

This paper makes the effort to reflect oni sone facts which seemn unquestionable, anid to make somegeneralisationsfirom thtem.

THE interest of the World Bank Group ries, the WBGs activity in the industrial Thus, the Bank considers DFCs not(WBG) in development finance com- field would be clearly biased in favour only instruments for transferring capitalpanies (DFCs) began in 1950.1 The of very large-sized projects. Closely and knowhow to a large number ofnetwork of DFCs associated with the related to its wish to penetrate more small and medium entrepreneurs, butWBG increased gradually to 45 at the deeply and more broadly into the indus- also as permanent instittutions capableend of December 1972. Roughly two- trial sector has been the Bank's wish of adapting to, and modifying, thethirds of WBG lending to the industrial (attenuated with the passage of time, environment and of devising indigenoussector during the sixties was channelled but not eliminated) to promote private solutions to local problems. How to tapthrough these in,.irmediate credit insti- investment and private enterprise, As household savings in the context oftutions. Altogether, the Bank, IDA and it happens, large-scale enterprise in prevailing family mnores? How to ir.flu-I1FC bommitted, till Deceml)er 31, 1972, developing countries is generally public ence corporate savings decisions in thethe equivalent of $ 1.7 billion in the in ownership and control; small- and light of business practices, ownershipform of loans, credits, and equity. medium-sized enterprise is overwhelm- pattems and the tax situation? How to

The Bank's relationship with DFCs is ingly private. win the confidence of governmentnot confined to the provision of finance. The second reason for the Bank's authorities and thereby obtain publicThe Bank also extends technical assist- interest in DFCs goes beyond the matter funds for development purposes? Howance, helps recruit managerial and of administrative convenience. It con- to influenee insurance companies, com-senior staff, trains DFC personnel and cems the basic concept of the develop- mericial banks, and other financial enti-supplies selected categories of informa- ment process and how it can be stimula- ties to expand the volume of industrialtion on a continuing basis to the deve- ted. Methodologies change in identify- finance? How to persuade potentiallopment banks associated with it. Miore ing the key to accelerating economic investors to examine their pro,ects criti-fundamentally, the Bank has played a progress in underdeveloped countries, cally? How to protect them from thek.:'y role in the initial establishment of Once it was (and among some, it still skilful salesmanship of foreign supplierssome DFCs and in the reorganisation is) considered that the injection of ex- of inachinery anxious to sell their wares?of -tIheis. In at least 16 cases, the ternal capital is the key. At other times How to find suitable foreign partnersWVIiG can be said to have influenced (and among other groups) emphasis for local busillessmnen, and how to sup-significantly the basic structure of the has been placed on the i'flow of techii- port local businessmen when they nego-institution. cal assistance. Clearly, both are im- tiate with large, experienced multi-

Why is the Barnk so lprofoundly inter- p)ortant elements in the I-lture. low- national corporations? These and manyested in DFCs? There are essentially ever, there is more to (levelol)ment thanr other questions needI to be aInswered.two reasons. First, these intermediaries capital accumrulation and knowhow. To answer them well requires detailedare convenient retail outlets through Econonmic devceulonpent involves basic know%ledge of time local scene and goodwhich the Bank can assist a broader changtes in society and in its institu- judgment distilled from long experi-cross-section of industrial enterprise in tional framework. DFCs are one ele- ence. A good DFC should provide thatthe developing world than would be ment in the complex of inistitutions and knowledge and judgment.feasible through a direct flnancing of mechanismns through which a societyprojects. Direct financing works well mobilises itself to achieve modernity. It BASES FOR EVALUA1oN

in the case of very large steel; fertiliser, is the context of such institutions thator pulp and paper plants, But direct professional staffs are built, decision- The group of DFCs associated withfinancing by the WBG would be pro- making skills are acquired and qualities the Bank is heterogeneous. Some havehibitively expensive - in financial termis of leadership are identified. It is only barely started; others are in their teensand in terms of staJ time - for pro- when expansioni in investment, output, and four have celebrated their twentiethjects whose total cost is below, say, $5 and employmnent, proceeds side ly side anniversaries. Some are operating inmillion. And yet, the cost of the hulk with institutional and entrepreneurial econornies which are still non-industrialof maniufacturing investment in most growth that the development process is in character; others are in semi-indus-developing countries is well below this likely to becomne firmly rooted in a trial countries. Some are wholly gov-level Without recourse to intermedia- society. ernment-owned while others are entirely

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private in ownership and control. Their This posture reflected a strong belief in weatlber economic and political storms.diversity is the reoult of iiot only struc- the effectiveness bath of private man- Perhaps this resilienice was the resuilttural differences related to their age agemnent of DFCs and of the desirabdilt- of their basically sounid financial str-uc-and ownership patterns and to thle stage of supp)orting private entrepr-eneurshiip ture or perhiaps it reflectod the gYeneralof do'veloprnipnt of' the economies in antd mobi'lisinig private techinical and( acceptance of tl-eir ob)jective.-; it m-ustwhich they operate, but also of differeni- financial resources for industrial dlevelop- certainly have beeni in part the reVSultces in management style and policy ment. In 1968, the Bank's policy of the political and nrai,1:1cerVill skills oforientation. cbnngc'dC( withi regard to insisting on the-ir chief executives,

By what standard should they be private DFCs; it decided that govern- it is notable thiat anost of [lhe I)Fi'Csevaluated? The performance of DFCs "en'it'(iwnied or conitrolledI l`Cs mright associate(d withi the WMit have notmiay be assessed by several standards. be necessary anti that they miighit play a me(relyv survived, Th'ley hiave also enjoy-valuable role under certain conditions. In e Cnmiyo uraenrt rhv

(a Frs, jireai te bJ~tVC~ 1971, the Bank d&'cided that, becauso lere ocac mngmn naand policies of thte DFC itself, VLnwtpoivan obetv r lre tobrv raigeeiti nas laid out in its Articles of A\sso- go'iinet oiya( oiciecr orderly fashion; i v, policies anid pro-ciation (or chiarter of organic curnstaucies in somne couintries made pri- cvdures have becomec sufficiently well-lawv), in its fonnial policy state!- vate enterprise unlikely, it wouldI established to ass~ure in, itutimiiial stahi-ment (if therec is one) t.nd ini not insist that the hulk of a DFC's lt, ept la~si :ngmn.Iperiodic Boardt decisions. In this ihssb wih p vteetrrss liydsiecan, nmiagnet.ncategory should be inehuded the bins bewt iveetepss, its 21 years of life, nmman,11:e-onet ofobjectives of the shareholders, if Bank policies wvill no doobt cootinue tii TSKB (Turkey) has r-emainied e'sseittiallyvthe DEC i', privately ownied. The change -- not only, in the lighit of its the samie, althoughi two different mnenfirst approachi to an evaluation of operational experiencee wit', I)F"Cs andi have from time to time hieldl the keyperfonrmarce involves a compari- with its member couotmie.,, but also in psto. Tesye adqaiyosonl between those objectives antIpitn. Tetve a( pltyowhiat the DFC hias in fact done telgtoth akstio.n nng-retof ICIC'I (India) have alsQin a particuilar periodi of timie. ceptioni of its own role ini economici remained essen)tially the same, (le-spite

(h) Performnance may also be assessed IILcsIL-oltii1cn t. a, crucial chiange, a f-w years ago, inagainst the policy objectives of It is mutchl easier, to evaluiate the per- the. comnpositiom of ownership. Onilythe governiment of ,he country inwhich 'he I)FGe is located. The forniance of an ind(ividuiall)C thait of untimely de.itli has forced e-hanges inobjectives and policies of DIYCs the group of DFCs assmociated wvith the u1.-n.ti4ciiuiitt in CM,) (Taiwan), hut soassociated withi thet WBG are al- WBG. The hleerocinci t ol tilt grouip fair these have niot infringed upon policy-ways congenial to the government of DECs associated withi thet WMll - or management imi,tinlo. Manly of thieedadat the; time t hi)F sestablih the diversity of their environmental taid I)FCs still have their orig;inal chiefbegins to deal with it. But institutional cliar:icteri-dims - miakes executive olficers; miost of the l)FCsgovernments and their policies: generalisatious about thecir performance older, than live years hiave liad thechange, antI divergences (and very difficuilt. So also dues the shifting same chilef executtives for at least .qveweenc staiDEC man dtegvern) e- posture of the Banlk, whose owni ba-sis :vvirs. This notable stability may bernent, uinless the DEC is abl to of evaluation hias changed. Th'Iis paper attributed to the development of anadjiust to the changing situiation. makes the effort to rellect oin stone facts undlerstandinig amiong shareholders and

(c) A thiird standar'd again-st whichi WhichI seeM tmu(1iiti'siNH01ltlm1, and to -nake of 'an eyprit (le corps among board mem-performance may he assessed, is some geeaiaiisfront them,l hers ahout the nature of the DFCs. Itthe WBG's own policy aims, i e, also dlei nost rates the resilience, leader-tie expectationis abou;t a DECSoeAcipihetshpadefcveesofIF nngrshield by the WIBC. The WBC oeAcmlsmnssiGn efcieeso E aaesmakes decisions as to wvhether to Survival is, of course, an accomplish-support thie establishmer't of SURVIVAi, ACAINS r ADVERSITY nment. However, while it is a necessarya DEC and whether to ctontinito condition for a DEFC to f-ulfli its miis-to providl:' it with financial To carry out their missions effectively, sion, it is hardly a suflicituit onie. Simimi-resoumces in the light of the DFCs mnust survive the turbulence inl larly, stability of mnmiiageml.'nt is genle-W13G's prio)rities anid lendling their enivironmient and( at tlile samne time rlyasoitd fItgo tstticiaprogramme in the couintry. It ke nse)wt lebii 1rt(f rlyascae %hgo i,HttoiIt can be exptec'ted to dt so only ke inspwthtthsctmntt perforniance i)ut thiere is nt necessaryif thie l)ECs performance con- national change. By) 'turbulence' ss C cauisal link betwe#'n the two. It is qutiteforms to th0o Bank's general meani inistability in the pitititi.a, social lyissilde for a l)VC to suirvive and( toobjectives anid policies, or economic realm which reflects tt'ili- have the samne execuitive biead for a

The three viewvpoints, though distinct, porary aberrations or erratic mov""lements decade or miore without creatitrg a (lis-are inter-related. Nevertheless, this as tlistinct from the miore enduring ele- tnusidoeainlrcrl atrpaper is concerned primarily with the ments in the process of national dleve- other than survival anti slability, arethi-rd : conformity wvith the WBC's lopmnent. Contditions in miany coUmn- also important.objectives and policies, Discussion of tries in the dc'veltipiiig world hiave beenthe performance of DECs fromi unstable in this seitse. ltitermra*i'tt.l STAFF DEVE_LOPMENT1this viewepoint. is not easy. For war, civil wvar, ct)nstitiititminl hro.kthowir,the Bank'.s --pecttitins and policies chmaig.z'us ini gevcrinment, tramiunir ic DFiCs mutst rcci mit, traiti, and (leploywith respect t. QDFCs havc' shiifted dur- chtangt in exclhangc' rates or othier a staff of engineer.s, financial analystsing the past twvo decades. One examnplo polities have, fiuurtl in tlrwir history. and othcr professitomil. A conitetentis the Bank's policy rcgirding the owner- These crises have addled greatly to tIme andi wvcl-organibcsd staff withi goodship of DFCs. Thrrttur'utiiut the fifties ntormial pruldonis of DECs 'and( in somie mnoralc is a critical resoulrce for carry-and moxst of the sixtie~s, thle Bank insisted cases have endangered their viability. ing ouit the normnal tasks antd thle in-on financing only privately-owned deve- It is therefore sigp1rriL.Iult that, practic- niovative functions of' these institititmlos.lopment banks which financed pr#oduc- ally without exception, the W)Cs a,;so- It hias not been easy for DFCs totive erterprises in the private sector. ciated with the WVBG hiave nianagecd to acquire this resource in the context of

M-49

the acute scarcity of high-level man- however, that mnany of the DFCs were questions, the DFC was casting doubtpower clharacteristic of many developing, not cashing in on a rapidly expanding on their projects, unidermininig theircountries. What complicates the sittia- manufacturing sector but were taking credibility, and threatening theirtion is that people who have the required over the financing function from other standing in the business community.skills and outlook are precisely the kind institutions and provijing funds on Still other industrialists feared that, byof people who are sought by private more appropriate terms. passing on detailed1 information to thefirms and govemment agencies for im- Yet, despite the record of growth in DFC, they would be revealing businessportant positions. Many DFCs have the sixties, most of the DFCs remained secrets to potential comnpetitors andhad to recruit frv K: 'iraduates from the relatively small in terms of the propor. financial infonnation to the tax collector.umiversity and to z7,oom them for the tion of total industrial investment Despite these difficulties, many DFCsjob. They have made use of national financed by their disbursements, (,ene- have succeeded in bringing home toand international training facilities and rally speaking, DF)lC disbursements their clients the virtues of carefulat least one (PDCP. in the Philippines) made up somewhere hetween 5 per cent project formulation and appraisal. Inhas established an institute for training and 25 per cent of industrial invest- doing so, they have helped industrialistsits own staff. In some DFCs, foreigin ment; most of the DFCs were at the to overhauil accounting systems, toadvisers have played an important role lower end of the range. This simall analyse systematically the implicationsin upgrading the quality of local staff. cuanititative role,was a reflection of the of proposed business decisions and toSome of the older institutions have manl- fact that capital formatioin in industry apply modem forecasting techniques.aged to acquire a team of professionals is financed to a laige extent by plough- They have managed to win the confi-who are more than a match for their back of profits withinl the firm, On the dence of their customers and to esta-counterparts in govemment ministries, other hand, some DFCs were making blish a relationship of mutual respect.planning offices and the like. In fact, an appreciable contribution to the flow These innovations in business beha-on a number of occazions an experienced of institutional industrial finance on a viour cnnot ati busoless bestaff member of a developrment bank has meditum-or long-tern basis. This was viour cannot be attributed solely to tholeft the institution at the reqiuest of the particularly tru.e of IDBI (Israel) efforts of the DFGs. On the contrary,government to undertake an important BNI)E (Mforocco) anid SNI (Tunisia). they were in any event being broughtofficial assignment. A number of I)FCs Also, these and other ll (Fs ocupLi( l on biy the increasing technical bomp-have helped teain staff members of a prominent place in the rinianeing ( lexity of modern industry and by theother younger developinenCt banks, in the import componlent of investment. associated demand for more sophisticat-the spirit of common endeavour. It is a ICICI was an inportnt supplier of ed rnanagerrent. Moreover from everymark of the success of some DFCs that foreigh exchange for private sector in- country young men were going abroadthey have become sources of skilled dutstry in India, as was TSKB in Tur- for study of the various disciplines thatmanpower for the public as well as key. A growing role is not to be expect- make up business management, andprivate sectors. Professional teams, as- ed in all cases; a declining role is not schools of business management weresembled in these senior DFCs, are a necessarily a sign of weakness. Inleed being set up in many developing coun-strategic asset wvhich have yielded, and it inay be arg,,ued that there is merit in tries. Nevertheless, DFCs were in ashould continue to yield, an important creating u-ominn titive institutiorns, or in good positioni to give a push to thesepay-off both to the DFCs themselves and spiingiml off specialised institutions, new trends; for, having command ofto the community when a DFC begins to have a very oten scarce financial resources, they

large q antitative role in the economy. were able to tie adoption of newEXPANSION OF Aciag techniques to the provision of finance.

DFC accomplishment can also be INNOVATION AND PROMOMION Some of the DFCs, but regrettablyseen in the growth of their poi tfolios. The record of DFCs should be very few, have played an entrepre-Many DFCs have rapidly expanded the juidged not by their financial contribu- neurial role by promoting new enter-volume of their commitments. The rate tion but also by their impact on the prises, Some, too, reacting to theof growth during 1966-70 in 17 DFCs thinking, working hlabits, and attitLdes deriiands of economies growing moreexceeded 20 per cent per annum. In of their clients and of the business complux and sophisticated, have begunsome instances, this growth iepresentecl conim nnity generally. The major innoi to promnote the establishment of newthe initial burst of overatiomi startinig vation development banks have tried filancial institutions- and mechanisms.from a very small base. In other DF'Cs to introduce is the techni(lue of proiectthere was a longer history of very rapid formulation and appraisal. The idlea FINANCIAl. VIABIn2rY OF

groNvth going back tQ the early sixties. that investment proposals should be DFC Cuw.Nis AN DFCsSeven institutions had crossed the spelled out in considerable detail (engi-$200 million mark in terms of cumula- rIetCring blueprints, I)roduction schedules, Through the application of projecttive commitments. Altogether, the total financial projectionr) was a new one in analysis, DFCs and their clients werefinarncial commitments made by DFCs many business commiunities. Many able to ascertain whether or not pro-associated with the Bank amounted to induhlstrialists had never before been posed investments made sense from thethe eqjuivalent of $729 million in 1970. exposed to qltuesLionis or this kind and standpoint of technical feasibility,About 150 commitnmenits were for )FlCs faced considerable resistance business risks, and fnancial priofitability.amounts cxcecding $ 1 miilliotn each, and when they tried to obtain answers. In This systematic screening partly ex-

nearly 3,000 were for amnuiits smmaller somn. cases, industrialists (lid not have plains why the bulk of industrial andthan this sum. Unfortunately, the data the answers, simply becauze they had other investment associated with Bank-needed to compare growbh in DFC; not though1t about the proposed invest- supported DFC operations has provedcommitments, systematically with expan- ment systematically or because they to be financially viable, (Another fac-sion of t,'tal manufacturing investment were unfamiliar with modemn account- tor, which must not be forgotten, is thatin the same countries, are not readily ing methods. In otlher cases, indus- governments often establislhed condi-available. There is reason to believe, trialists felt that, by asking all these tions in which failure was difiBcult: low

M-50

interest rates other grants and conces- to themn by their governm-enits and on But the group also incluides somec of thesiOnis, little or n( external compel ition, the fact that they were dispensing a largest, the most experienced and the.little internal competition.) The record scvercly rationed comminodity (i e, foi eign inost influenitial D)FCs associated withshows that most DFC clients were i~xclhaiige loanis oni a ]nie(liumrnor long- the Bank. The fact that these well-profitable and that there wvere relative- termi basis) as on aniiageri.il aiid techni- established inistituitioiis hiave, been eithierly few cases of structural failure. This cal acumen. Seconid, in the case of unwilling or uniable to redJuce their re-mieans that at lea'st gross errors in invest- their clients, the financial returins earn- liancee oni ollicial finiance by inoiioihiignineit were avoided. Moniey was spent, ed by the owners of projects financed fundIs oni miarket termns is di..mppoiiiting.as planned, on construiction and eqluill- by D)FCs might reflect thie hot-house A dlevice whichel the WVlG biad iproposedment, 1Factories did not collapse; inachi- ;mtniiisphere in which industrialisation as a tempuorary stimiuluis hias tenidedl tonery was found to be suitable for the somietimies takes place, nii.m~ing ineili- become a way of life.planned operation; theire was enough) cienicy in production thirouigh highi pro- Maniy D)VCs were oeix-atiimg withinmoney to install the fixed assets, to tection and other .nbsidis. Thlirdly, a governmoent policy framiework whiichlpurcha-se materials and( to) pay wvages; the question cani be raised whethier thec closcls' circunmscribed the opprtularuitie~.onice production started; the goodis activity of DFCs has resulted in acecn- for tappinig priv'ate savings at home. an(lcould be marketed. These happy se- tuatiing the inequalities of inicomec andI abroad. l'.ary gmveruioents remnainquences should be compared with mrany wealthi whiceh are characteristic of many wedded to a policy of raising savingscases of inifructuous i-nvestment resuilt- of the economies in whlich they operate, thiroughi the budget, thirough governmeniinig from. the attempt to implenment borrowing at relatively low interpsthalf-baked projects in a haphazard DEPENDENCE ON OFFI' At. FUNnS rates, antI thiroughi a system of creditmanner. The list of incentives extended by control as well as statutory require-

The financial profitability of firm governments to DFCs is a lonig one: omenits. Righitly or wigy these gov-which borrowed from DFCs associatedI cnrbtioe s to shiare capital, some- emments believed that developmentwithi the WBG is borne out by tIme tie subordinated to o'ther equity, tax pioo..raniniiii ought to be financed oni thesatisfactory collection exp)erie,nce of holidays or exemptionis, initerest sub- ba-sis of low interest rates, thiat thlethese intermediaries, B3y and large, they sidies. hlowever, pierliapis the most uin- adlverse impact ot these low rates onihave succeeded in rolfling over their potn mcniei on titrs :mIocatii,i dlecisionis colul(l be avoidedIloan portfolio anid serious arrears have rates wvell below the' market pm ce of th,rough admninisrative coimtiols, andseldom assumed daingerous proportions, ~.apital. Such loans conisttitutedi more that voluintary savings were ii(t rcspon-If it is agreed that the large expansion than 20 per cent oif t.,tal resources sive to interest rates, Thet fortmgmirmgin the financing provided by these deployed by 23 DFCs utpto 1970; in five iminmtwitlisian~diing, the policy climnate inDFCs is a considerable achievemnent, caes,o thre. propotio waCs nearlyte 50 per several counitries was s'ifhiiciintly periniis-then the good collection record should cetomreMstDCascitdwh sive to allow DFGs some roomi forbe viewed as an even bigger aox-om- the Bank Group in Asia amid in Africa mianoeuvre. Arim.cmo.emieik niighiclhaveplishment. It means that these DFCs were gi%ven, when they camie inito exis- beenD workedI o(t in ~onime cases to raise.have conducted business in the frame- tec,a neto fIe rcii, md nmre ems MC sagi,miipwork of financial discipline, anid subordinated, loani capital. The hiave i(ot' livedI upto expecta.it;ios on

WVBG recommendled this (inldeed, it this score: they lhave not showed. signii-A satisfactory collection expelience is was often a sinie quia ,mon) as a one- ficant capacity to devise reiourceonly one element in the generally shot stimulus, comparable to temporary niubilisation slchmes and they' hiavestrong financial position of most DFCs protection or tax-relief given to infant mnache little attempit to influence goerni-associated with the WVlG. This is not industries. mn oiy Es hv aualthe place to survey thle mix of fin)an- In addition, govrnnirncits have facili- acepte theolowy oFC concessnaturalv-

capoiisfloe byDC.Sfie tated greatly tIme DFIGs' task of raising erminient finance. They have taken theit to say that the DFCs associated wNith capital from official international and easy route, whichi, tol he sure, w~as atthe WB3G have behiaved pruidently, bilateral sources, by gii:mraimtee~iig thiese least in thei'r short-run initerest, raitherThey have avoided overextending their loans anid sometimes biy providiing pro- thian face the pressure of liviiig in theborrowing capacity, liave satisfactorily tection against foreign v'xclianie risk. m-arket.managed their protective reserves, and Ia more than a dozen caises, cumuilativehave followed well-considered dividend blTon-oVing from the WB3G constituted EF*FdICIENCY OF D)FG PiiOJECrs.Policies. In somne cases, time J)FGs enjoy- more than 20 per cent of the total re- The secondl poinit, that the finiancialed enough financial success, or gave suif- sources availabile. Othier n1licial sources suee.ess of D)FC clienxts is nio assuranceficient promnise of adt ciuato. returns, to - the US All), the Ccriniani KfWV, the that these enterprises have yieldedenable them to obtain adlditional fuinds Fr-enh Caisse Central, the regional adequate developmiental hvlmmefili , reflects

fo prvtsore.dcsvclopmcint banks (1mB, AD)B, EIB) - a growing coincern about 'the induistrialoccupy a prominent position in the policies of many (ie%velopiiig countries.

Weaknesses in the Record overall Tesource picturie of oither DFCs. Even the ardent advocates of the pc.licyThe strong financial showing of DFCs Altogethier, the vast niijority of DFCs of protection anld import substituition

and the financial suiccess of thjeir associated with the- WBIG remain lieavi- have expressedi dismay at the resultsclients are corn Rrtinig. But this is only ly dependent on official funds, both achieved during the past 20 years, Fora limited dleinoimstratiioi of good per- aational and internatlional. Such fuincis csaiunple, Rauil Prehisch - the formnerformnance. At least three important aLcount for 80 per cent t)r monore of Secr-etary-General of ECLA and the firstquesti'ons might be raised about the total resources available to 10 DFCs. Secretary General of UNCTAD - wroteperformance of DFCs. First, profitabnility Some of the institmiti(iiis withi this re- in 1951 that an impoi-t substitutionmay be a misleading index; for the source pattern hiave just got stirtemd, stiategy was necessary to assure theproritability of DFCs might be based and the pict-ure is, thmei efore, niot sur- dlevelopment of primary exportingas much on the incentives extended prising and need not cause concern,. countries operating on the periphery of

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the world economy. By contrast, his l)F"C9. We can onily speculate about uned thirough the fiscal mnechanism; taxesrecent writings tendI to b)e muchi more the results of suchi an axnalysis. It will, andl public expenditures could redlistri-circumspect and muchi more conscious no doubt, identify projects of question- bute incoumes as de.si.ed by governmnent.of the limitations of protectionist able merit whliich depend hie.wiy on. the heexperience of the past 20 yearsstrategy. Our associate, Bela B3alassa, gmver-n~ieiet's policy framcwio-kork for h ir as niot borne out this view of thehas spelled out the imperfections and finiancial viability. IIowever, we would political anid ecomnoiic process in manlythe costs of pursuing such policies he very ).i.)rised if' the analysis demoni- developing countries. Inequality ofthirough an examination of the situation strated that econiomic retuirns on DFC incomec anid wcdth seemns to hiave in-in seven countries. [Thie struceture of Pro- projects were negative. or low all across creased both in termis of personal andtection in Developing Couintries, Balti- the board. Wlhat we expect to fjind is regional distribution. Th'lerefore, accord-more, 1971 page 72.] Ihis pioinit is iiot a scatter of dce%lenpinerital returns - ing to thie new view', "effi'ciency" shouldso much that iiiiport replacement is a somle high and othiers low, This is in be the only criterion for planniniig in-had idea or that a policy of po(iteet ion fact the preliminai-y result of the first of vestment and produtctioni; consideraLionisis objectionable. HeI is emiphiasising, a series of intenisive examinations which of income distributioni mut he initroduc-rather, that in reality the measures taken the WBlG is making of the pmtoltrios of ed at the investmnent planning stage.correspond to no rational design and somie of the DFCs associated withi it. InI Io le hsnwprpcierltthat the structure of effective protec- that first case, we conjcluded that the tow Does adtheis new craietiovs? relate

tintends ho e arbitrary. FrequientEly lait4 majority of projects financed by financial intermediaries are active in thethe, magnitudle of incentives enjoy,ed by that L)t-'( hiave eceioliuie, rates of return mioderni industrial sector consistinig ofa firmn is unintended, and reflects simrply in excess of 80 per cenit. Even whien relatively large andi relatively capital in-the piecemeal and chaotic character of account is taken of the mninority of pro- tensive uniits. DkiCs were structutred andthe decision-making process. jects with unattractive economnic returns, enicouraged by -governinoents and by the

Given these distortions in the cost- iatsee mosetir unlkel that i)thel aggreat WBGC to deal with such enterprises.price-profit mechlanism in miany deve- rtofeunfrth or liasa Inevitably, their operations have hadloping countries, financial calculations whole is lowver than about 25 per cenit inmmiediate and direct 'benefit for, atare not a reliable guide for aswessinq the and( it miay well be considerabldy highier. b)est, thle upper quarter of the popula-merits of projects from the stanidpoinit An ex-post analy.,is of the economic tion) in the income pyramiid. In thisof society. High profits miay bo~ thte pa%-cff of DFC filnancetI P1o0-tS tswill sense., the operations of these DFCsresult of the fact that a ban on iimports be valuable. The qluestion arises wlie-- may have accentuated the duialismof the goods produced by the p)roject thier suchi analysis shiould also he characteristic of miany und(er-deuvelopedresults in an abnormally high domestic performned before DFCs take operational AXicitie, ])FC'(s associated with. theprice. The project may be grossly in- decisionis on specific loain requests. If WBG are not eqluippcd to grappleefficient in design, the managemenit miay thec effort is made to evaluate projects directly wvitlh the problems of the ruralbe slack, the raw miaterifals used in the in this manner and if there is a wide poor or the destitute in urban aieas, aproject, may he inexpenisive -and yet, dlivergentce between financial anid eco- very different kindI of institutionalthe enterprise may earn attractive profits. nomic returxns, liow shiould DFCs react? 1no-ehan1i.Sm1 would be necessary to dealOn the other hanld, a project whlich is They can hardly be expected to sup- wvith these groups.financially weak mnay turn out to have port econiomically attractive projects Nertlssevnwbi terlaconsiderable developmental merit, if the which are flinancially untenable; indeed Nevelnarthelss,beveno withi therea-inssale prire of its output is close to the the likelihood is that they will receive tivey nasrrbtow spheret of DCoper,atios,.Iinternational price, whlilec the raw few applicationis of this kind. The real the ditribution quest inn doearise.Imiaterials it must purchase have to bear (lilemma will arise in cases whiere fin- maytaeaheilitatnefomshiigh tariff and/or excise duities, ancial returnis are unsatisfactory. On (a) to whiat extent dlo DFCsfclte

Litte i knwn t peset abut he hismor laer,social mobility by helping neweconom ic nw ca actepreisenof ou i tvsze thsnoeltr entrants into 'thie entrepreneurial

fionanic byarat)rics. i dof knowthant IMS?ACT ON INtOME ),n,r, nmn111UTION class?(10an or at 1(1) to whatoknowexttent do they helpthe great mrajority of these instituitionis Thirdly, there is the 1Iiiestimui %%liellivr sm twall inxntrli. toepn

no, latDiino,aayete IFC investments have cudunuwed, or at their op)erations and to rise insocial costs and b)enefits of projects least hiave niot counter.wcted, the skewsvtedoca bear-ybefore decidling to finiance theuib. There- iticonne (distrilution genci ally prevail-th soillurlyfore, we cannot dismniss the fear that ign(lelincotrs.Aa,it (e) to whiat extenit dlo thiey premnoteDFCs may lbe suipporting proj-cts which isi imotnt to%o)n app nreites thathin, con ecL'01n11ic acti%sily in the rela-are financially attractive hut whiceh con- cer iprtant to. apprecet l'inat ina thinkcing tively uinder-developed regions oftribute to wasteful imnport sub,stittition. cabout dfvlpucka nctt el,I i.n t iikii the country'?Even projects which are expourt-oriented teepaiwaon uldga ()to htextent do they assistago teelhsswso Mlil d owaare not wholly immiune to the criticism, m-romenituin in investmient and prodluc- local industrialists in negotiatingFew projects cater excluisively to foreign tnanondighsasfiinlyswthorgnparties and thus in-markcets; exp)orts can he made at a loss, Io'l)l, tdinomaer wthrcrease the chances of securingpro%vided this is a condition for operat- th"Abe.I prmay daricipotsi mthis pvebroesqutberrl(:iting in a highly lucrative horne-nmrket.thprmrpatcpnsitisroesquaberrn". t?

Soegvrmnshv aacdte were big or small industziatmists, whiether (e) to whiat extenit do they influenceSom goemmntshae blane(Ith thIey were located in the relaiitively, thle factor proportions iiicorpo-

mincetives on sth osusidiesofimort rexplace- d%vclo1)xd capital city or in the hinter- rated in project design so as tomer yasto usde o xot. land,. it was expected that thiere wvould raise the share of wage inicome

It would be instructive to carry out a take plate in due conrme a diffusion of in total Value-aolded?systtanatic cost-benefit analysis of pro- incoane dhroug4lmout the economy. This On the basis of av ullable information,jects that constitute the portfolios of automlatic "spill-over" Couil(l be ' treumul- it is not possible to assess wvith assur-

ance the performance of DFCs in tionsv with access to private capital heavily on hoth productive enterprisesrespect of these five questions. New markets and that goveirninents ought to and financial intermediaries in the pub-analysis is required to sharpen our find other mechanisms for dealing with lic sector. Other governments mayappreciation of DFC perfornance in less ivell-cstablished or small-.calc busi- wish to substitute price signals forthis area; the intensive examination of ness enterprise and with the develop- licences or quotas and to tap the ini-the activities of some of the I,FCs ment of the more backward rugions of tiative of private enterprise for achiev-associated with the Bank, referred to the country. ing national objectives. In principle, itearlier, should in due course help shouild be possible to devise taxes andprovide answers. Nvertheless, it is This premise has some validity. subsidies so that, when a D e maxi-piobably fair to say that with respect topre se plCs deigoine to hner mtnises profit, it is also inaximiking socialto these questions the mlajority of DFCs ct prthe policie igion dto comean surplus. In practice, very littla researchhave played a relatively passive role, verments.hNewtan of e toas heen done in this field and evenThey have "responded" to loan applica- wealth, if they are to retain credibility less ex

lage tanisreevll t) mat ca 'iats natona deve Ilopmenlit-lIorient insti- pet'nmen tarin A 'Subiiesexnd

ions, and most of these care fromnuc atiowheneveloffc nt-orted ins ed to DFCs by goavernmeths hiave bcenavell established business louses in lc lg cur- . rIat DFCsu whi-e enilypivate r er general in character; tciey havendustrial centres rather than from the inistitutions whose operations were not failed to bridge the gap between pri-rans o ptenia enrepenursorsmal- influenced by subsidies or governmentrcanle i ortertialstrpresponrs iac keed- pivileges of any kind, this might not vate and social velfare. idesigoing award ireos. ral ply ormantfacoredn band- le necessary. But very few fall into more purposive set of penmalties and in-wan goons.tye, bothan p muich intaion an that category. As mentione(I previously, centives snould he higo on the agendaeDFbyCsg sthli nitnh muchav infoltncue- governments have suhsicdised iimcl sup- ofdelopment reserch.

ged dhe ainag wih ingew or sall bosii- ported DFCs in a variety of i nys. In Ir the rest of this paper, we shallaessmenealocatedioutsideothemain cetrsi turni, lending rates chargCd by DFCs foctiis oni three aspects of the policy aridandsme, nor doubt dishefo o t he mn tr are hieavily influenced by the low-ii ot- procediures of I)FC themstselvesnt thebusin aessmeno fombt appredchig sutb rest rate structure establisbed by gov- role of economicin analysis, an aipproaclhDFs.nesmen Fo rxmp anmberoach the vernments. New ald siall entrepre- to administrative costs, and the needDFCs.For xampe, anumbr ofDFCs neuirs whichi lack access to DFC finiance for Con1tinlUing critical self e V.IIaLation.do inot lend for amounts smaller than must raise funds at very hlighi interesta stated sum, whieh is genorally miuch rates from the unorganisimpmoiney m ynar- tCONOthic ANALYSISlarger than is relevanit to small-scale ket, whenever official programnmes forenterprise. Many DeFCs are reluct- dealing with such groutps are inadeqate. Few DFCs have had the capacity to

ant Stuch an otur hans an pcial sig- These groups cannot therefore share in conduct economtic analysis during thency. Suof i a prosoturef" lisO secial srig- menthe privileges granted to the DC vtblish- past two decadwes. The great majoritynificance for borrowers who may needW istrili throug DFCs t Frhicr did iot ihave a very clear idea of eitherto purchase locally manufactured capi- lsed slatrk ia itschrs toug DFCs Further- th tecniquls. or the meaning of eco-tal goods rather than imported items. mo alre,sis. Na wond th tlcnDFCets inaturhlly attach mf im rtance Nfrequently means that new fr siall noc s

DFOs naturallyl) attah mreiu mprisytance nzov hi slxlplllel i a t The lappraislreports of DFCs sldom;

entrepreneursa cannarot shiare in the sub- e appraisalyrepors ofaDcs seldoto the fnancial strength of a borroeving s pra goodl r (levoted mechni space to this sdl.jir fct;firm, for a healthy cash flow frsom the uiovide though the syste onteXtssually one found the statement that afirm's Iresent operation reduces sub- piovdad a nsthirnougtes a ofr roee project fell within a branchl of indiustrystantially the risk undertaken by the tin agains iorts assigned priority in the national five-DFC in financing an expansion. This is Suggestis for Im v year plan, or projects were justified bya sound business reason for DIFCs to Futuret Per form hmprte ane saying that they would generate xprefer lending to well-establisied and Future Performa nc new jobs or would expand cxpoirts byalready profitable coneems rathler than One poifnt whichi stands out in the y. There was little appreciation thatto semall or new ones. s n D Uch ding diciscussioi is the shner im- silh absolute mieasures of economic

DFCs have not clone much in the poskibility of evaluiating the develop- benefits were too crvudte to be usefulway of "promotfing" projects, particu- mental perfonancije (If a D)FC without and that it was necessary to conp.nelarly projects involving smiall or new dismussing the governmnctl's policy beniefits with costs to obtain rnciting-entrepreneurs. One reason is that such franmework. This is trute whe(thier one is fuil results. Onily relatively recently havepromiotionial work involves high acimin- concerned withi rai'sing resources, u'%ing a fewv of the I F~assoc'iate'd with thecistrative, costs for the D)FC per imit of them for sound projects or inproving WBG acrpihed somme of chc' basic toolsasset creartion. It is alsoi liely that D)FC the distribution of inicomie and %i edluh. necessary for ev.dnatiog the cc'uuinicsassets in the form of loanIS to such No doubt financial intennedliaries can Of PrOjects.grr,ups will be much mnore risky than improve their developmental imipact The hackmardn-,s of miany D)FCi inthe rest of the portfolio. There is no somewhat by carrying out internal re- econiomic analysis is scarcely m.urpi-sidng.financial compensation for these extra forms but really b,ig leaps forward N%ill The techinical expiertise required forcosts and risks, as most DFCs as-sociat- not be possible except in the conltext sucoh work is difficult to find. The posi-ed with the VWBG charge a standardI of major changes in gover-nment policy. ti(oli is no diffeic'it in oIther financialin-terest rate to all borrowers, Conise- Wh'at conistituites appropriate gove ii- intermediaries, most of the private busi-ciucnily, the se'arc'h by the I)FC for ment policy towards a DEC, is also a n1ess sector, or the vast innb ity of goy-biorrowers in this eatcgunry wouild he large queKStionl. Muich depends on a ernmmc'rt miniistries and plamumin'g detpart-unrewarding financially, This has been government's perception of its object- meiits. Indeed, evcen in the \VJIGC c de-a crucial consideration iinderlyinig both ives, and how best they can he achieved. batro continu-es on how best to deter'the attitude of the WBG andl that c)f Governm-ents whiich are disenichanted mine the cconomic ince it of indutstrialthe DFCs assaciatedi with it. Their pre- with the functioninig of the market mp- Immjcets. It is seldlom- appreciated hiowmnise has been that DFCs should aim chanism may decide to expand the net- smiall is the world-wide stock of pro-at becomning "financially sound"' institu- work of physical controls and to rely fessiona,ls able to evaluate pirojects fromn

anl economic standpolint in the con text economic staff. Once this happens, constraints will niot be so binding Inuf develolping counitries. Moreover, DFCs are in a position to perfoirm three economies where Investment and in-DFCs have rarely felt the neefd for developmental funictiolis: (a) help come are expandinig rapidly and whereeconomic analysis. For, whethe-r p3ri- clients improve the economic d"-sign of there. is a sizeable entrepreneurial class.vately or piublicly owned and controll- projects; (b) reject projects with unaccep- In these cases, rejecting an occasionaled, they have felt obliged to accept the tably low economic returns; and (c) project Nvhell there are clear economiceconomic decisions of g,overnmnitrts. The cc'otrihutvs to the process of reviewing grouinds for doinig so Is not likely tocommon view is that it is for the gov- and reformnulatinig government economic jeopardise the finiancial viability ofermient to decidle whether a project policy. DFCs. The rejected ',rojects willhas priority from an economic stand- D)FCs are already advis,ing clients on before lonlg be replaced by otherpoint; indeed, as a practical. iniater, the engineering andl financitid aspects candlidates for DFC support.many DFCs canniot finanice proji,cts uoi- of project dlesigni. if they hlave the There is another aspect to be consi-less they have obtained a licence or a necessary professional skills, DFCs can dlered. Generally, governments hiavepermit or a certificate fr-om some1 gov- extend their advisor-y [uncetioni tc; the not questioned thlat right of financialermient agency. Whyv, then, slhouill economic sphiere. The task of the D)FCs intermediaries to rceject applications onDFCs acquire capability in economic in this context is to review the miain technical or business grounlds. Buit gov-ainalysis? featuires of the proposed pr-oject-capa- ernments may not take to thle notion

Our view is that DFCs need a capa- city, prodluct-miix, choice of tcclncology, of DFC's rejectfin projects excluiZivelybility in e'conomic analysis in order to factor proportionis - andI to idenitify on economic grounds, pairticularly ifplay their double role as financial mnsti- mnodifications whilch would increasge these projects have received governm-entloitions and development agencios. In efficiency. Some of these miodifications sancetionis (anld privileges) at an earlierthe former capacity, they are interest- will enhance the financial attractiveness stage. A confidlent onvernmvent will noted in building a balarced Poctfolio of the project andI shouild be accetitable see a D)FC's inte-rest in the economicwhich. avoidIs excessive exio(c,urr to to the clienit. For example, analysis may aspects of project selection as a chial-various kinds of risk. Onie such categorY reveal that the sVon'sor will inr.rncve leinuv, but rather as a wortbwhilc mni-of risk, which hias not received mutch hiis finiancial prospect l)y reducing the tiative on whichl to build a collabora-attenition despite its importance is the diversity of the producit-inix, increasing, tive relamtionshuip. Most govvrinmientsrisk of reversal in government policy prodluction r-uns for the ienianiniog itnms rveco.nise that, at the early stage inwhich jeoparcdises the financial viability anid devising plans to sell a part of his the project cycle at wbhici they mustof certailn projects. Devaluations anid output in foreigni markets, taking decide to extend or withhmold approvaldisinantlii:q of quiota restrictionj take acdvanjtlagc of governnieot inicentives. (in the formn of licences or certificates),place swiftly, with diramatic rep.-,-us- Hlowever, other modifications may make it is not possible to analy5e fully thlesions on the liquid(ity, profitability and sense from the national economic stand- economic implications of the 1,roposeddebt-servicing capacity of indlustiial point but, owing to seriouis distoritions investment. While certain strategicfirms, It is important, therefore-, for in the cost-price structure, result in aspects (ownership, rough locniLion,DFCs to recognise explicitly. andi rre- loiwer profit.uhility for the finn. These approximate cost, main Inputs anitI ouit-cisely the link between the financial chanves in project de,iign will enicouniter puits) will be known, govemnment deci-condition of their clients and specific r, sistance from the clienit and( DFCs sions cannot he based on detailed andgovernment policy instruments. This will niot wish to insist on these imodi- specific estimiate-s of the kind necessaryknowledge can be acquired th~rough fitations. Buit they may takoe up these for conducting. social cost-benefit ana-economic analysis of projects - dluring aspects with govei mnnent in the context lysis. It is, therefore in the government'sbothi appraisal and( supervision - andI of a review of national economic poli- interest'to encouragev the DFC to carryqhouid( enable D)FC-s to avoid e%Lv".siv(. cies, ouit suchi an analysis at a later point inexposutre of their por-tfolios to the risks NC) onie will question a DFC's assist- the project cyclne and to reject invest-airisinig f-romn the instabiility of govern- ing its clients to finprove project eig ntwhcfail to qutalify despite earlierment policy. This knowledge, will also fromi the econiomici stindlpoint. However, governunent approval, Obviously, thisallow D)FCs to devise contiii-ic.v rejection of piojeck.t with low economnic kind of relationship cannot be establish-plans to facilitate the .udjustmncnt of returns may leave a D)FC wvith an ed unless the goverunnuit hias conflidencetheir clients to chianges in govvruninvn insuifficient volume of business, where in the integrity of the criteria, forPohicy. Sophl.sticat"d em noinic anialysis there is sucoh a sharp conflict between economnic apiraisal of projects.miighit eVen prodluce a modlel to faciii- the intere-st of the institution anid that In conchmcting ecdimyiuc~ anialysis attate systemiatic stud(y of the himpact of of %soc iet-t, it is clear thlat fuindamiental the project level, lFl'Gs will .icquuirc aalternative gwernhinent policies on thle ling'sare required in the g;overnmnint detailed compreliension of selic otedl as-cash flow of different categociks of pro- n,l icv% frame and psil it, the pects of governmnent economnic policyjf ts in the DFC por-tfolio,. struct'ue as well as orientation of the and of the difference it mnakes to

DFCs associated with the WBG are DFC. For example, finstead of going business decisions. Such an understand-not simply financial entities geareid to ahead with projects subilitted to it ing is seldom- avaiilable in gover-nmentthe objective of profit mn:xiNnisation, but which hirve questionable economiic miniristries. Indeed, one of the aspectssub)ject to a risk constraint, Th(y are mierit, the DFC can go throulgh the of J)ohicy-inalking whichl hias 5 nipress,edalso committed to the goal of economnic painful and financially expensive uis is the extent to whichl it is a shiotdevelopmient. Their policy s.tatvenets proce~ss of identifying, formulating inl the dark. Quito frequentfly dlecisionsand Articles of Association VOiCe this and promiotng prjcswith accept- ace- made by people Nv'ho hiave littleconcern explicitly, althiough this geeri(ial able economnic and financial features. first-hand( knowlvedge of tradlitionalcommitment has not always been trans- To dlo this may relicfrte a siginificsnit business mores or the specifics oflated into work-ing procedlures. in fact, change in DFC policyN and even this ins,titutional arangemenits in the marketthey are not likely to be able to do so i-ay prove insufficient in certain situa- place. That is why it is easy for busi-till they strengthen considerably their tions. However, we believe that the nessmen to mnake subtle adjustmenits

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in response to new policics whichi iake inctt idlea, formulates the project couild be I:rssd on to DFC clients intheir actual impact very different from design, promiotes thje venture anid plays thet form of hligher Icirdinig rates, Alter-what is intenided. DFCs have ani in- ani nnipotant part inl itS VXMc rlto. TheI natively, govennimenit nivi,lit olliet theseportant advantage in the review of point is that DFC "outpft" can be a increased costs thiroughi a systemn ofecbnomic policy, precisply because of miixture of pu c finance, techniical selet: ti'., eard-eully; calculated subtsidies.theit 'intimate, relationiships with the guidlancc and enrtipepncrcinial activitybusiness community. lf, at the sanme in differenit proportions. A DEC which SELIV EiVAUA. I IONtime,, they learn to commiiunicate with has a l,rrgr. imeasure of techniical assi- ItNa iiteci ait tire eniset thatIJ splanners and policy-makers, thc.y should stanice (anid/or cintit pi nrinrial activity) are institutions which shiouldi he capablebe able to play a dlistinictive role in in its kotal operation is likely to show froth of airl.t Lntg 1miii of breinig intluenec-evaluating policy proposAls aixd in pre- hiighi auhnninistrative costs per un,it of Cd by 'SOLie.ty, anid of devisinig indtigeni-parinig public opinioni for them, finiance extended. Amidl yet this is not oii solutionrs to local problems. The

necessarily bad so long as the operation) puim eptl;or of these problems and( theADMINSmITmrU IV COST is coniducted ViNlCiendty ira terms of th'e unpin 0tineL a.rsi',ied to eachi varies from

To upgrade the qutality of economnic, POnrfonjino0ce of indivinlnril taisks. "We timie to tiniw, )ic (:s leatrn froni experi-work, DFCs will have to incur atddi- needl to develop better ways :f judg Ling cre n xeineclnstewyitional admrinistrativ,'e costs. The corres- institutional efficiency thian just looking whichi they definle their problems anidponding benefit's will accrue largely to at 0(rr1hlnuiStr%tiVV' cr.ts per uniit of tr'y to deaNil Withl the(ml. 11ILdCil, to beclients, government andI society at Jlarge. finanice extended. Tlis, co-ellicienit con- eliective, D91-C. mulst pcnliudically re-Similarly, to finance projects inivolving fuises the qurNmtiurn of ef'ih nicy in. tire defiiie their tasks in theu lighit both ofnew, or small entrepreneurs and back- techniical senise - the .rvrrid.11ce of their cxpcnihncee anid of chaniginigward iegions, DFCs will have to incur waste, the limnildinig ofiii ipinurni organii- rmjt3orir.l values.additional adminiiistrative costs in the sationail formis, tile estabhishimierit of Of (urse, Einla.ijr.tionr as a result offormn of staff salaries, consultants' fees, pnr0rr incenitives anid penarltiPe, I)Cpericce is a natural procesS. It i.stravel, establishmient of branch offices with the muchl hirreer s,irittugic Issue I " lw 5frti rcs, mrand general everlie.rds. It will seldomn of whlat kin' 1Of in1t1er -in. irtion is re- A ,O it sire pocesslti I' .hLsrrr ntionrhabe possible to recover these ruitlays to unte in a u.nr tin nifhitivreIvoieeingmnTany significant extent, even thouigh settinig. In tire rcesls of( axlciti deacision. Thed

bei;efts tosociey migt be ignifcant. If the profirt of a DFGC dliriioi)Wcs as lairclsfo nepiitdcso nbenfis o ocet iigt e igifcat, a result of t dlecisoion t(o develop c otw 'Idlien k eflIrIt. it is, roini vmr imchi

Miost DFCs, even g(%,rnrnm~nrt-o%%ned minf analysis and to litirrce smraBlei ....o... claracteristic of indi(ividrtials thaninistituitions, think in terms of pmrofita- entir eprenceurs or und)(erdevelopedIt re- iiiitti inb1ity. An object of thevir policy is to gioris, its vreditwor thnirres anid its c~..pa- A DEC' learnis fromn its dlaily activity.miinimise adiministrative costs per up't city to raise resources miay be iffected( its lnonfitLi dectline (ime year; anid it asksof output or to muaximise the re'turn on adversely. If, oni the other band, a it\,elf wh'Jy thlis has happened and Itassets and on capital Invested. It is DFGCs staff an)d ictivitic, arc hninrrtci tim tries to) take steps ti) prevent recutrrencedlifficUlt to fault this policy. For the those needed to ealry out at hinkr t i thle C:tIe it rIILe. It lias a follow-upfin-ancial integrity of a DFC is generally funictioni str i tly conceived, real qlues- Ny~ri vhichl monitors the performnancejudged b)y, and its access to new me- tionis arise about its capac-ity to achiieve of its clienlts. if it is a goo(l systemi, thesources is generally related to, its its developmental oh jvir,t-is. Inr this informalitionnr iirn is itsr'l usedcapacity, to service debt and its ability perspective, highier adimuiiristrative costs to keep its finiger oln the pulse of itsto pay a return on its capital. This is ar niot IICLes.sai ily bad an)(l lower costs clienits; it is also fed havk inito thle ap-certainly true of m-ost of tl7 DFCs are not nenis.rr ,i05 praiw%eniithy. Mtuchi praisal and dcckionrin-i~-rr.rig procoss, soassociated with the W1'BG. Moreover, rclcn1rnd oni what the DFC' is trying to thi.a the expmerienrce of vcsteidl.rvs in-the steady diminuttion of adminiiistrative accnrrl:.r ad bow eflicierril, i3t is vestmlents is Made rsnvailnrlh! for tomnor-oudamys per unit of output is generally i4(ri!rg aibrUt IVt' task. row's lJJi,Lkti.n.r.. A D)FG learns tocomnsiidered to be onie of the tests of There is thus a close r elatiiorsdln adapt to fliv vx\tw ntionis (even shlnfinigefficiency of rnantnjernienut. between thies vairy diivienfc rt f~acets o (f rtt is of its r rcnhitnrrs. Wheilier

And yet, this liolicy towards cost of DEC pcmrfolnnrrrcn., between adnihiristra- it is well or ptinnly mrrnrn.rgvr, aniy fiarran-operation greatly o %ecr i niphiPi es the tivc- costs andI achmievenrent of under- iii1 iritnrimn'di.rry irinsit.il il y Iearnis fromnsituration of a IDFC. For one lunitg there lying objectives. Owners (I)verinirreint or its eXJieriV1iice mi tlreoe and othier wvavs;is no easy way of rireaisuririig thle "out- private slhareholdlers), bordnus and sumeli learin'ig sterns~1 from11 tile (,lailypuit" of an interinedhiary Institutiron. nriaiagernerrL-ltN, nieed to consider care- ti irgUln to SUrVive. CliitAriniY tI,n' DFVCS

usual practice of equanting this "output" fullly wlietlivr c\pnctai nons about these asmsrr.iatcd withi tire WBC; lave (lonewithi the amounit or number of comi- facets of per fnirrniamc are internally 50.-

mitments made by a DEC duiring a consis' ent. Thuxs, for hinSt,1rrCc, tlhe 1urit this is not enioughi. What is alsoyear can be quite miisleadIing At one en)d smrvultaneot)s goals of rinlincing, 1)1C needed is a urirtirroiinig testing and eva-of the spectrum m-ay be a loan whichl dhepnninlencoe oni concessional oflicial hniation of perfnnnrJ.nrr1Cn arg;iist theinvolves tine hare tiniriiiunriur of initer- borrowing and( tire srcial desir ability of underlymng objectives amid pr)hicies ofinedliatiomn. This wvill be tire ease wvhren ce.wanrdirg finance to mcev or sniAlvi- the DF( , ami a urn ini e-nieathe DEC is simply r(simnriuliirg to a fully onnireprencunrs niniglit l)e unte,nable if t i,n of tirosi' oNljemttive anid policies inworkedI out rejune-t from a -well esta- gov 'ruin' mit imposecs a loiw- interest rate tIre lil,hlt of chantginlg nLational ohbfee-blished, repuitable, indiriqtrial firm whiich reginmne. flowever, tirere ungir,t be less 'tives. IEvert a ptriely private enterpriseneeds little techinical arssistance at any tension between thiese two obijen lives if - if it is a udynanrnic onie - will try tostage of the project. At the orpos,ite highier financial charges for attnract ing jnuJlg- tire- ni itt of smin ty anti to adaptend of the spectruim may be a case In pdrivate savings ad( hiighier costs of its opcir ;tionn., ricordringly. The niore sowbic)~ %fir, DEC coniceives the invest- intermediation for highi risk borrowers a DFGC, whose objectives are f uinda-

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mentally developmental. Yet few, if thliings. A systematic examination of (a) What has been its developmentalany of the DlFCs associated witl the past activity will provide the opportunity impact?Bank have instituted meehanisms for for reflection and in.stitutional renewal. (b) What hava been the intermalcontinuing and systematic critical self Sustitutional constraints whichevaluation neither their Boards nor Self evaluation should involve, not intheir manageonents seem yet to asave simply the testing of performance have limited its developmentalappreciated the significance of the pro- agaiinst original objectives and policies, impact, either in mobilising or

Self evaluation is an imnportant instru- but also the reconsideration of those in allocating resources? Have thement of management. Costs and confor- objectives and policies with respect to critical factors been DFC policymity to objectives are the twin standards their' appropriateness to the future, quality of leadership, organisa-by which a manager can evaluate hlis There is merit in staljility, but risk also, tional structure, quality of staff,company's performancer They vill cer- An in.,titution that looks only to the access to information, or what?tainly be the standard by which credi- past, that considers onily justification of (c) V/hat have been the environ-tors, governments, and, in most cases, its historical record, is not likely to mental constraints which haveshareholders will evaluate the perfor- have much of a future. Its future will limited the DFCs dlcvelopmentalmance of the manager and the institu- depend as well on reorientation, when impact?tion. If self evaluation is to be effective, circumstances call for it, to a changing (d) What can he done to ease theit cannot he simply the activity how- environment. Thus a DFC established internal and external cnstrainitsiever regular, of an "external auditor", in the Fifties, before tourism was found (e) Does the changing environmentwhose report is periodically submitted to bne the dynamic sector it has blecome call for clange in the institu-for management or Board inspection. in many countries, and wnhich defihera tion's objectives or policies?It must be built into the procedures te]y excluded hotel financing from these questions,and decision-making processes of the activities, might In the Seventies find Asking and ansprel-y thesel as-DFC, at all levels. Staff as well as man- " sure a rnamsic itstctutnoni Yets niit.er

DFC biel deibeiitel, fcutheon answers nor the action can beexamination. DFCs start with an inno- finanitg imprort Mb.stitsntiin haasreat allowed to undonrine the financialvative purpose but there is the danger itrondr its ehis as he itrity of the DFC. Fiinding out andthat the sheer struggle to survive will economic strueture changes, new iradinig ingo the righ:t line between deve-dilute initial enthusiasm. Unless mana- opllortunities emerge and govcrninent loplinental dynamism and financial inte.gement is vigilant and staff is highly policy evolves. grity is the delicate, yet crucial taskmotivated, there will be the temptation In short a DFC should periodically which gives develoiment bank manage-to fall in with traditional ways of doing ask itself: ment its peculiar challenge.

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