FILE COPyDOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

Not For Public Use

Report No. 273a-PAK

APPRAISAL OF A LOAN

TO THE ISLAMIC REPUBLIC OF PAKISTAN

FOR FINANCING INDUSTRIAL INVESTMENT

TO BE ADMINISTERED BY

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

November 30, 1973

Regional Projects DepartmentAsia Regional Office

This report was prepared for official use only by the Bank Group. It may not be published, quoted |or cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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CURRENCY EQUIVALENTS

US$ 1 Rs 9.9Rs 1 = US$ 0.101Rs 1 million = US$ 101,000Rs 1 billion US$ 101.0 million

ABEREVIATIONS

ADB - Asian Development BankEPF - Equity Participation FoundICP - Investment Corporation of PakistanIDBP - Industrial Development Bank of PakistanKfW - Kreditanstalt ffr WiederaufbauNDFC - National Development Finance CorporationNIT - National Investment TrustPICIC - Pakistan Industrial Credit and Investment CorporationPIDC - Pakistan Industrial Development CorporationUSAID - United States Agency for International DevelopmentWPSIC - West Pakistan Small Industries Corporation

APPRAISAL OFA LOAN FOR FINANCING INDUSTRIAL INVESTMENT

TO BE ADMINrISTERED BYPAKISTAN INDUSTRIAL CREDIT AND INVESBINET CORPORATION

TABLE OF CONTENTS

Page No.

BASIC DATA ................................ ,- .... g .. ... i

SUMMARY AND RECOMMENDATIONS ......................... . . . ......

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

II. ECONOMIC ENVIRONMENT AND INDUSTRIAL FINANCE .................. 1

General ....................Industrial Environment ............................... 2Policy Setting ..................... . 2Industrial Finance .................................. ... 4

III. ROLE IN THE ECONOMY......................... 6

Resource Mobilization . ..................... 6Resource Allocation .................................. 7Developmental Impact ......................... 10

IV. INSTITUTIONAL ASPECTS .11

Share Capital and Ownership . .. . .. . ........ .-... 110rganization and Staff 11..Pocedures .. 12Operating Policies .. o ...... .. -. ... ... . . ....... . 12Relations with the Government and the Business Community 13

V. FINANCIAL POSITION AND CREDITIWORT9NESS .. .-. J.. 14

Problem of Assets and Liabilities in Bangladesh. 14Financial Position .. o..... - - 6-..*-o 15Quality of Portfolio .................... ..... .... 17

VI. PROSPECTS ...... .. o. ......... . * .... .- - 18

General Outlook. . . .......... 18Business Forecast . ..-.. ... 18Resource Requirements. . . . . .- 19Financial Projections ..... ............ ........ 19

VII. PROPOSED LENDING SCHEME ... . 20

General oo. .o*.... o ........ .. o so- 20Main Terms and Conditions .... oo .. .......... 20

This report was prepared by Messrs. T.N. Dinh, E.Elejalde and J.B. Shim follow-ing their visit to Pakistan in July/August 1973.

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ANNEXES

1. Resource Position as of June 30, 19732. Sunmiary of Loan Cperations-1958 to June 30, 19733. Summary of Underwriting and Equity Operations-1958 to June 30), 19734. Sectoral Distribution of Loan and Equity Portfolio, as of June 30, 19735. Comparative Statement of Loans Approved-1958 to June 30, 19736. Main Terms and Conditions for Assistance as of October 31, 19737. Selected Data on PICIC Assisted Projects-1958 to June 30, 19738. List of Shareholders as of June 30, 19739. Board of Directors and Executive Committee as of July 31, 197310. Statement of Policy11. Agreement Between the Government of Pakistan and PICIC on Foreign

Currency Liabilities in East Pakistan12, Balance Sheets, December 31, 1969-72 and June 30, 197313. Income Statements for years Ended December 31, 1969-1972 and Half-Year

Ended June 30, 197314. Analysis of Arrears as of June 30, 197315. Forecasts of Approvals, Commitments and Disbursements, 1973-197716. Projected Income Statements, 1973-197717. Projected Balance Sheets, 1973-197718. Projected Cash Flow Statement, 1973-197719. Estimated Disbursement Schedule for the Proposed Administered Loan

ORGANIZATION CHART

PAKISTAN INWSTRIAL CREDIT AND INVESTMNT CORPORATION LIMITED

BASIC DATA

1. Year of establishment: 1957

2. Ownership (June 30, 1973)

Number of Shares Percentage of Total

Donestic 3,829,032 63.8Public Sector (2,27Z,560) (37.9)Private Sector (l,556,,472) (25.9)

IFC 200,000 3.3Other Foreign 1,970,968 32.9

6,000,000 100.0

3. IBRD Loans

Status of Loans as of October 31. 1973Rate of -(US$ million)------------------

Loan No. Date Signed Iaterest Awunt Credited Disbursed Outstanding

185-PAK Dec. 17, 1957 5-3/4% ls.1 4.1 4.1 Fully repaid236-PAK Sept.25, 1959 Variable 9.9 9.9 9.9 do286-PAK June 27, 1961 do JJ4.7 114.7 314.7 0.1330-PAK Feb. 13, 1963 do 19.8 19.8 19.8 3.3382-PAK June 30, 1964 do 29.9 29.9 29.9 9.5421-PAK July 09, 1965 5-1/2% 30.0 30.0 30.0 20.8509-PAK Aug. 10, 1967 Variable 35.0 35.0 35.0 27.7590-PAK March 21,1969 6-1/2% 40.0 39.9 36.7 36.7

4. Operations_Anounts in Rs million)

(a) Loans

Approvals:Jan.-June

1958-70 1971 1972 1973 TotalLocal currency 15.3 30.9 1 2086Foreign currency 4,567.5 185.5 31.8 121.0 14905.8

Total 4,717.B 216.4 40.6 139. 5,13.47

Commitments:

Local currency 105.1 35.8 8.9 6.4 156.2Foreign currency 3,906.0 106.2 6.5 174.9 4,193.6

Tbtal Z,011.1 142.0 15g4 181.3 4,3 9.

i/ 1956-70 and 1971 figures include operations relating to the formerEast Pakistan.

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Disbursements: Jan. -June1958-70 1971 1972 1973 Total

Local currency MM. ~334 19.8 6.8 148,2Foreign currency 2 974.8 576.1 171.0 222.8 3.9944.7

Total 3 0 69.5 190.8 229.6 4s092.9

(b) Equity Investments

Acquisition ofportfolio 115.1 33.3 1.1 2.5 152.0

Sales fromportfolio 34.9 18.3 0.3 - 53.5

5. Financial Performance(in Rs million)

June 30Year ending Deoember 31 1971 1972 1973

(unaudited)(a) Total assets 1,514.4 3,030.2 2,987.7

of which loan and equityportfolio qt 917.8 2,o46.4 1,885.6

Long-term debts 872.9 2,219.7 2,1514.0Rupee subordinated loans 40.9 81.4 82.6Foreign currency loans 782.0 1,798.3 1,731.4

Equity 160.0 258.2 262.9Long-term debt/equity 5.4:1 8.6s1 8.2tllong-term debt/equity as

defined in Bank loan Agreement 4.6:1 6.3:1 6.0:1

(perc s)

(b) Earnings before interest, provision andtax as % of average total assets2y 7.8 10.6 8. ?

Profit after tax but before provisionsas % of average equity 14.7 16.4 114.72/

Reserves and provisions as % of portfolioY 1.82/ 6,92/ 7,82/Financial expenses as % of average total 6.9assets2/-' 6. .1

Administrative expenses as % of averagetotal assets_ 0.7 0.4 0.32/

Book value as % of par value 126.42/ 294,73/ 302.623/

Dividend as % of par value 12.0 14-

Dividend pay-out ratio 51.2 17.5 _

1/ Excluding assets in Bangladesh.2/ On annual basis.3/ After deducting from equity Rs 84 million representing PICIC's rupee

portfolio in Bangladesh.

APPRAISAL OFA LOAN FOR FINANCING INDUSTRIAL INVESTMENT

TO BE ADMINISTERED BYPAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

SUMMARY AND RECOtENDATIONS

Stimmary

i. After the severe strains undergone during 1971 and 1972, reflect-ing political events, the Pakistan economy started to recover in FY73. Themost encouraging aspect of the recent economic performance has been therapid growth of exports, which in FY73 amounted to $817 million, an increaseof 37% over the previous year.

ii. Manufacturing is the second largest sector in the economy andcontributes 17% to GDP. The rupee devaluation by 131% in 1972 has enhancedthe competitiveness of export industries and the attractiveness of labor-intensive industries. Notwithstanding the take-over by the Government ofthe management of enterprises in some industrial sectors, the private sectorstill controls 82% and owns 90% of total industrial assets in Pakistan.

iii. PICTC was established in 1957 to assist private industrial enter-prises mainly by providing medium- and long-term finance. PICIC operatesprimarily, as it was intended to, in the medium- and large-scale manufactur-ing sector, leaving the smaller projects, by arrangement, to the IndustrialDevelopment Bank of Pakistan (IDBP) and other financi.al institutions opera-ting at the provincial level. PICIC's past lending accounted for 17% oftotal private investment in medium- and large-scale industry in Pakistan.Including operations in the former East Pakistan, PICIC's cumulative ap-provals since its inception totalled Rs 5.3 billion ($532 million equiva-lent) for loans to 839 projects and equity investments in 155 companies.PICIC-financed projects are estimated to have generated 147,500 additionaljobs. Exports by enterprises assisted by PICIC are estimated to amountannually to $250 million. PICIC's financing has gone to a broad range ofclients, of which many were newcomers to industry. PICIC has made contri-butions in promoting new industries and enterprises, notably through itsindustrial sector studies. However, there is scope for PICIC to undertakemore promotional work. PICIC is considering steps to intensify its effortsin identifying and promoting new projects.

iv. PICIC's portfolio is highly concentrated in a few traditionalindustrial sectors, in particular textile projects. PICIC's managementrealizes the desirability of a wider industrial distribution, and intendsto emphasize lending to new sectors, such as the deep-sea fishing industry.

V. PICIC remains an efficient institution. The new Managing Director,Mr. Osman Ali, a former Executive Director of the Bank Group, is well supportedby an experienced staff. The star)dards of its internal operations are high,

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jts project appraisal and follow-up work satisfactory, but there is room±or improvement in its economic assessment of projects. Following discus-sions with the Bank's staff, PICIC is irtroducing, on a selective basis,the calculation of economic rates of returr, as a step for improving itsecnromic work. PICIC's staff is competent, but needs to be expanded inanvicipatior of an increased volume of business and to strengthen itsAppraisal, End-use and Economic Departments. PICIC has agreed to recruitadditional ;taff.

vi. PICIC's financial position remains undertain since it retainsthe liabilities, which still have to be serviced, pertaining to its projectslocated in what is now Bangladesh. The corresponding assets, consisting offoreign currency loans, rupee loans and equity investments, amounted to $80million equivalent, or about 30% of PICIC's total assets and three times itsshare capital and reserves. Clearly, it is not within the power of PICICitself to remove the uncertainty regarding its future debt servicing capa-city and its creditworthiness. PICIC's financial problem, given both itsnature and its magnitude, could be resolved only with the Government'shelp and in the context of Government policies in general. The Governmenthas provided financial assistance to PICIC and has undertaken, among otherthings, to service on behalf of PICIC its foreign liabilities (amountingto about $70 million) pertaining to projects in Bangladesh for the timebeing. This undertaking offers a temporary solution but does not ensurePICIC's long-term creditworthiness. It is expected that the Governmentwill eventually agree to a solution which would ensure PICIC's long-termfinancial viability, in view of the importance it attaches to PICIC as adevelopment institution. In the meantime, from a financial point of view,PICIC cannot be considered a creditworthy institution.

vii. Assuming a favorable outcome regarding PICIC's foreign liabili-ties relating to loans in Bangladesh, PICIC's financial position and pro-fitability remains satisfactory. PICIC's accumulated reserves enabled itto absorb the loss of its rupee investments in Bangladesh amounting toRs 84 million. The Government has given a general commitment to help PICICobserve the debt/equity limit of 7:1 agreed under the previous Bank loanagreement, by providing additional Government subordinated loans or throughother forms of financial assistance. In keeping with this, the Governmenthas agreed to give PICIC an additional subordinated loan of Rs 15 million.PICIC has agreed to increase its paid-in share capital by Rs 10 million.

viii. PICIC's uncommitted domestic currency resources as of July 1,1973, together with prospective collections and retained earnings, shouldenable it to undertake the rupee commitments it has projected. For pro-jected foreign exchange commitments, PICIC will require additional foreignexchange resources of $65 million in the two-year period from January 1,1974. It hopes to raise about $11 million equivalent from Kreditanstaltfur Wiederaufbau (KfW). This leaves a shortfall of $54 million. A loan

of $25 million from the Bank would meet about one-half of this, with thebalance expected to be obtained from the Asian Development Bank (ADB) andbilateral sources.

Recommendations

ix. The Bank has made eight loans to PICIC totalling $185 million.An additional loan to PICIC is justified on the grounds of its continuingoperational capability and the demand for imported-capital eqjxipment for in-dustry. However, in view of the judgement regarding PICIC's creditworthinessat this time, a loan to PTCIC should not be made. It- is recomm-eridedthat the proposed loan be made to the Government, with PICIC administeringthe proceeds under arrangements acceptable to the Government, PICIC and theBank. This administered loan is an exceptional arrangement to enable theBank to resume financing Pakistan industry through PNCIC without waitingfor a definitive solution of the problem of PICIC's assets in Bangladesh.Once this problem has been satisfactorily resolved, farther Bank lendingfor industry should again follow the usual pattern of Bank loans 'todevelopment finance companies.

X. The proceeds of the Bank loan to the Government would constitutea separate fund to be administered by PICIC without any financial liability.PICIC would have full freedom to take investment decisions in accordance withits usual criteria, and would receive a management fee of 1.75% per annum.The loan would have a fixed amortization schedule of 20 years includingX 0years of grace. The foreign exchange risk on the outstanding subloans wouldbe assumed by sub-borrowers; that on collections awaiting repayment lo theBank, by the Government. The free limit is proposed to be $3 million. Thedebt/equity liikt would remain unchanged at 7:1.

APPRAISAL OFA LOAN FOR FINANCING INDUSTRIAL INVESTKNT

TO BE ADMINISTERED BYPAKISTAN INDUSTRIAL CREDIT AND INVESTMET CORPORATION

I. INTRODUCTION

1.01 The Government of Pakistan has requested a Bank loan to financeindustrial enterprises in Pakistan, to be administered by the PakistanIndustrial Credit and Investment Gorporation (DICE). A Bank loan of $25million is-recommended.

1.02 Since 1957 the Bank has made eight loans to PICIC totalling $185million. The proposed loan, unlike previous Bank loans to PICIC, is pro-posed to be made to the Government and would be administered by PICIC onbehalf of the Government under arrangements--acceptable to the Bank--whichwould ensure that the financial risk would be assBumed by the Governmentinstead of by PICIC. A loan to the Government rather than to PICIC isproposed because PICIC at the present time cannot be considered credit-worthy, for it retains the liabilities pertaining to its projects locatedin what is now Bangladesh. PICIC's continuing operational capability, however,nuakes it a suitable administrator of a Bank loan made to the Government.The proposed loan would enable the Bank to resume financing Pakistan industrywithout awaiting a definitive solution concerning the problem of PICIC'sassets in Bangladesh. It represents an exceptional device, justified by thepresent special circumstances in Pakistan. When the above-mentioned problemhas been satisfactorily resolved, further Bank lending for industry shouldagain follow the general pattern of Bank loans to development finance compandes.

II. ECONC*C ENVIRCWET AND INDUSTIAL FINANCE I/

General

2.01 After the severe strains undergone during 1971 and 1972, reflectingpolitical events, the prolonged drought Which virtually halted the increasein agricultural output, and foreign exchange shortages, the Pakistan economystarted to recover in FY732/. Agricultural and industrial prodaction duringthat year increased by 3.8% and 6.0% respectively, compared with virtuallyno net growth in agriculture since FY70 and a decrease in industrial produc-tion during FY72. GDP increased by 5.8% during FY73 compared with a stagnantgrowth in the previous two years. Per capita income, which showed a declineduring FY71 and FY72, is estimated to have increased by 3.8% during FY73.

1/ Reference is invited to the latest Bank Economic Report on Pakistan,No. 74-PAK, of February 16, 1973.

2/ July 1, 1972 to June 30, 1973.

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2.02 The rapid growth of exports has been the most encouraging aspectof the recent economic performance. Exports daring FY73 amounted to $817million, an increase of 37% over FY72; manufactured exports accounted for62% of the total, primary comodities for 38%. This improvement was due tothe rupee devaluation (paragraph 2.08) which made Pakistan exports morecompetitive in international markets; the import liberalization measurestaken at the time of devaluation which contributed to the availability ofraw materials and the recovery of output; and favorable export prices ofcotton, cotton yarn, and rice. In mid-August 1973 Pakistan was hit bywidespread floods, which are likely to affect the economy adversely in theshort run, although the effects will not be as serious as was at first feared.

Industrial Environment

2.03 Recent perfomance. Manufacturing is the second largest sectorof the Pakistan economy and contributes 17% to GDP. After having grownat 10% durirg the 60's and at even higher rates in earlier years, valueadded in medium- and large-scale industry (firms with more than 10 employees)fell by 6.8% in FY72 after a small growth of 1.2% in FY71. The declinewas due to power shortages, labor troubles, increasingly tight import res-t-I ctions, political uncertainty, and the loss of the East Pakistan market.Devaluation and import liberalization in May 1972 and adjustment to changedcircumstances were reflected in renewed growth from the second quarter ofFY73. According to provisional estimates, the medium- and large-scalemanufacturing sector experienced a growth in production of 6.3% duringFY73.

2.o4 Structure. Three-fourths of industrial output is estimated tooriginate from medium- and large-scale industries and one-quarter from thesmall-scale sector. However, about three-fourths of the industrial laborforce is employed in small-scale establishments (less than 10 employees).Manufacturing employs 16% of the total labor force of about 19 million.The recent devaluation and the import liberalizatiDn (paragraph 2.08) havereduced some of the structural distortions and should help promote laborintensity and fuller utilization of existing capacity.

2.05 The sectoral distribution of industry emphasizes agro-based in-dustries (textiles, sugar, edible oil, paper, leather, tobacco) Which providefor about 60% of total industrial value added, while chemicalJs (mainlypharmaceuticals and fertilizers) and engineering industries each accountfor about 10%. Geographically, the distribution is uneven. Almost halfof industrial output is prodaced in Sind (mainly Karachi) and more than 40%in the Panjab. The Northwest Frontier Province produces less than 10%and Baluchistan less than 1%. The Government, through fiscal incentivesand administrative measures, is promoting the location of industries in lessdeveloped areas. The private sector owns over 90% of total induatrial assets.

Policy Setting

2.06 Several measures have been taken by the Government since early1972, in the fields of agrarian tenancy, labor, foreign exchange and trade,

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public management of basic industries, banking and life insurance. Thosewhich directly affected the manufacturing sector are described below.

2.07 Industrial planning. The fourth Five-Year Plan (FY7l-75) hasbecome obsolete because of recent events, and a new five-year developmentplan, under preparation, is to begin in July 1975. In the interim, AnnualPlans provide the guidelines for short-tenm indastrial development, and theIndustrial Investment Schedule (IIS) originally prepared in 1970 continuesto serve as framework for private industrial investments. It appears thatthe general direction of industrial planning in Pakistan will emerge asfollows: (i) more emphasis will be placed on the optimua utilization ofexisting capacity than on creation of new capacity; (ii) efforts will beintensified to promote small-scale industries to broaden industrial owner-ship, and to accelerate development of poor regions; (iii) engineering in-dustries will be given high priority to relieve pressure on foreign exchangeresources and because of its employment potential; and (iv) while the publicsector will increase its relative share in basic and heavy manufacturing,the private sector will be encouraged to play a larger role in export-orientedindustries processing indigenous raw materials.

2.08 Foreign exchange and trade policy reforms. Effective May 1972,the rupee was devalued by 131%1/ in relation to the dollar. At the sametime, the export bonus system with its multiple exchange rates was abolishedand import restrictions substantially liberalized. The devaluation hasremoved some of the serious distortions in the economy. Pakistani exportsare now more competitive in international markets and incentives to producefor the local market (especially domestic engineering goods) have alsoincreased. The liberalization of industrial imports has also resulted infaller utilization of plant capacity. On the other hand, the devaluationcreated the need for difficult financial adjustments and restructurirng ina large part of Pakistan industry because of the sharp increase in the debtservice burden on foreign borrowings. This was reflected in the arrearssituation of PICIC's portfolio (paragraph 5.12).

2.09 Public management of basic industries. In January 1972, theGovernment took over management control of 31 private companies in 10 basicindustrial categories2/. (The management of foreign-controlled enterprisesand those with assets of less than Rs 10 million, was not taken over by theGovernment.) These 31 companies accounted for some 8% of total Pakietanindustrial assets, 5% of industrial sales, and 6% of employuient in firmswith more than 100 workers. In these companies,shareholders were allowed

1/ In May 1972 the rupee was devalued from Rs 4.76 to Rs 11 to TS$l.Following the devaluation of the US dollar by 10% in February 1973,the Pakistani rupee was revalued by 10% in relation to the US dollar,to Rs 9.9 - US$1.

2/ The 10 categories are: iron and steel, basic metals, heavy engineering,heavy electricals, motor vehicle assembly and manufacture, tractorplants assembly and manufacture, heavy and basic chemicals, petro-chemicals, cement, and public utilities.

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to retain shares and proprietory rights, but the Government appointed newprofessional management recruited mostly from the private sector. Theoverall performance of these 31 companies under the new management hasimproved, reflecting in part the better economic situation. Daring thefirst nine months of FY73, sales amounted to Rs 1,035 million and profitsto Rs 54 million as against sales of Rs 714 million and a loss of Rs 13million for the same period in FY72. Adding public sector investments byPakistan Industrial Development Corporation (paragraph 2.12), and otherGovernment-controlled industries to these public managed industries, it isestimated that the Government now controls 18% of industrial assets, 10%of industrial sales and 11% of employment in industrial enterprises withmore than 100 workers. The effect of this reform on PICICs t operations-s discussed in paragraph 4.10.

Industrial Finance

2.10 Financial Institutions. The principal sources of long-term financefor industry are P101C and :DBP (Industrial Development :Bank of Pakistan).The Government controls some 76% of IDBP's share capital and 38% of PICIC's.In order to ensure complementarity of the two institutions, the Governmentdecided at the time IDBP was created that PICIC should operate primarilyin the field of medium- and large-scale manufacturing and IDBP in the fieldof small- and medium-scale industry. Hence, minimum lending limits havebeen set for PICIC, and maximum limits for IDBP. PICIC's minimum lendinglimit per client is Rs 1.5 million equivalent for foreign exchange andRs 2.5 million for rupee loans (the actual average size of its loans isRs 7.9 million equivalent and Rs 3.3 million, respectively). IDBP'smaximum lending limit on foreign exchange is Rs 3.0 million for limitedliability companies and RB 1.0 million for others. For rupee loans, themaximum limits are Rs 4.0 million and Rs 1.5 million, respectively. (Theactual average size of IDBP's foreign exchange loans is Rs 1.9 millionequivalent, that of rupee loans Rs 0.3 million.)

2.11 Although PICIC and IDBP can both make equity investments and under-write public issues, their financing activities have consisted primarilyof long-term lending. Securities and capital market activities are under-taken mainly by Investment Corporation of Pakistan (ICP), a Government-owned institution established in 1966. ICP also operates six closed-endmutual funds, manages individual investment accounts and provides long-termloans to private industries. As of June 30, 1972, ICP's total assets amountedto Rs 489 million. Operating alongside ICP is the National Investment Trust(NIT), an open-end mutual fund owned by 12 institutional shareholders in-cluding PICIC and IDBP. With total assets of about Rs 500 million as ofMarch 31, 1973, NIT is an important factor in the securities market sinceit enables investors, especially small ones, to participate in industrialfinance.

2.12 A government-owned institution, Pakistan Industrial DevelopmentCorporation (PIDOC), is in charge of establishing and managing public sectorenterprises in certain industrial sectors (notably mining), with a viewto ultimately transferring the ownership of these enterprises to privateinvestors. From 1966 to 1972, PIDC had established 59 projects at an esti-mated cost of Rs 1.2 billion (PIDC's contribution was Rs 896 million). Ofthese 59 projects, 40 are under the management of PIDC, and the remaining19 in the private sector.

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2.13 Twenty-five commercial banks (17 Pakistani and 8 foreign), wititatotal deposits of aboat Rs 19.6 billion, provide mainly short-term workingcapital to the economy although they are also permitted to provide termfinancing up to a ceiling fixed by the State Bank of Pakistan (the CentralBank) for each bank. In May 1972, a number of measures were taken tostrengthen the State Bank's control over comercial banks, and to ensurebetter management.

2.14 Insurance companies participate in industrial financing as membersof underwriting consortia, and as investors in corporate securities. Lifeinsurance conpanies were nationalized in 1972; the objective was to facili-tate the use of savings mobilized by insurance companies for developmentfinancing. Insurance companies own 23.7% of PICIC's share capital.

2.15 A number of new financial institutions have been created toassist small industries and public sector enterprises. The functionspreviously performed by West Pakistan Small Industries Corpor&tion (WPSIC)have been entrusted to the provincial Governments. Consequently, theGovernments of Putjab, Sind, and NWFP have recently established separatefinancial institutions in their provinces, to assist and finance cottageand small-scale industries. The Equity Participation Fhnd (EFF), owned bythe Government and administered by IDBP, has been reactivated after theloss of its Dacca office where most of its activities were concentrated.The Fund provides equity capital to medium and small enterprises withparticular attention to newcomers and entrepreneurs from backward areas.To promote domestic engineering industries, a refinancing scheme has beenmade available by the State Bank to commercial banks and financial insti-tutions such as PICIC and IDEP. Finally, to finance public sector enter-prises whose role in heavy industries is likely to grow, the Governmenthas decided to establish the National Development Finance Corporation(NDFC). This institution will also finance the 31 coqpanies in the tenbasic industrial categories in which the management has been taken overby the Government.

2.16 The institutional set-up for industrial finance in Pakistan appearsadeqaate. There is some overlapping between the securities market functionsof PICIC and IDEP on the one hand, and those of specialized inJtitutionssuch as ICP and NIT on the other hand, but this is not necessarily an un-healthy situation. The decentralization, down to the provincial level,of the operational responsibility for assisting small industry, is appro-priate. The creation of a new institution such as NDFC was designed tomeet new requirements of the industrial sector.

2.17 Interest rates. The interest rates applied by commercial banksare subject to ceilings set by the State Bank; those applied by financialinstitutions such as PICIC and IDBP are determined by these institutionsin consultation with the Government and the State Bank. Until August 1973,the discount rate was 6%, with maximum commercial bank rates of 10U11%.

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This represented a very low real rate, considering the rate of price increasesin Pakistan which has averaged 8% annually over the last five years. InAugust 1973 the State Bank raised the discount rate from 6% to 8% as a stepto curb inflation, control credit expansion and promote savings. Interestrate ceilings rose by 1% to 11% for larger banks and 12% for the smallerones. Deposit rates have risen by about 2% and now range from 6.75% to 9%.Although the new interest rates may prove to be still on the low side, inthe light of the prevailing inflation, their recent increases representedan improvement in the interest rate structure and should help domestic re-source mobilization and the development of the capital market.

III. ROIE IN THE ECONOMY

Resource Mobilization

3.01 PICIC's resourcestotalled Rs 5,139 millior at June 30, 1973.Foreign currency resources ($451 million) accountedlfor 85% of the totalwhile domestic resources provided the balance of 15% or Rs 669 million.PICIC's resource position is summarized in Annex 1.

3.02 PICIC has raised rupee resources not only from its shareholdersand the Government, but also from the domestic market. Of total rupeeresources of Rs 669 million, share capital and reserves accounted forRs 246 million or 37%, Government loans Rs 83 million or 122%, State Bankloans Rs 125 million or 19%, a USAID loan Rs 30 million or 4%, and PICIC'sown debentares Rs 185 million or 28%. PICIC's rupee debentures were issuedin three series in 1971 and 1972. About 60% of these debentures were sub-scribed by private institutions and individuals; the balance of 40% bypublic institutions, most of them insurance companies. Ternms range fromfive to eight years; interest rates are 7.5% on the first issue, 8.5% onthe second and 9% on the third.

3.03 PICIC's foreign exchange resources have been drawn from diversifiedsources. Oat of total foreign exchange resources of $451,5 million, eightIBRD loans account for 41%, loans from bilateral and other internationalsources for 38%, and several suppliers' credits for 20%. The remaining 1%comes from the portion of the share capital paid in foreign currency. Hostof the bilateral loans and suppliers' credits were made to the Governmentand allocated by the Government to PICIC for relending to induBtry.

3.04 Mobilization at project level. On average, every rupee investedby PICIC has generated another 1.25 rupees, i.e. 45% of the total financingin the projects is provided by PICIC. The balance has been supplied byforeign loans and equity investments arranged by PICIC (9%), and investmentsmade by the sponsors (46%). As of June 30, 1973, PICIC had arranged jointfinancing with foreign investors (including IFC) for 39 projects, of which9 were in the former East Pakistan. The total financing (loans and equity)provided by the foreign investors was Rs 1,042 million; PICIC's participationwas Rs 570 million.

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Resource Allocation

3,05 Overall operations. A summary of PICIC's operations through June 30,1973 is given in Annexes 2 and 3. Cumulative approvals since its inceptionin 1957 amounted to Rs 5,114 millionl/ for loans to 839 projects and Rs 152million for equity investments in 153 companies, a total of Rs 5,266 million($532 million equivalent). Cumulative disbursements for loans and equityinvestments totalled Rs 4,245 million ($429 million). PICIC's loan disbarse-ments daring 1964-1971 accounted for 17% of total private investment inmedium- and large-scale industry (firms with more than 10 employees).

3.06 After a virtual standstill in 1971 and 1972, reflecting the un-favorable investment climate and the lack of foreign exchange resources(foreign credit lines amounting to $8.7 million were fro;,en by foreignlenders in early 1972), PICIC's operations have revived in recent months.During the first half of 1973, loan approvals amounted to Rs 139.6 millioncompared with Rs 40.6 million for the whole of 1972; commitments amountedto Rs 181.3 million compared with Rs 15.3 million for the whole of theprevious year. Disbursements have also improved during the first half of1973, amounting to Rs 229.6 million compared to Rs 190.9 million for thewhole of 1972. This business revival was due to the improved economicsituation during the first half of 1973 and to the fact that foreign exchangeresources became available again to PICIC.

3.07 Sectoral distribution. Annex 4 shows the sectoral distribution ofPICIC's existing portfolio of loans and equity invettments. Textile industrypredominates, accounting for 42.5% of the total; cotton textile projectsalone represent 35.0% of the total portfolio. Sugar industry accounts foranother 19.7%. The balance of the portfolio consists of paper manufacturing(7.9%), engineering industries (6.8%), food processing (5.8%), chemicals(4.8%), jute (3.6%), cement(2.0%), shipping (2.0%), and other indastries(4.9%). Although jute projects accounted for 16% of total approvals (Annex 5),the loss of East Pakistan has virtually removed these projects from PICIC'sexisting portfolio, thus increasing the relative share of textiles and mgar.PICIC's heavy exposure in textiles was to some extent inevitable; it is thesingle most important industry in Pakistan, contributing 46% to employment,25% to output, 28% to value added in the industrial sector, and 30% to thecountry's total exports. PICIC s management, while it intends to continuesupporting this vital sector of industry, also realizes the desirability ofa wider industrial diversification of PICIC's portfolio. Regarding thetextiles sector, PICIC envisages limiting from 1974 its financing to (i)balancing projects and modernization projects of existing spinning enter-prises and (ii) a limited amount of additional loomage. Additional spinningcapacity will not be financed by PICIC. New industries, such as deep-seafishing, are expected to be emphasized in the future. PICIC should be ableto attract more projects in the non-traditional sectors by being more pro-motional. This is discussed under paragraph 3.16.

1/ Foreign amounts are converted into rupees at the current exchange rateof US$1 - Rs 9.9.

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3.08 Local currency and import financing. Rapee financing (lbans andequity investments) has represented only 10% of total financing in the past,although this proportion has increased to 20% for the period since 1970.The reasons for the relatively low proportion of domestic currency financingby PICIC are: (i) the availability of locally produced capital equipmentwas limited; (ii) PICIC has financed relatively large projects whose sponsorshave been usually able to put up the required domestic capital; (iii) rupeefunds for relatively large companies were and remain easily available fromcommercial banks; and (iv) until recent years, PICIC was not able to mobilizeenough domestic currency resources needed for significantly higher rupeeinvestments.

3.09 Size of loans. The average size of PICIC's loans since its incep-tion is relatively large, amounting to $616,000 equivalent, reflecting thefact that, as a matter of Government policy, and to ensure complementaritywith other financial institutions in Pakistan (paragraph 2.10), PICIC wasintended to operate in the medium- and large-scale sectors of industry.It would not serve any useful purpose for PICIC to assist smaller industries,because this task can be undertaken more suitably by IDBP and other institu-tions operating at the provincial level (paragraph 2.15).

3.10 Geographical distribution. Some 27% of loan approvals by PICICwere for projects located in former East Pakistan. 73% for West Pakistan(Annex 5). The distribution of West Pakistan approvals, which reflects thegeographical distribution of Pakistan industry, is as follows: Sind (45%),Punjab (44%), NWFP (8%), Baluchistan (3%). PICIC has in recent years madea conscious effort to assist entrepreneurs in backward areas. It is note-'Worthy that of the 15 new projectslJ approved by PICIC in 1972-73, 8 projectsaccounting for 61% of total approvals by amount, are in areas officiallydefined "backward areas". To develop business in these areas, PICIC in 1972established a regional office in Quetta and another in Peshawar (paragraph4.05). PICIC intends to keep up its commendable efforts to assist entre-preneurs in the country's less developed areas.

3.11 Terms of loans. As of June 30, 1973, about 6% of the total port-folio (by amount) had loan maturities of less than five years, 53% betweenfive and ten years, and 41% between 10 and 15 years. The average maturity ofPICIC's loans has been growing in recent years (58% and 84% of loan amou2ts in1972 and the first half of 1973, respectively, had maturities of over 1O years,Annex 5). This is explained by the increased proportion of new projects,which usually require longer maturities than expansion projects. Annex 6lists the rates of interests and other charges on PICIC's loans as ofOctober 31, 1973. Following the recent change in the interest rate etructurein Pakistan (paragraph 2.17) PICIC has raised its lending rate on rupeeloans from 10.5% to 11.5% per annum; the lending rate on its foreign currencyloans remains unchanged at 9.5%, with the sub-borrowers assuming the foreignexchange risk.

1/ As distinct from expansion of capacity and/or modernization projects.

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3.12 Diversification of clientele.. As of June 30, 1973,PICIC had ap-proved 839 loans, aggregating Rs 5.1 billion, to 554 clients, of which 108were newcomers 1/ to indastry. Of these 554 clients, 405 (or 73%) hadreceived only one loan and 149 (27%) had received two or more loans. Byamounts, repeat loans accounted for 27.5% of total lending, a rather lowratio for a development finance company which has been in operation forsixteen years. The proportion of approvals which went to companies in whichPICIC's directors were interested was 8.7%. The bulk of approvals, 63.6%,was for new projects, and 54.2% was for new enterprises. PIGIC's performancein broadening the range of its clients, and assisting newcomers to industry,has been commendable.

3.13 Underwriting and equity investments. Notwithstanding the presenceof specialized institutions in Pakistan which engage in thess activities(paragraph 2.11),PICIC had been active in underwriting and equity investmentsuntil 1971, when adverse political and economic developments reduced thescope for these operations. To date, it has underwritten 83 share issuesfor a total amount of Rs 112.7 million. PICIC has also indirectly contri-buted to the development of the securities market through its equity invest-ments in the NIT (paragraph 2.11) and the EPF (paragraph 2.15).

3.14 PICIC's equity investments also had increased steadily until 1971,after which they considerably slowed down due to the reasons mentionedabove. To date, PICIC has made equity investments in 155 companies total-ling Rs 152 million. Of its equity portfolio as of June 30, 1973, 29% camefrom underwriting take-ups and direct investments, 30% from the exerciseof options, and the balance of 41% from market purchases. These marketpurchases did not serve any clear developmental or promotional objective,but were conceived by PICIC as a means of earning a return on its rupeefunds awaiting term loan disbursements. They also contributed to the ac-tivities of the securities market. PICIC has virtually stopped these par-chases since 1972. Annex 3 summarizes PICIC's underwriting and equityoperations.

3.15 Promotional activities. In its early,years PICIC was instrumentalin bringing into being many projects, notably in the cement, paper and hard-board manufacturing sectors, by identifying investment opportunities; com-missioning feasibility studies for specific projects; seeking out entrepre-neurs; assisting them through the project designing and structuring stages;and having with the Government a constructive dialogue on related policymatters. As its operations grew, PICIC's promotional work was confinedmainly to the preparation and sponsorship of industrial studies2/, severalof which have served as a basis for Government policy decisions and haveled to the establishment of new investment projects by the private sector;market surveys3/; and arrangements for Joint financing by foreign investorsparagraph 3.047 and for foreign technical collaboration.

1/ Persons who had no previous experience in running an industry (retiredcivil servants and military personnel, landlords, importers and exporters,wholesale dealers etc.)

2/ Including studies in cement, cast iron pipe, power tiller manufacturing,outboard engine manufacturing, bagasse pulp industry, sugar beet,engineering capacity, etc.

3/ Including surveys on cement, paper, carpet yarn, diesel engines, etc.

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3.16 There is now both scope and need for PICIC to be active onceagain in promotional work. Government management of enterprises in the 10industrial sectors (paragraph 2.09) has reduced the sectoral range ofPICIC's assistance,since PICIC intends to continue assisting principallyprivately-owned and managed enterprises (paragraph 4.10). To offset thislimiting factor, PICIC intends to do more promotional work than in recentyears, in seeking out promising investment opportunities in those sectorsthat remain eligible for its assistance. To correct the present sectoralimbalance (paragraph 3.07) and gradually diversify its portfolio, PICICis beginning to undertake a concerted effort to attract or develop projectsin newer sectors, such as engineering industries and deep-sea fishing.PICIC is aware of the desirability and need for becoming more promotional.The steps that PICIC is studying towards this end include:

(i) the continuation and intensification of PICIC's involvement inindustrial sector studies, with a view to developing and financingprojects in these sectors. PICIC's staff is currently undertakingcomprehensive studies of the deep-sea fishing industry; pulp andpaper industry based on bagasse; processing of molasses for alcoholmanufacture; textile machinery industry; wollen spinning; andthe establishment of small units for manufacturing steel billets;

(ii) the creation of a special unit within PICIC's organization to under-take promotional work exclusively; and

(iii) closer cooperation between PICIC and Government agencies in chargeof industrial investment such as the Industrial Promotion Bureau,and professional associations such as the Federation of Chambersof Commerce and Industry, in order to identify investment projectsthat could possibly be launched with PICIC's assistance.

Developmental Impact

3.17 PICI makes both a quantitative and qualitative contribution tothe economy. The table in Annex 7 gives selected data on the 839 projectsfor which PICIC had approved loans up to June 30, 1973. Disbursements byPICIC during the period 1964-1971 accounted for 17% of total private invest-ment in large- and medium-scale industry in Pakistan (paragraph 3.05).PICIC's approvals amounting to Rs 5,114 million were part of a total fixedinvestment of about Rs 11,700 million. On the basis of estimates containedin PICIC's appraisal reports, the additional direct employment generatedby these projects is estimated at about 147,500. The average cost of fixedinvestment per worker is about $8,000. The incremental annual sales ofPICIC-financed projects are estimated to amount to Rs 8,506 million. Ex-ports by enterprises assisted by PICIC are estimated to amount annally to$250 million. PICIC has also endeavored in recent years to mobilize domesticresources from the market (paragraph 3.02). PICIC's qualitative contribu-tions also include its promotional activities and industrial studies(paragraph 3.15), its endeavors to assist newcomers to industry (paragraph3.12) and entrepreneurs in the backward areas of the country (paregraph 3.10),and, finally, the relatively broad range of its clients (paragraph 3.12).

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IV. INSTITUTIONAL ASPECTS

Share Capital and Ownership

4.01 PICIC's initial paid-in share capital was Rs 20 million. The lastincrease was in September 1971, when the capital was raised by Rs 10 millionto Rs 60 million through a rights issue for cash at a premium of 50%. Follow-ing that increase, Pakistani shareholding rose from 60% to 64%, since all butone of the foreign shareholders, at PICIC's request, renounced their rights.IFC's shareholding dropped from 4.0% to 3.3% of the total share capital.As a result of the nationalization of life insurance companies (paragraph2.14), public sector shareholding increased from 17% to 38%. Principalshareholders are listed in Annex 8.

Organization and Staff

4.02 Board of Directors. PICIC's Board comprises 20 directors (includingthe Chairman) of whom 12 are elected by Pakistani shareholders, 5 are nomina-ted by foreign shareholders and IFC, 2 by the Government, and the ManagingDirector who is an ex-officio member (Annex 9). Of the 12 elected directors,10 were elected in 1972 and 1973. While most of the previous directorswere connected with leading industrial groups, the majority of new directorshave a professional background in finance, banking and related fields. Theexperience represented on the Bbard has thus been broadened; the representationof the large industrial groups has been reduced. IFC is represented on theBoard by Mr. Hanns Pichler , the Bank's Resident Representative in Pakistan.

4.03 Management. Mr. M. Raschid, former Governor of the State Bank, waselected ChaI-man inJuly 1972. At the same time, the chairmanship became asalaried position, which however did not affect the executive powers of theManaging Director. Mr. Iqbaluddin Ahmed, the Managing Director since August1971, left PICIC in July 1973 to join the Private Development Finance Companyof Indonesia. He was succeeded by Mr. Osman Ali, a senior Government officialand former Executive Director of the Bank Group. Under the new ManagingDirector, well supported by an experienced staff, PICIC remains an efficientinstitution.

4.04 Staff. Following the separation of East Pakistan in December 1971,PICIC lost some gO professional staff in the former Dacca office and 19 pro-fessionalB in the head office. The loss, however, has had little impact onPICIC's operation because of the corresponding loss of business in Bangladeshand a slowdown of operations. PICIC had as of June 30, 1973 a professionalstaff of 92 including 10 new recruits during 1972 and 1973, and 161 otherstaff. PICIC's staff organization is shown in the attached Chart. Becauseof its prestige, competitive remuneration and working conditions, PICIC hasbeen able to attract qualified and competent staff. PICIC has no formaltraining facilities for its staff but provides adequate informal on-the-jobtraining for new recruits and junior officers. The overall quality of theprofessional staff remains high. PICIC has agreed to recruit additionalstaff to undertake more promotion work, and to strengthen its Operations(Appraisal) Department, End-Use Department and Economic Department whichare presently understaffed.

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4.05 Organization. There are nine departments in the head office andfour branch offices (see Chart). Three new departments have been createdsince 1969: the Project Development and Statistics Department was createdin 1970, mainly to undertake the preliminary screening of projects; a newInvestment Banking Department undertakes all work relating to investmentsin shares and securities; and the Letters of Credit and Insurance Departmentwas separated from the End-use Department in March 1973. While PICIC lostthe Dacca Regional Office, it has opened two new kegional offices: one inQuetta (Baluchistan) and one in Peshawar (Northwest Frontier Province).These are relatively small offices.

4.o6 Appraisal. The standards of PICIC's project appraisal work aresatisfactory, especially in the analysis of the financial, marketing andtechnical aspects of projects. PICIC's economic analysis is less satis-factory, and until recently was based only on such partial indicators ofeconomic attractiveness as earnings and savings of foreign exchange, valueadded and employment generation. However, following recant discussions withBank staff, PICIC is correcting this deficiency by introducing calculations ofthe effective rate of protection and the economic rate of return. PICIC'smanagement is endeavoring to strengthen its economic staff, specifically byrecruiting an experienced industrial economisrto head itaXconomic andMarket Research Department.

4.07 Follow-up. PICIC's follow-up procedures are well thought out.Clients are required to subMit quarterly progress reports during the con-struction stage, a completion report, and annual reports after the startof operation. Data provided in these reports are checked through visitsby the supervision staff who then submit their assessment of the project'sprogress and make recommendations, if necessary, on remedial action tobe taken. Problem projects are inspected more frequently, sometimesmonthly. The management is kept well informed.

4.08 Procurement and disbursement. PICIC does not in general requireits borrowers to apply international competitive bidding. Bat it doesusually require that procurement under its foreign currency loans bebased on at least three quotations obtained from foreign suppliers, andthat the final import contract be subject to its approval. The price andsuitability of the eqaipment proposed to be purchased is subject to a care-ful check by the staff, increasingly supplemented by comparisons on thebasis of its experience with similar projects. For this purpose, PICICset up in 1969 an Engineering Price Cell in the Operations Department,which has developed a pool of information on the specifications and pricesof machinery in a wide range of industries. PICIC's procurement proceduresappear appropriate to the nature of its business. Its disbursement pro-cedures are satisfactory.

Operating Policies

4.09 As intended by the Government and PICIC, the company has beenoperating mainly in the field of medium- and large-scale manufacturing,leaving the smaller scale sector to the Government-controlled IDBP

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and other provincial institutions. To that end PICIC's Statement of Policy(Annex 10) provides for minimum limits on its lending operations (para-graph 2.10). PICIC also has upper limits on its commitment. The maximaxsingle transaction is normally limited to $4 million equivalent; and thetotal commitment in a single enterprise to the equivalent of 25% of PICIC'sequity or $5 million, whichever is the lower (presently $5 million).

4.10 PICIC's policy statement limits its assistance to enterprises"in the private sector". The recent take-over by the Governrment of themanagement of 31 private companies in 10 industrial categoriesl/ (para-graph 2.09) has posed a problem to PICIC. Of these 31 companies, 19 arePICIC's clients. As a matter of policy, PICIC intends to continue to directits assistance principally to enterprises managed as well as owned by theprivate sector, but it envisages contiming to finanoe expansion and moderni-zation projects of these 19 existing clients. To that end, PICIC iB con-sidering amending its Policy Statement.

Relations with the Government and the Business Community

4.I1 PICIC works closely with the Government in the formu3*tion andimplementation of industrial policy. It is represented on iwportant Govern-ment committees/boards concerned with industrial and investment matters.As noted later (paragraph 5.05), the Government has undertaken to helpPICIC maintain its debt/equity ratio within the contractual limit agreedwith the Bank and has agreed to provide resources for servicing PFIIC'sexternal debt in respect of projects in Bangladesh (paragraph 5.02). Despitethis close relationship, PICIC has been able to maintain its operationalautonomy. PICIC has good relations with financial institutions. Severalbanks and insurance companies are PICIC's shareholders, and are representedon its Board. PICIC enjoys considerable prestige and influence in Govern-ment as well a business circles.

1/ These ten sectors to date account for about 4% of PICIC's total lending.

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V. FINANCIAL POSITION AND CREDITWORTHINESS

Problem of Assets and Liabilities in Bangladesh

5.01 The problemo At the time of the sece3sion of East Pakistan inDecember 1971, PICIC had in East Pakistan outstanding foreign currency loansof about $70 million, and rupee loans and equity investments of Ra 84 million,which together represented about 30% of PICIC' total assets and about threetimes its present share capital and reserves. On the one hand, PICIC retainedthe iAabilities relating to borrowings incurred to finance its projects lo-cated in Bangladesh, and hence had to continue servicing these liabilities.On the other hand, PICIC has ceased to derive any income from these assetsafter Decemoer 1971. Clearly, it is not within the power of PICIC itselfto remove the uncertainty regarding its future debt servicing capacity andits creditworthiness. PICIC's financial problem, given both its nature andits magnitude, could be resolved only with the Government's help and withinthe context of Government policies in general. Ihe Government has been forth-coming in its financial assistance to PICIC, and has already agreed with PICICor certain arrangements which are described below.

5.02 Existing arrangements. Following the secession of East Pakistan,PICIC's cruciaI and pressing financial problem was to find the resoarces tocontinue servicing its foreign liabilities pertaining to projects located inBangladesh. (The problem of PICIC's rupee assets in Bangladesh is discussedseparately under paragraph 5.04.) At PICIC's reqLest, the Government agreedin December 1972 to service the above-mentioned foreign liabilities on behalfof PICIC in terms of an Agreement with PICIC, shown as Annex 11. The Govern-ment's undertaking, however, was subject to the caveat "for the time beingand so long as the Government continues to service external liabilities per-tairdng to East Pakistan". It is not clear how long the arrangements underthis Agreement would last. Farther, the arrangements did not definitivelyrelieve PICIC of the foreign liabilities in question. In consequence, theamounts provided by the Governuent to service PICIC's foreign liabilitiesconstitute a debt to the Government by PICIC. It has not been decided whetherthe Government intends to require PICIC to repay the debt in dae course, and,if so, on what terms and conditions. The Agreement nonetheless has stipulatedthat PICIC shall not be required to repay the amounts advanced by the Govern-ment until PICIC has recovered its assets in Bangladesh, or obtained compen-sation therefor, or until all PICIC's external borrowings incurred afterNovember 1972 have been repaid.

5.03 While the arrangements described in the preceding paragraph doprovide a temporary solution to the problem of servicing PICIC's foreignliabilities pertaining to assets located in Bangladesh, they fall shortof ensuring PICIC's long-term creditworthiness. It is reasonable toassume that t e"overnment will enventually ensure PICIC's long-term

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financial viability, in view of the importance it attaches to PICIC as adevelopment institution. In the meantime, however, PICIC cannot be con-sidered a creditworthy institution and the Bank should not lend directlyto it. Hence, the proposed loan would be made to the Government andadministered by PICIC without incurring financial liability (paragraph 7.01).

5.04 With respect to PICIC's rupee assets in Bangladesh amounting toRs 84 million, the Government was unwilling to cover this loss, or to givePICIC some financial assistance similar to the arrangements regarding PICIC'sforeign liabilities, described in paragraph 5.02, on the grounds that PICIC'sfinancial position enabled it to absorb this loss., especially in view of aprofit of Rs 100.3 million (paragraph 5.07) which accrued to PICIC in 1972following the rupee devaluation. Ihe amount of Rs 84 million may thereforebe considtered as a loss to PICIC, and consequently it must be written off ora provision be made to cover it. A write-off at this time is not consideredappropriate. As of June 30, 1973, only a small provision of Rs 2.75 millionhas been made in PICIC's balance sheet. PICIC has agreed to make additionalprovisions of Rs 81.4 million in its December 31, 1973 balance sheet, in orderto cover the full amount of Rz 8U.1 million for its rupee assets in Bangladesh.

5.05 In addition to its undertaking to service PICIC's foreign liabili-ties pertaining to projeots in Bangladesh, the Govermsnt has given a generalconuitment to help PICIC observe the debt/equity limit of 7:l agreed underthe previous Bank loan agreement. In keeping with this comitment, theGovernment has rescheduled its subordinated loan to PICIC amounting to As 82mllion so that these loans could meet the definition of equity under theprevious Bank loan agreement. Dhe Government Ms agreed with the mission tomake PICIC an additional subordinated loan of Rs 15 million to furtherirn-prove PICIC's debt/equity ratio (paragraph 5.08).

Financial Position

5.06 General. In looking at PICIC's financial position, it is necessaryto bear inmindthat the status of PICIC's foreign liabilities pertaining toBangladesh remains uncertain (paragraph 5.03). No provisions have been madefor PICIC's foreign currency assets of $70 million located in Bangladesh, inline with PICIC's assuittion that it will not ultimately have to bear an-yloss on these assets.

5.07 Exchange revaluation lus. When the rupee was devalued inMay 1972, PFIICTi otstwdIgoregncurrency loans exceeded its foreigncurrency borrowings by Rs 100.3 million, which represented a non-operationalprofit to PICIC. This situation had arisen because PICIC Mt it8 foreigndebt obligations as they fell due at the pre-devaluation rate, prior to re-ceiving repayments from its sub-borrowers. The magnitude of the above asountwas due to the large volume of overdues by PICIC's clients at the time ofthe devaluation (paragraph 5.12).

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5.08 Debt/Equity ratio. According to the figtires in PICIC's unauditedbalance sheet as of June 30, 1973, (Annex 12), the contractual debt/equityratio, as defined in the Bank loan agreement, was 6.0:1, excluding fromdebt PICIC's foreign liabilities pertaining to Bangladesh on the assunption(paragraph 5.06) that PICIC will not have to bear any loss relating to theseliabilities. The June 30, 1973 figwres, however, did not take into accountan additional Rs 81.4 million provision for Bangladesh rupee assets whichPICIC has agreed to make (paragraph 5.04). If this provision were made outof PICIC's accumulated reserves, the debt/equity ratio would becone 7.9:1,in excess of the contractual limit of 7:1. Hence, in order to bring theratio back within the agreed limit, the Government and PICIC have agreedthat: (a) PICIC would increase its share capital by Rs 10 million in 1974;and (b) the Government would give PICIC an additional subordinated loan ofRs 15 million, following the cozrpletion of the share capital increase. Thiswould suffice to bring PICIC's debt/equity ratio back within the 7:l limit.It is recoimnded that the existing contractual debt/equity limit of 7:1remain unchanged, in view of the present uncertainty regarding PICIC'sforeign liabilities, and of the Government's commitment to help PICIC ob-serve this debt covenant.

5.09 Profitability. Income statements from 1969 through June 30, 1973are given inAmex 13. Net income before provisions rose to Rs 34.3 millionin 1972, a 53% increase over the previous year,l/ mainly because of therupee devaluation which more than doubled the interest income on foreigncurrency sub-loans. The return on average equity remained satisfactory at14.7% in 1971 and 16.4% in 1972. Administrative expenses remained very lowat 0.4% of average total assets in 1972. The spread on lending operationswas around 3% in the first half of 1973, which is adequate. PICIC declareda cash dividend of 12% in 1971 and 10% in 1972. The latter represented adividend pay-out of 17.5%.

5.10 Liquidity position, PICIC experienced serious liquidity problemsin 1972 as a rest of a high volume of arrears (paragraph 5.12), and thefact that PICIC had to continue servicing its debt obligations pertaining toprojects in Bangladesh. Collections from PICIC's borrowers (in West Pakistan)amounted to Rs 120 million, or only 55% of PICIC's debt repayments. Inaddition, PICIC had to put up Rs 81 million during 1972 to service foreignliabilities relating to Bangladesh projects prior to the Government's agree-ment to service these liabilities on behalf of PICIC (paragraph 5.02). PICICmet this shortfall with borrowings from the State Bank (Rs 125 million) anddebenture issues (Rs 185 million). The liquidity situation inproved oon-siderably in 1973 because of (a) a substantial increase in the rate of debtcollections to 71% of billings in the first half of 1973 conpared with 40%for 1972; and (b) the fact that funds for servicing Bangladesh foreignliabilities are now provided by the Government (paragraph 5.02). The liquidityposition is now satisfactory. PICIC is expected to have a positive debtservice coverage in 1973; it was negative in 1972.

1/ Fbr conparison purposes, a Rs 10 million donation by PICIC to the NationalDefense Fund during 1971 which appears as an expense in the income state-ment was not taken into account in this couputation.

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5.11 Audit. A.F. Ferguson and Company continue to be PICIC's auditors.Uhtil 1971, none of their audit reoorts on PICIC contained any qualification.In their 1972 report, however, the auditors were "unable to express anopinion on the adequacy of the provision made for doubtful accounts". Thisreservation relates, not to the adequacy of the Rs 20 million provision fordoubtful accounts in (West) Pakistan, but to the absence of provisions tocover possible losses on PICIC's assets in Bangladesh.(paragraphs 5.04 and5.06).

Quality of Portfolio

5.12 Loans. Annex 14 gives particulars of loans in arrears. As ofJune 30, 1973, 152 clients (out of 275) and 186 loans (out of 349) were inarrears for more than three months. The total principal of these loansamounted to Rs 905 million or 49.9% of the outstanding loan portfolio. Thetable below shows the development of the arrears situation since 1971:

No. of Loans Principal in Principal Outstandingin Arrears/ Arrears/ for Loans inTotal Nunber Outstanding Arrears/Outstanding

of Loans Portfolio Portfolio

June 30, 1973 53% 7.5% 9.9%December 31, 1972' 67% 6.i% 63.7%December 31, 1971 27% 1.3% 24.9%

As this table indicates, the proportion of arrears in PICIC's portfolio re-mains very high. This problem, however, has to be viewed in the context ofthe general situation prevailing in Pakistan since December 1971 which wascharacterized by an economic recession, the loss to many firms of the tradi-tional East Pakistan market, and the rupee devaluation of May 1972 which in-creased the debt service burden of PICICts foreign exchange borrowers by 131%or more and created the need for difficult financial adjustments and re-strcturings. In spite of the high ratio of arrears, actual losses to PICICare likely to be small because most delinquent clients appear to have beenexperiencing only temporary financial difficulties, and because PICIC's loansare usually well secured. As of June 30, 1973, PICIC estimated that the lossto it would not exceed an outside amount of Rs 8 million. lb date no loanshave been written off. Provisions already made for possible losses onPICIC's Wdest Pakistan portfolio (i.e. excluding East Pakistan assets) amountto Rs 20 million, which represents only 1.1% of this portfolio. Total pro-visions and reserves, however, amnunt to Rs 141 million or 7.8% of the out-standing loan portfolio as of Jume 30, 1973.

5.13 PICIC's management is keeping a close watch on the arrears situation.Individual accounts have been analyzed in detail and loans rescheduled whereappropriate. Fbllow-up and debt collection work has been tightened up. Someprogress has already been achieved. Debt collections in relation to arountsdue have improved from 40% in 1972 to 71% in the first half of 1973. Thisinprovement is expected to continue.

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5.14 Equity investments. As of June 30, 1973, PICIC's equity portfolioconsisted ofishiares in b4 npanies, all in operation, totalling Rs 73.7million at cost. Of these, 49 companies representing Rs 44.4 million arepaying dividends, 9 conpanies (Rs 8.5 million) are mderately profitable butnot paying dividends, and the remaining 26 (Rs 20.8 million) are sustaininglosses. Notwithstanding the slump in the stock market (the general shareprice index on the Karachi stock exchange was 85 as of June 30, 1973 versus64 in September 1972 and 100 in 1969-70), the aggregate market value of sharesheld by PICIC was Rs 82.1 million, slightly above cost. The dividend yieldon PICIC's average equity portfolio inproved slightly in the first half of1973 to 4.75% from 4.53% in 1972 but is still below the yitJld achieved inprevious years.

VI. PROSPECTS

General Outlook

6.01 Given revival of private sector confidence along with the Govern-.ment's pragmatic economic policies, prospects for further industrial growthin Pakistan over the next few years are good. The recent Bank EconomicReport estimates that the econony can be expected to expand by 7% per annumduring the period through 1977, with industrial output and investment growingat about the same rate, and that industrial exports would grow by 12% annuallyfor the next several years.

Business Fbrecast

6.02 Annex 15 shows the forecast of PICIC's approvalsF, commitments and,isbursements from July 1, 1973 through 1977. Approvals for 1973 and 1974are largely based on projects PICIC presently has in its pipeline. Approvalsof loans and investments are projected to be of the order of Rs 440 millionin 1973 and Rs 45o million in 1974, and to increase thereafter by 6% annuallyto a level of Rs 535 million in 1977. The level of approvals projected for1973 represents only about two-thirds of the annual level of approvals in1969-70, reflecting the reduction in PICIC's geographical scope of operations(loss of former East Pakistan), the limited opportunities for private in-vestments in ten basic industrial sectors (paragraph 4.10), and, wre gener-ally, PICIC's caution. Approvals of equity investments are expected to'grow steadily from Rs 5 million in 1973 to Rs 25 million in 1977. The pro-portion of rupee financing in relation to total financing for the projectedperiod will remain at about 18% despite the resumption of foreign lending,reflecting PICI1's expectation to finance the domestic machinery industryout of a rupee line of credit of Rs 50 million recently made available toPTCIC by the State Bank. PICIC's projected disbursements over the periodnoted above would represent about 20% of the estimated total private invest-ment in medium- and large-scale industry in that period.

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Resource Requirements

6.03 Foreign currencY. PICIC's uncommitted foreign currency resourcesat June 30a, 1973, amounted to $38.7 million, but are expected to decline to$16.5 million by the end of 1973. It expects to comnit foreign currencyloans of $43.3 nillion in 1974 and $37.9 million in 1975. For the two-yearperiod from January 1, 197h, PICIC would therefore require additional foreignexchange resources of about $65 million of which it expects to obtain $10.7million (DM 30 million) from E in early 1974. This leaves a shortfall ofabout $54 million. A Bank loan of $25 million would meet approximately one-half of PICIC's requirements for the two-year period 1974 and 1975, and thebalance is likely to be obtained from ADB and bilateral sources.

6.04 Domestic currenc.. PICIC's rupee commitments for the period fromJuly ', 1973 to=eF19ber 1975 are estimated to be Rs 190 million. As ofJune 30, 1973, PICIC had uncommitted rupee resources of Rs 176 million.These resources together with prospective internal cash generation (Rs 107million), draw-down on State Bank credit (Rs 50 million; paragraph 6.02), anew Government subordinated loan (Rs 15 million), and the planned sharecapital increase in 1974 ( Rs 10 million), should enable PICIC to undertakethe commitments it has projected and to maintain a satisfactory liquidityposition.

Financial Projections

6.05 The financial projections presented below are based on the assuip-tion that the Government will continue, under the existing Agreement, toprovide PICIC with resources for servicing its foreign liabilities relatingto Bangladesh projects and that a satisfactory settlement of this problemwill be reached eventually which would not inpose any loss on PICIC (para-graph 5.06).

6.06 Projected income statements for the period 1973-77 are shown inAnnex 16. Net profits after tax are expected to grow steadily from Rs 38.7million in 1973 to Rs 55.9 million in 1977. The return on average net worthwill increase from 17.5% in 1973 to 19.6% in 1977. Borrowing and lendingrates are based on the rates prevailing in August 1973 and assumed to holdthroughout the 1973-77 period. Administrative expenses are forecast to in-crease from Rs 9 million in 1973 to Rs 13 million in 1977, but will remainbelow 0.6% of average total assets. Although the projected dividend ratewill increase from 12.5% for 1973 to 15% for 1976 and thereafter, the pay-outratio will remain around 20% through 1977. On the assunption noted in thepreceding paragraph, 'PICIC's profitability will remain satisfactory.

6.07 Projected balance sheets through 1977 are given in Annex 17. Totalassets, which grew at an annual rate of 20% during 1967-1971, are expected todecline slightly from Rs 2,,457 million (excluding assets in Bangladesh) in1972 to Rs 2,312 million at the end of 1976. This absence of growth in totalassets is explained by two factors. First, the foreign currency loan port-folio outstanding is projected to decline gradually through 1975 because

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approvals and commaitments in the period 1971-72 were extremely low (paragraph3.06). Second, the proposed Bank loan of $25 nillion to be administered byPICIC will not constitute either PIIC's assets or liabilities becmse of theabsence of financial liability on the part of PICIC. The inp?ovement inPICIC's projected contractual debt/equity ratio, from 7.3:1 in 1973 to6.0:1 in 1974k, 5.5:1 in 1975, 5.9:1 in 1976 and 4.8:1 in 1977, is explainedby the same factors.

6.08 Projected cash flow statements through 1977 are shown in Annex 18.As noted earlier (paragraph 6.05), these assume that the Government would con-tinue to provide the resources for servicing PICIC's external debt pertainingto Bangladesh. The debt service coverage is expected to remain slightlyabove unity during the projected period, except in 1976 when it will be 0.96times because a sizeable portion of PICIC's debentures, issued in 1972 tomeet debt service requirements, becomeedue. If actual collections exceed theestimated collections (ratios assumed by PICIC are 70% of the amounts due in1973, 80% in 1974s, 85% in 1975, and 90% thereafter), the debt service coverwill i1prove correspondingly. In any event, PICIC's sizeable cash resources(Rs 208 million) as of June 30, 1973, together with new fmuds obtained throughthe proposed capital increase and the subordinated loan from the Government,will provide an added cushion.

VII. PROPOSED LENDING SCHM

Cerieral

7.01 The proposed loan would be made to the Government. The proceeds ofthe loan would constitute a separate fund to be administered by PICIC as anagent of the Government, under a Management Agreement acceptable to the Bank.PICIC would not assume any financial liability to the Government; financiallosses, if any, resulting from defaults by sub-borrowers, would be borne bythe Government. PICIC would generally operate the administered_fund asnearly as possible in the same manner as it would utilize a Bank loan,i.e. it would have full freedom in the selection and appraisal of projectsin accordance with its usual criteria; would fix relending terms of sub-loansaccording to the requirements of the projects; and would allow review ofprojects by the Bank, etc. The device of an administered loan would enablethe Bank to resume financing industry in Pakistan withoit waiting fora definitive solution to the problem of PICIC t s foreign liabiliti8srelating to projects in Bangladesh (paragraph 5.03). It is expected that theGovernment will eventually agree to a solution which would ensure PICIC'slong-term creditworthiness, It would then be possible for the Bank toresume lending to PICIC.

Main Terms and Conditions

7.02 Management fee and interest rate. As renumeration for PICIC'sservices, the Government and PICIC have agreed that PICIC will receive fromthe Government a fee of 1.75% per annum calculated on the outstanding amount

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of sub-loana. This appeara roaoonable, given that PICIC will not bear theinvestment risk. (PICIC presently gets a spread of 2% on the use of itsforeign currency resources, while bearing the investment risk.) The re-lending rate to sub-borrowers would be 9.5%, the same as that currentlycharged by PICIC on its foreign currency sub-loans, and two points belowthe rate of 11.5% charged on its rupee loans. Considering that the sub-borrowere assume the foreign exchange risk (paragraph 7.04), the proposed9.5% rate appears adequate.

7.03 Amortization schedule. As was the case for the previous Bank loanto PICIC (Loan 590-PAK), there would be a fixed amortization schedule of 20years, including three and a half years of grace.

7.04 Foreign exchange risk. The sub-borrowers will, as has been thecase with Bank loans to PICIC, assume the foreign exchange risk on outstand-ing sub-loans. The Government has agreed to bear the foreign exchange riskon amounts collected from borrowers and awaiting repayment to the Bank.

7.05 Free limit. Under the previous Bank loan to PICIC, the free limitwas $4 million with no aggregate free limit. Since PIC0C's maximum exposurein a single enterprise is limited to $4 million equivalent under its PolicyStatement (paragraph 4.09), no PlCIC sub-project required the Bank's priorapproval. PICIC's new Managing Director has expressed a desire for the Bankto review, for prior approval, a number of projects under the proposed loan,so as to maintain a dialogue between the Bank and PICIC's staff on projectappraisal, particularly economic appraisal. PICIC and the Bank have there-fore agreed on a $3 million free limit for the loan. For this purpose, theamount of $3 million relates not just to the amount drawn from the proposedloan, but to total amount lent by PICIC for a project. With this free limit,it is estimated that about 30% by amount, or 10% by number, of projectsunder the loan will require the Bank's prior approval.

Annex 1

PAKIQTAN INDUSTRTAL CREDIT AND INVESTMENT CORPORATION LIMITED

Resource Position as of June 30, 1973

Resource Position:

Domestic Currency: (Rs million)

Equity (after deducting estimated taxes and dividends) 246.6Government loansl/ - 82.6USAID loan2/ 30.0Rupee debentures 185.0State Bank of Pakistan loans 125.0

Total domestic currency resources 669.2

Loans outstanding 64.4Equity investments 73.7Excess of outstanding loans in foreign currency

over foreign currency borrowingsInvestment in net current assets except cash

and net fixed assets 178.7Local currency investments in Bangladesh 84.1Receivable from Government for debt servicing made by

PICIC during 1972 against Bangladesh liabilities 72.7 489.7

Domestic currency resources available for dibbursement 179.5Loans and underwritings committed but not disbursed 3.8

Domestic currency resources available for commitment 175.7Loans and underwritings approved but not committed 25.1

Domestic currency resources available for approval 150.6

Foreign Currency: ($ million)Share capital (paid-in in foreign currency) 3.9IBRD loans 183.4Other loans 170.5Suppliers' credits 93-7

Total foreign exchange resources 451.5Loans disbursed 398.5

Foreign exchange resources available f6r disbursement 53.0Loans committed but not disbursed 14.3

Foreign exchange resources available for commitment 38.7Loans approved but not committed 56.7

Shortfall in foreign exchange resources on basis of approval (18.0)

g/ Subordinated to share capital./ Subordinated to other debt.

2/ The amount of domestic currency resources PICIC has had to use for repaymentsof foreign currency borrowings due to deilays in repayments by PICIC's clients.

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

PAKISTAN INDJSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Summary of Loan OCerations -1958 to June 30, 1973(Rs in million)

1958 1973 1958 to 1973(upto June 30)to Upto All East West

1968 1969 1970 1971 1972 June 30 Pakistan Pakistan Pakistan(----- All Pakistan--- ----- (West Pakistan )

LOCAL CURRENCY

Approvals (net of cancellations) 75.90 27.90 46.50 30.90 8.80 18.60 208.60 84.56 124.04

Commitments 66.29 19.89 18.97 35.83 8.87 6.39 156.24 52.44 103.80

]Asbursements 65.85 10.38 11.99 33.40 19.84 6.76 148.22 48.24 99.98

Repayments 32.93 ( 4.59) 7.87 16.07 22.88 1.04 56.20 20.57 35.63

Outstanding (end of period)l/ 32.92?Z 47.89 52.01o/ 69.34 58.63 64.35 92.02 27.67 64.35

3/FOREIGN CURRENCY

Approvals (net of cancellations) 3377.90 632.00 557.60 185.50 31.80 121.00 4905.80 1284.91 3620.89

Commitments 2518.35 711.61 676.12 106.18 6.45 174.92 4193.63 1132.47 3061.16

Disbursements 1967.97 496.47 510.40 576.o9 171.02 222.77 3944.72 1024.68 2920.04Repayments 530.60 157.85 210.25 151.41 116.78 221.12 1388.01 215.51 1172.50

Outstanding (end of period)!/ 1437.37 1775.99 2076.14 2500.82 1745.89 1747.54 2556.71 809.17 1747.54

TOTAL

Approvals (net of cancellations) 3453.80 659.90 604.10 216.40 40.60 139.60 5114.40 1369.47 3744.93

Commitments 2584.64 731.50 695.09 142.01 15.32 181.31 4349.87 1184.91 3164.96

Disbursements 2033.82 506.85 522.39 609.49 190.86 229.53 4092.94 1072.92 3020.02Repayments 563.53 153.26 218.12 167.48 119.66 222.16 1444.21 236.08 1208.13

Outstanding (end of period 9/ 1470.29 1823.88 2128.15 2570.16 1804.52 1811.89 2648.73 836.84 1811.89

g After deducting payments received in advance.

j The difference between these figures and those appearing in the balance sheets represents invmestments in debenturespurchased from the market.

3 At exchange rate, Rs 9.9 - US$1.0.

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Sumnary of Underwriting and Equity Operations-1958 to June 30,1973(Rs in Thousands)

1958 to 1968 1969 1970 1971 1972 June 30.1973 TOTAL W. Pakistan E. PakistanNo. Amount No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount

UNDERWRITING

Commitnlts 29 65,757 23 13,975 24 15,200 7 17,800 - - - - 83 112,732 27 72,007 55 4o,725Take Ups 17 11,151 5 5,702 8 3,599 2 398 - - - - 32 20,850 11 10,490 21 10,360Commitments at the end of period 25 3hW985 24 13,775 36 20,925 42 37,475 42 37,475 41 36,050 41 36,o50 6 8,150 35 27,900

EQUITY PARTICIPATIONS

Underwriting take-ups 17 11,151 5 5,702 8 3,599 2 393 - - - - 28 10,441 V1 0 3J667I 18 6 774./Exercise of Options 31 29,758 3 2,787 13 15,342 6 5,627 2 1,104 2 2,000 34 29,558!'31 26,568 / 3 2,9901/Direct Investments 25 14,075 5 2,891 2 2,500 3 4,038 - - 1 500 28 17,793! 919 10,690 9 7,103Purchases 25 8,635 4 14,629 8 4,018 16 23,226 - - - - 47 40,765'V36 32,785 11 7,980-

Total Acquisition 98 63,619 17 26,009 31 25,459 27 33,284 2 1,104 3 2,500 137 98,557/96 73,7101/ 41 24,8h7,1/Opening Portfolio - - 96 52,077 95 65,909 111 80,224 133 95,203 1314 96,057 - -

98 63,619 113 78,086 126 91,368 138 113,508 135 96,307 137 98,557 - - - - - -

Sold during the Year (Cost) 2 11,542 18 12,177 15 11,144 5 18,305 1 250 - - - - - - - -

Closing Portfolio 96 52,077 95 65,909 111 80,2214 133 95,203 134 96,057 137 93,557 - -

l/ The total column represants the net holding under tlB respactive portfolio category.

Regiom1 Projects DepartmentAsia Regional OfficeOctober 5, 1973

Annex 4

PAKISTAN INDUSTRIAL CREDIT ANDINVESTMENT CORPORATION LIMITED

Sectoral Distribution of Loan and EquityPortfolio, as of June 30, 1973

( Rs in million)

West Pakistan Only

LOAN PORTFOLIO EQUITY PORTFOLIO TOTAL

Industrial Sector Amount. Amount _% Amount %

Jute Processing & Manufacturing 65.2 3.6 3.38 4.6 68.58 3.6

Cotton & Other Textiles 779.1 43.0 22.62 30.7 801.72 42.5

Sugar 358.8 19.8 11.77 16.0 370.57 19.7

Food Products & Processing 106.9 5.9 1.71 2.3 108.61 5.8

Engineering 123.2 6.8 4.97 6.7 128.17 6.8

Chemicals & Pharmaceuticals 88.8 4.9 1.48 2.0 90.28 4.8

Cement, Ceramics & Glass 37.1 2.1 1.00 1.3 38.10 2.0

Paper Products, Board & Printing 146.8 8.1 2.27 3.1 149.07 7.9

Inland Water Transport & Shipping 38.0 2.2 - - 38.00 2.0

Miscellaneous 68.0 3.6 24.51 33.3 92.51 4.9

Total: 1,811.9 100.0 73.71 100.0 1.885.61 100.0

Regional ProJects DepartmentAsia Regional OfficeOctober 5, 1973

PAKISTAN INDUSTRIAL CREDIT AND INVEST23ENT CORPORATION LIMITED

Comarative Stateumt of Loans Approved

1958 to June 30, 1973(Es in million)

Year Ending Deember 31 1958 to 1968 1969 1970 1971 1972 1973 (June 30) 1958-iuna 30. 1973

No. Amount % No. Amount 7. No. Amount % No. Amount % No. Amount % No. Amount 7. No. Amount %

SIZE OF LOANS:

Below Rs SOO,000 64 27.1 0.8 7 5.1 0.8 5 3.6 0.6 1 2.5 1.2 - 0.9 2.2 1 1.9 1.4 78 41.1 0.8

R. 500.000 to Rs 999,999 105 91.5 2.6 15 19.6 3.0 8 11.5 1.9 1 6.2 2.9 1 1.5 3.7 1 2.2 1.6 131 132.5 2.6

Rs 1,000,000 to Rs 2,499,999 143 277.0 8.0 16 30,7 4.6 9 20.5 3.4 7 17.5 8.1 2 8.7 21.4 2 4.6 3.3 179 359.0 7.0

Rs 2,500,000 to Rs 4,999,999 120 433.9 12.6 17 61.6 9.3 11 40.6 6.7 2 18.9 8.7 - - - 4 15.0 10.7 154 570.0 11.1

Rs 5,000,000 to Rs 9'999,999 86 1,060.2 30.7 15 110.1 16.7 16 129.8 21.5 5 36.6 16.9 1 6.5 16.0 5 31.9 22.9 Lue 1,375.1 26.9

Rs 10,000,000 and above 118 1.564.1 45.3 20 432.8 65.6 21 398.1 65.9 6 134.7 62.2 1 23.0 56.7 3 84.0 60.1 169 2,636.7 51.6

TOTAL 636 3,453.8 100.0 90 659.9 100.0 70 604.1 100.0 22 216.4 100.0 5 40.6 100.0 16 139.6 100.0 839 5,114.4 100.0

INDUSTRIAL CATEGORY:

Jute Processing 59 667.3 19.3 11 98.4 14.9 6 40.0 6.6 - 5.2 2.4 - - - 1 3.5 2.5 77 814.4 15.9

Cotton and Other Textiles 181 1,017.9 29.5 25 235.6 35.7 34 382.5 63.3 10 155.4 71.8 1 26.6 65.5 8 75.1 53.8 259 1,893.1 37.0

Sugar 38 534.3 15.4 3 125.7 19.1 - 5.0 0.8 2 5.1 2.4 1 3.0 7.4 1 39.7 28.4 45 712.8 13.9

Food Products and Processing 91 179.6 5.2 15 58.9 8.9 8 19.9 3.3 4 17.1 7.9 1 2.0 4.9 1 0.6 0.4 120 278.1 5.4

Engineering 88 200.4 5.8 9 18.6 2.8 S 30.6 5,1 - - - - - - 1 5.4 3.9 103 255.0 5.0

Chemicals and Pharmaceuticals 51 233.2 6.7 8 53.4 8.1 6 50.2 8.3 3 14.8 6.8 - - - - 0.2 0.1 68- 351.8 6.9

Cement, Ceramics and Glass 23 78.3 2.3 5 33.7 5.1 3 16.4 2.7 - - - - - - - - - 31 128.4 2.5

Paper, Paper Products and Printing 39 268.2 7.8 5 22.0 3.3 1 5.4 0.9 2 15.0 6.9 - 1.0 2.5 - 0.4 0.3 47 312.0 6.1

Inland Water Transport and Shipping 11 140.9 4.1 - - - - - - - - _ - - - - - - 11 140.9 2.8

Miscellaneous 55 133.7 3.9 9 13.6 2.1 7 54.1 9.0 1 3.8 1.8 2 8.0 19.7 4 14.7 10.6 78 227.9 4.5

TOTAL 636 3,453.8 100.0 90 659.9 100.0 70 604.1 100.0 22 216.4 100.0 5 40.6 100.0 16 139.6 100.0 839 5,114.4 100.0

GEOGRAPHICAL SPREAD:

Sind 249 1,108.3 32.1 30 225.5 34.2 22 202.0 33.4 8 35.3 16.3 2 2.8 6.9 7 94.0 67.3 318 1,6(7.9 32.6

Punsab 182 1,128-2 32.7 24 191.0 28.9 15 166.1 27.5 6 122.4 56.6 2 14.5 35.7 4 24.0 17.2 233 1,646.2 32.2

N.W.F.P. 36 189.8 5.5 3 8.9 1.3 5 45.5 7.6 3 26.5 12.2 1 23.0 56.7 4 20.9 15.0 52 314.6 6.2

Baluchistan 3 35.9 1.0 1 27.7 4.2 2 39.4 6.5 - - - - 0.3 0.7 1 0.7 0.5 7 104.0 2.0

Islambad (Capital) 2 7.9 0.2 2 4.3 0.7 - - - - - - - - - - - 4 12.2 0.2

East Pakistan 164 9h.3.7 28.5 30 202.5 30.7 26 151.1 25.0 5 32.2 14.9 - _ _ _ _ _ 225 1,369.5 26.8

TOTAL 636 3.453.8 100.0 90 659.9 100.0 70 604.1 100.0 22 216.4 100.0 5 40.6 100.0 16 139.6 100.0 839 5,114.4 100.0

NATURE OF PROJECT:

No projects 286 2,172.3 62.9 38 396.3 60.1 39 409.7 67.8 10 13.4 12,4 45 38.3 94.3 1 125.2 89.7 388 3,25.2 63.6

Existig projacta 1 37.1 52 263.6 39.9 31 194.4 32.2 12 103.0 L7.6 1 2.3 5.7 5 14.4 10.3 451 1,859.2 36.4

TOTAL 636 3.453.8 100.0 90 659.9 100.0 70 604.1 100.0 22 216.4 100.0 5 40.6 100.0 16 139.6 100.0 839 5,114.4 100.0

LOCAL VS. FORIB CUBWNC!2

Local Currency 60 75.9 2.2 11 27.9 4.2 15 46.5 7.7 6 30.9 14.3 3 8.8 21.7 4 18.6 13.3 99 208.6 4.1

Foreign Currency 576 3,377.9 97.8 79 632.0 95.8 55 557.6 92.3 16 185.5 85.7 2 31.8 78.3 12 121.0 86.7 740 4,905.8 95.9

TOTAL 636 3,453.8 100.0 90 659.9 100.0 70 604.1 100.0 22 216.4 100.0 5 40.6 100.0 16 139.6 100.0 839 5,114.4 100.0

TERMS OF LOANS:

'Jp to 5 years 163.4 4.7 23.2 3.5 45.2 7.5 22.5 10.4 8.8 21.7 18.6 13.3 281.7 5.5

Over 5 to 10 years 1,973.7 57.2 272.4 41.3 365.4 60.5 93.6 43.3 8.4 20.7 3.9 2.8 2,717.4 53.1

Over 10 years 1,316.7 38.1 364.3 55.2 193.5 32.0 100.3 46.3 23.4 57.6 117.1 83.9 2,115.3 41.4

TOTAL 3,453.8 100.0 659.9 100.0 604.1 100.0 216.4 100.0 40.6 100.0 139.6 100.0 5,114.4 100.0

Asia gbor 3 ceOctobar 5, 19?3

Annex6

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORFORATION LIMITED

Main Terms and Conditions for Assistance(as of October 31, 1973)

Interest rate on rupee loans: (a) U1.5% and 10.0% p.a.; the 10.0% rateapplies to projects located in less-developed areas. A 0.5% rebate isgiven for loans carrying convertibil-ity features.

(b) 114_p.a. above Central Bank's rate(8% p.a.) in respect of loans for finan-

cing locally fabricated equipment andrefinanced under a special facility ofup to Rs 50 million extended by theState Bank of Pakistan.

Interest rate on foreign currency (a) 9.5% p.a. for subloans under ADB loan.loans:

(b) 8.5% p.a.-9.0% p.a. for subloans underbilateral credits.

Commitment Charge: 1.5% per annum on undisbursed amounts, com-mencing 30 days after the date of sanction(60 days in respect of projects in less-developed areas). Charge increases to 2%when the loan is not utilized within 6months from the date of sanction (9 monthsin respect of projects in less developedareas).

Letter of credit opening commission: 1/4% of the letter of credit outstandingin the first quarter plus 1/8% in the sub-sequent quarters.

Appraisal fee: 0.5% of the amount sanctioned (3/8% for newprojects located in less-developed areasand involving PICIC financing up to Rs 2.5million).

Underwriting commission: 2.5% of the amount underwritten plus 2.5%on amounts taken up.

Penalty charges: 2% per annum over basic interest rate onamounts overdue.

Insurance commission:Marine policies 15% of the premiumErection policies 20% of the premiumFire policies 5% of the premiumAccident policies 20% of the premium

Regional Projects DepartmentAsia Regional OfficeNovember 28, 1973

Annex 7

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Selected Data on PICIC Assisted Projects(1958 to June 30, 1973)2

1. Number of Projects Assisted 839

2. Number of enterprises 554

of which newcomers to industry 108

3. PICIC financing (net approvals) Rx 5,14million

14. Total Fixed Investment Rsil,7Q0 milion

5. Incremental Annual Sales RB 8,506 million

6. Annual Net Value Added Rs 1,974 million

7, Annual Gross Exports US$ 251 million

8. Annual Foreign Exchange Earnings/Savings US$ 209 million

9. New Jobs Created 147,500

1/ Based on projections made in project appraisals.

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

Annex 8

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

List of Shareholders as of June 30, 1973

Name of Shareholders No. ofShareholders No. of Shares Percentage

Foreign shareholders who subscribed in foreign currency

International Finance Corporation 200,000Bank of America (USA) 180,554Irving Interna-,ional Financing Corporation (USA) 104,166Continental International Finance Corporation (USA) 149,654The Commonwealth Development Finance Company Ltd. (UK) 100,661Deutsche Bank A.G. (West German) 275.000

6 1,010,035 16.83Other shareholders holding less than 100,000 shares 23 623,275 10.39

Sub-total 29 1,633,310 27.22

Foreign shareholders who subscribed in Pakistan currency

The Chartered Bank (UK) 107,844The National and Grindlays Bank (UK) 201,250First National City Bank (USA) 133.333

3 442,427 7.37Other shareholders holding less than 100,000 shares 14 95.231 1.59

Sub-total 17 537,658 8.96

Total foreign shareholders 46 2,170,968 36.18

Pakistani shareholders

State Life Insurance Corporation of Pakistan 1,230,565Habib Bank Limited 191,829National Bank of Pakistan, Head Office 297,500Investment Corporation of Pakistan 195,796Pakistan Insurance Corporation 193,333United Bank Limited 108,509National Batk of Pakistan, Trustee Department 355,366

7 2,572,898 42.88

Other shareholders holding less than 100,000 shares 766 1.256,134 20.94

Total Pakistani shareholders 773 3,829,032 63.82

Total PICIC shareholders 819 6.000 000 100.00

Regional Projects DepartmentAsia Regional Office'ctober 5, 1973

Annex 9

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CUCk$RATION LIMITED

Board of Directors and dxecutive Committee(as of July 31, 1973)

Year ofPakistani Directors Appointment Principal Present Position

1. Mr. M. Raschid 1972 Chairman, PICIC.2. Hr. 14. Shabbir Ahmed 1962 Businessman and industrialist.3. Shahzada Monnoo 1973 Businessman and industrialist.4.* Pir Mohammed Mahfoos 1957 Chairman, Sima Laboratories Ltd.5.* Xr. H.U.Beg 1972 Chairman, State Life Insurance Corporation.6. Mr. M. Wisaluddin 1972 Trustee, Habib Insurance Company.7.* Mr. A. Jamil Nishtar 1972 Managing Director, National Bank of Pakistan.8. Mr. N. Mohamnmad Qureshi 1973 Manuaging Director, Investment Corporation of Pakistan.9. Mr. Aminullah 1972 IMerber, Board of Industrial Management.10.* Dr. Nasiruddin Jogezai 1972 Ptysician and Surgeon.11. Mr. Zabid Bashir 1972 Industrialist and Businessman.12. Mr. Ahmed Dawood 1972 Chairman, Dawood Group of Companies.

hepresenting Government of Pakistan

13.* 1r. Akhtar M4ahmood 1971 Joint Secretary, Ministry of Industries and NaturalResources.

14.* Mr. Masudur Rauf 1972 Director, PICIC, representing four provinces ofWest Padkistanby rotation.

Foreign Directors

15.* Mr. Hanns Pichler 1973 IBRD Resident Representative in Pakistan16. Mr. William B. Beam 1972 Senior Vice President, Americar. Express Banking

Corporation, New York.17.* Mr. R.S. Rees 1973 Managing Director, Overseas Banking Division,

National and Grindlays Bank, London.18. Mr. Paul Xrebs 1961 General Director, Deutsche Bank, Frankfurt.19. Mr. N.Kamei 1970 Manager, Bank of Tokyo, Karachi.

14anaging Director

20.* Mr. S. Osman Ali 1973 Managing Director, PICIC

Mr. Shafique Ahmed (Alternate Director forMr. William B. Beam) 1972 aunager, Bank of America, Karachi.

Mr. D.J. Fisher (Alternate Director forMr. R.S. Rees) 1973 General Manager, National and Grindlays Bank in Pakistan

Mr. Fredrick-Ctto (Alternate Director forMr. Paul Krebs) 1971 Manager, Deutsche - Asiatic Bank, Karachi.

* Members of the Executive Comiittee.

Regional Projects DepartmentAsia Regional officeOctober 5, 1973

ANNEX 10Page 1

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Statement of Policy

Approved by the Board of Directors on December 10, 1964 andAmended on March II,, September 30, 1967 and December 7, 1970

1. Objectives of the Corporation

(a) To stimulate the development of the country by providing financefor the establishment of new industries as well as for the bal-ancing, modernisation and expansion of existing industries, allin the private sector;

(b) To provide finance only for projects economically viable andfinancially sound; and

(c) As far as possible, to assist in broadening the base of industrialownership in the country and thereby develop the Stock Market.

2. These objectives are carried out through:-

(i) Investment Policy

(a) Finances are made available only for viable projects whichwill contribute to the economic growth of the country and tosaving or earning of foreign exchange. For this purpose allprojects are subjected to careful examination through quali-fied staff and only those judged economically viable, techni-cally sound and financially profitable are considered forassistance;

(b) Finances are made available to projects which are in linewith the development plans of the Government, preferencebeing given to projects largely based on local raw materials;

(c) Financing is diversified, as far as possible, both as regardsdifferent regions of the country and as regards different in-dustries and their ownership. Preference is given to the fi-nancing of projects in the under-developed areas of the 2wings of the country as long as they satisfy the conditionsof economic viability and financial soundness;

(d) In accordance with the normal business practice, adequatesecurity is obtained to cover the loans but in addition themain considerations are soundness of management and projectedprofitability of the enterprise to cover rep%jments;

ANNEX 1loPage 2

(e) The Corporation does not seek any controlling interest inany enterprise financed by it but consistent with the safetyof its interests, leaves the management and control in thehands of the entrepreneurs;

(f) Even after providing the finance, the projects are carefullywatched and those in difficulties are assisted to the extentpossible till the loans are repaid; and

(g) Corporation does not finance working capital requirements bymeans of short-term local currency loans, This buasiness isleft to the commercial banks. In other respects also PICICdoes not compete with commercial banks.

(ii) Method of Financin

Corporation provides finance according to the suitability ofeach project, in the form of:

(a) Direct loans, mostly in foreign currencies;(b) loans partly convertible into stock;(c) direct equity participations; and(d) underwriting of public issues.

(iii) Size of Loans

(a) Progressively and as desired by Government, Corporationhas raised the minimum lending limit for its operations.These minimum lending limits, except where enterprise isalready mortgaged with PICIC for earlier loan or wherepermitted by Government for special reasons., for the timebeing are Rs. 0.75 million for East Pakistan and backwardregions of West Pakistan and Rs 1,50 million for the pro-vinces of West Pakistan other than the backward regions forforeigIn currency loans and Rs 2.5 million for riuee loans(smaller loans are provided through other institutions inthe country).

(b) PICIC shall limit its financial assistance in any singletransaction to not more than US$4 million. PICIC shalllimit its total commitment to any single enterprise to theequivalent of 25% of PICIC s net worth or US$5 million,whichever is the smaller. For the purposes of thislimitation, the term "total commitment" means the aggregateamount of all the outstanding commnitments of PICIC in suchenterprise plus the total amount of any proposed newcommitment, both amounts to be determined as of the datesuch new commitment is proposed to be made.

ANNE 10Page 3

(iv) Exchange Risk

In granting foreign exchange loans (except in the case of sub-loans from the first IBRD loan to PICIC where the foreign exchangerisk is covered by Government) the exchange risk is passed on tothe ultimate borrowers.

(v) Staff Recruitment and Training

(a) In order to strengthen its own management and staff as wellas to assist its clients in the formulation and conduct oftheir projects, Corporation has continued to build up aneffective organization and develop an adequate staff poss-essing skills in finance, marketing and economic analysis,engineering, accountancy and law, and

(b) Corporation has been sending out members of its technicalstaff for training at IBRD, IFC, Economic DevelopmentInstitute and other development financing agencies abroad;at the same time Corporation has trained officers of otherinstitutions and is particularly ready to receive for train-ing officers from newly established development banks fortheir initial training.

(vi) Reserves

The Corporation continues to build reserves consistent with soundfinancial practices. In the past the practice has been to placeroughly 50% of the profits to reserves, in addition to capitalgains realised from the sale of investments and intention is tocontinue this policy.

(vii) Broadening Industrial Ownership

(a) In the case of new as well as existing larger industrialenterprises, as a condition of financing, Corporation hasrequired that certain percentage of the share capital isoffered to the general public as a means to broaden thebase of industrial ownership;

(b) The Corporation has, wherever practicable, made directequity investments or obtained conversion rights and thensold some of its investments in the open market to furtherthe growth of the capital market. In selling any investmentsit pays due regard not only to its own interests but also tothe interests of other participants in such enterprise aswell as to the steady and sound growth of stock exchangesin the country; and

A±"TNEX 10Page 4

(c) It is the intention that the ttal equity investment invarious enterprises, either made directly or acquiredthrough conversion rights, is normally restricted to thepaid-up capital and free reserves of the Corporation.

(viii) Control over the Corporation

The Directors will use their powers to prevent any one person,or company, or group of affiliated persons or companies obtain-ing effective control of the Corporation.

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

Annex 11Page 1

PAKISTAN INDUSTRIAL CREDIT AND INVESTIv1NT CCRPORATION LIMITED

Agreement Between the Government of Pakistan and PICIC on Foreign

Currency Liabilities in East Pakistan

AGREEMNT dated December 20, 1972 between the Islamic Republic ofPakistan (hereinafter called the Government) and the Pakistan IndustrialCredit and Investment Corporation Limited (hereinafter called PICIC).

Considering that:

(a) Pakistan Industrial Credit and Investment CorporationLimited (PICIC) has large assets in East Pakistan andPICIC has correspondingly large liabilities towardsthe Government and other internal and external agenciesand institutions with respect to its operations in EastPakistan;

(b) the assets which PICIC owns in East Pakistan are forthe time being not accessible to it; and

(c) PICIC's financial position is, therefore, impaired;

And since the Government is keen to promote the industrial development ofthe country and towards that end desires that PICIC should be enabled tobecome an acceptable recipient of financial assistance from external andlocal agencies and generally to function and operate as a strong andfinancially solvent indastrial development institution;

Therefore, the Government and PICIC have agreed as follows:

1. The foreign currency liabilities of PICIC pertaining to EastPakistan and the corresponding assets over which PICIC retains no de factocontrol would be segregated and transferred to a Trust Fund to be createdby PICIC.

2. Notwithstanding the transfer of such liabilities to the TrustFund, PICIC would remain finally liable for the liabilities so transferred,subject to the arrangement set out herein.

3. For the time being and so long as the Government continues toservice external debt liabilities pertaining to East Pakistan, the Govemmentwill provide to the Trust Fund necessary resources on such terms and conditionsas may be mutually agreed upon to service external liabilities of PICIC per-taining to East Pakistan to the extent that they are not covered by recoveriesof assets of PICIC in East Pakistan.

Annex 11Page-2

4. Except as may be otherwise agreed between the Government andPICIC, the Government shall not require the Trust Fund or PICIC to repayall or any part of the resources provided by the Government to the TrustFund and interest thereon until such time as the external loans obtainedby PICIC after 30 November 1972 have been repaid or until PICIC recoversits assets in East Pakistan or obtains compensation therefor, whichverbe earlier.

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

Annex 12

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMTED

Balance Sheets. December 31, 1969-72 and June 30, 1973

(Re in zmilion)June 30

1969 1970 1971 1972 1973

Audited Unaudited

ASSETS

Cash and ahort-term deposits 71.46 57.64 82.16 195.30 208.27

Government and other securities 24.94 25.23 17.41 11.20 23.69Accrued interest and charges 37.89 54.34 52.52 211.16 279.28Sundry current assets 4.95 10.26 9.02 12.41 12.20

139.24 147.47 161.11 430.07 523.44

Local currency loans 47.22 51.92 46.56 64.60 64.35Foreign currency loans / 837.77 987.10 802.40 1,910.57 1,747.54

884.99 1,039.02 848.96 1,975.17 1,811.89

Less: Provision for doubtful advances - - 20.00 20.00

Total loans 884.99 1,039.02 848.96 1,955.17 1.791.89

Equity investments (at cost) 65.91 80.22 68.85 71.21 73.71Fixed assets (net) 0.82 1.10 1.02 o.86 0.83

Anount receivable from Government of Pakistan - - 8 51.33 72.67Assets blocked in East Pakistan - - 434.41 491.52 525.14

TOTAL ASSETS 1, 1267.81 1 3, 030.16 2.987.68

LIABILITIES AND EqUIf

Accounts payable 21 27.91 31.52 29.72 104.79 80.70

Provision for taxes on income 11.68 15.53 11.01 31.36 44.13Proposed dividend 5.25 6.25 6.30 6.oo -

44.84L 53.30 L7.03 2.1 12h.83

Foreign currency long-term borrowings 2 814.85 962.24 782.00 1,798.28 1,731.43US AID rUipee loan 30.00 30.00 30.00 30.00 30.00Rupee debentures - - 20.00 185.00 155.00

Loan from State Bank of Pakistan - - - 125.00 125.00

Subordinated Goverrment advances 79.51 79.27 40.91 81.39 82.58

Total long-term debt 924.36 1,071.51 872.91 2,219.67 2,154.01

Capital paid-in 50.00 50.00 60.00 60.0o 60.00Reserves 71.55 92.52 99.65 129.99 131.35Revaluation reserves - - - 67.86 52.07

Undistributed earnings 0.21 0.48 0.35 0.36 19.50

Equity 121.76 143.00 160.00 258.21 262.92Liabilities in respect of East Pakistan / - - 4 1 3. 1.Loans disbursed or to be disbursed by Government

of Pakistan - - - 81.33 132.53

TOTAL LIABILITIES AND EQUITY 1,090.96 1.267.81 *1 4. 3.030.16 .68

RATIOS

Total long-term debt/equity / 7.6:1 7.5:1 5.4:1 8.6:1 8.2:1Long-term *bt/equity (IBRD Yfinition)!i 6.2:1 6.3:1 4.6:1 6.3:1 6.0:1Current ratio 3.1:1 2.8:1 3.4:1 3.0:1 4.2:1

I/ Including interest accrued on guarantees as shown below under |

/ Including outstanding guarantees as under:Guarantees Outstanding 76.27 85.49 152.46 414.20 408.99Interest Outstanding 1.60 2.42 3.45 17.16 24.39

2 Foreign currency liabilities in respect to East Pakistan (Rs 313.4 million as of June 30, 1973) areshown at the exchange rates prevailing before the separation of East Pakistan. At current exchangerates this amount would be Rs 748.7 million.

g Foreign currency liabilities relating to East Pakistan ar excluded from debts. PICIC has agreedto make provisions for its rupee assets in East Pakistan amounting to Re. 84.14 million. If thisprovision was made effective as of June 30, 1973 the total long-term debt/equity ratio would be12:1 and the long-term debt/equity ratio (Bank definition) would be 7.92:1.

Regional Projects DepartmentAsia Regional officeOctober 5, 1973

Annex 13

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LINITED

Income Statements fir years endedDecember 31, 1969-1972 and half-year ended June 30, 1973

(Rs in million)

(Upto June 30)INCOME 1969 1970 1971 1972 1973

Audited Unaudited

Interest on temporary investmentand bank deposits 6.85 5.53 5.12 12.91 5.15

Interest on loans 61.58 81.77 70.21 166.34 87.25Dividends from investments 5.60 4.48 4.72 3.23 3.50Capital gains from investments 5.35 6.61 7.19 - -Miscellaneous income 14.52 14.27 13.29 17.15 d.13

Total gross income 93.90 112.66 100.53 199.63 104.03

EXPENSES

Administrative expenses 5.03 6.48 18.56 8.00 3.91Interest paid and other financial

expenses 48.34 60.97 62.17 125.27 65.68

Total expenses 53.37 67.45 80.73 133.27 69.59

Income before taxes 40.53 45.21 19.80 66.36 34.44

Income tax 14.26 18.32 7.50 32.10 15.30

Net Income 26.27 26.89 12.30 34.26 19.14

Allocation of Net Income

Unappropriated profit, beginning of year 0.33 0.21 o.48 0.35 0.36Excess tax provision of previous year - o.60 - - -Net income 26.27 26.89 12.30 34.26 19.14

26.60 27. 12.78 34.61 19.50Reserves 21.14 2.13 5.10 -Provision for doubtful loans - - - 22.75J /Dividends 5.25 6.25 6.30 6.00 -Unappropriated profit, end of year - - 0.35 0.36 19.50Additional tax for previous years 0.21 0.48 4.00 0.40 -

2.0 27.70 1278 34.61 19.50RATIOS

Dividend pay-out ratio (%) 20.0 23.2 51.2 17.5 -

Rate of dividend (%) 10.5 12.5 12.0 10.0 -Net profit/average equity (%) 23.6 20.3 14.7 16 4 14.6Profit before taxes/average total assets () 4.1 3.8 2.5 2 3.7 2.8Administrative censes/average total 0.50 0.55 0.731' 0:44 0.32

assets (%W

/ Includes donation of Rs 10.0 million to the National Defence FTund./ Includes provision of Rs 2.75 million for assets relating to East Pakistan.

Y For 1971 the Rs 10 million donation to the National Defence Fund (footnote 1 )was not included in the calculation of these ratios.W West Pakistan assets only.

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

Annex 14

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Analysis of Arrears as of June 30, 1973Y/

(Rs in thousands)

Principal OutstandingNo. of Amount of Arrears Principal As % of Total

Companies Principal Interest Total Outstanding Loan Portfolio

A. AGE OF ARREARS

Loans servicing regularly_/ 123 - - - 906,872 50.1%Loans in arrears 152

3 _ 6 months 38,680 28,240 66,920 260,485 14.4%6 - 9 months 13,125 9,723 22,848 88,314 4.9.9 - 12 months 34,772 26,273 61,045 234,225 12.97.12 - 18 months 29,603 23,911 53,514 190,703 10.5%18 - 24 months 15,279 11,499 26,778 96,277 5.3%Over 24 months 5.212 12,256 17,468 35,015 1.9%

Total 275 136,671 111,902 248,573 1,811,891 100.0%

B. INDUSTRIAL AND AGEWISE DISTRIBUTION OF PRINCIPAL OUTSTANDING AFFECTED BY ARREARS Loans with ArrearsAs % of

Over 12 months 12 - 6 months 6 - 3 months Total % of Total Pptal Loans Outstandiro

Jute processing 14,026 7,013 21,039 2.37, 32.2%cotton and other textiles 142,588 139,511 120,741 402,840 44.5Z 51.7%Sugar 78,414 76,722 66,399 221,535 24.5Z 61.7ZFood products and processing 21,581 21,115 18,274 60,970 6.7Z 57.17Engineering 14,973 14,649 12,679 42,301 4.7% 34.3%chemicals and pharmaceuticals 11,256 11,014 9,532 31,802 3.5% 35.87.Cement, ceramics and glass 11,014 10,776 9,326 31,116 3.5Z 83.87.Board, paper, Paper products and printing 25,301 24,756 21,424 71,481 7.9% 48.7%Inland water transport and shipping 350 14,544 - 14,894 1.6Z 39.2%Miscellaneous 2,492 2,439 2,110 7.041 0.87 10.3%

Total 321.995 322,539 20485 9 100.0 49.9%

RPOVINCE AND IWDUSTRY-WISE STATEMENT OF OVERDUES:

SIND PUNJAB BALUCHISTAN N.W.F.P. TOTALPrinkcipal Interest Principal Interest Principal Interest Principal Interest Principal Interest

late processing _ _ 6,098 9,661 - - - - 6,098 9,661.*otton and other textiles 28,327 16,981 25,641 19,535 ; ,615 2,330 - - 55,583 38,846Sugar 136 125 17,466 12,725 - - 1,247 846 18,849 13,696Food products and procesaing 8,262 5,663 6,571 5,643 - - 108 36 14,941 11,342Engineering 3,862 7,091 4,520 1,364 - 1,767 - _ 8,382 10,222Chemicals and Pharmaceuticals 4,503 2,771 4,971 1,497 - - 1,266 550 10,740 4,818Cement, ceramics and glass 978 648 7,620 2,080 - - - 8,598 2,728Board, paper, paper products & printing 2,074 3,093 50 28 - - 8,764 14,272 10,888 17,393Inland water transport and shipping 1,516 8 - - - - - - 1,516 8Miscellaneous 886 1.052 8 2,039 - _ 182 97 1,076 3,188

Sub-total 50,544 37.432 9 54572 1A615 4,097 11 567 15 801 136,671 111.902

TOTAL 87,976 127,517 5,712 27,368 248,573

7 of total principal and interestto ar-ars 35.47 51.3% 2.3% 11.0% 100.0%

1, idst Pakistis portfolio.7/ This catagwy includes Itns in arrears for less than 3 months.

Regional Projects DepartmantAsia Regional OfficeOctober 5, 1J73

ANNEX 15

PAKISTAN INDUSMRIAL CREDIT AND INVESTMENT CORPORATION LhTED

Forecasts of Approvals, Commitments and Disbursements, 1973-1977(Rs in million)

July-Dec.Years ending December 31 1973 1973 1974 1975 1976 1977

Approvals

Foreign currency loans 229.00 350o00 375.0o 400.00 410,00 420.00Local currency loans 31.4o 50000 60.oo 70.00 80.00 20.00

Sub-total 260.40 400.00 435.00 47000 490-.00 510.00Equity investments 2.50 5.0O 10.00 1500 20.00 25.00

Total approvals 262.90 405.00 445,00 485.00 510.00 535.00

Commitments

Foreign currency loans 220.00 394.92 429.5o 375.00 395.50 410.ooLocal currency loans 28.01 34e40 67.00 67.00 77.00 87.00

Sub-total 288.01 U29.32 496.50 442.00 472.50 497.00Equity investments 2.50 5.00 10.00 15.00 20.00 25.00

Total commitments 250. 51 [3h 32 506.50 457e.00 492.50 522.00

Disbursements

Foreign currency loans 52,53 275.30 163,09 302.17 373.31 391.35Local currency loans 20,51 _27.27 57.22 67.00 74.00 84.OC

Sub-total 73.04 3752 7 220,31 369.17 447I31 475-35Equity investments 2.50 5.00 10.00 15,00 20.00 25.00

Total disbursements 75354 37 230.31 384el7 467031

Regional Projects DepartmentAsia Regional OfficeOctober5, 1973

Annex 16

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

Projected Incorn St teinerts. 1973-1977(Rs8itrnillion)

Years ending December 31 1972 1973 1974 1975 1976 1977(audited)

INCO-NE

Income from loans - interest 166.33 173.00 167.19 166.56 171.50 185.39Commitment charges, other fees,

commissions etc. 10.00 10.04 15.69 19.79 21.5 22.25

Income from loan operations 176.33 183.04 182.88 186.35 193.02 207.64Dividend income 3.23 5.53 6.50 7.50 8.90 10.70Realisation of exchange reserve 7.16 10.00 10.00 10.00 10.00 10.00Income from short-term investments,

deposits etc., 12.91 12.16 14.20 14.56 11.06 6.68Capital gains - - 1.00 1.00 1.50 2.00

Total gross income 199.63 210.73 214.58 219.41 224.48 237.02

EXPENSES

Interest and commitment chargeson borrowings 125.27 130.40 128.00 127.68 121.15 125.21

Administrative and other generalexpenses- 8.00 9000 10.00 11.00 12.00 13.00Total expenses 133.27 139.40 138.00 138.68 13.15 18.21

Income before tam 66.36 71.33 76.58 80.73 91.33 98.81Provision for tax 32.10 32,62 3_4.42 35.94 40.25 42.91

N4t income 34.26 38.71 42.16 44.79 51.08 55.90= =- = = ==*-

APPROPRIATIONS

Dividends 6.oo 7.50 8.45 9.80 10.50 11.25Reserves 27.90 31.00 33.00 34.50 40.00 44.00Unappropriated surplus 0.36 0.21 0.71 0.49 0.58 o.65

34.26 38.71 42.16 44.79 51.08 9RATIOS

Dividend pay-out (%) 17.5 19.4 20.0 21.9 20e5 20,1Rate of dividend (%) 10.0 12.5 13.0 14.0 15.0 15.0Net profit/average equity (%) 16.4 17.5 21.1 19.8 20.4 19.6Profit before taxes/average total assets(5*3.7 2.9 3.2 3.4 3.9 4.1Administrative expenses/average total

assets (%) 0.44 0.37 0.42 0.47 0.52 0.54

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

Annex 1 7

PAKISTAN IIDISTRIAL CREDIT AND INVESTNENT CORPORATION LIMITED

Projected Balance Sheets, 1973-1977(Rs in mjion)

Aa of DLoem,ber 31 1972 1973 1974 1275 1976 1977

(Audited)

Current Assets

Cash and short-term deposits 195.30 191.32 233.44 245.43 145.16 123.68Investunt in overnsint securities 11.20 11.20 11.20 11.20 11.20 11.20Receivables and accrued income 209.65 263.00 219.00 119.00 92.00 100.00Interest accrued on imestmwnts 1.51 1.51 1.51 1.51 1.51 1.51Deposits. prepayinnts, etc. 12.41 12.41 12.41 i2.41 12.41 i2.41

Total ourrent assets 430.07 479. 477.56 389.55 262.28 248.80

outstanding loans: ;Foreign Ourrensy 1,910.57 1,750.10 1,691.95 1,675.76 1,716.80 1,836.48Dorstic currency 64.60 84.6o 133.82 19o.46 251.06 317.31

Total loans 1,975.17 1,834.70 1,825.77 1,866.22 1,967.86 2,153.79Equity investaents 71.21 76.21 81.71 96.21 112,.6 ' 112.4

Total loane and investments 2,046.38 1,910.91 1,909.48 1,962.43 2,080.32 2,286.25Deduct: Reserve fur doubtful accounts 20.00 23.00 26.00 29.00 32.00 5S.o

Net portfolio 2,026.38 1,887.91 1,883.48 1,933.43 2,048.32 2,251.25Fixed assets o.86 0.96 1.06 1.16 1.26 1.36

Assets in let Pakistan.Foreign currency 410.13 484.79 484.79 48i4.79 484.79 484.79Local Currency 84.14 84.14 84.14 8414

Total aseets in hat Pakistan 494.27 568.93 568.93 568.93 568.93 568.93Less: Provision for local currency investrnt 2.75 84.14 84.14 84.14 B4.14 84.14

Net assets in ast Pakistani/ 491.52 484.79 484.79 484.79 48h.79 48b.79Receivable from Ocvernesnt of Pakistan in

respect servicing of E. Pakistan borrowings 81.33 - -

TOTAL ASSETS 3.0o0.16 2,853.10 _816 .8g 2,806.9.1 2,796.65 2,986.20

I3D Administered Loan - - 50-00 175.00 225.00 242.00LIABILITIES AND !2UriYCurrent Liabilities

Tax payable 31.36 32.62 34.42 35.94 40.25 42.91Dividends payable 6.o0 7.50 8.45 9.80 10.50 11.25Accounts payable and other current liabilities _104.79 105.56 104.36 104.36 101.36 102.86

Total current liabilities 14-c15 145.68 147.23 150.10 152.11 157.02

Long-term DebtsForeign currency borrowings.V 1,798.28 1,604.53 1,528.62 1,525.79 1,592.10 1,718.45Rupee loan from US AID 30.00 30.00 30.00 30.00 28.57 25.71let rupee debentures 20.00 20.00 20.00 20.00 - -2nd debenture issue 75.00 75.00 75.00 65.63 46.88 28.133rd debenture issue 90.00 90.00 90.00 90.00 72.00 54.004th debenture iseue - - - - - 75.00State Bank credit: I 75.00 75.00 56.25 18.75 -

II 50.00 50.00 50.00 37.50 12.50 -III - 10.00 50.00 4.38 43.13 36.88

Total borrowings senior to equity 2.138.28 1.954.53 1.899.87 1.837.05 1.795.18 1.938.17

Share capital 60.00 60.o0 70.00 70.00 70.00 80.00Revaluation reserve 93.10 72.40 62.40 52.40 42.40 32.40Reserves, unAppropriated murplue 127.86 157.07 192.78 227.77 268.35 313.00

280.96 291.47 325.18 350.17 380.75 425.40

Deduct: Provision for doubtful accountsof West Pakistan 20.00 23.00 26.00 29.00 32.00 35.00Local currency investment in East Pakistan 2.75 84.14 a4,14 a4.14 84.14 84.14

Total provisions 22.75 107.14 110.14 113.14 116.14 119.14

Net worth 258.21 184.33 215.04 237.03 264.61 306.26Sub-ordinated Osvernment advances 81.39 83.77 99.96 99.96 99.96 99.96

Total net-orth and subordinatedGovernment advances 339.60 268.10 315.00 336.99 364.57 406.22

Liabilities relating to East Pakietan&2 328.80 301.233/ 301.23 301.23 30.23 301.23Loans disbursed or to be disbursed by Govern-

ment of Pakistan&/ 81.33 183.56 183.56 183.56 183.56 18i.56TOTAL LIABILITIED AND EQUITY 3,030.16 2,853.10 2,846.89 2,808.93 2,796.65 2,986_20

- a -~~~~fw a.wa a..I3D Administered Loan - - 50-00 175.00 225.00 242.00Total long-term debt/equity 8.6:1 11.1:1 9.3:1 8.2:1 7.2:1 6.7:1Long-term debt/equity (IHtD definition) 6.3.1 7.3:1 6.0tl 5.5:1 4.9:1 4.8:1Current ratio 3.0:1 3.3:1 3.21t 2.621 1.7:1 1.6,1

1/ Ikeluding those under the proposed IBRD adeinistered loan.7/ In respect of PICIC's foreign currency assets in former East Pakistan and th* corresponding

liabilities, the projeted aounts outstanding as of December 31, 1973 are left constant through-out the rest of the proJected period since it is not known when a ssttlelrent will be reached.

I/ kA of D c_ber 31, 1973 the foreign currency liabilities related to Bat Pakistan calculatedat current axcsbag rates woiuld aount to sbout Rs 736.5 million.

Regional Projecte DcpartmtAsia Regional Office

Octobe 5, 1973

Annex 18

PAKISTAN INDUSYIAL CREDIT AND INVESTMENT CORP1RATDDN LIMITED

Projected Cash Flow Statement, 1973-1977(Re in million)

Year ending Decenber 31 1973 1974 1975 1976 1977

Sources

Profit before tax and revaluation reserverealizations 61.33 66.58 70.73 81.33 88.81

Add back: non-cash items (depreciation) 0.20 0.20 0.20 0.20 0.20Issue of rupee debentures (4th series) - - - - 75.00Draw down on fifth Government advanee - 15.00 - --

Increase in Government advances on accountof capitalza'J.G of interest 2.38 1.19 - - -

Increase in share capital - 10.00 - 10.00Draw-down on:

State Bank crediG 10.00 40.00 - - -Foreign currency borrowingas/ 275.30 138.09 202.17 273.31 366.35

Reduction in receivables, accrued income - 40.00 100.00 27.00 -Increase in accouni pVaible 0.77 (1.20) - (3.00) 1.50Loan collections against:Foreign currency loans 195.50 196.24 218.36 232.27 246.67Local currency loans 7.27 8.00 10.36 13.40 17.75

Sales from equity portfolio (not including,capita. gains) - 2.50 2.50 3.75 5.00

Recovery of receivable from Government in respectof BAst Pakistan loans serviced 81-33 _- -

634.08 520.60 628.26 811.28

Uses

Investment in fixed assets 0.30 0.30 0.30 0.30 0.30Disbursement ofForeign currency loans1' 275.30 138.09 202.17 273.31 366.35Local currency loans 27.27 57.22 67.00 74.00 84.00

Equity ilnvestments 5.00 10.00 15:00 20.00 25.00Repayment of borrowings:Foreign currency 231.00 214.00 205.00 207.00 240.00Local currency - 18.75 59-99 108.18 58.36

Increase in receivables, accrued income (netof exchange rate variation impact) 60.99 - - - 8.00

Payment of tax 31.36 32.62 34.42 35.94 40.25Payment of dividend 6.oo 7.50 8.45 9.80 10.50

637.22 478.48 592.33 728.53 832.76

'ash surplus/ (daficit) (3.14) 42.12 11.99 (100.27) (21.48)Opening cash balance (adjusted for exchangerate variation) 194.46 191.32 233.44 245.43 .145.16

Closing cash balaince 191.32 233.44 245.43 145.16 123.68

Debt service coverage 1.03 1.04 1.04 0.96 1.07

1/ Excluding those under the IBRD Admnistered Loan, which have been projected s follows:

- 50.0 125.0 50.0 25.0

Regional Projects DepartmertAsia Regional Office

October 5, 1973

Annex 19

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMTED

Estimated Disbursement Schedule for the ProposedAdministered Loan

(US$ '000)

1974 January - March -April - June 150July - September 1,850October - December .3,000

Sub-total 5,000

1975 January - March 3,000April - June 3,250July - September 3,500October - December ?,750

Sub-total 12,500

1976 January - March 1,650April - June 1,250July - September 1,100October - December 1,000

Sub-total 5°00

1977 January - March 900April - June 700July - September 500October - December 400

Sub-total 2,500

TOTAL

Regional Projects DepartmentAsia Regional OfficeOctober 5, 1973

PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED

ORGANIZATION CHART AS OF JULY 31,1973

BOARD OF DIRECTORS

EXECUTIVE COMMITTEE

.MANAGING DIRECTOR|Ounen Ali

DEPUTY MANAGING DEPUTY MANAGING

DIRECTOR DIRECTOR

W.h.b.dd.n Sh h AbuI H_n

ECONOMIC PROJECT

LASIR ISLAMABAD AND EO-S EV/ELOPMAENT INVESTMENT LETTERS OF

REGIONAL PESH4AWAR LIAISON OUEYTA MARKET OPERATIONS DEPARTMENT END-SLAW AlORANKING SECRETARIIAT ACCOUNTS CREDIT ANDt 1 *-^-4w _ I - I _ OPERATIONS DEVARTMENT _ I-I-I-I-seEr^elar -I -I~~~~~~~~~~~~DPARTENTINSUANC

OF F ICE OFFICE OFFICE OFFICE RESEARCH DEPARTMENT DEPARTMENT STATISTICS DEPARTMENT DEPARTMENT ISUPRANCE

DEPARTMENT DEPARTMENT DPRMN

MRnr Man.g. M.n.Nr M, ChI A QadI Ch..l Kh.lId S,II ChDel Ch.E Chitl Chi'.. SetrvI CW*ef Chi.f

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ODhI. ODMa!r | Tp,,ll Ye | A- t . Cl'' k- | .Ilf AI.,.. CerkI.k AW.,, C*kC|. | An.., CtDrRk | A#n, DIrE., ||Rr S...CI As... ClIrIk I 1.11

A.1,, Cl.,k', A.~~~~~I,w I Typi.. 7 TTYPIts IC ypIst

LC SECTION

SUMMARY INTERNAL AUDIT SECTIONSUMMARY

S,51ff.111Stll I ernr Audlor A He

S-nur Offi-n 14

OAhR, Offcn,s BAsisNlsh. ClIrkI, lIE 153

TOTAL 256 Sff Aw-ft 3

Wo-d RRr-58104