Document of
FOR OFFICIAL USE ONLY
IMPLEMENTATION COMPLETION REPORT
PAKISTAN
ThIRD INDUSTRIAL INVESTMENT CREDIT (IIC-III)
(LOAN 3019-PAK/CREDIT 1982-PAK)
Report No. 15731
MAY 30, 1996
Private Sector Development & Finance Division
Country Department I
South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ADB
BEL
CLA
DFIs
FSAL
FSDIP
GoP
HEL
IDBP
L\C
MCB
NBP
NDFC
PICIC
PFIs
SBP
T,
Currency
CURRENCY EQUIVALENT
Unit Pakistan Rupee (Rs)
(annual average)
1987
1988
1989
1990
1991
1992
1993
1994
1995
Rs. Per US$1.00
17.399
18.003
20.541
21.707
23.801
25.083
28.107
30.567
31.643
US$ Per Rs.1.00
0.0574
0.0555
0.0486
0.0460
0.0420
0.0390
0.0355
0.0327
0.0316
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-
-
-
-
-
-
-
-
-
-
-
-
-
-
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ABBREVIATIONS
Asian Development Bank
Bankers Equity Limited
Corporate Law Authority
Development Finance Institutions
Financial Sector Adjustment Loan
Fin. Sect. Deepening & Intermediation
Government of Pakistan
Proj
Habib Bank Limited
IndustrIal Development Bank of Pakistan
Letter of Credit
Muslim Commercial Bank
National Bank of Pakistan
National Development Finance Corporation
Pakistan Ind. Credit and Investment Corp.
Participating Financial Institutions
State Bank of Pakistan
Technical Assistance
GOP
HBL, NBP, MCB, PICIC, NDFC
FISCAL YEARS
= July 1 to June 30
= January 1 to December 31

FOR OFFICIAL USE ONLY
TABLE OF CONTENTS
Page
Preface
Zvaluation Summary . . . . .
. . . . . . . . . . . . . . . . . . .
. .i
PART I: PROJECT IMPLEMENTATION ASSESSMENT . . . . . . . . .
. . .
. . . .
.
1
A.
B.
C.
D.
E.
F.
G.
H.
I.
Statement/Evaluation of Objectives . . . . . . . . . . . . . . . .
1
Project Objectives . . . . . . . . . . . . . . . . . . . . . .
1
Evaluation of Objectives . . . . . . . . . . . . . . . . . . .
1
Achievement of Objectives . . . . . . . . . . . . . . . . . . . .
2
Implementation of the IBRD Loan Component . . . . . . . . . . .
2
PFIs Performance . . . . . . . . . . . . . . . . . . . . . . .
2
Sub-projects Performance . . . . . . . . . . . . . . . . . . .
4
Implementation of the IDA Credit Component . . . . ... . . . .
4
Capital Market Development . . . . . . . . . . . . . . . . . .
4
Major Factors Affecting the Project . . . . . . . . . . . . . . .
5
Project Sustainability . . . . . . . . . . . . . . . . . . . . . .
6
Bank Performance . . . . . . . . . . . . . . . . . . . . . . . . .
7
Borrower Performance . . . . . . . . . . . . . . . . . . . . . . .
8
Assessment of Outcome . . . . . . . . . . . . . . . . . . . . . .
8
Follow-up/Future Operations . . . . . . . . . . . . . . . . . . .
8
Lessons Learned . . . . . . . . . . . . . . . . . . . . . . . . .
9
PART II: STATISTICAL TABLES
Table 1 Summary of Assessments . . . . . . . . . . . . . . . . 10
Table 2 Related Bank Loans/Credits . . . . . . . . . . . . . . 11
Table 3 Project Timetable . . . . . . . . . . . . . . . . . . . 12
Table 4 Credit Disbursements: Cumulative Estimated and Actual .
12
Table 5 Key Indicators for Implementation . . . . . . . . . . 13
Table 6 Key Indicators for Project Operation . . . . . . . . . 14
Table 7 Studies Included in Project . . . . . . . . . . . . . . 14
Table SA Project Costs . . .
. . . . . . . . . . . . . .
. . .
. 15
Table 8B Project Financing . . . . . . . . . . . . . . . . . . . 15
Table 9 Economic Costs and Benefits . . . . . . . . . . . . . . 15
Table 10 Status of Legal Covenants . . . . . . . . . . . . . . . 16
Table 11 Compliance With Operational Manual Statements . . . . . 17
Table 12 Bank Resources: Staff Inputs . . . . . . . . . . . . . 17
Table 13 Bank Resources: Missions . . . . . . . . . . . . . . . 18
STATISTICAL ANNEXES:
I. Sub-project Financing Habib Bank Limited . . . . . . . . . . .
. 19
II. Sub-Project Financing Muslim Commercial Bank . . . . . . . . . .
20
III. Sub-Project Financing National Bank of Pakistan . . . . ... . . 21
IV. Sub-Project Financing Pak. Ind. Credit & Inv. Corporation .
.
. 22
V. Sub-project Financing National Dev. Finance Corporation .
.
.
. 23
VI. Sub-Projects' Performance . . . . . . .
i . . . . . . . . . . . .
24
VII. Technical Assistance Under IDA Credit (1982-Pak) . . . . . . . .
25
APPBNDIXES:
A.
B.
C.
ICR Aide Memoire and Government's Statement of Sector Policy .
.
.
26
Borrower's Contribution to ICR . . . . . . . . . . . . . . . . . .
36
Map

IMPLEMENTATION COMPLETION REPORT
PAKISTAN
THIRD INDUSTRIAL INVESTMENT CREDIT
(Ln. 3019-Pak / Cr. 1982-Pak)
Preface
1. This is the Implementation Completion Report (ICR) for the Third
Industrial Investment Credit (Ln. 3019/Cr. 1982) in the amount of US$ 150 million (inclusive of US$ 2 million equivalent IDA Credit for technical assistance) was approved on January 31, 1989 and made effective on June 16,
1989. The IDA Credit component was closed as originally scheduled on June 30,
1994. Final transaction for the credit component took place on February 21,
1995 at which time a balance of US$ 267,000 was cancelled. The loan component was, however, extended for 18 months and was closed on December 31, 1995. It should be mentioned that Bank established this closing date for one financed sub-project and closed all other project components/sub-loans on June 30,
1995. Final transaction for the loan component took place on February 27,
1996, at which time a balance of about US$ 10.34 million was cancelled.
2. The ICR was prepared by Shideh Hadian, Private Sector Development and Finance Division of the South Asia Region and reviewed by Mr. Abid Hasan
(Acting Division Chief) and Fakhruddin Ahmed (Project Advisor). The borrower provided comments that are included as appendix to the ICR.
3. Preparation of this ICR was begun during the Bank's final supervision/completion mission, January 1996. It is based on material in the project file. The borrower contributed to the preparation of the ICR by preparing the data on different component of the project, preparing own evaluation and commenting on the draft ICR.

IMPLEMENTATION COMPLETION REPORT
PAKISTAN
THIRD INDUSTRIAL INVESTMENT CREDIT (IIC-III)
(Ln. 3019-Pak/Cr.1982-Pak)
Evaluation Summary
Introduction l. Four Bank loans and two IDA credits totaling US$ 354 million had been approved for the development of small, medium, and large scale industries in Pakistan during four years preceding this project (Table 2). These loans and credits, in addition to meeting the long-term investment financing for the private manufacturing industries, supported the Government's policy reform programs and institutional strengthening of the participating financial institutions and concerned government agencies.
Project Obiectives
2. The project was designed to assist the Government of Pakistan
(GOP) in meeting its objectives of increasing the role of the private sector and accelerating the growth of the capital markets. The main objectives of the project were to: Ci) improve credit delivery system for industrial finance and ensure a stable flow of long-term foreign exchange resources to private industry; (ii) assist GOP in accelerating the growth of equity markets through necessary policy changes and Technical Assistance (TA); (iii) assist the
Development Finance institutions (DFIs) in their operational diversification programs and continue institution building of Participating Financial
Institutions (PFIs); and (iv) address selected corporate finance issues such as bridge loans and more market oriented interest rate to foster efficient industrial growth.
3. IIC-III complemented Bank's previous industrial sector operations and was in line with the priority objectives of the GOP and the Bank's country assistance strategy (para. 2). The project objectives and timing were right for the GOP's policy reforms and development priorities in Pakistan's Seventh
Five Year Plan (1988-93). The amount of the project was realistic and met 50 percent of foreign exchange requirement of total project cost of US$ 298 million. The balance was financed by the sponsors and PFIs (para. 3).
Implementation experience and Results
4. While the development objectives of the project were achieved in some areas, the overall implementation of IIC-III did not have desirable outcome and was deficient in some areas. Project performance was affected by a number of internal and external factors which resulted in delays in implementation and deterioration of the PFIs loan collection performance. The
IIC-III project had two components: (i) an IBRD loan of US$ 148.0 million for financing the capital investments of viable private manufacturing industries in all sub-sectors; and (ii) an IDA Credit of US$ 2.0 million equivalent for
TA for supporting the development of capital markets and organizational improvements of concerned institutions.
5. Implementation of the IBRD Loan Component The commitment and disbursement under the loan component were made with delays but, overall, satisfactorily. The loan amount was 93 percent utilized by 37 Medium and
Large Scale industries for capital investments and a balance of US$ 10.34
1/ Provides cross-references to paragraphs in the main text of the ICR.

ii million was cancelled. IIC-III had significant impact on employment generation (about 8,200 direct jobs were created). The commitment and disbursements were slower than the rate anticipated by the Staff Appraisal
Report (SAR). Commitments were generated smoothly at the beginning; however, subsequent sub-loan cancellations occurred, particularly in 1992/1993. During period 1993-94, a large number of sub-projects faced liquidity problems; therefore, number of arrears grew and PFIs recovery rate generally deteriorated. The PFIs collection ratio in 1993 and 1994 fell below minimum required 80% under this project.
6. In early 1990s, a combination of adverse domestic and external factors resulted in decline in Pakistan growth rate and led to sluggish industrial investment activities in particular in the textile industry (para.
16). In 1992-1993, the Pakistan's GDP growth rate declined to the level of its population growth mainly due to a sharp decline in agricultural cutput.
Adverse whether condition and viral attack on the cotton crop resulted in decline in wheat harvest and cotton crop failure. Bad cotton crop for three consecutive years (1992, 1993, and 1994) resulted in critical shortage of cotton and more than 100% increase in prices during this period and slowed down activities in the textile industry. Economic recession in major markets for Pakistan exports and intensified competition by its trading competitors were added to the domestic problems the country was facing. The 1993-94 political turbulence in the country and later the law and order situation in
Sind Province adversely affected economic activities and more so the performance of industrial sector. Most of the industrial units and in particular those in textile sector faced liquidity problem and had losses or closed down.
7. Frequently changing Government policies has made investment planning and project financing difficult for the business community in
Pakistan. Profitability of some sub-projects was adversely affected due to changes in government policies which were not accounted for in the suIbprojects' feasibility study and financial planning. In addition to circumstances mentioned above, several other factors affected the PFIs financial performance and their loan recovery rate; including: (i) over exposure of the PFIs loan portfolio in the textile sector and their fa--lure to diversify their loan portfolio, as proposed by the project (para. 17): political interference in managerial appointments and credit lending decision of PFIs; (iii) absence of a transparent and consistent accounting and auditing standards which provides lenders with reliable and timely information on the borrower's creditworthiness; and (iv) lack of effective legal framework that ensures speedy and impartial settlement of claims. At the sub-project level, delays in opening the Letters of Credit by some sub-borrowers and problemas with shipment/delivery schedule of goods by the suppliers had alsc contributed to slow implementation of sub-projects and disbursements rate (para. 1,3.
8. Implementation of the IDA Credit Component The credit flund was not utilized for all the TA components proposed in the SAR (para. 12). It: only used for training and system improvement by HBL, PICIC, NDFC, and the
Bankers Equity Limited (BEL), one of the development banks (Annex VII).
Although, in general, the training programs proved to be useful and well appreciated by the beneficiaries, there was not a systematic and formalized procedures for selection of trainees and for their evaluation after the training program. Overall, the impact of TA component was limited. About 87 percent of the fund was utilized and the credit was closed as originally scheduled on June 30, 1994; a balance of about US$ 267,000 was cancelled.
9. Capital Market Development Bank, through its IIC pro-ects, been instrumental in the acceleration and the development of the capital markets in Pakistan (para. 13). IIC-III proposed several measures for had improvement of the equities markets. First, to ensure a sound capital structure and strong commitment from sponsors, the project required that the

iii
debt:equity ratio of sub-projects financed under this loan not to exceed 60:40 and that the Bridge Loans be considered as debt. Second, to increase the number of participants in the stock markets, the project proposed to allow the financial institutions and investment corporations become members of the KSE.
Third, to increase the distribution network for shares in the country, it was recommended that commercial banks to perform trust functions on behalf of their clients. Fourth, in order to provide incentives to the companies to seek listing in stock markets, it was recommended that the pricing of new issues in the equity market be left completely to market participants rather than controlled. Fifth, to increase resources for equity finance, the project proposed to allow the corporate sector to issue Participation Terms
Certificates directly to the public. The government implemented all the measures except for the opening up of the stock exchange because of reluctance of the KSE to expand its membership. In 1990, the KSE agreed to amend its
Article of Association to only allow the financial institutions buy membership from the existing members (para. 15).
Project Cost, Financinca, and Time Schedules
10. Project cost was estimated at US$ 298 million during the appraisal, and the actual cost was about US$ 275 million (Tables 8A & 8B).
The project was prepared, signed, and became effective as originally scheduled. Due to slow implementation of the loan component, its original closing date was extended twice for a total of 18 months, to December 31, 1995
(para. 6 & Table 3). IDA credit component was closed as originally scheduled.
Project Sustainability
11. The prerequisite conditions for success and long-term sustainability of financial intermediation operations would include: (i) internal operational efficiency of financial intermediaries; (ii) prudent financial sector within which the financial institutions operate; and (iii) effective and consistent institutional/regulatory/legal framework for development and efficient operations of the financial institutions and the private sector. In Pakistan, the loan portfolio of the financial system has been deteriorating due partly to external factors and partly to internal deficiency of the institutions and poor legal and regulatory framework.
Despite GOP's efforts in improving the financial sector policy (assisted through Bank projects), there are still deficiencies in the operations of financial sector and more need to be done (para 19). The benefits
Bank assisted projects may not be sustainable in the long-run without from the improving the efficiency in the financial sector and strengthening the institutional framework.
12. Another key factor in achieving the project sustainability is the success of sub-borrowers with respect to their profitability and rate of return. The PFIs did not effectively follow-up the sub-projects' performance after the sub-loans were made and did not have any information on subprojects' ex-post economic rate of return. Therefore, it is difficult to precisely and systematically assess the sustainability of benefits of the subprojects (para. 21). The long-term sustainability of the sub-projects is also dependent on their sound capital structure which can be achieved through encouraging a higher share of equity participation and restricting use of bridge loans (para. 22). IIC-III was, to some extent, successful in achieving this objective.
Bank and Borrower Performance
13. The performance of Bank and GOP was satisfactory in identification and timely preparation of IIC-III (paras. 23 & 26). However, their performance in the implementation was somewhat deficient. Bank sent only four supervision missions, with the first two within 9 months after the

iv -
effectiveness and the last two during the last five years of the project life.
Given the problem of increasing arrears and slow sub-project implementation,
lack of effective and adequate supervision was a crucial issue.
14. While the five PFIs could meet the project eligibility criteria and were successful in the commitments of funds to the private manufacturing sector they, in general, remain financially weak and could not maintain the collection criteria during 1993-94 (para. 27).
Findinas, Follow-up/Future Operations, and Lessons Learned
15. To complement and expand the objectives and achievements of the
IIC-III and previous related industrial projects, in April 1991, the Board
approved the Microenterprise project with the objective of further supporting the Government on its continued efforts to strengthen the Pakistan's financial system and link it to the productive sectors of the economy (para. 29). The recently approved Financial Sector Deepening and Intermediation Project
(FSDIP) also focuses on maintaining the momentum for improving.financial
sector. The Bank will continue its support to Pakistan with assistance in,
among other things, improving financial intermediation for micro and small-
scale enterprises through a micro credit operation (para. 30). GOP's commitment to implement the elements of the financial sector reform policy and improving the legal and regulatory framework proposed under the follow-up Bank projects is the key to the long-term sustainability of the intermediation operations that have been designed to support the industrial sector operations.
16. Successful operations and sustainability of financial intermediation operations depends, to a large extent, on the financial viability of the credit institutions and their internal operational efficiency. This, in turn, can be achieved through a prudent financial sector policy and consistent and effective institutional/regulatory/legal environment. Political interference in the PFIs management and their lending decision lowered their asset quality and their loan recovery rate. When there is such a risk in a country like Pakistan, Bank should avoid to channel its loan through the Government owned financial institutions (para. 31). The PFIs need to strengthen their appraisal and supervision capacity and also streamline their information system in order to obtain regular and systematic information on the sub-projects performance.
17. Effective and timely monitoring and supervision of the project by both Bank and the borrower is an integral to the success of the project.
Considering the shortcomings in the financial system and prevailing political and economic difficulties in the country, the Bank should have sent more supervision missions and provided adequate staffing for close monitoring of the participating credit institutions and the financed sub-projects.
18. Bank needs to improve upon the design of the TA at the SAR stage by identifying and defining its clear objectives, its precise terms of
reference, its the link to the project objectives, and its potential benefits.
Bank also needs to strengthen the emphasis of its supervision effort for the
TA activities in order to improve the implementation. The Government needs to strengthen its monitoring, evaluation procedures, documenting, and reporting of the TA programs funded by the multinational organizations and other donors
and learn from the implementation experience of the past projects in order to improve upon the design of the TA for new projects.
May 30, 1996

IMPLEMENTATION COMPLETION REPORT
PAKISTAN
THIRD INDUSTRIAL INVESTMENT LOAN/CREDIT (IIC-III)
(Ln. 3019-PAK/Cr. 1982-PAK)
PART I: PROJECT IMPLEMENTATION ASSESSMENT
A. Statement/Evaluation of Oblectives
1. Pro-ect Objectives The project was designed to assist the
Government of Pakistan (GOP) in meeting its objectives of increasing the role of the private sector and accelerating the growth of the capital markets. The main objectives of the project were to: (i) improve credit delivery system for industrial finance and ensure a stable flow of long-term foreign exchange resources to private industry; (ii) assist GOP in accelerating the growth of equity markets through necessary policy changes and Technical Assistance (TA);
(iii) assist the Development Finance institutions (DFIs) in their operational diversification programs and continue institution building of Participating
Financial Institutions (PFIs); and (iv) address selected corporate finance issues such as bridge loans and more market oriented interest rate to foster efficient industrial growth.
2. Evaluation of Objectives Preparation of IIC-III and its focus were in line with the Bank's country assistance strategy and GOP's priority objectives under the Seventh Five Year Plan (1988-93). The trust of the seventh plan was to establish more efficient and sophisticated industries, minimize the direct role of the Government, set up more industrial estates in order to eliminate infrastructure problems, privatize selected public enterprises, and strengthen the financial institutions in project finance.
During the past two decades, the Bank has played an important role in supporting GOP to revitalize the private sector, improving public enterprise efficiency, strengthening the financial system, and increasing exports in line with Pakistan's comparative advantage.
3. Under seventh plan, projected investment in medium and large scale
(M&LS) industries for period 1988-91 (commitment period for IIC-III) was estimated at Rs 42 billion of which Rs 17 billion (about US$ 1.0 billion) was required in foreign exchange. Based on the available resources of DFIs at the time, project pipeline of the Asian Development Bank (ADB), and suppliers' credit and bilateral sources, there was a financing gap of about US$ 530 million. Since the Bank and ADB were the two major sources of foreign exchange for term lending in Pakistan, the Bank continued involvement was crucial for making adequate foreign exchange resources available to the PFIs to maintain momentum in credit lending to the private sector. IIC-III project of US$ 150 million was approved by the Board in January 31, 1989 to finance 50 percent of the US$ 298 million financing package. The balance was financed by the sponsors and PFIs.
4. Political uncertainties and possibilities of the slow implementation of policy reform to support a strong private investment climate were identified as the main risks to the implementation of the credit component. However, project pipeline of the DFIs indicated credit demand substantially in excess of the amount proposed by the project which ensured full commitment of the credit component within two years of effectiveness. In addition, steps were taken by the GOP and Bank to remove control inhibiting industrial development and to strengthen the financial sector.

2
B. Achievement of Oblectives
5. While the development objectives of the project were achieved in some areas, the overall implementation of IIC-III did not have desirable outcome and was deficient in some areas. A number of internal and external factors adversely affected the project performance during the implementation phase (paras. 16-18). The IIC-III project consisted of two components: (i) an
IBRD loan (Ln. 3019-PAK) of US$ 148.0 million for financing the capital investments of viable private manufacturing industries in all sub-sectors; and
(ii) an IDA Credit (Cr. 1982-PAK) of US$ 2.0 million equivalent for TA for supporting the development of capital markets and organizational improvement of PFIs.
G. Implementation of the IBRD Loan Component The commitment and disbursement under the loan component were made with delays but, overall, satisfactorily. Performance of the project, however, could have been better had there been less interference by the Government in the management and lending decision of the PFIs (para. 27). The objective of providing long-term foreign exchange resources to private industries was achieved as the loan amount was 93 percent utilized by 37 M&LS industries for capital investments and a balance of about US$ 10.34 million was cancelled. IIC-III had significant impact on employment generation. About 8,200 jobs were generated in the industrial sector. The commitment and disbursements of IIC-III were slower than the rate anticipated by the Staff Appraisal Report (SAR).
Commitments were generated smoothly at the beginning; however, subsequent subloan cancellations occurred, mainly due to adverse domestic and international economic condition in early 1990s. At the request of GOP, the deadline for submission of sub-loan applications was extended and the unutilized balance of loan proceed was committed for fresh sub-loans during 1992-94. Accordingly, the project closing date was extended twice for a total of 18 months, to
December 31, 1995, in order to provide the PFIs and project sponsors with adequate time to complete sub-projects implementation and disbursements (para.
18). IIC-III followed the same pricing policy for sub-loan financing as that under the second IIC project. The project proposed a competitive market rate were allowed to price the individual sub-loan at or above the minimum lending rate based on the credit risk of each sub-borrower. The minimum 15% rate was substantially positive in real term at the time and was consistent with market lending rates. The on-lending rates were reviewed annually to ensure that the rates remain positive in real terms through the project.
7. PFIs Performance The PFIs that were originally included in the project consisted of four commercial banks and three DFIs.' Out of these seven PFIs, five (HBL, MCB, NBP, PICIC, NDFC) met the participation conditions and eligibility criteria and were selected to participate in the project. The objective of improving the credit delivery system for industrial finance through institutional development of PFIs and business diversification programs of PICIC and IDBP was not achieved for the most part. Although 93 percent of the loan was committed and disbursement was smooth, the adequacy of approval and monitoring of sub-projects is questionable. The project appraisal and loan recovery capacity of PFIs are generally weak, despite continuous assistance from Bank and other donors for their institutional upgrading (para. 12). PICIC was late in completing its business diversification but managed to comply with the participation conditions and eligibility criteria one year after the project effectiveness, in July 1990.
1/ Commercial banks consisted of Habib Bank Limited (HBL); United Bank Limited
(UBL); Muslim Commercial Bank (MCB); and National Bank of Pakistan (NBP). The
DFIs consisted of Industrial Development Bank of Pakistan (IDBP); National
Development Finance Corporation (NDFC); and Pakistan Industrial Credit and
Investment Corporation (PICIC).

3
IDBP and UBL could not meet the IIC-III's eligibility criteria and never participated in the project. IDBP's and UBL's financial performances deteriorated due to frequent changes in the management, lack of effective monitoring and supervision of sub-projects, and large non-performing loan portfolio. The UBL was not in compliance with the eligibility criteria under
IIC-III due to its large non-performing loan financed under the second IIC.
IDBP was also in violation of basic financial covenants under the previous IIC projects and did not meet the eligibility criteria such as implementation of business diversification program. It suffered from lack of effective top management and external interferences in the credit process which forced IDBP into imprudent banking practices. As a result, its infected asset portfolio rose, collection ratio fell and its liquidity situation deteriorated.
8. Until 1992, the five PFIs were in compliance with the eligibility criteria under the project. During period 1993-94, a large number of subprojects faced liquidity problem; therefore, number of arrears grew and PFIs recovery rate generally deteriorated. The PFIs collection ratio in 1993 and
1994 fell below minimum required 80% under this project. Even MCB, which had perfect records of recovery of its IIC loans until 1993, had arrears in three out of four sub-loans financed under IIC-III. MCB's collection ratio fell below 40's HBL drop from 909 in 1992 to 75% in
1994. The systematic deterioration in the PFIs' portfolio seemed to be partly because of slow and weak economic recovery in the OECD countries in early
1930s and accompanying recession in Pakistan economy in 1992-1993 which led to sluggish industrial investment activities in particular in the textile industry (para. 16). The textile sector as a whole faced the twin problems of liquidity and viability which negatively affected Pakistan's export performaLce and its foreign exchange earnings.
9. The PFIs loan portfolio of IIC-III was highly concentrated in the textiles, reflecting the global textile booms in late 1980s and early 1990s.
Of the total commitments (about US$ 138 million), 85% was allocated to 28 textile industries (of which 28% was for 9 spinning projects); 8.8% to 5 sugar mills and one rice processing; and only 6.2% to 3 electronics and engineering a.ndustrles (Annexes I to V). HBL played the leading role in credit lending under IC-ILII project. It approved 12 sub-loans (10 to textile sector) under
IIC-III for the amount of US$ 52.6 million (35.5% of loan amount). MCB allocatel US$ 15.2 million (10.2% of total loan amount) to 4 textile industries. It was the first time for NBP to participate in the Bank operations. This bank made only one large loan for establishment of a spinning project amounting to US$ 7.1 million (4.7% of total loan amount).
PICIC approved 12 sub-loans (8 for textile projects) amounting to about US$
34.0 million (23.0% of loan amount). NDFC financed 8 sub-projects (5 in textiles) for a total amount of US$ 28.8 million (19.4% of loan amount).
10. In order to rehabilitate and revive the sick industrial units and help the financial institutions recover their loans, the GOP introduced a number ;f measures in 1994-1995. In November 1994, the Government formed a
Sick Unit Committee to review the situation and find remedial solutions. The
State Bank of Pakistan (SEP) introduced general relaxations in the prudential regulations during 1994-95 with regards to the sick units. In October 1995, the GOP introduced a 17-Point Relief Package for textile industries.
Following this incentive package, many banks and DFIs with high exposure in the textile sector, rescheduled their problem loans at concessional terms and in some cases allowed up to two years moratorium in payments of dues. The
PFIs reviewed the status of each of the financed sub-projects under IIC-III and, depending on the extent of their problems and difficulties, provided relief accordingly. With good cotton crops in 1995 and stability of yarn prices, the textile industrv may come out of the crisis within next two years.
Cash generations from the sub-projects during this period is expected to improvre the.Lr profitability and debt servicing capabilities.

4
11. Sub-projects Performance All the approved sub-projects are currently operating. These projects generated about 8,200 jobs in the industrial sector (Annex VI). Of total 37 financed sub-projects, 28 were in textiles sub-sectors, 26 were new investments, and 20 were mainly export oriented. Twenty sub-projects fell into arrears during 1993-94 and have been overdue in their debt servicing. During the course of 1994-95, 19 sub-loans were rescheduled.
12. Implementation of the IDA Credit Component As indicated above, the project also included an IDA credit of US$ 2.0 million equivalent divided into five sub-components: (i) organization and system studies; (ii) training and necessary equipments; (iii) sub-sector studies; (iv) programs aimed at strengthening the capabilities of the Corporate Law Authority (CLA); and (v) activities to support the financial sector reforms envisaged by GOP. Except for item (ii), the IDA credit fund was not used as proposed by SAR. The TA funds were only utilized for training and system improvement by HBL, PICIC, and NDFC. The Bankers Equity Limited (BEL), one of the development banks, also had access to the TA fund for staff training (Annex VII). Although, in general, the training programs proved to be useful (in particular for BEL) and well appreciated by the beneficiaries, there was not a systematic and formalized procedure for selection of trainees and for their evaluation after the training program. Most of the fund was used for sending PFIs, staff to international seminars and foreign training on an ad hoc basis without a longterm plan for institution building, which was largely due to lack of incentives on the part of PFIs. The impact of the TA component was limited.
About 87 percent of the TA fund was utilized and a balance of about US$
267,000 was cancelled. The credit was closed as originally scheduled on June
30, 1994.
13. Capital Market Development A major factor that restricted the development of capital market was very limited liquidity in the market due to the limited availability of high quality stocks and reluctance of good companies to go public. The project aimed at increasing availability of equity finance and non-bank long-term resources through the development of a more efficient stock market. TA on strengthening of the capital market complemented and expanded the Bank's assistance under the previous projects and was timely. Bank had a major role in the development and growth of the capital market in Pakistan. In connection with the Second IIC project
(approved in 1986), GOP took a number of concrete measures to improve the capital market, including: (i) reduction in corporate tax rate for listed companies from 50 percent to 40 percent; (ii) exemption of income tax on dividend paid by the listed companies; (iii) allowing private investment finance companies to perform all banking functions except deposit taking; (iv) introduction of bearer bonds in foreign and local currency to attract "black money" and mobilize additional resources; and (v) assisting the Karachi Stock exchange (KSE) and Lahore Stock Exchange (LSE) to improve their operations.
In order to further accelerate the development of the capital market, IIC-III proposed additional measures; discussed below.
14. First, to ensure a sound capital structure and strong commitment from sponsors, the project required that the debt:equity ratio of sub-projects financed under this loan not to exceed 60:40 and that the Bridge Loans be considered as debt. The government agreed to issue guidelines (by June 30,
1989) on bridge loans and enforce it uniformly to all the financial institutions. Second, to increase the number of participants in the stock markets, the project proposed to allow the financial institutions and investment corporations become members of the KSE. It was also proposed that the underwriting fees be freely negotiated between the sponsors and underwriters. Third, to increase the distribution network for shares in the country, it was recommended that commercial banks to perform trust functions on behalf of their clients. Fourth, in order to provide incentives to the companies to seek listing in stock markets, it was recommended that the pricing of new issues in the equity market be left completely to market

5 participants rather than controlled by the Controller Qf Capital Issues.
Fifth, to increase resources for equity finance, the project proposed to allow the corporate sector to issue Participation Terms Certificates directly to the public.
15. The objective of accelerating the growth of equity market through necessary policy changes was, for the most part, achieved. The government implemented all the measures except for the opening up of the stock exchange because of reluctance of the KSE to expand its membership. In 1990, the KSE agreed to amend its Article of Association to only allow the financial institutions buy membership from the existing members. The underwriting fees are freely determined between the underwriters and sponsors; and it is normally not more than 51 of total amount underwritten and taken-up. The KSE experienced a dramatic growth since 1989. The number of listed companies grew from 440 in 1989 to over 720 in 1994 and market capitalization rose from US$
2.5 billion in 1989 to about US$ 12.3 billion in 1994. Most financial institutions are involved in the securities business. In February 1990, the government reversed its earlier decision on the definition of bridge loans and issued a circular allowing a higher debt:equity ratio of 70:30 for projects promoted by new comers. However, since there was a high correlation between the failure of sub-projects and high leverage, Bank stressed concern over this decision and requested the GOP to restrict the use of the bridge loan and to subject all investment projects to the same rule. In general, the GOP requires a debt:equity ratio of 60:40; however, in certain cases and for incentive schemes, it relaxes this requirement and allow for higher debt:equity ratios.
C. Manor Factors Affecting The Prolect
16. Factors generally not subject to Government control: In early
1990s, a combination of adverse domestic and external factors resulted in decline in Pakistan growth rate, continuation of inflationary pressure, and weak balance of payments. In 1992-1993, the Pakistan's GDP growth rate declined to the level of its population growth mainly due to a sharp decline in agricultural output. Adverse whether condition and viral attack on the cotton crop resulted in decline in wheat harvest and cotton crop failure. Bad cotton crop for three consecutive years (1992, 1993, and 1994) resulted in critical shortage of cotton and more than 100% increase in prices during this period and adversely affected the textile industry which accounts for about
60% of the exports value. In addition, economic recession in major markets for Pakistan exports and intensified competition by its trading competitors were added to the domestic problems the country was facing. The 1993-94 political turbulence in the country and later the law and order situation in
Sind Province adversely affected economic activities and more so the performance of industrial sector. The problem was further aggravated by the squeeze on the working capital lending by banks to textile sector. As a result, most of the industrial units and in particular those in textile subsectors of spinning and weaving which were established between 1989-1992 have been badly hit. Many projects faced liquidity problem and had losses or closed down. Several sub-loans financed under the IIC-III project were cancelled during 1992-93 (para. 6).
17. Factors generally subject to implementing agencies: Frequently changing Government policies has made investment planning and project financing difficult for the business community in Pakistan. Profitability of some financed sub-projects was adversely affected due to changes in government policies which were not accounted for in their feasibility study and financial planning. Under IIC-III, it was proposed that in order to modernize and improve the efficiency of the textile sector, excessive financing of textile projects in spinning and creating excess capacity in spinning must be avoided and that the priorities should be given to financing fully integrated textile mills and to encouraging foreign investment through joint venture. It was

6 also proposed that the PFIs need to diversify their portfolio to increase investment in fully integrated mills of weaving and finishing houses and nontextile industries. Failure of the PFIs to diversify their loan portfolio accordingly, contributed to deterioration of their asset quality at the time of cotton crises. The global textiles boom in late 1980s and great demand in the export markets for Pakistan's yarn which had, at the time, the price advantage (Pakistan's cotton prices were 20% lower compare to international prices) were the major factors in heavy investment in the sector in late 1980s to early 1990s. When this advantage was lost due to cotton crop failure, high loan portfolio concentration in the textiles and in particular in spinning
(mostly producing low-count yarn for which domestic cotton is best suited) contributed to the deterioration of PFIs' balance sheet in the 1990s.
18. Other Factors: Delays in opening the Letters of Credit (L/Cs) by some sub-borrowers and problems with shipment/delivery schedule of goods by the suppliers contributed to slow implementation of some sub-projects and low disbursements rate. In May 1995, the GOP requested the Bank to grant six months extension for one of the PICIC's financed sub-projects in order to provide sponsors with adequate time to complete disbursements. In June 1995, the Bank approved a partial extension and established December 31, 1995 as the closing date for this sub-project on the ground that this company had already opened the L/Cs and Bank issued four Special Commitments against these L/Cs.
All the other project components and sub-loans approved by the PFIs closed on
June 30, 1995.
D. Prolect Sustainability
19. Internal operational efficiency of the financial institutions
(effective management, successful loan recovery, profitability, etc.) and prudent financial system within which the financial institutions operate are among the key factors in achieving sustainability of the financial intermediation operations that are designed to support the industrial sector operations. In addition, establishment and enforcement of effective and consistent institutional, regulatory, and legal framework is conducive to development and efficient operations of the financial institutions and the private sector. In the context of achieving a strong financial system that can efficiently allocate market-based credit to the growth sector, the Bank has been assisting GOP through Financial Sector Adjustment Loan (FSAL, prepared in parallel with IIC-III and was approved in 1989) and several successive intermediation operations with objectives of improving the industrial and financial sector policy (paras. 29-30; Table 2). Despite improvement in a number of areas (strengthening and enforcing prudential regulations, privatization of two state commercial banks in 1991, broadening supervision role of the SBP, opening up the capital market, etc.), there are still deficiencies in the operations of financial sector and more need to be done. The benefits from these Bank financed projects are likely to be unsustainable in the long-term without improving the efficiency in the financial sector and strengthening the institutional framework.
20. In Pakistan, the loan portfolio of the financial system has generally been deteriorating partly due to internal deficiency of the financial institutions, poor legal and regulatory framework, and weaknesses in the financial system. Pakistan has had six successive industrial investment credits, with mutually reinforcing objectives, financed by the Bank (some of which co-financed by ADB and other donors) in the period 1984-91. The evidence is that the financial institutions remain dependent on the GOP and multilateral donors for funding their long-term development credit to the growing private sector. Insufficient access to term-savings for long-term development investments and limited capital markets made it difficult for private entrepreneurs to obtain domestically funded term loans.

7
21. Another key factor in achieving the project sustainability is the success of sub-borrowers with respect to their profitability and rate of return. The PFIs did not effectively follow-up the sub-projects' performance after the sub-loans were made and did not have any information on subprojects' ex-post economic rate of return. Therefore, it is difficult to precisely and systematically assess the sustainability of benefits of the subprojects. Despite difficult political and economic conditions in Pakistan, all the sub-projects financed under IIC-III are still in operation.
Considering employment generation by sub-projects and expected satisfactory performance (para. 10) in coming years, as well as strong demand for long-term investment financing by the private manufacturing industries, expected net benefit of sub-projects is likely to be sustainable if the GOP further improve the legal, regulatory, and institutional framework for the private sector development.
22. The long-term sustainability of the sub-projects is also dependent on their sound capital structure which can be achieved through encouraging a higher share of equity participation and restricting use of bridge loans.
There has been a strong correlation between high leverage and project failure in Pakistan. Considering the vulnerability of the banking system, any policy that could add to higher portfolio risks of the financial institutions should be avoided and GOP should discourage excessive reliance on debt finance by e.g. accounting bridge loan as debt and not equity.
E. Bank Performance
23. Bank's performance in identifying and designing the IIC-III project was timely and in line with the GOP's development objectives under the seventh five year plan (1988-93) and the Bank's country assistance strategy
(paras. 2-3). The project was identified during the supervision of the first two IIC projects and the preparation and review of the Bank's Financial Sector
Report which provided a sound basis for continued dialogue between Bank and
GOP.
24. The TA programs and the sector issues that were addressed by the project, were also in line with the IMF programs and ADB assistance strategy.
The SAR was prepared by a group of competent economists and financial analysts and completed as planned. SAR, however, lacked a clear and detailed discussion on the TA programs (including training plans) and did not provide any implementation plan or terms of reference for the said TA programs. The project did not adequately address the need for a centralized unit/agency for monitoring, supervision and reporting of the project, in particular for the
IDA Credit component.
25. In general, the Bank supervision of IIC-III was inadequate. Bank sent only four supervision missions, with the first two within 9 months after the effectiveness and the last two during the last five years of the project life. Given the problem of increasing arrears and slow sub-project implementation, lack of effective and adequate supervision was a crucial issue. Bank should have emphasized the importance of careful sub-project approvals by the PFIs (given their portfolio concentration in textiles) and should have also closely monitored the PFIs asset quality and sub-projects performance during the project implementation. No ICR mission was carried out before the project closing because of political/civil problems in the country, in particular in the Sind Province. As this problem persisted, the Bank sent the ICR mission to Punjab (Lahore, Islamabad) in January 1996 in order to complete the ICR.

8
F. Borrower Performance
26. The GOP collaborated well with the Bank in the preparation and effectiveness of this project; however, there were deficiencies in the implementation phase. The GOP's performance in meeting the agreed measures for the development of equity market was, overall, satisfactory (para. 15).
27. While the five PFIs could meet the project eligibility criteria under this project and were successful in the commitment of funds to the private manufacturing sector they, in general, remain financially weak and could not maintain the eligibility criteria during 1993-94. In addition to factors mentioned in paras. 16-18, several other factors had adversely affected the PFIs financial performance and their loan recovery, including:
(i) political interference in managerial appointments and credit decision of
PFIs; (ii) lack of effective sub-project supervision and monitoring by PFIs;
(iii) absence of a transparent and consistent accounting and auditing standards which provides lenders with reliable and timely information on the borrower's creditworthiness; and (iv) lack of effective legal framework that ensures speedy and impartial settlement of claims. The GOP and the PFIs were continuously late in submitting the audit reports.
G. Assessment of Outcome
28. Smooth loan commitment and disbursement resulted in achievement of development objectives in some areas (capital formation and employment generation in the private sector). However, given: (i) the weaknesses in the financial sector and regulatory environment in which the PFIs operate; (ii) lack of autonomy and accountability in PFIs; (iii) poor performance of the
PFIs in their loan recovery; and (iv) deficiencies in the project supervision by GOP and Bank, the overall outcome of the project (including that of the TA component) was unsatisfactory.
H. Follow-up/Future Operations
29. The broader issues affecting the financial sector was addressed under the FSAL which was prepared in parallel with the IIC-III project. The reforms supported by FSAL included: improvement in the government debt management, reducing segmentation by raising concessional interest rates and limiting directed credit schemes, strengthening the banking system by strengthening prudential regulation and institution building, and development of capital markets. In order to continue and expand the reform process started under FSAL and support the GOP's strategy for macroeconomic and financial sector reforms, the Board approved two projects following IIC-III.
In April 1991, the Bank approved a Microenterprise project (Ln. 3318-PAK) with the objective of further supporting the Government on its continued efforts to strengthen the Pakistan's financial system and link it to the productive sectors of the economy. The main objective of the project was to increase productivity, growth, and employment in the microenterprise sector by providing credit investment through the bank and non-bank financial institutions and linking them with larger businesses.
30. The recently approved Financial Sector Deepening and
Intermediation Project (FSDIP; Ln. 3808-PAK), was built on experiences gained under previous loans and credits and focuses on maintaining the momentum for improving and deepening the financial system and promoting new financial instruments; strengthening institutional, regulatory, and legal framework; and completing key reforms in privatization. The GOP is committed to continue to reform the financial and industrial policy under this project (Appendix A).
The medium term Bank Group's assistance strategy includes, among other things, establishing a more competitive environment for private sector investment and accelerated growth. To this end, the Bank Group will continue to help

9
Pakistan to further broaden financial instruments available to private businesses, to provide insurance coverage for private financial institutions, and to improve financial intermediation for micro and small-scale enterprises through a micro credit operation.
31.
I. Success and sustainability of Bank financial/industrial intermediation operations both in term-lending and institutional development depends, to a large extent, on the following factors.
o The Government's implementation of elements of a prudent financial sector policy and establishing and enforcing proper institutional, regulatory, and incentive framework for the financial institutions and the private sector.
o o
I. Lessons Learned
In retrospective, the main lessons learned are summarized below:
The financial viability of the credit institutions and their internal operational efficiency such as strong management, effective loan recovery, and systematic appraisal and timely supervision of financed sub-projects. In Pakistan, the quality of
PFIs portfolio deteriorated partly due to political interferences and frequent changes in their top management. As long as the risk of Government's intervention in the internal operations of financial institutions exist, the Bank should not channel its intermediation loans through the Government owned financial institutions.
Sound capital structure of sub-projects, their profitability, and satisfactory rate of return.
II. Effective and timely monitoring and supervision of the project by both
Bank and the borrower is an integral to the success of the project.
Considering the shortcomings in the financial system (explained above) and prevailing political and economic difficulties in the country, the
Bank should have sent more supervision missions and provided adequate staffing for close monitoring of the participating credit institutions and the financed sub-projects.
III. Under this project, design and objectives of the TA were not specific and targeted; most of the credit fund was used for ad hoc training programs without a long-term plan for institution building and therefore, had little impact. Clear objectives, precise terms of reference, the link to the project objectives, and potential benefits of the TA should be identified at SAR stage. The supporting TA for strengthening institutional capabilities (training, system improvement, etc.) should be selected in a more systematic and formalized procedure and should be within the institutions' human resource development objective. Bank needs to strengthen the emphasis of its supervision efforts for the TA activities. The Government needs to strengthen its monitoring, evaluation procedures, documenting, and reporting of the TA programs funded by the multinational organizations and other donors and learn from the implementation experience of.the past projects in order to improve upon the design of the TA for new projects.
IV. The project did not establish an adequate counterpart responsible for coordination and supervision of the project. The quality of project supervision and administration could be improved by either developing a strong monitoring and reporting system in the Government or selecting an
Apex agency which commonly used in other Bank financed projects.

10
Table 1: Summary of Assessments
A. Achievement of Obiectives
Sector policies
Capital Market Development
Financial objectives
Institutional development
Physical objectives
Poverty reduction
Gender concerns
Other social objectives
Environmental objectives
Public sector management
Private sector development
Other- Employment Generation
Substantial
( )
( )
For the (5/) most part
( )
( )
( )
( )
( )
()
( )
( )
U)
U)
B. Project Sustainabilitv
C. Bank performance
Identification
Preparation assistance
Appraisal
Supervision
D. Borrower Derformance
Preparation
Implementation
Covenant Compliance
Operation (if applicable)
E. Assessment of outcome
Partial
( )
( )
( )
('1)
( )
( )
( )
()
( )
( )
( )
()
Ne2lipible
( )
( )
( )
( )
()
( )
(si)
( )
()
( )
( )
( )
( )
Likelv
O)
Hi2hIy
Satisfactorv
( )
( )
()
( )
Highly
Satisfactorv
( )
( )
( )
( )
Hi2hiv
Satisfactory
()
Satisfactorv
()
Unlikelv
O)
Satisfactorv
U)
(v)
(N)
( )
Satisfactorv
(N)
( )
Up to 1992
U)
( )
Unsatisfactory
(s')
Uncertain
(Vi)
Deficient
(
( )
()
('i)
Deficient
( )
('I)
After 1992 (N)
( )
Hi2hIv
Unsatisfactory
()
Not Anplicable
.
)
U)
( )
( )
('I)
U)
( )
( )
()
( )
U)
(,1)
('J)

11
Table 2: Related Bank Loans/Credits
Loan/credit title l
______________________
Purpose I
___________________________________________________
Preceding Operations
1. First Industrial
Investment
Credit (IIC-I)
Loan 2830/Credit
1439-PAK
To help GOP improve the credit delivery system and focus on the institutional restructuring of
PICIC and IDBP.
I Year of Status
02/02/84 Closed on
12/31/90
2. Second
Industrial
Investment
Credit (IIC II)
Loan 2648/Credit
1646-PAK
To assist GOP develop the capital market, improve credit delivery and continue institution for industrial building finance for PFIs.
01/07/86 Closed on
12/31/92
3. Second Small To promote investments in promising SSI sub-
Scale Industry sectors and improve productivity of existing SSI
Project (SSI II) units.
Credit 1499-PAK
06/14/84 Closed on
06/30/92
4. Third Small
Scale industry
Project (SSI
III) Loan 2839-
PAK
Following Operations
To provide SSI financing, funding capabilities, marketir.g system.
expand PCIs' SSI and develop export
06/16/87 Closed on
12/31/95
1. Financial Sector To assist the GOP in financial sector reforms:
Adjustment Loan gearing credit allocation to market signals,
(FSAL) Loan
3029-PAK improving health and efficiency system, and creating of banking more efficient Government debt system.
2. Microenterprise
Project
Loan 3318-PAK
To provide funds to the microenterprises; to strengthen the capacity of the PCIs; to catalyze
NGOs' financial and technical support services for microenterprises; to provide TA to microenterprises; and to help develop businesses owned by womer.
03/28/89
04/23/91
Closed on
06/30/92
Closing date is
06/30/98
3. Financial Sector To orovide term finance for all economic
Deepening and activities; to continue and expand the reform
Intermediation process started under FSAL; and to support GOP's
Project (FSDIP)
Loan 3808-PAK strategy reform.
for macroeconomic and financial sector
11/15/94 Closing date is
12/31/99

12
Table 3: Project Timetable
Steps in project cycle Date planned
January 1988
February 1988
July 1988
November 1988
NA
Date actual/ latest estimate
Identification
Preparation
Appraisal
Negotiations
Letter of development policy (if applicable)
Board presentation
Signing
Effectiveness
First tranche release (if applicable)
Midterm review (if applicable)
Second (and third) trance release
(if applicable)
Project completion
Loan/Credit closing
January 1988
February 1988
July 1988
November
NA
1988
January 1989
February 1989
May 1989
NA
NA
NA
January 1989
February 1989
June 1989
NA
NA
NA
December 1993
June 1994 2/
December 1994 1/
December, 1995 3/
NA = Not Applicable
1/ As project closing date was extended, two sub-projects were approved after the planned completion date.
2/ IDA Credit component was closed as scheduled on June 30, 1994.
3/ Closing date for the Bank loan component was extended twice to June 30, 1995 and later to December 31, 1995.
l
Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual
(US$ thousands)
FY89 |FY90 FY91 FY92 FY93 FY94 |FY95 FY96
Appraisal estimate 1/
Actual 1/
5.0 35.0 100.0 140.0 150.0 0.0 0.0 0.0
0.0 6.9 36.8 92.2 130.2 136.2 136.5
Actual as % of estimate
0.0 19.7
1/ Sum of loan and credit components.
36.8 65.8 86.8
Date of final disbursement: For Cr. 1982 was on August 30, 1993;
For Ln. 3019 was on January 22, 1996
139.8
l

13
Table 5: Key Indicators for Project Implementation
I. Key implementation indicators in
SAR/President's Report
1. Some Measures for development of the equity market.
Estimated
1. See para. 14 for measures stated in SAR; in particular setting debt/equity at 60:40
2. Sub-project financing; and Disbursements
1. See para. 15 for achievement of the objective.
Actual
2. Utilization of a total 2. 93% of loan was of US$ 148 million for disbursed (see table 4); increasing capital and employment in the private sector.
employment impact was high with 8,200 jobs created.
3. PFIs' financial performance in credit lending and compliance with the project's eligibility criteria including collection performance
4. Sub-projects performance
3. Human resource development; the credit lending and loan portfolio of the
PFIs; compliance with the financial covenants require recovery rate was
80%) improving
(Min.
3. The objective was partially achieved; however, PFIs' arrears rose in 1993-94; their financial performance weakened; PFIs' loan recovery rate dropped below 809 (paras. 7 & 8).
4. Adequate number of 4. Satisfactorily viable sub-projects to be achieved. See Annexes I materialized in order to to V fully utilize the credit fund.
5. Sectoral distribution of sub-loans
______________
II. Modified indicators
(if applicable)
III. Other indicators (if applicable)
5. SAR proposed a prudent exposure to textile sub- sectors; priority was to be given to BMR for existing spinning; fully integrated textile mills; independent weaving, finishing mills.
Not Applicable (NA)
5. Partiallv achieved. See paras. 9 and 17.
NA
NA
_.-
NA

14
Table 6: Key Indicators for Project Operation
I. Key operating indicators in
SAR/President's Report
1. DFIs business diversification
Estimated Actual
1. PICIC's and IDBP's 1. Only PICIC implemented business diversification the elements of the agreed to provide their clients criteria; It expanded its with more financial services in order to activities by entering into deposit mobilization, facilitate project implementation. trade financing, merchant banking, foreign currency deposit mobilization, etc.
2. PFIs' Institutional
Development.
II.Modified indicators (if applicable)
2. Training; equipments; 2. Had limited impact. TA organization and system was only used for some studies. training programs and purchase of computers.
See para. 12.
NA NA
III.Modified indicators for future operation (if applicable)
NA NA
Table 7: Studies Included in Project
No specific study was carried out under this project

15
Table 8A: Project Costs l___________________
Item
Appraisal estimate (US$M)
Local
Costs
Foreign
Costs
Total
Actual/latest estimate (US$M)
Local
Costs
Foreign
Costs
Total
1. Sub-projects
Investment
2. Technical
Assistance
Total
148
148
148
2
150
296
2
298
135.0
135.0
138.1
1.7
139.8
273.1
1.7
274.8
Table 8B: Project Financing l____________________
Source
Appraisal estimate (US$M) Actual/latest estimate (US$M)
Local
Costs
Foreign
Costs
Total Local
Costs
Foreign
Costs
Total
150.0
-
139.8 139.8
IBRD loan and
IDA credit
Cofinancing
Institution
(ADB)
Sponsors (local)
|Domestic contribution
(GOSL)
TOTAL
148.0
148.0
-
150.0
-
148.0
298.0
-
135.0
135.0
-
139.8
-
135.0
_
274.8
Table 9: Economic Costs and Benefits
Ex-post data regarding FRR and ERR are not available for sub-projects.

16
Table 10: Status of Main Legal Covenants
Agreement Section Covenant type
Loan
Loan
Loan
Loan
Loan
Loan
Credit
4.01
4.04
4.05
4.06
4.07
4.01
Accounting
Audit
4.02(a)
4.02(b)
Accounting
Audit
Financial
Financial
Financial
Financial
Accounting
Auidit
Present status
C
CP; CD
CP
CP
CP
CD; CP
CP
Original fulfillment date throughout the project life
6 months after each
FY
Revised fulfillment date throughout the project life throughout the project life
June 30,
1989
December
31, 1989
6 months after each
FY
Description of covenant
PFIs to maintain procedures and records adequate to nmonitor the progress of the project.
Comments
PFIs to have the records of financial statements and that for special account in accordance with sound accounting practice applied by independent auditors; submitted to the Bank within 6 months after each FY.
DFIs to maintain debt/equity ratio of not more than 7:1
There were delays.
DFIs to maintain a debt service coverage ratio of not less than 1.2
Government to issue, no later than Julrle instructions requirinig all finiancial institutions to include bridge loans in the definition of debt.
._____________
____________________________________________
Government t:o
December 31, 1989, opening the membership of the
KSE to financial institutions including private investment finance companies
Government to maintain records and accounts of the credit audited in accordance with sound accouLnting practices and sLubmitted to IDA no larer than 6
OFIs fiLancial performance atarted to deteriorate in
1993-94
DFIs financial performance started to deteriorate in
1993-94
But the decision was reversed in
Feb. 1990 (see para. i5)
See para. 15
There were continuous delays
C = Complied with
CD = Complied with after delay
CP = Complied with partially

17
Table 11: Compliance with Operational Manual Statements
There were no incidence of non compliance with Operational Manual Statements
Table 12: Bank Resources: Staff Inputs
Stage of project cycle
Through appraisal
Appraisal-Board
Board-effectiveness
Supervision
Completion
Planned 1/
Weeks US$
NA
110.0
NA
84.5
12.0
206.5
NA
NA
NA
NA
NA
NA
TOTAL
NA
Revised 1/
Weeks
74.0
NA
107.2
12.0
193.2
NA
NA
NA
NA
NA
1/ Consistent and complete information is not available.
US$
Actual 1/
Weeks US$ (000)
NA
73.8
NA
83.2
9.0
166.0
NA
NA
NA
NA
17.0
NA

18
Bank Resources: Missions 1/
Stage of project cycle
Month/
Year
Number of persons
Days in
Specialized staff skills field represented
I
1
Performance rating
Implementation status
Development impact
Types of problems
Through appraisal
Appraisal thlough
Board approval
Board approval througlh NA effectiveness
Supervision
Completion
10/1989
03/1990
11/1992
06/1993
NA
4
2
2
1 l________
01/1996
I
________
1
NA
16
14
11
06
Financial
Economics
_
I
_______
09
______________
Economics/
I Finance
The rating has been satisfactory throughout the project supervision
Same as above
The development impact has also been satisfactory
Same as above
_-
1/ The IIC- III missions were, in general, combined with those of other Bank's intermediation operations at that time.
No record is available as how the time/number of staff was split between the projects. Therefore, time for supervision missions, spent on the ITC-III was less than time indicated above.
May 30, 1996

Sub-projects above free limit ($ 3 m)
Total
United Technologies Ltd.
Ghazi Fabrics lhsan Sons Ltd.
Al-Abbas Spinning
Ayaz Textile
Rabia Textile
Atzal Textile Mills
QualityTextileMillsLtd.
Idrees Textile Mills Ltd.
Tri Star Polyester
Service Fabrics Ltd.
Baig Spinning
Sub-projects below
Total
Orient Rice Mills
Evernew Knitwear
Al-AbbasFabricsLid.
19
(In US Dollars)
15-Mar-96
Subporj. Date Amount Increases/ Amount Net
No. Authorized Authorized Decreases Cancelled Commilted
YY/MM/DD 66,739,421
Amount
Disbursed
1,352,710 17,596,35 50495,775 50.4975
Al-01
Al-05
89/10/11
A1-02 89/11/07
A1-03 89/11/28
A1-04 90/01/22
90/05/02
A1-06 90/05/02
A1-07 90/06/01
A1-08 90/07/06
A1-09 90/07/06
Al-10 90/07/13
Al-11 90/07/18
A1-12 91/05/21
6,567,965
6,000,000
3,067.000
6,000,000
5,657,891
6,000,000
4,692,608
6,000,000
6,095,000
6,413,000
5,553,349
4,692,608
14,873
520,000
197,791
157,453
317,593
145,000
30,998
752,785
6,000,000
82,231
6,000,000
4,692,608
4,811
32.923
6,582,838
6,489,002
2,314,215
5,575,660
6,197,791
6,252,453
4,804,685
6,582,838
6,489,002
2,314,215
5,575.660
6,197,791
6,252,453
6,730,593 6,730,593
5,548,538 5,548,538
4,804,685
YY/MM/DD
Bi -01 89/11/08
B1-02 90/05/04
B31-03 90/06/01
1.903,369
642,314
894,425
366,630
199106
74,318
106,407
18,381
2,15
716,632
1,000,832
385,0t1
2,102,475
716,632
1,000,832
385,011
Total A and B Sub -projects 586 796,36 52598250 52509

Sub-projects above free limit ($ 2 m)
Total
Sac Group Industries
Tawakkal Fabric Industries
Reliance Weaving
Mehmood Textile Mills
Multan Textile Mills Project
20
(In US Dollars)
15-Mar-96
Subporj.
No.
Date Amount Increases/ Amount
Authorized Authorized Decreases Cancelled
YYtMM/DD 25.604,000 868352
Net
12,128,135 14,344,
2 1 7
Amount
Committed Disbursed
14,344,217
A3-01
A3-02
A3-03
89/11/08
90102/01
90/05/02
A3-04 92/07/27
A3-05 93/03/24
5,547,000
5,941,000
6,000,000
3,211,000
4,905,000
614,000
254,352
1,181,173 4,979,827
5,941,000
100,962 5,899,038
3,465,352
4,905,000
4,979,827
5,899,038
3,465,352
Sub-projects below free limit ($ 2 m)
Total
Shahpur Textile Mills
Total A and B Sub-projects
B3-01
YY/MM/DD
90/01/08
799,00 42,731 1,538 840193 840193
799,000 42,731 1,538 840,193 840,193
26,403,000 911,083 12,19.67 15,184410 15,184,410

Total
Samin Textile
2]1
-
15-Mar-96
Subporj.
No.
Dale Amount Increases/ Amount Net Amount
Authorized Authorized Decreases Cancelled Committed Disbursed
YY/MMIDD 6,000,00 1,085,406 708540 7,085.406
A4-01 89/11/28 6,000,000 1,085,406 7,085,406 7,085,406

15-Mar-96
Sub-projects above free limit ($ 3 m)
Total
Khairpur Sugar Mills
Crescent Textile Mills
Jan Mohammad
Gulistan Textile Mills
Knitters
Shams Textile Mills
Amna Bilal Textiles
Legler-Nafis Denim Mills
United Finishing Mills
Fazal Weaving Mills Ltd.
Sub-projects below free limit ($ 3 m)
Total
Shakarganj Miils Ltd.
Pak Elektron Ltd.
Premier Sugar Mills
Ideal Appliances (PVT) Ltd.
Bengal Fibre Industries Ltd.
Total A and B Sub-projects
Subporj.
No.
Date Amount Increases/ Amount Net Amount
Authorized Authorized Decreases Cancelled Committed Disbursed
YY/MM/DD 36,82
4
.000 2,118,230 7,740.896 31201334 31,201,334
A6-01
A6-02
A6-03
A6-04
90/07/24
90107125
90/07/25
90/07/25
A6-05 90/07/25
A6-06 91/06/20
A6-07 92/08/12
A6-08 93/01/27
A6-09 93/09/30
A6-10 94/03/09
4,512,000
5,834,000
7,548,000
2,320,000
284,000
5,200,000
300,000
1,500,000
3,326,000
6,000,000
400,000
788,000
250,000
680,230
11,144
588,037
23,693
77,512
284,000
590,646
38
165,826
6,000,000
4,900,856
6,033,963
7,524,307
2,492,488
5,289,584
299,962
1,500,000
3,160,174
4,900.856
6,033,963
7,524,307
2,492,488
5,289,584
299,962
1,500,000
3,160,174
B6-01
B6-02
B6-03
B6-04
B6-05
YYIMM/DD 6,161,55
90/07/24
90/07/24
90/07/24
93/07/28
94/02/22
3.405,23 2,756,32 2,756,327
2,177,000
1,158,000
1,300,000
750,400
776,156
42,98555
1,412,401
350,019
628,997
750,400
263,413
764,599
807,981
671,003
0
512,743
2,118,230 11,146.126 33,95760
764,599
807,981
671,003
0
512,743
33,957,661

23
(In US Dollars)
15-Mar-96
Sub-projects above free limit ($ 3 m)
Total
Reliance Textiles L[d.
Chasma Sugar Mills
Gulshan Spinning Mills
Al-Qadir Textile Mills
Kohinoor Textile
Subporj.
No.
Date Amount Increases/ Amount Net Amount
Authorized Authorized Decreases Cancelled Committed Disbursed
YYIMM/DD 26.898,000 431,787 744,048 26.585.73 26,585,739
A7-01 89/10/11
A7-02 89/12121
A7-03 90/05/04
A7-04 90/07/13
A7-05 90/07/25
6,148,000
4,657,000
6,148,000
3,975,000
5,970,000
56.234
222,787
152,766
11,838
84,437
79,145
568,628
6,192,396
4,572,563
6,370,787
4,048,621
5,401,372
6,192,396
4,572,563
6,370,787
4,048,621
5,401,372
Sub-projects below free limit ($ 3 m)
Total
Amber Capacitors Ltd.
Venus Industries
Faran Sugar Mills
En-Em Industries Limited
Total A and B Sub-projects
YY/MM/DD
B7-01 89/08/31
B7-02 90/01/16
B7-03 90/01/19
B7-04 91/02/26
2,685,75 228,584 664.976 2249.358 2,248401
1,148,650
566,000
405,100
566,000 228,584
66,273
566,000
32,703
1,082,377
0
372,397
794,584
1,081,420
372,397
794,584
29,583.750 660371 1,409,024 28,835,097 28,834140

24
Implementation Completion Report
Third Industrial Investment Credit
Sub-projects' Performance
Annex VI
1 5-Mar-96

Total 1/
Training for HBL
Training for UBL
Training for MCB
Training for NDB
Training for IDBP
Training for PICIC
Training for NDFC
Training for BEL
Amount
Authorized
1,568,310
435,994
Amount
Cancelled
115.325
85,861
Net
Committed
1,452,985
Amount Balance Disbursed as
Disbursed 2/ Un-Disbursed 3/ % of Total
1.299.742 160.664 87%
350,133 233,372 116,761 16%
-
-
-
-
255,042
198,042
679,232
25
-
-
7,098
22,366
0
247,944
175,676
679,232
255,893
203,141
599,915
(7,949)
(27,465)
79,317
1/ Total original TA was SDR 1.5 million. Total disbursed includes utilization from Special Account.
2/ Includes SDR 7,421 exchange rate fluctuation between SDR and US$ (currency of Special Account).
3/ The total undisbursed balance as of October 31, 1994 (four months after credit closing) was SDR 200,258 which was cancelled.
17%
14%
40%
30-May-96

26
Pakistan
Third Industrial Investment Credit (IIC-II)
(Ln 3019-Pak/Cr 1982-Pak)
Implementation Completion Mission
January 18-30
Aide Memoire
Appendix A
Page I of 10
1. A World Bank mission led by Ms. Shideh Hadian visited Pakistan from January 18 to
30 to carry out the completion mission of the above project. Mr. Hasan Qureshi (SA1PK) participated in the mission. We appreciate the hospitality and cooperation extended to the mission by the Habib
Bank Limited (HBL), Muslim Commercial Bank (MCB), National Bank of Pakistan (NBP), National
Development Finance Corporation (NDFC), Pakistan Industrial Credit and Investment Corporation
(PICIC), the Sponsors of the sub-projects visited by the mission, the Bankers Equity Limited (BEL),
All Pakistan Textile Mills Association (APTMA), the Corporate Law Authority (CLA), and the
Ministry of Finance (MOF). The mission's work greatly facilitated bv the close cooperation of
Participating Financial Institutions (PFIs) in providing the required information and meeting with the mission in Lahore due to the persisting security situation in Karachi. As usual, the views expressed in this Aide Memoire are those of the mission, and are subject to confirmation by the World Bank
Management upon the mission's return.
Backeround
2. The Third [IC project was designed to support private sector development through credit and policv reforms of the capital markets. The project was approved by the Board of Directors loan of US$ 148 million for financing private industrial projects through the banking system; and (ii) an IDA Credit of US$ 2 million equivalent for Technical Assistance (TA) for supporting institutional capacity building of PFIs and development of the capital markets. The IDA credit component was closed, as originally scheduled, on June 30, 1994. However, per GOP's request, the closing date of the loan component was extended for one year to June 30, 1995 (see para. 5). The last supervision mission was carried out in July 1993 and due to the security situation in Karachi, there was no completion mission before the project closing. However, as the violence persisted in the Sind
Province, the Bank decided to send the completion mission to Punjab Province (Lahore and
Islamabad). The overall implementation experience of the above project will be discussed in the following paragraphs.
Implementation of the Bank Loan Component (Ln 3019-Pak)
3. The Bank Loan component was implemented with delavs but, overall, satisfactorily and achieved its development objectives. Of the total loan amount, about US$ 138 million (93%) was utilized by 37 medium and large scale industries for capital investment and the unutilized balance of about US$ 10.0 million will be cancelled. The project had significant impact on the employment generation in industrial sector. Of the four National Commercial Banks. all met the participation

27
Appendix A
Page 2 of 10 conditions at the time of effectiveness; however, only three banks (HBL, MCB, NBP) became eligible to have access to the Bank funds for term lending and TA. United Bank Limited participation was suspended under the Second [IC project due to its large non-performing loan to a textile company and therefore had never been eligible for participation in the Third IIC. Of the three DFIs identified to participate in the project, only PICIC and NDFC met the participation conditions and eligibility criteria. Industrial Development Bank of Pakistan never participated in this project.
4. Factors that Affected the Sub-Dro4ects Performance - The commitment and disbursements of IIC-III were slower than the rate anticipated bv the Staff Appraisal Report mainly due to adverse economic conditions of the OECD countries in early 1990s and accompanying recession in Pakistan economy in early to mid-1990s which led to sluggish industrial investment activities in particular in the textile industry. In eariv 1990s, a combination of adverse domestic and external factors resulted in decline in Pakistan growth rate, continuation of inflationary pressure, and weak balance of payments. On the supply side, bad whether condition and viral attack on the cotton crop resulted in decline in wheat harvest and cotton crop failure. Bad cotton crop for three consecutive years (1992, 1993, and 1994) resulted in critical shortage of cotton and more than 100% increase in prices during this period and adversely affected the textile industry which accounts for about 60% of the export value. On the demand side, economic recession in major markets for
Pakistan exports and intensified competition by its trading competitors were added to the domestic problems the countrv was facing. In addition, the 1993-94 political turbulence in the country and later the law and order situation in Karachi adversely affected economic activities and more so the performance of industrial sector. As a result, most of the industrial units and in particular those in textile sub-sectors of spinning and weaving which were established between 1989-1992 have been badly hit. Many projects faced liquidity problem and had losses, or closed down.
S. Implementation of IIC-III Since Julv 1993 - Several sub-loans financed under the
IIC-III were cancelled and as of June 1993, over US$ 16 million of the loan proceeds remained uncommitted. The Bank mission of July 1993 (the last supervision mission) recommended that the deadline for submission of sub-loan applications be extended for six months, from June 30 to
December 31, 1993. This was the second extension of this deadline: the original deadline for sub-loan applications was December 31, 1991. Part of the unutilized fund was committed, through PICIC, to
Fazal Weaving Mills Ltd for US$ 6.0 million in September 1993 and to United Finishing Mills Ltd.
for US$ 3.3 million in March 1994. Accordingly, the project closing date was extended for one year, to June 30, 1995, in order to provide the PFIs and sponsors with adequate time to complete subprojects implementation and disbursements. In Pakistan. it normally takes about one year to 18 months to implement a project after sub-loan approval.
6. While disbursements against all financed sub-projects completed on time, implementation of the above two mentioned sub-projects were delayed due to problems with the delivery schedule of equipment purchased and delays in opening of the Letters of Credit (L/Cs). Loan to grant another six months extension for the United Finishing Mills to complete disbursements, on the ground that this company had already opened the LICs and Bank' issued four Special Commitments against these L/Cs. In June 1995, the Bank approved a partial extension and established December 31,
1995 as the closing date for this sub-project. However, all the other project components and sub-loans approved by the PFIs closed on June 30. 1995. The final payments against Special Commitments have recently been made and no further payments will be made under this loan (see paras. 3 &17).

Appendix A
Page 3 of 10
28 several loans. In order to protect and revive its financed industries. HBL rescheduled most of its loans and allowed two years moratorium in payments of dues. It is expected that cash generations from the sub-projects during this period improve their debt service payments. The mission was informed by
HBL that based on the December 1995 status reports of the sub-projects, the industries' performance is better and HBL's collection of principal and interest have slightly improved since November 1995.
The mission visited Ghazi Fabrics Industrial Ltd. sub-project financed by the HBL. This sub-project, which is engaged in spinning and weaving, had its share of heavy losses during the cotton crisis; however, due to good cotton market in 1995, the company has started to generate better returns since
September of 1995. The company has set up a 10.5 Mega Watt power plant which has increased its production efficiency as it has uninterrupted electricity during its operations and reduced the cost of its electricity use in half. The power plant has high enough return to cover the investment cost in two years. As the sponsor is financially strong and experienced, despite running losses, he was regular in servicing its debt. Like many other sponsors, he is optimistic about better returns and profitability in the coming years.
12. PICIC approved US$ 34.4 million for 12 sub-projects of which 8 were textile manufacturing and 3 were sugar mills. There were delays in the implementation of some of the subprojects (including the above mentioned sub-project, Para. 6) and due to reasons mentioned above several sub-loans are now in arrears. As a result, PICIC's loan recovery rate was also deteriorated during 1993-94 and collection ratio on Bank's sub-loans dropped from 80% in 1992 to about 60% in
1994. PICIC informed the mission that it will continue its policv of rehabilitation and reviving sick units and have rescheduled some loans. It is expected that many sub-projects resume debt servicing
Electron Ltd (PEL) and Legler-Nafees Denim Mills Ltd. The former was an expansion and modernization project in the production of refrigerator which was successfully completed withiout delays. Despite adverse economic condition, the company runs well and is profitable: sponsors are regular in servicing their debt. Legler-Nafees Mills is a joint venture with a foreign company for establishment of a composite textile unit. The company is regular in its debt servicing. The mission found it encouraging to see a change in trend In investment in the textile sector from single product line (spinning and/or weaving) to higiler value-added production units venture textile mills such as Legler-Nafees Mills.
13. NDFC approved 8 sub-loans under [IC-IlI amounting to US$ 28.6 million. Five of tihe sub-projects were in spinning and weaving sector, 2 were for establishment and expansion of sugar projects, and one for setting up a new project for the production of capacitors. Except two projects in spinning and one in sugar, the rest are running at losses. Although the NDFC's share of its loan portfolio in the textile sector is low, its recovery rate has also deteriorated siice 1993 and its loan collection ratio under the project fell from about 90% in 1992 to about 75% in 1994. The mission visited three projects financed by NDFC. The Amber Electronic Ltd which produces capacitors for the local market started its commercial operations in 1992 and has faced liquidity problems since, was further suffered when in 1994 the GOP imposed heavv dutvyon raw materials used for this product and reduced duty on imported capacitors. This project. which is managed by an experienced sponsor, meets about 30% of the local demand and is now in the process of receiving license and certificate from a reputable standardization agency which would open up its market abroad. It is expected that withi expansion of its market and improvement of the domestic and international economy. this project become profitable. Kohinoor Looms Ltd. whicih was established in 1992 is

Appendix A
Page 4 of 10
29 several loans. In order to protect and revive its financed industries, HBL rescheduled most of its loans and allowed two years moratorium in payments of dues. It is expected that cash generations from the sub-projects during this period improve their debt service payments. The mission was informed by
HBL that based on the December 1995 status reports of the sub-projects, the industries' performance is better and HBL's collection of principal and interest have slightly improved since November 1995.
The mission visited Ghazi Fabrics Industrial Ltd. sub-project financed by the HBL. This sub-project, which is engaged in spinning and weaving, had its share of heavy losses during the cotton crisis; however, due to good cotton market in 1995, the company has started to generate better returns since
September of 1995. The company has set up a 10.5 Mega Watt power plant which has increased its production efficiency as it has uninterrupted electricity during its operations and reduced the cost of its electricity use in half. The power plant has high enough return to cover the investment cost in two years. As the sponsor is financially strong and experienced, despite running losses, he was regular in servicing its debt. Like many other sponsors, he is optimistic about better returns and profitability in the coming years.
12. PICIC approved US$ 34.4 million for 12 sub-projects of which 8 were textile manufacturing and 3 were sugar mills. There were delays in the implementation of some of the subprojects (including the above mentioned sub-project, Para. 6) and due to reasons mentioned above several sub-loans are now in arrears. As a result, PICIC's loan recovery rate was also deteriorated during 1993-94 and collection ratio on Bank's sub-loans dropped from 80% in 1992 to about 60% in
1994. PICIC informed the mission that it will continue its policy of rehabilitation and reviving sick units and have rescheduled some loans. It is expected that many sub-projects resume debt servicing within a year. The mission visited two of the PICIC's financed sub-projects under IIC-III, Pak
Electron Ltd (PEL) and Legler-Nafees Denim Mills Ltd. The former was an expansion and modernization project in the production of refrigerator whicil was successfuilly completed without delays. Despite adverse economic condition, the company runs well and is profitable; sponsors are regular in servicing their debt. Legler-Nafees Mills is a joint venture with a foreign company for establishment of a composite textile unit. The company is regular in its debt servicing. The mission found it encouraging to see a change in trend in investment in the textile sector from single product line (spinning and/or weaving) to higher value-added production units
(dyeing, finishilng, ready made garments) and more so the establishment of a fully integrated, joint venture textile mills such as Legler-Nafees Mills.
13. NDFC approved 8 sub-loans under IIC-Ill amounting to US$ 28.6 million. Five of the sub-projects were in spinning and weaving sector, 2 were for establishment and expansion of sugar projects, and one for setting up a new project for the production of capacitors. Except two projects in spinning and one in sugar, the rest are running at losses. Although the NDFC's share of its loan portfolio in the textile sector is low, its recovery rate has also deteriorated since 1993 and its loan collection ratio under the project fell from about 90% in 1992 to about 75% in 1994. The mission visited three projects financed by NDFC. The Amber Electronic Ltd which produces capacitors for the local market started its commercial operations in 1992 and has faced liquidity problems since, mainly due to non-realization of accounts receivahle as a result of prevailing recession. This project was further suffered when in 1994 the GOP imposed heavy duty on raw materials used for this product and reduced duty on imported capacitors. This project. which is managed by an experienced sponsor, meets about 30% of the local demand and is now in the process of receiving license and certificate from a reputable standardization agency whicIh would open up its market abroad. It is expected that with expansion of its market and improvement of the domestic and international economy, this project become profitable. Kohinoor Looms Ltd. which was established in 1992 is

Appendix A
Page 5 of 10
30 engaged in weaving manufacturing. The company had run to financial difficulties in 1993-94 and is overdue in its debt servicing to NDFC. The company has recently started to diversify its production into garments manufacturing for the local market which is expected to increase its earning il future.
Rescheduling of this company's loan is under review by NDFC. Highnoon Textiles Ltd, which was established in 1994, is an integrated unit engaged in knitting, dyeing/finishing, and garments manufacturing for the export markets. Highnoon had established its markets with reputable companies in USA and Europe over a short period of time and is expected to expand its operations in the future.
14. Under this project, MCB approved US$ 15.2 million for 4 sub-projects in the textile sector. Three companies started to face difficulties in 1993-94 which resulted in non-payments of their dues. The bank's recovery rate under this project was 100% until 1992; however, the prolonged illness of the textile sector, adversely affected the recovery rate of MCB and its collection ratio dropped way below the covenanted 80% under this project. Following the GOP's relief package,
MCB rescheduled its problem loans.
15. NBP approved only one sub-project under IIC-Ill for the amount of US$ 7.1 million.
The company, Samin Textile Ltd, is engaged in weaving manufactures mainly for the exports and is managed by well known group of industrialists with sufficient financial strength. The company is running efficiently and had managed to diversify its production of gray cloth through establishing its markets in Germany and Korea for the industrial fabrics whicih is expected to have higher return than regular fabrics. The company, however, had losses during past two years and has defaulted in servicing its debt to NBP. The company suffered partly because of the cotton crop failure and partly due to the changes in Government policies which were not accounted for in the project's feasibility and financial planning and subsequently affected the company's profitability. Rescheduling of the loan is under consideration. The company's performance has improved since September 1995, when it registered profit for the first time since cotton crisis began. Due to the high exposure of the NBP's portfolio to the textile sector, its loan recovery rate is not satisfactory. The mission was informed that bank's recovery rate for loan portfolio to non-textile sector is also low partly due to economic recession and partly due to non-performing loans to Government.
Implementation of IDA Credit Component (Cr. 1982-Pak)
16. The credit component was about 87% utilized and a balance of about US$ 267,000 was cancelled at the time of the credit closing, June 30. 1994 (see para. 2). The last disbursement against the credit component was on August 30, 1993. The credit fund was mainly used for institutional development (training; equipment) of the PFIs and BEL. The mission was intformed by some PFIs that several of their training programs were not useful and did not benefit the trainees or the institution. Several programs were selected on ad hoc basis and did not meet the human resource development needs of the banks. BEL used about 50% of the TA funds for foreign training programs.
It sent 47 of its middle level management abroad for short and long term programs. The mission was informed by BEL that the selections of training programs and the officers were based oln the human resources development plan of the institution and that the TA was very useful in capacity building of its technical staff.
17. Special Account - The mission informed the HBL and the MOF that a balance of US$
424,437.72 is still outstanding in the Special Accounts kept in the HBL. This amount must be

31
Appendix A
Page 6 of 10 refunded to the IBRD, credited to the loan account 3019-Pak as soon as possible so that, Bank can proceed with the loan cancellation and close the loan accounts.
18. Preparation of Implementation Completion Report (ICR) - Preparation of the ICR under the new Bank guidelines was discussed in details with the MOF and the PFIs. The MOF agreed to prepare part II (the borrower's evaluation of the project) of the ICR before end of March
of thisyear. The PFIs agreed to provide their inputsfor this part to the MOF. A questionnaire was sent out to the PFIs in December 1995 for their inputs regarding the status of their respective approved sub-projects. The mission received the required information upon arrival to Lahore.
Islamabad

32
Appendix A
Page 7 of 10
S
'~~I. A. Jafaray,
AdViser to the Prime Minister w i
E zn Finance and Sconomic Affairs.
0
asZS
.
d
C
__~~~~~~~~~~~~~~~~2 28 94'
No. F.7 I)-Inv. :1/93-
Dear Mr. Preston,
1. For a number of years the Government of Pakistan has been engaged in a systematic and wide-ranging policy reform program involving improving macroeconomic performance, deregulation of the economy, and privatization of state-owned firms. Portions of this program have been supported by World Bank adjustment operations, namely the Financial Sector Adjustment Loan and the
Public Sector Adjustment Loan.
2. The Government of Pakistan is committed to promoting a healthy, market-oriented financial system that can allocate investment resources and spread risk in the most efficient and equitable manner. To that end a number of reforms have been carried out such as, giving greater autonomy to the State Bank of
Pakistan, strengthening prudential regulation of commercial banks, extending prudential regulations to non-bank financial institutions, having privatized two commercial banks and being in the process of privatizing two more, eliminating credit ceilings, establishing an auction of treasury bills, limiting the volume of subsidized and directed credit, reducing the degree of concessionality in subsidized credit and eliminating foreign exchange cover, and opening up the capital account.
A program of monetary, fiscal and trade policy reforms is being supported by the
International Monetary Fund under ESAF.
3. Notwithstanding the strides made thus far in financial sector reform, the Government of Pakistan plans to continue the reform process in order to address a number of important remaining issues. These would be as follows:
(a) SBP will carry out a program to contain the flows of credit to the private sector through financial intermediaries to a level corresponding to overall increase in private sector credit.
Further, the rate of return at which SBP lends these funds will be linked to the returns on treasury bills. By August 1997 the

Appendix A
Page 8 of 10 rate in general will be brought at par with the treasury bill rate.
(b) SBP is moving towards indirect control of monetary and credit aggregates principally through open market operations. To facilitate this process, the Government of Pakistan will begin to issue quarterly estimates of its sales of debt instruments to the public through auction. So long as non-price mechanisms of monetary control, such as credit deposit ratio, continue to be used, SBP will take steps to ensure that they do not discriminate among classes of financial intermediaries and among non-governmental users of credit.
(c) In order to promote competition and the most efficient provision of financial services taxation, prudential regulations, and other rules applying to financial institutions and instruments will be progressively adjusted to create a level playing field. To that end SBP is carrying out a study to apply prudential regulations by activity rather than by type of institution. Government has decided not to issue any new debt instruments with tax exemptions. Government intends to phase out the tax exemptions of all financial firms by July
1996, except joint ventures in which tax exemption is established by treaty and the dividend income of mutual funds and modarabas acting as mutual funds. The privileged access of NIT to new corporate equity issues will also be reduced gradually and compulsory reinsurance and right of first refusal of PIC will be phased out over a period of 3 to 5 years.
(d) Prudential regulations of financial institutions *vill continue to be strengthened and their application is being made more effective. To this end, maximum exposure of a financial institution to a group of related firms will be defined and applied in a phased manner. SBP has prepared a program to require all NBFIs including DFIs, over time, to provision for non-performing loans and to suspend interest according to the same rules as applying to commercial banks. At an appropriate time, when financial institutions have been further strengthened, all financial institutions will be required to publish audited financial information prepared according to internationally recognized standards. SBP will prepare a program to require all financial institutions over time to meet capital adequacy standards defined according to risk weighted assets.

34
Appendix A
(e) So far the financial system had not been able to provide significant amounts of long-term credit. To correct this deficiency the Government will carry out a study to identify the major obstacles discouraging financial institutions in providing long-term credit, including interest rate controls, loan recovery problems, and any legal or regulatory deterrent to firms' and financial institutions' issuing floating rate and fixed rate long-term debt instruments. Bottlenecks so identified will be removed. Investment rules governing insurance companies will be reviewed to encourage these institutions to invest in prudent levels of private sector equity and debt instruments. Government will review desirability of issuing long-term variable rate debt instruments.
(f) Securities markets, particularly equities markets have developed markedly in Pakistan in recent years. Nevertheless, several additional measures will be undertaken to promote a deeper and more competitive market. The Corporate Law
Authority will be reorganized to create an independent wing to administer securities regulations. CLA will review ways of promoting issue and trading of corporate debt, including convertible bond instruments and to create the environment for trading in commodities futures contracts. CLA will allow firms issuing securities full freedom to price those securities and will promote the development of an over-the-counter equities market.
(g) The failure of financial institutions to recover their loans, especially long-term loans has been due in part to shortcomings in the legal system. The Government has already increased the number of Banking Tribunals (and has decided to combine the function of the Special Banking Courts and the
Banking Tribunals in the same persons, wherever necessary).
In addition, the Government has established a Task Force to examine ways of overcoming the shortcomings of the system of debt recovery, and in particular, of improving the legal environment for such recovery, and will carry out its recommendations as considered appropriate.
(h) The Government is undertaking a comprehensive program of technical assistance, including both consultant's services, training and equipment, for SBP, CLA and CI to strengthen their ability to promote a more competitive and efficient financial system.

Appendix A
Page 10 of lO
4. In the context of these developments, the Government of Pakistan would like to request the World Bank to provide a credit line of US$ 216.0 million, including a component for technical assistance, for long-term project financing.
The line of credit will be used to finance industrial projects through eligible private and public sector financial intermediaries on the basis of a counter guarantee from the approved financial institutions.
S. Government of Pakistan will look forward for an early response from the World Bank to the proposal.
With best regards,
t.
4
on
Mr. Lewis Preston,
President,
The World Bank,
Washington, D.C.

36
IMPLMENTATION COMPLETION REPORT
PARISTA
THIRD INDUSTRIAL INVESTMEMNT CREDIT
(Ln. 3019-Pak / Cr. 1982-Pak)
Appendix 2
Pagel of2
Evaluation Report By The Government
Third Industrial Investment Credit amounting to US$150 million including US$2 million IDA credit as Technical Assistant was approved in
January, 1989 and made affective on June 16, 1989. The loan was closed on
December 31, 1995, for all practical purposes. And amount equivalent to about
US$10 million remained un-utilized and therefore, cancelled.
PROJECT OBJECTIVES
The objectives of the IIC-III were:
(I) To assist in financing such productive facilities and resources in Pakistan as will contribute to the economic and social development of the country and to this end,
(a) improving the credit delivery system for industrial finance;
(b) continuing the institution building programs of PFIs;
(c) accelerating equity market development; and
(d) focusing on selected corporate finance issues relevant to industrial growth.
The industrial sector in Pakistan is a very important and a dynamic segment of Pakistan's economy and plays a major role in achieving GOP's economic and social sector. Of this, the role of medium to large scale industrial sector is more significant and meaningful as a major contributor of corporate taxes and provider of employment. In this context, the role of private sector is even more important reflecting GOP's greater emphasis on the development of private sector. The objectives of the IIC-III (for medium and large sized projects) were framed keeping in view the lessons learned from the
IIC-I and IIC-II projects which improved the system of industrial finance involving the major development and commercial banks and took measures to further develop the stock market. The objectives thus were consistent and realistic keeping in view the long term perspective of the financial and industrial scenario in Pakistan.
ACHIEVZMENT OF OBJECTIVES
The objectives of the project were achieved to a great extent with the help of World Bank appraisal and implementation missions at different intervals providing useful guidelines for the successful implementation of the

37
Appendix 2
Page 2 of 2 project. Under the circumstances, design of the project was suitable to the then prevailing conditions which facilitated in the smooth implementation of the project. The commitment on the part of the Government of Pakistan towards liberalization, deregulations and privatization which has substantially expanded the role of private sector has also played significant role in providing an impetus and incentive to the sub-borrowers of the project. The project significantly contributed towards mobilization of foreign exchange resources which were used to import sophisticated machinery which helped particularly in the development of textile sector. Needless to mention that textile exports contributed substantially towards foreign exchange earning and
GDP growth besides creating sufficient number of additional employment. As most of the sub-projects were established in relatively under developed areas of the country, the project proved useful towards Government policy aimed to reduce intro-regional economic dis-equilibrium. In the overall context the country has benefited by the project in terms of foreign currency funds, development of industrial sector, creation of new jobs, production of exports oriented products, substitution of importable goods, development of socioeconomic activities and broadening of the industrial base coupled with the transfer of technology. At micro level, the participating institution gained sufficient experience and benefited in terms of increased efficiency and profitability through increased business activity with improved methods and skills.
As regards Technical Assistance component the PFIs have their reservations regarding some procedural problems in the administration and management of bank's fund. It has been suggested that in future greater amount may be allocated for human resource development and technical advancement and the World Bank should lend support in selection of suitable training programs with a view to improve institutional building on long-term basis. There is also a need to strengthen coordination and supervision of the projects launched in future both on the part of the Bank as well as by the Government.
Received on May 22, 1996

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IMAGING
Report No:
Type: ICR
15731