The World Bank. Document of FOR OFFICIAL USE ONLY. Public Disclosure Authorized. Report No Public Disclosure Authorized

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1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No. 965 Public Disclosure Authorized PROJECT PERFORMANCE AUDIT REPORT ON GREECE SECOND AND THIRD DFC LOANS (665 and 791-GR) NATIONAL INVESTMENT BANK FOR INDUSTRIAL DEVELOPMENT S.A. December 31, 1975 Public Disclosure Authorized Public Disclosure Authorized Operations Evaluation Department 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.

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3 FOR OFFICIAL USE ONLY PREFACE This report covers an audit of achievements under Loans 665-GR and 791-GR to the National Investment Bank for Industrial Development, S.A. (NIBID), a privately-owned Development Finance Company in Greece. Loan 665-GR, for US$20 million, was approved in March 1970 and closed in March Loan 791-GR, for US$25 million, was approved in October 1971, and the closing date is set for December 31, Over 99 percent of Loan 791-GR has been disbursed. The report integrates, in one document, the findings of the Project Completion Report of May 8, 1975 (covering both loans) prepared by the EMENA, IC & DFC Division, and observations made by the Operations Evaluation Department on the basis of loan files, country economic analyses, discussions with Bank staff, and a short visit to Greece in which discussions took place with NIBID management and with several Greek economists. The report concentrates on a few important issues which arose during the period covered by the two loans. Currency Equivalents (Greek Drachma) Up to March 8, 1975: US$1.00 = Dr 30 Dr 1 = US$0.03 After March 8, 1975: Floating exchange rate averaging US$1.00 = Dr 30 Dr 1 = US$0.03 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.

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5 PROJECT PERFORMANCE AUDIT REPORT GREECE SECOND AND THIRD DFC LOANS (665- AND 791-GR) TABLE OF CONTENTS Page No. SUMMARY... o... i-iv I. Introduction... 1 II. Objectives of the Loans and Expectations of the Bank III. Financing Greek Industrial Growth and Modernization 3 A. Supply of Resources to the Manufacturing Sector 3 B. Resource Mobilization C. Capital Market Development... 6 D. Financial and Economic Impact... 8 IV. Institution-Building Efforts by the Bank A. Project Appraisal... o Technical Appraisal Economic Appraisal... o Financial Appraisal B. Bank Recommendations to NIBID - their General Value C. Follow-up and Supervision D. Lack of Internal Coordination and the Staff Constraint V. NIBID Influence on Sub-project Design VI. Financial Results VII. Conclusions

6 TABLE OF CONTENTS (Continued) List of Annexes 1. Income Statements: Forecast and Actual ( ) 2. Balance Sheets: Forecast and Actual ( ) 3. NIBID Operations: Forecast and Actual ( ) 4. Loan 665-GR, Sub-project Financing, Overruns, and Completion Time 5. Loan 791-GR, Sub-project Financing, Overruns, and Completion Time 6. Sub-projects Above the Free Limit: Loan 665-GR 7. Sub-projects Above the Free Limit: Loan 791-GR 8. NIBID Operations: Sectoral, Geographical and Size Distribution and Type of Projects 9. Performance Indicators for Greek Industry 10. Characteristics of NIBID Sub-projects (Above the Free Limit) 11. Sectoral Distribution of NIBID Lending Compared to Greek Industrial Production 12. NIBID's Non-financial Assistance to Sub-projects Financed Under Loans 665-GR and 791-GR

7 SUMMARY The Bank's second loan to the National Investment Bank for Industrial Development S.A. (NIBID), Loan 665-GR, for US$20 million, was approved in March 1970, fully committed by June 1972, and closed in March The third loan, 791-GR, for US$25 million, was approved in October 1971, and fully committed by September 1974, a half year behind schedule, and the closing date is set for December 31, Only US$37,000 remained undisbursed as of June 30, NIBID's disbursements as a percentage of manufacturing sector investment averaged 9.3% over the period covered by the two loans, and investment by NIBID-assisted projects equalled approximately 25 percent of total manufacturing sector investment. Commitments, disbursements, and equity investments were higher than projected for the years during which Loans 665 and 791 were committed. NIBID's profitability from 1970 to 1974 has outpaced the projections made in the appraisals for both loans. NIBID has a competent staff, a good financial position, and a sound loan portfolio. NIBID was unable to raise significant amounts of foreign exchange and domestic currency from other than concessional sources, although the appraisal report for Loan 791 strongly recommended that it do so. As a result, foreign borrowings fell short of projections made in the two appraisal reports, although borrowings from traditional sources, including the National Bank of Greece and the Bank of Greece, exceeded projections. In retrospect, NIBID probably did not need additional resources since (1) the volume of good projects coming forward was insufficient and NIBID was not promoting and designing projects itself; (2) NIBID had a severe staff constraint; and (3) any shortfalls in NIBID's resource needs were made up for by its parent, the National Bank of Greece (NBG), which was effectively mobilizing resources, mainly through time deposits. Since the drachma was convertible for capital goods imports, the distinction between foreign and domestic currency resources was not of great significance. Availability of long-term resources for lending to industry does not appear to have been an impediment to industrial growth in Greece. It was rather the demand for such resources which was inadequate as indicated by the competition for scarce projects between NIBID, the Covernment-owned Hellenic Industrial Development Bank, the Investment Bank of Greece, and commercial banks. The latter are required to make long-term loans of an amount equal to 15 percent of the value of their deposits. NIBID contributed to capital market development by significantly increasing its equity investments from 9% of approvals in 1970 to 24% in 1973, and has since maintained this high ratio. Another major contribution was its promotion (and 50% participation in the management company)of the Delos Mutual Fund, which can invest in Greek listed and unlisted securities, foreign

8 - ii - securities and short-term moneymarket instruments. There were some 4,300 unit-holders by the end of The Mutual Fund, by buying NIBID's equity shares in enterprises, permits NIBID to distribute and revolve its portfolio indirectly and assists NIBID in achieving the objective of a wide distribution of company ownership in a situation in which enterprises hesitate to list their shares publicly. The growth and modernization of Greece's industrial sector has been rapid and the limited existing evidence indicates that NIBID subprojects have performed at least as well as, and perhaps better than, the average. The export effort of enterprises financed by NIBID was considerable. The percentage of sales exported equalled approximately 30% for subprojects financed under Loan 665-GR, and 20% under Loan 791-GR. These ratios compare favorably to that for Greek manufacturing as a whole for which in 1973 and 1974 approximately 10% of output was exported. NIBID neither made nor was expected to make a special contribution to the geographical dispersion of industry. The average investment cost per job created by projects in which NIBID was involved is quite high, both in comparison to that of other DFCs assisted by the Bank outside continental Europe and in comparison to Greek industry as a whole. This ratio, which moved from $39,000 per man in 1970 to $48,000 in 1973, can be attributed to a heavy concentration on financing the expansion and modernization of existing plant especially that of the more modern Greek enterprises. NIBID, with the Bank's support, improved the quality of some of its technical appraisals during the period covered by Loans 665 and 791 by contracting them out to the ArthurD. Little-Hellas consulting firm which was promoted by NIBID. However, the firm's establishment in Greece was somewhat premature; Greek enterprises were still too small to make efficient use of its advice and to pay its high fees. The firm was liquidated in NIBID has fulfilled the objective of facilitating contracts and joint ventures between Greek and foreign entrepreneurs, as well as the objective of supplying economic, technical, and organizational advice to enterprises. The Bank suspected that some of NIBID's projects were not economically viable, and consistent with Bank policy at the time, established the objective that an indicator of economic viability be used in evaluating sub-projects under these loans. During the period under review, NIBID did not conform to this objective for the following reasons. Firstly, as in the case of other privately-owned DFCs, the indicator was not consistent with financial objectives because it might have excluded from NIBID's lending activity some projects for which other banks in Greece competed in a situation

9 - iii - in which financially sound projects were in short supply. Secondly, NIBID had a staff constraint, in part caused by its inability to pay higher salaries, which prevented it from searching for both financially and economically viable projects, and from assisting in the improvement of the financial situation of projects which were economically sound, but financially non-viable. Thirdly, the Bank was unable to convincingly demonstrate to NIBID's satisfaction that the measurement of economic viability was useful when the appropriate international prices were difficult or impossible to establish, which NIBID claimed was the case for nearly all projects which were not export oriented. Finally, the Bank was unable to adequately define to NIBID's satisfaction the role that the measurement of economic viability was to play in the appraisal process. However, NIBID now includes an economic analysis in its evaluation of sub-projects, which suggests that the Bank's efforts have had some impact. Bank advice dealing with methods of financial appraisal was somewhat inconsistent between the appraisal reports for the first three Bank loans to NIBID. Bank advice would have been more useful had an identifiable and plausible standard been used upon which to base recommendations about financial appraisals. The objective mentioned in the Loan 791 appraisal report that NIBrD prepare full progress reports on all clients, although apparently considered by the Bank staff to have represented NIBID's preference at loan negotiations, is now seen by NIBID to have been a Bank objective with which it was not fully in accord. NIBID felt that such reporting would have been of limited value either to NIBID or to its clients, and would have resulted in a dilution of NIBID staff resources which NIBID preferred to concentrate on problem projects. There is some evidence that the large and increasing volume of detailed information on sub-projects required by the Bank from NIBID has not led to an improvement in the quality of Bank advice or in the Bank's understanding of NIBID's problems, sufficient to offset the cost of this added burden on NIBID. The objectives of Loans 665-GR and 791-GR were generally met. The loans reduced Greece's balance of payments constraint, and were the catalyst for lending to NIBID by the National Bank of Greece and the Bank of Greece. Resources provided to NIBID by both of these institutions (which along with the Bank have provided about 95% of NIBID's resources) were contingent upon Bank support for NIBID. Since NIBID's developmental activities such as its technical and other non-financial assistance, its lending criteria, and its contribution to Greek capital market development, were of a higher quality than that of its competitors, and since these developmental activities appear to have contributed to Greek manufacturing sector development, the two Bank loans were justified. include: Important lessons for the Bank to be drawn from the two loans

10 - iv - (a) the importance of making loan objectives explicit; (b) the importance of specifying how and when the economic analysis of sub-projects can be most constructively and positively employed. (c) the need for carefully considering the benefits and costs to a DFC of Bank-imposed information requirements; and (d) the need for inquiring carefully into the extent to which full progress reports should be prepared by the DFC on its clients.

11 PROJECT PERFORMANCE AUDIT REPORT GREECE SECOND AND THIRD DFC LOANS (665- and 791-GR) I. Introduction 1.01 The second loan to the National Investment Bank for Industrial Development S.A. (NIBID), Loan 665-GR, for US$20 million was approved in March 1970, became effective in July 1970, was fully committed by June 1972, and was closed in March The third loan, 791-GR, for US$25 million was approved in October 1971, became effective in March 1972, was fully committed by September 1974, a half year behind schedule, and the closing date is set for December 31, US$37,000 was undisbursed as of June 30, NIBID was established in 1963 by the National Bank of Greece, a commercial bank. The first Bank loan of US$12.5 million was approved in March There have been two loans subsequent to Loan 791, including a loan for US$15 million approved in November 1973 and a loan for US$25 million approved in May Total Bank lending to NIBID amounts to US$97.5 million. II. Objectives of the Loans and Expectations of the Bank 2.01 As was the case with other DFCs receiving Bank loans in 1970 and 1971, the Bank's objectives in making Loans 665 and 791 were not made explicit. In addition, there was no indication of the degree to which NIBID shared the Bank's implicit objectives and expectations in regard to NIBID's operations. The following objectives, implied by the Bank policy papers of the time, NIBID's "Statement of Policies and Procedures," and the appraisal reports, were largely met. These included: (i) The financing of Greek industrial growth and modernization by lending to, or investing in, enterprises with good financial and economic prospects. Resources were to be mobilized, conditions permitting, from both non-concessional and concessional sources in addition to the World Bank during the period of commitment of the two loans. NIBID was also expected to indirectly contribute to the financing of industry by assisting capital market development both through equity participations and by revolving its equity portfolio.

12 -2- (ii) (iii) Assisting NIBID in "facilitating contracts and joint ventures of Greek and foreign enterpreneurs to promote the participation of foreign capital and technical and managerial skills in the development of the Greek economy." A related NIBID objective was to "supply economic, technical, and organizational advice to enterprises." Assisting NIBID to strengthen itself institutionally, specifically by: 1. For Loan 665-GR - (a) improving appraisal of financial and economic prospects of clients; (b) improving technical aspects of appraisals, in part by appointing a second engineer; (c) improving the organization of the follow-up and supervision department; (d) increasing leverage in order to improve profitability which would facilitate additional borrowing; (e) increasing equity investments. 2. For Loan 791-GR - (a) improving appraisal of economic aspects of projects; (b) achieving the goal of one follow-up report each year for each client; (c) improving internal coordination and procedures; (d) revolving its equity portfolio; (e) improving its earnings.

13 -3- III. Financing Greek Industrial Growth and Modernization A. Supply of Resources to the Manufacturing Sector 3.01 NIBID's disbursements as a percentage of manufacturing sector investment averaged 9.3% over the period covered by the two loans and investment by projects assisted by NIBID equalled approximately 25 percent of total manufacturing sector investment. Commitments, disbursements, and equity investments were higher than projected for the years during which Loans 665- and 791-GR were committed. Similarly, the increase in total assets outpaced projections made in the appraisal for Loan 665-GR, but fell slightly short of those made for Loan 791 up to The impact of this good performance was reduced somewhat by price inflation; the consumer price index increased at an average rate of 3.7 percent per year between 1970 and 1972, 16% between 1972 and 1973, and 27 percent from 1973 to Forecast 665-GR Forecast 791-GR Actual (Prepared in 1970) (Prepared in 1971) '73 '74 '71-'74 '73 '74 '71-'74 '73 '74 '71-'74 (average) (average) (average) Commitments* 1,075 1,180 1,028 1,560 1,730 1,490 1,668 2,065 1,522 Disbursements* 1,027 1, ,480 1,670 1,423 1,647 1,869 1,486 of which, equity *Millions of drachmas. B. Resource Mobilization 3.02 NIBID was unable to raise significant amounts of foreign exchange and domestic currency from other than concessional sources. The appraisal report for Loan 791 recommended that NIBID borrow $40 million from abroad, issue partially convertible domestic bonds of Drs 300 million, and increase capital by issuing shares of Drs 215 million (of which Drs 150 million was to be a rights issue at par and the remaining Drs 65 million was to be subscribed by the public). The Bank also established the objective of improving the rate of return on equity through an increase in leverage primarily in order to increase NIBIDIs attractiveness to potential customers for NIBID's bonds. NIBID committed itself verbally to these objectives during negotiations.

14 3.03. From its establishment in 1963 to December 31, 1974, NIBID undertook long-term borrowings of approximately $253 million equivalent, of which 33 percent was supplied by the Bank of Greece, 35 percent by the National Bank of Greece (the commercial bank which founded NIBID) 29 percent by the Bank, and 3 percent by NIBID's European shareholders. Borrowing from the Bank of Greece and the National Bank of Greece exceeded the target established in the appraisal reports. Foreign borrowings fell short of projections. Commitments out of Bank funds as a proportion of total NIBID commitments have declined from a high of approximately 33 percent from mid-1968 to mid-1970, to 27 percent from mid-1970 to mid-1972, and further to 17 percent from mid-1972 to the end of 1974, the difference made up by the Bank of Greece and the National Bank of Greece NIBID had not attempted seriously to tap the international capital market until the autumn of 1971, although it borrowed US$2.2 million from its foreign shareholders in However, NIBID has since made several attempts in this area, including (1) discussion with a group of European banks in the autumn of 1971 on NIBID's possible borrowing from them at an interest rate close to 8% p.a.; (2) negotiation with its European shareholders to borrow US$16.7 million equivalent in the autumn of 1973, after NIBID had already obtained the approval of Greek authorities; and (3) discussion with Kuwait in the first half of 1974 on a loan equivalent to US$15 million at an interest rate of 8.5% p.a. None of the above attempts succeeded during the period of commitment of Loans 665 and 791. The reasons for this lack of success were: (a) difficulty in passing on the foreign exchange risk to sub-borrowers since drachma loans were fully convertible for imports of capital goods, and since NIBID's major competitor, the Government-owned Hellenic Industrial Development Bank, was taking the exchange risk on its loans to industry; (b) the Central Bank's reluctance to extend its coverage of the exchange risk from IBRD loans to other foreign exchange loans to NIBID, although the Central Bank is willing to cover the foreign exchange risk on loans obtained from the European Investment Bank; (c) given foreign exchange controls (the drachma was convertible only for capital goods imports), the inability of NIBID to hedge against foreign exchange risks on its borrowings; (d) the interest rate ceiling for industrial loans, which prevented NIBID from on-lending the foreign resources raised at prevailing market rates in the international capital market at a reasonable spread; (e) political uncertainty.

15 -5- Given NIBID's and the Bank's concern with NIBID's low profitability, it was understandable that NIBID did not raise foreign exchange resources Regarding resource mobilization in the local market, NIBID only succeeded in issuing preferred, non-voting shares of Drs 150 million at par to existing shareholders in 1972, who in turn sold them to the public at market prices; the Bank provided valuable technical assistance to NIBID in this endeavor. NIBID's failure in bond issues can be attributed to the fact that the Greek bond market has been dominated by the Government and the yields required for NIBID's issues would have been prohibitive. NIBID charges the maximum legal rate of interest, which has varied from 7.5 percent to 10.5 percent over the period covered by Loans 665 and 791. The spread between NIBID's lending rate and the rate it pays for funds from the National Bank of Greece and the Central Bank has been about 2.5 percent. It is legally permissible for NIBID to add to its lending rate a profit-tied increment which has varied between 1 and 1-1/2 percent. However, as a result of the competition for projects between lenders of long-term capital, NIBID almost always charges a lower profittied increment than is permitted In retrospect, NIBID would probably have been unable to utilize additional resources effectively since (1) the volume of good projects coming forward was insufficient (there was a situation of excess liquidity in Greece and a general scarcity of projects which was reflected in the competition for projects among lenders of long-term capital), (2) NIBID was not identifying and designing projects itself and the Bank did not encourage it to do so until recently; and (3) NIBID had a severe staff constraint and would probably have been unable to approve a significantly greater number of projects. These problems were in part the cause of the half-year delay in the commitment of Loan 791. In addition, any shortfall in NIBID's resource needs was made up by its parent, the National Bank of Greece (NBG), which was mobilizing term funds through saving deposits and, by providing them to NIBID at a slight spread over deposit rates, was effectively converting them into long-term capital for investment in industry. The only shortcoming was that NIBID wished to increase its independence from NBG, and resource mobilization from non-concessional sources would have furthered this objective NIBID was mobilizing resources indirectly by bringing Greek and foreign enterprises together in joint ventures. NIBID is now considering ways in which to mobilize resources by making use of supplier's credits as well as of US.Export-Import Bank credits. NIBID has entered into profitsharing arrangements with some of its clients, thereby obtaining a greater share of the benefits of successful projects than would be obtained through interest payments on loans. Finally, resources from the pension funds managed by the Central Bank (the Bank of Greece) will be provided to NIBID.

16 Resource mobilization for long-term lending to industry does not seem to have been an effective constraint to industrial growth in Greece. Long-term lending to industry has been undertaken by NIBID, the Hellenic Industrial Development Bank (HIDB) which is 100% Government owned, the Investment Bank of Greece (85% owned by the Commercial Bank of Greece), and the commercial banks which are required to channel 15% of their term deposits into long-term loans. NIBID's position in this banking environment has been difficult, firstly because it had to compete with the HIDB, known for taking up the exchange risk itself, and applying less stringent lending criteria than NIBID. Secondly, NIBID is not financially independent from the National Bank of Greece (NBG), with which it competes for scarce projects. Fifty-five percent of NIBID's shares are held by NBG, and NBG appoints 11 of the 20 members of NIBID's board of directors, including the managing director. Although there is no evidence that NIBID has been forced to give up good projects to NBG, NIBID has attempted to - increase its independence-from this institution. The Bank by providing funds to NIBID, and thereby offering it the prestige of Bank support has assisted NIBID in maintaining a large degree of operational independence from NBG, and has additionally assisted NIBID in its successful effort to keep its operations free of political influence. The low-interest loans obtained by NIBID from the Bank of Greece were provided on the condition that resources be obtained from the World Bank. There is also reason to believe that lending to NIBID by the National Bank of Greece would have been at a much lower volume had the World Bank not been lending to NIBID. C. Capital Market Development 3.09 The appraisal reports stated that NIBID should increase its contribution to Greek capital market development by increasing its equity investment and assist in the expansion of the ownership of capital in Greece by making sales from its equity portfolio. This objective began to be met in 1972 when 20% of approvals were for equity investments (compared to 2.5% in 1971, and 9% in 1970) and this increased volume has been maintained since. As of March 31, 1973, NIBID had loans and equity investments outstanding totalling Drs 4,183 million ($139 million equivalent) in 235 companies. Of this, Drs million (7%) was in equity participations outstanding in 31 companies. By December 1974, NIBID had equity participations in 55 companies, with an acquisition cost of 950 million drachma, or approximately 13% of the total equity and loan portfolio. However, by December 1974 only five of these companies were listed on the Athens Stock Exchange, because of the predominance in Greece of family-owned and tightly-controlled enterprises which resist broadening their ownership base. As of December 1974, the aggregate market value of NIBID's holdings of quoted stock was equivalent to 160% of acquisition value. Equity participations have played a significant role in raising NIBID's profitability since capital gains have increased steadily.

17 -7- (in million drachmas) Sales of shares Realized capital gains Realized capital gains as a percentage of total profits before provisions 10% 32% 35.5% Source: National Investment Bank for Industrial Development Annual Report 1973, p NIBID's second contribution to capital market development, and hence indirectly to resource mobilization, was through its promotion of the Delos Mutual Fund, its 50 percent participation in the management company of the Mutual-Fund, and its purchase of 50,000 Fund units of Dr 500 each. The Fund began selling its units in April NIBID, along with the other two shareholders in the management company (including DEGAB, which is a subsidiary of Deutsche Bank A.G., and the Hellenic Shipowners Company) form the Mutual Fund's Investment Committee. NIBID is prevented from dumping its least desirable equity into the mutual fund as a result of the fund's rule that investment decisions must be unanimously taken by the Investment Committee, Purchasers of units have no input into investment decisions. At the end of 1974 the number of units in circulation was 726,000 and the total assets of the Fund equalled Dr 410 million (about US$13.7 million). There were approximately 4,300 holders of units in December The mutual fund can invest in Greek listed securities, foreign securities, Greek unlisted shares, and short-term moneymarket instruments. The Mutual Fund, by buying NIBID's equity shares in enterprises, permits NIBID to distribute and revolve its portfolio indirectly. NIBID can also sell its unlisted shares to the fund, thus allowing investors to benefit from the growth of companies in which they cannot invest directly. The Mutual Fund is an interesting vehicle through which the objective of a wide distribution of company ownership might be attained in a situation in which enterprises hesitate to list their shares. Unfortunately, the Mutual Fund did not have the growth of assets expected, in part due to the decline in share prices on the Athens Stock Exchange and in part due to poor management. The stock market underwent a speculative boom in 1972, caused by excess liquidity, increased prosperity, restrictions on the outflow of capital, and the desire of Greek investors to offset inflation by getting more than the 5%-7% return available on bank deposits. The Government curbed the speculation in December 1972 by dumping blocks of listed shares'onto the market from the portfolios of public enterprises, bringing stock prices down. Although there was a recovery in 1973, this experience, along with another decline in 1974 resulting from political instability, has inhibited greater investor participation in the stock market and the Mutual Fund.

18 The Bank's role, as well as that of IFC, in the creation of the Mutual Fund was essentially one of discussing with NIBID the obstacles to its development and the risks involved, including the possibility of a conflict of interest between NIBID and the Mutual Fund in stock transactions between them. D. Financial and Economic Impact of NIBID Sub-projects 3.12 Assistance was provided to 3 new and16 expansion projects under Loan 665 (see Annex 4), and 4 new and 29 expansions under Loan 791 (see Annex 5). Approximately 64 percent of NIBID financing of projects assisted under the two loans was provided by the Bank. NIBID assistance covered approximately 34 percent of total project costs under Loan 665 and 47 percent under Loan Information on ex-post economic and financial rate of return, value added, etc., does not exist for the sub-projects financed under the two loans, making a definitive statement as to their economic viability impossible The economic environment in which NIBID sub-projects operate has been exceptionally dynamic during the period of the two loans. Greece's exports of manufactures quadrupled from $273 million in 1970 to approximately $1,132 million in The share of exports of manufactured goods in total exports increased from 23% in 1967 to 45% in 1970 and rose continuously each year thereafter reaching 64% in Manufacturing sector output increased at an average rate of 13% in real terms over the period, but failed to increase in Annex 9 provides performance indicators for twenty manufacturing sector industries in Greece. The industries whose exports expanded the fastest over the period were electrical equipment, machinery and appliances, furniture and wood products, clothing and textiles, and non-metallic minerals. Industries in which production grew most rapidly were plastics and rubber, chemicals, basic metals, electrical equipment, beverages, and textiles. Productivity, measured as value added to labor employed, has increased at an average rate of 9.5 percent per year over the 1963 to 1971 period, with textiles and non-metallic minerals showing the most rapid increases Column 2 of Annex 11 shows the percentage of NIBID financing under Loans 665 and 791 which went to each industry, and in Column 3 is shown the percentage contribution by each Greek industry to total Greek manufacturing sector production. NIBID's sub-projects were approximately twice as concentrated in textiles, non-metallic minerals, and wood products as were these industries in Greek industrial production. NIBID's financial and technical assistance was important to the development of the woodworking industry. NIBID sub-projects were approximately one-third as concentrated in food, beverages and tobacco, chemicals, and clothing and footwear as was Greek industry as a whole Most of the companies financed by NIBID are medium sized, with fixed assets below Drs 50 million (US$1.7 million). Greece's manufacturing sector has a large proportion of small enterprises, with 65% having

19 -9- fixed assets below Drs 50 million in In 1969, when the last industrial census took place, Greece had approximately 127,000 manufacturing sector establishments of which 87% had fewer than 5 employees Exports as a percentage of sales equalled approximately 30 percent for sub-projects financed under Loan 665, and 20 percent under Loan 791. These ratios compare favorably to that for the Greek manufacturing sector as a whole, from which in 1973 and 1974 approximately 10 percent of output was exported. Scrutiny of Annexes 6 and 7 indicates that for Loan 665, out of 16 "A" projects for which data are available capacity utilization of only two was low. One project was operating at 21% capacity (as the result of a poorer export market than foreseen) and a second at 60%. All other projects were operating at 70% or above. For Loan 791, out of 16 "A" projects for which data are available, one project was operating at 33% of capacity (the system of product distribution does not work adequately), and two others in the 60-70% range. All others were operating at 70% capacity utilization or above. Thus, 16% by number of NIBID sub-projects for which data are available were operating at low levels of capacity utilization in 1974, although in only two cases (6% by number) do very serious problems in this regard appear to exist NIBID's projections for the costs of projects and dates of completion were for the most part accurate, the most important exception being Hellenic Owens Glass Co., S.A. In this case the cost overrun and delayed completion occurred as the result of an unexpected technical problem in the production facilities for which the foreign partner was allegedly responsible NIBID neither made nor was expected to make a special contribution to the geographical dispersion of industry. Approximately 45% of its sub-projects were still located in the developed area of Athens-Piraeus by the end of This concentration has dropped, and only 19% of subprojects financed in 1974 were located inside this area. This decline in geographical concentration was largely the result of the availability in regions outside Athens-Piraeus of low-cost labor, Government investment incentives, and expanding infrastructure facilities. The movement toward geographic decentralization of NIBID lending is in line with a similar tendency of Greek industry as a whole The average investment cost per job created by NIBID-assisted projects evolved from $39,000 in 1970 to $48,000 in This is quite high compared to sub-projects of other DFCs assisted by the Bank of which a sample is shown below:

20 - 10 Actual Fixed Investment per Employee: Projects Completed in the Early 1970s ICICI IMDBI KDFC BDET TSKB India Iran Korea Tunisia Turkey $9,000 $12,100 $13,200 $11,000 $11,600 It is also high compared to the approximate average for 1,311 Greek manufacturing sector firms sampled by the Federation of Greek Industries in 1971, which was $19,900 measured in 1972 prices. This resulted in part because NIBID's financing was heavily concentrated in expansion projects, in part because it was financing the more modern enterprises in Greece, and in part because it was assisting the modernization of industry, which, to be competitive with industry in the Common Market, will be forced to use relatively capital-intensive technology. The Finnish DFC assisted by the Bank (IFF) is in a similar position and shows a capital labor ratio of $46,000. NIBID was never expected to make a significant direct contribution to employment generation, and Greece has not recently had a significant employment problem although this is partly the result of workers', migration abroad NIBID's concentration in expansion projects reflects its conservative lending criteria, its goal of rapidly establishing a financially sound portfolio and the rapid growth of existing firms. Projects submitted by established sponsors were judged to have a greater likelihood of financial success. The Bank never questioned the desirability of NIBID's concentration in expansion projects, primarily because the expansion and modernization of existing facilities is perhaps the cheapest way to develop industry, where there is already an industrial base The growth and modernization of Greece's industrial sector has been rapid and the evidence which exists indicates that NIBID sub-projects have performed at least as well, if not better, than the average. IV. Institution Building Efforts by the Bank A. Project Appraisal 4.01 The appraisal report for Loan 665 stressed the need to improve the quality of economic, financial, and technical appraisal work. The appraisal report for Loan 791 identified a need to improve only economic appraisal, implying that financial and technical appraisal had become satisfactory.

21 Technical Appraisal 4.02 NIBID followed the advice given in the appraisal report for Loan 665 by appointing a second engineer, and followed through on its idea, supported by the Bank, of contracting out more complex technical appraisals to a consulting firm managed by Arthur D. Little, Inc., and financed in part by NIBID. Fees were passed on to sub-borrowers. This system worked satisfactorily during the period covered by Bank Loans 665 and 791 to the extent that those technical appraisals performed by the A.D. Little-Hellas group were improvements over those undertaken by NIBID. NIBID was not in a position to increase its engineering staff by the number necessary to carry out high-quality technical appraisals. The consulting firm was liquidated in 1974, however, because of its inability to find enough clients willing to pay its high fees, its inability to satisfy the expectations of many clients that its advice would be easily implemented, and because clients found it cheaper and adequate for their relatively small projects to obtain technical advice from equipment suppliers. Most Greek industrial enterprises were not of the size and sophistication which would have enabled them to either afford or make good use of advice available from Arthur D. Little and as such the establishment of the consulting firm was premature. There is likely to be adequate demand for the kind of technical consulting services offered by Arthur D. Little in the future as the size and sophistication of Greek enterprises increases In cases where difficult technical problems arise or when a new technology is suggested by equipment suppliers, NIBID requests technical information supplied by the Stanford Research Institute for a fee. This information pertains to technical problems encountered in various industries and with various sorts of machinery, and lists new machinery and processes. It is used by NIBID to suggest project design changes to clients. 2. Economic Appraisal 4.04 The Bank suspected that some NIBID projects were not economically viable, and consistent with Bank policy at the time, set the objective during the negotiation of the second loan, that NIBID undertake economic analysis of projects above the free limit. NIBID did not fulfill this expectation. This failure, according to the Bank, was significant since trade barrier& in Greece were declining as Greece's economy was slowly being integrated into the European Common Market. It was argued that enterprises which were not internationally competitive were not likely to have good long-term financial prospects even though, in the short term, trade barriers permitted substantial financial gain The Bank's attempts at inducing NIBID to improve its economic analysis were not fruitful over the 1971 to 1974 period, and it was only toward the end of 1974 that NIBID began to compute an economic rate of return for its projects. The reasons for NIBID's lack of conformity to this

22 objective were several. Firstly, the indicator was not consistent with NIBID's financial objectives since (i) some financially sound projects could be rejected, and in an environment where financially sound projects were in short supply, NIBID's lending activity might decline; (ii) there was an additional administrative expense which would have been incurred at a time when NIBID's profits were low due to a low gross margin (net profits to total assets varied between 1.8 and 2.3% from 1970 to 1974); and (iii) NIBID's staff shortage, partly caused by its inability to pay higher salaries, would have become even more of a constraint than it was. NIBID wished to establish a financially sound portfolio and increase its profitability in order to assist it to increase its independence from the National Bank of Greece, to satisfy its shareholders' objective of profit maximization, and to facilitate resource mobilization in the future NIBID was also concerned that the indicator of economic viability proposed by the Bank was deficient. Customs duties, the predicted future levels of which are a significant factor in explaining the difference between financial and economic return, were expected to decline in accordance with Greece's commitments to the EEC. In most cases, such duties were not high in As NIBID saw it, this fact obviated, to some extent, the usefulness of the economic rate of return measure. This can be observed by the fact that the average difference in the economic and financial rate of return on sub-projects recently appraised by NIBID is 1.9 percentage points, and the largest difference was registered for a project in which the ERR is 23.4% and the FRR 33.7%. NIBID also complained that international prices, except in the case of exports, were difficult to establish, and the value of the resulting calculation reduced by arbitrariness in the choice of prices. Finally, the Bank had a weak argument when it stated that as a result of Greek entry into the EEC, the calculation of economic return became more important in weeding out projects which were not internationally competitive, since good financial projections should take declining Greek protection into account, especially in determining what future domestic sales price would be Although the Bank vigorously advocated the inclusion in NIBID's appraisal reports of the measurement of the international competitiveness of its projects, the Bank did not appear concerned that this analysis be used in project identification and design. Projects are initially selected by NIBID firstly on the basis of its assessment of sponsors and management, and secondly on its assessment of certain financial indicators. Project appraisal follows this selection and even at present it would be very infrequent that the subsequent calculation of economic return, performed by an independent department within NIBID, would influence project selection or design. However, it is precisely in project selection and design that such a measurement might be useful in Greece, by identifying the few economically viable, but financially non-viable, projects which would normally

23 be rejected by NIBID. This would have been especially useful since viable projects were in short supply. The use of the economic rate of return measurement in this fashion requires its early use in the appraisal process in order to avoid rejection of the project for financial reasons; a DFC can thus demonstrate the need for policy changes which would bring financial return into line with economic return, and, if staff size and quality permits, assist in redesigning economically sound projects so as to make them financially viable. The system of economic appraisal introduced by the Bank merely served, at best, to select out economically undesirable projects from among the financially viable. Emphasis on a more positive role of the economic return calculation would not have removed the difficulties mentioned earlier but it could have helped to strengthen NIBID's resolve to overcome them The Bank's apparent inability to convince NIBID of the relevance and measurability of the economic rate of return, as well as the difficulty of implementing such a measure in NIBID's situation of low profitability, a staff constraint and the competitive banking situation, all explain NIBID's long hesitancy in accepting this recommendation from the Bank. NIBID now employs the indicator in evaluating sub-projects, suggesting that in the long run, the Bank's efforts did have a positive impact. 3. Financial Appraisal 4.09 The appraisal report, for the loan prior to Loan 665 (Loan 530-GR), found NIBID's financial appraisals of sub-projects to be adequate. The appraisal report for Loan 665 took a different stand on this point, finding that "financial details of sub-projects particularly pertaining to the future, are sometimes meagre," although there was no indication whether it was the data which were doubtful or the projections simplistic. The appraisal report for Loan 791 stated that NIBID's financial analyses of sub-projects were conservative "and its portfolio is, as a result, sound," in effect suggesting that NIBID should continue making conservative financial projections. This was an unusual suggestion since in constructing financial indicators useful in project selection, the Bank normally advocates the use of a "best estimate" approach to financial projections. The Bank's usual argument is that conservative estimates can result in the rejection of projects with good expected returns, an undesirable outcome when good projects are scarce. The inconsistencies of the Bank's recommendations between Loans 530 and 665 on the adequacy of NIBID's financial analysis, and its unusual recommendation for Loan 791 suggests that Bank advice would have been more useful had a consistently applied standard been used upon which to base recommendations about financial appraisals. B. Bank Recommendations to NIBID - Their General Value 4.10 NIBID stated that it benefitted from the ideas generated by the Bank, especially when responsibility for the Bank's DFC operations was centralized in one Department, but that this flow has now been reduced. On the other hand, information requirements imposed by the Bank have been steadily increasing. NIBID considered that the advice provided by the Bank and IFC in response to information requested from NIBID was often not very useful. Especially burdensome were requests for additional details on

24 -14- sub-projects before and after their approval by NIBID. The Bank staff did not consider that information requirements imposed on NIBID were excessive, nor that such requirements were greater than those imposed on other DFCs. NIBID's concern that the costs imposed on it by the Bank's information requirements are greater than the benefits of the advice it receives as a result, suggests that more attention may need to be given to the costs as well as the benefits to the DFC of the Bank's requests for information. C. Follow-up and Supervision 4.11 The appraisal report for Loan 665 stated that the organization of the follow-up and supervision departments required improvement but did not specify the nature of the improvements needed. The appraisal report for Loan 791 identified as a problem the ability of the follow-up department* to visit and report on each client-project. A target was set that by 1972 at least one report would be prepared on each client. This is apparently considered by Bank staff to have represented NIBID's preference at loan negotiations, while NIBID sees it as having been a Bank objective. In the event, NIBID determined that such complete coverage would be of limited value either to NIBID or to its clients, and would have resulted in a dispersion of its staff resources, which it preferred to concentrate on problem projects. By 1974, only 36% of NIBID's clients were covered by progress reports. For NIBID, follow-up is used to assure repayment and if necessary to provide assistance to enterprises having difficulty in repaying. In this task the follow-up department has been effective. A review of the arrears situation in the appraisal report for Loan 945, which followed Loan 791, revealed that only six companies representing an outstanding amount equal to 2.2% of total portfolio were experiencing difficulties, andallwere expected to overcome them. NIBID has so far written off only two items in its portfolio, both equity investments: CITEL, N.V. (Drs 3,421,000) and A.D. Little-Hellas, S.A. (Drs 1,000,000). The Bank does not seem to have recognized the fact that much of the supervisory function was effectively carried out by NIBID's parent, the National Bank of Greece, which is the commercial bank servicing nearly all of NIBID's clients. The Bank now finds NIBID's project supervision satisfactory. D. Lack of Internal Coordination and the Staff Constraint 4.12 The appraisal report for Loan 791 stated that NIBID's internal coordination and procedures required improvement. The report suggested the provision of written instructions on operational procedures, and reorganization so that the coordination of activities does not depend entirely on the General Manager. The coordination problem was identified to be most acute in the relation between the Operations Department and the Follow-up Department. The Project Completion Report states that the problem was

25 ameliorated by the reorganization and staff increase of 1972 in the Follow-up Department, and of 1973 in the Operations Department. Also, a change in personnel was said to have improved the situation. NIBID's organizational structure has evolved satisfactorily, to some extent as the result of Bank prodding Both NIBID and the Bank have recognized the existence of a staff constraint on NIBID's operations. This constraint has resulted from the scarcity of experienced people in Greece suitable to NIBID 's requirements, and the attractiveness of alternative high paying employment to NIBID's staff members. NIBID was not entirely successful in overcoming this constraint during the period covered by the two loans, and the Bank could not have been expected to provide any useful advice in this matter. V. NIBID Influence on Sub-project Design 5.01 NIBID has fulfilled the objectives of facilitating contracts and joint ventures between Greek and foreign entrepreneurs, and of supplying economic, technical, and organizational advice to enterprises. Review of NIBID's dealings with a group of sub-projects financed under Loans 665 and 791 revealed that NIBID acquired expertise in certain fields (such as cotton spinning and cement) and that for sub-projects in these fields it influenced equipment selection, size of investment, and operational policies. (See Annex 12 for a list of NIBID non-financial assistance to sub-projects financed under Loans 665 and 791.) NIBID has been inventive in its dealings with its clients. In addition to the use of the services of Arthur D. Little and of information from the Stanford Research Institute, NIBID has facilitated cooperation between clients and has often assisted Greek enterprises in their dealings with foreign enterprises, having arranged agreements with foreign firms for about 15 percent of its clients. NIBID has assisted clients in making use of Government subsidies improving financial structures, and preparing financial schedules. NIBID's participation as a shareholder in Frab-Bank International, a large European-Arab banking institution, will, NIBID hopes, provide an opportunity to attract foreign capital into Greece and help establish business contacts. VI. Financial Results 6.01 NIBID's profitability during 1970 through 1974 has outpaced the projections made in the appraisals for both loans. This is mainly due to capital gains on equity investments which was responsible for from 21 to 48