RETUr !

REPORTS, 7~ RESTRICTED

WY F1 LM- Report No. DB 17a .ON1E WEEK

Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

APPRAISAL OF

THE INDUSTRIAL AND MINING DEVELOPMENT BANK

OF

IRAN Public Disclosure Authorized

May 27, 1965 Public Disclosure Authorized

Development Finance Companies CURRENCY EQUIVALENTS

1 U.S. $ = Rls. 75 1 rial . = U.S. $0. 013 1 million U. S. $ = Rls. 75, 000, 000 1 million rials = U.S. $13, 300 INDUSTRIAL AND MINDIG DEVELOPMENT BANK OF IRAN

TABLE OF CONTENTS

Page

SUM1MARY i

I. DESCRIPTION OF IMDBI 1

Objectives and Powers 1 Resources 1 Organization 4 Procedures 6 Relations with Government 8

II. OPERATIONS AND POLICIES 9

Lending Activities 9 Managed Loans 12 Equity Investments 13 Promotional Activities 14 Policies 14

III. OPERATDIG RESULTS 16

Balance Sheets 16 Profit and Loss Accounts 17 Reserves and Dividends 19

IV. ECONOMIC BACKGROUND 19

Economic Impact of ThDBI 20

V. FUTURE PROSPECTS 21

IMDBI's Forecasts 21 Need for Additional Resources 22

VI. CONCLUSIONS AND RECO1MMENDATIONS 24 LIST OF ANNEXES

ANNEX 1 --- Class A Shareholders

2 --- Class B Shareholders

3 --- Board of Directors and Executive Committee

4 --- Organization Chart

5 --- Loans Signed as at September 22, 1964

A Analyzed by Purpose B Analyzed by Size C Analyzed by Duration D Analyzed by Industry E Analyzed by Location (as at I'iarch 20, 1964)

6 --- Analysis of Arrears as at March 20, 1965

A Among Loans Hade by LifJD3I B Among Loans Transferred to IIMBI

7 --- IBRD Loan No. 240 IRN (as at May 27, 1965)

8 --- Analysis of Mlanaged Funds as at September 22, 196L

9 --- Equity Investments Held as at March 20, 1965

10 --- Restrictions on the Size of Investments

11 --- Balance Sheets - March 20, 1961 to March 20, 1965

12 --- Profit and Loss Accounts - Oct. 14, 1959 to March 20, 1965

13 --- Other Sources of Finance for Industry and Agriculture

1 --- Forecasts - IMiarch 21, 1965 to Mlarch 20, 1967

A Balance Sheets B Profit and Loss Accounts C Cash Flow Statement - IMDBI Funds D Cash Flow Statement - Managed Funds E Assumptions Used in Forecasts SUWIIARY

i. The Industrial and Mining Development Bank of Iran (fIDBI) was estab- lished in 1959 with the primary objective of stimulating private industrial development within Iran. Its share capital of Rls. 400 million is divided into A shares, amounting to 60% of the total and held by Iranian nationals, and B shares, amounting to the remaining 40h and held by foreign investors. The share capital was supplemented by an interest-free long-term advance of Ris. 600 million from the Government which ranks pari passu with the share capital in the event of liquidation. At the time of its formation, DThBI also received two foreign exchange loans of US$ 5.2 million equivalent each from the World Bank and the U.S. Development Loan Fund (now administered by the Agency for International Development). In addition to these resources, loans previously made by two Government agencies totaling Rls. 1,400 million were transferred to IMDBI for management. DfliBI may relend repayments of these loans and receives a 3% management fee. Recently IMDBI has received a second loan from the Government totaling Rls. 750 million and a "Special Equity Fund" from the Government totaling Rls. 900 million.

ii. Foreign investors until recently held eight of the fifteen seats on the Board of Directors in accordance with an agreement vesting control with them for the first five years. Control passed, however, to the Iranian shareholders at the Annual General Meeting held on June 18, 1964. The Statutes give complete management responsibilities to the Board and, when it is not in session, to an Executive Committee. All investment proposals are submitted to the Executive Committee.

iii. M4anagement and the senior staff were originally non-Iranians. In line with the passing of control to the Iranian shareholders, these positions have been filled entirely by Iranians. The staff generally is competent. IMDBI enjoys cordial and close relations with the Government. The Government, how- ever, does not appear to exercise any direct influence over ffDBI's invest- ment decisions. iv. Appraisal and end-use procedures are satisfactory, though some improvements can be made. The various disciplines involved in appraising and supervising a project should be coordinated more closely and earlier in the study of a project. End-use procedures would also be improved by greater use of a team approach. Management is aware of these weak areas and has taken steps to improve procedures. v. IMDBI's profit has shown a steady increase and has been sufficient to allow for the payment of a yearly dividend (currently 7-1/2%) as well as the building up of reserves which equalled 9.4% of the outstanding portfolio at March 20, 1965. Its financial position is sound and its portfolio well diversified. Its record of collections is satisfactory. The great majority of its activities have been in the loan field and Management is seeking opportunities to expand equity investments and to underwrite. It is becoming more active in the promotional field where the dangers of over-enthusiasm are great. However, these dangers appear to be recognized oy DlU)BI's Mianage- ment. vi. Though VDfBI has no formal policy statement, it has generally followed prudent policies, both as to reserves and investments. In light of the several large investments which IDBI has under consideration, the desira- bility of having self-imposed restrictions covering its maximum involvement in any one project has been impressed on it, and it has recently adopted such restrictions.

vii. IMDBI's contribution to the economy of Iran has been significant, not only in financial terms but also, and more importantly, in terms of the example it has set and the educational value of its operations. It is being given an increasingly important role in the Government's industrialization plans, in helping to shape over-all policy as well as in stimulating invest- ment. IMDBI's importance to Iran should continue to increase in the future.

viii. An upturn of economic activity in 1964 makes it appear that the economy of Iran is beginning to recover from the recession which began in 1961. Business confidence is returning. IMDBI is receiving a larger volume of applications than before, and of a better quality. Its forecasts show a steadily rising level of activity and the need in the near future for additional resources in both rial and foreign currencies. It expects to be able to raise the needed rial funds through new loans from the Government and has approached the Bank for the needed foreign exchange.

ix. The present Bank loan of US$ 5.2 million, made in November, 1959, has now been entirely committed. IMDBI's slowness in committing this loan has been due to several reasons. Not the least has been the depressed busi- ness conditions due to the recession. Foreign exchange has in practice been readily available in Iran and investors tended, partly on account of their reluctance to bear an exchange risk, to use their own rial funds or funds from sources other than IIDBI to purchase the foreign exchange required for projects, approaching IMDBI for rial loans only after they had exhausted these resources. This position is changing, with more investors bringing their projects to IMDBI at an early stage. There is little doubt but that, as a consequence of this and other changes, foreign exchange resources will be drawn down more quickly in the future. x. IMDBI's forecasts indicate that it will require additional foreign exchange resources during the current and next fiscal years, March 21, 1965, to March 20, 1967, totaling about US$ 10 million. Three projects, totaling about US$ 1.3 million, have been submitted to the Bank in anticipation of a second loan. IMDBI's forecasts may prove to be somewhat optimistic if the expected recovery of the economy fails to gain momentum. However, IMDBI can be expected to commit US$ 10 million within two and a half years if not in two. The Bank should therefore grant lD0BI a loan in the amount of US$ 10 million to cover its needs for this period. APPRAISAL OF THE IDUSTRIAL AND MINING DEVELOPNENT BANK OF IRAN

I. DESCRIPTICON OF INDBI

1. IMDBI officially began operations on October l1, 1959, following two years of discussions and negotiations between the sponsors (Lazard Freres & Co. and Chase International Investment Corporation) and the Government of Iran. The World Bank acted, by invitation, as an advisor to the parties during this period.

Objectives and Povers

2. The primary objective of IMDBI is the stimu'lation of private indus- trial development within Iran. Its Memorandum of Association states that it is "to develop, encourage and stimulate private industrial, productive, mining and transportation enterprises in Iran" and to encourage, sponsor and facilitate the participation of domestic and foreign private capital in such enterprises. Emphasis is also given in the N-iemorandum of Association to the promotion and development of a capital market.

3. IMDBI may carry out these objectives in a variety of ways. It may make long- and medium-term loans, invest in equity capital, sponsor and underwrite new issues of securities and guarantee loans and commitments of other investors. It may make its funds available for reinvestment through sales from its own portfolio. It is designed to offer advice and guidance to Iranian industry on technical, financial, managerial and administrative matters. IfDBI may not, however, engage in purely commercial banking ac- tivities.

Resources

4. Share Capital. DfBI's presently authorized and fully paid share capital is Rls. 400 million (US$ 5.3 million), divided into 4OO,OO shares of Rls. 1,000 par value each. The capital stock is divided into two classes: Class A shares, which rust at all times be owmed by Iranian nationals and represent not less than 60%o of the total capital, and Class B shares, which may be held by nationals of any country.

5. flDBI has recently informed the Bank that it intends to propose during the current year a stock dividend of one new share for every five existing shares. These new shares would be created by capitalizing reserves. If this proposal is accepted by shareholders, the resultant share capital would be Rls. 480 million (US$ 6.4 million) with the division between classes remaining proportionately the same. - 2 -

6. Government Advance. Under an Agreement dated March 1, 1959, the Iranian Government advanced Rls. 600 million (US$ 8.0 million) to BTDBI. The Advance is interest-free, repayable in fifteen equal annual installments after a fifteen-year grace period, and is subordinated to all other debt. In case of liquidation it would rank- pari passui with the share capital of the bank. The Government has the right', as long as the Advance is outstanding, to appoint an observer to INDBI's Board of Directors who has the rights of a Director with the exception of the right to vote.

7. Plan Organization Loan. Under an Agreement dated January 12, 196b, the Plan Organization of the Iranian Government made a loan to ThDBI of a minimum of Rls. 00 million (US$ 5.3 million) with a further Rls. 350 million (us$ 4.7 million) to be made available if needed by fDMBI. The loan is to be paid over to lI1DBI in three yearly installments beginning in 1964 and repaid in ten equal annual installments after a five-year grace period. The interest rate is 3.5% less than the interest rate to be charged by ID-BI on loans from these funds. It is subordinated to any loan guaranteed by the Government.

8. AID Loan. Soon after IMDBI began operations, under an Agreement dated November 19, 1959, the U.S. Development Loan Fund (now administered by the Agency for International Development) (AID) lent flIBI Us$ 5.2 million equiv- alent to finance the foreign exchange cost of projects with a foreign exchange component equivalent to US$ 100,000 or more. In 1962 the uncredited portion of the loan, amounting to US$ 3.2 million, became tied to purchases in the United States. Previously it was available for expenditure anywhere in the free world. The term of the loan is fifteen years with a grace period of three years. It bears 5-3/4h5 interest and is to be repaid in U.S. dollars. Tle Government of Iran has guaranteed the availability of foreign exchange to service the loan. Sub-loans under US$ 250,000 do not need the prior approval of the U.S. Government.

9. IBT3D Loan. Under an Agreement dated November 23, 1959, the Bank lent flDBI U3$,7 5.2 million equivalent to finance the foreign exchange cost of projects with a foreign exchange component equivalent to US$ 100,000 or more. The term of the loan is fifteen years with a grace period of five years. Though the loan has a fixed amortization schedule, DMBI has followed the practice of prepaying in order to avoid carrying an exchange risk. The interest rate is determined separately for each part of the loan credited to the loan account at the time such part is credited. The Government of Iran has guaranteed the repayment of the loan. All sub-loans require the prior approval of the Bank. The Loan Agreement limits IMDBI's borrowing power to three times the sum of its umimpaired capital, surplus, free reserves and the outstanding amount of the Government Advance.

10. Managed Loans. Under an Agency Agreement dated November 8, 1959, the Government of Iran transferred to fIDBI 83 loans with an aggregate face value of Rls. 1,400 million (US$ 18.7 million) for DOBI to manage as agent on behalf of and for the account of the Government. These loans had been made to private industry by two Government agencies, the Industrial Credit Bank of the Plan Organization and Bank Melli Iran, the Government-owned - 3 -

commercial bank. fiDBI receives a fee of 37a per annum on the outstanding amount of the loans administered by it which have not been in default for three months or more. It does not carry any of the risk of these loans. It is obliged to relend repayments of these loans, the agency concerned receiving the interest less the 3% fee which is retained by DMBI.

11. The amount of the managed funds that is repaid to IIDBI is to be re- turned to the Government over a seven-year period starting in 1967.

12. Special Equity Fund. Under an Agreemient with the Plan Orgar,ization, which became effective on ITiarch 21, 196Li, Rls. 900 million (US$ 12.0 million) has been made available to IMDBI as a Special Equity Fund for the purpose of taking up equity participations in private Iranian enterprises on behalf of the Government. An amount of Rls. 500 million (US$ 6.7 million) has also been made available to the Industrial Credit Bank for the same purposes. The Government, as a matter of policy, will no longer tace direct equity par- ticipations in private companies.

13. Proposed investments are presented to the Executive Board of the Plan Organization for approval. However, only DIDBI can propose to the Plan Orga- nization a participation involving its portion of the funds. There are no restrictions as to the type of enterprise eligible for investment from this Fund. Rls. 200 million of IlIDBI's portion of the Amd is to be used for existing enterprises which are experiencing trouble due to their equity being insufficient to support their current loan capital; the remaining Rls. 700 million is to be directed towards new projects.

1L. LvDBI will hold the Fund's share holdings in the name of the Govern- ment but will exercise all rights and powers itself. It will receive a yearly fee of 1-1/2% of the total capital invested which will be paid it from divi- dends received and capital gains realized. ',]hen sufficient funds do not accrue from these two sources to pay this fee, arrears wzill be carried forward until funds are available to pay them.

15. fl)BI will be expected to sell equity participations acquired with this Fund to private investors whenever there is an opportunity to do so. This activity will help to support a capital market in the country and is in line with the Government's policy to divest itself of equity holdings in private companies. Repayment of the Fund to the Government will be made from proceeds of such sales.

16. The Government expects that commitments will be made, and the Fund drawn down, fairly evenly over four years.

17. Summary. The following is a summary of the total resources which have been made available to hDOBI. Rls. million US$ million Equity and Quasi-Equity

Share Capital 400 5.3 Government Advance 600 8.0

Subtotal 1,000 13.3

Loans

Plan Organization Loan 750 10.0 13RD 390 5.2 AID 390 5.2

Subtotal 1,530 20.h

Mianaged Funds 1,400h18.7

Special Equity Fund 900 12.0

TOTAL 4,830 64.4

Organization

18. Shareholders. Article 62 of the Monetary and Banking Law of Iran, which applies to LDBI, requires that no more than 40,0J of the share capital of Iranian banks may be held by non-Iranian nationals. Class A shares account for exactly 605, of the capital of B103I. It has the widest distribution of shares of any company in !ran with about 85% of the almost 1,700 Class A shareholders holding less than 100 shares each. However, one group of share- holders controls a block of 39,484 shares, or 16.55% of the total Class A votes. Annex 1 lists the Class A shareholders who held 2,000 or more shares each at September 22, 196L, and indicates, to the extent that they could be identified, the three largest groupings.

19. The Class B shares, wrhich malce up the remaining 40% of the share capital, are held by twenty non-Iranian private investors, mostly banking and investment institutions, from seven ccuntries. These shareholders are listed in Annex 2.

20. Il',J3I stands ready to act as a liaison between buyers and sellers of its shares. Th-ough these activities and its efforts to keep its shareholders informed of the Bank's activities are very time-consufing, DITBI feels that they are worth-while, especially when seen in the larger context of developing a capital market in Iran.

21. Board of Directors. The Board of Directors is vested with all the powers and responsibilities of managing the affairs of lDCBI. The Directors are elected annually. As a result of the Memorandum of Agreement between the sponsors and the Government of Iran, and as provided in its Articles of - 5 -

Association, control of BDFDBI was vested with the non-Iranian shareholder grotip for an initial period of five years. Accordinigly, the Class B share- holders have held eight of the fifteen seats on the Board. At the Anmual General IKeeting held on June 18, 1964, however, about 4-1/2 years from the formation of fDlBI, control passed to the Iranian shareholders who elected eight of tihe fifteen Directors, since the sponsors did not want to wait for the full five years to relinquish control. To enable this change9 the Articles of Association of TIDBI were altered at an Extraordinary Ileeting of the Company also held on June 18 l6L4.

22. The Chairman of the 3oard is chosen by the Board annually from t;.ose Directors representing Class A shareholders. The present Chairman is Eng. Jaafar Sharif Emami, former Prime 11inister, the President of the Iranian Senate, Head of the Chamber of Industry & iines, Deputy Head of the PahLavi Foundation and the holder of several other prominent positions. The lianaging Director is a full member of the Board. Annex 3 lists the present members of the 9oard.

23. The position of Governrment Observer, created by the Goverrnment Advance Agreement, is presently held by Dr. Mohamed Yeganeh, an Undersecre- tary in the iviinistry of Economics.

24. Executive Committee. As the Board meets only once or twice a year, the Executive Committee exercises substantially all its functions as provided in the Statutes. This includes the power to approve or reject projects. Its mem'bership is currently made up of three Class A Directors and two Class B Directors. Annex 3 lists the present membership. Under the Articles of Association the Government Observer has the right to attend Executive Committee meetings, but without the right to vote.

25. This Committee meets about once every three weeks at present. However, the two non-Iranian members, residing abroad, are unable to attend more than about two meetings a year and have given their proxies to the Managing Director. They receive, though, regular reports of developments and copies of project appraisals. In practice the cabled concurrence has always been obtained from the non-Iranian members by the 1anaging Director in respect to specific projects. This system appears to have worked satisfactori- ly.

26. Mianagement. The Managing Director since December 10, 1963, has been M4r. A. Gasem Xheradjou who is on leave from IFC. His rep'lacement of Dr. IJillem van Ravesteijn, D'2DEBI's first Managing Director, was an important step in the assumption of control of Il"IDBI by the Iranian majority.

27. Dr. van Ravesteijn had the assistance of an Iranian Associate Managing Director. This position became vacant in 1963 and was discontinued with the transfer of Management to Iranian hands.

28. Dr. Reza Amin, who was at one time on the staff of IPIDBI, and later acted as Technical Advisor to I4iDBI while managing the Esfahan Cement Company, has recently joined 4DIBI's Management as Deputy lvianaging Director. - 6 -

29. Staff. IhDBI is organized into six departments -- Secretariat and Legal, Administration and Public Relations, Treasury and Accounts, Economics, Loans and Technical. The functions of the first three departments are implied in their names. The Economics Department carries out market and allied studies on individual projects and general industrial surveys on specific sectors of the economy. The Loans Department is in charge of appraising all projects from a financial point of view. The Technical Department, which some time ago became a section of the Loans Department, is now again a full-fledged department and carries out engineering and other studies on projects.

30. One and a half years ago non-Iranians held the senior positions in IThBI. Niow, however, these expatriates have left and, with one exception, their positions have been filled by Iranians. flDBI is actively looking for a replacement for the last post, which was vacated in Iiarch of this year.

31. The present department heads are all well suited for their positions. They are assisted by a professional staff of thirty. Total staff numbers 69, a reduction of ten from the total two years ago. What has been lost in numbers, however, has been made up by more concentrated effort and more coordinated team work.

32. In general, the present staff appears to be well-qualified for their particular tasks. Most of them have been with IMDBI since its early days. D;IBI has been able to attract and hold them by offering salary scales and responsibilities more satisfactory than in competing positions with the Government or with the private sector. Thley have received much training and experience on the job during this period, especially through their contact with the foreign team. An internal training program has recently been started and IhDBI is taking advantage of the training opportunities available within the WKlorld Bank group.

Procedures

33. Project Appraisal. Project appraisal procedures and more particular'Ly the time taken in completing appraisals have been improved. The procedure now followed is roughly as described below.

34. All applications are given a preliminary appraisal by a Loans Committee consisting of senior professional staff, which advises the Managing Director whether to reject an application immediately or proceed with a full appraisal. Rejections at this stage are either because the project is too small or is unsuitable for INDBI's assistance for other policy reasons.

35. The Loans Department is responsible for the full appraisal. A joint financial/technical team, drawn from its staff and the staff of the Technical Department, prepares a report independently of the separate report, if re- quired, prepared by the Economics Department. This latter report is mainly concerned hrith the marketing aspects of the project. - 7 -

36. When these two reports have been prepared, the Loans Committee again considers the application. If it approves the application, and Mlanagement agrees withl its recommendation, a summary report, condensing tne findings of the various departments, is prepared by the Loans Department and the case subritted by is Management to the Executive CommLittee of the 3oard. The Executive Committee does not receive any of the detailed reports, questions it may have on matters of detail being left to be answered by staff members invited to the meeting.

37. The above procedure, fron; receiot of an application to its final approval by the Executive Committee, takes an average of six months. I-ost of' this time, howJever, appears to be spent in obtaining further information from the applicant on questions put by DJDBI. A further three weeks month is o.ten to a required after approval for the borrower to attend to 'Legal details necessary before signing the loan documents. 38. This appraisal procedure is followed for equity investments as well as for loans.

39. Project presentation by DfDBI's staff is generally satisfactory. However, one important wieakness is the relative absence of the impact of BDv3I on the project itself. Appraisa'ls lhave typically consisted of an analysis of the material gathered from the applicant and IMDBI has seldom exercised much influence over the shiape of the project. This has been under- standable to some extent since IND3I has often not been involved in the early stages of a project, the entrepreneur coming to D4DBI only after he has already undertaken major commitments. in the light of the recent trend clients to consult for IDMBI at an earlier stage, DZ)BI is now able to make a rnore active effort to improve both the financial and techmical aspects of all projects presented to it. 40. End-use Supervision. Besides annual financial statements; borrower each is asked to submit a monthly report to ThDBI. As might the frequency be expected, with W1iic&h these reports are received varies betweenl borrowers, as does their content and usefulness. Normally every project is visited once a year by a financial officer and by an engineer, with more frequent visits in the cases of projects in trouble or when the monthly reports are poor. especially

h1. On the basis of the montl,ly reports submitted by borrowers and the reports prepared after staff visits, appropriate action is decided INanagement. upon by This action is normally carried out by a special "team" the Loans wTithin Department which has the reponsibility of follow-up work.

42. End-use supervision suffers from excessive compartmentalization different of disciplines. Joint follow-up visits of technical and financial experts, and joint solution of problems unearthed during the visits independently, or arising are the exceptions. Though information is collected through reports received and visits made, an integrated descriptive report on a - 8 -

client enterprise after it has passed the construction stage is seldom available. Management is aware of these problems and has begun a frontal attack on existing procedures and attitudes.

43. Changes in Procedure. As already mentioned, several changes in the procedures have already been introduced and further modifications are under consideration. One such major change is the partial team approach in appraisals of new projects, which has resulted in providing a more integrated view of the project at a much earlier stage than was possible under the pre-existing system which resulted in departments working in relative isolation. The combined report to the Loans Committee of the financial/technical team is an outgrowth of this change. An attempt was also made to include the Economics Department in the team at this stage but, because of its existing work on general industrial surveys, this proved unworkable at the time. Management hopes to achieve this later.

44. Management has also taken steps to formalize internal reporting re- quirements and procedures. Department heads rieet with the Managing Director daily and the full staff meets weekly to review projects and other outstanding issues. The Managing Director intends to institute a foraal periodic review of all existing projects but so far other, more pressing matters have required his and his staff's time.

Relations with Government

45. Government Observer. The Government Observer's function is generallyr to keep the Government informed of fUlDBI's activities. It does not appear that present or past holders of the position have tried to takce an active role in Board or Executive Committee discussions. Relations appear to be excellent.

46. Coordination Committees. The Memorandum of Agreement between the Government and the sponsors, dated March 1, 1959, provides for the establish- ment of a permanent committee "to bring about the fu'llest harmony and coordina- tion in the granting of industrial loans and the adoption of a sound industrial policy." It is composed of the Mllinisters of Finance and of Economics, the Governor of the Central Bank, the Managing Director of the Plan Organization and the Secretary General of the High Economic Council. The Managing Director of 29fBI sits as an observer.

47. This cormittee has met very infrequently in the past and has had little or no effect on fDBI's operations. It is now beginning to meet fairly frequently and attempts to coordinate at a high level the activities of various organizations concerned witih assistance to private industrial develop- ment in Iran.

48. The Plan Organization Loan Agreement provides for the establislhment of another committee on a lower level including representatives of the Ministries of Economics and of Finance, the Plan Organization, the Central Bank and D4DBI. This committee was established "for the purpose of creating close cooperation in developing the affairs of private industrial and mining organizations in Iran and in order to study the prograrrs, methods and general policies in encouraging private investment." Its Purpose is, therefore, broadly the same as the first cormittee but to function more as a working committee than as a policy-making and planning commattee.

49. As the ministerial level committee 1has not been very active until recently and as the other committee was just being formed at the time of the mission's visit, it is too soon to judge how effective they will be or whether they will prove to be a step towards Government ilterference in the affairs of IiIDBI. The 1anaging Director and the various mem.bers of the Government to whom the mission talced all feel, however, that the committees will serve a useful purpose and be mutually beneficial.

50. Summary. fDlBI is reputed in Iran to be an institution which has shown sufficient strength to resist and survive Government pressure, with the result that such pressures are now rinimal. This position of relative inde- pendence has not been achieved through a total avoidance of relations with the Government, however. There was a period in wlhich the Government was seriously irritated with IliDBI to the extent of actively considering its nationaliza- tion. Ostensibly this irritation was due to D MBI's allegedly hard business attitude and conservative lending policies, but poor working relations with the Government Observer appointed at that time had much to do with it.

51. In the past year or so, thoughl, relations have become cordial, as evidenced by the association of the lianaging Director and serior staff with several policy-making bodies of the Government. On the other hand, the new -ianagemient appears capable of maintaining its independence if faced with. Government pressure.

II. OPERATIONS AND POLICIES

Lending Activities

52. Though the statutes of DMfBI authorize it tc assist its clients in all forms suitable to their needs, fDOBI has so far concentrated almost entirely on secured loans. Exceptions are the six equity investments it has undertalken, including two in enterprises it has promoted. These are dealt with in a later section.

53. Up to March 20, 1965, the end of fl3BI's most recent fiscal year, EM3I had made 121 loans, totaling Rls. 3,262 million (US$ 143.5 million). The following table indicates the volume of business done each year. - 10 -

Loans Signed Percentage Increase From Period Number Amount INIonthly Average Year Before (Rls. million) October 14, 1959 to Harch 20, 1961 31 1,016 60

1961/62 17 229 19

1962/63 15 369 31 61L/

1963/64 25 606 50 640

1964/65 33 1,042 87 72%

Totals 121 3,262 50

As can be seen, DIDBI's activities have been growing steadily each year after the drop in 1961 which coincided vith the beginning of economic recession in Iran.

54. Detailed data are available on I14DBI's loans only up to September 22, 1964, the mid-point of its last fiscal year, while financial data relating to EADBI's operating results have been made available for the full fiscal year. By September LZBI had made 100 loans, totaling Rls. 2,553 million (US$ 3h.0 millioni). The analysis ijhich follows is based on these 100 loans.

55. Tlwelve of the 100 loans have been granted for working capital purposes. These loans, averaging Rls. 10 million in size, have all been made to existing customers to assist them through times of temporary difficulty caused by depressed business conditions, and were originally for one-year terms, though some have had to be extended. These loans are made solely from repayments of the managed loans.

56. Slightly less than half of the 100 loans in number and slightly more than half in amount have been for new enterprises. Annex 5A analyzes DMBI's loan portfolio according to purpose.l/

57. Approximately three-quarters of the total number of loans have been for amounts less than Rls. 25 million (US$ 333,000). The five largest loans account for 22% of the total amount lent. Details on the size of loans DMBI has made are contained in Annex 5B.

1/ Annexes 5A - 5D relate to the period ending September 22, 1964. - 11 -

58. Over half of the loans, accounting for some 70', of the amount, are for terms over five years. Three loans have been granted for nine years. Loans over three years typically have a grace period of between 18 months and two years. Annex 5C analyzes the loans by duration.

59. Annex 5D analyzes the loans boy industrial sector. The food pro- cessing sector has received the largest amount of loans, 215 of the total amount granted, as well as the largest number, 23 in all. Textile manu- facturing has received approximately 17$ of the total amount of loans granted, followed by rubber products with 15%.

60. Annex 5E indicates the geographic location of loans. Tehran, as might be expected, has received the largest number (66) an4 the largest amount (Rls. 1,643 million - US$ 21.9 million) of loans. 1, The remaining loans are fairly well spread about the most populated areas of Iran.

61. Annex 6A analyzes the loans made from f@DBI's own and borrowed funds that were in default on M4arch 20, 1965. A total amount of Rls. 197.8 million (US$ 2.6 million) was in arrears, involving 39 loans. 2/ Apprcx- imately 301% of this was represented by managed funds relent, on which DDBI carries no risk. Nineteen loans were in default as to principal, the amount in arrears representing 7% of the total amount outstanding. Again, approx- imately 307% of this was represented by managed funds relent.

62. Only 9 loans had been in default for over two years, and only 8 in respect to principal. This situation is in contrast to the default history of the managed loans, dealt with below, and is a reflection of the more thorough appraisal given these loans than that given the transferred loans.

63. Status of the Bank Loan. Fourteen loans had been approved by the Banc by lay 27, 1965, for financing from its loan of US$ 5.2 million. TEhe amount involved will fully utilize the Bank loan. Ten of these loans have been signed, US$ 2.2 million having been disbursed by the same date. Two further projects have been received in anticipation of a second loan. Annex 7 reviews the status of the Bank loan. The following table indicates the rate at which this loan has been committed.

First 5 Months 1960 1961 1962 1963 1964 of 1965 Number of loans 1 1 1 2 6 3

Amount of loans (US$ millions) 0.5 0.2 0.3 0.8 2.8 0.8

Cumniulative amount (US$ millions) 0.5 0.7 1.0 1.8 4.6 5.4

1/ Figures in this paragraph and Annex 5E refer to the year ending March 20, 1964. 2/ Arrears on the transferred managed loans still outstanding are not included in these figures. See paragraph 67. - 12 -

W4hile it took four years to commit the first third of the loan, the re- maining two-thirds, equal to US$ 3.4 million, was committed in 15 months. This is indicative of the growing momentum of DfB3I's activities, re- flected in the table on page 10. Tlhe over-commitment of US$ 0.2 million will be carried over if a second loan is approved.

6h. Status of the AID Loan. SVBI's Balance Sheet for March 20, l965, indicates that US$ 3.3 million of this loan has been committed, though only US$ 1.7 million has been disbursed. Though the cut-off date for the sub- mission of projects to AID has been extended to November 30, 1965, DlBI T s projections do not assume that any further projects will be financed from this source.

Managed Loans

65. As mentioned earlier, IMDBI manages loans made by the Bank Melli Iran (BMI) and the Industrial Credit Bank of the Plan Organization (ICB) before it was established. These 83 loans were transferred to it when it began operations. The entire portfolio of ICB was so transferred, approximately 60 loans totaling Rls. 675 million. Some 20 other loans were selected from BMII's portfolio to bring the total amount transferred to the agreed figure of Rls. 1,400 million. Of this amount, Rls. 815 million was outstanding on September 22, 1964.

66. Of the original 83 loans, 47 had been completely repaid by September 2?, 1964. These loans, however, represented only 20j of the total amount trans- ferred. Of the 36 loans still outstanding, most are being repaid regularly or present no serious problems, though some may require extensions. About ten, however, are in serious difficulties, typically because the enterprises are burdened with excessively heavy debt capital.

67. Annex 6B presents a breakdown of the default position of these loans as at Mvarch 20, 1965. Twenty-three loans were then in default, the amount in arrears representing 28p of the total outstanding. Twelve loans had been in default for more than two years. Several loans have been granted more than one extension. However, some of these extended loans are again in default.

68. Though IMDBI will not be called upon to repay to ICB and BMI loans which are in default, it has had to spend a considerable amount of time with these managed loans trying to put the repayment schedules on a more appro- priate basis and generally advising the enterprise on how to cope with their difficulties. It does receive a fee of 3% per annum of the outstanding amomunt not in default over three months but it claims that this fee did not fully cover its costs during the earlier years when it had to devote much staff time to loans in trouble. IMDBI, however, feels that the training and ex- perience which these loans gave to its staff during those years more than made up for the difference. Now it feels that the fee covers adequately its costs in respect to these loans. - 13 -

69. I11I is obliged to reinvest repayments received from these loans in all new rial loans it makes. T'he percentaces of each new 'Loan *shich rep- resent DvIDBI's, ICB's and Bill's shares are calculated on the basis of the amount of uncommitted funds available from each source at the time the new loan is signed. IMDBI may also make working capital loans to existing clients entirely from repaid managed loans. Annex 8 oresents the disoosition oi? the original Rls. 1.,OO million of managed funds as at September 22, 19b.!.

Equity Investments

70. Details of the six equity investments fiDBI had made by Idarch 20, 1965, are given in Annex 9. By September 22, 19614, it had negotiated option rights with respect to 16 loans, six of which were second loans to the same company. These take the forms of a preferential right to purchase shares if a public issue is made as well as a right to convert part of the loan into shares. Four of these options had been allowed to lapse and none had ever been exercised by that date.

71. TIBI had also made by liarch 20, 1965, three other equity invest- ments totaling Rls. 60.5 million out of the Special Equity Fund, and the Executive Board of the Plan Organization had approved four further cases involving investments totaling Rls. 105 million.

72. IYDBI's failure to make a larger number of equity investments is perhaps not due to any unwillingness on its part to take on the normal risks of equity investments. Most client enterprises in Iran are closely held family units into which an outsider is not welcome. I^Jhere, reluctantly, such a client grants IMDBI the right to purchase its shares or to convert part of a loan into shares, this is almost invariably accompanied by an option on the part of the client to buy back the shares or the stock option. Again, most Iranian businesses do not maintain audited accounts and it is a common practice for the majority owners, in order to avoid tax obligations or the sharing of profits with minority shareholders, to siphon away the profits without showing them in the books. In such a context, an equity investment by flDBI might turn out to be unremunerative. For the same reasons, such shares are not saleable and DIDBI would not be able to revolve its port- folio as easily as might be desirable.

73. These reasons for IMDBI's limited activity in this field point to the need for a sustained but perhaps necessarily a slow effort on its part to mould the business practices in the country. This is one of the greatest contributions it can make. I1DM3I recognizes this and has devoted consider- able efforts to establish a stock exchange and to promote certain companies whose shares are widely held.

74. Underwriting. DDBI has not entered into any underwriting operations since, for the reasons already mentioned, it is difficult to find a market for securities. Here again it would be a great service to the country if - 1h -

IMDBI were to introduce to the business community an underwriting operation when a suitable case presented itself. Its Management is aware of its po- tential role in this field.

Promotional Activities

75. Industrial Promotion. IDDBI is well aware of the useful role it could play in promoting industries. In addition to assisting clients during the appraisal process and after a loan has been made, and to offering advice and services on a fee basis to clients who are not recipients of loans, "IPDBI has been instrumental in the bringing together of finance, management and technical know-how in the case of a sugar factory and a bonded wzarehouse. However, much more was expected of it in this field and its failure to do more has been largely due to depressed business conditions.

76. It intends to be more active in this field in the future, however, particularly in the sugar, paper, steel-rolling and glass-making industries. It currently holds government licenses in its own name for several such future projects. It is engaged in bringing together interested groups of investors, entrepreneurs and technical know-how to get these projects either studied in great detail or started where such studies have already been made. Besides the above-mentioned fields, fNDBI has carried out preliminary feasi- bility studies of several other industrial sectors, including cheese produc- tion, organic fertilizer and viscose rayon.

77. It is obvious that such ventures will absorb a great deal of the time and attention of DfMDBI's Mlanagement and staff, and that in sponsoring them IMDBI is undertaking a heavy responsibility to the investors it canvasses in regard to the soundness of these investments. The preliminary operations also involve a considerable amount of expense which, however, DTDBI is hopeful of being reimbursed out of the industrial promotion funds of the Government. IDBI's Management is aware of these pitfalls and can be counted upon not to sacrifice prudence in the effort to be helpful.

78. Stock Exchange. IMDBI began studying the possibilities of forming a Stock Exchange early in 1960. With the help and support of the Government, comnmercial banks and outside experts, f4DBI has now brought this Exchange almost into being. When the Stock Exchange is in operation, f DBI will initially provide the necessary administrative and secretarial facilities. Policies

79. IilDBI's Board has not laid down either specifically or incidentally an exposition of its operating policies (with the exception of certain re- strictions on the size of investments, adopted quite recently and referred to later in this section), with the result that these policies have to be deduced from a study of IhDBI's past operations and from discussions with its Management. Its loans are typically for the financing of fixed assets thoughi it has no objection to the principle of financing long-term working - 15 - capital needs. It has shown commendable imagination in its willingness to assist new enterprises instead of confining its operations to the more secure field of assistance to established concerns.

80. hDMBI normally insists on a first mortgage over all fixed assets of the borrower, which usually provides a 100% margin, plus the personal guar- antee of shareholders owning more than 10% of the project's share capital. It passes on to its borrowers the foreign exchange risks on the relending of the proceeds of its foreign loans.

81. DDBI has so far taken care to spread its portfolio over several industrial sectors. It is anxious to spread its investments throughout the country but has understandably not been able to go against the prevailing tendency for business to conglomerate in and around Tehran.

82. II•D3I usually limits its assistance to less than 50O of the total costs involved though it has on occasion provided a larger percentage of the finance required.

83. The amounts of assistance given to three projects in particular were large. One project, a sugar mill which DfBI promoted (and which has proven successful) received a total of Rls. 170 million which was about 17% of IIIDBIs outstanding portfolio as of the date it was made. Of this total, DPMBI carried the risk on about Rls. 120 million (Rls. 5O million being relent Mlanaged Funds). Rls. 70 million of this assistance was in the form of equity and represented 23% of the share capital of the project and about 17% of DvDBI's equity and reserves. Two other projects received loans of Rls. 150 million each (one has since been repaid), which also were large, though again about half of each were relent Managed Funds. With the growth in IDBl's portfolio, the relative size of the two outstanding investments has become substantially smaller.

8h. fDBI now has under consideration several large industria'l projects which it intends to promote or otherwise assist in a large way. It also lhas in view large investments in several sugar projects in addition to its present large investment in this sector. It is possible for IMDBI to spread the risks involved since it has at its disposal several sources of finance on which it does not carry any risk. There is also the possibility of joint operations with the Industrial Credit Bank of the Plan Organization. Nevertheless, as suggested by the Bank, fTDlBI has formally adopted restrictions on itself in regard to its maximum involvement in any one project and in any one major industrial sector. Annex 10 sets forth these restrictions.

85. IMDB charges the same interest on all loans it grants, regardless of their purpose or duration. The current rate of 7% per annum plus 1i service charge per annum (to cover the cost of studies, technical and financial - 16 - assistance and various other types of assistance given to clients) became effective in January 1964. These charges had totaled 90 during the previous year and were 1O5' before that. The reductions were made in order to keep in line with the general reduction of interest rates in the country sponsored by the Central Bank. fDvBI extended the benefit of these reductions to existing loans as well, as, otherwise, it stood in danger of having its better clients prepay their loans through refinancing at cheaper rates from conmercial banks or other sources. Its voluntary action to reduce its interest rates has improved its public relations and has enabled it, as a quid pro quo, to obtain from the Government an assurance that the Government-owned Industri.al Credit Bank, which wanted to bring interest rates down further, would not go below 8,. on loans above Rls. 5 million, the lower limit of Rl3BI's operations.

86. DMBI has followed a conservative reserves policy. Since the begirnirng of its operations about five and a half years ago, it has built up reserves amounting to Rls. 108 million, which represents about 50, of its net income in these years. Not included in these figures, however, is the hidden reserve for bad and doubtful debts, allocations to which are made before arrivin- at the net income figure. This reserve now stands at Rls. 63 million. 17 INDDI has so far maintained a proper balance between the desirability of paying dividends and the need to build up adequate reserves, and its fore- casts indicate that it will continue to do so.

87. In sum, it can be said that fvDBI has generally followed prudent operational policies.

III. OPERATING RESULTS

Balance Sheets

88. Annex 11 presents IDvBI's Balance Sheets as of Nvlarch 20, the end of its fiscal year, for the past five years. A summary of the latest balance sheet is given on the next page.

1,' f D3I' s own fmuds which were in arrears at iiarch 20, 1965, totaled Rls. 99 million. Total reserves, however, including this hidden reserve for bad and doubtful debts, stood at Rls. 172 million at the same date. - 17 -

March 20, 1965 (rials million) Assets

Current Assets 153 Local Currency Loans Outstanding 1,393 Foreign Currency Loans Outstanding 263 Equity Participations '55 Fixed Assets (net) 17 1,981

Liabilities

Overdraft 115 Provisions and Payables 146 AID Loan Disbursed 130 IBRD Loan Disbursed 132 Plan Organization Loan 350 Government Advance 600 Paid-in Capital L00 Reserves and Surplus 108 1,981

89. The managed loans and the Special Equity Fund, both treated as contra accounts, have not been shown in order to give a clearer picture of RMDBI's own position.

90. Under the IBRD Loan Agreement, the borrowing power of ITDBI is limited to three times the net worth plus the outstanding amount of the Gov- ernment Advance. As the present actually incurred debt is less than the net worth and Government Advance, 110BI has ample borrowing power. Profit and Loss Accounts

91. Annex 12 presents the Profit and Loss Accounts for each year since the establishment of IMDBI. Net profit after taxes has risen in each year, reaching Ris. 62 million for the year ended March 20, 1965, after the allo- cation of Pls. 28 million to "provisions and payables" which included Rls. '15 million allocated to the hidden bad and doubtful debt reserve. This profit figure represents a return on share capital of 15.5%, up from 12.7%o for the year before. The return on net worth at the beginning of the year also rose, from 11.6l, a year ago to 13.45. for the latest year.

92. The return on share capital can be considered quite attractive in view of the small leverage, the debt/equity ratio (including the Government Advance as debt) being only 2.2/1 at the end of fiscal 1964/65. It is a result partially of the fees received from managing the transferred loans and of the very low average cost of money, which in 196L/65 amounted - 18 -

to about 1.6:, u-; from less than 1' in the nrevious years. This lo0T cost of .m.oney, in turni, is due to the small use, up to nowi, of 'borrowed funds wh,ich carry an interest rate. At the endiof 1964/65 only 36i, of the total noney used by DIDDI had a cost.

93. DDBI's income is derived from several sources. The largest, as is to be expected, is interest and charges on loans outstanding, amounting to 74% of total income in 1964/55, up from 67% the year earlier. Fees received from managed funds is the second largest category, amounting to 16% of the total for 196hl/6, down from 18% in 1963/6L. For thie first time DlDM3 received dividend income from its equity investments, thouglh this source accounted for only 1% of gross income. Equity investments represented about 9; of E IBI's average portfolio in 1964/65. However, some two-thirds of the total are less than two years old. Their contribution to income can be expected to rerrain relatively small for several years to come. Otiher sources, such as interest on deposits, provided the remaining income.

94. The following table presents D'MBI's income and expenses both in absolute terms and as percentages of the average portfolio for 1963/6L and 1964l/65. 1963/64 196L/6% <0 of g of Rls. Average Pls. Average nlillions Portfolio millions Portfolio Interest & Divi- dends Receivable 94.4 8.4 11/.0 7.5 Less, Financial Expenses (11.3) (1.0) (2h.2) (1.6) Administrative Expenses (52.5) (4.7) (40.6) (2.6) Depreciation ( 1.1) (0.1) ( 1.6) (0.1) Total Expenses 64.9 5.8 66.4 4.3 Frosfit on Portfolio 2. 6o 0.0 3.2 Add: Other Income ha.9 L.1 39.5 2.6 Gross Profit 6.7 95 7 Less: Tax & Pro- visions 23.4 2.1 27.7 1.8 Pet Profit After Tax & Provisions 51.0 4.6 61.6 4.0

The drop in the percentage figures for interest and dividends receivable is basically due to the reduction in interest charges from 9p to 8' in January 196h. The large drop in expenses as a percent of portfolio, in spite of the increase in the cost of money, is due to the reduction in administrative expenses, both absolutely and relatively. (It might be mentioned that ad- ministrative expenses for 1263/64 also were lower than for 1962/63, though the drop was small.) The significant increase in the profit on nortfolio figure is due almost entirely to this reduction in administrative expenses. - 19 -

95. Income from sources other than portfolio decreased in 1964/65 from the total in 1963/64, as it has almost continually during IMDBI's history. However, it still represents an important element of Dfl.BI's gross profit figure, and will continue to so long as 0ID3I continues to manage sizeable funds on behalf of the Government.

96. IYDBI's profit in any one year is exempt from income tax up to a maximum of 6%a of the sum of IMDBI's paid-up capital and the Government Advance, i.e., net profit is exempt up to Rls. 60 million. Because net profit for taxation purposes must include the allocation to the bad and doubtful debt reserve, IMDBI has been liable for taxes for the past two years.

97. The reduction early in 1964 in interest rates which was applicable to all outstanding loans has, of course, reduced INDBI's income from the outstanding loans. Part if not all of the reduction in income has, however, been offset from increased new business and the holding down of operating expenses.

Reserves and Dividends

98. By the end of IMDBI's fifth full fiscal year, general and legal reserves totaled Rls. 108.0 million, an increase of Rls. 47.2 million from the previous year. The reserve for bad and doubtful debts and the provision for taxation are included in the "provisions and payable"' figure in accord- ance with European accounting practice, which TIDBI follows. Both of these provisions are made after the taxable income figure is arrived at. The reserve for bad and doubtful debts stood at Rls. 62.6 million at the end of the last fiscal year, representing 3.8% of the outstanding loans. This is considered adequate by Management. Total reserves represented 9.4% of the outstanding portfolio and 42.6 of the share capital at the end of the last fiscal year; the level should be considered quite satisfactory for an insti- tution which had been in existence for less than six years.

99. IIDBI paid its first dividend at the rate of 4% for the seventeen- month period from its establishment to March 20, 1961. This rate has been increased yearly, being 6%0 for fiscal 1961/62, 6-1/2$ for fiscal 1962/53 and 7% for fiscal 1963/64. A cash dividend equivalent to 7-1/2% and a stock dividend of one new share for every five shares outstanding is pro- posed for fiscal 1964/65, the latter to be accomplished by caDitalizing reserves. The proposed cash dividend would represent about 40% of net profit after taxes.

IV. ECONOMIC BACKGROUND

100. Reference is invited to IBRD Report No. AS-107a entitled "Current Economic Position and Prospects of Iran" dated I.arch 30, 1965. - 20 -

101. Indications point to the beginning of recovery from the severe re- cession which the country has experienced since 1961. The length of the recession has probably been increased by uncertainties arising from the Government's land reform and industrial profit-sharing programs. Though signs of recovery have appeared, it is too early to predict how far the up-swing that has been initiated will extend. However, development finance institutions are witnessing a considerab'e revival of interest in investment and an increase in the volume of applications for long-term assistance.

102. The Government's declared industrial policy and practice is to stimulate the private sector and to step in with direct investriients only where the private sector is slow in coming forward. It has provided several incentives to the private sector, such as tax exemptions during an enter- prise's early years, exemption of duty on imported capital goods, very large concessions on duty on imported raw materials, tariff protection and re- patriation rights in regard to foreign capital and profits. It has also made funds available to industry through the IDDBI, the Indusurial Credit Bank and the Industrial Guarantee Fund. The activities of these latter two institutions are described in Annex 13.

103. IThile the scope for industrial expansion in the export field is limited, though not negligible, considerable scope for expansion exists in the field of import substitution through manufacturing, assembling or packaging. The trend in the past has been for such substitution to take place progressively in small consumer products. However, a beginning has been made with the assembly of durable consumer goods such as refrigerators, radios, automobiles, and the like. Indications of the changing investment climate is the active promotion now being undertaken by private entrepreneurs of such large projects as a paper plant, a steel-rolling mill, a glass fac- tory and several sugar refineries. Investment in these projects alone might total US$ 120 million.

104. Though many of these projects will take two to three years to materialize, they provide a basis for judging the opportunities for invest- ment currently available.

Economic TIpact of IDIBI

105. It is of course difficult to quantify the impact IMDBI has had on the economy of Iran. Its total financial assistance of Rls. 2,353 million as of March 20, 196), might have represented 3% of the total industrial investment, public and private but excluding oil, during the previous four and a half years. HIowever, this assistance led to new investment totaling Rls. 8,075 million, perhaps one-eighth of total industrial investment during the same period. lDCBI estimates that the foreign exchange saved through local production financed by itself amounted to about US$ 35 million and that - 21 -

its assistance created some 13,100 newT jobs. 1/ It should also be remembered that Ii BI has nanaged 83 loans, totaling Rls. 1,400 million, which can be presumed to have produced similar benefits to the economy.

106. More important, perhaps, than such statistics is the educational value of I'lJBI's activities. Though it was criticized during its early years for requiring a great deal of information on projects brought to it, investors are beginning to appreciate the value of the thorough appraisal which IIDBI is now making and are less resistant to having their projects scrutinized by lDBI. The value of careful planning has been demonstrated by the success of those projects assisted by INDBI as compared to projects wihich received assistance elsewrhere.

107. DMDBI's reputation as an investment institution is so well establish- ed that its advice is sought not only by private entrepreneurs and establish- ed businessmen but also by the Government. Its leading role in the establish- ment of a Stock Exchange, for example, demonstrates not only its central position in the financial field but also the faith that others have in its ability and expertise. There can be little question but that IIDBI has had a major and important impact on the economy and will continue to do so.

V. FUTURE PROSPECTS

flDBI's Forecasts

108. The forecasts attached as Annex 14 and covering fiscal years 1965/66 and 1966/67 are essentially those prepared by DlDBI in M'ay, 1964. They do not take into acccuint the recently proposed stock dividend. In 196h ItS also prepared a forecast for 1964/65. Though- it is difficult to judge from the available data, it would apl,ear that the economy is recovering at a slower rate than anticipated in these forecasts. However, f-BI' s forecast of new business for l96o)65 turned out to be quite accurate.

109. The following table conpares DIiBPs forecast of new loans signed during 1964/65 with the actual amount, as well as presenting the forecast of loans to be signed during the coming two years.

1/ These figures all relate to the period up to March 20, 1964, and were gathered by the mission during its Niay 196h, visit. More up-to-date figures are not available. - 22 -

196b/65 1965/66 1966/67 Signed Loans (in millions of rials):

Actual 1,042 * * Forecast 1,000 1,359 1,250

Percentage increase from year before:

Actual 72% * * Forecast 65% 36, -8%

110. Several loans approved but not signed during 196L/65 are included in the figure forecast for 1965/66 resulting in its being larger than that for 1966/67. It is quite possible that sinilar delays may occur with loans approved during 1965/66, thereby reducing the figure for that year and increasing the corresponding figure for 1966/67. This postponement of commitments, coupled with the slower than anticipated recovery of the economy, may result in the forecasts proving to be somewhat optimistiZc. However, in viewJ of the fact that results for 196 4i/65 coincided closely with DCBI's forecast and the fact that, in spite of the recession and the s31om recovery, fDBI's business has been increasing rapidly over the past four years, the figures forecast for the coming two years can be considered not unduly optimistic.

111. The forecast Balance Sheets and Profit and Loss Accounts for the next two years indicate that net profit after taxation and the allocation to the reserve for bad and doubtful debts is expected to continue to rise. At the end of fiscal 1966/67 it is expected to total 2Z% of the share capital and 1'10 of the net worth at the beginning of that year. The forecast assumes an increase in the dividend rate of 1/2%5 each year. On this basis, total allocations to reserves would average over 70% of net profit, with reserves at the end of the forecast period being equal to almost 10%1 of the loan portfolio and about 85% of the share capital. If, as recently proposed by 1IflB, a stock dividend is declared, it is ex- pected that the cash dividend would be maintained at a rate of 7-1/2%. These two proposals would, of course, alter the above picture, though the overall change would not be too significant.

Need for Additional Resources

112. Rial Funds. ThDBI forecasts a shortfall during fiscal 1965/66 in rial funds. However, it is confident that it will be able to secure the necessary funds from the Government on appropriate terms when they are needed.

113. The Managed Loans are to be repaid starting in 1967. ThDBI, in anticipation of this obligation, has so scheduled loans made from repayments of these funds that there will be no shortfall of rial funds on hand to meet - 23 -

the repayments. UIowever, it intends to request an extension in the re- payment period.

114. Foreign Exchange. ThDBI's forecasts indicate that a total of US$ 10.7 million in new foreign exchange resources will be needed during the two years March 21, 1965, to March 20, 1967. It hopes to meet these needs from the World Bank.

115. Problems in the Use of Bank Funds. The increase in investment tempo in Iran need not automatically lead to an increase in the utilization of foreign credits offered by sources like the Bank. Alternative sources of rial credit exist, for example, commercial banks, and, as Iranian currency is now in practice easily convertible into hard currencies for approved imports, investors have shown some reluctance to use credits which saddle them with an exchange risk. Moreover, the normal practice in Iran is for the entre- preneur to first purchase equipment using his own resources or suppliers' credits, and then to seek local currency resources from institutions like D1-BI. Besides, an application to IDBI usually involves the entrepreneur in disclosure of information which he is not anxious to make and time- consuming formalities in the course of DDDBI's appraisal and approval of the project for assistance.

116. DMBI's Managernnt is aiware of these difficulties. On the problem of foreign exchange risr, in view of the recent reductiQn of interest rates and the consequent reduction of its own mar.gin on borrowed funds, Ii1BI is not in a position to provida an interest incentive on loans in foreign currencies. On the oth:er hand, it has initiated discussions with the Central Bank and Government on the possibility of one or the other taking on the foreign exchange risk. The Central Bank, anticipating an eventual fall in exchange reserves, is also exploring with IFDBI ways and means to encourage entrepreneurs who need credit to bring their projects to IYDBI for financing out of foreign credits before they expend foreign exchange on equipment.

117. Increasingly entrepreneurs are beginning to realize that seeking the advice and assistance of 2 lBI is well worth the temporary delay and annoying questions. DD3I is beginning to be recognized as much more than a source of financial assistance but also as a source of sound guidance. This is apparent from the fact that entrepreneurs are beginning to approach V3DBI at an early stage in the development of their projects. On the other hand, with IMDBI staff members now sitting on the Government licensing committee and foreign investment board, DEBI is learning of new projects before they have progressed very far and can contact the entrepreneur itself while he is still formulating his plans. The more competitive interest rate now charged by DviBI is attracting more new customers, leading to an increase in the volume of new business in both foreign and local currencies.

118. In spite of' the difficulties mentioned, DIBI was able substantially to step up the use of foreign exchange in the last fiscal year. As against - 24 -

US$ 2.2 million committed out of the Bank loan in the four previous fiscal years, it was able to commit US$ 3.0 million in the last fiscal year, and has, in addition, submitted to the Bank for approval projects which will use about US$ 1.3 million out of a second Bank loan, if granted.

119. In order to assist flDBI in utilizing Bank funds more rapidly, it should be allowed to apply Bank funds to expenditures made up to 90 days prior to the submission of the project to the Bank, which limitation is in line with the majority of Bank loans to development finance companies. The limitation in the current loan agreement is 60 days.

120. Prior approval of the Bank should not be required for projects using less than US$ 300,000 of the Bank loan. IMDBI has not had to seek the prior approval of AID for projects using less than US$ 250,000 of the AID loan. IMDBI's staff has built up enough experience and expertise so that the Bank need not review the smallest projects but can safely rely on IMzDBI's judgment.

121. Size of a Second Bank Loan. IIDBI expects to be able to conmmit in the two years ending IMarch 20, 1967, (the end of the period covered by its forecasts) additional foreign exchange resources totaling US$ 10 million. Though, as oreviously indicated, this may prove to be somewqhat optimistic, there is every reason to expect fDBI to be able to commit this amount within at least the next two and a half years. The present Bank loan is totally committed, and, as already mentioned, additional projects, totaling about US$ 1.3 million, are before the Bank for financing from a second loan. A second loan should therefore be granted as soon as possible in sufficient size to cover MDBI's foreseeable foreign exchange needs for the next two to two and a half years, i.e. US$ 10.0 million.

VI. CONCLUSIONS JND RECOIiZENDATIONS

122. IhDBI has had a significant and beneficial impact on the economy of Iran. This impact is much more far-reaching than the statistics of its operations would imply. It has built up a good reputation for competency, due in large part to the efforts of the foreign Management and staff. Its relations with Government are cordial and mutually advantageouis, while not at present marked by any undue pressures. The operating results of IMDBI can be considered satisfactory and its appraisal and end-use procedures adequate.

123. There is room for improvement in IMDBI's operating methods, how- ever, as lIanagement is well aware. Appraisals could benefit by more critical analysis and greater use of a team approach at an earlier stage. As regards end-use supervision, a team approach should again be employed, both for in- spection visits by EMDBI's staff and for analysis of a project's operations. The original appraisal should be periodically up-dated, and at least at the time the project begins commercial operations. 124. IMD3I is searching for new opportunities in underwriting as well as in straight equity participation despite the limitations of the Iranian environment. It is also active in promotional work and is aware of the expense and risk of moving too rapidly in this area.

125. The economic situation in Iran is improving. fDBI has a healthy volume of new business before it and can look forward to new opportunities in the future. Its forecasts are reasonable and demonstrate an immediate need for increased foreign currency resources, and, during the current fiscal year, for increased rial resources. DKDBI feels that it will be able to raise the necessary rial financing from the Government.

126. The present Bank loan is entirely committed. Difficulties in utilizing it and other foreign currency resources have been identified and steps are bei-ng taken to overcome these. Even if these difficulties are eliminated only slowly, there is every prospect that additional foreign exchange resources could be drawn dowm more quickly and effectively than in the past.

127. IMDBI's forecasts indicate that it will be able to commit during its next two fiscal years additional foreign exchange resources totaling about US$ 10 million. It is a suitable organization for a Bank loan and it is recommended that a loan in this amount be made. The interest rate should be the Bank's current rate for similar borrowers at the time each project is credited. The amortization schedule should be a composite of all the repayment schedules of P.OBI's borrowers as agreed with the Bank. I'S3T should be allowed to apply Banlc funds to expenditures made up to 90 days prior to the submission of the project to the Bank. IOBI should be free to use this loan for relending in amounts not exceeding US$ 300,000 without prior anproval by the Bank. Annex 1

INDUSTRIAL AID iIINING DE-ELOPIBNT BANK OF IRAN

Class A Shareholders Holding More than 2,000 Shares as at 1964

Shareholders Nuirmber of Shares

1. S.S. Iramoz 19,7741/ 2. Mr. R. Aryeh 15,840 3. S.S. Firouz 8,o000/ 4. Rural Development & Cooperative Bank 7,920 5. S.". Rissandagi va Bafandagi Rey 71,920S" 6. Mr. Hamid Nikpay Tehrani 7,920 7. Mr. Habib Elghanayan 7,000 8. Iranian Bank 5,784 9. hr. H. Ghassemieh 5,000 10. S.S. Bazargani Aryan 5,000 11. Mr. R. Aboud 4,501/ 12. Dr. Mohsen Lak , 5001! 13. S.S. Ghand Esfahan ,356_/ 14. S.S. Siman Esfahan 4,220 15. Irano British Bank 4,000 16. S.S. Bargh va Rissandagi Najafabad 3,960 17. klr. Asghar Panahi 3, 200k/ 18. Mr. M. Daneshwar 3,168 19. S.S. Rissandegi va Bafandagi Behris 3,168 20. S.S. Rissandagi Kashan 3,000 21. Nlr. A. Vossough 2,87 63 22. Mr. Ebraiiim Khajeh Nouri 2,800 23. Dr. K. Farmanfarmaian 2,3313/ 24. Mr. Kazem Kouros 2,000Y' 25. Mrs. Mahin Dokht Moddaberi 2,000 26. S.S. Margarine 2,000 27. S.S. Panbeh Gorgan 2,000

TOTAL 1hh,237

1/ Members of the "Sabet Groap" which controls 39,484 shares.

*i - iiembers of the "Kouros.:Group" which ntro1s 17,965 sheres,

3v/lembes of the "Farmanfarmaian Group" which controls 18,807 shares.

March 1, 1965 Annex 2

Ii'JD'USThIAL AN1rD ?fliNT 110 DLLiKiET -3Ei OF IrtAlHT

Class B Shareholders as at September 22, 1964

Shareholder Nhiwibcr of Sqhares

U. S.1 .

Lazard Freres & Co. 18,125 Chase International Investment Corporation 18,125 International Basic Econom.y Corporation 11,250 The First Boston Cornoratioa 7,500 Subtotal - U.S.A. 55,000 Uri ted Kin;--dora

Lazard Brothers (&.Co., Ltd. 3,750 Lloycds Ban1 Limited 3,750 Mlidland Bank Limited 3,750 Enj8 li.h L2.ectric Co. Ltd. 3,750 Simon Carves Limited 3,750 Subtotal - United Kirnzdom 18,750

France

Iazard Frercs & Cie. 9,,75 Banque de Paris et des Pays Bas 9,375 Subtotal - France 18,8750

Bel .um

Societe Financiere de Transrorts et drEntrenrises Industrielles (Sofina) 155,000

German-y

Sal. %Oenheim Jr. & Cie. 9,375 Deutsche Bank A.G. _9,375 Subtotal - Germanya,ry

Helland

Amisterdamsche Bank H.V. 7,500 Nederlandsche Handel - 'Iaatschtponij NI.V. 3,750 Hollandsche Bank-Unie N.V. 3,750 Subtotal - Holland 15.,000

Italy

Banca di Credito Finanzierio (iMiediobanca) 11,250 Mlontecatini Societe Generale Der l1Industria lhineraria e Chimica Anonima 3,150 Fiat S.),A. 3,750 Subtotal - Italy 18,750

Marwh 1., 1965 TCTAL - Class 3 10,1000 Annex 3 Page 1 INDUSTRIAL AND MININ4G DEVELOPMENT BANK OF IRAN

Board of Directors and Executive Committee

I. Board of Directors - elected on June 18, 1964

Directors Elected by Class "All Shareholders

1. Eng. Jaafar Sharif Emami, Chairman (President of Iranian Senate, Head of Chamber of Industry & Mines, Deputy Head of Pahlavi Foundation)

2. Mr. I4ohammad Khosrowshahi (President, Tehran Chamber of Commerce) 1/

3. Dr. Kaveh Farmanfarmaian (Manager of Bonded Warehouse Ltd., M4ember of Tehran Chamber of Commerce, Chairman of AEG)

L4. YMr. Saeed Hedayat (Chairman of the Board of Bank Kar)

5. Mir. Abol Gasem Kheradjou (Managing Director of IIlNOBI)

6. Mr. Essau Kouros (Director of Rey Textiles)

7. Mr. Habib Sabet (Ow-ner and Manager of TV station and of Pepsi Cola, Iran)

8. Dr. Zia Taheri (Managing Director of Yazdbaff Textiles)

Directors Elected by Class "B" Shareholders

1. Ivir. James S. Adams (Lazard Freres & Co., U.S.A.)

2. Mr. Enrico Cuccia (Banca di Credito Finanziario)

3. Viscount HEampden (Lazard Brothers & Co., Ltd., U.K.)

4. Mr. William S. Mliller (Chase International Investment Corporation)

5. Mr. Robert WI. Purcell (International Basic Economy Corporation)

6. Mfr. Willem A. van Ravesteijn (Lazard Freres & Cie., Paris, former Managing Director, I1DBI)

7. Baron Georg Ullman 2/ (Sal. Oppenheim Jr. & Cie.)

1/ Elected by Board in January 1965 to fill casual vacancy.

2/ Alternates every year with Mr. Franz H. Ulrich (Deutsche Bank A.G.) Annex 3 Page 2 II. Executive Conmittee of the Bank

1. Eng. Jaafar Sharif ,iiami

2. Mr. James S. Adams

3. Mr. Abol Gasem Kheradjou

4. MFr. William S. Miller

5. Mr. Hlabib Sabet

May 27, 1965 INDUSTRIAL AND MINING DEVELOPMENT BANK OF IRAN ORGANIZATIONAL CHART

SHAREHOLDERS CLASSES A AND B INSPECTORS AUDITORS E. KHAJE NOURI A. A. DEN HARTOG COOPERS AND LYBRAND BOARD OF DIRECTORS

EXECUTIVE COMMITTEE GENERAL COUNSEL TREASURER SECRETARY

N. EMAMI A.M. SHAKIB C. GHANI

MANAGING DIRECTOR

A. G. KHERADJOU

DEPUTY MANAGING DIRECTOR

M. R. AMIN

SECRETARIATAND ECONOMICADMINISTRATION AND TREASURY AND LA EHIA LEGAL DEPARTMENT DEPARTMENT DEPARTMENTI DEPARTMENT DEPARTMENT DEPARTMENT

C.DGHANI AND C.GHANIKOND F. MAHDAVI S.A. ATRI A M. SHAKIB P B L CLARK H. AREFPOUR M. TAVAKOLI

z z M March 1, 1965 (R)IBRD- 2363X nnex 5A

IND-JSTRIAL AND PINING DEVELOPIT1*T BiiNK OF IRLN

Loans Signed as at September 22, 1964 Anarzed byPurpose

(In millions of rials)

Purpose Number Amount Ahrerage Size of Loan of Loans of Loans of Loans (R1s) (7RlS)-

New L15 1,299.9 29

Expansion 43 1,130.5 26

tWorkirg Capital 12 123.0 10

TOTALS 100 2,553.4 26

NoB.: All second and third loans made to the samie enterprise have been classified as being for expansion purpose3.

April 23, 1965 Annex 5B

INDUSTRIAL IAN 1aITINING DEEVLOPEENT BANK OF IRAN

Loans Signed as at September 22, 1964

Analyzed by Size

(In millions of rials)

Size Nulmiber Ainount Percentage of of Loan of Loans of Loans Total Amount.

Up to Rls.15,000,000 49 440.0 17.2

Rls.15,001,000 - Rls.25,000,000 23 519.9 20.4

Rls.25,001,000 - Rls.45,000,000 i4 419.6 16.4

Rls.45,001,000 - Rls.75,000,OOO 9 613.9 24.1 Rls.75,001,000 and over 5 560.0 21.9

TOTALS 100 2,553.4 100.0

April 23, 1965 Annex 5C

IN'DUSTFIAL ATD ll-NING DEVELO1ENT BANK OF IiU.N

Loans Signed as at Septermber 22, 1964

Analyzed by Duration

(In millions of rials)

Durati o Number P3rbentage of Amount Percentage of of Loan 1 of. Loans Total Number of Loans Total Aimount (M;) (Rls j M

Up to 3 Years /2 2 24.o 431.0 16.9

Over 3 Years up to 5 Years 23 23.o 336.0 13.2 Over 5 Years up to 7 Years 36 36.0 894.3 35.0

Over 7 Years 17 17.0 892.1 34i9

TOTALS 100 100.0 2,553.4 100.0

/1 On the basis of the original sclledules, i.e., any extensions not taken into account.

/2 Includes the 12 working capital loans.

April 23, 1965 Annex 5D

ITDUSTRIAL AND MINING DEVELOPMENT BADK OF IRAN

Loans Signed as at September 22, 1964

Analyzed by industry (Including Equity Participations)

(In millions"of rials)

Loans Percentage Number Average Amount of of Size of Equity Industry of Loans Total Amount Loans Loans Participations (Rls.-T (Rls.) (Rls-.7

Food Processing 528.0 20.7 23 23.0 76.2 (Vegetable Oil 162.5 6.4 8 20.3 - ) (Sugar 100.0 3.9 1 100.0 70.0) (Tea 6.o 0.2 1 6.o - ) (Other 259.5 10.22 13 20.0 6.2) Textile Manufacturing 445.o 17.4 8 55.6 - Rubber & Rubber 2 Products 374.5 14.6 134.o 52.0 Construction Materials 263.6 10.4 12 22.0 - (Cement 160.1 6.3 3 53.3 - ) (Other 103.5 4.1 9 11.5 - ) El-ectrical Appliances 250.0 9.8 10 25.0 - Chemicals, Plastics & Pharmaceuticals 189.4 7.4 9 21.0 - Metal Works 164.9 6.5 7 23.6 - Motor Vehicles 130.0 5.1 2 65.o - Paper & Wood Products 102.0 4.o 9 11.3 - Cotton Ginning 38.4 1.5 3 12.8 - Mining 26.5 1.0 1 26.5 - 14iwscellaneous 41.1 1.6 5 8.2 30.0 2/

Totals 2,553.4 100.0 100 25.5 158.2

1/ Rls. 37 million paid 2/ Rls. 15 million paid

April 23, 1965 INDUSTRIAL AND MINING DEVELOPMENT BANK OF IRAN

Analysis of Arrears Among Loans Made by IMDBI as at March 20, 1965

Over 6 months Over 12 months Up to 6 months Up to 12 months Up to 2h months Over 2h months T 0 T A L S No. of No. of No. of No. of No. of Amount in Arrears Loans Amount in Arrears Loans Amount in Arrears Loans Amount in Arrears Loans Amount in Arrears Loans rials % of Total rials % of Total rials % of Total rials % of Total rials % of Total '000 .Outstanding '000 Outstanding '000 Outstanding '000 Outstanding '000 Outstanding (Rl-s) () (Rls) (%) (Rls) (%) (Rls) (%) (Rls)

Principal - own funds 54,376 3.2) 19 12,288 0.8) 9 19,832 1.7) 10 12,286 1.6) 8 98,782 5.9) 19 managed funds relent 16,272 2.6) 2,212 o.6) 15,352 2.5) 12,181 1.9) h6,017 10.6)

Interest - own funds 16,712 - ) 26 4,059 - ) 12 5,519 - ) 11 5,282 - ) 6 31,572 - ) 26 managed funds relent 5,419 - ) 1,L31 - ) 2,32h - ) 1,295 - ) l0,h69 -

Fees - own funds 4,098 - ) 22 1,36h - ) 10 1,826 - ) 8 1,871 - ) 6 9,159 - ) 22 managed funds relent 446 - ) 356 - ) 611 - ) 3h2 - ) 1,755 -

Subtotals - own funds 75,186 - ) 39 17,711 - ) 16 27,177 - ) 13 19,439 - ) 9 139,513 - ) 39 managed funds relent 22,137 - ) 3,999 - ) 18,287 - ) 13,818 - ) 58,241 - ) -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

TOTAL 97,323 - 39 21,710 - 16 45,h6L _ 13 33,257 - 9 197,75h - 39

May 19, 1965 INDUSTRIAL AND MINING DEVELOPMENT BANK OF IRAN Analysis of Arrears Among Loans Transferred to TMDBI as at March 20, 1965

Over 6 months Over 12 months Up to 6 months Up to 12 months Up to 24[ months Over 24 months T 0 T A L S No. of No. of No. of No. of No. of Amount in Arrears Loans Amount in Arrears Loans Amount in Arrears Loans Amount in Arrears Loans Amount in Arrears Loans rials % of Total rials $ of Total rials % oTotaof Total rials % of Total '000 Outstanding '000 Outstanding '000 Outstanding '000 Outstanding '000 Outstanding TRlis)7 (%) (Rls) M% (Rls) (%) (Rls) (%) TR-ls1- (--T) Principal 36,673 4.9 12 241,429 3.3 7 30,961 14.2 6 115,017 15.6 12 207,080 28.2 23 Interest 10,748 - 10 9,0714 - 6 114,880 - 5 32,534 - 12 67,236 - 19

T O T A L 47,1421 - 12 33,503 - 7 145,8141 - 6 1,7,551 - 12 2714,316 - 23

May 19, 1965 Annex 7

INDUSTRIAL AND MINING DEVELOPMENT BANK OF LRAN IBRD Loan No. 2L0 IRN Status as at May 27, 1965

Principal Amount $5,200,000

Less: Loans Approved and Signed (ten) Amount Disbursed $2,221,403 Amount Not Disbursed 1,373,288 3,59b,691

Amount Available for Commitment 1,605,309

Less: Loans Approved by IBRD but not yet credited to the Loan Account (four) 1,757,000

Amount Approvals Exceed IBRD Loan (to be carried over if there is a second loan) 151,691

Note 1: The four loans which the Bank has approved but not yet credited to the Loan Account are as follows:

Kaf Co. US$ 667,000 Air Taxi US$ 800,000 Towlidi Shokomars Co. US$ 150,000 Peech va hiohreh US$ l40,000

Note 2: Two projects, submitted to the Banm in advance of an exact deter- mination of the amount of foreign exchange needed, were under study on May 20, 1965. They were:

Arj Company US$ 3-400,000 Neishabour Sugar US$ 7-900,000

June 3, 1965 Annex 8

w'--,lTRI AL .~~~~~~~~~~~~~~~~~~~~~~~~~~7T ?G AA'D TJEVIIIIVI 1O Gy:KTI .9A j

Ina{Zsis of_'ianaged Funds as at SeT)Q 22 1964

(Ir millions ef nials)

A. Oric:inal Loans

;Nto. or Loans Amount

Total Received in 1959 83 1, LOG Loans Comtletely Repaid 47 282

Loans Outstanding 36 1,118 Repa.yments 2eceived on Loans Outstanding - 303

Principal Outstanding 36

B. :7ana,e6 7Lunds Relent Ariount

Total Reuavmients of iTha !ed Funds M'anaged Fvinds Relent:- Working Capital Loans 121 Other Loans 335

-;anaeed Funds Held as Cash snd Available for Rel-endinL

/ cceot in the case of iyorkinT capital loans, repaid mana.;ed funds Pnd IID.3IE s o-,n funds are lent together as one loan. Vijoiking capita'l loans are made up entirclv of repaid mana,ed funds.

April 23, 1965 Annex 9

INDUSTRIAL AND MINING DEVELOPMT BANK OF IRAN Equity Investments Held as at March 20, 1965 (In millions of rials)

Total Issued Percentage of and IMDBI Total Share Company Paid Share Capital Holding Capital (Rls) ~~(Rls)

Kermanshah Sugar Co., Inc. 340.0 70.0 20.6 S.S. General Tire and Rubber Co., Inc. 225.0 45.0 20.0 Bonded Warehouses Co., Ltd. (501 paid) 75.0 15.0 20.0 Melli Shoe Co., Inc. 125.0 12.0 9.6 B.F. Goodrich Iran S.A. 210.0 7.0 3.3

Pak Dairy Co., Inc. 46.8 6.2 13.1

Total 155.2

May 19, 1965 Annex 10

INDUSTRIAL AND MINfiiG DEVELOP1iENT BANK OF IRAN

Restrictions on the Size of Investraents (adopted by the Board of Directors on May 2, 1965)

a. It will diversify its financing among different types of enterprises.

b. It will not commit to any single enterprise (in whatever form) an amount of its own funds greater than 15% of its paid-up share capital, free reserves and the Government advance ranking pari passu with the share capital.

c. It will not commit to any single enterprise in the form of equity an amount of its own funds greater than 10% of its paid-up share capital and free reserves.

d. The total amount at cost of IMDBI's equity investments made from its owm funds will not exceed its paid-up share capital and free reserves.

e. In very exceptional circumstances, especially in cases wThere the Banlc is the primary sponsor of an industrial proJect, it is possible to digress from the requirements mentioned above.

INlay 27, 1965 INDUSTRIAL AND MINING DEVELOPMENT BANK OF TIHN

Balance Sheets - March 20. 1961 to March 20, 1965 (In thousands of rials)

March 20. 1961 March 20, 1962 March 20, 1963 March 20, 1964 March 20, 1965 ASSETS

Cash and short-term assets 425,302 187,030 287,361 146,726 98,210 Accrued interest and fees receivable 17,858 20,594 37,721 to,507 54,9444 Loans in national currency: Advances and commitments 760,407 826,869 850,537 975,583 1,072,331 Less amounts not disbursed 198,256 562,151 18,757 808,112 105,198 745,339 34,o09 94l,h92 79,423 1,392,908 Loans in foreign currency: Advances and commitments 147,058 180,081 197,156 300,091 497,375 L amounts not disbursed 133,042 14,016 37,130 142,951 33,402 163,754 83,159 216,932 234,724 262,651 Equity participations in Iranian companies, at cost 10,000 30,000 57,000 112,000 155,150 Fixed assets (net) 5,560 2,941 - - 17,230

Deferred charges (net) 11,805 5,902 - __

1,0146692 1,197,530 1,291,175 1,463 657 1,981,093 LIABILITIES

Overdraft - Central Bank of Iran - - 115,292 Provisions and payables 26,760 43,091 89,179 115,512 145,845 AID advances and comsitments 93,075 127,097 125,090 157,085 246,104 Less amounts not disbursed 83,025 10,050 42,657 84,4 4 0 17,935 107,155 39.099 117,986 115,752 130,352 IBRD advances and commitments 53,383 52,98h 72,o66 1h3,006 250,550 Less amounts not disbursed 49,417 3,966 4,547 48,437 15,467 56,599 h4ho60 98,947 118.972 131,578 Plan Organization loan - - - 70,000 350,000 Government advance 600,000 600,000 600,000 600,000 600,000 Paid-in capital Class A shares 240,000 240,000 240,000 240,000 240,ooo Class B shares 160,000 ho00,000 16o,oo o400,000 16o,o o400,000 160,000 400,000 160,000 400,000 Legal reserve 3,288 9,235 15,640 23,290 35,000 General reserve 2,500 12,000 22,500 37,500 73,000 Surplus 128 327 102 422 26

1,046,692 1,197,530 1,291,175 1,h63,657 1,981,093

Note: Earlier Balance Sheets have been modified to reflect a change in classification adopted in 1965.

May 4, 1965 INIIJSPPIAL AND MINING DEVELPMENTBANK OF IRAN

Profit and Loss Accounts - October 16, 1959 tI March 20, 1965 (In thousanda of title)

Oct. lb, 1959 March 21, 1961 March 21, 1962 March 21, 1963 March 21, 1966 tn to to to to March 20, 1961 March 20, 1962 March 20, 1963 March 20, 1966 March 20, 1965 INCC4E:

Interest, coecaitasent and service fees so loans to borrowers 22,558 69,191 76,720 96,396 U5,067

Diriden.d fro e - - - - 1,391

Agency fees 48,052 32,531 29,559 26,843 25,316

Interest on deposits with other Banks ad on short tem invest- ments 37,700 15,831 21,882 13,217 9,721

Other ijcose 1,743 3.403 6.272 6,819 4.474 Gross incoe 110,052 120,956 132,433 139,275 155,967 EXPESNSES

Interest and ccmaitment feea payable 178 5,546 9,633 11,335 26,206

Salaries, .agee end allowances 52,616 62,059 63,570 61,836 31,508

Other operating expenses 12,616 9,532 10,691 10,661 9,162

Sundry provisisos including pro- sioni for cootingenoiss and taation 11535 15,120 17,255 23,404 27,709

Deprecietion of fixed aseete 3,726 3,150 3,020 1,071 1,588 Amortization of preliInery and pre-operating sape-ses 7,870 5.903 5.983 Total enpeoses 88,137 81,311 89,752 88,305 9b.153

Net profit after taxation 21,916 39,645 62,681 50,970 61,816

Undietributed profits brought forward - 128 326 102 622

21,916 39,773 43,007 51,072 62,236 APPROPRIATIONS

Trasnfer from miscellaneous reserves (included in dprvsons nd pay.blee') - - - - 15.000

Arilable for dietribution 21,n6 39,773 43,DW7 51,072 77,236

Transfer to legal reserve 3,288 5,947 6,405 7,650 117110

Transfer to ge.eral reserve 2,500 9,5oo 10,510 15,00) 35,50°

Ditidend (68)16.000 (6f)21,,0W (&$%)26,000 (7%)28.000 (7j%)30,000

Tctal appropriations 21,788 39,447 62,905 5o,650 77,210

Undistributed profits canied forward 128 326 102 622 26 Net profit after tation (and allocation tI ths roserve f or bad and dcobtful debts) e percentage of:

(a) Net worth (at beginning of year) 5.5% 9.8% 10.1% 11.6% 13.4%

(b) Share capital 5.5% 9.9% 10.7% 12.7% 15.5%

May 4, 1965 Annex 13 Page 1

INDUSTRIAL AND MIMING DEVELOPMEHT BANK OF IRAN

Other Sources of Finance for Industry and Agriculture

Sources of Finance for Industry

1. In addition to normal sources of finance Like personal savings, retained profits, family funds, assistance from friends and loans from the curb market, there are two institutions besides EDBI which serve as the main sources of medium- and long-term credit for industry in Iran. Also, commercial banks allow re-rolling of short-term credits for the accuisition of fixed assets and permanent working capital as well as facilitating suppliers' credits through guarantees.

2. Industrial Credit Bank. Tne Industrial Credit Bank of the Plan Organization is a Government-owned corporation which is designed primarily to look after the credit needs of medium-sized industries. The volume of assistance granted by it is typically 50" of the capital needs of entre- preneurs up to a total of Rls. 5 million. It takes up equities, is interested in finding sponsors for projects it promotes, and manages some of the Govern- ment's industrial enterprises for the purpose of selling them off to the private sector or of selling participations in them tb the general public. It is now becoming active in the field of guarantees as well.

3. It charges interest at 7%0 for loans below Rls. 5 million. It is at present interested in financing larger projects as well and hopes to do some joint financing operations with LiMDBI, especially in sugar. Interest on these larger loans will be 8%. Its resources are of the order of Rls. 1,200 million, Rls. 4OC million being in share capital and Rls. 800 million, in loans supplied by the Plan Organization. It feels that it has sufficient resources to meet its immediately foreseeable needs. In deciding on the projects it will assist, it follows a list of priorities drawn up annually and based on the aims and targets of the Third Plan. Between Mviarch 21, 1961, and likarch 20, 1964, it had granted 45 loans amounting to Rls. 200 million.

4. Industrial Guarantee Fund. The Industrial Guarantee Fund was estab- lished in January 1961 as a non-profit entity with funds derived from the U.S. and Iranian Governments. It operates as a refinancing agency for term credits in amounts usually below Rls. 2 million offered by the banking system to small- and medium-aized industries. It charges a refinancing fee of 4% and allows the banks to charge a maximum interest of 10%. Its total resources are Rls. l,hOO million. By March 20, 196h, it had refinanced loans amounting to Rls. 302 million.

5. Oil Consortium. An Iranian newspaper noted in April 1965 that the Oil Consortium operating in Iran is to set up by September 1965 an Industrial Development Corporation with a capital of £ 2 million to "encourage and develop enterprises in association with the Iranian private sector". It is not clear what the area of operation or the policies of this new institution will be. Annex 13 Page 2

Sources of Fi,nance for Agriculture

6. The Bank of Agricultural Credits and Rural Development is the only major source of finance for agriculture ln Iran. Its capital of Rls. 10 billion is held by the Government. Its objectives are broad and aimed at improving agricultural conditions in the rural areas and generally raising the standard of living among farmers. It carries out these objectives mainly by granting credits to farmers. In the three years prior to March 20, 1964, it granted some 470,000 loans, totaling Rls. 6,011 million, though recently it has been much less active.

Slay 27, 1965 Annex 14 A

INDUSTRIAL AND MINING DEVELOPMENT BANK OF IRAN

Forecast Balance Sheets - March 20. 1966 and March 20. 1967

(In millions of rials)

March 20. 1966 March 20, 1967 (Ris.) (Rls.) (Rls.) (Rls.) ASSETS

Cash and short-term assets 120 145

Accrued interest and fees receivable 75 95

Loans in national currency: Advances and commitments 1,987 2,502 Less amounts not disbursed 112 1,875 131 2,371

Loans in foreign currency: Advances and commitments 949 1,289 Less amounts not disbursed 186 763 194 1,095

Equity participations in Iranian companies, at cost 255 330

Fixed assets (net) 23 26

3.111 _4,_062 LIABILITIES

Overdraft - Central Bank of Iran 115 115

Provisions and payables 181 221

AID Loan - advances and commitments 213 179 Less amounts not disbursed - 213 - 179

IBRD Loan - advances and commitments 336 310

L amounts not disbursed _ 336 - 310

Other foreign currency loans - Advances and commitments 400 800 Less amounts not disbursed 186 214 194 606

Plan Organization Loan 600 750

Additional rial loans 300 675

Government advance 600 600

Paid-in capital Class A shares 240 240 Class B shares 160 400 160 400

Legal reserve 47 61

General reserve 103 143

Surplus 2 2 3.111 _4.062

June 2, 1965 Annex 14 B

INDUSTRIAL AND MINING DEVELOPMENT BANK OF IRAN

Forecast Profit and Loss Accounts - March 21, 1965 to March 20, 1967

(In thousands of rials)

March 21, 1965 March 21, 1966 to to March 20, 1966 March 20, 1967 (Rls.) (Rls.) (Rls.) (Rls.) INCOME

Interest, commitment and service fees on loans to borrowers 178,500 248,000

Agency fees 25,000 25,000

Interest on deposits with other Banks and on short-term investments 7,500 7,500 Other income 5,000 5,50o

Gross income 216,000 286,000 EXPENSES

Interest and commitment fees payable 50,000 92,000

Salaries, wages and allowances 38,000 L1,000

Other operating expenses 11,000 12,000

Sundry provisions including provisions for contingencies and taxation 38,000 50,000

Depreciation of fixed assets 3,000 3,000

Total expenses Th0,ooo 198,000

Net profit after taxation 76,ooo 88,000

Undistributed profits brought forward 27 2,027

Available for distribution 76,027 90,027

APPROPRIATIONS

Transfer to legal reserve 12,000 14,o00

Transfer to general. reserve 30,000 40,000

Dividend (8%)32,ooo (81%)34,000

Total appropriations 74,000 88,ooo

Undistributed profits carried forward 2,027 2,027

Net profit after taxation (and allocation to the reserve for bad and doubtful debts) as percentage of:

a. Net worth (at beginning of year) 14.9% 15.9%

b. Share capital 19.0% 22.0%

June 2, 1965 Annex 14 C

DIDUSTRIAL AND MIND!G DEVELOPI,ENT 9ANK OF IRAN Forecast Cash Flow Statement - Liarch 21, 1965 to Ikarch 20, 1967 DlIDBI Funds (In millions of rials)

iMarch 21, 1965 March 21, 1966 to to 1i1arch 20, 1966 ILarch 20, 1967 Cash In

Repayments from borrowers:

Loans (rials) 200 200 Loans (foreign currency) 57 60 New funds:

Plan Organization loan (rials) 250 150 Additional rial loans 300 375 Foreign currency loans 558 392

Income 216 286 1,531 1,463 Cash Out

Wit.hdrawals by borrowers:

Loans (rials) 682 696 Loans (foreign currency) 558 392

Repayments of foreign exchange loans 57 60

Equity participations 100 75 Capital exl?enditure 8 6

Increase in receivables 20 "0

Interest payable & operating e,xpenses 99 145

Dividends 30 32

Taxation 5 12 1,559 1,438

Surplus 22 25

14Nay 4, 1965 Annex 1h D

INDUSTRIAL AND I4iTNING DEVELOPvENT BANK OF IRAN

Forecast Cash Flow Statement - March 21, 1965 to March 20, 1967

Managed Funds (In millions of rials)

Iiarch 21, 1965 1iarch 21, 1906 to to I4arch 20, 1966 Ilvarch 20, 1967

Balance at beginning of period 51 36

Repayments:

Loans from original portfolio 70 70

iNew loans 50 120 55 125 171 161

Less di.sbursements:

Lcans from original portfolio - -

New loans (signed before beginning of period) 26 21

New loans (signed during period) 109 135 115 136

36 25

N.B.: Repayments of loans from the original portfolio of 'Loans transferred to the Bank for management have been assumed to be 50% of actual amounts due during the respective years. This assumption is based on the Bank's experience of the loans in question.

April 23, 1965 Annex 14E Page 1

INDUSTRIAL AND MINING DEVEOPIMENT BANK OF IRAN-

Assumptions Used in the Forecasts

Iew Loans

1. The table attached shows the total new loans forecast to be signed and their expected rate of disbursement, broken down by year and by source of funds.

Equity Investments

2. Only the equity investments I4DBI expects to make from its own funds are included in the forecasts. These are expected to be in pharma- ceutical, steel-rolling, paper and sugar projects.

Capital E penditures

3. The capital exDenditures forecast are to be used to finance a new office building for IMI (it currently is renting its office space).

Plan CrFanization Loan

4. The full Rls. 750 million has been forecast to be drawn down during the three-year period. The Loan Agreement provides for this.

Additional Rial Loans

5. In order to meet its forecast requirements for rial funds, I4EBI intends to negotiate an additional loan or loans, most likely from the Government of Iran. I1MMI anticipates no trouble in negotiating such a loan. AID Loan

6. rIMIB's latest Balance Sheet indicates that US$ 3.3 million of this loan has been colmmitted, though only US$ 1.7 million has been disbursed. The undlsbursed amount of US$ 1.6 million will be disbursed by the end of fiscal 1965/66. It is assumed that no additional projects will be financed from this source.

IBRD Loan

7. A total of 13 projects have been approved, accounting for the entire loan. The undisbursed amount of US$ 3.0 million will be disbursed by the end of fiscal 1965/66.

Other Foreign Currency Loans

8. I1IBI has approached the Wrorld Bank for an additional line of credit. Its forecasts show a need for US$ 10.7 million during the two fiscal years 1965/66 and 1966/67. Annex 14E Page 2

Repayments

9. For the purposes of calculating the cash flow and the interest and fees to be received over the two-year period, repayments of all loans (except- ing the original portfolio of managed loans) have assumed to be, on the average, 65% of the total amount actually due during the year, rising to 70% by the end of the period. This assumption is based on INDBI's actual experience anid is considered by them to be realistic.

Income

10. Interest income is based on the 7% rate announced by EVDBI early in 1964. Avera-e service fees of 1-1/3% per annum on rial loans and lo per annum on foreign currency loans are also inc':uded, togetlher with interest on deposits and agency fees in respect of the managed funds.

Expenses

11. "Salaries, wages and a'lowances" have been forecast to increase a total of 30% over the two years covered. This is sufficient to cover eight or nine newi staff members as well as normal salary increases.

12. The figure for "sundry provisions including provisions for contingencies and taxation" includes the provisions for bad and doubtful debts, as well as provisions to cover taxation and unforeseen expenses. The breakdown of -this figure for the two fiscal years 1965/67 and the accumulated bad and doubtful debt reserve are shown in the following tables. The allocation to this reserve will be increased if INDBI's profits prove to be larger than forecast.

Breakdowin of Figure for "Sundry Provisions" (In millions of rials)

March 21, 1965 March 21, 1966 to to March 20, 1966 Miarch 20, 1967 Provision for Bad and Doubtful Debts 32.0 36.0

Provision for Taxation 5.0 12.0

Provision for Unforeseen Expenses 1.0 2.0

Total Provisions 38.0 50.0 Annex 14E Page 3

Accumulated Reserve for Bad and Doubtful Debts

March 20, 1966 Ilarch 20, 1.967

Total Reserve for Bad and Doubtful Debts Rls. 94.6 mil. Rls. 130.6 mil.

Reserve for Bad and Doubtful Debts as Percentage of Total Loans Outstanding 3.6%o 3.8w

Appropriations

13. The Legal Reserve is augmented each year by 15% of the forecast net profit in accordance with legal requirements. An annual increase of 1/2%' in the dividend rate has been allowed for. The remainder of the net profit after taxation, plus or minus a small carry-over, is allocated to the General Re- serve. if the provision for bad and doubtful debts is included, total allocations to reserves each yrear average about 70% of net profits after taxation.

PMay 27, 1965 Forecast of Total New Loans to be Signed and Their Expected Rate of Disbursement (In millions of rials)

March 21, 1965 March 21, 1966 to to Foreign Currency March 20 1966 March 20 1967 Two Year Total in U.S. Dollars ('000) (Rls,) (Rls.) (Rl1s.T tRls.) (R-ls.)T(R-ls .) (IJ.-S.$)

LOANS SIGNED

Rial Funds:

Own 715 715 1,430 Managed 135 135 270

Subtotal 850 850 1,700

Foreign Currency

IBRD - No. 24o-IRN 109l 109 1,453 AID - No. 89 _ _ _ Other 400 400 800 10,667

Subtotal 509 400 909 12,120

TOTAL 1,359 1,250 2,609 LOANS DISBURSED

Rial Funds - Own:

Loans signed in previous year 52 70 122 Loans signed during year 630 626 1,256 Subtotal 682 696 1,378

Rial Funds - Managed: Loans signed in previous year 26 21 47 Loans signed during year 109 115 224

Subtotal 135 136 271

Foreign Currency: | a Loans signed in previous year 235 190 425 5,667 r Loans signed during year 323 202 525 7,000 Subtotal 558 392 950 12,667

TOTAL 1,375 1,224 2,599

/ Represents two loans approved in 1964/65 but not signed.

April 23, 1965