Completion Report

Project Number: 33021 Loan Number: 1796 November 2007

Pakistan: Small- and Medium-Size Enterprise Trade Enhancement Finance Project

CURRENCY EQUIVALENTS

Currency Unit – Pakistan rupee/s (PRe/PRs)

At Appraisal At Project Completion 19–26 September 2000 2–11 July 2007 PRe1.00 = $0.0179 $0.0171 $1.00 = PRs56.00 PRs58.50

ABBREVIATIONS

ADB – Asian Development Bank CAR – capital adequacy ratio EA – executing agency EPB – Export Promotion Bureau EFS – export financing scheme FCEF – foreign currency export finance facility FY – fiscal year GDP – gross domestic product L/C – letter of credit PEFG – Pakistan Export Finance Guarantee Agency Limited PCB – participating commercial bank PCR – project completion review PRG – partial risk guarantee SBP – State Bank of Pakistan SME – small and medium enterprise TA – technical assistance TCR – technical assistance completion report TDAP – Trade Development Authority of Pakistan TEPI – Trade, Export Promotion and Industry

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2007 ends on 30 June 2007.

(ii) In this report, "$" refers to US dollars.

Vice President L. Jin, Operations Group 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director R. Subramaniam, Governance, Finance and Trade Division, CWRD

Team Leader M. Endelman, Principal Financial Sector Specialist, CWRD Team Member H. Bustamante, Operations Officer, CWRD

CONTENTS

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BASIC DATA i I. BACKGROUND 1 A. History 1 B. Scope of Operations 2 C. Relevance of Design and Formulation 3 D. Related Technical Assistance 3 II. IMPLEMENTATION 4 A. Lending and Guarantee Policies 4 B. Characteristics of Subloans 5 C. Implementation of Subloans and Guarantees 6 D. Operational and Financial Performance of PCBs and Other Banks Supported 7 E. Covenants 7 F. Performance of ADB 7 III. EVALUATION 8 A. Appraisal 8 B. Implementation 8 IV. ASSESSMENT AND RECOMMENDATIONS 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 9 D. Preliminary Assessment of Sustainability 10 E. Impact 10 F. Overall Assessment 10 G. Lessons Learned 11 H. Recommendations 11

Appendixes 1. Pakistan Export Finance Guarantee Agency Limited 12 2. Project Logical Framework 14 3. Details of Foreign Currency Export Finance Facility Utilization 17 4. Comparison of Disbursements Between the FCEF and the FE-25 Scheme 19 5. Comparison of Interest Rates Between the FCEF and the FE-25 Scheme 20 6. Partial Risk Guarantee Facility 21 7. Operational and Financial Performance of Participating Commercial Banks (PCBs) 22 8. Status of Compliance with Covenants 25 9. Overall Assessment of the Project 29

BASIC DATA

A. Loan Identification

1. Country Pakistan 2. Loan Number 1796 3. Project Title Small- and Medium-Size Enterprise Trade Enhancement Finance Project 4. Borrower Islamic Republic of Pakistan 5. Executing Agency State Bank of Pakistan 6. Amount of Loan – Original $150,000,000.00 – Amount Canceled $147,620,425.72 – Net $ 2,379,574.28 7. Project Completion Report PCR:PAK 987 Number

B. Loan Data

1. Appraisal – Date Started 19 September 2000 – Date Completed 26 September 2000

2. Loan Negotiations – Date Started 2 November 2000 – Date Completed 3 November 2000

3. Date of Board Approval 7 December 2000

4. Date of Loan Agreement 15 December 2000

5. Date of Loan Effectiveness – In Loan Agreement 15 March 2001 – Revised 2 April 2001 – Number of Extensions 1

6. Terminal Date for Commitments The initial amount deposited in the FCEF special account – In Loan Agreement shall be $30 million. No withdrawals shall be made from – Actual the second tranche ($30 million) or third tranche ($30 – Number of Extensions million) unless ADB is satisfied, after consultation with the borrower, that (i) the FCEF is being utilized in accordance with the terms of the loan agreement; (ii) at least 80% of the FCEF special account has been disbursed to PCBs and remains outstanding; and (iii) ADB has determined that there is adequate anticipated future demand for the FCEF.

7. Closing Date – In Loan Agreement 2 April 2004 – Revised 21 January 2004 – Number of Extensions 0

8. Terms of Loan – Interest Rate Interest is at a floating rate based on the 6-month London interbank offered rate, or, if the Government opts, at a fixed rate based on ADB’s fixed-rate borrowing in dollar

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terms at the time of disbursement, plus 60 basis points.

– Maturity 15 years – Grace Period 3 years – Free Limit None – Repayment Terms 24 semi-annual payments

9. Terms of Relending (if any) The interest rate will be equivalent to the Government’s cost of funds including the 60 basis points charged by ADB, plus 0.15% to recover the front-end fee and other administrative charges.

10. Interest Rate for Subloans The interest rate by PCBs to subborrowers will be – Original determined by PCBs based on SBP guidelines commensurate with the cost and risks of subloans, for maximum maturity of 180 days, with a maximum margin of up to 2% per year.

– Revised In April 2003, the 2% maximum margin was abolished. 11. Disbursements a. Dates

Initial Disbursement Final Disbursement Time Interval 2 April 2001 5 November 2002 1.7 years Effective Date Original Closing Date Time Interval 2 April 2001 2 April 2004 3 years b. Amount ($2,379,574). This is comprised of (i) $1,950,000 as a front-end fee, and (ii) $429,574 as subloans to four PCBs until the loan closed on 21 January 2004. The latter amount, which served as a revolving credit facility to PCBs, reached the sanctioned amount of $2.970 million from January 2001 to December 2003. From that amount, about $2.165 million was utilized, with a total repayment of $1.977 million as of 6 December 2003. Details of this amount are shown below.

Category or Last Net Undis- Original Amount Amount Subloan Revised Amount bursed Allocation Canceled Disbursed Allocation Available Balance PICIC Commercial Bank Nova Leather Ltd. 350,410 - - 350,410 138,221 212,189

Metropolitan Bank Nova Leather Ltd. 86,000 - - 86,000 84,000 2,000 Sullex Industries 129,322 - - 129,322 129,322 - Naeem Enterprise 300,000 - - 300,000 300,000 -

United Bank Ltd. Nova Leather Ltd. 2,072,679 - - 2,072,679 1,481,827 590,852

Habib Bank Ltd. Mian Textile 31,680 - - 31,680 31,680 - Industries Ltd. Total 2,970,091 - - 2,970,091 2,165,050 805,041 ADB = Asian Development Bank, FCEF = foreign currency export finance facility, PCB = participating commercial bank, PICIC = Pakistan Industrial Credit and Investment Corporation Ltd., SBP = State Bank of Pakistan.

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C. Implementation Data 1. Number of Subloans = 30 2. Sectoral Distribution of Subloans = 10 Sector/Subsector Number of Subloans Amount ($) Leather and Chemical 3 175,856 Cowhides 5 283,819 Raw Leather 2 146,780 Textiles and Cotton 6 483,415 Lambskin 1 24,620 Cow Leather 1 105,000 Sheep Napa 3 274,100 Sheepskin 7 590,246 Cowskin 1 71,134 Wet-Blue Chrome 1 10,080 Total 30 2,165,050 Source: State Bank of Pakistan.

3. Size of Subloans (actual) Range Number of Subloans Aggregate Amount ($) 4,000–10,000 1 4,860 11,000–40,000 9 226,970 41,000–100,000 14 899,411 101,000–150,000 3 352,090 151,000–250,000 2 381,719 251,000–300,000 1 300,000 Total 30 2,165,050 Source: State Bank of Pakistan.

4. Regional Distribution of Subloans Region Number of Subloans Amount ($) Karachi 29 2,133,370 Lahore 1 31,680 Total 30 2,165,050 Source: State Bank of Pakistan.

5. Project Performance Report Ratings Ratings

Development Objectives Implementation Progress Implementation Period From 7 December 2000 to 31 December S S 2000 From 1 January 2001 to 31 December S S 2001 From 1 January 2002 to 31 December S S 2002 From 1 January 2003 to 31 December PS S 2003 From 1 January 2004 to 17 January 2004 PS S PS = partially satisfactory, S = satisfactory.

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D. Data on Asian Development Bank Missions No. of No. of Specialization of Name of Mission Date Persons Person-Days Members Consultation Mission 1–14 March 6 76 senior financial/capital 2000 market specialist, senior private/public sector specialist, counsel, trade economist, associate project analyst, staff

consultant Consultation Mission 13–26 July 8 94 senior financial 2000, economist, trade 17–21 July economist, cofinancing 2000 specialist, senior counsel, economist, trade finance expert/consultant, investment officer, staff

consultant Appraisal Mission 19–26 8 64 senior financial/capital September market specialist, senior 2000 private/public sector specialist, trade economist, cofinancing specialist, senior counsel, counsel, investment

officer, staff consultant Inception Mission 30 May– 4 32 senior financial/capital 6 June 2001 market specialist, cofinancing specialist, counsel, associate project

analyst Review Mission 1 7–9 August 1 3 senior financial/capital

2001 market specialist Review Mission 2 16–17 May 2 4 senior financial/capital 2002 market specialist, cofinancing specialist Review Mission 3 9–14 6 18 senior financial/capital December market specialist, 2002 cofinancing specialist, senior financial sector specialist Review Mission 4 3–4 1 2 senior financial sector

December specialist 2003 Project Completion Reviewa 3–11 July 2 18 financial economist, Mission 2007 operations officer a This project completion review was prepared by the Project Completion Review Mission, which was comprised of S. Lewis, Financial Economist/Mission Leader and H. Bustamante, Operations Officer/Mission Member. Due to the departure of S. Lewis on 31 July 2007, M. Endelman, Principal Financial Sector Specialist, finished the project completion review.

I. BACKGROUND

A. History

1. Small- and Medium-Size Enterprise Trade Enhancement Finance Project

1. On 7 December 2000, the Asian Development Bank (ADB) approved the Small- and Medium-Size Enterprise Trade Enhancement Finance Project (the Project) consisting of (i) a $150 million loan from ordinary capital resources for the foreign currency export finance facility (FCEF); (ii) a partial risk guarantee (PRG) of $150 million for international commercial banks that confirm eligible import letters of credit (L/Cs) issued by Pakistani commercial banks; (iii) an equity investment of $2 million in the Pakistan Export Finance Guarantee Agency Limited (PEFG); and (iv) technical assistance (TA)1 of $800,000 for the institutional strengthening of the Export Promotion Bureau (EPB).

2. The FCEF was a dollar-based refinancing window at the State Bank of Pakistan (SBP) that provided an alternative financing scheme for exporters. The above-mentioned loan was then re-lent by SBP, the executing agency (EA), to participating commercial banks (PCBs) for onlending to viable small and medium enterprises (SMEs). The loan agreement was signed on 15 December 2000, but did not become effective until 2 April 2001 due to SBP’s delay in issuing FCEF regulations and guidelines and conditions for the incentive tranche release under the Trade, Export Promotion and Industry (TEPI) Program, which was a part of the Project. The first disbursement of $30 million was released on 2 April 2001, and the loan’s closing date was originally 2 April 2004. This was revised to 21 January 2004 due to the Government’s request for loan cancellation. On 21 January 2004, out of the initial disbursement of $30 million, SBP refunded $29,570,425.72. The reasons for cancellation and early closure are presented in paras. 27–29 below.

3. In September 2001, a facility agent was appointed, and ADB began to provide cover under a PRG for foreign exchange transfer and convertibility risks, which enabled international banks to increase their risk-bearing capacity for conducting business with Pakistan and to ensure their continued willingness to confirm import L/Cs issued by Pakistani banks.

4. ADB also made an equity investment in PEFG, a newly formed, private sector-owned export credit guarantee agency, which began operations in March 2001. PEFG issues guarantees for SMEs and emerging exporters that can be used as collateral substitutes for pre-shipment finance provided by PCBs. Details are shown in Appendix 1.

5. The TA was provided to restructure and assist in EPB’s institutional development so it could play an effective role in trade facilitation and export promotion.

2. The State Bank of Pakistan

6. SBP, the Project’s EA, is the central bank of Pakistan. Established by the State Bank of Pakistan Order of 1948, its scope of operations was broadened through the State Bank of Pakistan Act of 1956 to include regulating the country’s monetary and credit system and to foster growth with a view to securing monetary stability and better utilizing the country’s

1 ADB. 2000. Technical Assistance to the Islamic Republic of Pakistan for Institutional Strengthening of the Export Promotion Bureau. Manila.

2 resources. SBP also performs a regulatory and supervisory function for commercial banks. SBP has been an autonomous institution since February 1994.

3. Participating Commercial Banks (PCBs) and Other Banks Supported

7. Under the FCEF, commercial banks that met the required criteria of minimum paid-up capital and capital adequacy ratio (CAR), as well as income recognition and provisioning standards in SBP’s prudential regulations, were allowed to be PCBs. Of the six banks sanctioned, only four PCBs actually made drawdowns from the FCEF: Habib Bank Limited, Metropolitan Bank, PICIC Commercial Bank, and United Bank Limited Pakistan.

8. Under the PRG, any reputable international bank that was willing to confirm an eligible L/C and enter into a master risk participation agreement could receive cover under ADB’s guarantee. Such banks included Crédit Agricole Indosuez, Deutsche Bank AG, HSBC Holdings Group, ING Groep N.V., Société Générale, Standard Chartered Bank, Sumitomo Mitsui Banking Corporation, and Wells Fargo Bank NA. Further, any Pakistani bank or branch of an international bank in Pakistan could issue an eligible L/C if it (i) met SBP prudential regulations, (ii) had a corresponding banking relationship with the intended confirming bank, and (iii) was willing and able to open the L/C for the Pakistani importer. These banks included Askari Commercial Bank Ltd., Bank Al Falah, Bank AL Habib, Faysal Bank, Metropolitan Bank, Muslim Commercial Bank, PICIC Commercial Bank, and Soneri Bank Ltd.

B. Scope of Operations

9. The Project’s primary objectives were to contribute to higher growth, employment, and exports by supporting the development of new export markets and products, and to increase SME exports. These were to be achieved by (i) improving the export finance mechanism to extend credit availability to SMEs; (ii) reducing import L/C confirmation and transaction costs to import goods necessary for export production; (iii) reducing collateral burden and providing effective risk mitigation for SME pre-shipment financing requirements; and (iv) improving institutional support for export promotion and administration of the export incentive framework.

10. The FCEF’s proceeds were to be used for financing both domestic and imported inputs for export production. Financing under the FCEF was transaction-based and required a firm export order or export L/C, and covered both pre- and post-shipment requirements of exporters. Prior to loan effectiveness, SBP established an FCEF special account for disbursement of the loan proceeds. The first disbursement of $30 million was advanced by ADB to the special account upon loan effectiveness, on which the PCBs were to draw based on their clients’ subloan applications. The special account was a revolving credit facility that would be replenished upon maturity, i.e., not more than 180 days, and repayment of the subloans.

11. The PRG was designed to help international banks confirming eligible L/Cs keep Pakistan country limits open, accept longer terms, and stabilize or reduce confirmation fees by transferring country risk to ADB risk, thus ensuring continued access to trade financing and effectively reduce the cost of imports for export production. The PRG covered 100% of each L/C’s face value, provided that failure to pay under the L/C by the issuing bank was caused by foreign exchange inconvertibility, transferability blockage, or other related noncommercial risk. In consultation with the Government, ADB appointed Standard Chartered Bank as its facility agent to enter into master risk participation agreements and to administer, promote, and market the PRG domestically and internationally. To avail of the PRG, ADB charged the Government a front-end fee up to 0.30%, payable on the PRG’s maximum nominal amount, and a PRG

3 guarantee fee of 0.40% per year on the aggregate value of the maximum liability of all L/Cs covered.

12. Initially, it was envisioned that PEFG would act as the export credit agency for the country, offering a variety of pre- and post-shipment export credit products. Due to limited resources and difficulties in establishing an agency relationship with an international export credit insurer, however, PEFG had to focus on issuing guarantees for SMEs and emerging exporters that could be used as collateral substitutes for pre-shipment finance provided by Pakistani commercial banks. ADB was originally the single largest shareholder, holding 20% of paid-up capital, but it was expected that Pakistani commercial banks would act as a cohesive sponsor group and take the lead in PEFG management. Instead, the banks gradually stopped attending board meetings, participating in critical decision-making activities, and making client referrals to PEFG.

C. Relevance of Design and Formulation

13. The Project’s rationale, design, and formulation were relevant to and consistent with ADB’s Country Operational Framework 2 for Pakistan as well as with the Government’s development objectives as reflected in the Poverty Reduction Strategy Paper.3 ADB’s main goal was for the country to improve economic efficiency and export performance, prioritizing trade and industry reform. The Government aimed to develop broad-based economic growth to generate efficient income-generating opportunities for the poor and a pattern of growth that was relatively labor-intensive. Further, in accordance with the Government’s economic strategy announced in December 1999, promoting SMEs was a priority. To develop the SME sector, the FY2001 budget included support for (i) formulation of a policy to ensure an adequate flow of credit to SMEs, (ii) revitalization of the Small and Medium Enterprise Development Authority, and (iii) the preparation of packages to develop export capacity in nontraditional sectors. Moreover, SME promotion had a prominent place in the Government’s 3-year development program for 2000–2003.

14. ADB’s strategy for the trade and industry sector concentrates on policy reforms and capacity building to promote development of a competitive and diversified industrial base. In 1999, ADB provided trade and industry support under the TEPI program, which recognized that, given the country’s weak trade and industry policy regime, the economic gains that could be realized from industry investments had been limited. Therefore, since the program’s main objective was trade and industry development, the Project falls under the TEPI initiative.

15. To revitalize the sluggish economy, the Government has been focusing on export promotion, including a new trade policy that includes export base diversification and greater value addition in goods and services. The Project’s framework is in Appendix 2.

D. Related Technical Assistance

16. The TA aimed to develop EPB’s institutional capacities so that it could play a useful role in trade facilitation and export promotion. The TA restructured and developed EPB to (i) interface with private sector trade and export associations, international partners, and individual exporters; (ii) promote utilization of the various available export incentive schemes and facilities;

2 ADB. 1999. Country Operational Framework (1999-2000): Islamic Republic of Pakistan. Manila. 3 ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy of the Asian Development Bank. Manila.

4 and (iii) support new market development. Using a cluster modality, the TA had two components: a small-scale TA for reviewing EPB’s strategic plan and operational priorities, and capacity- building to develop EPB’s management information systems and training.

17. On 7 December 2000, the TA was approved as a cluster in the context of the Project and became effective on 25 August 2001. The letter of agreement was sent to the Ministry of Finance on 26 March 2001; however, signing did not occur until 25 August 2001 due to the need to first carry out a fact-finding mission. This mission for the first subproject (phase 1) occurred 7–16 August 2001, and the memorandum of understanding was then sent to EPB on 16 August 2001 for acceptance. The TA’s original completion date was 31 March 2002 but was extended three times to 31 March 2006 to accommodate various activities. Although the TA was expected to begin during the first quarter of 2001, the consulting services did not commence until March 2002 due to lengthy consultations with EPB. Phase 1, reviewing EPB’s strategic plan and operational priorities, was finalized in May 2003. The outcome included a concept plan for the development of a corporatized entity to provide related export promotion and marketing assistance to Pakistani enterprises.

18. On 21 and 22 May 2003, an ADB mission met with the minister of commerce and the EPB chairman to reach an agreement on phase 2’s implementation. With ADB’s approval on 24 July 2003, phase 2’s implementation was divided into two subprojects. Subproject 2 entailed an intensive stakeholder review and created a roadmap for trade development, including the functions of the Ministry of Commerce, EPB, and the Export Development Corporation of Pakistan (EDCP). Subsequent to Government and ADB endorsement of subproject 2 recommendations, subproject 3 would support the design’s implementation. The recommendations were presented to the minister of commerce, EPB chairman, and ADB staff on 26 March 2004.

19. During the presentation, there was some debate on the earlier approved concept to set up a corporatized marketing company to carry out export promotion functions while realigning EPB’s roles and functions. The minister of commerce decided on a revised concept to establish an autonomous public sector body known as the Trade Development Authority of Pakistan (TDAP), which would eventually replace EPB once it developed its full capacities. In a meeting held on 6 May 2004 with EPB, ADB, and TA consultants, the minister affirmed that his decisions were final, subproject 2’s implementation was complete, and requested ADB’s continued support and assistance to proceed with subproject 3’s implementation.

20. The minister of commerce then requested a high-level review of TDAP’s proposed establishment by the prime minister, which never occurred over a 15-month period. A decision was subsequently made to cancel subproject 3’s implementation, due to the period of lapsed time. The TA account was eventually closed on 30 September 2005, and the remaining amount of $618,860 was canceled.

II. IMPLEMENTATION

A. Lending and Guarantee Policies

21. Under the FCEF, loans were extended from SBP to PCBs and then onlent by PCBs to SME subborrowers, with a focus on nontraditional products and new export markets. The $150 million loan had a maturity of 15 years and a grace period of 3 years. The loan’s interest rate was based on the 6-month London interbank offered rate or, at if the Government opted, a fixed rate based on ADB’s fixed-rate borrowing in dollar terms at the time of disbursement, plus 60

5 basis points. The loan carried a 1% front-end fee and a 0.75% commitment charge. The onlending rate to subborrowers was determined by PCBs based on SBP guidelines commensurate with the costs and risks of subloans, for a maximum maturity of 180 days, with a maximum margin of up to 2% per year.

22. During implementation, lending policies changed to improve utilization of the FCEF. At the end of November 2002, the utilization of the FCEF—within 20 months of loan effectiveness—remained insignificant at $500,000, representing about 0.3% of the $150 million. Two modifications resulted in April 2003. With regard to pricing, PCBs would be free to determine the interest rates they charged SME borrowers, following the abolition of maximum margin of 2%. Further, by introducing a wholesale approach, SBP would assign uncommitted credit lines to PCBs based on their requests and ability to provide export credit to SMEs. PCBs could give credit lines to eligible customers and relend the unutilized funds to other banks if such banks were eligible; subsequently, these banks could provide documents to prove that the credit lines were for financing SME exporters. Apart from these two modifications, conditions for eligibility of banks and exporters remained unchanged.

23. Under the PRG and through the facility agent, ADB issued guarantees that covered eligible L/Cs with the following characteristics: (i) a term of up to 360 days, but may—on a case- by-case basis—be up to 3 years; (ii) a minimum value of $5,000 and maximum value of $1 million, but may—on a case-by-case basis—have an amount up to $2 million; and (iii) subject to UCP 500. To ensure that the PRG supported export production, importers had to certify to the issuing bank that the L/C was issued in respect of goods that were imported by or at the request of an exporter registered by the Pakistan Export Promotion Bureau, qualified under the FCEF, linked to TEPI, or supported by PEFG. To apply for a guarantee, the confirming bank delivered to the facility agent a guarantee request by SWIFT, with approvals given within 3 business days. A guarantee fee was charged as a percent per year for each L/C. The guarantee fee structure was designed to be attractive to both issuing and confirming banks and be reflective of the “premium” for Pakistan country risk that international confirming banks would normally charge during periods of political stability. In September 2001, these fees were set at 1.50% per annum for L/Cs with a term of less than 90 days, 1.45% per annum for L/Cs with a term of 90 days to 180 days, 1.40% per annum for L/Cs with a term 181 days to 360 days, and 1.35% per annum for L/Cs with a term of greater than 360 days.

B. Characteristics of Subloans

24. The maximum size of any subloan to be financed under the FCEF was required to be $500,000 per transaction, although any individual exporter might have total aggregate drawings in excess of $500,000 for different export orders for pre-shipment finance. The maximum maturity per transaction was 180 days from the date of drawdown from the FCEF. For post-shipment finance, a PCB could finance up to 80% of the export order if payment was by irrevocable L/C or on an open account and backed by export credit insurance.

25. Four subborrowers benefited from the FCEF. The subloans obtained by subborrowers were mainly used for the procurement of leather goods, textile materials including cotton, or other goods. Of the sanctioned amount of $2.97 million for 30 approved subloans, about 77% was utilized for the procurement of leather goods, 16% for textile materials, and 6% for other goods. Most subloans were between $40,000 and $100,000, were short-term loans with maturity less than 180 days, and were used for financing imported goods and domestic goods that were inputs for exports.

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C. Implementation of Subloans and Guarantees

1. FCEF Utilization

26. Of the $150 million loan, only $429,000 was disbursed as subloans to four PCBs until the loan was closed on 21 January 2004. This amount, which served as revolving credit to PCBs, reached $2.97 million, a sanctioned amount, during the period January 2001 to December 2003. Total utilization, as of 6 December 2003, amounted to about $2.17 million with a total repayment of less than $1.98 million as detailed in Appendix 3. All procurements were financed according to ADB’s guidelines, and all subprojects at approval met the criteria established under the loan and were consistent with loan objectives. The subprojects had no proven environmentally adverse effects.

27. The December 2002 review mission emphasized that full or partial cancellation of the loan would be considered if utilization remained unsatisfactory. Despite considerable efforts of SBP and ADB to enhance the FCEF’s attractiveness, i.e., through SBP’s product awareness campaign, modification of procedures by introducing a wholesale approach, and abolition of the maximum margin that PCBs could charge subborrowers, there was no utilization of the FCEF after 9 April 2003. Due to very low FCEF credit line use since its approval, at the request of the Government, ADB canceled the remaining uncommitted loan amount of $147.62 million and closed the loan account on 21 January 2004.

2. Factors that Affected Utilization

28. The utilization of the FCEF was considerably lower than expected due to the following.

(i) Market environment changed fundamentally. From 2001 to 2003, domestic and foreign currency interest rates decreased, liquidity increased, and the supply of foreign currency deposits available to commercial banks in Pakistan rose significantly. As a result, PCBs could extend short-term foreign currency loans under the FE-25 scheme,4 earning larger spreads with greater ease. The highest disbursement of $593,212 under the FCEF was made during the fourth quarter of 2002. This amount was about 0.2% of the loan disbursed under the FE-25 scheme during the same period.5 Comparison of disbursements between the FCEF and the FE-25 scheme is in Appendix 4.

(ii) Pricing remained nonresponsive to the market. Even though the FCEF was considerably improved in April 2003, when it allowed PCBs to price subloans according to risks and to avail of the facility on a wholesale basis, it retained a 6-month interest rate repricing mechanism that did not match the monthly repricing required by the market. PCBs perceived the FCEF as unattractive because it could not keep pace with the falling interest rate environment at the time. Comparison of interest rates between the FCEF and the FE-25 scheme is in Appendix 5.

(iii) Documentation process was not user-friendly. PCBs and exporters felt that the FCEF’s application and documentation process was not user-friendly and as

4 According to SBP’s F.E. Circular No. 25, dated 20 June 1998, the foreign currency deposits at commercial banks could be lent to exporters and importers to finance trade-related activities. The scheme was called the FE-25 scheme. 5 Around 80% of borrowers under the FE-25 scheme were exporters.

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attractive as that of the FE-25 scheme. SBP first circulated the FCEF under Circular No. 04 dated 28 March 2001. Due to PCBs’ negative feedback, SBP—in consultation with ADB—modified FCEF provisions in Circular No. 07 dated 17 April 2003 to enhance utilization by the PCBs and exporters. However, this was a minor issue relative to the FCEF’s uncompetitive interest rates.

3. PRG Utilization

29. Utilization of the PRG was lower than initially expected as well, due to the significantly improved international perception of foreign exchange transfer and convertibility risk associated with Pakistan and the ability of commercial banks in Pakistan issuing L/Cs to meet their obligations in a timely manner, which became evident during fourth quarter of 2001. This allowed international banks confirming L/Cs to re-establish or increase country limits and reduce confirmation fees, without the PRG. The PRG supported 30 import transactions with a total value of about $15.4 million, of which two thirds of the involved imports were from the United States and Europe, nearly all supported the textile industry, and all occurred within 9 months of the PRG’s start up in September 2001. Appendix 6 provides further details regarding utilization and sectors supported.

D. Operational and Financial Performance of PCBs and Other Banks Supported

30. Under the FCEF, the four PCBs were PICIC Commercial Bank, Habib Bank Limited, Metropolitan Bank, and United Bank Limited Pakistan. Their organization, operations, and financial positions are outlined in Appendix 7. Under the PRG, the banks that issued eligible L/Cs were Askari Commercial Bank Ltd., Bank Al Falah, Bank AL Habib, Faysal Bank, Metropolitan Bank, Muslim Commercial Bank, PICIC Commercial Bank, and Soneri Bank Ltd. Since the PRG covered risk not associated with these banks’ performance, commentary regarding these banks’ organization, operations, and financial position (other then Metropolitan Bank, which was also a PCB) is not presented.

E. Covenants

31. Appendix 8 summarizes the status of compliance by SBP and PCBs with the major covenants under the FCEF. Within 3 months of the FCEF’s loan closing date, SBP was required to prepare and furnish to ADB its own project completion report. SBP did not comply with this requirement.

F. Performance of ADB

32. The supervision and administration of FCEF was satisfactory. ADB fielded a total of five project administration missions, including a June 2001 inception mission and four review missions from 2001–2003, focusing on the FCEF’s implementation and the associated TA. Some review missions were conducted in conjunction with review missions for other projects in Pakistan due to limited staff resources, enabling close monitoring of program implementation. Recognizing the very low utilization of the FCEF, the missions, in consultations with the EA, put tremendous efforts in trying to find solutions to the problem. The Pakistan Resident Mission also provided valuable support. During the Project’s implementation, ADB approved necessary amendments in the loan agreement related to lending policies in order to enhance the Project’s attractiveness. However, utilization of the FCEF remained insignificant.

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33. Regarding the PRG, supervision and administration was greatly facilitated by the appointment of the facility agent who was responsible for day-to-day administration. ADB’s performance, however, could have been better from the second year onwards, when the facility agent requested approvals to change the pricing and certain other terms of the PRG, which ADB was not able to respond to in a timely, market-oriented manner.

34. ADB’s Private Sector Operations Department took the lead in supervising and administering the PEFG equity investment and fielded missions when staff resources were available. The Pakistan Resident Mission also helped by representing ADB at certain PEFG board meetings. Quarterly reports on private sector operations provided ADB management with regular updates regarding the Project’s status, supervision, and administration.

III. EVALUATION

A. Appraisal

35. Appraisal started during 19–26 September 2000 and was supported by 8 staff members with 64 person-days. Before the appraisal mission, 2 consultation missions occurred. The first was 1–14 March 2000 and was supported by 6 staff members with 76 person-days. The second was 13–26 July 2000 and was supported by 8 staff members with 94 person-days. The Project was generally well-prepared.

B. Implementation

36. Implementation of each of the Project’s components had mixed results.

(i) Utilization of the $150 million loan for the FCEF did not exceed 1% of the amount available, despite modifications to the FCEF procedures and several attempts by the SBP to promote the product in Karachi and other provinces.

(ii) Utilization of the $150 million PRG began well, with 30 import transactions with a total value of $15.4 million supported during the 9-month period after its September 2001 launch. The facility agent, Standard Chartered Bank, did a competent and professional job by (a) arranging and executing master risk participation agreements with a good variety of international banks, (b) providing timely reports and feedback regarding pricing and trends in the market, (c) issuing specific guarantees on behalf of ADB and collecting fees when due, and (d) promoting the facility internationally and in Pakistan—even after demand for cover from international banks no longer occurred.

(iii) PEFG’s business volume never met projections, and cumulative losses as of 31 December 2006 amounted to PRs64.42 million (about $1 million). On 21 February 2007, PEFG’s board advised the Ministry of Commerce that in the opinion of its external auditors, the company was no longer a viable concern. Since June 2007, issuance of guarantees was discontinued.6 However, there was some benefit from the equity investment in PEFG, as it issued pre-shipment finance guarantees totaling PRs715.68 million (about $12

6 Because ADB management was provided regular updates on this equity investment status by ADB’s representative on the PEFG board, through the Quarterly Report on Private Sector Operations, this PCR does not attempt to repeat this information.

9

million) during 6 years of operation, supporting about 500 transactions or about 80 transactions annually. This was, however, far less than the 2,500 transactions originally expected.

(iv) The consulting services under the TA commenced in March 2002, which was later than expected due to lengthy consultations with EPB. The first phase of the TA focused on reviewing EPB’s strategic plan and operational priorities. The report was finalized in May 2003, and after a review to verify the concept of restructuring EPB, in April 2005, EPB and the Ministry of Commerce agreed to move ahead with the proposed reforms. Following the recommendations from the TA, TDAP was established.

IV. ASSESSMENT AND RECOMMENDATIONS

A. Relevance

37. The Project was assessed as relevant for Pakistan at the time of processing. The Project’s goals, objectives, and outputs were consistent with the Government’s development strategy and ADB’s country strategy. However, during implementation, the Project was not totally relevant and appropriate, as utilization of the FCEF was insignificant. Only four exporters were direct beneficiaries, indicating nominal demand for the product. The PRG facility was useful at the start when there was some concern about sovereign risk; however, at the Project’s end, there was no demand for this product at a price that justified the costs involved. PEFG struggled in its operations, and profitability was never achieved. The TA seemed to be relevant as recommendations from the TA report led to the establishment of TDAP, a trade development organization.

B. Effectiveness in Achieving Outcome

38. The Project was not effective in achieving its goals. It was unsuccessful in increasing SMEs’ and emerging exporters’ access to export credit since utilization of the FCEF was marginal, involving only four exporters from traditional sectors, e.g., textiles and leather products. 7 Although the Project aimed to provide a greater choice of financing and risk mitigation instruments to markets through PRG and pre-shipment guarantees, only a small number of exporters benefited. Therefore, it can be concluded that the Project made a limited contribution to the development of new products and markets for Pakistan. However, it was able to facilitate reform of the export financing scheme (EFS) to reduce misdirected subsidies through policy dialogues with SBP and the Government. The outstanding refinance under EFS was reduced from PRs82 billion (approximately $1,585.3 million) as of 30 June 1999 to PRs57 billion (approximately $988.7 million) as of 30 June 2003. The PEFG was not able to achieve its purpose because of the shareholders’ decision not to infuse additional capital, the lack of referrals from shareholders, and the company’s inability to offer a wider range of export credit services.

C. Efficiency in Achieving Outcome and Outputs

39. The Project was partially successfully implemented. The FCEF, PRG, and PEFG were available during the Project’s period. However, the FCEF was not competitively priced relative to the FE-25 scheme during a period of declining interest rates and was not responsive to

7 Eight exporters were granted approvals, but only 3 exporters borrowed under the facility.

10 changing market conditions; therefore, it was canceled in January 2004. The PRG allowed several international banks to confirm import L/Cs issued by Pakistani banks on better terms, but demand for cover quickly fell away after market perception of Pakistan country risk improved. The Project also supported the establishment of PEFG, a private sector-owned export credit agency. However, the company offered only one product, a pre-shipment guarantee, to a limited number of exporters.

D. Preliminary Assessment of Sustainability

40. The Project was not sustainable. It was expected that the FCEF would be made available for at least 15 years. Due to insignificant utilization, the FCEF was canceled in January 2004, and the ADB loan was fully repaid in April 2004. As a result of significantly improved market perception of Pakistan country risk and the ability of Pakistani banks to meet their obligations under import L/Cs, demand for cover under the PRG was no longer necessary at the end of 2002. Because of low capitalization, high overheads, a single product, weak risk analytics, poor judicial recourse to defaulted buyers, and an ongoing departure of experienced staff, PEFG stopped issuing guarantees as of 2007. PEFG’s financial condition is not viable, and discussions are ongoing toward a voluntary liquidation or a merger with the newly established TDAP.

E. Impact

41. Economic impact. The Project was expected to increase access to credit and reduce the financing cost of SMEs and emerging exporters that had been excluded from the export finance system. The Project was also expected to offer risk mitigation measures to assist exporters to enter new markets. This would increase exports, generate employment, and increase foreign exchange earnings, resulting in improved balance of payment position that would contribute to macroeconomic stabilization. Due to insignificant utilization of the FCEF and a small increase in exports through PEFG, the economic impact was limited.

42. Social and poverty impact. The Project’s impact on direct poverty reduction occurred through employment creation in the SME sector. SME sector promotion also had an impact on women. Since the utilization of the FCEF, PRG, and PEFG were nominal, though, it could be inferred that the Project’s social and poverty impact was negligible.

43. Institutional impact on EPB. TA 3558-PAK was designed as a cluster TA for EPB’s institutional strengthening. The first component was a small-scale TA review of EPB’s strategic plan and operational priorities. The second component was designed to undertake EPB capacity-building activities, with a focus on management information systems and training needs. The TA did not continue to the second phase since the Government chose to implement EPB reforms by setting up TDAP. Therefore, the TA did not contribute to capacity development of EPB as originally planned.

F. Overall Assessment

44. The Project’s goal was to support higher and sustainable export-led economic growth and employment generation. The project had four components: (i) a $150 million loan for the FCEF, (ii) a PRG of $150 million for international commercial banks that confirm import L/Cs issued by Pakistani commercial banks at the request of eligible importers, (iii) an equity investment of $2 million in PEFG, and (iv) a TA of $800,000 for the institutional strengthening of EPB. The Project was assessed as partly relevant for Pakistan, but ineffective in achieving its

11 outcomes. Regarding the efficiency in achieving outcomes and outputs, the Project was assessed as less efficient. The Project was unsustainable, and the economic, social, poverty, and institutional impacts were considered minimal. Overall, the Project is rated as unsuccessful with an average weighted rating of 0.50 (Appendix 9), in accordance with the definitions and guidelines provided by the Operations Evaluation Department.8

G. Lessons Learned

45. The Project was appropriately designed. However, external factors prevented the Project’s successful implementation. In the second half of 2001, interest rates started to decrease. Since the interest rates under the FCEF had to be adjusted every 6 months while FE- 25 scheme interest rates could be adjusted monthly, the FCEF loans were not competitive. Therefore, there was much less demand for the FCEF from exporters. In addition, with higher margins that commercial banks could obtain under the FE-25 scheme relative to the margins that they could obtain under the FCEF, commercial banks were reluctant to use the FCEF. Also, from the fourth quarter of 2001 onward, the perception of country risk associated with Pakistan and the ability of commercial banks issuing L/Cs to meet their obligations improved markedly. This allowed international banks confirming L/Cs to re-establish and increase country limits and to reduce confirmation fees, which meant that the market ‘gap’ that the PRG was designed to help fill no longer existed. Thus, the conditions under which the FCEF and the PRG were designed in 2000 were different from the conditions under which the Project was implemented in 2001–2003.

46. With respect to PEFG, the equity participation from commercial banks in Pakistan and other interested parties was far less than expected, and no ‘champion’ or lead shareholder emerged. The request for an increase in capital was not taken by the PEFG board because of the shareholders’ decision not to infuse fresh capital to the company, and client referrals to PEFG from shareholder banks did not occur as expected. As a result, the company did not have enough capital or the deal flow to enable it to operate with any economy of scale. This, along with inefficient management, weak staff, and a limited presence only in Karachi, contributed to the failure of the company to fulfill its mission.

H. Recommendations

47. In an integrated world economy, trade matters more than ever before. Countries that have intensified their links with the global economy through trade and investment have usually grown more rapidly over a sustained period and have consequently experienced larger reductions in poverty. ADB should continue its policy dialogue with the Government to (i) address remaining impediments to trade; (ii) enhance trade facilitation; (iii) improve infrastructure such as roads, ports, and telecommunications; and (iv) improve the perception of sovereign risk so international banks will sustain and increase their country limits used for trade finance. These will reduce costs in doing business and enhance the country’s competitiveness, resulting in increased exports, economic growth, and poverty reduction. Further, ADB should continue to develop and use nonloan products, such as limited guarantees, which can be used to fill temporary market gaps, while recognizing that once conditions improve these products may not be needed.

8 Using Operations Evaluation Department’s Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations (2006).

12 Appendix 1

PAKISTAN EXPORT FINANCE GUARANTEE AGENCY LIMITED

1. The mission of the Pakistan Export Finance Guarantee Agency Limited (PEFG) was to provide a broad range of export trade finance guarantees and services to exporters and indirect exporters, focusing on small and medium enterprises (SMEs) and growth sectors. As its initial product offering, PEFG was expected to issue bankable guarantees to replace traditional collateral requirements of Pakistani banks. Guarantees would be issued on behalf of new or smaller exporters in favor of Pakistani banks providing trade finance facilities ranging from working capital during manufacturing to post-shipment finance. This was expected to allow smaller or emerging export-related enterprises to obtain enhanced access to trade-related finance. PEFG would guarantee up to 80% of an exporter’s performance risk. PEFG also intended to enter into a reinsurance arrangement with an international credit-risk insurer to provide post-shipment export credit insurance to Pakistani exporters. This would lower the risks for Pakistani exporters and their banks seeking to explore new markets. PEFG would also have an important role of promoting and expanding foreign currency export finance facility (FCEF) lending to indirect exporters.

2. PEFG was established in 2001 as an unlisted public limited company under the Company Ordinance 1984 with paid-up capital of PRs108 million (about $2 million). Equity participation was from the Asian Development Bank (ADB) and 12 commercial banks in Pakistan. ADB subscribed for 20% of the paid-up capital of PEFG. Representatives of ADB and commercial banks are on the board of directors. The company received its letter of incorporation on 19 January 2001 and its business commencement certificate on 8 May 2001. The company started its initial operations after the formal inauguration on 16 July 2001.

3. The approval for ADB’s equity investment of up to $2 million in PEFG was granted on 7 December 2000. To date, ADB’s equity investment in PEFG was only $375,000 since the percentage of ADB’s equity participation in PEFG could not be more than 20% of the total paid-up capital. After 2001, there was no additional increase in the capitalization of PEFG. In addition to an expectation of a $10 million capital base to support its establishment phase, other supporting mechanisms were anticipated: (i) a high level of business reciprocity from all the shareholder banks; (ii) the early introduction of a good range of export product offerings, most with positive profit profiles; and (iii) the creation of a governing council advisory body, to permit the Government to have a participatory role in PEFG’s development. None of these have been introduced nor established at the level or in the form anticipated in the original proposal. In the absence of the above expectations, PEFG has been unable to establish a profitable business from the commencement of operations until now.

4. From the start, PEFG was not fully capitalized to the level of $10 million as expected. Equity participation that was supposed to come from several financial institutions did not materialize. As a result, PEFG was not able to achieve the expected original volume. In 2005, a consultant was hired to prepare a strategy paper for PEFG. The consultant's findings were that PEFG in its present form, with low capitalization, reduced revenue stream, and higher losses, could not continue beyond 2008, and it was recommended that PEFG be converted into an export credit agency. On 15 June 2006, the PEFG board of directors met with the governor of the State Bank of Pakistan (SBP), and presented this recommendation. The governor advised that discussions were being undertaken with the Canadian Development Corporation to partner with PEFG, bring in fresh equity, and develop it into a quasi-export credit agency.

5. According to the strategy paper, PEFG has experienced staff losses at senior levels since 2003, which slowed down its stability and momentum. Recruitment to replace staff has been

Appendix 1 13 difficult, and staff morale has been low. Further, PEFG’s business plan for 2005 was overly ambitious since it did not have resources in place to accomplish its goals. The plan projected business volumes at levels significantly above what has been achieved. PEFG’s performance in 2005 also reflected slow business growth due to emphasis on recoveries of defaulted guarantees. Operating results indicated that the company generated insufficient revenue from its operations, and there were major outflows due to payment of claims. In 2005, the equity position fell by 9% in view of losses accumulated from prior years totaling PRs35.89 million (approximately $0.60 million).

6. In the 6-year period until June 2007, the total pre-shipment guarantees were valued at PRs715.68 million (approximately $12 million), or around PRs120 million (approximately $2 million) annually. Since June 2007, issuance of guarantees has been discontinued due to liquidity constraints.9 In particular, in 2005, 66 guarantees were issued supporting pre-shipment finance of PRs85.86 million (approximately $1.4 million). In 2006, the number of guarantees issued decreased to 35 transactions, and the value of the pre-shipment finance decreased to PRs52.97 million (approximately $0.87 million). The volume of business was far less than the projection of $100 million per year in guarantee volume, or about 2,500 transactions per year at an average volume of $40,000. It should be noted that the paid-up capital was $2 million, instead of $10 million as expected before the company’s establishment.

7. Despite PEFG’s poor outcome, there have been some benefits: (i) the actual establishment of a private sector-owned export credit agency, albeit very limited in operation; (ii) the operating experience and market knowledge gained; (iii) a core product, i.e., a pre-shipment guarantee; and (iv) a relationship with the exporters’ community and their financiers. The facility’s direct benefits arise from the PRs715.68 million (approximately $12 million) of pre-shipment guarantees issued since the company’s establishment to June 2007 to exporters, supporting about 500 transactions or about 80 transactions annually. The additional export activities, in turn, gave rise to employment generation, an increase in exports, global growth potential within these SMEs, incremental gross domestic product (GDP), and a subsequent rise in the Government's tax revenues. However, the benefits are much less than expected, even taking into account the smaller size of equity.

8. Financial statements indicate that total losses after taxation increased from PRs7.20 million (approximately $0.12 million) in 2005 to PRs28.54 million (approximately $0.47 million) for the year ending 31 December 2006. The company has incurred accumulated losses amounting to PRs64.42 million (approximately $1.06 million). Further, the company has been generating negative operating cash flows since inception. The company’s auditors also stated that these conditions indicate the existence of a material uncertainty that may cast significant doubt about the company’s ability to continue.

9. Factors contributing to PEFG’s poor operational and financial performance are as follows: (i) the absence of major/strategic shareholders that can gear the company for better performance; (ii) limited operations in only Karachi; (iii) far less cooperation from commercial banks with regard to client referrals; (iv) having only one product, i.e., a pre-shipment guarantee; and (v) too-small capitalization to reach economy of scale.

9 The liquid funds balance as of 30 June 2007 was PRs8,320,179 or approximately $140,000.

14 Appendix 2

PROJECT LOGICAL FRAMEWORK

Performance Assumptions and Design Summary Monitoring Mechanisms Indicators/Targets Risks Goal

Achieve higher and Increase export to GDP Trade statistics • Banks willing to sustainable export-led ratio promote the facilities economic growth and Current account and proposed under the employment generation Increase export volume balance of payments Project statistics Improve trade balance • Exporters willing to be Progress reports of TA documented and enter Increase employment in 3183-PAK: Monitoring the into the formal economy export-related industries Socioeconomic Impact of Trade, Export Promotion • Implementation of trade and Industry reforms under TEPI

• Consistent trade and export policy and macroeconomic stability Purpose/Objectives

1. Increase SMEs’ and Increase number of SME PEFG • International demand emerging exporters’ exporters entering into agency records for goods from Pakistan access to export the export industry guarantees issued credit • Constant devaluation of Increase number of SME SBP statistics and the Pakistan rupee 2. Offer greater choice exporters that can obtain reporting by banks of financing and risk access to formal export • Quality of Pakistani mitigation instruments financing under the new Official export statistics products do not meet to exporters, e.g., to instruments the demand of the develop new products Feedback from bankers international markets and markets that are Increase export credit and exporters during competitively priced volume for nontraditional review missions • PEFG able to recruit at international exports competent staff and market rates Statistics on EFS good management Increase dollar value of utilization 3. Support the banking export credit • Exporters are not and export community Directives issued by SBP aggressive in trying to to conduct structured Diversify export products enter new markets with trade and export markets new products

4. Facilitate reform of Use credit enhancement • Regulatory risks related the existing EFS to facilities for risk mitigation to interest-bearing reduce misdirected financial products subsidies Relatively reduce, in phase 2, financing under EFS, relative to overall export credit Outputs

1. Availability of the Utilize (number of SBP and banking • The FCEF is FCEF for pre- and transactions and statistics competitively priced, post-shipment: a new amounts) various and credit

Appendix 2 15

Performance Assumptions and Design Summary Monitoring Mechanisms Indicators/Targets Risks dollar window to schemes by exporters Review missions enhancement complement the and importers, export mechanism meets existing EFS, houses, and indirect Report by facility agent on exporters’ demand competitively priced exporters PRG utilization at international • SBP has adequate market rates Cover export volume and PEFG annual report capacity to quickly markets through administer the FCEF 2. Availability of PRG to post-shipment insurance and PRG cover risk of nontransferability and Guarantee utilization by • Sufficient Pakistan convertibility of commercial banks country risk limit by foreign exchange international banks under import L/Cs for Number and volume of importation of inputs pre-shipment guarantees • Documentary ease of required for export by PEFG for SMEs use for the facilities production • PEFG able to recruit 3. Establishment of an and retain capable export finance management and staff, guarantee agency to with adequate credit offer pre-shipment risk analysis and other guarantees and trade-related skills structured required by the agency trade-related to undertake assigned services, in particular tasks to SMEs and emerging exporters • Willingness by exporters and 4. Availability of entrepreneurs to post-shipment credit develop new products insurance and markets; and by the banking system to actively support this

• SBP allows substitution of collateral with guarantees and credit insurance products

• Willingness of international insurers to reinsure international credit risk of Pakistani exporters Inputs and Activities

1. $150 million initial SBP to review, draft, and Regular progress reports, • Adequate and timely funding by ADB for: administer policies, rules, statistics, and review provision of skilled staff (i) pre-shipment regulations, and missions and facilities export financing procedures for utilization of imported and of new facilities Follow up and facilitation • Project ownership by domestic inputs by ADB staff and PEFG SBP, exporters, and (ii) post-shipment Train key staff banking system

16 Appendix 2

Performance Assumptions and Design Summary Monitoring Mechanisms Indicators/Targets Risks financing Organize stakeholder • Active promotion of the 2. Provision of workshops new facilities, including post-shipment credit through EPB insurance and Agree on post-shipment enhancement through insurance with • Consistent political and the banking system international reinsurance private sector support company 3. Provision of $150 million partial risk Appoint facility agent and guarantee for: conclude master risk (i) letters of credit participation agreement opening as well as pricing (ii) letters of credit structure confirmation (iii) bills discount Support establishment of PEFG under technical 4. $2 million equity assistance loan 1681: investment in PEFG Reform of the Trade Regime 5. Activities by PEFG to promote the various Agree on legal statutes, new services offered and develop and implement operational 6. Dialogue with the plans (governance, banking system to organizational, business, effectively employ and financial); procure new trade-related and install information products technology systems for PEFG; train key staff ADB = Asian Development Bank, EFS = export financing scheme, EPB = Export Promotion Bureau, FCEF = foreign currency export finance facility, GDP = gross domestic product, L/C = letter of credit, PEFG = Pakistan Export Finance Guarantee Agency Limited, PRG = partial risk guarantee, SBP = State Bank of Pakistan, SME = small and medium enterprise, TA = technical assistance, TEPI = Trade, Export Promotion and Industry.

DETAILS OF FOREIGN CURRENCY EXPORT FINANCE FACILITY UTILIZATION

Amount Date of Sanctioned Date of Amount Disbursed ($) Repayment Participating Commercial Bank Subborrower/Exporter Commodity Sanction ($) Disbursement Domestically Import L/C Total Date Amount Repaid 1 PICIC Commercial Bank 1 Nova Leather (Pvt) Limited Leather Chemical 20-Nov-01 19,692 15-Feb-02 − 9,952 9,952 13-Aug-02 9,952 7-Mar-02 − 8,975 8,975 16-Aug-02 8,975 2 Nova Leather (Pvt) Limited Leather Chemical 14-Dec-01 48,500 4-Feb-02 − 38,420 38,420 06-Aug-02 38,420 1-Mar-02 − 9,779 9,779 10-Aug-02 9,779 3 Nova Leather (Pvt) Limited Cow Hides 4-Mar-02 214,218 29-Mar-02 − 27,095 27,095 4-Sep-02 27,095 4 Nova Leather (Pvt) Limited Sheep Napa 31-Jan-03 68,000 21-Mar-03 − 44,000 44,000 13-May-03 4,318 27-May-03 4,558 22-May-03 15,218 Total 350,410 − 138,221 138,221 118,315

2 Metropolitan Bank Limited 1 Nova Leather (Pvt) Limited Raw Leather 22-Jan-02 86,000 19-Feb-02 84,000 − 84,000 13-Aug-02 84,000 2 Sultex Industries Cotton 17-Oct-02 57,324 30-Oct-02 57,324 − 57,324 18-Jan-03 57,324 3 Sultex Industries Gray Fabric 12-Dec-02 36,000 19-Dec-02 36,000 − 36,000 4-Mar-03 36,000 4 Sultex Industries Dust Cloth/Apron 12-Dec-02 35,998 19-Dec-02 35,998 − 35,998 22-Jan-03 35,998 5 Naeem Enterprises Sheep Napa 3-Apr-03 300,000 8-Apr-03 65,079 65,079 4-Jul-03 65,079 9-Apr-03 234,921 234,921 7-Oct-03 234,921 Total 515,322 213,322 300,000 513,322 513,322

3 United Bank Limited 1 Nova Leather (Pvt) Limited Raw Leather 22-Jan-02 100,590 13-Feb-02 − 53,708 53,708 10-Aug-02 53,708 13-Feb-02 − 9,072 9,072 17-Aug-02 9,072 2 Nova Leather (Pvt) Limited Lamb Skin 29-Jan-01 24,620 13-Feb-02 − 24,620 24,620 13-Aug-02 24,620 3 Nova Leather (Pvt) Limited Cow Hides 12-Feb-02 4,860 18-Feb-02 − 4,860 4,860 7-Aug-02 4,860 4 Nova Leather (Pvt) Limited Cow Leather 16-Mar-02 105,000 10-Apr-02 105,000 − 105,000 24-Aug-02 7,520 8-Oct-02 97,480 5 Nova Leather (Pvt) Limited Textile Lining 20-Apr-02 22,420 22-May-02 − 22,413 22,413 12-Sep-02 7,965 26-Sep-02 14,448 6 Nova Leather (Pvt) Limited Cow Hides 28-Aug-02 51,600 6-Sep-02 − 50,504 50,504 8-Feb-03 50,504 7 Nova Leather (Pvt) Limited Sheep Skin 21-Sep-02 102,000 11-Oct-02 − 86,770 86,770 8 Nova Leather (Pvt) Limited Sheep Skin 21-Sep-02 81,200 19-Nov-02 − 81,200 81,200 20-May-03 81,200 9 Nova Leather (Pvt) Limited Sheep Skin 21-Sep-02 90,000 30-Sep-02 − 81,000 81,000 10 Nova Leather (Pvt) Limited Sheep Skin 30-Sep-02 64,500 8-Nov-02 − 64,500 64,500 10-May-05 64,500 11 Nova Leather (Pvt) Limited Sheep Skin 30-Sep-02 45,000 14-Oct-02 − 45,000 45,000 15-Apr-03 45,000 12 Nova Leather (Pvt) Limited Sheep Skin 17-Oct-02 59,386 13-Dec-02 − 20,157 20,157 6-Dec-03 20,157 13 Nova Leather (Pvt) Limited Cow Skin 25-Oct-02 175,222 24-Jan-03 − 71,134 71,134 24-Jul-03 71,134 14 Nova Leather (Pvt) Limited Cow Hides 8-Nov-02 138,360 15-Nov-02 − 62,160 62,160 16-May-03 62,160 16-Dec-02 − 31,500 31,500 17-Jun-03 31,500 19-Dec-02 − 44,700 44,700 18-Jun-03 44,700

3 Appendix

17

18 Amount Date of Sanctioned Date ofAmount Disbursed ($) Repayment Participating Commercial Bank Subborrower/Exporter Commodity Sanction ($) Disbursement Domestically Import L/C Total Date Amount Repaid 15 Nova Leather (Pvt) Limited Sheep Skin 12-Nov-02 211,620 20-Dec-02 − 90,000 90,000 19-Jun-03 90,000 3 Appendix 2-Jan-03 − 90,000 90,000 3-Jul-03 90,000 18-Feb-03 − 10,369 10,369 16-Aug-03 10,369 19-Feb-02 − 21,250 21,250 16-Aug-03 21,250 16 Nova Leather (Pvt) Limited Skin and Chemical 20-Nov-02 108,730 19-Dec-02 − 51,673 51,673 18-Jun-03 51,673

7-Feb-03 − 57,057 57,057 16-Aug-03 57,057 17 Nova Leather (Pvt) Limited Cow Hides 20-Nov-02 74,110 13-Dec-02 − 63,000 63,000 12-Jun-03 63,000 18 Nova Leather (Pvt) Limited Wet Blue Chrome 4-Feb-03 200,304 3-Mar-03 − 10,080 10,080 16-Aug-03 10,080 19 Nova Leather (Pvt) Limited Sheep Napa 10-Jan-03 243,057 27-Feb-03 − 60,000 60,000 16-Aug-03 60,000 20 Nova Leather (Pvt) Limited Sheep Com Napa 20-Feb-03 170,100 24-Feb-03 − 170,100 170,100 16-Aug-03 170,100 Total 2,072,679 105,000 1,376,827 1,481,827 1,314,057

4 Habib Bank Limited 1 Mian Textile Industries Limited Cotton 13-Feb-02 31,680 18-Mar-02 31,680 − 31,680 17-Sep-02 31,680 Total 31,680 31,680 − 31,680 31,680 Grand Total 2,970,091 350,002 1,815,048 2,165,050 1,977,374 L/C = letter of credit, Pvt = private. Source: State Bank of Pakistan.

Appendix 4 19

COMPARISON OF DISBURSEMENTS BETWEEN THE FCEF AND THE FE-25 SCHEME

Amount ($) Position During the Quarter Ended Disbursements Under the Disbursements Under the FCEF Scheme FE-25 Scheme 30 Jun 2001 0 – 30 Sep 2001 0 3,791,000 31 Dec 2001 67,126 41,822,000 31 Mar 2002 340,035 84,942,000 30 Jun 2002 22,413 160,448,000 30 Sep 2002 131,503 385,551,000 31 Dec 2002 593,212 340,783,000 31 Mar 2003 523,621 – Total 1,677,910 1,017,337,000 FCEF = foreign currency export finance facility, FE = foreign exchange. – = no data available. Source: State Bank of Pakistan.

20 Appendix 5

COMPARISON OF INTEREST RATES BETWEEN THE FCEF AND THE FE-25 SCHEME

LIBOR (%) Cost of Funds (%) Month 3 months 6 months FE-25a FCEFb April-01 4.31% 4.23% 6.81% 7.43% May-01 4.00% 3.99% 6.50% 7.43% Jun-01 3.79% 3.83% 6.29% 7.43% Jul-01 3.68% 3.69% 6.18% 7.43% Aug-01 3.49% 3.48% 5.99% 7.43% Sep-01 2.60% 2.53% 5.10% 5.72% Oct-01 2.23% 2.17% 4.73% 5.72% Nov-01 2.08% 2.10% 4.58% 5.72% Dec-01 1.88% 1.98% 4.38% 5.72% Jan-02 1.86% 1.99% 4.36% 5.72% Feb-02 1.92% 2.07% 4.42% 5.72% Mar-02 2.03% 2.33% 4.53% 4.92% Apr-02 1.91% 2.10% 4.41% 4.92% May-02 1.90% 2.09% 4.40% 4.92% a 3 month LIBOR rate has been used for analysis purposes. b 6 month LIBOR rate of 15th March and 15th September has been used. Source: State Bank of Pakistan.

PARTIAL RISK GUARANTEE FACILITY

Amount of Country of Origin of Ref. No. Issuing Bank Currency L/C Amount Guarantee Date of Issue Expiry DateUsage period, if any Applicant Beneficiary B/D of Goods Goods

PRG0001 PICIC Commercial Bank € 382,589.49 382,589.49 4-Nov-01 3-Dec-01 0 Quetta Textile W Schlafhorst AG winding heads Germany PRG0002 Faysal Bank Limited $ 81,189.75 81,189.75 21-Nov-01 4-Jan-02 0 Hussian Mills Ltd. Multan Auscott Marketing Austrailian Raw Cotton Austrailia PRG0003 Faysal Bank Limited $ 124,813.92 124,813.92 27-Nov-01 14-Dec-01 60 Style Textile Pvt. Ltd LHR Nice Dyeing Factory Hongkong Accessories for Ready made Garments China PRG0004 Metropolitan Bank $ 4,111,716.87 1,049,940.73 15-Nov-01 28-Feb-02 0 MEKO Tex Pvt. Ltd KHI American Commodity 5500 tons Ginned Cotton USA PRG0005 Bank AL Habib $ 955,867.50 955,867.50 15-Nov-01 31-Jan-02 0 Premium Textile Mills KHI Staple Cotton Cooprative Upland Cotton USA PRG0006 Metropolitan Bank $ 1,173,949.56 1,173,949.56 30-Nov-01 23-Mar-02 0 Amjad Textile Mills Ltd Multan Ecom Agro Industrial Corp Uzbekistan Raw Cotton Uzbekistan PRG0007 Askari Commercial Bank $ 413,362.50 413,362.50 11-Dec-01 15-Jan-02 0 Fazal Cloth Mills Muzaffargarh Ralli Bros & Coney,Liverpool Cotton Uzbekistan PRG0008 Soneri Bank Limited $ 48,620.00 48,620.00 23-Nov-01 10-Feb-02 0 Manzoor Plastic and Chemical Mitsubishi Corporation Japan Pojyamide in Primary Forms Japan PRG0009 Faysal Bank Limited $ 78,164.88 78,164.88 1-Nov-01 9-Jan-02 60 Style Textile Pvt. Ltd LHR Nice Dyeing Factory Hongkong Kintted fabric China PRG0010 Metropolitan Bank $ 315,395.59 315,395.59 15-Nov-01 6-Feb-02 0 Standard Textile Mills American Commodity Raw Cotton USA PRG0011 Faysal Bank Limited $ 451,943.00 451,943.00 5-Dec-01 20-Feb-02 0 Mahmood Textile Mills Ltd Weil Brothers Cotton INC Raw Cotton Uzbekistan PRG 0012 Faysal Bank Limited $ 126,736.95 126,736.95 20-Dec-01 20-May-02 0 Colony Textile Mills Ltd Multan Ecom Argoindustrial Corp.Switzerland Cotton Australia PGR0013 Muslim Commercail Bank $ 1,489,072.50 1,489,072.50 3-Jan-02 15-Feb-02 0 Quetta Textile Staple Cotton Cooprative Raw Cotton USA PRG0014 MuslimCommercialBank $ 1,400,205.00 1,400,205.00 3-Jan-02 30-Jan-02 0 Quetta Textile Staple Cotton Cooprative Raw Cotton USA PRG0015 Bank AL Habib $ 569,727.50 569,727.50 21-Dec-01 28-Feb-02 0 Premium Textile Mills KHI Staple Cotton Cooprative Upland Cotton USA PRG0016 Bank AL Habib $ 744,536.25 744,536.25 15-Jan-02 15-Feb-02 0 Eastern Spinning Mills Staple Cotton Cooprative Upland Cotton USA PRG0017 Soneri Bank Limited $ 250,000.00 250,000.00 9-Jan-02 26-Jan-03 0 Multi Media Manufacturers Odme B.V. Luchthaveriweg Disk mastering System Netherlands PRG0018 Bank Al Falah € 650,364.00 650,364.00 23-Jan-02 21-Mar-02 0 Amjad Textile Mills Ltd Multan W. Schlafhorst AG and Co. germany 4 Complete schlafhorst Autoconer Germany PRG0019 Faysal Bank Limited € 340,000.00 340,000.00 17-Jan-02 17-Jun-02 0 Chenab Limited Pakistan Osthoff Senge Gmbh and Co. KG Roller Germany PRG0020 PICIC Commercial Bank $ 14,822.28 14,822.28 1-Feb-02 2-Oct-02 90 Highnoon Textile Limited Lhr. Smartex Int'l Ltd. Hong Kong Garment Accessories Hong Kong PRG0021 PICIC Commercial Bank $ 23,475.94 23,475.94 6-Feb-02 25-Feb-02 90 Highnoon Textile Limited Lhr. Smartex Int'l Ltd. Hong Kong Garment Accessories Hong Kong PRG0022 Soneri Bank Limited $ 185,000.00 185,000.00 5-Feb-02 28-Feb-02 360 Multi Media Manufacturers Singulus Tecnologies AG Metalizer Germany PRG0023 Soneri Bank Limited $ 230,000.00 230,000.00 6-Feb-02 28-Feb-02 360 Multi Media Manufacturers Singulus Tecnologies AG Injection Moulning Machines Germany PRG0024 Metropolitan Bank $ 475,150.00 475,150.00 19-Jan-02 15-Mar-02 120 Ahmed Oriental Textile Mills Paul Reinhart, INC, Richardson Texas Raw Cotton USA PRG0025 Soneri Bank Limited $ 185,000.00 185,000.00 18-Feb-02 29-Mar-02 330 Multi Media Manufacturers Singulus Tecnologies AG CD replication line Germany PRG0026 Muslim Commercail Bank $ 117,600.00 117,600.00 7-Mar-02 27-May-02 0 Khas Textile Mills Pvt Ltd Tex-Mach INC Textile Machinery USA PRG0027 Muslim Commercail Bank $ 40,000.00 40,000.00 7-Mar-02 27-May-02 0 Khas Textile Mills Pvt Ltd Tex-Mach INC Textile Machinery USA PRG0028 PICIC Commercial Bank $ 342,000.00 342,000.00 8-Apr-02 30-Apr-02 120 Arain Fibers Multan, Pak Foster Textile Machinery London,UK Ring Spinning Frames United Kingdom PRG0029 PICIC Commercial Bank $ 114,000.00 114,000.00 22-Mar-02 24-Jun-02 120 Arain Fibers Multan, Pak Foster Textile Machinery London,UK Ring Spinning Frames United Kingdom L/C = letter of credit, PICIC = Pakistan Industrial Credit and Investment Corporation Ltd, Pvt = private. Source: Standard Chartered Bank.

Appendix 6 6 Appendix 21

22 Appendix 7

OPERATIONAL AND FINANCIAL PERFORMANCE OF PARTICIPATING COMMERCIAL BANKS (PCBs)

A. Operational Performance of PCBs

1. PICIC Commercial Bank

a. Organization

1. PICIC Commercial Bank was incorporated in Pakistan on 27 December 1993 as a public limited company and received a license from the State Bank of Pakistan on 3 April 1994. As of 31 December 2006, the total authorized capital and paid-up capital amounted to PRs3 billion (approximately $49 million) and PRs2.734 billion (approximately $45 million), respectively. The total number of bank staff in 2006 was 1,651 as compared with the 2005 figure of 1,534.

b. Operations

2. The segment of PICIC business activities includes (i) corporate finance, (ii) trading and sales, (iii) retail banking, (iv) commercial banking, and (v) payments and settlements. Additionally, the bank offers a wide range of asset-based products. Its branch network expanded to 136 in 2006, including 7 collection booths. PICIC is expected to open 20 more branches in 2007. Online banking has been introduced in almost all the branches throughout the country.

3. In 2006, the bank realized a pre-tax profit of about PRs1.28 billion (approximately $21 million) and a post-tax profit of PRs959 million (approximately $15 million), down from 2005’s pre-tax profit of about PRs1.91 billion (approximately $31 million) and post-tax profit of PRs1.50 billion (approximately $25 million). The decline in profit was attributed to the additional provision of PRs476 million (approximately $7 million) against the nonperforming loans.

4. Under the Project, the bank provided four subloans in the amount of $118,000.

2. Habib Bank Limited

a. Organization

5. Habib Bank Limited commenced its operations in Mumbai (Bombay) in 1941. Impressed by its initial performance, Muhammad Ali Jinnah—the founder of Pakistan—requested the bank to move its operations to Karachi after the independence of Pakistan. The bank established itself in Pakistan in 1943. As of 31 December 2006, its total authorized capital and paid-up capital amounted to PRs13.8 billion (approximately $226 million) and PRs6.9 billion (approximately $113 million), respectively. The total number of bank staff in 2006 was 14,572 as compared with the 2005 figure of 16,314. The reduction in staff is due to the voluntary staff separation program offered by the bank during the year.

b. Operations

6. The bank offers the following services to its customers (i) commercial banking, (ii) corporate banking, (iii) investment banking, (iv) international group banking, (v) retail banking; (vi) treasury, and (vii) Islamic banking, known as modaraba. The bank operates 1,437 branches domestically and 40 branches internationally. In 2006, the bank realized a pre-tax profit of

Appendix 7 23

PRs18.84 billion (approximately $309 million) and a post-tax profit of PRs12.70 billion (approximately $208 million), up from 2005’s pre-tax profit of PRs13.83 billion (approximately $231 million) and post-tax profit of about PRs9.65 billion (approximately $161 million).

7. Under the Project, the bank approved one subloan in the amount of $32,000.

3. Metropolitan Bank

a. Organization

8. Metropolitan Bank was incorporated in Pakistan on 3 August 1992 as a public limited company and commenced its banking operations on 21 October 1992. On 26 October 2006, Habib Bank AG Zurich’s Pakistan operations merged with Metropolitan. The merged entity was named Habib Metropolitan Bank Limited. Subsequent to the merger, Habib Bank AG Zurich conducted a public share tender offer in which it acquired a majority shareholding in Habib Metropolitan Bank Limited, and this bank became a subsidiary of Habib Bank AG Zurich in December 2006. The bank’s authorized capital and paid-up capital as of 31 December 2006 amounted to PRs6 billion (approximately $98 million) and about PRs3 million (approximately $49 million), respectively. The bank’s staff is comprised of 1,278 permanent staff, 283 contractual staff, and 402 outsourced staff for a total of 1,963 staff members.

b. Operations

9. As of 31 December 2006, the bank had a total of 82 branches. The bank plans to open more branches in 2007 and to upgrade existing branches. It realized a net income of approximately $34.61 million in 2006.

10. Under the Project, the bank approved a total of five subloans for $513,000.

4. United Bank Limited Pakistan

a. Organization

11. United Bank Limited Pakistan is a banking company incorporated in Pakistan on 7 November 1959 and is engaged in commercial banking and related services. It has five subsidiary companies: (i) United National Bank Limited, United Kingdom (55% holding); (ii) United Bank AG Zurich, Switzerland (100% holding); (iii) United Executors and Trustees Company Limited, Pakistan (100% holding); (iv) United Bank Financial Services (Private) Limited, Pakistan (100% holding); and (v) UBL Fund Managers Limited, Pakistan (100% holding). The bank operates 1,044 branches inside Pakistan including the Karachi Export Processing Zone, and 15 branches outside Pakistan. As of 31 December 2006, the total paid-up capital of the bank amounted to about PRs6.48 billion (approximately $106 million) out of the authorized capital of PRs10.30 billion (approximately $169 million).

b. Operations

12. The bank continued to demonstrate strong performance in 2006 with a 51% increase in pre-tax profit at PRs14.3 billion (approximately $234 million). The post-tax profit was PRs9.5 billion (approximately $155 million), an increase from the 2005 figure of PRs5.9 billion (approximately $98 million). During the last quarter of 2006, the bank launched its Islamic banking business with the first UBL Ameen Islamic Banking branch opening in Karachi.

24 Appendix 7

13. In 2007, the bank‘s focus remains on reprofiling the overseas branch network to deliver quality banking services, particularly in targeted markets across the Middle East. New branches will be opened, and selected Middle Eastern branches will be relocated to increase its customer base.

14. Under the Project, the bank approved a total of 20 subloans for $1,314,500.

B. Financial Statements and Ratios

15. PCBs did not have to comply with any specific financial ratios before they could avail of the foreign currency export finance facility (FCEF) scheme except the minimum capital adequacy ration (CAR) of 8% of risk-weighted assets. All PCBs have met the CAR as shown in Table A7.

Table A7: Compliance with Capital Adequacy Ratio (%)

PCB 2006 2005 2004 2003 2002 PICIC Bank 9.9 9.4 10.9 12.1 9.9 United Bank 12.6 8.2 8.2 8.1 9.1 Habib Bank 13.0 9.9 9.6 10.3 10.2 Metropolitan Bank 11.8 10.7 8.7 8.1 9.6 PCB = participating commercial bank, PICIC = Pakistan Industrial Credit and Investment Corporation Ltd. Sources: Audited financial statements of PCBs.

Appendix 8 25

STATUS OF COMPLIANCE WITH COVENANTS

Reference Covenants Status of Compliance LA, Section The Borrower shall, or shall cause the SBP Complied with. This provision is covered 4.02 to (i) promptly and effectively exercise its under SBP’s FE Circular No. 04 dated 28 rights in relation to each PCB; and (ii) cause March 2001 addressed to all authorized each PCB to promptly and effectively dealers in foreign exchange. In view of the exercise its rights in relation to each changes in market environment and the low subborrower, in accordance with the utilization of the FCEF facility, SBP and standards of a prudent lender and in such ADB have agreed to modify its provisions to manner as to protect the interest of the enhance utilization by the banks and Bank and the Borrower. exporters. The modification resulted in the issuance of SBP’s FE Circular No. 07 dated 17 April 2003 superseding FE Circular No. 04. LA, Section Each subborrower shall bear any foreign Complied with. This provision is covered 4.03 exchange risk which may arise in relation to under SBP’s Circular No. 04 dated 28 a withdrawal from the FCEF facility. In such March 2001 addressed to all authorized cases, the PCBs shall encourage a dealers in foreign exchange. Under the subborrower to obtain suitable forward procedure for availing finance from the coverage, expert credit insurance or make dollar window, an exporter drawing on the other suitable arrangements to minimize FCEF facility to finance domestic inputs, such foreign exchange risk. may convert the dollar facility on the spot market into Pakistan rupees in the inter- bank market, to the extent of such domestic input requirements. Each PCB shall assess the borrower’s ability to bear the foreign exchange risk. The PCB or PEFG, as the case may be, will confirm with the exporter that his/her foreign exchange exposure is adequately covered. The confirmation will primarily be done in cases where the exporter opts to avail PEFG cover through the use of the export credit insurance mechanisms. An exporter application approved by PCB will be sent to the Apex Unit of the Banking Supervision Department of SBP for confirmation of SBP’s agreement for extension of credit facility to the sub- borrower/exporter.

This particular covenant was no longer applicable effective 17 April 2007 because the abovementioned provision was not included in SBPs FE Circulate No. 07 dated 17 April 2003 which supersede SBP’s FE Circular No. 04 dated 28 March 2001. LA, Section The Borrower shall furnish, or cause to be Complied with. 4.04(a) furnished, to ADB a quarterly report within such a period as ADB shall reasonably request, and which shall indicate, among other things, progress made and problems encountered with respect to the Project

26 Appendix 8

Reference Covenants Status of Compliance during the 90 days under review, steps taken or proposed to be taken to remedy these problems, and the proposed program of activities and expected progress during the following 90 days. LA, Section Promptly after the final repayment of the Not complied with. SBP did not submit to 4.04(b) loan, but in any event not later than 3 ADB its own PCR. Prior to the fielding of the months following the repayment of the loan, PCR mission, SBP was provided with copy the Borrower shall prepare and furnish to of the PCR format for preparing their own ADB a report, in such form and in such PCR. detail as ADB shall reasonably request, on the utilization of the loan, the performance of the SBP’s obligations in respect of managing and administering the FCEF facility, the performance of each PCBs obligations under the SBP Regulations and Guidelines in respect of drawing on the FCEF facility. LA, Section The Borrower shall cause the SBP to Complied late. The audited project 4.05(a) maintain separate accounts detailing the accounts for the period 1 April 2001 to 30 use of the loan proceeds and these and its June 2002 was received by the PCR general accounts and financial statements mission on 5 July 2007. No further audited shall be audited annually, and shall, project accounts are required because the promptly after their preparation but in any last and final disbursement under the loan event not later than 12 months after the was made during the quarter ending 30 close of the fiscal year to which they relate, June 2002. furnish to the Bank certified copies of such audited accounts and financial statements. Schedule 5, SBP shall maintain an Apex Unit to Complied with. The Apex Unit was para. 1 implement, administer and monitor the established in the BPD under TEPI loan. FCEF facility and EFS on a full time basis. The Unit is now in SME & Microfinance The Apex Unit shall regularly review the Department, which is also looking after the progress of the FCEF facility and shall overall work of the EFS, and the FCEF. submit a semi-annual report to the EFS working group on the utilization of the FCEF facility. Schedule 5, The Borrower shall ensure that the EFS Partly complied with. The EFS working para. 4 working group shall meet on a regular basis group met only in October and December to consider, and subsequently reconsider, 2000. According to SBP, the meetings of the FCEF Regulations and Guidelines, the working group were conducted on need FCEF facility documentation and progress basis. Keeping in view the large number of of the project. working group members and to ensure the availability of all members for the meeting, working group meetings are called when the need arises. Schedule 5, The Borrower shall ensure that an effective Complied with. SBP and the EPB para. 5 and comprehensive public awareness conducted a series of seminars at the major campaign is developed and implemented by commercial centers of Pakistan in October MOC and EPB to advertise the FCEF facility 2001. Specific letters containing features of and ensure that all exporters, in particular the FCEF facility were given to all SME and indirect exporters, are made Chambers of Commerce and Industries.

Appendix 8 27

Reference Covenants Status of Compliance aware of the new FCEF facility. Schedule 5, No PCB shall receive proceeds from the Complied with. para. 9 FCEF facility unless it meets the following conditions: (i) minimum paid-up capital requirements stipulated in the SBP’s prudential banking regulations; (ii) the income recognition and provisioning standards stipulated in the SBP’s prudential banking regulations; and (iii) the minimum capital adequacy ratios stipulated in the SBP’s prudential banking regulations. Schedule 5, The Bank and the Borrower, from time to Complied with. The Exchange Policy para. 16 time, will review the pricing of subloans for Department in its Circular No. 07 dated 17 the subborrowers and the continued April 2003 addressed to The Head Offices financing of foreign currency costs of and Principal Offices of the Authorized exporters under the EFS and their effect on Dealers in Foreign Exchange mentioned the utilization of the FCEF facility. If it is that “In view of the recent changes in the determined that these factors have an market environment and the low utilization adverse effect on the FCEF facility, ADB of the Facility, the Asian Development Bank and the Borrower shall consider what steps and the State Bank of Pakistan have are to be taken. Such steps may include revisited the Facility and have agreed to additional incentive measures designed to modify its provisions to enhance utilization encourage utilization of the FCEF facility by the banks and exporters”. rather than utilization of rupee subloans under EFS for foreign inputs, measures The SBP in its Circular No. 01 dated 29 related to the interest rate differential January 2004 advised The Head Offices between the FCEF facility and subloans and Principal Offices of the Authorized under EFS, or measures phasing out the Dealers in Foreign Exchange of the use of rupee subloans for foreign inputs. termination of the Facility effective 29 January 2004 due to lack of interest from the exporters and under utilization of the Facility by the exporters which reduced its economic usefulness. Schedule 5, The Borrower shall ensure that (i) a new Complied with. After an extensive tripartite para. 19 labor policy which promotes the eradication dialogue and consultation, a consensus has of child labor and protection of the rights of evolved regarding the future shape and working women will be introduced; and (ii) course of industrial relations in Pakistan. In existing labor laws will be modernized by light of this consensus, the Labor Policy third quarter of 2001, in line with the new 2002 was developed within the following labor policy and preparation of such laws framework of objectives and initiatives: (i) will include consultation with stakeholders. support bilateral and tripartite mechanisms for policy formulation, self-regulation, and peaceful resolution of disputes; (ii) regulatory authority of government to be exercised only when bilateral mechanisms fail to resolve disputes; (iii) consolidation and simplification of labor laws; (iv) structural legislative changes to provide easy access to speedy justice in the labor sector; (v) promotion of employees’ social security and social programs; (vi) progressive extension of labor laws and

28 Appendix 8

Reference Covenants Status of Compliance welfare measures to informal and unorganized sectors; (vii) special emphasis on workers’ children education; (viii) combating child and bonded labor; and (ix) elimination of gender discrimination to reinforce gender equality.

The Government of Pakistan enacted the Labor Policy 2002 on 23 September 2002. Some of the provisions of the Labor Policy and its description as follows: a) Elimination of Gender Discrimination. This provision improves the role and contribution of women in the labor force and provides them equal opportunities for employment. b) Elimination of Child Labor and Bonded Labor. This provision enhances the age limit to 18 years in respect of worst forms of child labor, for entry into the labor market.

ADB = Asian Development Bank, BPD = Banking Policy Department, EPB = Export Promotion Bureau, EFS = export financing scheme, FCEF = foreign currency export finance facility, FE = foreign exchange, LA = Loan Agreement, MOC = Ministry of Commerce, PCB = participating commercial bank, PEFG = Pakistan Export Finance Guarantee Agency Limited, SBP = State Bank of Pakistan, SME = small and medium enterprise.

Appendix 9 29

OVERALL ASSESSMENT OF THE PROJECT

Criterion Weight Performance Details Rating Rating Weight % Description Value Rating 1. Relevance 20 The Project is assessed as relevant for Pakistan at the Partly 1 0. 20 time of processing. Its goals, objectives, and outputs Relevant were consistent with the Government’s development strategy and ADB’s country strategy for Pakistan. During implementation, the Project was not totally relevant, as utilization of the FCEF was insignificant at $429,000 out of the $150 million loan amount. Only four exporters were direct beneficiaries. The availability of the PRG was canceled in 2004 when it became clear that demand for cover was no longer needed by the market, due to improved perceptions of country risk at a price that justified the costs involved. PEFG was not fully capitalized to the level of $10 million as expected. Equity participation that was supposed to come from several financial institutions did not materialize. As a result, PEFG was not able to achieve the expected original volume. 2. Effectiveness 30 The Project was partially effective in achieving its Ineffective 0 0 outcomes. It was unsuccessful in increasing SMEs and emerging exporters’ access to export credit since the utilization of the FCEF was marginal, involving only four exporters from traditional sectors, i.e., textiles and leather products. The PRG facility involved 30 transactions with a total value of approximately $15.3 million. Its availability was canceled in 2004, when the perception of Pakistan’s sovereign risk improved and a market gap no longer existed for the PRG to fill. PEFG’s total pre-shipment guarantees in 6–year period was valued at PRs715.68 million (approximately $12 million) or around PRs120 million (approximately $2 million) annually. Since June 2007, issuance of guarantees has been discontinued due to liquidity constraints. 3. Efficiency 30 The Project was partially successfully implemented. Less 1 0.30 The FCEF, PRG, and PEFG were available during the Efficient Project’s period. However, the FCEF was not competitively priced relative to the FE-25 scheme during a period of declining interest rates and was not responsive to changing market conditions; therefore, the FCEF was canceled in January 2003. The PRG allowed several international banks to confirm import L/Cs issued by Pakistani banks on better terms, but demand for cover quickly decreased after market perception of Pakistan country risk improved. The Project also supported PEFG’s establishment, a private sector-owned export credit agency. However, the company offered only one product, a pre-shipment guarantee, to a limited number of exporters. 4. Sustainability 20 The Project was not sustainable. It was expected that Unlikely 0 0 the FCEF would be made available for at least 15 years. Due to insignificant utilization, the FCEF was canceled in January 2004, and the ADB loan was fully repaid in April 2004. As a result of significantly improved market perception of Pakistan country risk and the ability of Pakistani banks to meet their obligations under import L/Cs, demand for cover under

30 Appendix 9

Criterion Weight Performance Details Rating Rating Weight % Description Value Rating the PRG was no longer needed toward the end of 2002. Because of low capitalization, high overhead, a single product, weak risk analytics, poor judicial recourse to defaulted buyers, and an ongoing departure of experienced staff, PEFG stopped issuing guarantees as of 2007. PEFG’s financial condition is not viable, and discussions are ongoing toward a voluntary liquidation or a merger with the newly established TDAP. OVERALL WEIGHTED RATING 0.50 ADB = Asian Development Bank, FCEF = foreign currency export finance facility, FE = foreign exchange, L/C = letter of credit, PEFG = Pakistan Export Finance Guarantee Agency Limited, PRG = partial risk guarantee, SME = small and medium enterprise, TDAP = Trade Development Authority of Pakistan. Notes: Highly relevant = 3, Relevant = 2, Partly relevant = 1, Irrelevant = 0. Highly effective = 3, Effective = 2, Less effective = 1, Ineffective = 0. Highly efficient = 3, Efficient = 2, Less efficient = 1, Inefficient = 0. Most likely = 3, Likely = 2, Less likely = 1, Unlikely = 0.