crunch is to be avoided. Accordingly, I feel that Eximbank may well be required to step-up its lending activities abroad. DIVIDENDS PAID TO U.S. TREASURY Mrs. SMITH. From a reading of last year's hearings, it appears you were a bit modest in your forecast as to the Bank's het earnings. Your estimate was $110 million, and the actual amount was $115 million, of which $20 million was paid into the Treasury. As I understand it, Eximbank has practically repaid its original $1 billion capitalization from the Treasury? Mr. DUBRUL. The estimates are made far in advance of the end of the fiscal year. A change from the figures estimated for interest rates, amount of funds needed to be borrowed, and amount disbursed can cause changes in net income. Since its inception the Bank has paid dividends to the U.S. Treasury of $946 million, or almost equal to the original $1 billion of capital stock. EXPROPRIATION Mrs. SMITH. Has the Bank had to deal with the expropriation without compensation of some productive unit it helped to finance? Mr. DUBRUL. From the point of view of Eximbank, expropriation is relevant only insofar as it affects repayment of any indebtedness owing to the Bank. As was pointed out in response to an earlier question, only the People's Republic of China and Cuba have refused to make repayments to Eximbank. GAO COMMENT ON FINANCIAL CONDITION OF BANK Mrs. SMITH. While the Comptroller General's report is generally favorable this year, he enters one caveat with respect to the Bank's reserves for contingencies and liabilities. Will you comment on that comment? Mr. DUBRUL. In October 1975, the GAO issued a report, which we discussed with this committee last year, concluding that Eximbank was in potentially weakened financial condition. The issues raised by that report have been addressed and fully met. In this regard, I refer you to the summary and conclusion to the Bank's capital/income adequacy and financial stability review of February 1977, which is appendix II to my opening statement. It is my professional opinion that, if Eximbank persists in the rigorous discipline of its present review procedures, it will serve as a positive and productive force in our national economy for many years to come. It is the joint responsibility of the management of Eximbank, the Congress and concerned American taxpayers to insist on the maintenance of such discipline in the affairs of Eximbank. The present administration seeks sound management of all Government policies and programs. This sincere Presidential desire should reenforce the maintenance of sound practices at Eximbank in the years ahead. QUALITY OF U.S. GOODS AS COMPETITIVE FACTOR Mrs. SMITH. In terms of quality of product and supporting services rendered, which American products are most competitive in world markets? Mr. DUBRUL. The "Made in U.S.A." stamp is synonomous with high quality and good service in markets around the world. In the capital goods sector, with which we at Eximbank are most familiar, some products which dominate the world marketplace-largely due to their unmatched technological superiorityinclude commercial jet aircraft, mainline locomotives, nuclear powerplants, and aspects of the petrochemical processing industry. This list is by no means exhaustive, only illustrative. In fact, we at Eximbank quite frequently find that (to the buyer) the most attractive feature of a U.S. bid is the quality of the U.S. product. Mrs. SMITH. Does the Bank play a role in encouraging improvement in product quality in order to improve sales on the world market? Mr. DUBRUL. Eximbank does not involve itself in the nonfinancing aspects of any specific export sales possibility or attempt to advise any one or group of exporters on nonfinancial considerations of exporting. For one thing, we do not have the degree of expertise in the quality field to play such a role. For another, we do not think Eximbank involvement in the area would be effective or appropriate. The market place is, by far, the most effective and efficient stimulus to quality improvements and the Commerce Department is the Government agency responsible for helping U.S. manufacturers make their products more attractive to foreign buyers. COUNTRY DEVELOPMENT PLANS Mrs. SMITH. In your appendix, under "Portfolio Management and Country Risk Analysis," you mention the usefulness of "country development plans." We have heard mention of "country" plans in hearings concerning the international lending institutions. AID bilateral development programs. United Nations development programs, plus the many regional development programs. Are you in contact with these other development assistance groups, and do you ever finance directly or indirectly projects which complement these other country development programs? Mr. DUBRUL. Let me first make clear that the "country development plans" referred to in our appendix are economic planning tools put together by the borrowing country and used to set priorities for and give organization to their internal economic development. Such plans are helpful to Eximbank in allocating our limited financial resources among competing applications from any one country. On the other hand, most development-oriented lending institutions (Eximbank is not a development-oriented institution) have a plan of assistance for each country which is established by the development lending instiution and is followed in helping individual countries develop their economic potential. Eximbank does not establish such country lending plans." As part of an effort to keep informed on events and activities around the world, Eximbank maintains contacts with many financing sources-including commercial banks and development lending institutions. Moreover, Eximbank has not only financed projects that complement the country development plans of development institutions, but has also financed different aspects of the same project being financed by development institutions. It is important to note that this "complementarity" is the result of vastly different objectives temporarily converging, not the confluence of similar objectives. APPENDIX 1 [CLERK'S NOTE. These inserts were provided 2 months after the hearings on the international financial institutions. Therefore they were not included in the appropriate place in this volume. Please ref (See page 169) In the developing countries, there has been remarkable progress in improving living standards and income during the last 15 years. Admittedly, the quality of some basic measurements has shortcomings, but the general conclusion for that period is not open to question. From 1960-74, when in the United States per capita income rose at an average annual rate of 2.9 percent, some 42 developing countries or territories encompassing over 480 million people had increases in income averaging 3 percent or more, according to the "World Bank Atlas." That includes almost 200 million people in lower income countries such as Pakistan. Korea, and Thailand where per capita income is $500 or less, and over 280 million people in middle income developing countries such as Brazil, Mexico, and Malaysia with per capita incomes of over $500. In all of these countries, the majority of the people are "poor" and they have shared in these truly remarkable improvements in income and living standards. The relation between growth and changes in income distribution has been analyzed in only 13 developing countries for which at least rudimentary data are available.' In roughly one-third of the countries studied-Colombia, El Salvador, Sri Lanka, and Taiwan-income growth for the lowest income groups was faster than that for the higher income groups. In other words, the distribution of income for the poorest 40 percent improved and their growth in income averaged over 8 percent annually for the four countries. In the second group of countries-India, Korea, Peru, the Philippines, and Yugoslavia-all income 1 Hollis Chenery, et al. "Redistribution with Growth," Oxford University Press, 1974. classes improved at about the same rate (on average about 5 percent annually) so that income distribution remained largely unchanged. Last, in a third group comprising Brazil, Mexico, Panama, and Venezuela, the relative income distribution appears to have worsened. Nevertheless, the poorest 40 percent of the population in those countries recorded healthy gains in income (on average about 4.5 percent annually), even though the upper income group had even larger gains. This performance, which relates primarily to the 1960's, is particularly impressive in view of the fact that developing efforts by governments and international lending institutions during that period were primarily directed to raising overall growth per se and not on direct relief of poverty. It is only in the past 5 years that lending policies of the development banks have emphasized projects and programs to assist the poor and it is still too early to measure the impact of the new lending policy on income distribution. However, the full payoff will come when those programs that proved to be really successful are widely introduced throughout the developing countries and financed, not just through the IFI's, but out of domestic resources as well. (See page 306) Use of new certified seeds is projected to raise farm cash income by $17.20 per hectare or, 10 percent, for wheat farmers currently using improved seeds (see item A in table below), by $63.40 per hectare, or 53 percent, for wheat farmers currently using local variety seeds (see item B), and by $80.50 per hectare, or 20 percent, for cotton farmers currently using ordinary seeds (see item C). Details of Afghan seed project (ADB loan No. 276-AFG(SF)): Projected increases in farm incomes from using certified seeds $119.60 63.40 53 B. Farmers currently using local variety seeds: Increased revenue from using new certified seeds_. Cotton farmers: C. Farmers currently using ordinary seeds: Present net cash income_. Increased income from using new certified seeds_ NOTE.-National average landholdings is 3.5 hectares. (See page 310) $400.00 80.50 20 The ADB has elaborate procedures to monitor, evaluate, and audit its loans to all borrowers, including those to the Koreans, to assure that the proceeds of these loans are being used for their intended purposes. There is no such thing as a "Korean account," but rather individual loans to various Korean borrowers. A detailed description of the procedures used by the Bank to monitor its loans follows: RIGHTS AND PRACTICES OF THE BANK Bank loans are disbursed to its borrowers for making payments by the borrowers to suppliers and consultants. The Bank establishes no contractual relationship with those who supply goods or services to borrowers of Bank loan. The Bank, therefore, does not make any arrangements directly with suppliers or consultants for auditing their accounts with respect to goods and services supplied by them to borrowers of Bank loans. The Bank, however, requires its borrowers to maintain adequate records and accounts relating to the use of the proceeds of loans and to furnish the Bank with such information and reports as the Bank may request concerning the expenditure of the proceeds of loans. The Bank also requires its borrowers to obtain approval of the Bank for contracts which are to be made by them with their suppliers or consultants. Through such procedure, the Bank can insure that all arrangements which the Bank considers appropriate are included in such contracts. This aspect is further discussed below. RIGHTS AND PRACTICES OF BORROWERS It is the responsibility of borrowers to make appropriate contractual arrangements with their suppliers and consultants with respect to goods and services to be financed by the Bank, provided that such contractual arrangements should be satisfactory to the Bank in terms of the Bank's lending policies and procedures. As far as supply contracts are concerned, the Bank does not require or suggest its borrowers to include in supply contracts any provision for auditing the suppliers. It is also the normal practice of borrowers not to include any such auditing provision in their supply contracts. A supply contract is usually awarded to the lowest evaluated bidder after international competitive bidding; furthermore, a supply contract is usually on a fixed price basis (subject to a suitable cost escalation clause in certain cases). It is, therefore, considered that there is little practical necessity for including auditing provisions in supply contracts.1 In the case of consultants, however, the situation is somewhat different. Consultant contracts are usually made on a cost-plus-fee basis, which means that payments to consultants are to be determined on the basis of costs actually incurred by them plus a reasonable profit margin. Verification of costs claimed by consultants under such a contractual arrangement may be needed in certain situations. Accordingly, the Bank requests its borrowers to include in their consultant contract provisions to the effect (i) that the consultant should keep accurate and systematic accounts and records in respect to their services in such form and detail as is customary in its profession and is sufficient to establish accurately the costs actually incurred by them in their services and (ii) that the consultant should allow the duly authorized representative of the employer to inspect such accounts and records and make copies thereof from time to time and should, when requested by the employer, submit such accounts and records to audit by auditors selected by the employer. PROCEDURES FOR LOANS TO DEVELOPMENT FINANCE INSTITUTIONS (DFI'S) In extending loans to DFI's, the following auditing rights and practices are usually detailed as standard conditions of the Bank's loan agreement: DFI's are required to submit annual reports and financial statements audited by an external auditor acceptable to the Bank within an agreed time period, usually within 4 months of the close of the financial year. The Bank usually requires the audit report of the DFI to take the form of a long format audit which normally includes a detailed loan portfolio audit prepared according to the Bank's standard requirements (which are essentially the same as those contained in the IBRD audit form for development finance companies). The long format audited report and statements are further examined by Bank staff and any deficiencies are promptly brought to the attention of the DFI's concerned. The Bank normally requires the DFI, where appropriate, to also submit long format audit reports from its sub-borrowers. In addition to the standard requirement of a long format audit report, provision is made in the loan documents whereby the Bank and the DFI are entitled to obtain all such information and records relating to each subloan that it considers necessary and reasonable for its normal loan supervision and control functions. The Bank also requires a continuous flow of information in the form of periodic (quarterly) progress reports to be submitted by each DFI on its utilization of proceeds of the Bank's credit line. In addition, DFI's are asked to furnish standard reports, some at short and some at long intervals, on their capitalization, operations, portfolio, arrears situation, accounts (profitability and financial 1 Witnessing of tests and inspections during manufacturing, however, is widely used where large and important contracts are involved. For large and important civil works, the borrower normally employs experienced and reputed consultants to supevise construction works. Certified progress reports are submitted by these consultants to the borrower and to the Bank prior to payment. status) and status of individual Bank-financed subloans. In this way, the Bank is kept continuously informed on developments affecting the cash flow of its DFI loans. Appropriate corrective action, where necessary, is then recommended for weak or problem areas associated with the Bank's DFI loans. POSTEVALUATION AUDITS One important aspect emphasized in Bank's postevaluation (particularly in respect of performance auditing) has been the close scrutiny and analysis of utilization of the proceeds of the loan. Such scrutiny and analysis usually require review of records on procurements and disbursements, in particular, international bidding procedures, certificates of countries of origin, time required for delivery, actual manner of disbursement, etc. Compliance with the Bank's "Guidelines" and the loan documents are also examined. Audits, as referred to above, are generally carried out as essential ingredients of Bank's postevaluation. But such audits go beyond monitoring or checking the cash flow of loans. Insofar as postevaluation in the Bank is primarily intended to enable the Bank to learn from experience, the question is generally asked as to how effective have the relevant procedures (i.e., procurement, disbursement, monitoring, etc.) been in satisfactory and efficient implementation of the project. In other words, postevaluation exercises seek not only to determine if there has been compliance with loan convenants and procedural requirements but also to evaluate the relevance and efficacy of these covenants or requirements in relation to the circumstances of projects concerned, In conclusion, in Bank's postevaluation studies, audits are carried out in order to determine if the current procedures are satisfactory for both lenders and borrowers and to come up with suggestions on possible improvement of procedures. For this purpose, recommendations are included in the postevaluation study with a view to implementing the results of auditing. MONITORING CASH FLOW OF LOANS The following describes the Bank's monitoring of loan cash flows: 1. Project components described in the appraisal report.-Detailed description of the project is contained in the appraisal report, including estimated costs of various project components. 2. Specific allocation of loan proceeds.—Side letter No. 1 of the loan agreement provides specific allocation of loan proceeds by category of expenditures. Disbursements against the loan will be limited to the amount allocated for each category; however, reallocation from one category to another may be done with the approval of the Bank, whenever necessary. 3. List of goods and contract packages approved by Bank.-Prior to commencement of procurement, the Bank reviews and approves list of goods to be procured, including grouping of these goods into economical bid packages. 4. Review of procurement documents and procedures.-Procedures for calling, submitting, and evaluating bids are agreed upon in the loan documents to insure economy and efficiency and proper utilization of loan proceeds. The Bank reviews the borrower's action to see if these procedures were followed. The Bank also approve draft tender and contract documents before issue. 5. Approval of contract.-The Bank reviews the bid evaluation report and if in order, the proposed contract award is approved. Usually, the Bank approves the contract before an award is made in small contracts, however, contracts are reviewed ex-post facto. The contract must conform to the category allocation, approved listing of goods and approved draft contract. 6. Processing of withdrawal applications.-The application is processed by the controller's department. Any payment requested is checked for conformity to: Specific category allocation, letter of commitment, if any, and approved contract (description of goods as well as payment terms). Supporting documents (invoices, bills of lading, evidences of payments, progress reports, certificates of origin, etc.) are required. In some cases, inspection reports and the results of testa during manufacture are also required. 7. Disbursement.-Payment as applied for and authorized is made to the appropriate party for account of borrower depending on the payment procedure agreed upon : Direct payment procedure: payment direct to supplier. |