lLtE COPY RESTRICTEDReport No. DB-62a

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

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL, LTD.

May 1, 1970

Development Finance Companies Department

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CURRENCY EQUIVALENTS

1 Isreli pound = .285 U.S. dollars1 U.S. dollar = 3.5 Israeli rounds

APPRAISAL OF

INDUSTRIAL DEVELOPMEUKT BANK OF ISRAEL LTD.

TAMLE OF CONTENTS

Paragraph Page

S tWYATRY 1-8 i-iii3ASIC DATA iii-v

I. INTRODUCTION 1 1

II. ENVIRONMENT AND ROLE 2-12 1-3General Economic Setting 3-4 1Industrial Setting 5-8 2-3Financial Setting 9-11 3Role of IDBI 12 3

III. DESCRIPTION OF IDBI 13-36 4-9Establishment and Purposes 13 4Share Capital and Ownership 14-15 4Organization, Management and Staff 16-20 4-6Procedures 21-23 6Resources 24-36 7-9

IV. POLICIES AND OPERATIONS 37-59 10-14Policy 37-39 10Loan and Guarantee Operations 40-50 10-12Government Guaranteed Loans 51-55 12-13Investment in Shares 56-57 13-14Investment Company of IDBI 58-59 14

V. FINAlNCIAL PERFORMANCE 60-75 15-18Income Performance 60-62 15-16Financial Position 63-69 16-18Quality of Portfolio 70-73 18Share Value and Audit 74-75 18

VI. PROSPECTS 76-84 19-21General 76-77 19ID3I's Requirements and Resources 78-81 19-21Projected Income and Profitability 82 21Projected Balance Sheet 83 21Debt Service Cover 84 21

VII. CONCLUSION AND RECOMMENDATIONS 85-90 22-23Conclusion 85-87 22Recommendations 88-90 22-23

ANNES

This report is based mainly on the findings of amission consisting of Messrs. Powell and Takaramurawho visited Israel in October-November 1969.

LIST OF ATITEXES

1. Shareholders as of December 31, 1969

2. Shares Other than Ordinary A Shares as ofDecember 31, 1969

3. Board of Directors and Committees as ofDecember 31, 1969

4. Organization Chart

5. Composition and Conditions of Share Capital as ofDecember 31, 1969

6. Status of Debentures as of December 31, 1969

7. Summary of Loan Operations 1958-1969

8. Analysis of Loans Approved

9. Investment Company of IDBI, Balance Sheets, December 31,1966-1969

10. Investment Company of IDBI, Statements of Income, YearsEnded December 31, 1966-1969

11. Statements of Income, Years Ended December 31, 1966-1969

12. Balance Sheets, December 31, 1966-1969

13. Delinquent loans as of December 31, 1969

14. Bad Investments Written Off, Loans Undergoing LegalProceedings and Loans in Arrears

15. Projections of Loan Operations, 1970-1974

16. Projected Statements of Income, 1970-1974

17. Projected Balance Sheets, 1970-1974

18. Projected Cash Flow Statements, 1970-1974

SUMMARY

1. The Industrial Development Bank of Israel, Limited (IDBI) wasestablished in 1957 to assist private industrial development in Israel.The Bank has so far made IDBI tw-o loans, totalling US$35 million; thefirst loan of $20 million in September 1965 and the second of $15 millionin November 1967.

2. Of IDBI's presently issued share capital of IS 379 million, onlyOrdinary A shares of IL 15 million carry full voting rights. 55% of theOrdinary A shares are held by private domestic investors, 26% by the Govern-ment and 19% by foreign investors. IDBI's Board of Directors numbers 56,and its functions have largely been delegated to three committees on whichthe main share holding groups are represented.

3. IDBI is well organized and expertly managed. Its staff iscompetent and experienced. The standard of appraisal work is satisfactory,and IDBI's investment decisions are soundly based. Its follow-up work iswell performed.

4. Although IDBI is empowered to undertake a wide variety offunctions, IDBI has concerned itself almost exclusively with lending. Asa general rule, IDBI does not make equity investments. From its inceptionto December 31, 1969, IDBI had approved 2,568 operations for a cumulativetotal of IL 1.39 billion. As of December 31, 1969, the loan portfolioamounted to IL 901 million, of which the repayment of IL 106.5 million orabout 12% is guaranteed by the Government. As of the same date, IDBI'sinvestment in shares amounted to IL 33.7 million or 3.5% of its totalportfolio.

5. IDBI's financial record is satisfactory. Net earnings increasedfrom IL 21.9 million in 1966 to IL 25.1 million in 1969, representing arange from about 13% to 15.5% of average year-end share capital. The amountoverdue is relatively smXall and actual losses to IDBI are likely to beminimal. The ratio of non-current debt and guarantees to equity was about1:1 at the end of 1969. Reserves and retained earnings increased fromIS 12.5 million in 1966 to Il 22.4 million in 1968. Total reserves togetherwith provisions amounted to about 9% of the total portfolio as of December 31,1969.

6. IDBI is an institution of national importance. The averageannual amount of IDBI's financing for industrial development has beenequal to about 25% of total gross industrial investment in the country.IDBI's relations with the Government and the commercial banking system areclose and harmonious.

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7. IDBI has projected loan commitments of about IL 475 million(US$ 136 million) during the two years from July 1970 to June 1972. Theprojections appear reasonable and attainable. During the same period,IDBI will need additional capital of around IZ 319 million to help meetexpected demands for financing. IDBI has made considerable efforts toraise funds from as many sources as possible. It expects to obtain IZ 169million out of the required IL 319 million from dcmestic and foreignmarkets. For the shortfall of I£ 150 million or US$ 43 million IDBI isrelying heavily on the Bank. The provision of around half this sum, up toUS$ 25 million, would keep the pressure on IDBI to continue searchingfor new capital while assuring it of resources until about February 1972.A loan of $25 million is recommended.

8. IDBI is a sound development finance company and continues todeserve the support of the Bank. The financial projections for the nexttwo years are satisfactory and debt service cover will be adequate through-out the projected life of the loan. The proposed loan should be on theBank's usual terms for recent loans to development finance companies. Inview of the high standard of IDBI's operation, the "free limit" should beraised to US$ 750,000, with a limit on the aggregate to be credited belowthe free limit of 50% of the amount of the loan. A debt-to-equity ratioshould be included in the loan agreement and the limit should be set at3:1.

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BASIC DATA

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL

Year of Establishment: 1957

Ownership (as of December 31, 1969) IZ ('000) Percent

Ordinary A (voting) Shares, issued and subscribedGovernment 3,925 26.0Private Domestic 8,275 5h.8Foreign 2,900 19.2

Sub-total 100 100.0

Non-Voting Shares, issued and subscribedGovernment 191,029 52.4Private Domestic 12,846 3.5Foreign 101,807 28.0Mixedl/ 58,435 16.1

Sub-total 36k,117 100.0

Total 379,217

Resource Position (as of December 31, 1969)(I£ million)

Domestic Currency

Equity 450 9Borrowings (less cancellations and repayments)

Debentures 24.8Long-term deposits of Israel Treasury 127.4A.I.D. loan 35.6A.I.D. (Cooley) special deposits 25.5Participation of third parties in loans granted 9.7AMAAL-ISRAEL Development Corporation Limited 1.1Short-term loan 15.0 239.1

690.0Less: Miscellaneous adjustments 1.5

Total Domestic Currency Resources 688.5

1/ Entities owned jointly by domestic and foreign shareholders.

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Foreign Currency (less cancellations and repayments) (If million)

European bonds 1972/82 52.5IBRD loans 110.8A.I.D. loan 20.5Loan from U.S. Export-Import 3ank 52.3Loan from U.K. Export-Credit Guarantee Department 41.1Belgian loan 35.0Israel Development Corporation 14.0Sundry loans 0.3 326.5

Less: Exchange adjustments 10.4

Total Foreign Currency Resources 316.1

Grand Total of Domestic and Foreign Currency Resources 1,004.6

Loans, Equity Investments Outstanding

Long-term loans 901.1Equity investments outstanding 29.8Subsidiary Company 16.2 947.1

Resources Available for Disbursement 57.5

Commitments of Loans and Investments 1967 1968 1969(IL in million)

Loans 112.7 175.3 230.1Equity investments 2.9 1.2 1.9

Total 115.6 17-6.5 232.0

Loans and Investments Disbursed 82.2 128.7 210.1

Earnings Record (percentage)

Profits before financial charges andtax to average total assets 7.4 7.7 8.4

Profits before tax and provisions toaverage total assets 4.9 5.2 5.4

Profits before tax and provisions toaverage equity 1/ 18.4 19.4 20.4

Net profit to average year-end sharecapital 2/ 14.0 15.5 13.2

Dividends paid to year-end sharecapital 5.9 6.4 6.6

1/ Excluding Ordinary 3 and Preference A shares owned by the Government, butincluding net linking funds.

2/ Excluding Ordinary 3 and Preference A shares owned by the Government.

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Financial Position (as of December 31, 1969)

Total debt/equity ratio 1.3:1Reserves and provisions to loan and investment portfolio 9%

Interest Rates and Charges (as of December 31, 1969)

Interest rates on loans Variable rangingfrom 6.5% to 9%p.a.

Commitment fee No commitmentfee, but a one-time commissionof 1% on theamount of eachloan.

Guarantee fee 2% per annum.

APPRAISAL OF

INDUSTRIAL DEVELOPM1ENT BANK OF ISRAEL, LTD.

I. INTRODUCTION

1. The Industrial Development Bank of Israel (IDEI) has applied to theBank for a third loan, of $55 million, to cover part of its projected foreignexchange requirements for a period of five years. So far, the Bank has grantedtwo loans: the first loan, US$20 million, in September 1965 and the second,US$15 million, in November 1967. This report, which examines the suitabilityof IDBI to receive a third Bank loan, is based on a continuing relationshipbetween the Bank and IDBI since the first Bank loan was made and on the find-ings of a Bank mission that visited Israel in October-November 1969.

II. ENVIRONMENT AND ROLE

2. A review of the economy of Israel is given in the economic reportdated July 22, 1969 "Current Economic Position and Prospects of Israel"(EM4A-7b). This was updated by a memorandum dated March 20, 1970 (EMA-18a).

General Economic Setting

3. Israel's economic growth in the past has been remarkable consideringher scarce natural resources, limited domestic market and inability toestablish trade relationships with neighboring countries. Between 1960 and1966, real MNP expanded at an average of 9%d a year while per capita productionincreased by about 5%. Investment rose to an average annual rate of 26%. Therate of export growth was about 15% per year. This growth performance was madepossible mainly by a relatively large and sustained inflow of foreign capitaland by a broad base of well-educated people.

4. More recently Israel's resources have been strained by heavy defenseexpenditure. This strain was reflected in growing budgetary and balance ofpayments deficits. The balance of payment deficit was further aggravatedby the high growth rate of the economy. The 1969 deficit on the currentaccount of the balance of payments was estimated at about $930 million whichwas some 30% higher than the 1968 deficit and about double that of 1967. TheBank of Israel lost foreign exchange reserves of more than $250 million during1969. A large increase in the price level was avoided. Wages, which havebeen frozen for the past two years, were renegotiated early in 1970 andeffectively the freeze has been reimposed for a further two years. Rates ofsavings and investment declined sharply in 1967 and despite some revival inthe following two years remain well below levels recorded in the first halfof the 1960's. The Government faces a difficult task in containing internaldemand and the balance of payments deficit, and in rebuilding the country'sforeign exchange resources.

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Industrial Setting

5. The industrialization of Israel has played a key role in thecountry's economic growth. From 1950 to 1968 industrial output rose at anaverage rate of over 10%. In 1968, industrial output accounted for 27% ofMP and for some three-quarters of the yearly export of commodities excludingdiamonds. Employment in the industrial sector was 226,000 or about 25% ofthe total of gainfully employed in the country. The strong upsurge in theindustrial sector has continued through 1969. Industrial output increased28% in 1968 and is estimated to have increased 17% in 1969 at constant prices.Industrial investment amounted to IL 470 million in 1968 and is expected tohave reached about I£ 750 million, in 1969, or about 19% and 22% of the totalfixed investment in the country, respectively.

6. The impressive industrial development in the past would not havebeen possible without substantial Government support and encouragement. Asearly as 1950, the Law for Encouragement of Capital Investment was enactedto attract foreign capital to IsraeL, to channel domestic investments intokey sectors, to increase exports, to reduce reliance on imports, to absoxbimmigrants and to populate the underdeveloped areas. The Law has been amendedfrom time to time to meet changing conditions. The latest amendments weremade in 1967. Investment projects which assist in the achievement of theaims of the Law may benefit from special advantages and financial assistance;incentives include tariff protection, cash grants, subsidies, drawback ofcustoms duties, and low cost financing. Applications for such incentives arefiled with and processed by the Investment Center, a Government body createdto administer the Law.

7. Aware of the possibility of distortions in production costs thatcould result from protection and Government subsidies, the authorities havebeen taking steps to rationalize the existing structure and increase theintexnational competitiveness of the industrial sector. Following the 1962devaluation, quantitative import restrictions were replaced primarily bytariff protection. Since the 1967 devaluation, the Government has beenmaking efforts to reduce the effective tariff levels and to rely less onsubsidies and preferential treatment. At the time of the 1967 devaluation,for instance, tariff protection of at least 50% was given to two-thirds oftotal industrial output exposed to foreign competition. One-third enjoyedmore than 100% protection. However, tariff reductions of between 10% and30% were announced for a wide range of industrial commodities in October 1968and January 1969. In May 1969, the Ministry of Commerce and Industry approveda five-year plan to reduce average duties to under 3)% by January 1, 1975.Also, the Government has promoted mergers and modernization and expansion ofenterprises, to improve efficiency of output, by providing low cost long-termfinancing and sometimes Government subsidies. Although the present level ofprotection remains high, the gradual reduction of tariffs and the encouragementof various measures for cost reduction are significant steps in the rightdirection.

8- In the early 1950's, owing in large part to the need to absorbimmigrants, Government support for industrial development was directed prin-cipally to labor intensive industries for domestic market consumption, suchas textiles and food processing. Increasing emphasis has been placed oncapital-intensive metal, chemical, and rubber industries. Recently, suchsophisticated science-based industries as electronics, scientific instrumentsand netro-chemicals have been encouraged. An increasing demand for industrialdevelopment loans is expected from such new science-based industries.

Financial Setting

9. There are 27 commercial banks with 648 branches, 17 credit coope-ratives with 83 branches and 20 mortgage banks operating in Israel at thepresent time. Twenty-two of the banks are authorized to deal in foreigncurrency. These banks mainly make short-term credit and participate inindustrial financing by providing working capital.

10. Investment banks, as distinguished from commercial banks, providemedium- and long-term credit for industry, construction, public services andthe like. The most important investment banks in the respective sectors are:IDBI in the industrial sector; the Israel Bank of Agriculture Limited in theagriculture sector; Tefahot Mortgage Bank Limited in the construction sector;and Tourist Industry Development Corporation Limited in the tourist andtransportation sectors. The Israel Corporation Limited, established inApril 1968, may become important in channeling funds from abroad to financeindustrial and other projects and in providing managerial services. Two-thirdsof the funds available to investment banks are derived from the Government,particularly from the development budget. In addition to this source, theinvestment banks mobilize funds by issuing securities in the local market andabroad.

11. The Minister of Finance is authorized by Law to fix maximum interestrates for loans. However, at the end of March 1970 the ceiling on interestrates for commercial credits was removed. Until 1967, IDBI charged 12%. How-ever, under an agreement with the Government effective October 1, 1967, DBIcharges interest rates ranging from 6.5% to 9% per annum for its long-termloans to industry, the rate depending on the location and nature of projects.When IDBI charges an interest rate of less than 9% per annum, the Govermmentpays IDBI the difference between 9% per annum and the rate charged to theborrower.

Role of IDBI

12. IDBI is the largest institution in Israel providing medium- andlong-term credit for industrial development. Its assets amount to about 80%of the assets of all the investment banks operating in the industrial field.IDBI's loan approvals have represented, on the average, about one-fourth ofgross annual investment in industry. IDBI administers some Government fundsfor certain development loans to Government-controlled enterprises, and actsas agent for the U.S. Agency for International Development. It closely cooper-ates with the Government in implementing industrial development programs andcontinues to play a key role in financing the Israeli private industrial sector.

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III. DESCRIPTION OF IDBI

Establishment and Purposes

13. IDBI was established in 1957 on the joint initiative of theGovernment of Israel, the three largest commercial banks in Israel, theHistadrut (General Federation of Labor) and the Manufacturers' Association.Its main objective is the provision of medium- and long-term finance toprivate industrial enterprises in Israel. DBI is also empowered by itsArticles of Association to undertake a variety of functions includingparticipation in equity capital of entexprises, underwriting and promotingsecurity issues, guaranteeing obligations and providing managerial, financialand technical assistance to industries.

Share Capital and Ownership

14. Of the presently authorized share capital of I£417 million, onlyOrdinary A shares of I116 million carry full voting rights, of whichI£15.1 million had been issued and subscribed as of December 31, 1969. TheOrdinary A shares were widely distributed among the Government, privatedomestic and foreign investors, as shown in Annex 1; the Government held26%; private domestic investors, 55%; and foreign investors, 19%. Theproportion of the Government's shareholding gives it, in terms of IsraeliCompany Law, veto power in regard to major changes in IDBI's Charter.

15. Other than the Ordinary A shares mentioned above, there were eightclasses of ordinary or preference capital stocks issued, totalling aboutI£364 million, as of December 31, 1969. Of these shares, Government heldabout 52%, foreign investors 28%, private domestic investors 4% and enter-prises jointly held by the private domestic and foreign investors 16%.Annex 2 describes the distribution of the shares other than Ordinary A.

Organization,_Management and Staff

16. Board of Directors. IDBI's Board has 56 members representing theOrdinary A shareholders. All holders of I£250,000 or more in Ordinary Ashares are entitled to appoint one director. 12 directors represent theGovernment, 13 represent foreign shareholders, and the remaining 31 representdomestic shareholders and the enterprises jointly owned by domestic andforeign interests. The Board represents a broad cross-section of financialand business institutions in the country, and foreign investors. IDBI'sBoard members are listed in Annex 3(A). The Board meets three or four timesa year, reviews the record of activities of the Executive Committee anddecides key policy matters referred to it by the Executive Committee. TheBoard is responsible for the election of the Chairman and the appointment ofthe Managing Director.

17. Dr. Y. Foerder who had been the Chairman of the Board since IDBI'sinception relinquished office in March 1970 because of ill health. Mr. MosheSandberg, Executive Vice-Chairman, who was active in IDBI's day-to-daymanagement on a full-time basis from his appointment in 1968 until November1969, is now acting as Chairman and works on a part-time basis.

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18. Committees. Three committees operate in IDBI: The ExecutiveCommittee, the Vice-Chairments Committee and the Loan Committee. The powersand duties, chairman, members and the number of meetings of these committeesare described in the following.

Executive Committee Vice-Chairmen's Committee Loan Committee

.All powers of the Major administrative and Reviews andBoard, except to personnel matters and a decides onelect the Chairman sounding board for policy loan applica-

Powers and of the Board and to matters likely to prove tions up toDuties appoint the Managing controversial. cumulative

Director. Reviews total ofand decides on loan I£500,000 forapplications beyond individualthe authority of the projects.Loan Committee.

The Board Chairman The Board Chairman or, in The ManagingChairman or, in his absence, his absence, the Execu- Director.

the Executive Vice- tive Vice-Chairman.Chairman.

20 Board members or The Board Chairman, the 15 BoardMembers their alternates. five Vice-Chairmen and members or

the Managing Director. theiralternates.

Number of Twice a month. Once a month, or as Once a week.Meetings necessity arises.

Mlembers of both Executive and Loan Committees are listed in Annex 3(B).

19. Management. Dr. Avraham Neaman has been the Managing Director, whois the chief operating executive, since 1961. He has four senior assistants:the Deputy General Manager who directly supervises the Economics, Engineeringand Follow-up Departments; the Assistant General Manager who is responsiblefor the Implementation, Collection, and Accounting Departments; the GeneralCounselor and Assistant Manager who heads the Legal Department; and theGeneral Secretary who heads the Secretariat Department which is also in chargeof Administration and Statistics. The day-to-day management team consists ofthese five members plus the Executive Vice-Chairman and meets once a week todiscuss management problems. IDBI is well led and well managed.

20. Organization and Staff. IDBI is organized in eight departments,mentioned above. The staff numbers 135, including 6 members of the managementteam and 43 professional staff members. The professional staff includes 15economists, 10 engineers, 8 lawyers and 6 accountants. The staff aregenerally competent and experienced. IDBI has been training less-experienced

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staff on the job and sends its staff members to various training coursesoutside IDBI. It also plans to add new staff members, provided qualifiedprofessionals are found, to enable it to deal with an expected increase inthe volume of appraisal and end-use work, The organization chart is shownin Annex 4.

Procedures

21. Appraisal of Investment Proposals. Loan applications are given apreliminary review by an initial screening committee consisting of themanagement, department heads concerned, two representatives from the Govern-ment, one from the government's Investment Center and three Board members.This committee decides whether an application deserves further examination orshould be rejected for reasons of Governmental priority or on various othergrounds. If the committeets decision is favorable, an appraisal team,consisting of one engineer and one economist, is assigned to the project.The Engineering and the Economics Departments, acting together, prepare theappraisal report and recomendations, assisted by the Legal and otherdepartments. The appraisal report thus prepared is reviewed by a workingparty, consisting of the management team, the department heads concerned andtheir deputies. This working party decides whether to present the appraisalto the Loan Committee (or the Executive Committee), possibly with revisions ofthe terms and conditions, or whether to return the report for further studyand justification. The Loan Committee or the Executive Committee reviews thereport screened by the working party and makes a final decision on theproject.

22. IDBI's appraisal is carefully done; the appraisal report covers allpertinent aspects, including prospects for the international competitivenessof the project. The standard of the underlying appraisal work is satisfac-tory; IDBI's investment decisions are soundly based.

23. Follow-up. The Engineering Department closely follows the projectduring the construction. Engineers visit the project site several times toassure proper performance of construction and installation. Upon the comple-tion of the project, the Follow-up Department is responsible for obtainingthe reports and accounts from clients and examining them, for making siteinspections and for recommending actions to the management where necessary.Because of the relatively large number of clients (about 850 as of December 31,1969), the Follow-up Department has adopted a policy of selection and reviewsabout 10 clients per month. The firms which are selected are in arrears, orin default, or in some difficulty. The selection of clients is made mainlyon the basis of a monthly t tcollection status report" prepared by the Collec-tion Department, supplemented by other available information. The Follow-upDepartment produces about 120 follow-up reports in a year. The reports arewell organized and comprehensive, and contain necessary recommendations. Ingeneral, the follow-up work is well done. Nevertheless, IDBI feels that thisactivity creates a heavy load on its staff and, therefore, has recently com-missioned a consultant firm to devise a more efficient method to select clientswhich require close attention. IDBI will inform the Bank of any revisions inits procedures arising from the consultantst recommendations.

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Resources

24. IDBI's main resources consist of its paid-in share capital, reservesand retained earnings, Government deposits, debentures, loans from AID andIBERD, bonds floated in Europe and other borrowings. The resource position asof December 31, 1969, is summarized in Basic Data, shown in pages iii-iv.

25. Share Capital. As of December 31, 1969, the authorized sharecapital was s17;million of which I£379.2 million was issued and paid-in.At present, there are 9 classes of authorized capital, each having, istinctivecharacteristics as to voting powers, redeemability, value-linking _, dividendrights, profit participation and rights in liquidation.

26. Two of the classes of non-voting shares, one ordinary and onepreference (redeemable), are fully owned by the Government and carry dividendsat the rate of 3% and 3.5% respectively; these in effect provide a subsidy.The five classes of shares held by private investors and the Government areexchange-linked and are entitled to dividends at the rate of 6% (threeclasses), 7%" and 7.5%othe first three also participate in profits. Thehighest fixed dividend is 8%, paid on the preferred ordinary shares. Adetailed description of each category of shares is given in Annex 5.

27. Reserves and Iletained Earnings. As of December 31, 1969, IDBI'slinking fund, reseirves and retained earnings amounted to I£71.6 million.

28. Government Deposits. IDBI receives deposits from the Governmentfrom time to time. The Government deposits are classified into threecategories: (1) the Government places its funds from time to time to coverthe defaulted amount of IDBI loans, the repayment of which is guaranteed bythe Government (aI8.6 million as of December 31, 1969); (2) the Governmentmakes deposits, from which IDBI withdraws funds for loans to projectsdesignated by the Government on the terms specified by the Government(I£74 million as of same date); (3) the Government places long-tern depositswith IDBI at an interest rate of 3% per annum to augment IDBI's resources(I£45 million as of same date). The Government deposits totalled I£126.6million as of December 31, 1969.

29. Debentures. Five issues of debentures bearing interest at therate of 6% totalled I£i54.8 million, of which I£24.8 million was outstanding

1/ In Israel, Government bonds are issued with the principal linked to thecost of living index. Other financial transactions in the private sector areoften likewise index-linked. Also, financial transactions connected withforeign currency borrowings are sometimes linked with exchange rate. Until1963 IDBI loans Ere linked with both the cost of living index and exchangerate. IDBI abolished linking loans in 1963, but both assets and liabilitieslinked with exchange and index still remain in connection with these trans-actions. IDBI also holds some Government bonds which are index-linked. Inaddition, IDDI has a part of its equity linked to the U.S. dollar. IDBImaintains a special account, "linking fund"., for the adjustments on suchlinking transactions (see also paragraph 65).

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(including linking increments of I£11 million) as of December 31, 1969.A description of those debentures is presented in Annex 6. Since December 31,1969, IDBI has issued additional debentures totalling If35 million whichconsist of I£2l million, cost of living index-linked, with interest at 5.5%,and IL1h million, dollar-linked, with interest at 7%, both redeemable during1975-1985.

30. AID Loans and Managed Funds. IDBI received two AID U. S. dollarloans, one in 1959 and the other in 1961, each $10 million at an interest rateof 5% per annum for 12 years, including two years of grace. I£S20.5 millionequivalent in total was outstanding as of December 31, 1969. IDBI alsoreceived an AID counterpart fund loan of I£40 million in 1964 at an interestrate of 3.5% per annum for 25 years including three years of grace. IZ35.6million was outstanding as of December 31, 1969. Furthermore, IDBI acts asagent for the U.S. Government to administer local currency loans which AIDgrants to Israeli industrial enterprises within the framework of the Cooleyfund authorization.!/ IDBI is responsible for the disbursement and collectionof the loans; it occasionally guarantees the loans. For its services, IDBIreceives a one-time commission of 1% on amounts up to I£l million and 0.5%on amounts exceeding I M million. As of December 31, 1969, the managed fundamounted to about I£ 25.5 million.

31. IBRD Loans. The terms, conditions, and the status of two IBRDloans are summarized below:

(US$ million)First Loan (1965) Second Loan (1967)

Amount 20.0 15.0Date of Approval September 1965 September 1967Interest Rate 5.5% per annum Variable ratesAmortization Flexible Flexible

Status on ]Narch 31, 1970

Credited 20.0 15.0Disbursed 20.0 9.8Outstanding 16.7 9.8

As of December 31, 1969, the World Bank loans represented 11.1% of IDBI'stotal resources.

32. European Bonds. IDBI issued bonds in the amount of $15 million,which were fully subscribed in the Eurcpean market in 1967. The bonds carrya 7% coupon, giving an effective cost to IDBI of about 8.23%. The bonds areredeemable in eleven installments by 1982.

1/ The fund was created under Section 104(e) of the U.S. Agricultural TradeDevelopment and Assistance Act of 1954 and was available from accruals in localcurrency of the proceeds from the sales of U.S. agricultural commodities.

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33. Loans from the U.S. Export-Import Bank. IDBI has utilized linesof credit at an interest rate of 6$ per annum from the U.S. Export-ImportBank for financing imports of capital goods from the U.S. The amount out-standing as of December 31, 1969 was I£28 million.

34. Loans from the U.K. Export-Credit Guarantee Department. IDEIreceived two 'ana at an interest rate of 6.47$ per annum from the U.K.Export-Credit Guarantee Department, totalling UK£5 million in 1968 and 1969.The outstanding amount as of December 31, 1969 was I1F23.0 million.

35. Participation of Third Parties in Loans Granted. IDBI has receivedloans fro -local commercial banks and American Palestine Association toparticipate in IDBI-financed projects. IDBI is responsible for repayment ofsuch loans, The amount outstanding as of December 31, 1969 was I£9.7 million.

36. Other Sources. IDBI borrows, from time to time, at short-termfrom the Bank of Israel to accommodate its short-term needs. The amountoutstanding as of December 31, 1969 was I£15 million. IDBI has recentlyentered into an agreement with a consortium of four Belgian banks for a loanof $10 million equivalent at an interest rate of 7% per annum, for a periodof up to ten years. As noted above, IDBI has made considerable efforts toraise funds from many sources.

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IV. POLICIES AND OPERATIONS

Policy

37. IDBI does not have a comprehensive statement of general businesspolicies. Its lending policy has evolved in the course of operations, guidedby its Articles of Association and the Government's policies for industrialdevelopment. Individual loan applications are judged on their own merits,and profitability for IDBI is an overriding consideration.

38. Although the Articles of Association provide IDBI with a widevariety of functions, IDBI has concerned itself almost exclusively withlending. Loans are granted for fixed capital including land, buildings andequipment for industrial projects, primarily in the private and cooperativesectors. With minor exceptions, IDBI does not provide loans for workingcapital. It has not lent to Government-controlled enterprises from its ownresources including the proceeds of Bank loans. Loans to Government-controlledenterprises are made only from special funds so provided or arranged by theGovernment. IDBI has no stated policy on lending in the occupied territories,and would consider such applications, if any, on an ad hoc basis on their ownmerits, but only against full Government guarantees. So far, IDBI has madeonly two such loans, neither involving Bank funds. The proposed Bank loan 4would finance only projects within the borders of the state of Israel as ofJanuary 1, 1967, and would be used only for t"productive purposes", i.e. it 0'would not be used for investments in projects primarily or mainly devoted tthe production of defense items.

39. IDBI also engages in two types of guarantee operations: first,guarantee of letters of credit to finance imports of equipment abroad; andsecondly, guarantee of long-term loans including AID (Cooley) loans.

Loan and Guarantee Operations

10. Summary of Operations. IDBI's statistics and accounts show, fromits inception, not only loans from its own resources but also Cooley loansand long-term guarantees, on the ground that all these operations haveinvolved management decisions on the part of IDBI. From its inception toDecember 31, 1969, IDBI had approved 2,568 operations for a cumulative totalof l£ 1.39 billion. Loan approvals, commitments and disbursements since 1966have been as follows:

(IL million)1966 1967 1968 1969

Approvals 96.2 175.6 164.8 278.3Commitments 100.4 112.7 175.3 230.1Disbursements 94.7 80.2 128.3 206.4

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It is apparent that IDBI's operations have grown since 1967, reflecting thestrong upsurge in industrial activity, following the recovery from the 1966recession. The growth of loan activities in 1969 is particularly noteworthy.A summary of loan operations since 1958 is shown in Annex 7, and an analysisof loans approved in Annex 8.

41. Size of Loans. IDBI is reluctant to consider applications for loansbelow IU50,000, but about one-fifth by number (only 1.2% by value) of loansapproved are below that figure. There are no specific restrictions on themaximum size of a loan or on total commitment to a single enterprise. Thelargest loan so far made and the maximum exposure in a single enterprise isI£44 million to a chemical company, equivalent to about 10% of IDBI's equityas at December 31, 1969. The average size of loans is IF£540,000. Loansabove I£1 million account for 11% in number, but 64% in amount.

42. Commitment Fee and Other Charges. IDBI does not impose a uniformrate of commitment fee, but passes on the same amount of commitment fee tothe borrowers as it must pay to its lenders, when the lenders charge acommitment fee. It charges a one-time commission of 1% on the amount of eachloan and a guarantee fee of 2% per annum on the guaranteed amount outstanding.

43. Interest Rate and Exchange Risk. As noted in paragraph 11,IDBI charges rates up to 9% per annum. In cases where it charges lessthan 9%, the Govermment pays IDBI the difference. By agreement with IDBI,the Govexnment assumes the exchange risk on foreign borrowing without chargingany premium. IWhenever IDBI negotiates foreign credits from abroad, it doesso only with the prior approval of the Government, which approval alsoconveys the Government's undertaking to assume the foreign exchange risk onthe credit.

44. The Government's interest rate policy is part of a complex systemof incentives, which include development grants, export subsidies, drawbacksof customs duty and other devices, designed to promote economic and socialobjectives such as the encouragement of exports and the development of under-populated areas. During negotiations, the Bank received assurances from theGovernment and IDBI that they recognize the importance of adequate economicjustification of investment projects, and that economic as well as financialcosts and benefits were being carefully assessed. IDBI's representativeconfirmed that IDBI would continue to address itself with particular careto the economic justification of projects during their appraisal, and thatthe reports submitted to the Bank would reflect the economic analysis made.

h5. Security. IDBI's loans are made on a secured basis, mainly againstfirst mortgage but sometimes supplemented by the guarantee of eithersponsors or third parties including the Govermment. Collateral is assessed,based on estimated realization on liquidation. The size of the loan isusually limited to 55% of the estimated project cost.

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46. Maturity. With a few exceptions, IDBI does not lend for less thanfour years. Its longest maturity has been 20 years. The maximum graceperiod for repayments is two years and a half. Of the loans approved up toDecember 31, 1969, about 71% by value were repayable over nine years, butabout one-half by number were repayable in between six and eight years. Theaverage maturity is about eleven years.

47. Industrial Distribution. Loans are fairly evenly distributed amongvarious industries. The textile and leather industries have received about24% of the total loans by value, the metal industry about 17% and the chemicaland rubber industry about 16%, the food and tobacco industry about 12%, non-metallic minerals about 10%, paper and printing about 5% and miscellaneousabout 16%. Loans to the chemical and rubber industries and the metalindustry have proportionately increased by value recently. No statisticaldata on export industries as distinguished from industries producing goodsfor domestic use are available. Howvever, IDBI estimates that more thantwo-thirds of the enterprises it finances are export-oriented.

48. Geographic Distribution. The regional distribution of loansapproved indicates Government's emphasis on development areas, i.e. on theborders where the availability of infrastructure and skilled labor isinadequate, and risks are substantial, as are also the Government's incen-tives. Loans do not show heavy concentration in a particular region.

49. Mew or Existing Industries. About three-fourths of IDBI's lendingby amount has been to existing enterprises for modernization and expansion.The balance of one-fourth has gone to support new ventures. Recently, loansfor expansion and modernization have further increased, reflecting thenecessity and efforts for balancing and rationalization of existing indus-tries for cost reduction.

50. Guarantees. IDBI's guarantees outstanding amounted to I$39.8million, I£30.9 million and I£29.3 million as of December 31, 1967, 1968and 1969 respectively.

Government-Guaranteed Loans

51. As of December 31., 1969, an outstanding amount of about I£275million or 31% by value of IDBI's portfolio consisted of loans which werepartially or wholly guaranteed for repayment by the Government of this total,the portion guaranteed by the Government was IL1O6.5 million. The Governmentguarantees repayment of IDBI's loans because of its interest in stimulatingthe growth of development areas, in promoting exports or import substitutes,and in encouraging projects with a high value added, especially those basedon local raw materials. IDBI seeks Government guarantees for projectslocated in areas which are handicapped by inadequate infrastructure andskilled labor supply. Over 80% of the Government-guaranteed projects arein such areas. Another group for which guarantees are sought is projects

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which meet the criteria set by the Law for the Ecnouragement of CapitalInvestments, but for which the security is inadequate in IDBI's judgment.

52. The Government guarantees are of two types, "general" and "special".The Government obligations in the "general" guarantees are met from a fund towhich the Government credits an amount (according to an agreed formula) foreach guarantee given. The present size of this fund is adequate in relationto the size of the outstanding amount of guaranteed loans and to the likelyclaims. In the event of default, IDBI is compensated up to 8O% of theoutstanding balance of a loan. As of December 31, 1969, the amounts coveredby the "general" guarantees totalled IT 100.1 million. The "special"guarantees may be extended up to 100% of the value of the loans and are givenon an individual basis without using the funds for the "general" guarantees.The value of outstanding loans covered by the "special" guarantees was IL 6.4million, as of the same date.

53. The Government guarantees are not conditional on the exhaustion oflegal remedies by IDBI. In the event of default, the amount of repayment due,both principal guaranteed and interest accrued is immediately paid to IDBI.

54. Before the second Bank loan was made, the Bank noted IDBI'sinadequate appraisal reports on a few projects guaranteed by the Government.In making the second loan, the Bank required IDBI to obtain the Bank's priorapproval on all sub-loans to be guaranteed by the Government, regardless oftheir size. This has helped ensure adequate appraisals. Also, about twoyears ago, it was determined that Government guarantees would be given onlyafter specific approval by the Israeli Legislature. This requirement toohas prevented IDBI from excessive reliance on Government guarantees, whichcan now be obtained only rarely and with difficulty. In view of the goodstandard of IDBI's appraisal work and the more stringent conditions for thegrant of Government guarantees, it is no longer necessary for the Bank tostipulate prior approval of all projects guaranteed by the Government forwhich Bank funds are used.

55. IDBI made two loans totalling about IL 4.5 million to enterprisesin the occupied territories in 1968 (Bank funds were not involved), but ithas made no such loan in 1969. IDBI's loans to Government-controlledenterprises made through special funds provided by the Government amountedto IS 74 million or rather less than 10% of its portfolio, as of December 31,1969. Risks in all these loans are fully assumed by Government.

Investment in Shares

56. IDBI, as a general rule, does not make equity investments, exceptwhen necessary to rescue its borrowers or in connection with mergers or thereconstruction of clients' companies. In fact, IDBI has been inactive in newshare investment since 1965 when the first Bank loan was granted. Thisinactivity largely resulted from the fact that Israeli industry is character-ized by a high proportion of debt and considerable reluctance to expand

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equity ownership. The depressed condition of the stock market in recentyears has further aggravated the difficulty of making good equity invest-ments. IDBI's present management believes that development lending shouldnot be mixed with share ownership. Many of IDBI's investments in shareswere made in connection with its loan operations in earlier years.

57. As of December 31, 1969, IDBI's investment in share capital,including its holding in its subsidiary investment company, amounted toI£33.7 million, 3.6$ of its total portfolio. The bulk of the share invest-ments are not quoted on the stock exchange. As of December 31, 1969, themarket value of the quoted shares and securities was about 88% of cost.

Investment Company of IDBI

58. The Investment Company of IDBI was established in 1963 to operatein the field of equity investment, following legal advice on the requirementsof the U.S. Security and Exchange Commission, in order to enable IDBI tocontinue to be exempt from SEC's classification "investment company". IfIDBI had not remained exempt it would have been able to seek funds in theU.S. capital market only after complying with substantial restrictions. (Forexample, IDBI's Board would have had to include United States citizens asa majority.) The share capital of the Investment Company, I£20 million, isowned by IDDI (74.9%) and Government (25.1%). The Investment Companyoperates in accordance with IDBI's policy towards investments in sharesmentioned above, and functions virtually as a department of IDBI, having noseparate staff of its own. The Investment Company was originally intended totake over most of the equity investment activity of IDBI, but in the circum-stances its activity has been limited mainly to rescue operations of IDBI'sclients in trouble.

59. The Investment Company's total assets amounted to about I£32.6million, 3.3% of IDBI's total assets, as of December 31, 1969. Its totalportfolio, consisting of investments in shares, debentures and loans, amountedto about I£26 million at cost, of which I M9.6 million or about 75% wasinvested in share capital. Quoted securities amounted to IL 11.2 million,the market price of which was about IL11.8 million, slightly higher than thecost. The balance sheets and income statements of the Investment Company since1966 are shown in Annexes 9 and 10, respectively.

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V. FINANCIAL PERFORIANCE

Income Performance

60. ID3I's income statements for the years 1966 through 1969 are givenin detail in Annex 11 and are summarized below.

(I£ million)1966 1967 1968 1969

Gross income 62.2 72.0 76.5 83.7

Expenses:

Financial charges 23.2 22.4 23.2 25.6Administrative and general expenses 3.1 5.2 5.3 4.3Allowance for doubtful loans andinvestments, etc. 1.3 4.2 1.3 2.3

27T6 W37 =29. 32.2

Total net income, before taxes 34.6 40.2 46.7 51.5

Net earnings 21.9 22.7 28.6 25.1

Profit before financial charges and taxas % of average total assets 7.2 7.4 7.7 8.4

Profit before tax and provisions as %of average total assets 4.7 4.9 5.2 5.4

Profit before tax and provisions as fof average equity 1/ 17.2 18.4 19.4 20.4

Profit after tax and provisions as %of average year-end share capital 2/ 14.9 14.0 15.5 13.2

61. IDBI's income performance is satisfactory. Gross incomeincreased from I£ 72 million in 1967 to I£ 83.7 million in 1969. Net incomeincreased from If, 22.7 million in 1967 to IL 28.6 million in 1968, butdecreased to If 25.1 million in 1969 owing to higher tax payments. Adminis-trative and general expenses have been below 0.6Z of average total assets.

1/ Excluding Ordinary B and Preference A shares owned by the Government, butincluding net linking funds.

2/ Excluding Ordinary B and Preference A shares owned by the Government.

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62. IDBI's calculation of the difference betwieen yield from funds usedand cost of resources (including in cost the payout on shares which rank fordividends ahead of Ordinary A shares) was 155% in 1966. The margin increasedto 2.05c- in 1967, 2.11% in 1968 and 2.51s in 1969 owing to the new arrangementwith the Government whereby payment to the Government of insurance premiums byID3BI for exchange risk was eliminated.

Financial Position

63. IDBI's balance sheets as at December 31, from 1966 through 1969,are given in detail in Annex 12 and are summarized below:

(I£ million)1966 1967 1968 1969

Assets

Short-term assets and deposits 46.4 98.3 38.9 34.2Long-term deposits 36.2 33.3 30.1 23.9Loans 650.5 696.1 805.4 901.1Investments in shares and subsidiarycompany 39.2 39.1 37.3 33.7

Fixed assets and deferred charge 4.9 7.3 5.2 0777.2 874.1 916.9 992.9

Liabilities

Short-term liabilities 72.9 62.8 44.9 102.9Special deposits and participation 93.6 82.8 123.6 117.5Long-term debt 189.4 279.1 280.6 321.6Linking funds 63.5 65.8 62.1 41.8Share capital and retained earnings 357.8 383.6 405.7 409.1

Except in 1967, IDBI's current ratio was less than 1.0. However, IDBI hasbeen able to meet short-term requirements through long-standing arrangementsfor short-term accommodation with the Bank of Israel. The annual rate ofgrowth of total assets was 4.9% in 1968 and 8.3% in 1969. Reserves andretained earnings increased from It 16.5 million in 1967 to IZ 22.4 million in1969. IDBI's financial position is generally sound, although its liquidityposition remains tight.

64. The only restriction on IDBI's borrowings in relation to its equityis contained in the first AID loan agreement, which provides that IDBI'sindebtedness should not be more than twice the share capital and surplus.The ratio of non-current debt and guarantees to equity was 0.92:1 in 1968 and1.06:1 in 1969. In view of IDBI's low debt to equity ratio, the Bank did notimpose any such restriction for the previous loans. However, IDBI's first AIDloan is scheduled to mature in 1972. For a new Bank loan, it would be prudentto limit IDBI's indebtedness to not more than three times the share capital andsurplus. The draft documents for the proposed loan have been negotiatedaccordingly.

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65. Linking Funds. Since April 1963, IDBI has not made loans linked withthe dollar or the cost of living index. All linking increments accrued onlinked loans made before that date were cancelled effective January 1967 underan agreement with the Government, whereby the Government undertook to compensateID3I for any amounts that would otherwise have become due to IDBI. Linkingincrements on linked loans will remain as assets in IDBI's accounts until thefinal settlement is made. Also, IDBI has index-linked assets in certain localbonds, as well as dollar and index-linked liabilities in connection with itsshares and borrowings. The combined net balance shows a surplus of linkedassets over linked liabilities. As of December 31, 1969, the net balance inthe linking funds amounted to If 32.6 million, out of which the sum of If 28.1million wlas earmarked to adjust the par value of the linked share capital.

66. Dividends. All classes of shares except Ordinary A shares carry theright, statutory or conventional, to certain minimum rates of dividend.Consequently, dividends have commanded a substantial share of disposableincome. IDBI has also paid dividends on Ordinary A shares at moderate ratessince 1959 and has since 1967 maintained a rate of 8.9% per annum on thoseshares. Total dividends paid amounted to I£ 24.0 million or about 76%0lo ofdisposable income in 1968, and I£ 19.5 million or about 78% in 1969.

67. Reserves. The Articles of Association require that after paymentof dividends and dividend arrears on all Preference shares, a part of"ordinary" profit, up to 10%, must be credited to a reserve fund. There isno lower limit, so that theoretically even a token sum can be set to reserve.Further amounts (unspecified) may be credited to the reserve fund at twostages: after payment of the specified dividends on Ordinary shares; and afterdistribution of specified participating dividends on Preference shares. Thereserve fund may also be credited with sums from the surplus of the linkingaccounts. As of December 31, 1969, the general reserve was IL 18.5 million.

68. The following table lists the various items of reserves and shows thereserves position in the past three years:

(I£ million)December 31

1966 1967 1968 1969

General reserves 11.5 13.5 16.0 18.5Other free reserves 0 2.5 7.0 0Share premiums 6.4 6.5 7.2 7.5Capital linking fund 33.8 36.7 33.6 32.6Unappropriated 1.0 0.5 0.5 3.9

Total 527 57 WI 9J7

Total reserves at If 62.5 million as of December 31, 1969, represented 6.7% ofIDBI's total portfolio.

69. Provisions for Bad Debts. The cumulative provisions for bad anddoubtful debts, net of amounts written off, as of December 31, 1969 wereIf 8.1 million. A provision has also been made of about IL 4.5 million for

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diminution in value of share investments. The provisions appear to beadequate in the light of the position described below.

Quality of Portfolio

70. As of December 31, 1969, the amount of overdue installments on loanrepayments was It 16.5 million (of which I£ 15.1 million had been in arrearsfor more than a year). The amount in arrears was less than 2% of the loanportfolio and the total principal of loans in arrears was I£ 113.1 million,or about 12.6% of the loan portfolio (Annex 13). Legal proceedings were inprogress in respect of outstanding loans amounting to Ia 16.9 million, ofwhich I£ 8.3 million was guaranteed by the Government for repayment.

71. Of the amount of I£ 16.5 million in arrears, IL 13 million was duefrom one textile company, Wooltex. The loans to Wooltex were made early inIDBI's life, and Wooltex has long been in difficulties. Its present managementwas installed by IDBI in an attempt to improve its condition, but the attempthas not been successful. IDBI is considering whether to change the managementagain, or to secure the appointment of a Receiver. !rjhatever the outcome, IDBIdoes not expect to lose any part of its loan. IDBI has collateral security aswell as an 80% Government guarantee.

72. As of December 31, 1969, the total amount of loans and investmentsin shares written off from provisions for bad debts was I£ 3.3 million, ofwhich the Government, under its guarantees, reimbursed IDBI IL 2.8 million(Annex 14). As of the same date the Government had a deposit with IDBI ofIr 8.4 million in respect of Government-guaranteed loans in default which wereundergoing legal proceedings.

73. IDBI's portfolio is fairly well diversified in various industrialfields. Bearing in mind that IDBI deliberately takes risks, within limits,the proportion of its outstanding loans which are in trouble is not excessive.Actual losses to ID3I are likely to be minimal, taking into account theGovernment guarantees and collateral security. IDBI's portfolio issatisfactory and its reserves and provisions are adequate.

Share Value and Audit

74. IDBI's Ordinary A shares, Preferred Ordinary shares and the dollar-linked Preference B, C, CC, CC1 and D shares are listed on the Tel Aviv StockExchange. Quoted prices on December 31, 1969, were about 70% of par (exceptPreference D share which were quoted at about 90%), reflecting generallydepressed conditions in the stock market. The average book value of allclasses of shares as of the same date (including the reserve for linked sharecapital) was about 117% of par.

75. IDBI's accounts are audited by Messrs. Somekh Chaikin, Citron andCompany, a firm of independent public accountants acceptable to the Bank.The 1969 accounts were certified by the auditors without qualification.

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VI. PROSPECTS

General

76. Industrial Investment. The Government is now preparing anindustrial investment plan for the period through 1980. IWhile no defini-tive figures are yet available, the present draft envisages an averageannual growth rate of industrial output of 10.4% over the next ten yearsat 1968 prices. Gross industrial investments of more than IS 16 billionare projected for the period. This level appears feasible on the basis ofcurrent favorable economic conditions, accomplishments in the past and theneed for replacement of the fixed capital already invested. The annualgross investments in industry in 1970-74 are estimated as follows:

Year Amount (I. million)

1970 8001971 9001972 1,0001973 1.1501974 1;350

Total 5,200

77. IDBI's Share in Industrial Investment. In the past, the averageamount of IDBI's financing for industrial development has been about 25% oftotal industrial investment in the country, and the ratio was as high as36% in one year. IDBI envisages the amount of its financing for the nextfive years to be about the same proportion of total industrial investmentas the average in the past.

IDBI's Requirements and Resources

78. Projections of IDBI's loan operations for the five years from1970 through l974 appear in 'nnex 15. Sums of past and projected loanapprovals, commitments and disbursements are summarized below:

(IL million)Approvals Commitments Disbursements

1967 (actual) 176 113 801968 (actual) 168 175 1281969 (actual) 278 230 206

1970 (estimate) 230 258 2501971 (estimate) 230 230 2451972 (estimate) 230 230 2331973 (estimate) 240 236 2331974 (estimate) 250 246 240

On the basis of these projections, IDBI will commit IS 1,200 million anddisburse the same amount over the next five years. The projected disburse-ment of IL 1,200 million is about 23% of the projected total gross investmentin industry, or slightly less than IDBI's average share in total industrialinvestment in the past.

79. IDBI has projected loan commitments of about IS 475 million ($136million) during the two years from July 1970 to June 1972. On the basis ofIDBI's past and present performance, the current economic outlook, theGovernment's industrial investment plan and loan applications already in the

pipeline (IL 243 million, as of December 31, 1969), IDBI's projectionsappear reasonable and, if resources become available, practicable.

80. Resources projected for the same tio-year period from July 1970to June 1972 are summarized as follows:

Equivalent inDomestic sources IL million $ million

Government deposits, debentures, etc. 141 40Loan collections (net) and retained earnings 105 30

Sub-total 246 70

Foreign sources

Uncommitted funds under existing agreements 51 15New borrowings from abroad 178 51

(of which Exim Bank) (28) (8)

Sub-total 229 66

Total 475 136

Of the total resources requirements projected for the two-year period,IS 475 million, IDBI estimates that IL 105 million will become availablefrom loan collections (net) and retained earmings and IL 51 million fromfunds uncommitted under existing agreements with financial institutionsabroad. Thus, IDBI will have to seek additional financing from domesticand foreign sources of around IL 319 million or US$91 million equivalent.IDBI expects to raise I;J 141 million from domestic sources, including theGovernment. The balance, II 178 million or US$ 51 million equivalent, itwill seek from abroad. Of the amount of IS 178 million, IDBI expects toreceive I628 million or $8 million equivalent from the U.S. Export-ImportBank, of which $5 million is already under negotiation. IDBI thereforeproposes to seek IS 150 million or US$ 43 million equivalent abroad to fillthe remaining gap in its projected resource requirements.

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81. Assuming that imports (including the identifiable foreign exchangecomponent of local expenditure) constitute the same proportion of IDBI's commit-ments in the two years ending June 1972 as in the recent past, IDBI will needabout $66 million for use in that period. The proposed Bank loan of $25 millioncould therefore be used entirely to finance imported goods and services. A partof the equipment requirements of investment enterprises can be met from goodsmanufactured in Israel from imported raw materials and components; another partcan be met from off-the-shelf purchases of imported goods. It is proposed thatthe foreign exchange component of such goods be financed out of the loan, andfor the sake of administrative convenience it is intended to use as the measureof the foreign exchange component 20% of the cost of goods produced in Israel and50% of the cost of goods produced outside Israel and purchased from localsuppliers. As usual, the loan will be subject to the 90 days restriction on thefinancing of prior expenditures but in order to provide continuity of Bank finan-cing (the second Bank loan being fully credited by January 31, 1970), the loandocuments provide that the Bank will consider applications for withdrawalscovering expenditures incurred after February 1, 1970.

Projected Income and Profitabilit

82. Projected income statements for the five years ending December 31, 1974are given in Annex 16. Net income is expected to grow from Ib 32.3 million in1970, to IA 34.6 million in 1972. The ratio of profit before taxes to averagenet worthi/ should be maintained at around 20% to 21% throughout 1972. Withpayment of required dividends, IDBI should be able to appropriate to the reserveaccount Il 7.5 million in 1970, IL 8.6 million in 1971 and IS 10 million in 1972,amounts slightly higher than those in the past.

Projected Balance Sheet

83. Projected balance sheets for the forecast period are presented in Annex17. Although the current ratio is less than one throughout the projected period,IDBI will be able to manage current requirements through the Bank of Israel'sshort-term accommodation, as it has done in the past. Loan portfolio is expectedto increase to Ib 1,093.7 million in 1970 and to IL 1,320.3 million in 1972.Pnnual rate of growth of total assets is estimated at 10.4% in 1971 and 6.5% in1972.

Debt Service Cover

84. On the basis of projected cash flow statements (Annex 18) and theprojected income statements (Annex 16), debt service cover would be 1.67:1 in1970, 2.16:1 in 1971 and 2.01:1 in 1972. Because of the relatively large networth against debt (debt equity ratio being less than 3:1 throughout theprojected period), a sound debt service cover will be maintained during the lifeof the proposed loan.

1/ Excluding Ordinary B and Preference A shares owned by the Government, butincluding net linking funds.

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VII. CONCLWSION AND RECOENDATIONS

Conclusion

85. Since the second Bank loan was made in 1967, IDBI has continuedto grow and to play an important role in industrial development in Israel.Project appraisals cover all pertinent aspects and IDBI's investmentdecisions are soundly based. Despite the large number of IDBI's clients,end-use supervision is relatively satisfactory.

86. IDBI is and will continue to be the most important financialinstitution for long-term financing of industrial development in Israel andan organization of national importance. It is closely integrated with thecommercial banking system of Israel. The Government has continued to assistIDBI by paying in share capital, maintaining special deposits with IDBI,guaranteeing some IDBI loans for repayment and assuming the foreign exchangerisk on IDBI's liabilities. Despite the close relationship with the Govern-ment, IDBI's decisions in making individual loans have been independent.Government guarantees have helped reduce the risk to IDBI on some of itsloans.

87. IDBI is a sound development finance company and continues to be asuitable borrower. mBI will need additional capital of around IL 3l9million, equivalent to about $91 million, to help meet expected demands forfinancing over the next two years. It expects to obtain IL lhl million fromdomestic sources, including the Government, and IL 128 million from abroad.The shortfall is thus IL 150 million or US$ 43 million, and for this sumIDBI is relying heavily on the Bank. The provision of $25 million towardsthe shortfall would keep the pressure on IDBI to continue searching for newcapital both at home and abroad, while assuring it of resources at leastuntil around February 1972.

Recommendations

88. It is recommended that the Bank make a loan to IDBI of $25 millionto help provide IDBI's estimated requirements of capital during the next twoyears, on the terms usual for loans to development finance companies.

89. In view of the quality of IDBIfs management and staff, of itsloan appraisals and of its follow-up work, the limit for projects needingthe Bank's prior approval under the proposed loan should be increased fromthe current I£ 1.5 million to US$750,000 (equivalent to IL 2.6 million).The amount of the free limit should be designated in U.S. dollars, as isusual for development finance companies. Even with this increased freelimit, the Bank's prior approval would be required in about one-half byvalue of IDBI's loans using Bank funds, judging from the size distributionof IDBI's past operation. To assure that the Bank will review an adequate

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number of projects, however, it is recommended that withdrawals from theloan account without the Bank's prior approval should not exceed an aggregatelimit of 50% of the amount of the proposed loan.

90. The debt-to-equity ratio as calculated under the definition nowusually applied to development finance companies should be applied to IDBIunder the proposed loan and the ratio should be set at 3:1.

IBRD/DFCMay 1, 1970

A1TNEX 1

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.

Shareholders as of December 31, 1969

Amount Group(I£ '000)

Ordinary A (Voting) Shares

1. The State of Israel 3,925 Government

2. Otzar Letaasiya B.M. 1,050 Private DomesticInvestors

3. Investment Fund of Hevrat Haovdim Limited 975 "

h. Hevra Lerishumim Shel Bark Leumi Le-Israel B.M. 825 i5. Israel Discount Bank Limited 1,405 "

6. Israel American Industrial Development Bank Ltd. 1,0607. Foreign Trade Bank Limited 2508. Clal Israel Investment Co. Limited 2509. Export Bank Limited 250

10. Israel Industrial Bank Limited 39911. P.E.C. Israel Loan Corporation 35012. Mivtachim Mossad Lebituach Sosiali Shel Haovdimn

B.M. 500

13. The Israel Central Trade & Investment Co. Ltd. 250 r

14. Development & Mortgage Bank of Israel Limited 25015. The Weizmann Institute of Science 250

16. Israel Investors Corporation 1,500 Foreign

17. Edith & Isaac Wolfson Charitable Trust 25018. Artina Trading Trust (Reg.) Vaduz 150

19. P.E.C. Israel Economic Corporation 25020. The Eli -Tishnick Foundation 250

21. International Credit Bank, Geneva 25022. Apcob (Nominees) Limited 250

23. Other Shareholders each holding less than 1% ofthis category 211

Total Ordinary A (Voting) Shares 15,100

I3RD/DFCMiay 1, 1970

ANIEX 2

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.

Shares Other Than Ordinary A Shares as of December 31, 1969

I£ '000Private 1/

Class of Shares Government Domestic Foreign Mixed - Total

Preferred Ordinary - 9,939 - 61 10,000

Ordinary B 134,900 - - - 134,900

Preference A 52,500 - - - 52,500

Preference B - - 2,701 2,330 5,031

Preference C - - 22,875 7,725 30,600

Preference CC 1,521 1,500 21,204 5,775 30,000

Preference CC1 800 995 7,704 42,544 52,043

Preference D 1,308 112 47,323 - 49,043

Total 191,029 12,846 101,807 58,435 364,117

Percentage of Total 52.5 3.5 28.0 16.0 100.0

1/ Entities owned jointly by domestic and foreign shareholders.

I3RD/DFCMlay 1, 1970

AlNEX 3Page 1

INDUSTRIAL DEVELOPM1TT BANK OF ISFRAEL LTD.

Board of Direc'-rs id. 2ri.-ttees as Decemn1Ar 31, 1969

(A.) Members of the Board of Directors

Name Affiliation

Chairman1/

1. DR. Y. FOERDER Chairman of the Board of Directors,Bank Leumi Le-Israel B.M.

Vice-Chairmen

2. MR. M. SANDBERG (Executive) Chairman of the Board of Directors.Deco Investment Corporation Limited.

3. MR. M.B. CETTER Chairman and General Manager, The Is-rael Development and Mortgage BankLimited.

4. lvR. G. LAHAV Deputy Director General, Ministry ofCommerce and Industry.

5. MR. A. ZABARSKY Chairman of the Board of Directors,M4anaging Director, Bank Hapoalim B.M.

6. mR. M. ZAGA5I Deputy Director General, Ministry ofFinance.

REPRESENTING FOREIGN SHAREHOLDERS

7. MR. C. CLORE Chairman and Director of Companies.8. iMR. A. DICKENSTEIN President, Ampal-American Israel Corp.,

U.S.A.; President of the Board ofDirectors, Israel; A4merican Industri-al Development Bank Ltd.; ManagingDirector - Bank Hapoalim B.M.

9. IR. M.C. MAYER Director of Companies, Switzerland.10. MR. H. MERKIN President, Merkin & Co., Inc.,

Members, New York Stock Exchange.11. MR. J. MEYERHOFF Chairman, Board of Directors and

Executive Committee of P.E.C. IsraelEconomic Corporation, U.S.A.

1/ Resigned March 1970 because of health.

ANNEX 3Page 2

Name Affiliation

12. MR. R. RECMWATI Vice-Chairman and Managing Director,Israel Discount Bank Ltd., New York.

13. DR. T. ROSENBAUM President, International Credit Bank,Geneva, Switzerland.

14. MR. S. ROTHBERG 'President, Israel Investors Corpora-tion, U.S.A.

15. MR. L. SAINER Solicitor, Director of Companies,London.

16. MR. J.B. VENEZKY Secretary and Treasurer, israel In-vestors Corporation, U.S.A.

17. IvR. R. TECHSLER Director of Corporation, New York.18. MR. R.I. WISHNICK Chairman, Executive and Finance Com-

mittees, Witco Chemical CompanyInc., U.S.A.

19. SIR I. WOLFSON, Bart Chairman, The Great Universal StoresLtd., London.

REPRESENTING DOMESTIC SHAREHOLDERS

20. MR. A. ARAD General Secretary, Industrial Workers'Division, Executive Committee Hista-drut, Tel-Aviv.

21. MR. R. ALLON General Manager, Hashomer Hatzair FundLtd.

22. IR. E. AVN EYON General Manager, "Gmul" Investment Co.Limited.

23. MR. C. BEN-DAVID Deputy General Manager, Israel Dis-count Bank Limited.

24. MR. A. DOVRAT General Manager - Clal - Israel In-vestment Company Limited.

25. MR. G. DROR Deputy Director General (Financial andAdministration) The Weizmann Insti-tute of Science.

26. MR. I. EILAM Chairman of the Board of Directors,"Lapidoth" Israel Oil ProspectorsCorp. Limited.

27. MR. A. FRIEDMAN Managing Director, Milouot Haifa BaySettlements Development Company Ltd.

28. MR. ABRAHAM FRIEDMAN Managing Director, Israel Central Trade& Investments Co. Ltd.

29. MR. D. GOLAIN Director General, Ministry of Commerceand Industry.

30. DR. E. TSVI GOLDMANN Assistant rGeneral Manager, Bank LeumiLe-Israel B.M.

ANMIEX 3Page 3

31. MR. I. HAIMOVIC General Manager, American IsraeliPaper Mills Limited.

32. MR. S.Y. HORN Senior Vice-President, Israel In-vestors Corp.

33. MR. E.I.M. JAPHET General Manager, Bank Leumi Le-Israel B.M.

34. MR. S. KLAGSBALD Member of the Executive Committee ofthe Manufacturers' Association ofIsrael, Director of Companies.

35. MR. S. MAGTRISO Deputy General Manager, Israel DiscountBank Ltd.

36. DR. M. PIANDELBAUM Director of Food & Chemicals Division,Ministry of Commerce & Industry.

37. MR. A. MANOR Assistant General Manager, Bank LeumiLe-Israel B.M.

38. MR. M. MAYER Managing Director, Export Bank Limited.39. DR. A. NEAMAN M4anaging Director, Industrial Develop-

ment Bank of Israel Limited.4o. MR. M. NUSS3:TJM Managing Director, "Hassneh" Insurance

Company of Israel Limited.41. M,R. 0. PROPPER Member of the Executive Committee of

the M4anufacturers' Association ofIsrael; Director of Companies.

42. MR. D. RECP-NATI Chairman and Managing Director, IsraelDiscount Bank Ltd.

43. MR. C. ROT Deputy Director, Government Corpora-tions Authority.

44. MR. J. SHARON Adviser to the Minister of Commerceon Development Areas.

h5. MR. M. SHERmAN Managing Director, Paz Oil Co. Limited.46. MR. Y. SPORN Director, Israel Industrial Development

Co. Limited.47. MR. C. STOESSEL Conmissioner of Capital Market and

Financing, Ministry of Finance.48. MR. Y. STOPPER Director of Investment Authority and

Investment Centre.49. MRS. L. TIGNER Deputy Director General in charge of

Financing, Ministry of Commerce, andIndustry.

50. MR. D. TOLKOWSKY Managing Director, Discount Bank In-vectment Corp. Limited.

51. MR. B. TOREN Director, Textile and Leather Dept.Ministry of Trade & Industry.

52. MR. M. IWEISGAL President of the Weizmann Instituteof Science and Chairman of the Ex-ecutive Council.

53. MR. Y. IWTEINSTEIN Director of Corporations.

ANNEX 3Page

54. DR. G. S. WISE President of the Tel-Aviv University.55. MR. S. ZAK Managing Director, Bank Hapoalim B.M.56. MR. M. ZINAMON Managing Director, "Mivtachimn1 , The

Workers' Social Insurance Fund Ltd.

(B.) Membership of Committees

Executive Committee Loan Committee

DR. FOERDER, CHAIRMAN * DR. NEAMAN, CHAIRMAN* MR. M. SANDBERG * MR. M. SANDBERG* DR. A. NEAMAN * MR. C. STOESSEIl/* MR. C. STOESSEL/ * MRS. L. TIGNERY* MRS. L. TIGNERl/ * M4R. M. ZAGAGI/* MR. M. ZAGAG,7 * MR. G. LAHAVI!* MR. G. LAHAV/ * MR. C. BEN-DAVID* MR. C. BEN-DAVID DR. E. T. GOLDMAN

MR. Y. STOPPERI/ MR. 0. PROPPERMR. E. AVNEYON MR. Z. SAGIMR. A. DOVRAT MR. S. ZAKMR. I. EILAM MR. C. HERTZOG_/MR. M. B. GITTER MR. N. L. LIPS4XTZ! YR. G. GUREWITZ MR. A. SHALMON_!:MR. S. Y. HORN MR. A. ZEEVZ/IlR. E. I. M. JAPHETMR. S. KLAGSBAiDMR. M. MAYERMR. S. ROTHBERGMR. A. ZABARSKY

TOTAL MEMBERSHIP: 20 TOTAL NENMERSHIP: 15

* Members in both Committees.1/ Represents the Government.2/ Alternates of Directors.

IBRD/DFU

May 1, 1970

ISRAEL

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITEDORGANIZATION CHART

I

O NBOARD OF DIRECTORSE

VICE-CHAIRMAN'S COM T EXECUTIVE COMMITTEE LOAN COMMITTEE

| EXECUTIVE VICE-CHAIRMANL|(MM. Sondber. )nl

MANAGING DIRECTOR * Prof l SA. Nefmon )

GNRl SERTR DEPUTY ASSISTANT ||GENERAL COUNSELLOR|GENRA GSECRTR GENERAL MANAGER GENERAL MANAGER & ASSISTANT MANAGER

( F. Gavse ) F ~( Y. Mccht )_ (D. Friedmran )(M. Rotten6erg)

INTERNAL SECRETARIAT ECONOMICS IMPLEMENTATION LEGAL INVESTrMENTAUDITOR _ DPRMN E _ DEPARTMENT _ DEPARTMENT _ DPRMN o FIB(S. Brudner) Mr.lihrE. Bronholc A. Elias 8. .Snbr

l ENGINEERING l| COLLECTION lDEPARTMENT l L DEPARTMENT l

B. Tzvic E. Nemesh l

l FOLLOW-UP l|ACCOUNTING lL DEPARTMENT l DEPARTMENT l

S.Sokcl Mrs|F5*m l

*Professional Staff ZzIBRD/DFC x

May 1, 1970 IBRD - 4696(R) 4>

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.

Composition and Condit4Qns of Share Capital as of ]ecember 31, 1969

Par Value Authorized Issued Paid-in Voting Linked to

Share Title and Description IL each IL million IL million IL million Rights Redeemable the U.S.$ Remarks

1. Ordinary 'Al 1,000 16.00 15.10 1510 Yes No No (a) 1,000 votes per share.(b) Powers to appoint Directors(c) 26% owned ty the State of Israel.

2. Ordinary 'BI 1,000 144.40 134.90 134.90 No No No All owned by the State of Israel.

3. 8% Cum. PreferredOrdinary (participating) 10 10.00 10.00 10.00 Yes No No One vote per share. No right to appoint

Directors.

4. 3½% Cum. Preference 'A' 1,000 60.00 52.50 52.50 No Yes No (a) All owned by the State of Israel.

(b) Redeemable 1965 to 1999.

5. 7% Cum. Preference'Bl 1,000 6.oo 5.03 5.03 No Yes Yes (a) Redeemable 1970 to 1979.(b) Linked $1 = IL 1.80.

6. 6% Com. PreferencelC' 1.80 30.60 30.60 30.60 No No Yes Linked O $L - 111.80.(participating)

7. 6% CG. Preference 'CCI'(participating) 30 30.00 30.00 30-00 No No Yes Linked 5*1 - Ii 3.00.

8. 6% Cumr. Preference 'CC1' 30 60.00 52.o4 52.04 No No Yes Linked 0 $1 * Is 3.00.

(participating)

9. 73f O. Preference 'DI 60.00 49.04 49.04 No Yes Yes (a) Authorized on Marco 3, 1966.(b) Redeeable after December 31, 1973,

at 105 5/8% of par, at IDE!'s option.

TOTAL

4L17.00 379.21 379.21

l/ Uter. redemption of IL 5,000,000 in the years 1965-1969.

IBRD/DFC

May 1, 1970

INDUS TRIAL DEVEIOPMENT BANK OF ISRAEL LTD.

Status of Debentures as of December 31, 1969

Amount Amount Outstanding in IL MillionYear Redemption Rate of Sold Dollar- Index- Linking

Issued Linking - Period Interest IL mil. Linked Linked Increments Total

1958 Dollar and Index 1960/69 6% 15.00 - -

1959 Half-Index Hhlf-Dollar 1962/71 6% 15.00 1.50 1.50 2.50 5.501/

1960 Dollar 1965/74 6% 9.81 4.89 - 4.62 9.511/

1961 Dbllar and Index 1963/72 6% 10.00 1.68 1.32 2.35 5.35

1961 Index 1966/75 6% 5.00 - 3.00 1.4B 4.48

-2/ - /31Total 54.81 8.07 5.82 10.9524.B4

Linked to the Dollar @ $1 - IL 1.80.

Total authorized, It 55 million.

Of this, It 1.47 million covered by linking insurance, thus effective total outstanding, IL 23.37 million.

IHRD/DFC

May 1, 1970

_UTNEX 7

INDUSTRIAL DEVELOPHE2T BANK OF ISRAEL LTD.

Summary of Loan Operations 1958-1969

(including Cooley Fund loans and long-term guarantees)

(I£ million)

1958/65 1966 1967 1968 1969

Ap:?rovals 672.1 96.2 175.6 164.8 278.3

Commitments N.A. 100.4 112.7 175.3 230.1

Disbursements (including Cooleyloans) 591.1 94.7 80.2 128.3 206.4

Repayments (including Cooley loansexcluding linkage increments) 104.8 35.4 40.6 65.5 87.9

Outstanding at end of year (exclud-ing linkage increments) 486.3 545.6 585.2 648.0 901.1

IBRD/DFCiEay 1, 1970

ANNEX 8

INDUSTRIAL DIVELOMNT BAIK OF ISRAEL LTD.

Analysis of Loans Approved

(IL milnion)

Cumulative1958 - 1967 1968 1969 1958 - 1969

No . Amount No . Amount No . Amount No . Amount

I. Industrial branch

Paper and printing 101 46.5 15 4.5 13 10.7 129 61.7Non-metallic minerals 162 114.2 26 13.5 13 9.7 201 137.4Miscellaneous 437 155.3 53 24.0 59 49.0 549 228.3Food and tobacco 346 112.6 40 21.6 36 26.1 422 160.3Chemicals and rubber 204 102.0 39 43.5 28 83.1 271 228.6Metals 398 133.5 59 36.7 60 66.7 517 236.9Textiles and leather 383 279.7 21.0 49 33-. 479 333-7

Total 21 943. 279 164.8 278.3 2.568 1,386.9

II. Geographical location

Galilee 207 105.4 41 21.1 36 16.2 284 142.7Yizrael 211 78.6 28 11.4 22 14.3 261 104.3Jerusalem 139 45.4 19 6.4 19 30.1 177 81.9North Negev 171 84.1 20 9.1 16 23.8 207 117.0South Negev 194 160.4 14 11.1 26 83.2 234 254.7

Development Area 922 473.9 122 59.1 119 167.6 1.163 700.6

Haifa 213 152.3 38 38.1 20 26.1 271 216.5Shomron 148 63.4 17 11.3 20 17.2 185 91.9The Sharon 240 52.6 38 16.8 32 24.5 310 93.9Tel-Aviv Yofo 281 101.7 31 11.8 38 17.8 350 131.3The South 227 99.9 33 27.7 29 _2.1 289 152.7

Out of Development Area 1,109 469.9 157 105.7 139 110.7 1,405 686.3

Total 203 943.8 29 164.8 258 278.3 2.568 1.386.9

III. Size

Up to 25,000 228 3.7 4 0.1 3 - 235 3.825,001 - 50,000 283 11.1 17 0.8 18 0.8 318 12.750,001 - 100,000 360 27.8 44 3.5 24 1.9 428 33.2

100,001 - 250,000 478 81.9 87 14.9 71 13.6 636 110.4250,001 - 500,000 301 113.6 56 19.4 66 23.8 423 156.8500,301 - 1,000,000 186 138.6 34 24.5 28 19.8 248 182.91,000,000 and above 195 567.1 37 101.6 48 218.4 280 887.1

2.031 1643.8258 278. 2,568 1,386.9

IV. Repayment term (year)

1 - 5 165 52.5 42 12.6 44 21.9 251 87.06 - 8 974 204.3 119 40.2 119 60.7 1,212 305.29 - 13 784 486.1 112 103.4 88 119.4 984 708.9

14 - 20 108 200.9 6 8.6 7 76.3 121 285.8

2,031 943.8 279 164.8 258 278.3 2.568 1,386.9

IBRD/DFC

May 1, 1970

ANUEX 9

INVESTMENT COMIPANY

OF

INDUSTRIAL DEVEJOPNENT BANK OF ISRAEL LTD.

Balance Sheets, December 31, 1966-69

(I£ ' 000)

Audited1966 1967 1965 1969

Assets

Current assetsDebtors and accrued interest 1,764.5 1,518.7 1,000.5 1,205.7IDBI in current account - 2,428.5 4,39h.4 2,298.1Cash at banks 42.4 1.6 5.2 3.7

1,806.9 3,948.8 5,400.1 3,507.5

InvestmentsShares of subsidiaries, at cost 16,573.1 14,713.h 17,368.0 19,581.6Debentures, at cost 39h.6 2,060.1 2,783.2 762.3Loans 5,661.0 4,096.4 3,436.3 5,838.4Deposit with IDBI - - 150.0 -

2,628.7 20,869.9 23,737.5 26,182.3

Fixed assets 97.8 94.7 91.7 2,897.2

Total assets 24,533.4 24,913.4 29,229.3 32,587.0

Liabilities

Current liabilities and provision 882.8 .471.3 4,649.3 4,760.7

Long-term liabilitiesThe General and Educational Trust - - - 2,700.0Treasury of the State of Israel 152.9 142.8 142.8 142.8IDBI 1 600 0 1,600.0 1,h40.0 1,280.0

1,742.8 1,582.8 h,122.8

Reserve for value fluctuation ininvestments 1,750.0 2,4OO.O 1,200.0 1,200.0

Capital and surplusShare capital 20,000.0 20,000.0 20,000.0 20,000.0Reserves and unappropriated profit 147.7 299.3 1,797.2 2,503.5

20,1h7.7 20,299.3 21,797.2 22,503.5

Total liabilities 24,533.4 24,913.4 29,229.3 32,587.0

IBRD/DFCMay 1, 1970

ANNEX 10

INVESTIZEUIT C0ivANY

OF

INDUSTRIAL DEVEL0PINENT RANK OF ISRAEL LTD.

Statements of Income

Years Ended December 31, 1966-1969

(IL '000)

Audited1966 1967 196b 1969

Income

1/Interest and dividends 950.4 980.5 1,742.3 2,091.9-Other income 107.0 119.8 28.0 62.9

1,0577 1,100-.3 1,770.4 2,154.8

Expenses

Interest 20865 174.7 151.9 141.1Administrative and general expenses 73.8 70.4 71.9 125.0

25M.3 245.1 223.8 266.1

Profit before taxes 775.1 855.2 1,546.6 1,888.7Provision for taxes 310.0 340.0 600.0 410.0

Net profit after provision of taxes 465.1 515.2 946.6 1,478.7

Balance of profit from preceding year 786.4 147.7 12.9 875.1Adjustment in linking and value

fluctuation (1,103.8) (650.0) (84.4) (1,427.7)Balance of profit, carried forward 147.7 12.9 875.1 926.1

L/ Includes capital gains of IL 655,300.

IBRD/DFCMay 1, 1970

ANNEX 11Page 1

INDUSTRIAL DEVELOP1IENT BANK OF ISRAEL LTD.

Statements of Income

Years Ended December 31, 1966-1969(excludn Poi-iknFudAcnts)

(I£ '000)

(Audited)1966 1967 196t 1969

INCOME -

interest on loans 37,019 53,310 54,559 62,965Premium interest on loans 10,283 - - -Co;npensation from Government for loans at 4

subsidized interest 3,319 3,180 3,090 5,203 -Interest income from deposits with the

Treasury 2 250 1,996 1,253 1,12252471 W 58,902 69,290

Dividends on invest ents in shares- 1,277-/ 290 1,534 1,192Commission income27T 841 1,148 2,526 2,709Interest on short-term deposits, State of Israel

bonds, etc. 889 1,819 3,092 2,428Other 633 471 418 _445

Total Income 76,511 62,21 6,472 769064

EXPENSES

Interest on long-term loans 5,569 6,799 7,400 9,509= nterest on debentures 2,530 2,558 5,947 5,352Interest on long-term deposits of the Treasury 2,666 2,270 5,145 6,293Interest in lieu of linkage and linkage

insurance charge 6,747 5,132 - -Interest on short-term loans 3,213 2,630 866 517Other interest and commission 1,058 1,791 2,635 3,035

21,753 21,150 21,993 m4,706

Achinistrative and general expenses(including depreciation) 3,051 4,1253/ 4,394 3,929

Amortization of debenture and share issue expenses 91 1,125 988 370Allowances for doubtful debts 1 2,650 1,303 1,381Provision for diminution and adjustment in value

of investments 1,303 1,505 - 970Total Expenses 26,229 30,58 28,678 31,356

Operational earnings before taxes 30,282 31,629 37,794 44,708

1/ Also includes interest income on State of Israel bonds.2/ Consists of the one-time commission on loans, and commissions on guarantees and

and letters of credit.3/ Including IF£83h,736 written off on Premises, Property and Equipment in excess of

normal depreciation.4/ Including I£ 673,400 for previous years.

AlX 11Page 2

INDUSTRIAL DEVELOPMENT 3AINK OF ISRAEL LTD.

Statements of Income for "Linking Fund" Accounts

Years Ended December 31, 1966-1969

(I£ '000)

(Audited)1966 1967 196t 1969

Income

Increments to interest from loans& investments, and to interestcompensation 4,433 2,311 1,138 2,118

Increments to interest fromTreasury deposits 1,299 4,429 5,639 1,888

5,732 6,7L0 6,777 h,oo6

Expenses

Increments to interest ondebentures 1,203 1,077 1,032 776

Increments to interest andcommission on deposits, loans& other accounts 234 177 136 82

1,437 1,254 1,168 858

Excess of income over expenses 4,295 5,486 5,609 3,148

Page 3

INDUSTRIAL DEVMJOPIE1JT SANIK OF ISRAEL LTD.

Statements of Income including "Linking Fund" Accounts

Years Ended December 31, 1966-1969

(IL '000)

(Audited)1966 1967 1968 1969

Operational earnings (Statements of Income) 30,282 31,629 37,794 44,708Excess of income over expenses, profit-

linking fund account 4,295 5,486 5,609 3,148Capital gain from sale of assets and other

income - 3,0702/ 3,318 3,623

Net income, before taxes 34,577 40,185 46X721 51,479

Taxes on income (including estimate onincome of Linking Fund) 12,650 17,500 18,100 26,400

Net earnings 21,927 22,685 28,621 25,079

Retained earnings accountNet earnings for the period 21,927 22,685 28,621 25,079Add, unappropriated income from

previous period 1,625 1,036 520 536Excess provision for taxes in

previous years - - 2,424 70

23,552 23,721 31,565 25,685

Less:Dividends 17,747 21,201 2h,029 19,510Linking increments on dividends 1,484 - - -

Allocation to general reserve 3,285 2,000 2,500 2,500Allocation to general reserve for

doubtful debts - - - 2,000

Allocation to inner reserve - - 4,500 -Allocation to capital redemption

reserve fund - - - 1,130

22,516 23,201 31,029 25,14o

Unappropriated 1,036 520 536 545

1/ Includes I£ 1.68 million transferred from "inner reserve".

I;3RD/DFCMay 1, 1970

ANNM= 12Page 1

INDUSMRIAL DEVELOP-IENT 3ANK OF ISRAEL LTD.

Balance Sheets, December 31, 1966-1969

(IE million)

(Audited)December 31

1966 1967 1965 1969ASSETS

Cash 1.95 16.41 11.58 3.15Short-term deposits 13.34 38.50 - -

liarketable securities, at market value(below cost) 2.32 2.55 3.76 4.68

Absorption and Defence Loan bonds, at cost(below mar'-et value) - 1.91 4.15 7.63

State of Israel dollar bonds, unquoted 10.33 6.94 - -

Accounts receivable and accrued interest 13.81 10.78 5.33 6.78Short-term loans 4.66Receivable from Government on account ex-

change differences and linking incrementsand liabilities - 21.24 14.08 11.91

76717 9B.33 38.90 34.15

Long-term deposits with Israel Treasury 36.17 33.30 30.13 23.95

Long-term loans to industry, less allowancefor doubtful loans:

From own funds 549.43 553.50 626.01 761.81From AID managed funds 32.20 28.77 28.06 25.45From other special funds 58.40 41.79 85.56 83.72Receivable from Government on account

linking increments on loans - 60.03 53.40 18.76Loans undergoing legal proceedings,

guaranteed by Government 10.48 11.96 12.36 11.37650.751 696.05 805.39 901.11

Irnvestments in shares and debentures, includ-ing payments on account of investments - atcost less allowance for diminution in value 22.75 22.71 20.84 17.48

Investment in and advances to subsidiary co.Shares - at cost 14.79 14.79 14.79 14.79Deposit 1.60 1.60 1.60 1.44Current account 0.02 - - -

16.1 -16.3-9 10.3-9 -16. 23

Property and equipment - at cost,less depreciation 4.99 4.00 3.00 -

Deferred charges - 3.30 2.20 -

777.24 874.08 916.85 992.92

A1ifl,EX 12Page 2

(Audited)December 31

19___~ 1967 1955 1959

LIABILITIES

Short-term loans 45.17 26.42 - 15.00Accounts payable 10.33 17.90 16.22 43.68Interest and linking insurance charge payable 6.99 3.53 11.08 4.65Provision for dividends 10.25 11.38 12.12 12.12Provision for taxation 0.23 1.13 0.44 24.88Subsidiary company - 2.43 5.04 2.57

72.79 62.79 44.90 102.90

G3overnment deposit against loans undergoinglegal proceedings 43.39 10.86 9.90 8.35

Other government deposits against loans - 29.31 74.00 74.01Farticipation of third parties in loansgranted 15.02 13.57 11.56 9.70

AID special deposits (Cooley) for grantingof loans 35.20 29.07 28.05 25.45

Long-term debt:Debentures (secured), and bond issue inEurope 62.13 lo4.16 86.82 77.34

Loan from International Bank for Recon-struction and Development 41.15 60.90 72.30 86.83

Loans from AID, linked to the U.S. dollar 40.88 39.06 29.98 20.45AID loan, counterpart funds 31.59 39.11 37.33 35.56Long-term deposits of Israel Treasury 12.70 33.22 38.95 45.01Loan from Exim Bank - 1.75 12.95 27.96Sundry loans, linked to foreign currencies 0.94 0.84 2.29 28.46

189.39 279.04 280.-63 321.62

Reserve for tax in capital linking incre.nlC 29.65 29.09 28.54 9.20Linking funds:

Fund for adjustment of par value of sharecapital linked to the U.S. dollar atI£ 1.8 24.12 25.02 27.58 28.10

Capital Linking fund 9.70 11.70 5.99 4.45

33.82 36.72 33.57 32.55

Capital shares:Capital shares, paid-in 338.84 360.61 37b.97 379.22Share premiums 6.42 6.50 7.19 7.51

345.26 367.11 382.16 386.73

ANNEX 12Page 3

(Audited)December 31

195$ 1967 1968 1969

Retained earnings:General Reserve 11.50 13650 16.00 18.50Other free reserve - 2.50 7.00 _Unappropriated 1.04 0.52 0.54 3.91

12.54 16.52 23.54 22°41

777.24 874.o8 916.85 992.92

Notes: 1) The company was contingently liable on account of customers in an ag-gregate amount of If30.35 million, If£39.84 million and I£30.96 millionas of December 31, 1966, 1967, 1968, and I£29.°7 million as ofDecember 31, 1969, respectively.

2) All the items in the balance sheets are on the basis of the currentrate of exchange (US$l = I£3.5), except for two classes of dollar-linkedshare capital, which are 1 $1 = IZM.8, and three other classes of dollar-linked share capital, which are @ $1 = I£3; a fund exists for adjustmentof par value of the former two items, while the Government bears the ex-change risk on the latter three.

IBRD/DFC

May 1, 1970

INDUSTRIAL DRVELOPMENT '3ANK or ISRAEL LTD.

Delinquent Loans as of December 31, 1269(If I000)

Percentage Percentage of AmountPeriod in Arrears of Total Amount Total Outstand- GuaranteedArrears Principal Interest Total Arrears Outstanding ing in Arrears by Government

Up to 3 months 443 364 807 4.9 78,959 69.8 32,015

3 - 6 months 97 37 134 0.8 1,529 1.4 248

6 - 12 months 304 94 398 2.4 2,648 2.3 -

1 - 2 years 7,119 7,992 15,111 91.9 29,9?4 26.5 26,924

Totals 7,963 8,487 16,450 100ao. 113,060 100' 59,187

ITRRD/DFCMay 1, 1970

AmEr 14

INDUSTRIAL DEVELOPMNT BANiK OF ISRAEL LTD.

Bad Inv Lt entE Tritten-Cff Lcr-n- nroceedinds -cnd Lonns in Arrears

(December 31, 1967, 1968 and 1969)

(If, '000)

Cumulative, Year-End1967 1958 1959

1. Loans written off fi7om provision forbad debt 275 373.3 494.0

2. Investment in shares written off fromprovision for bad debt _16.9 16.9 16.9

Total written off on IDBI a/c 291.9 390.2 510.9

3. Loans written off, guaranteed byGovernment 1,394 2,480 2,770

4. Loans, undergoing legal proceedings 5,755 6,422 5,610

5. Loans, undergoing legal proceedings,guaranteed by Government 11,960 12,361 11,369

a) Part guaranteed by Government 10,862 9,895 8,347b) Portion of loan not guaranteed 1,098 2,466 3,022

6. Loans in ArrearsLength of Arrears

(in months)

Up to 3 1,081 309 8073.1 - 6 602 202 1346.1 - 12 2,332 176 398Over 12 32,421 10,302 15,111

Total 36,436 10,989 162450

IBRD/DFC

May 1, 1970

AFNEX 15

INDUSTRIAL DEVIELOPHENT BANK OF ISRAEL LTD.

Proiections of Loan Operations, 1970-1974

(IF, million)

Years ending December 31 1970 1971 1972 1973 1974

Approvals 230 230 230 240 250

Commitments

60% of current year's approvals 138 138 138 1h4 150Balance of previous year's ap-

provals 120 92 92 92 96

Total 258 230 230 236 246

Disbursements

50% of current year's commitments 129 115 115 118 12340% of previous year's commit-ments 113 103 92 92 94

Balance of outstandin; commit-ments of previous years 8 27 26 23 23

Total 250 245 233 233 240

IBRD/DFC

May 1, 1970

ANMEX 16

INDTJSTRIAL DEVELOPI]71T 3ANK OF ISRAEL LTD.

Projected Statements of Income,_1970-1974

(I million)

Years ending Decermber 31 1970 1971 1972 1973 1974

IncomeInterest on loans 86.0 99.2 108.9 117.3 125.1Commissions and other fees 2.0 2.0 1.9 1.9 1.9Dividend income 1.3 1.3 1.3 1.3 1.3Income from short-term investments,

deposits, etc. 1.5 1.0 0.7 0.4 0.4Other income 5.1 5.0 4.9 4.7 4.5

Total Income 95.9 108.5 117.7 125.6 133.0

ExpensesInterest and commitment charges on

borrowings 36.5 45.8 51.3 56.7 60.9Administrative and general expenses

(including depreciation) 4.3 4.4 4.6 4.8 5.0Provision for doubtful loans 1.1 1.5 1.7 2.0 2.0Amortization of deferred charges 0.8 1.0 1.3 1.0 1.1Other expenses 0.5 0.5 0.5 0.5 0.5

Total Expenses 43.2 53.2 59.4 65.0 69.5

Profit before taxes 52.7 55.3 58.3 60.6 63.5Provision for taxes 20.4 22.0 23.7 24.9 26.4

Net Profit 32.3 33.3 34.6 35.7 37.1

AppropriationsDividends 24.8 24.7 24.6 2h.5 24.4Reserves and unappropriated

surplus 7.5 8.6 10.0 11.2 12.7

IBRD/DFC

May 1, 1970

ANNEX 17

INDUSTRIAL DEVELOPMENIT ANTK OF ISRAEL LTD.

Projected Balance Sheets, 1970-1974

(IL million)

Years end-.ng Decen.fer 31 1970 1971 1972 1973 1974

AssetsCash, short-term investments and

receivables 20.6 20.2 20.2 20.2 20.2Receivables from Government in

connection with exchange andlinking increments 8.9 7.0 5.0 3.9 2.8

Long-term deposit with Treasury 16.6 10.4 6.9 3.4 0

Loans to industry (net) 1,093.7 1,226.2 1,320.3 1,402.3 1,476.5Investments in shares and

Subsidiary Company 37.4 37.2 37.0 36.9 36.7Fixed assets and deferred

charges 4.8 4.8 4.5 4.7 5.2

Total Assets 1,182.0 1,305.8 1,393.9 1,471.4 1,541.4

LiabilitiesAccounts payable and short-term

liabilities 61.2 60.7 57.5 58.3 58.6

Government deposits against loans 93.7 85.9 70.1 62.1 54.2A.I.D. special deposits and their

parties participation 42.5 36.3 30.9 25.8 21.1

Foreign currency borrowings 354.4 434.7 483.1 509.7 522.8Domestic currency borrowings 169.1 224.4 279.9 333.6 391.8

659.7 751.3 E6*i7y 931.2 -99.9

Share capital, reserves andlinking funds

Share capital 377.4 375.9 374.5 373.1 371.6Reserves and surplus 45.5 54.1 64.1 75.4 88.2Linking funds 38.2 33.8 33.8 33.4 33.1

461.1 463.8 472.4 461.9 792.9Total Liabilities 1,182.0 1,305. 1,393.9 1i±1 1?

IBRD/DFC

May 1, 1970

ANEXT 18

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LTD.

Projected Cash Flow Statements, 1970-1974

(IF million)

Years ending December 31 1970 1971 1972 1973 1974

Sources

Earnings before taxes and dividends 52.8 55.3 58.3 60.6 63.6Add: Charges not involving cash

expenditure 2.4 3.0 3.4 3.5 3.6Cash generation fromoperations 55.2 58.3 61.7 64.1 67.2

Collections of loans 94.5 111.0 137.2 148.9 163.8Withdrawals of deposits 7.5 6.6 3.9 3.9 3.9

Drawdown from foreign borrowingunder existing agreements 50.9 18.9 13.5 7.0 0

New borrowing from domestic sources 65.0 65.0 63.0 60.0 65.0New borrowing from foreign sources 104.0 88.0 76.0 66.0 67.0Increase in current liabilities 1.3 0.4 0.2Decrease in current assets 0.6 0.4

377.7 7 48.2 35.6 350.3 367.1

Uses

Disbursement of loans 250.0 245.0 233.0 233.0 240.0

Redemption of share capital 1.6 1.6 1.6 1.6 1.6

Repayments for domestic currencyobligations 53.8 28.4 32.9 19.2 19.5

Repayments for foreign currencyobligation under existingagreements 20.8 24.9 33.1 29.2 28.8

Repayments for new foreignborrowings 0 0 6.2 16.2 24.3

Decrease in current liabilities 5.4 0.1 0 0 0Payment of income taxes 20.4 22.0 23.7 24.9 26.4

_,,-tyment of dividends 24.8 24.7 24.6 24.5 24.4Deferred charge 0.7 1.3 1.3 1.5 1.9

377.7 31782 356.6 350.3 367.1

IBRD/DFC

Kay 1, 1970