- UNN-19 J' Aj REPORT ON THE COLOMBIAN CAPITAL MARKET Submitted by ALFONSO MANERO to the iA iLNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington, D.C. July 1952 vq. C REPORT ON THE COLOMBIAN CAPITAL MARKET Submitted by ALFONSO MANERO to the EI'-LANATIONAL BANK F'OR RECONSTRUCTION AND DEVELOPME.NT Washington, D.C. luly 1952 REPCRT ON THE COLOBIAN CAPITAL MARKET Submitted to the International Bank for Reconstruction and Developnent by AlIonso Mianero July l052 REPORT ON TH13 COLOYBIAN CAPITAL MAR1T Table of Contents Page Letter of Transmittal I. Summary of Findings and Recaiendations I Summary of Recamendations 3 II. The Structure of Business and Government Irnvestment 5 1. Introduction 5 2. Commercial Banks 9 3. Corporate FTnance 11 4. The Bogota Stock Exchange 17 5. Savings and T4ortgage Institutions 19 A. The Colombian Savings Institution 19 B. Other Savings Institutions 22 C. Central Miortgage Bank 22 6. Other Public Institutions 24 A. Agricultural Credit Institution 25 B. Industrial Development Institute 27 C. Territorial Credit Institute 29 7. Insurance Companies 30 8. Public Sacurities 33 A. Government Bonds 33 B.. Department Bonds 41 C. Municipal Bonds 42 III. Suggestions for Remedial Action 44 1. Introduction 44. 2. Fina'#-,c.ng of Private Investment 45 3. An Investment Finance Corporation 47 4h, Requirements of Sound Corporate Finance 52 5. Refunding of Public Debt 55 6. Short-Term Debt Certificates 60 7. Lottery Savings Bonds 63 8. A Market for Government Securities 65 Appendix I. Composition of Internal Debt, September 1951 I. Bonds 68 II. Other Contractual Obligations 70 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOBIENT 1818 H Street, N.W., VWashington, 25, D. C. Office of the Vice President July l5, i952. My dear 14r. Ambassador, It gives me pleasure to transmit to you a report on the Colombian Capital Market which has been prepared by Mr. Alfonso Manero, partner Of Glore, Forgan & Company, investment bankers in New York, at the request of your Goverment and the International Bank for Reconstruction and Development. The Bank has studied the report with great interest and believes that the various measures which Mr. ilanero proposes are deserving of the most careful consideration by the Government of Colombia. It i.s our sincere hope that the Government will not only give the report full consideration, but will also give it the widest possible circulation for study by the public. The creation of a well functioning capital market is described in the report as a necessarily slow process. .In our opinion, this point should be emphasized. WIe feel that it is most important that the selection of proper policies and the establishment of adequate institu- tions should be apcoxmpanied by a gradual process of educating the Colcmbian public to accept savings in monetary form and to select among the various instruments of financial investment those forms which are best suited tp the specific needs o' the various types of investors. The suggestions contained in the report should be of great assis- tance in the attempts of your Government to further the economic progress of your country and the Bank stands ready to assist in their implementation. Sincerely yours, (Signed) R. L. Garner His Excellency Cipriano Restrepo.Jaramillo, kAbassador of Colombia, 2128 LeRoy Place, N.W., Waslhngton, D. C. Attachment. June 30, 192. Mr. R. L. Garner, Vice President, International Bank for Reconstruction and Development, 1818 H Street, N.W., Washington, 25, D, C. Dear i.r. Garner, I am sending you herewith, for transmittal to the Colombian Government, a report on the Colombian capital market which I prepared at the joint request of the Government of Colombia and the International Bank for Reconstruction and Development. The report is the result of a visit of several weeks to Colombia. There I had the opportunity of acquiring firsthand knowledge of the financial institutions, the market for public and private securities, md the fin4ncial practices of business enterprises. I discussed many problems which I encountered with officials of the Goaverment, various Government institutions and the Central Bank, with representatives of the banking community and wdth industrialists and businessmen. I re- ceived from them full cooperation and valuable information, and I should like to take this opportunity of expressing to them my sincere apprecia- tion. In the report, I recommend certain measures which, in my opinion, are necessary to increase the flow of capital into productive private enterprises. Also, I advance various suggestions for the iLmprovament of the internal debt structure of the Colcmbian Govermnent, and for the creation of a broad market for public securities. I focused my atten- tion particularly on Government secturities and financing of industrial activities because I feel that in, these two sectors remedial action is particularly urgenti. The concentration of my proposals on these two sectors does not imply, however., that further improvements in other sectors of the capital markets, such as agricultural credit and mortgage financing, are less important. It is in these fields, however, that the Economic Development Committee has made certain recommendations and I trust that the Government will pay close attention to them. Although I am confident that the implementation of the various suggestions in this report will bring about substantial improvements in t.he structure and the functioning of the Colombian capital market, I realized throug,hout my study that the creation of a capital market wmhich will serve all the needs of the fast-growing Colombian economy, will take considerable time. No combination of specific measures can immediately bring about those changes in institutions and attitudes which are required. The developnent of a capital market through which savings can be channelled to their most productive use is a gradual pro- cess; but I am convinced that this, process can be speeded up by proper policies and through the cooperation of the financial and industrial interests with the Goverment. I hope that the recommendation.s which I have fomulated in this report will receive the close attention of the Colombian Goverrment and of the financial and industrial interests of the country. I have taken the liberty of suggesting in the report that the Colombian Goverrnment should seek the assistance of the International Bank for the implementa- tion of scne of my recommendations. I hope that your institution will extend this assistance. If in this connection, my own services are required I should be glad to give to the Colombian authorities and to the International Bank whatever aid I can offer. 'I remain, Sincerely yours, (Signed) Alfonso Ivanero Attachment REPORT ON THE COLOMBIAN CAPITAL MARKET I. Summary of Findings and Recommendations The purpose of this report is to make a survey of the conditions that prevail today in the field of inirestnent financing in Colombia, to determine in what respects existing institutions and current practices are deficient, to propose such concrete steps as will increase the flow of capital into productive private enterprise, ad to suggest measures which will foster a market for public securities. In the first seetion of the report the recommendations are summar- ized. The second section analyzes and comments on the operations of the financial institutions through whiclh savings are channell d into the hands of Colombian industrial and commercial enterprises, and to the national and department4l governments and municipalities, The analysis is based on data and information which various goverrment agencies, other official institutions, and private business fims furnished for the parpose of this epout, and on material presentead in the Report of the Survey M4ission sponsored by the International Bank and in the Final Report of the Colombian Scomtnic Development Caomittee. . In the last section of the report, a number of recomendations are presented for the development of a sound capital market through vhich funds can be channelled to their most productive use. Throughout this report an attempt has been made to isolate as much as possible the problem of investment financing from its wider setting in the framework of general monetary and fiscal policies. But it is obviously imS possible to discuss it without reference to the broad prcblems of the Colom- bian economy and its growth. Investment financing is not a subjeot conduc- ive to one or tugo simple cure-all recommendations vihich might be expected to solve permanently and over-night the ever-present problem of capital sCarcity. The development of a capital market which will serve both private enter- prise and the Government sector is a slow and tedious process which must be adap-ed to the special circumstances of Colombia and the constantly chanri- ing needs of her econony. It presupposes, above all, the pursuit of sound btut flexible monetary and fiscal policies. Intelligent tax policies and effective controls of public exoenditures are essential if public investment and the expansion of private business are to complement each other. The re- port showrs that these pre-iond[itions for economic progress have not prevailed in Colornbia and that some deficiencies continue in both the private and the public sector of the econoimy. In the last "3o years, however, goQd progress has been made. In- flationary tendencies lhave been arrested and external balance has been achieved, At the same time, Colombia lhas gone tlrough a process of stock- tJaking of her resources and is now in a better position than ever before to formulate a program for economnic development and to carr,y it out successfully. This report deals with a specific aspect of the wider problem o.L economic development. It is concerned with the problem of financin, of long-berm private investmient and ol raisin-g funids :rom non-infl'htionary sources for public investment expeniditures. But even th3 field of in-lvest- ment financing9) is not completely covered. Nqothing is said about private foreign 4nvestment; credit operation of departments and municipalLties are hardly touched upon; only passing reference has been made to the financing of the Paz de Rio Steel Uill; and no recomrendations have been formulated regarding agricultural and mortgage credit. Moreover, several of the suggestions advanced in this report are presented in general terms because their implementation presupposes factual information which only the Colombian authorities can obtain, and decisions which only the Government can make. Nevertheless, I X confident that this report will assist the Colombian authorities in the solution of some of the major financial problems of their economy. The salient features of the suggestions advanced in the last part of the report are summarized below. They represent attacks, from difLerent angles, on the focal problems of the scarcity of capital and the need for more economic utilization of the capital resources which are avail- able to the Colombian econcmy. Their successful implementation will depend on the cooperation of the Government, and its agencies and institutions, with private business and financial interests. It is my sincere hope that this cooperation will be forthcaing as it was in connection with the work of the Economic Development Committee. Summary of ecommendations 1. Comercial banks, insurance ccanpanies and industrial interests should take the initiative in the establishment of a Finance Corporation to supply medium- and lohg-term funds for inidustrial enterprises. If necessary, the Government should provide a part of the financial resonurces of the Cor- poration from its accumulated surplus, and efforts should be made to cbtain additional funds from abroad. 2. Private corporations should review their dividend policies and strengthen their internal financial structuree They should attempt tc raise additional capital through the issue of bond5 abad preferred stock, 3. The part of the public debt held outside the Central Bank and Uovernment institutions should be refunded by issues which pr'ivate financial institutions and insurance companies are willing to hold on a voluntary basis. The terms of the refunding operation should be determined after consultations between the Goverment and the financial interests of the country. The administration of the public debt should be transferred to the Banco de la Republica. 4. The Govermnent should issue short-term certificates of indebted- ness for the irnvestment of idle funds of financial institutions and industrial corperations. 5. The Government should issue savings bonds with special lottery features which would make them attractive to savers in low and medium incoane groups. 6. The CGovernment authorities should continuously attempt to gain the confidence of private savers and financial institutions in its obli- gations. Its aim should be to develop gradually a wider market for public bonds. The maintenance of orderl.y conditions in the market for Goverment securities is a function of' monetary nmanagement; therefore, the Stabilization Fund should be divested of its other functions and its operations should be left to the discretion of the Central Barnic. II. The Structure of Business and Government Investment 1. Introduction The Economic Survey lvlission sponsored by the International Bank for Reconstruction and Development, and the Economic Deveelopment Committee have prepared detailed estimates of the national accounts and of the volume of private and public investment. Both groups reached the conclusion that in the course of the postwar years the overall level of investment in Colombia has been qu-ite high, and that per capita income has been growing steadily. The following table shows a breakdomn of gross capital fo=ation and an esti- mate of the gross national product.l/ Table I Estimates of Gross Capital Formation and Gross National Product in 1950 (7IdllonTs of Pasos_; Private Public Total % of Toual Commerce 106 . 106 12.1 Agriculture 6o 13 73 8.3 Transportation 165 117 282 32.2 Industries 102 - 102 12.7 Miines 20 - 20 2.3 Public, Utilities 10 60 70 8,0 Housing 183 - 183 20.8 Government Buildings - 26 26 3.0 Miscellaneous 1 - 14 1.6 Total Capital Form.tation 660 216 876 i0m0Q Gross lNational Product 6100 GCapital Fornation as % of Cross Nlational Pzoduct i4.3 / Gross capital fomation is the sum of all private and public investment outlays for plants, equipment, housing, public works and the acacmulation of inventories, without allowance for depreoiation; the gross national pro- duct is the sum total of all goods and services produced in thze economy. 2/ 1 peso = U.S..$O.O. The percentage of total resources going into investment cmnpares rather favorably with that of many other countries, and is probt ly among the highest in Latin America. Moreover, the fact that more than two-thirds of total investment was made by the private sector of the economy, from private resources, indicates that the Colombian business community has at its disposal a large volume of private savings. Nlevertheless, the Final Report of the Economic Developnent Comittee has pointed out that further improvements can be made regarding the composi- tion of investment. Investment in industry and agricilture camo to only 20% of the total. On the other hand, there was excessive investment in housing, mostly for upper-incone groups, and in merchandise inventories, wihich accownt for ahlost one-half of investment expenditures in industry and cmmerce combinied. The Report of the Economic Developnent Committee also comments on the relatively large amounts invested in the field of transportation which did not, however, prevent a deterioration of the trans- port system. Private investment in transportation consisted l1.rgely of imports of passenger cars. The unsatisfactory composition of investnent in the postwar period has been partly the result of temporary causes, the most important among thea being the inflationary price increases which occurred between 1945 and 1950. It is only natural that during a period of rising prices private individuals and business firms should attempt to minimize losses which holdings of money and fixed-interest securities entail in an inflation. ?doreover, they try to exploit the opportunities for rapid capital gainS by investing their savings in inventories of foreign and domestic merxhandise, and in real estate and land whose value is likely to increase in step with 7- the rising price level. The change in monetary policy which took place in thte Fall of 1950 has succeeded in stemming the tide of inflation and thus has removed some of the incentive to izivest in merchandise and real estate. Aside from these temporary factors causing a distortion of the in- vestment pattern and thus preventing an allocation of capital for purposes most conducive to a balancedgrowth of the economy, there are more permanent causes for the concentration of private investment in tangible assets and for speculative purposes. Traditionally, the main sources c .C large incomes and wealth have been ownership of rural and urban property, and participation in commercial activities including both donestic ard foreign trade. This tradition has retarded the growth of manufacturing industries. Only in the last two decades has there been a noticeable development of the industrial sector of the economy, primarily in textile and shoe masnufacturing, in brewer- ies, tobacco and food processing, andn,more recently, also in cement, rubber tire, sugar and chemical production. But in most industries, the individual- ist.ic traits of the Colanbian businessman asserted themselves in the form of business ownership by individuals or single faiilies, and ownerdip of corpor- ations by a large niumber of shareholders developed only in the last few years. The development of financial institutions and the methods of financ- ing business enterprises reflect the agricultural and commercial traditions of the Colombian economy. Commercial banking has developed considerably and, by and large, the 14 commercial banks of Colanbia serve well the legiti- mate needs of Colombian commerce for short-tem financing. In the field of long-tenm financing, hovever, grave deficiencies exist, Industrial enter- prises have been financed almost exclusively by the sale of stock and by the plowing-baqk of profits. This method of financing has been made easy by the large profits which many of the corporations have shown in the last ten years. These profits were to a considerable extent the result of inflationary price increases and a rapidly rising consumer demand. There is, however, no organized capital market where the Colombian industry can obtain funds for capital investnent and expansion. The only major savings institution is owned and controlled by the Government and most cf its resources are used to provide funds for the Government-owned mortgage bank or for the Government itself. The Government has found it necessary to establis4 various public instituations to finance public investment and investment in the manufacturing sector, but the bulk of the capital requirements of industrial enterprise has come directly from pri- vate investors without the benefits of such institutional arrangements as in- vestment banks or finance corporations. It is not surprising that with this one-sided institutional frame- work and the traditional distrust of public financial operations, the national Government, the Departments and the iJun.icipalities have been successful only to a limited extent in their attempts to supplement tax and customs revenues through borrowings frcm financial institutions and private investors. Legis- lation to make the purchase of various types of public securities compulsory has only made the situation worse. This report is primarily concerned with the institutional aspect of savings and investment in Colombia. The brief description of existing institutions and the recommendations for their further development are pre- sented in the belief that the time has come to put private and public invo'st- ment on a sounder basis, thereby laying the foundations for a gradual change in attitudes and in business and financial usages. 2. Commercial Banks There are 10 Colombian and four foreign cctnmercial banks operating in Colombia. As of December 1951 these institutions showred gross assets of 1,102 million pesos with deposits of 767 million, savirngs accounts of l..?7 million and capital and reserves of 117.6 million. Their investments in securities and real estate amounted to only 75.8 million. The largest part of their assets, 701.4 million pesos, consisted of loans and discounts. Until 1950, banks were generaUly pexmitted to lend money for a mQd.um of one year only. Since then, five-.year loans have been permitted but only for the purpose of "financing an important national economic development". In l951, the penmission to make medium-ten loans was further broadened and industrial loans expanded somewhat. Commercial banks are authorized to invest in (1) Federal, Municipal and Departmental bonds itithout any limit on the amount, provided the issues are regularly serviced; (2) up to 10% of their capital and reserves, in foreign government securities or industrial and commercial bonds; (3) up to 20% of their capital and r'eserves, in mortgage bonds issued by the Central Miortgage Bank; (L4) up to 10% of capital and reserves, in common stock of the Central Bank; (5) up to 5% of their capital and reserves, in shares of Alma- cenes Generales de Deposito (General Warehouses); (6) in shares of the Central Mlortgage Bank and in shares of the Paz de Rio Steel Mill without any Limit; and (7) in real estate for the bank's own use, and for a period of twro years in property acquired through foreclosures. The banks are compelled by lawv to maintain an excess reserve (encajo adicional) of up to 5% of their sight and tem deposits in bonds of the Caja de Credito Agrario paying 4% and maturing within six months. In additionr, -10 - they must invest 5% and 10% of their reserve requirements in 4% Internal Unification bonds (Dinu) and in 6% National Economic Defense bonds (Denal), respectively. (The legal reserve requirements of commercial banks amounted to 12% of demand deposits until January 1952, wvhen they were raised to 15%; the increase is to be accomplished gradually through a i2% rise every six months.) On the basis of total deposits of 767 million pesos, compulsory holdings of Dinu anid Denal bonds amounted to 13.8 million pesos at the end of June l951. Commercial banks are not permitted to buy for their own account common stocks other than those indicated above. The 1f4 banks aced, as of July 1951, approximately 35 million pesos in national, 4 million in departmental, and 5 million in municipal bonds, or a total of 44 million out of the 67.6 million reported as held in their investment portfolio. The banks' investment of 35 million in national Government obligations amounted to about 5% of their deposits. Outstanding bank oredits as of July 1951 were as follows: to Commerce 43.7% Industry 27.2% Cattle raising 9.2% Agriculture 7.2% Construction 2.6% Official institutions 5.1% Other 5.O% Although these figures may not accurately reflect the actual use of borrowed funds, they indicate that conmercial banks are an important source of finance for industrial enterprises. In fact, aside from private capital subscriptions, commercial credits are virtually the only means of financing industrial inventories and working capital. As a result, short-texm commercial credits have been resorted to by industrial corporations to carry inventories and to finance operations often upon the understaniding by the -11-. lending institution as weIL as by the borrowers that credits would be renewed. In this roundabout way, caTmercial credit has beccme an imperfect substitute for long-texm incustrial capital. 3* Corporate Finance The most widely used method of financing industrial enterprises in Colcnbia during the last 25 years has been the sale of ccmon stock in privately-owned corporations. The distribution of cammon stock among in- vestors has reached a relatively high degrese of development. The stock mar- ket is closely followed by a large number of people, incluLding businessmen and members of the middle class. The Bogota Stock Exchange lists 96 stock issues covering a wide diversity of industrial and financial activities, including 9 banks, 14 insur- ance companies, 1 airline, 12 textile mills, 5 cement works, 14 sugar mills, 3 beer breweries, 3 hotels, 3 rubber factories, 2 leather faotories, 2 rail- roads, 2 electric ccmpanies, 6 food processing finms, 5 oil companies, 1 moving picture house, 1 drug store, 3 soft drink producers, 1 match factory, 1 shipping concern, and 1 glass f&.ctory. A record of the number of stock- holders in each of the companies listed on the Exchange indicates that there are 16 ccmnpanies with over 1,000 individual stockhlolders each, of which Coltejer (textiles) has nearly 14,000 and Consorcio Bavaria (beer) nearly 20,000 stockholders. At the end of 1949, the total number of stockholders was 83,,000. This figure includes, however, a certain proportion of double- counting of owners of stock in more than one corporation. The number also fails to reflect the fact that many corporations are closely held by one or more families, with a small number of "stray" shares owned by outsiders. The total par value of listed stock amounted to approximately 616 million pesos on June 30, 1951, and their market value to 1.,076 million pesos. This sum not only greatly exceeded the value of listed bond issues, but also the total of all the federal, depart-nental and municipal debt, which amounted to 474 million posos. Transactions in listed stocks during 1951 totaled 19,727,000 shares with a market value of 95.0 million pesos, ccmpared with 101.7 million pesos in 1950. The following table presents the amounts of paid-in capital of the most important corporations iLn Colombia in 1940 and in 1951: Table II Capital Structure of Seleted4Colom~bian Cororations Jaur. 1940 June 195l Increase Paid-in Capital Paid-in Caita. % Banks Banco de la Republica (Central Bank) $ 1l,735,800 $ 16,9533,00 44 Banco de Bogota 6,000,000 20,000,000 233 Banco de Colombia 3,690,o000 7,664,780 108 Banco Careroial' AntioqvenO. 3,000,000 15,000,000 400 Cement Compania de Cementos Diamante 3,229,880 5,949, 230 86 Fabrioa de Cemento Samper 3$807,,20 15,000,00O 294 Beer Consorcio de Bavaria 23,860,760 176,200,000 638 eather Empresa Colombiana de Curtidos 900,000 6,000,0oo 567 ManufActuras de Q(ero 'Ia Corona" 307,520 1,800,0 485 Electric Power Ccgipania Electrica de Bucaramanga 600,000 1, 200, 000 100 Empresas Unidas de Energia Electrica 4,,713,000 13,h47,770 185 Insurance Compania Colombiana de Seguros l500,o900 3,600,,000 140 Tobacco Compania Colombiana de Tabaco 5,433,520 10,968,710 102 Textiles taeteria Pepalfa 368,300 2,783,785 656 Coltejer 1,800,000 42,394,385 2,255 TejidQs de Occidente 300,000 5,162,o48 1,721 Compania de Samaca 4150,ooo 2,000,,000 344 Fabricato 1, 800, 000 16,, 500,000 817 Panos Col2.obia 62o,000 ,5Q00Q,00 142 Alicachin 488,603 3,009%165 526 - 13 The table indicates that in the last ten years the capital of Colombian corporations has increased very rapidly. The increase was par- ticularly striking in the case of manufacturing enterprises, especially in the textile industrya T'he increase in corporate capital was accomplished through the sale of new stock, generally to old stockholders on very favorable conditions, and the distribution, free of charge, of shares from accumulated reserves. In some instances, the offer of new stock was made particularly attractive by the advance declaration of a dividend payable on the new stock. The cost of such dividend payments was charged to special reserves or to the receipts of premium payments on new stock. Indicative of these practices is the followring composite record of 14 manufacturing concerns in the textile, cement, beer, tobacco, food, metals and chemical industries. Table III Financing of Capital Expansion of 14 Selected Colombian Industrial Corporations (Thousands L6 Pesos) Paid-in Capital, 'December 31, 1945 63,226 it s n 31. 1950 9 8 Increase in Live years 56,361 Financed : Stock dividends 5, 077 Subscriptioni at par 20,326 Par value of stock sold at a premium 30,956 Total 56,361 Amounts paid by stockholders: Subscription at par 20,326 Par value of stock sold at a premium 30,956 Premiuma paid Total cost 87,283 - 14 - During the same five-year period, dividend paymnents amounted to 177,264,000 pesos. An analysis of the annual reports and balance sheets of several textile corporations which has been made for the purpose of this report gives an indication of the financial practices which prevail in this indfustry but which by no means are confined to it. Most of the companies dis- tributed as dividends 66% to 85% of their net eamnings almost every year since 1935. The high dividend payments stimulated high quotations for the sthares of the companies and enabled them to sell new shares to their shareholders which had an additional inducement to buy in the fom of attractive subscrip- tion rights. Subscriptiorn rights were offered to stockholders practically every six months from 1941 to 1951, in general at prices above par but scme- what belov market quotations. The ccvpanies applied the sales proceeds of the new stock to the capital acuont and the premiums to various types of reserves. In the aggregate, the sale of new stock amounted to almost 50% of the amounts that tne companies had disbursed as dividend payments. A practice which appears to be vwidespread and which. in other coun- tries is generally not accepted as good corporate practice, is the declara- tion in advance of a dividend payable on stock about to be offered for sub- scription. In some cases, cQrporations vote stock dividends and charge their cost to a special reserve or to the receipts fron sales of stock at a premium. Auditing practices appear to be deficient in many instances. Many corporations do not use the services of outside auditors. Neither the Colombian pertinent laws nor the Bogota Stock Exchange regulations require the services and certification of accounts by independent public accountants. The prevalent practice is to appoint an auditor Lrom the corporation's own staff at the annual stockholderst meeting. The volome of public information available about the financial position of corporations is limited. The Banco de la Republica and the Stock Exchange issue periodical reports on corporations but only the paid-in capital and reserves and the amountN of dividend payments are published. Financial statements of listed corporations are available at the Stock Ex- change but the financial results of corporate activities are seldom published and, in m4ny cases, stockholders do not receive aninual reports. TableI1V gives an indication of the yield of shares during the year ending June 30, 1951 of 22 leading corporations whose operations were analyzed for the purpose of this study. Table IV Yield of Shares of 22 Select-d Colombian Corpprations in 1950-1951 Percent of Market Value of Stock Rang AvAe age- Bankcing 11.4 13.2 12.3 IDsurance 10.3 10.3 Tobacco 10.3 10.3 Beer 12.2 -13.6 12.9 Textiles 12.4 156 14.0 Food Processing 12.2 12.2 Cement 11.0 - 14.0 12#5 Various 12.4 - 141.4 13.4 Dividend payments in 1950 and 1951 were virtually the same as those prevailing in earlier years, although stock prices had declined, on the a-!-erage, by one-third. Only towrard the end of 1951. rapidly declining earnings of some corporations, particularly in the textile industry, made it necessar-y to reduce dividend payments. In the second half of 195l the stock, of 14 of the 22 corporations sold substantially above their book value. In some instances, stock prices 16 - were four times the book value. It must be realized, however, that as .a result of price increases over the last few years, and particularly of the devaluation of the peso) replacement values are substantially larger than book values. The ccabined effects of high dividend payments and the lack of any method of financing other than the issue of new stock are only parVly reflected in corporate balance sheets. In most instances, accumulation of reserves and undistributed profits were substantial; for example, in the case of the 14 selected industrial corporations they amounted to 2-07 million pesos ccmpared with a paid-in capital of 120 million pesos. It must be realized, however, that only a very small fraction of the reserves vas in liquid form, since they had been used for the expansion of productive facilities, and the financing of inventories of raw materials and finished products. Therefore, industrial corporations had to rely to an increasing degree on short-term commercial credits to meet their working capital requirements. The com- posite balance sheet of the 14 industrial corporations, for instanice, shows that between 1945 and 1950 short-term liabilities (cmnprising liabilities to banks, accounts payable, taxes payable, and dividends payable) rose from 18 to 26% of the balance sheet total. It must be added, hovever, that one of the reasons for the limited liquidity of corporate reserves is the lack of suitable investment outlets, since Goverment, departmental, municipal or mortgage bonds do not offer sufficient liquidity for the investment of short-term funds. Corporate bonds are virtually unknown in Colombia. There are only two issues of industrial bonds listed on the Bogota Stock Exchange; one is an 8l% issue of the Consorcio Bavaria brewrery, which seems to be closely held since, in the fiscal year 1950/51 the total turnover in these bonds on the -17 - Stock Exchange amounted to only 500 pesos* The other is an issue of the Bogota Power Company which was originally privately awned but was recently acquired by the Qity. 4. The Bogota Stock Exchange The Bogota Stock Exchange (Bolsa de Bogota S.A.) was established in 1928 as a private corporation with a capital of 1,600,000 pesos composed of 160,000 shares of 10 pesos each. According to the statutes and regulations of '1he Exchange, the objectiaves of the corporation are (a) to give protection to the public in the purchase and sale of securities; (b) to avoid undue speculation in listed securities; (e) to offer to the public authentic data regarding companies whose stocks are listed; (d) to create a market in the securities of Colombian companies and thus enhance the credit standing of such compaxnies in Colconbia and abroad. The Exchange is administered by a Board of Directors, which in turn appoints a manager, a secretary and an auditor. The number of seats is limited to 40.; proceeds from the sale of seats go into a special fund. In order to become a member of the Exchange, it is necessary to mmn at least 200 shares of common stock of the corporation, to be accepted by the Board of Directors of the corporation, and to deposit a guarantee of 1,000 pesos, or the equivalent in negotiable securities. The listing of securities on the Exchange is subject to the approval of the Board of Directors and management of the Exchange, provided the follow- ing conditions are fulfilled: (1) the paid-in capital of the corporation must be at east50,000 pesos; (2) the corporation must submit copies of its charter and statutes, a list of directors and officers, and a balance sheet; (3) the corporation must agree 18 to submit to the Exchange for publication its financial statements, notices of drawings, dividend payments, stock offers and subscriptions, etc; and (4) it must pay a listing fee of 1/20 of 1% of the paid-in capital, such payment to be not less than 200 pesos and not over 500 pesos. The Exchange is authorized to deal in commodities and in foreign currencies. Actually, dealings in foreign exchange are relatively small, and there are no ccmodity transactIons. The numlber of corporations whose stocks are listed on the Exchange rose from 49 in 1939 to 96 in 1951. The capital and reserves of these con- cerns r'ose from 140 million to 773 million. The number of shares of the 96 companies total 153 million of which 71 million are Consorcio Bavaria (brewery) and 8 million Coltejer (textile) shares. The value of stock transactions has shown a remarkable growth since 1942, as illustrated by the following table. Table V Stock Transactions on Bogota Exchange 1942-1951 Year M4illions of Pesos 1942 31.7 1943 61.0 1944 72.9 1945 86.1 1946 140.4 1947 100.7 1948 79.2 1949 103.4 1950 101.7 1951 95.0 rDiring the year 1951, 19,727,00Q shares were bought and sold of which 18,969,000 were industrial shares and 758,000 stocks of financial institutions. Dealings in Consorcio Bavaria and Coltejer shares amounted to almost 14,000,000 shares or about two-thirds of the total volume. - 19 - In additionr, 23 bond issues were listed, but r,i;La 17 of them were actually traded. Of these, eight were Government bonds and bonds of Gcvern- ment institutions. Four were department bonds, one was a municipal i'sue, two industrial, and two were obligations of the Bogota Country Cluba. The volume of bond transactions was small. The tumover i. Goverrment bonds was 7.7 million, in mortgage bonds 8.4 million, in department and muncipal bonds 4.7 million, and in all others 0.2 million pesos. 5. Savings and Tortgae Institutions One of the most noteworthy features of the Colombian financial structure is the fact that all long-tenm credit institutions of importance, among them t'ne Colombian Savings Institution (Caja Colcmbiana de Ahorros) and the Central Mlortgage Bank (Banco Central Hipotecario). are Government-ovwed and, to a large extent, managed by Government-appointed personnel. A. The Colombian Savings Institution The Caja Colombiarde Ahorros was established as an autonomous institution in 1931. The entire capital of 8 million pesos is subscribed and paid in by the Government. From 1936 to 1949, the Caja, operating with a network of 200 branches throughout the country, had a virtual monopoly of savings operations in Colombia and was the recipient of more than 80% of all savings deposits in the country. R.ecentgy the Government removed certain restriction against the operation of savings accounts by commercial banks and some of them have operied savings departments. The buk of savings in the country, however, is still in t1he hands of the Caja. At the end of 1951. it held 114 million pcPos of savings out of a total of 137 million. Table VI shovws the number, size and distribution of the deposits of the Caja. Table VI M¢idyear 196 1947 1948 1949 1950 1951 Number of Accounts (thousands) 368 433 483 54o 574 633 Amount of Deposits '/ (millions) 84.5 98.5 102.7 112.7 108.9 122.5 Size of Accounts (thousands) Less that 2 pesos 11 11 13 12 10 9 2 to 100 "34 238 284 333 380 417 10l to SQO " 47 57 57 59 5 61 501 to lOQO i 13 15 15 17 15 18 1001 to 2000 " 9 10 1.0 12 11 13 2001 to 5000 ' 6 7 7 8 8 10 5ool to 7500 X 2 2 2 2 2 2 Over 7500 1 1 1 1 Special Accounts 86 93 94 97 96 102 The data indicate that saving habits are quite widespread amoong the CoUL d ian population and that savings bank deposits are by far the most im- portant fom of savings fo:r the lower and middle classes. They also reveal that the number of small savers has grown substantially in the course of the last five years, and that their funds ccnstitute a relatively large share of total liquid savings of the economy. The financial resources of the Caja de Ahorros are the most impor- tant non-inflationary source of borrring by the Government, the departments, muni.cipalities, and public financial institutions. At the end of September 1951, ithe investnent portfolio of the Caja de Ahorros czaounted to 111.6 million pesos. It was composed as follQws: i/ Including demand and special deposits, mostly of public institutions. _ 21 - Goverment bonds and notes 46*6 million pesos Departmental bonds 12.7 "i Municipal bonds 2.8 i t f Mortgage bonds 34.1 n Bonds (cedulas) of the Agricultural Credit Institute 9.3 n ii Bonds of the Territorial Credit Institute 5.5 " Private bonds 0.5 " Total 111.6 if The composition of the investzient portfolio confoms to standards of safety and liquidity of most advanced couintries. It must be realized, however, that the lack of an active market for public securities and mortgage bonds, of which the entire portfolio consists, makes the Caja de Ahorros highly illiquid and dependent on the support of the Central Bank whenever withdraw- als exceed new deposits. This was amply demonstrated during the banking crisis wOhich followed the disturbances of 1948. The Caja de AhorrQs, as well as the other sa.rings banks, are under certain legal conpulsions in the investment of their assets. From 1942 to 1949, savings banks were obliged to invest out of their total deposits: 20% in National Economic Defense bonds (Denal), 20% in 6% Treasury bonds, and l10% in bonds of the Territorial Credit Institute, a financial institution of the Govermnent. Two decreos of 1949 and 1950 provided that the investment in Denal bonds and in Treasury bonds must be liquidated over a period of 18 months and the pro- ceeds reinvested in cedulas of the Banco Central -iipotecario (mortgage bonds); up to 40% of any increase in deposits since 1949 must also be invested in these mort gage bonds, and any deficiency in this investment must be applied to the purchase of bonds of the Paz de Rio Steel t:Iill. Compliance 'with the provisions of the decrees is likely to be -22- difficult since it is doubtful whether the market can absorb the 24 million of Penal and Treasury bonds held by the Caja de Ahorros. B. Other Savings Institutions Aside from the Caja Colobiana de Ahiorros there are only three other savings banks in operation. They are the Circulo de Obreros, with deposits (at the end of 1951) of 7.4 million pesos, the Prevision Feminina (deposits 0.2 million),, and the Union Obrera y Campesina (deposits 0.2 million). Two caamercial banks, the Banco de Colombia and the Banco Industrial Colcmbiano operate savings departments. Their savings deposits amounted to 14.7 and o.5 million pesos, respectively, at the end of 1951. C. Central Mortgage Bank The Central Mortgage Bank (Banco Central Hipotecario) is the oldest and most important Government-owned financial institution in the field of long-term financing. It was founded in 1913 as an autonomous Goverment organization. Its capital was recently increased from 10 million pesos to 17 million. The Bank is administered by a board of directors, one member of which is appointed by the Goverment, onp by the Banco de la Republica, four by the commercial banks and one by private shareholders. All obliga- tions (cedulas and titulos) issued by the Bank are guaranteed by the Govern- ment. The prinQipal functions of the Bank are: (1) to grant mortgage loans on a basis of 50% of the assessed value of property, with maturities up to 20 years and interest rates 2% higher than the Banrts obligations; at present, these pay 6 and 7A; the Bank does not, hovrever, make construction loans; (2) to grant industrial loans of up to 5 or 6 years tem, secured by collateral mortgages on industrial maachinery, land or buildings,with interest - 23 - at 7i%; (3) to grant mortgage loans on public utility plants owned by municipalities; (4) to act as agent for the administration of urban proper- ty; and (5) to deal in real estate. The Bank obtains working capital through the sale of mortgage bonds, industrial bonds3 and capitalization certificates (cedulas de capitalizacion). The outstanding amount of mortgage loans has been increasing steadily frcm 53 million pesos in 1946 to 111#5 million at the end of 1951. The mortgage loans were almost entirely financed by the issue of mortgage bonds or cedulas. These cedulas mature in 5 to 20 yeare; originally,' they carried a 6% coupon, but recently the rate was raised to 7%. The total amount of cedulas out- standing at the end of 1951 was 95.9 million pesos, Also outstanding were industrial bonds amounting to 10.7 million pesios. These issues, which were made for the first time in 1947, were used to finance indust4al loans in approximately the same amount. The 7% 20-year cedulas are listed and traded on the Bogota Stock Exchange. Dutring l951, dealings in these bonds amounted to 8.h million pesos or about 9% of the total then outstanda.ng. During 1951, tlhe quotations fluctuated between a high of 87 and a low of 85, at the end of 1951, the bonds were quoted at 85.97. The compulsory investment features of the two recently enacted de- crees directing savings banks to invest up to 30% of their deposits (and in- surance companies 15% of their reserves) in cedulas of this Bank, will give this institution a very substantial source of working funds. Apparently, the purpose of this legislation is to enable the Mortgage Bank to improve its method of mortgage finarncing. At present, the Bank does not pay cash to the borrovier when it buys a mortgage; instead, it delivers mortgage cedulas on a peso for peso basis after applying certain discounts and other charges. It is up to the borrower to dispose of these cedulas in the open market. Since the cedulas sell at about 86%o, the borroarer obtains in cash 83 to 8!s% of the amount for which he has given a mortgage. In spite of the compulsory purchases of mortgage bonds by savings banks and insurance companies, the market for these securities has not im- proved, Data for 1950 indioate that in that year three institutions held approxiriiately 65% of all of the mortgage cedulas issued by Banco Hipotecario. The Compa-nia Colcmbiarg de Seguros held 8 million pesos, the Banco de la Republica 22.2 million, and the Caja de Ahorros 36.6 million. In addition to the mortgage and industrial bonds which the Bank issues, it also sells oedulas de capitalizacion. These cedulas are a special type of savings bond Which are paid for in installments, The paid-in amounts bear interest at less than 4%, but the cedula is made attractive by a lottery feature. If the cedula is drawn, the purchaser obtains the face value thus winning the difference between the amount deposited plus accrued interest and the face value, Cedula purchases have increased steadily in recent years, rising from 8.3 million pesos in mid-1947 to 14.8 million in June 1949. Similar cedulas axe issued by the Sociedad de Capializacion y Ahorros Bolivar but the amount of the issue is inisignificant. In addition to real estate mortgages and industrial loans, the bank also holds a sizeable portfolio of securities. The investment account amounted to 37.5 million pesos in June 1950 but declined to 22.5 million by the end of 1951. 6. Other Public Institutions In addition to the Savings Institution and the Central Mortgage Bank, the Goverrment has established a series of other financial institutions, Some of these public entities are credit institutions proper; others combine certain adninistrative and entrepreneurial functions with financial activities. In the aggregate, they are of considerable importance because they have be- come a significant source of investment credits. In this section, a brief description of the most important institutions and their operations is pre- sented. A. aigcu]tural. Credit Institution The Caja de Credito Agrario, Industrial y ,Iinero, commonly known as CajaAgraria, was established by Goverment decree in 194. It is the main source of agricultural credit; it also finances irrigation projects and the purchase of cattle and of agricultural machinery and equipment. At the end of 1951, the capital and reserves of the Caja amounted to 66.2 million pesos. The stock of the Caja is almost completely owned by the Goverment; only an insignificant number of shares is held by the Coffee Growers Federation (Federacion Nacional de Gafetercs) and private individuals. Until the autumn of l951, the Caja was compelled to invest certain portions of its capital and reserves in Government obligations. As of June 30, 1950, these investments totaled 13.8 million pesos, but they had declined to 2.9 million at the end of 1951. The Caja was also released from the obli- gation to hold 2.3 million pesos of stock of the Banco de la Republica. The Caja is permitted to accept sight and term deposits which at the end of 1951 amounted to 36.7 million pesos. The largest part of its resources it obtains, however, through the sale of short-ten notes bearing a 4h coupon and maturing in six months, and through the issuance of long-term obligations bearing a 5% coupon. Most of these securities are wnzed by the Caja de Ahorros and other - 26 - financial institutions. The total of the Cajays short- and long-term obli- gations outstanding from 1946 to 1951 follows: (Thousands of Pesos) December 1946 31.5 1947 46.7 1948 64.7 1949 91.9 19$0 105.9 1951 125.4 The Annual Report for 1950 of the Cajastated that the distribution of the securities issued by that institution was as follows: Notes.-' A. Discounted at Barco de la Republica: (Millions of Pesos) 30 days 9.0 90 to 24.5 180 lt 3.7 240 o 3.8 18.7 Total 59.7' B. Owned by other institutions: 30 days 4.8 90 '" 16.2 180 " 10.2 Total 31.2 Lonag-Term Bonds: Owned by the Caja de Ahorros 2 Owned by others 5.0 Total 14.2 Total 105.1 As indicated before, canmercial banks are compelled to maintain 5% of their sight and 30-day deposits invested in short-term obligations cf the Caja Agraria. - 27 Total loans granted by the Caja Agraria amounted in December 1951 to 172.8 million pesos. According to information about earlier (mid-l950) data, about 56% of all loans wrent to agriculture, 44% for cattle raising, and less than 1% for industrial and mining enterprises. Approximately 75% of all agricultural and cattle loans were short-term, the remainder medium- and long-temn. There were more than 130,000 individual loans with an average amount of less than 1000 pesos, The largest number of loans was between 1000 and 5000 pesos. Loans in excess of 5C),000 pesos were made only to rural producers' cooperatives. The importance of the Caja in the field of agricultural credit is indicated by a tabulation in its 1950 arrual report., according to which its loans accounted for 5h% of all credits granted to private agricultural pro- ducers. Besides, it was the principal source of credit for rural producers; cooperatives (5.3 million pesos) and for rural canunal im-provements (7.8 million). It also financed irrigation projects, in which it had invested, in mid-1950, 6.7 million pesos. The concentration of short-tem maturities in the Cajats loan portfolio shows, on the other hand, that a large propor- tion of the demand for long-tern agricultural credit remains unsatisfied. B. Industrial Devrelopmntt Ins titu.te . The Instituto de Fomento Industrial was created in 1940. Its authorized capital is 10 million pesos. The paid-in capital as of June 30, 1951 was 6 inillion pesos, of which the Government contributed 5 million and the Central Mortgage Bank 1 million. The purposes and functions of the Institute are to plan the estab- lishment of net industries utilizing basic national resources, to cooperate in the development of new industries, and to reorga'mize existing enterprises. The law provides that the Institute can only invest in bonds or common stock of corporations with the approval of 4 out of 7 of its board members and upon the recaxmendation of its technical experts. It must have suitable representation on the Board of Directors of enterprises in which it makes an investment. The Institute may invest up to 50% of its capital in industrial bonds which it can rediscount with the Central Bank. The obli- gations and bonds of industral enterprises sponsored by the Institute may be guaranteed by it. The Institute is authorized to secure funds -hrough the sale of bonds, but it has not been able to sell its securities to the public. In 19h2, it issued 1.5 million pesos of 20-year 4% bonds of wrhich 794h,200 pesos were out- standing on June 30, 1951. All of these bonds were held by the Banco Central Hipotecario. The Mortgage Bank also held 5,266,000 pesos of a 1946 bond issue of 6 million pesos. This issue was authlorized in conneation -wnith the estab- lishment of the Paz de Rio Steel Mill. The Institute. on the other hand, oned some Government and department bonds, which aggregated 780,000 pesos. The Industrial Development Institute was originally charged with the preparatory research and the financial responsibility for the establishment of the Paz de Rio Steel Mill, but in 1948 the Institute was ordered to divest itself' of lthe new enterprise. It continued., however. to finance various other ir-idustrial enterprises. The investment of the institute includes partic:i.,; t:,:t on in various chemical ccmpanies, a tire factory, lumber mills, paper £ctoies, coal mines, sea fishing, meat packing plants, etc. In June 1901, thIe investment in inrdustrial enterprises amounted to 10.5 million pesos. Profits frxom these investments anounted to 1400,000 pesos, which sum was used to write off losses resulting from previous operations, - 29 - Fron. the record of the Development Institute, it becomes clear that its operations have stimulated investment in the industrial sector of the econcmy, particularly in fields which private business had not entered before. However, the inadequacy of the financial resources at the Institute's disposal prevented it from playing a major role in the industrialization of the Colombian econamy,. Compared with the overall expansion of industrial activity in the, last ten years, its contribution has been minor. Nieverthe- less, the experience gained by the Institute in the field of industrial and market research should prove of value both to the Government and private industry in the future. C. Territorial Credit Institute The Instituto de Credito Territorial is a Government-controlled semi- autonomous institution, the purposes of wAihich are the financing and con- struction of low-cost urban and suburban housing. It was created byalaw passed in 1938, but did not become active until 1945, when major financial resources were made available to it. Beginning in 1945, all corporations and inrcdividuals with taxable net earnings in excess of 10,000 pesos were canpelled to invest 5% of their earn- ings in bonds of the Institute. The taxpayers obtained for tgo-thirds of their investment 2X-year bonds (series A) and for one-third 30-year bonds (series B), both bearing interest at 3%. The proceeds of series A wrere to be used to finance urban real estate development, series B for suburban con- struction. Since these bonds were negotiable, the public sold them steadily in the open market and their price declined to about 35. The Institute wvas then authorized to purchase the bonds in the openB irarket, but even substantial purohases brought the quotation only to 42. In 1949, a decree modified the -.30- 1945 law and eliminated the 5% compulsory investment in Institute bonds. It substituted for it a 2j% tax on excess income the proceeds of which are turned over by the Treasury to the Institute as a capital contribution. In connection with the allocation of tax receipts to the Institute, and in anticipation of further income from the sane source, its capital was raised in 191 from 26.1 million to 200 million pesos, 62.5 million of which are reported as paid in. In addition to its oam capital, the institution also acquired substantial armwunts through the sale of bonds. At the end of 1951, the followving zramounts were outstanding- (Thousands of Pesos) 3% 20-year bonds, issued 1947-.49 (series A) 18,350 3% 30-year bonds, issued 194749 (series B) 9, 644 6% bonds, issued 1942 (series C) 750 5% bonds, issued 194i7 (series D) Total 34,039 The 6% issue was made in 19142 and sold to private investors. Originally, an amount of 1 million pesos was issued, but 250,000 pesos have been retired. The entire 5% issue of 1947 of 5,910,000 pesos was sold to the Caja de Ahorros; 295,OOO pesos have been repaid so far, The 3% series A and B bonds are listed on the Dogota Stock Exchange. Their average quotations in 195l were 38.22 and 38.33, respectively. The volume of dealings was slightly more than 1 million pesos. 7. Insurance Companies There are 32 insurance companies operating in Colombia. Three of them are Colombian, the rest are American, Canadian and British. The three Colombian companies had, as of December 31, 1950, capital and reserves of 13.1 million pesos while the foreign companies had 17..5 million pesos. - 31 - The Compania Colo-nbiana de Seguros and its life-insurance subsidiary, the Comipania Colomnbiana de Seguros de Vida, the largest group in the country, together had gross assets of 84.3 million pesos as of October 31, l951L Technical reserves of all of the 32 companies at the end of 1950 amounted to 65.2 million pesos, and other reserves to 9.2 million pesos. Insurance issued by all of the companies amounted to 6,636.8 million pesos at the end of 1950, compared with 4,859.0 million at the end of 1949, or an .ncrease of 36.6%. A breakdown of the amounts underwritten indicates that life insurance has developed mutch less than fire, transport, and automobile insurance which together account for 5,7l42.7 million pesos, or almost 87% of the total. Life insurance amounted to 538.8 million pesos, or 8% of the total, The amounts of premium collections show the growth of insurance, and its importance as a potential source of capital and investment funds. Table VII Premium Collectlons, 1946-19L0 (Milio:nsofPeese) Year Amount 1946 24.9 1947 33`h 1948 42.8 1949 50.8 1950 65.7 The Colombian Insurance Law contains certain regulations regarding investments by insurance companies, distinguishing between compulsory and authoried investments. The statutes provide that insurance companies must invest: (1> 15% of their total assets in Gpvernment bonds, of which an amount equal to at least 10% of the technical reserves must be invested izi I)enal - 32 - (NJational Econnic Defense) bonds; (2) 10% of their total assets in bonds of the Caja de Credito Agrario, or in industrial bonds issued by the Banco Central Hipotecario; and (3) 10% of their technical reserves in mortgage bonds or mortgage loans. The insurance regulations further stipulate that the companies must invest all of their funds in Colombia vith the exception of 15% of their assets, which may be invested abroad. The insurance ccipanies are petted to invest, at their discretion, in (1) municipal and departmental bonds; (2) bonds and stocks of Colombian industrial corporations; (3) cedulas of the M.1ortgage Bank, bonds issued by the Caja de Credito Agrario, and the Banco Central Hipotecario; (4) term de- posits in commercial banks; (5) up to 15% of their total assets or 25% of their technical reserves, whichever is greater, in foreign government obli- gations; (6) urban real estate up to 30% of their assets; (7) mortgage loans up to 30% of capital and reserves in amounts not to exceed 50% of the assess- ed value of the mortgaged property if it produces revenue, and 40% if it does not; (8) loans with a 30% margin having as collateral Govermnent bonds, mortgage cedulas, foreign government obligations, or insurance policies. Investments of insurance companies increased from 36 Million pesos in 1946 to over 90 minlion pesos in 1950; their participation in private financ- irig (i.e. holdings of bank and industrial shares, and commercial loans secur-^ ed by mortgages or securities) rose from 15.7 million in 1946 to 48.4 million in 1950 or over 300%. Investments in real estate mortgages, placed either directly or through the purchase of mortgage bonds, represented an important part of investments, i.e. almost 30%. The insurance companies have acquired some importance as a source of 33 - investment capital, particularly for real estate and public expendituxes; investment in commerce and industry has also been of significant proportions. It is questionable, however, whether it would be sound policy for insurance companies to expand their industrial investment portfolio (of 25 million pesos) as long as it must necessarily consist of common stock, the value of which may fluctuate widely. The issuanQe of corporate bonds would of course offer an investment outlet not subject to this objection. 8, Public Securitie-s Having presented a brief description of the various financial insti- tutions end their operations we now proceed to a discussion of the public debt as represented by the issues of the national Government and Goverment entities, the departments, and the municipalities. A. Government Bonds In a study prepared by the Budget Office of the iinistry of F'inance, the internal debt of the Colombian Goverment outstandLng as of September 30, 1951, was reported at 392.5 million pesos. According to reports of the Treasury, the total internal debt amourited to 376.5 million pesos at the end of l951, but this figure does not include all of the items listed in the report Q: the Budget Office; tlhe difference in the total is also partly &ae to scme payments which were rnade between September and Dcember. The description and analysis of the goverment debt which follows have been based on the report of the Budget Office since the report contains more complete iniformation than that available for later dates. The Governnent debt consists of four types of obligations. By far the largest is made up of 56 bond issues mostly of long and m.edium maturities. Their total amounts to 310.2 million pesos. The list of all outstanding - 3h- issues together itith other pertinent information is shown in Appendix I. The second type of debt is represented by 23 different contractual obligations of the Government to banks, Govermnent institutions, departments, etc. I'Ace the publitc v.sues, these debts are regularly serviced by the Government, but their ownership is not transferable. The total amount of the contractual debts amounted to 70.3 million pesos. A list of the con- tractual debts is also shown in Appendix I. The tiird type consists of contractual obligations of the Government which technically have not been incorporated in the public debt and for which interest and amortization service have not been formalized. This Ofloating debt"' ineludes debts to various departments, to the national railroads, and, small amounts payable to the United States Government for war surplus pur- chases, and to the Magdalena Fruit Company in settlement for a railroad ren- tal arrangement. The, last two amounts are payable in United States dollars. At the end of September 195L, the total amount of the floating debt was 10.0 million pesos. As a fourth category,, the report of the Budget Office lists a "perpetual consolidated and irredeemable debt" of 2.1 rnillior pesos. This debt which is also called "nominal rent", is a debt in name only. The amo-unt outstanding is the basis of certain Goieirment contributions to educational, welfare and reli-ious instit,,tions, The Governraentts obligation to make these payments goes back to 1861; in later years it was modified several times. Actually, the interest payments on this "nominal debt" are annual Government grants to these institutions which presumably would be made even if the con- tractual obligation did not ezist. Therefore, the "nominal debt" is not discussed here. The f1cating debt is also not considered f-arther in this - 35 - report since it has only an indirect bearing on the public debt transactions of the Government. The most important issues of Government and Government-guaranteed bonds are the following: Table VIII Selected Bond Issues of Government and Government Institutions eptember 1951 Amount Interest Year of Year of (thousands of Issues Rate Issue Maturity pesos) Unification Bonds (Dinu) Series A 6% 1941/46 1971 31,534 National Economic Defense Bonds (Penal) Series A, B, C, D 6% 1943 1973 19,v748 Treasury Bonds 6% 1944 1974 22,244 " Series A and B 6% 1945 1975 31,595 o if C 6% 1946 1976 13,892 MPaicipal Development Bonds, Series F,, G, H, I 6% 1945/48 1965/68 16,815 Territorial Credit Institution Bonds 6% 1947 1977 12,581 Agricultural Credit Bonds, Series A, B, C, D 5% M47 1977 9,339 Territorial Credit Institution Bonds, Series D 5% 1950 1970 5,615 Unification Bonds (Dinu) Series B 4% 1941/46 1971 18A446 Salt Mine Bonds, Series A 4% lY42/5Q 1971 32,899 is B 3% 1942/50 19'71 34,018 Territorial Credit Institution Bonds, Series A 3% 1947/49 1967/69 18,472 tIrritorial Credit Instituti,on Bonds, Series B 3% 1947/49 1977/79 9,682 Total 276,880 The contractual debt includes several large amounts. The largest obligation is a debt which the Government incurred in connection with an Export-Import Bank loan to the Agricultural Credit Institution for the financ- ing of irrigation projects. Indirectly, it is thus a foreign debt. The amount outstaiding at the end of September 1951 was 17.4 n4llion pesos. Other large items are 4% Treasury notes of 6 million pesos, and payment - 36 - certificates of 10 million pesos issued in connection with the Inter-American Conference of 1948. These obligations are held by the Stabilization Fund, the Banco de la Republica, and by the Colombian Sa-vings Institution. Other obligations of this type are debts incurred in connection with capital sub- scriptions of the Government to power stations of tne Institute for Water Supply and Electric Development (7.1 million pesos) and capital contributions of the Govemrnent to the Agricultural Credit Institution (5-O million pesos). Interest rates of these obligations vary from 2% (for the capital subscription to the Caja Agraria) to 8% (on miortgage loans of railroads on which the Govern- ment assumed the debt service). The average interest rate is somewhat lower than on bonds, but the anual debt service is relatively higher since most of the obligations are of mediim maturities with large annual amortization pay- ments. The debt service amounted to 10.3 million pesos in 1951, or 14.4% of the total amount outstanding. The following table shcws a breakdown of the various bond issu.es by interest rates: Table IX Interest Rates and Interest Costs of Internal Debt Interest Amount % of Computed Interest Rate '2utstang Total Cost (Mllions of esos) ands eos) 6% 161.6 52.1 9.7 5% 27.8 9.0 1.14 4% 53.2 17.2 2.1 3% 614.2 20.7 1.9 No coupon 3.2 1.0 - M1atured or called 0,1 - Total 310.2 100.0 1.1 The average interest rate is 4.88%. The bulk of the low-interest issues, such as the 4% and 3% salt mine bonds of 1941, is entirely held by the Central Bank; the only substantial 'low-rate issues held outside official institutions are the previously mentioned 3% bonds of the Territorial Credit institution. Asile from these issues, the interest cost of bonds held by the general public and private institutions is considerably higher than the average* As to the maturities of the various issues, the following table indi- cates that the largest concentration occurs in t.he longest tems. Almost 90% of all issues become due after 1966. The present maturity ccnposition is largely fortuitous, however, since it is merely the result of the fact that in 1941 a large proportion of the then outstanding debt was refunded in the fom of two.30-year issues, and that in 1943 another 19.8 million of 30- year bonds wrere issued. Table X MIaturity Composition of Internal Debt % of Matu4ty Amounts Outstandin Total (Millions of esosJ To 5 years (1956) *5.9 1.9 10 (1961) '.90 2.9 15 (1966) 21.8 7.0 20 " (1971) 134.7 43^5 25 (1976) 87.5 28.2 More than 2$ years 51.2 16.5 Mllatured or called 0.1 Total 310.2 100.0 The maturity pcmposition and the relatively lom aver4ge interest rate stand in sharp contrast to the annual cost of servicing thie debt. In 1951, the service including amortization payment. as well as interest, amount- ed to 34.8 million pesos, indicating that amortization payments came to al- - 38 - most 20 million pesos, or more than 6% of the amount outstanding. The debt did not, however, contract by the same amount since new borrowings were made at the same time. The detailed data shown in Appendix I confinm the general im.pression that the present composition of the Government debt does not reflect any systematically formulated and enacted policy. There is, for instance, no connection between the interest rate level and the matuirity ccaposition. The longest maturitie4 include issues of 3, 4, 5, and 6%. In view of these deficiencies it is not surprising that the market for Government bonds is rather confused and poorly organized. The Bogota Stock Exchange lists only eight Goverment bond issues aside from the mortgage bonds of the Banco Hipotecario. The volume of transactions in these bonds, their average prices, and their yield during 1951 are shown in Table X:£ Table XI . ,,i Goverment Bond Transactions of the Bogota Stock Exchange 191L Volume of Average Yield to Issue Transactions Quotation Maturity (in lQOO pesos, M ncmial ue) National Economic Defense Bonds (D?nal) 6% 1943-73 2,767.4 97.21 6.25 Unification Bonds (Dinu) 4% 1941-71 977.1 94.92 4.40 Unification Bonds (Dinu) 6% 1941-71 524.8 91.17 6.85 Territorial Development Institute Series A 3% 1947/49-1967/69 l,i795.6 38.22 lo.65 Territorial Developuent Institute Series B 3% 1947/49-1977/79 1,028.5 38.33 9.20 Treasury Bonds 6% 1944-74 622.5 81.81 7.75 if 6% 194575 2,512.8 81.13 7.80 The table indicates that activity in the Government bond market is very limited; the market value of all transactions is less than 8 million pesos, compared -with 95 million for stock transactions. The wide spread in 39 the yield of the various issues is in part a reflection of the small number of transactions. But the main reason for this picture of disorganization is the fact that only a small proportion of the listed issues is privately held, and that the holdings of financial institutions and insurance capanies are compulsory. Occasionally, the compulsory portfolios have to be adjusted in accordance with legal requirements; depending on the direction of these ad- justments the market is thus either temporarily glutted, and prices decline, or unsatisfied demand drives the quotations up. The broadening of the market for Government securities outside finan- cial institutions and insurance companies has been impeded by the previously mentioned decree of 1947 which forced taxpayers to purchase certain amounts of 3% bonds of the Territorial Credit Institute,, which are now traded at approxi- mately 60% below par. The decree was repealed in 1949, but at the same time the purchase of stock of the Paz de Rio Steel Mill was made virtually cmpul- sory. A new decree pro-vided tIhat taxpayers could avoid payment of a 2;2 surtax on corporate and individual income if an equivalent araoant was used for the purchase of Paz de Rio stock and the taxpayer signed an affidavit re- nouncing his right to sell or transfer the stock until the company begins operations. The requirement that the Steel Mill stock must not be sold at present prevents a repetition of the experience which taxpayers had wvith the Territorial Credit bonds. But there is no question that the decree has un- favorable effects on the willingness of private investors to purchase and hold Government securities. The disorganized state and the narrowness of the market for Government securities is in part also due to the ineffectiveness of official interventions in the market. Although more than one-half of the total public debt is held - ho - by the Central Bank, the Stabilization Fund, the Govermnent-owned Caja de Ahorros, arid other public institutions, the purchases and sales of these institutions have not been able to stabilize the market and even less to attract private investors into it. The maintenanee of orderly conditions in the Goverment bond market is the task of the Stabilization Fund (Fondo de Establizacion) which was created in 1940 with a capital of 10 million pesos of which the Government contributed 9.6 milion, and the Banco de la Republica hOO,OO pesos. The Eund is operated as a separate entity under the direct supervision of the Central Bank. The resources of the Fund have been in- creased periodically through an allocation of 5% of the annual profits of the Banco de la Republica, through further deposits of the Goverment (16 million pesos at the end of June 1951), and ccnpulsory deposits of importers in connection with the issuance of import licences. These deposits amnounted to )43.5 million pesos in inid-1951 The Stabilization Fund has been charged with additional responsibilities such as the adninistration of enemy property, Besides, its resources ha!ve been used to finance, wholly or in part, specific projects of the Government and other public entities. As a consequence of these various operations, but primalily because of the rapid increase in Goverment borrowings, the resources of the Stabilization Fund have proved completely inadequate. According to infomation published by the Central Barnk, the Fund held on April 30, 1951, 39.l million pesos of Government bonds, 8.0 million department bonds. and 14.2 million municipal bonds. Almost 40% of the Goverrnment debt is held by the Banco de la Republica whose report for the fiscal year 1951 shcwed that it held 129.8 million pesos of Goverment bonds and other obligations, 4.2 million mortgage bonds of the Central Mortgage Bank, and one million of 'other" securities, or a total of - 41 - 135 million. This total includes the taxo entire issues of Salt Mine bonds, a large proportion of the Unification bond issues (Dinu), and 7.2 million of Paz de Rio Steel M',ill bonds. It appears exceedingly difficult to obtain comprehensive information about the amount of Govermnent obligations held by public and private finan- cial institutons other than the Central Bank and by non-institutional in- vestors. The following amounts were held during the last year at various dates by sone of these institutions: (1.illions of Pesos) Colombian Savings Institution (Caja de Ahorros) 52.1 Insurance companies 25.1 Commercial banks 11.2 Agricultural Credit Institution (Caja Agraria) 9.7 Central Mortgage Bank (1anco Hipotecario) 6.2 Industrial coxporations Total 110.2 These sums,together vrith the holdings of the Central Bank and the Stabili4zation Fund, account for over 80% of the total of 310 million pesos outstanding at the end of September 1951. B. Dep!rtment Bonds The debt of Colombian departmennts consisted of 40 issues of 13 separate departments with a total valpie at the end of June 1951 of 33.7 million pesos. Most of these issues bear interest at 7%; maturities range from one to sixteen years. - 42 - Table XII DeRartent Debt, June 30 1951 Department Amounts Outtanding % Rte Maturity (Thousands o$. esos) Antioquia 7,667.5 7 and 6 1954/67 Atlantico 490.6 7 1953/54 Bolivar 785.9 6 1955 Boyaca 2,459.1 7 1953/66 Caldas 6,018.0 7 1952/66 Cauca 517,J1 7 and 6 196h/66 - Cundinamxarca. 4,648.4 6 and 6i 1954/57 Huila 976.1 7 1964/65 Narino 106.2 7 1955 Santander 7,028.3 7 1959/68 Tolima 1,908.5 6 and 7 1953/64 Valle del Cauca 992.6 4 and 6 1956/61 Caqueta 83.8 7 1965 Total 33,682.1 Departnent debts have been steadily declining in recent years. Most of the issues outstanding were directly negotiated -with and purchased by the Colcmbian Savings Institution, the Contra], 1ortgage Bank, insurance compan.es, comercial banks and the Stabilization Fund. At the end of 1951, the Caja de Ahorros held 12.7 milLion pesos of 4spartnent- bonds. the Stabilization FUnd 8.0 million, and the Credito Hipotecario 3.2 million. Only six of the 40 various issues are listed on the Dogota Stock Exchange. There were no transactions in tQo of them during 1951, and the turnover in the remaining four vas neglUgible. Quotations for 7% bonds were between 73 and 75. Ct Municipal Bonds The municipal debt consisted of 44 separate issues of .2 municipali- ties in mid-1951 totaling 49.4 million pesos. Most of the issues are small. Only the obligations of the municipalities of Bogota, Medellin, Cali, and - 43 Manizales exceed one million pesos8. Table XIII Selected Municipal Bond Issues, 1951 Aunicipalities Thousands of Pesos Coupon Rate Maturity Armenia 155.0 4% 1961 Bogota 32, 571.O 6% 1954/78 Calarca 102.0 4% 1960 Cali 3,683.0 7% 1961 Cucuta 5620o 4 and 6% 1957/62 hIbague 127.0 4/% - Manizales lo379.Q 4 and 7% 1956/60 :i.edellin 10 280.0 6 and 7% 1954/66 Pereira 119.0 7% 1954 Popayan 216.0 6% 1956 Rio Negro 81.6 7% 1967 Sevilla 120.0 4% 1962 Total 149,395-0 Only one of these issues a 4Fro Urbel" 6% bond of the City of Bogota - is tracdd on the Stock Exchange. As in the case of department bonds, most of them are held by a small group of financial institutions and insurance companies. The Stabilization Fund holds 14.2 million petos of municipal bonds. -4 - III. Suggestions for Remedial Action 1. Introducti.Lon The recommendations which are outlined in some detail in the following pages propose various rays and means by which a stable and reliable capital market might be established in Colombia. It would, of course, be futile to expect that the iriplementation of one, or several, of these recom- mendations will eliminate at once all the obstacles which now stand in the way of the most productive utilization of the capital resources of the Col- ombian economy; the creation of a capital market is a slowr and gradual process wihich is bound to take mazr years. But I am certain that the measures which I suggest would be steps tQwards a gradual improvement of the presex;t unsatisfac- tory condition. If the continuous growth of production and economic irrelfare is to be attained on the basis of private initiative - a policy to which the Government has committed itself on nunerous occasions and .which was strongly endorsed in the Final Report of the Economic Levelopment Committee - the imple- rentation of the recommndations advanced in this report are essential to the balanced and stable growth of the Colombian economy. In the last tiz years, the Colombian authorities have succeeded in sternming the tide of inflation, and in eliminating a large part of the system of direct controls over the country's international transactions. An enviromuent has thus been created in Wvhich a more rational pattern of capital investment can be developed. It now seems possible, and eminently desirables to supplement these policy clhanges be measures des .ned to strengthen the institutional mechanism of business in- vestment and public credit operations, and to change those practices of private business and of the Government which still impede the free flowm of investible funds into the most desirable channels. 45 - 2. Financing of Private Investment As indicated in earlier sections of this report, commercial banks, savings institutions, and insurance companies have so far played only an insig- nificant role as sources of funds for medium- and long-term investment in private business enterprises, although legislation aiming at the utilization of funds of commercial banks for medium-tern loans wxas passed in 1950 and 1951. As a result of the unavailability of investrent funds from institutional sources, old and well-established manufacturing corporations have relied for additional -.apital primarily on their own earnings and on the issue of new stock, while the establishment of new enterprises has been impeded b-r a lack of loan or equity capital. Commercial banks have shown, with a great deal of justification, a preference for concentrating on short-term operations in the field of commercial transactions, w}hile savings institutions and insurance companies have invested their funds in real estate mortgages, and Governmient or Government-guaraxfed secu'.ities. The provisions of the two decrees hViXIJ were enacted upon recommendations of the Economio Development Comiittee, apparently did not make the field of mdiumternr invest.ment sufficiently at- tractive to coirmercial banks, particularly since they coincided laith the establishment of credit ceilings lor commercial banks, and because of the re- quirements, introduced at the sare tine, that importers had to make a deposit with the Stabilization Fund whenever they applied for import licenses. More- over.,the Colombian comircial banks lack experience in the field of nedium- and long-term loans for industrial enterprises since traditionally they have conQentrated on the financing of commercial transactions. There is a great deal to be said in favor of the practice of com- mercial banks of concentrating on short-term lending. This practice, permits flexibility of operation and facilitates the adjustment of bank credit to -4,.6 - business conditions. There is, on the other hand, an urgent need to Lrovide mnedituix and. long-term funds for new enterprises, particularly in the steadily developing manufacturing sector of the economry S:nce the bulk of private financial resources of the country is concentrated in the commercial 'balking system, commercial bank cred-it has been utilized in part to provide manu- facturing enterprises with permanent working capital. In form, this credit is largely short-term. But it seems quite clear that in marn instances these credits cannot be nollocted 1-ithout enckngerinv the operations of the borrowers and, indirectly, the interest of the londing institutions them- selves since the inventories and the equipment financed by t.hese credits cannot be readily l.quidated. Thus, commercial banks have been forced by developments in Colombia in the last few years to enter the field of investm;ent financing, so to speak, thro-uh the back door. It is undesirable that co:rimercial banks should expand this sort of operation and it is therefore essential that a sounder andcl more appropriate institutional basis for the financing of mnanufacturing enterprises be established. At the sanme time, efforts should be mdace to overcome the present tendencies - which are a consequence of the comnercial balnks' justified hesitancy to engage in medium- and long-term operati.ons - to restrict credit facilities to well-established enterprises thereby making it difficult, if not impossible, to establish newr busi-ness ventures, particularly in hitherto uns explored Lields. It is my considered opinion that the solution o2C this problem s.ould not be bought through direct intervention by the Government in the field of investnent financing of private enterprises, and even less tlhrouglh Government ownership of new mranufacturing establishments. bMr preference for private initlative in the financing of long-term investment should not be interprete'R as a reflection on the operations of the Tndustrial Development Institute since it is clear that the roerations of the Institute hiave contributed to the ex- tension of industrial activity into new fields which nreviously had not been exploited in Colombia. My reasons for proposing the establishment of a pri- vately. .owned and privately-managed institution to proviide financial support for industrial enterprises on a businesslike basis are twofold. Firstly, I feel that ta private financial institution would be more suitable than a Government agency in the Colombian economic environment wrhere the largest part oL the inidustrial sector of the economy is controlled by private capital and management. Secondly, I have come to the conclusi on that the failure of the Industrial Develovment Institute to interest private capital in partici- pating in its operations, through the sale of its shares or bonds, is a re- flection of the deep-teated negative attitude of private interests towards commercial, financial,or industrial activities of the Governmento Moreover, I believe that tlhle possibilities of industrial develcoment in Colombia offer a challenge and an opporti.nity to the private financial institutions of the country. 3. Ani Investment Finance Corooration I therefore recommend that the leading commercial banks, insurxnca companies and industrial interests take the initiative in the establishm3nt of a Finance Oorporation whose purpose it itould be to provide existing and newly created industrial enterprises with medium- and long-term futnds. The equity capital of the proposed instltution should be subscribed by comnmercial banks, insurance conrianies and private savings institutions, and to the extent pos- sible, stock should be sold to individual private investors and to industrial corporations. The amourt of equity capital which can be privately raised mnry be too small, howiever, to provide adeqcuate resources to the Finance Corpora- tion. In tlhat case, the resources of the Finance Coi.._ration might have to be -48 - augmented by funds to be obtained from the Government and from abroad. I suggest that the Government may' be able to use 20 to 25 million pesos of the increased cash deposits of the Treasury with the Central Bank, which, according to the latest information, exceed 140 million oesos, as a contribution to the resources of the Finance Corporation. The contribution ot the Government should take the form of a subscription of oreferred or non- voting stock, or the purchase of bonds, to be issued by the Finance Cor=oration. The stock subscription or bond pulrchase could be made directly by the Government, or by making the necessary funds available to the Banco de la Republica i4hich in turn would invest in the Finance Cornoration on a preferred stock or loan basis; or the Government might choose, in accordarnce with the law regulating the activPties of the Industrial Development Inistitate, to channel these funds through the Institute. If the latter method were alonted, the Government could complete its capital contribution to the Institute and make the remainder available to the Institute either as a loan or as an increase in its capital contribution, with the explicit stipulation that the funds be used by the Institute to make a loan or capital subseription to the Finwace Corporation* Whatever method of financing is chosen, however, it shouldc be clearly understood thlat the JPinance Corporation, conceived as a private instsitution and not as a mixed enterprise with managerment shared by the Government and the private participatino instit-utions, should not become subject to oolitical influence. In addition, it would be advisable to obtain foreign exchange re sources for the institution. Foreign capital might become available in the form of a loz. -Virtually all investment exoenditures for inOustrial purposes involve purchases of equinment and machinery from abroad. According to the Re- port of the Currie Mission, the foreign exchan-e cost of industrial invest- - 49 mont is close to 50% of total 1;1vestment. Although Colombia at present enjoys6 a satisfactory level of foreign exchange reservero, it would appear inadvisable to cover the foreign exchange cost of an increased level, of industrial invest- ment entirely from current foreign exchaige earnings or by drawing down reserves. Moreover, the availability of foreign funds would commensuretely raise the level of resources available to the proposed institution, and thus to the Colombian economy. In view of the large foreign exchange cost of industrial investiment, and of the desirability of' increasing its total volume, foreign capital of the order of magnitude of 20 to 25 million pesos w-xould apnear aipropriate. In view of the unfilled need for long-term investment capital for industrial enterprises wzhich has been estimated by the Eiconomic Development Committee at 25 to 30 million pesos anniually, I would estimate that the total re- sources of the Finance Corporation should initially be between 50 and 70 million pesos. With funds of this magnitude at its disposal, the proposed institution should be in a positiL,on to make uip the deficierLcy of fu-nds available for indus- trial investment. I do not anticiLate, however, that the Finance Corporation would im-mediately make use of all its resources, since it is desirable that its normal operations be joint ventures writh private capital. There are indications that at preseint a certain proportion of profitable investment Op ortulnities re- main unexploited because prosmective in:vestors do not possess sufficient fnds to carry out their investment plans, although some capital is available to them. Presumably, additional private financial resources would enter the field of in- dustrial investment, if the Finance Corooration were to provicde funds for the same purpose. One maay surmise that, on the average. loans from the Finance Cor- poration would be maatched by additional private capital so that annual lending operations of, say, 15 million pesos would bring forth additional industrial in- vestment of 30 million pesos. Thus, it may be concluded that the initial resol,rces of the Finance Cor-oration will suffice for a period of four or five yrears if L-A the mirlnimun level of indusurial development proposed by the Economic Develop- ment Committee is to be attained. In the co&rse of this initial period, the Finance Corporation should be able to gain experience in the field of investment financing,, and l.tuh it, the confidence of the Colombian private and institutional investors. II' its operations are successful, it is probable that the scope of i-ts activities will expand gradually. Initially, thlze Finance CorDor.tion wrould have to rely on its capital subscription and borrowings for nmaking loans and investments. It should attempt, however, to sell its security holdings to private investors as the opportunity arises, in order to replenish its supply of funds. The creation of a broader market for corporate securities presupposes, howTever, the introduction and observatioi of sound businese rractices by corporate enter- prises themselves. Specific suggestions on this Limportant subject are advanced in the next section of this report. The Finance Corporation should also be able to strengthen its capital structure by issuing its awn bonds t o private investors and b,, increasing its capital through further stock subscriptions, at a later date, from private sources. The success of the Finance Cornoration will c&enend primaril,r upon the selection of inanagerial persorunel who are fully familiar writh the Colorp1bi"an economr and experienced in the field of investment firnancing. SQince inr-'st-ment financincg is substantially different from the oper-at.i: G; of comnercial banks and those of savings institutions, insurance companies, and inclustrial corpor- ations, the stockholders slhould not atte2mp,t to interfere witlh the day-to-day operations of the Corporation but the board of directors should concent-rate on the formulation of its general lending policies and tn the supervision of its lending activities. Thne primary task of the marnagement will be to lend fin. ancial assistance to enterprises in those sectors which at present are not yet fully developed, and to provide resources for the expansion of the operations of business firms whose growth is impeded by lack of capital. Its aim should be to supplement thp activities of comnmercial banlcs and not to compete 7ith them. I want to emphasize, however, that in spite of the inherent risk of all investment financing, the operations of the Finance Corporation should be guided by sound business principles. In v-iew of the i.a Af old investment op- portunities wlhich the Colomtbian economy offers, I anticipate that the opera- tions of the Finance Corporationi will not onlly fill an important gap in the structure of Colo6i!n ba-g but also that they will yield a rate of profit coimiensurate with the normal rate of return in banking and industry. No attempt will be n.ade to outline in detail the organization of the Finaece Corporation. It should be emphasized, however, that great care will have to be taken to assure that the proposed institution will be suited tQ the requirements of the Colonbian econorr. I realize that some parts of a7 woposal may conflict -wfith exdsting laws, and that special legislation may be required to establish the proposed Corporation. During ny visit in: Col6mbia, I was informed about a preliminary proposal for the establishment of an instituLtion to .-,ake long- and mediun-term loans to industrial enterprises. The pronosal, which hlad been prepared by a special comrittee of the asso-iations of bank.ers, insuralnce companies, and industrialists, has, in Tr,r opinion, conasiderah,le merit and may serve as a basis for the implementation of my recomnl7.endations. The International BalLl for Reconstruction and Developmernt has assisted several member comtries in the establishmelnt of financial institutions of the type proposed here. Therefore, the Colombian authorities mi.ght well request the International Bank to make its experience available in the preparatory tork for the establishment of th'e Finance Corporation to assist in the selection of its mana_e.menetard to advise on organizational problems. R. lequirements ol Sound Corporate Finance Although private industrial corporations have growrn rapidly in number and importance in the last decade, the difficulties of raisine capital, part-icularly for new enterprises but also for "rseasoned" corpQrations, have not been ovrercome. In the last tvo years, they h-a-ve even become more pro- nounced, since profits are no longer large eniough to assure both high dividend payments and means for f-urther expansion. Eany corporations find themselves without sufficient working capital because large dividend pa,yments in Drevious years prevented them from accu}mulating adequate reserves; others which retained a le2ger part of earnings, are short of funds because they used their reserves for the purchase of equipment and large inventories. Th.is situation calls for remedial action in several respects. Since large dividend payments may result in a dissipation of corporate assets, a re- vision of the dividend, prolicies oL the leading corporations appears essential. A dowi-waard adjustment of dividend payments is, of course, looked upon with dis- favor by stockholders, particularly since their attention has cus, .JinIarily been focused on the level of dividend paynments rather than on the level and dis- position of earnings. However, under present conditions, the owners of corpor-- ate stock must realize that their oiTn interests will be served best by a gradual strengUtening o.f the financial structure of corporate enterprise thirouglh the retention of a larger part of profits. One of t,he reasons for the high level of dividend paymnents relalbive to corporate earnings has undoubtedly been the fact lthat di-vidend receipts are not subject to income taxation. On the other lhand, ta--free de-:2eciation allowances under e,sting tax legislation are relativ7ely modest and corporations have no special inducemrent to retain as reserves .more than a small proportion of the total of their earnings. I am reluctant to recoimend a change in tax legislation which would subject dividend receipts to taxation, since a tax on dividends would disrupt the principle of single taxation fimly established in Colombia. I would faVor, however, a reconsideration of the provisions of the Itax lawis regarding the level of depreciation allowvances. Tax legislation could provide an incentive for corporations (and non-incorporated business) to adopt sound financial practices, in the form of more generous depreciation allowances, contingent upon the use of the amounts correspolldill to the in- creased depreciation for the building-up of reserves, and not for dividend pay,ments. Although information Drovided by the To(-ota Stock Excharge indicates that the distribution of corporate stock is fairly wide, it clearly is in the interests of Colombian corporate enterprise and the rapid further industrial- ization of the country that inTvestment in corporate stock should be Lmade at- tractive to prospective new investors. In countries where the corporate form of enterprise is highly developed corporate lavs are designed to protect the interest of all shlareholders, irrespective of the size OL Their holdings. Among the devices used for the protection of shareholders are the audituing of corporate books by certilied public accountants and the publication of detailed financial stateliments and annlual reports. I suggest that the Colonibi-an author- ities irnvestigate to t..±hat extent corporate practices are in accord:' withll the spiit of e:d.sting laws and whether current legislation gives adequiate as-ur.ances of safety and fair treatment to thle shareholder. I,t remedial action by the corporations themselves may be even mnore important and effective than new legislation. Fair treatment of shareholders and good management.-shareholder relations coulld substantially contribute to a broadening of the ownership of corporat-ions. An improvement in financial and accounting pract,ices of corporations 5 .4 - and the modification of prevailing dividend policies also appear essential prerequisites for the soundness of the lending operations of the Finance Corporation. The granting of medium- and long-tenm loans by the Finance Corporation presupposes that the borrowing corporations pursue such financial practices as will assure the best possible utilization and safety of borro-red funds. A promising remedy for the prevailing dividend policies of industrial corporations vwould be the issue of- preferred stock or corporate bonds by corporations in need of capital for the expansion of their operations'i Al- though it is clear that the bulk of industrial capital -will continue to take the form of stock subscriptions, under the present circuLmstances reliance on issues of preferred stock and corporate bonds would effectively break the vicious circle created by the practice of maintaining high dividend payments in order to raise additional capital. In view- of the uncertaintyr with re- spect to the ability of many corporations to res=wn dividend payments at the level of earlier years, the situation may be opportune for placing preferred stock and corporate bond issues at reasonable interest rates. Perhaps the preferred stock and bond issues could be made more attractive by making them V.f1 conviertible into common stock at the option of the owner after an interval of three or five years. In order to aake corporate bonds competitive with stocks, it may bo advisable to make the interesi -rrY such securities likewise tax ex- empt, or to tax them at a lower rate. In that case, the tax liability of the borrowing corporation could be adjusted aocordingly. In view of the price stability which has prevailed for almost bto years in Colombia, and which it is hoped can be maintained by proper monetary and fiscal policies, it appears likely4 that savings institutions and insurance companies will be able to attract a larger volume of private savings than has been the case in the past. Tnhese institutions may find it to their advantage to invest some of their funds in bonds of this type. It should also be possi- ble to make use of the facilities of the proposed Finance Corporation to place preferred stocks and corporatUe bonds among institutional and private investors. 5. ReRinding of Public Debt Having advanced some specific observations and recormendations on the financing of private industrial investments I nva turn to the field of public debt operations. In view of the many deficiencies in the present eomposition of the public debt, in its ownership, and in the Government bond market, I believe that only a general overhauling of the entire public debt structure with the objective of rehabilitating the market for public securities can re- medy the situation. The administration of the public debt has become exceedingly cumber- some as a result of the multiplicity of issues which have been floated in the course of the last ten years, in many instances nithout regard to conflicts of yield, maturity, amortization provisions, etc. An incidental consequence of the complexity of the public debt picture is that even the Government finds it difficult to maintain complete records of the amounts outstanding. The Public Administration Mission which prepared a report on the reorganization of the execu- tive branch of the Government of Colombia, was informed that "it is impossible to establish a definite figure for outstanding debts in less than two months" and that the Debt Service Section "is dependent for some of its data on the Banco de la Republica". It is obvious that no single type of issue can satisfy the requirements of all investors, private and institutional. But in the interests of an im- proved and less expensive administration of the public debt, and in view of the desire to create an active market for public securities, it appears admisable to limit the number and types of issues. There is, at present, no general market for public securities in Colcm- bia. Aside from the large holdings of such securities by the Central Bankj the $tabilization Fund, and the various Government institutions, the bulk of all public bond issues is held by insurance companies and ccmmercial banks., largely on a compulsory basis. As indicated before, the legal requirement to purchase and hold certain types of publ)c securities has discouraged many investors from entering the bond market. At present, it appears impossible to repeal the law stipulating compulsory holdings. I believe, however, that serious consider- ation should be given to a partial repeal of existing legislation so that fin- ancial institutions and insurance companies will not have to increase their ccm- pulsory holdings passu vith an increase in their capital and reserves. The major ain of the refunding operation which I have in mind would be to replace these issues which insurance companies, savings and banking insti- tutions are at present forced to hold, by securities which these institutions are willing to acquire and hold, on a voluntary basis, so that the need for com- pulsory investment in public securities will gradually disappear. In order' to shape these issues to the specific needs of the various institutional investors, it appears desirable to propose at least t>hree different issues: one with a maturity of approxcimately 5 years; one of 8 to 12 years; and a long-term issue of 20 to 25 years9 I am not in a position to make definite proposals regarding the relative size of the three issues, but on the basis of the lata presented in the second section of this report it appears that the total amounts of the three issues should be between 100 and 125 million pesos. This amount is sufficient-p ly large to permit the conversion of all n-ational bonds held by the insurance comn- panies, the commercial banks, industrial corporations and the Stabilization Fund. On the basis of the bond rates presently prevailing in Colombia, I would recoimmend securities with a coupon rate of 6 to 621, the higher rate applying to the longest issue. To make the refunding issues more attractive than the bonds outstanding at present, I suggest sinking fund provisions along the followving lines. (i) The Government will retire each year 2% of the total amount of each issue in the following mmanner: (a) It will purchase up to one half of the required amnount of each issue in the open narket, provided the bonds are available at par plus accraed interest or less, (b) in addition, the number of bonds required to complete tlhe 2, a.mortization wvill be drawn by lot r.ith a premium of 15 to 25 points, plus accrued interest. (it) The Government will have the right to purc'hase bonds in excess o2 the stipulated sink1ing fund requirements, at par or below, plus accrued inter- est. Several questions must be resolved before any refunding operation can be undertaken, They -pertain to the maturities of the conversion issues, the amount of the premium on drawn bonds, and the purchase price of the bonds which are to be refuzded. I suggest that on all these questions the Govern- ment consult vith representatives of the large institutional bondholders, as soon as it has formulLated its tentative conversion plans. The selection of the issues wvhichl are to be refunded should be left largely to the institutional investors. Liise, the selection of th.e raturitLes of the new issues should take into accra.nt the preference of the various institutional investors, although the Government should aim at a mat-urity composti6n similar to the prevailing one. It should be noted in thlis co=nection that the proposed sink- ing fund and premium feature make longer mat,urities more attractive, than shorter ones since the chances of amortization at a premium increase with the length of the maturity. The exact amount of the premium should be decided on alter the proposed consultations. r am reluctant to make any specific recommendation as to the prices at which the issues made eligible for refunding will be accepted by the Govern- ment. In view of the large number of issues, outstanding and the wide diffLer- ernces in their yields this is a complicated and. delicate question the solution of which weill have to be sou,a,ht in the course of the proposed negotiations. I merely w-uish to suggest that the decisive factor for the setting up of the re- funding offers should not be the face value of the bonds in question but their market value since it appears likely that the present holders of bond-, part- icularly those of the Territorial Credit Institute which were issued at 3" rate, are not the original purchasers. iMioreover, the additional improvements in the organization of the Government bond markcet which I propose, ma,y be con- sidered at least a partial compensation for the capital loss which may be in- curred by some of the present ho'mders of low interest bonds0 In connection with the conversion. provision should also be made for the complete retiremnent of the 12 matured issues which are still listed in the Government's debt records. The final call of the outstanding bonds should be advertised and a time limit should be set for the submission of the obligations. Bonds w'hich are not tUrned in should be declared -void. The issues to which this reconmendation pertains are listed as "residual issues"? in Appendcix I. in order further to strengthen the acceptability, on a voluntary basis, of the new issues by institutional investors - and perhaps gradually also by private investors - I attaclh great, impportance to the possibility of disposing of a part of the present holdings of the stabilization 'und in con- nection with the conversion. T am of the opinion that because Qf the lack of a reasonably well-oraanized bond market, there is need for an inlstitution which would be responsible for the maintenance of orderly conditions in the public securities market. Elsewhere in this report (see Page 66) I offer so.me specific suggestions on the reorganization of the Stabilization Fund and its absorption by the Banco de la Republica. In this context I wish to empha- size, however, that it appears clearly in the interests of the Government and of the instiltutional owners of Oovernment securities that at all times suf- ficienlt f.unds be available if anyr official intervention in the npmarket is to be successful. In order to provide funds for this purpose without an expansion of the total money supply, T suggest that the possibility be explored that in the course of the proposed conversion insurance companies and savings banks, and other institutional investors which can forecast with reasonalle accuracy the flow of investible funds at their disposal, comnmit themselves to ;Jurchases in the fature until the Stabilization Fund is sufficiently liqluid to be consid- ered a genuine and firm safeguard against undue fluctuations in the bond market. The Government on the other hand shou- commit itself to a policy of refraining from the issue of new domestic securities over and above the volume of annual amortization payments, at least for a limited period, and -nith the exceDt.ion of certain other issues wlhich I suggest below. Such an undertaking by the s'overnment would be in line with the policy recommnendations advanced in the Final Report of the Economic Development Commrittee. The aim of the operation should be to refund the issues presently in the hands of the public, or held by the Stabilization Fund. Issues entirely or largely leld by the Banco de la Republica should not be refunded at present. Perhaps at a later date if and when the situation warrants it, a second con- version operation coluld. be undertaken twith the objective of mnaking the bond holdings of the Central Eank also more attractive Lor institutio±.al and :rivate investors. As a further measure designed to lay the foundations for a genuinely free market for public securities, I propose that the administratior of the public debt be transferred from the Debt Service Section of the Ministry of Finance to the Banco de la Republica, and that the Central Bank be appointed fiscal agent for a)). outstanding issues. As fiscai agent the Central Bank sho,u.ld have the righlt to use the general account of the Treasury for making cointractual interest and amortization payments on the public debt without prior authorization by the Governmenlt. The Central Dank should also adminis- ter all sinking funds in accordance with the provisions of the various bond issues. Although I realize that so Lar interest and amortization rpayments have been properly executed by the Government authorities, i attach consider- able psychological importance to this transfer of authority to the Banco de la Repu.lica since it lends emphasis to the concept that the contractual obliga- tions wvhich the GoverriJrnt undertakes in its debt operations represent a first lien on the funds of tihe Treasury.. doreover, I believe that such an arrange- ment will grc;atly simplify the administration of the public debt, particularly since almost half of the total amount outstanding is held by the Banco de la RepublicAi i self and by the Stabilization Fund which the Bank administers. 6. Short-Term Debt Certificates The refunding issues of Government securities wlhich I suggested in the precLdinL. pcaragrapl-s slhould. -o a long-wfy tonards improving the market for public securities, and should take care of the foreseeable requirements o0 savings institutions and insurance comDanies for 1icni-ter:n inirv¢stment outlets in Governrmi;ent securities. However, there are, in my opinion, other opportur- ities for broadening the market for Government and Government-guaranteed securities which should be given careful consideration by the Colointian authorities. Tlhe purpose o2 sxuch securities is to mobilize idle funds and to 61- attract capital of private investors illto the parket for- public securities. At present, the volume of short-term issues of public securities is rather limited. As shown in Table X, less than 5% of total outstandinlg securities mature witlin iive years. Assuming that the refunding issues hlich i proposed above will leave the rnatuiity composition of tihe outstanding issues more or less unchanged, I feel that there are reasonably good prospects for the Treasury to obtain funds on a short-term basis. At present, the Treasury can call on the Central Bank for short-term borrawings up to an amount of 8% of budget receipts. I do not propose that the right of the Treasury to engage iyn short-term borrowing operations be increased, but I believe that attempts should be made to x-ely more heavily upon funds available in commercial banks and in- dustrial corporations. For that purpose, L recomrnend that an issue of short-term certilicates of indebtedness with maturities of 3, 6, 9, and 12 months anC. with interest rates of 3 to 4% per annum be continually available for purch ase,. Thbe exper- ience of many countries shows that there always exists a float of temporarily idle furds held by commzercial banks as wArell as byr non-banking cornorations, partly because of seasonal fluctuations in the demand for bank loans and partly because of the necessity ol' accumulating funds for periodic disbursements such as tax or di-vidend payments. In view of the short-term nature of these certifi- cates, and the high liquidity wrhich they must have, the sales proceeds of the certi-ficates -ould constitute only a re-latively minor contribution to the volume of funds available to the Government "or current or capital expenditures. As a matter of sound fiscal practices, the sale of the certificates should not inlduce the CGovernment to expand its exnenditures, since the increase in the Treasuryts cash holdings is offset by an increase in short-term liabilities. Nevertheless, I believe that the issue oPr such certificates wvrould - 62- have several beneficial effects. In the first place, it would curtail tle amount of excess reserves which some of the cor.mercial bJk hold and whlch occasionally interfere with the efficient operation of mo)netary controls. Oviously., the lack of an outlet in whrl,ich cash hol6i-ngs could be invested provrides a strong incentive for connercial banks to expand loan operations as muci l.s possible; the availability of an interest-bearing, short-term paper would m,ake it less costly to withhold funds from unsound investments. Secondly, the debt certificates, together with nediuw-term bonds, would be most suitable ,or the transitional investment of reserves of in- dustrial corporations, As I pointed out before, many industrial corporations have failed to devote a sufficiently large part of their earnings to a strengtheinir., of their reserves and their .working capital. Undoubtedly, one of the reasons for the insufficient accumulation of reserves in licuid form has been the fact that no instruzment has been available in wiihich corporations cou'd invest their reserves. Short,term debt certificates would be ideally suited for the purposes of corporate enterprises as ,:ell as of large private business firms since such certificates would Derrilt the investmenl1 of idle funds Which must be accuimulated in arnticipation of dividend and tax nayments. A safe and at the same time liquid outlet for corporate funds would perhaps also have. a benieficial effect upon the -.idespread policy of converting cash into eXcessive inventories. Thirdly, the gradual introduction of short-term debt certificates into general use byr business enterprises might be expected to imiprove the regularity of tax collections. If the issues are timed in such a wfay as to let their maturities coincide v.ith tax pay-ment dates, business firms may be more ready to dischiarge their tax liabilities on time. The same effect could be achieved if the certificates .were made acceptable for tax payments at face value plus accrued interest in lieu of cash. The advantages which the Government would derive from the sale of short-term certificates are indirect only since because of the short-term nature of the certificates, the funds wvhich the Government o.)tains from their sale caniot be initially considered as an increase in funds available for an increase in expenditures. But insofar as the sale of certificates takes the place gf borrowing from the Cen1tral Banit the Government does not incur any addition4l interest cost, 7. Lottery Savings Bonds The popularity which the cedulas de Capitalizacion of the Central Mortgage Banlk and the various public lotteries enjoy leads me to believe that the issuance of small-denomination savings bonds of medium maturities with a reasonably attracti-ve lottery feature wiould mneet vith considerable success. Such an issue would to some extent compete wtrith the sale of cedulas of the kiortgage Bank. It appears probable, however, that more wiridespread publicity and some revision of the intereest, maturity anid lottery features ma-y attract a large number of new investors. Issues of this type have been surprisingly successful in manr countries, oarticularly in Latin America. 'Their success depends to a large extent, upon their suitab4'ity for the particular environment and their agpeal to small savers. I therefore make no specific reconmendations as to the exact wrake-up of such an issue; instead I give two examples of issues similar to those which have been successful in other countries. The examples should enable the Col.- ombian authorities to adopt a scheme best suited for the country. As one altarnative, I suggest an issue .of savings bonds in denomina- tions of 25,, 50, 100, 500 anid 1000 pesos with a maturity of three years and -64- compound interest accumulating at, a rate of approxixately 31% so that the' savings bonds co-ild be issued at 10, below their face 'value. The bonds should be redeemable on dermand at any time after an initial period of six months at the purchase price plus accrued interest w;rhich should be computed in rounded amrounts every three months. The periodic dravrin~;s for one or more special prizen could be combined with concentrated efforts to increase thle sale 0X bonds through bond drives. For the finacin,c , of the lottery prizes, an amount equivalent to the difference between the effective interest rate and 5% should be set aside. In order to induce the purchasers of such bonds to re- invest the proceeds at maturity, provision should be made either (a) to ex- change matured bonds 'or new ones at a higher rate of interest, perhaps some- what above 4Lpo so that after three years the new bond would be retired at 15% of the original face value; or (b) inducement to retain the bond could be offered by doubling thee cl-ance for a lottery prize in the second 3-year period; or (c) a combination of both a higher rate of initerest and of a better lottery chance could be osfered. The other alternative which I recomend is an issue in denominations from 25 to 1000 pesos with a maturity of 10 years and a purchase price of 60% of face value. These bonds likewise would be redeemable at any timLe six months from the date of issue. Interest schedule slould accrue every three months at rates which rise from 2% for the first year to 7.8.;k in the last year. The average rate of interest would be solnei-rhat h-r-her than 6, for bonds held to ri.aturity. To the extent to which the bonds would be redeel7ed before mat- urity, the interest cost to the Golrerrnent would be less than 6%. The lottery feature of this issue should consist of quarterly dravwings for prizes equival- ent to the tenfold purchase price of the bonds. An amount equivalent to .1% of the face value of tle total outstanding issue should be used to finance the drawrings. - 65- I realize that the a-rninistration of savings bonds with relatively complicated interest, maturitty', and lottery features would be auite expensive. I believe, however, that this cost would be outweighed by the advantages of such an. issue since it wrouldd attract funds which otherwise would not become available as savings. Their accumulation would therefore represent a net addition to the sum total of funds available for investment in Colombia. 8. A -4arket for Government Securities The ultimate aim of all nreceding recommendations is, of course, to transform the present system of legal compulsionto hold Government securities, and of the accumulation of Government obligations in the portfolios of the Central 3ank and of the Stabilization Fund, into a genuinely free market for Government securities which are held voluntarily by institutional and private investors. The various proposals to make investment in Government securities more attractive and remunerative should go a long wray towiards attaining this aim If the proposed refunding operation is undertaken, the necessity of coimelling financial institutions to invest exact proportions of their assets in soecific issues will graclually disap-pear. If the desires of the financial institutions, including the insurance companies, are taken into account in the prerar:ation of the refunding issues and if the Government abides by its commitment not to en- gage in borrowing operations in excess of amortization payments, I a.m ho-eful that the contulsory features of the ,present legislation can be replaced byr greater emphasis on liq uidity. Savings institutions, insurance comoanies and other financial inLstitutions which obtain their fun.s from private savers should be required to hold a large pronortion of their total assets in the form offixed- interest securities wrhich are readily marketable and thus assule the continuous - 66 - liquidity of the institutions in question. Within the limits of the legal requirements to invest their assets in securities of this general tyre, however, the institutions should be free to decide for themselves on the cormosition of their investment portfolios and to adjust the composition in accordance with their ow$,n contractual obliga- tions. An increase in the total holdings of prirvate financial institutions and insurance companies in fixed-interest securities may make it necessary for them to discontinue their current practice of investing a relatively large proportion of their funds in real estate and industrial shares. The curtailment of their operations in the field of i.austrial finanacing should not cause any shortage of funds, however, if the orovosed 'inance CorporaGion provides industrial erterprises with new funds and if thi financial requirements of in- dustrial corporations are met in part through the issuance of bonds instead of shares* It would be futile, however, to expect that a market for public se- curities will develop in the course of a few months or years, anfl as long as such a market is not developed financial institutions and. insurance companies are not assured of a sufficiently high degree of liquidity or marketability of their portfolios of Government securities. Therefore, it apoears essential that some intervention by public authorities in the Government bond market be continued. For t,hat purpose I recormeend that the Banco de la Republica take over the Stabilization Fund, after it has been divested of all ancillary func- tions. This course of actiori had been 'oreviously suggested by the Economic Development Committee and by the Public Administration "Itission. The latest report of the Manking Supnerintendent indicates that the management of the onerations of the hand in the public securities market is now it the hands of the 3anco de la Republica and that the foreign exchange activities of the Fnd haye lost their importance in view of the recent liberalization of foreign ^67 exchange transactions. The Fund continues, hcwever, the management of former enexrr properties and is thus engaged in industrial and agricultural activities. T strongly support the recommendation of the Banking Superintendent thnat these functionis be transferred to the Government administration itself. I do not believe that there exist any valid reasons for the con- tinuation of the Stabilization Fund as a separate legal entity. In most coun- tries, it has been recognized that the maintenance of orderly conditions in the mrket for Government securities is a function of monetary rnianagenient and as such should be exercised by the bank of issue which is charged with responsib- ility for monetary controls. Tlle rearrangement of t,he relations bet-,ween the Government and the Central Bank in connection with the renewval of the bank charter has eliminated to a large degree the danger that conflicts may arise between tlhe Government and the Central Bank. Therefore the task of intervening in the market for public securities should be left entirely to the discre-. tiorn of the Central Bank. I want to emphasize, however, that these interventions should not result in a further increase in holdings of Government securities by the Central Bank. Quite to the contrary, as indicated above, I antici½-ate that as a result of the various proposa:ls of this report the Bank wnill be able grad- ually to dispose of a portion of its investment portfolio. If the refunding issues are made sufficiently attractive, occasions for intervention in the public securities market should not arise too frequentlyr. If thJey do arise, I would expect the Central Lank to adopt a flexible policy ;rL-ich %ot& not dis- tort the m.ark.et situation as deteriLmined by the suppl-r and demand for Government securities. As an operationial device, I oll'l Lavor the keeping of separate accounts for the debt-management operations of the Banco de la Republica. Pro- fits derived from open market operations should be credited to the Stabilization Account which, in turn, wvould also be charged with losses arising out of these transactions. 68 APPENDIX I Composition of Internal Debt, Se-tember 1951 Annual Service Amount Outstand- Year of Year of Interest (Interest and ing September 30, Issue Maturity Rate Amortization) ( (in pesos) Remarks I. BONDS Unification Bonds (Dinm) Series A 1941/46 1971 6% 2,845,360 31w534,322 24.4 million of Dinn bonds (6% and 4%) held by Central Bank. Colombian Treasury Bonds 1944 1974 6% 1,810,000 22,244,400 iI It tt 1945 Series A 1945 1975 6% 1,450,000 18,255,200 t ,, it B 1945 1975 6% 1,088,000 13,339,700 " C 1946 1976 6%o 1,096,000 13,892,100 National Economic Defense Bonds (Denal) Series A 1943 1973 6% 1,888,000 49291,370 INational t' Series B 1943 1973 6% 1,888,000 4,768,180 4, P Ii It U 0 1943 1973 6% 1,888,000 4,849,740 It 11 II U t D 1943 1973 6% 1,888,000- 5,838,350 Municipal Development Bonds Series A 1941 1970 6% 218,760 2,459,600 " D 1944 1964 6% 20,80o 180,400 F 1945 1965 6 520,000 4,792,500 II II II C 1,946 1966 6% 348,000 3,359,100 t H 1947 1967 6% 228,000 2,316,000 " I 1948 1968 6% 611,600 6,347,500 Territorial Credit Bonds 1947 1977 6% 1,081,-111 12,580,605 Capital contrlbution of Governmenit. National Railroad Bonds Series. A 1942 1962 6% 174,800 1,338,800 Held by Central Bank. It II I II B 1944 1964 6% 261,600 2,292,900 " " " II 11 t0 1945 1965 6% 87,600 803,200 It I) I .I It " 1948 1948 1958 6% 1,348,000 3,698,466 it It H II Radio Communication Bonds 1946 1961 6% 154,400 1,139,600 Territorial Credit Bonds Series C 1942 1962 6% 92,000 750,000 Internal Debt Bonds 1945 1946 1961 6% 103,200 572,700 Agricultural Credit Bonds Series A 1947 1977 5% 163,700 2,318,000 r B 1947 1977 5% 163,700 2,329,200 it it " C 1947 1977 5% 163,700 2,340,300 t ! 1 D 1947 1977 5% 163,700 2,351,200 Road Pavement Bonds 1948 1963 5% 960,400 8,284,400 Held by Central 3ank. 69. Annual Service Amount Outstand- Year of Year of Interest (Interest and ing September 30, Issue Maturit Rate Amortization) 1921 (in nesos) - Remarks Territorial Credit Bonds Series D 1950 1970 5% 557,761 5,614,545 4.4 million held by Central Bank. UTJNRA Bonds 1946 1961 5% 394,800 2,983,900 Coffee Premium Bonds 1940 1940 1955 5% 450,$00 1,612,.000 Held by Central Bank. Salt Mine Bonds Series A 1942/50 1971 4% 2,577,254 32,899,100 "1 H J Unification Bonds (Dinu) Series B 1941/46 1971 4% 1,733,960 18,445,979 Agricultural Development Msgdalena 1942 1967 4% 97,200 1,097,500 Territorial Credlt Bonds 1944 1959 4% 89,941 605,550 Discounted by the Federacion iracional de Cafeteros. Municipal Development Bonds Series 3 1943 1953 4% 32,000 58,300 H H' ' C 1944 1954 4% 38,000 86,60o S E 1944 1954 4% 7,200 22,000 Salt Mine Bonds Series B 1942/50 1971 3% 2,434,171 34,017,500 Held by Central Bank. Territorial Credit Bonds Series A 1947/49 1977/79 3% 1,500,000 18,471,650 ; II I B 1947/49 1977/79 3% 600,ooo 9,682,350 Certificates and Subscription Certificates 1947/49 1977/79 3% - 1,155,158 Including 788 pesos of interest- free subscription certificates. Cartagena Bonds, Series A 1949/50 1952 3% 874,400 883,600 Veteran Bonds, II Issue 1947 1952 - 750,000 3,223,336 8% Internal Debt (Agricultural development)- 1917 C 4,762 Matured and called,, residual irssmes. Treasury Bonds of 1912 1912/16 - 6 i 7,275 I Foreign Bonds of 1904 1904 - 6% - 6,839 U 11 @ 0 It Coffee Premium Bonds 1932 - 6% - 100 H u t Treasury Bonds of 1918 1917 - 6%4 Patriotic Loan 1932 1947 4% - 25,069 3 1/2% Internal Debt 1934 1964 3 1/2% - 694 Treasury Certificates 1933 1933 - 3% 265 H Treasury Bonds 1922 - 14,175 H H H H H War Bonds of 1899 1903 - - 6,o45 t1 H ' H 1895 1896 - 509 " It Treasury Certificates 1905 1905 -3 - . tt Total 34,843,918 310,193,110 c, / -b 70 Annual Service Amount Outst and- Ysar of Year of Interest (Interest and ing September 30, IIOTHER CONTRACTAL OBLIGATION Issue Maturity Rate Amortization) 192a (in pesos) - Remaks. Mortgage Loans of Railroads 1937 and 1957 and 8% 61,656 837,485 1939 1959 Payment Certificates for Communications Palace 1948 1968 7% 372,114 3,697,948 Mortgage Loans of Municipality of Popayan 1935 and 1955 and 7% 25,291 85,855 11,567 pesos at 8%; debt assumed in 1939 1959 1941. Payment Certificates for Caja Agraria 1947/50 - 6% 232,512 17,413,750 Issued in connection with Ex-Im Bank Loan of 1947. Amortization schedule follows term of loan and depends in part on exchange rate, Payment Certificates for Docks of Buenaventura 1948 1953 6% 1,365,029 4,578,125 Debt service computed, not shown in source. Payment Certificates for Purchase of Shares of Bogota Power Company 1950 1953 6% 1,180,000 3,000,000 Payment Certificates for National Steel Mill Paz de Rio 1949/50 1951/52 6% 1,068,672 1,000,000 Debt service computed. Payment Certificates for Hydro-electric Works 1947 1952 6% 784,000 700,000 It Payment Certificates for Irrigation (Caia Agraria) See Remarks 6% 253,549 5-year bonds, issued at various dates sinca 1939; held by Caja Agraria. Payment Cartificates forv Irrigation (Banco de la Republica) 6% 150,000 5-year bonds, issued at various dates since 1939; held by Banco de la Republica. Payment Certificates for Inter-American Oonfer- ence. 1947 1957 5% 500,000 10,000,000 6 million held by Oaja de Ahorros, 4 million by Central Bank. Payment Certificates for Department of Caldas 1943 1951 5% ?29,540 44,908 Debt service computed. Payment Certificates of Institute of Water Supply and Electric Development 1950 1955 4% - 7,140,000 Payment Certificates of Treasury, 1949 1949 1956 4% 1,315,982 6,000,ooo Held by Stabilization Ftnd; debt service computed. - 71 Annual Service Amount Outstand- Year of Year of Interest (Interest and ing September 30, Issue Maturity Rate Amortization) 1951 (nese )- Remarks Payment Certificates for Societe Nacional de Ohemirs C e Per 1938 1958 4% 801,629 5,.023-,368 Payment Certifi.cates for Tropical Oil Company 1943/45 See remarks 4% 825,738 Debt service and maturities depend Payment Certificates for Avenida General 1946/48 on time and amount of purchases. Santander 1949 4% - 742,150 Payment in full to be made before Payment Certificates for Caja Colombiana de Ahorros 1943/44 1963/64 3% 268,863 2*767,803 Debt service computed; not shown in source. Payment Certiflcatez for Diocese of Antioquia 1941 1970 3% 25,000 371,937 II t National Navigation Companry 1949 1955 3% 59,0o0 250,000 Payment Certificates for Caja de Credito Agrario 1946/?7 1966/67 2% 811,167 5,025,000 Payment Certificates for Pension Fund of War Ministry 1950 195z - 6oo,ooo 4oo,ooo Payment Certificates for Department of Antioquia 1950/53 1951/54 570,000 - P,720,000 to be issued in 1950, 46o,ooo in 1952, and 250,000 in 1953; P.570,000 paid in 1951. Total 10,270,455 70,307,616 70 307.61