Third Small Industries Project
 Report No: ; Type: Report/Evaluation Memorandum ; Country: Pakistan; Region: South Asia; Sector: Small Scale Enterprise; Major Sector:
                                                    Industry; ProjectID: P010279


The Pakistan Third Small Scale Industries Project, supported by Loan 2839-PAK for US$54 million, was
approved in FY87. The loan was closed on December 31, 1995, its original closing date, and US$32.5
million was canceled. The Implementation Completion Report (ICR) was prepared by the South Asia
Region. The Borrower's comments are included in an appendix. The loan was co-financed with a grant
of US$12.5 million equivalent from the Government of Netherlands, of which US$9.1 million was
unused.

The main objectives of the project were to increase lending to small-scale industries (SSI), strengthen
the financial institutions (FIs), develop strong export marketing services, improve the efficiency of
industrial units through technology upgrading, and improve the reliability of SSI statistics. The project
consisted of a line of credit and funds for technical assistance.

The project did not meet its objectives. Three of the five FIs were ineligible to participate for most of the
project period and a fourth was ineligible for two years. Sixty percent of the loan funds were canceled.
The funds for strengthening export houses were never used, and only about 30% of the grant funds
available for technology upgrading were used. Sub-loan repayment rates are very low (50-65%), and
term lending by commercial banks has now been suspended. There is no evidence that reliability of SSI
statistics has improved. Because of the low repayment rates and generally poor performance of the FIs,
and the grant nature of the technology upgrading fund, sustainability is unlikely. Institutional
development objectives were not met and should be considered negligible.

The I&P rates the project's outcome as marginally unsatisfactory, institutional development as partial,
sustainability as uncertain, and Bank performance as satisfactory. OED rates the project as
unsatisfactory, institutional development as negligible, sustainability as unlikely and Bank performance
as unsatisfactory. The Bank failed to supervise the project in a timely fashion, and during project
restructuring in 1993. made no effort to be consistent with the major reforms it was advocating in the
financial sector

This project offers important lessons. It illustrates the over-riding importance of adequate governance
and an appropriate prudential framework for FIs as well as the importance of timely and adequate Bank
supervision that should be consistent with on-going sector reforms. The ICR is of satisfactory quality. It
gives a frank account of the many difficulties encountered by the project. The differences in judgment
between the ICR and OED are due more to different weights on various factors than to inadequacies in
the presentation or analysis.

An audit is planned, in conjunction with three other lines of credit and a financial sector adjustment loan
to Pakistan.