Audit of industrial reactivation fund operations under USAID/Peru loan no. 527-F-093

Audit report covers the period 8/84-6/86 and is based on document review and interviews with personnel of USAID/P, the FRI, the Industrial Bank of Peru (IBP), and private intermediate credit institutions (PICI"s), and with sub-loan beneficiaries. Several problems have hindered program effectiveness. To date, only 36% of the loan disbursements have been channeled through PICI"s, and their participation is not expected to increase significantly during the remainder of the program. As a result, the IBP may benefit disproportionately from a program which targeted the private sector. Due to a failure to reassess its information needs, the FRI program office has required of loan applicants information of a volume and type that has discouraged medium-sized businesses from participating in the program. The program office also failed to establish a system for monitoring compliance with the special conditions set down to ensure that loans would be used for agreed-upon purposes. The Government of Peru (GOP) has not complied with a covenant requiring annual contributions to maintain the value of the FRI in dollars. As a result, depending on the method of calculation used, the FRI was short between $2.7 and $8 million as of 6/86. Other problems have included the IBP"s diversion, early on, of $5.1 million in project funds to cover its own operating expenses, and delays in releasing the second tranche of local currency to the project, due to negotiations over the applicable exchange rate. USAID/P has generally maintained close oversight over the program and has taken aggressive action to solve emerging problems. The Mission has required the IBP to repay the funds diverted at an exchange rate which maintained their value in dollars. To cope with the constant devaluation of local currency in the FRI, the Mission has secured tax-exempt status for interest earnings (allowing a greater portion of loan repayments to be re-lent) and has required the program office to charge the highest interest rates allowed by the Central Bank. It is recommended that USAID/P: (1) obtain a plan from the FRI to maximize the use of PICI"s and formally advise the FRI trustee committee that loan applications may be rejected only for reasons stated in the program"s formal criteria; (2) have the FRI prepare a simplified loan application form and establish both a system for monitoring compliance with special loan conditions and remedies for non-compliance; and (3) enforce the covenant regarding the GOP"s annual contribution to the FRI. (Author abstract, modified)