Afghanistan - Third Agricultural Credit Project

Report No. 1 490-AF FILE^" Appraisal of a Third Agricultural FIOPYu Credit Project Afghan istan May 12, 1977 Agricultural Credit and Agroindustries Division Projects Department Europe, Middle East and North Africal Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQJIVALENTS US$1 = Afgnan-s (Af) 50 1/ Al 1 U US$0.02 Af 1 million = S$20,00o US$1 = Canadian (Can) $1.057 Can $1 U US$0.946 WEIGHTS AND MEASURRE3 1 kilogram (kg) 2.20 pounds 1 kilogram 0.142 seer 1 seer - 7.07 kilograms 1 metric ton = ,000 kg 1 metric ton 0.98 long ton 1 metric (m) 1.09 yards 1 kilometer (km) 0.62 mile 1 hectare (ha) 2.47 acres 1 hectare 5 jeribs 1 jerib 0 0.2 hectare ABBREVIAT:IONS AFC Afghanl Fertilizer Company AgBank Agricultural Development Bank of Afghanistan AMSCO Agricultural Machines and Services Company DAB Da. Afghanistan Bank (Central Bank) FAO Food and Agriculture Organization (United Nations) UNDP United Nations Development Programme USAID Unitedi States Agency for International Development WAPM = Water and Power Ministry FISCAL YEAR March 21 - Mcrch 20 1/ This is the official export exchange rate. The fluctuating market rate is now close to US$1 = Af43. TIhe Central Bank is pursuing an intervention policy designed to eliminate the gap between these two rates.  FOR OFFICIAL USE ONLY APPRAISAL OF A THIRD AGRICULTURAL CREDIT PROJECT AFGHANISTAN TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .. . . ................. ........... . i-ii I. INTRODUCTION ........................................... 1 II. THE AGRICULTURAL SECTOR ...... ................ 2 A. Structure of Agriculture ..... ............ . 2 B. Organization and Supporting Services .............. . 2 C. Problems and Prospects ................. ............ 4 III. INSTITUTIONAL AND FINANCIAL ASPECTS .................... 5 A. Agricultural Development Bank of Afghanistan ....... 5 B. Performance Under Previous Projects ................. 7 C. AgBank Subsidiaries .......... .................... . 8 IV. THE PROJECT ...................... .............00.. 10 A. Objectives ......................................... 10 B. Description ................................................... 10 C. Cost Estimates ..................................................... 12 D. Financing ........ ............. ..................... 14 E. Procurement .................... .................... 15 F. Disbursement ................... .................... 16 G. Implementation Schedule .................. .......... 17 H. Environmental Impact ................... ....... 17 V. ORGANIZATION AND MANAGEMENT ..................... 17 A. Responsibilities for Implementation ........ ........ 17 B. On-Lending Policies and Terms ...................... 19 C. Accounts and Audit ..... ....... ................. 21 D. Monitoring and Evaluation ........... .. ............. 21 VI. BENEFITS AND JUSTIFICATION ............................ 21 A. Production, Markets and Prices ..... ...... 21 B. Financial Benefits ................................ 23 C. Economic Benefits ............... .. ................ 23 D. Risks ....................... ...................... 25 VII. RECOMMENDATIONS ....................................... 25 This document has a retricted distribution and may be used by recipients only in the performanco of their official duties. It contents may not otherwise be disclosed without World bank authorization.  TABLE OF CONTENTS (Continued) ANNEXES 1. The Agricultural Sector 2. Agricultural Production, Prices & Marketing 3. Agricultural Credit and The Agricultural Development Bank 4. AgBank Subsidiaries, and Farm Mechanization 5. The Project On-Lending Policies and Terms Projected Financial Results -- Models 6. Detailed Project Costs 7. Estimated Cumulative Quarterly Schedule of Disbursements 8. Economic Rate of Return Calculations MAPS IBRD 12720 IBRD 12719 IBRD 12718  APPRAISAL OF A THIRD AGRICULTURAL CREDIT PROJECT AFGHANISTAN SUMMARY AND CONCLUSIONS i. The agricultural sector is predominant in the Afghan economy, pro- viding about half of its GDP, employing two-thirds of the labor force and contributing 75-80% to exports. The physical resource base is poor, and there are various constraints to agricultural development, including an out- moded land tenure system and weak institutional structure. Overwhelmingly subsistence in nature, agriculture is heavily dependent on precipitation. The Republican Government established in 1973 has taken measures to stimulate progress, such as enactment of land reform, land tax and cooperative laws, and support to such institutions as the Agricultural Development Bank of Afghanistan (AgBank), which is the principal source of institutional credit to agriculture. ii. The proposed project, a continuation of the two agricultural credit projects financed by IDA, aims to develop agriculture by extending productive credit to large numbers of farmers, especially smallholders, and continuing the process of strengthening AgBank. It would increase agricultural produc- tivity and production, to support the Government's objectives of self- sufficiency in food and increases in export earnings. iii. The project would comprise eight components: (a) financing of farm mechanization, i.e. tractors and small farm equipment; (b) short-term lending for fertilizer and other inputs; (c) financing of investments by newly settled farmers; (d) working capital loans to organizations for marketing and produce processing; (e) credit for irrigation wells; (f) credit for a variety of investments for on-farm development; (g) financing of technical assistance to further strengthen AgBank's management, operations and financial systems; and (h) funds to AgBank for supporting services, including fellowships and purchase of vehicles. In addition, a fertilizer study would be undertaken by the Government under the project.  - ii - iv. The project cost is estimated at US$31.5 million (Af 1,574 million) of which 43% or US$13.5 million would be in foreign exchange. The proposed IDA credit would finance US$12 milLion or 38% of total project cost. The Canadian Government would co-finance the project with a Can$5 million (US$4.73 million) credit from its IDA administered funds. The cost would also be co- financed by USAID with a US$5 millLon grant. The Government would be the Borrower and bear the foreign exchange risk. These financing would be sup- plemented by AgBank's own resources US$6.1 million and sub-borrowers' contri- butions US$3.6 million equivalent. Retroactive financing is proposed for the purchase of tractors up to a total cost of US$600,000, ordered through interna- tional competitive bidding proceduires under the Second Agricultural Credit Project. v. AgBank would be the channel for all project funds, except for the fertilizer study. The Government would make a grant to AgBank of $1.1 million from the proceeds of the IDA and IDA administered credits, representing costs of technical assistance and supporting services; and on-lend to it about US$15.3 million equivalent from such proceeds for its financing program, at 4.5% interest for 15 years including 5 years' grace. AgBank would make subloans on suitable terms, of durations of up to 12 years, at 10% and 8% interest rates for short-term and medium- and long-term subloans, respectively. vi. Pumps for deep and shallow wells, tractors and mobile workshops would be procured by AgBank through its subsidiary supply company, AMSCO, under international competitive bidding procedures in accordance with IDA's guidelines on procurement. Procurement of items for on-farm development and land settlement, which are simple and would be in small lots, would be done by AgBank or sub-borrowers through existing commercial channels. Other machinery, equipment and vehicles would be procured by AgBank locally or abroad, following solicitation and receipt of quotations from at least three sources of supply in each case. The selection of consultants for technical assistance to AgBank and for the fertilizer study would be in accordance with IDA's guidelines for the selection and use of consultants. vii. The project would contribute to sizable increases in the output of the main agricultural products, and significantly improve the living standards of approximately 60,000 rural families of whom about 60% are expected to be in the target group. The total annual foreign exchange earnings or savings generated at full development would be US$45 million. An estimated 2.8 million man-days of additional employment (including additional family labor) would be directly generated by project activities. The financial rates of return on subproject investments, estimated on the basis of representative models, would range between 11% and 54%. The overall economic rate of return is estimated at 46.3% from total project investment including technical assistance. viii. The project is suitable for an IDA credit of US$12 million and an IDA administered credit of Can$5 million, on standard terms.  APPRAISAL OF A THIRD AGRICULTURAL CREDIT PROJECT AFGHANISTAN I. INTRODUCTION 1.01 The Government of the Republic of Afghanistan has requested the International Development Association (IDA) to assist in financing a third agricultural credit project, to be implemented principally by the Agricultural Development Bank of Afghanistan (AgBank). 1.02 The proposed project would be in continuation of two IDA financed agricultural credit projects previously undertaken by AgBank, and aims to develop agriculture by providing credit to farmers, cooperatives and other forms of organizations for mechanization, on-farm development, irrigation, fertilizer, marketing and produce processing. To strengthen the institution building process, technical assistance to AgBank would be continued. The project would also assist hitherto landless persons towards becoming produc- tive farmers. A study of the fertilizer program in Afghanistan, which has widespread financial, economic and social ramifications, would be financed under the project. 1.03 The total project cost is estimated at about US$31.5 million (Af 1,574 million) of which US$13.5 million would be in foreign exchange. The cost would be financed US$12 million by IDA, Can$5 million (US$4.7 million) by an IDA administered credit, and US$5 million by the US Agency for International Development (USAID). The balance of the project cost would be financed by AgBank's resources and sub-borrowers' contributions. 1.04 IDA has so far made the following credits for agricultural develop- ment in Afghanistan: The First Agricultural Credit Project, signed June 1970 (Credit 202-AF); The Khanabad Irrigation Project, signed June 1971 (Credit 248-AF) and a supplementary credit signed January 1976; The First Livestock Development Project, signed May 1973 (Credit 375-AF); The Second Agricultural Credit Project, signed April 1975 (Credit 539-AF); and The Second Livestock Development Project, signed June 1976 (Credit 649-AF). In addition, the Second Education Project, signed January 1977 (Credit 674-AF) provides assistance for agricultural education. 1.05 The project was prepared by AgBank. This report is based on the findings of an appraisal mission in October/November 1976 consisting of Messrs. Bose, Ashworth, Bhargava and Zulfiqar. Mr. Khorana provided analytical support in preparation of the report.  -2- II. THE AGRICIJLTURAL SECTOR (Annex 1) A. Structure of Agriculture 2.01 Afghanistan is a land-locked country with approximately 85% of the total land area of 63 million ha being unsuitable for cultivation. Agricul- ture accounts for half of GDP, supports the 80% of population in rural areas, and occupies an estimated 3.3 million persons or 67% of the active labor force. About 8 million ha of generally infertile soil are suitable for cultivation of which about 4 million ha are cultivated annually, and output is heavily dependent on fluctuations in the continental climate. Due to a shortage of water only about 2.4 million ha which produce about 75% of the total crop output are irrigated each year. Production and Trade Patterns 2.02 Agricultural export value increased by over 100% from 1971 to 1976, due almost equally to price and volume increases. Four consecutive years of about normal precipitation have resulted in record crop production. Wheat, which is the most important crop, occupying over 60% of the cultivated area and amounting to 64% of total production of all grains, increased by 39% to 2.9 million tons. Despite these production gains average yields at about 1.8 ton/ha for irrigated wheat and 1.5 tons/ha for cotton are low. Farm incomes are also low and on irrigated farms of 1.5-3 ha would seldom exceed about Af 5,000 (US$100) per capita; about a quarter of the rural population is esti- mated to be below the absolute poverty level of US$53 per capita. The average size of holdings is estimated at about 3.5 ha of cultivable land, with distri- bution of land ownership being highly skewed in most areas. Sharecropping is the dominant form of land operation. An ancient system of water rights con- tributes to inefficient water management and utilization. The Afghan farmer is independent and conservative and social customs in rural areas continue to be defined by strong tribal loyalties. B. Organization and Supporting Services Government Departments 2.03 The Ministry of Agriculture is the main administrator of agricul- tural development, but its performance in influencing agricultural development has been limited by a number of inter-related factors, including insufficient funds, unsatisfactory administrative framework and lack of trained staff. The Research Department within the Ministry has been of limited effectiveness and is given low priority. Agricultural extension is the responsibility of the Department of Extension which has a total staff of about 2600 (including nearly 140 college graduates) most lacking agricultural or vocational training. The extension service is inadequate to meet the wide and pressing needs of agriculture and its upgrading is a major need. In view of the severe shortage  - 3 - of vocationally trained people, an IDA financed education project has been launched recently which would train middle level personnel in agriculture. The recently constituted Water and Power Ministry (WAPM) offers the pos- sibility of more efficient utilization of the nation's scarce water resources, including the planning, design and implementation of irrigation projects. The Rural Development Department within the Prime Minister's Office is responsible for the implementation of minor irrigation projects. The Food Procurement Department of the Ministry of Finance has responsibility for carrying out the Government's wheat price stabilization policy. Since 1968 the Swedish Inter- national Development Authority has been financing a project on agricultural credit and cooperatives, executed by FAO. In 1973 this pilot project was changed to a nation wide cooperative program and a cooperative law was enacted in November 1974. The biggest weaknesses in the current cooperative structure are the absence of trained personnel and a lack of member understanding and participation. Marketing and Credit 2.04 The traditional bazaar combines the functions of both a wholesale and retail market. It operates with only limited Government interference, and at present generally meets the needs of the volume and pattern of agricultural production. Government fixes prices for certain commodities (cotton, sugar beet) which are marketed directly with the processing companies, and has indirect influence on commodity price levels through import and export policy, wheat purchases, and pricing of fertilizer and other inputs. Since 1973, Government's pricing policy has aimed mainly at keeping domestic food prices stable; imports and exports are made on both a free trade and barter basis and are handled by Government organizations and private traders mainly through the Ministry of Commerce (Annex 2). The majority of farmers rely on money- lenders for short term loans, for which they pay very high finance charges. Commercial banks provide limited short-term financing for processing and marketing, particularly for export. AgBank is virtually the only source of institutional credit for agriculture, but because of staff constraints and loan security requirements, credits made by it so far cover only 5% of farmers. Farm Inputs and Machinery 2.05 The use of inputs such as fertilizer and agro-chemicals is very low, although since the formation of the Afghan Fertilizer Company (1973), the use of fertilizer has doubled (Annex 4). The multiplication of improved seed (wheat and cotton) has been the responsibility of the Research Department, but will now be assumed by the Afghan Seed Company which is being assisted by an Asian Development Bank loan. The level of mechanization of farming is very low. AgBank has been the largest importer of tractors and related equipment and since 1975 has also been responsible for after-sales service. Tractors have proved to be a financially attractive investment, and the very limited data available indicates that they have displaced relatively small amounts of labor. Due to high demand for labor from neighboring oil producing countries, a rural labor shortage is developing in particular areas. This situation is further  - 4 - aggravating the prevalent critical seasonal labor shortages during peak demand periods such as harvesting of wheat and planting of second crops (June-July) and cotton harvesting in fall which coincides with wheat planting. In the circumstances, the process of farm mechanization is likely to grow and, over- all, would be economically justified. To help small holders, AgBank has begun to finance tractor purchases by cooperatives and import a wider range of small equipment and implements. C. Problems and Prospects 2.06 The most significant constraint to increasing agricultural production is the physical resource base including the rugged topography, severe climate, shortage of irrigation water and infertile soil. Further constraints include weak Government administration, ineffective agricultural extension, restricted access to institutional credit, and for livestock the competing needs of a subsistence society. At the farm level the prospects for increasing produc- tion are fair and will depend on how efficiently the skills of the farmer are mobilized. The Government puts a high priority on agricultural development, and the overall institutional framework is being steadily strengthened. Recent legislative measures include the cooperative law, a progressive land tax law and a land reform law. An ambitious Seven Year Plan has been launched to cover the period 1975-76 to 1982-83, with primary emphasis in agriculture on expan- sion of cash crop (sugar beet and cotton) production and food self-sufficiency. Increases in production are to be achieved largely by the adoption of more intensive techniques, particularly the use of fertilizer. The Plan seems to be based largely on optimistic assumptions about institutional development, policy changes and input usage, but is useful as a guide to Government priori- ties. Land Reform and Settlement 2.07 An important legislative act, the Land Reform Law, which lays down ceilings for agricultural land became effective in August 1976. Provision has been made for compensation to dispossessed landowners and land acquired would be used for the settlement of landless persons. A Land Reform Department with responsibility for implementing the Law has been established within the Minis- try of Finance. AgBank is given special duties under the law as repository of land ownership documents and the Government's agent for collections and payments, and is also required to cater to the credit needs of new settlers. The Government proposes to continue its settlement program on irrigated state land and over the next ten years hopes to settle between 200 and 300 thousand families. With responsibility spread among a number of Ministries and depart- ments, land reform and settlement lack firm direction and implementation procedures. Thus the Government's expectations are likely to prove over optimistic. However steps are now being taken to consolidate responsibility for implementation.  - 5 - III. INSTITUTIONAL AND FINANCIAL ASPECTS A. The ARricultural Development Bank of Afghanistan (Annex 3) Organization and Management 3.01 Following a chequered history from its establishment in 1954, the Agricultural Development Bank of Afghanistan (AgBank) was reorganized in 1969, and a revised charter adopted in 1970. Since then it has undergone a remarkable transformation from a poorly organised channel for disbursement of State budgetary funds to an operationally autonomous, professionally managed and revenue generating institution. It has grown considerably in size and become the premier financial institution for agriculture, with an effective and functional organization. 3.02 AgBank's charter was amended in October 1976, to conform to the requirements of the Law of Money and Banking of July 1975. It is now 100% Government owned and is generally under the supervision of the Da Afghanistan Bank (DAB), the central bank. AgBank's Board of Directors establishes policies and takes major decisions, while an Executive Board directs day-to-day opera- tions. Changes in management have been infrequent. A cadre of competent staff has been built up through selective recruitment and training. Operations are administered through four functionally structured departments, namely credit, finance, staff and administration. AgBank has 13 branches and 4 sub-branches. Recent rapid growth of operations has created a shortage of qualified staff at all levels, especially in management positions, the most prominent among these being the position of Vice President-Finance. Furthermore, the organization for short term lending, the largest element of its activities, is new and needs substantial strengthening, while AgBank's poorly staffed branches are not in a position to operate independently (Annex 3). Loan approval authority is thus centralized at the head office. Lending Operations and Policies 3.03 AgBank makes short, medium and long term loans for an expanding range of agricultural investments including farm mechanization, on-farm development, production inputs, livestock, agrobusiness and marketing. Its loan portfolio almost doubled over the past two years, to 76,000 loans out- standing for over Af 1.13 billion as of March 20, 1976. Short-term input loans predominate, constituting 96% and 64% by number and amount of loans outstanding, respectively, at that date. The average size of loans in FY75/76 was Af 14,800 (US$296) with the bulk of short-term loans averaging less than Af 10,000 (US$200), representing a continuing decline towards smaller loans to an increasing number of borrowers. The growth of lending operations and the directions they are taking are satisfactory.  - 6 - 3.04 AgBank has made good progress in developing suitable lending poli- cies and procedures. Appraisal and disbursement methods for medium and long- term loans are satisfactory, although field supervision is sporadic. Given the unfamiliarity with credit discipline in the country, AgBank has had to be conservative in securing loans, and requires mortgage of land or promissory notes guaranteed by land owners as security for medium and long-term loans. Such land related security requirements have restricted availability of credit since mortgage of land is complicated and costly. There is some expectation that, through implementation of the Land Reform Law, land ownership will be progressively regularized. To ease access to credit, AgBank introduced in 1974 the promissory note, whose legal effectiveness has not yet been tested. AgBank has commenced lending to cooperatives, with security related to their capital and callable resources. Under the two IDA-financed livestock projects, which provide close field supervision, security is based on community certified land ownership or guarantors of good financial standing. The effects of these relaxed requirements can be evaluated only over time. 3.05 AgBank's short-term lending for fertilizer and other inputs is a remarkably innovative program in terms of effectiveness of delivery. These 'loans are made with a minimum of formality, upon verification of applicants' repayment records and areas cultivated, and are secured by joint and several guarantees of groups of 5 to 10 farmers. (The inputs are supplied by AFC). However, AgBank carries no financial risks since the Government has guaranteed overdue collections, and also assists in loan collection. At present, there- fore, AgBank does little supervision of these loans, and has been able to handle this large and expanding program with a relatively small staff, mostly at sub-professional level, and thus at a low cost. Determination of fertilizer use is made on simple technical coefficients. The poorly organized Extension Service has provided meager technical assistance to farmers, but AFC has been partly filling this void through demonstrations at the village level. In future, AgBank intends to assume increasing responsibility for managing this important credit program, including liability for the credit risk. 3.06 AgBank's current interest rates are positive in real terms, being 8% on medium and long term loans and 10% on short term loans, with a 1% interest rebate to borrowing cooperatives. The interest rates adequately cover borrowing and operating costs including risks on medium and long term loans. However, profits would be eroded if AgBank had to make provisions for delayed or doubtful collections on short term loans, in lieu of the Government guarantee payments. The interest rate structure is appropriate, since borrowers usually obtain higher returns on short term loans, on which the default risks are also higher. Financial Structure and Position 3.07 The current status of loan collections is not entirely satisfactory, especially on short term loans. The loan recovery rate has been relatively low because institutional credit and borrower credit discipline are new in Afghanistan; borrowers of short term loans are large in numbers and scattered  in remote and extensive geographical areas; and local Government staff, on whom AgBank depends for short term loan collection, are cooperative but lack the necessary motivation or time. Recovery of medium and long term loans, which are subject to elaborate appraisal and some supervision, has been better than that of short term loans. Despite prevailing handicaps there has been a remarkable improvement in collection performance. As of March 1976, AgBank had recovered only 58% of aggregate repayments due on all loans made since its inception. As compared to this long range position, current recovery percent- ages 1/ increased between 1973/74 and 1975/76 as follows: 41% to 65% for short term loans, 77% to 81% for medium term loans and 44% to 78% for long term loans (details in Annex 3). AgBank and the Government continue their collection efforts for short term loans beyond due periods, and are succeeding in obtaining gradual repayments. For example, in respect of loans disbursed in 1972/73 the recovery percentage was 77% at the end of 1973/74, but improved to 98% by the end of 1975/76. The repayment cycle of loans shows a shortening trend. Overall, there has been all round improvement in the quality of AgBank's loan portfolio. The consistent improvement in loan recoveries is also indica- tive of a growing credit discipline among AgBank borrowers, and is commendable. 3.08 AgBank's financial structure and long term resource position, which included Af 733 million in capital and reserves as of March 20, 1976, are satisfactory. However, it has had periodic deficits in short term resources, due to relatively low current collection rates on fertilizer loans, the unpredictability and seasonality of such collections, and delays by the Government in reimbursing AgBank for loans in arrears in accordance with a guarantee arrangement. The payment by the Government in December 1976 of Af 200 million on this account has eased AgBank's current liquidity position, but future uncertainties remain. 3.09 AgBank's financial performance has been satisfactory. Increases in profits have been substantial over the years, but only marginal in the past two years because of relative increases in personnel and administrative expenses and a decline in income from supply operations. The level of reserves, which protect medium and long term loans, is adequate. B. Performance Under Previous ProJects 3.10 The 1969 reorganization (UNDP/SF project with IDA as Executing Agency) was supported by management services from an expatriate firm of consultants. Success has led to two successive three-year renewals, through August 1978. AgBank's two agricultural credit and two livestock projects, all financed by IDA, should be viewed as a continuum, having progressively contributed to its transformation from a very weak to an increasingly active and successful 1/ Recovery percentage = Amounts (principal) collected during year 100 - Amounts falling due for payment in year  - 8 - organization. This achievement is remarkable in the Afghan context, and demonstrated that expatriates can be successfully utilized in management positions of a Government-owned agricultural bank. Performance Under First Agricultural Credit Project (202-AF) 3.11 This US$5 million credit 'became effective in December 1970, and was completed in December 1975, one year after the original closing date. With minor qualifications, the Project was a success. It was to help AgBank develop a lending program for farm mechanization, irrigation and on-farm development; and to support AgBank's organization. As implemented, the number of loans made was 1,250 or only about one-third of the appraisal estimate, largely due to the failure of a minor irrigation scheme and over-estimate of loans for animal drawn implements. Although potentially sound in concept, the minor irrigation scheme suffered from fundamental errors in design and preparation. It proved to be premature in that farmers were very reluctant to use credit financing for community irrigation improvement, for which the Government was making grants or interest free loans in many parts of the country. Poor co- ordination between the concerned agencies was another constraining factor. Consequently, no similar scheme was included in the Second Agricultural Credit Project. In terms of the original goals, AgBank's financial and institutional performance under this Project was very satisfactory. An estimated 1,400 farmers supporting 13,500 persons, including about 6,000 in the "target group", benefited directly. The overall economic rate of return on Project investments is estimated at 46%. Returns from investments in tractors (the largest category), irrigation pumps and oxen are estimated to have been high. (A Project completion report was issued on November 5, 1976, and is under review by OED). Progress Under Second Agricultural Credit Project (539-AF) 3.12 The Second Project (effective July 1975) provided a US$13 million IDA credit, to finance a similar lending program without the minor irrigation component, but with the addition of an important new dimension viz. short term lending for fertilizer, and funds to AFC for construction of fertilizer ware- houses. Implementation has been faster than projected, and the Credit is expected to be fully disbursed by the end of 1977, a year ahead of schedule. The US$6.8 million allocated for the largest component, short term lending for fertilizer, has been fully disbursed and an additional allocation will be needed. Disbursement of the next largest category, farm mechanization, was initially delayed in procurement, but substantial deliveries have now been made and the remaining orders are being finalized. Progress of dis- bursement for the other categories has been satisfactory. C. AgBank Subsidiaries (Annex 4) The Afghan Fertilizer Company 3.13 The Afghan Fertilizer Company (AFC), established in 1973 as a subsi- diary of AgBank, is responsible for the procurement, storage and distribution  of fertilizer. It has expanded its activities rapidly, distributing 70,000 tonnes of fertilizer during the 1976 fall program, and has built up a satis- factory organization (including a wide distribution system) with the help of consultants financed by USAID. All urea is supplied from a local plant, while diammonium phosphate is imported. Most of the fertilizer has been imported under bilateral arrangements or procured in accordance with USAID guidelines. All other procurement conforms to Government regulations which require that quotations be obtained from at least three independent sources. These proce- dures have satisfactorily met IDA's requirement for the Second Agricultural Credit Project; they have not been changed since. Very little is known about the economics of the urea plant, built and operated with USSR assistance, and AFC is being billed on an ad hoc basis. Fertilizer prices to end users are determined by the Government and some of them have been subsidized. Thus AFC depends on the Government's financial support, which is usually not made available on time. AFC has an arrangement with AgBank for deferred payment for fertilizer supplied under the credit program. These factors render its financial position unstable. AFC has recently concluded an agreement for USAID to provide a three-member advisory team to assist with marketing, business and financial management. The Government has ambitious plans for accelerating fertilizer usage, but an overview of the organizational, eco- nomic and social implications of the program is lacking. Agricultural Machines and Services Company 3.14 In 1975 the Government decided that sales and servicing of tractors and other farm machinery shall be carried out by a national organization. Given the lack of expertise of state enterprises in these matters, IDA con- curred with the decision provided a professionally-oriented organization was established for this purpose and it received adequate external technical assistance. Accordingly, AgBank established a fully owned subsidiary, the Agricultural Machines & Services Company (AMSCO), with its supply department as nucleus. A draft charter for AMSCO, approved by IDA, is expected to be adopted by October 31, 1977. UNDP has financed a technical assistance project, with FAO as implementing agency, to provide AMSCO with 108 man-months of specialized services, including those of three full-time specialists in management, agricultural machinery and workshop instruction, of whom two have taken up their posts. One of the major suppliers of tractors has also been providing guidance on technical matters and training operatives. 3.15 The Government and AgBank are in the process of establishing the AMSCO organization, including selection of management staff. At this early stage however AMSCO is deficient in professional staff and lacks operational experience. Recently the cost of supply operations has been increasing and profits declining. These matters, including pricing policy, will receive the attention of AMSCO's management assisted by the FAO experts.  - 10 - IV. THE PROJECT A. Objectives 4.01 The proposed project would be a continuation of the agricultural development efforts undertaken in the First and Second Credit Projects, with certain new dimensions. Its basic objectives would be as follows: (i) Increases in agricultural production, productivity and farm incomes through supply of productive credit for investments and modern inputs, and improvements in the very low levels of farm technology and management. These would support the national objectives of f'ood self-sufficiency and increase in export earnings. (ii) While expanding productive credit to farmers generally, an increase in assistance to the "target group" farmers by institutional initiative and, in particular, by providing means to hitherto landless persons to become productive farmers. (iii) Continuation of institution-building by consolidation and further upgrading of AgBank's organization. (iv) Identification of the financial, economic and administrative implications of expanding fertilizer usage. B. Description 4.02 The proposed project would support AgBank's lending program over the three year period from October 1977 through September 1980. It would finance technical assistance to AgBank and a fertilizer study, and comprise seven other components as follows (details are given in Annex 5): (a) Farm mechanization. Financing would be provided for approxi- mately 610 twenty-five hp and forty-five hp tractors, with most of the larger tractors intended for farmer groups. In addition the project would finance about 85 tractors which are part of a lot of 300 tractors being procured through interna- tional competitive bidding under the Second Agricultural Credit Project, but for which insufficient funds are available under the Second Project. Retroactive financing for these expenditures upto an amount of US$600,000 is recommended to enable AgBank to take advantage of bulk purchase prices and maintain continuity in its lending program. A considerable number of small farm equipment and implements would also be financed.  - 11 - (b) Irrigation wells. This comprises pumping equipment for and drilling of up to 20 deep wells and about 480 pumps for shallow wells, all for the irrigation of groups of farms. (c) On-farm development. A wide range of activities would be financed, such as the establishment or improvement of vine- yards, orchards, poultry and crop cultivation, with invest- ments in land preparation, planting materials, oxen, farm buildings and minor equipment. Most loans are expected to be between Af 50,000 and Af 70,000 (US$1,000-1,400) for small and medium sized holdings. (d) Land settlement. As a pioneering venture by AgBank, finan- cing is envisaged of the investment and current input needs of settlers in Government settlement schemes in areas such as Helmand, Nangarhar and Parwan. Infrastructure, housing and initial living costs would be provided or arranged for by the Government. About 4,000 settlers would benefit from loans averaging Af 32,000 (US$640). (e) Fertilizer. This would be a continuation of the on-going lending program for fertilizer, improved seeds and other inputs. The project would finance incremental annual disburse- ments by AgBank. A large number of small holders with three to four ha of irrigated land are expected to benefit from loans averaging Af 10,000 (US$200). (f) Produce marketing and processing. Short term loans would be made to finance produce marketing by cooperatives to enhance members' bargaining power, and to processing firms or cooperatives for purchase of produce from small farmers at equitable prices. (g) AgBank supporting services. The project would finance staff field allowances, foreign fellowships, transport vehicles and mobile workshops for AMSCO. 4.03 Technical assistance. 1/ AgBank would receive technical assistance from a suitable firm of consultants providing three qualified experts and other services, selected on terms and conditions agreed with IDA, as follows: (i) Two experts specializing in management/banking and credit operations to assist in institutional improvement, to continue the process of strengthening of management and operations I/ The Government has indicated its intention to request UNDP funds for technical assistance. If such financing is approved, as is likely, the funds provided for technical assistance under this project would be reallocated to other components.  - 12 - (paras 5.08 and 5.09). The former would be in a management position with AgBank. (ii) One financial expert, and short term consultancies totalling about 12 man-months, to strengthen financial management. The three-man team would be employed for two years beyond the term of the present consultancy, i.e. from September 1978 to August 1980. The average cost of the consulting services is estimated at US$5,000 per man-month including contingencies. 4.04 Fertilizer study. The fertilizer program has evolved into a multi- faceted endeavor involving the Ministries of Agriculture and Planning, AFC, the Government owned urea plant and AgBank. Neither the large costs involved nor the consequent macro-benefits of the national program are known with any reliability, and lack of advance financial planning has rendered the Government and the institutions involved vulnerable to serious problems. The projected rapid expansion of the program under the Seven-Year Plan is likely to intensity the problems. To help in understanding the long term problems and taking remedial measures, a study would be undertaken by the Government, with the assistance of specialized consultants, under agreed terms of reference to include long term demand for and supply of fertilizer, suitable fertilizer usage, economics of local production, pricing policies including relationship to agricultural production pricing, economics of procurement, storage and distribution, resource needs and Government subsidies, the role and delivery of agricultural extension services, costs and risks of fertilizer credit, and a suitable framework for AgBank to assume increasing financial responsibility for fertilizer loans (Annex 5). The project would finance the costs of the study, including an estimated 48 man-months of consultants' services. C. Cost Estimates 4.05 Project cost estimates are based on recent AgBank experience, on June/September 1976 prices of the respective investment items with suitable price and physical contingencies, and on representative models of production units examined during appraisal (Annex 5). Total project cost is estimated at Af 1,574 million or US$31.5 million equivalent, of which 43% or Af 674 million (US$13.5 million) would be in foreign exchange. Detailed cost esti- mates are presented in Annex 6 and summarized below.  -13 - Project Cost - -----Af Million---- -US$ t- Fo Foreign Exchange Investment Item Local Foreign Total Local Foreign Total Component I. Farm Mechanization & Implements: a. Tractors 75.0 225.1 300.1 1,500 4,502 6,002 75 b. Small equipment & implements 10.3 30.9 41.2 206 618 824 75 II. Irrigation Wells: a. Shallow well pumps 34.9 48.1 83.0 698 962 1,660 58 b. Deep wells 10.7 20.0 30.1 214 40D 614 65 III. On-Farm Development 107.2 5.6 112.8 2,164 112 2,256 5 IV. Land Settlement 121.6 6.4 128.0 2,432 128 2,560 5 V. Short-Term Lending for fertilizer, seeds & qther inputa 308.7 205.8 514.5 6,174 4,116 10,290 40 VI. Short-Term Lending: a. To coops for marketing & processing 61.0 - 61.0 1,220 - 1,220 0 b. To firms for processing 72.0 - 72.0 1,440 - 1,440 C VII. Technical Assistance 4.9 11.3 16.2 98 226 324 70 VIII. Supporting Services: a. Field allowances 2.0 - 2.0 40 - 40 0 b. Fellowships - 1.9 1.9 - 38 38 100 c. Vehicles, office equipment and mobile workshops - 26.7 26.7 - 534 534 100 IX. Fertilizer Study 3.1 9.4 12.5 62 188 250 75 Base Cost 811.4 591.2 1,402.6 - 6$228 1_+.g7 21,2- 42 Contingency Allowances: a. Physical 1' 1.1 1.6 2.7 22 32 54 59 b. Price 2/ 87.6 80.8 168.4 1,752 1,616 3,368 48 Total Project Costs 900.1 673.6 1,573.7 18,002 13,472 31,474 43 1/ Only for elements of irrigation wells, at 5% each for drilling and pump house for deep wells and excavation for shallow wells. 2/ For calculation of price contingencies during 1977-81, the following annual inflation rates were applied: impWrted equipment 7.5%, local itens 5%,(the local rate of inflation) civil vorks for deep wells 0%, fertilizer 57 only for lQ7R/70 (Government controls price) and technical assistance 7.5%.  4.06 The financing plan for the project is sbown below; Sub- IASub.- TDA borrowe Aglank USATD A IDA t orrower AgBank U3AID AM n,, DA TotA Farm Mechanization; Tractors 71.2 17,8 - 75,5 191.7 356,2 1,424 356 _ 1,510 3,834 7,124 Small equlpment 9.1 3.6 - 10,7 27.3 50.7 182 72 _ 214 546 1,014 Irrigation Wells: Shallow well pumps 30.9 12.3 - 16,8 42,8 102.8 618 246 - 336 856 2,05 Deep wells 9.4 3.7 - 6,9 17.4 37,4 188 74 138 348 748 On-Farm Development 19.2 32.7 21.6 54,7 128,2 384 654 _ 432 1,094 2,564 Land Settlement - 43.7 . 28.8 73.1 145,6 - 874 - 576 1,462 2,912 Short-term Lending for fertilizer, seeds and pesticides - 159.7 250.0 34,5 87,8 532.0 - 3,944 5,000 690 1,756 10,640 Short-Term Lending: a. To cooperatives for marketing & processing - 20.8 - 13.7 34,7 69,2 - 416 - 274 694 1,384 b. To firms for processing 40.8 12.3 - 8,1 20.4 81.6 816 246 - 162 408 1,632 Technical Assistance - - - 5.7 14,3 20,0 - - - 114 286 400 Supporting Services - - . 10.0 25.0 35,0 - - - 200 500 700 Fertilizer Study - - _ Aa_2 a R - # i 300 Total 180.6 3C6.6 250.0 236,5 600.0 1671.7 _ 1 5,000 4,730 12,000 31,474 Percent of Total 11 20 16 15 38 10J  - 15 - 4.07 Subject to final authorization, the USAID would provide a grant of US$5 million towards financing of AgBank's short-term lending program for fertilizer and other inputs under the project, through agreements with the Government and IDA. Can$5 million (US$4.73 million equivalent) would be made available from the IDA administered funds of the Canadian Government, for pro rata financing with IDA of all project components. The proposed IDA credit of US$12 million would finance 38% of total project cost. The IDA and IDA administered credits would finance about US$11.47 million of the foreign exchange cost of the project (USAID would finance the remaining US$2 million), as well as an estimated US$5.26 million equivalent of local currency costs. The Government would be the Borrower, and bear the exchange risk. It would on-lend to AgBank about US$15.33 million, representing the proceeds of the IDA and IDA administered credits earmarked for financing of AgBank's lending program, at 4.5% interest repayable over 15 years, including five years' grace. The repayment terms are based on estimated terms of sub-borrowers' repayments to AgBank and its debt servicing capacity. The Government would also make a grant to AgBank of an amount of US$1.1 million from the IDA and IDA administered credits, representing the cost of technical assistance and supporting services, and would utilize the remaining US$0.3 million to carry out the fertilizer study. Assurances were obtained during negotiations on these terms and conditions, which would be suitably reflected in a subsid- iary agreement between the Government and AgBank. 4.08 AgBank would contribute from its own funds Af 307 million (US$6.1 million), representing 20% of the cost of investments financed under its lending program. Sub-borrowers would contribute a total of Af 181 million (US$3.6 million). In order to meet fully the resource needs for the fertilizer program, AgBank would obtain financing from time to time on suitable terms from the Government or banking sources. The maximum such financing required during the project period is estimated at Af 300 million. Assurances were obtained during negotiations on the above financing arrangements. E. Procurement 4.09 Tractors with accessories, pumps for deep and shallow wells and mobile workshops (total value US$10.2 million) (except for contracts below $150,000) would be procured by international competitive bidding in accordance with IDA's guidelines, bulked where appropriate. Consultants for AgBank (US$400,000) and for the fertilizer study (US$300,000) would be satisfactory to IDA and engaged on terms and conditions agreed with IDA. 4.10 Vehicles and equipment for AgBank and small farm equipment and imple- ments (total US$1,353,000), including those which may be manufactured locally (an estimated 10% by value for the latter), would be procured following solici- tation and receipt of quotations from at least three sources in each case. Procurement of items for on-farm development (US$2,564,000) and land settlement (US$2,912,000) would be through existing commercial channels, which provide an adequate choice of supplies at competitive prices for the relatively simple items involved. The above items would be procured in small lots over a long period of time, mostly for sales over a wide geographical area, and are thus not suitable for procurement through international competitive bidding.  - 16 - 4.11 Procurement under the project (except for consultants for the fer- tilizer study) would be the responsibility of AgBank, but it would delegate to AMSCO the administrative arrangements for procurement of machinery, equip- ment and supplies. In conjunction with such procurement, AgBank/AMSCO would assure satisfactory arrangements, by AMSCO or through the suppliers, for adequate after-sales service. F. I)isbursement 4.12 The proposed IDA and IDA administered credits would be disbursed over four years. An estimated disbursement schedule is given in Annex 7. Withdrawal of the proceeds of these two credits would be in accordance with the following percentages: (a) Tractors, their attachments and spares; other farm equipment; water pumps (US$7,782,000): 100% of foreign expenditures, or 100% of ex-factory costs, or 75% of local expenditures if imported but procured locally. (b) AgBanks sub-loans for on farm development (US$1,526,000) and land settlement (US$2,038,000): 70% of amounts disbursed by AgBank. (c) Short-term subloans for fertilizer and other inputs (US$2,446,000): in the first year of the project 23% of the incremental amount disbursed by AgBank over and above the total disbursed in the twelve months preceding the date of signing of the Credits, and thereafter 23% of the annual incremental disbursements. (The incremental,.disbursement in any one year is the difference between the total amount disbursed in that year and the total amount disbursed in the previous year). The corresponding incremental disbursements by USAID would be 47%. (d) Short-term loans for marketing and processing (US$1,538,000): 70% of subloans disbursement in the first year of project and 70% of the incremental subloans disbursement thereafter. (e) Consultancy services; field allowances; fellowships; vehicles and equipment for AgBank; mobile workshops; and fertilizer study (US$1,400,000): 100% of total expenditures. 4.13 Disbursement requests would be supported by full documentation except for items (b), (c) and (d) in the paragraph above, for which disburse- ments would be made against certificates of expenditure, the documentation for which would be retained by AgBank, and would be available for review by IDA during supervision missions. Savings in any category would be allocated to other categories.  - 17 - G. Implementation Schedule 4.14 Project implementation would commence when the proposed credit becomes effective, estimated in October 1977, in respect of project compo- nents which are parts of ongoing projects of AgBank. Financing of land set- tlement is expected to commence early in 1978. Key dates for implementation were agreed upon during negotiations. H. Environmental Impact 4.15 Through improvements in cultivation practices, increased irrigation, controlled use of fertilizer and chemicals, better land use and control of soil erosion, project investments and activities would generally contribute to improving the environment. V. ORGANIZATION AND MANAGEMENT A. Responsibilities for Implementation 5.01 The Government would be the Borrower, and would on-lend part of the IDA and IDA administered credit proceeds to AgBank, which would be primarily responsible for implementing the lending program under the project. As an established and professionally oriented organization, AgBank is in a position to carry out this project. However, rapid and complex developments envisaged in its future operations would necessitate some strengthening of its organiza- tion and further external support to it. The Government's and AgBank's agreement to the following organizational responsibilities were obtained during negotiations. 5.02 According to a protocol with AgBank signed February 1977, WAPM would be responsible for ground water testing, drilling of deep wells (bearing costs of unsuccessful drilling) and providing technical data to AgBank. If necessary AgBank would supplement the above with drilling arrangements with other agen- cies on terms acceptable to IDA. 5.03 For land settlement under the project, AgBank's role would be limited to making productive loans to settlers in selected areas which have the pre- requisites for development (para 5.12). The Government would be responsible for making adequate preparations for settlement and providing the necessary infrastructure, i.e. simple and low cost roads, feeder canals, housing struc- tures, schools, etc. suitable for the traditional rural areas which would be sufficient for the initial basic needs of settlers to enable them to undertake on-farm investments on a viable basis. The Government would undertake to arrange for related funding; the cost of housing construction, land plowing and levelling and canals associated with settlement investments under the project is estimated to be approximately Af 80 million (not included in the cost of the project, which is limited to credit facilities to settlers from  - 18 - AgBank). A part of the financing is likely to be provided through a World Food Program project. The Land Reform Law entrusts AgBank, as the only capable agricultural financing institution, with the task of providing credits to settlers. Selective participation in settlement financing as envisaged under the project would enable AgBank to embark on this venture on a sound footing. While AgBank would deal with the different agencies involved for various land settlement schemes, on policy matters it would be guided by a single Ministry to be designated by the Government. The agreement between Government and AgBank for land settlement financing would be suitably incor- porated in the subsidiary agreement (para 4.07). 5.04 Quite distinct from credit functions are AgBank's routine statutory administrative responsibilities under the Land Reform Law, for such tasks as maintenance of legal records and accounts, and collection of instalments from settlers and payments to former owners. In order that this routine work (which may become heavy) does not detract from its primary development financing role, the Government would compensate it for the administrative expenses involved and provide it with needed additional facilities. 5.05 The Government would provide AFC the necessary assistance to carry out fertilizer operations to be financed under the project. The fertilizer study would be the responsibility of the Government, which would be assigned to a suitably representative committee. It would be supported by specialized consultants. The terms of reference of the study (including a timetable) would be agreed with IDA by October 31, 1977, and the consultants appointed by April 30, 1978. The findings of the study would be reviewed with IDA, and mutually agreed measures suitably implemented. Strengthening of AgRBank 5.06 To consolidate its organization and current activities, AgBank has been in the process of filling key management vacancies. Further changes in organization and management comprise expansion, qualitative improvement of staff skills and some restructuring to accommodate new activities, and would include the following: (a) Assumption of greater administrative and financial respon- sibility for the fertilizer program, including augmentation of head office management and considerable upgrading of branch staff. (b) Special attention to financial management, which has suffered from lack of management personnel, slow progress in training and rapid build-up of financial transactions. (c) Greater delegation of responsibilities within head office and to branches. (d) New activities include financing of land settlement, coopera- tives and agricultural products processing. Designs, policies (especially collateral requirements) and procedures are also to be drawn up to enlarge the availability of credit to farmers. (e) Organizational and technical support to the fledgling AMSCO.  - 19 - AgBank has adopted a comprehensive program for strengthening its organization, incorporating plans for each of the above areas, which has been reviewed and agreed with IDA. This program would be implemented by September 1978 in accordance with an agreed schedule. The only unfilled major vacancy in AgBank is that for the position of Vice President Finance; AgBank is committed to making this appointment as early as practicable. 5.07 The agreed draft AMSCO Charter would be adopted by October 31, 1977. AgBank has been seconding some technical staff to AMSCO. In an endeavor to rapidly overcome AMSCO's present deficiencies, the Government (with AgBank assistance) would be responsible for providing AMSCO with qualified management and personnel; it would also have AMSCO prepare by March 1978 a satisfactory program for building up its organization and operations, and implement it in an agreed manner. Technical Assistance 5.08 To enable AgBank to successfully carry out its program of organiza- tional strengthening, while its operations are expanding and becoming more complex, technical assistance would be necessary in support of management, operations and finance. The major part of the project would be carried out through the end of 1980, which is an appropriate time span for this essential support. Agreement was obtained during negotiations to the following technical assistance arrangements. 5.09 Technical assistance would be provided as indicated (para 4.03) by a team of three qualified specialists engaged through a consulting firm, to ensure overall performance commitment and adequate coordination between the consultants performing closely related functions. The consultants' team leader, who would have a management/banking background, would be placed in a management position in AgBank; his terms of reference and that of the opera- tional adviser would be similar to those of the two corresponding consultants presently engaged by AgBank through the management consulting firm currently providing technical assistance. In regard to financial systems, AgBank's senior management will need considerable support; assistance is also required in development of management accounting systems and computer programs, internal audit, branch accounts and financial planning including treasury functions. These diverse functions would require inputs from a number of disciplines for varying periods, to be supplied through short term consultancies by the con- sulting firm which would provide the three consultants. B. On-Lending Policies and Terms 5.10 AgBank's policies and loan negotiations have been developed over the years in conjunction with the four IDA financed agricultural projects. These would continue to be followed, and would be reviewed from time to time with IDA. In particular, AgBank would endeavor to relax its security requirements for loans, in consultation with IDA, to enable a larger number  -. 20 - of farmers with holdings of 3 ha or less of irrigated land or equivalent to have access to credit. AgBank's on--lending policies and procedures would be as indicated in this section (details are given in Annex 5). 5.11 AgBank's lending decisions for medium and long term loans would continue to be supported by adequate technical and financial appraisals. For relatively new areas of activity, i.e. loans to groups or cooperatives for tractors or deep wells and marketing and processing loans, the content and methods of appraisal would be suitably expanded or refined. AgBank would also adopt lending terms for marketLng and processing loans satisfactory to IDA prior to making any subloans for these purposes. To enable IDA to assess the quality of appraisals and provide guidance at an early stage, AgBank would furnish for IDA's review appraisals of certain subloans in the above fields (Annex 5). 5.12 AgBank credit for land settlement would be only one link, albeit an important one, in a long chain of a development process. Therefore, consider- able preparation and a systematic alpproach would be essential. AgBank's lending terms for land settlement, including special security requirements, would be agreed with the Government and IDA prior to its making any loans for this purpose under the project. The procedure would be for AgBank to make an overall appraisal of each settlement area or scheme, taking into account suitability of land for cultivation, availability of minimum infrastructure and projected viability of typical farms; upon satisfactory technical, finan- cial and economic evaluation, subloans could be made in that area expeditiously with a minimum of formalities. Prior to withdrawals from the IDA/IDA adminis- tered credits in respect of any settlement areas, AgBank's appraisal report for that area would be submitted through the Government to IDA for review. 5.13 Short term subloans for fertilizer and other inputs would continue to be made as at present. Because of the special nature of the fertilizer program, the Government would continue to reimburse AgBank for defaults on repayments of such loans made up to the closing date of the IDA/IDA adminis- tered credits, and assist in loan collections. AgBank would initiate a general system of group loan supervision and generally strengthen its loan recovery procedures. In conjunction with the fertilizer study, the Government and AgBank would prepare proposals for making AgBank increasingly independent in future of the Government guarantee. 5.14 AgBank's current interest rates are appropriate (para 3.06), and would apply to project subloans, viz 10% on short term loans and 8% on medium and long term loans, with a 1% interest rebate to cooperatives as at present. For land settlement AgBank's finance would be in the form of composite medium or long term loans, at 8% interest. The above on-lending rates would result in a gross weighted average spread over cost of resources of about 5.5%, which is considered adequate to cover its increasing administrative expenses and risks on medium and long term loans; this will also enable AgBank to build up reserves so as to be better prepared to gradually assume risks on short term input loans in future. 5.15 The terms of individual subloans would vary according to project category (e.g. repayment periods would range from one to 12 years) and would be determined by financial evaluation of specific subprojects. Credit for  - 21 - land settlers would be in the form of "packaged" medium or long term loans incorporating the sub-borrowers' credit needs for on-farm investments, housing materials and inputs. Normal terms and conditions of subloans, derived from farm model analyses, are indicated in Annex 5. C. Accounts and Audit 5.16 AgBank's accounting system, adequate for its present needs, would be continuously upgraded with the assistance of consultants as indicated. AgBank's new Charter requires its accounts to be audited by a Board of Auditors appointed by the Supreme Council of DAB, which in turn can appoint authorized professional auditors for this purpose. AgBank's accounts are being audited by a firm of independent auditors acceptable to IDA, Khanna and Annandhanam. AgBank would maintain separate accounts for the project and for IDA/CIDA funds, including those on activities to be administered by AMSCO. AgBank is in the process of separating the accounts of AMSCO, and assisting it in establishing an adequate system. In future AgBank's accounts would continue to be audited, and AMSCO's accounts would be audited, by independent auditors acceptable to IDA, and the two sets of audited accounts and auditors' reports, in a form satisfactory to IDA, would be sent within four months of the end of the respective fiscal year. D. Monitoring and Evaluation 5.17 AgBank would be responsible for monitoring the project and evaluating project benefits. The present quarterly reporting system would be continued. An evaluation system satisfactory to IDA would be established for assessing the impact of the project on subborrowers in terms of project objectives, for which information would be collected and analyzed on crop yields, production and farm incomes. Suitable sampling methods would be adopted, covering target group farmers, tenants and sharecroppers. AgBank would present a proposal for such a monitoring and evaluation system to IDA by March 31, 1978, and there- after implement it on an agreed basis. VI. BENEFITS AND JUSTIFICATION A. Production, Markets and Prices Production 6.01 The project would result in a substantial increase in production of both foodgrains and cash crops, and contribute significantly to the production targets outlined in the Seven Year Plan. The following table shows the expected project generated incremental crop production at full development:  - 22 - Annual Production on Project Farms Crop Pre-Project Future (full development) Incremental Without Project With Project