Ecuador - Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Repoit No. 7323 PROJECT CONPLETION REPORT ECUADOR AGRICULTURAL CREDIT PROiJECT (LOAN 1459-EC) June 28, 1988 LAC Regional Office Thi document has a redrkitd dutbwdon and my be used by rfcipents mly In the peifonnanc of their oEica duiek lt contebs my no otherwe be discosd wihout World Bank uthodbfton.  WEIGHTS AND MEASURES The metric system has been used throughout this report. ACRONYMS AU - Animal Unit CB - Cooperative Bank CENAPIA - National Center for the Promotion of Small and Artesan Industries BNF - National Development Bank IDB - Inter-American Development Bank INIAP - National Agricultural Research Institute MAG - Ministry of Agriculture PU - Project Executing Unit GOVERNMENT OF ECUADOR FISCAL YEAR January 1 - December 31  OR OFFCIAL USE ONLY THE WOULD SANK Washwngton. D.C. ZO433 U.S.A. Oke of Diect-GCwal q - ta1tw vaaeh June 28, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report - Ecuador Agricultural Credit Project (Loan 1459-EC) Attached, for inf3rmation, Is a copy of a report entitled "Project Completion Report - Ecuador Agricultural Credit Project (Loan 1459-EC)" prepared by the Latin America and the Caribbean Regional Office. No further evaluation of this project by the Operations Evaluation Department has been made. Yves Rovani by Ram K. Chopra Attachment This document ou Is itod dRtbutin and may be ud by ocpints o t pefomue of their offcial duties. Its cootents may not otherwse be discboed witbout Wotid Bak utbofitioo.  FOR Or., CIUL USE ONLY ECUADOR AGRICULTURAL CREDIT ]PROJECT - LOAN 1459-EC PROJECT COMPLETION REPORT Table of Contents Page No. PREFACE * ........................................................ i BASIC DATA SHEET ........................... ........** i EVALUATION SUMMARY ............... . iv I. INTRODUCTION ..................... 1 II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL ........... 2 Objectives and Description ................................ 2 Appraisal and Negotiations 2........................ 2 III. IMPLEMENTATION ooo ooooosooo ooo............... oooo......o**.** 3 Disbursements ............................................. 3 Reallocation of Funds 3................ .......... ........ 3 Project Cost and Financing ...................o.e.......o.. 3 Technical Support ...................................**....0 4 Sublending Terms and Conditions ........................... 5 Honitoring and Evaluation ........... *00*e@ ...........e.0 5 Compliance with Loan Conditions ........................... 5 Accounts, Audit and Reporting Requirements .........*....... 5 IV. PROJECT IMPACT .. ........ .......................................o 6 V. INSTITUTIONAL PERFORMANCE .....oo.o......*o o......o.o...*.. 6 Project Unit (PU) ............ 0000600000*0*00**00*00 0....*... 6 National Center for the Promotion of Small and Artisan Industry (CENAPIA) ................... 7 National Development Bank (BNF) ........................... 7 VI. BANK PERFORMANCE .............o*..**...oo.** oo***** o*** o** o** 7 VII. CONCLUSIONS AND LESSONS LEARNED . .. ............................. 8 IThis document hans a restricted distribution and inay be used by tecipientfs only in the petfotnnance | of their officialf duties. Itsi contents may not othei-wise be disckxsfed without World Bank authorization.  ANNEXES Annex 1 Schedule cff Disbursements Annex 2 Allocation of Bank Loan Annex 3 Project Costs/Financing 3a Project Costs by Activities 3b Agricultural Credit Annex 4 Key Lending Policies Annex 5 Comparison of Production Coefficients MAP - IBRD 18179  PROJECT COMPLETION REPORT ECUADOR AGRICULTURAL CREDIT PROJECT (Loan 1459-EC) PREFACE This is the Project Completion Report (PCR) for the Agricultural Credit I Project (Loan 1459-EC), carried out by the Project Executing Unit (PU) within the Ministry of Agriculture (MAG) in Ecuador. The loan was approved by the Board on June 14, 1977, for an amount of US$15.5 million, and was fully dlsbursed by October 20, 1985. The PCR was prepared by the Latin America and the Caribbean Regional Office, Agricultural Division C, after a completion mission to Ecuador in February 1986. The PCR is also based on a special report and data prepared by the Borrower, the Staff Appraisal Report (Report No. 1499-EC), the President's Report (Report No. P-2098-EC), the Loan Agreement dated November 3, 1977, supervision reports, and correspondence with the Borrower. Interual Bank memoranda on project issues were also reviewed. In accordance with the revised procedures for project performance reporting, this PCR was read by the Operations Evaluation Department (OED) but the project was not audited by OED staff. The draft PCR was sent to the Borrower for comments on February 25, 1988 and none were were received.  - ii - ECUADOR AGRICULTURAL CREDIT PROJECT - LOAN 1459-EC PROJECT COMPLETION REPORT BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as X of Estimate Estimated Actual Appraisal Estimate Project Costs (US$ million) 36.0 36.8 102 Total Subloan (US$ million) 24.8 28.0 112 Date of Board approval June 1977 6/14/77 Date of effectiveness December 1977 6/14/78 Closing Date 12/31/82 10/20/85 Economic Rate of Return 202 33X_ Financial Rate of Return 181 to' 26Z 302 to 352 Number of Direct Beneficiaries 2010 families 1551 families 77 CUMULATIVE DISBURSEMENTS FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 Appraisal Estimate (US$ '000) 750 3,250 7,750 12,250 14,750 15,550 0 0 0 Actual (US$ million) 1,900 4,800 5,300 7,400 9,200 11,954 15,500 Actual as a X of Estimate - - 25 39 40 48 59 77 100 Date fo Final Disbursement Principal repaid to (mo./day/yr.)(US$ million) STAFF INPUTS (staff weeks) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 Appraisal 75 Negotiation 4 Supervision 10.4 16.8 4.5 8.0 9.0 8.5 5.5 7.0 2.5 / Estimated on data available up to December 1986 at which time economic conditions for the v ector were better than during th- implementation period.  - iii - MISSION DATA No. of Man days Specializations Performance Type of Mission Date Persons in field Represented 1/ Rating 2/ Trend 3/ Problems (mo./yr) -r- Preparation Aug/76 - a/ Appraisal Octib6 5 Z5 c.ba,k,g Supervision 1 8/77 2 5 b,a 1 2 M 2 3/78 2 8 c,c 1 2 M 3 7/78 1 7 c 1 2 M 4 10/78 1 8 c 1 2 14 5 2/79 2 9 b,c 2 2 P 6 4/79 1 9 b 2 2 P 7 9179 2 5 b,c 2 1 MT - 8 7/80 1 16 c 2 1 MT 9 12/80 1 3 c 2 2 MT 10 7/81 2 1 c,g 3 2 FM 11 3/82 2 10 a,c 2 1 FMT - " 12 3/83 3 7 T b,c,g 3 1 FMT 13 9/83 1 4 c 2 1 FMT 14 1/84 1 9 c 2 1 FMT 15 2/85 1 14 c 2 1 FMT 16 10/85 1 5 c 3 2 FM Borrower Government of Ecuador Executing Agency Project Executing Unit Under MAG Fiscal Year January 1 - December 31 Name of Currency S/(Sucres) Currency Exchange Rate: Appraisal Year Average US$ 1.00 = S/ 25.0 Intervention Year Average US$ 1.00 - SI 57.0 Completion Year Average US$ 1.00 7 S/ 110.0 a/ Prepared by staff members from the previous PU and from Ministry of Agriculture and Livestock. I/ a=agriculturalist; b-agricultural economist; c-financial analyst; g-livestock specialist; k-agricultural credit adviser. 2/ 1-problem free or minor problems; 2-moderate problems; and 3-major problems. 5/ 1-improving; 2=stationary; and 3-deteriorating. 4/ F-financial; M-managerial; T-technical; P-political; and O=other.  - iv - PROJECT COMPLETION REPORT ECUADOR AGRICULTURAL CREDIT PROJECT (Loan 1459-SnC) EVALUATION SUMMARY Oblectives The Agricultural Credit Project (Loan 1459-EC) was designed to support the Government's objective to increase agricultural output through expansion into new areas and increased productivity, thereby improving economic and socisl conditions in rural areas and increasing rutral employment. To meet this objective, the Bank loaned US$15.5 million, mainly to provide financial support to public and private banks for lending oper ttions in livestock development, on-farm investments, small local agroindustries, and agricultural consulting services. In addition, the Bank loan supported -nlied research on agricultural production, and the institutional development of the Project Unit (PU), the Cooperative Bank and selected cooperatives (paras. 2.02-2.03). Implementation Experience The project was executed between 1978 and 1985, and was twice extended. Extensions were necessary due to disbursement delays caused mainly by the Government's inability to provide adequate counterpart funds on a timely basis. The problem of counterpart funds was the central issue affecting the execution of the project, followed by the poor level of management by the PU (para. 3.02). Despite these problems, the project objective to increase agricultural output was met. Subloans for livestock production (712 of project investments) had a positive impact and although productivity increases were smAll, there wa a significant increase in the area of improved pastures and the total number of herds. However, productivity increaser. were only marginal. Conversely, the impact on crop production was minor as the areas under production only increased marginally. Because of inadequate records, the project's incremental impact on farmer's incomes was not determined. Applied research under the project was particularly successful in pasture development for the Amazon Region. However, the project was unsuccessful in the area of institutional development. The PU did not utilize the majority of funds provided for its development, performed badly, and was eventually terminated. The Cooperative Bank and the selected cooperatives also failed to take up the component provided for their nstitutional strengthening (paras. 4.01-4.03).  -v v Sustainability The sustainability of the productive component of the project, large-scale farmers engaged in beef and dairy production, appears to be good as these types oZ farmers and their activities are viable. The institutional strengthening of the National Development Bank has enabled it to upgrade its accounting and record keeping to banking standards. The institutional .trangthening of the project unit and the Cooperative Bank did not take place. The development of crop agriculture for small-scale farmers is not sustainable. Findinzs and Lessons Several findings and lessons emerge from this project experiences (a) The PU consistently showed the project to be fully committed; however, the majority of the outstanding commitments h&d been financed from other sources of funds. The problems were aggravated by the deteriorating relationship between the Ministry of Agriculture, the National Development Bank, BNF, and the PU. At the end of December 1984, the project was 701 disbursed and was incorrectly shown as being fully committed (para. 3.02). (b) While credit to small farmers amounted to 251 of total agricultural credit, compated to 302 allocated at appraisal, the actual amount disbursed (US$3 million) surpassed the appraisal amount by 14X, as a result of reallocations from unutilizei agroindustries, technical assis.sance and unallocated funds for modium- and large-farmers. BNF was by far the most active agent in lending to small farmers. It delivered 791 of the total number of subloans representing 64Z of the total amount loaned (para. 3.06). (c) While at appraisal, it was expected that subborrowers would pay real positive interest rates, interest rates became highly negative from 1983 onwards. Due to local legal constraints, no provisions were made in the subloans legal documents for interest rate readjustments, causing the decapitalization of the loan portfolio (para. 3.11). (d) BNF's responsiveness to the bank's critictss of its internal control, accounting and auditing procedures helped to influence it to become a much improved credit institution (parsa. 5.04-5.05). (e) Becauee of its inadequate performance, the PU was terminated in mid-January 1985, and BNF was given the responsibility for completing the project (paras. 5.01-5.02). (f) Private financial institutions will lose their interest in a project if counterpart funds are not ensured for discounting (para. 7.02).  - vi - (g) Adequate financial management is a prime requirement for *11 credit-related projects (para. 7.02). (h) Institutions included for project participation should first have an understanding of the project and be committed to it (e*g., Cooperative Bank) (para. 7.02).  ECUADOR AGRICULTURAL CREDIT PROJECT - LOAN 1459-EC PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 In 1983, Ecuador's agricultural sector accounted for about 12% of GDP and 35% of export earni ngs compared to 33% of GDP and 90% of export earnings in 1970. While the decline in agriculture was due mainly to the discovery and export of petroleum, agriculture (except for livestock, forestry and shrimp production) grew slowly from 1970 to the mid-1980s, with no substantial increase shown in the average yields of major crops. The growth rate of real value-added for the major export crops during this period-bananas, coffee, and cocoa--was about 1.7% per annum, with other traditional crops growing at only 0.6% per annum, well below the population growth rate of 2.5%. However, the picture in the livestock subsector from 1974 to 1984 was better, as the area under pastures increased by 53%, with an annual average increase in meat of 3.5% and milk of 2.9%. At the same time, poultry, meat and egg production increased by over 20% per year, and pig production by over 5%. 1.02 Since 1984, the new Government has introduced a developmenL program more supportive of agriculture which is designed to (a) raise farm prices; (b) progressively eliminate consumer and producer subsidies; (c) achieve realistic exchange rates; (d) introduce variable positive and unified interest rates; (e) emphasize import substitution and export expansion; (f) strengthen agricultural support services; and (g) reduce Government intervention and generally improve the terms of trade for agriculture. 1.03 At end-December 1985, the total outstanding credit of the finencial sytitem to agriculture production amounted to about US$576 million, of which 882 was outstanding to the Government-owned National Development Bank (BNF); the remaining 12% was outstanding to the private banks, Including the Cooperative Bank (CB) and financial coorporations. Agricultural lending during the past ten years has increased by an average of about 7% per annum in real terms, with medium- and long-term credit accounting for about 35%. Much of the agricultural subloan portfolio made by the financial institutions are discounted by the Central Bank from special petroleum-generated and other funds, and Bank and Inter-American Development Bank (IDB) loans. The Bank, in supporting the Government's agricultural development program has so far financed through the Central Bank, three livestock development loans (a total of US$15.3 million) and the first agricultural credit loan (US$15.5 mil- lion). The projects supported b: these loans were managed by a Project Executing Unit (PU) within the Ministry of Agriculture (MAG). In addition to providing resources, the Bank has supported applied research and technical assistance, mainly related to pasture and livestock development. 1.04 The Monetary Board, which is set up by the Government, sets policies related to interest rates, exchange rates, credit, reserves and  deposits. The Central Bank implements, and the Superintendency of Banks monitors, controls and audits the Banking system. II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL 2.01 The project was prepared by the PU as a continuation of the Dsnk's assistance to livestock development, emphasizing lending to small producer", and diversifying by providing credit for crops and the development of agroindustries. The project was managed by the PU, with the National Center for the Promotion of Small and Artisan Industries (CENAPIA) having a secondary responsibility for agroindustries subprojects. While Project Completion Reports (PCRs) showed the previous projects as being successful in Improving productivity and output on participating ranches, they noted (a) the lack of a monitoring system and (b) the negative Impact arising from subsidized interest rates. Also, the latest PCR (Credit 222-EC) referred to inadequate accounting and auditing in the PU, and serious deficiencies in the accounts and internal control of BNF, the principal participating bank. Objectives and Description 2.02 The project was designed to support the Government's objective of increasing agricultural output by expansion into new areas and increased productivity, thereby Improving econom:.c and social conditions in rural areas and increasing rural employment. Specifically, the project was to (a) provide agricultural credit resources; (b, assist the development of farm enterprise management; (c) support applied research for farm and pasture development; and (d) provide technical assistance for the institutional development of the CB and selected cooperatives, the PU, CENAPIA, and participating MAG extension services. 2.03 The Bank loan of US$15.5 million was to finance the estimated foreign exchange cost (432) of the project. The remainder of the project was to be financed by Government counterpart funds (24%), participating banks (16X) and producers (17x). At least 30% of the agricultural funds were allocated to small producersl/. The credit resources were to finance livestock development, crop Tarms in selected areas, agroindustries, and agricultural consulting services. Appraisal and Negotiations 2.04 At appraisal, the mission noted the National Development Bank's (BNF's) poor financial position, poor internal control, the need for stronger and more qualified auditors, and its poor relationship with the PU. However, the Bank was assured that BNF was undergoing the required institutional reforms; as a result, it desired greater autonomy under the project. It was agreed that there would be a gradual delegation of authority for subloan approval away from the PU to BNF and the private financial institutions, provided the institutions' operations were satisfactory to the Bank. For interest rates, Ecuador's Monetary Board permitted a revision of rates substantially upwards; In 1979 inflation was 102, compared to interest rates of 112 to small producers and 142 to others. 1/ Small farmers were defined as those with net assets under US$20,000, excluding their housing.  -3 - III. IMPLEMENTATION 3.01 The loan was approved in June 1977, signed in November 1977, and became effective in June 1978. The delay was associated with the fulfillment of the conditions of effectiveness and bureaucratic hurdles in the Government. The estimated project completion date of end-June 1982 was extended twice, and completion was not until end-December 1984; the loan closed at the end of September 1985. Disbursements 3.02 The delay of over two years in loan disbursement was due mainly to the Government's inability to provide counterpart funds for discount through the Central Bank on a timely basis (Annex 1). As a result, the participating banks lost interest in the project. Also, when funds did become available, disbursements were slow, since the PU failed to advise the participating financial institutions and to monitor for the speedy processing of documents. For several periods, the PU showed the project to be fully committed, when the majority of the outstanding commitments had been financed from other sources and should have been cancelled. These problems were f.rther aggravated by the deteriorating relationship between MAG, BNF, and the PU. Also, the uncertainty of the status and future role of the PU demoralized its staff, which lost interest in the speedy completion of the project. As a result of the ineffectiveness of the PU, the new Government terminated it in mid-January 1985, and BNF was given the responsibility for the project's completion. At end-December 1984 the project had been 70% disbursed, and BNF reported that the loan was fully committed. However, because of the PU's lack of cooperation in the handing over of records and project documents to BNF, the Bank extended the normal disbursement period after project completion from six to nine months. Reallocation of Funds 3.03 There were two major reallocations: the first in November 1981 to transfer US$1.6 million from the non-performing agroindustries componenc to agricultural credit; and the second in December 1983 to transfer unallocated funds (US$2 million) and unutilized technical assistance funds (US$800,000) to agricultural credit. A final adjustment was made at the end of the project to reflect remaining over- and under-disbursements (Annex 2). Project Cost and Financing 3.04 The project cost of S/ 2,097 million (Annex 3) was more than twice that estimated at appraisal (S/ 900 million), mainly due to the devaluation of the sucres during the project period, The project was financed by the Bank (42%), Government counterpart funds (24%), participating banks (17%), and producers (17%). The Bank's funds were disbursed at an average of S/ 57 to US$1, compared to the appraisal estimate of S/ 25 to US$1. 3.05 As anticipated, the project was mainly a continuation of the previous livestock project, with 71% of investments going to livestock production, and 15% to crops (Annex 3a). The large number of crop loans (1,000) which was estimated at appraisal was replaced by fewer and larger loans (87). This change in composition was influenced by the higher delivery  - 4 - cost to smal2 farmers, and the lower than planned participation of the cooperatives. The agroindustries component declined significantly, and while the number of subloans increased, agroindustrial investments only amounted to 6% of total investments compared to 26% estimated at appraisal. This ceecline was mainly due to the poor performance of CENAPIA and the lack of counterpart funds to finance the larger investments required for agroindustries. 3.06 While credit to small farmers amounted to 25% of total credit, compared to 30% allocated at appraisal, the allocated amount at appraisal (US$2.6 million) was surpassed as a result of reallocations from agro- industries to medium and large farmers (para. 3.03). Also, as private financial institutions were much more concerned with lending to medium and large farmers, the small farmer component got off to a slow start. BNF was by far the most active financial institution in lending to the small farmers, delivering 79% of the total number of subloans, representing 64% of the total amount loaned. The majority of subloans were maae to the Sierra region (highlands). Annex 3b summarizes agricultural credit by beneficiaries, regions, and financial institutions. Technical Support 3.07 The technical support components of the project were only about 60% utilized (Annex 3a). Technical support had been provided for (a) applied research by the National Agriculrtral Research Institute (INIAP); (b) institutional development for the CB and about ten selected cooperatives; and (c) the institutional development of the PU. INIAP's reduced use of the funds allocated was due mainly to the lack of the Government's timely approval for the hiring of external consultants. However, INIAP carried out a good research program for the development of pastures and legumes, and crop rotation. Their main achievement related to the development of technology suitable to the fragile ecology of the Amazon region, which would improve the income of the established farmers and new settlers. Preliminary indications were that a mixed-farming system based on livestock production would be sustainable in the local environment and would provide a reasonable level of income. The CB and the cooperatives did not utilize the funds allocated, as they failed to provide a satisfactory program for institutional development and refused to carry out an evaluation of their operations, as was required. The CB thought that the funds were a grant, without any requirement for repayment. The PU utilized less than 20% of the funds allocated to them, and failed to engage short-term consultants for crop development, marketing services and agroindustrial support, and an internationally recruited financial advisor, as was required. At first, the Government failed to provide the necessary approval for these consultants; later, when approval was received, the PU claimed incorrectly that the advisor was no longer necessary, as the project was fully committed. 3.08 Because technical support funds were available, and there was the need for agricultural research and development in the poor province of Loja and in the Amazon region, the Bank agreea to provide financial support to the University of Loja and the Technical College of Chimborazo. Both programs were considered by the Bank to be project-oriented, well-designed, and aimed at developing a stable and productive land use system in these highly fragile areas. The program included the selection, establishment and persistence of tropical pastures and legumes.  -5- 3.09 While no funds were provided in the project for extension services, the Ministry of Agriculture (MAG) was required to provide extension support services to smallholder borroiers. However, Bank supervision missions noted that MAG's technical advice and assistance was frequently inadequate and did not meet the standards envisaged at appraisal. Sublending Terms and Conditions 3.10 Supervision missions noted that subloan evaluacion procedures were of good technical quality. However, the procedures for approval, disbursement, and Central Bank discounting were slow and cumbersome. Also, the transfer of subloan approval to the participating financial institutions was not carried out until the final year of the project. At end-1984, about 21% of loans falling due were in arrears to the financial institutions, equal to less than 2% of the outstanding balances. As outstarding subloans are automatically recuperated on due dates by the Central Bank, the outstanding balances are entirely the responsibility of the participating financial institutions. 3.11 At appraisal it was expected that subborrowers would pay positive interest rates. However, interest rates became negative in 1983 when inflation rose above normal levels (the 1984 inflation rate was 48%). No provision was made in the loan documents for the automatic adjustment of rates linked to inflation or any other indicator, and adjustments made by the Monetary Board were significantly below the inflation rates. Monitoring and Evaluation 3.12 As a requirement of the project, the PU developed a special department and system for the evaluation of its subprojects. However, with the termination of the PU at end-1984, the records of the department disappeared, leaving no information relating to the subprojects monitored. Compliance with Loan Conditions 3.13 Subloan conditions were generally net, except that the Government failed to provide on a timely basis the counterpart funds necessary for the project. In addition, under the technical support component, it failed to provide the necessary and timely approval to engage expatriate staff and consultants for INIAP and the PU. . Accounts, Audit and Reporting Requirements 3.14 Project financial accounts were maintained by the Central Bank and the PU, and were audited annually by the Superintendent of Banks. The audit reports (received up to end-1984) showed that the accounts were reasonably well maintained, and that the project funds were properly accounted for. However, the management accounting records maintained by the PU to monitor project implementation were fNequently inaccurate and lacked adequate guidance. The records show that management consistently failed to update the status of committed subloans or to adjust for the changes in the rates of exchange between the commitment dates and disbursement dates. Project reports were submitted to the Bank on a timely basis until mid-1984, after which their submission became irregular.  - 6 - IV. PROJECT IMPACT 4.01 The project's impact is based on an ex-post evaluation of a weak sample derived from 88 subprojects financed between 1979 and 1982. The sample showed that subloans financed had a positive Impact on production. In particular, the livestock subsector which accounted for 71% of the investments financed: (a) improved pastures rose from 37% to 50% of the total area; (b) the number of cattle rose dramatically (152% in the highlands, 128% in the Coast, and 268% in the Amazon); and (c) carrying capacity rose for beef operations in the coast from 1 A.U. up to 1.5 A.U. per hectare. However, productivity coefficients indicated that management and technical activities did not improve significantly. For example, mortality rates in beef operations rose from 5% to 8% and in dairy operations from 10% to 14%; milk production increases were modest, rising on a per hectare basis from 1,600 to 1,900 liters per ha. The conclusions, based on the above coefficients, are that the level of management was not good and that technical assistance and veterinary support services to subborrowers were inadequate. 4.02 While increased crop production for small farmers was a key objective of the project, the project had little impact in this activity. Under the project, annual crops only rose from 5.6% to 6.72 of the area financed, and perennial crops only rose from 3.52 to 4.1%. There were no records available to demonstrate comparative yields, but it was clear that crop production received only minor attention. 4.03 Because of the lack of project records, in particular comparative baseline data, it was impossible to determine the projects' incremental impact on farmers' incomes. However, a comparison of current farm modele of similar investment types show financial rates of return ranging from 30% to 37%, compared to the project's estimates of 192 for livestock operations and 26% for crops. Economic rates of return in current models range from 332 to 38%, compared to an average of 18% estimated at appraisal. V. INSTITUTIONAL PERFORMANCE Project Unit (PU) 5.01 While the PU sacisfactorily completed the previous Livestock Credit Project (Loan 222-EC), the Bank noted that its accounting arrangements required strengthening, and consequently provided in the project for the engagement of an expatriate financial/credit adviser. However, this adviser was not engaged because (a) Government approval was delayed for over two years; and (b) when approval was received, the PU submitted that the project was fully committed and the adviser no longer required. It was unfortunate that the adviser was not engaged, as the lack of adequate financial and administrative leadership was reflected in the poor performance of the PU. The PU was unable to efficiently deal with the problems arising from the lack of counterpart funds, e.g., its inability to (a) initiate strong intermediation with the Government and the Central Bank; (b) accelerate the movement of documentation for discount and subsequent Bank reimbursement; and (c) properly interpret and manage accounting and subloan information (para. 3.14). In addition, the PU suffered from its poor relationships with MAG and BNF.  -7- 5.02 In summary, the PU's management consisted mainly of livestock technicians, whose knowledge of proper administrative and management procedures were inadequate. In mid-January 1985 the Government terminated the PU and transferred to BNF the responsibility to complete the project. The PU actively opposed its own termination, and refused to cooperate in the handing over of some project records and information causing a delay in the final three months of disbursements. National Center for the Promotion of Small and Artisan Industry (CENAPIA) 5.03 While CENAPIA insisted on and obtained agreo-ent for 't to be in charge of managing the agroindustri-s component of the project, it performed poorly. During the project period, there were several changes in management and it suffered from budgetary restrictions. Its management of subloan records was poor, and it was not able to promote many subprojects (the majority of agroindustrial subprojects were promoted and managed by BNF). National Development Bank (BNF) 5.04 BNF is the main source of agricultural credit in Ecuador and under the project loaned 79% of the number of loans and 64% of the amount loaned. At the beginning of the project period, BNF had a poor institutional reputation, with poor account1ing practices and an inadequate system of internal control. With the assistance of an FAO/UNDP team of consultants, BNF underwent a substantial program of institutional development and is currently considered a reasonably good financial institution. However, it still suffers from some decapitalization, caused mainly by its lending in the past at negative fixed rates of interest. 5.05 BNF's management of the final stages of the project was efficient. The PCR prepared was of reasonably good quality, after taking into consideration the lack of cooperation from the PU and the unavailability of several documents (para. 5.02). VI. BANK PERFORMANCE 6.01 Bank supervision was adequate and timely. Throughout the life of the project, the Bank's attention to the lack of counterpart funds overshadowed all other problems. This problem was compounded by the inaccurate subloan records maintained by the PU, and its poor management of the project. During appraisal, the Bank was aware of the PU's poor management and provided for the recruitment for a financial adviser. Also, it noted the PU's poor relationship with BNF. It was unfortunate that the Bank did not insist strongly enough on the r:cruitment of the financial adviser during project implementation, and was unable to influence an improvement in the relationship between the PU and BNF, the most important participating institution in the project. 6.02 The Bank's initial concern on the effect of negative interest rates on the participating institutions was satisfied through the increase in rates at the beginning of the project. However, the Bank was unable to obtain a commitment for subsequent automatic adjustments during implementation to reflect the future significant increase in inflation.  -8- 6.03 BNF's responsiveness to the Bank's criticism of its internal control, accounting and audit procedures helped to influence it to become a much Improved credit institution. This improvement resulted in BNF's efficient execution of the final stages of the project, and its acceptance as the recipient of the second agricultural credit project to Ecuador, which is about to become effective. 6.04 The Bank contributed to the termination of the PU after having made many unsuccessful efforts to improve that institution's performance. However, supervision in general tended to focus heavily on increasing disbursements and ensuring the timely availability of counterpart fdnds. VII. CONCLUSIONS AND LESSONS LEARNED 7.01 While there are some areas of uncertainty, the main project objectives set at appraisal were met. The project mainly supported livestock, and while productivity only increased marginally, the area under production and the number of animals increased significantly. The thrust to deliver an increased number of small subloans for crop production was not achieved, mainly because of the failure to obtain a closer working relationship with the Cooperative Bank. While the technical support program deviated slightly from the original plan, the contributions to pastures development through INIAP, the University of Loja and the Technical College of Chimborazo were quite significant. The main constraints suffered by the project were: (a) the failure of the PU and CENAPIA to develop as strong institutions; and (b) the lack of a variable interest-rate system to reflect the changing levels of inflation. 7.02 Lessons learned were: (a) private financial institutions will lose their interest in those projects that are unreliable in meeting financial obligations (lack of counterpart funds for discounting); (b) adequate financial management is a prime requirement for all credit-related projects; and (c) institutions included for project participation should first have an understanding of the project and be committed to it (e.g., Cooperative Bank).  -9- OnMGIUIM UEP - WANN 1459-DC Actual al Acua as X of Be* Fiscal Yer ndm1-Ya IIS$ dtiuani- 1978 -750 1979 -3,250 1980 I~u~r31, 1979 2Do 5,250 4 June 30, 198 1,900 7,750 25 1981 I~m~r31, iwoD 4,200 10,250 41 Jim 30, 1981 4,800 12,250 39 1982 Deeber 31, 1981 5,100 13,750 37 Jime 30, 1982 5,300 14,750 36 1983 _r 31, 1982 7,100 15,750 46 ime 30, 1983 7,400 - 48 1984 e 31, 1983 8,000 52 ime 30, 1984 9,200 - 59 1985 1~o.uber 31, 1984 10,800 - 70 -Im 30, 1985 11,954 - 77 1986 teoui,er 31, 1985 15,500 - 100  -10 - hmx2 OM1E F(4W E - WMN 1459-IC AUocatlm of huk Im LU FNiL 1. 9ublWA for livetock an8 agrlsattwe a) for f 61anrs 2,600,000 17 2,958,999 19 b) for otb*r famis 6,100,000 39 10,386,841 67 2. Sbk for dl-agrdlrAntrie 3,100,000 20 1,310,242 9 3. &bosms for agriculuwal oomitirg servics 75,000 1 30,182 - 4. Iwchicg1 Asistance, Teanlrg and Appled 1earch 1,600,000 10 813,736 5 5. UbaLlocated 2,025,000 13 - - 15,500,000 100 15,500,000 130 _ _m  ECM aXFFIETlcN REUM - LON 1459-BC Project Ost.Flzuacig Bank QNeruoot Batcpaf3ItaL Produxezs Ptoject R ircin comterpGrt Buzlhs h zb btibuI oost a/ Snail fmamer 198.9 159.2 41.6 399.7 39.9 439.6 Other fare$s 596.7 306.5 287.1 1,190.3 297.6 1,487.9 795.6 V5. TZ.7 33i 7.5 1,927.5 Argi3dustries 55.5 33.3 22.2 111.0 22.2 133.2 Agriwulturawl Uultamt 2.4 1.4 0.9 4.7 0.9 5.6 2Bcmical Assistaix 31.1 - - 31.1 - 31.1 8W4.6 350. 351.8 -I736.8 3606 2,097.4 Fente ErtdptIo ktual 42 24 17 83 17 100 Apprassi EBtiute 43 24 16 83 17 100 a/ Ihe prject cost of w 2,C97 miion m w equl tD US$36.8 millioa, at the sege uibaW rate of (S/.57 to Ui$1) at tdih the lea mm disburse.  - 12 - ,kvA 31 EaL4Dh (XIK]G W RX - WM 1459-DC Pzuect Q3s !I Akt