Nicaragua - Preinvestment Fund Project

Document of The World Bank FOR OFmFCIAL USE ONLY Report No. 3338 PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) JANUARY 26, 1990 Trade, Finance and Industry Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  MA PRINCIPAL ABBREVIATIONS AND ACRONYMS USED FINAPRI - Financiera de Preinversion FIR - Fondo Internacional para la Reconstruccion de Nicaragua FNI - Fondo Nicarsguense de Inversiones IC - Investment Committee PCR - Project Completion Report CURRENCY EQUIVALENTS Name of Currency: Cordoba Exchange Rate: At Appraisal - US$1.00 = Cord. 10.00 Annual Averages: 1981 - US$1.00 - Cord. 10.05 1982 - US$1.00 = Cord. 11.70 1983 - US$1.00 = Cord. 13.20 1984 - US$1.00 = Cord. 16.52 FISCAL YEAR January 1 - December 31  FOR OFFCIAL USE ONLY THE WORLD BANk Washington. D C. 10433 U.S.A. OIie n0i Ovtecd w .mffi Opeatmm Iwvkatit"f January 26, 1990 MEtORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Nicaragua Financiera de Preinverzion (FINAPRI) Preiyestment Fund Project (Credit 1081-NI) Attached, for information, is a copy of a report entitled "Project Completion Report on Nicaragua - Financiera de Preinversion (FINAPRI) Pre- investment Fund Project (Credit 1081-NI)" prepared by the Latin America and Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Yves Rovani by Ram K. Chopra Attachment This document has a restricted distribution and may be used by recipients only in the perfomance be  FOR OMCLAL USE ONLY PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) TABLE OF CONTENTS Page No. PREFACE ..................................................... BaSIC DATA SHEET ........................ .................... EVALUATION SUMMARY ................................... v I. BACKGROUND ..................... 1 1.1 Bank and IDA Operations in Nicaragua ............... . 1 1.2 Economic Context ................................... . 1 II. PROJECT PREPARATION AND APPRAISAL ........................ 2 2.1 Project Origin ................. ; 2 2.2 Project Preparation and Appraisal ..... ............ 3 2.3 Negotiations, Presentation, and Effectiveness ....... 4 2.4 Major Covenants of the Credit and Project Agreements ......................... 4 III. PROJECT EXECUTION ........................................ 4 3.1 Actual and Forecast Data on Project Execution ....... 4 3.2 Project Cost and Timing ...... ....................... 5 3.3 Project Results ....................... 5 3.4 Allocation of the Credit and Timing of Disbursements . ................. . . . . ...................... 5 3.5 IDA-FINAPRI Relations ...... .............. . 6 3.6 Evolution of FINAPRI ................................ 6 3.7 International Credit Situation of Nicaragua ......... 6 IV. FINANCIAL PERFORMANCE .................................. . 6 4.1 Actual and Forecast Data on Financial Performance ... 6 V. PERFORMANCE OF THE BORROWER, FINAPRI AND IDA ............. 7 5.1 The Borrower .. ..................................... . 7 5.2 FINAPRI ............................................. 7 5.3 IDA ................................................. 7 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.  TABLE OF CONTENTS (cont'd.) Page No. VI. LESSONS TO BE LEARNED ................*.*.......* 8 6.1 Project Results ......... .... ... 9........... *...........* ....... 8 6.2 Lessons ....... *............0... ANNEXES 1.1: FINAPRI Organization and Operations .... .................. 9 1.2: Major Covenants of the Credit and Project Agreements ..... 12 2.1: Execution of the Project ................................. 13 2.2: Cost and Disbursements by Sub-Project ...... .............. 16 2.3: Actual and Forecast Disbursement by Category ... .......... 17 2.4: Actual and Forecast Timing of Disbursements .............. 18 3.1: Actual and Forecast Funds Staterent 1981-1984 ............ 19 4.1: Comments Received from the Borrower ...................... 21  PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) PREFACE 1. This is the Project Completion Report (PCR) for the Preinvestment Fund Project, which the International Development Association (IDA) sup- ported with Credit 1081-NI (SDR 3.9 million equivalent to US$5.0 million). As the borrower, the Government reloaned the proceeds of the credit under a SubsidiaL( Loan Agreement to the beneficiary, Finw'ciera de Preinversion (FINAPRI), a semi-autonomous Government agency link 1 to the Ministry of Planning and skilled in the contracting, selection and supervision of con- sultants. With the proceeds of the IDA credit and with additional equity contributions furnished by the Government, FINAPRI made sub-loans to sub- borrowers (public sector entities) to finance preinvestment studies on projects which were suitable for the reshaping of the economy as determined by the Ministry of Planning. 2. The Association approved the credit on December 16, 1980; and signing of the Credit and Project Agreements occurred two days later. The Credit Agreement became effective on March 18, 1981. The last disbursement was on November 29, 1984; and the closing date was June 30, 1985. 3. The Latin America and Caribbean Region prepared this report based on the contents of IDA files and information supplied by FINAPRI. 4. This PCR was read by the Operations Evaluation Department. The draft PCR was sent to the Borrower for comments, and they are attached to the Report (Annex 4.1).  - iii - PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) /a As of Nov. 30, 1989 Original Disbursed Cancelled Repaid Outstanding Credit 1081-NI 5.00 4.15 0.00 0.00 5.01 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (aSS Million) FY81 PY82 FY83 FY84 FY85 Appraisal Estimate 0.50 1.00 2.60 4.20 5.00 Actual 0.00 0.55 1.56 2.81 4.20 /a Actual as Z of Appraisal (1) - 552 602 67Z 842 Date of Final Disbursement: November 29, 1984 PROJECT DATES Original Actual Government Application - 03180 Appraisal - 04/80 Negotiations _ 11117/80 Board Approval - 12/16/80 Credit Agreement Date - 12/18/80 Effectiveness Date 03/18/81 03/18/81 Final Commitment Date 06/30/84 06/30/84 Closing Date 06/30/85 06/30/85 la This credit is demonimated in SDRs (SDR 3.9 million). Disbursed and outstanding totals differ from the original amounts of the credit in terms of USS because of changes in the US$/SDR exchange rates. The credit was fully disbursed.  - iv_ STAFF INPUTS (staff weeks) FY80 FY81 FY82 FY83 FY84 FY85 FY86 TOTAL Preappraisal 0.4 1.4 - 1.8 Appraisal - 11.2 - - - - - 11.2 Negotiations - 3.0 - - - - - 3.0 Supervision - 2.1 7.8 4.0 4.0 4.2 2.9 25." Total 0.4 17.7 7.8 4.0 4.0 4.2 2.9 41.0 MISSION DATA Type of Month/ No. of No. of Staff Date of Mission 'Year Weeks Peroons Weeks Report Identification 03/80 1 1 1 04/09/80 Preparation/ Appraisal 06/80 0.5 1 0.5 06/30/80 07/25/80 08/04/80 12/01/80 Supervision I 09/81 0.5 1 0.5 10/16/81 Supervision II 02/82 0.5 1 0.5 03/12/82 Supervision III 06/82 0.5 1 0.5 07/29/82 Supervision IV 04/84 0.5 1 0.5 06/22/84 Supervision V 08/84 0.5 1 0.5 10/26/84 OTHER PROJECT DATA Borrowers Government of Nicaragua Executing Agency: FINAPRI Follow-on Project: None  PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) EVALUATION SUMMARY 1. In post-revolutionary Nicaragua civil strife had resulted not only in destruction of urban infrastructure and productive facilities, but in a massive flight of capital ard trained personnel. The parastatal sector found itself in the greatest difficulties, since many of the enterprises which it had taken over had ceased to function, or if functioning, were financially insolvent. The Preinvestment Fund Project (Credit 1081-NI) was conceived as a means of assisting the revolutionary Government of Nicaragua to establish a sound basis for new project identification and preparation. 2. FINAPRI, the executing agency for the project, utilized IDA fi.ads to finance 23 consultants pre-feasibility and feasibility studies covering a broad spectrum of potential investment activity in energy, transport, agriculture, forestry, mining, commerce, industry and tourism. The project was L :cessfully completed within the time frame envisaged at appraisal, and the Government met all of its obligations under the project, except for a financial covenant requiring payment of a 0.75Z service fee on the dis- bursed balance of the credit. In March, 1984 the Government suspended all debt service payments on outstanding Bank and IDA debt. 3. This project was successful in providing the Nicaraguan Government with sound professional advice in producing studies which were expected to identify important investments for the restructuring of the economy. FINAPRI (and later Fondo Nicaraguense de Inversiones (FNI)) implemented and administered the project efficiently. Unfortunately, because of the deter- iorating economic and political situation in the country, the pre-invest- ment studies carried out with positive results under the project did not in all cases materialize as new investments. Of the thirteen projects recom- mended for implementation, seven were undertaken, but two of these are in abeyance because of financial constraints. The other six have been de- ferred due to the extremely difficult investment climate. 4. Because renewed civil strife and deteriorating economic perfor- mance during the later phase of project implementation severely limited the capacity of the Government to undertake new investments, no clear lessons can be derived from IDA's experience.  PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND P'tOJECT (CREDIT 1081-NI) I. BACKGROUND 1.1 Bank and IDA Operations in Nicaragua 1.1.1 Prior to the civil war (1978-1979) which ended the Somoza regime, the Bank and IDA made 25 loans and one credit to Nicaragua for a total of US$185 million. These loans and credits supported: (a) export diversifi- cation projects; (b) infrastructure projects in key sectors (such as water supply and electric power); (c) projects with major social objectives (such as education, rural sanitation, etc.); and (d) an earthquake reconstruction project. 1.1.2 At the end of the civil war (July 19, 1979), the Bank and IDA took in understanding attitude toward the financial problems of Nicaraguan bor- jers, which, for reasons beyond their control, were unable to comply with -he financial covenants of their respective loan agreements. After agree- ing to restructure many projects and after agreeing to waive or to modify the financial covenants of existing agreements, the Bank and IDA resumed disbursements (October 1979) and began to process new applications for loans and credits. In January 1980, the Bank and IDA signed Loan and Credit Agreements amounting to US$52.0 million to support projects for industrial and agriculturai rehabilitation and urban reconstruction. Beginning in March 1960, IDA staff began processing a credit in support of a preinvestment project, which is the subject of this report. 1.2 Economic Context 1.2.1 The civil war was costly in terms of loss of life (about 30,000), physical damage (about US$435 million),1 and capital flight (about US$500 million). The revolutionary Government inherited an economy which was financially insolvent and burdened with a damaged productive apparatus. After taking power, the revolutionary Government (a Junta of National Re- construction backed by the Sandinista Front), confiscated the properties of the Somoza family and many of its supporters, and nationalized major sec- tors of the economy (finance, foreign trade, mining, and communications), thereby making the Government the dominant economic decision maker. The Government also reorganized public companies; encouraged a restoration of agricultural and industrial production in both the public and private sec- tors; and established an austerity program based on a reasonably balanced budget, wage and price controls, and a minimal degree of foreign borrowing. 1/ FNI data reflect loss of life of 49,000 and physical damage of US$2.5 billion, which may reflect a different time period than that referred to in para. 1.2.1.  -2- 1.2.2 In recognition of the fact that the economy was still largely in private hands, the Government announced an economic recovery program based on the concept of a mixed economy, which envisaged the full participation of both public and private sectors. The Government's main objectives weze r to restore production (particularly basic foods) to pre-revolutionary levels, generate erployment and promote exports. First priority was given to reviving the agricultural sector in * ime for the Spring 1930 planting season. A second priority was to recover lost industrial output. 1.2.3 During its first year, the Govetnment experienced economic diffi- culties, but these difficulties were less severe than initially expected. With commitments for loans and credits amounting to about US$750 million, the Government made progress towards restocking inventories, relieving unemployment, and restoring real levels of cons%.aption. While these devel- opments partly helped to restore capacity and to renew physical plant, they did not resolve fundamental structural problems which severely constrained further efforts to regain lost production capacity and to improve effi- ciency. 1.2.4 The Government had become owner and operator of firms which, in many cases, had ceased to function, were financially insolvent and had lost most of their key personnel. T'here was a need to set policy objectives and priorities, develop viable investment targets, create coordination mech- anisms at the ministerial level, as well as to establish proper financial management, accounting and budgeting procedures, and staff training at the enterprise level. However, parastatal enterprises tended to focus on imme- diate production goals and on maintaining unskilled work force levels regardless of output considerations. Many private sector firms tended to be constrained about taking decisions for the future due to uncertainty as to the Government's political and economic direction, and tried to maintain viability by cutting costs while maintaining current output levels. In addition, both sectors not only lacked the financing to undertake new in- vestments, but the expertise to prepare new projects as well. II. PROJECT PREPARATION AND APPRAISAL 2.1 Project Origin 2.1.1 In March 1980, the Government requested IDA to provide financing for a preinvestment project. The borrower would be the Government, which would relend the proceeds of the proposed credit to the executing agency. The executing agency would be FINAPRI, a semi-autonomous agency linked to the Ministry of Planning and skilled in the contracting, selection, and supervision of consultants. FINAPRI would maintain its records and conduct its operations as if it were a revenue-earning entity, not as if it Tcre another department of the Government. 2.1.2 FINAPRI would use the proceeds of the proposed credit to make sub- loans to sub-borrowers to finance sub-projects (studies). In recognition of the needs of FINAPRI for speed and flexibility, IDA agreed to simplify its approval procedures for the smaller studies which would be financed by  so-called Oiree-limit' sub)-loans. Each 'free-limit" sub-loar. would amount to no more than US$150,000 equivalentg and as a group, they would amount to no more than US$2.0 million equivalent. Annex 1.1 sets forth add'"ional details on the 3rganization and operations of FINAPRI as ex. .ted at appraisal. 2.1.3 The project would consist of the preparation of feasibility and other studies by consultants. 7hese studies would enable a planning body, the Investment Committee (also linked to the Ministry of Planning), to decide whether a project proposed by a public or private entity (and re- quir!g foreign exchange) should be carried out. It was expected that all approved projects would ctunform to the political, economic, and social object ves of the Government (paras. 1.2.1 and 1.2.2). 2.2 Project Preparatiot and Appraisal 2.2.1 Project preparation and appraisal moved very quickly. In March 1980, an identification mission established informal requirenzu's for pro- cessing a request for IDA fiisncing. In June 1980, a preparatict, mission was upgraded to an appraisal mission as all documentation was prepared and outstanding issues were settled. In addition to the dtsft operational manual of FINAPRI, the mission concentrated on the definition and cost of the project, and a list of tentative studies (sub-projects). 2.2.2 The Government and IDA agreed that the credit would amount to SDR 3.9 million (equivalent to US$5.0 at appraisal) to support a project consisting of: Part (A) a three-year program of assistance to finance (through sub- loans) the cost of hiring consultants to prepare and review preinvestment studies (sub-projects) in such sectors as trans- port, agriculture, energy, education, mining, public utilities, etc. Part (B) technical assistance for FINAPRI in the form of hiring consul- tants with expertise in the mechanism of preinvestment (preparation of terms of reference, consultant selection pro- cedures, etc.). The Credit Agreement specified that the credit would be allocated as fol- lows: SDR 3.8 million would cover 80Z of the cost of Part A and SDR 0.1 million would cover 100Z of the cost of Part B. 2.2.3 The Government aud IDA also agreed on the following cost and financing plan for the project: .. ..  - 4 - Tatle 2.1: EXPECTED PROJECT COST AND FINANCING PLAN (US$ million equivalent) Cost Local Foreign Total Item: Sub-loans 1.8 4.3 6.1 Technical Assistance - 0.1 0.1 Total 1.8 4.4 6.2 Financing Plant Government 1.2 - 1.2 IDA 0.6 4.4 5.0 Total 1.8 4.4 6.2 2.3 Negotiations. Presentation, and Effectiveness 2.3.1 No major problems delaye negotiations (11117-18/80), Board ap- ptoval (12/16/80), signing of the Credit and Project Agreements (12/18/80), and effectiveness (3/18/81). Credit 1081-NI amounted to SDR 3.9 million (equivalent to US$5.0 million) made at the then prevailing IDA terms, i.e., there was only a charge for administrative costs of three-fourths of one percent (3/4 of 1Z) p.a., the term of the credit was 50 years, including 10 years of grace, and repayments would commence on February 1, 1991 ane end on August 1, 2031. 2.4 Major Covenants of the Credit and Project Agreements 2.4.1 The Credit Agreement defined the project, obligated the Government to carry out the project, and set forth the terms and conditions of the credit (para. 2.3.1). The Project Agreement established the obligation of FINAPRI to seek prior IDA approval for all sub-loans. defined the terms of the sub-loans, and set forth various procedures for contracting con- sultants. 2.4.2 Annex 1.2 sets forth major covenants of the credit and project agreements. The Government and FINAPRI complied with these covenants, except for the covenant requiring the Government to pay administrative costs equivalent to three-quarters of one percent (3/4 of 17' of the dis- bursed balance of the Credit. In March 1984, the Government indicated its inability to cover debt-service payments on all loans and credits owed to the Bank and IDA (para. 3.7.1). III. PROJECT EXECUTION 3.1 Actual and Forecast Data on Project Execution 3.1.1 Annex 2.1 provides a brief description of the studies approved for financing by IDA and the implementation of their recommendations. Annex 3.2 sets forth the actual cost and disbursement of the credit (stated  5 - in SDRs) on a study-by-study basis. Annexes 3.3 and 3.4 compare actual and forecast data on, respectively, allocation of the credit and timing of disbursements. The paragraphs below discuss the information set forth in these annexes. 3.2 Project Cost and Timing 3.2.1 The original project cost of US$6.2 million (para. 2.2.3) was equivalent to SDR 4.8 million. This is very close to the final project cost. The cost data in Annex 2.2 must be treated with some caution, how- ever, because of the ride difference between the official and market rates of exchange for the cordoba. 3.2.2 FINAPRI carried out the project between Harch 18, 1981, (the date of effectiveness) and November 29, 1984, (the date of last disbursement). Two studies were completed in 1985 using local funds. At appraisal, the expected completion date was December 1984. The deteriorating interna- tional credit situation of ilicaragua (para. 3.7.1) did not interfere with completion of the project. 3.3 Proiect Results 3.3.1 IDA approved financing for twenty-five studies proposed by FINAPRI, and disbursements were made for twenty-three studies. All sub- borrowers were state agencies (Annex 2.1). 3.3.2 Annex 2.1 sets forth details on the studies, which were designated A-1 to A-S (sub-projects requiring detailed IDA approval procedures), B-1 to B-17 (sub-projects requiring less detailed IDA approval procedures), and C-1 to C-3 (technical assistance benefiting FINAPRI). IDA never disbursed for B-9 (Annex 2.2). 3.3.3 The sectoral distribution of the studies was diversified, covering (in order of cost) energy, transportation, agriculture and forestry, mining and natural resources, marketing, tourism and industry. Nine of the studies consisted of technical assistance or preparation of terms of refer- ence and were successfully concluded. Of the remainder, one recommended that a proposed castor oil production project not be undertaken. Five resulted in implementation of projects ir grain storage, tourism and wood products. Two other studies (in rice seed production and coconut re- planting) have led to some investment, limited by financial constraints. Similarly, six projects (covered by eight studies) are in abeyance due to financial and security problems, including the Hojolka hydroelectric plant which was the largest sub-project under the IDA credit. 3.4 Allocation of the Credit and Timing of Disbursements 3.4.1 The allocation of the credit betveen sub-projects and technical assistance vas just about as expected (Annex 2.3). Disbursement timing vas initially siower than expected but was completed within the originally anticipated period (Annex 2.4).  -6- 3.5 IDA-FINAPRI Relations 3.5.1 In the course of complying with Sections 2.05a and 2.05b of the Pro,ect Agreement (which required IDA approval for all non-free-limit sub- projects), FINAPRI engaged IDA in a continuing dialogue which was profes- sional and cordial. FINAPRI took serious note of IDA commentary on pro- posed terms of reference, consultant selection procedures, and draft con- tracts. FINAPRI also sought IDA comments on some free-limit sub-projects. 3.6 Evolution of FINAPRI 3.6.1 In December 1983, the Government merged FINAPRI and FED2 to estab- lish FNI. IDA did not object to this change, on the understanding that it would continue to receive separate accounting statements for the preinvest- ment operations of FNI. The merger did not affect the implementation of the project. 3.7 International Credit Situation of Nicaragua 3.7.1 In early 1984, the Government, being about US$10 million in arrears, was on the verge of defaulting on its obligations to the Bank and IDA. To provide the Government with additional time for mobilizing finan- cial resources, IDA developed a strategy involving the application of the undisbursed resources of existing loans and credits to cover debt-service arrearage. In accordance with this strategy, the Bank and IDA first iden- tified those loan and credits which permitted disbursements for local cur- rency expenditures. Credit 1081-NI qualified in this respect, and the Bank and IDA transferred the undisbursed balances into a special account, from which disbursements were made to IDA as disbursement applications for eligible local-currency costs were received. The Central Bank of Nicaragua made payments to consultants and suppliers in cordobas. Although this arrangement provided some more time, the Government was unable to mobilize the necessary financial resources to meet debt service obligations to the Bank and IDA and formal disbursements were suspended in September 1984. Disbursements under the special arrangement for Credit 1081-NI continued through November 1984, when the credit was fully disbursed. IV. FINANCIAL PERFORMANCE 4.1 Actual and Forecast Data on Financial Performance 4.1.1 Annex 3.1 compares actual and forecast data on the financial per- formance of FINAPRI between 1981 and 1984, the period of project execution. Actual data is based on audited financial statements expressed in cordobas translated into US dollars at the average rate for the year. Substantial fluctuations in the rate of exchange between the US dollar and the cordoba 2/ Fondo Especial de Desarrollo. Th:^s entity was created following the earthquake (December 1972) which devastated Managua. The merger combined the human and financial resources of the two institutions.  -7- and the wide margin between the official and market rates of exchange limit the comparability of actual and forecast data. The information in Annex 3.1 is discussed below. 4.1.2 FINAPRI's net disbursements for preinvestment loans were 23Z above the appraisal forecast in 1981-83, but fell below it in 1984 (-23Z), reflecting the broader problems of the Nicaraguan economy. This higher level of activity was funded in the earlier years by budgetary funds, as drawdown of external grant and loan funds fell below expectations. In 1984 there was a sharp contraction in budgetary support and grants (64Z below the forecast) and FINAPRI's largest sources of fzmds were special Govern- ment lines of credit for state enterprises, small enterprises and rehabili- tation of coffee plantations. 4.1.3 Revenues were substantially above appraisal forecasts as a result of the quicker rate of disbursement and the introduction of cost recovery for technical assistance, which was decided after the IDA credit was approved. Although FINAPRI's cash requirements for administration were also higher than anticipated, the cumulative deficit in 1981-84 was slightly below the appraisal forecast. V. PERFORMANCE OF THE BORROWER, FINAPRI AND IDA 5.1 The Borrower 5.1.1 The performance of the Government was satisfactory in connection with implementation of this project, except with respect to the observance of the financial covenant requiring payment of the service fee (3/4 of 1Z) on the disbursed balance of the credit. 5.2 FINAPRI 5.2.1. The performance of FINAPRI was satisfactory (paras. 3.4.1 and 3.5.2) IDA staff were favorably impressed with the skill and efficiency of the beneficiary. There was concern that turnover of middle management staff might affect project implementation. FINAPRI propcsed a training program for its staff to address this problem. To} management continuity was maintained throughout the gestation and implementation of the project; this undoubtedly contributed to smooth project execution. The merger of FINAPRI and FED was wise, since the two institutions were involved with similar problems at different stages of the project cycle and there was a possibility of achieving economies by sharing staff and facilities. 5.3 IDA 5.3.1 IDA designed a credit arrangement which provided flexibility to FINAPRI. As with other preinvestment fund projects, a multisectoral effort was involved in the review of subprojects. This meant that occasionally specialists were not available to ensure prompt response to FINAPRI com- munications.  VI. LESSONS TO BE LEARNED 6.1 Proiect Results 6.1.1 The project benefits are clear in the area of technical assistance and preparation of terms of reference (nine of the twenty-five studies approved). Of the other sixteen studies, seven are known to have resulted in implementation. The economic and political problems and civil strife that have been confronting Nicaragua since IDA credit approval explain much about the lack of results in terms of investment. 6.2 Lessons 6.2.1 Because renewed civil strife and deteriorating sconomic perfor- mance during the later phase of project implementation severely limited the capacity of the Government to undertake new investments, no clear lesuons can be derived from the studies financed; howerer, the project was success- ful in demonstrating the need for such studies in the process of project identification, and strengthening FINAPRI as an institution. I December 1988 Revised: January 1990 I  _ 9 _ ANNEX 1.1. Page 1 of 2 PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) FINAPRI Organization and Operations Introduction 1. Set forth below is the appraisal description of the organization and operations of FINAPRI (Report No. P-2916-NI, December 1, 1980). At appraisal (June 1980), FINAPRI was not a veteran organization but a working group linked to the Ministry of Planning. It had modest experience in preinvestment work, a proposed organizational chart (Attachment 1), and a draft operations manual. Origin 2. Law 322, dated February 28, 1980, established FINAPRI as a semi- autonomous body linked to the Ministry of Planning. Its major function would be carrying out preinvestment work--that is, supplying loan financing and technical help to borrowers who needed to undertake preinvestment studies. It was expected that the work of FINAPRI would help to create an inventory of projects suitable to advance the objectives of the Government. Board of Directors 3. As described in the President's Report, the Financial Cabinet of the Government would act as the Board of Directors of FINAPRI; would select the Executive Director; and would exercise general supervisory functions, including supervision of financial operations, budget and borrowing agree- ments. It would consist of one member ot the Junta (para 1.2.1), the pres- idents of the Corporacion Financiera and the Central Bank, the Minister of Finance, the Minister of Planning, and the head of the Fondo Internacional para la Reconstruccion de Nicaragua (FIR). FIR was charged with the responsibility for promoting, negotiating, and organizing external finan- cial assistance for reconstruction projects. Relations with Other Government Bodies 4. FINAPRI would carry out its duties in connection with decisions taken by the Investment Committee (IC), a Government entity which was headed by the Ministry of Planning and which included representatives of FIR, FINAPRI, and the Ministry of Finance. For investment projects re- quiring foreign currency financing, the relevant public sector agency or private sector enterprise would subm.it proposals for approval by the IC.  - 10 - ANNEX 1.1 Page 2 of 2 If the IC judged that preinvestment studies were necessary before it could act on a proposal, FINAPRI would undertake to finance and to supervise the generation of such studies. Upon completion of the study, and if the IC were to approve the proposei project, FIR would assume the responsibility for marshalling external financing. L FINAPRI Operations 5. The appraisal mission found satisfactory the procedures described in the draft operating manual, including procedures for lending and pro- curement. With capital supplied by the Government, including the reloaned proceeds of the IDA credit, FINAPRI would lend (sub-loans) to public and private entities to finance feasibility and such other studies (sub-proj- ects) as were required for an investment decision. FINAPRI would charge its customers 8? p.a. with terms extending up to 10 years. Private cus- tomers would pay an additional 0.5Z commitment fee and had to post collateral. 6. When necessary, FINAPRI would assist in project identification and preparation of project briefs for submission to the IC. Once the IC had given its approval for a study, the borrower would proceed to the drafting ef detailed terms of reference, a preliminary budget, prequalification, selection and contracting of consultants. FINAPRI would provide technical assistance and supervision in all stages. FINAPRI would maintain its books as if it were a revenue-earning entity. It was expected that FINAPRI would not require budgetary support from the Government for its operations once its portfolio of sub-loans had been built up.  FINAPRI ORGANIZATION CHART BOARD OF DIOMRS | EiTBULL AUDllTlNC| T|IC DIRECTORA ADVISORS .WIA .IC P1YANO ANID AINISTUlTIVIt DlillEMl LOAN TECiICAL ASSISTANCE LE:AL BUDCETINC AND ACCOIIWING ANINISTIATIVI DEPARTHN DEPARTE DPARTMENr PL SECES Statistics iIFE"oR5 J rlztrittion I Andustry Technical Electromechanical Information Natural Re0ources CLmiitry Ecoomic and Financial Anslysia ft 3-h|  - 12 - ANNEX 1.2 PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) Maior Covenants of the Credit and Project ARreements 1. The Government complied with the following covenants of the credit agreements Section 3.01: (a) The Government caused FINAPRI to carry out the project in accor- dance with the provisions of the project agreement and subsidiary loan agreement; and Section 3.01: (b) The Government reloaned the proceeds of the credit to FINAPRI under a subsidiary loan agreement which was satisfactory to IDA. 2. FINAPRI complied with the following major covenants of the project agreement: Section 2.01: FINAPRI carried out the project with due diligence and efficiency; Section 2.02t FINAPRI made sub-loans and free-limit sub-loans on terms and con- ditions satisfactory to IDA; Section 2.03: FINAPRI employed satisfactory consultants; Section 2.04: FINAPRI ensured that its sub-borrowers contracted consultants' services on terms satinfactory to IDA; Section 2.05: FINAPRI provided the required information on sub-projects.  - 13 - ANNEX 2.1 Page 1 of 3 PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) Execution of the Project A. Sub-proJects Financed by Large Sub-loans A.1 Ocotal-Jalapa-Teotecacinte Highway Improvements: Final design study to upgrade 85 km of highways. Local consultants (CISCONCO) completed the final design in January 1982. with a delay of 5 months and a cost over- run of 7?. The Government accepted the estimated construction cost of US$23 million. Construction was postponed due to lack of funds. A.2 La Gateada - Nueva Guinea Road Improvements: Final design of 63 km highway in Zelaya department. Local consultants (ESPRINSA) completed the work in January 1982, with a delay of 6 months and a cost underrun of 201. The Government accepted the consultant's work and authorized imple- mentation, with an estimatea cost of US$7 million. Construction was post- poned due to lack of funds. A.3 Hololka Energy Study: Feasibility study of a 180 MW hydroelectric project, coWpleted in 1984. The study was carried out by Canadian consul- tants (MONENCO) with a time saving of 7 months and a cost overrun of 1OZ. The Mojolka project is in abeyance in view of the economic problems of the country. A.4 Topacio 4inera: Pre-feasibility and feasibility study of gold mining area. The consultants (CPRM of Brazil) rediscovered two gold mines with an estimated yield of 0.8 to 1.2 ounce troy per metric ton for the main mine. The project was designed in phades of 6,000 tons per year up to 18,000 to 20,000 tons when fully developed. Study completed in November 1983, with a delay of five months and a cost overrun of 19X. The Govern- ment authorized implementation and is applying to CABEI for financing. A.5 Petroleum Study: This was an oil-reserve inventory study involving reinterpretations of geophysical data and seismic data. The work stopped at one point for lack of financing, but was completed satisfac- torily in 1985 by the French firm BEICIP. There was a 31X cost overrun. Because of foreign exchange constraints, detailed follow-up work is delayed.  - 14 - ANNEX 2.1 Page 2 of 3 B. Sub-projects Financed by "Free Limit" Sub-loans B.1 Gold Mine Rehabilitation: This contract with an individual US consultant was to prepare terms of reference for A.4 above. The Government was satisfied with this study which was completed in 1982. B.2 Rehabilitation of the Atlantic Coconut Plantationst The study by a local consultant was concluded satisfactorily in 1983. Two areas suit- able for a US$8 million investment were identified and 282 hectares were replanted. Work had to be suspended, however, because of the war. B.3 Castor Oil Production: Feasibility study carried out by French consultants. Completion of the study was delayed until 1985 due to changes in the terms of reference and disogreement between FNI and the consultants on methodology. The consultants recommended that the project not be imple- mented and this recommendation was accepted. B.4 MASA: This was a technical and feasibility study for the con- struction of grain silos. The Government was satisfied with this study which was completed in 1980 by Honduran consultants (CINSA). The grain silos were built near Masaya at a cost of US$20 million of which CABEI provided US$13 million in finance. 3.5 Forest Inventory: First phase of a study that developed more specific proposals (B.10). The work was carried out by Chilean consultants and completed in 1983. A change of the location of the project was recom- mended and accepted. B.6 Pochomil Tourism Infrastructure: The Government was satisfied with this study which was completed in 1982 by local consultants (CISCONCO). The completed project which provided basic infrastructure for small hotels and recreation houses along 4 RH of beach along the Pacific Coast was implemented by INTIRISMO--the national tourism organization. B.7 Ha22ings This study consisted oi creation of a quantitative and qualitative database based on satellite imagery for the Instituto Nicaraguense Territorial. The mapping was completed satisfactorily in 1983 by Italian consultants (GEOMAP). B.8 MASA II Grain Storage: This study of the rehabilitation of existing silos was completed in 1982 by the Interamerican Institute of Agricultural Cooperation (IICA). The recommendations have been imple- mented. B.9 Commodity Analysis: The same consultants for MASA II completed a useftil study of 32 basic commodities by regional analysis. No investment was proposed. 3.10 Forest Product Feasibility: This successful study of wood extrac- tion for laminates and chip board was completed at the end of 1984 by the same consultants as B.5. The study recommended setting up an Empresa Mixtaw of Hexican and Nicaraguan capital. Implementation is underway.  -15- ANNEX 2.1 Page 3 of 3 B.11 National Airlines: Canadian consultants (DELCANDA) completed a comprehensive diagnosis of operations of the national airline in 1984 and the recommendations for administrative restructuring were adopted. B.12 Highway Rehabilitationt Under this contract a consortium of local consultants was engaged to prepare engineering designs for the rehabilita- tion of 265 km of roads. The work was completed In 1982 within the terms of reference. The intention was to obtain financing from CABEI, but this did not materialize and the project has not been implemented. B.13 Food Production: Feasibility study of food production in the Jalapa Valley by local consultants. The study was completed in 1984, covering production of basic grains and potatoes on 3,250 hectares. Imple- mentation was completed in 1986. r B.14-17 Rice Studiest Feasibility studies of an irrigated rice project (2,500 hectares) and of production of certified rice seeds by local consul- tants. The 2,500 hectare project was presented to Mexican investors who decided to proceed with an alternative investment. The seed improvement study was carried out for the rice production parastatal, Enarroz. Invest- ments recommended under the study are being carried out gradually by Enarroz. C. Technical Assistance to FINAPRI C.1 Livestock Production: This was a study of cattle production and utilized an approach capable of wider application. Some of the recommen- dations were implemented with IDB financing including training of local technicians in beef production. C.2 Industry: Completed in December 1983, this study analyzed the industrial sector of Nicaragua and covered three fields: general super- vision of the economic content cf terms of reference; generation and organ- ization of statistical information; and the use of input/output analysis to establish the financial implications of investment opportunities. ..3 Agriculture: This study, completed in December 1983, recommended a US$60 million credit for cooperative and small-scale farmers and develop- ment of the poultry and egg production for the country.  - 16 - ANNEX 2.2 PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAiRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) Cost and Disbursements by Sub-Proiect (stated in SDRs) Sub-Proiect Actual cost la Disbursements A-1 238,553 252,082 A-2 234,197 187,357 A-3 2,204,417 1,758,693 A-4 369,965 295,972 A-5 384,160 307,328 Sub-total 3,431,292 2,801,432 B-1 19,207 15,366 B-2 20,,454 16,363 B-3 79,335 63,893 B-4 71,470 57,176 B-5 38,581 30,864 B-6 70,565 56,452 B-7 135.853 108,682 B-8 58,008 46,407 B-9 16,224 - B-10 118,996 95,197 B-il 18,162 14,530 B-12 364,773 313,066 B-13 134,755 107,803 B-14 33,200 26,560 B-15 7,969 6,375 B-16 65,073 52,058 B-17 24,821 - Sub-Total 1,277,445 1,010,792 C-1 30,521 26,116 C-2 35,671 40,996 C-3 17,599 20,663 Sub-total 83,791 87,776 Total 4,792,527 3,900 000 Ia Because of exchange differences, the SDR equivalent of payments made to consultants in cordobas was in some cases lower than the amounts disbursed by IDA.  - 17 - ANNEX 2.3 PROJECT CMPLETION REPORT NICARAGUA PIlANCIERA DE PREINVERSION (FINAPRI) PREINVESTHlNT FUND PROJECT (CREDIT 108S-NI) Actual and Forecast Disbursement by Category (stated in SDRs) Actual Forecast Category 1. Sub-projects 3,812,224 3,800,000 2. Technical Assistance 87,776 100.000 Total 3,900.000 3,900,000  - 18 - ANNEX 2.4 PROJECT COMPLETION REPORT NICARAGUA FINANCIERA DE PREINVERSION (FINAPRI) PREINVESTMENT FUND PROJECT (CREDIT 1081-NI) Actaal and Forecast Timing of Disbursements (stated in millions of USS) Fiscal Year Actual Forecast Percent of Forecast 1981 0.00 0.50 1982 0.55 1.00 55 1983 1.56 2.60 60 1984 2.81 4.20 67 1985 4.20 /a 5.00 84 /a Difference from forecast amount reflects difference in rate of exchange between US$ and SDR after appraisal.  NICARAGUA FINANCIERA DE PREINERSION (FINAPRI) PREDNESTMENT FUND PROJECT (CREDIT 1081-NlI Actual and Forecast Fund Statement 1981-1984 (in mllions of current US1) 1981 1982 1988 1984 Auoraisal Actual Aggralsl Actual Agpraisal Actual Aperalsal Actual Source -- 00 equvalent--- Ecu ltNT Ov. counterpart contribution 826 G8 195 5976 2765 6205 8382 1588 Gov. contribution - externally fundsd 2812 186 198 984 2090 788 1760 255 Sub-total 8688 6274 $946 6809 4846 6988 5088 1848 Oenertions I Incoo 17 152 278 @75 641 1567 1105 las8 ExpeWitures and working capital 84) (184) (1087) (1010) I (1l11) (2137) (1594) (1824 Sub-total (8) (1191) (809) (885) (670) (W80) (489) (488) orroul nQ IDA a80 588 1480 426 184'9 1059 1480 1088 CABEI - 48 - 84 - 81 - 18 Nicaraguan Government entities - - - - 2312 8S0 688 1480 460 1640 1090 1480 8418 Totel 8162 4719 4617 6984 581 7478 6029 4818 Auol Ications Start-up cost and equipment 185 221 65 184 - 61 - - Net loan disbursements 8025 8121 4642 6409 5792 6909 595 4688 Dkt Service 2 22 10 49 28 82 84 8S Total 1812 86 4817 6591 5815 7002 6029 4718 Cash surplus - 155 - 848 - 476 - 100  - 21 - ANNEX 4.1 Page 1 of 2 Comments Received from the Borrower Translation of Incoming Letter September 6, 1989 Hr. Alexander Nowicki Operations Evaluation Department World Bank Res Financiera de Preinversion (FINAPRI)s Proyecto de Fondos de Preinversion (Credito 1081-NI) Informe de Terminaci6n del Proyecto We have read the draft Project Completion Report and we find it accurate except for some observations that we attach to this letter for your consideration. With kind regards, Sincerely. Silvio Lanuza Hatamoros Executive Director Fondo Nicaraguense de Inversiones Attachment  - 23 - ANNEX 4.1 Page 2 if 2 FONDO NICARAGUENSE DE INVERSIONES ANNEX RE: Comments on draft Project Completion Report (Credit 1081-NI) 1. Para. 1.2.1 49,000 human lives have been lost, and the cost of damAge directly resulting from the war exceeds US$2.5 billion. 2. Component C of the Credit consisted of technical assistance for FINAPRI. This was fundamental in strengthening the staff's professional expertise and substantially reducing turnover. Some of the effects of this strengthening are still being felt, because we now have qualified and motivated personnel with experience in the effective management of preinvestment. 3. Para. 6.2.1 We believe that the following lessons can be learned from this project: (a) The strengthening of preinvestment is an effective process, and provides lasting capability. (b) Even in these difficult economic and political circumstances, the process of preinvestment project identification is very important for stabilization and recovery, since this phase will require intensive preinvestment. (c) The approval procedures for FINAPRI subloans provide for flexibility and the necessary degree of operational control.