Morocco - Fifth and Sixth Agricultural Credit Projects

Documewtof The World Bank FOIt OFFaCIAL USE ONLY Rpat No. 11492 PROC COMLLETION REPORT MOROCCO FIFTH AND SIXTf AGRICULTORAI CREDIT PROJECTS (LOANS 2367-MOR AND 2731-MOR) DECEMBE 30, 1992 MICROFICHE COPY Report No.:11492 MOR Type: (PCR) Title: FIFTH AND SIXTH AGRICULTUfL CRI Author: RICE, E.B. Ext.:31755 Room:T9059 Dept.:OEDDI Agriculture Operations Division Country Department I Kiddle East and North Africa Regional Office Thi doeument has a restricktd disrib*Yo and may be used by recpients only in te pformance of dir offci dutis Its content may not othwnvse be dicosd wthout World Bank auhorizaion.  CURRENCY EOUIVALENT Curr Unit Moroccan Drn (Dh) Oh 1.00 5 US$0.12 US$1.00 5 Dh 8.5 (Average C abr 1989) GLOSSARY OF ABREVIATIONS ADS. African Devlopmet Bank AIC AgrltraI Invment Code CLCA: Caisse Local de Cr4dl Agrkcoe CNCA Caim Nat onale de Crddit Agicole CRCA Calsse Rgkonafe de CrdiK Agricole EEC European Economic Communiy FADES Arab Funds for Economic and Social Development KW Kredanstat r Wderaubau of the Federal Republic of GenrmaW MARA MlnLtmre de rAgrlcuture et du R6fomne Agraire MIS Managemn Information Systern ROE Return on Equity USAID United Stats Agency for Intrnationa Development FISCAL YEAR Janay 1 to December 31 WEIGHTS AND MEASURES Metric System  FOR OFRCAL USE ONLY THE V 'UL muN WasngtcA D.. a43 USA Offlce of Directorz4eural Operations Evaluation December 30, 1992 MIMORANDUM TO) IntEXEUTIV DIRECMRS AND THERSI SUBJECT: Project Completion Report on MOROCCO Ffth and Sixth Agricultural Credit Projects Loans 2367-MOR and 2731-MOR) Attached is a copy of the report entitled "Project Completion Report on Morocco - Fifth and Sixdh Agricultural Credit Projects (Los 2367-MOR and 2731-MOR)' prpared by the Middle East and North Africa Regional Office. Part II was prepared by the Borrower. The projects achieved their primary objectives of financing on-farm investments by small and medium scale farmers, and of strengthening CNCA as a dovelopment institution CNCA has shown Initiative with innovative programs, including a credit line for women fairmers. Its training program has attracted international attention On the other hand, at completion of the Sixth Project, much remained to be done to enhance CNCA's credit recoveries, financial management and resource mobilization. On balance, both projects are rated as satisfactory and their sustainability as likely. A seventh project is currently under implementation. The Project Completion Report is of acceptable quality. An audit is in process. Attachment Tlbb doc_un be asa reed dlstbb2n ad may be asy ed Ir *pu ony X tmance of_ dhf oEIcIm due lb onets mab ot ao _hiw be dbdowd whou Wod Bak auRdwf6  FOR OFTICIAL USE ONLY PROJECT COmPLETnON REPORT MOROCCO FIFtH AND SIXH AGRICULTURAL CREDIT PROJECTS (Lans 2367-MOR and 2731-MOR) TABLE OF CONTENTS Pare NO. Preface ............................................................. i Evaluation Summary . ................................................... iii L PROJECr REVIEW FROM BANK'S PERSPECflVE . . 1 A. Introduction . .................................................... 1 Background . .................................................. 1 Bankfinanced AgriculturalCredits .................................. 1 B. Project Fomulation .............. ............................... 2 Preparation, Apprisd & Negotiations ............................... 2 Project Objecives ................ .............................. 3 ProjectDescription ............................................. 4 C Project Inplemnentation .............. .............................. S Effectiveness and Start-Up ........................................ S implementation ................................................ 6 Disbursements ................................................. 9 Fmancial Perfornance ........................................... 10 Compliance with Covenants ....................................... 12 Reporting and Auditing .......................................... 14 Project Inpact .................................................. 14 D. Conclusions and Lesons Lened .................................... 14 IL PROJECr REVIEW FROM BORROWER'S PERSPECTIVE ..... ........... 16 IIL STATISIICAJL INFODRUATION ......... .......... .................... 21 1. Projects imetable .............. ................................. 21 2. Cumulative Estimated and Actual Disbursements ........................ 22 3. Comparison Between Appraisal and Actual Disbursements by Category of Disbursement .......................... 23 4. FIancialRatios . ................................................ 24 5. Related Bank Loans .............................................. 25 6. Status of Covenants .............................................. 25 7. Bank Resources ................. ................................ 26 Map IBRD 19570 This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclesed without World Bank authorization.  - i - PROlECT COMPIErlON REPORT MOROCCO FIFTH AND SIXTM AGRICULTURAL CREDIT PROJECTS (Loans 2367-MOR and 2731-MOR) PREFACE This is the Project Completion Report for the Fifth and Sixth Agricultural Credit Projects (Loans 2367-MOR and 2731-MOR, respectively) for which loans of US$115.4 million and US$120 million, respectively, were approved. The Fifth Agricultural Credit Project was approved on December 13, 1983, signed on March 1, 1984 and became effective on May 11, 1984. The original loan closing date was August 31, 1987, but the loan was fully disbursed on March 17, 1987, several months ahead of schedule. The Sixth Agricultural Credit Project was approved on June 26, 1986, signed on September 17,1986 and became effective on December 10, 1986. The original loan closing date was March 31, 1990 and the loan was fully disbursed in February 1990, one month ahead of schedule. This report was prepared by the Europe, Middle East and North Africa Region, Agricultural Operations Division in Country Department U on the basis of information available in the Division's and the Bank's central files: apprasal reports No 4654-MOR, dated November 22, 1983 and No. 6094-MOR, dated May 28, 1986; supervision reports; correspondence with the Borrower:, and internal Bank memoranda. The report is also based on the Borrower's Project Completion Reports, translated copies of which can be found in the files CNCA sent a substantial comment on the combined PAR/PCR package that was submitted to Government in July 1992. Ihe primary letter is incorporated here as Part IL Y Caisse N ae de CrEdit Agricole - CNCA.  -i- PROJC COMPMEFION REPOIRT MOROCCO FIlTH AND SITH AGRICULTURAL CREl)T PROJECTS (Loans 2367 MOR and 2731-MOR) EVALUATION SUMMARY Objecdives 1. The main objectives of the Fifth and the Sixth Agricultural Credit Projects in Morocco were to improve agricultural production by financing on-farm investments of small and medium fames, improving access of small farmers to agncultural production and strengtheming the status of CNCA as a financial and developmental institution. Mhis was to be done by: (i) emphasizing institutional credit penetration in rural, particularly tifed, are; (ii) introducing a new system of appraisa of credit needs; and (iii) emphasizing the role of CNCA as an institution which would accommodate epanding demand for credit (paras. 2.07 - 2.08). Implementaton Experien 2 Except for some initial slowdown in lending due to a major drought in 1983P84, CNCA!'- lending for traditional agricultural activities proceeded smoothbly and disbursements e=ceeded appraisal estimates throughout the life of both projects. Progress was initially somewhat slower for the areas that were new for CNCA, such as lending for agroindustries and for rural housing, but over the six years of both projects ( mid-1984 to early 1990) lending in these areas has also shown considerable progress and disbursements matched appraisal expectations (paras. 3.03 - 3.07). On institution- building, the progress was predictably slower and overall more mixed. CNCA, the borrower, was in general very receptive to using consultants where necessary, and in taking necessary action in certain internal improvements. These include setting up agroindustrial units in branch offices in regions with high potential (parm. 3.04), and establishing a training program and a monitoring and evaluation unit, both of which functioned and are continuing to function effectively (paras. 3.14 - 3.15). Improvements in the management information system and in accounting procedures were slower to be introduced (paras. 31.0 - 3.11), and the construction of branch offices and of headquarters showed the least progress of any of the components (paras. 3.08 - 3.09). 3. Fmancial performance was good, although in the last two years, 1988 and 1989, the return on equity dropped quite sharply (from over 12 percent to 6-7 percent), due mainl to a change to a stricter provisioning policy. While the financial ratios look less impressive, in fact they represent an institution that is in better financial shape than previously, because of adequate provisioning, as well as representing a more honest picture of the financial situation than did the past ratios (paras. 3.18 -  - iv - 3.20). Loan recoveries were good compared to many similar agricultural credit institutions in other countries, although they had dropped progressively from the late 1970s, when they were around 80 percent, to 1986 and 1987, when they were below 65 percent. CNCA mounted a serious campaign to improve loan recoveries, and was successful in increasing recoveries to 76 percent for 1988 (paras. 3.21 - 3.22). Lending interest rates remained positive in real terms throughout the life of both projects (para. 3.24). 4. Compliance with covenants was generally good, and reporting and auditing was satisfactory. CNCA has been audited by qualified international auditors (paras. 3.25 - 3.31). Result 5. The impact of the two projects has been considerable. CNCA has definitely developed as an institution in fundamental and important ways, at the same time that the projects have had an impact on the overall financial framework within which CNCA operates (by looking at CNCA's ability to compete, both for clients and for its own staff). The projects were successful in channeling resources to agriculture and in financing private investments both in this sector and in agroindustry (paras. 3.32 - 3.33). Sustalnabiity 6. To the extent that the projects introduced and supported sounder management practices and encouraged longer term planning (now being carried out under the follow up project), and to the extent that CNCA has introduced better financial management and practices, these projects have had a permanent, and therefore, sustainable, impact on delivery of agricultural credit. In addition, the method of credit delivery has improved, CNCA has begun to diversify into new areas of profitable lending such as agroindustries and rural housing, and these aspects will better ensure the sustainability of CNCA as a profitable institution in a gradually liberalized financial sector. Findings and Lessons Learned 7. The two projects both have had a positive impact on CNCA's operations and have helped to strengthen the institution. At the same time, two lessons from these projects, which are perhaps self- evident, but which the Bank tends to lose sight of at appraisal time, are: a) the long-term nature of institution building and the need to have specific, realistic goals and detailed, realistic action plans for accomplishing these goals (para. 4.02); and b) the use of covenants to ensure specific financial ratios should be based on sound accounting practices: in more general terms, the use of covenants on financial ratios cannot substitute for ensuring that an institution is financially self-sufficient (para. 4.03).  PROJECT COMPTON REORT MOROCCO FIFMF AND SIXTHI AGRICULTURAL CREDIT PROJECTS (Loas 2367-MOR and 2731-MOR) PART I PROJECr REVIW FROM BANIKS PERSPEC E A. INTRODUCrION Backgoud 1.01 The major objectives of the Moroccan Government for the agricultural sector throughout 1980s were to: (i) promote production of stapl fioods, thereby increasing self.sufficiemy, (ii) promote exports of agricultural products; (iii) create employment opportunities in depressed rural areas, thereby decreasing regional income disparities; and (iv) encourage imestments in processing primaq commodities which increase the value added of agricultural products At the same time, due to budgeta,ry constraints, the Go wrment wanted to rely on prnvate sector ivetments and the banking sstem for financing. The Fifth and the Sixth Agricultual Credit Projects were designed to address these objectms by providing credit to farmers and agro-industrial imestors for productive investments and by building up the capacity of the agricultural credit institution to deliver and recover credit efficiently. Bank-flnned Agrictural Crei 1.02 Since 1965 the Bank has supported lending in Morocco for agricultural development through a series of loans and a credit to the Caisse Nationale de Crddit Agricole (CNCA). Four Hlies of credit1 have been extended to Morocco in the past with the following two-fold objectives: to build up CNCA as a viable and effective financial institution and to finance development of the agricultural sector. The loans and credit have been to a large extent successf in achievng both objectives Over the years the loans were used for increasingly broader targets and became increasingly flexible in design initiaDy restricted to the medium and larger farmers (because of differences between the Bank and the Government on interest rate policies to small-scale farmers) for specifc imvestments, the loans were gradually used to finace small-scale farmers, rural cooperatives, and agro-industies for a broad range of investments. 1.03 During the implementation of the fist four agricultural credit projects, from 1965 through 1983, CNCA improved its financial structure and developed into a financially stronger and Y These were: year loacredit amournt numter US$ mn Fis Agrculral Credi Poject 1965 Ln.0433.MOR 10 Second Agrcultra Credi Project 1972 Ln.0861-MOR 24 Cr.0338-MOR 10 Thid Agrcuu Credit Prwoj 1977 Ln.1361-MOR 35 Fourth Agriculu Crdit Proect 1979 Ln.1704-MOR 70  -2- increasingly autonomous credit institution. Fo example, incases in Iterest rates allowed CNCA to ear a satisatory return on its portfolo; increased autonomy from the Govenmet allowed CNCA to make its own deiios on its lenadg program; improvWed internal systems for credit delivery and monitring meant that CNCA reahd an ever-larger pportion of the farming population and bad feedback an the more successful initiatve; and increased human resource devepment (traing pr-ams) also improved credit delvery and recovey. On the Bank's insistence, CNCA began to be audited by an.iernationally recognized audit fine Credit delivery reached .50,000 farmes under tjq Fourth Project compared to 6,000 farmers under the Frst; in 1983, with an estimated population of famer at about 1.4 mion, this represented over 25 percent of the total number of potei dents. Furthennore, credit recovry remained at one of the highest rates for any agricultural credit institution supported by the BanL 1.04 Since most of the focus of previous craedit projects was on specific sub-loan and financial issues, howeve, rather tha on the overal institution, much remained to be done to stengDn CNCA!s internal structure and systems, such as the planning capacity of CNCA, the accounting and Infomation systems, and the organitioal setup. Since CNCA was operating in a dynamic s.tor, much abo remained to be done to strengthen the lening procedures and resource mobiztion strategy of CNCA, in order to ao t a growing clientele, and to face the challenge of a competitive banking evironment. B. PROJECr FORMUIATION rp, Appa d Ne Z01 CNCA prepared the Fifth Agricultural Credit Project, with i iput from Bank staff during superision missos for the Fourth Agricultural Credit Project. Most of the components included in the preparation were retained by the appraisal mission in Apil 1983. In addition, the apprasal mission paid particular attention to the impact of the interest rate structure on CNCA!s retr on equity, as well as to other aspects of institutional development, such as the need to develop an effective trai progam for CNCA staff, and to instal a satisfactory data processing system and a maniagement idnmtion system. The Fifth Project differed ftom the previous ones mainly in terms of the provision for financing these elements, a more aggresive lending approach to small-scale farmers and agro-industres, a training program for CNCA staff and, in general, a greater focus on the o tional, financial and management issues facing CNCA as a specialzed development bank. 202 Becaue of the concem with the Agrcultual Investment Code (AIC) of Morocco, whi* reglated the pattern of subsidies for on-farm inputs and imvestments and therefore the demand for credit fot these investments, a condition of negotiations was that the Ministry of Agriculture (MARA) submit terms of reference for a study of the AIC and a short list of consultants, and have issued the nvitations to bid to the consultants on the list. his w done, and negotiations of the Pifth Project took place in October 1983. The files contain no further mention of this study until October 1985, when Government proposed that studies be caried out to examine only imvestments, as subsidies on inputs were in any case being phased out under an Agricultural Sector Adjustment Loan. MARA ultimately proposed that a local consulting firm cr out the study, which was to be financed under another Bank loan (LoukkIs Rural Development, Loan 1848-MOR). To date the full study has not been carried out. Provio were included under the Second Agrcultural Sector Adjustment Loan  -3- (FY 88) to review a part of the AIC; in the meantime, the King of Morocco has gvein new impeW to the use of the AIC for promoting private investment and Goverment has told Bank missions that the AIC should be studied gradually, over a longer tem As the AIC touches vrtualy all aspects of public investments and subsidies for private investments in agriculture, the Bank will need to find ai appropriate forum to deal with it. 2.03 A condition of Board presentation for the Fifth Project was that lending interest rates be ineased by an average of two perentage points, which would make the inte e.t rates positive in real terms and bring them in line with lending rates of other commeral bans in Morocco. Ibe Gowernment did increase the rates by an average of 1.9 percentage points, which the Bank found acceptable. 2.04 'he identificaion and preparation of the Sixth Agricultural Credit Project were undertaken in 1985 by CNCA with the assistance of Bank missions supeving the Ffth Project. The main issues nrised during the preparation were: (a) reaching a larger number of farmers; (b) introducing couwi a new system of credit evaluation; and (c) increasing savings mobilintion. The apprasal mission which was brought forwad by about fie months from the orina plaig so that the loa would be presented to the Board in FY 86, also &oed on: (a) chages needed in the institudonal and legal hamework within which CNCA was functioning (for example, the lack of an effective Board of Directors to prvide guidance on strateg and policies); (b) the need to establish a medium term plan, a strateg for cmying out that plan, and operational and financial polcies; and (c) setting specific fiancial targets to ensure the viability of CNCA and the gradual elimnatim of its onyear bonds (paying only 3 percent) which commeial bank were requhied to subscrbe to as an investment in CNCA. 2.05 Negotiationswere centered aroundvarious fcial covenants on CNCAs financial stucure and interest rate leWs necess to achieve that stuctur In addion, howev, the Goverment s ll ressted attempts to reduce CNCA's bonds with commercial banks by agreeing only to study the scope for reducing the bonds; this issue was pusued furither by the Bank in another forum (see para 328). At negotiations, CNCA did ommmit itself to inresing deposits from the curent lvel of 14 percent of total resources to at least 20 percent (noted in the minutes of negotiaticn, not in the Loan Agreement). The dicussion of the performance with respect to the various financia covenants is in paras. 327 - 3.29. 2.06 Tle two conditions of Board presentation were: (a) a Manement Commtee be appointed with powrs conferred on it by CNCAs Board of Diectos, satisfctoy to the Bank; and (b) Government make a first payment, in accord with a schdule of payments agreed at negotiations, for the foreign exchange losses guaranteed by the Government and already paid by CNCA in advace on reimbursmnent of Bank loans. These conditins were met and the Sixth Ptojec was presented to the Board on June 26, 1986. Project Objecte 2.07 The overall objectives of the Fifth and Sixth Agricudtural Credit Projects were in line with the Government objecs and the Bank strategy to assist Morocco in enhancing the impact of credit on agricultural development. Both Projects aimed at (i) improving agricultural producton by financing on-farm ivestments; (ui) improvig access of small farmers to agrcultural credit; and (iii)  -4- streu thening CNCA's management and financial position. In addition, both Projects emphasized CNCA's institutional development and, in principle, were to be vehicles for removing subsidies both to CNCA and its clients (in agriculture as wel as rural housing). 2.08 The FMfth Agricultural Credit Project placed increased emphasis (compared to previous agricultural credit projects) on CNCA's internal development, and st as objectives the installation of an effective management information system and the expansion of CNCA's mobilization of domestic savwing The Sixth Project prt specific emphasis on increasig institutional credit penetration in rural particularly rainfed, areas, in part by introducing a new appraal ystem of credit needs which had been tested on a smaller scale under a rural development project. The Sixth Project also paid particular attention to diversifying CNCA's loan portfolio by encouraging lending in agro- industry and for rural housing, and continued to emphosize institutional development already started during the Fifth Agricultural Project. Project Descrpon 2.09 The PCRs written by CNCA give an accurate description of the major components financed under the Projects (Section IL1, pages 5-6 for the Fifth Prqject and Section ILI, pages 6-7 for the Sixth). The Projects were to finance CNCA's medium and long-term agricultual lending over a six- year period, between 1983/84 and 1988/89, exluding lending to state enterpises. lhe main components to be financed (percentage of total project cost represented by each category is indicated in parentheses) were as follows: (a) lending to Small Farmers (44 percent in each project) (b) lending to Medium and Are Farmes (46 percent and 47 percent in the Fft and Sixth Projects, respectively) (c) lending to Agrarian Reform Cooperatives: (5 percent in the Fift) (d) lending to Agro-industries: (4 percent in each project) (e) lending for Construction of Rural Housing: ( 3 percent of the Sixh Project) (f) CNCA rural branch network: (1 percent and 1.5 percent, respectively). The Sixth Project also included financing for the construction of new CNCA headquarter, based on a satisfactory finandal analysis, done by CNCA, justifying the cost. (g) Institutional Devlopment. (0.3 percent and 0.2 percent, respectively). 2.10 Total project costs for the Ffth Project were estimated at US$601.9 million of which US$115.4, or 19 percent, were to be financed by the Bank loan, US$135.3 million, or 23 percent, were to come from the sub-bonowes, US$43.1 million, or 7 percent, were from Government subsidies for investment, US$82 million, or 14 percent, were to come from co-fianciers and US$226.2 mfflln, or 38 percent, were CNCAls own resources. The conditions of effectiveness were signig by CNCA of  -5- the ADB and first KfW loan agreements and satifactory evidence of request by the Moroccan Government for the FADES and second KfW loans 211 The total Project costs for the Sixth Ptoject were estimated at US$720 million of which US$120 million (17 percnt) were to be financed by the Bank loan, US$212 million (29 percent) were to come fron sub-borrowers, US$101 million (14 percent) from co-financien and US$288 million (40 percent) were CNCAs own resources. For the fist time under the Sixth Project, CNCA was to share the foreign exchange losses with the Government in accodance with a formula established by the CGoemrment under the Industrial and Trade Policy Adjustment IX Loan. Since 1986, when the Sixth Project became effective, the formula has undergone successive changes to bring it closer to a market-determined method of sharing foreign exchange risk; under the proposed Fnancial Sector Development Project CNCA, along with other banks, will be paying into an exhange guarantee fund the difference between the interest rate on its foreign bonrwings and the market-determined rate of resources in the domestic market, plus a 1 percent front-end fee charged to the end-user. Both CNCA and its sub-borowers will therefore be indifferent as to whether the source of the funds is domestic or foreign. 212 The Fifth line of credit was to be implemented over a period of three years with the anticipated closing date of August 31, 1987 and the Sixth line over a period of three years with the anticipated closing date being March 31, 1990. 2.13 One interesting feature of the financig plan of the Fifth and Sixth Projects is the etent of World Bank exposure to CNCA, which was not mentioned in either report At the time of appraisal of the Fifth Project, in 1983, the total estimated amount of World Bank loans disbursed and outstanding was almost double that of CNCA's net worth (as reported at the end of CNCA's fical year for 1982). Thus was still the case at the time of appraisal of the Sixth Project in 1985 (as reported at the end of CNCA!s fiscal year for 1984)1. Whfle CNCA repayment performance to the Bank was at the time of the two appraials unblemished, it would seem that this level of exposure would have merited some discussion in both cases. C. PROJECIr IMPLEENTATION Efftveess ad Start-up 3.01 The Loan Agreement for the Fifth Project was signed on March 1, 1984, became effective on May 11, 1984. The Loan Agreement for the Sixth Project was signed on September 17, 1986 and became effective on December 10, 1986. This is based on the amot otsdin as o Jun 183 and Jun 1985 (data avaable frm Loan Accounting and Bow SeMvices), respi, compard to the nt woth as d the end of August 1983 and 1985 an fon the balc sheet as presented In te Staff Appraisal Repots), respectively Gn the volume and sped of d Isements over that period, t figures on ouutnding as of the end of August would show an em gr_e Woad Bank eposr  -6- 3.02 The start-up of the Ffth Project was sdow due to problems relating to the drought. During the fist four months of the Project, total sub-lending was ower than proected at appraisaL While CLCAN sub-lending increased by 32 percent, sub-leading decrased substantially (35 percent) for CRCAs- and Headquarters, because the drought caused medium and large famers to postpone ivestments. Under the Sixth Project, the rural housng categ of subloans also suffered from slow implementation in the beginning of the Project for a number of reasons (see para 3.03). ImplemenltatIon 3.03 CNCA's lendi activities Except for some slowdown early in the Fifth Project due to a major drought in 1983iB4, most sub-lending for the traditional on-farm investments proceeded at a reasonable pace throughout the six years of the two projects Progress was slwer for rural housig, where the demand for credit was slower than expected in the beguming and slowed down further in the middle of the Sixth Project - from 1986 to mid 1988, and the demand for investments in agro- industries did not grow as quickly as anticipated. For the rural housing component, the low level of lending was attnbuted in part to the imposition by the Minister of Fnance of stricter guarantees for the mortgages and to the reduction on the subsidies on the interest rate, insisted on by the World Bank. In fact, it was probably also due to the fact that it was a new area of lending for CNCA, and the personnel at the branch level were not weJl prepared to handle it. In mid-1988 CNCA made a concerted effort, howee, to redesig its lending for nural bousing in order to respond to market demand and to promote its lending in this area. Thee efforts included both a campaign within CNCA at the branch level to sensitize the staff, a lowering of the lending rate for loans for low cost housing and an energetic adverting campaign to inform potential borrowers of the creit availability. The efforts were rewarded with increased lending for this component (the amount tripled from 1988 to 1989), and final disbursements of the Sixth Loan were close to appraisl estimates (US$6.7 miSlion against an appraisal estimate of US$7.0 milion). 3.04 During the Fifth Project, an agro-industrial unit was opened in the CRCA office of Meknes- Fez (a covenant in the Loan Agreement). The unit collected about 50 sub-loan applications and carried out a sector suvey to assess the area's agro-indusr investment potential and undertake a promotional campaign. During the Sixth Project two more agro-industrial branch offices were established, one each in Casablanca and Agadir. While the pace of demand varied throughout both projects, the overall trend in sub-lending for this subcategory was upward, fom DH 30 milion in 1983/84 to DH 44 milion by 198687 and thereafer x upward, to DR 163 millon in 1988 and DR 134 mllion in 1989. In the ,-d, disbursements matched appraisl expectatios in both the Fifth and the Sixth Projecs This was probably attributable to the patticular effort made by CNCA in this area. 3.05 In the Fifth Project, dibursements for CLCAsubkus somewhat exceeded appraisal estimates and in the Sixdh Project the same was true for investments in greenhouses financed by CRCAs and Headquarters Because of the loe coincidence of appraisal estimates and actual disbursements across a number of sub-loan categories (see the Borrowers PCRs, pp. 6-7 and 8-9 for the Ffth and i CLCa Caisso local de crdd agrcolb, seAVg smar fames; CRCA = Ca s. rmonl de crd agco, sw lmr m flamn  -7- Sixth Projects, respectively), CNCA may have exercised some discretion in determining to which of its man lenders it would submit dbursement aim 3.06 Under the Fifth Poject disburements against subloanS for Agrarian Reform Cooperatives accounted for only 59 percent of appraisal estimates The reasons given for the shortfall were the same as those during the Fourth Agricultural Project: (i) some of the existing cooperatives were in arrears ith payments and hence were ineligible for additional borrowg and (ii) establishment of new cooperatives was suspended in 1980, pending a full review of Government's policy towards this Agrarian Reform sector. This component was absent from the Sixth Project. 3.07 In general, the use of the World Bank loans to finace CNCA!s subloans has proceeded quickly and smoothly. Ihere have been temporazy setbacks due to drought or to start up difficulties when lending in a new area has been involved, but CNCA has proved itself to be a higWy effectve organization in terms of credit delivery and an efficient client in terms of the use of the Loan funds Slower progress has been made, predictably enough, on the mstitutional development components 3.08 Construction an reabiltto of branch Under both projects, the use of the loans for financing construction and rehabilitation of CNCAls branch offices lagged well behind appraisal estimates This seems to be due to a combination of: (a) overestimating the speed at which CNCA coud expand from a purely logisdcal point of viev, (b) an unfortunate choice of contractors in some cases; (c) a priori control exerised by Government over CNCA!s budget expenditure; and (d) the need to have prior World Bank approval for reladvely small investments (under the Fifth Project prior approval was required for any onstruton costing more than US$300,000 and under the Sixth the limit was inidally US$400,000 until it was raised in mid-1988 to US$700,000, partly in an effort to expedite the program of network expansion). Towards the end of the Sixth Project, a superviion mission rcommended that a separate dqetment or service be put in charge of the construction and rehabilitation program, to avoid the dflution of responsibDities and lack of attention that had characterized it up until then. By the end of both projects only a small fraction of the Loan proceeds (16 percent and 6 percent, respectvely) had been used. In an attempt to accelerate this program and in the contedt of supervision of the follow up project (National Agricultural Credit Project, Lowa 3088-MOR), the Bank has recently recommended a posteriori control by Government of CNCA!s budgetary expenditures. 3.09 Construction of new headquarters (Sixth Project). Although CNCA moved quickly in 1985 and early 1986 to preselect contractors for the new headquarters, whose justification, financing and design had all been approvWed under the Sixth Project, CNCA decided in 1987 that the site designated in Rabat for construction was ultimately unsuitable, and that with an upcoming change in the focus and functions of CNCA, the organiational structure of CNCA would change considerably, and that therefore the design of the headquarters had to be rethought. As a result, nothing was done on the headquarters for over a year; in 1988 CNCA was again ready to construct and began to seek a new site in Rabat. Mhis took some time, and by the end of the Sixtbh Project, CNCA had obtained a site and had a new design ready for tendering. As a result, at the end of the Sixth Loan, only 2 percent of the Loan category had been used. Fnancing for part of the cost of headquarters was included in the follow-up prqect.  -8- 3.10 Consultants' Srices and Management Inform,aton vtr Under the Fifth Project CNCA was to improve its MIS in two phases lTe fiMst phase, consisting of a review of the accounting sytem, was carried out by January 1985 by an internationally recruwted consuting firm Te second phase, the design and implementation of a comprehensive electronic data proesing system (EDP), including purchase and instalation of equipment, was to be carried out by a locally recruited firm working with the firm that had done the first phase. Disagreement between the former CNCA management and the internationaly ecruited fim on disclosure of information and decentralization of MIS resulted in the termination of the contract. 3.11 A new partnership was formed in 1985 between the local fim and a different foreign firm but little progress was made until after the arrival of new CNCA management in 1987. At the end of the Fifth loan about 60 percent of the categoly consultants' services and nothing of the category for computer equipment had been used. The focus of the new effort was on reorganizing CINCA, establishing medium and long-term planning focussed on deposit mobilization and agricultural lending, and then installing a decentralied EDP system through mni-computers in the branch network, and training of accounts and loan officers in the use of microcomputers. The report submitted in mid- 1988 was not acceptable to CNCA because it was found to be incomplete in seveal areas, and it was decided not to pursue the issues ith the same consultants; no further work was done on planning under the Sixth Project. Because of the delays in getting this work started, at the end of the Sixth Project only about 17 percent of estimated disbursements for consulting services had been used and no purchases had been made on computer equipment (and hence no disbursements). Efforts along these lines have been pursued under the follow up project by requiring CNCA to provide a policy statement defining its medium term objectives (which CNCA has done) and to improve its organiation, MIS and accounting. 3.12 Management Committee and CNCA's Long-tem S . Under both the Fifth and Sixth Projects CNCA was to develop a medium term plan and a strategy for carying out that plan, but it was only under the Sixth Project that arrangements were formalized in terms of conditionality (for Board presentation). An external Management Committee was set up, comprsed of senior representatives of various Ministries, to determine CNCA's policies and strategy. After new management was appointed to CNCA in 1987, this concept of an external committee to determine CNCA's long-term planning was considered superfluous to the proper functioning of the Board of Directos Te Bank and CNCA agreed to disband the Management Committee in 1988 in favor of strengthening the Board of Directors instead to enable it to carny out the normal and appropriate Board functions of strategy, policy mabing, overal supervision and development of CNCA's intemal managerial capacity. In addition, consultants were to be relied on to help the management to articulate the longer-term planning to present to the Board for approval. 3.13 Banking Activities Development. The Fifth and the Sixdh Projects were also to formulate a medium term plan for the development of CNCA's banking activities with special emphasis on the promotion and development of savings deposits. This aspect of institutional development was of continuous concem to appraisal and supervision missions, because of the importance for CNCA to increase its domestic resource base and to rely less on external sources of fuding. During the Fifth Project, CNCA linked resource moblization to an improved information system. As a result, the delays in implementing the MIS meant that no work was done on it. During the Sixth Project, with the arrival of new management, this became a higher priority, but was still associated with developing  -9g a long term plan and strategy for CNCA's future, and implementation invohled developing procedures, staff training, and a concerted promotional campaign. While some progress was made on this, in that domestic deposits grew from Dh 715 million in 1984 to 1,751 million in 1989, liabilities grew faster, so that as a proportion of total liabilities (excluding equity), deposits shrank from 19 percent to about 16 percent over this same period (the minutes of negotiations for the Sixth Project specified a target for deposits of 20 percent of total resources)0'. This remains a priority under the follow up project.Y 3.14 Training Program. Throughout both projects, training took on increasing importance and became a regular feature of employment in CNCA. Given the lack of attention often given to training, this is a considerable achievement. Under the Fifth Project, CNCA was required under the Loan Agreement to produce a training program, which it did by planning a program on: (i) new credit and banking procedures; (ii) use of newly computerized system; and (iii) project anabsis of larger projects for a Limited number of staff According to the files, CNCA did carry out a 30-week internal training program on a part of this program which covered general accounting and the use of microcomputers, benefitting about 430 professionals. Under the Sixth Project, the training programs in various activities (agro-industries, loan rcoveries, accounting, computer system, bankdng activities) were prepared and carried out for continuous in-service training. CNCA currently has an active in- service training program covering many areas of CNCA!s banking activities. Later supervision reports (from 1988 onwards) pointed out the need to coordinate CNCA's training program wnth the long- term planning and strategy being put in place. 3.15 Moitoring and Evaluation. As stipulated in the Loan Agreement under the Fifth Project, a monitoring and evaluation (M and E) unit was created in CNCA in May 1984 and became operational in 1985. Based on farm surveys, the unit: (a) monitored the use of CNCA funds by beneficiaries; (b) calculated at least financial benefits of subloans; whether the unit also calculated costs and benefits in economic terms is not clear; (c) surveyed current and potential CNCA customers for their views on present lendmg procedures, organization and lending potential and Umits. The first survey was carried out in 1985. About 5 percent of medium and long-term clients were surveyed in the North West regions and the results of the survey indicated that the objectives set under the credit line were generally being achieved. It was decided that M and E services would be extended to other areas of the country and a computer managed data bank would be established to increase the usefulness of feedback information for CNCA's lending activities. This is being continued on a national scale under the follow-up project. Disbursements 3.16 Unlike most Bank projects, throughout most of the life of both projects, disbursements * exceeded appraisal estimates (Annex 1, Tables 1 and 2) They were both fully disbursed and final E n equity is Included, ftn deposts decreased from 16.3% in 1984 to 14.7% in 1989. Y Another aspect constraining deposit mobilization was the fact that CNCA has not been allowed to mobUiize deposks in urban areas, this being the domain of the commerci banks. This issue was not fiubl discussed untl the follow up prolect and is now being dealt wfith under the Financiai Sector Development Project  - 10- disbursements took place m both cases ahead of original closing dates The actual and estimated disbursements for both Project periods, over time and by category of disbursements, are in Annexes 1 and 2, respectively. Under the Fifth Project, retroactive financing was allowed for US$11 milion (10 percent of total loan amount) and disbursement percentags were increased twice. The Bank accepted the requests on the grounds that because of delays in Loan effectiveness, cofinancing funds had been used and were now exhausted, demand for farm investment was higher than expected due to Government liberalzation measures, certain categories (computer equipment and technical assistance) were not being used because of initial difficulties with consultants, and the funds for completion of activities under these categories were provided for under the Sixth Project. Under the Sixth Project retroactive financing was also included for US$12 million (10 percent of total loan amount). 3.17 On the request of CNCA management and the Ministry of Fnance, a Special Account was created in July 1985 (Fifth Project). The account was kept in Dirhams which was an exception to normal Bank practice; it was allowed because the funds credited to the CNCA account represented the Dirham equivalent of foreign curreny already spent to pay for imported agricultural equipment purched by project beneficiaries and because CNCA did not assume the foreign exchange risk under the Fifth Project. Under the Sixth Project, provisions were included for a Special Acowunt and the authorized amount was later doubled in size on the request of the CNCA. In spite of this, the Specia Account under the Sixth Project was never actually established because in the event CNCA was able to pre-finance the expenditures Financal PerformIace 3.18 Over the six fiscal years of the two projects (1983/84-89), the financial position of CNCA continued to be generaly satisfactory. During this time, CNCA's role continued to grow rapidly as the principal financial institution to provide funds to the agricultural sector and the only one financing small farmers' credit needs From 1984 to 1989, CNCA's total assets increased almost three-fold from DIH 4.4 billion to DH 11.9 billion (while cumulative inflation was 43 percent for the same period, varying from 87 percent to 2.7 percent per year, assets in real terms virtually doubled). This growth was financed primarily through long-term lending by external agencies, whfle domestic resource mobilization was lower than expected (see par. 3.13). 3.19 In spite of the statements and figures in CNCA's PCR showing that CNCA had respected all the financial covenants (up through 1987; figures are not available in CNCAWs PCR for 1988 and 1989), this report found that it was mixed. Calculations and ratios are in Annex 3. Under both Projects, the liquidity ratio was to remain at or above 1.2. Between 1985 and 1987 it was slightly below 1.1. Since 1988 it has been above 1.5. Under the Fifth Project the (long-term) debt to equity ratio was to be no greater than 6:1. It was above this figure for 1985 and 1986. Under the Sixth Project the ratio was increased to &1 and CNCA was able to stay within this limit for 1987 - 1989. Fnally, the Fifth Project specified in the appraisal report and reflected in the legal documents (Supplemental Letter) that the return on equity (ROE) was to be at east 10 percent for 1985 and 12 percent thereafter. Under the Sixth Project, the appraisal report specified, as did a covenant in the Loan Agreement, that the ROE was to be at least 12 percent. In fact, CNCA's ROE was comfortably above 12 percent until 1988, when it dropped to about 6 percent (as loan loss provisions  - 11 - increased considerably, thereby reducing net income, and CNCA profits became taxable), and 1989, when it was 7.4 percent. 3.20 In spite of the high rates of return eamed in 1985 - 1987, however, an audit of CNCA by an internationally e ized auditing firm in 1986 questioned the adequacy of the provisions given the loan portfolio. In 1987, CNCA agreed to study careflly its provisioning policy, and the result was a change to a much stricter approach which was announced in a policy statement in 1989 and made retroactive to 1988 As early as mid-1988, it was predicted by World Bank missions that the return on equity would decrease as a result of this. Net income (before tax) did indeed drop considerably, from about DH 87 mfllion in 1987 to DH 52 million in 1988 CNCA has further improvements to make in its accounting practices, such as the introduction of a policy on non-accrual of interest on past due loans, and this, combined with the recent reforms on provisioning policy and the introduction of a corporate income tax that increases the incentive to reduce net income (CNCA does not distribute dividends), means that there is likely to be a more modest return on equity in the future, but a sounder financial structure. CNCA has nevertheless set itself a target (speiled out in its policy statement) of achieving a return on equity at least equal to the domestic inflation rate, and this is an entirely reasonable objective. 3.21 L c . CNCA loan recoveries during the project implementation perods were good compared to other agriultural credit banks in both developing and industrialized countries. However, due to unfavorable weather conditions, there was a gradual decline in recovery performance; the rate fell from 80 percent during the Fourth Agricultural Credit Project (1979-82) to some 65-70 percent between 1983 and 1985, and eventually to below 65 percent in 1986 and 1987. During the Fifth Project, around 1985, some rescheduling became possible with extemal funds from EEC (US$20 M), the USAID (US$13.5 M) and CNCA's own resources (US$7 M); loans were rescheduled over a ten year period to accommodate about 70 percent of CNCAs arreams Of this, EEC and USAID contnbutions were used to assist small farmers with less than DH 6,000 of fiscal income. 3.22 As a result of the declining trend in recovery rates, CNCA made a concerted effort towards the middle of the Sixth Project (in 1988) to improve them, piaril by sensitzing CNCA staff to follow up on reimbursements. In addition, CNCA changed its fical year in 1988, to run from January to December and thus coincide better with the lending cycle (with an end of the fiscal year formerly in August, loan recovenes looked quite lovr, by December they had usually increased appreciably). Loan recoveries improved in 1988 to 76 percent, and remained at that level in 1989 and 1990 (75 percent and 76 percent, respetively). 3.23 In summary on the financial performance, it is important to distinguish CNCA's financial health and soundness of accountig practices from its ability to meet the financial covenants of World Bank Loan Agreements. Particularly under the Sixth Project, CNCA made important progress in improving its provisioning policies, as well as undertakng a concerted effort to increase loan recoveries As a result, it is a stronger financial institution today than when it was showing a 12 percent or 13 percent ROE. Tis argues for focussing on policies and procedures as well as on financial ratios to ensure longer term financial health.  - 12- 3.24 Interest Rates. Between 1985 and 1989 interest rates have been positive in real terms, as shown in the following Table: CNCA'S INTEREST RATES 1985 1986 1987 1988 1989 Average on-lenditg rate 10.6 10.5 11.2 11.3 12.7 Annual Inflation rate 7.7 8.8 2.8 2.3 3.1 Effective re 4 rate 2.7 1.6 8.2 8.8 9.3 of interest ' 'l Based on the fomd as e - l+r - 1 1+i where e a effective rate of interest r - nominal Interest rate i - inflation rate CompLHnce with Cove=na 32S With a few exceptions the overall compliance with covenants in both projects was good. As stipulated in both Loan Agreements for the Fifth and Sixth Projects, CNCA used consultants for various acthivties, including management consultants for analyzing the accounting system and procedus and electronic data processing, other consultants for technical appraial and supervision of rural housing projects, and an architect and an engineer for monitoring the construction and rehabilitation of branch offices CNCA also opened an agro-industrial office at Mecknes wthin the stipulated period under the Fifth Project and two others, as stipulated under the Sixth Project, at Casablanca and Agadir. A training program was developed and carried out and a monitoring and evaluation unit was established as stipulated under the Fifth Project, both of which continued to function throughout the two projects. Fmally, the stipulation under the Sicth Loan Agreement that lending for rural housing was to be limited during CNCA's fiscal years 1987 and 1988 to DR 200 million (because it was a new activity in a new sector) was respected. 3.26 Several covenants dealing with institutional development were not met These included, under the Fifth Project, the requirement that salaries of CNCA personnel be made competitive with those in other specialized financial institutions. As this was still an issue at appraisal of the Sixth Project, it would appear that this covenant was not complied with until it became a condition for the follow up project By 1988, however, salaries had (again) slipped to about 60 percent of those in other specialized finandal institutions. The issue was taken up in the follow up project as a condition of Board presentation, which was met on time in May 1989. 3.27 Because of disagreement between the consultants and former CNCA management over the scope and objectives of the studies to be carried out, CNCA did not prepare and carny out a medium term plan for the development of banking activities, discussed in param 3.13 above, nor prepare plans for a new management information system, accounting procedures, planning and budgeting and internal controls, discussed in paras 3.10-3.12 above. There were covenants in both projects dealing  - 13 - with these issues. Finally, under the Sixth Project, the Management Committee that was to take an active role in determining many organizational and operational issues never fulfilled its function as discussed in para. 3.12 and this idea was ultimately abandoned (and the Loan Agreement amended accordingly). 3.28 Compliance with Financial Covenants. As discussed in para. 3.19, compliance with the covenants on financial ratios was mixed, although CNCAs fnancial performance should be considered generally good. In addition, CNCA and the Government did keep interest rates positive in real terms (para. 3.24), as specified under the Sixth Loan Agreement. There were other financial covenants which were either girt met or not monitored. For example, under the both the Fifth and the Sixth Projects, CNCA's lending or other financial participation for any one investment was limited to 20 percent of CNCKs equity. While external auditors presumably would have flagged any particular problem in this area, there is no mention in the files that this covenant was ever monitored by the Bank. CNCA was to ensure that full costs of operating CLCAs, the branches serving the poorer clients, were covered by the lending interest rates. There is no specific mention in the files as to whether this was accomplished, although CNCA did develop an accounting system that allowed it to account for CLCAs' operations separately. 3.29 The covenant in the Sixth Loan Agreement (Section 4.10) regarding one-year bonds was not complied with; CNCA was to complete a study by June 30, 1987 on the scope for gradual elimination of CNCA bonds to which commercial banks were required to subscnrbe at below market rates. The intention was to encourage CNCA to mobilize other domestic resources to replace the bonds. As CNCA did not make significant progress on mobilizing other domestic resources for reasons discussed in para. 3.13, CNCA did not carny out the study. The Bank has continued to press for reduction in the obligatory subscription to these bonds; with the gradual liberalization of the banling system, the Bank has made new proposals for all spealized financial institutions, including CNCA, under the proposed financial sector development loan. In addition, CNCA was to establish and maintain a separate account to which it would credit each year an amount equal to 1 percent of its outstanding bonds for covering losses resulting from the failure of its borrowers to repay their loans because of natural calamities. This account was created to ensure adequate loan loss provision pending the development of improved general financial policies, but upon CNCA's request the Bank agreed to change this requirement as being an inappropriate way to deal with the issue (the Loan Agreement was amended accordingly). Under the follow up project, CNCA has adopted significantly improved loan loss provisioning policies and procedures (see para. 3.20) and the establishment of a Guarantee fund for natural disasters is currently under study. 3.30 Compliance with Guarantee Agreements. Most of the covenants of both Guarantee Agreements concerned ensuring that CNCA would be able to honor its commitments under "%e Loan Agreements (for example, on interest rates or salary structure). To the extent that CNCA met its conditions, it can be said that Government compliance was also satisfactory. One area which was problematic throughout both projects concerns Government obligation to reimburse CNCA in a timely manner for its share of the foreign exchange losses incurred on foreign debt reimbursements that CNCA paid on behalf of Government. While Government did settle its 1986 and 1987 foreign exchange arrears to CNCA in July 1988 with five-year Treasury bonds at 6 percent and its 1988 arrears in a similar way in April 1989, this has created problems of liquidity for CNCA.  -14 - Rqportig ad Auditing 331 CNCA submitted to the Bank regular semi-annual reports including detailed data on its lending activities by category and maturity, credit recovery, financial situation, and progress achieved in the implementation of its institution building activities. External audit reports were prepared by a qualified independent priate auditor and were submitted to the Bank annually and in a timely fashion. Project Impact 3.32 The Fifth Project proposed to improve the living standards of about 580,000 farm families and create some 78,600 manyears of rural employment. Under the Sixth Project around 520,000 families were projected to be direct beneficiaries and about 50,600 man-years of rural employment would be created. It is not clear from the fMies why CNCA expected a decrease in the number of its borrowers between the Ffth and the Sxth Loans. However, neither CNCA's own PCRs nor project files provide information as to the impact of these projects in terms of the number of beneficiaries and employment. According to the follow-up project, about W85,000' farmers had been reached by 1987; this represents an increase of 30 percent over the estimated 450,000 clients reached in 1982. 333 On the institutional side, the impact of the two projects has been considerable. Combined with new and more receptive management, CNCA has evolved considerably in terms of its internal procedures, accounting practices, organizational structure, recognition of the need for long term planning and strategy, training prgrams; in terms of its actvities, it has considerably expanded the wope of its lending to cover agro-industres and ruraa housing and is continuing to explore other areas for lending under the follow-up project. Continual Bank presence and intervention should take at least part of the credit for these developments. D. CONCLUSIONS AND LESSONS LEARNED 4.01 Overall, the Fifth and the Sixth Projects were successful both in terms of delvering credit to an impressive number and proportion of the agricultural population, at unsubsidized interest rates, and in terms of progress made in the development of a specialized financial institution. While some of the specific covenants were not met, CNCA was, at the end of the two projects, institutional stronger in financial and managerial terms than it had been at the beginning. 4.02 CNCA"s overall record is good, and from 1984 to 1987, progress was made on: (a) introducing a management information system and improving the accounting procedures to show a more accurate picture of the financial situation; (b) introducing and expanding internal training which had direct results in, among other things, improvnmg credit delivesy in new areas and in loan recovery; (c) beginning the process of decentralization, which increased efficiency, and (d) improving the lending criteria so as to facilitate credit delivery and reach a larger number of farmers In most areas, however, these developments were slower than expected until around end-1987 and in some areas, little progress was made. These include direct deposit mobilization and constructon of new branches. d' Includt women farmers and aitisans and cint reahed though Agrarin Reform CooPeraiesand ORMVA.  The limited success of these components can be attributed to: (a) their ambitious and long-term nature; (b) lack of a wel defined plan of implementation; and (c) administrative constraints imposed by Government. These activities are now being undertaken (with increasing success with respect to deposit mobilization) during the follow-up National Agricultural Credit Project. 4.03 Measuring CNCA!s financial situation only in terms of the ratios used during the two projects, it appears that its profitability, for example, worsened, as CNCA's return on equity dropped from 12- 13 percent to 6-7 percent. CNCA had, however, improved its financial management and changed its accounting practices so that CNCA now has in place more prudent accounting pracdtes and the financial statements reflect a more soundly managed institution (in particular, there is more adequate provisioning for loan losses than in the past). One of the lessons of this exercise is that defining financial ratios in legal documents without also having good financial management and accountng practices is not very useful for ensuring financial health and long-term viability. 4.04 Although CNCA has grown rapidly into one of the largest and most important financil institutions in Morocco, both its management and its structure must be modernized in order to continue to operate effectively in the future and to evolve towards fullservice banking. By the end of 1987, CNCA had grown rapidly (with a clientele numbering over 700,000), and was suffering from the consequences of this rapid growth CNCA now must face the challenge of servicing an ever- increasing clientele in an increasingly competitive financial sector environment, and is responding to it by introducing reforms following the decision to transform CNCA into a universal banL These major institutional reforms are currently being carried out under the National Agricultural Credit Project (Loan 3088-MOR). 4.05 In many respects, CNCA continues to be a successful example of an agricultural credit banL Tbis accomplishment, due in part to continued Bank assistance as weU as to excellent leaderip within CNCA itself and to Government support in certain areas, and in spite of the restrictions under which it has operated, should not be underestimated. It is currently one of the few examples of successful agricultural credit institutions with which the Bank is associated. CNCA has in the past enjoyed justifiable grants and concessionaire funds, which are not available to other banks that do not work in agriculture, for rescheduling loans in arrears due to bad weather; CNCA has also obtained a portion (12-13 percent in 1986/87) of its resources at below-market cost. These resources have enabled CNCA to undertake the costly and risky business of senvng small farmers under adverse climatic conditions. CNCA has simflarly operated under considerable constraints, such as a priori control and an interdiction on mobilizing deposits in urban areas. Now that CNCA is on reasonably sound footing, the Bank, the Moroccan Govenment and CNCA are moving towards establishing an undistorted, competitive financial sector environment and are in the prooess of removing the existing distortions in the farm credit system. It is important to recognize, however, the special conditions prevaiing in agricultural lending, which make it imperative to provide some sort of financial safety net to either farmers or to the financial institution(s) lending to farmers (provided, of course, that such a safety net is transparent). The success of CNCA to date is testimony to this fact.  - 16 - PART Un PROJECT REVIEW FROM BORROWER'S PERSPECTIVE In addition to the two PCRs prepared by CNCA, retained in Bank files, CNCA submitted a substantial comment on the PARJPCR package sent to< Government in uiy 1992. The CNCA comment includes a primaty letter, included here, and an annex, which refers to PAR paragraphs and is attached to the PAR but not included here. In the following letter, reference on the first page to paragraphs numbers and the Subsidy Dependence Index are also directed at the PAR.  - 17 - TRANSLATION KINGDOM OF MOROCCO CREDIT AGRICOLE gneral Director N 547/92/DG Rabat, October 1, 1992 Mr. Graham Donaldson, Chief Operations Evaluation Department International Bank for Reconstrction and Development 1818 H Street N.W. Washington DC 20433 U.SA Dear Mr. Donaldson: In reply to your letter of July 22, 1922 enclosing the preliminary evaluation report on the fifth and sixth Agricultural Credit projects, I am sending you herewith my remarks on the contents of that document. I should like first of all to congratulate the team of experts who produced the evaluation in question on the fine quality of the work and the distinct highlighting of the development prospects for Credit Agricole in spite of the particularly difficult situation which beset the 1991-1992 crop year. The first group of my comments has to do with the congruence of the figures: that subject is addressed in a detailed note attached to this letter. In examining the conclusions of the report, I shall confine my remarks to the topics of financial results (4.3), the settlement of arrears (4.9), the exchange risk (4.11) and, finally, the future of Credit Agricole (4.15) 1. Financial Performance Before tackling this subject, I think it is important to note that the CNCA had, at the appropriate time, already conveyed to the experts responsible for the evaluation the limitations of the Jacob Yaron model for calculating the degree of dependence on subsidies. Since very little time  -18- was available for the experts to apply the model to Credit Agricole, it had been decided to take this question up with the model's author himself in the course of July 1992. While awaiting the adaptation of the Subsidy Dependence Index (SDI) to the specific case of CNCA (since Mr. Jacob Yamn was unable to keep the July appointment because of other engagements), judgment on the subsidy amoun.s estimated by the esaluation mission (see paragraph 3.17) should be reserved. Moreover, as noted in the report, Credit Agricole today as in a more solid financial position than in the past, thans to a stronger policy for setting up reserves for bad debts-one that is better able to cope with the risks facing the agricultural sector. It should be noted in this connection that our external auditors have-for the first time-stated that the reserves set up in 1990 were adequate, taking into account the risks inherent in the agricultural sector. In my opinion, however, strengthening of this financial structure is not achieved solely by raising interest rates, but also-and most importantly-by the establishment of a guarantee fund as insurance against natural disasters in order to protect the institution from other than banking risks. 2 The Settlement of Past Due Accounts The mission was able to observe the importance the CNCA assigns to the settlement of overdue fincial obligations and the impressive efforts expended by Credit Agricole to resolve that situation. It was also in this context, and due to the drought experienced in the 1991-92 crop year- the adverse impact of which had been noted by the experts-that steps were taken to clean up the arrears situation and ease the farmers' debt burden. To that end, it was decided to cancel the late payment charges for debtors who pay the amounts owed within the allotted period, and to grant rescheduled loans to the farmers who pay off part of their dues. I should like to point out, along the same lines, that the statistics presented by the CNCA reflect the account ledgers; and that inconsistencies noted by the evaluation mission stem from a oonfusion between the recvery rate on current maturities for the fiscal year and the rate on all accounts payable, including those for earlier coliection periods. Generally speaking the results posted as a result of the 1985 rescheduling have been satisfactory, when the region in question has experienced successful crop years in the wake of that operation. The analysis of previous overdue accounts should have taken into account the regional concentration of such arrears. Three regions (the east, Haouz and the south) were chronically beset by disasters throughout the 1980s and at the start of the 90s, and they account for more than 70% of the entire CNCA arrearages. This is why the development of Credit Agricole in those regions must include more widely diversified activities and risks, as well as the establishment of a guarantee fund for protection against natural disasters.  -19- 3. Mtem for Cveraue of Exchane Risk According to the simulation exercises conducted, application of the new exchange risk coverage system to external loans contracted by the CNCA will boost the interest rate by three to four points This increase would jeopardize the profitability of the projects financed, and it will undoubtedly have an adverse effect on loan recoveries. While awaiting the implementation of specific financial mechansms to cover exchange rislcs, it is eminently desirable to continue using the exchange coverage system negotiated in May 1989, (which was approved by the World Bank), for the new lines of credit that the CNCA hopes to mobilize in 1993. 4. The Future of Credit Agricole Originally a financial institution specializing in funding for agrculture, the CNCA has now begun to diversify its activities so that it wil gradually become a universal bank for service to the rural community and, eventually, a bank that is able to provide its customers with all categories of banking services. That long and difficult process calls for an evolution strategy tailored to the country's specific needs as well as to its economic and social situation. The efforts deployed since 1987 are aimed at strengthening the institution's financial structure, cleaning up previous arrears, diversiing financing to spread the risks; actively attract savings deposits; strenw then the branch network; enhance the reliability of management control tools; and imest in the training of Credit Agricole's managers, professional staff and agents. Tbis new strategy also calls for instituting basic reforms needed to meet the competition, which has become increasingly evident since the departitioning decreed by the monetary authorities in 1991. What are those necessary reforms? * Frst and foremost, revision of the text of the law governing Credit Agricole to adapt it to the reality of the nationwide financial sector reform and the changes in the national economy. * In addition, the establishment of a Guarantee Fund to cover Natural Disasters. * And finally, completion of the reforms currently in progress, covering administrative, accounting and data processing procedures, implementation of a mamagement information system, and upgrading of the services offered by the Credit Agricole. Only when all of these prerequisites have been met and Credit Agricole's public service role as the source of financing for small farmers has been established-with all the associated  - 20 - implication in regard to the mobilization of stable concessional resources-only then can we contemplate the participation of commercial banks in the development of rural financial markets. Tbere you have some observations I wanted to contnbute to the important evaluation report which reviews almost eight years of Credit Agricole activity (1983-1990). To conclude, I would like once more to assure you of the need to take into account and support the strategy now being implemented to mobilize the means required for its complete success, without undue haste, in the knowledge that the most important mission of Credit Agricole will ahvways be to make an effective contribution to improve living conditions for farmers and the rural population by sponsoring productive and profitable investments. Thank you again for your cooperation and for the World Bank's ongoing assistance to Credit Agricole. Please accept. Sir, the assurances of my highest consideration. M. Rachid Haddaoui, Director General  -21 - PART mI: STATISTICAL INFORMATION 1. Prject Timetable ifth Agricultural Credit Project (Loan 2367-MOR) Activitv Orilinal Plan Revisions Actual Appraisal 03/21/83 Negotiations 10/18/83 Board Approval 12/13/83 Loan agreement 03/01/84 Loan effectiveness 06/01/84 05/11/84 05/11/84 Closing 08/31/87 08/31/87 Completion 08/31/87 03/87 Sixth Agricultural Credit Project (Loan 2731-MOR) Activity Ori-inal Plan Revisions Actual Appraisal 01/86 02/86 10/85 Negotiations 06/86 07/86 05/02/86 Board Approval 07/86 09/86 06/26/86 Loan agreement 09/17/86 Loan effectiveness 12/16/86 12/86 12/10/86 Loan amendment 03/06/90 03106/90 Closing 03/31/90 03/31/90 Completion 09/30/89 02/90  -22- 2. CumulatIve Estlmated and Actual Disbursements Fifth Ariculturl Credit Project (Loa 2M7-MOR) FY84 FY85 FY86 FY87 FY88 Appraisal estimate (US$ mn) 10.0 38.0 78.0 113.0 115.4 Actual (USS milioa) 15.4 47.0 106.0 115.4 Actual as 2 of estimate 154.0 124.0 136.0 102.0 Date of final disbursement March 17, 1987 Sixth Agricultural Credit Project (Loan 2731-MOR) FY87 FY88 F" i9 FY90 Appraisal estimate (U$ n) 15.0 50.0 95.0 120.0 Actual (US$ mlllion) 32.2 68.2 112.7 120.0 Actual as 2 of estimate 213.0 136.0 118.0 100.0 Date of finl disburseent February 7, 1990  -23- 3. Compaison Beween Appisal and Actual Disburseme by Categoiy of Dbumsement (US$ million) Fth Agriculurl Ceit Project (Loan 2367-MOR) Category Appraisal Actual Actual as 2 of appraisal 4 1 Subloans through CLCAs 42.0 48.5 115 2 Subloans to Agrarian Refonm Cooperatives and Narmers' Associations 4.0 2.3 57 3 Subloans through CRCAs and CRCA headquarters 50.0 49.7 99 4 Sub-loans for Agro-industries 14.0 13.8 98 5 Civil Works for CNCA Physical Infrastructure 3.5 0.6 14 6 Consultants' services 0.5 0.3 60 7 Data processing equipment 1.0 nil -- 8 Front-end fee 0.3 0.3 100 9 Unallocated -/ 0.1 nil -- TOTAL 115.4 115.4 100 11 This is not a category of disbursement but is the distribution shown in the Staff Appraisal Report. Sit Agriultul Credit Prjecd (Lan 2731-MOR) Category Appraisal Actual Actual as of appraisal I-a Subloans through CLCAs 35.0 31.7 90 1-b-i Subloans through CRCAs and CNCA for Greenhouses 13.0 18.6 143 1-b-2 Subloans through CRCAs and CNCA for Other Investments 45.9 49.0 106 1-c Sub-loans for Agro-industries 14.6 13.7 93 1-d Subloans for Rural Housing 7.0 6.7 96 2-a Goods and Works for CNCA's Branch Offices 2.0 0.02 6 2-b Goods and Works for CNCA's Headquarters 1.0 0.1 1.7 3 Equipment for HIS 1.0 nil nil 4 Technical Assistance 0.5 0.08 16 TOTAL 120.0 120.0 100  - 24- 4. FIancal Ratlos 1984 1985 19861 1987 1988 1989 -CNCA V- -CNCA Vli- DEBT: Equity Equity 517.6 589.2 670.6 ' 758.0 862.7 901.3 L-T Debt 2110.8 4,021.4 4,610.9 '5,284.6 5,58.6 5,877.6 Actual Ration 4.1 6.8 6.9 ' 7.0 6.5 6.5 Covenant -o greater than 6:1 - not greater than 8:1- Other Sources Model " 6 84 &7Y PCR-OCA 3.7 57 6.9 7.2 n.a n.ae UQUIDiTY Current Assets 2,067.0 1,733.3 2676.1 '3,105.8 5,886.7 7,257.7 Current Labiiitles 1,616.3 1,625.6 2780.3 '2877.9 3,624.1 4,305.9 Actual Ratio 1.3 1.07 0.96 ' 1.08 1.6 1.5 Covenant -not less than 12-' -not iess than 1.2- Other Sources Model ia / 1.3 1,5 PCR-CNCA 1.5 1.7 1.9 i 2.0 n.a. n.a RETURN ON EQUITY Net Profit Before Tax 62.8 71.7 81.4 0 87.4 51.7 65.5 Average Equity Y 486.9 553.4 629.9 ' 714.3 862.7 882 Actual ROE 129% 13.0% 12.9%' 12.2% 6.0% 7.4% Covenant (Minutes of Negot.) 10.0% oo t less than 12% - Other Sources Model1' a 6.1% 7.7% PCR-CNCA 11.5% 11.1% 122% 1 11.7% n.a. n.a. 1' Financial Projection Model. Y For 1988, end-year figure (rather than average) was used. W Projection. Sources: 1984: SAR No.6094-MOR, Sbth Agricultural Credit Project 1985-87: SAR No.7453-MOR, Natioral Agricultural Credit 1988-89: Audited accounts.  -25- 5. Relad ak Laos Fifth Agicult l Credit Projwct (Lan 2367-MOR) Borrower Cadse. Rationale de Cr4dit Agricole (CNCA) Ulme 1Sxth Aaricultural Credit Project Loan number 2731-HO! Amount USS120 million Date Board Approval 06126/86 Sih Agiulura Credit Project (Lon 2731-MOR) Borrower Caisse National de CrEdit Agricole (CNCA) Rsme on fPro ect National Agricultural Credit Project Loan Number 3088-10R Amount US$190 minlion Date Board Approval 06/14189 i Status of C(veants Fif Ag ultural Credit Pojct (Loan 2367-MOR) Sixh Agrkculu Credit Project (Loa 2731-MOR) See PMR pam 325-330.  -26 - 7. Bank Resources A. Staff Inputs Ffh Ariutura Credit Project (a 2367-MOR) FY81 PY82 FY83 FY84 FY85 FY86 FY87 FY91 TOTAL Prgappraisa1 2.2 0.7 6.5 9.4 Appraisal 34.3 12.8 47.0 Negotiation 8.8 8.8 8 rvision 6.6 9.1 0.8 5.6 1.8 23.8 Other 0.1 0.7 3.6 9.8 14.2 Total 2.3 1.4 44.4 37.9 9.1 0.8 5.6 1.8 103.2 Sih Apricultural Credit Project (L1n 2731-MOR) PY85 YY86 FY87 FY88 FY89 FYgo pY91 TOTAL Preappraisal 8.7 12.2 20.9 Appraisal 32.8 32.8 Negotiation 4.8 4.8 Su ervision 0.6 2.2 4.3 2.0 7.6 7.3 24.1 uther 1.5 11.3 0.9 13.7 Total 10.2 61.7 3.1 4.3 2.0 7.6 7.3 96.2  -27 - B. Missio Data Fifth Agrkultu Credit Project (Loan 2367-MOR) No . of Mandays Specializatiopl, Performanc Tes of Piosion Dates Persons in field _represented ratin. Trend Proble Appraisal 3183 3 60 B A PA Supervision 1 2/84 1 4 E 1 2 Supervision 2 7184 1 9 B 1 2 Supervision 3 12/84 1 12 PA I I Supervision 4 3/85 1 11 P Supervision 5 7/85 1 13 F Supervision 6 7/86 1 10 PA Subtotal 59 3 TOTAL 119 I u Economist; PA - Financial Analyst; A Agronumist. 1 problem-free or minor problems; 2 = moderate problem- 3 major problems. I Some of this time Was spent in preparation of the Sixth Project. Sixth Agrltun Credit PJject (L4an 2731-MOR) No.of Mandays Specialisatiou Performsn e Types c Mission Dates persons in field reVresented O ratina - Trend ' Problem - Appraisal 11/85 5 125 I E A FA Supervision 1 4/87 4 51 EN E FA 0 Supervision 2 11/87 1 8 PA Supervision 3 4/88 6 108 PA Al 0 Supervision 4 7/88 1 6 EN Supervision 5 8/89 3 17 FA EN 0 Supervision 6 2/90 5 9 LS PA AIO Subtotal 199 TOTAL 324 1I Economist; PA - Financial Analyst; A k Agronomist; EN * Engineer; Al Agro-Induetry; LS - Livestock Specialist; 0 - Other. Form 590s were not available in files. Some of this time was spent on supervision of the Fifth Project. - Some of this time was spent on supervision of the follow-up project.  MOROCCO/C4ARO - SIXTH AGRICULTURAL vRfIED #P1imT --odtterranean 5e., SIXI#ME PROJET OE CRADD(7AeflhCOI4 . A.,. BRANCH NETWORK OF THE DNAPT ONAV IT4MIKJ RASAU DE IA CAI55 NA(Ar,aA HMoA. "6(: NUrMMO4/R1f0D^ N E MAt - , m*-. t CRCA'4O) ALGERIA * CLCA 090 *S-b L J1 ; -600- ind )im 47j r ndu*) n,' '- Afw~ws o^ie ,o * (W J * CRCA~~~~~~~~~~~~~~~~~~~~~~~S 002 Avmgt, a em