Jordan - Second Agricultural Credit Project

1t'ILE IIICOPY RESTRICTED Report No. TO-586a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION SEC OND AGRICULTURAL CREDIT PROJECT JORDAN April 14, 1967 Projects Department  CURRENCY EQUIVALENTS US $1 = Jordan Dinar 0. 3571 (3571 mils Jordan) JD 1 1, 000 mils = US $2. 80 JD 1, 000, 000 US $2. 8 million WEIGHTS AND MEASURES Metric System One dunum = 0. 1 hectare  J 0 R D A N SECOND AGRICULTURAL C,1_DTT RtOJ'CT TABLE OF CONTEITS Page No. SUEE ARY9 .... t ., , ...a......6......a...a........................ 1. INTRODUCTION . . . . . . . . ... . . . . .1. 2* BACKGROUND. . . . . . * . . . . . . . . . . . . . . . . . . . 1 As General . . . . . . 4 . . . . . . . . . . * * * * . * . * 1 B. Land and W,1ater Resource Development . . . . . . . . . . . 2 C. Agricultural Services..... . * 6 *... 2 D. ACC's Progress and &cperience Under First IDA Credit. . . 3 E. ACCts Overall Credit Program. . . . . . . . . . . . . . . 4 3. THE PROJECT . . . . ..a . . . 0 . . , . . . . a . 5 A. Detailed Features.. . .. . . , . . . . . . . . . . . 5 B. Cost Estimates. . . . . . . . . , . . . . . . . . . . . . 6 C. Proposed Financing, . ni. .. .. .. . ... . .. .. 6 D. Lending Policies and Procedures . ..* . . . .. . .. . 7 EB Disbursement . . . * . . *. . . . . . . . . . . . . . . 9 F. Operating Results . . . * . .. .a * . . . . . . . . . 10 4. ORGANIZATION AND MANAG&MUT . . . , . . . . . . . . . . . . . 10 A. Project Administration. . . . . e . . a a . . . - 10 B, Procurement . . . . . . . . . . . . . . . . . . . . . . . 11 5. BEN3FITS ANID JUSTIFICATION* . . . . . . . . . . . . . . . . . 11 6. COUCLUSIONS AND RECOIZENDATIONS . . . . . . . . , . . . . , . 12 AlirXES 1. The Agricultural Credit Corporation (Tables 1-5) 2. Details of the Lending Program (Tables 1- ) 3. On-Farm Development Projection for Representative Farms (Tables 1-6) ONE MAP *^ * * This appraisal report is based on the findings of a mission atich visited Jordan from September 16 to October 6, 1966. The mission was composed of lIessrs. P.A. Courbois and H. von Oppenfeld.  J 0 R D A N SECOND AGRICULTURAL CREDIT RiOJECT S U 14 M A R Y The Government of Jordan has requested an IDA credit to enable the Agricultural Credit Corporation (ACC) to finance part of the second stage of its 'Lending program. The proposed credit of US$3 million would supplement ACC's own resources to permit lending for the Project of US$5 million over a four-year period. The program is within the framewJork of the Seven-Year Development Plan 1964-1970, and aims at the improvement of Jordan's limited land and water resources and their development for fruit and vegetable production. ii. In December 1963, IDA extended a first Credit of US$3 million ([DA Credit 44-JO) to the Government of Jordan to support the first stage of the lending program. Progress of the Project was satisfactory and there was a ready response frcm farmers to the opportunities afforded in the four main areas of lending, i.e. farm water supply, livestock develop- ment, farm mechanization, and land reclamation. The Credit was fully disbursed by April 1966, and since then ACC has continued the program initiated under the IDA Credit, at a reduced level with a short-term advance from U.S.AID and its own resources, which are inadequate for meeting the demand for credit. iii. As with the first Credit, the Project would include land recla- mation and improvement, farm water supply development, and farm mechani- zation, but there would be greater concentration on tree crop and vineyard establishment and on-farm development within Government irrigation schemes. iv. The total Project cost would be US$6 million. In addition to the IDA Credit of US$3 million, ACC would provide US$2 million and the farmers themselves the remaining US$1 million. The Project is techni- cally sound and economicaIly justified. Estimated benefits both to farmers and the national economy are substantial. The Project is suitable for an IDA credit of US$3 million.  J O R D A N SECCbID AGRICUITUIiL CIMEDIT PROJECT 1 . INTRODUCTION 1.01 The Government of Jordan has applied for a second IDA credit to enable the Agricultural Credit Corporation (ACC) to continue its lend- ing program within the framework of its Seven-Year Development Plan 1964- 1970. The Government's request for a credit of US$5.8 million to help finance ACC lending program over a four-year period was scaled donvn to US$3 million. The credit of US$3 million would supplement ACCts resources to permit a lending program of US$5 million over a four-year period. 1.02 In December 1963, IDA extended a first Credit of US$3 million (IDA Credit 44-JO) to the Government of Jordan to support the first phase of its lending program. The progress of the Project was satisfactory; the Credit was fully disbursed in April 1966, slightly before the closing date of June 30, 1966. Since then, ACC has been able to continue the lending operations initiated under the IDA Credit, from its own resources and with a short-term advance from U.S.AID; but its resources, which are now restricted to collections, are inadequate for meeting the demand for credit. 1 03 This report is based on information prepared by the Government of Jordan and on the findings of an appraisal mission which visited Jordan in September-October 1966, composed of Ilessrs. P.A. Courbois and H. von Oppenfeld. 2. BACKGROUND A. General 2.01 Jordan has recently revised its Seven-Year Development Plan 1964- 1970. The Government's major goal is to reduce the deficit in the external balance of trade and the dependence upon external budget support. The agricultural sector is expected to contribute significantly to the attain- ment of this goal, and substantial investments are planned to increase the agricultural output. 2,02 Jordants GDP expanded rapidly by 10 per cent per annum from 1959 to 1964. Aided by two good harvests during this period, the growth rate in agriculture (17 per cent per annum) was even higher. Exports of agri- cultural products also increased by about 17 per cent per annum on the average. They constitute 55 per cent of total exports. In 1964, agricul- ture represented 25 per cent of GDP and accounted for 35 per cent of the 0.5 million labor force. Wages of unskilled laborers have risen in the last few years to a level ranging from JD 0.4 to 0.7 per day (US$1 .15 to  US$2.00). Although Jordan has little registered unemployment, there is scope for additional employent of family labor and of -the predominantly rural refugee population through the agricultural development which would be generated by the proposed Project. B. Land and Water Resource Development 2.03 Jordan has a land area of 9.7 million ha and supports a popula- tion of about two million. Eighty-seven per cent of the land area receives less than 200 mm annual rainfall and is unsuitable for cultivation except in small areas where irrigation is feasible, Although not more than 60,000 ha, or less than one per cent, was irrigated in 1963, this area accounted for about 30 per cent of agricultural production. 2.04 Surveys of water resources indicate that an additional area of about 160,000 ha can be irrigated. Uater development is being planned and supervised by the 1iatural Resources Authority (formerly the Central 1Jater Authority), with the assistance of internationally recognized con- sultant firrns 17 2.05 New farm units of not less than 30 dunums (three hectares) have been established in large government irrigation schermes from newly reclaimed lands and from larger farms divided under a land reform program. With intensive fruit and vegetable production these farm units are viable. Formier oimers of larger farms subject to the land reform program have been permitted to retain units up to 200 dunums (20 ha) of irrigated land. 2.06 ilinor irrigation works, involving mainly groundwater development and well construction, have been carried out by progressive farmers vino frequently sell surplus mater to other farmers. Well construction is sub- ject to licensing and supervision by the Hatural Resources Authority. This development has been encouraged by loans under the first IDA Credit. C. Agricultural Services 2.07 The Iinistry of Agriculture has been weak and provided little assistance to farmers borrowing under the first IDA Credit. ACC itself filled the gap, however, by improving and expanding technical services to its borrowers. In recent years the Government of Jordan has significantly improved agricultural research and education, and steps have now been taken to strengthen the agricultural extensiorn services. These measures, allied to the continued provision of technical services by ACC and the industry and skill of commercial farmers, will be adequate for the success- ful operation of the proposed Project, 1/ Ilarza Engineering Company and Sir Ilurdoch HIcDonald and Partners.  - 3 - 2,08 Considerable progress has been made in tackling the problems of marketing of agricultural produce. A marketing bureau has been set up to carry out research on markets and related problems of processing, storage and transportation and to promote the development of marketing facilities. In line wiith recommendations of a Government/UNDP market research team, the Government has established two farm marketing centers, with facilities for produce weighing, grading and shipping. The city market of Arman has been relocated and reorganized to improve the efficiency of wholesale distribution, Steps have also been taken to improve packaging, tr&nsport and quality control in order to increase exports of fresh fruit and vege- tables to Kuwait, Saudi Arabia and Iraq. 2.09 Prospects for growth of internal demand are good, and exports of fruit and vegetables have grown at an annual rate of 16 per cent over the past five years. Tomatoes, melons and citrus are the chief export conmodities. D. ACC_s Progress and Experience Under First IDA Credit 2.10 The first IDA Credit became effective in April 1964 and wias disbursed by April 1966 (ACC vas the executing agency). The US$3 million Credit assisted ACC in making development loans to farmers under a USU4.5 million loan program. These development loans have enabled farmers to reclaim land not previously cultivated and to intensify production through water supply development and mechanization. Investment wJas concentrated on four purposes Which accounted for 82 per cent of the lending program: (i) farm vater supply, (ii) livestock development, (iii} farm mechaniza- tion, and (iv) land reclamation. Farmers' response to the program reflects entrepreneurship and wrillingness to modernize their operations, particularly in producing quality fruit and vegetables. 2.11 Signif'icant improvements have been achieved in ACC's technical competence and administrative organization. The technical staff has benefitted from overseas training and from U,S,AID technical assistance. Loan approval, up to s-pecified limits, has been delegated to branch offices. Accounting and statistics have been greatly strengthened. IIech- anization of the accounting system is being undertaken and should further improve the efficiency of loan administration. A substantial recent increase in salary levels is expected to help ACC recruit and retain qualified technicians. However, in-service training is still inadequate, particularly in the techniques of assisting borrowers in the preparation of farm plans and in methods of loan appraisal (para 4.02). 2.12 ACC took important steps to improve its financial position. In 1963, it discontinued its short-term credit operations, leaving this function to the Central Cooperative Union (CCU) and to the cooperatives. In 1964 the rate of interest on medium- and long-term loans to farmers was raised on IDA's request from four to five and a fourth per cent. This rate would be raised to six per cent; it would still be below those of commercial banks which range from seven and a half to nine per cent per  - 4 - annum for short-term operations /para 3.08(i)70 Ileasures have been taken to improve loan collections, but the Corporation has not yet applied penalty charges for loans in arrears. The Government refrained from granting moratoria affecting repayment of ACCts loans. As a result of these measures and of government support, ACC's lending operations have been profitable. A net increase of JD 1.3 million has been realized in the loan portfolio from 1963 to 1966. 2.13 ACC's use of funds has not been fully satisfactory in the past. Large cash balances have been deposited in commercial banks where high returns could be obtained, instead of being lent to farmers. These bal- ances have now been drawn down and assurances by ACC were obtained during negotiations that this situation would not recur (para 3,13). 2,14 The CCU provides short-term credit to farmers through coopera- tives from its own resources and ACCG's advances, During 1965 and the first half of 1966, CCU had to reduce its lendings pending reorganization and collection of arrears. E. ACC's Overall Credit Program 2.15 The Corporation's total lending program at the time of appraisal was JD 8 million for the 1967-1970 period. This was considered too ambi- tious by IDA on the grounds of ACCts inadequate staffing for loan appraisal and the danger of excessive farmer indebtedness. During appraisal ACC agreed to reduce this lending program to JD 5.4 million (US$15 million) over the four-year period. The proposed IDA financed Project would be a part of this four-year program as show-n below. UJS" I-lillion JD I1illion Equivalent Total Lending Program 1967/68 5.40 15.O Operations Outside Project a) Investment for subprojects 3.C0 8.4 b) ACC's advances to CCU's revolving fund 0.60 1.6 Lending for Project a) Financed by IDA Credit 1,08 3.0 b) Financed from ACC's own resources 0.72 2.0 2.16 From the total program IDA has selected for the proposed Project those subprojects which have the highest priority and require fairly large amounts (para 3Q02). The rather longer average terms of investment involved for these subprojects would probably have led to some reluctance on ACC's part to give these investments first call on its resources. Other subprojeots,  - 5 - while forming a legitimate part of ACC's portfolio, wJere not felt by IDA to have the same priority., or were subject to special factors. Examples of these are: the financing of draft animals, local cattle and sheep; storage and processing facilities which had not reached a stage of prep- aration required for appraisal by the mission; and poultry, where demand is difficult to predict and any lending program would require constant reassessment, and where amounts are likely to be small. ACC will go ahead with the financing of these items from its own resources, but they will remain outside the scope of the Project with the possible exception of storage and processing facilities if adequate justifications for their inclusion are eventually submitted to IDA. The total investment over a four-year period for subprojects outside of the proposed Project wiould aggregate to JD 3 million (US$8.4 million). 2.17 The balance of ACC's lending program outside the Project wOuld take the form of a contribution during the four-year period of about JD 0.6- million (US$1,7 million) to CCU's revolving fund for the extension of short- term credit. This fund wjould provide among others the complementary work- ing capital to farmers obtaining development loans from ACC. 3. THE PflO0IECT A. Detailed Features 3.01 The proposed Project would be part of the second phase of ACC's on-farm investment program. The IDA credit of JD 1.08 million (US$3 mil- lion) would supplement ACC's resources for the extension of about JD 1.8 million (US$5 million) in loans to farmers for priority investment fields in 1967 and 1968. The estimated 3,000 to 4,O00 farmers who would receive loans would contribute the remaining JD 0.36 million (US$1 million) to the financing of the total project cost aggregating JD 2.16 million (US$6 mil- lion) (see paras 3.03 and 3.05). 3.02 Priority investments to be financed would be (i) land reclamation and improvement, (ii) farm water supply, (iii) tree crop and vineyard establishment, (iv) farm machinery, and (v) on-farm development in govern- ment irrigation schemes. The investments would thus improve Jordan's limited land and water resources and develop fruit and vegetable production. iAost of the demand for loans is expected to occur in the northwestern part of Jordan, in the uplands and the Jordan Valley (see map).  -6- B. Cost Estimates 3.03 Approximate investment and lending targets for the Project are as follows: On-Farm Investment Targets Estimated Foreign Cost of Exchange Component Proposed Subprojects JDIOOO Per Cent ACC Lending (JD'C00) (TJD1000) land reclamation & improvement 300 76 25 240 Tree crop establishment 400 60 15 340 Farm water supply devel- opment 340 170 50 280 Farm machinery 520 364 70 420 On-farm development with- in irrigation schemes 280 112 40 240 Unallocated 1/! 320 96 30 280 Total: in JDOOO 2,160 878 41 1,800 (in US$'000) (6,000) (2,1460) (5,000) 3.04 Costs have been estimated conservatively on the basis of prices and wages prevailing during the appraisal, with a contingency allowance of about 10 per cent. Except for farm machinery, the farmers' contribution would primarily consist of labor. Because of possible changes in demand and in economic conditions, an amount equivalent to 15 per cent has been left unallocated to permit adjustments and, if necessary, for financing technical services (para 4.02). The estimated foreign exchange component of JD 0.88 million is about 41 per cent of the total project cost or 82 per cent of the proposed IDA credit. C. Proposed Financing 3.05 The estimated project cost of JD 2.16 million (US$6 million) would be met from the following sources: L Technical services have not been specifically included since it is expected that they would be financed from other sources. Should this financing not be available, the foreign exchange cost of these services would be met from the unallocated portion of the IDA Credit.  - 7 - JD'OOO US$ lUlion % of Total Farmers' participation O.36 1 17 Total lending 1.80 5 83 Total 2.16 6 100 Sources of Lending ACC's own resources 0.72 2 33 Proposed IDA credit 1 .o8 3 50 Total 1.80 5 83 3.06 Farmers would contribute on the average about 17 per cent to the project cost, primarily in the form of hired or family labor. The contri- bution of settlers within government irrigation projects, whose capital resources are small, could be as low as 10 per cent. A higher contribution would discourage farmers from investing or would force them to borrowr from other sources at excessive cost. 3.07 The balance of project costs (83 per cent) would be provided as loans from ACC., of which 60 per cent would be finarnced from the IDA credit while the remaining 40 per cent would be financed from ACCts omn resources. D. Lending Policies and Procedures 3.08 ACC is an agricultural credit institution making medium- and long-term loans to farmers for development purposes. Operations under the Project wiould be carried out under the general policies and procedures as outlined below and elaborated in Annex 1. The major changes are with respect to interest rates, terms of lending and the basis for loan appraisal. i) Interest , Rates For new loans the Corporation would raise interest rates to individual borrowers from the present annual rates of 5-1/4 per cent to 6 per cent and charge penalty rates of at least one per cent on loans in default, Increase of interest rates rould narrow the gap between ACCrs current interest charges and those of commercial banks (para 2.12). Wlith respect to the IDA credit, the Government would be the borrower and would make the proceeds of the credit available to ACC for 20 years, including 10 years of grace. ACC would pay Government a rate of 3-1/4 per cent as in the first IDA Credit. This would pro- vide a margin of 2-3/4 per cent which wiould be adequate to cover administrative expenses and risks. The interest rate would be reviewed from time to time and necessary changes vould be agreed upon between the Corporation and IDA. The Government would bear the exchange risk for repayment to IDA.  ii) Terms f4endml Terms of lending to farmers within the ranges indicated below w,ould be determined on the basis of the projected financial returns in each case. Terms and grace periods for loans for land reclamation, water supply and tree crop establishment would be longer, while terms for loans for light tractors would be shorter than under the fi-rst Credit. Terms and grace periods would be shorter where the land is to be used primarily for vegetable production, intermediate for grape and tree fruit and longest for olive grove development. Terms Including Grace Grace Period Period ....n years),**.'. Land reclamation & improvement) Tree crop establishment ) 7-12 2-5 Farm water supply developm.ent ) On-farm development up to 10 1-3 Heavy tractors (50 hp & above) & combines up to 7 Light tractors (below 50 hp) up to 5 - iii) Basis for Loan Appraisal Under the Corporation's lending rules and procedures, separate appraisals are often made for loans to the same farmer for land reclamation, water supply development and tree crop establish- ment. Assurances have been provided by ACC that all of these would be combined into one farm plan for each farm and would be appraised together. This method of appraisal would permit the formulation of more realistic repayment plan for the farmer than the present system. For pump irrigation schemes involving loans exceeding JD 5,000 ACC would require a satisfactory feasibility report and pumping plant specifications would be prepared in a manner acceptable to the Natural 11ater Aesources Authority. Costs of technical studies would be included in the investment costs and could be financed under the Project. 3.09 As under the first IDA Credit, loan decisions based on the tech- nicians' appraisal reports would be made by committees at the branch, dis- trict, or head office level for loans up to JD 2,500 and by the Board of Directors for loans above that amount. Loans to individual farmers or - for single schemes financed under the Project and exceeding in the aggre- gate JD 20,000 would require IDA approval. The committees would approve or disapprove the application on the basis of creditworthiness of the  - 9 - pros'oective borrower, but could lnot change the amount of loan recommended by the techlical staff, since a reduction would not permit the farmer to complete the investments to be carried out under the farm plan. 3.10 ACC would give emphasis to the economic and financial returns to be expected from each farm plan, but would continue to have regard for loan security. Loan security wiould be a first mortgage, with excep- tions authorized in ACCts rules and procedures. With respect to tractors or other heavy equipment, titles wiould be registered and a commitment would be obtained from the farmer not to sell, transfer to assign the equipment until his loan is repaid. 3.11 Loans to farmers would be disbursed in tranches upon documentary evidence of expenditure incurred or on the basis of inspection by ACC of the progress made in carrying out the farm plan. In the case of agricul- tural machinery, ACC would make payments directly to dealers. 3.12 ACC would further strengthen its staff of loan collectors and would pursue a rigorous policy of collections. It would contact borrowers immediately when loans become overdue, enforce a penalty interest rate on defaulting borrowiers and foreclose >hen necessary to recover loans in arrears. The Government would support ACC in this policy, especially by the enforcement of collections through administratiive channels as provided for under ACC's constituting law and would continue to refrain from insti- tuting moratoria affecting the repayment of ACC's loans (para 2.12). During negotiations assurances were obtained concerning these points, 3.13 Due to a pressing demand, ACC is expected to have its resources fully utilized for loans and should, without compromising its standards of loan appraisal, keep only small cash reserves for contingencies which should not exceed about JD 50,000 over and above the amounts currently required for disbursements on loans approved, such amount being projected not to exceed about JD 300,000 at any time. During negotiations, assurances were obtained that ACC would invest the balance of its resources in lending operations (para 2,13). 3.14 Assurances were also obtained that ACC would arrange for regu- lar auditing of the accounts by accountants acceptable to IDA. E. Disbursement 3.15 Disbursements from IDA would be made on the basis of 60 per cent of loans paid out by ACC for farm development purposes (para 3.07). Docu- mentation would consist of a statement of ACC's expenditures for loans, supported whenever possible by the local supplier's invoice. The IDA par- ticipation cannot be related directly to the foreign exchange component of the Project. Imported goods, if any, will be purchased locally by the farmers, and the origin of such goods will not be identifiable except for agricultural machinery and for the major equipment used in wrater supply development. Any disbursements for technical assistance approved by IDA would be on the basis of their foreign exchange cost (para 4.02).  - 10 - F. Operating Results 3.16 The projected financial implications of the Project in conjunc- tion with ACC's overall credit operations (see Annex 1, Table 5) are summarized as folloTws: JD'000 Requirements Lending under IDA credit 1 ,800 Lending under ACCts own resources to farmers for development 3,CCO CCU for crop loans 600 Repayment of U,S,AID loan 208 Repayment of Government advance 15 Increase in fixed assets 80 Increase in cash in hand from JD 134 to JD 237 103 5.8o6 Resources Increase in paid-in capital 140 Accumulated retained earnings 429 Loan collections 4,57 IDA proposed credit 1h080 5,8o6 4. ORGAI4TIZATION AS 11ANAG_.3iNT A. Project Administration 4.01 ACC has the responsibility for administering Jordants agricultural credit program wzithin the Seven-Year Development Plan, which is under the control of the Jordan Development Board. It would administer the proposed IDA credit within its overall credit program. Assurances were obtained that IDA wnould be consulted about any changes in the laws and regulations governing ACC and on future appointments to the offices of the Chairman and the Deputy General lVhnager. The present office holders are highly regarded and manage the Corporation on a sound basis. 4.02 Details on ACC's present organization and financial conditions are given in Annex 1 . ACC is benefitirg from U.S.AID assistance given in accounting, statistics and credit procedures. There is clear need for continuation of such assistance and for additional assistance in the field of farm planning and production economics. During negotiations, assurances  - 11 - were obtained that ACC would male all efforts necessary to secure, within six months after signing, the services of a farm economics expert with qualifications satisfactory to IDA for a period of one and a half to two years. He would train and supervise ACC's personnel concerned with the preparation of farm development plans and loan appraisals. From its staff ACC would assign on a full-time basis two persons trained in farm economics (one each in the development areas east and west of the Jordan PRiver), who would assist the farm economics expert in training branch technicians and loan officers in the preparation of farm plans and in methods of loan appraisal. In the event that ACC does not succeed in securing a qualified farm economics expert through U.S.AID or other technical assistance programs, ACC would finance the respective foreign exchange cost from the unallocated portion of the IDA credit (para 3.03). (This would constitute less than 10 per cent of the unallocated portion.) 4.03 In addition to further training of its own technical staff, ACC would increasingly work in liaison with the Natural Resources Authority and the Ilinistry of Agriculture, particularly in its extension and veter- inary services and marketing organization. The Agricultural Engineering and Irrigation Section of the IIinistry of Agriculture would continue to be responsible for on-farm development within the