Morocco - National Agricultural Credit Project and National Rural Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 18447 IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO NATIONAL AGRICULTURAL CREDIT PROJECT Loan 3088-MOR and NATIONAL RURAL FINANCE PROJECT Loan 3662-MOR September 30, 1998 Private Sector Development and Finance Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of May 1998) Currency Unit = Dirham (DH) 1DH = US$0.103359 US$1 = 9.675 DH EXCHANGE RATES 1994 1995 Dec. 31, 1996 Dec. 31, 1997 May 31, 1998 9.203 8.540 8.800 9.714 9.717 WEIGHTS AND MEASURES Metric System MOROCCO'S FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS IBRD - International Bank for Reconstruction and Development IDA - Intemational Development Association OED - Operations Evaluation Department BTO(R) - Back to Office (Report) ICR - Implementation Completion Report PAR - Performance Audit Report PCR - Project Completion Report SAR - Staff Appraisal report ADB - African Development Bank ASAL - Agricultural Sector Adjustment Loan CFD - Caisse Francaise de Developpement CNCA - Caisse Nationale de Credit Agricole EIB - European Investment Bank FADES - Arab Fund for Economic and Social Development ITPA - Industrial and Trade Policy Adjustment KfW - Kreditanstalt fuAr Wiederaufbau of the Federal Republic of Germany KPMG - KPMG Peat Marwick MOF - Ministry of Finance OECF - Overseas Economic Cooperation Fund of Japan USAID - United States Agency for International Development MIS - Management Information System ERR - Economic Rate of Retum FRR - Financial Rate of Return TA - Technical Assistance Vice President: Kemal Dervis Country Director: Christian Delvoie, MNCMG Sector Director: Nemat Shafik, MNSPF Team Leader: Denis Chaput, MNSPF Task Team Leaders: Victor Agius, Axel Peuker, MNSPF ICR Project Manager: Stephanie Gober, MNSPF  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO NATIONAL AGRICULTURAL CREDIT PROJECT (LOAN 3088-MOR) & NATIONAL RURAL FINANCE PROJECT (LOAN 3662-MOR) Table of Contents PREFACE ..................I EVALUATION SUMMARY......................................I PART I. PROJECT IMPLEMENTATION ASSESSMENT ....................................1 A. Statement/Evaluation of Objectives .I B. Achievement of Objectives.5 C. Major Factors Affecting the Project .11 D. ProjecttSustainability.14 E. BankPerformance .S.............. l 1 F. BorroweraPerformance.16 G. Assessment of Outcome.17 Hf. Future Operations.18 1. Key Lessons Learned.18 PART II. STATISTICAL TABLES..19 Table : Summary of Assessments ..19 Table 2: Related Bank Loans/Credits ..21 Table 3a: Project Timetable (Loan 3088-MOR) ..22 Table 3b: Project Timetable (Loan 3662 -MOR) ..22 Table 4a: Loan 3088-MOR: Loan/Credit Disbursements: ..23 Table 4b: Loan 3662-MOR: Loan/Credit Disbursements: ..23 Table 8A-a: Project Costs (Loan 3088-MOR) ..23 Table 8B-a: Project Financing (Loan 3088-MOR) ..24 Table 8A-b: Project Costs (Loan 3662-MOR) ..24 Table 8B-b: Project Financing (Loan 3662-MOR).. 25 Table 1Oa: Status ofLegal Covenants Loan 3088-MOR.. 25 Table 10b: Status of Legal Covenants Loan 3662-MOR ..27 Table 12a: Bank Resources: Staff Inputs (Loan 3088-MOR) ..29 Table 12b: Bank Resources: Staff Inputs (Loan 3662-MOR) ..30 Table 13a: Bank Resources: Missions (Loan 3088-MOR) ..30 Table 13b: Bank Resources: Missions (Loan 3662-MOR) ..31 Appendices: Appendix A. April 3, 1998 Supervision Mission's Aide-Memoire Appendix B. Borrower contribution to the ICR This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  i IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO NATIONAL AGRICULTURAL CREDIT PROJECT (LOAN 3088-MOR) & NATIONAL RURAL FINANCE PROJECT (LOAN 3662-MOR) PREFACE This is the combined Implementation Completion Report (ICR) for the National Agricultural Credit Project (Loan 3088-MOR) and the National Rural Finance Project (Loan 3662-MOR), made to the Caisse Nationale de Credit Agricole (CNCA) and guaranteed by the Kingdom of Morocco. Loan 3088- MOR, in the amount of US$190 million equivalent, was approved on June 14, 1989, and made effective on September 27, 1989. Loan 3662-MOR, in the amount of US$100 million equivalent, was approved on November 23, 1993, and made effective on February 18, 1994. Loan 3088-MOR was closed on December 31, 1993, as planned. It was fully disbursed, and the last disbursement took place on March 28, 1994. - The African Development Bank (ADB) and the Kreditanstalt fur Wiederaufbau (KfW) of the Federal Republic of Germany provided cofinancing for this project. Loan 3662-MOR was closed on March 31, 1998, as planned. The last disbursement took place on March 1, 1996, and US$79 million equivalent was cancelled out of the original US$100 million equivalent. Cofinancing for this project was provided by the Overseas Economic Cooperation Fund (OECF) of Japan, the Caisse Francaise de Developpement (CFD), the Arab Fund for Economic and Social Development (FADES), the European Investment Bank (EIB), and KfW. The ICR was prepared by Ivan Christin (Consultant), under the supervision of Stephanie Gober (ICR Project Manager, MNSPF). Task Team Leaders were Victor Agius and Axel Peuker (MNSPF), and Nemat Shafik was the MNSPF Director. Preparation of this ICR was begun during the Bank's supervision mission March 30-April 3, 1998. The ICR is based on material in the project file. The borrower contributed to preparation of the ICR by providing: 1) the data contained in Tables 8A and 8B; 2) comments on the draft version of the report which have been incorporated into the text; and 3) its own report on Loan 3662-MOR, which is attached as Appendix B.  ii IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO NATIONAL AGRICULTURAL CREDIT PROJECT (LOAN 3088-MOR) & NATIONAL RURAL FINANCE PROJECT (LOAN 3662-MOR) EVALUATION SuMMARY Introduction i. For almost 25 years, the Bank supported Morocco's Caisse Nationale de Credit Agricole (CNCA) through a series of loans which, by 1988, totaled US$384.4 million. Over this time, the Bank and CNCA had developed a high level of mutual confidence; in fact the Bank cited CNCA as the most prominent example of a success story among many failures-in agricultural finance in the developing world. Through the two loans under review, the Bank intended to develop a two-fold strategy. First, it sought to enhance the economic performance of the agricultural sector. Agriculture was, and still is, a strategic sector in Morocco's economy. By the end of the 1980s agriculture accounted for about 40% of employment and was the primary source of foreign exchange earnings (about 33% of total exports). It is, however, subject to the consequences of recurrent droughts, a cyclical phenomenon with about one drought every three years. Second, the Bank's strategy was designed to steadily improve the overall efficiency of CNCA., the institution responsible for financing the agricultural sector. Deep structural imbalances in this sector had led the Government and the Bank to launch two successive sectoral adjustment operations (ASAL I in 1985 and ASAL II in 1988) for a total of US$325 million. As both the domestic and the international economic environments steadily evolved towards more liberalized, private sector-driven, competitive conditions, continued support to CNCA had to shift its focus progressively towards (i) supporting increased private sector investment in agriculture, in rural activities and more broadly, in agro-related export-oriented activities and (ii) helping CNCA to broaden its financial activities by developing new lending and savings mobilization programs in order to become a full-fledged bank that could compete with other Moroccan banks. These two considerations were integrated into two successive new operations launched in 1989 and 1993 respectively: the National Agricultural Credit Project (Loan 3088- MOR, for US$190 million equivalent) and the National Rural Finance Project (Loan 3662-MOR, for US$100 million equivalent). Project Objectives 2. Both projects had similar objectives aimed at: (i) enhancing productivity of broadly-defined agricultural activities (farmers, agro-industries, fisheries, exporters of agricultural products, rural artisans' activities, rural housing, etc.); and (ii) helping CNCA, through an institutional development component, to carry out its transformation to a bank providing a full range of banking services to rural areas in increasingly competitive conditions.  iii 3. The economic (agricultural) development component was supported by credit lines amounting to US$183 million for Loan 3088-MOR and US$99 million for Loan 3662-MOR. Bank funding, together with CNCA's own resources and cofinancier funds, was supposed to result in about 450,000 loans made to targeted activities for the first project and about 340,000 loans made to targeted activities for the second project. Loans under the first project were expected to be unevenly distributed among small farmers (27%), medium and large farmers (43%), agro-industries (3%), rural housing (3%), agro- exporters (3%), fisheries (10%), artisans (2%), and land consolidation (9%). Loans under the second project were expected to be unevenly distributed among small farmers (26%), medium and large farmers (43%), agro-industries (10%), rural housing (9%), fisheries (4%), artisans (8%). The expected development impact was deemed to be very substantial with FRRs/ERRs ranging from 15% (for sheep rearing) to 50% (for dairy cattle). The broad range of targeted activities was also the foundation on which CNCA could build its strategy of loan diversification. 4. The institutional development component comprised several major elements: (i) building a cohesive senior management team to implement necessary institutional changes with adequate procedures; (ii) (re)defining strategic objectives which would be implemented through an appropriate planning and budgeting process; (iii) upgrading the management information system (currently based on manual bookkeeping operations) to a fully automated system capable of processing data needed to establish (inter alia) a strong management control system; (iv) diversifying the bank's resource base and lending program; (v) providing related training; (vi) modernizing CNCA's physical infrastructure; (vii) maintaining financial viability during this transition, and (viii) improving financial strength using a climatic insurance scheme aimed at providing CNCA with a hedging device against the catastrophic financial consequences of droughts. The scale of this institutional development component amounted to a restructuring program, designed to transform the state of the institution from that of a "Government-sponsored farm credit disbursement and collection agency" to that of a genuine bank specialized in rural finance. 5. Most objectives of both projects were relevant. First, financial support to private investments in Morocco's agriculture, in rural activities, and in other profitable segments of the food industry was warranted. The support not only helped develop these activities but also contributed to the diversification of CNCA's lending program. Second, CNCA's institutional transformation and restructuring were also justified given the new liberalized, competitive environment in which the institution was to evolve. It is highly questionable whether the Bank took the necessary steps to attain these objectives; specifically the following measures were lacking in substance or vigor of execution: (a) project preparation by the Bank including substantial due diligence with respect to CNCA; (b) an assessment of CNCA's institutional, managerial, organizational and financial situation which was not based solely on the Bank's 25-year relationship with CNCA; (c) the active involvement during project monitoring and supervision of teams composed of representatives from CNCA, the Central Bank, and the Bank with expertise in the implications of CNCA's restructuring; (d) a more realistic approach to the issue of hedging CNCA against drought risk.  iv Implementation Experience and Results 6. Apparently, the first loan (3088-MOR) was deemed to have been successfully implemented. Quick disbursements and commitments of the credit line and general satisfaction concerning the implementation of the institutional development component (even though related progress was somewhat slow, there was optimism about the forthcoming decisions to be made by CNCA) resulted in an eagerness to prepare a follow-up operation. That operation became effective in February 1994. At that point, performance started to deteriorate. Contrary to expectations, the Bank's funds did not disburse. Much of this failure was attributed to the catastrophic drought that occurred in 1994-1995. In fall 1994, however, CNCA wrote a letter to the Bank expressing concerns about the relative expensiveness of Bank funds compared to funds available locally or externally through cofinancing, the disadvantages resulting from the implementation of a new foreign exchange risk coverage scheme, the decline in the exchange rate of the US dollar, etc. A new Director General was appointed to CNCA in April 1995. At that time, the Bank's supervision mission expected that further discussions to be held in Washington with the new Director General would clarify the future of the institutional restructuring components defined in the loan. 7. The new Director General commissioned KPMG to audit the "quality of the bank's overall management". In October 1995 that report was published. Devastating conclusions concerning almost all aspects of CNCA's management and organization emerged from the report. Specifically, KPMG stressed that (a) the bank's governance, characterized by the autocratic management style adopted by the Director and by the marginalized role of the board, was very weak; (b) serious deficiencies characterized CNCA's current work practices (e.g., lack of systematically written procedures); (c) structural inadequacies crippled the bank's structure (e.g., the ineffectiveness of the internal audit department); (d) poor credit risk management had compromised the quality of the loan portfolio and resulted in insufficient provisioning for losses (KPMG noted that several credits had been granted on the basis of purposely false statements); (e) serious bias in estimating critical assets and liabilities resulted in poor financial management of the bank; and (f) the competitive position of the bank, initially weak, had further deteriorated. 8. Obviously, this bleak picture of CNCA's condition was the result of several years of deterioration. The initial reaction of the Bank staff in charge of supervising CNCA-related operations to the KPMG report was somewhat defensive. A long, confusing period of indecision followed. In 1996, CNCA's internal audit unit also expressed that the opinion that the backbone of the banking business, the credit chain, was unstable. It was only in April 1997 that the Bank finally officially endorsed the conclusions of KPMG's report. The Bank admitted that the objective of consolidating the transformation of CNCA into a competitive universal bank geared to rural finance and to poverty reduction had not been achieved and would never be under the prevailing circumstances. In the meantime, there was a partial cancellation of US$50 million, and the Bank considered suspending further disbursements. Since CNCA's financial situation continued to deteriorate, and the comprehensive restructuring plans submitted to the Bank were judged unacceptable, the undisbursed portion of the loan (US$25 million) was cancelled' and US$4 million was reallocated to support CNCA's institutional transformation2. These actions demonstrated the Bank's recognition that the project had failed to achieve its institutional development objectives. According to CNCA, these two cancellations were requested due to the relative expensiveness of the Bank's funds and the decline in loans refinanced on this line. 2 This amount was ultimately cancelled in April 1998 because CNCA could not use the funds before the loan closed on March 31, 1998, and did not wish to extend the closing date.  v 9. Several observations can be made concerning the credit lines. Recent data provided by CNCA indicate that: a) For Loan 3088-MOR, CNCA's overall credit program was scaled down by 27%, with substantial reallocations of funds among the sub-components. Sub-components which were substantially reduced were: lending to farmers (-36%), lending to fisheries (-81%), and lending to artisans (-33%). In contrast, two sub-components received large increases in funding: lending to agro- industries (a more than four-fold increase, including loans to agro-exporters) and lending for rural housing (+137%). Following a request from CNCA, the loan agreement was amended in June 1992 to allow reallocations. The changes were requested because CNCA had exhausted certain cofinanced lines and because of the increase in the US dollar against the dirham. In retrospect, it may not have been useful to set such specific lending targets for a project of this nature. In order to ensure that the distribution of the funds is truly demand-driven, it might be more appropriate to list acceptable sub-components for the project without targeting specific amounts for each sub-component. For Loan 3088-MOR, the ex post performance of the sub- components is also unknown since these indicators were never studied by CNCA or by the Bank. As a result, it is almost impossible to make a reasonable assessment as to whether the objective of enhancing the productivity of broadly defined agricultural activities has been reached. Considering the serious suspicions expressed in OED reports on previous Bank loans to CNCA concerning the reliability of CNCA's credit granting and follow-up processes and the conclusions of both the 1995 KPMG report and CNCA's internal audit unit work in 1996, it is the opinion of this mission that the objectives of Loan 3088-MOR were not attained.3 b) In the next project, CNCA reduced its own funding to sub-loan categories even as the Bank cancelled funds from Loan 3662-MOR and other cofinanciers cancelled their funding. There is one exception, however: lending to agro-industries on CNCA's own resources increased by 2.5 times. Otherwise, sub-loans to fisheries were reduced by 33%, to rural housing and artisans by about 66%, and to farmers by about 75%. Globally, the lending program was reduced by 63%, with cancellations of Bank funding of 79% and cofinancier funding of 720/o4. Since this loan suffers from the same lack of information described in (a) above, the mission is therefore led to the same conclusions. 10. To summarize, overall, the credit lines failed to reach the objectives that were defined in their respective loan appraisal reports. 3 The borrower disagrees with this opinion. CNCA has commented that since they have no system for evaluating the impact of loans financed on external funds, there is no way to confirm that the general objectives of Loan 3088-MOR were not achieved. They note that more than 307,000 clients received financing through the two Bank loans, including 290,694 clients (4.3 million dirharns) in the agricultural sector. During that period, agricultural GDP rose almost 9%/a in nominal terms. 4 CNCA attributes the decrease in its loan funding, and in part, its requests for cancellation of Bank and cofinancier funds, to more rigorous credit policies and to the difficult economic and climatic environment in Morocco.  vi Summary of Findings, Future Operations, and Key Lessons Learned 11. The Bank failed to carry out a full and effective due diligence with respect to CNCA. Instead, it relied on the relationship of trust established over 25 years of cooperation with CNCA and left substantial parts of the project preparation for both loans to CNCA without adequate analysis or challenge. Sensitive strategic and technical issues such as the bank's governance, its capacity for accepting and internalizing the considerable structural changes implied by the introduction of a modern MIS system, its aptitude for operating under competition, and its capacity to transform itself from a government service into a full- fledged bank were not addressed substantively. In addition, Bank supervision, both at staff and management level, was perfunctory. The follow-up of the credit line was reduced to almost nil, and the follow-up of CNCA's financial health was limited to reading the external auditor's opinions which were usually unqualified. When the external auditor did note an unacceptable practice such as granting credits in violation of current bank policies, the supervision mission was satisfied with noting that "according to reliable sources, the problem has been fixed". No one ever questioned the capacity of CNCA's management to implement the planned restructuring. There have been Government pressures for CNCA to lend to small farmers, and the repeated Government-sponsored rescheduling programs in times of drought contributed to weakening borrowers' financial discipline. The planned restructuring would have been especially difficult in this environment. Before the 1995 KPMG report, CNCA did not provide the Bank with proper and reliable information concerning its accomplishments and its difficulties, either because the institution's top management was unaware of them due to the disorganized state of the bank or because it preferred not to disturb the status quo. 12. From the moment that both CNCA and the Bank officially recognized KPMG's conclusions as reflecting the truly distressed situation of the institution, the Bank has constantly urged its Moroccan counterparts to provide it with a comprehensive and credible rehabilitation plan. Such a plan would need to address all aspects of the Bank's reconstruction: from top management (the board of directors, the executives, etc.) to teller operations to the entire credit process from origination to collection. So far, the Bank's requests remain unanswered. Plans submitted were rejected as being grossly incomplete and inadequate. The Bank is committed to providing technical advice, and if an acceptable plan can be agreed upon together with a reliable commitment by the Moroccans to implement it, the Bank is willing to provide some appropriate funding for the plan's implementation. In any case, given the seriousness of CNCA's distress, no new substantial lending similar to Loans 3088-MOR and 3662-MOR is currently planned. 13. Despite their generally negative outcome, both projects have generated important and interesting lessons. First, the Bank should verify that warning signals emerging from factual observations on prior projects are systematically followed by in-depth investigations aimed at ensuring that future lending operations are based upon sound criteria. It should also ensure that the conclusions of these investigations are duly integrated in SARs and monitored during supervision. Second, the Bank must verify that its funding is not considered by its borrowers to be a substitute for equity. When Bank loans are repeatedly granted on a routine basis, they may easily be considered by borrowers as quasi-permanent resources, a credit window that the lender will hesitate to close because this closing could destabilize the borrower's situation. Third, credit line developments and outcomes should be given as much attention as associated institutional change developments and outcomes. Failures in credit line-related processes are useful devices to detect failures existing elsewhere in the borrower's general organization. Fourth, projects that at some analytical level involve organizational restructuring should be entrusted to qualified teams that are aware of the many risks that accompany such transformations. In the case of CNCA, it was a mistake to rely on financial analysts. Banking specialists would have been better able to design and supervise the transformation of an agricultural financing institution into a genuine bank. Finally, ]Bank  vii teams should be renewed frequently in order to avoid complacency, and their project assessments should be systematically questioned by Bank management to make sure that their conclusions are reliable and based on solid analysis.  I IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO NATIONAL AGRICULTURAL CREDIT PROJECT (LOAN N