Honduras - Agricultural Credit Project

Document of The World Bank FOR OMCIL USE ONLY Report No.5755 PROJECT COMPLETION REPORT HONDURAS AGRICULTURAL CREDIT PROJECT (CREDIT 628-HO) June 28, 1985 Latin America and the Caribbean Regional Office This documen bas a restrcted distribuin and may be used by recipints mly in the perfonance of I [ their officid dutes Its coten may Do otwise be discsd with World Ban1k authohaion.  CURREICY EQUIVALENTS USS1.00 = L 2.00 L 1.00 = US$0.50 WEIGHTS AND MEASURES 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (km2) 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1,000 kg = I metric ton (m ton) = 0.98 long ton ACRONlYMS MRN Ministerio de Recursos Naturales (Ministry of Natural Resources) UPCA Unidad del Proyecto de Credito Agricola (Agricultural Credit Project Unit) BANADESA Banco Nacional de Desarrollo Agricola (National Bank of Agricultural Development) INA Instituto Nacional Agrario (National Agrarian Institute) EAP Escuela Agricola Panamericana (Pan American Agricultural School) COHBAJA Corporaci6n Hondurena del Banano (Honduran Banana Corporation) IICA Instituto Interamericano de Cooperaci.on Agricola 'Inter American Institute for Agricultural Cooperation) CATIE Centro Agronomico Tropical de Investigacion y Ensenanza (Center for Tropical Agriculture Research and Training)  FOR OFFICIAL USE ONLY HONDURAS AGRICULTURAL CREDIT PROJECT PROJECT COMPLETION REPORT Table of Contents Page No. Preface ......................................................... i Basic Data .................................................. ii-iii Highlights .............................................................. iv I. INTRODUCTION ...................................................... 1 II. PROJECT FORMULATION ................................................ 1 A. Identification/Preparation and Appraisal ...................... 1 B. Negotiations and Board Approval ............................... 1 C. Objectives and Description .................................... 2 D. Project Cost and Financing .................................... 2 III. IMPLEMENTATION ..................... , ..................... 4 A. Project Components ............................................ 4 B. Disbursements .................................................. 12 C. Procurement ................................................... 12 D. Reporting and Auditing ........................................ 12 E. Compliance With Covenants ....................................13 IV. FINANCIAL AND ECONOMIC IMPACT ..................................... 13 V. INSTITUTIONAL PERFORMANCE . ......................................... 14 VI. ROLE OF THE BANK ....................................... 15 VII. LESSONS LEARNED AND CONCLUSIONS .................................... 15 Annex 1 - The Dual-Purpose Farm ........................................ 17 Annex 2 - Financial and Economic Analysis of Sugarcane Investments ... ... 20 Annex 3 - Financial Intermediaries ...................................... 22 Attachment 1 - Comments from Borrower ............... .. .................. 25 MAP No. IBRD 11910 (PCR) IThis docunent has a resticted distribution and may be used by recipients only in the perfornmance of l their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  HONDURAS AGRICULTURAL CREDIT PROJECT (Credit 628-HO) PROJECT COMPLETION REPORT PREFACE 1. This completion report covers a credit project, for which Credit 628-HO was approved in May, 1976, in the sum of US$14 million. The Closing Date was June 30, 1983, but disbursements were authorized through February 2, 1984. An amount of US$24,689 was cancelled on February 2, 1984. 2. The report was prepared by the Latin American and the Caribbean Regional Office on the basis of the country visits in January and February, 1984, and a completion report prepared by the Project Unit of the Honduran Central Bank, delivered to the Bank on August 13, 1984. 3. Other sources of information for the completion report were: the Appraisal Report No. 1044a-H0 dated May 6, 1976; the Credit Agreement No. 628-HO dated July 2, 1976; the Project Completion Report No. 4250 of the Honduran Second Livestock Development Project (Credit 434-HO), dated December 30, 1982; supervision reports; correspondence with Borrower and internal Bank memoranda as contained in relevant Bank files; and discussions with Bank staff associated with the project. The project was not selected for audit by OED. 4. A copy of the draft report was sent to the Borrower on April 23, 1985 for comments. Comments received appear as Attachment 1.  - ii - WWWAS At~~J~TB~CREDIr FP)JEU (aedit 628-HO) PRa a m FEPORr BASIC DfTA KEI PRWr DATA Appraisal Actual or Actual as 2 of Fatimte FAtinmted Actl Appraisal Etinate Project Cost (US$ milliai) 20.0 1/ 20.5 102 Credit Amount (US$ ndion) 14.0 14.0 100 Date Board Approval N.IA 05/18/76 - Dat Eff 09/30/76 12/10/76 !loinv lDate 06/15/81 06/30/83 Fcomic Rate of Return (2) 41 'I 24-26 / Financial Rate of Return (Z) 15-27 4/ 23-28 4/ Institutional Perforimme Good k-even Number of Direct Benficiay Falies 1,719 1,186 6/ 69 'IHJIE D l FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 Appraisal estimte (US$ niLiim) 1.5 6.2 10.1 12.3 13.5 14.0 14.0 14.0 Actrkl (US$ MilliOx.) 0 2.1 6.0 9.4 10.7 11.9 13.2 14.0 Actual as Z of estimte 0 34 59 76 79 86 94 100 Date of final disbursement Feb. 2, 1984 Amont cancelled US$24,689 (02/02/84) 1/ Inclu,eS cntig 2J Applies to invesoet cotm ts and assodated techical servioes olly, acounting for 63Z of total project cost. 3/ Pange of eacxxic rate of return for dual-purpose (dairy/beef) farms only. ERR of a typical stgar cane farm has been estimted at more than 502. It was not feasible ta quantify specific benefits for the technical assistant ccnxonts. 4/ Range of financial rate of return for invest-mt models. 5/ Me performance of the Project Uuit and EAP msm good. MIe performnce of MRN and COHWBAN as satisfactory. The performanoe of 1i was less tban satisfactory. 6/ Three hundred and fifty-eight subloansnc we granted. Although a sublomn to Isleta Cboperative (1,400 faiUlies) did not materialze, 32 subloans w-re granted to agrarian reform cooperatkves with a total of 860 members. It is estimated that 2,000 mroe famlies benefited from the technical services omrponent only.  - iii - BASIC DATA (Cont'd? MISSION DATA Doae No. of Stfh/da SpeCelailatioan PertWmnCa Type of 1Il6lon GIifYr) Peroene In Flield Reprnemattd I/ latting 2/ TrJd 35/ roblem ' l3etiflcatlondPr.aratln am I 5 a ApprWall t1/7 s 130 ea.ft,bd Supervision I 5 7/76 1 13 a na.e. n.a. n.a. Supervision 2 10/76 2 26 *na 2 1 ItO Spervislon 3 S/ 2# 1 5 a n.S. n.e. n.n. Supervlison 4 6/7l 2 12 a.b 1 1 0 Suprvisin 5 S 9/77 1 3 c nU.. n. .e. Spervision 6 1/78 1 6 c 1 2 0 Suprvlslon 7 7/78 2 14 *,c 2 I 0 Supervision 8 10/78 I 1 a na. n.e. n.e. Superwiln 9 SY 1/79 1 2 a n.a. n.a. n.S. Specrvision 10 5/ m 1 2 a na. n.a. na. Supervision 11 5/ 8/79 1 2 a n.e. n.a. n.j. Supervlslo1t2 9S79 1 6 a I I 0 Suprv1slon 13 11/79 1 2 a nI. Supervlsln t4 5/ 1t8D 1 3 a na. na. n_. Superlslon 15 Z/8 1 5 a I I n. Surwvlslon 16 V/ S/80 1 13 9 na.e n.e. n. Superwielon 17 5/ 7/80 1 6 c n.O. n".. nJ. SUWrlslon ;8 5/81 2 23 *,c 2 t ns. Suprvlslon 19 S/ 12t81 1 5 c n.S. n.1. n.e. Supervision 20 5/ 4/82 1 5 c n.8 a.n. na. Suervilson 21 7/82 2 IO *.c 2 2 T Supervision 2 3/83 1 5 a 2 1 T Total Supervision OIR PRIJECT DATA Borrrr Republic of Honduras Exaeuttng Agency Banco Central de iondwars Flaei Yfer January 1 to Becea*er 31 Non of Currency (obbreviation) Lnpira CL) Currency Exchange Rate: AppraIal Year Average USS1.00 - L 2.00 Intervening Vears Average USSl00 - L 2.00 Caonetlon Year Average US$1.00 - L 2.00 - Fol lapW Project: Nnlt Second AgricuItural Credit Project LoanXiradit Ndo. Loan 11i3-H0redl t 1005+10 LoandCredit Amount IUSS mlIlIon) Loan 20.0/Credit 5.0 Ontt Board ApproWval April 17, 1980 If a - agriculturlst; t - agric:ltural aconumiec; c - financial analyst; d - mfssion leader; a - livestock peciallit; t - ajutl.uliural credit peciallst; g - Irrigation enginuar. 2., - problorfren or minor problem; 2 - sedr sb problem; 3 - major problena. / 1 - Impeoving; 2 - statonery; 3 - deteriorating. A/ 11- Itarbal; T- Tecunlal; and 0 - Other (de"l In appointing technical spcialists at M and INA, mwialI linked to lou prevailing salary cales; difficulties In retalning highly qualflod staff In Project Unit de to 1w prevailing salary scales; and legal problb regarding sublon to slab cooperative). S/ Llmited upervlslon mission; noFonr 99 ftilled.  - iv - HIGHLIGHTS 1. The general objectives of the project were to: (a) expand the area under food crops and livestock production; (b) increase export earnings and import substitution; (c) increase farm and agroindustrial employment opportunities; (d) maintain the momentum of the agrarian reform. In order to achieve these objectives the project provided credit to finance the develop- ment of livestock, crops, agroindustries and to purchase heavy machinery, as well as technical assistance to support selected agricultural technical institutions for the improvement of services to land reform and other beneficiaries. 2. The main objectives of the project were generally met: (a) for livestock, new pastures were established in 12,341 ha and an additional 8,078 ha of pastures were improved (para. 3.04); for crops, 4,400 ha of land were cleared (para. 3.09); (b) regarding export earnings and import substitution, the project helped to increment the annual production of meat and milk by 1,170 m ton and 7,545 m ton respectively (para. 3.05) and an incremental production of 18,000 m ton of sugar was achieved (para. 3.13); (c) as regards the farm employment, it is estimated that the project may have generated about 600 additional jobs for permanent laborers and about 3,000 additional jobs for temporary laborers only in the cattle dual-purpose and sugarcane farms (para. 4.04); and (d) the project maintained the momentum of the agrarian reform financing 32 agrarian reform cooperatives with a total of 860 members (Table 3.1). 3. Because the initial period of project implementation (1976 to 1979) was a time of economic growth and attractive rising prices and export opportunities, the bulk of US$6.3 million for general credit activities was disbursed during that period. However, the slow implementation and disbursement of the technical services component resulted in three extensions of the project Closing Date, the latest to June 30, 1983, or two years beyond the originally scheduled Closing Date (June 15, 1981). 4. The execution of the credit component was carried out, in general terms, as anticipated at appraisal (para. 3.02). At the end of 1979 all funds originally allocated to credit had been totally committed, except for those funds earmarked for the Isleta Banana Cooperative (para. 3.14). Later, in 1982, these funds were reallocated to the general credit category. 5. The progress in the execution of the technical services component in three of the beneficiary institutions: Ministry of Natural Resources (MRN), National Agrarian Institute (INA), and Honduran Banana Corporation (COHBANA), was exceedingly slow and project funds were fully disbursed at the end of 1983 only, after seven years of project implementation. However, the Project Unit and EAP were the exception: their assigned project funds were utilized on schedule (para. 3.16 and 3.17).  6. A number of technical studies were carried out with mixed results by the beneficiary institutions under the technical assistance component. Three institutions (MRN, INA and COHBANA) did not fully profit from the financial help that they received. Five major regional studies were carried out by MRN with project funds, out of which only three appeared to be of interest to the Government (para. 3.18 to 3.24). 7. The farm model-specific estimates of financial and economic rates of return at completion under the credit component were comparable to the appraisal estimates. The FRR and ERR for the typical dual-purpose (dairy/beef) farm fluctuated between 23Z-28Z and 24Z-26X, respectively, as compared to appraisal estimates of 152 and 35%. The FRR of a typical sugarcane farm was estimated to be about 23%, and the ERR to be above 50% (para. 4.01 to 4.03). 8. The project was very successful in attracting all ten private banks of Honduras, in addition to the National Bank of Agricultural Development (BANADESA), to participate in project implementation. The performance of these banks was satisfactory, except with regard to Loan recovery. The 1979 and 1980 weighted average recovery rate for principal was 73%, but it deteriorated to about 61% for 1983 (para. 5.05). 9. A lesson learned from this project is that the implementation of the non-credit components is very difficult. It took much more time than anticipated at appraisal due mainly to the fact that four different agencies were involved (para. 3.17), and some of them with objectives not directly related to the credit conponent. In future operation, to the extent feasible, these components should be linked to the credit component and be implemented by the agency coordinating the credit component itself (para. 7.02). 10. The major institutional achievements that resulted from this project are the following: a) the strengthening of the Central Bank's Project Unit through the expansion of its technical staff and improvement of its operational procedures (para. 5.03); b) the organization of an M&E section within the Project Unit with specialized staff at the regional level and a coordinator at Tegucigalpa (para. 3.35); and c) the improvement of accounting, auditing and the measurement of the arrears situation of the participating intermediaries (para. 3.36).  HONDURAS AGRICULTURAL CREDIT PROJECT PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 In the early 1970s the economy was in a state of recession, with the agricultural sector growing slowly. GDP per capita was about US$340, with 60Z of the rural population receiving annual incomes of less than US$100. Some of the main factors for the slow growth of the agricultural sector were hurricane damage to banana plantations in 1969, 1973, 1974 and 1975 (Fifi); dtoughts in 1972 and 1975; a war with El Salvador in 1969; virtual withdrawal from the Central American Common Market in 1971 causing a slump in trade; restrictions on beef exports to the USA and reduced world beef prices after 1973; and the sharp increase, starting in 1973 of prices paid for oil and other imported goods. 1.02 In December 1972, to address rural poverty and to create more stable political conditions for the improvement of the agricultural sector, the Government started to implement the agrarian reform. A more comprehensive agrarian reform law was promulgated in January 1975 and aimed at improving land utilization by transferring poorly used land held by large landowners to landless rural families. The Bank supported this Government effort. II. PROJECT FORMULATION A. Identification/Preparation and Appraisal 2.01 In October 1975, the Central Bank, on behalf of the Government of Honduras, submitted a loan application to IDA for assistance to finance a project which would provide (a) agricultural and livestock credit to farmers and (b) technical assistance to some institutions of the agricultural sector. The project was prepared jointly by the Central Bank's Agricultural Credit Project Unit (UPCA) and personnel of other Honduran institutions closely connected with the agricultural sector. The proposed project was appraised by an IDA mission which visited Honduras in October/November 197T. B. Negotiations and Board Approval 2.02 Negotiations for the Agricultural Credit Project took place in Washington in April 1976 with representatives of the Government, the Central Bank of Hooduras and IDA. On May 18, 1976, the Credit was approved by the Board. The Board was concerned that: (a) the small-scale farmer would have a minor role in the project; (b) sufficient safeguards had not been built in to ensure the full participation of the beneficiaries of the agrarian reform; and (c) the Bank's lending program for Honduras did not focus on supporting the poorest 40% of the Honduran population.  - 2 - C. Objectives and Description 2.U3 The primary objectives of the project were to: (a) expand the area under food crops and livestock production; (b) increase export earnings and import substitution; (c) increase farm and agroindustrial employment opportunities; and (d) maintain the momentum of the agrarian reform. 2.04 In order to achieve these objectives the project was designed to provide: (a) credit for the development of livestock, crops, agroindustries and for purchase of heavy agricultural machinery; and (b) technical services to support selected agricultural technical institutions. The primary executing agency was UPCA which was responsible for the credit activities of the First Livestock Credit Development Project (Credit 179-HO) and the Second Livestock Development Project (Credit 434-HO). The technical assistance component was implemented by each beneficiary institution under separate agreements with the Central Bank. 2.05 The two previous livestock projects (para. 2.04) provided credit for livestock only, and their beneficiaries were medium- and large-scale farmers. However, in the second project funds amounting to US$1.0 million were reallocated to finance banana rehabilitation. The Agricultural Credit Project, on the other hand, included credit for crops, which was expected would mainly benefit agrarian reform groups. The technical services component in the latter project also emphasized assistance to agrarian reform beneficiaries. D. Project Cost and Financing 2.06 Total project cost was estimated at US$20.0 million, of which IDA was to contribute approximately 70% (US$14.0 million) to cover the foreign exchange component (US$12.0 million) and some local currency costs (US$2.0 million equivalent). The financial intermediaries were to contribute 15% (US$3.0 million), the Central Bank 5% (US$1.0 million), and farmers the remaining 10% (US$2.0 million). 2.07 At completion, in current prices, total project cost (US$20.5 million) was 102% of appraisal estimate. With respect to project financing, IDA participation at appraisal was 70%; actual figures show 68%, while the actual participation of the Central Bank increased eight percentage points because the technical services cost was higher than anticipated at appraisal, as outlined in table 2.1. The Central Bank, as was agreed, provided the necessary working capital, complementary to the medium- and long-term investments. Short-term subloans amounted to US$3.1 million at constant prices.  -3- Table 2.1 Source and _iut of FwWd CMS no Illon) Financial catgory Producers Intomdlewie Central Oak I[A Tteal mount S mount Z mnt T It S Crts DraWial Estlites 1. Livestock Farm 040 10 1.0 27 - - 2.52 63 4.00 2. Crop Farm 0.3 10 0.78 27 - - 1.13 63 2.90 3. Islets Benam Rahb. - - - - - - 0.70 100 0.70 4. Agroindustrles 0.15 20 0.17 24 - - 0.40 X 0.72 S. Havy Mechinery 0.18 2D 0.21 24 - - 0.49 5 0.81 6. Tochnical Services - - - - 1.00 16 5.40 4 6.40 Contingenciss 1.00 - 0.74 - - - 2.66 - 4.40 Total Project Cost 2.00 10 3.00 Is 1.00 5 14.00 70 20.00 Actual at 1975 Prices 1. Livestock Faros 0.3 10 1.05 27 - - 2.44 63 3.18 2. Crops Farn 0.24 10 0.63 D - - 1.49 63 2.36 3. Islette Bem Rehab. - - - - - - - 4. Agroindustrles 0.14 2D 0.17 24 - - 0.3 X 0.69 S. Heavy laMminry 0m 2D 0.24 24 - - OX SS 1.00 6. Technical Services - - - 2.12 2S 6.3 75 B.46 Toatl Project Cost 0.97 6 2.09 13 2.12 13 11.21 6S 1.38 Actual at Current Prices 1. Livestock Farm 0.48 10 1.31 27 - - 3.05 63 4.14 2. Crops Fan. 0.30 10 0.80 27 - - 1.86 63 2.9S 3. ISLEI BRnmm Rehab. - - - - - - - - - 4. Agroldustrles 0.17 20 0.21 24 - - 0.48 X D.86 .5 HevyN echnery O.Z5 2D 03 24 - - 0.70 56 125 6. Technlcal Services - - - - 2.65 25 7.91 75 1O0S Totil Project Cost 1.20 6 2.62 13 2.65 13 14.00 68 20.47 SOURCE: Mieslon EstImtes Deeat 1984  -4- III. IMPLEMENTATION 3.01 The Credit became effective oi December 10, 1976. Project implementation followed, and the first IDA supervision mission took place in July 1976. The SAR assumed a five-year implementation period, and the project was expected to be completed by June 15, 1981. However, the project was fully completed after seven years of implementation (June 30, 1983). Table 3.1 shows total project costs by component. A. Project Components (i) Agricultural Credit 3.02 Three hundred and fifty-eight subloans were approved against the proceeds of the Agricultural Credit Project. This result exceeded by 12Z the number of subloans that were estimated at appraisal. However, 1,186 families (69% of appraisal estimate) benefitted. The shortfall in the actual number of beneficiary families relative to appraisal assumptions was mainly due to the fact that the Isleta subloan never materialized (para. 3.14). 3.03 The analysis of the impact of the project was based on a fairly representative survey of 36 dual-purpose (dairy/beef) farms and 15 rainfed sugarcane farms conducted by UPCA in 1982. UPCA followed the evaluation method of comparing situations before and after the project. The first field survey was carried out in 1979, the year that the M&E section in UPCA was organized (para. 3.34). The analysis and evaluation procedure was geared primarily toward identifying three farm models: two different representative dual-purpose farms (:innex 1 presents UPCA's findings) and one typical sugarcane farm in the south (Annex 2 presents the financial and economic analysis of sugarcane investments). The credit components are discussed in detail below: Livestock Subloans 3.04 Two hundred and fifty subloans were approved for livestock development, 98% of the appraisal estimate. The average size of farm financed was four times larger than anticipated at appraisal, thus mainly medium-- and large-scale farmers, and to a lesser extent cooperatives, profited from these operations. The proceeds of the credit component made the following physical investments possible for livestock development: (a) establishment of 12,341 ha of new pastures and the improvement of an additional 8,078 ha; (b) installation of 1,722 km of new fencing and repair of 1,008 km of existing fences; (c) construction of 201 corrals for stock-handling purposes; (d) purchase of 91 pure bred females, 4,270 commercial standard females and 444 bulls for improvement of the breeding herd; and (e) investments for pig development; and (f) well drilling, drinking troughs and forage equipment.  -5- Table 3.1: Project Costs and Key I ndicrters 1115'0DD at 1975 Prizes) Appralal Eatlets Arctual Average Averge Averag e A age Acttai C"t 11. of Tabe l _unt per Slin of MD. of Total Amunt pr Sim of a Percentage Sublouma imut Sablem Form Sunlouns Amount Subloan Farm ot AWrail the) (ho) I. CIT 00WlNbIT Llvetck Farm BirryAmst 215 3,1l 17.3 40 178 2,S2 14.2 170 6S Fattening 40 Z0 7.0 SO 36 621 17.2 25D 22Z