Colombia - Second and Third Agricultural Credit Projects

Documt of TheW FOR OFFIC Report No. 9860 PROJECT PERFORMANCE AUDIT REPORT COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (LOAN 1357-CO) THIRD AGRICULTURAL CREDIT PROJECT (LOAN 1737-CO) AUGUST 28, 1991 Operations Evaluation Department 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 Name of Currency: Colombian Peso (Col$) Rate of Exchange: at December 31st 1975 US$ - '.ol$ 24.8 1976 - 30.3 1977 - 34.8 1978 - 40.8 1979 - 47.8 1980 - 50.1 1981 - .6 1982 - /0.0 1983 - 87.8 1984 - 112.8 1985 - 169.2 1986 - 217.0 1987 - 262.1 1988 - 333.0 1989 - 433.9 1990 - 554.1 ABBREVIATIONS AND ACRONYMS BG Banco Ganadero Livestock Bank BOR -'Banco de la Republica Colombia's Central Bank CAJA -Caja de Credito Agrario, Agricultural, Industrial Industrial y Minero and Mining Credit Bank DCA -Departamento de Credito Agropecuario Agricultural Credit Department of BOR DCF Departamento de Credito de Fomento Development Credit Department of BOR DCI -Departamento de Credito Industrial Industrial Credit Department of BOR DRI -Desarrollo Rural Integrado Integrated Rural Development ERR -Economic Rate of Return FBGI -Fondo Rotatorio Banco Ganadero-INCORA Revolving Fund of BG-INCORA FFAP - Fondo Financiero Agropecuario Agricultural Finance Fund FFI - Fondo Financiero Industrial Industrial Finance Fund FIP - Fondo para. Inversiones Privadas Fund of Private Investment FRR - Financial Rate of Return HIMAT - Instituto Colombiano de Hidrologia, Colombian Institute for Hydrology, Meteorologia y Adecuacion de Tierras Meteorology and Land Improvement ICA - Instituto Colombiano Agropecuario Colombian Agricultural Institute IICA - Instituto Interamericano de Ciencias Interamerican Institute for Agricultural Agricolas Sciences INCORA- Instituto Colombiano de la Reforma Colombian Institute for Agrarian Agraria - "Instituto" Reform M&E - Monitoring and Evaluation OED - Operations Evaluation Department PCR - Project Completion Report PPAR - Project Performance Audit Report SAR - Staff Appraisal Report TAP - Trade and Agricultural Policy Loan FISCAL YEAR OF BORROWER Government of Colombia: January 1 - December 31 Banco de la Republica: same INCORA: same WEIGHTS AND MEASURES Metric System THE WORLD BANK OMMALM OMY Wash.nIon. D.C. 20433 U.S.A. ice go DUeamal Oprton av~auavm August 28, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THL PRESIDENT SUBJECT: Project Performance Audit Report on COLOMBIA - Second Agricultural Credit Project (Ln.1357-CO) and Third Agricultural Credit Proect (L.n.1737-CO) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Colombiat Second Agricultural Credit Project (Ln. 1357-CO) and Third Agricultural Credit Project (Ln.1737-CO)" prepared by the Operations Evaluation Department. Attachment 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. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (Loan 1357) THRD AGRICULTURAL CREDIT PROJECT -(Loan 1737) TABLE OF CONTENTS Pase No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Data Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . i Evaluation Summary . . . . . . . . . . . . . . . . . . . . . . . . . vii I. BaACKGROUN . . ..... ... .. ... ... .. 1 II. IMPLEMENTATION EXPEIENCE . . . . . . . . . . . . . . . . . . . 2 A. Second Agricultural Credit Project . . . . . . . . . . . . . 2 B. Third Agricultural Credit Project . . . . . . . . . . . . . 5 III. PROJECTS OUTCOME . . . . . . . . . . . . . . . . . . . . . . . 8 A. Monitoring and Evaluation Systems . . . . . . . . . . . . . 8 B. On-Farm Impact . . . . . . . . . . . . . . . . . . . . . . . 10 C. Agroindustrial Impact . . . . . . . . . . . . . . . . . . . 11 D. Institutional Impact . . . . ................ 11 E. Interest Rates . . . . . . . . . . . . . . . . . . . . . . . 14 IV. FINDINGS AND ISSUES . . . . . . . . . . . . . . . . . . . . . . 16 A. Bank Impact on Credit Policy Reform . . . . . . . . . . . . 16 B. Subsidies, Substitution and Diversion . . . . . . . . . . . 18 C. Small and Larger Farmers . . . . . . . . . . . . . . . . . . 21 Table: Agriculture and Livestock Components: Financing Shares of Participating Banks ................... 3 Map: IBRD 14212R 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. PROJECT PERFORMANCE AUDIT REPORT COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (Loan 1357-CO) THIRD AGRICULTURAL CREDIT PROJECT (Loan 1737-CO) PREFACE This is a Project Performance Audit Report (PPAR) on the Colombia Second and Third Agicultural Credit Projects, involving IBRD loans in the amounts of US$64.0 million and US$20.0 million, respectively. The objective of the first was to finance term credit requirements of small and large scale commercial farmers, and of agroindustrialiste, through rediscount funds of the Central Bank (BOR). The objective of the second was to finance term credit requirements, in association with working capital, of small farmers on settlements administered by the Colombian Institute for Agrarian Reform (INCORA). In all about 17,000 farmers were to be assisted under the two loans. Loan 1357 was approved on December 12, 1976. The Loan was fully disbursed, and the final disbursement wae made in January 1985. Loan 1737 was approved on June 21, 1979. The loan was also fully disbursed, and the final disbursement was made in April 1987. The PPAR is based on the Project Completion Reports (PCR) which were submitted to the Board on May 29, 1987 and May 12, 1988 (Reports No. 6806 and 7234), the Staff Appraisal Reports (SAR), the Presidents Reports, the loan documents, reports of the Executive Directors' meetings at which the projects were considered, a study of project files and discussion with Bank staff. An OED mission visited Colombia in November 1990 and discussed the effectiveness of the Bank's assistance and project execution with relevant Government agencies. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. The PCRs provide good accounts and assessments of the project experiences, and discuss the performance of the Bank and the project executing authorities. The PPAR elaborates on particular aspects of the overall lending period, including the evolution of the Bank's program for agricultural credit in Colombia, the controversy over subsidized interest rates and the likely effect of those subsidies on the farmers' use of the credits. Following standard OED procedures, copies of the draft were sznt to the Government for comment on June 10, 1991. INCORA responded suggesting A minor correction in para. 3.16. - iii - PROJECT PERFORMANCE AUDIT REPORT COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (Loan 1357-CO) BASIC DATA SHEET Appraisal At Full Estimate Development 2 Economic Rate of Return (2) 28 na Financial Rates of Return (%) 16-30 na Number of Farmers Participating 9,353 9,515 107 Number of Agroindustrialists Participating 190 186 98 PROJECT TIMETABLE Item Date Date Planned Actual Identification 1974 Preparation November, 1974 Appraisal Mission April, 1975 Loan Negotiations February, 1976 November, 1976 Board Approval December 28, 1976 Loan Signature February 4, 1977 Loan Effectiveness June 6, 1977 September 6, 1977 Loan Completion June 30, 1981 December 31, 1983 Loan Closing December 31, 1981 December 31, 1983 ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Appraisal Estimate 3.0 14.5 21.5 14.0 11.0 Cm C lative 3.0 17.5 39.0 53.0 64.0 Act 1 23.4 15.1 9.7 2.9 11.0 1.3 0.6 Cumulative 23.4 38.5 48.2 51.1 62.1 63.4 64.0 Actual as % of Estimate 0 0 60 73 75 80 97 99 100 Date of Final Disbursement: January 2, 1985 TUPINPrUTS (Staff Weeks) FT73 FY74 1175 1Y76 7Y77 PT78 FY79 1Y60 HY81 &'Y&2 HY83 H84 1185 70TAL Preappraisal 3.4 136.3 1.2 140.9 Appraisal 83.3 47.9 1.1 132.3 Negotiation 9.5 15.4 24.9 Supervision 2.6 25.5 31.3 16.2 5.7 11.9 7.8 2.3 11.7 115.0 Other 0, ..o _S , ,1, 0., 8. ....LS 2 Total 0.8 3.4 219.7 59.4 19.2 25.6 31.3 16.2 5.7 11.9 7.9 2.3 11.7 415.1 Sot.rce: LCPDR. Includes both field and office work at Headquarters. - v - PROJECT PERFORMANCE AUDIT REPORT COLOMBIA THIRD AGRICULTURAL CREDIT PROJECT (Loan 1737-CO) BASIC DATA SHEET Appraisal At Full Estimate Development 2 Economic Rate of Return (%) 38 12 32 Financial Rates of Return (Z) 12-50 12-50 100 Number of Farmers Participating 7,620 7,200 94 ------------------------------------------------------------------------- PROJECT TIMETABLE Item Date Date Planned Actual Identification November, 1977 Preparation October, 1978 Appraisal Mission November, 1978 Loan Negotiations June 1, 1979 Board Approval June 21, 1979 Loan Signature November 30, 1979 Loan Effectiveness February 28, 1980 October 1, 1980 Loan Completion December 31, 1984 June 30, 1986 Loan Closing June 30, 1985 June 30, 1986 -------------------------------------------------------------------------- ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Appraisal Estimate 2.8 4.4 6.0 5.8 0.7 0.3 Cumulative 2.8 7.2 13.2 19.0 19.7 20.0 Actual 0.9 2.3 1.5 4.3 4.2 5.9 0.9 Cumulative 0.9 3.2 4.7 9.0 13.2 19.1 20.0 Actual as % of Estimate 0 13 24 25 46 66 96 100 Date of Final Disbursement: April 1, 1987 - Vi- :ZM INPUTS (Staff Weeks) 1H78 1179 180 161 1182 1r83 1164 1185 PY86 M7 TOTAL Presppralsal 3.2 28.1 33.3 Appraieal 107.1 107.5 Negotiation 6.0 6.0 Supervision - - .7 L_ LL Zq,I IL. 1.0 13. 91.6 Total 5.2 141.6 7.7 3.4 12.9 20.5 15.7 17.0 13.3 1.1 238.4 - vii - PROJECT PERFORMANCE AUDIT REPORT *OR CEI* SECOND AGRICULTURAL CREDIT PROJECT (LN. 1357-CO) THIRD _AGROT LCEI RETW 177CO EVALUATION SUteARY I. Introduction and supervision of both projects were upset by continuing controversies Over a 25-year period the Bank has over interest rates and other Issues, supported in Colombia thirteen and the future oi lending to INCORA projects with important farm credit was later celled to question by components. The projects under audit disappointment in Government and the - the eighth and ninth - represent an Bank with its performance. The two important phase in that progression. projects were effectively completed As suggested by their names, they In 1983 and 1986, closed fully aimed at strengthening comprehensive disbursed, but not repeated. national credit programs rather than continue the piecemeal subsector In late 1990 the Bank intensified (livestock) and area-based (specific discussion with Government over settlements or Departments) targets project support for a proposed open of previous Vrojects. The Second line of rurel cradit within a Agricultural Credit Project, prepared remodeled rediscount operation. It in 1975 and effective in 1977 for meets the Bank's new guidelines for US$64 million, supported a country- rural financial intermediation. wide rediscount operation run by the Government now favors positive Central Bank. The Third Agricultural Interest rates and an end to the Credit Project, prepared in 1978 and subsidy conveyed to farmers in effective in 1980 for US$20 million, previous programs. The audit sought to fill an unintended gap, recognizes the desirability of apparently left by the Second positive rates and self-financing Project, by supporting the small programs. But it finds that in these commercial farmer credit program two earlier project experiences the executed by INCORA, the national concern over the risk of resource settlement authority, for families in misallocation, associated with over half of its settlement subsidized credit, was based on the perimeters. With this shift from potential of such risk more than "dedicated" to open lines of credit, empirical evidence. There was the Colombia program anticipated by a evidence of some mipallocation, but decade the Bank's general shift in it was probably limited. There was rural credit policy of the last few considerable concern too over the years. potential for substitution of inexpensive credit for own-resources For different reasons the results by farmers, but this issue also was were not encouraging. Negotiations not well documented and appears to - viii - have been exaggerated. Based on the assistance, training and provision apparent favorable effects of the of vehicles and other equipment subloans at the farm level, the audit (and Intensive supervision), a feels there was justification for a goal that had proven illusive follow-on project in both cases, if under the previous, narrowly the issue of interest rate subsidies focused Loans for that agency. could be satisfactorily resolved. Nevertheless, the credit projects Support for larger farmers and that did follow (diversification from ogroindustriolists under the Second coffeel institutional support for Project was in both cases part of Caja Agraria, the main rural banking much larger Central Bank system) are impressive in concept and rediscountinS operations already implementation. The audit's finaings underway. Support for small farmers do not imply criticism of those under the Second project was a novel activities. The new project offers feature of that rediscount program. to bring all these trends together Support for INCORA's settlers under (para 4.03). the Third Project would add substantially to funds already 2. Objectives and Setting available to INCORA. Objectives of the Second Project 3. Imglementation Experience were to: * expand food production Colombia entered a period of countrywide, increase availability accelerated inflation about the time of inputs for industry from the Second Project was prepared. The agriculture, and continue the Bank insisted with little success sector's substantial contribution that Government adjust lending and to the balance of payments; rediscount rates to maintain at least non-negative levels. Government * provide investment credit for resisted for various reasons, 12,000 farmers and 190 including an emphatic preference for agroindustrialists; subsidized credit (para 3.14). Negotiations and execution of both * reserve part of that credit for projects were punctuated by 6,300 small commercial farmers, controversies - and occasional including INCORA's families: and suspension of Loan disbursements - as the volatile rate of inflation moved * increase employment opportunities, up and down in a range just above the particularly in the rural areas. interest rates agreed in the legal documents. Objectives of the Third Project were to: Nevertheless, fund. under the * increase income and employment of larger-farm component of the Second 7,620 of INCORA's land Project were comitted quickly after reform/colonization families project effectiveness. This occurred through provision of credit and despite concerns in the Bank that it technical assistance; and was precisely this group of farmers where the threat of misallocation - * improve INCORA's overall including diversion and substitution performance through technical of funds - was greatest. Commitments - ix - of small-farm funds in the Second of the herd. Banks participating in Project was delayed for years, one of the rediscount operation and INCORA the factors contributing to the assured that the cati, finance vas i6entification and preparation of the complemented by other capital Third Project. Ultimately the Bank's improvements on the ranch. insistence that this component be kept alive paid off: small-farm funds na Second Project did not provide in both projects were fully disbursed technical support for the Central and the small farmer rediscount Bank or the participating on-lending window became a permanent fixture in banks. The fact that the Loan the Central Bank (paras 2.05, 3.09). ultimately covered only 1.6Z of all Disbursements for the agroindustry rediscounted paper during the six- component of the Second Project were year disbursement period indicates drawn out over six years, again with the Bank could have expected little occasional controversy and leverage. Nevertheless, the suspension. But two years after permanent establishment of the small effectiveness the Bank decided that farmer window, the increase in end- subsequent lending for agroindustry use verification controls by the would be shifted out of agriculture Central Bank to limit loan diversion and to its much larger industrial by participating farmers, and the lending line with Colombia. slow shift in attitude on interest rate policy are evidence of Bank influence (para. 3.09). The Third 4. Results Project sought and the Bank reported, substantial Improvements in Monitoring and Evaluation services INCORA's management information were to be established in both system, portfolio control and loan primary executing agencies - the collections. The supervision input Central Bank and INCORA. Progress was intensive and, after one five- here was poor. The extent and month suspension of disbursements, quality of farm-level data to support also paid off (para 2.11, 3.11). analysis of production impact cannot sustain reliable reestimates of rates 5. Sustainabilitl of return or any confident assertions about quantitative results. The rediecount program expanded Nevertheless, supervision mission substantially after the Second reports on their infrequent field Project was completed, including the visits, and the audit mission's own funding for small farmers. Changes in limited field exposure, suggest that the system in 1990 (including the the application of the subloans restructuring of interest rates) have generally followed the original or a made it even stronger. For reasons modified farm plan agreed with the that are not clear to the audit, this assisting technician and had positive increase in credit availabilities for effects on improving production small commercial farmers has not been and/or productivity. The number and accompanied by an expansion of credit value of loans to livestock was for INCORA's families, who now suffer higher than to crops, particularly a clear shortage of term credit for the small farmers. The livestock compared to the project years. The loans were dominated by the purchase Bank did not follow-up the Third of breeding cattle for the expansion Project with either institutional or -x - financial support for INCORA. dominate, where end-use visits are Institutional improvements up to 1986 maintained, and where transaction have eroded and INCORA's status in costs of the subloans are perceived Government has declined. to be high, the incidence of misallocation is likely to be low. 6. Findings and Lessons It is important to note that the Board was as concerned as Bank staff Interest Rates on Farm Loans. with this problem. This was the issue that dominated the relationship between the Bank and Proiect versus Policy Lendini. Government throughout the Second The Bank's failure to achieve Project, and flared up also in the interest rate refo.-m under cover of Third Project. The Bank's concern the Second Project was one of the was that negative interest rates reasons why the Bank dropped plans convey subsidies that would not only for a follow-on project in 1984 and reward the farmer but lead to the shifted its objectives thereafter to misallocation of his resources, a series of two policy-based loans. through either approved investments Each provided at least four times the that in fact were not economic, loan funds of the Second Project approved investments he would have (US$300 and 250 millions versus US$64 made anyway, or ineligible (though million), but were also unsuccessful not necessarily uneconomic) uses of in achieving interest rate reform in the loan funds. However the clientele their time. As stated above, of the project, including the larger Goverment subsequently made a farmers of the Second Project, are decisive turn in that direction which judged by the audit not the sort was not linked to a specific loan. which attract suspicions of a The audit feels that the project substantial propensity for abuse. interventions in the earlier phase of The Bank took this propensity for dialogue with the Government were as granted, because of the nominal price important as the policy-based incentive provided by the credit, and interventions in finally helping did not document it with sufficient achieve meaningful change (pars research (paras 4.06-4.11). If the 4.03-4.05). Policy lending should misallocation phenomenon recedes, the complement, not substitute, project case against the subsidy at the farm lending to achieve project-related level is based mostly on equity and reform. distributional judgements, which would not warrant such intense Farm Visits. The concern for concern during supervision. The interest rates, other aspects of impact of subsidy at the level of the credit policy and, in particular, the financial intermediary is another institutional viability of INCORA matter, and that is where the Bank's dominated Bank supervision. This was attention ultimately was directed, at the expense of visits to the long after the farmer lending farmers and the field technicians who categories of the Loan had been assisted them. Better familiarity exhausted (para 4.12). These with the farm-level basics of the comments refer only to tese two projects would have helped clarify projects. But they do suggest that the issues over diversion and for credit projects where small and substitution of funds. And field medium scale commercial farmers visits would have increased Bank - xi - awareness of the efficiency oC on- that is contributing to the farm application of the loans, a misunderstanding about misallocation dimension which missions focusse' on of credit resources. The Second efficiency at the level of the Project defined small farmers as financial intermediary cannot assess. those with total assets no more than The last Bank mission to the Second a level corresponding to a farm of Project to include a technical expert about 20 ha and 20 cows. All others - either agronomist or, preferably, were defined in the Loan Agreement as livestock specialist - was in 1978, "other than small commercial one year after effectiveness. In the farmers". But they came to be subsequent five years of supervision, perceived as "large farmers", and when the Bank was pushing this image seems inexorably to move successfully for the small farmer up-scale and fix itself on the opening, the subject of the Bank's classic, wealthy, large farmer with concern was literally out of sight of substantial assets both on and off Bank staff. The audit concludes that the farm. That ignores a wide band farm visits should continue to be a of medium scale farmers who were the part of supervision of at least some principal clients - indeed targets - of the broader-based projects for of the Second Project. The dichotomy rural finance that are now coming of small and large farmers is badly forward. defined, and serves the Bank poorly in assessing its agricultural Small Farmer/Large Farmer. The programs (paras 4.13-4.14). projects reveal a semantic problem PROJECT PERFORMANCE ADIT RUPORT COLOMIA SECOND AGRICULTURAL CREDIT PROJECT (Loan 1357-CO) THIRD AGRICULTURAL CREDIT PROJECT (Loan 1737-CO) 1. BACKGROUND 1.01 In the early 1970s the Bank was financing farmer credit programs in Colombia under four separate projects: one of them executed country-wide by a specialized livestock development authority in the Caja Agraria (CAJA), the country's primary agricultural bank; two others executed in specific settlement areas by the national settlement authority, INCORA, using the CAJA's banking facilities; and the fourth - the first Agricultural Credit Project - executed also by INCORA through the CAJA for medium scale farmers living near the settlements in four Departments (Loan 624-CO, of US$17.0 million). This last project was completed in 1975. One of the purposes of the Second Agricultural Credit Project, originally proposed in 1974, was to allow the Bank to consolidate the parts of its credit portfolio aimed at commercially-oriented farmers under a single line of finance for a new agricultural credit rediscount operation administered by the Central Bank (BOR). When it became clear after effectiveness of the Second Project that it would not be able to incorporate easily the small farmer strata, the Third Agricultural Credit Project was developed to finance INCORA's settlers in the majority of the institution's operational regions. These two projects were effectively completed, with the loans to be fully disbursed, in 1983 and 1986. Other credit lines appeared in the Bank portfolio - for subsistance farmers in integrated rural development areas and for coffee farmers to diversify to other crops - but the two projects under audit attracted the principal energies of those in the Bank who were trying to accelerate the pace of reform of some of the central elements of agricultural credit policy, in particular interest rates, field verification of credit uses, accounting and debt recovery. The Bank's credit program in Colombia anticipated by a decade the reform of rural finance that has characterized the Bank-wide agricultural credit operations in the last several years. The Bank had mixed success with the reform package in Colombia during the life of the projects. Neither was repeated, though another, broader credit project is now under discussion. In fact a comprehensive reform of financial sector policies has been launched by the Government, and it is useful to ask whether these projects contributed, with a lag, to part of that turnaround. 1.02 Overriding all other project issues was the low level of interest rates. The issue dominated the negotiations and supervision of the Second Project, and it flared up again in supervision of the Third Project. The audit was interested in assessing the undesirable effects of the interest rate subsidies - in particular the diversion of loan funds and oubstitution for own funds that are alleged to be the inevitable consequences. -2- II. IMPLEMENTATION EXPERIENCE A. Second Aricultural Credit Project 2.01 Loan 1537-CO for US$64.0 million was designed to support a three-year on-lending program. It was divided into three substantive categoriess US$14.0 for small commercial farmers (Category I), US$23.0 million for larger farmers and machinery contractors (Category II), and US$19.0 million for agroindustrial enterprises. US$8.0 million was unallocated. The phasing of disbursements after effectiveness in September 1977 was different for each category. Category I remained practically inactive until adjustments in lending procedures enabled two successive waves of investment activity, the first in 1979/80 and the second, bigger, in 1982 that effectively exhausted the Loan. Category II was disbursed in the reverse pattern: all of the original allocation was committed within a year of effectiveness, and a reallocation in 1980 from Unallocated of US$2.0 million was also quickly disbursed. These were all lent to farmers. BOR excluded machinery contractors from the disbursement requests. By contrast, the agroindustrial component Category III was disbursed over the entire lending period 1977-1984, including the remaining US$6.0 million from Unallocated reallocated in 1980. Another US$3.7 million was reallocated in 1981 by amendment from the small farmer category also to agroindustry, but the burst of small farmer lending in 1982 required the recapture of almost all those funds, a reversal that was accomplished without recourse to another amendment. 2.02 The project was executed by BOR as part of rediscount operations for agricultural and industrial lending by public and private financial agencies. The rediscount facility for agriculture was created in 1973 as one of the series of reforms embodied in Lei Quinta (Law 5), enacted for the purpose of expanding and systematizing the national base for agricultural credit. Law 5 also tied all rediscount approvals to farm level technical planning and support, to be financed by the larger farmer with up to 2% of his loan. The formal association of credit with extension is one of the major features of the Colombian system. Bank funds were administered by two BOR departments - the Agricultural Credit Department (DCA), which managed the Agricultural Finance Fund (FFAP), and the Development Credit Department (DCF, now DCI), which managed the two funds available for rediscounting industrial loans (FFI and FIP). The financing shares of participating banks under FFAP is shown in table 1 taken from the PCR. It gives the breakdown by small and larger farmers and by agriculture and livestock. -3 - T1leI Agriculture and Liestock Componentst Financing Shares of Participating anks Neditum-Large Siall TOMMLs Scale Tazma Asriculte Liretock 25 go. of No. of go. of No. of no. of Lel Loggs. v. kalue Laa Vu1au. Loas v.lue. Loans.L val Caja Agraria 27.5 22.3 17.5 17.3 34 26 54 51 45 40 Banco Ganadero 21.9 19.1 6.1 7.7 12 13 41 39 28 27 Sanco Cafetero 1.5 0.5 10.0 7.8 24 16 1 2 11 8 Camsercial Ranks _M 0.5 ia AA --ag 4 4 a,g 1L M 51.5 42.4 48.5 57.6 100 100 100 100 100 100 2.03 The table above that 451 of the total number of farmer loans under the project (and 40% of their aggregate value) were handled by the CAJA. The Livestock Bank (BG) handled another 282, the Coffee Bank 121 and all participating commercial banks the remaining 151. Two-thirds of all CAJA and BO loans were made to small farmers, and two thirds were made to livestock. By contrast, 92% of all Coffee Bank and comercial bank loans were made to larger farmers, and 921 were made for crops rather than livestock. These identities are coincidcatal, but the preferences they indicate are real. FEAP was discounting CAJA and BG paper under the project mostly for small farm livestock loans, and Coffee Bank and commercial bank paper almost entirely for larger farm crop loans. These loans were for investments: the project did not cover the rediscounts which FFAP was making routinely for seasonal loans. The table also shows that just under half of all project loans, and 582 of loan values, were made to the larger farmers. That is roughly the appraisal allocation for loan funds 621 to the larger farmers. In terms of FFAP's overall rediscounting operation that rate has no significance, since during the six year project period project lending to the larger farm strata was an insignificant share of FFAP's activity. The PCR estimates that the project financed only 4Z of all FFAP rediscounts in that period, the overwhelming majority concentrated on the larger farmers. That is why the original allocation and reallocation for Category II were committed so rapidly: they were time slices of a much larger program. All eligible FEAP rediscounts would be submitted to the Bank up to exhaustion of the Bank's provision. DCA would select for submission the loans the Bank preferred to sees hence the low share of livestock loans for the larger farmers. The Bank was worried about diversion of funds by the ranchers (para 4.09). By contrast, project lending to the small farm strata represented nearly the totality of FEAP involvement. Details on disbursements from each category are given next. 2.04 Catesory I funds for small farms disbursed so slowly in the initial years that BOR suggested they all be reallocated. Later, after the first wave of lending under Category I using exceptional procedures had subsided in 1980, BOR requested that all or part of the remaining funds in Category I be reallocated. Part were, but the Bank remained adamant that the small farm component be maintained. This initiative had been an important feature of Bank -4- deliberations through appraisal. There were three constraints on the disbursement of Category I funds. First, BOR and DCA simply did not share the Bank's interest in opening the window for small farm clientele in the rediscount operation. Better said, their motivation to do so was not enough to persuade management to take the extra steps needed to remove the legal and institutional constraints that were then preventing growth of the small f-rm portfolio. Second, BOR did not earmark Government counterpart funds specifically for the small farm sector to match Category I availabilities, so that FFAP's total domestic annual resources would be committed easily and quickly to established customers leaving little for new, small farm accounts. Third, most of the small farm subloans being made by the two participating banks with a tradition of lending to small farmers - the CAJA and BG - were initially ineligible for FFAP rediscount due to rules established by Law 5. These were defended by BOR as prudent, but descr'bed by the Bank as inhospitable to the project's small farm initiative. For example, Law 5 required that term loans of over six years - the typical FFAP project loan - be supported by a mortgage on the farm. Many commercially oriented small farmers had none, and this was especially the case with INCORA's settlers - the group of small farmers that was thought to be the prime candidate for Category I loans. Another prohibitive requirement of Law 5 was that all loans be supported by technical assistance provided by college graduates: ruling out most of CAJA's field force which were recruited at a lower technical level. 2.05 Bank pressure on Government to dismantle these roadblocks eventually paid off. In 1979 BOR opened a special line of FPAP project funds for BG to cater to INCORA's clients, setting aside the mortgage requirement. This "FBGIn program resulted in a surge of commitments in 1979 and early 1980 that persuaded Bank supervision to forecast exhaustion of Category I by the end of that year. But the program collapsed at the end of 1980, partly because the Bank objected to a peculiar subsidy feature embedded in FBGI interest rates, partly because FAP ran out of 1980 funds earmarked for livestock, and partly because Government denied counterpart for FBGI for the 1981 budget year. Then in late 1981, the Monetary Board (Junta Monetaria), which controlled all monetAry policy in the country, including the application (though not the rules) cf Law 5, accepted changes in the limitations on CAJA's activity that bypassed the six-year limit and legitimatized its extension team. This led to a remarkaSle surge of CAJA activity - again, mostly with INCORA clients -, and a restart of the FBGI program, that finally did exhaust the remaining Category I funds and called back nearly all the US$3.7 million that had earlier been reallocated out of that category. In an unexpected twist, the rulings in late 1981 provided counterpart to Category 1, but limited it to livestock loans. This helps explain why the great majority of Category I vas ultimately committed to that sector: both BG and CAJA were confined to it, the first by mandate and the second by decree. 2.06 Category II funds were fully committed fifteen months after the date of effectiveness. Better said, rediscounted loans eligible for presentation to the Bank were assembled quickly from realized commitments made after the agreed starting date. Worsening economic conditions persuaded some applicants to withdraw, but substitute claims were entered. Within two years of effectiveness, withdrawal applications were in hand to exhaust the original US$23.0 million - 5 - allocation. This short burst of eligible lending coincided with continuing Bank- Borrower discussions over interest rates (para 3.14). The discussion vas academic for the little influence it had on the investment decisions and clientele of Category II. In 1980, the US$2.0 reallocation was also quickly committed with no important implementation issues. 2.07 Category III funds for agoindustry were disbursed by the Bank over the full implementation period starti.ng in Septembar 1977 - including a two year tail for multi-year commitments that carried the final disbursement out to January 1985. Year to year changes in the level of comitments were a response to changes in the economic environment providing incentives to the agroindustrial community, as well as to temporary informal suspensions applied by the Bank to certain sections of the portfolio. A total of 186 investment subloans were presented to the bank, which compares with the SAR target of 190. Here again the relationship of the actual to the target is unimportant, since the loan helped finance only a small share - 13% - of total rediscounting under the FFI and FIP lines during the disbursement period. DCF was mostly concerned about which loans to present. The notable feature of this component was a concentration on investments much larger on average than that established by the SAR. Total costs per project averaged three times that anticipated by the Bank. Since the Bank's loan disbursement ceilings were respected, it meant other sources substantially increased their shares. This was one of several contentious policy issues raised during supervision. In this case it signaled a departure from the Bank's plan to direct the majority of funds to smaller enterprises. The PCR says that it is not clear whether the shift reflected more the preferences of participating banks or lack of demand for smaller projects. DCF told the audit mission that applicants for smaller projects had other, quicker lines of credit. In any case the Bank accepted the new pattern. The PCR says also that the average subloan still fit under the ceiling set by the Loan Agreement. But that is an inappropriate justification, since the ceiling applied to individual investments and not the average. In terms of numbers of subloans, of the 186, 117 (632) were made to enterprises with assets smaller that the upper limit in the "small enterprise" subcategory (US$750,000, originally US$350,000). Implementation of Category III was marked by several other policy arguments which disrupted routine approval by the Bank. Among these were DCF's practice of mingling project funds with other FFI/FIP lending lines bearing lower interest rates, thus reducing the average rate, and the Bank's attempt to have DCF compute FFRs for all projects and ERR's for those above US$350,000. Compliance on this last demand was irregular at best; at worst it was unresponsive, as suggested in an exchange of memo's within the Bank over the validity of any of DCF's FRR and ERR computations, one officer suggesting they may be worthless. B. Third Agricultural Credit Project 2.08 The project allocated 89% of total costs of US$50.0 million, and 862 of the Bank loan of US$20.0, to (a) a four-year on-farm credit component (exclusive of contingencies). The rest was divided between (b) credits for agroindustry and (c) technical assistance to INCORA, including vehicles and equipment. The farm loans were to be available for all eligible INCORA clients within 12 regions selected by INCORA from among its 20-region operational area. -6- Regions with problematic settlements were omitted. The loans could include working capital related to technically and financially viable farm investment plans. The SAR forecast that 35% of on-farm costs would be for working capital and 65% for medium and long term investments. The investments could cover the range of crop and livestock enterprises, with a few exclusions (i.e. coffee, cattle-fattening). Breeding cattle could claim up to 751 of total costs of any individual investment plan. Farm plans would be prepared by INCORA's technical field staff. CAJA branch personnel would administer the loanr, but their technical contribution would be marginal and subordinate to INCORA. The target population was 7,620 small scale farmers, with an average farm size to be developed under the project of 25 ha per beneficiary. Maximum lending per beneficiary would be US$12,500. The total number of families living within the INCORA perimeters in the 12 regions was estimated at 35,000. Of these, 15,000 were reckoned at appraisal to be potential borrowers and, of these, half (7,620) were expected to participate. This group would be composed mostly (84%) of families resettled within INCORA's agrarian reform perimeters, i.e. properties acquired by expropriation, purchase, etc. for transfer and cultivation collectively ("empresas") or subdivision into individual lots ("parcelamientos"). The rest (161) would be composed of organized or spontaneous settlers on virgin lands within perimeters now administered by INCORA. When the project was formulated, it was expected that 40% of the 7,620 families would enter the program in small groups, usually the residents of a single expropriated farm. The investments there would be managed collectively. The SAR presents farm models for groups of 10, 8 and 5 families, as well as a model of a single lot. 2.09 Those population targets held up during implementation. The total number of families ultimately financed is estimated in the PCR at 5,802 individual families and 200 collective groups. Assuming 7 families per collective (the PCR estimate, which is consistent with the average of the SAR group models) the total number of families benefited is 951 of the SAR target. In the two regions visited by the audit mission, the groups had fallen apart almost everywhere and the assets and debt obligations had been divided. INCORA asserts that the switch to individual proprietorship is country-wide. The SAR anticipated that 60% of all 7,620 participating farmers would request livestock- based plans, either individually or in groups. The PCR concludes that livestock, in fact the purchase of breeding cattle, did dominate the portfolio. The average loan was about US$6,500. The average was the same for crops and livestock loans, though the crop loans included a higher percentage of working capital. The farm size ranged widely from 10 to 50 ha, depending on the extent of irrigation or good rainfall. Some farmers not strictly classified as INCORA settlers entered the program - INCORA's mandate does not always allow a neat distinction. But it appears that the clientele was indeed "small scale", and in that sense differed in kind from the clientele of the first Agricultural Credit Project (para 1.01). 2.10 More importantly in terms of the "map" of project lending, the impression given by the SAR of families receiving loans only from the project broke down altogether, at least in the regions visited by the audit and allegedly in the others as well. The Third Project funds were mingled by INCORA with its other sources of loans and distributed according to the availability over time - 7 - of releases frcm those sources, including Third Project counterpart, and the submission over tim,. of farmer applications. The sources included reflows from US AID programs of the 1960s, reflowe from the first Agricultural Credit Project, BG's own funds and the FFAP/FBGI window in the Second Project, the CAJA's own funds and the FFAP window in the Second Project, together with INCOA's own funds and their reflows. Most Third Project beneficiaries had other loans, before and/or after the Third Project loans, so that the so-called "farm plan" for the latter was just a slice of the whole farm development program. This is the reason why the PCR says reestimating the ERR is nearly impossible (para 3.05 describes the PCR estimate), 2.11 The loan became effective on October 1, 1980, seven months after the appraisal estimate. The delay was because it took more time than anticipated to sign the subsidiary contract between INCORA and CAJA. Disbursements were slow during the next three years, principally because of a shortfall in counterpart releases to maintain a Revolving Fund. But this period also witnessed major, policy and procedural disputes between the Bank and INCORA involving this and other Bank projects with INCORA. The differences were over: 1) interest rates on farm loans, which fell below the 16% agreed minimum because of INCORA's practice of postponing interest as well as principal in the grace period, without compounding the deferred interest payments (this itelped cause the breakdown of the FBGI program in the Second Project in 1980); 2) annual levels for non-project lending, which INCORA was obliged to maintain at or above the 1975-77 average but which fell well below it with the steady erosion of INCORA's capital base and Government's failure to compensate fully with new counterpart; and 3) INCORA's accounts, which attracted negative audits from Colombia's Controller General year after year and serious criticism from Bank supervision. The audit issue dominated the count-down to a short suspension in 1983. An "Action Plan" for institutional reform had been jointly designed during the September 1982 supervision in an attempt to avoid suspension. Progress was reported by the following February mission, but not enough to meet the deadlines and the suspension was called for all active loans. Five months later the Bank responded to improvements against most targets in the Action Plan by lifting the suspension. The agreed interest rate was restored; the Bank abandoned the pre- project, without-project, lending floor, accepting also to allow all INCORA reflows to be counted as counterpart. The tempo of disbursements changed dramatically. In the next three years mid 1983-mid 1986 the Production Credit category of loan funds of US$15.6 million was exhausted, resupplied, and the Category eventually closed with US$18.2 million disbursed. 2.12 Funds reallocated to Production Credit were drawn from Unallocated and from two other functional categories, which were underutilized. The Agroindustrial Credit category disbursed less t'an half of the US$1.1 million allocation. Seven sub-projects were financed by this component, one of them - a cooperative rice processing mill in Cucuta - absorbing 87Z of that category's funds. (This successful venture provides a good case study of the integration of processing with a dynamic crop production project - INCORA's irrigated rice scheme near Cucuta). The Technical Assistance category was practically abandoned: the Bank disbursing US$58,000 of the US$300,000 allocation. INCORA decided it did not need the consultant M&E services provided for, and gave up - 8 - trying to agree on a short list of candidates for overseas training (too many officers insicted on going). The Bank did not accept INCORA's proposal to use the overseas training funds for domestic courses, preferring to reallocate them to the Production Credit category and let IICA help finance most of the domestic training that did take place. The failure to implement the technical assistance program agreed at appraisal, when assessed against obvious deficiencies in INCORA's capacity to execute and to account, is an unsatisfactory part of this project experience. Finally, there were small savings in the Vehicle and Equipment category, though INCORA was nevertheless able to exceed the agreed procurement targets. The SAR anticipated purchase of 132 vehicles and 90 motorcycles; actuals were 140 and 103. This was despite cancellation of the first two bidding processes. III PROJECTS OUTCOME A. Monitoring and Evaluation Systems 3.01 In both projects the Loan Agreements called for the establishment of an ME system capable of monitoring performance of the farm and agroindustrial lending programs and for preparing reports on impact. Progress here was poor. For the Second Project, the BOR was required to establish a system, within six months of the Agreement, for monitoring progress of at least 5% of the investment plans, and for "collecting technical and financial data of sufficient quantity and quality to enable an evaluation of the effects of the project". The BOR proposal for FFAP was delayed and finally submitted three years after the Agreement, but the Bank deferred approving it and in the end no formal system for FFAP was ever mounted; neither in BOR nor in the participating banks. Lending for the larger farmers under Category II was completed before work on the proposal had even begun, and no evaluation data base, apart from the farm plans themselves, exists for that category. In 1985 the Bank accepted BOR's proposal that it prepare a PCR without any attempt to assess impact on this primary target group. BOR did however carry out a sample survey of 373 smallholder livestock operations under Category I, 8% of the total number of borrowers in this group, with the assistance of BG and CAJA field staff. This provided a basis for the final report prepared by DCA, and for the PCR prepared by the Bank, to discuss farm impact. As a second best solution for developing an evaluative data base, this was a sensible decision. In 1985 the smallholder livestock borrowers were clearly the key group to investigate, the project investments on the Category II larger farms by then having aged seven years and in most cases having been followed by subsequent investments financed by non-project funds. A similar situation existed for the Category III agroindustry portfolio. DCF had established a small control unit for the project portfolio in 1981, but its output was insubstantial and, in preparing an ex post report for the PCR, the unit limited itself to a files search. The Bank commissioned a consultant firm to survey a sample of 29 of the 186 borrowers (162), including 11 subsectors of the 18 in which loans were provided. This became the basis for the Bank's PCR. DCF also provided the Bank reestimates of ERRs for a sample drawn from the 50 -9- firms for which an ERR had been computed for the original appraisal. For all three categories it is important to point out that the highly detailed investment plans, coupled with the participating bank reports on visits to each borrower, and 80R reports on its verification visits to a small sample of these borrowers, constituted a substantial data base in its own right. It did not however provide the input/output, before/after informatiou necessary to reastimate the raves of return or incremental farm income. BOR gave that type of data base lower priority than the Bank did. 3.02 The M&E project experience in INCORA followed a different path but with no better results. The Institute refused to contract with an M&E consultancy, but did establish with in-house resources a capability for farm surveys. In terms of reporting to the Bank on implementation progress, the unit's work was satisfactory. In terms of reporting on impact it was not. This small headquarter's unit worked with INCORA officers in each region to manage a sample selection, a baseline study ("diagnostico"), and an annual survey. In Year 1 of the program, 1980, a saMple of approximately 1,000 farms was interviewed for the baseline. The annual survey was then begun and repeated four times, through 1985, and it is the material of that last survey, which included 897 farmers, which was used by the Bank/FAO PCR team to compare with the 1980 baseline. After 1985, INCORA abandoned the survey, considering it a requirement for a Bank project whih was then being closed. No follow-up has been made. The six year ourvey data base itself was not properly developed to permit formal statistical inference: the size of the sample changed each year (482, 372, 1,051, 832 and 897 respectively for 1981-1985), and there was no attempt to preserve or even identify a core group of farms which continued in the sample through the years (although that had been the intention). One explanation is that the groups included in the initial sample along with individual farmers began to break up, so that groups that existed in one year's sample would not exist for the next in comparable form. The regional M&E managers responded to this disturbance on an ad hoc basis - without uniform instruction. The samples actually implemented each year also depended on the resources and interests of the regional INCORA offices. Thus the number of rice farms, for examplo, in the overall sample varied arbitrarily from year to year, as offices would drop some rice farms and other offices would add. The statistics based on comparisons between years are good only as measures of gross relationships. The INCORA evaluation unit always compared the present survey with the year before - never with the base year (except in Year 2) - and in its annual report described changes in production of individual crops that could reflect changes in the sample rather than on-farm activity. INCORA's refusal to recruit consultant support for M&E may help explain the amateur nature of this effort. The Bank does not seem to have intervened to improve the statistical base - or paid any attention to it - during supervision. 3.03 For both projects, the PCRs identify the weakness of the M&E program as one of the significant, negative, lessons to be learned and corrected by the Bank. At BOR, the InterAmerican Development Bank has been more successful in recent years in installing an M&E capability. - 10 - B. On-Farm Impact 3.04 A total of 9,515 loans to farmers were rediscounted under the Second Project, well distributed throughout the country. Half (4,898 or 512) were taken by Category I small farmers. Average dollar values for loans were US$7,000 for smallholder livestock loans (97% of the value of all Category I loans) and US$2,800 for smallholder crop loans (31). For larger farmer Category II loans the figures are US$21,300 for livestock loans (152) and US$13,400 for crop loans (85%). Since multiple lending to the same farmer was practically non-existant, these figures refer to the number of farmers as well as the number of loans. As mentioned in para 3.01, no information on farm impact on the larger farms is available. Even for the small farms, BOR's 1985 sample survey of 373 livestock investments does not allow comprehensive statements on incremental production or income, though the PCR does present pieces of evidence, derived from the survey, on production, income and employment and concludes that in all three cases the results were acceptable ("these figures suggest a satisfactory return on the project investment in livestock development" - PCR para 5.07). The audit visited and was impressed by INCORA's work on livestock farms in the Department of Norte de Santander, the second leading Department receiving funds under the Third Project and presumably a major target also of Second Project lending under Category I. Apart from that anecdotal evidence, the audit cannot comment on the PCR's assessment. The rare supervision visits to livestock farms were also generally satisfied with the farm plans, actual investments and farmer progress. 3.05 For the Third Project, the PCR presents data on crop production and yields, herd coefficients and incomes, most showing acceptable results. The PCR reestimates FRR's for the those SAR models which turned out to be most representative, and shows a range from 12Z to 501. For the ERR, the PCR makes a simple but necessary adjustment to the data base from the 897 survey farms - to isolate the impact of project loans from other loans - and arrives at a reestimated ERR of 12%, one third of the SAR estimate of 321. The rice crop estimates are inconsistent and appear to be badly reported in the PCR. Since rice became the dominant project crop (at least in the survey), these inconsistencies suggest the conclusions about impact are shaky. Nevertheless, the audit mission was agreeably surprised by the depth and quality of INCORA's on-farm activity on rice and livestock farms in the Departments of Santander and Norte de Santander. This, coupled with favorable reporting from the few supervision missions which visited the farms - more frequent in the Third Project than in the Second - suggests that the PCR judgement should be accepted. It should be noted that the positive results were achieved despite steady deterioration in the real salary levels of INCORA's staff of about 700 professionals (average monthly salaries in 1990 were about US$350 for college graduates, half the level of CAJA salaries when all payments are taken into account). 3.06 In short, based on an inadequate historical record, the audit is prepared to accept the conclusions of the two PCRs that the production impact of the three main lending series we are examining - Category II larger farmers in 1978/79, Category I small farmers (moatly INCORA) in 1982, and Third Project INCORA farmers again in 1984/86, were positive in both financial and economic - 11 - terms. Lt should be noted that the first burst, in 1978/79, was a time slice of an ongoing larger farmer credit program financed by other sources both before and after the project and judgements on project impact would have to associate themselves with impact throughout the whole period. For the other two bursts, with INCORA clients in 1982 and 1984/86, the word burst really is appropriate and the two projects provided a significant, though short, increase in funding over and above what otherwise would have occurred. Thus these results can be more closely linked to the Bank's intervention. Another observation is that in both of these agricultural credit projects little supervision attention was directed at M&E, contributing by its absence to the weak data base for PCR and audit evaluation. Also, under the Second Project, no agriculturalist or livestock expert joined the missions for field work after 1978. 3.07 A fourth observation is that the livestock loans, which dominated small farm.r lending in the Second Project (97% by value of Category I loans) and the whole Third Project portfolio (521), were in their majority made for the purchase of breeding cattle. The Loan Agreements permitted cattle purchase up to 751 of the value of each loan. Taking 70% as the actual share comiitted to cattle purchase, in both programs, we find that 471 of all farm credit in both projects was used for this purpose: financing some farmers to buy breeders from others. This transfer of assets has value to the country only under certain conditions. C. Agroindustrial Impact 3.08 Under Category III of the Second Project loans were made to 186 enterprises, covering 18 subsectors, of which the dominant were milling (37), milk processing (29), slaughterhouses (21), cattle feed (17) and edible oils and fate (17). Reporting on the sample survey of 29 bortwing firms, the PCR says that of the subgroup of 20 that preexisted the project only 2 failed to increase production (one of the two cotton firms and the only tobacco firm) and all increased their sales. Of the 9 enterprises that started new activities with the loans, three had already reached their predicted volume of sales. The 29 firms originally had 2,138 employees and by 1983 reached 3,067. If that proportional result were applied to all the remaining investments, the PCR says that the increased employment for all 186 investments would reach 6,000 jobs. Taking this together with job creation estimated under the agricultural component (Category I), the PCR states that "the project appears to have exceeded its job creation target" (PCR para 5.12). With respect to the few ERR estimates that the BOR reran on individual investments, the PCR reports "little change from previous estimates (12%-1392) or, in some cases actual figures better than the estimate". The audit cannot comment on the validity of the BOR reestimate, except to recall that the quality of DCF's ERR analysis had been challenged in 1981 in an exchange of memos within Bank headquarters (para 2.07). D. Institutional Impact 3.09 FFAP The Second Project included no funds for technical assistance and was not intended to significantly improve the operational performance of BOR - DCA and DCF - or the administration of the participating banks. Given that the project constituted only 41, and the Loan only 1.6Z, of all FFAP finance in - 12 - the six-year project period, any leverage on overall performance would have been surprising. In three respects favorable effects nevertheless can be associated with the project. First, although the general format of BOR control over participant bank activity was already established, including the system of on- farm, and-use, verification visite to a sample of borrowers, Bank insistence that that system be enhanced to reduce the incidence of diversion of funds (para 4.09) led to an expansion of the field control staff and of the size of the sample subject to annual review (up to 10-152). That applied to the whole portfolio, not just project subloans. BOR's control system was already good and the Bank pushed it to get better. Second, Bank insistence also that Category I for small farmers not be abandoned led eventually to agreements with BG and CAJA during the life of the project that firmly established a small farmer clientele within FFAP. This probably would have happened anyway, but not in the same time frame. The opening to small farmers was later to be further expanded by two other decisions of the Monetary Board in 1987, when the 1981 ruling to limit small farmer lending to livestock was set aside and all enterprises were made eligible, and when funds for the first time were earmarked exclusively for small farmers. By 1990 FFAP annual budgeting for small farmers reached US$140 million, 28Z of total PFAr funds available and four times the amounts originally targeted for the three-year project. In ways impossible to quantify, Bank intervention in the Second Project helps explain that important reversal of attitudes during the 1980s. And thirdt Bank pressure on raising the level of interest rates gradually won more sympathy in Government, though whether the Bank was a decisive factor in leading finally to the broad consensus that now exists on positive rates is debatable (paras 4.03ff). Nevertheless improvements in rates and margins would have had a favorable impact on the viability of FFAP and the institutions that administered it. Whether o. balance FEAP was a healthy innovation in rural intermediation is another issue, discussed in para 4.12. These comments on favorable institutional impact attributable to the Second Project do not refer to the creation of Law 5 and FFAP in 1973. That was influenced by the successful formulas developed under the First and Second Livestock Projects (Loans 448-CO and 651-CO, approved in 1966 and 1969) for tying credit to technical assistance to farmers, for requiring that cattle purchase be complemented by other on-farm works, for elaborating farm plans and herd models, and for verifying compliance. That is an earlier story of effective Bank project work. 3.10 FFPfIlP One of the reasons for including a line of credit for agroindustry in the Second Project was to guarantee availability of funds to assure complementarily between the growth of primary agricultu:al production supported by Categories I and II and the growth of capacity to process it. In practice, that logic had no operational utility. DCF claims that there was no actual or necessary programmatic link between decisions in DCA and DCF, and the two portfolios had no integrative features. That outcome is largely explained by the fact that integration at the BOR level meant nothing in the absence of integrated lending at the level of the participating banks - in almost all cases an inoperable concept. It is not easy to identify any appreciable favorable project effect on BOR actions in the agroindustrial sector. Again, the leverage factor worked against the Loan, which contributed only 162 of funds onlent under FFP/FIP in the six-year period (the PCR says 13%). But DCF also told the audit mission that the effort to earmark industrial loan funds for agroindustry was - 13 - misguided and unnecessary, and that the requirements met by the project could have been filled from other sources. In particular, four Bank industrial credit loans became available to BOR just before or during the project periodil, and these, coupled with the technical assistance thev provided to BOR, are seen in retrospect to have been more appropriate channels. Echoing one of the principal points in the Bank's present policy for rural financial intermediation, the DCF told the mission that earmarking industrial loans for agroindustry does damage to the institutions and very little good. These reflections must be put in context of the shift of Category III lending to larger investments than targeted in the SAR (para 2.07). Smaller-scale clientele were obviously harder to find and may have been less easily accommodated by the DFC loans (apart from Loan 1834-CO). In any case as early as 1979, in preparation for a follow-on project, the decision was taken to shift all agroindustry to the DFC line. 3.11 INCORA In contrast with BOR, the salutatory impact on INCORA was both intended and significant. After agreement on the Action Plan in 1982, an event which coincided with a change in senior INCORA management at headquarters and all regional offices, there were steady improvements nearly across the board in institutional behavior, especially on the management information system and on loan recoveries. The former had been the focus of much of the Controller General's negative assessments. It is possible to identify the influence on this process of one Bank supervisor, a financial analyst, during the period 1979-85, whose exhaustive familiarity with INCORA accounts and detailed aide-memoires explains an important part of the progress. He set tough standards. On several occasions during visits to Colombia he suggested suspension of Loan disbursements to all ongoing Bank-supported INCORA projects (there were four in 1979 and one in 1985). But his colleagues in supervision emphasized more the progress at INCORA, and only the one, short, suspension in 1983 was imposed. By mid-1985 the project ratings were significantly better and most of the contentious institutional issues had disappeared from the INCORA supervision reports. The missions that visited the field during the dark days in the early 1980s described the development of farmer contacts and the quality of the loan portfolio in positive terms that stood in marked contrast with the aggressive attacks on weaknesses in INCORA's management and finance. The field missions in the final years of project activities 1985-86 are also upbeat. What is unfortunate about this project experience is that having brought INCORA up to acceptable standards, the Bank pipeline for the institution shut down and its support to INCORA terminated. The audit cannot testify to any slippage of standards in the past four years, but INCORA's reputation in the Regional Office of the Bank is poor and its survivability within the structure of public institutions is in doubt. This is a consequence in part of changes in Government's policy for agrarian reform. But it must also reflect the Bank's indifference, now, to the fortunes of an institution it recently helped rehabilitate. And this despite clear indications that credit available for INCORA farmers, especially for investments, has declined since the project period and a substantial shortage now exists. 11 The Sixth DFC Project (Loan 1223-CO, approved in 1976); the Seventh DFC Project (Loan 1598-CO, approved In 1978) 1 the Third Small-Scale Industry Project (Loan 1834-CO approved In 1980); and the Eighth DFC Project (Loan 1857-CO, approved in 1980). - 14 - 3.12 Debt Recovery The PCR on the Second Project, prepared in 1986, refers to 1984 arrears figures quoted in DCA's completion report. Recovery rates on those term loans already due were said to be good, and in line or even better than the overall performance of the FFAP portfolio. The PCR quotes this as 6% delinquency on collectibles for the whole portfolio at end December 1983, and for the BG and CAJA Loan 1357-CO accounts only 4% and 12. The Government in its remarks on the draft PCR pointed out that FFAP is a rediscount fund that in principle suffers no (zero) delinquency: arrears is a measure appropriate only to the participating banks. Both BG and CAJA told the PCR mission they were satisfied with the quality of the loans. DCA could not readily provide the audit mission with information on the arrears situation of participating banks specifically for the Loan 1357-CO borrowers. Apparently the accounts are not maintained with that specificity preserved. However both DCA and CAJA told the audit mission in 1990 that arrears is a minor problem - less than 5% - and farmers of all size treat the rediscount facility with raspect and intend to fully repay. The situation with INCORA is said to be almost as good, at least with respect to the original portfolio of Loan 1737-CO. The PCR quotes a figure of 13% as of the end of 1986, again measuring arrears as a percentage of dues. Field officers in regions visited by the audit mission talked of 10% average delinquency, and INCORA headquarters said the same, but those estimates appear unreliable to the mission. The great majority of loans from Loan 1737-CO ref lows would have been allocated by INCORA to seasonal credit, where repayment rates are even better. The INCORA arrears story is part of the successful reform mentioned in para 3.11. At project appraisal INCORA's overall arrears situation was in much worse shape - about 24% in 1977. Both the total account and the project account, the latter always better than the former, have continued to improve. It is necessary to add that some commentators claim the arrears situation is worse than INCORA's figures suggest. E. Interest Rates 3.13 Government has recently abandoned its policy to pass a subsidy to agriculture through the FFAP interest rate, the policy which provoked the only continuing controversy throughout the preparation and execution of the Second Project. The Third Project was not an important arena for this debate, because its rates were linked to FFAP rates and the question as to whether they were appropriate was not raised in this (INCORA's) context. Nevertheless interest rate issues surfaced in supervision reports on INCORA as well. To what extent Bank pressure, particularly Its interventions in Loan 1357-CO, help explain the shift in Government's position is taken up in the next section (para 4.04). Here only the evolution of those rates is discussed. 3.14 During preparation and appraisal of the Second Project the Bank argued that FFAP interest rates should be at least non-negative. This period (1974-76) coincided with the beginning of an inflationary process in Colombia - which had experienced relative price stability for the previous 25 years, averaging about 8% per annum - that has never since been brought under control. FFAP on-lending rates for farmers at appraisal in 1975 varied, with the dominant rate at 15% plus 2% for other unavoidable charges. This was lower than inflation, and lower still than rates on other savings instruments available to commercial bank clients. - 15 - Despite the acceleration of inflation in late 1976 due to a sharp increase in coffee prices and a serious drought, Government, as represented by the ministries and the Monetary Board, insisted on maintaining the statue quo with respect to FFAP rates. Its position reflected: (1) a d"liberate bias toward subsidizing farm credit; (2) agrarian political support for a cheap money policy; (3) uncertainty over the future course of inflation, with a suspicion that it would abate; and (4) a knowledge that at 15% Colombia's farm credit base rate was already high by Latin American standards. Of these factors, the Bank and informed Colombian sources claimed during the audit that the first, the tilt toward subsidy, was dominant. The Bank was tilted the other way. It argued for 24%, then 21% and finally acceded to the base 15% provided Government also agreed to a review of terms and conditions of on-lending at the request of either party "whenever economic conditions make it advisable", and that failure to reach agreement 60 days following any such review was cause to discontinue new commitments to borrowers until agreement and consequent amendment of the legal documents were effected. Inflation soared to 29% in 1977, but the Bank argued before the Board in presenting the project at that time that prices were expected to retreat and that the 17% level would provide non-negative rates during the commitment period through 1979. Given the uncertainty of price changes, that was not an implausible argument. Some such justification was essential to successfully prosecute the project. The Board focused its questions on the subsidy, was unsatisfied with the rate structure, and insisted that the Bank report to it any significant changes in economic conditions. Government's position was retested several times in this period before Loan Agreement and remained adamant. 3.15 Inflation never returned to the earlier low levels, though an improvement in 1978 restored hopes that the situation could be controlled. Government meanwhile raised FFAP rates in successive moves in 1978 and 1979. By 1980 the effective onlending rate was 23% (21+2) and inflation was between 25% and 30%. Though the absolute levels would change, that relative positioning of rates characterized the next several years until the Second Project was completed. By the period of accelerated lending under the Third Project, after 1985, inflation had eased somewhat. 3.16 Execution of both projects was also upset by disputes over the effective interest rates on INCORA's portfolio, an issue unrelated to the main question of non-negativity. INCORA insisted throughout the periods of on-lending under the two loans that its clients could not afford unsubsidized rates, and required rates even more favorable than FFAP. INCORA helped this along by forgiving both interest and capital during the grace period without adequate capitalization of compounded interest. The Bank estimated that the effective interest rate to the small holder livestock farmers under these rules dropped not only below inflation but also below the minimum established in the Loan Agreements (15% in Loan 1357-CO and 16% in Loan 1737-CO). In both cases INCORA reversed itself (in 1981 and 1983, respectively). Lending rates under Category III of the Second Project were never as hotly contested, since they started within a range of 20%-24% (instead of 15%) and Government was prepared to hold them close to inflation and not far from commercial lending rates for industry. - 16 - 3.17 By completion of the Third Project in 1986, FFAP rates had risen enough, coupled with some decline in inflation, to defuse the charged atmosphere of Bank-Borrower relations of the early years of the Second Project. Also, the forum for policy debate had shifted to another arena, as described below (para 4.02). Nevertheless, despite the prominence of the issue in project dialogue, the Bank had still not come near to achieving its overall objective, which was to persuade Government to establish a level of farm interest rates that would provide a nominal positive margin above inflation and ensure that the threats of diversion, substitution and misallocation of resources in rural Colombia were minimized. Those threats are evaluated in the next section. IV. FINDINGS AND ISSUES A. Bank Impact on Credit Policy Reform 4.01 In a limited sense the Bank's pressure was clearly effective. On every occasion when the average interest rate had dropped below the minimum level established in the Loan Agreements, the Bank objected and the Government relatively quickly raised it again at least that far. This occurred in Categories I and III of the Second Project (including short, informal suspensions) and again in the Third Project. But the larger objective of reaching non-negative rates, protected by policy agreement, was never achieved. Neither project was repeated, notwithstanding evidence of satisfactory results attributable to the subloans on the farms. In the last years of both projects repeaters were discussed, and despite some reservations in Government, supervision reports were optimistic that new projects would materialize. They did not. Project supervision after 1983 played an increasingly subordinate role in the Bank's Colombia divisions to policy-based reporting and lending. The repeater projects were casualties of a substantial shift in the Bank's approach to dealing with constraints in the rural economy. 4.02 These changes should be put in the broader context of Bank activity in Colombia's rural credit sector. During the 1980s there were four other types of intervention aimed in that direction. First, and parallel to the Second and Third Agricultural Credit Projects, the Bank had helped finance, with co-donor support, two Integrated Rural Development Projects (DRI) - including large credit components administered by CAJA - aimed at smallholders throughout the country (Loans 1352-CO and 2174-CO, effective in 1977 and 1983 respectively). A third project in the series has yet to become effective (Loan 3250-CO). The target population was subsistence-oriented farmers, resource poor compared to the norms for small farmer clientele of the Second and Third Project (including the INCORA settlers). There was some overlap in those target populations, and interest rates in DRI were related to other CAJA rates and slightly-above FFAP rates. By and large the policy issues that surrounded FFAP, the Second Project and subsequent policy-based lending have not interfered with the prosecution of the poverty-oriented DRI activity. Second, a project specifically for the CAJA rested for many years in the pipeline. In mid-1979, with Loan 1357-CO already - 17 - effective for two years and Loan 1737-CO just approved, the Bank was also planning for the Fourth and Fifth Agricultural Credit Projects, the Fourth to repeat the Second with FFAP and the Fifth to be dedicated to CAJA. A repeater for INCORA was not yet in the pipeline, but then the Loan for the Third Project was not yet effective. Six years later, when the Third project was approaching completion, the Bank proposed that further support for INCORA was justified but should be incorporated in the CAJA project which was still under discussion. When the CAJA project became effective in 1988, however, the on-lending component was deleted. The project provided only for technical assistance and other institutional support for CAJA (Caja Agraria Institutional Development Project, Loan 2909-CO for US$15.0 million). There was no support for INCORA. Third, by then another project, to finance diversification of coffee farms, had become the leading Bank rural credit intervention for the late 1980s (Agricultural Diversification Project, Loan 2453-CO for US$50.0 million, effective March 1985). And fourth, interest rates and other macro-policy issues were picked up after 1984 not by project lending but by program lending, specifically two trade policy loans of US$300 million and US$ 250 million, effective in 1985 and 1986. The second dealt explicitly with agricultural policies (Trade Policy and Export Diversification Project, Loan 2551-CO, and Trade and Agricultural Policy Project (TAP), Loan 2667-CO). These loans were complemented by a series of policy- related reports addressing the problems of the agricultural sector and in particular of rural financial markets (para 4.12). The two policy loans were also unsuccessful in their time in changing Government's position on rural interest rates. In fact the second loan occasioned considerable debate within the Bank over whether it should release a second tranche of US$125 million despite failure to meet the agricultural policy conditions. The tranche was released. 4.03 This audit is not the place to evaluate this complex pattern of Bank intervention in Colombia's rural credit sector in the 1980s. It was pointed toward and ultimately justified by the major overhaul of credit policies that has just been accomplished. In 1990 Law 5 was replaced by Law 16. A new agency, FINAGRO, was established within the domain of the Ministry of Agriculture. The overhaul includes the extinction of FFAP and its replacement by another rediscounting fund (also called FINAGRO), full support for positive rates indexed to inflation, and the end of requirements forcing commercial bank contributions to the rediscount fund and the allocation of those funds to specific crops and subsectors. These reforms match those advocated by the Bank. A Bank mission visited Colombia in December 1990 to discuss a US$200 million loan for rural finance. This loan had originally been intended only to follow-up the first coffee diversification project. But the Government's reforms overtook this initiative and it has been expanded to address the wider needs for credit in the sector. It will reactivate Bank support for the rediscount operation, including funds for INCORA farmers. In effect it picks up again on the two lines of credit under audit. 4.04 Among the factors explaining the gradual shift in public policy are the changes also in the financial base of FFAP and the composition of Government. The steady increase in reserve deposits which provided the funds for FFAP had begun to diminish in the late 1980s. This prompted BOR to throw support to higher interest rates, margins and revenues in order to maintain the growth of - 18 - that portfolio. More important# elections every four years brought in new administrations, and the last two elections, in 1986 and 1990, resulting also in a shift in the balance of rural/urban power in congress, pushed forward new personalities and new attitudes about the value and effects of rural subsidy. The point to be made is that the gradual and ultimately successful evolution of Colombian policy toward a more rational use of rural finance has to be attributed in part not oniy to Bank action at the policy and sector level but also, the audit would maintain, to the work at project level over the details of the structure of interest rates back in the years when the Second and Third Projects were underway. Bank involvement in the early 1980s, especially in the substance of FFAP, provided the information base, the institutional and personal relations, and the opening for a broader assault in the late 1980s, together contributing to the coincidence of views with Government that now obtains. 4.05 In this regard the audit would modify the Second Project's PCR's conclusion that issues such as interest rates cannot be tackled at the project level, but rather need the forum and leverage of policy-based loans. That the TAP loan for US$250 million - four times the US$64 million loan for the Second Project - got no further with interest rates is enough evidence that there are no easy prescriptions for achieving policy reform and that the evidence is equally persuasive that solid project work counts. It should be mentioned as well that the PCR made a nice presentation of these issues in 1987 and may itself have contributed to the dialogue. B. Subsidies, Substitution and Diversion 4.06 Subsidies conveyed to farmers by interest rates set below costs of lending are criticized for their undesirable effects: (1) on the allocation of resources, (2) on financial intermediaries which have to absorb those losses, and (3) on the raral financial system as a whole. The allocation effects are usually separated into three types: farmers borrowing to invest in activities that would not be justified at economic interest rates (the pure resource issue); farmers using the cheap loans to finance an approved investment plan they would have financed from other sources, releasing those savings or other funds for other objectives (the substitution or fungibility issue); and farmers using the cheap loans to finance expenditures other than those sanctioned in the approved plan (the diversion issue). Appraisal and supervision files for the Second Project are packed with references to substitution and diversion, especially following a visit to Colombia by a consultant on rural finance in November 1977. He brought together these concerns over subsidized interest rates in a hard hitting report on misallocation associated with lending under Category II to larger farmers. Loan 1357-CO had then been effective only two months, but popular demand for the subsidized rediscounts meant that the Loan funds available to commit under the category were rapidly being exhausted. The report discussed the institutional effects also, but references in the files concentrated on the substitution and diversion issues. These had been a preoccupation of the Board as well at the meeting to approve the project in December 1976 (para 3.14). They are highlighted also in the Second Project's PCR. By contrast the issues were not important in appraisal and supervision of the Third Project, because INCORA - 19 - lent to small holder settlements where the opportunity for and incidence of abuse were thought to be much less. 4.07 The audit finds that the attention given to the misallocation issues was excessive both in appraisal and supervision of the Second Project. This is partly because much of the correspondence in the supervision files is dated after the commitments under Category II were made, investment plans approved and investments under way. The only project effects an increase of rates would have achieved if it had been accepted, which it was not, would have been on lending under Category I, for INCORA and other small commercial farmers, where gross abuse was not anticipated. Also, Category II borrowers would have had to pay higher rates in subsequent years, but that would not effect the allocation of resources already invested. But there is a more important reason for asserting here that the misallocation issue was exaggerated. Discussions with involved project officers does not bear out assertions that the incidence and extent of abuse were very significant. 4.08 The consultant report and the files refer repeatedly to the "highly subsidized" credit in the FFAP program, and the alleged effects relate to that sense of excess. To affect resource allocation at the farm level the credit has to be seen by the farmers as well to be highly subsidized, and it is at this point that the criticism begins to break down. We can represent the rate structure in 1977/78 as followes the farmer had to pay the participating bank 172 (effective rate, including special costs) in a period when inflation had peaked at 292 but averaged lower, perhaps 252, when savings instruments at commercial banks returned 302-352, and when those banks were lending farmers term credit, if they lent it at all, at 352. All those figures except the first were significantly higher than they had been in the early 1970s. The farmer had no way of knowing whether and when they would return to previous levels. In theory the subsidy was indeed substantial - the borrower should have been paying a rate reflecting the cost of capital, the costs of servicing the loan, a margin for risk (default), and all of these expanded by the rate of inflation. But, for substitution to occur, the borrower had to have either reasonably liquid assets, or access to term credit at a bank at normal rates, equal to the loan request, which he was prepared to convert to invest in the absence of the "cheap" credit (para 3.04 said that the average loan under Category II for crops and livectock was US$13,400 and US$21,300 respectively). For diversion to occur he had to have other expenditure opportunities - investments or consumption. Conversations during the audit suggest that none of these conditions prevailed, although there was certainly some incidence of abuse. Some Bank officers said the same during appraisal, but they were in the minority. Another point is that the 172 figure is just the base cost of the loan; for most of these farmers there were substantial transaction costs as well, holding them back from a quick grab at "easy" money. 4.09 The most outrageous abuse would have been diversion of loan funds to conspicuous consumption or asset accumulation; swimming pools, real estate, etc. In fact most of the diversion that was late- discovered was concentrated on on- farm investments that were not sanctioned in the approved plans - purchase of fattening stock, which was ineligible; farm machinery, which was eligible in - 20 - principle but may not have been included in the plan; etc. The borrowers in Category II were in the main not the "very large" farmers and ranchers with major off-farm assets and bank accounts that provided the opportunity for abuse, though some of these persons entered the program as well. The diversion problem was dramatized by a report in 1977 from BOR on a survey of 860 farms, which showed that 319 (37.) were found to have misused loan funds to an extent that part or all of the loans had to be recalled. But the survey "sample" was known to have been selected to include farms suspected of abuse. How the 37% statistic is evaluated matters alot. The pessimist would say that 37% of the entire portfolio of 4,600 Category II borrowers diverted, less some percentage to reflect the bias in the sample. The optimist would say that 7% diverted (319 out of 4,600), plus those divertors who by mistake were missed in the sample. The 1977 consultant said the first. So did the PCR. The audit reckons the true figure is in between and closer to the second. Taken together with the probability that most diverted funds were invested on the farm, even though on ineligible items, the casting of the diversion issue changes shape. Given the attention in the Bank and the Board to this matter, it should have been more throughly researched in the field by the Bank, and was not. 4.10 Similarly for pure resource misallocation and for substitution, the audit suspects that the potential for abuse was much less in the Colombian context of Category II borrowers than implied in the files. Most borrowers did not have US$13,400 or US$21,300 tied up in savings instruments they could have converted to cash, and some of those that did kept those assets as reserves against the contingencies of farming and would not have converted them in the absence of the program. There is no hard evidence on this point. 4.11 The Colombian administrators of the program believe the number of borrowers who met these tests for potential abuse was relatively small and not worth the level of the Bank's concern. These assumptions would depend of course upon the relation between the rates of interest, inflation, savings, etc. But in the conditions of the Colombian economy in the late 1970s, with steep inflation being a new phenomenon and FFAP rates at 17% higher than ever before, the attractions of the margins in the rate structure stated above is unlikely to have turned the "larger" farmers toward substantial arbitrage operations. Again, the Bank should have invested supervision resources into evaluating the operational impact of these "highly subsidized" rates and the amount of substitution or waste they provoked, at least with respect to developments under Category II, of the Second Project, which attracted critical attention. 4.12 By 1985 the Bank's attention had properly turned from misallocation to the institutional impact of subsidized interest rates. In a Rural Financial Markets Sector Study, researched that year and issued the next, the substitution and diversion effects are scarcely mentioned. The principal criticism of FFAP comes from a completely different direction: the impact on the loanable funds, and behavior, of those commercial banks that had to contribute to the reserves from which the FFAP was supplied. Low on-lending rates under FFAP were made possible because of the low rates paid by BOR on these forced reserve deposits. The farmer subsidy was thus provided at the expense of the commercial banks and their regular depositors and borrowers. FFAP itself was protected. Thus Loan - 21 - 1357-CO neither wounded nor benefitted directly the rediscount agency. The damage was done at the front line - on the financial intermediaries. This Study was the first of several issued by the Bank between 1986 and 1988 which developed arguments against the undesirable features of FEAP and which have been reflected in the agreements on the proposed new loan. To complete this comment on effects of subsidy, it should be said that discussions of the Third Project, for INCORA smallholders, were never focused on abuse. There the emphasis was always on the institutional damage to INCORA of lending rates below the costs of lending. C. Small and Larger Farmers 4.13 One problem in addressing the incidence of misallocation is semantic. Category I was directed to "Small Commercial Farmers", with a borrowing ceiling of US$10,000 and a gross asset ceiling of US$25,000, both specified in the Loan Agreement. The asset ceiling was higher than that normally used by BOR to distinguish the top of the "small commercial" category. Given the increase in land prices in the 1970s, the US$25,000 project cut-off would have occurred at about 20 he and a herd of 20 cattle (in the better endowed areas). All other applicants would in principle fall in Category II, which would thus have ranged within a wide spectrum up to very large developed estates. Category II was dedicated to farmers "Other than Small Farmers". The ceiling on borrowing was US$100,000. This audit report refers to them as the "larger" farmers. In the files they are called medium and large farmers. Under Category II US$89.9 million was lent to 4,617 farmers for an average loan of US$15,000: US$21,000 for the ranchers and US$13,000 for the crop farmers. The PCR does not show the breakdown of these loans by size of loan, but, if only 5% of the "larger" farmers drew the full US$ 100,000 permitted - and this is not a big loan for a big farmer - that would mean the other 95% only drew loans averaging US$10,000, the upper limit for Category I. The scenario sounds implausible. In other words the lending data itself suggests that most "larger" farmers were taking relatively small loans, that the percentage of this category of farmer that took the largest permissible loan was almost certainly below 5%, and that even they did not get the kinds of large loans that are associated with the elite. The whole of Category II has a "medium" scale sense to it, which fits with what visitors to these farms say about them and with the previous comments about low incidence of abuse. It does not fit the 1977 consultant's representation of "large, relatively wealthy, commercial farmers", which alarmed the Bank. 4.14 It is interesting to note that on the other end of the scale, the small commercial farmers eligible for Category 1, as well as the INCORA settlers eligible for both Loans, were all larger than the subsistance farmers targeted by the three DRI projects. The semantic problem works both ways. The Second Project calls its Category II farmers "other than small", and still invites criticism for its "large farm" clientele (which would amuse the elite). And the Third Project calls its farmers small holders, although a DRI lending line had already occupied the bottom space for subsistence farmers below the poverty line. In earlier years the Bank would have called both credit project populations "medium" size without embarrassment and paid much more attention during supervision to how the investments were impacting on production and productivity. Better familiarity with farm-level effects under the two audited projects also would have helped diffuse the argument over misallocation of resources and moved that subject from center stage. MAP SECTION C O L 0 MÄ B l A lke 0 50 100 150 200 250 1' s A Ii AGRICULTURAL CREDIT PROJECT- INCORA K,'om' .ets .°" Project Gres50 10 150 12* 12-Prjcioeo South * INCORA agencies Americo * Caja Agraria £ Banco Ganadero olj'J,o Moln poved roads Riahacho Secondary paved roods Railroads Santa Marta ^ly-c, guaCh6n Rivers DepartmeIntendena and Cornisrla boundares Barranquillo -cs¢.o"a - - International boundories ATL AT ATTUDES(meters/ AVERAGE TEMPERATUR&ES( i CIMA TE Oaarg Above 4,000 Below 7° Alpine 3,000 -4,000 Below 12° Moorland A cn r m, 2,000- 3,000 Not less thon 12° Cold ¯nu ~er if 1,000- 2,000 Not less than 17.5° Temperate Cnw esent Up 10 1,000 Over 24° Hot C SA R -~ PANAMA MSUCRE VENEZUELA OLIVAR\ \ bu ORDO cconr- B0,6 Pt erlooyta PFcootw eP erto o Lten M EE Uffiff M oE AAN 7Retormo i- Son José del G,~oire GUA A R 2- NAR NO, CAQUETA PUTUMAYO E CUA DOR 7.76 74.