Colombia - Second Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6806 PROJECT COMPLETION REPORT COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (LOAN 1357-CO) May 29, 1987 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their officisl duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY Currency Unit Colombian peso (Col$) US$1 = Col$ 116 Col$ 1 = US$0.0086 Col$ 1,000 - US$8.62 WEIGHTS AND MEASURES Metric System ABBREVIATIONS BG - Banco Ganadero (Livestock Bank) BOR = Banco de la Republica (Colombia's Central Bank) Caja Agaria = Caja de Credito Agrario, industrial y Minero (Agricultural. Industrial and Mining Credit Bank) DCF = Departamento de Credito de Fomento (Development Credit Department of BOR) FBGI = Fondo Rotatorio Banco Ganadero - INCORA FFAP - Fondo Financiero Agropecuario (Agricultural Finance Fund) FFI = Fondo Financiero Industrial (Industrial Financing Fund) FIP 3 Fondo para Inversiones Privadas (Fund for Private Investment) ICA = Instituto Colombiano Agropecuario (Colombian Agricultural Institute) INCORA = Instituto Colombiano de la Reforma Agraria (Colombiarn Institute for Agrarian Reform)  FOR OrVICL uSE OLY THE WORLD BANK Washington. D.C. 20433 U.S.A. Offic d Dof totr-CmaI Opsiatoms EvAluatim May 29, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Colombia Agricultural Credit Project (Loan 1357-CO) Attached, for information, is a copy of a report entitled "Project Completion Report on Colombia Agricultural Credit Project (Loan 1357-CO)" prepared by the Latin America and the Caribbean Regional Office. Further evaluation of this project by the Operations Evaluation Department has not been made. Attachment Ram K. Chopra for Yves Rovani This document has a estricted distribution and may be used by recipients only in the performance of their officlW duties Its contents may not otherwist be disclosed without World Iak authoriation.  FOR OmCIAL USE ONLY COL01BIA SECOND AGRICULTURAL CREDIT PROJECT (LOAN 1357-CO) PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. Preface .................. .i Basic Data Sheet ii Evaluation Summary ........... iv I. INTRODUCTION 1..... .. .1 II. BACKGROUND 1 III. P&OJECT FORMULATION .... S. ..... 2 A. Preparation and Appraisal ........................... 2 B. Negotiations and Board Approval 2 C. Objectives and Description ............................ 3 D. Project Cost and Financing 4 IV. PROJECT IMPLEMENTATION .......04 A. Key Events . 4 B. Implementation Problems 4 Interest Rates 4 Diversion/Substitution of Funds 5 Lending to Small Farmers ......................*..... 6 C. Agriculture and Livestock Component ................. 7 D. Agro-Industrial Component 9 E. Changes in Project Cost and Financing ................ 10 F. Noncompliance with Covenants ........................ 10 V. PROJECT IMPACT .................00000000000000000000..... 11 A. Agriculture and Livestock Component .................. 11 Performance of Sample Livestock Operations ......... 11 B. Agro-industrial Component ............................ 13 Performance of Sample Agro-Industrial Borrowers .... 13 VI. INSTITUTIONAL PERFORMANCE ..... 14 VII. BANK'S PERFORMANCE .... .o ..................... 15 VIII. LESSONS TO BE LEARNED ............................... . 16 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.  TABLE OF CONTENTS (CONT'D) Page No. TABLES IN TEXT Table 1: Agriculture and Livestock Component: Targets and outcome ................,............ . . .. 7 Table 2: Agriculture and Livestock Component: Financing Shares of Participating Banks ...................... 8 Table 3: Agro-industrial Component: Targets and Outcome ...... 9 Table 4: Agro-industrial Component: Sources of Financiag...... 10 ANNEXES Annex A: Withdrawal of the Proceeds of the Loan ............... 17 Annex B: Agriculture and Livestock Component Technical Data from Smallholder Livestock Survey ..... 18 Table 1: Phasing of Lending by Years and Converqion into US$ .................. . 19 Table 2: Breakiown of Leneing by Subsector and Geographical Distribution . ............. 20 Annex C: Agro-industrial Component Table 1: Interest Rate Schedules .................... 21-22 Table 2: Breakdown of Lending by Economic Activity .....0.................. 23 Table 3: Sample Evaluation of Enterprise Performance 24-25 annex D: Borrower Comments from the BOR's Assistant Credit Manager. ....................,...............o 26-27 Map IBRD No. 11689 11690  COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (LOAN 1357-CO) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (POR) of the Second Agricultural Credit Project (Loan 1357-CO). The total loan amount was US$64.0 mzllion, as approved by the Board on December 28, 1976. The Loan and Guarantee Agreements were signed on February 4, 1977. The total loan amount was fully disbursed, with final disbursement on January 7, 1985. The PCR was prepared by the Latin America and Caribbean Regional Office, after a visit to Colombia in January 1985. The PCR is based on a project completion report prepared by the Borrower, and draws on the Appraisal Report (No. 1248-CO), 4sted November 15, 1976, the President's Report (No. P-1961-CO) of DecembeT 16, 1976, and the Loan and Guarantee Agreements. The minutes of the Board presentation, supervision reports, correspondence with the Borrower and internal Bank memoranda on project implementation were also reviewed. Finally, interviews were held with Bank staff associated with the project. A copy of the draft report was sent to the Borrower for comments. Comments received have been incorporated and are attached as Annex Dr This project has not been subjected to an audit by OED.  - ii - OOLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (LOAN 1357-00) PROJECT CCMPLETION REPORT Basic Data Sheet Actual or KEY PRWOECT DATA Appraisal Estimated Actual as % of Estimate Actual Appraisal Estimate Project Cost (US$ million) 174.1 272.8 157 Loan Amount (USS million) 64.0 64.0 100 Date Board Approval - 12/28/76 Date Effectiveness 06/06/77 09/06/77 Dare Physical Components Completed - 12/31/83 Percentage then Completed - 100 Closing Date 12/31/81 12/31/83 Economic Rate of Retutrn 28% n.a. Number of Credit Beneficiaries 9,643 9,701 100 CUULATIVE DISBURSEKENTS FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Appraisal Estimate (US$ million) 3.0 17.5 39.0 53.0 64.0 Actual (US$ million) - - 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 7, 1985 Principal repaid to (mo./day/yr.) March 31, 1985 - US$21.51 million STAFF INPUTS a/ FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Dbtal Preappraisal 3.4 136X3 1.2 140.9 Appraisal 83.3 47.9 1.1 132.3 Negotiation 9.5 15.4 24.9 aiWxvision 2.6 25.5 31.3 16.2 5.7 11.9 7.8 2.3 11.7 115.0 Other 0.8 0.1 0.8 0.1 0.1 0.1 2.0 Ibtal Staffweks 0.8 3.4 219.7 59.4 19.2 25.6 31.3 16.2 5.7 11.9 7.9 2.3 11.7 415.1 a/ Source: LPDR. Includes both field and office work at }badquarters.  - iil - Date No. of Staff/Weeks Specialization Performance lypes of Mission (mo./yr.) Persons in field Represented / Rating / Trend 3/ Problems 4/ Identification 03/74 Preparation 11/74 Appraisal 04/75 Supervision 1 01/77 2 0.5 c, h 2 2 P Supervision 2 10/77 3 6.3 c, f, h 2 2 P Supervision 3 06/78 1 1.0 f 2 1 M, 0 Supervision 4 1l/78 3 4.0 c, f, g 2 2 0 Supervision 5 04/79 1 1.0 c 2 2 0, F Supervision 6 11/79 1 2.0 c 2 1 0, F Supervision 7 05/80 1 1.0 c 2 2 0, F Supervision 8 03/81 l 0.5 f ---- BTO only----- - Supervision 9 09/81 2 2.0 c 2 1 0, F Supervision 10 2 2.0 c I I F Sapervision 11 06/83 1 0.5 c --- -BTO only Supervision 12 10/84 . 0.5 f 1 1 - Completion 01/85 1 1.5 Sp Total 22.8 O R PROJECT DAT Borrower : Banco de la Republica (BOR), Bogota, Colombia Executing Agency: BOR's Agricultural Finance Fund and Development Credit Department Guarantor : Republic of Colombia Fis-- 1 Year : January 1 - December 31 Name of Currency (abbreviation): Colombian Peso (Col$) Currency Exchange Rate Appraisal Year Average US$1.0 - Col$ 30.3 Intervening Years Average US$1.0 - Col$ 41.7 Completion Year Average US$1.0 - Col$ 76.9 Follow-on Project: Name Third Agricultural Credit Project Loan Number 1737-CO Loan Amount US$20.0 million Date Board Approval 06/21/79 1/ a-agricultural!st; b-agricultural economist; c-finaacial analyst; d-engineer; e-credit specialist; f-economist; g-livestock specialist; h-agronomist. 2/ I-problem free or minor problems; 2-moderate problems; and 3-major problems. 31-improving; 2-stationary; and 3-deteriorating. 4/ F-financial; M-managerial; T-technical; P-political; and 0-other.  - iv - COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT (Loan 1357-CO) PROJECT COMPLETION REPORT EVALUATION SUMMARY Introduction This was the ninth IBRD-supported project for agricultural development in Colombia since 1966. The eighth previous loans totalled US$114.6 million, of which five were smallholder oriented while the other three supported credit programs for livestock ranchers and crop farmers (para. 2.01). This project was production oriented and out of the total loan amount (US$64.0 million), about 251 was earmarked for lending to small farmers (para. 4.12). Objectives The objectives of the project were to assist the Government of Colombia in expanding food production and in increasing the agricultural sector's contribution to the rest of the economy in terms of balance of pay- ments, value added and employment creation (para. 3.06). These objectives were to be accomplished through a line of credit to support on-farm and agro- industrial development. The project was to be administered by the Banco de la Republica (BOR) and implemented through BOR's development funds for agriculture (FFAP) and industry (FFI and FIP); credit would be chanelled to beneficiaries through financial intermtdiaries. This was the Bank's first opportunity to become directly involved with FFAP (para. 2.02). Implementation Experience Project completion was delayed by two years (para. 4.02). Delays in implementation were partly due to changes in regulations governing interest rates. Partly however, they were due to problems related to proce- dures for lending to small farmers (para. 4.09). Caja Agraria, one of the major public sector banks, had experience with lending to small farmers, but did not have access to FFAP rediscounting because its technical assistance was not of a high enough level to meet FFAP requirements. Moreover, Caja Agraria had difficulty in making long-term loans to farmers without adequate guarantees. A scheme to allow lending to small farmers was devised in the face of these difficulties and turned out to be one of the positive aspects of the project: amallholders have gained access to FPAP rediscounting, and this is now a permanent feature of FF#" lending (para. 4,11). In connection with the difficulties mentioned in the preceding paragraph, two points are of interest:  (a) the concern expressed by several Directors during Board presenta- tion (para. 3.05) regarding interest rates, the level of inflation, and the possibility of substitution/diversion of funds, was proven correct (para. 4.06); and (b) despite the implementation delays, the Bank's initiative in earmarking 25% of the loan proceeds for small farmers was nonethe- less timely and constructive, because it gave these farmers access not only to Bank funds, but more generally to FFAP financing (para. 4.11). Results The project's targets and objectives were met (paras. 5.07-5.09) and the institutions responsible 'or the day-to-day operation of the project performed satisfactorily (para. 6.01). In particular, the estimated distzibution between subborrowers (small farmers and medium- and large-scale farmers), between subsectors (agriculture and livestock), and between components (agriculture and agro-industries) was achieved, and targets for the numbers of beneficiaries and amount of subloane were largely met (para. 4.12). However, because no monitoring and evaluation system was established under the project, the impact of the project is not precisely known (para. 4.20(a). Two sample surveys-on livestock development subloans for small farmers and agro-industry subloans--give some indication of improvements achieved through project lending, particularly the creation of employment opportunities above the appraisal estimate. Technical improvements in livestock farming have helped to achieve at least a threefold increase in the production of milk and meat on the farms surveyed. Most of the agro-industrial enterprises surveyed have increased their production and 75% exceeded their projected increase in sales (para. 5.03-5.13). Sustainability The prospect for sustainability of benefits from BOR's development funds for agriculture and industry appear uncertain at this stage. Credit activities are expected to continue at a slower rate utilizing the recovery of this and other project credit funds. However, there is a concern of possible shortage of BOR's lines of credit. In order to support follow-up projects for on-farm and agroindustrial development in the country, BOR would need additional local or external funds. The Bank may play an important role financing future BOR projects. Findings and Lessons Based on the difficulties encountered during project implementa- tion, the following lessons (paras. 8.01-8.02) should be reflected in future project objectives, design, and supervision:  .. vi - (a) attempts to tackle macroeconomic issues (such as interest rate policy) should not depend solely on relatively small projects, but should also be pursued in a broader context such as policy-based sector loans. This project attempted to deal with the interest rate issue through BOR. However, interest rates are regulated by the Monetary Board, and BOR is one of several institutions repre- sented on the Board. A dialogue with all institutions involved in regulating interest rates, based on a comprehensive knowledge of both the agricultural and financial sectors, could make progress in achieving a desirable interest rate policy; (b) key policies and procedures for project implementation - in this case for lending to small farmers - should be established and agreed with tne Borrower prior to loan approval; and (c) designing effective monitoring and evaluation systems should be an integral part of project preparation, and obtaining the full support of the implementing agencies is essential for success. Furthermore, the inherent difficultiea in evaluating broad-based credit operations should be kept in mind.  COLOMBIA SECOND AGRICUL!URAL CREDIT PROJECT (Loan 1357-CO) PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 Agriculture is a key sector in the Colombian economy. From 1971 to 1975, agricultural output grew at an average of 4.6% p.a. in real terms. In 1975, the sector contributed 27% of GDP and 59% of the value of all exports of goods and services. With the exception of wheat, cocoa, oilseeds and pulses, Colombia was self-sufficient in food. Coffee is the main agricul- tural export, providing about 62% of total agricultural exports and about 44% of total merchandise export value; other important exports were sugar, cotton, rice and bananas. Processing of agricultural production has traditionally been limited to sugarcane processing plants, cotton gins, rice and wheat mills, and oil extraction plants, with very few plants handling milk, vegetables and fruit processing. 1.02 In the mid-1970s, 9 million people (37% of the total estimated population of 24.5 million) lived in rural areas, and the agricultural sector supported 37% of a total labor force of about 7 million. However, most of the rural population lived in poverty due mainly to: poor distribution of land, associated with a high concentration of small farmers on poor soils; lack of coordinated production support services; and very poor physical infrastructure and social services. 1.03 The Government's principal objectives in the agricultural sector were to increase production as rapidly as possible, while raising nutritional standards and improving income distribution. The main strategies for achieving these objectives involved an integrated rural development program, backed by investment in research and the adaptation of new varieties for production on small farms, and a national agricultural credit program that gave high priority to the production of cereals, legumes, starch crops, and animal products. Priority was to be given to investment in agro-industries and to the development and marketing of fishery products. II. BACKGROUND 2.01 Between 1966 and 1976, when the Second Agricultural Credit Project was presented to the Board, the Bank approved eight loans for agricultural development, for a total of IJS$114.6 million. Five projects helped finance land development and settlement, while the other three supported credit programs for livestock ranchers (Loans 448-CO of 1966 and 651-CO of 1969, which provided funds through Caja Agraria) and crop farmers (Loan 624-CO of 1969, which provided funds through the Colombian Institute for Agrarian Reform, INCORA). With the approaching completion of the commitment periods of Loans 624-CO and 651-CO in 1975, discussion of projects to continue support for these two separate credit programs led ultimately to the concep- tion of a single project.  -2- 2.02 The project was to be administered by the Central Bank (BOR). 1t To provide affordable credit to priority sectors as an incentive to investment,the Government had already established three financial funds in BOR: FFAP (Fondo Financiero Agropecuario) dealing with agriculture, and FFI (Fondo Financiero Industrial) and FIP (Fondo de Inversiones Privadas) dealing with industry and administered by DCF (Departamento de Credito de Fomento). These funds provided rediscount facilities to commercial banks and other financial institutions for loans granted to farmers and farmer groups involved in agriculture and/or agro-industries, and to industrial enterprises. The interest rates on loans eligible for rediscounting were substantially lower than the prevailing interest rates of the financial markets and gave a rediscounting spread of about four points 1/. The rates are established by the Monetary Board (Junta Monetaria), which is chaired by the Minister of Finance and includes representatives of BOR and the Ministry of Agriculture as members. III. PROJECT FORMULATION A. Preparation and Appraisal 3.01 in early 1975, the Gover.ament of Colombia requested a Bank loan to help finance a three-year lending program for medium- and long-term invest- ments in agriculture (including livestock) by commercial farmers and machinery contractors, and in related agro-industries. The project was prepared by various official entities in Colombia under the guidance and coordination of BOR, and with the assistance of a Bank/FAO Cooperative Program mission that visited the country in November/December 1974. The project was appraised in April/May 1975. B. Negotiations and Board Approval 3.02 Negotiations began in Bogota under the direction of the Resident Mission in February 1976, but were prolonged by difficulty in resolving the interest rate issue. At the time of appraisal, FFAP rediscounted loans to farmers carried rates of 15-20% and commercial bank loans financed from their own resources, 25-30%; however, with inflation running at over 20%, FFAP's rates were negative in real terms. Prior to negotiations, however, the Government raised the ceiling on commercial bank loans financed from their own resources to 28-32% (giving an effective interest rate of 35%). To ensure positive interest rates and avoid substitution under the proposed project, the Bank proposed an effective interest rate of 24% for both agricultural and agro-industry subloans. 3.03 During negotiations in February 1976, the Colombian representatives agreed to raise the issue of changing FFAP's interest rate with the Monetary Board in early March 1976. No action was taken, however, and in April 1976, in an effort to complete negotiations, the Bank proposed an effective interest rate of 21% p.a. for agricultural lending. In May 1976, however, the Bank was informed that the Monetary Board had decided to make no change 1/ See also comments from the BOR's Assistant Credit Manager in Annex D.  - 3 - in FFAP's interest rates. During subsequent negotiations over five months, the Bank proposed alternatives such as disbursing Bank funds through an entity other than FFAP; none was acceptable to the Government. 3.04 in October 1976, the Bank accepted the Government's position that disbursement must be through FFAP on its prevailing terms and conditions. However, it proposed a yearly review of interest rates in the light of changiag economic conditions, and in case of disagreement between the Bank and the Government as a result of this review, the Bank could stop disburse- ments until agreement was reached. The final wording of the legal covenant was that the review could be held at the request of the Guarantor, the Bank or the Borrower (Loan Agreement, Section 3.04). The Bank's remedy of stopping disbursements was maintained. Schedule 5 on Lending and Operating Policies and Procedures gives 15% p.a. as the minimum nominal interest rate for subloans to farmers (i.e. FFAP's ongoing rate), while rates for agro- industrial subloans would be in accordance with FFI and FIP rates in force at November 30, 1976 (see Annex C, Table 1). 3.05 Board presentation took place on December 28, 1976. While general- ly supporting the project, several Directors expressed concern about onlending rates, the rate of inflation, and in particular the strong possibility of substitution and/or diversion of funds in view of the substan- tially higher returns offered by financial investments in Colombia. I/ The Board believed that interest rates should become positive in real terms as quickly as possible and noted the provision for review of these rates. C. Objectives and Description 3.06 The project was to support a three-year lending program of BOR to help finance on-farm investments by commercial farmers and investments in agro-industries. Specifically, this lending program was to contribute to: (a) expanding food production, to enable Colombia to continue meeting nearly all her domestic food requirements from local resources; (b) increasing the availabil