Colombia - Caja Agraria Institutional Development Project

Document of The World Bank FOR OFFICIAL USi ONLY Report No. P-4728-CO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$15 MILLION TO TIE CAJA DE CREDITO AGRARIO, INDUSTRIAL Y MINERO WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE CAJA AGRARIA INSTITUTIONAL DEVELOPMENT PROJECT January 21, 1988 This document has a restricted distribution and mav be used bv recipients onlv in Ihe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIYALENTS Currency Unit - Colombian Peso (Col$) US$ 1.00 - ColS 223.00 (01/01/87) WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS BOR - Banco de la Republica (Bank of the Republic, Colombia's Central Bank) Caja - Caja de Credito Agrario, Industrial y Minero (Caja Agraria) (Agricultural, Industrial and Mining Credit Bank) DNP - Departamento de Planeacion Nacional (National Planning Department) FFAP - Fondo Financiero Agropecuario (Agricultural Financing Fund) TAP - Trade and Agricultural Policy Loan GOVERNMENT OF COLOMBIA FISCAL YEAR January 1 - December 31 PROJECr YEAR January 1 - December 31  FMR OFfiCIAL t8= ONLY COLOMBIA CAJA AGRARIA INSTITUTIONAL DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Caja de Credito Agrario, Industrial y Minero (Caja Agraria). Guarantor: Republic of Colombia. Amount: US$15 million equivalent. Terms: 17 years, including four years of grace, at the Bank's standard variable interest rate. Financing Plan: Caja Agraria US$20.0 million Bank US$15.0 million Total US$35.0 million Economic Rate of Return: N.A. Staff Appraisal Report: No. 6571-CO Map: IBRD No. 20315 This document has a restricted distribution and may be used by recipients only in the perfor- I,Lt | of their official duties. Its contents may not otherwise be disclosed without World Bank auth% ncan  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED L(AN IN AN AMOUNT EQUIVALENT TO US$15 MILLION TO THE CAJA DE CREDITO AGRARIO, INDUSTRIAL Y MINERO WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE CAJA AGRARIA INSTITUTIONAL DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed loan to Caja de Credito Agrario, Industrial y Minero (Caja Agraria) for US$15.0 million equivalent, with the guarantee of the Republic of Colombia, is submitted for approval. The proposed loan would he repayable over 17 years, including four years of grace, at the Bank's standard variable interest rate and would help finance the Caja Agraria Institutional Development Project. 2. Background. Agr`culture is the largest sector in the Colombian economy accounting for 22% of GDP and 63% of registered exports in 1985. Agricultural activities provide employ!aent for two million people, a quarter of the national labor force. The country is a net agricultural exporter: of the US$3.8 billion total exports in 1985, coffee accounted for 47%, with bananas, cut flowers, cotton and beef accounting for less than 5% each; agri- cultural imports, mainly wheat, soybeans and fish products, represented 7% of Colombia's USS4.2 billion registered imports in 1985. Agriculture expanded steadily at rates above 4% p.a. during the 1970s, led by increasing non- coffee agricultural exports in the first half of the decade. In the early 198ns by contrast, depressed international commodity markets kept agricul- tural growth at 1.3% p.a. until 1984. Other factors contributing to the slow sector performance of the early 1980s were: (a) the overvalued exchange rate and sector policy shortcomings which imposed export restrictions on key com- modities and import barriers for agricultural inputs; (b) reduced government investments in agricultural infrastructure since the mid-1970s; and (c) rapid real increases in the rural minimum wage, leading to higher production costs. The exchange rate problems have been addressed by the Colombia Government through a successful stabilization program undertaken during 1985-86. In the same period, the Government also introduced measures to liberalize trade and strengthen the institutional framework of the agricultural sector while increasing the level of public sector investment in the sector, particularly in 1987. The macroeconomic program and policy measures have been supported by two Bank operations, the Trade Policy and Export Diversification (TPED) loan and the Trade and Agricultural Policy (TAP) loan. These issues are important elements in the Bank's continuing policy dialogue with Colombia.  3. The primary source of funding for agricultural credit in Colombia is the Agricultural Financing Fund (FFAP), established in 1973 as a rediscount window of the Central Rank. FFAP provides, through public and private financial intermediaries, more than half of the total supply of agricultural credit in Colombia. FFAP, in turn, funds a large share of its rediscounting operations with low-vielding bond issues, which banking institutions acquire in proportion to their portfolio and volume of deposits on a compulsory basis. This system, which places undue pressure on the profitability and liquidity of the banking system, has been reviewed under the TAP. Progress has been achieved in raising average interest rates, and for some credit lines, these have been brought to levels close to market iates. This has improved the profitability of the banking system and the allocation of financial rsources. Further liberalization of the financial system including the use of more market-oriented mechanisms for financing FFAP continues to be an integral part of the Bank's macroeconomic dialogue with the Government. 4. The proposed project would focus on strengthening Caja Agraria, the most important financial intermediarv for agriculture in Colombia, accounting for 56% of the agricultural portfolio in 1984. Caja Agraria has assets equivalent to US$1.4 billicn, a network of 878 branches and a staff of 13,000. Its main function is to provide credit and financial services to agriculture-related activities, particularly medium- and small-scale farming. Until the early 1970s, Caja Agraria was reasonably efficient, but since then, non-banking functions it has assumed on behalf of the Government as well as a deterioration in the quality of management have weakened its operational effectiveness and quality of services. Caja Agraria has high staff costs, largely as a resuit of its cumbersnme procedures, lack of automation, and relatively high benefits package. Its extensive branch network, established to reach large numbers of small farmers in remote areas, contributes to the institution's high operating costs. Caja Agraria's loan arrears are high at 17% of the total loan portfolio. Branch personnel spend over half their time on administrative Functions to the neglect of customer service and securing new business. Caja Agraria's performance since 1980 in mobilizing deposits has been weak compared to other financial intermediaries, largely due to its inability to offer savings instruments that are competitive with those available in the market as a result of the high administrative costs it incurs in its operations. 5. Rationale for Bank Involvement. The proposed project supports the Bank's strategy of assisting the growth and diversification of the key agriculture sector and of improving the welfare of small farmers in CGAombia in the context of the current Government's increased emphasis on poverty alleviation. The Bank considers the strengthening of sector institutions as a fundamental means of achieving such objectives. Bank participation in this project would provide an important impetus to needed structural reforms in the most important institution for agrtcultural credit to small farmers, Caja Agraria. 6. Project Objectives. The project aims at rebuilding Caja Agraria into a more efficient and self-sustaining financial intermediary, more dependent of financial market mechanisms to support its activities, thereby helping to improve the overall efficiency of rural financial markets. More specifically, the project would help Caja Agragria to stengthen the quality  - 3 - of its loan portfolio and reduce arrears, introduce automated data management systems and simplify credit administration, stengthen resource mobilization, rationalize the branch network and strengthen staff capabilities. 7. Project Description. The proposed project would comprise: (a) an estimated 370 staff-months of consultant services to assist Caja Agraria in: (i) completing a loan portfolio review and improving portfolio management to reduce loan ar:ears; (ii) defining and implementing measures to enhance its accounting, data processing, and management information systems, and to streamline administrative and credit procedures; (iii) revising the staff remuneration package; (iv) rationalizing the operations and costs of its branch network; (v) increasing the effectiveness of marketing and customer service activities; and (vi) strengthening resource mobilization; (b) a training program to upgrade the management, technical and marketing skills o; Caja Agrari.i's personnel; (c) provision of data processing, office administration and training equipment; and (d) renovation of branch facilities, including civil works and furniture. The project is expected to be carried out over 3 years at a total cost of US$35 million equivalent, with a foreign exchange component of US$15 million (43%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule, are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Colombia are given in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report No. 6571-CO of January 15, 1988, is also attached. 8. Agreed Actions. Caja Agraria has agreed to: (a) hold total administrative costs through the Life of the project below th- 1986 level in real terms; (b) reduce annual administrative costs expressed as a percentage of loan portfolio by 34% by the end of 1990; (c) increase branch office staff relative to total staff by 6 percentage points by the end of 1990; (d) reduce loan portfolio arrears from 17% of the loan portfolio to 12% 'y the end of 1990; and (e) increase growth of deposit mobilization from the present 6.5% p.a. in real terms to 8% p.a. by the end of 1990 (with annual intermediate targets in the case of (b), (c) (d) and (e) above). 9. In support of project implementation, Caja Agraria has agreed to: (a) submit an annual training program to the Bank for approval two months prior to the start of eacr: year of the project; (h) complete a review of the loan portfolio and introduce a system to improve its management by June 30, 1988; (c) maintain a remuneration package satisfactory to the Bank which would enable Caja Agraria to attract qualified staff; (d) design by June 30, 1988, and subsequently implement, improved accounting, management information, and data processing systems; (e) prepare by December 31, 1988, and subsequently implement, a plan for Caja Agraria to become a financially self-sustaining institution; (f) undertake a mid-term review of the project by June 30, 1989, together with the Government and the Bank, to evaluate progress of the institutional strengthening and achievement of the agreed performance targets and make mid-course corrections as necessary; (g) by December 31, 1988, prepare and subsequently implement a plan for rationalizing the branch network ('ncludiag a specific program to red,ce the number of, or increase the efficiency of branches showing continuous losses); and (h) by June 30, 1989 ar.d June 30, 1991, furnish to the Bank, tinder terms of reference acceptable to the Bank, the conclusions of a public opiiion survey on the quality of services it renders. As conditions of loan  - 4 - effectiveness, Cala Agraria also agreed to: (a) select the lead Consultant to assist the Project Director; (b) prepare a statement, satisfactory to the Government and to the Bank, on its objectives and strategies for achieving them; (c) present Caja's financial statements for FY 86 audited by independent auditors acceptable to the Bank; and (d) appoint a Deputy Project Director acceptable to the Bank. The Government has agreed to pursue the necessary meastures to enable Caja Agraria to achieve financial self-sufficiency. 10. Benefits. Since Cala Agraria supplies half of all agriculture credit in the country and virtualLy all the credit and financial services to small farmers, more eff'cient financial intermediation will have a substantial impact on agriculture. Furthermore, a self-sustaining and profitable Caja Agraria operation would lessen the need to finance the sector through FFAP's non-market mechanisms (para. 3), and eliminate the drain on the national budget to cover Caja Agraria's operating deficits. 11. Risks. The main risks are associated with the schedule for the implementation of institutional refornis. The size of Caja Agraria and its long-established institutional practices may slow the pace of change. However, the Government and Caja Agraria's recently appointed general manager are strongly committed to the reforms envisaged in the action program. This project will be carefulLy moniitored through close supervision and a mid-term review. 12. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barher B. Conable President Attachments Washington, D.C. January 21, 1988  -5- Schedule A COLOMBIA CAJA AGRARIA INSTITUTIONAL DEVELOPMENT _PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs a/ Local Foreign Total