Colombia - Caja Agraria Institutional Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Retprt No. 6571-CO STAFF APPRAISAL REPORT COLOMBIA CAJA AGRARIA INSTITUTIONAL DEVELOPMENT PROJECT January 21, 1988 Country Department III 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 official dutles. Its contents may not otberwise be disclosed without World Bank aothoriztion.  CURRENCY BQUIVALENT Currency Unit - Colombian Peso (Col$) US$ 1.00 - Col$ 223.00 (01/01/87) WEIC-IITS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS BAH - Banco Hipotecario BOR - Banco de la Republics (Bank of the Republic (Central Bank)) Caja - Caja de Credito Agrario, Industrial y Minero (Caja Agraria) (Agricultural, Industrial and Miring Credit Bank) CDT - Certificado de Deposito a Termino (Certificate of Deposit) CPI - Consumer Price Index DNP - DeparLamento de Planeacion Nacional (National Planning Department) DRI - Programa de Desarrollo Rural Integrado (Inte6rated Rural Development Program) FEDERACAFE - National Coffee Federation FFAP - Fondo Financiero Agropecuario (Agricultural Financing Fund) HIMAT - Instituto Colombiano de Hidrologia, Meteorologia y Adecuacion de Tierras (Colombian Institute for Hydrology, Meteorology and Land Improvement) ICA - Instituto Colombiano Agropecuario (Colombian Agricultural Institute) !DB - Inter-American Development Bank IDZMA - Instituto de Mercadeo Agropecuario (Agricultural Marketing Institute) INCORA - Instituto Colombiano de la Reforma Agraria (Agrarian Reform Institute) INDERENA - Institutc Nacional de Recursos Naturales Renovables (National Institute for henewable Natural Resources) ISE - Inversion Sustitutiva del Encaje (Reserve Replacement Investment) OPSA - Oficina de Planemiento del Sector Agropecuario (Agricultural Sector Planning Office) PRODESARROLLO - Program for the Development and Diversification of Coffee Growing Areas RFMSS - Rural Financial Markets Sector Study TAP - T:ade and Agricultural Policy Loan GOVERNMENT OF COLOMBIA FISCAL YEAR January 1 - December 31 PROJECT YEAR January 1 - December 31  Ka WVUL US ONLY COLOMBIA CAJA AGRARIA INSTITIlTIONAL DEVELOKtRNT PROJECT Table of Contents Page No. L. LOAN AND PROJECT SUM...... ..................................... 1 II. THE AGRICULTURAL SECTOR ......................................... 3 The Role of Agriculture in the National Economy................. 3 Agricultural 4................................................6.. 4 Caja Agraria .............6 5 Government Strategy for the Agricultural Sector................. 8 Bank Role in the Sector ........................................ 8 Experience with Past Projects .................................. 8 III. THE PROJECT ................... ................................. 9 Project Oii ..... 9 Project 9............................................ 6666666666 9 Project Description*. .............................................o....... 9 Longer-Term Strategy for Caja's Development.*****....**. ......6 11 Project Css....,11 ......................... 66666 6666666666 666 66666 66666666 666 66666 12 P r o c u r e m e n t ~~~~~~~~~~~~~~12 Disbursements. 66666666666 66 666666666 66666 6666 66 66 66 6666 12 Accounts and Audit 13 Project Implemen-:ation,,,eooo,,oos.eeseeeees 13 Monitoring and Evaluation....a l u a ti................on. 6.6...... 13 Benefits, Justification and Risks .............................. 14 IV. AGREEMENTS REACHED AND RECOMMENDATION ......................... 14 This report is based on the findings of an appraisal mission which visited Colombia in July 1986. The mission comprised Messrs./Mmes. W. B. Johnson (Mission Leader), A. Herlihy (Financial Analyst), F.M. Schorosch (Loan Officer), M. Grossman (Consultant, Banking Specialist) and E. Diaz-Bonilla (Consultant, Economist). This document ha a restricted distribution and may be used by recipients only in the performance Lof their offcial duties. Its contents may rot otherwise be dischose without World Bankt authorization.|  - ii - SCHEDULES AND ANNfEXES Schedule A - Terms of Reference - Lead Consultant Schedule B - Statement n Caja Agraria's Objectives and Strategies ANNEX 1 - Agricultural Credit in Colombia Table I - Total, Rural and Agricultural Portfolio and Loans, 1974-85 2 - Outstanding Agricultural Portfolio by Financial Intermediary, 1974-85 3 - Resources Mobilized by Agricultural Baniks and Total Agricultural Portfolio, 1974-83 4 - Compositioa of Deposits, 1974-85 5 - Statistics on Forced Investments, FFAP and Caja Agraria 6 - FFAP 1inancing Sources, 1974-85 7 - Major Aural Credit Lines - Effective Interest Rates, 1974-86 8 - Loan Interest Rates - Caja Agraria 9 - Loan Interest Rates - FFAP Graph I - Movement of CDT Rate and CPI, 1974-86 ANNEX 2 - Caja Agraria Table 1 - Financial Statements - Balance Sheet, 1982-1985 2 - - Income Statement, 1982-1985 3 - Projected Financiai Statements - Balance Sheet, 1986-1992 4- - Income Statement, 1986-1992 5 - Ratio of Savings to New Credit 6 - Rural Lending by Use 7 Overdue Portfolio Statistics 8 - Growth Statistics 9 - Key Indicators Chart 1 - Organization Chart ANNEX 3 - Project Tables Table 1 - Project Costs - Branch Office Improvements 2 - Project Costs - Office Equipment 3 - Technical Assistance Program 4 - Training Program 5 Implementation Schedule 6 Disbursement Schedule 7 - Price Contingencies and Devaluation Chart 1 - Project Organization ANNEX 4 - Documents Available in the Project File MAP: IBRD 20315 - Caja Agraria's Operations  COLONBIA CAJA AGRARIA INS 2ITUTIONAL DFVEL PMENT PROJECT I. LOAN AND PROJECT SUMMARY Borrower: Caja de Credito Agrario, Industrial y Minero (Caja). Guarantor: Republic of Colombia. Loan Amount: US$15 million equivalent. Terms: 17 years, including four years of grace, at the standard variable interest rate. Project The project is part of Colombia's strategy to Description: stimulate the growth of the agricultural sector, through, inter alia, institutional reforms to upgrade and improve the operational capacity of key public sector agencies. The project aims at strengthening Caja, the main financial. intermediary for agricultural credit in Colombia, thereby helping to meet the rural sector's needs for financial services in a more efficient manner. The project would comprise consultant services, training, office equipment and civil works to assist Caja in defining and implementing measures to improve operational efficiency, reduce its loan portfolio arrears, improve credit procedures, enhance its capacity to mobilize resources using market mechanisms, improve its accounting and management information systems, and rationalize and improve its branch network. The main project benefic is that Caja would become a more efficient, competitive and self-sustaining financial intermediary. Project Risks: The major risk is that the institutional improvements sought for Caja wV.hin the project might not be achieved in a time- ly manner. To mitigate this risk, technical assistance and traLuing are key features of the project to facilitate implementation of the proposed improvements. Caja's management is committed to the reforms being pursued through the proposed project. Finally, Bank staff would carefully monitor project implementation through close supervision and a mid-term review.  -2- Propect Cost: Local Forelgn Total -(US$ million)--- Technical Assistance 1.6 1.7 3.3 Training 0.8 0.2 1.0 Offite Equipment 3.4 7.9 11.3 Branch Improvements 11.7 1.9 13.6 Base Coat 17.5 11.7 29.2 Contingencies: Physical 1.5 1.0 2.5 Price 1.0 2.3 3.3 Total Project Cost 20.0 15.0 35.0 Financing Plan: Caj a 20.0 - 20.0 Bank Loan - 15.0 15.0 Total 20.0 15.0 35.0 Estimated Disbursement: Bank FiscaW Year 1988 1989 1990 1991 1992 -----(US$ million) --- --- - Annual 2.4 1.2 5.5 5.5 0.4 Cumulative 2.4 3.6 9.1 14.6 15.0 Economic Rate of Return: N.A. MAP: IDRD No. 20315.  - 3 - II. THE AGRICULTURAL SECTOR The Role of _qriculture in the National Econow 2.01 Agriculture is the most Important sector in the Colombian economy, accounting for about 22X of GDP. Within the sector, crop and livestock products contribute about 52% and 432, respectively, to the gross value of production, with the remainder coming from forestry, fishing and other rural activities. Agriculture provides employment for t.vo million people, or a ,'uarter of the national labor force. The country is a net agricultural exporter. Agriculture's share in total registered merchandise exports fluctuated between 67X and 75X in recent years. Of tne total value of exports of US$3.8 billion in 1985, coffee accounted for 471, followed by fuel oil (11%), bananas (5X) and coal (41). Agricultural imports, iainly wheat, soybeans and fish products, represent 7X of Colombia's total registered imports (US$4.7 billion), for 1985. 2.02 The recent performance of the sector has been heavily affected by macroeconomic policy shortcomings and by external events. During the 1970s, agriculture expanded at more than 4% p.a., due to the dynamism of non-coffee agricultural exports in the first half of the decade and to the coffee boom during the second. By contrast, during 1981-83 coffee exports were greatly affected by depressed international markets, while non-coffee exports showed a negative growth rate, resulting in sector growth of only 1.3X p.a. in 1980-84. In 1984 and 1985, coffee exports increased to close to the pre-1981 level to cover a large drop in world production due to an unusual frost in Brazil. Factors contributing to the decline in agricultural exports and sector performance in the early 1980s include: (a) unfavorable international conditions for agricultural commodities exported by Colombia (coffee, sugar, cotton, beef); (b) macroeconomic and sector-specific policies that imposed export restrictions for some commodities and import restrictions for agricul- tural inputs; (c) reduction of government investments in agriculture since the mid-1970s; (d) a rapid increase of the real agricultural minimum wage rate, which contributed to a rise in production costs; and (e) a shortage of agricultural credit, particularly for small, and medium scale farming. 2.03 Agricultural Base. Of the country's total area (112 million ha), 83% (93 million ha) has no or limited crop potential and is used mainly for grazing and forestry. Of the remainder, 13 million ha are only suitable for non-mechanized agriculture; 3.8 million ha could be used for modern agricul- ture after providing some type of land reclamation works; and only 1.7 mil- lion ha are suitable for modern mechanized agriculture without restrictions. Structural problems in agriculture are the uneven land distribution and poor land use (some good crop land is used for extensive grazing and marginal land for cultivation). Countryside violence is widespread in newly colonized areas. The lack of clear land title in these areas acts as a disincentive to private investment, as does the decline in agricultural profitability caused by a decrease in commodity prices relative to the cost of agricultural inputs. 2.04 Sector Institutions. The Ministry of Agriculture has primary res- ponsibility for the formulation and execution of public sector agricultural  - 4 - policy and programs, and within it the Agricultural Sector Planning Office (OPSA) has the responsibility for programming and coordinating sector activi- ties. OPSA maintains a close relationship with the National Planning Department (DNP). Other lnstitutlans under the Ministry of Agriculture are concerned with research and extension (Colombian Agricultural Institute, ICA), marketing of crops (Agricultural Markcting Institute, IDEMA), land distribution (Agrarian Reform Institute, INCORA), environmental protection (National Institute for Renewable Natural Resources, INDERENA) and irrigation and drainage works, hydrology and meteorology (Colombian Institute for Hydrology, Meteorology and Land Improvement, HIMAT). In addition to these public sector Institutions, producer associations provide a wide range of services to their members and are a dynamic force in agricultural develop- ment. Agricultural credit institutions are discussed below. Agricultural Credit 2.05 The flow of institutional rural credit--comprising lending for agriculture, marketing and processing activities--grew annually by about 3X in real terms from 1974 to 1985. 1/ Over the same period, the flow of agri- cultural credit alone grew by about 5% p.a. in real terms, but declined in the early 1980s and in general has not kept pace with the growth of cradit to other sectors. 2.06 In terms of the total agricultural portfolio (US$1.4 billion in 1984), the Agricultural, Industrial and Mining Credit Bank (Caja) is the most important financial intermediary, accounting for 562 of the portfolio in 1984; the other agricultural banks (Banco Ganadero and Banco Cafetero, both public sector banks) provide 282, and the private commercial banks and fin"n- cial corporations, 16Z. In recent years, Caja's share in total lending has been increasing; and it continues to be the major source of credit to small farmers. Banco Cafetero and Banco Ganadero are also channeling an increasing share of institutional credit to the sector, because of legal requirements that they maintain a high percentage of their portfolio in agriculture (502 and 702, respectively). The importance of the commercial banks and financial corporations in the financing of the agricultural sector has declined some- what, due to relatively low profitability. Based on data from a recent survey of four rural municipalities. credit from non-institutional sources (friends, moneyleaders, etc.) may provide about a quarter of the value of amounts lent. 2.07 Successive governments have intervened in financial markets to sup- ply institutional credit to the agricultural sector at below-market rates, through forced investments, subsidized interest rates, and directed credit allocations. The system of forced investments is administered by the Junta Monetaria within parameters mandated by the Congress. The system of forced investments requires banking institutions to invest in certain types of low- yielding bonds in proportion to their portfolio and/or deposits. In 1985, 56% of the funds generated through forced investment were allocated to agricultural credit--47X went directly to the Agricultural Financing Fund (FFAP), which is the primary source of funding for agricultural credit in Colombia. The balance, 9%, went directly to Caja. All institutions lending 1/ See Annex 1 for a more complete discussion of agricultural credit.  - 5 - for agriculture have access to FFAP and in 1985, Caja received 38% of FFAP funds. 2.08 While the system of forced investments has allowed large amounts of funds to be made available for directed lending, it has substantially lowered incentives to mobilize rural financial savings, and increased depend,nce on non-market mechanisms to obtain financial resources. I. has placed serious pressure on the profitability and liquidity of the banking system and does not foster optimal allocation of the financial resources it mobilizes. Progress has been achieved in the critical area of Interest rates, which have been increased, in some cases, to levels close to market rates. This has improved the profitability of the banking system and the allocation of financial resources. Optious for further 'Liberalization of the financial system, including the use of more market-oriented mechanisms for financing FFAP, continue to be an integral part of the Bank's macroeconomic dialogue with the Colombian Government. Caja Agraria 2.09 Caja is the leading agricultural credit institution in Colombia (para. 2.06). Its role is to provide farmers, particularly smaller farmers, with agricultural credit, agricultural itputs, insurance, and banking services. 2/ However, its growing commercial business, primarily in the urban centers, now constitutes 18X of its loan portfolio. As of December 31, 1985, Caja had outstanding loans to some 500,000, mostly small-scale, farmers (almost half of all farmers) and to 90,000 other clients. 2.10 Until the early 1970s, Caja was considered a relatively efficient institution, but since then it has developed administrative and staffing problems. Because of Caja's wide geographic coverage through Its 878 branches, it is used by the Government to provide access to credit for small farmers and to provide concessionary credits after natural disasters and, in remote areas, for political stabilization purposes; the latter kinds of credit usually have poor repayment records. While Caja has an able General Manager, some of its senior managers, who were political appointees, lacked banking expertise. Other staff in general are qualified but suffer from lack of training in modern banking and business techniques. The Government is also involved in CaJa's wage negotiations and in financing the losses that have resulted from the negotiated staff benefits package. 2.11 Caja has problems in the following areas: (a) Efficiency. Caja's inefficiencies as reflected by a 13 percentage point spread, arise from its cumbersome procedures and high staf- fing costs. Caja's procedures are determined by its need to comply with a complex set of regulations laid down by Government. Ihe number of reports and approvals for all types of transactions is excessive, ana farmers experience high transaction costs, as well as uneven credit practices, such as delays in disbursements, and 2/ More information on Caja's operations and financial performance is contained in Annex 2.  - 6 - unexpected cancellation of loans to small farm!rs. Branches are organized by service, which limits cross selling opportunities. The main organizational issue is the insufficient delegation of decision-making to the field offices. Caja's high staffing costs are largely the result of its present procedures, lack of automa- tion, and a benefits package that is high compared to those offered by the private banking sector. Caja has 13,000 employees, and staffino is especially excessive at headquarters (2,110 employees, or 16% of staff) and in the large regional branch offices, which are the major factors in Caja's high operating costs. Generally, Caja's staff is not customer-service oriented and makes little effort to compete (particularly for savings). FLirmal training in technical areas has only been available for a few mid-management positions. On the other hand, senior managers' remuneration is relatively low, which h'as increased turnover and hampered administrative continuity. (b) Quality of Portfolio and Credit Procedures. Caja's portfolio is characterized by high loan arrears, which have increased from 12% to 17% of total portfolio between 1974 and 1985. There is no asset/liability management, no loan review function and no separa- tion between the functions of loan promotion, administration and analysis. Credit procedures are complex: they suffer from exces- sive regimentation in the administration of some 75 credit pro- grams, each with its own eligibility criteria, terms and monitoring systems, and the present credit manual emphasizes compliance with regiulations. (c) Mobilization of Financial Savings. Although Caja's total deposits have grown at 6.5% p.a. in real terms since i980 and savings at 0.7% p.a., the growth in total deposits of other financial inter- mediaries, including official banks, has averaged over 10% p.a. in the same period. On the other hand, the stock of FFAP funds rediscounted through Caja has grown by 14% p.a. in teal terms over the same period. Caja's relatively weak performance in mobilizing deposits results primarily from its inability to offer savings instruments that are competitive with those available in the market due to the high administrative costs it incurs in its operations. (d) Support Systems. Most work is done manually. Data processing equipment is used at the head office but not in the branch offices. Because of cumbersome manual procedures, branch personnel spend too much time on administrative functions (over 50%) and not enough on providing services to customers and securing new business. As a result, loan processing is lengthy and not responsive to the borrower's needs. Planning concentrates on the allocation of credit resources, extends for only six months or a year, and is not linked in a systematic way to budgeting. The management informa- tion system does not provide proper information in an efficient and timely manner. Major problems with Caja's accounting are the result of inadequate systems for aggregating and transmitting basic accounting information from the branch network to headquarters. As a consequence, Caja's management cannot obtain timely reports on its liquidity position, collection ratios, or reliable profitabi- lity figures for its branches, product lines or customers.  (e) Branch Network. Caja maintains a branch network to allow it to reach large numbers of small farmers in remote areas and to provide the geographic coverage required by Government. This overextended network contributes to the institution's high operating costs. Moreover, many branches are operating at a loss based on corrent practices in allocating costs between the main office and the branches. In addition, many of the branches are old and in poor physical condition due to lack of adequate maintenance. Often the physiLal layout of branches is inefficient and allows customers into the employees' work areas to transact business. Much of the required basic equipmeat such as fans, air conditioning and office equipn,ent, and in some cases electric generation equipment for lighting, is non-existent or not functional. Many employees have to provide their own calculators for their work. 2.12 Financial Perfonnance. As of December 31, 1985, Caja's balance sheet had assets oft US$1.4 billion, which comprised loans to customers (58%); funds to be received from Government (21%); and land, buildings and equipment (7%). The mati liahilities on the balance sheet were customers' savings and checking accounts (50%); funds owed to FFAP and Benco de la Republica (BOR), the central hank (2b%); and the amount of funds ti-at need to be set aside for employee pensionis (18%). Total income in 1985 was US$273 million with the major expenses of interest oni deposits (US$109 million), personnel expenses (US$101 milLion) arid other exrenses (US$62 million); a small profit of US$1.1 million was reported, the first in over 10 years. 2.13 Since 1974, Caja's growth in lending, in terms of agricultural loan portfolio, has averaged 5.9% p.a. in real terms, substantially above the rate of growth of the country's total abricultural portfolio (3.2% p.a.), reflecting its access to FFAP's funds. Income has grown at 8.1% p.a. since 1975 in real terms, bi,t has been more than offset by the growth in interest expense (9.65 p.a.) and personnel expenses (6.8% p.a.). 2.14 Looking at more recent trends, Caja's total portfolio growth has accelerated to 10% p.a. since 1980, with commercial lending doubling its 9% share of total portfolio. The increased portfolio growth has been supported by growth in use of FFAP funds (16.9% p.a.) and in deposits (6.5% p.a.). Total income growth increased to 10% p.a. while the growth in personnel expenses has fallen Lo 3.3% p.a. The high growth rate in Caja's interest expense (15.7% p.a.) reflects the growing proportion of customer savings in certificates of deposit. 2.15 In spite of a 13 percentage point spread, Caja fails to cover its costs mainly due to its high personnel and administrative costs. It had accumulated losses ot about US$300 million by 1983; the small profit in 1985 is projected to change to losses in 1986 and 1987. If present trends con- tinue, it is expected that staff costs will continue to grow, at least at about 3% p.a. in real terms, and overdue loans will remain at the current h'gh level of 171. Moreover, in the absence of a major effort to mobilize financial resource- using maiket mechanisms, agricultural lending can only continue to grow at the historic rate of 5.9% p.a. in real terms if funds from forced inve'-tments continue to grow and Caja continues not to fund its employee pension funid, for which its accrued liability was US$230 million at the end of 1985.  - a - Government Strategy for the Agricultural