Mexico - Seventh Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report.,. 7931 PROJECT COMPLETION REPORT MEXICO SEVENTH AGRICULTURAL CREDIT PROJECT (LOAN 1891-ME) JUNE 30, 1989 Latin America and Caribbean Regional Office 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 auihorization. ABBREVIATIONS ACF An index published monthly by the Banco do Mexico BANRURAL National Ru7al Credit Bank FIRA Agricultural Trust Funds Fondo da Garantia y Fomento para la Agricultura, Ganaderia y Avicultura GIRA General Interest Rate Agreement LIP Low-Income Producer MIP Medium-Income Producer OTP Other Producer PCR Project Completion Report SAP Special Action Program FOR OICI4L uME OnLY THE WORLD BANK Washngton, DC 10433 US.A OM6e of ocwermal Opsaha valuam June 30, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THL PRESIDENT SUBJECT: Project Completion Report on Mexico Seventh Agricultura1 'redit Project (Loan 1891-ME) Attached, for information, is a copy of a report entitled "Project Completion Report on Mexico - Seventh Agricultural Credit Project (Loan 1891-ME)" prepared by the Latin America and Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. 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 COMPLETION REPORT MEXICO SEVENTH AGRICULTURAL CREDIT PROJECT (Loan 1891-ME) Table of Contents Page No. Preface .. ............................. .................... i Basic Data Sheet ...................... ................... ii Evaluation Summary .............................................. iv PROJECT COMPLETION REPORT 1. INTRODUCTION ........................................... I 11. PROJECT IDENTIFICATION AND PREPARATION ................... I Objectives .............................................. 2 Description and Financing ...................... ..........2 Appraisal and Negotiations .................... .......... 2 Ill. IMPLEMENTATION ......................................... 3 Beneficiary Categories and Reallocation of Funds ......... 3 Project Cost and Financing ................. ............. 3 Characteristics of Investments and Subloans .............. 4 Productive Support ....................................... 4 Disbursements .......................................... 4 Sublending Terms and Conditions .......................... 5 Monitoring and Evaluation .................... ........... 6 Compliance with Loan Conditions ........6...............6 Accounts and Audit, and Reporting Requirements ........... 6 IV. PROJECT IMPACT ....................................6......6 Product4ve Support .......................................... 7 Production Yields and Output ............................... 7 Financial and Economic Returns ................. ........ 7 V. INSTITUTIONAL PERFORMANCE .................... ........... 8 FIRA's Financial Position ................................... 8 FIRA's Lending .............................................. 8 FIRA's Technical Services ................................... 8 Participating Banks ..................................... 9 Organization and Management .................... ......... 9 Monitoring and Evaluation ...................... ......... 9 VI. BANK PERFORMANCE ........................................ 10 VII. CONCLUSIONS .............................................. 11 TABLES I THROUGH 14............................................... Attachment I - borrower's Comments MAP: IBRD 11789R1 This document has a restricted distribution and may be used by recipients only i:. the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT COMPLETION REPORT MEXICO SEV.TH AGRICULTURAL CREDIT PROJECT (Loan 1891-ME) PREFACE 1. This is the Project Completion Report (PCR) for the Seventh Agricultural Credit Project (Loan 1891-ME), executed by the FIRA trust funds in Mexico. The loan was approved by the Board on August 7, 1980 for an amount of US$325 million, which was fully disbursed. 2. The PCR was prepared by the Latin America and Caribbean Region, Ag,-icultural Division C; a country visit by project staff taking place in Aptil 1935. It is based on a special report and data prepared by the Borrower, the Staff Appraisal Report (2944-ME), the President's Report (P- 2836-ME), and the Loan Guarantee, and Project Ag-ecments dated August 15, 1980. Supervision reports, zorrespondence be.ween the Bank and the Borrower, and internal Bank memoranda on project issues as ccntained in relevant Bank files were also reviewed. 3. This PCR was read by the Operations Evaluation Department (OED). The draft PCR was sent to the Borrower for comments and they are attached to the Report (Attachment I). - ii - PROJECT COMPLETION REPORT MEXICO SEVENTH AGRXCULTURAL CREDIT PROJECT (Loan 1891-ME) BASIC DATA SHEET KEY PROJCT DATA Appraisal Actual or Actual as % of Estimate Estimated Actual Appraisal Estimate Project Costs (USSmillion) 1,179.0 800.1 68 IBRD Loan Amount 325-0 325.0 100 Date Board Approval 817/80 8/7/80 Date Effectiveness 10/80 11/17/80 Closing Date 3/31/84 12/31/84 Economic Rate of Return 21 over 100% 15-53% Financial Rate of Return 22-41% 19-27% Number of Direct Beneficiaries 140,000 families 393,765 281 CUMULATIVE DISBURSEMENTS FY81 FY82 FY83 FY84 FY85 Appraisal Estimate (USS'000) 70.0 185.0 290.0 325.0 - Actual (USSmillion) - 63.0 157.0 302.0 325.0 Actual as Z of Estimate - 34% 54% 93% 100% Date of Final Disbursement 9/31/84 Principal repaid to September 1988- US$100 million - iii - STAFF INPUTS (staff weeks) FYTS FY79 FY68 FY81 FY92 FY18 FY84 FY85 FY6 TOTAL Preeppraisel 23.2 23.2 Apprele*I 11.5 61.5 Neotietione 6.9 1.9 10.6 Supervisien 9.6 21.1 16.3 0.2 11.4 5.4 70.4 Other .4 1.6 .6 2.2 Subtetal .4 114.6 12.4 21.1 16.6 6.2 11.4 5.4 188.1 MISSION DATA No. of Mandays Spe-ializations Performanc. Types of Mission Date Persons in Field Represented I/ Rating 2/ Trend 3/ Problems 4/ (mo. /Yr.) Preparation 11/79 4 64 5/ c,f,,e Appraisal 1/80 7 130 b,g,J,c,e,i,k Supervision 1 10/80 1 17 6/ c 1 2 M,T Supervision 2 2/81 2 34 1/ , _1 2 M,T Supervision 3 10/81 2 10 c,k 1 2 M,T Supervision 4 12/81 2 22 a,c 1 2 M,T Supervision 5 11/82 3 48 0/ a,c,e 1 2 M,T Supervision 6 5/83 1 16 c 1 2 M,T Supervision 7 10/83 1 12 c 1 2 M,T Supervision 8 8/8/ 2 22 c,k 1 2 1,T Completion 3/85 3 18 1/ a,c,e - - Total (SPN) Borrower Nacional Financiera (NAFINSA) Executing Agency FIRA Fiscal Year January I - December 31 Name of Currency (abbreviation) MexS Currency Exchange Rate: Appraisal Year Average USS 1.00 = 22.9 Intervening Years Average uSS 1.00 - 7/.0 Completion Year Average USS 1.00 - T67.8 (84) Follow-on Project: Name FIRA VIII Loan/Number 2454-ME Loan/Amount (USSmillion) 325.0 Date Board Approval 6/27/84 1/ a-agricultura.,st; b-agricultural eco,nomist; c*financial analyst; d-ag. financial analyst; e-economist; f-loan officer; g-livestock specialist: h-pasture specialist; i-agro-ind. engineer; j-agronomist; k-agricultural credit adviser. 2/ 1-problem free or minor problems; 2-moderate problems; and 3-major problems. 'T/ 1-improving; 2-stationary; and 3-deteriorating. 4/ F-financial; M-managerial; T-technical; P-political; and 0-other. f/ Combined with SPN of FIRA V and VI (Ln. 1217-ME and 1569-ME). '/ Combined with SPN of FIRA VI (Ln. 1569-ME). 7/ Combined with SPN of FIRA V and VI (!.n. 1217-ME and 1569- !E). '8/ Combined with PRN of FIRA VIII. V/ Combined with SPN of FIRA VIII (Ln. 2454-ME) and Identification of Agroindustries Project. - iv - PROJECT COMPLETION REPORT MEXICO SEVENTH AGRICULTURAL CREDIT P!-TCT (Loan 1891-ME) EVALUATION SLHARY Objectives 1. The loan, for USS325 M, was the seventh to finance Mexican agricultural credit. It permitted a government trust fund, FIRA, to e:;pand its rediscounting of agricultural and agro-industrial loans made by commercial banks and by a special state bank (BANRURAL) for loans to small- scale and non-creditworthy farmers. The objectives of the Project were: (a) to expand and increase the efficiency of agricultural an agro- industr-al production by expanding inv3stment therein; (b) to sttengthen FIRA's planning, training, and M&E; (c) to robilize more pa' ticipation from private banks; and (d) by introducing flexible interest rates pegged to the Average Cost of Funds, to arrest FIRA's decapitalization. The means to attain these obiectives were: (a) Use of US$319 M of proceeds from the Bank loan to permit expansion of FIRA's three-year agricultural and agro-industrial loan rediscount program to US$5,700 M (of which US$1,159.4 M in the project); and (b) Use of US$6 M of Bank loan proceeds to support FIkA's three-year US$19.6 M program to strez.gthen its training, demonstration, planning & programming, and monitoring & evaluation. Major weaknesses of earlier agricultural credit projects had been: (a) concentration on banking aspects of agricultural credit--lending and recovery of funds--with insufficient attention to development aspects--the ultimate financial and economic impact of investments made with the loans; and (b) decapitalization of FIRA in Mexico's increasingly inflationary environment because its interest rates were not keeping pace with inflation. (Recovery experience, however, was very good.) 2. The first problem was addressed in this project by the planned strengthening of M&E, by training officers of FIRA and of banks whose loans were being rediscounted, by creating an operations and regulations manual, - v - and by decentralizing decision-making. The second ptoblem was addressed by agreeing to adjust interest rates to the Average Cost of Funds (ACF), a step which ...* Borrower had been unwilling to take in the previous project. Implementation Experience 3. Implementation, between 1981 and 1984, coincided with one of the most difficult periods in Mexico's recent economic history. Inflation accelerated to 992 in 1982 and 812 in 1983. The shift from fixed-rate See Borrow- lending to variable rates was achieved, but adjustments were not sufficient eris to bring FIRA's lending rates up to the rate of inflation. The ACF itself commer.t #1 remained below the consumers' price index, modestly in 1981, then by ca. 40%/year in 1982-3. Furthermore, there were delays in adjusting FIRA's lending rates to the ACF. Moreover, the FIRA VII loan agreement called for negative interest rates to low-income and middle-income borrowers, and these categories were expanded. 4. On three occasions, totalling fifteen months, the borrower failed See Borrow- to make the required interest-rate adjustments on time and, consequently, er's agreed not to submit disbursement requests. comment #2 5. The project was affected by inclusion in Mexizo's Special Action Program (SAP) in DeceLber 1983. As a result, the final (january 1984) interest rate adjustment was less than had been called for in the loan agreement, Bank loans were used to rediscount US$30 M of short-term working capital loans, and the Bank increased its disbursement percentag from 40% to 70%. As a result, loan disbursements, which had fallen quite far behind See Borrow- schedule as a result of the voluntary suspensions, accelerated. Forty er's percent of the loan amount was disbursed between January and September 1984 comment #3 and the loan was fully disbursed by end September 1984, six months behind projections. 6. While Bank supervision very much concentrated on interest rates, monitoring and evaluation was a secondary theme. Despite urgings from the Bank, FIRA kept poatponing the necessary moidifications and revisions of the sample of 370 forms receiving loans. Consequently, the sample was no longer a reliable indicator of the financial or economic impact of the loans.l/ Results 7. Uncertainty remains regarding the economic ano financial impact of See Borrow- the project due to the weaknesses of the monitoring system. However, the er's results of that sample and field observations by Bank missions suggest that comment #5 investments stemming from the project had acceptable or high rates of return. During the project period, farmers were the victims of declining producer prices in real terms as administered prices failed to keep pace with inflation. Investmente that were finAncially attractive with highly subsidized credit, therefore, might not have been without it. There is no 1, Nevertheless, the Borrower points out, the Bank itself has found that the project had considerable achievements in output and economic rate of return. See comment #4. - vi - reason to believe that economic returns were affected by the growing distortions in the economy. 8. During the project period, 65% of the loans FIRA rediscounted were for short-term credit, 352 for investment. FIRA reports that 46% of project loans vent to low-income producers (LIP) and 35% to medium-incom producers (MIP). These figures cannot be taken at face value becauses a) by agreement, during the project, the definition of MIP was changed to expand itl and b) supervision missions have frequently found that loans submitted in the LIP category were to beneficiaries with too much income to qualify for that category.2/ 9. Except for M&E, institution building was successful. FIRA improved its organization and management structure, decentralized decision- making, and introduced an operations and regulations manual. Its extension, training, and demonstration activities for bank techninians and farmers increased. However, M&E deteriorated considerably, and insufficient attention was given to impact analysis. 10. While FIRA became organizationally stronger, it became financially weaker, decapitalized by extremely negative interest rates. Although the rural credit system made a major shift from fixed interest rater to variable ones, covenants in the loan agreement were weakened by delays in applying them and then abandoned with agreement on the SAP. Furthermore, safeguards in a side letter for cases where ACF lagged substantially behind the CPI, as happened during the project, proved worthless. Sustainabilit,y 11. FIRA could not sustain the kind of decapitalization that occurred during the project. This was recognized during implementation and addressed through the General Interest Rate Agreement (GIRA), which applied to the project's successors. The participating commercial banks, however, were not decapitalized. Indeed, they were shielded from potential decapitalization by FIRA, thereby suscaining their strong agricultural capacity. 12. FIRA trained over 56,000 bank technicians (its own and those of participating banks) and farmers during the project, an effort that should produce a sustainable improvement in their capacity to assess farm loans, give farmers advice, or to farm. FIRA and t1 participating banks are institutionally stronger in other ways as well as a result of the project. However, FIRA failed to exert a positive influence on BANRURAL as expected.3/ 13. Due to FIRA's deteriorated M&E system, 4udgements about farm impact are risky. However, it is l.kely that most of the farm investments financed will prove sustainable if Me:,.ico provides an economic environment conducive to agricultural growth. 2/ The Borrower takes strong exception to this assertion (h). See comment #6. 3/ While IBRD may have expected such influence, the Borrower points out the independence of FIRA and BANRURAL. See comment #7. Findints 14. The project illustrates the difficulty of implementing an agricultural credit project in conditions of rapid inflation. Despite drawbacks, the project helped FIRA and the participating banks maintain or expand agricultural lending during this period, while maintaining the financial strength and increasing the institutional strength of the participating banks whose loans were being rediscounted. 15, FIRA's inadequate system for measuring project impact makes it uncertain, but most agricultural investments supported by the project were probably economically justified. Agricultural investment was sustained in a period when agriculture's terms of trade worsened and many agricultural investments would not have been financially attractive without heavily subsidized credit. 16. Against these considerable achievements, there are considerable drawbacks, the most important of which is the immense public cost of sustaining agricultural investment without weakening the participating banks. The system did switch from fixed interest rates to variable ones, but decapitalization, at great cost to the fisc, was not arrested. Moreover, to achieve timely disbursements, especially as part of SAP, Bank financing was switched from investments to recurrent expenditures and more negative interest rates than agreed at negotiations were accepted. Moreover, FIRA wea unable to strengthen BANRURAL, and FIRA management's attention turned more to disbursements and less to M&E and the economic and financial i )act of its program. eROJECT COMPLETION REPORT MEXICO SEVENTH AGRICULTURAL CREDIT PROJECT (Loan 1891-ME) I. INTRODUCTION 1.01 Mexico's agricultural sector, excluding agroindustries, contributes about 10% af the gross domestic proeuct and employs about c:ie-third of the country's active labor force. During the decade nf the 1970s, agriculture's rate of growth declined significantly to an average of 3% pet annum, during which time the terms of trade turned against agriculture. As a result, agricultural exports declined dramatically and food imports increased sharply. To reverse this, the Government started in 1980 to increase sharply farmgate support prices, and in rcduced a broad range of input subsidies. Although successful in increaEing food production, the program proved too costly and was abandoned In 1982. Since 1982, input subsidies have been sharply reduced and farmgate prices raised at levels close to border prices. However, food retail prices have increased considerably less than inflation, and as a result, consumer iibsidies have expanded. 1.02 The National Rural Credit Bank (BANRURAL) and the Agricultural Trust Funds (FIRA) have together provided over 90% of institutional credit for agriculture in Mexico. Although only about 30% to 35% of producers receive institutional credit, outstanding agricultural credit had increased from 1977 to 1981 by about 10% annually in real terms, with about 50% going to Low-Income Producers (LIPs). However, credit fell by about 28% in real terms in 1982, and 25% in 1983. The decline occurred because: (a) with high inflation (99% in 1982 and 817 in 1983) the recuperations on the existing loan portfolio were inadequate to cover the demand for funds; and (b) the Government was unable to finance the large subsidy required to bridge this gap. Since 1984, institutional credit has grown again (17% in real terms), helped by the Bank's Special Action Program (SAP) to Mexico. 1.03 The Bank, in supporting the Government's agricultural develooment program, financed seven loans to FIRA between 1965 and mid-1984 amounting to US$925 million for investment lending. Since mid-1984, the Bank has financed two further loans, Loan 2454-ME (the Eighth Agricultural Credit Project) for U3$300 million, which has been fully disbursed, and Loan 2610-ME (the Interim Agricultural Credit Loan) for US$180 million, signed in September 1985. By supporting FIRA, the Bank has, 4n addition to providing increased resources to agriculture: (a) improved the standards for economic, financial and technical soundness of agricultural subloans; (b) increased the allocation of funds to LIPs; (c) improved production support services through the upgrading and the increase in number of technicians, including those of the participating banks; and (d) contributed to improved sector policies through the reduction of interest rate subsidies. II. PROJECT IDENTIFICATION AND PREPARATION 2.01 The Seventh Project was prepared by FIRA as a continuation of Bank assistance to FIRA's investment lending program. Previous project completion reports (PCRs) had shown FIRA's performance to be i-mpressive, the projects - 2 - having a strong positive impact on agricultural production and institution building. However, beginning in 1976 FIRA's interest rates had gradually fallen below commercial rates as subloans were made at fixed interest rates and interim rate adjustments proved to be insufficient to keep pace with inflation. Objectives 2.02 The Seventh Project was to continue FIRA's program to providt credit based on technically sound investment plans for increased production of annual and perennial crops, beef, dairy products, agroindustries and fisheries. The project's specific objectives were to: (a) increase low- and medium-income farmer participation; (b) strenghthen FIRA's institutional development through technical staff training, the introduction of an operating procedures' manual, and monitoring and evaluation; (c) expand commercial bank participation in agriculture; and (d) introduce the principle of adjustable interest rates in agricultural financing. Description and Financing 2.03 The Bank loan of USS325 million was to support a FIRA line of credit equal to 21% of FIRA's estimated investment lending over a three and one-half year period (1980-1983). This would cover investments estimated at US$1,179 million, of which 28% was to be financed by the Bank, 42% by FIRA from its own resources, 15% by participating banks, and 15% by the producers. The project cost was based on mid-1980 prices plus 31% for price contingencies. About US$20 million of the project was designated for productive support, :raining, monitoring and evaluation, demonstration, planning and programming, and consultant services. Appraisal and Negotiations 2.04 As in the previous two FIRA projects (Loans 1217-ME and 1569-ME), the major issue was interest rates on subloans. It was agreed in negotiations that: (a) interest rates would be linked to the average cost of funds to the country's financial institutionsl/ (ACF) at the time; (b) subsidies through interest rates would be progressively reduced and only LIPs would continue to receive subsidized credit; (c) the agreed rates would be applied to all agriculture credit; and (d) because of uncertainties on the future course of inflation, a system for periodic adjustments of interest rates would be introduced. 2.05 Following the above, interest rates were initially set: (a) to medium-income producers (MIPs) at 17%, equal to the average ACF for the previous 12 months; (b) to LIPs at 14% and 15.5%, which was below ACF; and (c) to the other producers (OTPs) at 18% to _1%, which was above ACF. In 1/ An index published monthly by the Banco de Mexico. -3- addition, the rates were to be adjusted annually to reflect the change in the average ACF over the preceding 12 months compared to the previously agreed rates. Furthermore, the Government provided a side letter, undertaking to review the interest rates whenever the average ACF of a three-month period differed by three or more Points from the chen existing rates. However, if after r,view and discussion with the Bank there was no agreement, the existing rates would continue. 2.06 At the Board presentation, the Directors were concerned that the interest rate levels were negative, a problem that was also noted in the PCR for the Fourth Credit Project. Also, the Board expressed its concern over FIRA's capability to introduce an effective monitoring and evaluation system. III. IMPLEMENTATION 3.01 The loan was signed in August 1980, became effective in November 1980, and was fully disbursed in September 1984, six months after the original clo3ing date. Beneficiary Categories and Reallocation of Funds 3.02 The beneficiary categories2/ were revised in January 1982, the main change being the expansion of the MIP category to include all producers with an annual family income equal to 3,000 times the minimum daily wage rate, compared to 2,000 times the wage rate in the previous de5inition. However, this had the effect of incorporating many producers Into MIPs who would have been categorized previously as OTPs. To coincide with the c"anges in defining beneficiary categories, and in the credit demand caused by The difficult financial years in Mexico (1982 and 1983), the Bank agreed to two reallocation of funds between categories under the project (Table 6). Also, as a part of SAP (para. 1.02), US$30 million was reallocated to short term credit for LIP working capital. LIPs eventually received 51% of the Bank loan. Project Cost and Financing 3.03 Project cost was US$800 million, compared to US$1,179 estimated at appraisal (Table 1). The reduced size of the project in US dollars was 2/ Subloan Beneficiary Categories: "Low Income Producer (LIP)"--a farmer whose main source of income is derived from farming, and whose net annual family income does not exceed 1,000 times the daily minimum wage for the region where he is located. "Medium Income Producer (MIP)"--a farmer who does not qualify as LIP, but whose net annual family income does not exceed 3,000 times (up to June 1982, 2,000 times) the daily minimum wage for the region where he is located. "Other Producer (OTP)"-a farmer whose income is above that of a LIP or a MIP. mainly the result of: (a) signific-nt devaluations of the Mexican peso during the life of the project (M$23 to US$1 at appraisal, compared to the average project disbursement rate of MS109 to US$1); and (b) increased Bank participation under SAP, from 28% estimated at appraisal to 41%, with FIRA's participation reduced from an estimated 42% to 23%. Participating banks' contribution under the project remained at 15%, as estimated. Characteristics of Investments and Subloans 3.04 , Table 4 shows crop investments representing about 47% of the project costs, with livestock at 42% and agroindustries 10%. Machinery and equipment purchases continued to dominate crop production costs, at 54%, while cattle purchases dominated livestock investments, also at 54%. Agroindustries investments supported mainly packing plants, animal feed, wine processing, sawmills, and fish farming. The number of subloans, beneficiaries, and amount discounted by FIRA for investment lending are summarized in Table 5. Of the 393,765 families (2.2 million persons) benefiting from the projecr, 238,280 families (1.3 million persons) were LIPs, excluding agroindustries beneficiaries. At appraisal, it was estimated that 140,000 families (770,000 persons) would benefit. Despite FIRA's efforts to diversify its program nationwide, the more prosperous irrigation areas in Mexico's Northwest, Northeast, and Central Districts ccatinued to absorb the bulk of FIRA's lending, with about 48% discounted to these areas under the project. Productive Support 3.05 The productive support component of the project was almost fully utilized (90%), mainly to support the operations of the 'emonstration farms and to provide training to producers and technicians of both FIRA and participating banks. iunds designated under the project for consultant services for the development of planning and programming, and monitoring and evaluation were not utilized because of delays in introducing the programs planned. 3.06 Under the project, FIRA increased the number of its demonstration farms from 53 to 98, specializing in a wide range of agricultural activities including basic crops, milk, forage, fruits, beef. small animals, irrigation and agroindustry. After the doubling of expenses for training and demonstration centers in 1981, FIRA reduced these expenses in 1982-1983 as part of the Government's austerity program. During the period 1980-1984, FIRA increased its training program, with 525 courses in 1980 to 852 in 1984. FIRA's courses from 1980 to 1984 had over 56,000 participants, including technicians from its own staff, participating banks' technicians, and producers who were mainly LIPs. Disbursements 3.07 After three years (Lo December 1983), Bank disbursements were only 60% of appraisal estimate, with three stopiages of disbursements totalling -5- about 15 months (Table 8). These stoppages occurred when subloan commitments were not eligi.le for Bank disbursements due to the lack of timely agreements between the Government and the Bank on the level to which interest rates should have been annually adjusted. The remaining 40% of the Bank loan was disbursed in nine months, between January and September 1984, strongly aided by the inclusion of the project in the SAP, under which Bank disbursements were increased from 40% to 70% of FIRA discounts. Also, the Bank allowed US$30 million to be disbursed to LIPs for working capital credit, and extended the formal closing date by a year to December 1984. Sublending Terms and Conditions 3.08 Contrary to project design, interest rates, despite some adjustments, continued to be negative throughout the implementation period (Table 9). Also, the linkage of the interest rates to ACF failed to achieve the desired results as, for a while, ACF lagged substantially below inflation levels. This was strongly influenced by the Government's fiscal policies, which kept the cost of funds (deposit rates) artificially low. What was at first merely a lag of AC7 behind inflation (4% to 6%) later developed into a wide disparity in 1982-83, when ACF ranged from 46% to 56% compared to inflation levels of 99% and 81% in those years. The margins between the rates charged and inflation were significant because the loan agreement provided for annual interest rate adjustments. The side letter providing for discussion of interest rates if the average ACF had tncreased over the previous three monzhs by more than 3 percentage points (para. 3.05), was not helpful because in the absence of an Agreement, the annually adjusted fixed rates continued to apply. The Government's position was consistently one of optimism about its ability to reduce inflation levels speedily.3/ 3.09 The final adjustment of interest rates under the project (average increase of about 5 percentage points) was effected in January 1984 at rates below those required by the loan documents. However, in agreeing to the new rates, Phe Bank took into consideration (a) the new Government's recent policy of increasing producer prices to about world levels; (b) the reduction of input subsidies for water and fertilizers; (c) the political constraints in relation to the size of the adjustments required (17% average increase was required for compliance), especially as there was an indication that both inflation and ACF were declining; and most importantly, (d) the agreement by the Mexicans to a comprehensive review of interest rates, which later formed the framework for the General Interest Rate Agreement (GIRA). The GIRA, signed in August 1984, covered the following principal points: (a) interest rates were defined as a percentage of ACF, and would progressively move towards real positive rates by January 1, 1987, except for rates to LIPs, which would remain subsidized by about 20%; (b) the ACF or other replacement index would be allowed to reflect meaningfully the cost of funds; and (c) variable rates would be introduced. In addition, the Government would carry out a study of subloan beneficiary categories to redefine them in order to reduce the level of credit subsidy. 3/ The Borrower points out that the provisiors of the side letter were not trivgered precisely because of the way macroeconomic policy affected interest rates. -6- Monitoring and Evaluation 3.10 FIRA's system of monitoring and evaluation was introduced as a requirement of the Bank during the Fifth Project in 1977. It measured, on a continuous basis, the progress of about 370 subprojects (originally 500) for the five-year period to December 1983. However, as FIRA's lending expanded and many producers changed their principal activities, the sample was no longer representative. It required expansion and a change in the combination of subprojects to be monitored. Also, it required a change of emphasis for it to be utilized as a tool to identify problems at the producer level and to act as a trigger for remedial action. 3.11 The Bank had provided, as part of the productive support component of the project, funds to assist in financing t,. further development of the monitoring and evaluation system. However, in spite of the urgings of Bank supervision missions, these funds were not utilized because FIRA kept postponing the necessary modifications and expansion of the sample. The system has since been revised, and a new and representative sample of FIRA's lending of about 1,000 subprojects was introduced in January 1985. Compliance with Loan Conditions 3.12 On the whole, FIRA complied with loan conditions, and in those instances in which non-compliance was identified, FIRA quickly implemented remedial action. Accounts and Audit, and Reporting Requirements 3.13 FIRA maintained separate and adequate project accounts within its overall accounting system, which was audited annually by independent and qualified firms of accountants. Certified copies of audited financial statements were sent to the Bank on a timely basis, and have been consistently free of qualifications. FIRA has an efficient system of timely reporting. Quarterly, semi-annual and annual reports were routinely sent to the Bank on time, summarizing project performance, subloan disbursements and project costs, subloan beneficiaries, training activities, and FIRA's financial operations. IV. PROJECT IMPACT 4.01 While the substantive proof is weak, as the sample used to measure the impact of subprojects financed by FIRA was too small (para. 3.10), it is considered sufficient to indicate that the Seventh Project had a favorable impact on production and farm income. It supported LIPs in improving their farm operations and increased rural employment (Table 10), which were good achievements considering that the project period (1981-1983) was one of the most difficult in recent years for Mexican agriculture, with high inflation levels, resulting devaluations, producer prices declining in real terms, and 7 - inputs becoming more difficult to finance. During project implementation, subloans for medium- and long-term credit exceeded the appraisal estimate by over 80%, and more than half were for LIPs (Table 5). In addition, over 8,000 working capital subloans were made to about 50,000 families. Productive Support 4.02 Under the project, FIRA continued to develop strong technical capabilities, using its demonstration centers and participating banks' technicians for accelerating the introduction and adoption of appropriate technologies into Mexican agriculture (paras. 3.05 and 3.06). The LIP program's success has been due largely to the technical assistance provided directly by the participating banks' technicians. In addition to giving training on land preparation, varieties, planting densities, fertilizer applications, plant and weed control, technicians also considered the maximization of financial returns. Ejidatarios interviewed spoke highly to the Bank missions of the level and quality of assistance provided. Production Yields and Output 4.03 Production yields of subprojects included in the sample showed increases for annual crops during 1977 to 1981 (Table 10). However, some yields fell in 1983 because of adverse climatic conditions in 1982 and the reduced use of input caused by increased prices. Also, livestock herds as well as production of milk and beef increased substantially. During the sample period, beneficiaries increased the value of their equity in real terms from 30% to over 100%, with the greatest increase attributed to the increased values of perennial crops. Apart from milk operations, where the average net income fell by about 20%, the average net income per enterprise increased by 50% to over 100% in real terms. Financial and Economic Returns 4.04 The financial returns of the sample were based on a selection of rainfed and irrigated annual crops, dual purpose cattle, intensive milk production, and one perennial crop (Table 12). Results were satisfac:ory ranging from 19% for dual purpose cattle to 27% for grapes, compared to a range of 22% for dual purpose cattle to 41% for irrigated annual cropEt estimated at appraisal. Economic rates of return were calculated based on border prices for the main traded outputs at 1982 constant prices. The economic returns for the sample was 15% for milk compared to 29% estimated. Other activities ranged from 29% for dual purpose cattle to 53% for rainfed annual crops, compared to a range of 21% for dual purpose cattle to over 100% for irrigated annual crops estimated at appraisal. The financial returns suggest that the low domestic prices during the period were partially offset by the interest rate subsidy, especially for annual crops and milk. -8- V. INSTITUTIONAL PERFORMANCE FIRA's Financial Position 5.01 While FIRA is a relatively strong financial institution, its equity suffered decapitalization during 1982 and 1983. During these two years its profVts, which were based on negative and fixed interest rates on its loan portfolio, were insufficient to offset the levels of inflation. This position was reversed in 1984, when increased interest rates under the GIRA (para. 3.09), supported by new equity contributions, resulted in an increase in equity of 75% in real terms. At end-December 1984, FIRA's equity was equal to US$290 million. As interest rates become positive and variable rates are introduced, FIRA should again be able to maintain its equity in real terms from income. FIRA's operating costs have consistently remained low, at 2.8% cf the average loan portfolio in 1984, and 1.7% after including production income from demonstration centers, and Government compensation for technical assistance. Table 13 summarizes FIRA's financial position. FIRA's Lending 5.02 At end-1984, FIRA's loan portfolio stood at USSt.1 billion. For 1977 through 1981, FIRA's lending increased at an average annual rate of 20% in real terms; it fell at an average of over 20% in real terms in 1982 and 1983, but increased in 1984. The decrease in 1982 and 1983 was the result of the decline in real terws of FIRA's cash resources arising from decapitalization, despite the funds provided by the Bank (Table 14). During the project period 1981 to 198., FIRA's discounts were 65% for short term credit and 35% for investment credit. Also, about 42% of discounts were allocated to LIPs, the balance about equally to MIPs and OTPs. FIRA's discounts were mainly to the commercial banks, increasing from 83% in 1981 to 94% in 1984, significantly reducing its assistance to the public banks (mainly BANRURAL). FIR4's Technical Services 5.03 The promotion of improved production technologies through extension and demonstration has long been a part of FIRA's activities. Technical assistance costs between 1981 and 1984 averaged from 1.9% to 2.5% of average loan portfoLio, with an increased number of demonstration centers and training courses (paras. 3.05 and 3.06). Over 5,000 technicians are involved in subloan evaluation and the delivery of technical assistance, of which about 25% are from FIRA and 75% from participating banks. In addition, FIRA guarantees up to 80% of commercial banks' participation in subloans to LIPs. Payments under this scheme averaged 0.5% to 0.9% of the amounts guaranteed between 1981 and 1984. In recent years there has been good coordination between FIRA and the Ministry of Agriculture and Water Resources (SARH) for research and ext nsion services. In 1983, about 100 SARH extension staff received training in FIRA's demonstration units. -9- Participating Banks 5.04 As shown in para. 5.02, FIRA's discounts through the commercial banks have steadily increased at the expense of the public banks, mainly BANRURAL, which is institutionally a much weaker organization but still provides credit to over 70% of all LIPs in Mexico. While the Bank had envisaged that FIRA would provide a positive influence on BANRURAL, this has not been achieved, particularly in the delivery of technical assistance. The creation of FICART to service BANRURAL exclusively as a rediscounting window has not contributed to cooperation between EANRURAL and FIRA. 5.05 The on-lending margins allowed the participating banks ranged between 2% for OTPs and 3.5% for LIPs. As FIRA discounted between 70% and 90% of subloans, the participating banks earned positive interest rates on their investments. Organization and Management 5.06 FIRA has made significant strides in streamlining, strengthening and decentralizing its planning and programming. The role of the field offices was increased, giving the regional offices greater responsibility in the formulation, implementation and control of their investment programs. To facilitate improved control and faster subloan processing, FIRA introduced revision panels ("Mesas de Apoyo"), located in each region for on-the-spot reviews of subloan documentation submitted by participating banks for discount. Subloans discounted, which are processed through the local Bank of Mexico branch, are summarized and forwarded to its headqur ters for overall review, processing and control. In addition, on the recommendation of the Bank, FIRA established an operating regulations and procedures manual which among other things, standardized the participating banks' lending procedures under FIRA. Training has been given to personnel at the field level, especially in the area of credit analysis, using computer programs for analyzing and aggregating data for the preparation of the annual investment program. 5.07 FIRA has also improved its organization and management stricture. On the recommendation of the Bank, FIRA decentralized decision-making, particularly with respect to budgeting, program planning and execution to regional and state levels. It also expanded the commercial banks' facilities for providing technical assistance to their clients. The role of the FIRA regional technicians was changed, giving less emphasis on their direct involvement with farmers, and more on their role of assisting technicians from participating banks in identifying and organizing farmers and farmer groups. Woere necessary, FIRA's regional technicians provide training and technical back-up to participating banks' technicians. Monitoring and Evaluation 5.08 While FIRA committed itself at the beginning of the project to giving monitoring and evaluation the importance it needed, this commitment - 10 - was not fulfilled. ' had been agreed that the sample introduced in 1i7 (para. 3.10) would be replaced on January 1, 1983, by an updated and eypanded sample. Due to management changes, th.s was delayed and the new sample was not introduced until January 1985. Monitoring and evaluation had suffered from the lack of support from senior management and staff, and it was perceived for a long time as a burden imposed by the Bank rather than as an important tool for impact analysis of credit on Mexican agriculture. VI. BANK PERFORMANCE 6.01 Throughout the Seventh Pioject, the Bank's attention was focussed on the interest rate issue. Its concern during appraisal and negotiations about the level of future inflation proved to be entirely justified, and its insistence on introducing a mechanism for adjusting interest rates was correct. However, the substantial lag of ACF behind inflation (para. 3.08) and the reluctance of the Government to adjust interest 7ates upward and to make such adjustments in a timely manner, was an important stumbling block. While the loan documents included a remedy for failure to adjust interest rates on an annual basis, there was nothing to impel the Government to make the needed changes required by the side letter (para. 2.05). On three occasions Government undertook not to submit disbursement requests because of failure to make the required interest rate adjustment on time. 6.02 The Bank was also sensitive to Mexico's difficult economic and financial problems. It increased disbursement percentages by including the project in SAP, thereby increasing overall Bank participation from 28% to 40%, and it transferred US$30 millicn of investment funds to short term credit to meet the increased demand for working capital support. These actions boosted disbursements, especially during the last year of the project, thus limiting disbursement delays to only about nine months. Unfortunately, the Bank also agreed to a redefinition of subloan categories (para 3.02) which increased the number of farmers with access to preferential rates, thereby increasing the level of subsidy. 6.03 FIRA's responsiveness to :he Bank's recommendations on institution building has made it into one of the most efficient agricultural credit institutions in the region. The program of decentralization, development of the organization and procedures manual, and strengthening of the subloan evaluation procedures through the Mesas de Apoyo were prime factors in the development of the institution. While long-term planning and programming still require further strengthening, this has been addressed in the subsequent project. The largest remaining area of institutional weakness is the need to further improve FIRA's monitoring and evaluation procedures and to maintain management's commitment to its usefulness. 6.04 Bank supervision missions were adequate and timely, reflecting a high level of continuity in staff participation. Sank supervision work was strong in the area of institution building, and remedial action was always quickly recommended when weaknesses were identified, even though action by FIRA was not always as prompt. Bank missions regularly visited the participating banks, field offices and selected producers, and as a result were able to obtain first-hand impressions of FIRA's tending and technical support. The relationship between Bank staff and FIRA management was good.4/ VII. CONCLUSIONS 7.01 In the main, project o),jectives set at appraisal were met. FIRA increased credit participation of low- and mediun-income farmers; 81% of the project went to these two groups, zompared to 65% estimated at appraisal. The financial and economic rates of retarns, shown by the sample measured were, on average, in line with appraisal estimates. FILA also strengthened its institutional development, decentralized operations, improved subloan evaluation procedures, introduced an organization and procedures manual to guide its own staff and that of the participa?ing banks, expanded its technical assistance through additional demonstration centers, and intensified and increased its training programs. The main drawbacks have been (a) the failure to introduce an interest rate structure reflecting changing levels of inflation, which resulted in an increased level of credit subsidy and in the decapitalization of FIRA for two years; and (b) the failure to improve its monitoring and evaluation to keep it abreast of its expanded credit operations. 7.02 As a result of the exporience with the Seventh Project, the follow-up Eighth Project was approved only after a complete overhaul of Mexican interest rate policy, which resulted in the General Interest Rate Agreement (GIRA), signed with GO in August 1984 (para. 3.09). Also, FIRA has revised its sample for measuring the impact of its lending (para. 3.11). 4/ The Borrower observes that focus of Bank supervision on administrative and financial aspects helped make it possible to take major decisions which avoided a major deterioration in FIRA's financial condition. However, tech- nical field supervision which the project required was not given and for this, in some cases, foreign experts would have been useful. See Borrower's comment #9. - 13 - TABLE 1 (DIFtETON REPOR - MAN 1891-&E Project Costs and Financing PARTICIPATIN APPRAISAL PRODUCERS BANIS FIRA IBRD 110AL USn dllion A. IDW IIOE PROIUERS I. Crope 44.6 12.0 56.7 99.9 213.2 27 II. Livestock 25.8 32.5 31.8 64.9 155.0 19 Subtotal 70.4 44.5 88.5 164.8 368.2 46 50 B. MEDIt M I E PRODUCERS I. Crops 32.9 22.0 26.4 48.8 130.1 16 II. Livestock 34.5 25.6 30.9 57.2 148.2 19 Subcotal 67.4 47.6 57.3 106.0 278.3 3S 15 C. UE PRODUCERS 1. Crope 4.6 12.2 6.4 11.0 34.2 4 II. Livestock 4.8 5.2 4.6 7.9 22.5 3 Subtotal 9.4 17.4 11.0 18.9 56,' 7 28 D. AGROINCUSTIES1/ 23.2 11.3 16.7 29.9 81.1 10 5 PROUTIVE SUPPORT - - 10.4 5.4 15.8 2 2 TOTAL 170.4 120.8 183.; 325.0 800.1 100 100 % 21 15 23 41 APPRAISAL ESTMAIE (%) 15 15 42 28 1/ Including fisheries. Source: FIRA - 14 - TABIE 2 2PLET INF REP - LAN 1891-E Project Costs - Medium ad laig Term Invstoents PARTICIPATING PRODUCERS BANS FIRA TMD MtAL USS million A. LW INCOE PRODUCERS I. Crop 44.6 8.2 46.4 76.4 175.6 23 II. Livestod 25.8 31.5 29.0 58.4 144.7 19 Subtotal. 70.4 39.7 75.4 134.8 320.3 42 B. MEDU1M INDE PRODUCERS I. Crope 32.9 22.0 26.4 48.8 130.1 17 II. Livestock 34.5 25.6 30.9 57.2 148.2 ) Subtotal 67.4 47.6 57.3 106.0 278.3 37 C. ODER PRODUCERS 1. Crop3 4.6 12.2 6.4 11.0 34.2 5 I. Livestock 4.8 5.2 4.6 7.9 22.5 3 .ubtcetal 9.4 17.4 11.0 18.9 56.7 8 D. AGROLNDUSIIS 23.2 11.3 16.7 29.9 81.1 11 PRODUTIVE SUPPOFT - - 10.4 5.4 15.8 2 TOTAL 170.4 116.0 170.8 295.0 752.2 100 % 23 15 23 39 100.0 Source: FIM - 15 - TABLE 3 (DM NErN WRT -LAN 1891-WE Project Cost - Working Capital PAICICIPATI#G PROCERS BANKS FIlA tBRD 'lOlAL % US$ uilian 10W INCOME PRODl)CERS I. Crops 3.8 10.3 23.5 37.6 79 II. Livestod - 1.0 2.8 6.5 10.3 21 ULAL 4.8 13.1 30.0 47.9 100 10 27 63 100 Source: FIRA - 16 - TAMLE 4 HT IIN REMT - LOAN 1891-E roe*ct Inme.ni ty Type a/ MNAL PERENIAL COP CPS LIVES1C MWDMRIE TMAL exS Mex$ Me exS % Construction and Installations, including Irrigation 6,509 2,077 10,035 - 18,621 23.5 Machinery and Equipment 18.431 1,512 3,583 - 23, 526 29.7 Land Inprovernts 1,716 115 1,401 - 3,232 4.1 Crop Establishment 754 6,426 - - 7,180 9.1 Livestock Procurement - - 18,407 - 18,407 23.3 Agroindustries - - - 8,159 8,159 10.3 TMAL 27,410 10,130 33,426 8,159 79,125 100.0 % 34.7 12.8 42.2 10.3 100.0 a/ Investnent lending financed by: Discounted by FIPA $48,922 Participating Banks $11,920 Producers $18,283 Total x$79, 125 Source: FIRA 1ILE 5 OMPIErI0N REPOR= - [LMN 1891-W NuMber of lAam, Beneficiaries, and amount Discmnted-Mtium and lmg Term Credit NILtiE OF ILMS BEWFICIARIES AMOLNr DIS(IIM (M$ oUe n) INIM INlDE Illm LIP WIF I BilES TZM UrAL LIP KI P GIP TRIDS 10AL LIP HIP ORP WRES 10FAL EJIDATARICS 7,177 1,364 70 293 8,904 209,210 10,028 113 59,545 278,896 15,437 1,335 66 1,452 18, 290 Individual 1,396 1,305 68 76 2,845 2,762 1,979 96 106 4,943 1,0) 1,036 59 168 2,282 Associations 5,781 59 2 217 6,059 206,448 8,049 17 59,439 273,953 14,417 299 7 1,284 16,008 S PHPIEItARIE 9,756 15,187 1,399 689 27,031 29,070 43,789 2,088 39,922 114,869 7,507 18,135 1,854 3,136 30,632 Individual 9,004 14,896 1,349 408 25,657 12,279 19,072 1,795 536 33,682 5,673 17,305 1,567 781 25,326 Associations 752 291 50 281 1,374 16,791 24,717 293 39,386 81,187 1,834 83D 287 2,355 5,106 TUrAL 16,933 16,551 1,469 982 35,935 238,280 S3,817 2,201 99,467 393,765 22,944 19,470 1,92) 4,588 48,922 Average Rate of Exchange to US$1 109.3 119.2 64.2 100.6 108.9 Eqpuivale' in WE doilar million 210.2 163.3 29.9 45.6 449.0 Average . of loan per beneficiary in UE dollars 882 3,034 13,588 4,585 1,089 - 18 - TABLE 6 02PIlN REOR - 11r1 1891-M Allocation of Bak Lo Against Subloan Beficiary Categories Allocation of Bank Loan Production Original Allocation Final Allocation Category Subloan Beneficiary Category Category USS4 % S % 1 Low Incom Producers (LIPs) Crops 132.0 41 99.9 31 Up to 1,000 tines daily wage rate Livestock 57.0 17 64.9 20 - first tine barrowrs - others 2 Medium Income Producers (IPs)a/ Crops 31.0 9 48.8 15 Above LIPs and up to 1,500 tins Livestock 16.0 5 57.2 17 daily wage rate, and located in rainfed districts 3 Up to 2,000 times daily wage rate changed to Up to 3,000 tines daily wage rate b/ 4 Other Producers (U1PS)a,/ Crops 41.0 13 11.0 4 Above 2,000 ties daily age rate Livestock 28.0 9 7.9 2 changed to Above 3,000 tims daily wge rate All Producers Agroindustries 14.0 4 29.9 9 319.0 98 319.6 98 Production Support 6.0 2 5.4 2 325.0 100 325.0 100 a/ In June 1982, the definition of the categories were changed, and Categories 2 and 3 merged to become Category 2 and Category 4 changed to become Category 3. b/ Funds were originally combined for old Categories 2 and 3. - 19 - TABLE 7 MEXICO COMPLETION REPORT - LOAN 1891-ME Operating Expenditures for Training and Demonstration Centers 1980 1981 1982 1983 1984 -------------- (USS thousand) --------------- Training 2,358 4,841 1,679 1,897 3,768 Demonstration Centers 2,013 5,624 2,443 2,134 1,932 TOTAL 4,371 10,465 4,122 4,031 5,700 Number of Training Courses and Participants 1980 1981 1982 1983 1984 Participants FIRA technicians 2,848 3,968 3,811 4,792 3,754 Participating Bank Technicians 1,961 2,338 3,647 1,371 4,103 Producers 2,531 5,105 3,558 4,555 7,885 TOTAL 7,340 11,411 11,016 10,718 15,742 Courses 525 703 636 650 852 Source: FIRA - 20 - TABLE 8 MEXICO COMPLETION REPORT - LOAN 1891-ME Schedule of Disbursements Actual Appraisal Actual as % of Fiscal Year and Quarter Total Estimate Appraisal Estimate (USS million) 1981 December 31, 1980 15 March 31, 1981 40 June 30, 1981 70 1982 September 30, 1981 61 95 64 December 31, 1981 63 125 50 March 31, 1982 63 155 41 June 30, 1982 63 185 34 1983 September 30, 1982 108 215 50 December 31, 1982 139 245 57 March 31, 1983 139 270 51 June 30, 1983 157 290 54 1984 September 30, 1983 181 305 59 December 31, 1983 190 315 60 March 31, 1984 232 325 71 June 30, 1984 302 - 93 1985 September 30, 1984 325 - 100 Closing Date 3/31/84 9/30/84 - 21 - TAELE 9 MWION REPOIC - LDM 1891-AE Interest Rates on Subloans to Producers original Revised Revised Revised 1980 Dec. 81 Dec. 82 Dec. 83 Ia Income Producers (LIPs) Up to 1,000 tis daily wege rate 19.0 26.0 27.5 - first time borrowers 14.0 -- - - other 15.5 - Medium Incane Producers (MIPs) Up to 1,500 times daily wege rate aid located in rainfed districts 17.0 - - Others - up to 2,000 times daily wage rate 18.0 - - - changed January 1982 to Others - up to 3,000 times daily wage rate 25.0 33.0 36.0 Other Przoducers - for production of Basic Products 28.0 36.0 45.5 - others 21.0 ACF + 3 ACF + 4 ACF + 5 Average inflation for preceding 12 ainths 29.8 28.7 98.8 80.0 Average CF for preceding 12 anths 20.7 28.6 40.4 56.6 ACF at date of Revised Rates 24.2 31.8 46.1 56.4 - 22 - TABLE 10 iqmP TI RPw - LIA 1891--E Principal Indicators Amual PeedAl Dai Beef Milk Beef Cattle Cattle AMerage per Enterprise included in Sample Hectares in Production Liter per cow Kg per ha LIPs - Ejidos 1977 Before Credit 25 - 3,728 6 109 50 1983 After Credit 279 191 4,089 26 197 617 MIPs 1977 Before Credit 39 27 3,870 15 237 111 1983 After Credit 148 146 4,584 49 455 201 Total Produxtion of Sample Tons Tons Liters Tons LIPs and KPs 1977 Before Credit 19,210 1,663 19,123 2,797 1983 After Credit 29,684 14,258 45,165 3,632 Increase () 54 757 136 30 Tbtal Employees in Sample Euployees 1977 Before Credit 324 82 360 169 1983 After Credit 438 519 1,090 495 Increase (%) 35 533 23 193 - 23 - TABLE 11 MEXICO COMPLETION REPORT - LOAN 1891-ME Yields - Tons per Hectares a/ 1977 1981 1983 Annual Crops LIP Maize - rainfed 1.9 2.0 1.3 Beans - rainfed 0.3 0.3 0.4 Wheat - irrigated 3.9 4.0 4.3 Sorghum - irrigated 4.1 4.6 4.9 - rainfed 1.8 2.6 1.6 MIP Maize - rainfed 1.9 1.9 1.8 Beans - rainfed 1.0 1.0 1.1 Wheat - irrigated 4.1 4.7 4.7 Sorghum - irrigated 5.1 5.8 4.8 - rainfed 2.2 2.7 1.9 Cotton - irrigated 3.0 2.8 2.7 Perennial Crops LIP Avocado - 2.4 3.5 Mang, - 3.1 7.0 Grapes - 8.6 8.4 MIP Avocado 2.8 4.7 5.9 Mango 4.2 3.9 7.5 Grapes 12.9 12.7 11.4 a/ Sample evaluated only. -24- TABLE 12 MEXICO COMPLETION REPORT - LOAN 1891-ME Rates of Return a/ Financial Economic Rainfed Annual PBIs (maize, beans and sorghum) Appraisal 34 42 Sample 21 53 Irrigated Annual PIM (cotton, wheat, sorghum and soybeans) Appraisal 41 100+ Sample 25 49 Dual Purpose Cattle PIM Appraisal 22 21 Sample 19 29 Intensive Milk PBI Appraisal 28 29 Sample 26 15 Perennial Crops PIMs (grapes) Appraisal N/A Sample 27 39 N/A - Not available. a/ All figures are based on the sample monitored (para. 4.08 to 4.10). - 25 * TABlE 13 Celetion Report - tae 18914f Cmrstie Statemnt of FIPA's Coisolidated Finacal Statemts (1979-1984) (MexS idllions) Fras From Fran From 1980 1980 1981 1981 1982 1982 1983 1983 1984 a/ ASSETS Inv tents in Goverm Securitie 2,124 703 2,827 (1,720) 1,107 4,552 5,659 (4,025) 1,634 Loa Portfolio Short-Texa 9,126 7,870 16,9% 14,860 31,856 21,381 53, 237 43,675 %,912 Mediuar and Lan-Term 34,530 1 46,246 11,910 58,156 27,989 86,145 41 030 127,175 43,656 19,586 63, 242 269, 0 W,01 49,370 139 224,087 Other Assets 5,280 4,102 9,382 (4,419) 4,%3 1,116 6,079 583 6 662 Total Assets 20 75,451 20,631 9,082 55,038 120 81,263 LIABILIIE Bakn of Meio 23,293 10,000 33,293 10,500 43,793 18,979 62,772 36,490 99,262 Federal Govermat 's rediscounts - - - - - 18,426 18,426 25,391 43,817 Bank Loans IBD 1,606 1,606 9,868 11,474 13,725 25,199 33,689 58,888 Foreign Comnercial 3,490 8,314 11,804 31,531 43,335 21,294 64,629 21,748 86,377 Bak of Mexico - Special - - - 14,000 14,000 - 14,000 (2,154) 11,846 Other 301 (22) 279 (21) 258 11,500 11,758 (11,542) 216 3,791 9,898 13,689 55,378 9,7 46, 519 i 15, 586 41,741 157,327 Less: Govermnwt Guaranteesa/ 44,298 44,298 40,862 85,160 60,105 145,265 11,080 24,769 5,657 30,426 (18,364) 12,062 Other Liabilities 7,200 3,403 10,603 (3,150) 7,453 8,628 16,081 (4,435) 11,646 Total Liabilities 34,284 23,301 57,585 18,430 76,015 51,690 127,705 39,082 166,787 EqUTY b/ 16,776 1,090 17 866 2,201 20,067 3,348 23,415 42,181 65,596 Total Uabl-litie/Equity 5100 -24,391 75,451 -W63 -O'W 35-1-0 1 81=,6 3 2- a/ Governmeat Guarantees relate to accmLlated foreign exchange losses an external financing, which are payable by the Government. b/ Annual changes comprise: (a) profits for the year; and (b) new equity contributions including the assuption of external liabilities. - 26 - TABLE 14 MEXICO COMPLETION REPORT - LOAN 1591-ME Summarv of Financine of Loan Portfolio 1981 1982 1983 1984 ---MEX $ MILLIONS - 1981 Constant---- A. INCREASE IN EQUITY, INCLUDING NET PROFITS 1,090 1,106 930 7,323 B. RECEIPTS I. Bank of Mexico Rediscounts 10,000 12,311 5,272 5,961 II. Foreign Commercial Banks 8,314 - - - III. World Bank 1/ 1,606 4,959 3,812 5,849 IV. Government Rediscounts - - 5,118 4,408 V. Government Securities - 864 - 699 VI. Local Commercial Banks and Other - 627 5,281 - 19,920 18,761 19,483 16,917 TOTAL A & B 21,010 19,867 20,413 24,240 C. PAYMENTS I. Government Securities 703 - 1,264 - II. Local Commercial Banks and Other 721 - - 2,875 1,42'4 - 1,264 2,875 D. GOVERNMENT GUARANTEES - 6,415 5,435 6,659 1,424 6,415 6999,534 NET RECEIPTS (A+B) - (C+D) 19,586 13,452 13,714 14,706 INCREASE IN LOAN PORTFOLIO Short-term 7,870 7,467 5,939 7,583 Medium and Long-term 11,716 5,985 7,775 7,123 19,586 ~ 13,714 1,0 1/ Government Guarantees represent the loss on exchange on foreign indebtedness. Also, an unidentified portion of the World Bank loan should be netted against this figure. Attachment I Page 1 BORROWER's COMMENTS 89E0792 June 21 1989 Spanish (Mexico) OEDDI RP:mec NACIONAL FINANCIERA GERENCIA DE FINANCIAMIENTOS BANCO MUNDIAL (BUREAU FOR WORLD BANK FINANCING) June 19, 1989 TO: Mr. William Jones Operations Evaluation Department FROM: Juan Manuel Izquierdo Further to our telephone conversation, I enclose comments on the Project Completion Report of the Seventh Agricultural Credit Project (Loan 1891-ME). (Page 1 of 6). Yours, etc. Note: Original sent by pouch. - 28 - Attachment I Page 2 NACIONAL FINANCIERA GERENCIA DE FINANCIAMIENTOS BANCO MUNDIAL (BUREAU FOR WORLD BANK FINANCING) CEC/1077/VI/89 June 16, 1989 Mr. Graham Donaldson Chief, OEDD1, Agriculture, Infrastructure and Human Resources, World Bank Washington, D.C. I reLer to your letter of April 3, 1989, in which the Bank furnished this Institution with the Project Completion Report on the Sevcnth Agricultural Credit Project (Loan 1891-ME), and invited comments for consideration during the preparation of the final version to be submitted to the Bank's Board of Executive Directors. I therefore enclose the comments and opinions of the implementing agency, the guarantor and the borrower, who studied the document jointly. It must be emphasized that the project was executed at a time when the country was facing very difficult economic circumstances, requiring adjustments in macroeconomic policy thpt affected the progress of the Seventh Project. Yours, etc. /s/ H6ctor Flores Santana Chief, Bureau for World Bank Financing - 29 - Attachment I Page 3 NACIONAL FINANCIERA COMMENTS ON THE PROJECT COMPLETION REPORT OF THE SEVENTH AGRICULTURAL CREDIT PROJECT (LOAN 1891-ME) GENERAL (1) We agree with the Report that the Project was executed at a time when the country was facing very difficult economic circumstances. This necessitated adjustments in macroeconomic policy which affected the execution of the Seventh Project. (2) The Report places emphasis on the behavior of interest rates in Mexico at a time of high inflation. Consequently, the Bank must establish the right context when describing this situation, including the following factors: (a) The external debt crisis; (b) an increasing budget deficit causing inflationary pressure; (c) the macroeconomic adjustment program; (d) the impossibility of adjusting interest rates, because this also would 1':.d to inflationary pressure. (3) The Report repeatedly states that FIRA's system for measuring project impact was inadequate. Nevertheless, and as the Bank well knows, very few of the Bank's project implementation agencies have succeeded for such a long period as FIRA in maintaining a system for measuring the results of credit operations, this having been established in 1976. The advantage of the system is that data on borrowers is gathered in a constant and ongoing manner, in contrast to other systems that collect information only sporadically. Similarly, because other countries lacked experience of such issues, FIRA applied for the specialized assistance of Bank staff on several occasions, but received no response to these requests. RFERENCL PAGSECT IN .tut adjustments were not %utIitient to bring HRA's v As mentioned in the general coments, interest rates behaved in Irridinq rates up to the rate of inflation." accordance with the policy implemented by the Federal Government. "On three oc%asions -agreed not to submit disbursement v As in the case of (1) above, it should be noted that interest rate requests." adjustments implemented by the Mexican Government made it impossible to fulfill the conditions agreed with the Bank. and for this reason the planned disbursements could not be made. "lofty percent of the loan amount." v It must be pointed out that the agreements allow for a postponement of the Loan c asing date. it any eventuality should occur. 0n1-quen'Itly, the sample was no longer a reliable v This contradicts the coments of the Bank itself in Part IV ("Project ,itlidtOr of the financial or economic impact of the loans." Impact"), since the latter refers to the Project's considerable achievements with regard to output and economic rates of return. '(tUnertainty remains regarding." v See previous point. .i; supervlsion missions have frequently found..." vi This assertion is incorrect. As the World Bank knows, the methodology for calculating producers' net income was in fact designed jointly by World Bank and FIRA and has been used in an identical form in other Projects. As part of FIRA's normal supervisory activities, the calculations of net inct.es are reviewed, and if any anomalies are found, the cases in question are reclassified. Various f6.rms of penalty can be applied to participating banks and to staff. including 0 retirement of subloans. imposition of penalty interest on banks, and withdrawal of the staff member's authorization. Consequently, we suggest that section (b) of this paragraph, and other references made to this matter in the -emainder of the Report. be removed. "Howeve.-, IIRA failed to exert.." vi It must be pointed out that FIRA's activities should at no time be assumed to affect BANRJRAL's operations, since the two institutions are independent and have their own operAting rules. f The side letter providing for.." 5/3.08 The side letter was not applied precisely because macreecoremic policy affected interest rates. ( ll "Bank supervision missions...." 11/6.04 It should be noted that Bank supervision work was basically directed toward administrative and financial issues, and provided valuable g Is lessons and the bases for taking decisions that prevented any greater me deterioration in FIRA's financial position. Nevertheless, the techni- that, in the field, projects were developing normally - was not F provided, even though in certain cases the opinions of outside experts would have been very useful. _________________________________________________________________________ IBRD 1~'~ - - -~ yr¾-~ui4t~D rAr~ U»NA T E 0 S T A T E 5 Nj~~ E--> ¼ * 30-i X L - 6 ¾, _____ ¾' * \ m -i VM b-- * i AU * () ¾ ¾' '¾ I m * SE <i. -, -, j;'>. IREDK PPOJECT . .. AU * U 6 B et - B B - -' B m å * '1 -* U * B * *' * MeD B eg etm Sv B * B * e*- * B 0 * ¾- ~ * Må B B * * * B N * B * B * ( A ft '.