Peru - Sixth Agricultural Credit Project

Dcumcnt of The World Bank FOR OMCIL USE ONLY RpORt NQ- 8531 PROJECT COMPLETION REPORT PERU SIXTH AGRICULTURAL CREDIT PROJECT (LOAN 2302-PE) APRIL 18, 1990 Agriculture Operations Division Country Department IV Latin America and the Caribbean Regional Office This document has a restricted distributon and may be used by redpients only In the performance of dwir offidal dudes. Its contns may not othwise be dbiosed without WorM Bank autboradtio.  ABBREVIATIONS AND ACRONYMS ALIDE - Latin American Association of Finance and Development Institutions (Asociaci6n Latinoamericana de Instituciones de Desarrollo y Finanzas) BAP - Peruvian Agricultural Bank (Banco Agrario del Peri) ESAN - Graduate School of Business Administration (Escuela Superior de Administracin de Negocios) GDP - Gross Domestic Product (Producto Domestico Bruto) GOP - Government of Peru (Gobierno del Perd) -NIPA - National Institute of Agricultural Research and Promotion (Instituto Nacional de Investigaci6n y Promoci6n Agricola) MA - Ministry of Agriculture (Ministerio de Agricultura) PCR - Project Completion Report (Informe de Terminaci6n del Proyecto) CURRENCY Currency Unit: 1000 Soles - 1 Inti as of 01/01/86 (New Currency Created) At Appraisal s US$1 = SI. 750 At Completion: US$1 m I/. 72.83 WEIGHTS AND MEASURES Metric System  THE WORLD) SANK IOR OIVCAL US ON Washington. D.C. 30433 U.S.A. 0Ok. d Oftectav.C.mrat April 18, 1990 M4ESORANDUH TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report: PERU - Sixth Agricultural Credit Proiect (Loan 2302-PE) Attached, for information, is a copy of a report entitled "Project Completion Report: Peru - Sixth Agricultural Credit Project (Loan 2302-PE)" prepared by the Latin America and the Caribbean Regional Office with Part II of the report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a motrtd disbution nd may be used by recipients ony in the peformance of their off dutieL Its tonets may not odthrw*e be disclosd wikhout Wodd Benk autUbor*t |  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT PERU SIXTH AGRICULTURAL CREDIT PROJECT (LOAN 2302-PE) TABLE OF CONTENTS Page No. Preface* ................................... i Evaluation Summary .............. . ...... ....... ii PART Is PROJECT REVIEW nROM THE BANK'S PERSPECTIVE .........0.... 1 Project Identity ..................................................... 1 Background **..*.*. **.*...**.*****....... ...................... 1 Project Objectives and Description ............*.........0... 2 Project Design and Organization ........................... 3 Project Implementation ............. * * *..* ...*... 4 Project Results .................................. 5 Project Sustainability ........ * *.......................... 6 Bank Performance .......... ...........*..****............ 6 Borrover Performance ... ... .. ... .. . ...... 7 Project Relationship ...... ... ....... ...................... 7 Consultant Services .... ................................... 7 Project Documentation and Data ............................ 7 Lessons Learned .#**..... ..... ......... 8 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ....... 9 1. Background ..... #................ ..... 9 II. Results .......***. ........... ........ 0000000.00400**.... 9 Comparative Performance of the Main Crops by Region (Tables 1-2) ........ **..... * . ..... ...0... 0...... *.............**##.. 11-13 Annex I: Comments on the World Bank Report (Part I) .......... 14 Annex II: Further Comments ...... * ........ ..................... 18 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (contd.) PART-111s STATISTICAL INFORMATION 19............. Table Is Related Bank Loans and/or Credits ..... .............. 19 Table 2: Project Timetable ......... .......................... 20 Table 3: Cumulative Estimated and Actual Disbursements ....... 21 Table 4: Project Implementation .............................. 21 Table 5: Project Costs and Financing (A) Project Costs ............................. 22 (B) Project Financing .......................... . . 22 Table 6: Project Results (A) Direct Benefits ... ............... ....... ... .... 23 (B) Financial and Economic Impact ................ 23 (C) Studies ...**...................... * 24 (D) Training ..................................... 24 Table 7: Status of Covenants ... . .................. ... . ... .. 25 Table 8: Use of Bank Resources (A) Staff Inputs ................ ................. 26 AB) Missionh ..................AeraeLeding te................... 26 Annex ls BAP - Weighted Average Lending Rate ....................................... 27  PROJECT COMPLETION REPORT PERU SIXTH AGRICULTURAL CREDIT PROJECT (LOAN 2302-PE) PREFACE This is the Project Completion Report (PCR) for the Sixth Agricultural Credit Project in Peru, for which Loan 2302-PE in the amount of US$130.0 million was approved on June 7, 1983. The loan was closed on June 30, 1988, as scheduled. Disbursements were US$98.7 million and the last disbursement was on June 23, 1987. An amount of US$31.3 million was cancelled. The PCR was jointly prepared by the Agriculture Operations Division, Country Department IV of the Latin Amierica and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). Preparation of this PCR relied on Appraisal and President's reports, Loan and Guarantee Agreements and Supplementary letters, supervision and Borrower's progress reports, correspondence files and project briefs.  - ii - PROJECT COMPLETION REPORT PERU SIXTH AGRICULTURAL CREDIT PROJECT (LOAN 2302-PE) EVALUATION SUMMARY Obiectives 1. The project's objectives were: (a) to increase the flow of agricultural credit in support of the GOP's efforts to accelerate agricultural sector growth and improve the living conditions of Peru's farmers; and (b) to strengthen the Peruvian Agricultural Bank (BAP). Imylementation Experience 2. Project implementation progressed well initially, but the main elements of its strategy soon collapsed, as evidenced by the followings (a) Interest Rates. Maintaining adequate interest rates became the main project focus, as negative real rates turned into a nagging source of disagreement between the Bank and the GOP. Attempts to resolve the dispute were unsuccessful. The Gar-ia Government decreed that the Central Bank would set interp-.t rates for the entire Peruvian financial system, and BAP's rates were de-linked from inflation, forcing it into non- compliance with a major project covenant. Attempts to secure Borrower compliance failed. Disbursements were accordingly suspended in early 1987 (see para. 5). Short-term credit funds were fully committed by BAP, reflecting its experience of such lending. However, the project overestimated the rapidity with which BAP could process medium- and long-term credit, and volumes were disappointing (see Part III, Table 6A). (b) Strentthening of BAP. The training program envisaged at appraisal was directed towards assisting BAP, Ministry of Agriculture (MA) and National Institute of Agricultural Research and Promotion (INIPA) personnel, but only the former actually received any training. The management information system was prepared and implemented successfully, but not in time to benefit from Bank financing (i.e., before suspension of disbursements). The BAP had to request a loan from local sources to purchase the equipment. During the last supervision in January 1988, it was evident that the computerization program was well under way (see paras. 17-19).  - iii - Studies. Project studies tot (M) design a rediscount facility in the BAP to help seimulate commercial bank lending to agriculture; and (ii) complete preparation of a sugar rehabilitation project, were not carried out. BAP lacked experience in preparing appropriate terms of reference or in commissioning consultants. In any case, events ovartook the component before suitable arrangements could be made. Results 3. Project objectives of increasing the flow of credit to the agricultural sector and strengthening the BAP were partially achieved. Only limited information is available, however, on the incremental production resulting from the loans. 4. Institutional strengthening fell short of its target in the training program, but good results were obtained on the management information system. In combination with better trained personnel and continued application of Bank standards to subloan approval, the efficiency of the RAP has probably increased (see paras. 20-21). Sustainabili4l 5. Although the project sought to ensure its sustainability through market determined interest rates at close-to-positive rates, and improved SAP management and procedures, GOP actions steadily forced BAP to lend at negative rates resulting in its inability to mobilize local savings. By 1988, 70S of its lending (almost US$1.0 billion equivalent) was funded from the Central Bank, undoubtedly contributing to inflation (see para. 22). Prineigal Pindinas 6. The project demonstrated how a potentially successful lending program, characterized by significant innovation and full support of the implementing agency, can be overtaken by events beyond the control of the Bank or the agency. It is likely that, had the planned changes in credit policy not been abandoned, something approaching a competitive market- oriented system would now be in place for the Peruvian rural sector (see para. 30).  PART I MAIN FINDINGS AND LESSONS LEARNED Proiect Identity 1. Project Name: Sixth Agricultural Credit Project Loan No.s 2302-PE RVP Unit: Latin America and the Caribbean Country: Peru Sectors Agriculture Subsector: Agricultural Credit Backaround 2. The Sixth Agricultural Credit Project vas appraised once under a military regime and then prepared, reappraised and implemented under two civilian governments. Project preparation originally started in the seventies, and its first appraisal took place in October 1976. Work on the vroject was later suspended because of the deteriorating economic situation in the country and the far-reaching policy changes which were being intro- duced. In general, agrarian policy was marked by a strategy of controlled food prices and subsidized imports of agricultural raw materials for the domestic industrial sector, further deteriorating the agricultural terms of trade. All new lending was halted during a short period in 1977 when Peru was not considered creditworthy. When lending resumed, and mainly because of the Peruvian Agrarian Bank's (BAP) negative lending rates in real terms, the Bank and the Government of Peru (GOP) could not agree on a revised project concept. 3. President Belaunde's civilian Government took power in mid-1980. This government was more inclined to promote private versus public initia- tive and incentives versus control measures than the preceding military regimes. At the beginning of 1982, this government decided to cut direct subsidization to the BAP. and establish a commission to study and propose a new agricultural credit policy more reliant on higher financing autonomy for the BAP through increased interest rates and savings mobilization. The commission recommended that the UAP's rates gradually increase to commer- cial rates for most borrowers, though low income borrowers would continue to benefit from subsidized rates. The Bank supported these new decisions and the project was appraised in September 1982. The project became effec- tive in September 1983. 4. In spite of its laisser-faire inclination, the government bowed to political pressures to curb inflation, and continued protection to indus- trial and urban consumers. As the agrarian reform collapsed and physical productivity of the sector continued its downward slide, the agricultural sector entered a serious crisis. These troubles compounded with bad weather resulted in a 9.6S drop in agricultural GDP in 1983.  - 2 - S. In 1985, a new populist civilian government headed by Dr. Alan Garcia P6rez was voted into power. His administration's program featured selective price controls, overvalued and multiple exchange rates, manufactured import restrictions, agricultural subsidies, subsidized credit, a unilateral limitation of debt service payments and an extension of state economic intervention. As a result of the GOP's policies on interest rates, the BAP's rates fell out of line with Loan Agreement covenants, and therefore the Bank had to request in November 1986 that no further comitments for credit operations be made. Later, the GOP fell in arrears to the Bank, and disbursements for all projects vere suspended in June 1987. The loan was closed in June 1988. Prolect Obiecclves _and Descrivtion 6. The project's objectives weres (a) to increase the flow of agricultural credit in support of tFs GOP's efforts to accelerate the growth of the sector and improve the living conditions of Peru's farmers; and (b) to strengthen the BAP. The BAP contended that there was a large unmet demand for medium and long-term agricultural credit, at least on BAP's usual lending terms, because resources from previous World Bank loans had already been exhausted, the BAP was rationing its short-term lending and its minimum long-term lending had stopped in May 1982. The project was appraised in September/October 1982 at the time of the Special Action Program (SAP). The objectiv8s of tue 'aAP were to increase the flow of resources to selected countries by increasing dis- bursement percentages on existing loans and increasing commitments under new loans offering prospects for quick disbursement. Following appraisal, this project was selected as an appropriate vehicle for action under the SAP reflecting confidence by Management that sufficient credit demand existed to ensu.tre rapid disbursement. Accordingly, before Board presenta- tion (June 3, 1983) the recommended loan size was increased from US$60 million to US$130 million. 8. The project financed the following components: (a) agricultural credit to individual farmers, cooperatives and agroindustrial projects for: (i) long-term invest- ments to improve irrigation infrastructure, changing cultural practices of cropping and expansion of mixed crop/livestock farming, acquisition and repairs of machinery, vehicles and equipment; and (ii) short-term needs for expanded agricultural production. Over 20,000 farm families would receive investment loans, and the BAP's on-going working capital program would be increased by about 25,000 operations during the project execution period; (b) technical assistance and training to improve the effi- ciency of BAP's operations; and  - 3 - (c) studies tot (i) design a rediscount facility in the BAP to help stimulate commercial bank lending in agri- culture; and (ii) complete preparation of a sugar rehabilitation project. 9. A. finally approved, the project's total costs were estimated at US$239 million with Bank financing of US$130 million (542 of total coats), including about US$24 million in local costs under the Special Action Program. The credit component accounted for US$100 million or 972 of base costs at appraisal, of which US$54.1 million were for medium- and long-term lending and US$45.'v million for incremental short-term lending. Project DesiRn and Organization 10. The project concept and design were consistent with the Belaunde Government's policies, but were incompatible with the policy direction taken by the subseqttent administration. The project sought to broaden the sources of agricultural credit and transform the BAP into a more efficient institution able to withstand commercial competition. The strategy con- sisted of: (a) increasing Incentives for the banking system to lend to the sector by means of more realistic interest rates; (b) studying the possible installation of a second tier window in the BAP to rediscount agricultural loans made by commercial banks; and (c) strengthening the BAP by X king up a new management information system and providing training for its tech- nical staff-II One weakness in the project design, lack of support ser- vices to the farmers, was being tackled by the newly-created National Institute for Agricultural Research and Promotion (INIPA), a new research and extension agency (the Bank approved an Agriculture Research and Extension Project in May 1982 - Ln. 2150-PE). 11. More realilstic Interest Rates. This project was predicated on the Belaunde's Government's decisions to phase out direct subsidization of the BAP and to adopt agricultural credit policies more related to market interest rates. In April 1983, the BAP adopted new policies which aligned its practices with those of comercial banks. All loans to commercial farmers over a certain amount (about US$13,000) were to be charged commer- cial rates. The average rate of a representative sample of commercial banks would be used as a benchmark. Loans for lesser amounts, which typically went to small farmers in the most impoverished areas (the Sierra and the Selva), would remain subsidized. The Loan Agreement contained a covenant, number 6.01, that stated that interest rates would not fall below 902 of inflation and that their levels would be reviewed each semester. Formulas for these calculations were included in a supplemental letter to the Loan Agreement and subsequently clarified in 1985. To avoid the risk 1/ The Government notes inconsistencies in this interpretation of project purposes and strategies, especially with regard to project objectives set out in para. 6. See Part II, Annex I, paras. 1-3.  -4 - of possible decapitalization due to subsidies, the GOP was to provide an annual equity contribution to the BAP, as necessary to maintain the BAP's equity at the level of June 1983 in constant terms. 2/ 12. The Rediscount Window. The BAP was practically the only source of agricultural credit available, because commercial banks had no incentives to lend to the sectort/ The project financed a study to assess the feasibi- lity of opening a rediscount facility in the BAP for commercial banks to lend for medium- and long-term investments. 13. Strenathening the AP. This project (and the previous five agricultural credit projects) was implemented using BAP's normal procedures but included training