Colombia - Caja Agraria Institutional Development Project

Document of The World Bank FOR oFFICIAL USE ONLY Report No. 14690 IMPLEMENTATION COMPLETION REPORT COLOMBIA CAJA AGRARIA INSTITUTIONAL STRENGTHENING PROJECT (LOAN 2909-CO) JUNE 28, 1995 Natural Resources Management & Rural Poverty Division 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 duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso (Col$) Average Exchange Rates 1987 - US1$ = Col$ 242.6 1988 - US$1 = Col$ 299.2 1989 - US$1 = Col$ 384.6 1990 - US$1 = Col$ 502.2 1991 - US$1 = Col$ 622.4 1992 - US$1 = Col$ 680.7 1993 - US$1 = Col$ 813.2 1994 - US$1 = CoA$ 800.0 WEIGHTS AND MEASURES Metric System FISCAL YEAR OF THE BORROWER January 1 to December 31 ABBREVIATIONS AND ACRONYMS Caja - Caja de Credito Agrario, Industrial y Minero Caja Agraria (Agricultural, Industrial and Mineral Bank) CAS - Country Assistance Strategy FINAGRO - Fondo para el Financiamiento del Sector Agropecuario (Agricultural Sector Financing Fund) IBM - International Business Machines ICR - Implementation Completion Report PC - Personal Computers TA - Technical Assistance GOVERNMENT OF COLOMBIA FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT COLOMBIA CAJA AGRARIA INSTITUTIONAL STRENGTHENING PROJECT (LOAN 2909-CO) TABLE OF CONTENTS Page No. PREFACE .......................................................i EVALUATION SUMMARY ....................................................... ii PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives ................................1 B. Implementation Record and Major Factors Affecting the Project .................................3 C. Project Sustainability ................................ 10 D. Bank Performance ................................11 E. Borrower Performance .................................11 F. Assessment of Outcome ............................... 12 G. Future Operations ............................... 13 H. Key Lessons Learned ............................... 13 PART II: STATISTICAL TABLES 1. Summary of Assessments ........................................... 15 2. Related Bank Loans .......................................... 16 3. Project Timetable .......................................... 16 4. Loan Disbursements: Cumulative Estimated and Actual ............... 16 5, 6 Key Indicators of Project Implementation/Operation .................... 17 7. Studies Included in Project .................. ........................ 18 8A. Project Costs ...........................................18 8B. Project Financing ...........................................18 9. Economic Costs and Benefits .19 10. Status of Legal Covenants .20 11. Compliance with Operational Manual Statements .19 12. Bank Resources: Staff Inputs .19 13. Bank Resources: Missions .23 14. Key People .24 ANNEXES A. Mission's Back to Office Report .25 B. Borrower's Comments of the Draft ICR and Its Project Implementation Plan .28 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. I  2 C. Miscellaneous Annexes 1. Caja Agraria - Financial Statements .......................... 36 2. Caja Agraria - Financial Ratios .......................... 39 3. Corporate Plan .......................... 40 4. Cost Summaries .......................... 49 D. Map: IBRD 26153  IMPLEMENTATION COMPLETION REPORT COLOMBUI CAJA AGRARIA INSTITUTIONAL STRENGTHENING PROJECT (LN. 2909-CO) PREFACE 1. This is the Implementation Completion Report (ICR) for the Caja Agraria Institutional Strengthening Project in Colombia, for which loan 2909-CO in the amount of US$15 million equivalent was approved on February 2, 1988, and made effective on September 14, 1988. 2. The loan was closed on June 30, 1994; the original closing date was June 30, 1992. Final disbursement took place on November 2, 1994, at which time a balance of US$7.4 million was canceled. Cofinancing for the project was provided by the Government of Japan in the form of a grant of US$0.5 million equivalent. 3. The ICR was prepared by W. B. Johnson and S. Joss, Natural Resources Management and Rural Poverty, Division Im, Latin America and the Caribbean Region. The ICR was reviewed by Jonathan Parker, Principal Operations Officer, Natural Resources Management and Rural Poverty Division and Robert Crown, Project Advisor, Country Department III. 4. Preparation of this ICR was begun during the Bank's final supervision/completion mission, January 1994. It is based on material in the project file. The Borrower contributed to the preparation of the ICR and commented on the final draft through its letter of June 14, 1995 (see Annex B). The Borrower also prepared the final cost summaries for the project (Annex C 4). 5. All local currency amounts shown in this report are in US$ equivalents.   IMPLEMENTATION COMPLETION REPORT CAJA AGRARIA INSTITUTIONAL STRENGTHENING PROJECT (LOAN 2909-CO) COLOMBIA EVALUATION SUMMARY Introduction A. Project Objectives 1. The main objective of the project was to strengthen Caja, the primary financial intermediary for agricultural credit in Colombia (especially for small farmers); thereby helping to meet the agricultural sector's credit needs in a more efficient manner. The project was aiming at helping Caja become a more modern, self-sustaining financial intermediary, enhance its capacity to mobilize resources, and lower its costs of financial intermediation. These objectives met Government's strategy at the time (1986) to improve agricultural productivity and production by inter alia, improving the functioning of rural credit markets and strengthening the institutional capacity of key public sector agencies. These objectives are still valid and are consistent with the current CAS for Colombia which includes rural poverty alleviation and institutional strengthening. 2. A set of key indicators was established to measure the success in strengthening Caja's operations. These were contained in a 'Supplemental Letter" which was signed by the Borrower. The indicators were chosen to measure improvements in efficiency, control of overhead costs and resource mobilization. At the end of 1990, the legal time-frame for the above indicators had expired. As part of the new Agricultural Sector Credit Project (Ln. 3575-CO), a new set of key performance indicators contained in an agreed Corporate Development Plan were established and monitored under that project. These indicators included divestment of non-banking assets, shrinldng the size of the branch network, eliminating financial operating losses and continued staff reductions. The new Corporate Plan embodied an agreement between Caja, Government and the Bank on a restructuring plan for Caja. 3. In retrospect, the attainment of these indicators were very dependent on: (a) continued growth of the sector and specifically on Caja's business of lending and mobilization of deposits, which didn't happen during the period; (b) management's commitment to reduce staff, which didn't happen until 1991; and (c) a stable economic and political situation in the country-side which also did not happen and which caused savings to fall and loan arrears to increase. Much of  in what happened in points (a) and (c) was beyond the control of Caja's management. B. Implementation Experience and Results 4. From the start of the project, Caja was unable to meet the Key Indicators it had agreed to in the Supplemental Letter. Administrative costs grew in real terms and as a percentage of the loan portfolio. Head office staffing continued to rise as a share of the total. Loan portfolio arrears went up while deposit mobilization barely grew in real terms. As a result annual losses, adjusted for understated pension liabilities, averaged almost US$90 million a year during 1986-92. Strong actions by Caja were only able to reduce these losses to US$30 million in 1993 and US$14 million projected for 1994. 5. Caja did, however, finally achieve a large downsizing and restructuring of its business which the Bank fully supported. It reduced staff in 1991 by 4,500 from a high of 15,000 and has since reduced staff further to a level of 7,650, a reduction of almost 50 percent. As part of this process, Caja has sold off its non- banking assets, which were losing money, and agreed to shut-down money-losing bank branches or be compensated by Government for any branches Government wished Caja to keep open for political purposes. Government imposed these changes in 1991 and 1992 when it stepped in and provided a guarantee of US$170 million to ensure that Caja met the fiscal requirements of the Superintendent of Banks' to continue its operations. 6. Nevertheless this downsizing was not reflected in improved financial performance and sustainability. It was overshadowed by the lack of tangible capital, decreasing deposit liabilities and a poorly performing loan portfolio. While the Technical Assistance (TA) activities financed by the project were necessary to achieve the objective of self-sustainability, they were not by themselves sufficient to permit this objective to be achieved. C. Summary of Findings 7. Borrower leadership of project preparation did not take place nor was there active participation by the Government during project implementation, especially when Caja was experiencing the serious financial losses. 8. Overall the outcome of this project should be considered unsatisfactory in that Caja has not achieved the project's objectives of self-sustainability and improved resource mobilization, even though it did sharply reduce its staff and divest its non-banking assets. 9. The sequencing of the project activities was not consistent with achieving their objectives. The downsizing of the operations should have taken place  iv before the training was provided to the staff. Staff trained as team leaders to introduce new systems and procedures and staff trained in those systems and procedures left Caja during the staff downsizing operation. 10. Caja's continuing losses required Government to recapitalize it to comply with the Superintendent of Bank's legal requirements. While these inputs helped Caja meet the minimum requirements for the ratio of equity to risk assets, the bonds and promissory note (both non-cash items) were an illusion, as they did nothing to finance increased business activities which were desperately needed to increase profitability and improve self-sustainability. Government did agree to compensate Caja annually for the money-losing branches Government wished keep open. 11. Caja was not able to reach profitability during the project period. Based on 1994 business levels, Caja would still need to increase its business, i.e., Net Interest Income, by about 50 percent or reduce expenses by about 16 percent to generate a return on assets of 1 percent, the target for 1994 in the Corporate Plan. Profitability is also dependent on having a healthy loan portfolio of sufficient size to sustain its operations. As noted earlier, Caja did not have the resources to grow the loan portfolio, in real terms. High loan arrears, indicating questionable portfolio quality, contributed to the drop in income and a continuing need for recapitalization. 12. Caja has not achieved the agreed reduction in branches. As at December 31, 1993, Caja still had 851 branches, almost the same number (878) when the project started in 1986. It was agreed that the number of branches would be decreased to 760 by the end of 1993 and 650 by the end of 1994. 13. Caja achieved a significant amount of staff training during the project period from both internal resources (US2.1 million) and a Japanese Grant (US$0.5 million), arranged by the Bank. In all, some 750 separate training sessions took place with some 15,000 participants. D. Future Operations 14. Specific Plan for Project Implementation. Caja has prepared a specific plan to complete project implementation by December 1995. This plan covers the three remaining components: the automation of 40 branches; the purchase and installation of the 1200 workstations including PCs; and the rehabilitation of the computer center. 15. Status of the Corporate Plan. On March 1, 1994, the Bank advised Government that Caja was no longer a qualified financial institution with access to the line of credit, through Loan 3575-CO, with FINAGRO. This action was considered necessary since Caja had not met two of the key indicators in the Corporate Plan. It has been agreed with Government that Caja can regain its  v qualification if it sets agreed revised dates for accomplishing the objectives of the Corporate Plan and the Key Indicators which are part of the Loan Guarantee Agreement. Caja, to date, has not done this. E. Key Lessons Learned 16. This was the first project in Colombia for institutional strengthening of a financial intermediary for agricultural credit. Some of the key lessons learned from the project were: * Borrower ownership and commitment is required for effective implementation and sustainability of actions. Management of Caja Agraria changed so many times, it lost its commitment to the project. * Stronger monitoring and supervision on the part of the Bank can play a crucial role in salvaging a project. Bank supervision should have responded earlier to the deteriorating overall conditions (the frequent changes in senior management staff, loss of key project staff, the seriously declining profitability, and increased loan arrears) at Caja by involving Government in taking action. * A Financial Intermediary is unlikely to achieve its objectives on a technical assistance project if it is not financial viable. Consequently, project design and supervision should not pursue TA objectives in isolation, but also address as part of an integrated package, the policy issues which negatively impact financial performance and long-term viability. - A more realistic assessment of risks and external contributing factors is required at project preparation. At appraisal, the risk cited was that the institutional reforms sought for Caja might not be achieved in a timely manner due to the size of Caja and its long established institutional structure. However, external contributing factors came into play which, if taken into account in project design, would have reduced the expectations of the project. The unstable economic and political environment, particularly in rural areas, and the decline in the growth of the agricultural sector were both evident at the time of appraisal. * Utilize the Mid-term Review to ensure consensus on future implementation. When the financial situation of the Borrower had deteriorated so badly, all of the attention of the Borrower and the Government were directed to solving that problem. The Bank should have used the Mid-term review to discuss the status of the project and the likely impact on project implementation of the deteriorating financial situation at Caja and Government's proposed restructuring plan for Caja. This would  vi have resulted in increased ownership of the project by both Caja and Government, or if not it could have been used to close the Project. * Sequencing of Activities. This project provided a good example of the problems encountered with the sequencing of activities. Staff training, especially the training of key implementing teams, should only be done with assurance that these people would be in place to implement the project. * Upfront Conditionality, linked to negotiations, loan effectiveness and disbursements, should be used to test the Borrower's commitment to project objectives and the achievement of key improvements. These could have included basic reforms to address Caja's financial problems.   IMPLEMENTATION COMPLETION REPORT CAJA AGRARIA INSTITUTIONAL STRENGTHENING PROJECT (LOAN 2909-CO) COLOMBIA PART 1 - PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives 1. The major objective of the project was to strengthen Caja Agraria, the main financial internediary for agricultural credit in Colombia (especially for small farmers), thereby helping to meet the agricultural sector's credit needs in a more efficient manner. Specifically, the project was expected to help Caja become a more modern, self-sustaining financial intermediary, enhance its capacity to mobilize resources, and lower its costs of financial intermediation. Reform of the rural credit system and relevant institutions continues to be an important element of the rural poverty alleviation and institutional strengthening objectives of the current Country Assistance Strategy. This rural credit reform process was expected to continue under the Agricultural Sector Credit Project (Loan 3575-CO, effective November 1993). 2. In order to measure success in reaching the above objectives, key indicators were established and embodied in a "Supplemental Letter" signed by the Borrower. Specifically, these indicators (Table 5) were to measure improvements in efficiency, control of overhead costs, and resource mobilization. At the time (1986) they were considered realistic and achievable because Caja: (a) had, since 1974, shown its ability to increase growth rates in loans by 5.9 percent per annum, in real terms; (b) had, since 1980, been able to hold increases to administration costs at 3 percent per annum in real terms; (c) had been averaging 12 percent per annum for loan arrears during 1975 - 1985; and (d) had averaged 6.5 percent per annum in growth of deposits from 1980 - 1985. Nevertheless, the key indicators did not take into account external contributing factors which were unforeseen at appraisal, i.e., the unstable economic and political environment, and the decline in the growth of the agricultural sector due to: the contraction of the coffee subsector, the temporary downturn in world commodity prices, and increased rural violence. Therefore, in retrospect, the key performance indicators have proven to be overly ambitious. A new set of performance indicators have been included in an agreed Corporate Development Plan for Caja under the Agricultural Sector Credit Project which takes more into account the above factors (para. 24).  2 Achievement of Project Objectives 3. From the start of the project, Caja had difficulty meeting the Key Indicators (Table 5) agreed to in the Supplemental Letter. The Key Indicators and the results were as follows. * Increase in Administration Costs. Administration costs were expected to be held to zero growth in real terms. These costs, however, continued to increase in real terms, on average six percent per year. This trend was offset in 1989 by underproviding for the pension fund liabilities and later reversed dramatically with the large staff reductions in 1991 to 1993. * Administration Costs as a Percent of the Loan Portfolio were expected to fall from 18 percent in 1987 to 14 percent by 1990, through increased efficiency. However, these costs increased from an actual level of 17 percent in 1987 to a high of 23 percent by 1990. * Branch Office Staff as a Percent of Total Staff was expected to increase from 86 percent in 1988 to 90 percent by 1990, to reflect reduced Head Office Staff. Branch Office staff level actually fell to 83 percent by 1990. * Loan Arrears as a Percent of the Loan Portfolio were projected to fall from a target of 16 percent in 1987 to 12 percent by 1990. Loan Arrears did fall from an actual level of 19 percent in 1987 to 16 percent in 1990 but then increased to 25 percent in subsequent years. * Growth in Deposits, to reflect increased resource mobilization, was projected to increase from a level of by 6 1/2 percent in 1987 to 8 percent by 1990. In fact, deposits grew at an average annual rate of only 0.2 percent from 1987 to 1990 and minus 1.0 percent from 1991 to 1993. 4. Overall, the project's success in achieving the major objective of institutional development is rated as partial. Caja has lowered costs somewhat through a large downsizing and restructuring of its business, which the Bank fully supported. It reduced staff in 1991 by 4,500 from a high of 15,000 and has fiurther reduced staff to about 7,650, a reduction of almost 50 percent. Caja has also sold off its non-banking assets, which were losing money, and agreed to shut-down money-losing branches or be compensated by Government for any branches Government wanted Caja to keep open for political purposes. Government imposed these changes in 1991 and 1992, when it stepped in and provided a guarantee of US$170 million to ensure that Caja met the fiscal requirements of the Superintendent of Banks to continue its operations. In  3 exchange for this Caja agreed, in 1991, to the restructuring plan and a new statement of objectives. 5. Nevertheless this downsizing was not reflected in improved financial performance and sustainability. It was overshadowed by the lack of tangible capital, decreasing deposit liabilities and a poorly performing loan portfolio. While the Technical Assistance (TA) activities financed by the project were necessary to achieve the objective of self-sustainability, they were not by themselves sufficient to permit this objective to be achieved. 6. Caja has neither achieved self-sustainability nor enhanced its capacity to mobilize resources. During 1986 -1989, Caja's reported financial losses averaged US$15 million per year with a peak of US$19 million in 1989. As presented, this appeared to be lower than the period preceding the project when losses peaked at US$176 million in 1982 and US$100 million in 1983. However, Caja had been under-providing for pension liabilities in 1988 and 1989. Financial losses returned to the former high levels - US$73 million in 1990, and US$97 million in 1991- due, in part, to the Superintendent of Banks' request for Caja to increase the provision for pension fund liabilities, starting in 1990. Caja's ability to mobilize resources have been hampered by a combination of factors including declining economic conditions, increased competition from private banks, and the higher than normal withdrawal of deposits on the news of Caja's declining financial health and its lack of freedom to set competitive interest rates. B. Implementation Record and Major Factors Affecting the Project 7. Delay in Start-up. The project, which was negotiated in November 1986, was not presented to the Board until February 1988. This delay was due to slowness of the Government in its internal approval system which is required prior to final clearance of the negotiated documents. The loan became effective in September 1988. Thus startup was effectively delayed by more than one year. 8. Principal Consultant In October 1988, Caja hired the principal consultant. His main tasks were to assist the Project Director with the contracting and management of the work of the consulting firms hired to design and implement new systems and procedures for the strengthening of Caja. In addition, he was to review the designs and procedures and facilitate implementation and adoption. His contract, which was originally for three years ' New Statement of Objectives: (a) to finance agricultural and rural sector development; (b) to promote the development of an efficient financial rural sector, thus contributing to financial sector development; (c) to operate under financial performance criteria equivalent to those of privately owned financial institutions; (d) to limit its activities to banking and credit, except for lending-related insurance, the family subsidy program under trust fund arrangements with the Government, and ancillary non-lending support services to Government under a well defined fee structure, the latter only until such time as the Government can assign the responsibilities to a more appropriate institution; and (e) ultimately, as these objectives are met, to regionalize and/or privatize part or all of Caja itself.  4 was extended until March 1993, in order to provide continuity and to facilitate the implementation of key project components. 9. Contrary to his terms of reference, a large part of his work involved the development and implementation of short-term solutions to management operating problems encountered in the day-to-day operations of such a large and diverse entity as Caja. The consultant concentrated on short-term solutions while the longer-term ones were being developed by Price Waterhouse and IBM. Examples of the former were: (a) to develop a simplified human resources model to select staff to be trained and involved in the project who would later be the key personnel for project implementation. Caja had no automated information system of its human resources which could search out personnel on criteria such as education, work experience and current level; and (b) to develop a simple automated inventory control and invoicing system for the agricultural supply depots (while not generating much profit, these outlets had total gross sales of about US$100 million per year). These stores had woefully inadequate record keeping for inventory control and timely and accurate invoicing. 10. As an interim step to alleviate the manual work load of the branches, the Principal Consultant developed simplified automated procedures for branch accounting, loan portfolio management and savings and checking accounts management. To implement these new procedures it was agreed that Caja would purchase 1,200 personal computers (PCs) and install them in about 600 branches. This component is currently being implemented with 575 PCs and 283 improved work stations installed as of June 30, 1994. It was understood that these computers, while being employed initially on short-term accounting solutions, would be compatible with the automated systems being developed by IBM for the branches. CAJA expects to complete this component in 1995 (see Caja' s Project Implementation Plan - Annex B). 11. Price Waterhouse Contract. Price Waterhouse (PW) was hired in February 1989 and, based on its initial diagnoses of Caja's operation and with the agreement of Caja's management, embarked on a program of five components: Strategy and Organization, Information and Systems, Rationalization of the Branches, Rationalization of the Credit Process, and Improve and Develop Human Resources. By June 1991, PW had completed the design of new systems for credit processing, managing human resources, management information and branch operations, as well as proposed a new management structure. PW then installed and tested the new systems and procedures in one branch as a model with reported good results. 12. The next step was to begin one of the more important tasks of this component, that was to implement the new systems and procedures in the remaining branches. To do this, PW trained a cadre of managers who would form and lead implementation teams. Unfortunately, most of these trained managers and key team players opted to take the voluntary separation package offered by Caja in December 1991 (para. 26). As a result almost nothing has  5 been done on this important subcomponent, although Caja management had set a target, in October 1992, of converting 15 branches every two months. By December 1993, only three branches were converted. 13. IBM Contract. After nearly a two-year delay due to changes in Caja's management and local pressure regarding the award of the contract, Caja signed a contract with IBM in February 1991 and implementation began in April of 1991. The objective of this contract was to develop automated systems for branches and install these new systems with the necessary hardware and software in 40 branches. In addition, IBM was to develop an automated human resources information system. The development and implementation of this contract faced serious delays due to the underestimation by IBM of the time required to get the new systems operational and the lack of trained Caja personnel to work with IBM due to the reduction of staff, especially the trained professional staff. As a result, the IBM contract was extended three times from the original completion date of June 30, 1992 to the end of 1995; Caja has financed the IBM contract from its own resources after the closing of the loan, though it now intends to cancel this and reassign it to a different vendor (see Project Implementation Plan - Annex B). 14. Training. Training was an important component of the project and over the period 1989 to 1993, about 370,000 mandays of training were provided to the staff of Caja. This training, which cost about US$2.6 million was financed partially by a Japanese Grant of US$500,000 and the balance by Caja. Over twenty percent of the training was in banking and credit. Other major subjects were: the keys of success, accounting systems, loan administration systems, credit, project management, auditing, training development, and accounts evaluation. In all, over 750 training sessions took place and involved almost 15,000 participants. 15. Mid-term Review. The Loan Agreement called for a mid-term review, with Caja, Government and the Bank exchanging views, by June 30, 1989, on the progress of the project and the compliance by Caja with the Key Indicators and other obligations. In October 1991, some two years late due to the slow startup and implementation of the project, Caja hired Unisoftware to undertake a study to evaluate the current state of the project as compared to the original objectives and suggest changes where necessary. 16. During the mid-term review and especially when Unisoftware was in the process of preparing its final report, Government and Caja's senior management were immersed in the major reorganization and downsizing of Caja's operations (see para. 25). With financial losses of close to US$100 million in 1991, and under strong pressure from Government to take direct action, the implementation of the project and the preparation of the mid-term review report took a low priority. In fact, senior management asked the Bank informally about cancellation of the loan.  6 17. In January 1992 Unisoftware presented its report. Key findings and recommendations centered on: (a) the lack of involvement in the project by high level management of Caja (Unisoftware proposed that the project should be directed by a committee at the Board of Directors level, presided over by the General Manager), as well as a mechanism to ensure staff continuity for project implementation; (b) frequent changes in management of Caja during three separate Governments, and a lack of leadership, at different times, in the important areas of banking and systems. Such actions adversely affected implementation of the required structural changes in Caja; and (c) Caja's need for better management of consultants and the integration of their work. 18. About mid-1992, Caja Management informally advised the Bank that it wished to continue the project. Caja management felt that the project would still provide benefits in improved systems and procedures which would support, in the long-term, Caja's downsizing of staff and improved efficiency and profitability. In retrospect, the Bank should have used the mid-term review as an opportunity to discuss the status of the project with Caja and Government. 19. The mid-term review of the Key Indicators, by Caja, Government and the Bank, did not take place as these indicators were superseded by the improvements mandated by Government, in July 1991 (para. 22), and later by the new Corporate Plan which was part of the Agricultural Sector Credit Project (Ln. 3575-CO - see para. 22). These new indicators were considered better at measuring Caja's success at solving its overall problems. The Bank was very supportive of these moves by Government. 20. Two, one year, extensions of the Loan closing date were approved to allow time for Caja to complete contracts and to support Caja's efforts as part of the Agricultural Sector Credit Project (Ln. 3575-CO). Implementation of a new Corporate Plan for Caja was included as one of the objectives of the new Agricultural Sector Credit Project with the Bank which became effective in November 1993 (para. 25). However, Caja's financial situation continued to deteriorate and Caja and Government's commitment to the project fell even further. Despite some progress in staff reduction, Caja's achievements in increasing profitability and reducing the number of branches fell short of the agreed targets. 21. Management Change and Project Ownership. Since the appraisal of the project, there have been five Managing Directors and five Project Managers (Table 14). The lead consultant provided some continuity and institutional memory during the four year period that he was in place; this ended in March 1993. Nevertheless, as a result of frequent management changes, and Caja's major restructuring imposed by Government, senior management's attention was diverted from the project and there was never much management commitment as a result.  7 22. Drop in Caja's Lending, Profitability and Efficiency. Since 1989, Caja has been unable to maintain its level of lending due to a combination of the following factors: (a) reduced mobilization of deposits (in 1990 the target was to increase deposits by eight percent per year, in real terms - Table 5). Actual deposits dropped by 3.7 percent in 1990 and 9.4 percent in 1991, in real terms, due to declining economic conditions, increased competition from the private banks, and the higher than normal withdrawal of deposits on the news of Caja's declining financial health and uncompetitive interest rates; (b) increased loan arrears, from 15.6 percent of the loan portfolio in 1990 to 25.0 percent in 1991 (Table 5). This was caused by poor economic conditions in the country, especially the rural areas, and by borrowers stopping loan repayments with the news of Caja's poor financial condition and rumors of it possibly closing; (c) reduced operational efficiency, as measured by administration costs as a percent of the loan portfolio, one of the Key Indicators. In 1989 this was 15.2 percent versus the agreed target of 14.9 percent, in 1990 it deteriorated to 23.1 percent versus the target of 13.8 percent. Since then it has remained at the 20 percent level despite the large cuts in labor costs; and (d) high losses from operations siphoned off resources i.e., savings, profits etc., that would have gone to new lending. 23. As a result of the above, Net Interest Income declined dramatically. From 1989 to 1990, it declined 5 percent in real terms; from 1990 to 1991 by an additional 25 percent; and from 1991 to 1992 an additional 52 percent; in all a reduction of 65 percent, in real terms, from 1989. The falling interest income, as a result of lower lending levels, was not completely offset by a corresponding reduction in administrative and overhead spending. As a result, financial losses in 1991 totaled US$97 million, US$88 million in 1992, US$30 million in 1993 and expected to be about US$14 million in 1994. The value of the loan portfolio feli 35 percent, in real terms, from the start of 1989 to the end of 1992. As a comparison, in the period 1980 to 1985, the portfolio had grown at an average of 10 percent per annum in real terms. 24. Government Action. To counter this deteriorating financial situation and the fact that the Superintendent of Banks could close down Caja due to Caja's ratio of equity to risk assets falling below the minirnum, Government formed a task force in December 1990 to study Caja's problems and recommend a course of action. Based on the recommendations of the Task Force, Government took strong action and issued Decree 1755, in July of 1991, which set the following changes for Caja:  8 (a) staff would be reduced by at least 4,000 by the end of 1992; (b) Caja would divest itself of the non-banking business, i.e., agricultural inputs sales, seed production plants, farms and airplanes by the end of 1992; (c) Caja would reduce loan arrears from the level in 1989 of 20 percent of the loan portfolio to 5 percent by the end of 1993; (d) Caja would shut down all loss-making branches unless Government wished them retained and in those cases Government would pay the net cost of their operation; (e) Caja should look at selling stock to employees and customers; and (f) Caja would be recapitalized. To support these changes Government provided a guarantee of US$170 million, to ensure payment of Caja's pension plan in case Caja became insolvent. This guarantee, when recorded on the Balance sheet as an asset and additional equity, also satisfied the Superintendent of Banks requirement for the minimum ratio of equity to risk assets that all banks require to remain in operation, but it provided no operational benefit. 25. By December 1991, Caja had reduced staff by about 4,500 through a voluntary separation program and began the process of divestment and shutting down loss-making branches. The option of selling the ownership of Caja (common stock) was not pursued, because in view of the high losses, it was doubtful that anyone would be interested in buying. 26. New Project and Corporate Plan. The Bank responded to this new reorganization plan for Caja by incorporating a Corporate Strengthening Plan, agreed to by Caja, Government and the Bank, into a new Agricultural Sector Credit Project. This new project was supported by a Bank loan of US$250 million, which became effective in November 1993. Conditionality in this project allowed Caja to access the line of credit with FINAGRO, only if Caja met the agreed Corporate Plan (Annex C 3) and met key performance indicators as follows: (a) Caja would have eliminated losses by December 31, 1993 (excluding the reconstitution of the pension fund) and, by December 31, 1994 achieved a return on assets of at least one percent;  9 (b) Caja's staff would be reduced to 9,250 by early 1993, 8,200 by December 31, 1993 and to, at least, 7,200, by December 31, 1994; (c) Operating expenses as a percentage of the average deposits would be 16 percent or less; and (d) Caja's number of operating branches would be reduced to about 800 by March 31, 1993; 760 by December 31, 1993; and 650 by December 31, 1994. Of the remaining branches, up to 100 money-losing branches would remain open on Government's request and the net cost of operation be included in the Government budget and transferred to Caja. 27. On November 8, 1992 the Congress of Colombia approved Law 17 ordering the transfer of US$82 million to Caja. This transfer took place in December, 1992 in the form of US$35 million in cash and US$47 million in bonds. This first payment was part of a recapitalization of Caja, which would total about US$180 million over a three-year period under the restructuring of this institution, as confirmed by a letter to the Bank dated November 18, 1992, from the Minister of Finance. Continued disbursements by the Government were subject to satisfactory progress in implementing the Corporate Plan. 28. In 1993 Government increased "Paid In Capital" by US$110 million in the form of a transfer of Bancoldex bonds. This contribution of assets improved the reported financial condition at Caja, ensuring that it continued to meet the Superintendent of Bank's minimum requirement for the ratio of equity to risk assets. In addition, Government gave a promissoxy note of US$61 million to cover, as per the restructuring agreement, incremental pension costs. Unfortunately these inputs, not being cash, were an illusion as they did nothing towards increasing business levels which capital inputs would normally be intended to do. 29. In addition to the above, Caja and the Government entered into an agreement under which Caja would receive from the Government Budget, about US$8.0 million per year in 1994 and 1995 as a direct subsidy for banking and ancillary services provided by Caja through its money-losing branches that the Government has requested Caja to keep open. 30. The Agricultural Sector Credit Loan was canceled in July 1995 due to the inability of Government to meet loan conditionality intended to liberalize interest rates for financing the agricultural sector.  10 C. Project Sustainabiity 31. Caja will probably maintain the limited achievements generated in relation to the Project' s major objective of institutional strengthening. Caja has satisfactorily completed the installation of new systems for: credit card management, human resource management, and check clearing. The experience it has obtained in automating the 40 branches under the IBM contract will benefit future automation of the other branches. Caja continues to work toward reducing costs, and reducing losses (see Annex C 1). There is a commitment on the part of Caja's management to continue activities under the project, particularly increasing efficiency through improved office and banking systems. Caja has prepared a specific plan (see Annex B) to complete project implementation by the end of 1995. The Government's political commitment is evidenced through its decisive actions in 1991/92 and the restructuring/financial support given to Caja in 1991, 1992 and 1993. 32. Staff Levels and Administration Costs. Caja has demonstrated its ability to reduce staff levels, with a reduction of almost 50 percent from 1991 to 1994. Caja's reduction in costs should continue provided that Caja management and Government both remain committed to a smaller Caja and resolve the issue of the money-losing branches. In addition, Caja's installation of new procedures and automated systems in the remaining branches would likely increase business without a commensurate increase in staff. Such actions would have a lasting impact on holding down administration costs which have been reduced by 37 percent in real terms from 1990 to 1993. 33. Scope of Business. As discussed earlier, Government and Caja had agreed that Caja would limit its operations to providing banking services to the rural sector. Caja has recently, under new management, indicated that it would continue its operations in the urban areas. When the new procedures and automated systems are in place in all of the branches, Caja will be in a better position to provide improved service to existing clients and could conceivably grow, but it is uncertain what the financial results might be. 34. Profitability. Stable profitability has eluded Caja for some time and while losses have been reduced dramatically, Caja still projects a loss of US$14 million for 1994, half of the 1993 loss. Based on 1994 business levels, Caja would need to increase its business (Net Interest Income) by 50 percent or reduce expenses by 16 percent to generate a return on assets of 1 percent, the target for 1994 in the Corporate Plan. Profitability is also dependent on having a healthy loan portfolio of sufficient size to sustain the operation. As noted earlier, Caja suffered from a large reduction in the size of the portfolio, in real terms, and has high loan arrears, indicating questionable portfolio quality. This has led to erosion of the portfolio with recapitalization required from time-to-time. Based on the above, it now seems that Caja will need Government subsidies for the foreseeable future in order to operate.  11 D. Bank Performance 35. Overall Bank performance is rated as unsatisfactory. This was an ambitious project with high expectations and targets. In retrospect, given the number of senior management changes, a more realistic assessment of Caja's capacity for institutional change and its ability to meet the targets should have been made by the Bank at appraisal. Such assessment should have taken into account the risks associated with Caja's history of financial instability, the long- term process required for institutional strengthening, and the country's volatile political and economic situation. There should have been more safeguards to ensure the involvement of Government in project decisions when Caja's ability to continue its business was in question. The mid-term review was not used adequatedly as a vehicle to resolve these issues, nor did the Bank choose to withdraw from the Project. 36. Caja's seriously declining profitability and the numerous changes in management and staff affected its ability to meet the key indicators, and the implementation targets. The Bank and the Government should have addressed these issues more promptly. However, the Bank did respond to the changing direction of Caja when it incorporated a new Corporate Plan for Caja into the recently canceled Agricultural Sector Credit Project, which was appraised in 1992. For the first time there was a Corporate Strengthening plan for Caja with Key indicators that was agreed to by Caja, Government and the Bank. Some of the problems during implementation could have been reduced if the Bank had involved Government, rather than just Caja (the Borrower), more in appraisal and implementation and had asked Government to take steps earlier to down-size the staff and scope of operations at Caja. E. Borrower Performance 37. The performance of the Borrower is rated as deficient. Many of the implementation problems are linked to the lack of strong ownership of the project at the important phase of implementing new systems and procedures, as well as external fictors beyond its control. Such factors included an unstable economic and political environment, particularly in the rural areas; and a decline in the growth of the agricultural sector. During the design of the project and especially at appraisal, Caja indicated that major downsizing was not achievable due to the high political risks and that it could not expect support from Government. As a consequence of the numerous changes of senior management staff in Caja through Government reorganizations and the lack of Borrower ownership, project implementation was delayed; little progress was made in implementing the new procedures and branch layouts developed by Price Waterhouse; key project staff were released in 1991 through the voluntary separation program;  12 completion of the IBM contract was delayed three years; and there was a lack of trained staff to work with IBM. 38. In spite of the difficulties during implementation, it is clear that Caja is now in a much better position to carry out its mandate of providing credit to the rural sector more efficiently by having a much leaner operation, concentrating on banking services and employing more modem and efficient systems in all aspects of its operations. Current management of Caja has shown a strong commitment to complete implementation of the project (Annex B) and continue the process of improving systems and procedures to improve not only the efficiency of operations but also service to Caja's clientele. F. Assessment of Outcome 39. Overall the outcome of the project is rated as unsatisfactory. Caja has not achieved self-sustainability due to high financial losses, high loan arrears which will eventually erode the capital base, thus requiring recapitalization from time to time, and poor performance in mobilizing resources. Caja has also not achieved the agreed reduction in branches. As at December 31, 1994, Caja still operated about 850 branches, almost the same number as in 1986 when the project started (878). It was agreed that the number of branches would be decreased to 760 by the end of 1993 and 650 by the end of 1994. Caja also did not meet the target of having a break-even financial operation in 1993, reporting a loss of US$30 million. It has projected a loss of US$14 million for 1994, thus it will not obtain the return of at least one percent of its assets in 1994. To achieve this level of return, Caja would have to increase its business level, i.e., Net Interest Income, by about 50 percent or reduce its operating costs by about 16 percent. 40. On the other hand, Caja has made some significant changes in downsizing its operations. It has reduced staff from a level of 15,000 in 1991 to about 7,650 by December 31, 1994, reducing overall administration costs by 37 percent in real terms between 1990 to 1993. It has divested its non-banking operations, except those as agreed between Government, Caja and the Bank, (lending related insurance and management of the trust fund for family subsidies). Critical for much of these positive changes has been Government actions in 1991, and in 1992 through the linking of further improvements to Caja to another Bank financed project in the sector. In addition, the Government agreed to a significant recapitalization of Caja, and acknowledged it should compensate Caja annually for the money-losing branches Government wanted to keep open.  13 G. Future Operations 41. Specific Plan for Project Implementation. Caja has prepared a specific plan to complete project implementation by December 1995 (see Annex B). This plan covers the three remaining components to complete as follows: (a) the work under the contract with IBM to be reasigned to another vendor; (b) the purchase and installation of the 1,200 workstations including PCs; and (c) the rehabilitation of the computer center. 42. Implementation and Status of the Corporate Plan. On March 1, 1994, the Bank advised Government that Caja was no longer a qualified financial institution for access to the line of credit with FINAGRO. This action was considered necessary since Caja had not met two of the key indicators in the Corporate Plan. It has been agreed with Government that Caja can regain its former qualified classification, if it sets agreed revised dates for accomplishing the objectives of the Corporate Plan and the Key Indicators which are part of the Loan Guarantee Agreement. Caja, to date, has not done this. H. Key Lessons Learned 43. This was the first project in Colombia for institutional strengthening of a financial intermediary for agricultural credit. The key lessons learned from the project were the following: * Borrower ownership and commitment is required for effective implementation and sustainability of actions. Management of Caja Agraria changed so many times, it lost its commitment to the project. * Stronger monitoring and supervision on the part of the Bank can play a crucial role in salvaging a project. Bank supervision should have responded earlier to the deteriorating overall conditions (the frequent changes in senior management staff, loss of key project staff the seriously declining profitability, and increased loan arrears) at Caja by involving Government in taking action. * A Financial Intermediary is unlikely to achieve its objectives on a technical assistance project if it is not financial viable. Consequently, project design and supervision should not pursue TA objectives in isolation,  14 but also address as part of an integrated package, the policy issues which negatively impact financial performance and long-term viability. * A more realistic assessment of risks and external contributing factors is required at project preparation. At appraisal, the risk cited was that the institutional reforms sought for Caja might not be achieved in a timely maner due to the size of Caja and its long established institutional structure. However, external contributing factors came into play which, if taken into account in project design, would have reduced the expectations of the project. The unstable economic and political environment, particularly in rural areas, and the decline in the growth of the agricultural sector were both evident at the time of appraisal. * Utilize the Mid-term Review to ensure consensus on future implementation. When the financial situation of the Borrower had deteriorated so badly, all of the attention of the Borrower and the Government were directed to solving that problem. The Bank should have used the Mid-term review to discuss the status of the project and the likely impact on project implementation of the deteriorating financial situation at Caja and Government's proposed restructuring plan for Caja This would have resulted in increased ownership of the project by both Caja and Government, or if not it could have been used to close the Project. e Sequencing of Activities. This project provided a good example of the problems encountered with the sequencing of activities. Staff training, especially the training of key implementing teams, should only be done with assurance that these people would be in place to implement the project. * Upfront Conditionality, linked to negotiations, loan effectiveness and disbursements, should be used to test the Borrower's comnmitment to project objectives and the achievement of key improvements. These could have included basic reforms to address Caja's financial problems.  15 COLOMBIA Caja Agraria Institutional Strengthening Project Inplementation Completion Report MTble 1: Summary of A semiments A. A_hhw ot 8ofandamw Parl NqOWil No Objecdv Appirable Mar Policis X Secbr PolicicS X Fiancial Objecw X lnat*moci D pent X Plyical Objcwo X PoE Redictio X Gmder 1m X Ohicr Social Object' X Euvizommbl ObjccN X PubLic Srcdr Manam X Privaz Sebr Demlopmnt _ X Other X likdy ULikLdy Uncertain Bs Projed SuAianabillty X C Bank Perform An. Higly StOidadry Ddec _ _ _ _ _ _ _ _ _ _ _ _ _ _ SatidActory _ _ _ _ _ _ _ _ _ _ _ ldcadficaon X Prepntion Aisamnce X Appisal X Supervisioz X Do Berrowr Perbroram Hil Sadadory Prepazatioo X lmpkerAnt6m X Ceant Complia; X Opcmtion X Highly uno U- rL Satabdory Sa