Afghanistan - Agricultural Credit Project

CA. A.- RESTRICTED LE COPY Report No. PA-46a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AGRICULTURAL CREDIT PROJECT AFGHANISTAN May 27, 1970 Agriculture Projects Department  CURRENCY EQUIVALENTS US$1 = Af 75 Af 1 = US$0. 013 Af 1, 000 = US$13. 3 Af 1, 000, 000 = US$13, 333 WEIGHTS AND MEASURES 1 Jerib 0. 20 Hectare 1 Hectare = 5 Jeribs I Seer 7 Kg 1 Kg = 0.14 Seer ABBREVIATIONS ADB - Asian Development Bank AFA - Agricultural Finance Agency AGBANK - Agricultural Development Bank HVA - Helmand Valley Authority MAI - Ministry of Agriculture and Irrigation MID - Minor Irrigation Department of MAI PACCA - Program on Agricultural Credit and Cooperatives in Afghanistan PDA - Paktia Development Authority RGA - Royal Government of Afghanistan SIDA - Swedish International Development Authority UNDP/SF - United Nations Development Program/Special Fund USAID - United States Agency for International Development  AFGHANISTAN AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . - I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . 1 II. THE AGRICULTURE SECTOR . . . . . . . . . . . . . . . 2 General .... . . . . . . . . . . . . . . . . . . . 2 Agricultural Production . . . . . . . . . . . . . . . 3 Some Factors Affecting Development . . . . . . . . . 3 Irrigation .... . . . . . . . . . . . . . . . 3 Land Tenure and Farmers' Organization . . . . . 5 Support Services . . . . . . . . . . . . . . . . 5 Agricultural Credit . . . . . . . . . . . . . . 6 Machinery . . . . . . . . . . . . . . . . . . . 6 III. THE AGRICULTURAL DEVELOPMENT BANK OF AFGHANISTAN (AGBANK) . . . . . . . . . . . . . . . . . . . . 7 General . . . . . . . . . . . . . . . . . . . . . . . 7 Resources . . . . . . . . . . . . . . . . . . . . . . 7 Use of Resources . . . . . . . . . . . . . . . . . . 8 Financial Position and Past Earnings . . . . . . . . 9 Organization and Management . . . . . . . . . . . . . 9 Lending Policies and Procedures . . . . . . . . 9 Agricultural Finance Agency (AFA) . . . . . . . . . . 9 IV. THE PROJECT . . . . . . . . . . . . . . . . . . . . . 10 A. General Description . . . . . . . . . . . . . . 10 B. Detailed Features . . . . . . . . . . . . . . . 11 Farm Machinery . . . . . . . . . . . . . . 11 Tractors and Related Equipment . . . . 11 Animal-drawn Equipment . . . . . . . . 11 Shallow-Well Pumps and Experimental Tubewell Development . . . . . . . . . 11 Improvement of Small Traditional Irriga- tion Schemes . . . . . . . . . . . . . 12 Supporting Services . . . . . . . . . . . . 12 C. Cost Estimates and Financing . . . . . . . . . . 13 D. Procurement . . . . . . . . . . . . . . . . . . 15 E. Disbursements . . . . . . . . . . . . . . . . . 16 This report is based on the findings of a mission which visited Afghanistan in November 1969, and was composed of Messrs. H. von Oppenfeld, H.A. Vieilhescaze, E. Zimmer-Vorhaus (IDA) and M. Nakahara (Consultant). Mr. von Oppenfeld was primarily responsible for writing the report.  -2- Page No. V. ORGANIZATION AND MANAGEMENT . . . . . . . . . . . . . . 17 Ministry of Agriculture and Irrigation . . . . . . . . 17 Minor Irrigation Section (MIS) . . . . . . . . . . 17 Groundwater Development Sub-section (GWD). . . . . 17 Project Coordinating Committee . . . . . . . . . . 17 Extension Services .... . 18 Agricultural Development Bank of Afghanistan (AGBANK) . 18 Organization and Management . . . . . . . . . . . 18 Lending Policies and Procedures . . . . . . . . . 19 Financing and Expansion . . . . . . . . . . . . . 19 Interest Rates and Future Earnings . . . . . . . . 19 Accounts and Audit .... . . . . . . . . . . . . 20 VI. PRODUCTION, MARKETS, PRODUCER BENEFITS AND REVENUE GENERATION . . . . . . . . . . . . . . . . . . . . 21 Production .... . . . . . . . . . . . . . . . . . . 21 Markets .... . . . . . . . . . . . . . . . . . . . . 21 Prices .... . . . . . . . . . . . . . . . . . . 21 Producer Benefits and Revenue Generation . . . . . . . 22 VII. BENEFITS AND JUSTIFICATION . . . . . . . . . . . . . . 25 VIII. RECOMMENDATIONS ..26  -3- ANNEXES 1. THE AGRICULTURAL DEVELOPMENT BANK Appendix 1 -- Consultants' Terms of Reference Appendix 2 - Revised Organization Chart Appendix 3 -- Projected Cash Flow 1969/70 - 1979/80 Appendix 4 -- Projected Income and Expenses 1968/69 - 1979/80 Appendix 5 -- Projected Balance Sheet 1969/70 - 1979/80 2. IMPROVEMENT OF EXISTING SMALL IRRIGATION SCHEMES Appendix 1 -- Guidelines for Preliminary Investigation Appendix 2 -- Guidelines for Project Preparation Appendix 3 -- Terms of Reference for Experts Appendix 4 -- Organization of the Ministry of Agriculture and Irrigation Appendix 5 -- Project Coordinating Committee Appendix 6 -- Proposed Fellowship Program and Estimated Cost Table 1 -- Minor Irrigation Rehabilitation, Cost Estimate for .Model Scheme 3. AGRICULTURE -- MDERNIZATION AND INSTITUTIONAL SUPPORT Table 1 -- Technical Services, Estimated Cost of Additional Project Staff, Equipment and Vehicles 4. FARM MECHANIZATION IN AFGHANISTAN 5. FARM MODELS 6. ECONOMIC RATE OF RETURN MAP   AFGHANISTAN AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. Output of staple food in Afghanistan has not kept pace with the country's population growth. Although modernization of agriculture has begun, mainly due to new technology for growing wheat, maize and cotton, traditional subsistence farming is still paramount. The priority objective is to accelerate the momentum of modernization through careful deployment of technical assistance, strengtliening of the development agencies of Govern- ment, and meeting the increasing demand by the farmer for output-increasing capital goods. ii. This report appraises an agricultural credit project for which an IDA Credit of US$5 million is proposed. This would be the first agri- cultural project in Afghanistan receiving Bank Group support. The Project is a three-year lending program by the Agricultural Development Bank of Afghanistan (AGBANK) to finance farmers' investment in mechanization, pump- sets and improvement of small traditional irrigation schemes. This invest- ment is expected to lead to increased production of staple food and cotton, mainly for import substitution at an estimated annual value of about US$12 million equivalent. About US$1 million would be direct export earnings. iii. The Royal Government of Afghanistan (RGA) realizes the importance of institutional credit for financing increasing use of modern inputs. The main agency in the credit field is the AGBANK which has experienced difficulties in the past in establishing an effective lending program. Although AGBANK's financial resources are adequate at present, RGA would have to augment AGBANK's capital to meet projected requirements. Strength- ening of the AGBANK, which is essential, is already underway through tech- nical and management assistance under a UNDP/SF project for which the Bank is executing agency. The Project is also designed to take advantage of ongoing technical assistance eforts supported by multilateral and bilate- ral sources. iv. The Project would support a three-year lending program amounting to an estimated cost of US$5.8 million equivalent and supporting services (including expert and extensica. serv:-es, fellowships for local staff, irri- gation construction equipment aald spare parts), at an estimated cost of US$1.4 million equival n... The main components of the lending program are: US$4.1 million for farm machinery and US$1.7 million for rehabilitation of existing minor irrigation schemes. Of the total project cost (US$7.2 mil- lion equivalent), IDA would finance about 70%. This represents the total  - ii - estimated foreign exchange component (66%) plus some local currency. Farmers would contribute 18% of the investment cost, the AGBANK 11%, and RGA 1%. The borrower would be the RGA, which would make the loan portion of the credit available to AGBANK on an equity basis. RGA would carry the exchange risk. AGBANK would lend to individual borrowers at 8% per annum. v. Tractors (including attachments and spare parts), pumpsets, vehicles and construction equipment would be procured through international competitive bidding. Animal-drawn implements and threshers amounting to about US$270,000 equivalent would be locally procured. For irrigation rehabilitation schemes, local competitive bidding would be followed since these works, being labor-intensive, would not attract foreign firms. vi. To strengthen the Ministry of Agriculture's technical services for farmers investing under the Project, the Ministry would establish a Minor Irrigation Section, including a Ground Water Development Sub-section. Three experts for the irrigation unit and one for the groundwater unit would be provided by the Project. Their terms of reference would, in addi- tion to technical and managerial assistance, include the preparation of sub-projects for a second-stage project. The Ministry would also expand and improve its extension services. To strengthen local staff competence, fellowships are included for on-the-job training in neighboring countries under conditions similar to those in Afghanistan. vii. Returns to farmers ranging from 22% on irrigation rehabilitation to 31% on tractors would be high because investment would be on existing farms, and output would be increasing from a low starting base. The rate of return to the economy is estimated at 21%. Additional but non-quantified benefits would result mainly from institutional improvements of the AGBANK and the Ministry of Agriculture. During negotiations, appropriate assuran- ces were obtained for carrying out the Project. It is suitable for an IDA Credit of US$5 million.  AFGHANISTAN AGRICULTURAL DEVELOPMENT BANK OF AFGHANISTAN I. INTRODUCTION 1.01 Afghanistan is at an early stage of trying to modernize agricul- ture. Thle only credit source for the farmer is the Agricultural Development Bank of Afghanistan (AGBANK), a mixed public-private enterprise, which has been in operation since 1954 but has had great difficulty in trying to establish an effective lending program. The requested IDA Credit is aimed at supporting its efforts during a critical phase of reorganization. A three-year lending program, primarily for farm mechanization, shallow-well pumps, and the improvement of small irrigation schemes -- with appropriate institutional proposals -- was worked out through consultations with the Bank Group, UNDP assistance and consultant advice. 1.02 In 1967, following two FAO/IBRD preparation missions, an IDA mission visited Afghanistan and reported that a lending program could not be developed and implemented unless AGBANK was completely reorganized. Because of the lack of local expertise, IDA proposed that RGA request technical assistance from UNDP/SF and the Bank prepared the terms of ref- erence for the experts required. RGA did not submit the request to UNDP/SF until November 1968. It was approved in July 1969, with the Bank as execut- ing agency. A consultant firm 1/ was employed and four experts, with execu- tive responsibility, assumed their duties with AGBANK in September 1969 (terms of reference are at Annex 1, Appendix 1). 1.03 A second IDA mission visited Afghanistan in January 1969 to advise on the further steps necessary for the preparation of a lending program. As a result of this mission's recommendations, another FAO/IBRD preparation mission followed in July 1969. RGA's application for an IDA Credit is based on the recommendations of these two missions. 1.04 This report is based on the findings on an IDA appraisal mission to Afghanistan in November 1969, composed of Messrs. H. von Oppenfeld, H. A. Vieilhescaze, E. Zimmer-Vorhaus (IDA) and M. Nakahara (Consultant). 1/ Dr. Hendrikson Associates, Gesellachaft Fuer Angewandte Planungs-und Entwicklungsforschung mbH, Frankfurt, Germany.  - 2 - II. THE AGRICULTURE SECTOR General 2.01 Afghanistan is a land-locked country of about 650,000 km2 in Central Asia bounded by Russia, Mainland China, Pakistan and Iran (see Map). Estimates of its population range from 12 to 15 million, including about 2 million nomads. No overall population census has been taken. 2.02 Elevation averages about 1,300 m. However, the Hindu-Kush mountain range rises above 6,000 m. Stretching from northeast to south- west, it divides the entire country. North of Hindu-Kush the altitude drops to 500 m permitting cotton, grain and fruit production in fertile, wind-blown soils. The Central Plateau contains many small fertile valleys, watered from adjacent mountains. Southwestern Afghanistan is mostly desert, with less than 100 mm of annual rainfall. 2.03 Precipitation in North and Central Afghanistan, averaging 250- 300 mm per annum, occurs mostly in winter and spring and in the form of snow. Supplementary irrigation is thus of extreme importance. The climate is predominantly continental, cold in winter and hot in summer. Only the southeastern regions bordering Pakistan have semi-tropical climate. 2.04 Agriculture, the dominant sector in the Afghan economy, supports at least 80% of the population, accounts for 53% of GDP, and contributes 85% to the country's export revenue. It is relatively stagnant, however, and subsistence oriented. The slow growth of the economy (2% per annum, from 1962/63 to 1967/68) is due largely to the slow pace of agricultural development. 2.05 The First and Second Five-Year Plan (1958 to 1967) emphasized infrastructure development, especially roads, electricity and tele- communications. Actual investment in the agricultural sector reached less than half of planned expenditures. Moreover, two-thirds of Second Plan agricultural investment went into slow-yielding major irrigation structures. Output of staple food, over the 10-year period, did not keep pace with estimated population growth. 2.06 The Third Plan (1967 to 1972) strategy calls for a shift from infrastructure to productive agricultural and industrial investment. In agriculture it emphasizes quick-yielding inputs, such as fertilizer and high-yielding seed, and completion and improvement of existing irrigation schemes. No major new irrigation projects are included. Public invest- ment in agriculture is being raised to Af 9.7 billion (US$129 million) in the Third Plan period compared with Af 4.4 billion in the Second Plan and this will increase agriculture's share of the total public investment from 18% to 29%.  -3- Agricultural Production 2.07 About 8 million ha are believed to be arable, but only 3.8 million ha are actually cultivated, of which about 60% (2.4 million ha) are irriga- ted. Foodgrains (wheat, barley, rice and corn) account for 90% of the crop area; the balance is planted to cotton, sugar beet and cane, oil seeds, fruit and vegetables. About 75% of the output is consumed on farms. 2.08 Livestock is important. The national sheep flock is estimated at 23 million of which about 6 million are Karakul sheep, highly valued for their pelts in foreign markets. Sheep losses are high (up to 50% in severe winters), due to poor nutrition, parasites and disease. Livestock contributes 7% to GDP and 17% to commodity export revenue. 2.09 On the vast majority of farms, tools and methods are traditional and productivity is low. Overall wheat yields are low averaging about 1 ton/ha, and are much less on dry lands where yields are also unreliable. National foodgrain output has fluctuated between 3.4 and 3.9 million tons since 1962 and, despite good weather in the last three years, has not markedly exceeded historic levels. Wheat imports have averaged nearly 100,000 tons per year during the last six years. 2.10 The introduction of modern crop production practices has been recent, but early results have been highly encouraging. Seeds of "Mexipak" and other high-yielding wheat varieties have been tested, multiplied and distributed on a limited basis. Yields of irrigated wheat, on demonstra- tion plots and farmers' fields, have reaclhed 3 tons/ha. The Government's "Accelerated Wheat Program," initiated in 1966, has emphasized the use of fertilizer and improved seeds. The program has been active in selected provinces, and despite handicaps such as inadequate production credit, it has been well received by farmers. An estimated 10-15% of the irriga- ted wheat area is now included in the program. Encouraging results have also been obtained with high-yielding varieties of corn and cotton in selected provinces. Some Factors Affecting Development 2.11 Irrigation. For climatic reasons, irrigation is in many regions essential to survival. For centuries farmers have shown great ingenuity in developing surface channels and underground tunnels, called karezes, through which aquifers are capped and water conveyed 20-30 m below ground for several kilometers to irrigable land. Th3se karezes in effect con- nect hillside sources of groundwater with nearby flatland. Although very important as a method, the karez is not the most important source of irrigation water. In order of importance, major sources are rivers and canals, springs, karezes, and shallow wells. Canal or surface irrigation accounts for 85% of the 2.4 million ha of irrigated land.  - 1; _. 2.12 Most surface irrigation schemes Sap rivers, are minor in size, and have been constructed by the f"mrs ttiemselves. Traditional systems are frequently destroyed through spring 'moods, resulting in costly repairs, damaged crops, and later in the growing season crop losses througlh water shortage. There is an institutional mechanism through which groups of water users approach Government for assistance in improving their systems through more modern structures. Goverriment had 67 suclh requests on file in 1969. It has been able to assist in only a few cases so far. lhus public investment for improving minor irrigation schemes has been negligible. 2.13 External assistance has concentrated on two large storage and canal systems: one with US assistance in the Helmand Valley, the otlher with USSR assistance in Nangahar province. Major civil works are involved and although not yet completed, they absorbed about 50% of public expendi- ture for agriculture during the First and Second Five-Year Plan, and will require still further expenditures for secondary irrigation and drainage canals, on-farm development, and settlement of new farm families. More time will elapse before the full benefits materialize. Feasibility studies are under way for two other large projects (Kunduz/Khahahad and liari Rud). Asian Development Bank (ADB) financing is being contemplated for 2-4 medium- sized irrigation projects. Construction is in progress on two other medium- sized projects, one with Mainland Chinese, the other with USSR financial and technical assistance. All these have long gestation periods. 2.14 Rehabilitation of small, existing irrigation systems, by contrast, is relatively inexpensive (averaging US$120/ha), yields quick returns, and benefits farmers already settled in the area who are willing to share con- struction cost. Government has staff capacity for planning and executing rehabilitation, provided that its organization is strengthened by appro- priate means (Annex 2). 2.15 Shallow-well pumping was introduced in Afghanistan within the past decade. About 370 pump and engine units have been imported from Pakistan, about 100 being purchased through farmers' own initiative and the remainder by RGA; these latter were sold to farmers with AGBANK financing in 1967. Total area irrigated by pumps does not exceed 6,000 ha. Since 1967 there have been applications for about 500 additional pump units, but no procurement has been undertaken. The method of well construction and pump installation had been influenced by Afghan farmers' experience in Karez construction, involving placing the pump at the bottom of a double- shaft system. 1/ Although showing adaptive ingenuity, this method of pump- ing has technical and economic limitations. Where groundwater conditions are satisfactory, drilled wells, although initially more costly, would be 1/ A vertical shaft is dug down to the water table, sometimes 25 m deep, and then a second, inclined shaft is dug tc meet the vertical shaft about 15-20 m below the surface where a diesel engine is installed.  - 5 - more efficient and economical. Initial surveys indicate groundwater development potential in the provinces of Kabul, Parwan and Paktia, but there is a danger of overpumping in Ghatwin and Katawaz provinces. Addi- tional investigations are planned with USAID assistance in Kabul, Kandahar and Helmand provinces. Existing applications for pumps are concentrated in Farah and Herat provinces, where observations on open wells and tube- wells ranging in depth from 10 m to 100 m and a groundwater expert's preliminary report indicate ample groundwater resources. The Government is strengthening technical services to farmers acquiring and operating pumps, with technical assistance from UNDP. Commercial well drilling has not yet been established. 2.16 Land Tenure and Farmers' Organization. Reliable information on farm size and tenure exists for some regions, but not for the whole country. Half of the cultivated area, it is estimated, is farmed by owner-operators. Share-tenancy is common on larger farms where the land-owner generally makes the investment decisions. Irrigated farms tend to be small (2-5 ha) in Central and Northern regions, larger (20-IJO ha) in Southern and Western Afghanistan. 2.17 Farmers' organizations, including cooperatives, are relatively under-developed in Afghanistan. These are expanding slowly but without any guidance from government agencies at present. Water users' associations are not established by law, but traditional organizations exist which operate and maintain their irrigation schemes. 2.18 Support Services. Agricultural research and extension services, established only 6 and 12 years ago respectively, are the responsibility of the Ministry of Agriculture and Irrigation (MAI). Some time will elapse and substantial outside technical and financial assistance will be required until staff competence and leadership will reach effective levels. 2.19 Conflicts in the extension agents' role, due to their involve- ment in regulatory functions and supply distribution, are being eliminated. For example, extension workers are no longer responsible for farmers' compliance with cotton and sugar beet acreage allotments, and the respon- sibility for distributing wheat seed and fertilizer under the "Accelerated Wheat Program" is gradually being shifted to the Food Department and to bonded village leaders (Annex 3). 2.20 About 300 extension workers serve some 2.1 million farm families. Since this 1:7,000 ratio is so inadequate, bilateral assistance in agricul- tural development has concentrated on regional development schemes: The Helmand Valley scheme supported by USAID; the Paktia Development Scheme supported by Germany; and a Cotton Development Institute near Kunduz sup- ported by France. With assured budgetary allocations from the Afghan, the US and German Governments respectively, the Helmand Valley Authority (HVA) and the Paktia Development Authority (PDA) have financial and administrative autonomy. Aside from watar resource development and input supply, agricul-  - 6 - tural research and extension are major components of these regional develop- ment schemes. HVA will also have a USAID funded short-term credit program, in close coordination with the AGBANK's medium- and long-term credit program. 2.21 The thrust of MAI's research and extension effort has been on the "Accelerated Wheat Program" which aims at introducing high-yielding wheat varieties coupled with improved cultural practices and short-term input credit. Wheat research and extension have also had USAID technical assistance. In Nangahar province, 90% of the wheat acreage is reported to have been planted with improved seed in 1969. 2.22 Agricultural Credit. Institutional credit for agriculture was introduced in Afghanistan with the AGBANK's establishment in 1954. Earlier established commercial banks, the Pashtany Tejeraty Bank, the Bank Melli, and the Da Afghanistan Bank (which performs both central bank and commer- cial bank functions) have not been active in agricultural production credit. Only some large farms have access to these banks whose interest charges, mainly for short-term loans, range from 9% to 12% per annum. Commercial banks have financed processing and marketing of agricultural commodities, however, especially for export of grapes, raisins, and karakul pelts. 2.23 Two approaches to improving short-term credit for input purchase are being tried on a limited scale. One involves distribution of these inputs from provincial warehouses, against farmers' or small merchants' pledge to repay after harvest through delivery of grain; the other involves distribution of seed and fertilizer "packages" through elected village leaders. While these approaches appear to be popular, a true short-term credit program has not yet emerged. 2.24 As in other countries at a similar stage of development, small farmers depend primarily on non-institutional sources, landlords, mer- chants, and money-lenders for loans in cash or kind. Interest charges on these often exceed 30% per annum. 2.25 Machinery. Tractors were introduced in 1964 and there is a great deal of interest among farmers in their potential. One hundred were im- ported in 1964 and a further 300 in 1966. Since then a back-log of 217 applications for tractors has been accumulated. The demand is great enough to have stimulated unofficial imports from Pakistan, and it is estimated that at least 100 tractors have been brought across the border. Advantages of tractor operation cited by farmers in areas suitable for them are: full use of irrigated land (eliminating areas left fallow because of draft ani- mal shortage); better and more timely land preparation; and more double- cropping (Annex 4).  2.26 The "polyculteur," an animal-drawn multi-purpose implement for cultivation, introduced with French technical assistance, has achieved some initial success in the country and is being manufactured locally. Its wide-spread adoption will only be achieved, however, as an integral part of improved practices for commercial crops like cotton and sugar beets. Other implements for which demand is expected to increase are grain and fertilizer drills imported from Pakistan, and locally-made threshing machines. III. THE AGRICULTURAL DEVELOPMENT BANK OF AFGHANISTAN (AGBANK) General 3.01 The AGBANK (formerly the Agricultural and Cottage Industries Bank) is the only source of institutional credit to farmers and would be the main channel for the proposed IDA Credit. After a promising start in 1954, the AGBANK devoted increasing portions of its limited resources to supply of fertilizer, pesticides and farm machinery and to investments in firms engaged in agricultural processing and trade, at the expense of its credit function. Its lending performance has been poor and at very low interest rates. Security requirements have been excessive and unsuitable for short=@ term production loans since chattel mDrtgages and cooperative laws did not exist. Its earnings have been mediocre, due primarily to weak organization and ineffective management which lacked experience in agricultural credit. It has had no access to additional resources which would have been necessary to sustain an agriculture credit program (details are at Annex 1). 3.02 Corrective action is now being taken to improve organization and management and to revise loan regulations and procedures. With further staff training and provision of permanent resources as part of the proposed Project, the AGBANK should constitute a suitable channel for the proposed Credit. Resources 3.03 The AGBANK is a joint stock company with an authorized capital of Af 150 million. Most of its resources have been contributed by Govern- ment principally as capital. Out of an estimated capitalization of Af 162 million (based on provisional accounts as of March 20, 1970, the end of the last fiscal year), Af 100 million was equity, consisting of paid up capital of Af 86 million and reserves (net of estimated portfolio losses) of Af 14 million. The AGBANK has no access to long-term borrowings and there are no discounting facilities available in Afghanistan. About half of the outstanding debt of Af 62 million represents the balance of five-year medium-term credits principally from foreign suppliers, repayable by 1972. The other half consists of short-term government deposits and  -8- accounts payable. RGA has agreed that AGBANK would retain as equity capital that part of the IDA Credit which covers its lending program (US$3.7 mil- lion, paras. 4.14 and 5.09). Use of Resources 3.04 Since 1954, AGBANK has made loans totalling about Af 225 million (US$3 million). Lending, however, declined progressively to 15 loans totalling Af 5 million (US$70,000) in 1968/69 and to an even lower level in 1970. The estimated portfolio as of March 20, 1970 was about Af 91 mil- lion (US$1.2 million), net of about Af 20 million of doubtful accounts. Most of the latter stem from loans disbursed before 1961. Recent portfolio reviews have indicated that the large arrears about 30% were due to inadequate collection procedures rather than to debtors' unwillingness to pay. Initial improvements have been recorded and should proceed under reorganized management (para. 3.09). Interest rates charged by AGBANK were 4% for short-term loans, 5-6% for medium-term and 7% for long-term. These rates, which would be increased in connection with the proposed Project, are substantially below commercial rates, do not reflect lending costs and contributed to the AGBANK's mediocre earnings performance (para. 3.06). 3.05 Under its revised Charter, AGBANK will no longer be permitted to continue investing in firms engaged in agricultural processing and trade. At March 20, 1970, such investments aggregated Af 18 million. AGBANK has been increasingly active in agricultural supply transactions (tractors, waterpumps, fertilizers, pesticides and veterinary drugs). The turnover for the last four years reached Af 142 million. Goods in stock as of March 20, 1970 amounted to Af 19.2 million. Separation of t[ie Supply Department's activities is in progress. Its performance will be reviewed with a view to an eventual transfer of the supply activities to the private sector. Financial Position and Past Earnings 3.06 As of March 20, 1970, the liquidity position was satisfactory (Annex 1, Appendix 5). Liquid assets of Af 29 million (US$40,000) repre- sented 18% of total assets (Af 162 million) and covered current liabilities 1.1 times. The debt: net equity ratio was 0.5. Overall results remain positive considering the build-up of reserves to Af 14.2 million after adjustment for losses to be written off (Af 28.4 million). These results were achieved partly because revenues were generated from operations in preceding years and partly because proceeds from loan collection were kept in bank deposits earning 6% interest per annum instead of being re-lent, and also because of earnings from commercial transactions and participations.  - 9- Organization and Management 3.07 As indicated in para. 1.02, a consultant teamu assumed duty in September 1969, under a technical assistance project financed by UNDP/SF. There are four experts: a credit specialist, an agricultural economist, a supply manager and an accountant. They hold senior executive positions. The credit specialist is the General Manager. 3.08 Organizational improvements have already been achieved through approval in January 1970 of a revised Charter which is satisfactory to IDA. The General Manager and the President are now ex-officio members of the Supreme Council, whose chairman (formerly the Minister of Agriculture) is the Minister of Finance. The Supreme Council delegates executive power to the Executive Board which consists of the President, the two Vice-Presi- dents and the four consultants. Staff training is in progress by Program on Agricultural Credit and Cooperatives in Afghanistan (PACCA) (Annex 3, para. 5) and through on-the-job training under the consultants. The pro- posed Project includes fellowships for further staff training. 3.09 Lending Policies and Procedures. The four consultants are also in the process of redrafting loan regulations and introducing effective loan appraisal, supervision, and collection procedures. Hitherto, AGBANK has insisted on mortgages on land as security for every loan in the absence of chattel mortgage and cooperative laws. The formalities for obtaining mortgages are complicated, time-consuming and expensive. This type of security is not suitable for short-term production loans. The consultants are in the process of investigating possibilities of liberalizing security requirements and introducing chattel mortgage and cooperative society laws. Agricultural Finance Agency (AFA) 3.10 The AFA is being established as a semi-autonomous agency, with head office in the city of Lashkar-Gah (Helmand province). RGA and USAID have agreed to transfer Af 49 million (US$600,000) as additional capital subscription to AGBANK. Simultaneously AGBANK would apply these funds to subscribe the initial AFA capital. AFA's own lending program would be developed in accordance with AGBANK's lending policies and procedures, AFA acting as a branch office. AGBANK's General Manager would be an ex- officio member of AFA's administrative board with veto powers. Although RGA, USAID and AGBANK have reached agreement on these conditions which are satis- factory to IDA, final agreements and AFA's proposed Charter have not yet been signed.  - 10 - IV. THE PROJECT A. General DescrLption 4.01 The Project is a lending program by AGBANK to finance farmers' investment in farm mechanization, shallow-well pumps and improvement of small traditional irrigation facilities. Aside from financial support for the lending program, it aims at institution building: to enable AGBANK to meet Afghan farmers' credit needs and to assist the Ministry of Agriculture and Irrigation in minor irrigation improvement and groundwater development, during and beyond the Project's disbursement period. Because planning and execution of the irrigation improvements are carried out by MAI, the Project would include provision of technical assistance and equipment to strengthen MAI's capabilities. Total Project cost is esti- mated at AF 542 million (US$7.2 million). 4.02 Type of investment, typical farm size, phasing and average invest- ment per farm is shown below: Average Average Total Farm Invest- Invest- Size Number of Loans ment ment Year Year Year per Farm Af Lending ProRra ha 1 2 3 Total Af'0O million 1. Farm Mechanization Tractors & Attachments 60 150 150 150 450 476 214 Animal-drawn Implements 4 500 1,000 2,000 3,500 5 18 2. Pumpsets 40 130 150 150 430 175 75 3. Irrigation Rehabilitation 5 800 900 1,100 2,800 45 126 Total 1,580 2,200 3,400 7,180 433 The Project would cover the purchase of the investment goods by AGBANK's Supply Department and arrangements for their subsequent distribution under AGBANK's credit operation. The equipment and technical services component, accounting for the remainder of the Project, would include expert and local extension services and fellowships, office, construction and design equipment.  - 11 - B. Detailed Features Farm Machinery 4.03 Tractors and Related Equipment. The Project would provide for the purchase of 450 tractors (35-45 hp) together with spare parts and implements, including trailers and locally made threshing machines. A back-log of demand for this type of equipment has accumulated since 1966 when imports ceased. About 300 tractors would be sold in the Helmand/ Kandahar and Paktia provinces and the remaining 150 in provinces where improved wheat, cotton, and maize are being introduced, including areas covered by the project irrigation schemes. 4.04 Normally, loans would be made to farmers or contractors culti- vating about 40 ha of irrigated land, unless, on smaller farms, it could be proved that the tractor would also be used for custom work, with reasonable evidence that there will be at least 1,000 hours per year of productive work in agriculture. During negotiations, assurances were obtained on the foregoing. Loans would include the purchase of auxiliary equipment such as a plow and tiller or other implements needed by the farmer. An average loan would be Af 380,000 (US$5,000) repayable over five years without a grace period. 4.05 Animal-Drawn Equipment. Ox-drawn implements (polyculteurs) would be sold on credit to small farmers cultivating about 4 ha of irrigated land, initially in provinces served by the cotton development center at Kunduz. Altliough one unit with attachments suitable for cotton and wheat cultivation costs only Af 5,000 (US$67), farmers' repayment capability depends on simul- taneous use of other improved cultural practices (para. 2.26). To establish and expand a coordinated program, RGA would add a cotton-wheat extension and marketing program to its existing cotton research, seed multiplication, and extension training program, under guidance of French technical assis- tance experts; IDA received assurances on this. Assurances were also ob- tained that AGBANK would extend short-term credit for cotton and wheat fer- tilizer to farmers purchasing polyculteurs with medium-term loans. Farmer loans which would average Af 4,000 (US$54), would be repayable over three years without a grace period. Shallow-Well Pumps and Experimental Tubewell Development 4.06 The provision of pumps would assist farmers, cultivating about 40 ha, in the installation of about 430 pumps and engines (mainly 20 hp). In addition, RGA would give these farmers technical assistance in well construction and selection of pumps best suited to groundwater and pump conditions. In certain regions, the groundwater/pump expert provided for in the Project is likely to recommend tubewells rather than the conventional shallow-well pumps. All pump loans would require the groundwater and pump expert's technical approval (paras. 5.01 and 5.03) in addition to AGBANK's evaluation in terms of incremental returns. A continued evaluation of  groundwater resources will be part of the ex'ert services provided for. Farmer loans for pumpsets averaging about .5t 140,000 (US$1,900) would be repayable in six years without a grace period. Improvement of Small Traditional Irrr4g,?tion Schemes 4.07 These small irrigation schemes involve groups of about 200 farmers, cultivating about 5 ha eag Project investments would cover construction of intakes, spiliwavs, syphons, sluices, and gated turnouts (technical details are at Annex 2). Emphasis would be on improvements which would ensure efficient water use 'within each canal system rather than individual components of the system. Only in exceptional circumstances would the expansion of existing canal schemes to irrigate adjacent publicly- owned land be financed. In such cases Government would, in accordance with its current practice, bear the costs attributable to that part of the com- mand area. Assurance was obtained that this practice would be continued. 4.08 Although costs would vary from scheme to scheme, a 1,000 ha model based on experience in Afghanistan indicates improvement costs would average about Af 9,000 (US$120) per ha. MAI would carry out, and bear, the costs of survey, design, and feasibility analysis. It would also provide technical services and supervision during and after construction. Construction costs would be financed by AGBANK through long-term loans (nine years, including two years grace period) to farmers and/or associations of water users. To be eligible for AGBANK financing these associations would be legally estab- lished. Loan contracts would provide for security, repayment, organization and management of the water users' associations. Assurances were obtained on the foregoing. 4.09 Under the Project, 14 rehabilitation schemes would be undertaken. Three would be carried out by the Helmand Valley Authority (HVA) which has experienced irrigation engineers and technical assistance from the USAID. Three further schemes would be carried out by Paktia Development Authority (PDA) with the support of German irrlgation experts. The remaining eight, in the Central and Northern provinces, would be done by MAI, or by contrac- tors under MAI's supervision. Supporting Services 4.10 The available contingent of local and expatriate irrigation engineers and surveyors is adequate for planning and implementing invest- ments under the Project, but their services cannot be fully utilized due to lack of management and equipment. The Project, therefore, provides for strengthening of MAI by the addition of three experts for irrigation re- habilitation and one for groundwater development (paras. 5.02 and 5.03); the experts would have managerial functions. Additional equipment, vehicles, extension staff and finance for operating expenses are also required and details of the provision for these under the Project are given at Annex 3, Table 1.  - 13 - C. Cost Estimates and Financing 4.11 Estimated project cost and foreign exchange requirements are shown below: Af (million) US$ ('000) Foreign Local Total Local Fgn. Total &2h.n:e a. LENDING PROGRAM 1. Farm Mechanization Tractors 27.3 108.9 136.2 364 1,452 1,816 SO Tractor attachments 15.0 60.0 75.0 200 800 1,000 80 Stationary threshers 2.0 1.3 3.3 26 18 44 40 Animal-drawn implements 10.5 7.0 17.5 140 93 233 40 2. Pumpsets Pimpsj eingines & pipes 8.9 35.4 44.3 118 473 591 80 Wells & pump installation 30.9 -- 30.9 413 413 -- 3. rrigation Rehabilitation 75.6 50.4 126.0 1,ooB 672 1,68o 40 Sub-total ...... 170.2 263.0 1433.2 2,269 3,508 5,777 61 b. TRACTOR SPARES 17.0 17.0 __ 227 227 100 c. SUPPORTING TECHNICAL SERVICES BEpert services 31. 28.4 31.5 42 378 420 90 Fellowships -- 21.6 21.6 -- 288 288 100 Local extension services 8.8 -- 8.8 118 3- 118 -- Vehicles and office - - equipment -- 9.3 9.3 -_ 124 124 100 Construction & design - equipment -- 20.2 20.2 -- 269 269 100 Sub-total ...... 119 79.5 91.4 160 1,059 1,219 87 Total .......... 182.1 359.5 541.6 2,429 4,794 7,223 66 Foreign exchange costs are est4iured on the basis of dealers' CIF Kabul quotations for tractors, attachments, pumpsets, vehicles and equipment and include 5% for contingenci- Local costs of these items were estimated at 25% of their CIF costs. For rrinor irrigation schemes, estimates of foreign exchange and total costs are based on experience with similar works in Afghanistan. Spare part requirements for the disbursement period are esti- mated at about 15% of the CIF value of _._. &-actors. This constitutes an initial stock of spare parts.  4.12 The Project would be financed as follows: Total Foreign Farmers Gov' t. AGBANK IDA Cost Excchange % of % o- % of % of % of Af M Total Af M Total Af M Total Af M Total Af M Total a. LENDING PROGRAM 1. Farm Mechanization Tractors 27.3 20 -- -- -- - 108.9 80 136.2 80 Tractor attachments 15.0 20 -- -- -- - 60.0 80 75.0 80 Stationary threshers 0.7 20 -- -- 1.3 40 1.3 40 3.3 40 Aimal -draln Implements 3.5 20 --7.0 7.0 40 17.5 4' 2. Pungsets umps, engines & pipes 8.9 20 -- - -- -- 35.4 80 44.3 80 Wells & plump installationl5.4 50 -- -- 15.5 50 -- -- 30.9 -- 3. Irrigation Rehabilitation Saall schemes 25.2 20 __ _ 37.8 40 63.0 50 126.0 40 Sub-total 96.0 22 61.6 14 275.6 64 433.2 b. TRACTOR SPARES - - -- -- 17.0 100 17.0 100 c. SUPPORTING TECENICAL SERVICE lcpert services -- _- 3.1 10 - 28.4 90 31.5 90 Fellowships -- -- -- -_ -- -- 21.6 100 21.6 lOo Local extension services -- 4.4 50 -- -- 4.4 50 8.8 -- Vehicles & office equipment -- -- -- -- -- -- 9.3 100 9.3 100 Construction & desigmf equipment -- -- - -- -- -- 20.2 100 20.2 100 Sub-total 7.5 83.9 91.4 Total 96.0 18 7.5 1 61.6 U1 376.5 70 5141.6 66 (in US$ Million) (1.3) (0.1) (0.8) (5.0) (7.2)  - 15 - 4.13 The IDA Credit of Af 377 million (US$5 million) would finance (a) the foreign exchange component of farm machinery, pumps, irrigation rehabilitation, expert services, fellowships, vehicles and construction equipment and (b) local currency costs covering 10% of irrigation rehabi- litation and 50% of the additional extension services. Although IDA's contribution to local costs (Af 17 million or US$230,000) would be small, it would help ensure that essential extension services would be provided. In total, IDA would finance 70% of the Project costs while farmers would contribute 18%, AGBANK 11% and RGA 1%. 4.14 RGA would be the borrower and would bear the exchange risk. It would transfer about Af 276 million (US$3.7 million) or 73% of the Credit proceeds to AGBANK as equity and retain the balance to help finance expen- ditures for technical assistance, fellowships and expert services. The proposed transfer of IDA capital to AGBANK would, after full disbursement of the IDA Credit, eliminate the need for further contributions from RGA to AGBANK and pass on to AGBANK the principal benefit of IDA terms. This would enable AGBANK to use farmer repayments for re-lending for similar agricultural projects (see para. 5.09 and Annex 1, Appendices 3, 4 and 5). Assurances were obtained on the foregoing. D. Procurement 4.15 Farmers' purchases of tractors through existing dealerships are not acceptable since a reasonable level of competition does not exist; only one established tractor dealer imports from IDA countries (imports began only in 1966 and total some 200 to date), and dealers in pumpsets (who are not yet well established) represent only two or three makes. One local firm is beginning to manufacture water pumps. AGBANK would procure tractors, attachments, spares and pumpsets through international competi- tive bidding. Provided specifications can be met, the local manufacturer of pumpsets may participate in international competitive bidding with a level of preference of 15% or prevailing customs duties, whichever is lower. AGBANK would also coordinate procurement through international competitive bidding of vehicles and construction equlxment, and local dealers would be invited to participate without any preference. To encourage development of efficient dealer services, AGBANK would require suppliers submitting bids to give full particulars as to after-sale service arrangements and suppliers not meeting satisfactory service conditions would be disqualified. Assurances of these procurement conditions were obtained during negotiations. 4.16 Importation of an initiai stock of tractor spares would be equal to 15%, of the CIF value of all tractors. however, to ensure proper ser- vicing of project tractors, assurances were received from RGA that for the five years following the final IDA dis:.-.rsement for tractors, import licen- ses would be issued to AGBANK or dealer. for the annual importation of tractor spares at 10% of the CIF value of all tractors imported under the Project.  -- 16 - 4.17 Ox-drawn implements, th-shers and other locally made small equipment which is specially desi- - for Afghan farmers' needs and would involve average investments o. less than the equivalent of US$100,000 annually or about US$270,000 in total, would not attract foreign firms at this stage. They would, therefore, be locally procured by AGBANK. 4.18 Irrigation rehabilitation for 14 schemes at estimated average cost of Af 9 million (US$120,000) each would involve small civil works and would be carried out over three and a half years. Similar works are at pre- sent carried out by MAI, HVA and PDA in their respective regions. Being labor-intensive, they would not be attractive for foreign firms, but might attract local contractors for all or part of the works in each scheme. Local competitive bidding would, therefore, be required for each scheme or for its major components. AGBANK together with MAI's Minor Irrigation Section's project manager would be responsible for preparing tender documents and for evaluating bids. If contractors do not participate or if their bids are not judged acceptable, MAI's Construction Sub-section, HVA and PDA would carry out the works in thteir respective regions. IDA's approval prior to the award would be required where construction costs or contracts for one scheme exceed US$100,000 in the aggregate. RGA would continue its current practice of bearing the construction cost attributable to the expansion of existing command areas (para. 4.07). E. Disbursements 4.19 Disbursement under the Project would cover 3-1/2 years, allowing for completion of irrigation improvement initiated during the third year. Against appropriate statements and documents IDA would disburse: (a) the CIF value of tractors, attachments, pumpsets, MAI and AGBANK vehicles, construction, design and office equipment, the foreign exchange cost of expert services, fellowships, and spare parts upon proof that importation of such spare parts has been made under license from RGA; (b) 50% of the irrigation rehabilitation cost, and 40% of the cost of ox-drawn implements, threshing machines and other locally made equipment, upon certification that such goods and services have been sold or extended against loans to farmers; and (c) 50% of RGA's expenditures for additional extension services required under the Project. At RGA's request, IDA would disburse directly to foreign suppliers, based upon invoice and shipping documents.  - 17 - V. ORGANIZATION AND MANAGEMENT 5.01 The two main agencies involved are the Ministry of Agriculture and Irrigation (MAI) and the AGBANK. AGBANK's reorganization is in pro- gress (paras. 3.08 and 5.06). In the Ministry, a Minor Irrigation Section (MIS) (para. 5.02), including a new Ground Water Development Sub-section (GWD) (para. 5.03), would be established. The extension services would be ex- panded and improved under the Project. RGA would also establish a Project Coordinating Committee (para. 5.04). Assurances were obtained on the fore- going. Ministry of Agriculture and Irrigation 5.02 Minor Irrigation Section (MIS). MIS would consist of three sub- sections: (a) Survey and Design, (b) Construction and (c) Ground Water Development (Annex 2, Appendix 4). The sub-sections (a) and (b) would be responsible for the rehabilitation of minor irrigation schemes, for which MAI would secure the services of a Design Engineer (Project Manager), a Construction Engineer and a Farm Management Expert for three years each (Annex 2, Appendix 3) in addition to supporting staff as needed for the Project. MIS would be further strengthened through procurement of vehicles, irrigation design and construction equipment under the Project. RGA has assured that MIS would be established, staffed and equipped as proposed and that MAI would render the services required for preparation and execu- tion of minor irrigation schemes, and would not divert MIS staff and equipment services for purposes outside the Project, without approval of the Project Coordinating Committee (para. 5.04). 5.03 Ground Water Development Sub-section (GWD). GWD would be set up as a sub-section of MIS and would be responsible for the study, evaluation and execution of groundwater development. It would also assist AGBANK in the appraisal of applications for pump loans and in the preparation of tender documents for pumpsets. The services of a Groundwater and Pump Expert would be required for three years (Annex 2, Appendix 3) in addition to supporting staff. Assurances were obtained on the establishment and staffing of GWD. 5.04 Project itee. This committee would be composed of representatives of AGBANK, the Ministries of Agriculture and Planning (Annex 2, Appendix 5) and would have the following responsibilities: i) to coordinate all tezhnical aspec_s of irrigation and agricultural ex- tension with AGBANK's _nding proi,>-> it) subject to preliminary evaluation of MIS and AGBANK's technical staff. zo approve each minor irrigation and pump scheme, before construction ana credit operations would be allowed to begin; iii) to approve plans and procedures for preparing a second-stage project; and iv) to nominate trainees and develop training programs for AGBANK and MIS, including GWD staff 'r.. -, ppendix 6). Assurances on  - 18 - the foregoing have been obtained. The appointment of the four experts (paras. 5.02 and 5.03) and the establishment of the Project Coordinating Committee would be conditions of effectiveness. 5.05 Extension Services. Existing services in Helmand and Paktia provinces are adequate. Assurances were obtained that extension services would be expanded and improved for farmers investing in animal-drawn equip- ment, initially in provinces served by the cotton development center at Kunduz, and for those undertaking irrigation rehabilitation in Central and Northern Afghanistan and pump irrigation in Southeastern Afghanistan, Farah and Herat provinces. In addition, demonstration farms and plots would be established within irrigation areas. The present staff of about 300 would need to be increased by not less than 100 over the next three years (Annex 3) to cope with the additional work. In view of inadequate budgetary support in the past, assurances were obtained that sufficient funds would be made available on a timely basis for the operating expenses of MIS and for the extension services to be established under the Project. To enable MiAI to start operations when the Project becomes effective, RGA has assured that an initial amount of Af 1.5 million (US$20,000) would be available to MAI. Thereafter, annual budgets would be prepared by the Project Coordinating Committee and, after Government's approval, would be submitted to IDA. Agricultural Development Bank of Afghanistan (AGBANK) 5.06 Organization and Management. AGBANK would be capable of adminis- tering the Project subject to further strengthening of its organization and management. The following assurances have, therefore, been obtained: (a) the revised Charter approved in January 1970 would not be changed without IDA's approval (para. 3.08); (b) changes in the appointments of AGBANK's President and its two Vice-Presidents would not be made without con- sulting IDA; (c) AGBANK would, over the next two years, supplement the six university graduates on its staff with at least 10 more and would accelerate further training under the fellowship pro- gram provided in the Project (para. 4.12 and Annex 2, Appendix 6); and (d) arrangements satisfactory to IDA would be made to ensure the continued management of AGBANK after September 1972, when the existing UNDP/SF management service contract terminates (para. 3.07).  - 19 - 5.07 Lending Policies and Procedures. As indicated in para. 3.09, new lending policies and procedures are being prepared by the consultants. These policies and procedures should be submitted to IDA for review and approval by AGBANK's Supreme Council as a condition of effectiveness. 5.08 To help ensure the technical feasibility and economic justifica- tion of sub-loans under the Project, assurances were obtained that: (a) farmers' loan requests for tractors and pumpsets would be evaluated in terms of incremental returns; (b) pump loans would, in addition, require the groundwater and pump expert's technical approval; (c) unless otherwise agreed with IDA, farmers investing in animal-drawn equipment, initially in provinces served by MAI's Cotton Development Center in Kunduz, would not receive loans without the recommendation of MAI's or PACCA's designated extension officer, certifying that these farmers are participating in MAI's cotton/wheat improvement program; and (d) loans to farmers for minor irrigation rehabilitation would be appraised on the basis of MAI's evaluation reports and feasibility analyses. 5.09 Financing and Expansion. In connection with the proposed Project, RGA has recently increased AGBANK's resources by Af 20 million. In addition, RGA and USAID have agreed to transfer Af 49 million as additional capital subscription to AGBANK for AFA's operations (para. 3.10). Assurances were obtained that the establishment of AFA or any other such subsidiary would be made on terms and conditions acceptable to IDA. To further augment AGBANK's resources, as mentioned in paras. 3.03 and 4.14, the lending pro- gram portion of the IDA Credit would be passed on to AGBANK as equity. This would enable AGBANK to continue and expand its lending program beyond the disbursement period of the Project (Annex 1, Appendix 3). 5.10 Interest Rates and Future Earnings. Assurances were obtained that interest rates to farmers (including fees and service charges) would be raised from 4% to 10% on short-term loans and from 5-7% to 8% on medium- and long-term loans and that a 2% pe.r annum oenalty rate for late repayment would be introduced. This increase is needed to reflect lending costs, especially the higher cost and risk of short-term loans, and to enable AGBANK to accumulate resources consistent with its expansion needs. The new rates would be more in line witn commercial rates in the country (para. 2.22) while within the estimated payment capabilities of farmers. These rates will be implemented ana would not be changed without IDA's ap- proval. Such rates would be reviewed from time to time with IDA to ensure that the objectives mentioned above continue to be met.  - 20 - 5.11 Forecasts of income and expenses (Annex 1, Appendix 4) show that in five years gross income would increase almost four times while expenses and provisions for bad debts would only double. Taking into account only the lending operations, the net return to capital in 1974/75, after taxes, would be about 2.5%. On this basis, reserves would build up to about Af 46 million. Estimates, not reflected in this report, indicate that if profits from marketing and supply operations were included the net return would be in the order of 5%. 5.12 Accounts and Audit. AGBANK's revised Charter provides for the auditing of accounts at least once every fiscal year. Present audit arrangements are unsatisfactory because qualified personnel are not em- ployed. Moreover, for many years accounts were kept in branches, without effective control and supervision from the head office. An interim audit was prepared by a German accountant to evaluate the portfolio and clarify the accounts. A full audit by an accountant acceptable to IDA for the years ending March 20, 1969 and 1970 would be a condition of effectiveness. In addition, assurances were obtained that AGBANK will henceforth employ auditors acceptable to IDA and submit to IDA, not later than four months following the close of each fiscal year, audited statements of its entire operations.  - 21 - VI. PRODUCTION, MURKETS, PRODUCER BENEFITS AND REVENUE GENERATION Production 6.01 Under the Project about 7,000 farms cultivating some 70,000 ha would benefit from mechanization, irrigation rehabilitation and pump irri- gation (para. 4.02). Incremental production at full development is esti- mated at 70,000 tons of wheat, 50,000 tons of maize and 10,000 tons of seed cotton, aside from small quantities of rice and alfalfa. Markets 6.02 Domestic demand can readily absorb the incremental production generated by the Project, except for cotton which would either be exported as lint or processed, substituting for imported cotton goods. (a) Wheat imports have averaged more than 100,000 tons annually. Incremental production under the Project would partly fill this gap. (b) Part of the incremental maize production would also substitute for wheat imports since Afghans in several regions eat maize; the remainder would be fed to sheep (mainly karakul), thus helping to reduce winter death loss (para. 2.08). (c) Cotton exports have during the last five years contributed between 10% and 21% to Afghanistan's export revenue. The cotton has an average staple length of 1-1/16" and has been sold to USSR and European countries. Incremental project output would either be exported or processed, thus substi- tuting for imports of cotton fabrics which during the last five years have averaged 29 to 36 million meters annually. Cotton ginneries have about 60% unused capacity at present. (d) The small additional quantities of rice would be readily absorbed in domestic urban markets while alfalfa would mainly be bought by camel and sheep owners. 6.03 Prices. Present farm prices for wheat, maize and cotton are shown below in comparison with 1975 projected world market prices. World prices included transport allowance of US$20/mt from Karachi to Kabul for wheat and maize, while cotton prices are adjusted to FOB Kabul basis by deducting US$12b/mt for ginning, baling, tra:.sport, insurance and handling.  - 22 - Present 1975 Projected Price World Market Price Afghanistan Adjusted FOB Kabul Basis ----US$/mt---------------------- Wheat 67 85 Maize 48 83 Cotton, Lint 381 421 Wheat prices have been fairly stable for about two years at Af 35/seer (US$67/mt) after declining from a temporary high of Af 57/seer (US$109/nit) in 1966, due mainly to poor harvest. They are supported by strong domestic demand and by a modest Government purchase program which aims at stabiliz- ing producer and consumer prices. The buying price of cotton is fixed by Government, and has been at present levels since 1958. About four years ago, when the farm price per unit of seed cotton was only equal to the then high price of wheat (Af 38-43 or US$76/mt) farmers lost interest in cotton and national production of seed cotton declined from 110,000 mt in 1963 to 59,000 mt in 1966. Government intends to maintain the present cotton price as an incentive to increase cotton output. Producer Benefits and Revenue Generation 6.04 The Project would substantially increase farm income by intensi- fying and improving production on irrigated farms through use of tractors and ox-drawn implements, and by providing additional and reliable water supply through irrigation rehabilitation and pump irrigation. Benefits have been estimated on the basis of farm models:  - 23 - Farm Size in ha 4 60 40 5 Pumpset Minor Animal-drawn Tractor and and Irrigation Implements a/ Attachments Dug Well Rehabilitation ------------------------(in Af)--------------------- Model Investment 5,000 476,700 175,000 45,000 Annual Net Income: Without project 14,594 70,565 12,840 19,177 With project at full development 18,690 216,396 57,450 30,370 Increment 4,096 145,831 44,610 11,193 Debt Service 1,552 95,510 30,000 6,915 Increment after Debt Service 2.544 50.321 14,610 4,278 Financial Rate of Return: As Appraised a/ 31% 23% 22% 6.05 Farm labor has been charged at full rates on the larger pump and tractor farms. On 4 ha and 5 ha farms allowances have been made for family labor by deducting the value of wheat for home consumption, but labor re- quirements exceeding available supplies of family labor have been charged at hired labor rates, ranging from Af 30 to Af 50 per day. The higher rates take into account peak labor periods when demand for hired labor tends to be high relative to available supplies. a/ Animal-drawn implements are being introduced together with fertilizer, high-yielding seed and other improved practices and with concentrated supervision from extension staff for which the farmers do not pay. Although an attempt has been made to determine the benefits due to the polyculteur alone (Annex 5), the underlying assumptions remain arbitrary until additional input/output studies have been completed in Afghanistan. The financial rate of return due to the polyculteur alone has, therefore, not been computed. The total "package of improved practices would more than double farmers' net value of production (Annex 5) and would offer adequate incentives.  - 24 - 6.06 All costs, including land tax, water charge for minor irrigation rehabilitation, and interest on short-term loans were deducted in computing net incremental income before debt service. For all farm models, net incremental income after debt service provides adequate incentives to in- vest under the Project. 6.07 Incremental taxes generated by land and water resource improve- ment would be negligible. Present land tax rates are very low and, with the exception of irrigation schemes under HVA, water charges are payable only to local water users' groups which are responsible for operation and maintenance. However, if implemented as proposed, the Project would generate (at full development and under the present tax structure) about Af 14 million (US$190,000) of annual revenue through the tax on diesel fuel consumed by pump engines and tractors. In addition, RGA, which together with the State Bank owns 96% of AGBANK, would realize some Af 8 million (US$110,000) annually as income tax on AGBANK's net profit and in dividends it would receive as AGBANK's owner.  - 25 - VII. BENEFITS AND JUSTIFICATION 7.01 An assessment of overall benefits to the economy cannot be made with certainty, since the Project's success depends upon participation of small farmers who would engage in varied cropping patterns. Although tradi- tional methods are still predominent, Afghan farmers have been remarkably responsive to modernization efforts by development institutions in regions where these have been concentrated, generally with bilateral or multilateral technical assistance. Project investments would be closely associated with these efforts and thus the probable return from the investments can be esti- mated witlhin a reasonable degree of confidence. It has been assumed that farms would reach full development within four years after entering the Project. The economic rate of return would be 21%. 7.02 The rate of return has been tested to see how sensitive it is to adverse changes in the factor most subject to uncertainty which is the physical crop yield. A 10% decline in the incremental yield would reduce the rate of return to 13%. While this return is still satisfactory, the test reveals that the Project is sensitive to further yield reductions without respective declines in costs. The probability of greater yield reductions is small because incremental vields resulting from the Project were conservatively estimated. The effect of drought can be ruled out because all farms are irrigated. If incremental yields were more than 10% below those assumed in the appraisal, this would be a result of lower input levels, in which case lower costs would be a compensating factor. Moreover, domestic prices are substantially below projected 1975 world market prices. Since it is more likely that domestic prices will exceed rather than fall short of project values there is potential protection in the event that yields fall below expectations. 7.03 Annual value of incremental production attributable to the Project would be about US$12 million equivalent, including direct export earnings of about US$1 million from cotton exports and US$4.5 million equivalent of import savings. Additional but non-quantified benefits would result mainly from institutional improvements of the AGBANK and Ministry of Agri- culture and Irrigation, and through further project preparation with a view to a second-stage project.  - 26 - VIII. RECOMMENDATIONS 8.01 During credit negotiations, assurances were obtained to ensure satisfactory project performance. The principal assurances cover: (a) expansion and improvement of extension services, including establishment of demonstration farms and plots for farmers investing under the Project (para. 5.05); (b) evaluation of loans to farmers on the basis of technical feasibility and incremental returns (para. 5.08); and (c) transfer of the proceeds from the Credit designated for credit operations to AGBANK as equity capital (para. 5.09). 8.02 Important conditions of effectiveness would be: (a) establishment of a Minor Irrigation Section and appointment of four experts to prepare and execute minor irrigation rehabilitation and pump schemes (para. 5.02); (b) establishment of a Project Coordinating Committee (para. 5.04); and (c) adoption by AGBANK of operating policies and procedures, including loan regulations, acceptable to IDA (para. 5.07). 8.03 The proposed Project is suitable for IDA assistance of US$5 million under the usual IDA terms. May 27, 1970  ANNEX 1 AFGHANISTAN AGRICULTURAL CREDIT PROJECT _- - THE AGRICULTURAL DEVEILOPMENT BANK Organization and Management 1. The AGBANK was established in 1954 as a joint stock company subject to the provisions of the Afghan commercial code. Its authorized capital is Af 150 million; Af 86 million has been subscribed and paid up of which the Government owns 7%. Da Afghanistan Bank (State Bank) 89%, Bank Melli Afghan 2.3%, commercial companies 0.6% and private individuals 1.1%. Head office is in Kabul and it has ten branch offices (Map). 2. Until January 1970, AGBANK was governed by four bodies: i) the General Assembly of Shareholders; ii) the Supreme Council (of which the Minister of Agriculture was Chairman); Lii) the Board of Directors; and iv) the Board of Auditors. It also had a President and two Vice-Presidents who were nominally in charge of day-to-day operations. 3. This system of management proved unsatisfactory and in November 1968, the Government requested UNDP/SF technical assistance for the comp- lete reorganization of AGBANK. As a result, four experts (credit specia- list, agricultural economist, accountant and supply specialist) took up their duties with AGBANlK in September 1969 (their terms of reference are at Appendix 1). Reorganization 4. Reorganization is now underway. The four experts hold executive positions, the credit specialist being the General Manager. In January 1970, the Government approved a revised Charter which should permit more efficient and flexible management. Under the revision, the chairmanship of the Supreme Council was transferred to the Minister of Finance and the President and General Manager of AGBANK became members. The Board of Directors was abolished and an Executive Board created, consisting of the President, the two Vice-Presidents and the four experts. This Board will be responsible for overall administration under powers delegated to it by the Supreme Council. The Board of Auditors, elected by the General Assembly, may delegate its duties to professional auditors of accepted international standards.  ANNEX 1 Page 5. The Supply Department, which is responsible for the importation and supply of farm machinery, fe-tilizers, pesticides and other farm inputs, will operate as a separate entity within the framework of AGBA1YK's general policy. Its finarncial transactions will be separated from AGBAi'IK's lending activities. 6. The administrative and operational systems are being revised, including loan appraisal, supervision and collection, and accounting and statistics. Staff 7. Although the staff is sufficient, numerically (112 at Head Office and 56 in branches), only 6 are university graduates and very few have banking or credit experience. Additional assistance in training of tech- nical staff would be necessary. Two-year fellowships for 3 agricultural economists, 9 accountants and 6 credit supervisors have,therefore, been included in the Project and on-the-job training has already started under the consultant's responsibility. Agricultural Financing Agency(AFA) 8. With the view to harmonizing agricultural credit throughout Afghanistan, the USAID assisted Helmand-Arghandab Valley Authority's (HAVA) Agricultural Credit Division would be disbanded. It would be re- established as the Helmand Arghandab Agricultural Finance Agency (AFA), to be administered by a Board of Directors on which AGBANK's General Manager would be an ex-officio member with veto power. USAID would advance to the RGA the proceeds from US Public Law 480 transactions amounting to Af 49 million. RGA in turn would use these funds to subscribe in like amounts to additional capital of AIGBANK. AGBAN'K would simultaneously apply these funds to subscribe the initial AFA capital. In conjunction with this subscription .AFA waould immediately deposit the proceeds in AGBANK. These funds and accrued interest would then be drawn on demand by AFA for its credit operations and operating cost. AFA would develop its own lending program in the Helmand and Arghandab Valley in accordance withl AGBANK policies and procedures. In addition AFA would act as a branch office of AGBANK for operations not covered under its own lending program. Lending Policies and Procedures 9. Prior to the arrival of the UNDP experts in September 1969, loan policies and procedures were unsatisfactory. Loan appraisal, supervision and collection systems were not in existence. The main criterion for granting a loan was the amount of security an applicant could offer. Security was limited to mortgages over land which was unsuitable for short-term production credit. The experts are in the course of drafting new loan regulations and establishing appraisal, supervision and collec- tion systems.  ANNEX 1 Page 3 10. Interest rates charged to borrowers were too low, 4% per annum for short-term loans, 5-6% per annum for medium-term and 7% per annum for long-term. They did not cover the cost of lending, were not in accordance with ruling cammercial rates (9-12% per annum). The whole interest rate structure is at present being examined. Use of Resources 11. Lending 2Perations. Accurate statistics are not available, but records indicate that since 1954, AOBANK has made loans totalling Af 225 million (US$3 million). Since 1959, it has confined its operations to medium- and long-term lending. From 1964 onward, its lending operatiQns declined steadily and only 15 loans totalling Af 5 mllion (US$70,000) in 1968/69 and to only 12 loans totalling Af 0.8 million (US$1O,600) in the first seven months of 1969/70. 12. As of March 1970, after write-off of losses (Af 20 million), the loan portfolio amounted to Af 91 million (US$1.2 million), of which Af 27 million (3oi) were principal overdue and Af 6 million interest charged and unpaid. Of the Af 27 million overdue in principal, Af 23 million stam from loans disbursed before1961. The high percentage of arrears is mainly due to a complete lack of follow-up and adequate action for loan collection. A recent survey made by AGBANK consultants and their first efforts of intro- ducing systematic collection procedures indicate that many debtors are willing to pay. Based on a 1967 portfolio review, an amount of Af 36 million overdue, including Af 9 million of unpaid interest, was estimated difficult or too expensive to collect. In 1969/70, according to the consultants' review, such losses were estimated at Af 20 million, including Af 7.5 million of unpaid interest and have been written off. Agreements with cotton ginneries, sugar beet factories and AGBANK have already permitted to col- lect an additional Af 22 million through deductions from payments to farmers. Pending final settlement with farmers and MAI these amounts are kept in a suspense account. The new Charter requires provision for bad debts to be made as from 1970/71. 13. Investments. AGBANK's investment through capital participation in firms and agencies engaged in agricultural processing and trade amounted to Af 20.7 million. Over three-fourths of this was held in three firms: Spinzar Cotton Company, AC 9.6 million; Pashtany Tedjerati Bank, Af 5 million; and the Construction Bank, Af 1 million. Af 3 million of the investments will not be recovered and have been written off. Under the new Charter, AOBANK is not authorized to engage in further share participation. 14. upply Activities. In addition to its lending activities, AGBANK has been active in agricultural supply transactions (tractors, waterpumps, fertilizers, pesticides and veterinary drugs). The turnover "or the last four years reached Af 142 million. Goods in stock as of Marc.a 1970, amounted to Af 19.2 million.  IANEX 1 Page 4 Resources 15. AGEANK's resources at March 1970, amounting to Af 162 million, (US$2.2 million), consisted of Af 86 million in capital, Af 14 million in accumulated reserves after write-off of losses, Af 32 million in borrowings and Af 30 million in other payableaccounts. 16. Of its Af 150 million (US$2 million) authorized capital, Af 86 million is paid-up capital, of which 89% is owned by Da Afghanistan Bank, 7% by Goverment and the remaining 4% by other banks, companies and private individuals. 17. Borrowings are limited to one loan from Da Afghanistan Bank, contracted in 1966 for an amount of Af 16 million, at 4% interest per annum for five years, under special arrangement with MAU for import of fertilizer. Af 6 million of this remained unpaid as of March 1970. Other loans were Af 23 million obtained in 1964 from USSR at 3% per annum for five years and Af 73 mllnion obtained in 1966 from a UK firm (Massey Ferguson) at 5.5% per annum for five years for import of tractors. Of these a balance of Af 26 million remains. AGBANK benefits also from some short-term Government deposits (Af 17 million) and other payable accounts (Af 13 million). AGBANK has no access to discounting. Such facilities do not exist in Afghanistan. Financial Position 18. As of March 20, 1970, the liquidity position was satisfactory (Annex 1, Appendix 5). Liquid assets of Af 30 million (US$0. million) represented 18% of total assets (Af 162 million) and covered current liabilities 1.1 times. The debt-net equity ratio is 0.54. Reserves in March 1970 were Af 14.2 million after covering the losses to be written off which were Af 28.4 million (Af 20 million from loans Af 3 million from participation, Af 5.4 million from doubtful debtorsi. 19. Positive results were achieved in recent years partly because revenues were generated from operations in preceding years and partly because proceeds of loan collection were kept in bank deposits earning 6% interest per annum instead of being relent, and also because of earnings from conmercial transactions and dividends on investnents. Accounts and Auditing 20. Records and accounting systems prior to 1970 have been inadequate. Reorganizing of accounting and strengthening of AGBANK's internal control are the consultants, major tasks. The new Charter requires auditing of AOBANK accounts at least once in every fiscal year. The auditor shall be appointed annually by the General Assembly upon proposal of the Supreme Council. There is presently no chartered accountant acceptable to IDA in Afghanistan. An interim audit of AGBANK accounts has been made in 1969 by a German accountant provided by the Ministry of Finance.  .XNNEX I. Appendix 1 AFG1ANISTtN UITDP/SF PLAIl OF OPERATIONS AGRICULTURAL AND COTTAGE INDUSTRIES BANK Consultants' Tenms of Reference I. OBJECTIVES The objective is the reorganization and management of the Agricultural and Cottage Industries Bank (AGEANK) of Afghanistan to make it an effective lending institution in the field of agriculture. (In future the Bank will no longer be concerned with Cottage Industries and the name will be changed accordingly.) To this end the consultants' team shall: (a) advise and assist the Ministry of Finance and the AGBAqK at all levels concerned in the organization, policy, administration and development of the AGBANK; (b) assume managerial and executive responsibilities within the AGBANK; (c) train Afghan personnel in all aspects of development banking; and (d) undertake such feasibility, economic and evaluation studies as agreed from time to time by Government, Consultants and Bank. II. ORGANIZATION OF SERVICES, TIi4E SCHEDULES AND REPORTS A. Operations and Responsibilities of Consultants, Team The experts will hold senior executive positions within the Agricultural Bank for an initial period of three years, during which time they will not only be responsible for the reorganization of the Bank and training of staff but also for operations of their respective depart- ments. The experts will: (a) assist in redrafting the Charter and By-Laws of the Agric- ultural Bank (if redrafting is not completed prior to commencement of their duties); (b) plan and put into operation a new accounting system;  .ANTEX 1 Appendix 1 Page 2 tc) separate the supply activities from the banking functions establishing a separate supply organization which wlll be managed by the Agricultural Bank on an agency basis; (d) plan and implement an effective loan appraisal and evalua- tion system, which will include redrafting loan application forms, instituting farm plans and budgets (where appropriate) and making on-farm iL spections; (e) plan and put into operation an effective collection system for loan payments including existing loans; (f) arrange for the supervision of loans, including a follow-up system, to ensure thatloans are properly used and to evalu- ate the economic results of loans; (g) undertake studies to determine the technical feasibility and economic return of projects submitted for consideration; (h) plan and put into operation a system for the collection, analysis, and publication of statistical data; (i) work in close cooperation with the Ministries of Finance, Agriculture and Planning, Kabul University and other train- ing and research institutes and local representatives of bilateral and international aid organizations; (J) assist in the identification and preparation of investment projects appropriate for international financing in accord- ance with Government policy; (k) train staff in all aspects of agricultural credit and banking- (1) advise and assist generally in the reorganization and con- tinued operations of the Agricultural Bank; (m) be responsible for the operations of their respective department; and (n) prepare such instruction manuals as are required to guide administrative and technical staff in day-to-day operations. If the Bank and the Royal Government of Afghanistan approve, any of the experts may be sent on visits to other countries for any purpose related to their work in Afghanistan and any Afghan staff of the Agricultural Bank may be sent abroad for periods of academic stucdr or practical training in agricultural credit and banking.  ANNEX 1 Appendix 1 Page 3 It is anticipated that the reorganization of the Agricultural Bank, the establishment of sound lending techniques and systems, and the training of staff, will be completed in about three years, when the management of the Agricultural Bank should gradually be taken over by Afghan personnel. B. Duties of Team Members The main duties of the members of the Consultants' team are: (a) Credit Specialist: responsible for the organizational and managerial policies of the Agricultural Bank. His duties will be those of a General Manager; (b) Agricultural Economist: responsible for (i) planning and putting into operation a new loan appraisal and evaluation system; (ii) the economic aspect of the Bank's operations; (iii) the training of field and other staff involved in credit operations; (iv) the evaluation of the results of lending operations; and (v) establishing working relations with the Ministry of Agriculture and other 'bodies and indi- viduals engaged in agricultural development; (c) Suplies Manager: responsible for establishing and operat- ing a supply organization separate from the banking functions of the Agricultural Bank. His responsibilities will include maintaining stock records; ensuring that tractors, punps, fertilizer, pesticides and other farm inputs are available at the appropriate times; obtaining such supplies at compet- itive rates; organizing distribution; ensuring that repair and spare services are adequate; evaluating the suitability of various types of equipment to ensure that they are suited to the country and its needs; and training local staff in all such duties; and (d) Accountant: will install a new accounting system and generally be responsible for all accounting operations (including those of the supply organization), the provision of statistical data to management and the training of account- ing staff.   AFGHAN IS TAN AORIOUTURAL VLP0MZIT BANK REVISED ORGANIZATION CHART PRES IDENT General Inager IRTICE-PRESIDENT I RSD --- - ------------ ---------- -------- ~~~~~~~~~~~~~~~~~~~~~~~~UPLYMANAGER Credit gr Account mger SECrETARIAT A]JVI~ [AGRICULTURAL GENERAL ORGANIZATION ITICS ISECRETARIAT LEGAL ALVICE PERSONNL ANT F A CONTROL AND INS- C SO |A CHEDIT AND FINANCE ADNINISTRATION | | PE5TION | AND RESEALRCH | PURCHASES | |RSTORE ATSTLLES CREDIT EA ADMINIST|RATION S OFFICE LIAISON WITH AFA] LASHKAR GA.r   ANNEX I AF GHANI S TAN Appendix AGRICULT'JRAL DEVELOPMENT BANK PROJECTED CASH FLOW 1969/70 - 1979/80 (Fiscal Year ending March 20) (Af Million) 1969/7o 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 Cash at Beginning of Year ...... 40.6 29.9 89.1 64.7 48.8 59.0 84.8 91.1 111.5 119.6 124.3 I N F L O W Equity Capital ................. -- 68 8 -- - 2/ -- -- -- -- -- IDA Disbursements .............. .4 91-8 99.4 59.6 - __ __ Borrowers' Contribution (20%) -- 12.7 30.1 33.4 19.7 __ __ __ __ _ __ Loan Repayment: IDA Project ...........-- -- 5.1 16.6 31.0 43.3 50.9 51.7 42.4 29.7 20.7 AGBANK ST Loans ............. - .0 18.0 27.0 40.0 44.0 49.9 50.8 52.5 52.2 51.2 AFA ST Loans ............. 2.1 6.4 14.6 22.3 33.7 35.8 38.3 40.1 38.3 38.3 Old MT Loans ............. 17.0 22.0 19.0 15.7 6.5 3.0 - -- -- -- -- Nfw AGRANK MT Loans ......... -- -- 0.5 1.9 5.3 10.0 17.6 27.2 38.9 51.5 63.4 Supply Department .......... - 0.5 1.0 2.4 3.1 4.0 4.1 4.0 4.0 4.0 4.0 Interest Received: IDA Project ........... -- 3.2 10.0 16.8 18.7 14.6 10.1 6.3 3.6 1.8 AGBANK ST Loans ............. 0.9 1.7 2.9 4.o 4.9 5.2 5.4 5.4 5.4 5.14 AFA ST Loans ...........-- 0.1 0.6 1.1 2.8 3.0 3.9 4.0 3.6 4.0 4.0 AGBANK Old MT Loans ........... 5.1 5.1 2.4 2.3 1.7 0.5 -- -- - -- -- AGBANK New MT Loans ......... -- -- 0.3 0.9 2.5 4.1 6.6 9.5 12.6 16.0 18.7 Sundry Income .......... 2.3 4.0 8.8 6.6 6.0 6.1 6.9 7.7 8.4 8.5 10.0 Total ............. 24.4 171.6 188.9 234.8 221.3 175.3 195.5 208.7 2114.2 213.2 217.5 O U T F L O W Operating Costs ................ 5.5 6.o 7.2 8.6 10.4 12.4 13.6 15.0 16.q 18.1 20.0 IDA Project Loans .............. -- 43.9 105.2 117.5 70.7 -- __ -- -- -- -- Borrowers' Contribution ........ - 12.7 30.1 33.4 19.7 -- -- -- -- -- -- AGBANK ST Loans ................ 15.0 22.0 32.0 45.o 48.0 52.4 52.4 52.14 52.4 52.4 AFA ST Loans ................ -- 3.0 8.2 18.2 25.1 39.0 39.0 39.0 39.0 39.0 39.0 AGBANK New MT Loans ....... .. 2.0 3.6 9.0 22.5 30.0 45.0 60.0 75.0 90.0 90.0 90.0 Repayment of Borrowings ........ 15.4 13.9 17.7 _- -- -- -- -- -- -- - Interest Paid on Deposits ...... 0.1 2.0 1.8 1.8 1.6 1.2 1.2 1.0 0.5 1.0 1.0 Financing Supply Department .... 8.0 8.6 10.5 13.7 4.2 -- 19.3 2.0 .1.0 4.0 4.0 Sundry Payments ................ 4.1 3.7 1.6 3.0 4.4 3.9 3.7 3.9 3.7 4.0 4.5 Total ............. 35.1 112.4 213.3 250.7 211.1 149.5 189.2 188.3 0t.l 208.5 213.9 Cash at End of Year ............ 29.9 89.1 64.7 48.8 59.0 84.8 91.1 111.5 119.6 124.3 130.9 Of Which: Minimum Cash Balance ........ -- 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Available for Marketing Scheme (Grapes, Raisins, Karakul). -- 69.1 44.7 28.8 39.0 64.8 71.1 91.5 99.6 104.3 110.9 1/ Includes Af 1.8 million for purchasing AGBANK's vehicles. 2/ Includes Af 0.7 million for purchasing AGBANK's accounting machine. May 21, 1970   ANNEX 1 AFGHANISTAN ~~~~~~~~~~~~~Appendix 1, A F G H A N I S T A N Apni AGRICULTURAL DEVELOPMENT BANK PROJECTED INCOME AND EXPENSES 1968/69 - 1979/80 (Fiscal Year ending Mrch 20) (Af Million) 1968/69 -/1969/70 1970/71 1971/72 1972/73 1973/74 19714/75 1975/76 1976/77 1977/78 1978/79 1979/80 TI C O M E Interest Collected On: IDA Loans ........ ............ -- -- 3.2 10.0 16.8 18.7 114.6 10.1 6.3 3.6 1.3 AGBANK Short-Term Loans ....... 09 1.7 2.9 4.0 14.9 5.2 5.41 5.14 5.14 5.1 AGEANK Medium-Term Loans ..... 5.5 5.1 5.1 2.7 3.2 14.2 14.6 6.6 9.5 12.6 16.o 19.7 Deposits with Banks ..... ..... 1.8 2.0 2.5 3-5 1.6 1.5 2.6 3.14 14.2 8.9 5.0 6.5 Dividends from Participations. 1.0 0.3 11.9 -/ 5.3 5.0 14.5 3.5 3.5 3.5 3.5 3.5 3.5 Surplus from Supply Dept. d/ .. 1.5 1.5 -- -- -- -- -- -- -- -- -- -- Sub-total .......... 9.8 8.9 20.14 16.4 22.7 31.0 314.3 33.3 32.7 32.7 33.5 35.9 E X P E N D I T U R E Administrative Expenses ......... 5.1 5.5 6.o 7.2 8.6 10.14 12.14 13.6 15.C 16.5 18.1 2C.C Interest Paid On: Deposits ......... ............ 0.1 2.0 1.8 1.8 1.6 1.2 1.2 1.C 0.5 1.C 1.0 Borrowings e/ ...... .......... 1.8 2.1 2.1 2.5 -- - _ _ _ _ _ __ Other Expensesf/.-- -- -- -- 0.1 0.2 0.3 0.5 0.8 1.0 1.5 2.0 Sub-total ..... ..... 6.9 7.7 10.1 11.5 10.5 12.2 13.9 15.3 16.8 18.0 2C.6 23.0 G It 0 S S P R 0 F I T ....... 2.9 1.2 10.3 4.9 12.2 18.8 20.4 18.0 15. 114.7 12.9 12.Q L F S S: Depreciation ....... .......... o.5 0.7 0.7 0.7 0.8 0.8 0.8 C.9 1.0 1.2 1.3 1._1 Provision for Bad Debts ...... 0.3 2.0 1.0 2.0 3.7 14.O 3.6 3.2 2. 2.6 2.6 Taxes ........................ o.6 0.2 1.3 o.6 1.6 2.14 2.6 2.2 2.0 l.8 1.5 1.9 N E T P R O F I T .......... 1.8 -- 6.3 2.6 7.8 11.9 13.0 11.3 9.7 8.8 7.5 7.L A P P It 0 P R I A T I 0 N Reserve for Contingencies ....... -- -- 0.3 0.3 o.8 1.2 1.2 1.0 0.9 C.9 0.7 0.7 Staff Provident Funds.-- -- 0.2 0.1 0.2 0.2 0.3 0.2 0.2 0.2 C.2 0.2 General Reserve ....... .......... -- -- 5.8 2.2 14.7 7.0 7.3 6.5 5.6 5.1 8.3 L.3 Unappropriated Profit .. ......... 1.8 2.1 3.5 14.2 3.6 3.0 2.6 2.3 2.2 a/ Excludes A.F.A. income and expenses. b/ Figures for 1968/69 not yet audited. c/ Includes Af 10.14 million additional shares of Spinzar Co. d/ Surplus from 1970/71 onwards are not shown because trading activities would be separated from AGBANK credit operations. e/ Interest on tractor suppliers' credit and on Da Afghanistan Bank loan. f/ Fees paid to A.F.A. for administering AGBANK's loans in Helmand Valley. 1-ay 21, 1970   ANNEX 1 A F G H A N I S T A N Appendix AGRICULTURAL DEVELOPMENT BANK PROJECTED BALANCE SHEET 1969/70 - 1979/80 (Fiscal Year ending March 20) (Af Million) March 20, 1969 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 A S S E T S Cash on Hand and in Banks . ......... 40.6 29.9 89.1 64.7 48.8 59.0 84.8 91.1 111.5 119.6 124.3 130.9 Investments (Participations) . 17.7 17.7 75.5 75.5 75.5 75.5 75.5 75.5 75.5 75.5 75.5 75.5 IDA Project Loans .-- -- 43.9 144.0 244.9 284.6 241.3 190.4 138.7 96.3 66.6 45.9 Other Loans (Less Provision for Bad Debts) .111.7 91.3 69.8 59.9 65.5 83.3 114.8 156.1 202.3 250.4 286.5 311.7 Advances to Supply Department . 11.2 19.2 27.3 36.8 48.1 49.2 45.2 60.4 58.4 58.4 58.4 58.4 Other Assets .19.0 3.5 5.3 5.3 5.3 6.0 6.o 6.3 6.o 6.0 6.o 6.u Total .200.2 161.6 310.9 386.2 488.1 557.6 567.6 579.5 592.4 606.2 617.3 628.4 L I A B I L I T I E S Capital Paid Up .86.1 86.1 154.9 154.9 154.9 154.9 154.9 154.9 154.9 154.9 154.9 154.9 IDA Disbursements .-- -- 38.3 125.9 221.0 275.7 275.7 275.7 275.7 275.7 275.7 275.7 Reserves .32.6 14.2 20.5 23.1 28.8 37.2 46.0 53.7 60.4 66.6 71.8 77.0 Unappropriated Profits .15.6 -- -- -- 2.1 5.6 9.8 13.4 16.4 19.0 21.3 23.5 48.2 l/ Less Losses to be Written-off 28.4 19.8 Borrowings.. 47.0 31.6 17.7 -- -- -- -- -_ __ __ __ __ Other Liabilities .47.3 29.7 79.5 82.3 81.3 84.2 81.2 81.8 85.0 90.0 93.6 97.3 Total .200.2 161.6 310.9 386.2 488.1 557.6 567.6 579.5 592.4 606.2 617.3 628.4 1/ Reserves + Unappropriated Profit, Af 48.2 million, have been reduced to Af 42.6 million after adjustments in 1969/70 (see second Consultants' Progress Report dated March 10, 1970). May 26, 1970   AIN1 FX 2 PiFGiAANISTAN AGRICULTURAL CREDIT PROJECT IYROVE1E1T OF EXISTING SI-LL IRRIGATION SCHEES A. General 1. Without irrigation, the people of Afghanistan would find it difficult, if not impossible, to survive. For this reasmn, they have, through centuries, brought about U.9 million jeribs (2.4 million ha) under irrigation by means of canals, springs, "karezes"