Document of

The World Bank

FOR OFFICIAL USE ONLY

Repoit No. 7323

PROJECT CONPLETION REPORT

ECUADOR

AGRICULTURAL CREDIT PROiJECT

(LOAN 1459-EC)

June 28, 1988

LAC Regional Office

Thi document has a redrkitd dutbwdon and my be used by rfcipents mly In the peifonnanc oftheir oEica duiek lt contebs my no otherwe be discosd wihout World Bank uthodbfton.

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WEIGHTS AND MEASURES

The metric system has been used throughout this report.

ACRONYMS

AU - Animal UnitCB - Cooperative BankCENAPIA - National Center for the Promotion of

Small and Artesan IndustriesBNF - National Development BankIDB - Inter-American Development BankINIAP - National Agricultural Research InstituteMAG - Ministry of AgriculturePU - Project Executing Unit

GOVERNMENT OF ECUADOR

FISCAL YEAR

January 1 - December 31

OR OFFCIAL USE ONLYTHE WOULD SANKWashwngton. D.C. ZO433

U.S.A.

Oke of Diect-GCwalq - ta1tw vaaeh

June 28, 1988

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report - Ecuador Agricultural Credit Project(Loan 1459-EC)

Attached, for inf3rmation, Is a copy of a report entitled"Project Completion Report - Ecuador Agricultural Credit Project(Loan 1459-EC)" prepared by the Latin America and the Caribbean RegionalOffice. No further evaluation of this project by the Operations EvaluationDepartment has been made.

Yves Rovani

by Ram K. Chopra

Attachment

This document ou Is itod dRtbutin and may be ud by ocpints o t pefomueof their offcial duties. Its cootents may not otherwse be discboed witbout Wotid Bak utbofitioo.

FOR Or., CIUL USE ONLY

ECUADOR

AGRICULTURAL CREDIT ]PROJECT - LOAN 1459-EC

PROJECT COMPLETION REPORT

Table of Contents

Page No.

PREFACE * ........................................................ i

BASIC DATA SHEET ........................... ........ ** i

EVALUATION SUMMARY ............... . iv

I. INTRODUCTION ..................... 1

II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL ........... 2

Objectives and Description ................................ 2Appraisal and Negotiations 2........................ 2

III. IMPLEMENTATION ooo ooooosooo ooo............... oooo......o**.** 3

Disbursements ............................................. 3Reallocation of Funds 3................ .......... ........ 3Project Cost and Financing ...................o.e.......o.. 3Technical Support ................................... **....0 4Sublending Terms and Conditions ........................... 5Honitoring and Evaluation ........... *00*e@ ........... e.0 5Compliance with Loan Conditions ........................... 5Accounts, Audit and Reporting Requirements .........*....... 5

IV. PROJECT IMPACT .. ........ .......................................o 6

V. INSTITUTIONAL PERFORMANCE ..... oo.o......*o o......o.o...*.. 6

Project Unit (PU) ............ 0000600000*0*00**00*00 0....*... 6National Center for the Promotion of

Small and Artisan Industry (CENAPIA) ................... 7

National Development Bank (BNF) ........................... 7

VI. BANK PERFORMANCE ............. o*..**...oo.** oo***** o*** o** o** 7

VII. CONCLUSIONS AND LESSONS LEARNED . .. ............................. 8

IThis document hans a restricted distribution and inay be used by tecipientfs only in the petfotnnance |of their officialf duties. Itsi contents may not othei-wise be disckxsfed without World Bank authorization.

ANNEXES

Annex 1 Schedule cff DisbursementsAnnex 2 Allocation of Bank LoanAnnex 3 Project Costs/Financing

3a Project Costs by Activities3b Agricultural Credit

Annex 4 Key Lending PoliciesAnnex 5 Comparison of Production Coefficients

MAP - IBRD 18179

PROJECT COMPLETION REPORT

ECUADOR

AGRICULTURAL CREDIT PROJECT(Loan 1459-EC)

PREFACE

This is the Project Completion Report (PCR) for the AgriculturalCredit I Project (Loan 1459-EC), carried out by the Project Executing Unit(PU) within the Ministry of Agriculture (MAG) in Ecuador. The loan wasapproved by the Board on June 14, 1977, for an amount of US$15.5 million,and was fully dlsbursed by October 20, 1985.

The PCR was prepared by the Latin America and the CaribbeanRegional Office, Agricultural Division C, after a completion mission toEcuador in February 1986. The PCR is also based on a special report anddata prepared by the Borrower, the Staff Appraisal Report (Report No.1499-EC), the President's Report (Report No. P-2098-EC), the Loan Agreementdated November 3, 1977, supervision reports, and correspondence with theBorrower. Interual Bank memoranda on project issues were also reviewed.

In accordance with the revised procedures for project performancereporting, this PCR was read by the Operations Evaluation Department (OED)but the project was not audited by OED staff. The draft PCR was sent tothe Borrower for comments on February 25, 1988 and none were were received.

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ECUADOR

AGRICULTURAL CREDIT PROJECT - LOAN 1459-EC

PROJECT COMPLETION REPORT

BASIC DATA SHEET

KEY PROJECT DATA

Appraisal Actual or Actual as X ofEstimate Estimated Actual Appraisal Estimate

Project Costs (US$ million) 36.0 36.8 102

Total Subloan (US$ million) 24.8 28.0 112

Date of Board approval June 1977 6/14/77

Date of effectiveness December 1977 6/14/78

Closing Date 12/31/82 10/20/85

Economic Rate of Return 202 33X_

Financial Rate of Return 181 to' 26Z 302 to 352

Number of Direct Beneficiaries 2010 families 1551 families 77

CUMULATIVE DISBURSEMENTS

FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86

Appraisal Estimate (US$ '000) 750 3,250 7,750 12,250 14,750 15,550 0 0 0

Actual (US$ million) 1,900 4,800 5,300 7,400 9,200 11,954 15,500

Actual as a X of Estimate - - 25 39 40 48 59 77 100

Date fo Final Disbursement

Principal repaid to (mo./day/yr.)(US$ million)

STAFF INPUTS(staff weeks) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86

Appraisal 75

Negotiation 4

Supervision 10.4 16.8 4.5 8.0 9.0 8.5 5.5 7.0 2.5

/ Estimated on data available up to December 1986 at which time economic conditions for thev ector were better than during th- implementation period.

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MISSION DATA

No. of Man days Specializations Performance Type ofMission Date Persons in field Represented 1/ Rating 2/ Trend 3/ Problems

(mo./yr) -r-

Preparation Aug/76 - a/Appraisal Octib6 5 Z5 c.ba,k,gSupervision 1 8/77 2 5 b,a 1 2 M

2 3/78 2 8 c,c 1 2 M3 7/78 1 7 c 1 2 M4 10/78 1 8 c 1 2 145 2/79 2 9 b,c 2 2 P6 4/79 1 9 b 2 2 P7 9179 2 5 b,c 2 1 MT

- 8 7/80 1 16 c 2 1 MT9 12/80 1 3 c 2 2 MT10 7/81 2 1 c,g 3 2 FM11 3/82 2 10 a,c 2 1 FMT

-" 12 3/83 3 7 T b,c,g 3 1 FMT13 9/83 1 4 c 2 1 FMT14 1/84 1 9 c 2 1 FMT15 2/85 1 14 c 2 1 FMT16 10/85 1 5 c 3 2 FM

Borrower Government of EcuadorExecuting Agency Project Executing Unit Under MAGFiscal Year January 1 - December 31

Name of Currency S/(Sucres)Currency Exchange Rate:

Appraisal Year Average US$ 1.00 = S/ 25.0Intervention Year Average US$ 1.00 - SI 57.0Completion Year Average US$ 1.00 7 S/ 110.0

a/ Prepared by staff members from the previous PU and from Ministry of Agriculture andLivestock.

I/ a=agriculturalist; b-agricultural economist; c-financial analyst; g-livestock specialist;k-agricultural credit adviser.

2/ 1-problem free or minor problems; 2-moderate problems; and 3-major problems.5/ 1-improving; 2=stationary; and 3-deteriorating.4/ F-financial; M-managerial; T-technical; P-political; and O=other.

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PROJECT COMPLETION REPORT

ECUADOR

AGRICULTURAL CREDIT PROJECT(Loan 1459-SnC)

EVALUATION SUMMARY

Oblectives

The Agricultural Credit Project (Loan 1459-EC) was designed tosupport the Government's objective to increase agricultural output throughexpansion into new areas and increased productivity, thereby improvingeconomic and socisl conditions in rural areas and increasing rutralemployment. To meet this objective, the Bank loaned US$15.5 million,mainly to provide financial support to public and private banks for lendingoper ttions in livestock development, on-farm investments, small localagroindustries, and agricultural consulting services. In addition, theBank loan supported -nlied research on agricultural production, and theinstitutional development of the Project Unit (PU), the Cooperative Bankand selected cooperatives (paras. 2.02-2.03).

Implementation Experience

The project was executed between 1978 and 1985, and was twiceextended. Extensions were necessary due to disbursement delays causedmainly by the Government's inability to provide adequate counterpart fundson a timely basis. The problem of counterpart funds was the central issueaffecting the execution of the project, followed by the poor level ofmanagement by the PU (para. 3.02).

Despite these problems, the project objective to increaseagricultural output was met. Subloans for livestock production (712 ofproject investments) had a positive impact and although productivityincreases were smAll, there wa a significant increase in the area ofimproved pastures and the total number of herds. However, productivityincreaser. were only marginal. Conversely, the impact on crop productionwas minor as the areas under production only increased marginally. Becauseof inadequate records, the project's incremental impact on farmer's incomeswas not determined. Applied research under the project was particularlysuccessful in pasture development for the Amazon Region. However, theproject was unsuccessful in the area of institutional development. The PUdid not utilize the majority of funds provided for its development,performed badly, and was eventually terminated. The Cooperative Bank andthe selected cooperatives also failed to take up the component provided fortheir nstitutional strengthening (paras. 4.01-4.03).

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Sustainability

The sustainability of the productive component of the project,large-scale farmers engaged in beef and dairy production, appears to begood as these types oZ farmers and their activities are viable. Theinstitutional strengthening of the National Development Bank has enabled itto upgrade its accounting and record keeping to banking standards. Theinstitutional .trangthening of the project unit and the Cooperative Bankdid not take place. The development of crop agriculture for small-scalefarmers is not sustainable.

Findinzs and Lessons

Several findings and lessons emerge from this project experiences

(a) The PU consistently showed the project to be fully committed;however, the majority of the outstanding commitments h&d beenfinanced from other sources of funds. The problems wereaggravated by the deteriorating relationship between the Ministryof Agriculture, the National Development Bank, BNF, and the PU.At the end of December 1984, the project was 701 disbursed and wasincorrectly shown as being fully committed (para. 3.02).

(b) While credit to small farmers amounted to 251 of totalagricultural credit, compated to 302 allocated at appraisal, theactual amount disbursed (US$3 million) surpassed the appraisalamount by 14X, as a result of reallocations from unutilizeiagroindustries, technical assis.sance and unallocated funds formodium- and large-farmers. BNF was by far the most active agentin lending to small farmers. It delivered 791 of the total numberof subloans representing 64Z of the total amount loaned (para.3.06).

(c) While at appraisal, it was expected that subborrowers would payreal positive interest rates, interest rates became highlynegative from 1983 onwards. Due to local legal constraints, noprovisions were made in the subloans legal documents for interestrate readjustments, causing the decapitalization of the loanportfolio (para. 3.11).

(d) BNF's responsiveness to the bank's critictss of its internalcontrol, accounting and auditing procedures helped to influence itto become a much improved credit institution (parsa. 5.04-5.05).

(e) Becauee of its inadequate performance, the PU was terminated inmid-January 1985, and BNF was given the responsibility forcompleting the project (paras. 5.01-5.02).

(f) Private financial institutions will lose their interest in aproject if counterpart funds are not ensured for discounting(para. 7.02).

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(g) Adequate financial management is a prime requirement for *11credit-related projects (para. 7.02).

(h) Institutions included for project participation should first havean understanding of the project and be committed to it (e*g.,Cooperative Bank) (para. 7.02).

ECUADOR

AGRICULTURAL CREDIT PROJECT - LOAN 1459-EC

PROJECT COMPLETION REPORT

I. INTRODUCTION

1.01 In 1983, Ecuador's agricultural sector accounted for about 12% ofGDP and 35% of export earni ngs compared to 33% of GDP and 90% of exportearnings in 1970. While the decline in agriculture was due mainly to thediscovery and export of petroleum, agriculture (except for livestock,forestry and shrimp production) grew slowly from 1970 to the mid-1980s, withno substantial increase shown in the average yields of major crops. Thegrowth rate of real value-added for the major export crops during thisperiod-bananas, coffee, and cocoa--was about 1.7% per annum, with othertraditional crops growing at only 0.6% per annum, well below the populationgrowth rate of 2.5%. However, the picture in the livestock subsector from1974 to 1984 was better, as the area under pastures increased by 53%, with anannual average increase in meat of 3.5% and milk of 2.9%. At the same time,poultry, meat and egg production increased by over 20% per year, and pigproduction by over 5%.

1.02 Since 1984, the new Government has introduced a developmenL programmore supportive of agriculture which is designed to (a) raise farm prices;(b) progressively eliminate consumer and producer subsidies; (c) achieverealistic exchange rates; (d) introduce variable positive and unifiedinterest rates; (e) emphasize import substitution and export expansion;(f) strengthen agricultural support services; and (g) reduce Governmentintervention and generally improve the terms of trade for agriculture.

1.03 At end-December 1985, the total outstanding credit of the finencialsytitem to agriculture production amounted to about US$576 million, of which882 was outstanding to the Government-owned National Development Bank (BNF);the remaining 12% was outstanding to the private banks, Including theCooperative Bank (CB) and financial coorporations. Agricultural lendingduring the past ten years has increased by an average of about 7% per annumin real terms, with medium- and long-term credit accounting for about 35%.Much of the agricultural subloan portfolio made by the financial institutionsare discounted by the Central Bank from special petroleum-generated and otherfunds, and Bank and Inter-American Development Bank (IDB) loans. The Bank,in supporting the Government's agricultural development program has so farfinanced through the Central Bank, three livestock development loans (a totalof US$15.3 million) and the first agricultural credit loan (US$15.5 mil-lion). The projects supported b: these loans were managed by a ProjectExecuting Unit (PU) within the Ministry of Agriculture (MAG). In addition toproviding resources, the Bank has supported applied research and technicalassistance, mainly related to pasture and livestock development.

1.04 The Monetary Board, which is set up by the Government, setspolicies related to interest rates, exchange rates, credit, reserves and

deposits. The Central Bank implements, and the Superintendency of Banksmonitors, controls and audits the Banking system.

II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL

2.01 The project was prepared by the PU as a continuation of the Dsnk'sassistance to livestock development, emphasizing lending to small producer",and diversifying by providing credit for crops and the development ofagroindustries. The project was managed by the PU, with the National Centerfor the Promotion of Small and Artisan Industries (CENAPIA) having asecondary responsibility for agroindustries subprojects. While ProjectCompletion Reports (PCRs) showed the previous projects as being successful inImproving productivity and output on participating ranches, they noted(a) the lack of a monitoring system and (b) the negative Impact arising fromsubsidized interest rates. Also, the latest PCR (Credit 222-EC) referred toinadequate accounting and auditing in the PU, and serious deficiencies in theaccounts and internal control of BNF, the principal participating bank.

Objectives and Description

2.02 The project was designed to support the Government's objective ofincreasing agricultural output by expansion into new areas and increasedproductivity, thereby Improving econom:.c and social conditions in rural areasand increasing rural employment. Specifically, the project was to(a) provide agricultural credit resources; (b, assist the development of farmenterprise management; (c) support applied research for farm and pasturedevelopment; and (d) provide technical assistance for the institutionaldevelopment of the CB and selected cooperatives, the PU, CENAPIA, andparticipating MAG extension services.

2.03 The Bank loan of US$15.5 million was to finance the estimatedforeign exchange cost (432) of the project. The remainder of the projectwas to be financed by Government counterpart funds (24%), participating banks(16X) and producers (17x). At least 30% of the agricultural funds wereallocated to small producersl/. The credit resources were to financelivestock development, crop Tarms in selected areas, agroindustries, andagricultural consulting services.

Appraisal and Negotiations

2.04 At appraisal, the mission noted the National Development Bank's(BNF's) poor financial position, poor internal control, the need for strongerand more qualified auditors, and its poor relationship with the PU. However,the Bank was assured that BNF was undergoing the required institutionalreforms; as a result, it desired greater autonomy under the project. It wasagreed that there would be a gradual delegation of authority for subloanapproval away from the PU to BNF and the private financial institutions,provided the institutions' operations were satisfactory to the Bank. Forinterest rates, Ecuador's Monetary Board permitted a revision of ratessubstantially upwards; In 1979 inflation was 102, compared to interest ratesof 112 to small producers and 142 to others.

1/ Small farmers were defined as those with net assets under US$20,000,excluding their housing.

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III. IMPLEMENTATION

3.01 The loan was approved in June 1977, signed in November 1977, andbecame effective in June 1978. The delay was associated with the fulfillmentof the conditions of effectiveness and bureaucratic hurdles in theGovernment. The estimated project completion date of end-June 1982 wasextended twice, and completion was not until end-December 1984; the loanclosed at the end of September 1985.

Disbursements

3.02 The delay of over two years in loan disbursement was due mainly tothe Government's inability to provide counterpart funds for discount throughthe Central Bank on a timely basis (Annex 1). As a result, the participatingbanks lost interest in the project. Also, when funds did become available,disbursements were slow, since the PU failed to advise the participatingfinancial institutions and to monitor for the speedy processing ofdocuments. For several periods, the PU showed the project to be fullycommitted, when the majority of the outstanding commitments had been financedfrom other sources and should have been cancelled. These problems weref.rther aggravated by the deteriorating relationship between MAG, BNF, andthe PU. Also, the uncertainty of the status and future role of the PUdemoralized its staff, which lost interest in the speedy completion of theproject. As a result of the ineffectiveness of the PU, the new Governmentterminated it in mid-January 1985, and BNF was given the responsibility forthe project's completion. At end-December 1984 the project had been 70%disbursed, and BNF reported that the loan was fully committed. However,because of the PU's lack of cooperation in the handing over of records andproject documents to BNF, the Bank extended the normal disbursement periodafter project completion from six to nine months.

Reallocation of Funds

3.03 There were two major reallocations: the first in November 1981 totransfer US$1.6 million from the non-performing agroindustries componenc toagricultural credit; and the second in December 1983 to transfer unallocatedfunds (US$2 million) and unutilized technical assistance funds (US$800,000)to agricultural credit. A final adjustment was made at the end of theproject to reflect remaining over- and under-disbursements (Annex 2).

Project Cost and Financing

3.04 The project cost of S/ 2,097 million (Annex 3) was more than twicethat estimated at appraisal (S/ 900 million), mainly due to the devaluationof the sucres during the project period, The project was financed by theBank (42%), Government counterpart funds (24%), participating banks (17%),and producers (17%). The Bank's funds were disbursed at an average of S/ 57to US$1, compared to the appraisal estimate of S/ 25 to US$1.

3.05 As anticipated, the project was mainly a continuation of theprevious livestock project, with 71% of investments going to livestockproduction, and 15% to crops (Annex 3a). The large number of crop loans(1,000) which was estimated at appraisal was replaced by fewer and largerloans (87). This change in composition was influenced by the higher delivery

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cost to smal2 farmers, and the lower than planned participation of thecooperatives. The agroindustries component declined significantly, and whilethe number of subloans increased, agroindustrial investments only amounted to6% of total investments compared to 26% estimated at appraisal. This ceeclinewas mainly due to the poor performance of CENAPIA and the lack of counterpartfunds to finance the larger investments required for agroindustries.

3.06 While credit to small farmers amounted to 25% of total credit,compared to 30% allocated at appraisal, the allocated amount at appraisal(US$2.6 million) was surpassed as a result of reallocations from agro-industries to medium and large farmers (para. 3.03). Also, as privatefinancial institutions were much more concerned with lending to medium andlarge farmers, the small farmer component got off to a slow start. BNF wasby far the most active financial institution in lending to the small farmers,delivering 79% of the total number of subloans, representing 64% of the totalamount loaned. The majority of subloans were maae to the Sierra region(highlands). Annex 3b summarizes agricultural credit by beneficiaries,regions, and financial institutions.

Technical Support

3.07 The technical support components of the project were only about 60%utilized (Annex 3a). Technical support had been provided for (a) appliedresearch by the National Agriculrtral Research Institute (INIAP);(b) institutional development for the CB and about ten selected cooperatives;and (c) the institutional development of the PU. INIAP's reduced use of thefunds allocated was due mainly to the lack of the Government's timelyapproval for the hiring of external consultants. However, INIAP carried outa good research program for the development of pastures and legumes, and croprotation. Their main achievement related to the development of technologysuitable to the fragile ecology of the Amazon region, which would improve theincome of the established farmers and new settlers. Preliminary indicationswere that a mixed-farming system based on livestock production would besustainable in the local environment and would provide a reasonable level ofincome. The CB and the cooperatives did not utilize the funds allocated, asthey failed to provide a satisfactory program for institutional developmentand refused to carry out an evaluation of their operations, as was required.The CB thought that the funds were a grant, without any requirement forrepayment. The PU utilized less than 20% of the funds allocated to them, andfailed to engage short-term consultants for crop development, marketingservices and agroindustrial support, and an internationally recruitedfinancial advisor, as was required. At first, the Government failed toprovide the necessary approval for these consultants; later, when approvalwas received, the PU claimed incorrectly that the advisor was no longernecessary, as the project was fully committed.

3.08 Because technical support funds were available, and there was theneed for agricultural research and development in the poor province of Lojaand in the Amazon region, the Bank agreea to provide financial support to theUniversity of Loja and the Technical College of Chimborazo. Both programswere considered by the Bank to be project-oriented, well-designed, and aimedat developing a stable and productive land use system in these highly fragileareas. The program included the selection, establishment and persistence oftropical pastures and legumes.

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3.09 While no funds were provided in the project for extension services,the Ministry of Agriculture (MAG) was required to provide extension supportservices to smallholder borroiers. However, Bank supervision missions notedthat MAG's technical advice and assistance was frequently inadequate and didnot meet the standards envisaged at appraisal.

Sublending Terms and Conditions

3.10 Supervision missions noted that subloan evaluacion procedures wereof good technical quality. However, the procedures for approval,disbursement, and Central Bank discounting were slow and cumbersome. Also,the transfer of subloan approval to the participating financial institutionswas not carried out until the final year of the project. At end-1984, about21% of loans falling due were in arrears to the financial institutions, equalto less than 2% of the outstanding balances. As outstarding subloans areautomatically recuperated on due dates by the Central Bank, the outstandingbalances are entirely the responsibility of the participating financialinstitutions.

3.11 At appraisal it was expected that subborrowers would pay positiveinterest rates. However, interest rates became negative in 1983 wheninflation rose above normal levels (the 1984 inflation rate was 48%). Noprovision was made in the loan documents for the automatic adjustment ofrates linked to inflation or any other indicator, and adjustments made by theMonetary Board were significantly below the inflation rates.

Monitoring and Evaluation

3.12 As a requirement of the project, the PU developed a specialdepartment and system for the evaluation of its subprojects. However, withthe termination of the PU at end-1984, the records of the departmentdisappeared, leaving no information relating to the subprojects monitored.

Compliance with Loan Conditions

3.13 Subloan conditions were generally net, except that the Governmentfailed to provide on a timely basis the counterpart funds necessary for theproject. In addition, under the technical support component, it failed toprovide the necessary and timely approval to engage expatriate staff andconsultants for INIAP and the PU.

. Accounts, Audit and Reporting Requirements

3.14 Project financial accounts were maintained by the Central Bank andthe PU, and were audited annually by the Superintendent of Banks. The auditreports (received up to end-1984) showed that the accounts were reasonablywell maintained, and that the project funds were properly accounted for.However, the management accounting records maintained by the PU to monitorproject implementation were fNequently inaccurate and lacked adequateguidance. The records show that management consistently failed to update thestatus of committed subloans or to adjust for the changes in the rates ofexchange between the commitment dates and disbursement dates. Projectreports were submitted to the Bank on a timely basis until mid-1984, afterwhich their submission became irregular.

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IV. PROJECT IMPACT

4.01 The project's impact is based on an ex-post evaluation of a weaksample derived from 88 subprojects financed between 1979 and 1982. Thesample showed that subloans financed had a positive Impact on production. Inparticular, the livestock subsector which accounted for 71% of theinvestments financed: (a) improved pastures rose from 37% to 50% of thetotal area; (b) the number of cattle rose dramatically (152% in thehighlands, 128% in the Coast, and 268% in the Amazon); and (c) carryingcapacity rose for beef operations in the coast from 1 A.U. up to 1.5 A.U. perhectare. However, productivity coefficients indicated that management andtechnical activities did not improve significantly. For example, mortalityrates in beef operations rose from 5% to 8% and in dairy operations from 10%to 14%; milk production increases were modest, rising on a per hectare basisfrom 1,600 to 1,900 liters per ha. The conclusions, based on the abovecoefficients, are that the level of management was not good and thattechnical assistance and veterinary support services to subborrowers wereinadequate.

4.02 While increased crop production for small farmers was a keyobjective of the project, the project had little impact in this activity.Under the project, annual crops only rose from 5.6% to 6.72 of the areafinanced, and perennial crops only rose from 3.52 to 4.1%. There were norecords available to demonstrate comparative yields, but it was clear thatcrop production received only minor attention.

4.03 Because of the lack of project records, in particular comparativebaseline data, it was impossible to determine the projects' incrementalimpact on farmers' incomes. However, a comparison of current farm modele ofsimilar investment types show financial rates of return ranging from 30% to37%, compared to the project's estimates of 192 for livestock operations and26% for crops. Economic rates of return in current models range from 332 to38%, compared to an average of 18% estimated at appraisal.

V. INSTITUTIONAL PERFORMANCE

Project Unit (PU)

5.01 While the PU sacisfactorily completed the previous Livestock CreditProject (Loan 222-EC), the Bank noted that its accounting arrangementsrequired strengthening, and consequently provided in the project for theengagement of an expatriate financial/credit adviser. However, this adviserwas not engaged because (a) Government approval was delayed for over twoyears; and (b) when approval was received, the PU submitted that the projectwas fully committed and the adviser no longer required. It was unfortunatethat the adviser was not engaged, as the lack of adequate financial andadministrative leadership was reflected in the poor performance of the PU.The PU was unable to efficiently deal with the problems arising from the lackof counterpart funds, e.g., its inability to (a) initiate strongintermediation with the Government and the Central Bank; (b) accelerate themovement of documentation for discount and subsequent Bank reimbursement; and(c) properly interpret and manage accounting and subloan information (para.3.14). In addition, the PU suffered from its poor relationships with MAG andBNF.

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5.02 In summary, the PU's management consisted mainly of livestocktechnicians, whose knowledge of proper administrative and managementprocedures were inadequate. In mid-January 1985 the Government terminatedthe PU and transferred to BNF the responsibility to complete the project.The PU actively opposed its own termination, and refused to cooperate in thehanding over of some project records and information causing a delay in thefinal three months of disbursements.

National Center for the Promotion of Small and Artisan Industry (CENAPIA)

5.03 While CENAPIA insisted on and obtained agreo-ent for 't to be incharge of managing the agroindustri-s component of the project, it performedpoorly. During the project period, there were several changes in managementand it suffered from budgetary restrictions. Its management of subloanrecords was poor, and it was not able to promote many subprojects (themajority of agroindustrial subprojects were promoted and managed by BNF).

National Development Bank (BNF)

5.04 BNF is the main source of agricultural credit in Ecuador and underthe project loaned 79% of the number of loans and 64% of the amount loaned.At the beginning of the project period, BNF had a poor institutionalreputation, with poor account1ing practices and an inadequate system ofinternal control. With the assistance of an FAO/UNDP team of consultants,BNF underwent a substantial program of institutional development and iscurrently considered a reasonably good financial institution. However, itstill suffers from some decapitalization, caused mainly by its lending in thepast at negative fixed rates of interest.

5.05 BNF's management of the final stages of the project was efficient.The PCR prepared was of reasonably good quality, after taking intoconsideration the lack of cooperation from the PU and the unavailability ofseveral documents (para. 5.02).

VI. BANK PERFORMANCE

6.01 Bank supervision was adequate and timely. Throughout the life ofthe project, the Bank's attention to the lack of counterpart fundsovershadowed all other problems. This problem was compounded by theinaccurate subloan records maintained by the PU, and its poor management ofthe project. During appraisal, the Bank was aware of the PU's poormanagement and provided for the recruitment for a financial adviser. Also,it noted the PU's poor relationship with BNF. It was unfortunate that theBank did not insist strongly enough on the r:cruitment of the financialadviser during project implementation, and was unable to influence animprovement in the relationship between the PU and BNF, the most importantparticipating institution in the project.

6.02 The Bank's initial concern on the effect of negative interest rateson the participating institutions was satisfied through the increase in ratesat the beginning of the project. However, the Bank was unable to obtain acommitment for subsequent automatic adjustments during implementation toreflect the future significant increase in inflation.

-8-

6.03 BNF's responsiveness to the Bank's criticism of its internalcontrol, accounting and audit procedures helped to influence it to become amuch Improved credit institution. This improvement resulted in BNF'sefficient execution of the final stages of the project, and its acceptance asthe recipient of the second agricultural credit project to Ecuador, which isabout to become effective.

6.04 The Bank contributed to the termination of the PU after having mademany unsuccessful efforts to improve that institution's performance.However, supervision in general tended to focus heavily on increasingdisbursements and ensuring the timely availability of counterpart fdnds.

VII. CONCLUSIONS AND LESSONS LEARNED

7.01 While there are some areas of uncertainty, the main projectobjectives set at appraisal were met. The project mainly supportedlivestock, and while productivity only increased marginally, the area underproduction and the number of animals increased significantly. The thrust todeliver an increased number of small subloans for crop production was notachieved, mainly because of the failure to obtain a closer workingrelationship with the Cooperative Bank. While the technical support programdeviated slightly from the original plan, the contributions to pasturesdevelopment through INIAP, the University of Loja and the Technical Collegeof Chimborazo were quite significant. The main constraints suffered bythe project were: (a) the failure of the PU and CENAPIA to develop as stronginstitutions; and (b) the lack of a variable interest-rate system to reflectthe changing levels of inflation.

7.02 Lessons learned were: (a) private financial institutions will losetheir interest in those projects that are unreliable in meeting financialobligations (lack of counterpart funds for discounting); (b) adequatefinancial management is a prime requirement for all credit-related projects;and (c) institutions included for project participation should first have anunderstanding of the project and be committed to it (e.g., Cooperative Bank).

-9-

OnMGIUIM UEP - WANN 1459-DC

Actual al Acua as X ofBe* Fiscal Yer ndm1-Ya

IIS$ dtiuani-

1978 -750

1979 -3,250

1980

I~u~r31, 1979 2Do 5,250 4June 30, 198 1,900 7,750 25

1981

I~m~r31, iwoD 4,200 10,250 41Jim 30, 1981 4,800 12,250 39

1982

Deeber 31, 1981 5,100 13,750 37Jime 30, 1982 5,300 14,750 36

1983

_r 31, 1982 7,100 15,750 46ime 30, 1983 7,400 - 48

1984

e 31, 1983 8,000 52ime 30, 1984 9,200 - 59

1985

1~o.uber 31, 1984 10,800 - 70-Im 30, 1985 11,954 - 77

1986

teoui,er 31, 1985 15,500 - 100

-10 - hmx2

OM1E F(4W E - WMN 1459-IC

AUocatlm of huk Im

LU FNiL

1. 9ublWA for livetockan8 agrlsattwe

a) for f 61anrs 2,600,000 17 2,958,999 19b) for otb*r famis 6,100,000 39 10,386,841 67

2. Sbk for dl-agrdlrAntrie 3,100,000 20 1,310,242 9

3. &bosms for agriculuwal oomitirgservics 75,000 1 30,182 -

4. Iwchicg1 Asistance, Teanlrg andAppled 1earch 1,600,000 10 813,736 5

5. UbaLlocated 2,025,000 13 - -

15,500,000 100 15,500,000 130_ _m

ECM

aXFFIETlcN REUM - LON 1459-BC

Project Ost.Flzuacig

Bank QNeruoot Batcpaf3ItaL Produxezs PtojectR ircin comterpGrt Buzlhs h zb btibuI oost a/

Snail fmamer 198.9 159.2 41.6 399.7 39.9 439.6

Other fare$s 596.7 306.5 287.1 1,190.3 297.6 1,487.9795.6 V5. TZ.7 33i 7.5 1,927.5

Argi3dustries 55.5 33.3 22.2 111.0 22.2 133.2

Agriwulturawl Uultamt 2.4 1.4 0.9 4.7 0.9 5.6

2Bcmical Assistaix 31.1 - - 31.1 - 31.18W4.6 350. 351.8 -I736.8 3606 2,097.4

Fente ErtdptIoktual 42 24 17 83 17 100Apprassi EBtiute 43 24 16 83 17 100

a/ Ihe prject cost of w 2,C97 miion m w equl tD US$36.8 millioa, at the sege uibaW rate of (S/.57 to Ui$1)at tdih the lea mm disburse.

- 12 -,kvA 31

EaL4Dh

(XIK]G W RX - WM 1459-DC

Pzuect Q3s !I Akt±vltIas

N&ube of I sw lwmt AM Sims of 1w.FatiwTe ~ aiSteSE-SN IUM s'E tw Acti btimatd AimSo SuUim S. millaII I S. .ulons

- a -

crop 1,000 87 75 9 309 15 0.1 3.6

UvIstoc 950 1,282 548 64 1,475 71 0.6 L2

mixed 93 96 5 - 1.0

Otbr 17 47 2 - 2.81,950 TM -M TS 1T2T W 0.3 1.3

Agralzxtwtrim 50 68 220 26 13 6 4.4 2.0

0iltultalmt 10 4 7 1 6 1 0.7 1.5

ect Ite 2,010 1,551 850 100 2,066 100

Research 16 11

Coawmtiw 8 0

Poect UWit 26 4

Ikdlveuit1 0 16

&Sbtotal 50 31

TOAL 900 2,097

-13 - bc 3b

03 lR4 N R - WM 1459-BC

Rml ad tbr arer

Appmil

Actualk 17 % %

&mwU farmer 1,028 69 400 25 30

Otbur fumm 451 31 1,190 75 701,479 li 3w

Sierr 993 67 869 54

Cos8t 305 21 647 4:.

Anazon 181 12 74 3i747~ ~ -0 1,T590 N.A.

Piancial budtutlix

BNF 1,174 79 1,014 64

Otbers 305 21 576 36147 0 1,590 100 N.A.

_/ Bark resoure, Qweuun couterpart fuixis and contrbut1m fra i Jr ; g b013M.

- 14 -

U1PEfG ROM - WN 1459-EC

ledv Poi$cSm

QUGM&L REVa

AgrWte aiunt of ahloau to any mll-famer beneficiary US$12,000 tS$20,000

Lindt of sbloom a apercntage of sibproject:

-to sna1 fan2s 90%- to otber farnirs anl agraLdustri )

) NDdw- loais up to US$50,000 &a )- lans US$50,000 to US$100,000 71 )- ;as aer US$1; MO0P 70% )

,dual outstaiig amount (incluig new laan), requiriprior Bank pprwal for now loan

- agrculture US$100,000 WS$150000- agroindstris US$150,000 US$200,000

daidn size of sublmn x*d size together wlud not 1ee20% of all such subloars US$100,000 UB$150,000

Maxdnu amunt of bloan to any:

- sirg1e qWaindustries cterprise US$200,000 US$250,000- single agricultural cwuulcant US$15.000 US$25.000

Tnterest Rate including commission

- sprea od partci bngikls 3% to EX lb cd- nimu anrawl rates to

- smal fatrs 11% 1%/- oter 14Z 231F/

a/ Tis Is tie final of several revisions.

.~~~I K

hit N0 0 Ii§"4"tgIf ' I

i' iw

RW ffi S q X *

NOTES

I

I~~~~~~~~A ETO

I

I

Scn lorenzo ' S

Pblest _ ' - n Froncc C 0 L 0 IV, B I A

Abcca"nes loo R,,.,L R co

Mu-s,,e° | Ccple S>r OSan Gregworo * Asoil Sn Gabr.d f

e t / _ ,.y8~~MBAE U'"U< Th .. a Jose de nncde C! IBARRA

Blohqulh gg - Pbo Qabc 'L P - Cor,_ ogo Ag,.o

F Indape~enweroTordovopo - -, -S- - - o- o - q

J. ]AMA PI \ PlC ff> Kfu m A~o H, i. s Col t 0

La Vrden La EstocjdrV-- 1 / / lo Son Seboston del CocoT'

_AIforo b { JTomb lb ~fio/ Frorc,sco de OrelIano!M Nffi bJ|.tE z I / / Alotg t' 1Boewo

Balho de Caroquez c° SlInI hcha

5. bac.nto Chone X { -- _ ef«oI8/ t vbT.pufir

Pie do Coyoj%~ eet 3en lMontsrA a Si D°I c O,J U P ASiA( I

Salnos StO.EIpf~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Tn

U(EDO -A II ECUADOR

COtOPAXi~~~~~~~ECNAR OAS

aA~~~~~~~~~ot

Pto. de AtoEr Si erra

COaos .- 2- NbLa ClloJed }A ° >/ O'et ,. 2

Celrca~ TOIna PAMORAPrASTAZ Alorore

50nb5 pMacos

PrrDqreAs~la bao 9 , 8. c'LoM. .

ot Rc itooos or Or a tao orAniuso J elG .I GUARANoA

Nobo- Chnllu-esd' 0 ao

La GtJ~~ACHAQLA 1/s lo f . -G

Sama Ba If , er ,\ o nanm~

,7 4 / Gonzonortc NT&~~~~ch I-ItroinloudrePlo M rimog RqAo

_ ocoro _ > * ,( ' ' o 20 40' EC50DO R

') ;;Dzo SECmo tlONDATRY OAS

P E R U Tb rd resoerr anerZs D=r>F TboS*3hr r>r* +sdefr _y rOt re evrrcrrvedf diltrloz _ r d r |~~~~~~~~~~~~~~~~~~~~~~~~~o -cZub .G