Public Disclosure Authorized
Document of
The World Bank FOR OFFICIAL USE ONLY
Public Disclosure Authorized
Public Disclosure Authorized
Report No. 16202
IMPLEMENTATION COMPLETION REPORT
POLAND
AGRICULTURAL DEVELOPMENT PROJECT (LOAN 3343-POL)
Public Disclosure Authorized
December 30, 1996
Agriculture and Regional Development Operations Division Central and Southeastern Europe Departments Europe and Central Asia Region
This document has a restricted distribution and may be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
CURRENCY EQUIVALENTS Currency Unit - Polish Zloty (PLZ) 1988 US$ 1990 US$ 1992 US$ 1994 US$
1 1
1 1
= = = =
PLZ PLZ PLZ PLZ
0.0431 0.9500 1.3626 2.2723
1989 US$ 1991 US$ 1993 US$ 1995 US$
1 1
1 1
= = = =
PLZ PLZ PLZ PLZ
0.1439 1.0576 1.8115 2.4250
WEIGHTS AND MEASURES (metric) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADP AEDP ARMA ASP BGZ CBs CC CF CMEA EFSAL ERR ETP EU FAO/CP FAPA FIDL FRC FRR GDP ICBS ICR IEDP JTF LCBs MAFE MOF NBP PBs PHARE PU RCBs RCSUs SAR USAID
Agricultural Development Project Agroindustries Export Development Project Agency for Reconstruction and Modernization of Agriculture Agricultural Strategy for Poland Bank for Food Economy Cooperative Banks Convertible Currency Capital Fund Council of Mutual Economic Assistance Enterprise and Financial Sector Adjustment Loan Economic Rate of Retum Economic Transformation Program European Union Food and Agriculture Organization/Consultative Program Foundation for Assistance Programs for Agriculture Financial Institutions Development Loan Foundation for Rural Cooperatives Financial Rate of Return Gross Domestic Product Independent Cooperative Bank System Implementation Completion Report Industrial Export Development Project Joint Task Force Local Cooperative Banks Ministry of Agriculture and Food Economy Ministry of Finance National Bank of Poland Participating Banks Poland-Hungary Assistance Recovery for Europe Project Unit Regional Cooperative Banks Regional Cooperative Service Units Staff Appraisal Report United States Agency for International Development
Vice President Director Division Chief/Manager Staff Member
Johannes Linn Jean-Michel Severino Michele de Nevers Kishore Nadkarni
FOR OFFICIALUSE ONLY
IMPLEMENTATIONCOMPLETION REPORT POLAND AGRICULTURAL DEVELOPMENT PROJECT (Loan 3343-POL)
CONTENTS Preface ...........................................
i
Evaluation Summary ...........................................
iii
Part I: Project Implementation Assessment............................................ A. Project Objectives. B. Evaluation of Objectives.1 C. Achievement of Project Objectives. D. Implementation Record and Major Factors Affecting Project Implementation. E. Project Sustainability. F. Bank Performance. G. Borrower Performance.10 H. Assessment of Outcome.11 I. Future Operation .11 J. Key Lessons Learned.
1
Part II: Statistical Annexes ................... Table 1: Summary of Assessments.14 Table 2: Related Bank Loans.15 Table 3: Project Timetable.15 Table 4: Loan Disbursements: Cumulative Estimated and Actual.16 Table 5: Key Indicators for Project Implementation.16 Table 6: Key Indicators for Project Operation.17 Table 7: Studies Included in Project .17 Table 8A: Project Costs ........................................... Table 8B: Project Financing........................................... Table 9: Economic Costs and Benefits ........................................... Table 10: Status of Legal Covenants........................................... Table 11: Compliance with Operational Manual Statements ......................... Table 12: Bank Resources: Staff Inputs ............................................ Table 13: Bank Resources: Missions...........................................
3 7 9 9
11 13
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Appendices: A. Aide-Memoire of ICR Initiation Mission B. Borrower's Contribution to the ICR C. Map - IBRD No. 28477 This documenthas a restricteddistributionand may be used by recipientsonly in the performanceof their official duties. Its contents may not othemise be disclosed wiLhoutWorld Bank authorization.
18 18 19 20 22 22 23
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IMPLEMENTATION COMPLETION REPORT POLAND AGRICULTIJRALDEVELOPMENT PROJECT (Loan 3343-POL)
PREFACE This is the Implementation Completion Report (ICR) for the Agricultural Development Project (ADP) in Poland, for which an IBRD loan in the amount of US$100 million equivalent was approved on June 11, 1991; signed on July 10. 1991; and made effective on March 4, 1992. The original loan closing date of June 30, 1995 was extended by one month until July 31, 1995. The loan account was kept open thereafter for a period of four months to enable completion of disbursements in respect of expenditures already incurred before the revised closing date. The last disbursement from the loan account was made on October 12, 1995. The final amount utilized was US$ 25.28 million equivalent and the unutilized balance of US$74.72 million equivalent was canceled with effect from October 12, 1995. The ICR was prepared in the Agriculture and Regional Development Operations Division of the Central and Southeastern Europe Departments (Country Departments I and II) in the Europe and Central Asia Region. The current Task Manager is Kishore Nadkarni; the report was reviewed by Michele de Nevers, Division Chief and Franz Kaps, Project Adviser. On behalf of the Borrower - the Republic of Poland. a written contribution was jointly provided by the Ministries of Agriculture and Food Economy (MAFE) and of Finance (MOF), and the National Bank of Poland (NBP), and is included as an Appendix to the ICR. Preparation of the ICR was begun in the last supervision mission in July 1995 and followed up on in the Implementation Completion Report mission of April 1996. It is based on materials in the project files, discussions with relevant officials of MAFE, MOF and NBP; the Foundation of Rural Cooperatives (FRC); the National Union of Cooperative Banks (NUCB), the Regional Cooperative Banks (RCBs), and the Bank of Food Economy (BGZ). The Borrower's agencies (MAFE, MOF and NBP) contributed in the preparation of the ICR by: (i) discussing major points included in the report; (ii) providing information on the credit line component; (iii) coordinating collection of necessary data; and (iv) providing its section of the report.
IMPLEMENTATION COMPLETION REPORT POLAND AGRICULTURAL DEVELOPMENT PROJECT (Loan 3343-POL)
EVALUATION SUMMARY INTRODUCTION i. Since Poland rejoined the Bank in 1986, the Bank's strategy of assistance has focused on supporting the country's program of macroeconomic and structural adjustment to make the economy more efficient, flexible, market responsive and competitive in external markets. In the agriculture sector, the Bank's first operation was the Agroindustries Export Development Project (Loan 3167-POL), approved in June 1990, that aimed at supporting Poland's efforts to expand its exports to convertible currency markets, by financing restructuring and modernization investments in selected agricultural subsectors in which Poland was perceived to have comparative advantage. The Agricultural Development Project, approved in June 1991, was the Bank's second operation in the sector. It was followed by an Agricultural Sector Adjustment Loan (Loan 3600-POL), approved in May 1993, in support of the Government's MediumTerm Adjustment Program in the agricultural sector (para. 3). PROJECTOBJECTIVESANDCOMPONENTS ii. Objectives. The development objectives of the Agricultural Development Project (ADP) were to: support private farmers and promote other private sector activities in rural areas, primarily through the restructuring of high-priority rural cooperatives (e.g. cooperative banks, and marketing, dairy and horticulture cooperatives). More specifically, the project was to: start transforming existing rural cooperatives from social sector organizations to member-controlled, market-oriented business enterprises; help develop rural commercial enterprises by improving access to credit; and provide investment funds for business and institutional development in rural communities. iii. Components: To achieve these objectives, the project was to support over a three-year implementation period (January 1992 to December 1994) the following activities: Institutional Development. Provision of institution-building activities for about 2,400 rural cooperatives and cooperative banks, including the strengthening of individual cooperatives and banks, and assisting them in establishing suitable apex structures at regional and national levels. The project was also to provide for staff training, advice on organizational restructuring and privatization, and assistance in credit implementation-related activities, as well as the financing of equipment and operating expenditures for the Technical Assistance (TA) delivery system. The project's TA component (then estimated at US$20.2 million) was to be implemented with grant funds from various agencies, the foremost being the EC (now EU). The project was also to support the establishment of a Capital Fund (CF) for cooperative banks financed from the Government's budgetary and other sources. Credit Program. The project was to provide medium- and long-term credit (through a US$100 million equivalent Bank loan) for investments in agriculture, agroindustry and other rural productive sectors, benefiting farmers, individual entrepreneurs, private cooperatives, private enterprises, and former state enterprises which had been privatized. Loan funds were to be
iv channeled to investors through NBP, acting as the apex bank, and participating banks (PBs) either directly or through qualified cooperative banks (CBs) (para. 2). IMPLEMENTATIONEXPERIENCE ANDRESULTS
iv. Achievement of Objectives. The project's institutional objectives - in respect of supporting the transformation of rural cooperatives and strengthening of the cooperative banking system - were substantially achieved although the sustainability of the progress depends critically upon the Government's resolve and ability to ensure a conducive environment for them. In regard to the transformation of rural cooperatives, the envisaged apex structures at the national and regional levels (the Foundation for Rural Cooperatives (FRC) and its associated 12 Regional Cooperative Service Units (RCSUs)) were established, and became operational, on schedule with extensive donor-financed technical assistance. Technical assistance was provided under the project to about 3,000 (out of a total of around 8,000) rural cooperatives in various aspects of the transformation process. FRC and the RCSUs have progressively established themselves in terms of their clients' recognition of their contributions, and this is reflected in their increased self-financing from fee-generating activities. To the extent that FRC's charter includes activities of a developmental nature, it and the RCSUs would continue to require some financial support from the Government through budgetary sources (paras. 11 to 13). In regard to the strengthening of the cooperative banking system, the project was instrumental in the establishment of an independent cooperative bank system (ICBS), consisting of three regional cooperative banks (RCBs) and associated 400 local cooperative banks (LCBs) that together accounted for about 40 percent of the total assets of the entire cooperative bank system. As in the case of rural cooperatives, the envisaged national and regional apex structures (the National Union of Cooperative Banks and the three Regional Cooperative Banks) were established and made operational with extensive donor-financed technical and financial assistance. This included, significantly, a Capital Fund (of about US$20 million equivalent) that was vital in enabling the establishment of the three RCBs (paras. 14 to 18). v. The project was less successful in meeting its financial objectives of making funds adequately available to private farmers and other rural investors, and in securing benefits from the funds actually onlent to the extent expected at appraisal. Of the original Bank loan amount of US$100 million equivalent, only about US$25.3 million was disbursed with the balance being canceled at loan closing. The bulk of the funds onlent went to agroprocessing and rural services activities; farm investments accounted for only around 11 percent of the amount onlent, reflecting the reluctance of private farmers to borrow at the perceived high interest rates. The weighted average reestimated financial rate of return (FRR), computed on the basis of the FRRs prepared by the subborrowers and participating banks for a sample of subprojects, was substantially lower than that projected - about 24 percent as compared to 43 percent - and likely itself is a significant overestimate, arising from computational and methodological weaknesses. In regard to repayment performance, as of July 1996, four of the 31 subloans (involving subloans of about US$6 million out of the total of US$25.3 million) were in arrears, primarily in relation to interest payments. The PBs concerned regard the arrears problems as transitional and expect them to be corrected (paras. 19 to 24). vi. Major Factors Affecting the Project: The main risks to project implementation were recognized at appraisal - the possible effects on the subsector from variations in implementation of the overall economic transformation and structural reform programs; slow progress in financial sector reform; and the financial institutions' lack of experience in lending to private sector clients. What could not be foreseen was the juxtaposition of the sudden collapse of the CMEA market and the transitional difficulties in domestic markets, and their combined impact on agricultural and non-agricultural enterprises, and the banking system. Also, frequent changes in the government and associated discontinuities adversely affected project implementation (paras. 7 and 25 to 29).
V
vii. Bank and Borrower Performance: While Bank performance was satisfactory in all phases of the project cycle, it was more effective in the pre-implementation phases of the project, including identification, preparation and appraisal. During the implementation phase, Bank supervision was satisfactory in terms of the frequency and extent of efforts, including missions in the field. However, its effectiveness in securing project objectives was mixed. While the institutional objectives were achieved to a large extent, the Bank, despite intensive proactive efforts, particularly after a major review in 1993, was unable to secure a significant improvement in the credit component (paras. 31 to 34). viii. The Borrower's performance was satisfactory during the identification, preparation and appraisal stages of the project cycle. Performance during the implementation phase was affected by a number of factors, including, in part, the many changes in government. This contributed to delays in securing essential improvements in the enabling environment, including timely modifications to the cooperative law, and the adoption of a clear and consistent policy in regard to BGZ and the cooperative banks. Despite the presence of a Project Coordination Committee (PCC) with representation from the key implementing agencies (MAFE, MOF and NBP), and the nominal anchoring of the ADP in MAFE, there remained an overall lack of effective ownership, resulting in less than proactive involvement, including in project promotion, facilitation, and monitoring. Compliance with covenants was generally satisfactory except in regard to the timely completion of a rural finance study and the installation of the monitoring system for preferential credit, as originally agreed. Reporting, while complied with, was inadequate in terms of the accuracy and quality of information (paras. 35 to 36). ix. Assessment of Project Outcome: The overall project outcome is assessed as marginally satisfactory; the project has met its institutional objectives to a large extent but this is significantly offset by its lack of success in meeting its main financial objectives of providing investment funds to private farmers and other rural investors, and to rural cooperatives to support their restructuring (para. 37). PROJECT SUSTAINABILITYAND FUTURE OPERATIONS
x. Sustainability: Sustainability of the project, including the continued effective operations of the project-supported institutions, would depend critically upon the Government's success in resolving satisfactorily the situation in regard to the framework for rural finance, including the proper roles of BGZ and the cooperative banks. Vital, in this regard, would be the Government's ability to secure necessary changes to the law on cooperative banks and to ensure its even-handed application to BGZ and the cooperative banks (para. 30). xi. Future Operation: At the Government's request, the Bank is continuing to provide technical assistance in the design and implementation of the restructuring program for the Polish rural finance sector. The EU and the European Bank for Reconstruction and Development (EBRD) have indicated that BGZ and the cooperative banks are high priorities for their support. The Bank is collaborating with the EBRD in jointly developing, by mid-1997, a technical assistance program for BGZ that would help define, inter alia, its organizational relationship with the cooperative banks and its business strategy, including a clear delineation of roles, and the respective areas of focus, of BGZ and the cooperative banks associated with it. In regard to the FRC and its constituent regional units, the Government has confirmed its intention to provide support for their operations but it has been unable as yet to submit a formal operational plan in regard to the nature and modalities of the intended support. The Bank intends to continue to monitor progress in the institutional areas above in the context of other ongoing and planned work in regional and rural development in Poland (paras. 38 to 40).
vi KEY LESSONS LEARNED
xii. The main lessons from the project (as summarized in para. 41), which may also have more general relevance for other projects, are: (a) it is essential to agree upon, at the outset, a clear strategy for the overall development of the rural finance sector, including the respective roles of the key intermediaries (in this case BGZ and the cooperative banks); (b) strong and sustained Government commitment is required to ensure timely actions to improve key aspects of the enabling environment (in this case, the cooperative law and the law on cooperative banks and BGZ); and (c) credit lines are inappropriate instruments in the absence of strong financial intermediaries, and in environments of significant monetary instability characterized by high inflation and interest rates.
IMPLEMENTATION COMPLETION REPORT POLAND AGRICULTURAL DEVELOPMENT PROJECT (Loan 3343-POL)
PART I: PROJECT IMPLEMENTATIONASSESSMENT A. PROJECT OBJECTIVES 1. The development objectives of the Agricultural Development Project (ADP) were to: support private farmers and promote other private sector activities in rural areas, primarily through the restructuring of high-priority rural cooperatives (e.g. cooperative banks, and marketing, dairy and horticulture cooperatives). More specifically, the project was to: start transforming existing rural cooperatives from social sector organizations to member-controlled, market-oriented business enterprises; help develop rural comrnercial enterprises by improving access to credit; and provide investment funds for business and institutional development in rural communities. 2. To achieve these objectives, the project was to support over a three-year implementation period (January 1992 to December 1994) the following activities: Institutional Developmnent. Provision of institution-building activities for about 2,400 rural cooperatives and cooperative banks, including the strengthening of individual cooperatives and banks, and assisting them in establishing suitable apex structures at regional and national levels. The project was also to provide for staff training, advice on organizational restructuring and privatization, and assistance in credit implementation-related activities, as well as the financing of equipment and operating expenditures for the Technical Assistance (TA) delivery system. The project's TA component (then estimated at US$20.2 million) was to be implemented with grant funds from various agencies, the foremost being the EC (Pow EU). The project was also to support the establishment of a Capital Fund (CF) for cooperative banks financed from the Government's budgetary and other sources. Credit Program. The project was to provide medium- and long-term credit (through a US$100 million equivalent Bank loan) for investments in agriculture, agroindustry and other rural productive sectors, benefiting farmers, individual entrepreneurs, private cooperatives, private enterprises, and former state enterprises which had been privatized. Loan funds were to be channeled to investors through NBP, acting as the apex bank, and participating banks (PBs) either directly or through qualified cooperative banks (CBs).
B. EVALUATIONOFOBJECTIVES 3. Poland rejoined the Bank in 1986. At the time, although socialism was under strain and the demand for reform was growing. there was no consensus that radical change was the only solution. Bank operations focused, therefore, on securing gains in selected subsectors, chosen on the basis of their potential comparative advantage, through improvement in the productivity and efficiency of state-owned enterprises. The elections of June 1989 marked a watershed in Poland's history. The new democratically elected Government. strongly committed to the rapid creation of a market economy, initiated its Economic
2 Transformation Program (ETP) in early 1990 with priority on stabilizing the economy and creating effective markets to replace the system of central command. The Bank's assistance program shifted to helping the Government carry out its program of reforms. In April 1990, the Government decided that it urgently needed to formulate a strategy for the agriculture sector. A Joint Task Force (JTF), composed of representatives from the Bank, the EC and Polish agencies, was established in May 1990 and charged with submitting its report on an Agricultural Strategy for Poland (ASP) by the end of July 1990. Among the recommendations of the ASP was the urgent need for developing rural institutions -- rural cooperatives and cooperative banks -- by supporting their transformation to make them more responsive to the evolving needs of Polish agriculture. This was subsequently taken up for addressing through the ADP; other recommended policy and institutional measures were to be taken up under an agricultural sector adjustment operation, that was to follow the ADP with a slight lag. An Agricultural Sector Adjustment Loan (ASAL - Loan 3600-POL) did follow, but only in May 1993, two years after the approval of the ADP. The Bank was also closely involved in supporting the Government's program of financial sector reform, and approved a loan (Loan 3341-POL) for the Financial Institutions Development Project (FIDL) in June 1991 in parallel with the approval of the ADP. 4. The objective of supporting private farmers and the promotion of other private activities in rural areas was consistent with the importance of agriculture in the national economy (at the time, 12 percent of GDP, 20 percent of exports, and 28 percent of employment); and the already large (over 80 percent of farm land) and growing share of private farmers in Polish agriculture. The emphasis on transformation of rural cooperatives and cooperative banks was well-justified in view of the shares of these institutions in respectively providing essential services (input supply, output marketing, dairy and horticulture) and credit to private farmers and other rural investors. The objective of providing investment funds was also consistent with facilitating the transformation of the cooperatives, and the development of other private sector activities in the rural sector. 5. Project design rightly emphasized institutional development as the primary focus. Certain changes in the laws and regulations pertaining to cooperatives and banking, pursued under the ETP with the objective of freeing individual cooperatives and cooperative banks from centralized control (for example, through the dissolution of the central unions of the cooperatives, and the removal of the Bank for Food Economy (BGZ) as the apex institution for the cooperative banks) also had the concurrent effect of depriving the cooperatives and the cooperative banks of essential training, advisory and administrative services that had been provided by the central organizations. Recognizing this vacuum, the design correctly identified the need for interim institutions to be established to meet these needs. For the rural cooperatives, this implied the establishment of a central agency to assist in cooperative transformation through provision of advice, training, and support services. For the cooperative banks, it implied the establishment of tiered structures - a number of regional cooperative banks (RCBs) owned by member cooperative banks; and a National Union of Cooperative Banks (NUCB) formed by the RCBs and the many local cooperative banks (LCBs). The institutional development component under the project rightly focused, including in concentrating the technical assistance, on the establishment and operationalization of these intermediate institutions. These institutions, in turn, were to undertake the provision of technical assistance and supporting services to the large number of primary cooperatives (about 8,000) and the LCBs (over 1,600). The establishment of a Capital Fund was vital in helping the LCBs in meeting the capital requirements of the three RCBs that were established, particularly in view of the higher capitalization requirements introduced by the new banking law in 1991. 6. In regard to the credit component, the design called for successive onlending through a tiered structure with the NBP as the apex which would onlend the funds to eligible participating banks (including BGZ, other commercial banks and the RCBs), which in turn could lend the funds directly to the final beneficiaries (cooperatives, private farmers and investors) or onlend to eligible LCBs for onlending to the final beneficiaries. It was recognized that, given the relative lack of experience of the LCBs in such
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lending and the time that it would take them to become eligible to participate, at least initially, BGZ and the other participating banks (PBs) would be the main participants. Design of the credit component was influenced by the then newly issued guidelines in the Bank on lending through financial intermediaries; accordingly, eligibility for financing was extended to a broad spectrum of beneficiaries in the rural sector, and onlending interest rates were to be market-determined. In the light of experience under a preceding credit line (for the Agroindustries Export Development Project - AEDP - Loan 3167-POL that was implemented in parallel with the ADP) in Poland as well as that under other credit lines, it was decided not to preappraise subprojects for inclusion given the need for flexibility to the PBs to respond in a rapidly changing economic environment.
7. The main risks to project implementation were recognized at appraisal - the possible effects on the subsector from variations in implementation of the overall economic transformation and structural reform programs; slow progress in financial sector reform; and the financial institutions' lack of experience in lending to private sector clients. What could not be foreseen was the juxtaposition of the sudden collapse of the CMEA market and the transitional difficulties in domestic markets, and their combined impact on agricultural and non-agricultural enterprises and the banking system. In hindsight, the considerable risk associated with the Government's political will and ability to follow a clear and consistent strategy in regard to the development of the rural finance sector, and to deal effectively in a timely manner with BGZ, was also not adequately recognized. 8. To increase the attractiveness of the Bank loan to subborrowers in the changing circumstances, a number of modifications were made to the project during implementation without compromising the original objectives. These included simplification of application procedures; extending the period of eligibility for refinancing of subloans made by the LCBs from 90 to 180 days; and extending the subborrower eligibility to operating lease companies. For consistency, thresholds and conditions were harmonized between the Bank's different credit lines in Poland. As a special accommodation to LCBs which had been denied the opportunity to participate under the project due to delays in finalization by NBP and the PBs of the relevant onlending agreements, eligibility in respect of refinancing was extended to eligible subloans made after loan signing (July 1991) to enable the LCBs to extend the maturities of the concerned subloans. C. ACHIEVEMENTOFPROJECTOBJECTIVES 9. The project's institutional objectives - in respect of supporting the transformation of rural cooperatives and strengthening of the cooperative banking system - were substantially achieved although the sustainability of the progress depends critically upon the Government's resolve and ability to ensure a conducive environment for them (para. 30). The project was largely unsuccessful in meeting its financial objectives, both in terms of making funds adequately available to private farmers and other rural investors, and in securing adequate benefits from the limited funds that were actually onlent. Sector Policy Objectives 10. The project was undertaken in the context of the Government's overall sweeping reform program under the ETP which was being supported by the IMF, and by the Bank through a Structural Adjustment Loan (Loan 3247-POL) that addressed key macroeconomic and structural reform areas. Priority agricultural sector issues, identified under the ASP, were to be addressed under a separate sector adjustment operation, originally planned to follow closely upon the ADP, but later delayed by about two years. In addition, the Bank was also engaged in supporting the ongoing financial sector reform, including through the FIDL (para. 3). The ADP therefore focused on institutional and financial objectives. The principal sector policy objective was to address the deficiencies in the law on cooperatives that was constraining the restructuring and rational development of cooperatives. Amendments that
4 considerably improved the existing law were adopted in 1994 but only with a delay of over two years; even so, there remain significant areas for further improvement. Institutional Objectives (a) Rural Cooperatives 11. Cooperatives: The project had substantial success in assisting rural cooperatives in their transformation from state-controlled to member-controlled organizations. Out of a total of around 8,000 cooperatives, about 3,000 received direct assistance from the Foundation for Rural Cooperatives (FRC) and/or its member Regional Cooperative Service Units (RCSUs) in various aspects of the transformation process: interpretation of the provisions of the revised cooperative laws and regulations; preparation/ amendment of the cooperatives' own statutes and by-laws; assessment of reorganization alternatives; preparation of business plans; assistance in credit applications to banks and other financial institutions; training and conferences for cooperative management and staff; and dissemination of information on experiences in cooperative development and organization in other European countries. The transformation process would have been faster but, particularly up to 1994, it was affected by the uncertainties arising from the delays in the amendments to the law on cooperatives.
12. Foundation for Rural Cooperatives (FRC). Establishment of a cooperative development unit to assist in the transformation of rural cooperatives was a condition of effectiveness. The FRC was established on schedule in October 1991 as a foundation established by MAFE, MOF and the Supreme Cooperative Council (SCC). In addition, 12 affiliated RCSUs were established as envisaged. Funding for the first three years of operation was provided entirely from EU PHARE grant financing. This included substantial technical assistance in the form of long and short term advisers; support for training and advisory programs, including seminars and information dissemination; and office equipment. As a result, FRC and the RCSUs have progressively established themselves in gaining client recognition and expanding the range of their services. While their main activities (as indicated in para. 11 above) remain training, consultancy and promotion of the cooperative concept, they have also contributed significantly to providing inputs for the revision of the law on cooperatives, helping devise sector strategies for areas of major interest to rural cooperatives; and working with agricultural extension service centers in areas of common interest. 13. At their inception, FRC and the RCSUs were expected to have a duration of about three years, after which they were expected to be absorbed into the new and permanent structures that would by then have been established by the rural cooperatives as they completed their reorganization. Accordingly, funding was provided primarily through grant funds for the first three years of operation, during which time, the units were expected to become increasingly self-reliant or be absorbed by newly established cooperative apex organizations. Although the units have been able to increase the share of self-financing (to about 25 percent in 1995), and have taken steps to reduce their operational costs (the number of pennanent staff was reduced from about 250 to 130 by the end of 1995), they are being constrained by the limited ability to pay for services on the part of many of the cooperatives in need of assistance as well as the developmental nature of some of the main functions entrusted to FRC under its charter. Further, the process of establishing efficient regional and national level service and apex organizations has been slower than anticipated. EU PHARE has responded to the need by extending the assistance beyond the originally expected period through assigning FRC and the RCSUs to work on specific contracts which include: counseling to restructuring cooperatives through the regional information and advisory services, revision of cooperative by-laws; preparation of regional sector strategy papers; and dissemination of information on the implications for rural cooperatives of Poland's economic integration with the EU.
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(b) Cooperative Banks 14. In regard to the project's aims to support the development of the cooperative bank system through improvements in organizational structure; operating systems; training of management and staff; and the legal/regulatory/supervisory framework, the project's main contribution was to the development of an independent cooperative banking system (ICBS), accounting for about 40 percent of the total assets of the entire cooperative banking system. Prior to 1975, the cooperative banks had their own central associations. At the time, the predecessor of BGZ was a fully state-owned bank, which financed mainly state-owned farms and agricultural enterprises. Pursuant to changes in legislation in 1975, BGZ was formed by the merger of the state-owned agricultural bank with the central association of the LCBs, and became in effect the apex organization of the over 1,600 LCBs, with substantial oversight powers. LCBs were compulsorily required to keep their deposits with BGZ. While the changes under the ETP removed the monopoly of BGZ over the LCBs, it left a vacuum as to the apex organizations for the LCBs. The project was instrumental in supporting over 400 of the LCBs to separate from BGZ into an ICBS consisting of three RCBs and the associated LCBs. 15. Regional Cooperative Banks (RCBs): Of the six RCBs envisaged during project preparation, only three were established during the implementation period. However, these RCBs attracted around 400 LCBs, accounting for about 40 per cent of the total assets of the Polish cooperative bank sector. In parallel to the preparation of the ADP, provision of technical assistance to the LCBs and RCBs had already started under donor financed programs, principally from EU PHARE and USAID. The project built upon these ongoing programs by further expanding and deepening the assistance which continued to be financed from US and EU PHARE grant financing. USAID financed a comprehensive program (US$8 million) designed and implemented by Agricultural Cooperatives Development International (ACDI). Assistance under the EU PHARE program was extended under its Agroline program, started in 1991, under which an allocation of ECU 3 million was made for technical assistance, primarily for the cooperative banks. The Agroline program was implemented by the Cooperation Fund. As a result of the considerable assistance from EU PHARE and USAID, the RCBs have progressively established their operations and expanded the range of services provided to the member LCBs in respect of training and management of staff; improvement of procedures and systems; establishment of internal controls; development of new products; and loan workouts. While the technical assistance was delivered as planned, an area where progress was slower than expected was in the establishment of an integrated computer information network, which was affected initially by delays in arriving at an agreed concept and later by the uncertainties as to the CBs' organization ensuing from the new law on cooperative banking. 16. National Union of Cooperative Banks (NUCB). The NUCB was reconstituted in 1991 by the three RCBs and their member LCBs. Technical assistance was provided under both the USAID and EU PHARE programs. After some delays in developing its strategy and action plan, NUCB was increasingly used by the EU PHARE programs (via the Cooperation Fund) as a channel and coordinator of technical assistance provided for LCBs and RCBs. NUCB served as an effective vehicle of coordination among the RCBs until 1994; since that time, its position has been weakened by the reduction in use of NUCB services by the member RCBs. 17. Local Cooperative Banks (LCBs): In view of the large number of LCBs, project design called for technical assistance to be provided mainly through the intermediate organizations (RCBs and NUCB). Eventually, the number of LCBs that moved to the ICBS was lower than expected (400 out of the over 1,600 LCBs, although the 400 accounted for about 40 per cent of total assets). The project's assistance primarily reached the 400 LCBs under the ICBS; the over 1,200 LCBs that continued to be under BGZ affiliation were not able to participate; however, since 1994, they have benefited from support programs implemented by the Foundation for Assistance Programs for Agriculture (FAPA).
6
18. Capital Fund (CF).* The CF was established with some delay and changes in organization than originally conceived. The CF was originally expected to be funded from the proceeds of purchases of bonds to be issued by the LCBs; the proceeds were to be utilized by the LCBs to purchase shares in the RCBs. Changes in the Banking Law precluded the use of debt instruments such as bonds in raising funds for equity investments in the RCBs. As a result, the CF had to be set up from grant funds made available to the LCBs for purchase of shares in the RCBs, and funded by the Government and the USAID from counterpart funds. After an initial allocation of US$10 million equivalent, the CF's resources were subsequently increased to US$19 million equivalent by 1994; as of July 1996, the CF had invested about US$15 million equivalent in the shares of three RCBs; an unutilized balance of about US$4 million remains. The use of the CF grants was instrumental in the timely establishment of three RCBs. Use of the balance has been held up pending a difference of opinion within the financiers of the CF as to its application - whether to increase the allocations in existing RCBs or to utilize it for establishment of new RCBs, and more broadly, the role of BGZ in relation to the RCBs supported by the CF. This issue is expected to be resolved within the wider framework of the Bank's ongoing discussions with the Polish government in regard to the reorganization and future development of the Polish rural finance sector (para. 30). Financial Objectives 19. Project Cost and Financing: The total project cost is estimated at about US$81 million equivalent, substantially lower than the appraised project cost of about US$180 million. The shortfall was in the investment component (US$40 million compared to US$140 million) whereas the technical assistance and institutional development component remained at around the same level (US$40 million) as expected at appraisal. In regard to project financing, the Bank loan, which financed the investment component, accounted for a much lower share of total project financing than expected (about 31 percent as compared to 56 percent). However, the share of the Bank financing of investment subprojects remained around the same as expected, at about 68 percent, with the balance of 32 percent being provided by the local banks and investors. While the overall level of financing for the technical assistance and institutional development components remained around the same, donor financing was higher than expected and compensated for the shortfall in local sources. 20. Subproject Portfolio Characteristics. A total of 31 loans was made under the project for an amount of about US$16 million equivalent for financing of investment and permanent working capital; the average loan size was about US$515,000 with a range of US$100,000 to US$3.2 million. Eleven subloans for a total of about US$8.4 million (average subloan size of SU$780,000) were denominated in US dollars, and 20 subloans, totaling about US$7.6 million (average subloan size of US$380,000) were in local currency. In addition, under the special provision to enable the cooperative banks to utilize the credit line funds, the CBs were allowed to refinance packages of eligible investments since loan signing (July 1991). This accounted for another US$9.3 million. Of the total amount of Bank funds onlent (US$25.3 million), the largest share was for agroprocessing activities (US$14.3 million or 57 percent), primarily poultry, meat processing and fruit juices; followed by the cooperative banks for strengthening their credit delivery facilities (US$4.6 million or 18 percent), and rural service enterprises (US$3.4 million or 13 percent). Only a small share, US$2.8 million or 11 percent, went for farming investments, reflecting the greater reluctance of farmers to borrow under the credit line due to the perceived high interest rates. 21. The credit line thus had limited success in making credit funds available for financing investments by private farmers and other non-bank rural investors (about US$20.7 million of the US$25.3 million disbursed went to such beneficiaries with the balance being utilized by the RCBs/LCBs to improve their own facilities for credit delivery). The low utilization was due to a combination of factors: (i) relatively low profitability of many agricultural investments due to the changes in domestic markets, and in relative
7 prices of inputs and outputs; (ii) continued prevalence of high interest rates on both short and long term credit; (iii) constraints to adequate collateral and equity funds for many private investors; (iv) the continued prevalence of agricultural subsidy programs, including interest subsidies, that created expectations of widespread subsidization on the part of farmers and rural investors; and (v) the existence of competing, alternate lower cost sources offered at lower interest rates than the ADP funds. These factors were further reinforced by a relative lack of proactive promotion and involvement on the part of the main implementing agencies (para. 29). Finally, the Bank's own restrictions on the use of its funds limited the usefulness of the ADP credit line, e.g,, the Bank funds could not be used for purchase of land, or transfer of existing assets, both of which are significant investments in the context of restructuring and reorganization of rural cooperatives. 22. Subproject Performance: A comparison of projected and reestimated financial rates of return (FRRs), as prepared by the PBs for a sample of the subprojects covering about 50 percent of the amount onlent, indicates that the reestimated FRRs are substantially lower than projected - a weighted average reestimated FRR of about 24 percent as compared to 43 percent projected. However, these reestimated FRRs are themselves likely to be significant overestimates on account of computational and methodological weaknesses. The subborrowers and the PBs have not estimated economic rates of return (ERRs) as the requirement of a separate estimation of ERRs had been dropped during project preparation in recognition of the Government's program of widespread price and trade liberalization. In regard to repayment performance, as of July 31, 1996, 4 of the 31 subloans (involving about US$6 million of the US$25.3 million onlent) were in arrears, of which three were in respect to interest payments as they were still within the grace period. The PBs have indicated that the arrears problems are transitional due to market variations or delayed subproject completion, and are expected to be corrected. 23. Participating Banks: Although eight banks had been cleared as eligible under the project, only six eventually participated. BGZ and BPH Krakow had the largest share of the subloans, accounting for a combined amount of about US$12.5 million (or 50 per cent of the total amount onlent for investment purposes). 24. Perjfornance of PBs: Performance of the PBs has been mixed. After initial good results, the financial situation of the three RCBs has been adversely affected by the poor financial performance of some of their weaker LCBs. The financial position of BGZ, the principal PB under the project, has been heavily affected by a poorly performing loan portfolio and high administrative costs to the point where the Government felt obliged to repeatedly recapitalize BGZ, and to initiate a major restructuring program for BGZ under NBP supervision, within the context of a comprehensive reorganization of the cooperative banking system. At the Government's request, the Bank has been, and continues to be, closely involved in the process, primarily as a coordinator of the multilateral and bilateral assistance being provided for the program from EU and other sources. D. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION Implemenaion Record 25. The project was appraised in January 1991, followed by loan negotiations in May 1991, Board approval in June 1991, and signature in July 1991. Effectiveness was planned for October 1991 but delayed by six months primarily in regard to the Borrower meeting the conditions in respect to establishment of the Capital Fund and the signing of the fiscal agency agreement between NBP and the MOF. The FRC was established on schedule in October 1991; the three RCBs were progressively established by 1992, with a delay of some months. Disbursement was slower than expected at appraisal with only US$2 million disbursed in the first two years after loan approval, due in part to delays in effectiveness and the finalization of the necessary onlending agreements between NBP and the PBs. A
8
major review, focused on irnproving credit line utilization, was undertaken in May 1993. While several modifications were made to increase the loan's utility in the rapidly changing circumstances (e.g., extending the refinancing period for eligible subprojects of LCBs from 90 days to 180 days; simplification of application procedures; extending the borrowers' eligibility to operational leasing companies), credit line utilization picked up only to a very limited extent and a balance of US$74.7 million (about 75 per cent of the loan amount) remained unutilized, and was canceled, at loan closing. The original closing date, June 30, 1995 was extended by one month at the Borrower's request to enable completion of disbursement in respect of commitments already entered into. Factors Not Generally Subject to Government Control 26. Two exogenous factors in particular had a significant impact on project implementation. First, the major changes that occurred after 1990 in the former CMEA markets which were significant for many Polish exporters. The effect was even more pronounced as, encouraged by the increasing trade in convertible currency among CMEA participants prior to 1990, many agroprocessing enterprises had undertaken investments aimed primarily at these CMEA convertible currency markets, but which they found difficult to switch from to the more demanding Western markets. The second was the effect of period of severe drought, particularly in 1992, which seriously affected agricultural production, thereby reducing product quality and increasing unit costs of production for processors. Factors Generally Subject to Government Control 27. Two aspects of the enabling environment were particularly important for their impact on project implementation. The first was the revision of the law on cooperatives; the second was the articulation of a strategy for the rural finance sector, delineating the respective roles of BGZ and the cooperative banks. In regard to the first, the necessary revisions to the cooperatives law, originally expected to be carried out by mid-1992, were substantially delayed to 1994; even at this point, the amendments did not wholly remove the shortcomings. The delays, and the consequent uncertainties, affected the pace and extent of restructuring of the rural cooperatives. Secondly, project design and implementation was based on the understanding that the Government was in agreement with the principle of distinctive development of BGZ and the cooperative banks - BGZ to function progressively as a commercial bank for financing farms and agricultural enterprises and the cooperative banks to set up increasingly independent systems, including RCBs, to carry on the cooperative banking functions. The Government's commitment to proceed on articulating this strategy was unsteady, in part due to the changes in the government during the period. The diagnostic study for BGZ, expected to be completed in 1992, was seriously delayed, and finally available only in end-1994. Further uncertainties arose from the new law on cooperative banks, adopted in 1994, which has created further complications for the cooperative banks, including the existing ICBS (the three RCBs and their member LCBs) by re-establishing the apex functions of BGZ in respect of cooperative banks. Factors Generally Subject to Implementing Agency Control 28. Implementation agency responsibilities were shared between MAFE, MOF and NBP, with MAFE primarily responsible for the implementation of the FRC and rural cooperatives component; MOF, through its department of rural finance, for the BGZ and cooperative banks components; and NBP for the credit line component. Technical assistance under the project for FRC, the RCSUs and rural cooperatives was channeled through the Foundation for Assistance Programs for Agriculture (FAPA) established under the aegis of MAFE. Over the implementation period, the relationship between FAPA and FRC was uneven, influenced in part by the many changes in government and their effects on FAPA. This affected FRC's operations by the frequent delays and uncertainties in obtaining approvals for programs and timely transfer of funds. The relationship improved considerably after 1994, and now appears to be functioning
9
relatively smoothly. MOF had primary responsibility in coordinating the articulation of a clear strategy for BGZ and the cooperative banks, including ensuring the timely completion of the diagnostics study for BGZ; the inability of the Government to do so adversely affected project implementation. This has been compounded by the further uncertainty arising from the new law on cooperative banks. 29. In regard to the credit line component, while utilization was affected by a number of factors in the economic environment (para. 21), a contributing factor was the lack of clear ownership that resulted in a less than proactive approach to project implementation. Thus, the project's ultimate beneficiaries (private farmers, rural cooperatives and other private rural investors) fell within the purview of MAFE; and the main financial intermediaries, BGZ and the cooperative banks, within that of MOF. Unlike in the earlier credit line project (Loan 3167-POL for the Agroindustries Export Development Project), where NBP was the Borrower, under this project, NBP's role was that of a fiscal agent without taking the credit or exchange rate risk. A contributing factor to the low utilization was the continued prevalence of agricultural subsidy programs, principally credit subsidies, administered by MAFE through the Agency for Reconstruction and Modernization of Agriculture (ARMA), that led to expectations of further subsidized credit on the part of farmers and other potential subborrowers. E. PROJECTSUSTAINABIL1TY
30. The institutions set up under the project, primarily the FRC, RCSUs, and the three RCBs, with the support of the considerable technical assistance provided by EU PHARE, USAID and other donors, have progressively established themselves, and gained client recognition and confidence for the value of their services. However, sustainability of the project, including the continued effective operations of these institutions, would depend critically upon the Government's success in resolving satisfactorily the situation in regard to the framework for rural finance, including the proper roles of BGZ and the cooperative banks. Vital, in this regard, would be the Government's ability to secure necessary changes to the law on cooperative banks and to ensure its even-handed application to BGZ and the cooperative banks. The Bank has been providing extensive assistance through participation in the ongoing effort in regard to restructuring of the Polish rural finance system, and coordinating multilateral/bilateral technical assistance that is being provided from EU and other sources to the Government in the design and preparation of the program. F. BANKPERFORMANCE
31. While Bank performance was satisfactory in all phases of the project cycle, it was more effective in the pre-implementation phases of the project, including identification, preparation and appraisal. During the implementation phase, Bank supervision was satisfactory in terms of the frequency and extent of efforts, including missions in the field. However, its effectiveness in terms of securing project objectives was mixed. While the institutional objectives were achieved to a large extent, the Bank, despite intense proactive efforts, particularly after the major review in 1993, was unable to make much head way in respect of the credit component. 32. Project design and preparation were preceded by the Bank's close involvement in the preparation of the JTF report that identified the priority areas for support. The Bank worked closely with the Polish agencies and the various multilateral (EU, USAID) and bilateral donors during the identification, preparation and appraisal period to ensure that the project would be consistent with, and complementary to, the other ongoing efforts of the donors. In the case of the EU, this implied coordination of project preparation with that for a parallel operation under the EU's Agroline project. In the case of UJSAID,the participation of ACDI specialists in the preparation of the ADP led to the US-supported cooperative bank technical assistance program.
10
33. The Bank mounted 10 supervision missions between 1991 and 1995, roughly at six month intervals. A total of 127 staff-weeks were spent on supervision, or an average of 28 staffweeks per year. Most supervision missions were staffed by a financial analyst and a cooperative specialist as a core, supported by cooperative banking and agroindustry specialists where necessary. In view of the slow pace of credit line utilization, the Bank carried out a major review with the Polish counterparts in May 1993. Findings of this review resulted in several modifications to the provisions of the loan agreement (para. 25) to make the credit line more accessible to potential users without compromising the main objectives. Following the review, the Bank made a concerted proactive effort to improve credit line implementation, including by making available the services of cooperative bank and agribusiness specialists (financed through Trust Funds available to the Bank) to work with the Polish counterparts to assist in subproject identification; procedural aspects including application and evaluation; and modalities of selecting and packaging eligible applications under the refinancing opportunity given to LCBs. Recognizing the impact that the credit subsidy program (through ARMA) was having on the demand for, and supply of, credit, the Bank proactively sought to work with ARMA and MAFE to arrive at workable, less distortive ways of combining such assistance with ADP credit line funds to ensure that the assistance in fact went to viable subprojects. No satisfactory agreement could be reached in this case. 34. In regard to BGZ, the Bank was aware from the outset of the doubts in regard to the quality of BGZ's portfolio. Consequently, it monitored regularly (under the concurrent credit line project - Loan 3167-POL) the progress in the preparation of satisfactory financial audits and portfolio assessments as a basis for BGZ to develop an action plan to improve its performance. However, the process was seriously delayed - first as a result of the inadequacy of the audits carried out by the chosen firm; and later by delays by BGZ to agree to undertake diagnostic studies; appoint suitable consultants; provide the required support and information; and finally, accept the consultants' findings and recommendations. While regularly urging the Borrower and BGZ to meet their obligations, in hindsight, the Bank could have been more forceful in seeking BGZ's compliance with its commitments, including the examination of stronger remedies such as suspension of disbursements. G. BORROWERPERFORMANCE 35. The Borrower's performance was satisfactory during the identification, preparation and appraisal stages of the project cycle. The project was the outcome of the collaborative work that had been started under the JTF with the close involvement of MAFE. MOF and NBP. Performance during the implementation phase was affected by a number of factors, including, in part, the many changes in government. This contributed to delays in securing essential improvements in the enabling environment, including timely modifications to the cooperative law, and the adoption of a clear and consistent policy in regard to BGZ and the cooperative banks. Despite the presence of a Project Coordination Committee (PCC) with representation from the key implementing agencies (MAFE, MOF and NBP), and the nominal anchoring of the ADP in MAFE, there remained an overall lack of effective ownership, resulting in less than proactive involvement, including in project promotion, facilitation, and monitoring. It is also reflected in the failure to carry out, in a timely manner, the study of the rural finance system and the installation of a preferential credit monitoring system, as originally agreed. 36. Compliance with covenants was generally satisfactory except in regard to the timely completion of the rural finance study and the installation of the monitoring system for preferential credit. Reporting, while complied with, was inadequate in terms of the accuracy and quality of information.
11 H. ASSESSMENTOF OUTCOME
37. The overall project outcome is assessed as marginally satisfactory; the project has met is institutional objectives to a large extent but this is significantly offset by its lack of success in meeting its main financial objectives of providing investment funds to private farmers and other rural investors, and to rural cooperatives to support their restructuring. While the institutions set up with the support of the project have established themselves in terms of their clients' (the rural cooperatives and local cooperative banks, respectively) recognition of their contributions, their future prospects and sustainability depend critically upon the Government's willingness and ability to take the necessary actions to remedy the threats and uncertainties arising from the current unresolved situation in respect of the strategy for the Polish rural finance sector. I.
FUTuRE OPERATION
38. At the Government's request, the Bank is continuing to provide technical assistance in the design and implementation of the restructuring program for the Polish rural finance sector. The EU and the European Bank for Reconstruction and Development (EBRD) have indicated that BGZ and the cooperative banks are high priorities for their support. The Bank is collaborating with the EBRD in jointly developing, by mid-1997, a technical assistance program for BGZ that would help define, inter alia, its organizational relationship with the cooperative banks, and its business strategy, including a clear delineation of roles, and the respective areas of focus, of BGZ and the cooperative banks associated with it. Successful completion of this first phase is expected to be followed possibly by a subordinated loan from EBRD that would help finance modernization and upgrading of BGZ's information technology system. 39. In regard to the FRC and its constituent regional units, the Government has confirmed its intention to provide support for their operations but has been unable as yet to submit a formal operational plan in regard to the nature and modalities of the intended support. Pending the Government's finalization of such a plan, FRC's strategy is to continue to increase the extent of its self-financing by expanding feegenerating activities in areas of its comparative advantage; and further reduction of personnel and other operational costs, including through reducing the number of full-time personnel, and greater subcontracting of tasks to outside experts. 40. Although there is no follow-on project scheduled, the Bank intends to continue to monitor progress in the institutional areas above in the context of other ongoing and planned work in regional and rural development in Poland. J.
KEY LESSONS LEARNED
41. The main lessons from the project, which may also have more general relevance for other projects, are: (i)
it is essential to agree upon, at the outset, a clear strategy for the overall development of the rural finance sector, including the respective roles of the key intermediaries (in this case BGZ and the cooperative banks);
(ii) strong and sustained Government commitment is required to ensure timely actions to improve key aspects of the enabling environment (in this case, the cooperative law and the law on cooperative banks and BGZ); and
12 (iii) credit lines are inappropriate instruments in the absence of strong financial intermediaries, and in environments of significant monetary instability characterized by high inflation and interest rates.
1T
13
IMPLEMENTATION COMPLETION REPORT POLAND AGRICULTURAL DEVELOPMENT PROJECT (Loan 3343-POL)
PART II. STATISTICALANNEXES
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8A: Table 8B: Table 9: Table 10: Table 11: Table 12: Table 13:
Summary of Assessments Related Bank Loans Project Timetable Loan Disbursements: Cumulative Estimated and Actual Key Indicators for Project Implementation Key Indicators for Project Operation Studies Included Under the Project Project Costs Project Financing Economic Costs and Benefits Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions
14
Table 1: Sunmary of Assessments A. Achievement of objectives
Substantial
Partial
Macro policies
LI
Sector policies
Cl
El El
Financial objectives
El
Institutional development
Negligible
Not Applicable
E1 El El
EC
Ex
E
EC
Physical objectives
E
IXI
E
0
Poverty reduction
E
l
El
lI
El
ER
Other social objectives
El
El El
Environmental objectives
El
El
El
IX]
Public sector management
El
E
E
IX
Private sector development
El
Other (specify)
[1
Gender issues
B. Project sustainability
C. Bank performance
lx
EE
El
E
Likely
Unlikely
E
El
Highly Satisfactory
Satisfactory
El Uncertain
Deficient
Preparation assistance
E E
El El
Appraisal
El
El
Supervision
El
Identification
D. Borrower performance
Highly Satisfactory
ER] Satisfactory
Preparation
El
Il
Implementation
E
El
Covenant compliance
El E]
Operation (if applicable) E. Assessment of outcome
El Deficient
El
EX E
E
Highly Satisfactory Satisfactory Unsatisfactory Highly Unsatisfactory
El
El
El
15
Table 2: Related Bank Loans
Loan
Purpose
Year of Approval
Status
Preceding Operations Agroindustries Export Development Project (Loan 3167-POL)
Support to enterprises for increasing exports of processed agricultural products to convertible currency (CC) markets.
1990
Closed (ICR issued)
Support to Poland's Medium-Term Sector Adjustment Program through selective sectoral policies, urgent structural reforms, and institutional reforms and institution-building measures in the agriculture sector.
1993
Closed (ICR under preparation)
Following Operations Agricultural Sector Adjustment Loan (Loan 3600-POL)
Table 3: Project Timetable Steps in Project Cycle
Date Planned
Date Actual
Identification
9/90
9/90
Preparation
10/90
10/90
Appraisal
12/90
01/91
Negotiations
04/91
05/91
Board presentation
05/91
06/91
Signing
06/91
07/91
Effectiveness
10/91
03/92
Project completion
12/94
06/95
Loan closing
06/95
07/95
16
Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ thousands) FY92
FY93
FY94
FY95
FY96
5,000
60,000
75,000
100,000
100,000
Actual
0
4,000
10,800
24,200
25,300
Actual as % of Estimate
0
7
14
24
25
Appraisal Estimate
Date of Final Disbursement:
10/12/95
Table 5: Key Indicators for Project Implementation* Key Implementation Indicators in SAR
Establishment of central cooperatives development unit
Estimated
October 1991
Actual
FRC established in October 1991.
Establishment of National Union of Cooperative Banks
1991
NUCB established in 1991.
Establishment of regional cooperative service units (RCSUs)
12
12
Establishment of regional cooperative banks (RCBs)
up to 6
3
Diagnostic study of the Bank of Food Economy to be carried out
12/92
10/94
* No formal implementationplan was agreed under the project.
T
17
Table 6: Key Indicators for Project Operation* Key Operating Indicators in SAR
Estimated
Actual
2,400
over 3,000
18 courses covering 1,350 participants
n.a.
- local cooperative banks
22 courses covering 10,000 participants over 3 years
n.a.
- regional cooperative banks
15 courses covering 225 participants
n.a.
Number of rural cooperatives and cooperative banks to be assisted FRC to organize training courses for cooperative managers and senior staff Training in bank management for personnel of:
* No formal operational plan was agreed under the project.
Table 7: Studies Included in Project Study
Rural financial markets (to be completed by 12/92)
Purpose as Defined at Appraisal/Redefined
Status
Impact of Study
To guide rural financial institutions in developing their credit programs, taking into account credit demand and transaction costs, and to help the Government in formulating rural credit policy.
Delayed by the Government's decision to include the study within the scope of a larger assessment of the restructuring of the rural finance sector.
None
18 Table 8A: Project Costs (US$ million) Appraisal Estimate Component
Actual/Estimated
Local Costs
Foreign Costs
Total
Local Costs
Foreign Costs
Total
Farm Investment
12.0
28.0
40.0
1.9
2.8
4.7
Agroindustry
10.0
50.0
60.0
8.3
14.5
22.8
Rural Enterprises 1/
18.0
22.0
40.0
4.7
8.0
12.7
Institutional Development
11.6
8.6
20.2
9.7
11.6
21.3
Capital Fund
20.0
-
20.0
19.5
--
19.5
71.6
108.6
180.2
44.1
36.9
81.00
TOTAL
1/ Includes investments by cooperative banks in their own facilities.
Table 8B: Project Financing (US$ million) Appraisal Sources
Local
Actual\Estimated
Foreign
Total
Local
Foreign
Total
-
100.0
100.0
--
25.3
25.3
Financial Intermediaries
25.0
-
25.00
8.4
--
8.4
Subborrowers
15.0
-
15.0
6.5
--
6.5
Technical Assistance
11.6
8.6
20.2
9.7
11.6
21.3
- Budgetary sources
5.0
-
5.0
4.5
--
4.5
- External sources
15.0
-
15.0
15.0
--
15.0
TOTAL
71.6
108.6
180.2
44.1
36.9
81.0
IBRD
Government (Capital Fund)
19
Table 9: EconomicCostsand Benefits The main benefit of the project was to be the creation of viable rural cooperative institutions to serve the private sector. The credit component under the project was to improve access to credit by the rural private sector thus stimulating the supply response and contributing to a competitive economic environment. Overall economic costs and benefits were not quantified; individual investment subprojects of over US$500,000 were required to have a financial rate of return (FRR) of not less than 15 per cent. The PBs have reestimated FRRs for a sample of subprojects covering about 50 percent of the amount onlent - the weighted average FRR was about 24 percent against a projected FRR of 43 percent, but is likely an overestimate due to computational and methodological weaknesses.
20
Table 10: Status of Legal Covenants Overall Project Rating: 3
Agreement
Section
Covenant Class
Status
Original Fulfillment Date
Revised Fulfillment Date
Description of Covenant
Comments
LOAN
4.01 (b)
1
C
The Government to have the special account audited on an annual basis, and the audit report to be submitted to the Bank within six months of the end of the fiscal year.
In compliance
LOAN
4.01(c)
1
C
The statements of expenditure to be audited on an annual basis, as part of the audit of the special account, and the audit report to contain a separate opinion on these statements.
In compliance
LOAN
4.02
4
C
06/30/1992
The Government to establish and operate a capital fund for cooperative banks under arrangements, and with resources, legal personality, organizational structure and terms of reference satisfactory to the bank.
In compliance
LOAN
Schedule 2 Section A(4) Schedule 4 Section A(2)(a)
3,9
NC
12/31/1992
The Government to carry out a rural credit study.
Delayed. The Bank is assisting in a rural finance review.
5
C
10/31/1991
The Government to establish and maintain the cooperative development unit and its regional cooperative service units under terms of reference satisfactory to the Bank.
Schedule 4 Section A(4)
12
CP
06/30/1992
The Government to prepare and submit to Parliament a draft cooperative law satisfactory to the Bank.
LOAN
LOAN
In compliance
A new law has been adopted and is being reviewed.
21
Agreement
Section
Covenant Class
Status
Original Fulfillment Date
Revised Fulfillment Date
Description of Covenant
Comments
PROJ
3.01(a)
1
C
NBP's project accounts to be audited on an annual basis, and the audit report is to be submitted to the Bank within six months of the end of the fiscal year.
In compliance
PROJ
Schedule Section B(2)(a)
5
C
NBP to coordinate and monitor the execution of the credit program in accordance with policies and procedures satisfactory to the Bank.
In compliance.
PROJ
Schedule Section B(2)(c)
5
C
NBP to maintain its Project Appraisal and Implementation Division with facilities, staff, and other resources and terms of reference satisfactory to the Bank.
In compliance.
PROJ
Schedule Section C(2)
9
NC
NBP to establish a monitoring system for preferential rural credit.
Not complied with was to have been incorporated into the monitoring system being introduced under FIDL (Loan 334 1-POL)
06/30/1992
Covenant Class 1. Account Audit 2. Financial performance/generate revenue from beneficiaries 3. Flow and utilization of project funds 4. Counterpart funding 5. Management aspects of the project or its executing agency 6. Environmental covenants 7. Involuntary resettlement 8. Indigenous people 9. Monitoring, review and reporting 10. Implementation 11. Sectoral cross-sectoral budgetary or other resource allocation 12. Sectoral or cross-sectoral regulatory/institutional action 13. Other
C CP CD NC SOON
= = = = =
Status Complied Partially complied Complied with delay Not complied Compliance expected in a reasonably short time
22
Table 11: Compliance with Operational Manual Statements
Basically, there was compliance with the applicable Bank Operational Manual Statements.
Table 12: Bank Resources: Staff Inputs (Staff-Weeks) Stage of Project Cycle
--
Planned
Revised
Actual
Through Appraisal
76.0
Appraisal-Board
67.9
Board-Effectiveness
23.8
Supervision
109.4
Completion
10.0
TOTAL
287.1
23 Table 13: Bank Resources: Missions
Stage of Project Cycle
Month/Year
No. of Persons
Days in Field
Performance Rating 2
Types of Problems
Specialization Implementation Development status objectives
Through Appraisal
10/90
5
20
A, E, C. F, R
01/91
4
20
E, F, C, R
Board Approval Effectiveness
05/91
2
7
F, R
-
-
Supervision 1
09/91
2
10
F, R
2
1
T
Supervision II
01/92
2
10
F, R
2
1
T
Supervision III
04/92
1
7
F
2
1
T
Appraisal - Board Approval
Supervision IV
06/92
3
10
A, F, R
2
1
T, M
Supervision V
11/92
2
10
F. R
2
1
T, M
Supervision VI
05/93
6
20
F, C, R, E
3
2
T, M
Supervision VII
10/93
3
10
F, C, R
3
2
T, M
Supervision VIII
03/94
5
7
F, C, R, E
3
2
T, M
Supervision IX
07/94
2
7
F, M
3
2
T, M
Supervision X
04/95
2
7
F. R
Completion Initiation
07/95
1
2
F
Implementation Completion
04/96
2
7
F, R
1 - Specialization A = Agriculturist C = Cooperative Banking Specialist E = Economist F = Financial Analyst H = Horticulturist L = Livestock Feed Specialist M = Marketing Specialist N = Engineer R = Rural Cooperatives Specialist
2 - Performance Rating
I = Minor problems 2 = Moderate Problems 3 = Major Problems
3 - Types of Problems F = Financial T = Technical M = Managerial
I
APPENDIX A Page 1 of 5
POLAND AGRICULTURAL DEVELOPMENT PROJECT (Loan 3343-POL) AIDE MEMOIREOF IMPLEMENTATION COMPLETIONMISSIONOF APRIL 1996
INTRODUCTION
1. A World Bank mission consisting of Messrs. Kishore Nadkarni and Lorenz Pohlmeier visited Poland from April 22 to 30, 1996 to initiate the preparation of the Implementation Completion Report (ICR) for the Agricultural Development Project. The mission held discussions with officials of the Ministries of Finance (MOF) and Agriculture and Food Economy (MAFE); the National Bank of Poland (NBP); the Foundation of Rural Cooperatives (FRC); the Cooperation Fund (CF); the Bank for Food Economy (BGZ); and visited selected regional centers of the FRC. Representatives of the European Union's PHARE office in Warsaw participated in some of the meetings. The mission wishes to express its sincere appreciation for the cooperation and courtesies extended to it. The mission's views and findings in the Aide Memoire are subject to confirmation by the Bank's management. BACKGROUND
2.
The loan for the project closed on July 31, 1995. It was thus the objective of the mission to: (i)
initiate the preparation of information required for the ICR; and
(ii) advise the Polish authorities and agencies concerned on the preparation of their own contribution to the ICR. 3. The ICR marks the transition of the project from implementation to its future operation. It is intended to assess: (i)
the degree of achievement of project objectives;
(ii) prospects for the Project's sustainability; (iii) Bank and Borrower performance; (iv) Project outcome; and (v) the plan for the Project's future operation. PROJECTIMPLEMENTATION
(a) Credit Component 4. Project Closing: The loan for the project closed on July 31, 1995 following an extension of one month from the original closing date of June 30. The final disbursement figure was US$25.3 million
APPENDIX A Page 2 of 5 equivalent out of the loan amount of US$100 million. The unutilized balance of about US$74.7 million was canceled with effect from October 4, 1995, the date of the last disbursement. 5. Cofinancing: Grant funding for institutional components under the project were provided by EU PHARE; US AID; and some bilateral donors. The amounts of final contributions received from each source should be updated for the ICR. 6. Credit Line Utilization: Out of the loan amount of US$100 million, only US$25.3 million were utilized at loan closing with the balance of US$74.7 million being canceled at the request of the Borrower. Loan disbursement performance was particularly slow in the first two years of implementation when only about US$4 million equivalent were disbursed. An in-depth review of credit line utilization was carried out in mid-1993 as a result of which several modifications were made to promote the credit line and increase accessibility of rural investors to credit line funds. These included: (i)
simplification of procedures for application and assessment;
(ii) extension of the eligibility period for expenditures already incurred by local cooperative banks (LCBs); and (iii) provision of the services of a Trust-Fund financed consultant on a full-time basis to work for a period of over six months with the participating banks to facilitate credit line utilization. 7. Nevertheless, despite a modest pick-up after 1993, a large part of the credit line remained unutilized at loan closing. 8. Formulation and Attainment of Credit-Related Objectives: The principal objective of the project, as stated in the staff appraisal report (SAR) for the project,I was to support private farmers and promote other private sector activities in rural areas, including developing rural commercial enterprises by improving access to credit; and to provide investment funds for business and institutional development in rural communities. In view of the limited utilization of the credit line component, this objective has clearly not been met. The ICR should examine the reasons for this lack of success, including factors both within and outside the control of the Government, the project agencies and the World Bank. (b) Institutional Component 9. Rural Cooperatives (RCs): The main objectives of this sub-component, as stated in the SAR, were to: (i)
guide, facilitate and accelerate transformation of existing RCs from social sector organizations to private sector and member-controlled institutions;
(ii) support the establishment of new RCs; and (iii) assist the RCs in establishing a service and apex structure.
1/
ReportNo. 9436-POLdatedMay 20, 1991.
APPENDIXA Page3 of 5 10. Based on preliminary information, the first two objectives would appear to have been substantially achieved. The target of supporting "institutional building activities for about 2,400 cooperatives and cooperative banks" seems to have been achieved. Additional information is required on the: (i) kind and quality of support provided to cooperatives and farmer groups in the various subsectors; (ii) other activities conduced by FRC; and (iii) impact of the support services and other activities of FRC. 11. Only a few activities of FRC were aimed at achieving the third objective, and the impact of these activities appear to be negligible. 12. For the implementation of this sub-component the FRC was established by three parties, i.e., MOF, MAFE, and the Supreme Cooperative Council (SCC). During its initial three years of operations, FRC and its activities were fully funded by the PHARE program of the European Union (EU). Initially, the three founding institutions (MOF, MAFE and SCC) provided FRC with substantial institutional support and guidance. However, this support and guidance was substantially reduced over time up to the point that the "ownership" of FRC became a significant issue. Another major factor complicating the activities of FRC was the drafting of, and passing amendments to, the law on cooperatives. During the absence of these amendments, FRC and its clients had to operate largely in a legal vacuum. During 1995 PHARE phased out its direct funding of FRC activities. FRC responded by: (i)
reducing operational cost (e.g. by substantially reducing staff from about 250 to 130);
(ii) implementing projects for Government and Government agencies; and (iii) increasingly charging cooperatives for services provided by FRC. However, in spite of the significant progress made in all three areas, additional efforts are required to achieve FRC's sustainability. During a high level meeting attended by senior officials from MAFE, MOF and FRC, it was agreed with the mission and EU PHARE representatives that an perational plan. addressing FRC's short and long term future, would be prepared urgently. 13.
Cooperative Banks: The objectives of this sub-component were to: (i)
strengthen local cooperative banks (LCBs) to serve as a foundation for the cooperative banking system (CBS); and
(ii) support the development of up to six regional cooperative banks (RCBs), including the National Union of Cooperative Banks (NUCB). 14. The objectives of reaching most of the 1,600 LCBs; establishing and rendering operational up to six RCBs; and strengthening NUCB, were obviously too ambitious. Furthermore, a lack of unity among LCBs and RCBs, a decline in the performance of NUCB, and changing Government priorities further constrained achievement of the objectives. 15. Again, EU PHARE fully funded this sub-component mainly through the institutional component of AGROLINE, an EU credit program administered by the Cooperation Fund. In implementing this program, the Cooperation Fund worked closely with NUCB and with the three RCBs of Poznan (GBW),
APPENDIX A Page 4 of 5 Wroclaw (GBP-Z) and Warsaw (BUG). In parallel to, and in close coordination with ADP, a project funded by USAID and implemented by ACDI, also significantly supported the three RCBs and their affiliated LCBs. Government facilitated this component, especially the capitalization of RCBs, through a Capital Fund administered by MAFE. In 1994, Government drafted and Parliament passed a law on restructuring of cooperative banks and the Bank for Food Economy (BGZ), which mandated rigid rules for the reorganization of the entire CBS, including the establishment of additional RCBs, and the appointment of BGZ as the apex organization of the CBS. This law has come in for substantial criticism on account of, inter alia: (i)
its top down approach to CBS reorganization;
(ii) inadequately taking into account the position of the RCBs in Wroclaw and Warsaw; and (iii) appointing BGZ, which faces severe financial and structural problems, as the apex institution. 16. The weaknesses in the law, and the different positions taken toward this law or its application, have significantly complicated the implementation of the cooperative banking component under the project. 17. The three RCBs established during and/or supported by the project are likely to be sustainable if the application of the above-mentioned law does not produce any significant negative effects for their structure or operations. 18. Capital Fund: The Capital Fund (CF) was established under the ADP with the objective of assisting LCBs "in meeting the capital requirements of RCBs". For legal, administrative and financial reasons, it was necessary to design and structure the CF differently than envisaged in the SAR. Compared to its redefined objective, structure and functions, the CF has performed well. The mission agreed with the Government to accelerate the efforts to enable utilization of the remaining funds under the CF.
BORROWER'S CONTRIBUTION TOTHEICR 19.
The Borrower's contribution consists of: (i)
an operational plan for the Project's future operations; and
(ii) an assessment of the experience under the project. 20. Operational Plan: The operational plan includes a statement of the objectives, updated as appropriate, that the project is expected to continue to achieve, and in this context, for each significant project component, what its expected contribution is; how it is to be enabled to achieve its goals, including what resources, financial and non-financial, are to be provided to support it; how are identified constraints to its operations to be addressed; which are the main agencies and authorities concerned, and what are their respective responsibilities towards the project component/entity; and how is future performance is to be monitored and evaluated. 21. Borrower's Part of the ICR: The Borrower prepares and makes available to the Bank its own evaluation report on the project's execution and initial operation; costs and benefits; the Bank and the Borrower's performance of their respective obligations under the Loan Agreement, and the extent to
APPENDIX A
Page 5 of 5 which the purposes of the loan were achieved. A summary of this report (or the full report if it is ten pages or less) is attached unedited to the ICR. 22. For guidance, the mission provided the Polish counterparts with a copy of the relevant parts of the Bank's guidelines on ICR preparation, including the contents of Implementation Completion Reports. PROJECTCOSTANDFINANCINGPLAN 23. To enable a comparison of appraised and actual project costs and financing plan, the Borrower and the project agencies should update the relevant tables (Tables 5.1 and 5.2 on pages 28 and 29 of the Staff Appraisal Report No. 9436-POL of May 20, 1991). INFORMATIONTO BE SENT TO THEWORLDBANK
24. To enable the World Bank to complete the draft of its part of the ICR, it was agreed that the information indicated in the attached formats in Attachments 1, 2 and 3 be sent to the Bank by July 15, 1996 together with the updated project cost and financing plan indicated in para. 23 above. 25. The draft operational plan would be sent to the Bank by July 15, 1996, and the Borrower's contribution by August 15, 1996. COORDINATION OF ICR PREPARATION
26. The following persons would coordinate the preparation of the Borrower's and the Bank preparation of the ICR:
For the Borrower:
Mr. Jerzy Indra (MOF) Mr. Czeslaw Siekierski (MAFE) Ms. Maria Celarska (NBP)
For the Bank:
Mr. Kishore Nadkarni (Central Europe Dept.)
Warsaw/Washington, D.C. April 29, 1996
Attachment 1 ELEMENTSOF REPORTSUGGESTEDTO BE DRAFTEDBY FRC
*
Establishment and evolution of FRC - establishment of Foundation
*
gradual phasing in 12 regional centers restructuring of management board changes in management and senior staff training of FRC staff at all levels
Quantification and impact of FRC services and activities (at HQ and regional centers) - support to process of drafting cooperative law, developing sector strategies (e.g. dairy sector, etc.). - training of farmers, cooperative members, managers, staff, etc. by category; number of training days - services to cooperatives (by sector) - contacts - initial assessments - general support
- specific support (development of business plans, loan applications, marketing concepts, etc.) - services to other institutions and clients (e.g. extension service, marketing groups) - other activities, e.g.:
- support to the establishment of farmer groups - commercial activities
*
Significance (quantitative data), role and impact of short- and long-term Technical Assistance
*
Income and expenditure by year
*
Restructuring and reorganization of FRC at all levels, results expected by June 30, 1996
*
Plans and projections for the future
*
Situation of client cooperatives
*
Evolution of the environment for FRC's mandate and activities -
legal
- government and infrastructure support (at central, regional and local level) - perception of members, managers and cooperative staff
Attachment 2 ELEMENTS OF REPORT SUGGESTED TO BE DRAFTED BY THE COOPERATION FUND (IN COOPERATION WITH NUCB)
*
Activities funded by PHARE (Agroline) - kind and quantification of activities by year and beneficiaries - impact of activities
*
Significance, role and impact of short- and long-term Technical Assistance.
APPENDIX B Page I of 5
BORROWER'S CONTRIBUTION TO THE ICR (Prepared jointly by the Ministry of Agriculture and Food Economy, Ministry of Finance, and the National Bank of Poland) THE ADP LOAN 1. After two years of negotiations, on July 10, 1991, a Loan Agreement was signed between the Polish Government and the International Bank for Reconstruction and Development (IBRD) concerning the financing of the Agricultural Development Program (ADP), to the amount of U.S.$100 million. As part of this credit line, medium- and long-term loans were to be issued to the private sector for investments in agriculture , agri-food processing and other areas that would contribute to the development of the rural sector's development. 2. Simultaneously with the Loan Agreement, a Project Agreement was signed between the IBRD and the National Bank of Poland (NBP), which was meant to administer the funds from the loan and issue them to private borrowers through participating banks. At the time, the participating banks were planned to be mainly newly established regional banks grouping cooperative banks, regional banks were meant to issue loan funds directly to borrowers or through the cooperative banks. The aim was to give rural borrowers the widest possible access to loans. The Loan Agreement provided for a fouryear implementation period (closing date June 30, 1995). Loans were issued for 2 to 12 years, with a grace period for capital repayments of up to 3 years. The maximum amount of a sub-loan was $5 million or the zloty equivalent. Zloty-denominated loans carried an interest rate equal to the market rate for Polish bank loans, based on the NBP rediscount loan rate. Foreign-currency loans were also available, but these were only worthwhile for exporters due to significant exchange-rate growth. The total interest on a foreign-currency loan, including bank commission, was about 10% plus exchangerate risk. 3. The participating banks received loan funds from the NBP and could issue loans directly or through cooperative banks. The NBP approved applications for up to $3 million, while higher loans required approval from the IBRD. As a result of changes introduced in 1994, which liberalized the loan-issuing procedures, the IBRD withdrew from reviewing implementation completion reports for amounts higher than $3 million, authorizing the NBP to do this. 4. The loan was accompanied by a very high (30 million) sum of extraordinary capital-technical assistance. The aim of this was to support the reconstruction of genuine rural cooperatives including cooperative banks. The above aid was earmarked for two main purposes: *
US$20 million for increasing the cooperative banks' capital for acquiring shares in the regional banks that were being established,
*
US$10 million for rural cooperative development.
The first part was financed by the U.S. Government and the Polish Government, and the second by European Union countries from PHARE funds. The funds were at the disposal of the Polish side, after consultation with the IBRD, the U.S. Ambassador and the EU. 5. In order to supervise the loan's implementation, the Borrower established the Coordination Committee, which included representative of the Ministry of Finance (MoF), the Ministry of Agriculture and Food Economy (MAFE) and the NBP. The Committee held meetings in order to
APPENDIX B Page 2 of 5 review the current implementation of the loan and to make the decisions that - according to the agreement on administering the loan - could not be made by the NBP. IMPLEMENTATION OF THE ADP LOAN AND THE CAPITAL TECHNICAL AID 6. Loan funds could be issued once the loan was in force, following approval of the banks by the IBRD and the signing of agreements with the banks. This process was seriously delayed. Through the first agreement with Gospodarczy Bank Wielkopolski (GBW) was signed in February 1992, the firs loan was issued in November 1992. The process of establishing regional banks was delayed, so the IBRD agreed to the participation of Bank Gospodarki Zywnoseiowej (BGZ) and other commercial banks. Successive banks signed agreements as follows: * * * * *
BGZ on October 1, 1992 Bank Przemyslowo-Handlowy (BPH) in Krak6w on January 7, 1993 Bank Unii Gospodarczej (BUG) in Warsaw on October 22, 1993 Gospodarczy Bank Poludniowo-Zachodni (GBPZ) in Wroclaw on October 22, 1993 Bank Rolno-Przemyslowy (BRP, currently RABO-BRP) in Warsaw on October 22, 1994
7. In August 1994 the IBRD did not permit further funds to be made available to Bank Gospodarki Zywnosciowej due to this bank's financial condition. The cooperative banks grouped in BGZ and in regional banks did not participate (except for refinancing - see item 8, iv) in the loan's implementation, which largely made impossible the planned availability of loans to rural borrowers. 8. Due to the deteriorating market situation in agriculture and high interest rates, the loan aroused negligible interest. The IBRD agreed with the Borrower and the NBP (January and April 1994) that changes liberalizing the procedure would be introduced. The important changes were: (i) abolishing the requirement of a bank's 30% contribution to the loan amount; (ii) extending from 90 to 180 days the expenditure refinancing period for cooperative banks; (iii) withdrawal by the IBRD from reviewing implementation reports on projects where the loan amount was more than $3 million and entrusting the NBP with that responsibility; (iv) permitting regional banks and the cooperative banks grouped in them and in BGZ to refinance any expenses incurred after July 10, 1991 to finance their own investments and loans. During this operation, which lasted several months, the equivalent of $9.2 million was paid out, but this amount was less than half of the sum declared by the banks and approved by the IBRD ($20 million). 9. The total amount of the loan used up was equivalent to $25.2 million, including $16 million in loans and $9.2 million in refinancing as describe above (item 8, iv). The banks issued a total of 31 loans in 11 areas of the agricultural and agri-food industry and in 2 areas of the plastics processing industry. Implementation of the loan amount by individual banks was as follows:
* * * *
BGZ - $7.36 million (10 loans) BPH - $5 million (4 loans) GBW - $240,00 (4 loans) BRP - $3.5 million (13 loans)
The number of loans issued in particular years was as follows: 1992 - 2, 1993 - 8, 1994 - 11, 1995 10. BUG and GBPZ made use of the funds only for refinancing expenses incurred earlier and did not submit any loan applications.
APPENDIX B Page 3 of 5 10. In view of decreasing interest in the loan funds on the part of the banks (excluding BRP, which signed in agreement in October 1994 and consistently implemented it), the Borrower applied to the IBRD to extend the loan's closing deadline by just one month, to enable payments for loans already issued to be made. Ultimately, the loan was closed on July 31, 1995 and the utilized amount was $25.2 million.
11. In order to administer the assistance funds for increasing the cooperative banks' capital for acquisition of shares in the regional banks, the Minister of Agriculture and Food Economy established the Capital Fund Foundations on March 6, 1992. In 1992 the Minister of Agriculture and Food Economy transferred 12.47 million zlotys to the Capital Fund's account, including 5.99 zlotys from the state budget and 6.47 million zlotys from USAIDI for the initial fund. In addition, the Capital Fund received 10.33 million zlotys in 1994 from USAID by the end of 1992, 3.53 million zlotys in 1993, 0.003 million zlotys in 1994 - a total of 26.33 million zlotys. 12. The aid for increasing cooperative bank capital was largely used up. In 1992-1995 three regional banks received a total of 20.01 million zlotys (about $12.4 million), including BUG - 4.56 million zlotys, GBPZ - 10.72 million zlotys, GBW - 4.73 million zlotys. 10.71 million zlotys, or about $4 million, was left in the Capital Fund's account. 13. In January 1995 the U.S. Ambassador requested that the remaining fund be temporarily frozen, until the IBRD drew up an assessment of the changes in cooperative banking. Following this, as of February 1995 the funds were not allocated. 14. On July 31, 1996 the Minister of Agriculture sent a memorandum to the U.S. Ambassador concerning the allocation of the remaining funds. 15. The technical assistance for rural cooperative development was fully utilized. A condition for this aid's effectiveness was the establishment of the Foundation of Rural Cooperative (FRC), in October 1991. Out of a total of about 8,000 cooperatives, about 3,000 received direct aid from the FRC or its Regional Cooperative Service Units (RCSUs) - 12. Over the first three years the FRC was wholly subsidized from the EU/PHARE program, which financed significant technical assistance in the form of advisory services, training program support including seminars and dissemination of information, and office equipment. Consequently, the FRC and its regional units gradually acquired customers and extended the range of services provided. In July 1994 the FRC statutes were changed, giving it the legal possibility to provide paid training and advisory services including those concerning small business in rural areas. 16. Since July 1994 up till now restructuring process of FRC has been lead. The number of employees has been decreased to less than 25%. The role of funds other than from PHARE is increasing in financing FRC activities. They are conquered on commercial way. The FRC is becoming n consulting firm in the area of rural cooperative movements. 17. Though training, advisory services and promotion of the cooperative concept were the FRC's main field of activity, the organization also made a significant contribution to the work on amending the cooperative law, developing sector strategies important for cooperatives, developing guidelines for establishing local agricultural wholesale markets. The FRC developed cooperation with Agricultural Extension Service Stations (ODR), treating the function of both institutions as complementary. I Originally, this was 6 million zlotys transferred in 1991, which had increased by interest by the time the Capital Fund was established.
APPENDIX B Page 4 of 5
ACTIVITIES UNDERTAKEN TOWARD ADP LOAN ACTIVATION 18. The ADP loan procedure was liberalized in 1994 - see item 8. Improvement in ADP loan utilization was expected following the implementation in 1994 of a sector restructuring program for the dairy industry and milk cattle breeding. However, despite great interest on the part of both dairy cooperatives and cattle breeders in cheap loans (with subsidized interest repayment form the Agency for Restructuring and Modernization of Agriculture - ARMA), ADP loan implementation improved only slightly. The reason was the elimination of BGZ (as an unprofitable bank) from distributing ADP loan funds. It should be noted that BGZ is the bank that mainly services the sector restructuring program in the dairy industry, 19. Bank Rolno-Przemyslowy in Warsaw took advantage of ADP loan funds due to the fact that these were long-term resources and they increased the bank's credit capacity. ACHIEVING THE LOAN'S AIMS 20. In the part concerning the credit line, the ADP loan did not come up to expectations. Loans were too expensive, especially in view of the deteriorating market situation in agriculture and food processing, and significant exchange-rate changes. Cheaper, preferential loans for agriculture were introduced (thanks to the MAFE's efforts). 21.
Other reasons for the loan's meager utilization: (i) lack of the possibility to finance purchases of land as well as second-hand machines and equipment, for which there was a need, form the ADP loan, (ii) the requirement of a 30% share of a bank's own funds in the amount of a loan (especially difficult to fulfill for cooperative banks), which was abolished - but too late, (iii)the existence of cheaper, alternative sources of loans, e.g. Agroline from EU/PHARE funds (iv) the lack of sufficient borrower collateral for the banks, (v) the banks' preference for using their own funds for loans, in view of the Polish banking system's over-liquidity, (vi) the overall macro-economic situation in Poland, which was not conducive to investment due to high inflation and high interest rates.
As a result, only 25 % of ADP loan funds was utilized. In the part that was utilized, the funds were well allocated in terms of the small amount of bad loans (compared, for example, to the AEDP loan). 22. A much more positive assessment can be made of the utilization of the capital-technical aid supporting the reconstruction of genuine rural cooperatives, including cooperative banks. In terms of cooperative banking, the ADP program was aimed at supporting regional cooperative banks and about 400 local cooperative banks grouped in them. Aid from PHARE was extended by the Agroline program, under which 3 million ECU was earmarked for technical assistance for cooperative banks. Thanks to PHARE, and USAID assistance, regional banks developed and extended the range of services offered to local cooperative banks in personnel training and human resources management, procedure and system improvement and establishing internal supervision. The Capital Fund provided significant aid, transferring to regional banks (BUG, GBPZ, GBW) about 56% of accumulated funds, from the Polish Government and USAID, in return for shares taken over by local cooperative banks. The remaining amount (10.7 million zlotys, or about $4 million) is the subject of negotiations between
APPENDIXB Page 5 of 5 the Capital Fund and the Donor. There is no formal restriction on capital support for other regional banks (apart from the three mentioned above). Through the FRC, thanks to PHARE aid, significant success was achieved in supporting changes in cooperatives toward transforming them into cooperatives controlled by their members. A number of regional auditing organizations was also established as well as national organizations for different cooperative branches. Though the situation varies among the different branches, in general they need time and resources to consolidate. Their situation also depends on the overall improvement in rural cooperatives' economic condition. 23. The delays in amending the act on cooperatives were not the fault of the Polish Government, but of the parliament, which also changed in the meantime. The ADP technical assistance program's great success has been the training of a large number of Polish workers active in rural cooperatives, cooperative banks, agribusiness, education, and economic and agricultural consulting. CONCLUSIONS 24. The implementation of the ADP credit line was similar to that of other credit lines, meaning it was unsatisfactory; the cause should be seen to be the overall economic situation. 25. Banks were not interested in the loan's funds and, with a few exceptions, did not promote this credit line. Promotion undertaken by the MAFE or NBP could not be effective because these institutions themselves were not in a position to offer anything to prospective borrowers. 26. The help of consultants employed by the IBRD over a relatively long time was certainly very useful for the banks, but did not improve utilization of the loan's funds. 27. Technical assistance as part of the ADP had a positive impact on the standard of operation in cooperative banks, the Foundation of Rural Cooperative and the Agricultural Extension Service Stations. Thanks to this aid, a number of cooperative banks learned about world banking procedures and underwent capital consolidation, which facilitated the establishment of the first regional banks.
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