Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16491 IMPLEMENTATION COMPLETION REPORT HUNGARY INTEGRATED AGRICULTURAL EXPORT PROJECT (Loan 3229-HU) April 16, 1997 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 performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Hungarian Forints (HUF) 1988 US$1 = HUF 50.4 1989 US$I = HUF 59.1 1990 US$1 = HUF 63.2 1991 US$1 HUF 74.7 1992 US$1 = HUF 79.0 1993 US$1 = HUF 79.0 1994 US$I HUF 105.1 1995 US$1 HIUF 125.7 1996 US$1 = HUF 151.9 WEIGHTS AND MEASURES (metric) FISCAL YEAR January I - December 1 ABBREVIATIONS AND ACRONYMS AMP - Agroprocessing Modernization Project APR - Agricultural Policy Review CMEA - Council for Mutual Economic Assistance ERR - Economic Rate of Return EU - European Union FRR - Financial Rate of Return GATT - General Agreement on Tariffs and Trade GDP - Gross Domestic Product IAEP - Integrated Agricultural Export Project ICR - Implementation Completion Report MOA - Ministry of Agriculture MOF - Ministry of Finance MOT - Ministry of Trade NBH - National Bank of Hungary PB - Participating Bank PHARE - Poland-Hungary Assistance Recovery OECD - Organization for Economic Cooperation and Development Vice President: Johannes Linn Department Director (Acting): Hans Apitz Division Chief: Michele de Nevers Staff Member: Kishore Nadkarni FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT HUNGARY INTEGRATED AGRICULTURAL EXPORT PROJECT (Loan No. 3229-HU) CONTENTS PREFACE. i EVALUATION SUMMARY. iii PART I. PROJECT IMPLEMENTATION ASSESSMENT ..............................................................1 A. Project Objectives ..............................................................:1I B. Evaluation of Objectives ..............................................................1 C. Achievement of Project Objectives ..............................................................3 D. Implementation Record and Major Factors Affecting Project Implementation ................................6 E. Project Sustainability ..............................................................7 F. Bank Performance ..............................................................7 G. Borrower Performance ............................................................ 8 H. Assessment of Outcome ..............................................................8 I. Future Operation ..............................................................9 J. Key Lessons Learned ..............................................................9 PART II. STATISTICAL ANNEXES ..............................................................11 Table 1: Summary of Assessments .13 Table 2: Related Bank Loans .14 Table 3: Project Timetable .14 Table 4: Loan Disbursements: Cumulative Estimated and Actual .15 Table 5: Key Indicators for Project Implementation .15 Table 6: Key Indicators for Project Operation .16 Table 7: Studies Included in Project .16 Table 8A: Project Costs ............................................ 17 Table 8B: Project Financing ............................................ 17 Table 9: Economic Costs and Benefits ............................................ 18 Table 10: Status of Legal Covenants ............................................ 19 Table 11: Compliance with Operational Manual Statements ............................................ 20 Table 12: Bank Resources: Staff Inputs ............................................ 20 Table 13: Bank Resources: Missions ............................................ 21 Appendixes: A. Aide-Memoire of ICR Initiation Mission B. Borrower's Contribution to the ICR C. Map - IBRD No. 28664 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. IMPLEMENTATION COMPLETION REPORT HUNGARY INTEGRATED AGRICULTURAL EXPORT PROJECT (Loan No. 3229-HU) PREFACE This is the Implementation Completion Report (ICR) for the Integrated Agricultural Export Project (IAEP) in Hungary, for which an IBRD loan in the amount of US$100 million equivalent was approved on June 20, 1990; signed on June 29, 1990; and made effective on October 1, 1990. The original loan closing date of December 31, 1995 was extended by six months to June 30, 1996. 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 was made on July 26, 1996. The final amount utilized was US$99.21 million equivalent and the unutilized balance of US$790,000 equivalent was canceled with effect from October 31, 1996. 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. The Borrower - the National Bank of Hungary (NBH) - provided a written contribution, jointly prepared with the Ministry of Agriculture (MOA), including a summary which is included in an Appendix to the ICR. Preparation of the ICR was begun during the last supervision mission of October 1995 and followed up during the Implementation Completion Report mission of July 1996. It is based upon materials in the project files and discussions with relevant officials of the Ministry of Agriculture (MOA), National Bank of Hungary (NBH) and the participating banks. MOA and NBH 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 the Borrower's contribution to the ICR. IMPLEMENTATION COMPLETION REPORT HUNGARY INTEGRATED AGRICULTURAL EXPORT PROJECT (Loan No. 3229-HU) EVALUATION SUMMARY INTRODUCTION i. Since lending to Hungary began in 1983, the Bank's strategy of assistance has focused on supporting the country's program of structural adjustment to make the economy more efficient, flexible, market responsive and competitive in external markets. In the agricultural sector, the Integrated Agricultural Export Project (IAEP) was preceded by Bank operations to improve efficiency and competitiveness in grain storage and farm mechanization; production and marketing of livestock and meat products; crop production; and modernization of agroprocessing enterprises. It was followed by an operation to strengthen the food and non-food consumer goods marketing and distribution systems. PROJECT OBJECTIVES ii. Objectives: The development objectives of the IAEP were to: (a) provide quality food products for export either as raw material or as inputs into agroprocessed goods; and (b) improve the efficiency of agricultural producers by providing additional financial resources to small scale, private farmers and modernizing the agrobusiness methods and practices of managers of large scale farms (para. 1). iii. Components: The project consisted of: (a) a credit component of US$100 million; (b) an institutional component comprising technical assistance and training in the areas of agriculture and food marketing; commodity exchange development and market information services; training of farm managers in business planning and marketing; extension services and training for private farmers; and livestock advisory services; and (c) a sector policy component including Government actions for: reduction of agricultural subsidies; improving the efficiency of large scale farms; facilitating restructuring of cooperatives; making land mortgageable for bank loans; and reduction in import licensing (para 2). IMPLEMENTATION EXPERIENCE AND RESULTS iv. Achievement of Objectives: Over its implementation period, the project substantially achieved its major objectives, albeit with varying degrees of delay in the case of the policy component. In regard to policy objectives, overall agricultural subsidies declined from 8 percent of GDP in 1988 to I percent in 1990, and reached their lowest levels in 1992, but subsequently increased to 2 percent of GDP in 1994 in the face of external pressures emanating from three successive years of drought. Subsidies have continued to decline since in real terms and are budgeted at around I percent of GDP in 1997, lower than in most OECD countries. Important legislation was passed in regard to the land compensation policy, iv reorganization of cooperatives, and privatization of land in collective farms as a result of which about 90 percent of all agricultural land is expected to be privately owned by the end of 1997. The privatization of state farms was substantially completed by mid-1996. Out of about 120 state farms, 86 were fully privatized, mostly through purchase by Hungarian investors. This includes 39 loss-making state farms that were liquidated and their assets sold through auction. Twenty-eight state farms, most of which are engaged in production of plant and animal breeding stock, are expected to remain in majority state ownership although about 30 percent of the shares are to be distributed to private investors, including current managers and employees. Introduction of a new law on land mortgages has been substantially delayed and is now expected to be put before Parliament in 1997. In line with Hungary's commitments to GATT, import licensing and quotas have been replaced by tariffication (paras. 9 to 14). v. In respect of financial objectives, subprojects financed under the project did not directly contribute to exports but provided raw materials in the form of crop production, livestock and meat that entered into agroprocessed exports. Based on estimates prepared by the Borrower's agencies for a representative sample of subprojects, the weighted average financial rate of return (FRR) is estimated at about 16 percent (as compared to the minimum requirement of 12 percent). Private farmers and rural investors were the main beneficiaries, receiving about 74 percent of the subloans, the balance going to cooperatives (23 percent) and state farms (3 percent). Repayment performance was satisfactory - about 72 percent of the subloans were fully current in repayment; in regard to subloans with arrears, the PBs view the problems in most cases as transitional that would be corrected; legal proceedings for recovery have been instituted in 5 percent of the subloans (paras. 15 to 20). Institutional objectives in regard to technical assistance and training were substantially achieved as well (paras. 21 to 23). 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 the implementation of the overall economic transformation and structural reform programs, and insufficient incentives to farm and enterprise managers to carry out the required restructuring. What could not be foreseen was the juxtaposition of the sudden collapse of the CMEA market and the transitional difficulties in the domestic markets, and their combined impact on the agricultural and non-agricultural enterprises and the banking system. The implementation period was also marked by an unusual period of three successive years of droughts which increased pressures on the Government for increasing the level of subsidies (paras. 6 and 25). vii. Bank and Borrower Performance: While Bank performance was satisfactory in all stages of the project cycle as acknowledged by the Borrower, the Bank's concept of the project as an "integrated operation" was not supported by the project design that was adopted and the specific implementation arrangements entered into (para. 29). Bank supervision tended to focus on the credit line component, and in hindsight, the Bank could have been more forceful in persuading MOA to adopt a more coordinated approach in regard to monitoring of the institutional component (para. 30). viii. The Borrower's performance was satisfactory during all stages of the project cycle. NBH carried out well its responsibility of monitoring and reporting of the progress of the credit line component. MOA's various departments in charge of monitoring of the institutional component cooperated well with the Bank supervision missions. The Bank was unable to persuade MOA, however, to define a focal point to be responsible for coordinating the implementation of the institutional component. Compliance with covenants was marked by some delays in the case of policy components but these were substantially complied with by project closing. Cooperation between the Borrower and the Bank remained responsive and cordial at all times (paras. 31 and 32). v ix. Assessment of Project Outcome: The overall project outcome is assessed as satisfactory as the project achieved to a substantial extent its major objectives in terms of sector policy, financial benefits, and institutional progress, albeit with varying degrees of delay in the case of the policy component (para. 33). PROJECT SUSTAINABILITY AND FUTURE OPERATIONS x. Sustainability: The project achievements are likely to be sustainable given the Government's continued implementation of its economic and structural reform program which is being supported by the Bank through the recently approved Enterprise and Financial Sector Adjustment Loan (EFSAL) and a proposed Public Sector Adjustment Loan (PSAL). The Government is expected to continue its program of agricultural sector reform as well in the context of Hungary's planned accession into the EU, and the Bank is helping the Hungarian authorities with technical assistance in the preparatory work for the transition (para. 28). xi. Future Operations: Although the Borrower's agencies have not prepared a formal forward- looking operational plan, they have reiterated their support for sustaining the institutional achievements of the project. The PBs expect to be able to recycle the funds from the repayments of the first generation of subloans to make additional subloans for the purposes defined under the project (paras. 34 and 35). KEY LESSONS LEARNED xii. The main lessons from the project as summarized in para. 36 are: (i) project design should be limited to achievement of a few, key, well-defined objectives, and should be appropriately reflected at the outset in agreed implementation arrangements; in retrospect, the project concept as an "integrated operation" was too ambitious in relation to the project design and implementation scheme; (ii) policy conditionalities should be limited to a few, key actions with a clear indication of priorities and importance; and (iii) special attention needs to be provided to the design and implementation arrangements where the project's technical assistance component is financed largely from external donor sources. IMPLEMENTATION COMPLETION REPORT HUNGARY INTEGRATED AGRICULTURAL EXPORT PROJECT (Loan No. 3229-HU) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. The development objectives of the Integrated Agricultural Export Project (IAEP) were to: (a) provide quality food products for export either as raw materials or as inputs into agroprocessed goods; and (b) improve the efficiency of agricultural producers by providing additional financial resources to small scale, private farmers and modernizing the agrobusiness methods and practices of managers of large scale farms. 2. To achieve these objectives, the project consisted of the following components: (a) a credit component of US$100 million; (b) an institutional component comprising technical assistance and training in the areas of agriculture and food marketing; commodity exchange development; market information services; subsector professional organizations; agricultural insurance scheme; training of farm managers in business planning and marketing; local consultancy services; training of private farmers; and livestock advisory services; and (c) a sector policy component including government actions for: reduction of subsidies to the agricultural sector; improving the efficiency of large scale farms through restructuring or liquidation as appropriate; facilitating restructuring of cooperatives by improvements in the governing laws and regulations; making land mortgageable for commercial bank loans; and gradual reduction in import licensing. B. EVALUATION OF OBJECTIVES 3. The project was designed at a time of major economic change in Hungary in 1990 as Hungary's first democratically elected government undertook an accelerated program of macroeconomic and structural reform. This program differed radically from earlier efforts in its clear vision of a Hungarian market economy fully integrated with Western Europe. Foreign trade was liberalized; prices were freed; subsidies to consumers and producers were drastically reduced; and legal restrictions on hiring and firing of workers were removed. Significant progress was also achieved in reforming the enterprise and financial sectors, including the creation of a large number of private banks and sale of state-owned enterprises to domestic and foreign investors, raising the share of private sector contribution to GDP to more than 50 percent. Consistent with the overall economic program, major changes were also required in the Hungarian agricultural sector, which accounted at the time for about 20 percent of GDP, 20 percent of employment, and 30 percent of exports to convertible currency markets. Despite being a star performer among the agricultural sectors of the former CMEA countries, the legacy in Hungary's agricultural sector was mixed. Agriculture was constrained by the well-known shortcomings of socialist systems. Quantity considerations were the major objective while quality and efficiency played a secondary role. Agricultural land did not have clear ownership, and land markets did not function. The sector needed an expensive system of subsidies, partly to keep consumer food prices low. The secure 2 markets in other Eastern bloc countries resulted in inadequate attention to quality improvements. Farm structure was skewed in favor of large scale farms, owned either by the state or by state-controlled (as against member-controlled) cooperatives. Private farmers accounted for only about 15 percent of the agricultural land but were estimated to contribute to around 50 percent of the value added in agricultural production in certain activities, e.g. vegetable production. A major breakthrough in agricultural policy was the freeing of agricultural producer prices in January 1990, but further improvements were required in liberalization of agricultural imports, reduction of subsidies, restructuring or liquidation of unprofitable large scale farms, and removal of constraints to increased owner-operation of farms by private farmers. In this overall context, the project identified as "two of the most pressing challenges facing the agricultural sector": (i) the urgent need for large scale farms to increase their efficiency through improved business planning, adoption of modern financial management methods, and a decision-making orientation of the farm accounting systems; and (ii) for private farmers to be enabled to develop into owner-operators of commercially-oriented farms for which they would need improved access to commercial credit and supporting services such as extension and marketing. 4. Against this background, the project's objectives of increasing exports of quality (and hence higher value added) products, and improving the efficiency of agricultural producers, both large and small scale, were clear. The project was conceived to be an "integrated operation which addresses the urgent need for agricultural producers to vertically coordinate their output mix on the one hand with the capabilities of the agroprocessing sector, and, on the other, with the effective demand on the domestic and international markets". 5. Project design rightly identified the main constraints to be addressed in the policy and institutional frameworks. The policy component identified the main areas for action in improving the enabling environment for farm restructuring. The institutional component, financed largely from donor funds under EU PHARE cofinancing, covered the most relevant areas where technical assistance and training were essential for assisting both large and small scale producers to improve their operations; monitoring was to be carried out by the MOA, and for the marketing related components, by the Ministry of Trade (MOT). 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 on-lending interest rates were to be market determined. An innovation, aimed at encouraging the participating banks (PBs) faster to commit and disburse the credit line funds, was the allocation of the loan amount among individual PBs on the basis of bids submitted by them as to the amounts they would expect to onlend; the PBs were then required to pay the commitment fees on their respective allocations. To encourage private and small scale farmers to utilize the credit line, simplified evaluation procedures were provided for subloans under US$300,000 equivalent. In hindsight, where project design fell short was in ensuring an integrated approach for project implementation. Each of the identified objectives - and the associated components - was relevant, but the project lacked a mechanism to provide coordination between the credit, policy and institutional components to ensure mutual reinforcement and benefits. Thus, the project components were implemented in relative isolation from each other; while important benefits were secured under each component, the project design was not conducive to its implementation as an "integrated operation". 6. 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; and insufficient incentives to farm and enterprise managers to carry out the required restructuring. 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 the agricultural and non-agricultural enterprises and the banking system. 3 7. A major review of the Bank's ongoing credit line projects in Hungary was carried out in October 1992; for consistency, thresholds and conditions were harmonized among the different credit lines. No significant amendments were deemed necessary in the case of the IAEP as the design of the credit component already provided for substantial flexibility and simpler procedures for smaller subloans (under US$300,000) to private and small scale farmers and rural investors. The Bank also undertook with the Hungarian authorities a major Agricultural Policy Review (APR) in 1994-95 that focused on changes needed in the context of Hungary's increasing integration with, and eventual planned accession into, the EU. C. ACHIEVEMENT OF PROJECT OBJECTIVES 8. Over its implementation period, the project substantially achieved its main objectives - sector policy, institutional, and financial - although with varying degrees of delay, particularly in the case of the policy and institutional objectives. Sector Policy Objectives 9. Reduction of Agricultural Subsidies: Overall agricultural subsidies were sharply reduced between 1988 and 1990, from about 8 percent of GDP to I percent, thus more than meeting the requirement of reduction by a third by December 1990. Subsidies continued to decline up to 1992 when they reached their lowest levels. Subsequently, subsidies increased to about 2 percent of GDP by 1994 due in large part to the adverse effects of three years of successive droughts. An assessment of Hungary's agricultural support programs, including subsidies, was a major focus of the APR carried out in 1994-95. Subsidies have declined in real terms thereafter. As budgeted, the 1997 agricultural support programs total about US$490 million, about 30 percent less than in 1993 in US dollar terms, and accounting for about I percent of GDP. At these levels, aggregate agricultural subsidies in Hungary are substantially below levels in most OECD countries, although they are still higher than in other countries with comparable GDP. 10. Land Reform and Farm Restructuring: The privatization and restructuring of large scale state and collective farms has been substantially completed. Privatization of land was based on compensation policy and legislation guiding the restructuring of collective farms. By mid-1996, the compensation process was completed in respect of about 85 percent of the land; the land to be allocated to the new owners has physically been defined. On the other hand, the physical distribution of land shares for collective farms has been lagging behind; only about 20 percent of this category of land had been redistributed by mid-1996. As a result of land privatization, which is expected to be completed in 1997, over 90 percent of the land would be privately owned. 11. Reorganization of Collective and State Farms: The relevant legislation was passed in 1992 to provide a framework for the distribution of assets and privatization of land in collective farms. The actual restructuring took longer than expected; the first phase was completed only in 1995. From the initial assets of the collective farms, about 42 percent were distributed to active members, 39 percent to pensioners, and 19 percent to ex-members. In the first phase of the reorganization, most of the active members opted to remain under the umbrella of the cooperative farming organizations. Only about 15 percent of the active members left, and about one-third of these have created smaller cooperative organizations or partnerships. Cooperative farms are now evolving toward service and marketing types of cooperation or holding-type structures. 12. The privatization of state farms was substantially completed by mid-1996. Of the initial state farm land (about 411,000 hectares), about 47 percent was used to compensate former owners. Out of the 4 121 state farms, 86 have been fully privatized, mostly through purchase by Hungarian investors. Thirty nine loss-making state farms were liquidated and their assets sold through auctions. The privatization of seven other state farms is in process and expected to be completed in 1997. Twenty eight other state farms were converted into joint stock companies and remain under majority state ownership. These include mainly farms engaged in plant and animal genetic material production. The Hungarian authorities intend to sell about 30 percent of the shares in these farms to private investors (including current managers and employees). 13. Land Mortgage: Hungary inherited a solid system of cadastre and land titling, but this required adjustment to the needs of a modem land market in a market economy. The upgrading of the land titling system is in process with significant financial support from the EU for computerization of the over 100 land registry offices. Progress in introduction of a law governing land mortgages has lagged behind, however. Preparation of a draft law has been in process since 1993. During the 1994-95 APR, the Bank commented on the proposals under consideration at the time, including the creation of a suitable Land Mortgage Institution. Finalization of the draft law continued to be delayed subsequently, and is now expected to be submitted to Parliament in the first half of 1997. 14. Reduction of Import Licensing: In line with Hungary's commitment under GATT, import licensing and quotas were gradually reduced. Beginning in 1995, import licensing, quotas and other non- tariff measures were replaced by new (and higher) tariff rates under the GATT provisions. Financial Objectives 15. Project Cost and Financing: The total project cost is estimated at about US$200 million equivalent as compared to about US$275 million equivalent projected at appraisal, reflecting the much smaller than expected average size of the subprojects financed under the loan. In regard to project financing, the Bank loan, which financed the investment component, accounted for a higher share of total financing than expected (53 percent as compared to 45 percent). Against the expected cofinancing in the amount of US$11 million equivalent from various OECD sources, actual cofinancing amounted to about US$7 million, largely from EU PHARE. 16. Subproject Portfolio Characteristics: A total of about 1,445 subloans was made under the project for an amount of US$99.2 million equivalent for financing of investment and working capital; the average subloan size was about US$68,500 equivalent. All subloans were onlent by the PBs in local currency for maturities of up to ten years with up to three years of grace, at interest rates that included individual PBs' spreads over the NBH refinancing rate. Of the total amount of Bank funds onlent, the largest share was for crop production (33 percent), followed by agroprocessing and services (24 percent each), and livestock production (18 percent). The bulk of the subloans went to private farmers and rural investors (74 percent), the balance going to cooperatives (23 percent) and state farms (3 percent). 17. Subproject Performance: Under the project, the PBs and the beneficiaries were required to calculate rates of return for individual subloans exceeding US$300,000 equivalent; subloans below this threshold were to be evaluated by the PBs on the basis of their normal practices in respect of such subloans, including tests of the creditworthiness of the subborrowers. In practice, almost all the subloans were below the US$300,000 threshold. Ex-post financial rates of return (FRRs) were estimated by the Borrower's agencies on the basis of a representative sample of subprojects. These indicate a weighted average FRR in real terms of about 16 percent (as compared to the project requirement of an FRR of at least 12 percent in respect of subloans over US$300,000 equivalent). The PBs and subborrowers were not required to calculate economic rates of return (ERRs) under the project as the requirement for a separate estimation of ERRs had been dropped during project implementation in recognition of the Government's program of widespread price and trade liberalization. 5 18. In regard to repayment performance, about 72 percent of the subloans are fully current in regard to repayment of principal and interest; this includes about 34 percent of the subloans where the subborrowers prepaid the subloans prior to maturity. Of the remaining 28 percent, nine percent were sold by the PBs under the Government's program of debt consolidation introduced in 1994, and are no longer on books of the PBs. The remaining 19 percent are affected by arrears of payment of either principal or interest or both. The PBs expect that, in most of the cases, the problems are transitional due to market problems or delayed completion, and are expected to be resolved. However, in respect of about 5 percent of the subloans, the PBs have initiated legal proceedings against the subborrowers to recover owed amounts. 19. Participating Banks: Eight banks participated under the project. The Commercial and Credit Bank (K&H Bank) had the largest share of the subloans (35 percent), followed by Mezobank and Agrobank (24 percent together), Budapest Bank ( 18 percent), Hungarian Credit Bank (13 percent), and OTP Bank (11 percent). 20. Performance of Participating Banks: The project contributed to the further strengthening of the loan evaluation and supervision procedures of the PBs that had been developed under earlier Bank credit lines. More general development of the PBs' institutional and operational capabilities was pursued under other concurrent and successor Bank operations. In common with many other Hungarian commercial banks, the PBs under the project are facing systemic problems, particularly in relation to the non- performing and problem parts of their portfolios. The Government has taken some measures to strengthen the financial situation of the banks through injections of new capital. However, substantial further progress is needed, and this is being pursued under the recently approved Enterprise and Financial Sector Adjustment Loan (EFSAL). Institutional Objectives 21. The institutional component under the project consisted of a program of technical assistance and training, financed largely from EU PHARE sources. After initial difficulties, due in part to procedural problems and the multiplicity of local agencies involved, the different components were completed with varying degrees of delay as compared to the original expectations. 22. In respect of agricultural and food marketing, an allocation of ECU430,000 was utilized to develop and implement a domestic and overseas training program for agricultural and food marketing specialists. The Budapest Commodity Exchange, with ECU70,000 of assistance under the project that supplemented that received from US and other commodity agencies, has become fully operational and has progressively expanded the range of its trading activities. The establishment of the market information system was started in 1990 and the first phase, financed under the project (ECU770,000), was completed in 1992. Further development of the market information system is being pursued under the Bank's successor Product Market Development Project (Loan 3509-HU). In regard to subsector interprofessional marketing organizations, by 1996, 26 accredited product organizations had been established, including for the principal products - milk, meat, poultry, corn, vegetable, oil, fruits and vegetables. A program for training offarm and agricultural business managers was developed with the assistance of bilateral grants (from Germany, Netherlands and Finland). For local consultancy development, French bilateral funding supported the training of staff from selected Hungarian institutes in French institutions and companies in preparation for consultancy work. Training of private farmers, and establishment of a consultancy service system for them, were pursued under an ECU3 million allocation. A computer-based registry of consulting services has been prepared. The training program also includes model demonstration farms, funded from bilateral grants from Netherlands and New Zealand, and study tours for private farmers and investors from bilateral grants from Germany. 6 23. Studies were also carried out as agreed on the development of an agricultural insurance system under an ECU70,000 allocation with the assistance of French consultants; and on agricultural extension services which resulted in a significant modification of the system, including a new program introduced in 1994 to subcontract delivery of extension services through eligible private extension agents or groups. D. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION Implementation Record 24. The project was appraised in January 1990, followed by loan negotiations in April 1990, Board approval in June 1990, and signature, also in June 1990. The loan became effective in October 1990. Disbursements were much faster than projected in the first three years of project implementation (1990- 93) with some of the PBs fully committing and disbursing their respective allocations under the credit line, but slowed down subsequently as other PBs were not able to fully commit their funds. As indicated earlier, the Bank carried out in October 1992 a major review of its ongoing credit lines in Hungary, including the IAEP. No major changes were deemed necessary in respect of the IAEP at the time. The original loan closing date of December 31, 1995, was extended at the Borrower's request by six months to June 30, 1996 to enable completion of disbursements in respect of commitments already entered into. Factors Not Generally Subject to Government Control 25. Two 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 critical for many Hungarian exporters. The effect was even more pronounced as, encouraged by the increasing trade in convertible currency within CMEA participants prior to 1990, many enterprises had undertaken investments aimed primarily at these CMEA convertible currency markets, but which were not readily switchable to the more demanding Western markets when the CMEA markets disappeared. The second was the deleterious effect of an unusual period of three successive droughts between 1990 and 1993 which severely affected agricultural production, thereby reducing product quality and increasing unit costs of production for processors. The prolonged drought period also contributed to escalating pressures on the Government for reversing the falling trend in agricultural subsidies until then. The juxtaposition of the sudden collapse of the CMEA market and the transitional difficulties in domestic markets under the economic adjustment and structural reform program, combined to lead to a significant decline in agricultural employment, and required the Government to reinforce schemes to provide alternative rural employment, including through special schemes of regional development. Factors Generally Subject to Government Control 26. Despite the substantial progress in reducing overall levels of agricultural subsidies since 1988 (para. 9), the Government, in large part due to the pressures resulting from the external factors described in the preceding paragraph, continued to maintain a program of production and investment subsidies as part of its overall support program. Production subsidies were largely in respect of working capital loans against certification of use of approved seeds and other inputs by the farmers. These were reviewed during the APR in 1994 and not found to have significant biases. Investment subsidies, however, were largely provided through the Agricultural Development Fund, established in 1993 to encourage investments in small and medium scale farms and rural enterprises, and included a variety of forms - grants for investments in infrastructure, and soft-interest loans as well as amounts to be applied against payments of interest on commercial loans, for investments in productive assets. The interest rate subsidies on commercial bank loans were given outside the banking system; the commercial banks received the normal market rates of interest from the farmer or investor who was later eligible to claim a 7 variable refund (of up to 50 percent of the interest paid) depending upon the type of investment from regional tax offices. Although not distortive in terms of the commercial banks' evaluation of investments, the prevalence of the subsidy schemes did appear to favor the targeted sector (small and medium farms and enterprises with up to 60 employees) as compared to larger investors. It may also explain in part the fact that almost all the subprojects under the project were relatively small, with an average subloan size of only around US$68,500. Factors Generally Subject to Implementing Agency Control 27. The responsibility for implementation of the technical assistance and training components was distributed between MOA and MOT (for the marketing component). Within MOA, responsibility for monitoring the progress of individual components was dispersed among different departments. Consequently, there was no single focal point for coordination of the implementation during the critical early stages, and led to individual tasks being launched and completed with varying degrees of delay. The lack of a focal point also led to a less than integrated approach in the implementation of the different components, with some loss of consistency and the benefits of mutual reinforcement of the components under a more coordinated approach. There also remained, overall, a dichotomy between the credit and the institutional components, with each being pursued in relative isolation from the other. E. PROJECT SUSTAINABILITY 28. The project achievements are likely to be sustainable. The Government is continuing to implement its economic and structural reform program, including enterprise and financial sector reform, to be supported by the recently approved EFSAL (FY97), and public expenditure reform, to be supported by the planned Public Sector Adjustment Loan (FY98). During the period of project implementation, the Government has made important strides in agricultural sector reform, including privatization of farms and agroprocessing enterprises, and is expected to continue this process in view of Hungary's planned accession into the EU. The Bank has been substantially involved in the agricultural policy dialogue, and is continuing to support the Government's efforts in preparing the sector for increasing integration with the EU. Participating banks are expected to continue to finance viable projects from private farmers and cooperatives. Progress under the enterprise and financial sector reform program, aided by the EFSAL, would further reinforce the ability and willingness of the PBs to lend. The project's institutional achievements are likely to be sustained as well. F. BANK PERFORMANCE 29. Bank performance was satisfactory in all stages of the project cycle as acknowledged by the Borrower. During project identification and preparation, the Bank was substantially involved in assisting the Borrower's agencies in the design and development of the project; the FAO/CP participated substantially in the preparatory stages. The main project risks - the possible effects on the subsector from variations in implementation of the overall economic transformation and structural reform programs, and insufficient incentives to farm and enterprise managers to carry out the required restructuring, were identified at appraisal. However, what could not be foreseen were the resulting discontinuities - including years of negative GDP growth and weaknesses in domestic markets - and the sudden collapse of the CMEA market. In hindsight, however, the Bank's concept of an "integrated" project was not matched by the project design that was adopted. Thus, while the integrated project was to provide for increased exports, or increased value added, in quality products, through enabling greater "vertical coordination" among primary producers and agroprocessors, the project design and implementation arrangements did not provide for such integration (para. 5). 8 30. The Bank carried out eight supervision missions during the implementation period of 1990 to 1995, initially at six month intervals, but later at up to annual intervals. Supervision missions were staffed either by agricultural economists or financial analysts. The initial implementation period (1990 to 1992) was marked by some discontinuities resulting from internal Bank reorganizations and reassignments. In respect of the credit line component, supervision focused, from the outset, on the PBs' lending activities to final beneficiaries; more general issues relating to the PBs' overall financial performance and operations were addressed under concurrent other Bank operations, including credit lines to the industrial sector and a loan to the PBs themselves for undertaking modernization of their operating systems and facilities. In regard to the institutional components, supervision was affected in the early period of project implementation by the fragmentation of responsibility among MOA departments, and by the fact that the component was entirely financed from donor grants, which were subject to the particular procedures and schedules of the donor agencies. In hindsight, Bank supervision could have been more forceful in persuading the Borrower's agencies of the need for a more coordinated mechanism. Progress under the policy component was reviewed and discussed in detail during the preparation and finalization of the APR in 1994-95, and under subsequent updates. G. BORROWER PERFORMANCE 31. The Borrower's performance was satisfactory through all stages of the project cycle. MOA put together an experienced team to work with Bank and FAO/CP staff during project preparation. While individual departments cooperated fully with the Bank missions during supervision in supplying the necessary information and support, overall monitoring of the institutional component was affected by the lack of a central focal point. MOA remained unpersuaded of the need for a more coordinated approach. Responsibility for monitoring and reporting of the credit line component was placed on the section already set up in NBH under earlier Bank credit lines. This section remained well-staffed at all times, with continuity, and monitoring and reporting were regular. Both MOA and NBH officials remained accessible at all times for consultation and cooperated fully with supervision missions. 32. The Borrower substantially complied with project financial and reporting requirements, including timely submission of audited accounts in respect of project expenditures and the Special Account. Compliance with several of the policy conditionalities was delayed to varying extents, but substantially complied with by project closing. H. ASSESSMENT OF OUTCOME 33. The project outcome is assessed as satisfactory as the project achieved to a substantial extent its major objectives in terms of sector policy, financial benefits, and institutional progress, albeit with substantial delay in the case of some of the sector policy objectives. Project sustainability is likely given the continued good progress being made by the Government in regard to its economic and structural reform program, supported through major Bank operations such as the EFSAL and the planned PSAL, and in its agricultural sector policy, given Hungary's desire for eventual accession into the EU. I. FUTURE OPERATION 34. The Borrower, NBH, has submitted a detailed contribution to the ICR, including a summary which is included as an appendix in this report. The Hungarian agencies have not prepared a formal forward-looking operational plan in respect of the institutional component, but have reiterated their intention to continue to support the institutions assisted under the project. 9 35. To the extent permitted after meeting their repayment obligations towards the Borrower (NBH), participating banks are expected to continue to onlend the recycled funds from repayments of the first generation of subloans for the purposes specified under the project. No follow-on project is envisaged at this time. J. KEY LESSONS LEARNED 36. The main lessons from the project, which may also have broader relevance for other projects, are: (i) project design should be limited to achievement of a few, key, well-defined objectives, and should be appropriately reflected at the outset in agreed implementation arrangements; in retrospect, the project concept as an "integrated operation" was too ambitious in relation to the project design and implementation scheme; (ii) policy conditionalities should be limited to a few, key actions, with a clear indication of priorities and importance; and (iii) special attention needs to be provided to the design and implementation arrangements where the project's technical assistance component is financed largely from external donor sources. 11 IMPLEMENTATION COMPLETION REPORT HUNGARY INTEGRATED AGRICULTURAL EXPORT PROJECT (Loan No. 3229-HI) PART II. STATISTICAL ANNEXES Table 1: Summary of Assessment Table 2: Related Bank Loans Table 3: Project Timetable Table 4: Loan Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 1 1: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions 13 TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies Ei mx 0 [ Sector Policies :1 30 Financial Objectives F7 Institutional Development I 3 iii Physical Objectives E E E Poverty Reduction E E Gender Issues i I 0zi Other Social Objectives E70 Environmental Objectives E L 0 Public Sector Management L L L L Private Sector Development ixF -ii Other (specify) I El l B. Project Sustainability Likelv Unlikely Uncertain (/) (v') (s/) Hig_hly C. Bank Performance satisfactory Satisfactory Deficient (/) (/) (/) Identification zz Preparation Assistance z I z Appraisal P7i Supervision El i M Highly D. Borrower Performance satisfactory Satisfactory Deficient (V) ($) (v') Preparation z 7I Implementation i izi Covenant Compliance I 3z Operation (if applicable) ai E o Hig-hly H-ighly E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory _nsatisfactorv (L) (L) Li)( 14 TABLE 2: RELATED BANK LOANS Loan/credit title Purpose Year of Status approval Preceding operations 1. Grain Storage and Farm Modernization of grain storage and on-farm 1983 Closed Mechanization Project equipment and facilities 2. Integrated Livestock Modernization of production and marketing 1985 Closed Industry Project system for livestock and meat products 3. Crop Production Improvement of crop production efficiency 1986 Closed Improvement Project through funding of improved farm machinery and construction equipment, and rehabilitation of liquid fertilizer plants 4. Agroprocessing Enhancement of international competitiveness of 1988 Closed Modernization Project Hungarian agroprocessed exports and increasing efficiency of production and effectiveness of marketing of agroprocessed products Following operations 1. Product Market Enhancement of marketing and distribution of 1992 Ongoing Development food and non-food consumer goods activities TABLE 3: PROJECT TIMETABLE Steps in Project Cycle Date Planned Date Actual Identification (Executive Project Summary) 11/1988 11/1988 Preparation 03/1989 03/1989 Appraisal 06/1989 01/1990 Negotiations 10/1989 04/1990 Letter of Development Policy (if applicable) Board Presentation 11/1989 06/1990 Signing 12/1989 06/29/1990 Effectiveness 10/01/1990 Project Completion 06/20/1995 06/30/1996 Loan Closing 12/31/1995 06/30/1996 15 TABLE 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL (US$ THOUSANDS) FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal estimate 3,000 18,100 45,800 75,000 92,000 100,000 100,000 Actual 4,085 52,499 78,361 86,092 89,603 92,951 99,213 Actual as % of estimate 136.2 290.0 171.1 114.8 97.4 93.0 99.2 Date of final disbursement 7/26/1996 TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Estimated Actual . Key implementation indicators in SAR 1. Maintaining and monitoring its program by the Government for By 12/31/1990 Complied partially the reduction of investment, production and export subsidies to the agricultural sector 2. Reduction by the Government of all agricultural subsidies at least By 12/31/1990 Complied one third. 3. Carrying out by the Government of an action plan for revising By 12/31/191 Complied partially the income support program for large scale farms located on poor quality land. 4. Submitting by the Government of a legislature draft legislation By 12/31/1992 Complied with delay for the revision of investment tax credits. 5. Submitting by the Government of a draft legislation to the By 6/30/1991 Complied legislature providing for the assignment of ownership rights in the net assets of cooperatives and the definition of ownership rights in agricultural land. 6. Adopting by the Government of the regulations for accounting By 12/31/1991 Complied partially purposes land as an asset with notional value. 7. Carrying out by the Government of actions to make agricultural By 6/30/1991 Complied with delay land mortgageable for commercial bank loans. 8. Liquidating by the Government of each large scale farm which is Complied with delay participating in the Government's 1987-90 debt reduction program. 9. Carrying out by the Government of an action plan for the gradual Complied reduction of the licenses on imports of agricultural products in accordance with GATT negotiations. *No formal implementation plan was agreed under the project. 16 TABLE 6: KEY INDICATORS FOR PROJECT OPERATION Estimated Actual Key operating indicators in SAR 1. Subprojects to have acceptable Ranging from 15% to 40% Borrower's estimates (based financial rates of return (FRR) with an average of around on a representative sample of 31% subprojects) indicate a weighted average FRR of around 16% in real terms. 2. Net present value (NPV) About US$145 million at a Borrower's estimates of about discount rate of 12% US$186 million at a discount rate of 12%. *No formal operational plan was agreed under the project. TABLE 7: STUDIES INCLUDED IN PROJECT Study Purpose as defined at Status Impact of study appraisal/redefined On organization of the To determine the lines on which Completed Used as an input in extension system extension arrangements are to be reorganization of established for private, small- the extension scale farms system On livestock-related To identify weaknesses in the Completed Used as an input in services existing system of livestock reorganization of services and to make livestock-related recommendations for services improvement 17 TABLE 8A: PROJECT COSTS Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs 1. Crop Production 22.0 52.0 74.0 22.4 28.0 50.4 2. Livestock Production 32.0 10.0 42.0 18.5 18.3 36.8 3. Horticulture 18.0 2.0 20.0 2.5 4.6 7.1 4. Agroprocessing & Other 19.0 27.0 46.0 21.2 39.6 60.8 5. Trade Infrastructure 3.0 4.0 7.0 29.1 8.7 37.8 6. Services & Training 9.0 2.0 11.0 -- 7.0 7.0 Total Baseline Costs 103.0 97.0 200.0 93.7 106.2 199.9 Physical Contingencies 10.0 10.0 20.0 -- -- -- Price Contingencies 39.0 15.0 54.0 -- -- -- Total 152.0 122.0 274.0 93.7 106.2 199.9 TABLE 8B: PROJECT FINANCING Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item NBH/ Govem Project NBH/ Govem Project Com- ment Bene- IBRD OECD Total Com- ment Bene- IBRD OECD Total mercial Contri- ficiaries mercial Contri- ficiarie Banks butions Banks butions s Equipment & 54 -- 36 100 -- 190 35.6 28.4 99.2 -- 163.2 Services 1/ Civil Works 53 -- 16 -- -- 69 9.9 19.8 -- -- 29.7 Technical Services -- 1 -- -- 14 15 -- -- -- 7.0 7.0 Total 107 1 52 100 14 274 45.5 48.2 99.2 7.0 199.9 Percentage Share 39% 1% 19% 36% 5% 100% 22.8% 24.1% 49.6% 3.5% 100.0% 1/ Includes incremental working capital and services such as business planning and marketing. 18 TABLE 9: ECONOMIC COSTS AND BENEFITS Based on a sample of the most likely investments under the project, economic rates of return (ERRs) were expected to range between 18 to 57%, averaging about 20% for crop production, 20% for livestock, and 40% for agroprocessing subprojects. The requirement of calculating ERRs was dropped during project implementation in recognition of the widespread liberalization under the Government's price and trade reform programs. The Borrower has re-estimated financial rates of return (FRRs) for a representative sample of subprojects. These indicate a weighted average FRR of about 16% in real terms. 19 TABLE 10: STATUS OF LEGAL COVENANTS Agreement Section Covenant Present Original Type Status Fulfillment Description of Covenant Comments Date LA 3.01(b) M C For carrving out Part A of Project. Borrower is to make available to Complied the Guarantor funds under Subsidiary Loan Agreements termns and conditions approved by the Bank. LA 3.01(c) M C Borrower to supervise the carrying out by the Participating Banks Complied of their respective Subsidiary Loan Agreements in accordance with policies and procedures satisfactory to the Bank. LA 3.02 P C Procurement to be governed by Schedule 4 to the LA, Complied LA 4.01(b) F C Borrower to maintain satisfactory records and accounts in Complied accordance with sound accounting practices. LA 4.01(b) F C Borrower to have records and accounts, including those for the Complied Special Account, audited not later than five months after the close of fiscal year. LA 4.01(c) F C Borrower to maintain appropriate records and accounts for all Complied expenditures for which withdrawals were made from the Special Accounts and ensure that audit report contains a separate opinions by the auditors. GA 3.01 M CD Guarantor to liquidate large scale farms, which participated in debt Complied with reduction program. delay GA 3.02 E CP 12/31/1990 Guarantor to maintain and monitor for reduction of investment, Complied production and export subsidies to agricultural sector within and partially consistent with the overall subsidy reduction program, reduce all agricultural subsidies by at least one third. GA 3.03 M CP 12/31/1991 Guarantor to review mcome support program for farms on poor Complied quality land and revise income support program. partially GA 3.04 M CP 12/31/1991 Guarantor to review the results of the implementation of Complied investment tax credits for the agricultural sector. partially GA 3.05 M C 12/31/1992 Guarantor to adopt a plan of action for the gradual reduction of the Complied import licenses of agricultural products; and for the use of tariffs on the imports of agricultural products in accordance with GATT negotiations GA 3.06 M CP 12/31/1991 Guarantor to adopt regulations which require all farms on balance Complied sheets for accounting purposes as an asset with notional value. partially GA 3.07 M CD 6/30/1991 Guarantor to submit to draft legislation the legislature providing Complied with for the possibility of and conditions for the assignment of delay ownership rights in the net assets of cooperatives and the definition of ownership rights in agricultural land. GA 3.08 M CD 6/30/1991 Guarantor to make agricultural land mortgageable for commercial Complied with bank loans. delay - legislation before Parliament Covenant Type: Present Status M =Managerial P- Procurement C = covenant complied with F Financial E = Economic CD complied with after delay T Technical CP complied with partially NC not complied with 20 TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS There was compliance with applicable Bank Operational Manual Statements TABLE 12: BANK RESOURCES: STAFF INPUTS (STAFF-WEEKS) Stage of project cycle Planned Actual Preparation to appraisal -- 42.9 Appraisal -- 36.7 Negotiations through Board -- 7.3 approval Supervision - 75.5 Completion -- 10.0 Total -- 172.4 21 TABLE 13: BANK RESOURCES: MISSIONS Performance Rating: Types of Stage of project cycle Month/ No. of Days in Specialization' Implem. Developm. Problems3 Year Persons Field status objectives Through appraisal 10/88 4 7 E, E, F, A - - - 03/89 4 10 E, E, F,A - - - Appraisal through Board 11/89 5 18 E, E, M, R, A - - approval 02/90 1 5 - - - Supervision 1 11/90 2 10 E, F I I M Supervision II 04/91 3 10 F, R, A I I M Supervision III 10/91 2 7 E, F I I M Supervision IV 11/91 10 3 A, A, M - - - Supervision V 10/92 2 21 F, A I I M Supervision VI 10/93 2 12 E, F I I M Supervision VII 06/94 1 3 F I I M Supervision VIII 10/95 1 5 F S S M ICR Completion 07/96 1 7 F S S M I - Specialization 2 - Key to Performance Ratings: 3 - Key to Types of Problems: A = Agriculturist I = Minor problems F = Financial C = Cooperative Banking Specialist 2 = Moderate problems T = Technical E = Economist 3 = Major problems M = Managerial F = Financial Analyst H= Horticulturist L = Livestock Feed Specialist M Marketing Specialist N = Engineer R = Rural Cooperatives Specialist Appendix A Page 1 of 7 HUNGARY INTEGRATED AGRICULTURAL EXPORTS DEVELOPMENT PROJECT (Loan 3229-HU) AIDE MEMOIRE OF IMPLEMENTATION COMPLETION REPORT MISSION 1. A World Bank (WB) mission visited Hungary between July 3 to 10, 1996 to initiate work on the Implementation Completion Report (ICR) for the Integrated Agricultural Exports Development Project (IAEDP); and to review the progress of the Product Market Development Project (PMDP). This Aide Memoire pertains to the IAEDP; a separate Aide Memoire covers the PMDP. The mission met with representatives of the Borrower (the National Bank of Hungary - NBH); the Ministry of Agriculture (MOA); selected participating banks (PBs); and the Godollo Agricultural Institute (FMI). The mission would like to thank the various Hungarian counterparts for all the cooperation and courtesies extended.to it. The missions views expressed in this Aide Memoire are subject to confirmation by W1B management on the mission's return to Washington. PROJECT OBJECTIVES 2. The project objectives, as set out in the Loan and Project Summary of the relevant Staff Appraisal Report (No. 8337-HU of May 15, 1990) were to: (a) provide quality food products for export; and (b) make agricultural producers more efficient by providing additional financial resources to private, small scale farmers, and by improving agrobusiness methods and practices of managers of large scale farms. 3. To achieve these objectives, the project design included (i) a credit component in the forn of a line of credit through eligible commercial banks to finance investments by private farmers, agricultural enterprises and agroprocessing enterprises to improve their operations, reduce their unit costs, and increase exports; and (ii) a technical assistance component to provide training and advisory services to private farmers and other project beneficiaries. OPERATIONAL PLAN 4. The W3B's revised guidelines (April 1994) on preparation of ICRs requires the preparation of an operational plan by the Borrower and the implementing agencies, indicating actions and measures to be taken by the Borrower, the relevant Government agencies, and the project entities, to ensure satisfactory future implementation and operations under the project, and the achievement of the project's objectives. The draft operational plan should include: * the Government's views on the continued relevance of the project's objectives; * actions and measures to be taken to ensure sustainability and continued satisfactory operation of institutions and technical assistance programs under the project; * actions and measures to be taken in the case of subprojects and subborrowers facing financial difficulties, including enterprises that continue to be under state ownership. The operational plan should be supported by a table that indicates clearly, for each major item under the policy, institutional, technical assistance, and credit components, the following: Appendix A Page 2 of 7 * major issues/problems; * major actions/measures already take, being taken or to be taken; * schedule and timing of each major action/measure; and * the main Government and/or project agencies responsible for the actions/measures. BORROWER'S EVALUATION OF PROJECT IMPLEMENTATION 5. The Borrower's responsibilities in the preparation of the ICR are indicated in the WB's Operational Manual Statement and Good Practices for ICR Preparation (GP 13.55 of April 1994, paras. 4 and 5). Copies of the WB's BP 13.55 and relevant parts of GP 13.55 were given earlier to the Borrower (NBP) in the context of the ICR for the Agroprocessing Modernization Project (Loan 2936-HU). 6. As indicated in BP 13.55 and GP 13.55, the Borrower's ICR should include a summary not exceeding 10 pages, together with the supporting background information and annexes. PROJECT COST AND FINANCING PLAN 7. To enable a comparison of appraised and actual project costs and financing plans, the Borrower and the project agencies should update the relevant tables (Tables 2 and 3 on pages 20 and 21 of the Staff Appraisal Report No. 8337-HU of May 15, 1990). INFORMATION TO BE SENT TO THE WORLD BANK 8. To enable the WB to complete the draft of Part I of the ICR, it was agreed that the Borrower would ensure that the information in relation to the credit and technical assistance components indicated in Annexes I and 2 is sent to the WB together with the updated project costs and financing table (para. 7). 9. For the credit component, given the large number (about 1,500) of subloans under the project, it was agreed that the estimates of project benefits, including overall project financial rates of return, be prepared on the basis of well-selected, representative samples of subloans by each of the PBs. Careful consideration should be given to sample size and composition to ensure that the selected samples are truly representative of the overall subloan population and the results can be relied upon as a reasonable basis for extrapolation of the project impact, including net benefits. To ensure uniformity as well as independence in evaluation, it was agreed that the Borrower, MOA and the PBs would engage an independent consulting institution to carry out the analysis. Terms of reference (TORs) for the consultants' work are attached in Annex 1. As the Godollo Agricultural Institute (FMI) has been engaged since the project's inception in carrying out surveys of project beneficiaries on a sampling basis, MOA and NBH have proposed that FMI undertake the evaluation work for the ICR as well. In view of the budgetary constraints faced by the Hungarian state institutions, MOA and NBH have requested the mission to explore the possibilities of supporting the work through WB trust fund grant financing. The mission undertook to look into the possibilities. 10. For the technical assistance component, MOA will coordinate the preparation of the assessment report, including the operational plan for future operations. A suggested format for the assessment of each TA component is provided in Annex2. Appendix A Page 3 of 7 OUTPUTS AND SCHEDULE 11. To enable the timely submission of the final ICR, including both the Borrower's and the WB's parts, to the WB's Board of Directors by December 31, 1996 as required, it was agreed that the following timetable would be followed: NBH to send the WB by October 31, 1996: (i) the background information on the credit component, including the estimates of the FRRs, prepared by the PBs and the consultants (see para. 9); (ii) the updated project cost and financing tables (see para. 7) (iii) the draft operational plan (see para. 4); and (iv) the assessment notes for each of the technical assistance components (see para. 10). COORDINATION OF ICR PREPARATION 12. The following persons would coordinate the preparation of the Borrower's and the WB's preparation of the ICR: For the Borrower: NBH - Ms. Eva Tarjan Mmes. Tunde Vertes and Maria Deak MOA - Mr. Istvan Banati Ms. Zsuzsa Fulop For the World Bank: Mr. Kishore Nadkami Budapest/Washington, D.C. July 10, 1996/August 8, 1996 Appendix A Page 4 of 7 SUBPROJECT INFORMATION SUMMARY TO BE SUBMITTED FOR EACH SUBPROJECT PART I. BACKGROUND INFORMATION Name of Investing Enterprise: Location: Type of Ownership: majority state-owned/cooperative/majority private-owned Type of Organization: state enterprise, joint stock company, limited liability company, etc. Main Activities of Investing Enterprise: Short Description of Subprojects: e.g. new facility/expansion/diversification for production of (name of product) of which ... percent aimed at exports to convertible currency markets (if applicable). Subloan Information: * name of participating bank * date of subloan approval by participating bank * amount of subloan (US$ equivalent) * maturities, grace period * interest rate charged by participating bank * date of first repayment of subloan principal * are interest/principal payments current -- indicate extent of arrears, defaults, rescheduling, etc., if applicable Subproject Completion/Expected Completion Date: month/year PART II. PERFORMANCE SUMMARY Subproject Performance: Appraisal Actual/Current Estimate (in US$) * incremental sales * incremental exports to CC markets * incremental employment (in nos.) Appraisal Actual AppraisalActual (in HUE) (in US equiv.) * civil works * machinery & equipment * incremental working capital * other Total subproject cost Appendix A Page 5 of 7 Subproject Financing: Appraisal Actual * investors' own funds * local loans * World Bank subloan * other foreign loans Total subproject financing Subproject Financial Rate of Return: Appraisal Current Estimate Appendix A Page 6 of 7 Annex 1: TERMS OF REFERENCE FOR CONSULTANTS INTRODUCTION 1. The World Bank (WB) had made a loan of US$100 million equivalent in 1990 to the National Bank of Hungary (NBH) for the above project. The loan closed on June 30, 1996. It is the practice of the WB to agree with the Borrower that, after the project is completed and the loan closed, an Implementation Completion Report (ICR) be prepared within six months of the loan's closing that assesses the experience under the loan, including whether and to what extent the project's objectives were met. This includes an assessment of the financial and economic impact of the project, including subproject and subloan performance. 2. To assist in the preparation of the assessment, NBH and the Ministry of Agriculture (MOA) wish to engage the services of qualified, experienced, independent consultants. Terms of reference for the consultant's work are provided below. OBJECTIVES 3. The consultants are expected to assist NBH, MOA and the participating banks (PBs) in making a realistic assessment of the financial and economic impact of the credit component of the project in terms of evaluating subproject and subloan performance, and making estimates of the overall financial rate of return for the project as a whole, based on underlying estimates for a representative sample of subprojects, chosen with the assistance of the PBs. METHODOLOGY 4. In view of the large number (about 1,500) of subloans, the PBs have agreed to choose a representative sample of subprojects. The selected samples should be adequately representative of the total population of subloans so that they can be used as a reasonable basis for extrapolating the development impact, including the net benefits of the project investments. The consultants should review with the PBs and NBH the samples provided by the PBs in regard to their representativeness, taking into account relevant factors such as performance (including well-performing as well as problem subprojects), sectoral composition, ownership characteristics, etc. 5. Financial rates of return (FRR) should be calculated for each of the sample subprojects. Guidelines as to preparation of FRRs will be provided by the WB mission through the NBH. The consultants should use their judgment as to the need for field visits to ensure the accuracy and relevance of the information. Wherever possible, crosschecking should be done to ensure that the financial and economic information provided for the calculation of the subproject benefits and performance are realistic and consistent. 6. To respect the confidentiality of information, as well as to encourage the preparation of truly representative samples, it was agreed that the consultants' assure the PBs as well as the individual subborrowers that they would not be identified by name in the consultants' report when presenting their analysis. Both the PBs as well as subborrowers/subprojects would be coded by number for presentational purposes. OUTPUTS AND SCHEDULE 7. The consultants' draft report in Hungarian, including all the analysis as above, should be submitted to NBH and MOA by October 15, 1996. The final report would be prepared after comments by the Hungarian entities (NBH, MOA and the PBs) and the WB. Appendix A Page 7 of 7 Annex 2: SUGGESTED FORMAT FOR ASSESSMENT OF EACH OF THE TECHNICAL ASSISTANCE COMPONENTS Objectives of Component Design Experience * what problems, if any, were encountered? * what changes were made as a result? Implementation Experience * was implementation as expected? * if not, what problems were experienced? * what steps were taken to improve/correct the situation? * lessons learned form the experience? Results/Outcome * what was the impact of the technical assistance? * who benefited? to what extent? * to what extent were the objectives achieved? Future Relevance/Sustainability * do the objectives continue to be relevant? - if not, what should be changed? * if relevant, what is being done to ensure sustainability of the institutions and programs created so that they can continue to yield benefits? Operational Plan * what is the Government's operational plan to ensure sustainability and successful future operations of the component? * which agencies are responsible for what actions, and according to what time schedule? * what performance indicators would be used to measure continued good performance and progress? * what arrangements would be made for future monitoring? Budapest/Washington, D. C. July 10, 1996/August 8, 1996 Appendix B Page 1 of 5 BORROWER'S CONTRIBUTION TO THE ICR' (Prepared Jointly by the Ministry ofAgriculture and the National Bank of Hungary) INTRODUCTION 1. Since the lending of the World Bank in Hungary started in 1983, the activity has focused on supporting the economic restructuring progress and on increasing the efficiency, the flexibility, the market respondence and competitiveness of the economy in external markets. During the activity of the World Bank in Hungary in the agricultural sector, the Integrated Agricultural Export Project was preceded by Bank operations to improve efficiency and competitiveness in grain production and storage mechanization by the Grain Storage and Mechanization Project, in livestock and meat processing by the Integrated Livestock and Processing Project, in crop production by the Crop Production Development Project, in agricultural processing by the Agroprocessing Modernization Project. The objectives of the Integrated Agricultural Export Project (IAEP) were to improve agricultural production and marketing of agricultural products and related services. The IAEP was followed by the Product Market Development Project which helps the marketing and distribution of the food and non-food consumer products. PROJECT OBJECTIVES AND COMPONENTS 2. Objectives. The objectives of the Integrated Agricultural Export Project were to (a) give incentives to the business activity of the private small scale sector and modernize large scale farms; (b) increase earnings and export capacity of agriculture by restructuring the production and increasing the efficiency; (c) reorganize the assets of large scale farms by helping to lease or sell them to private farmers organized in groups or as individuals; (d) provide investment and working capital for improvement of the production-processing-marketing system; (e) improve rural services; (f) strengthen the financial system, meet the financing needs of the new farmers in the transitional process of the sector, extend the creditworthiness of agricultural cooperatives and private small scale farms by establishing land mortgage; (g) promote new private farmers as clients for commercial banks. (Paragraph 1) 3. Components. The main components of the project were (a) an IBRD credit line in the amount of USD 100 million equivalent (i) to procure machinery and equipment for the improvement of crop and livestock production, including construction materials and equipment for buildings for crop and livestock production; (ii) to improve non-agricultural activities of agricultural enterprises (services and manufacturing); (iii) to improve storage and commodity handling facilities; (iv) to improve small scale agroprocessing activities; (v) marketing and sales promotion; (vi) to support the rural entrepreneurs engaged in agricultural, agroprocessing and service activities or in village tourism; and (b) an institutional component to establish and develop an institutional system for supporting the improvement of agricultural production, agroprocessing, marketing and rural services including the development of (i) marketing schemes for agricultural Summary as prepared by the Ministry of Agriculture and the National Bank of Hungary; the references to para numbers are the paras in the main report of the Borrower's contribution, kept in Project Files. Appendix B Page 2 of 5 and agroindustrial products; (ii) commodity exchange; (iii) market information system; (iv) subsector interprofessional marketing organizations; (v) agricultural insurance scheme; (vi) training farm managers in business planning and marketing; (vii) local consultant services for business planning; (viii) training of private farmers; (ix) professional consultancy services for private farmers; (x) livestock advisory services. IMPLEMENTATION EXPERIENCE AND RESULTS 4. Achievement of Objectives. When the project was launched in 1990 the political, economic and social transformation had already started which radically changed the objectives of the World Bank projects compared to the previous ones. While the characteristic objectives were the investments for improving the level of production, increasing the efficiency and external competitiveness on the basis of large scale farms this project primarily aimed at supporting small and medium sized enterprises and privatization process, naturally maintaining the objectives of increasing efficiency and competitiveness. The project played an important role in the launching of rural development by enlarging the scope of final beneficiaries in the period when the output of the Hungarian economy declined considerably, the financial reserves were decreased, domestic sources were inadequate and unemployment increased. Due to the transformation of the cooperative sector and the rehabilitation process considerable number of new, small and medium sized enterprises were started. Under these circumstances the project approved by the World Bank had an important role in the implementation of the macroeconomic goals, the acceleration of the privatization process and the establishment of the small and medium sized enterprise sector. (Paragraphs 7-9) 5. The majority (74.2%) of the subloans under the project was extended to investments of private individuals and private enterprises, the smaller part to cooperatives and in majority state owned large scale farns. During the implementation period of the project the macroeconomic importance of the agriculture changed. The agriculture represented 17% of the GDP in 1990 and only 8.9% in 1995. (The contribution of the agroprocessing industry to the GDP decreased from 4.2% to 3.8%). The number of unemployed people increased considerably in agricultural areas. The project provided investment sources for the rural population which was forced to start business to be able to establish new existence and become entrepreneurs from employees. One of the most important economic impacts is that the proportion of the service activities related to the rural sector increased. The agricultural processing represents 24.5%, the services 21.4% of the total number of subloan contracts. However, the ratios of crop production (24.9%), horticulture (6.1%) and livestock production (23.1%) show that the traditional agricultural activities also remained important. In case of newly established enterprises the capacities created by investments are mainly used for fulfilling regional needs. In the majority of cases the technical-technological level of investments is medium which meets the objectives of the project and the requirements set by the rural consumer market. Due to economical reasons the investors procured less expensive technologies which require in many cases more handwork. 6. Investments in crop production are characterized by investments in machinery completed by enterprises with longer business practice (cooperatives, state farms and their successor enterprises). In many cases due to the use of more simple buildings and technologies the livestock became more extensive in order to make production less expensive with smaller number of animals. To a smaller extent the investments implemented the most updated technologies. Investments related to rural tourism are the most important within the development of rural services. Frequent objective of investments in services was to build bakeries and breweries. The bakeries competed successfully for the markets of the collapsing state baking industry, providing customers with Appendix B Page 3 of 5 higher level of quality as well as with wider range of products. The financial objectives of the project were virtually accomplished. The most important element of the objectives was the development of the private sector. The conditions for small and medium sized private enterprises did not include requirements of direct export. However, smaller part of the enterprises produce exportable products and sell them on foreign markets. (Paragraphs 10- 16) 7. The requirement of increase in efficiency is generally accomplished. The enterprises in competitive market situation improved cost efficiency and reduced unit costs by the rationalization of production. In case of processing factories the input market supply competition increased which has an important role in price regulation and at the same time the market harmonization mechanism is developing which takes an effective part in setting the price level of local markets. The monopoly of big companies generally ceased to exist therefore product organizations and naturally wholesale markets and commodity exchange play significant role in market regulations. At the same time the state subsidy system, which through guaranteed prices and export subsidies played market regulative role, also has influence on the structure of domestic prices. (Paragraphs 17-19) 8. The 1446 subloan contracts concluded under the project virtually used up the USD 100 million creditline. More than 70% of the subloan contracts were concluded with individuals or newly established private enterprises. The average total investment cost was HUF 12.1 million, out of which the credit amounted to HUF 8 million. Out of which HUF 6.1 million was financed from World Bank, HUF 1.8 million from intemal investment sources and HUF 1.1 million represented working capital loan. The commercial banks' averages of investments financed varied between HUF 1 and 80.6 million. At the majority of participating commnercial banks the average investments amount to about HUF 11-13 million, out of which HUF 0.6-14.6 million was financed from World Bank and HUF 0.3-15 million from internal investment sources and up to HUF 5 million represented working capital loan. The remaining part was covered by the beneficiaries' own sources. 45.9% of the subloan contracts was concluded with individuals (small farmers and individual entrepreneurs), 28.3% with private enterprises, 23% with cooperatives and 2.8% with state farms. The proportion of large scale farms significantly decreased under the project compared to former World Bank projects. The average loan amount is higher in case of enterprises and large scale farms. The breakdown of loan amounts by subprojects is different. 32.9% of World Bank subloans were utilized for the development of crop production, 18.5% for livestock, 24.4% for food processing, 24.2% for services. (Paragraphs 20-27) 9. Major Factors Affecting the Project. During the implementation of the project several factors had unfavorable impact on the success of investments carried out in accordance with the objectives of the project. The collapse of CMEA markets and later the liquidation of the organization itself considerably destroyed sales positions in export markets. The 30% decrease of intemal consumption narrowed the intemal market potential. The embargo against Small- Yugoslavia considerably damaged the extemal market situation of the country. The Yugoslav war and the German unification had perceptively unfavorable impacts on rural tourism. As part of the social transformation process started in 1989-90, the democratic Parliament and the Govemrnment in 1990 launched a restructuring program which had significant social impacts. The demolition of state property, the privatization caused substantial increase in the number of small and medium sized enterprises. During the restructuring of cooperatives and under the Compensation scheme hundred thousands of people became owners of some land suitable for agricultural activity. During the livestock was halved, yields decreased etc. In order to increase the creditworthiness of private farms the Government established from budget and PHARE sources the Foundation for Credit Guarantee of Agricultural Enterprise, which - considering its importance - gives partial Appendix B Page 4 of 5 guarantee opportunities primarily for private farmers for commercial bank collateral. This was an important element of the increase of bank confidence in new private entrepreneurs with less collateral assets. The set of Government actions gave incentives to financing the establishment of private enterprises by commercial banks. The credit losses due to forced pace of transformation were partially taken over by the state under the bank consolidation scheme. (Paragraphs 28-35) 10. Bank and Borrower Performance. The performance of the World Bank during the implementation of the project was satisfactory. The World Bank, in cooperation with the Hungarian counterparts, had a significant role in the establishment and preparation of project objectives and implementation. The World Bank experts and consultants gave substantial assistance and guidelines to the Hungarian experts during the planning and elaboration of the project. The selection of the project objectives corresponded to the objectives set during the Hungarian economic change and helped their realization on the preferential areas of the project (development of crop production, livestock, processing activity and rural service sector). The project appraised properly the institutional changes required during the economic restructuring. The World Bank was flexible in solving the problems cropped up during the project. In order to close the project financially successfully the World Bank approved to amend the Closing Date for the project from December 31, 1995 to June 30, 1996. The performance of the Borrower was satisfactory during the whole life of the project. The Ministry of Agriculture (MOA) carried out the project preparation successfully, harnonized the preparation of market studies and financial analyses which formed the basis for the World Bank SAR. During the project the MOA in cooperation with the PHARE Office coordinated the implementation of the institutional part of the project and commissioned the FMMI to continuously monitor the implementation of the project and to carry out follow-up studies based on representative sample for the consequent years. The representatives of NBH and MOA were always available for discussions and cooperation for the World Bank delegations during Supervision missions. The Borrower always performed reporting requirements. (Paragraphs 39-45) l1. Assessment of Project Outcome. The outcome of the project is satisfactory. The objectives were achieved or are to be achieved soon. The economic-social changes started in 1990 created favorable conditions for business activities. Most of the macroeconomic processes which accompanied the changes helped the achievement of project objectives the accomplishment of privatization, the spread of small and medium sized enterprises, the realization of their economic stability and the appearance of new entrepreneurial classes in agriculture, processing industry and rural services. The development of the institutional system - in accordance with the SAR - was executed. The legal preparation of land mortgage is under way. The marketing system of agricultural products developed considerably under the project, the Commodity Exchange is operating, the network of wholesale markets developed, new wholesale markets were built and are being built. For rapid and up-to-date evaluation of market tendencies the Market Information System (MIS) was developed, which is operated by the Institute for Agricultural Research and Information (AKII). The conditions for practical training were improved in the secondary and higher education institutions. The state subsidized consulting services and their information system were developed for the purposes of professional assistance for small and medium sized enterprises. For evaluation and analysis of the financial and economic results of enterprises the Financial Accounting System (FAS) was elaborated, which is also operated by AKII. The product organizations were established as a part of the institutional system development. (Paragraph 46-47) Appendix B Page 5 of 5 PROJECT SUSTAINABILITY AN1D FUTURE OPERATIONS 12. The conditions of project sustainability are favorable. The privatization of the Hungarian agricultural sector is virtually completed. The economic weight of small and medium sized enterprises is already significant, the proportion of the GDP produced by them is expected to increase. At the same time the concentration of capital is required in this sector in order to reach viable economic size which can increase their efficiency and competitiveness. Hungary's association efforts indicate that the beneficiaries of the project have to adjust themselves to be measured on a big integrated market, much harder competition and increasing quality requirements. The project played an important role in the development of agricultural market mechanism and the implementation of a new institutional system which resulted in increased flexibility. The majority of borrowers intend to continue successfully with business activity, and execute the objectives and meet the requirements. No specific plan was prepared for future operation of the project due to its characteristics. (Paragraphs 36-38 and 48-51) KEY LESSONS LEARNED 13. The key lessons learned are the following (according to the summary of paragraph 52). a) the development of agricultural production is successful when it is carried out as part of the integrated rural development, including the total agricultural sector, by harmonized, proportional development of input-output service sectors; b) to continue restructuring, to modernize production and the structure of products, produce quality products, control the quality of the total production process are inevitable conditions for the increase in competitiveness; c) the reliable planning and operation of enterprise are very difficult when market conditions are less developed, inflation is high and taxes change continuously, d) the newly established, less experienced commercial banks learned the practice of lending and assistance to successful enterprise operation; and e) during the implementation of the project creditlines with more favorable interest rate slowed down the utilization of the project. 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