Document of The World Bank FILE COpy FOR OFFICIAL USE ONLY Report No. 2263 PROJECT PERFORMANCE AUDIT REPORT KOREA FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 335-KO) November 14, 1978 Operations Evaluation Department 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 Won (W) 1.00 = US$0.00206 Won 485 = US$1.00 Won 1 million = US$2,062 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet I square meter (sq m) = 10.76 square feet 1 kilogram (kg) = 2.205 pounds 1 hectare (ha) = 3,000 pyong 1 pyong = 3.3 sq m ABBREVIATIONS NACF - National Agricultural Cooperative Federation TU - Technical Unit of NACF PKCs - Participating Kun (Gun) Cooperatives LAOs - Loan Appraisal Officers of the PKCs FOR OFFICIAL USE ONLY Project Performance Audit Report KOREA FIRST AGRICULTURAL CREDIT PROJECT (Credit 335-KO) TABLE OF CONTENTS Page Preface Basic Data Sheet Disbursement Schedule Highlights PROJECT PERFORMANCE AUDIT MEMORANDUM I. Summary 1 II. Main Issues 4 Adjustments to Errors in Project Design 4 Institution Building 4 Bank Performance 7 a) Employment of Consultants 7 b) Supervision 10 c) Overall Comment 11 Table 1 - Loan Allocation and Rates of Return Table 2 - Relation of Farm Size to Subloan Size Annex 1 - Borrower's Comments PROJECT COMPLETION REPORT 1. Introduction A 1 2. The Project A 2 3. Summary of Project Implementation A 3 4. Bank Assistance During Project Implementation A12 5. Conclusions- Al3 6. Issues Arising from Project Implementation A14 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. Table of Contents (continued) TABLES Table 1 - Annual and Total Loan Commitments by Subprojects Table 2 - Total and Average Investment Costs by Subprojects Table 3 - Major Investment Items by Subprojects Table 4 - Fruit Prices Received by Farmers Table 5 - Cocoon Prices and Silk Exports Table 6 - Swine: Prices and Exports Table 7 - Distribution of Subproject Loans by Provinces and PKCs Project Performance Audit Report KOREA FIRST AGRICULTURAL CREDIT PROJECT (Credit 335-KO) PREFACE This is a report on an audit of performance under the First Agri- cultural Credit Project in Korea, supported by Credit 335-KO. The project was appraised in June/July 1971 and was presented to the Board and signed in September 1972. The execution of the project was governed by a Credit Agreement for US$10.5 million. The closing date was September 1, 1976. However, the Credit was already fully disbursed by May 1976. A Project Completion Report was issued by the East Asia and Pacific Regional Office in February 1977. An OED mission to Korea was undertaken in October/November 1977. Comments on the draft PPAR were received from the Minister of Agriculture and from NACF's Foreign Loan Department and Technical Unit. The corrections suggested have been incorporated in the PPAR. Copies of the two letters are at Annex 1 of the PPAM. The Borrower's views were fully taken into consideration when preparing the PPAM. The report consists of the Audit Memorandum and the Project Comple- tion Report. The audit was based on discussions with Bank staff and on a review of the First and Second Appraisal Reports, a review of Bank files, the PCR, and the conclusions of the OED mission to Korea. The assistance of NACF staff, other Government officials, and participating farmers is gratefully acknowledged.  PROJECT PERFORMANCE AUDIT BASIC DATA SHEET KOREA FIRST AGRICULTURAL CREDIT PROJECT (CREDIT 335-KO) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ million) 18.2 18.7 Overrun (%) 3 Loan/Credit Amount (US$ million) 10.5 Disbursed )- 10.5 Raepaid t April 30, 1978 Outstanding to) 10.5 Date Physical Components Completed 09/01/76 05/30/76! Proportion Completed by Above Date (%) 100 100 Proportion of Time Underrun (%)- 2 Economic Rate of Return (%) 32 38 OTHER PROJECT DATA Original Actual or Item Plan Revisions Est. Actual First Mention in Files or Timetable - - 12/12/68 Government's Application Negotiations Board Approval Loan/Credit Agreement Date 09/29/72 09/29/72 Effectiveness Date 05/24/73 05/24/73 Closing Date 09/01/76 05/30/76 Borrower Government of Korea Executing Agency National Agricultural Cooperative Federation (NACF) Fiscal Year of Borrower January 1 - December 31 Follow-on Project Name Second Agricultural Credit Project Loan Number 1328-K0 Amount (US$ million) US$20.0 Loan Agreement Date October 12, 1976 MISSION DATA Sent Month, No. of No. of Date of Item b Year Weeks Persons Manweeksy! Report Identification Bank 12/68 1 1 1 12/68 Preparation FAO/Bank 2-3/69; 5-6/70 Preappraisal Bank 03/71 Appraisal Bank 6-7/71 4 4 16 12/71 Total more than 5 more than 17 Supervision I Bank 07/73 1.5 2 3 09/13/75 Supervision II Bank 10/73 1 2 2 01/09/74 Supervision III Bank 03/74 1.5 2 3 05/10/74 Supervision IV Bank 04/75 3.5 2 7 05/22/75 Supervision V Bank 10-11/75 3.5 5 17. 12/05/75 Completion 1 2 2 02/10/77 Total 12 34.5 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Won (W) Year: Appraisal Year Average Exchange Rate: US$1 = W370 Intervening Years Average US$1 = W415 Completion Year Average US$1 = W485 /1 Project was scaled down. /2 Number of 5-day weeks shown in the mission report plus travel time. /3 Number of weeks times number of persons. / Supervising another project as well. /5 Supervising another project as well, and appraising Second Agricultural Credit Project.  Disbursement Schedule US$ million 10.0 9.0/ Actual 0 -Projected 7.0 6.0 5.0 / 4.0 / 3.0/ 2.0 -4 1.0 / 6/ 12/ 6/ 12/ 6/ 12/ 6/ 73 73 74 74 75 75 76  Project Performance Audit Report KOREA FIRST AGRICULTURAL CREDIT PROJECT (Credit 335-KO) HIGHLIGHTS The First Agricultural Credit Project provided funds for medium and long-term lending to small farmers through the National Agricultural Cooperative Federation. In addition the project aimed at improving technical services and training facilities. The project had a strong effect on improving technical efficiency and largely because of flexible reallocation of project funds, in response to changing opportunities, appears to have fulfilled its primary goals well. It succeeded in diversifying agricultural production, but assisted about 6,000 farmers instead of the 12,000 expected at appraisal, largely because of inflation. Technical assistance to sub-borrowers was of high standard. The appraisal had estimated a 32% rate of return but the actual accomplish- ments contributed to better project performance and the revised rate of return is now estimated to reach 38%. The following points may be of special interest: - Communication problems between NACF and Bank staff (PPAR paras. 1.03, 2.15, 2.17, 2.18, 2.26); - Change in project investments due to changing markets and profitability (PPAR paras. 1.05, 2.02, 2.03; PCR paras. 3.11, 3.12); - Project's impact on farm technology (PPAR paras. 1.06, 1.07; PCR paras. 2.04, 3.09, 3.12); - Unsatisfactory consultant study dealing with NACF institutional aspects (PPAR paras. 2.06-2.09; 2.15-2.26). I Project Performance Audit Memorandum KOREA FIRST AGRICULTURAL CREDIT PROJECT (Credit 335-KO) I. PROJECT SUMMARY 1.01 The credit project is one part of a group of agricultural projects financed in Korea by the Bank during the 1970's, which also included projects in irrigation, seed multiplication and processing centers, farm mechanization, dairy-beef development, the development of a metropolitan marketing center for Seoul, and an Agricultural and Fishery Development Corporation (AFDC) loan. Projects for irrigation, dairy-beef development, and agricultural credit have been completed. 1/ 1.02 The first agricultural credit project, for which an IDA credit of US$10.5 million was provided, was intended to support a three-year lending program for financing sub-loans on about 12,000 farms under four major categories: orchards, sericulture, mushroom, and poultry and swine. The major objective of the project was to continue and substantially extend earlier governmental efforts to diversify agricultural production into high value crops and livestock, to meet rapidly rising domestic demand and also for export. Funds were to be channeled through the National Agricultural Cooperative Federation (NACF) at the national level, to provincial NACF branch offices, to selected Kun (country) cooperatives, then to members. In addition, the project provided funds for technical services and training facilities to assist in implementing the project and improve NACF's operations. The principal beneficiaries were expected to be sericulture producers and orchard growers with typical farm sizes ranging from 1 to 3 hectares. A Technical Unit (TU) within NACF would be in charge of project implementation. 1.03 The Project became effective in May 1973. Implementation was ini- tially delayed due primarily to more preparatory work required by the TU and NACF, complicated by a lack of communication on technical issues between NACF and Bank staff. The first supervision mission, in July 1973, found serious shortcomings in sub-loan appraisal and supervision practices and recommended a temporary ceasing of disbursements until such practices were changed. The supervision mission also provided NACF and the TU with information required by the latter to introduce the necessary changes. Appropriate remedial mea- sures were promptly taken by NACF, including reassessment of the eligibility of the participating county cooperatives and intensive training in appraisal and supervision techniques for the staff of the TU and the participating county cooperatives. The second supervision mission found that impressive progress had been made in correcting earlier project deficiencies and lending was resumed on a limited basis. In March 1974, the third supervision mission 1/ A PPAR has been issued for the Dairy Beef Project, Credit 234 (Report No. 2035; April 20, 1978). A PCR is being prepared for the Pyongtaek Kumgang Irrigation Project, Loan 600. - 2 - found further progress and full scale lending was resumed. Project funds were fully committed by the end of 1975 and disbursements completed in May 1976, about three months ahead of the official closing date. 1.04 The project made loans to about 6,000 farmers instead of the 12,000 expected at appraisal. The reduction in the number of loans made was due chiefly to inflation. In several investment categories, larger individual sub-loans, brought about by the inclusion of items not foreseen at appraisal, also reduced the number of loans which could be made. And loan processing difficulties reduced the number of sericulture sub-loans as NACF's staff was simply inadequate to make the sub-loans originally predicted. 1.05 A substantial change occurred in the distribution of project invest- ments regarding appraisal predictions, primarily caused by changing product prices, technological and institutional factors, and government policy. The mushroom component was eliminated, the peach and grape orchard development components were sharply reduced, and poultry and sericulture investments were proportionately smaller than expected. In contrast, pear and apple orchard and swine investments were well above expectations. Equally important, within the orchard categories substantial investments were made for sprinkler irrigation and for dwarf rootstocks, two technologies which were not included in the appraisal design. Despite the alteration in the end-use distribution of project funds, the project appears to have fulfilled its primary goals well. 1.06 The project permitted and encouraged more rapid diffusion of tech- nologies already available in Korea, and had its strongest effect on technical efficiency. In orchard development dwarf apple rootstocks led to more rapid increases in production and much higher production per hectare. The use of sprinkler irrigation systems improved both the quality and the quantity produced. Improved orchard management had its impact primarily through the improved technology embodied in the new investments. In sericulture, im- proved mulberry varieties and improved rearing house designs resulted in higher quality silk cocoons and an increase in labor and land productivity. In swine and poultry, the expanded size of the production unit achieved econ- omies of scale and improved designs permitted improved control of disease. Even in the case of apple and pear storage, technological improvements were made. New standardized architectural designs, cheaper as well as more ef- ficient than previous facilities, have gained wide acceptance by producers. 1.07 The project was designed to increase agricultural diversification without specific attention to distributional concerns. Nonetheless, the proj- ect appears reasonably well balanced in this regard. The project achieved diversification by increasing the importance of new agricultural activities in Korean agricultural production, and by bringing in new producers and assisting existing small producers to expand their operations and become more efficient. About 4000 of the producers assisted, or 66%, had very small-scale operations in the activities financed prior to receipt of the project sub-loan. The technical unit made specific efforts to restrict loans for orchards to farmers having no more than 5 hectares, and to prohibit loans to absentee owners. - 3 - 1.08 Technical assistance to sub-borrowers has been good.- NACF developed a training program for loan appraisal officers (LAOs) responsible for sub- loan promotion, supervision, and technical assistance. The LAOs have become increasingly competent with growing experience and continued support from the technical unit and periodic NACF-sponsored courses on new technologies. Farmers receive technical assistance from several other services, including government extension officers, private sector enterprises, and "leading farmers" selected for their technical and commercial success. The combination of this assistance and the interest and ability of Korean farmers has resulted in good progress. 1.09 The collection ratio of principal for the three sub-projects whose loans have reached the repayment stage is good; the collection'ratio of principal due is about 94% and the collection ratio of interest due is about 98%. However, most sub-loans are still in their grace periods apd it,is premature to draw strong conclusions regarding arrears. 1.10 The project permitted NACF to extend its training facilities at its Cooperative College. The extension, completed on schedule, permitted up to 400 persons to be accommodated for short-term training courses; the facilities have been used to capacity since completion. 1.11 Data were not available when the PCR was written to permit an eval- uation of the technical and financial impact of on-farm investments. The PCR mission requested, however, that the TU collect and process data permitting an estimate of the rates of return actually being achieved on each of the project sub-components. The TU carried out this task with considerable detail and care, and the results, including the rate of return calculations, were given to the OED audit mission in October and December 1977. These results, summarized in Table 1, may be compared with the rates of return estimated at appraisal and by the first and third supervision missions. 1.12 The investments made appear to be highly profitable to the sub- borrowers. Excepting pear storage, the financial rates of return range from 29 to over 100%. The economic rates of return, again excluding pear storage, range from 20 to over 100% with an average estimated at 38%. 1/ 1/ The rates of return calculated are based on assumptions of future pro- ductivity and prices. The economic life of investments made ranges from 15 (for swine and poultry) to 35 years (for apple orchards) and in most cases involve new technologies whose physical productivity cannot yet be fully evaluated at this time. Similarly, domestic and international markets have undergone substantial changes during the five years since the agricultural credit project was initiated, and future developments could cause actual profitability to diverge from that now estimated. II. MAIN ISSUES 1. Adjustments to Errors in Project Design 2.01 The project was ultimately very successful, promoting the diffusion of new technologies, encouraging agricultural diversification, and encouraging significant institutional improvements in NACF. The project design nonethe- less contained serious errors, including investment sub-components which were institutionally undesirable or technically infeasible. The design of the project was also carried out too independently of the implementing agency so that the latter was unclear what was ultimately to be done. 2.02 The predictive capability of the appraisal models, in terms of desirable sub-loan allocation, was relatively low. For example, models show apple orchard investments consistently to be the least profitable of the fruit investments and among the least profitable of all sub-components. Yet present estimates of investment returns in orchard development, installation of sprinkler irrigation systems, and storage facilities - all in apple production - are strikingly high. The final allocation of project funds went largely to the apple sub-component. 2.03 Both the TU and the Bank responded to perceived design errors and to changing market conditions (both price and technical) by permitting a change in the allocation of project funds. The project required that a substantially new approach to agricultural lending be introduced to the NACF and, after a shaky start, the project seems to have achieved this while remaining appropriately flexible and sensitive to profitable opportunities. In summary, models were used but the project was not slavishly dependent upon them. Some technologies were dropped and others added and the TU had the ability, with close cooperation and consultation with the Bank, to alter and adapt the original plans. This seems to have been the most important factor in the success which was achieved. 2. Institution Building 2.04 The first agricultural credit project was to be channeled through the NACF, which is a public institution and has a large federated structure with the head office in Seoul and an extensive network of branches and member cooperatives throughout Korea. It is an important instrument of government policy and the growth and extent of its activities reflect this role. It has the nation's largest branch banking system and accounts for over 10% of the country's savings deposits. To its members, comprising over 90% of Korean farmers, it provides about 30% of all agricultural credit (the rest coming almost totally from the informal sector). Its branches and member coopera- tives also provide training and introduce new technologies to farmers. In addition to its bank and credit operations, however, NACF is engaged in other business, as purchase and distribution of farm inputs, marketing of agricul- tural products, mutual insurance, foreign banking and trade, livestock breed- ing, dairy farming, livestock feed production, and agricultural research. The value of its annual operations in the early 1970's totaled over US$1 billion. - 5 - 2.05 NACF's business operations, complex in themselves, are complicated further by its role as the primary means of government intervention in the agricultural sector. NACF buys and sells both inputs and products at prices fixed at government initiative. The implicit taxes and subsidies involved in these transactions are usually not fully separated in NACF's accounts, nor are the commercial, insurance, or production operations separated from the credit and banking transactions. And in the case of credit, frequently subsidized and rationed, its operations have been an important source of government influence and power as well as an instrument of economic growth. 2.06 At appraisal, the Bank believed that increased efficiency was crucial if NACF was to become effective as a modern credit institution and that to achieve efficiency the credit and banking functions had to be sep- arated from other business functions, and credit from political considera- tions. The Bank was also concerned that there was not sufficient technical expertise in NACF's credit sections to design and carry out a supervised credit program of the type envisaged for the first agricultural credit project. 2.07 NACF recognized that an institutional reorganization, with clearer lines of responsibility for different executives and operating sections, was important. The Government had already invited a study group from Michigan State University (MSU) to investigate NACF's structure and operations and to make recommendations for improvements. 2.08 The MSU team's report became available to Bank staff during proj- ect preparation and, after a discussion of its findings, a number of their recommendations were incorporated into the design of the first project. Thus, the Bank pushed for (i) the creation of a special fund for the first project which would be isolated from other credit or business transactions, (ii) a clearly defined lending policy for medium- and long-term loans out of Bank funds, as these loans were expected to be made according to different criteria and would be subject to supervision, (iii) the establishment of a technical unit which would work exclusively on the implementation of the project, and (iv) the employment of an expatriate technical advisor who would assist the technical unit in its operations, especially in preparing farm investment models, loan appraisal and supervision. These requirements were similar to those which have been required by the Bank on a large number of agricultural credit projects in other countries. 2.09 In addition, the Bank requested NACF to retain an international consulting group for a management study which would make specific recommenda- tions for general institutional reorganization and reform. Funds were included in the first loan for this study. Thus, the Bank sought to create an institutional framework within NACF, as it then stood, which would permit the credit project to be implemented as planned, while also urging NACF to re-examine its entire operation and to take initial steps to improve it. 2.10 The Government had lending programs similar in terms of the agri- cultural activities financed, the technologies utilized, and the interest rates and grace periods available, to those which were to be promoted through the first agricultural credit program. And the Government's programs were frequently routed through NACF's county cooperatives. The mechanism by which such loans were made was quite distinct, however, insofar as the Government's credit was usually allocated largely by fiat. There was little if any pre- analysis of the investment project, little supervision of loan funds, and little technical assistance was provided by NACF. 1/ Nonetheless, so long as technologies were already well standardized and well known, and funds were strongly sought by producers, the system permitted the Government to make a larger number of loans with a small staff in a short time. Because of the lack of trained loan appraisal officers and the desire of the Government to move funds rapidly into agriculture, this was a considerable advantage. 2.11 Despite the existence of Government credit for on-lending, and NACF's own resources, NACF was eager to obtain a Bank loan. By virtue of greater control, NACF could use the Bank-financed sub-loans to provide funds to farmers left out of Government programs, and it could induce farmers to increase their marketing through NACF channels in exchange for credit, thereby promoting general cooperative business. 2.12 The first project was designed almost exclusively by Bank staff. NACF staff provided the Bank with whatever information the latter requested, and were aware of the general pattern of lending which was being planned, but did not understand the credit system which the Bank hoped NACF would adopt. Their lack of understanding was greatest with regard to the farm models which were presented in the appraisal report, and the rate of return and cash flow methodology which was to be used to check the viability of specific invest- ments. They were also uncertain how to establish a system for sub-loan supervision. 2.13 Through discussions with the supervision missions, careful study of instructional material, and after some staff members attended EDI courses in Washington, the technical unit learned the techniques of project evalua- tion. It satisfactorily prepared the second project and carried out the evaluation of the on-farm impact of sub-loans made under the first project. The technical unit now intends to implement a continuous monitoring system of project impact during 1978. Some members of the technical unit feel that too much effort has now been devoted to model building, detailed appraisal of individual farm plans, and investment impact - at the cost of sub-loan implementation, and are trying to design lending procedures which would put the same emphasis on productivity and cash flow while permitting a larger number of loans to be made with the staff available. This has already been implemented in the second project for the sericulture component because of the small average size of such sub-loans. On the other hand, NACF has been very impressed with the performance of the technical unit, the impact of the first project, and the credit methodology which was utilized, and these same methods are having an impact on NACF's other credit operations. 2.14 NACF devoted its best young staff to the project and their technical advancement during the implementation of the project is impressive. As a 1/ The Government considered its own scheme as a pilot project to promote a new rural credit system with the intention to transfer responsibilities to NACF at a later stage. -7- result of the high quality of the individual staff, and their professional progress, promotion for the staff has been relatively rapid. The Bank has been concerned with the resulting high turnover. The technical unit began with six members and a total of six staff were transferred out of the unit (some of the promotions were for individuals who joined the unit after the project was initfated) during the first three years. Although it has been the conventional practice of NACF to promote individuals out of the unit and into the county cooperatives, the Bank urged NACF to promote individuals within the technical unit itself, thereby maintaining the staff intact. While it is important to maintain staff continuity, diffusion of technical staff through NACF's organization is also important to the institutional impact which the Bank has hoped the first project would have. Personnel in the technical unit were also upset by what they may have considered as Bank efforts to restrict its promotions, which they felt reduced the rate at which they advanced. 3. Bank Performance a) Employment of Consultants 2.15 The Bank required as a condition of the first loan that NACF employ an expatriate farm management expert as an advisor to the project manager of the technical unit. This condition was proposed by the Bank just prior to negotiation and was unexpected by NACF. Partially because communication between NACF and Bank staff was difficult (language differences), the role of the farm management advisor in implementing the credit system was not clear to the Koreans. Again, because negotiations on several other issues were intense and because the technical advisor appeared to be a minor issue, NACF accepted this condition. 2.16 Having accepted a technical advisor, however, NACF did not know whom to employ. It approached both USAID and the Bank for recommendations. Both institutions indicated that they would make the availability of the position known, but neither specifically recommended candidates. Five individuals eventually applied for the position; the Bank did not assist NACF in evaluating these individuals in regards to the terms of reference which had been outlined in the appraisal report. The expatriate finally hired, although he had a strong background and wide experience in farm management, worked hard and got along well with Koreans, had no experience in credit utilization and did not understand, nor could he learn rapidly, the credit appraisal methodologies which the Bank hoped he would teach to NACF. 2.17 Although NACF staff might have pressed the Bank more strongly for assistance, the Bank was significantly at fault. The Bank indicated the need to hire an advisor, on the basis that the Koreans did not know how to imple- ment the credit methodologies desired, but did not seem to recognize that without an understanding of the task NACF could not even select a suitable candidate. The communication problems between the Bank and NACF were severe at times, but it would have been the Bank's responsibility to ensure that basic facts were well understood. NACF staff expressed the view that the principal problem was the Bank's inaptitude to discuss how the data which had been solicited during the project's preparation was to be utilized. NACF had no understanding of the appraisal models. It became quickly clear that it did not know how to implement the project. It requested copies of the - 8 - appraisal report, but NACF staff were not able to understand the appraisal models. These were only explained when the first supervision mission arrived and then, because of multiple other difficulties, the explanation was neces- sarily brief. The technical unit was then provided with a copy of an EDI instruction manual for project evaluation, which was difficult to understand even for the expatriate technical advisor. 2.18 As noted in para. 2.09, the Bank also required that NACF employ a management consultant firm to carry out a study of NACF and to make specific recommendations for general institutional reorganization and reform. Funds were included in the first loan for this study. NACF accepted this condition partly because the issue was raised by the Bank just prior to negotiations and the Government was preoccupied with other project issues, and partly because NACF officials recognized a need for organizational reform. Nonethe- less, the Bank does not seem to have adequately communicated with NACF regard- ing the purpose of the study, and the specific results sought. 2.19 After NACF accepted this condition, it requested assistance from the Bank in locating suitable firms which might undertake the study the Bank had proposed and outlined. The Bank indicated that it could not recommend individual firms, though it provided several general suggestions. NACF subsequently indicated that it would like to sign a contract with a partic- ular firm but sought further advice from the Bank regarding the suitability of the contract as then designed, including the price. 2.20 The first supervision mission concluded that the terms of reference for the management consultant study, drawn up by the Bank, were overly ambi- tious. They were then redrafted. The revised terms of reference, however, were still too ambitious. The Bank also informed NACF that it thought the consultant firm's bid of US$195,000 was too high and agreed to contact the firm to argue for a bid reduction; the bid was reduced to US$180,000. 2.21 The management study was completed in three stages (volumes). The first dealt with recommendations for the improvement of the accounting and financial information systems of NACF and its member cooperatives, including: (i) the need to measure and value services of certain centralized service departments and to charge the costs of such services to other departments which use them; (ii) the introduction of an accounting code structure which would allow all departments and activities to maintain independent account- ing records; and (iii) the creation of a consolidated accounting function to reconcile and eliminate duplication of transactions and to prepare formal statements at each organizational level and for NACF as a whole. The Bank, on reviewing the first volume, felt that it was well done. 2.22 The second volume dealt with recommendations for organizational changes to permit the efficient implementation of the accounting and fi- nancial information system designed in the first report. These changes, limited to those areas directly affected by the accounting system recom- mendations, were thought to require no fundamental organizational changes, no major increase in staff, and, in the short run, no major change in com- puter facilities. The Bank concluded that the second volume was also well -9- done, and thought that the recommendations and their implications had been discussed with and accepted by NACF. 2.23 The third volume, which dealt with lending procedures and credit policies, and which was of the greatest immediate priority to the Bank, was much less satisfactory to the Bank. The report (i) was based on a tradi- tional banking approach which emphasized collateral rather than incremental cash flow in lending; (ii) did not analyze the important implications of the increasing shift of responsibility from the county to local cooperatives (which NACF was bringing about through reorganization); and (iii) was super- ficial and imprecise in many places. The Bank wrote to NACF indicating its dissatisfaction with the report, and attempted to counter those conclusions and recommendations with which it disagreed. It also sought to induce the consultant firm to review its findings, though this was never achieved. 2.24 The audit mission's discussions with NACF indicate less satisfac- tion with the consultants' report than was registered by Bank staff, even insofar as the first two volumes were concerned. NACF officials felt that the consultants, in part because of communications problems with the Koreans, could not understand how and why the existing Korean system worked, nor could they tell the Koreans how to get from the current to the proposed new systems. The consultants' report provided theoretical general terms which the Koreans were incapable of translating into a specific system. NACF perceived that the consultants' efforts to assist the computerization of information was useful and well done, but the establishment of a cost accounting and finan- cial information system was not a great improvement. 2.25 NACF also indicated to the audit mission that they had asked the consultants to discuss the final report, hoping to gain a better understand- ing of what was recommended and specific ideas as to how the recommendations could be incorporated into their existing system. The consultant firm refused the request, arguing that such a discussion was not included in the terms of reference. NACF officials indicate that they did not discuss this issue with the Bank because, by standards of Korean etiquette, it would have been wrong to have caused a debate or conflict between the Bank and the consultants. 2.26 NACF officials feel that the consultants' study was not useful and that the funds spent could have been better used to hire a Korean firm to make organizational and accounting improvements, or to train NACF staff in the disciplines in question. These are points which NACF probably should have raised with the Bank during negotiation. Nonetheless, the Bank's approach to this issue seems to have been flawed. The Bank requested that NACF accept a costly study regarding its operations without adequate discussion of the purpose, design, content and use of it, did not design appropriate terms of reference, and did not ensure that the study was carried out to NACF's satisfaction. Yet if such a study was necessary, it was worth ensuring that it was done well. - 10 - b) Supervision 2.27 The first supervision mission encountered that the Technical Unit was not implementing the project as expected - and had hired a technical advisor who was not suited for the task which was outlined. Furthermore, sub-loan appraisal methods and procedures were inadequate or non-existent, field investigations were not usually carried out and were weak when done, primary emphasis was being placed on a traditional evaluation of the borrower involving collateral as opposed to the productivity of the proposed invest- ment, there was no on-farm supervision of sub-loan use (and in some cases loan funds had clearly been used for purposes different from that proposed), the coordination of sub-loans and technical assistance was poor, and the knowledge of agriculture among loan officers appeared to be inadequate. 2.28 The mission analyzed the situation carefully and judged, correctly, that NACF needed to completely overhaul the organizational procedures estab- lished for the implementation of the first project. While such was undoubt- edly true, the Bank was at least as much at fault as the NACF. Yet the Bank made it appear that it was the Technical Unit which was solely responsible and pressure was placed on them by suspending disbursements until improve- ments could be established, to be verified by future supervision missions. 2.29 On the one hand, the supervision mission can be commended. Its analysis of the situation, its detailed recommendations for the needed change, and its explanation to NACF were unusually clear. In the agricultural credit projects evaluated by OED, a temporary ceasing of disbursements has been rare. It is common to recommend changes, and to work with the implementing agency to overcome difficulties, even serious flaws, without such a serious action. And in many cases the flaws are not rapidly overcome. In this case the impact of suspension was electrifying. Improvements in the process of sub-loan implementation were made rapidly, disbursements were reinstated within three months, the project was committed and disbursed on schedule, and both the lending procedures established and carried out, and the results of such lending, imply that the Technical Unit evolved into an unusually competent agency. If a lesson is to be learned, it might be that suspension of disbursements in other cases might also have the same beneficial effects. 2.30 On the other hand, it is clear that the Technical Unit felt that it had been treated unfairly. Although it understood finally what the Bank wanted, and went quietly about improving the situation to the Bank's satis- faction, its staff smarted under the rebuke. It would have been advanta- geous, from the perspective of both the Bank and NACF, had a much clearer understanding of the project, and the methods and means to implement the project, been worked out during preparation and negotiations. 2.31 Overall supervision of the project was excellent. The first super- vision mission, though severe in its attitude and the requirements which it imposed on NACF, accomplished its purpose. It took account of the shortcom- ings in the project to date, which were considerable in number, presented both the Bank and NACF with a detailed list and analysis of the problems which had to be corrected, and within its time constraint, indicated the - 11 - precise solution which was required in each case. It re-examined the rates of return on individual investment components, noted that the terms of reference in the consultant study were unsuitable, and pointed out that the farm management expert would not be able to fully fill the role which had been expected. 2.32 Subsequent supervision missions were equally good, if not so dra- matic in their impact. They worked with the technical unit to explain the farm management models and the calculation of internal rates of return, helped develop satisfactory sub-loan supervision methods, develop training courses, and develop standardized technological packages for investment components. The supervision missions were intense when the project was having difficulty. And good continuity of supervision staff - through completion of the first project; and design, appraisal and implementation of the second, led to successful coordination and growing confidence on both sides. c) Overall Comment 2.33 Three important lessons seem to be evident. First, project prepara- tion must be carried out together with the implementing agency, and agreement on all major issues needs to be established, if such work is to have the de- sired impact. Second, the negotiation process should give the Borrower enough time to analyze all important issues. And third, if the Bank requests that a foreign advisor or consultant be hired, the responsibility would seem to rest with the Bank to explain in detail the specific experience and knowledge that is required and to help the Borrower in selecting candidates for such positions - the responsibility for the final selection remaining with the Borrower. Table 1 Loan Allocation and Rates of Return Loan Allocation Rates of Return Appraisal Actual Appraisal (5/72) 1st Supervision (9/73) 3rd Supervision (3/74) Technical Unit (10/77) Subprojects (%) FRR ERR FRR FRR FRR ERRLI Apple orchard planting 29 23 15 >50 30 on-farm storage 15 44 ) ) 66 ;- 35 sprinkler irrigation - 100 Pear orchard planting 29 37 22 23 - on-farm storage 8 12 1 0 -sprinkler irrigation - - - - Peach -orchard planting 6 30 29 25 - - 1 Grapes -vineyard planting 10 ) 40 34 24 - - subtotal 39 56 Sericulture 34 24 18 18 21 18 48 20 rearing house construction Mushroom 11 - 25 29 - Swine 1 14 58 23 49 29 30 >100 Poultry egg layers 15 6 34 32 20 - - broilers 36 24 30 50 60 Total 100 100 /a OED estimates. Table 2 Relation of Farm Size to Subloan Size Project Sub-Loan Data Size of Operations No. of Total Amount Av. Size % of % of Subprojects Before Project sub-loan ('000 Won) sub-loan sub-loan Funds (ha) (Investment cost) Apple 0 462 702,131 1,520 25 21 0-1 234 329,018 1,410 12 10 1-2 656 1,031,150 1,570 35 30 2-3 275 600,373 2,180 15 18 over 3 243 729,267 300 13 21 sub-total 1,870 3,391,939 1,810 100 100 Pear 0 85 148,571 1,740 13 16 0-1 418 488,312 1,170 62 51 1-2 114 187,739 1,650 17 20 2-3 20 48,984 2,450 3 5 over 3 37 79,384 2,140 5 8 sub-total 674 952,990 1,415 100 100 Sericulture 0 76 54,442 710 3 3 0 - 0.3 562 339,243 600 22 19 0.3 - 0.6 1,072 822,192 710 42 45 0.6 - 1.0 485 344,801 710 19 19 over 1.0 358 254,065 710 14 14 sub-total 2,553 1,814,743 687 100 100 (bird) Egg layers 0 7 23,655 3,290 5 5 0 - 500 37 118,278 3,190 25 25 500 - 1000 52 165,589 3,190 36 35 1000 - 2000 22 70,967 3,180 15 15 2000 - 3000 18 61,504 3,390 12 13 over 3000 10 33,117 3,300 7 7 sub-total 146 473,110 3,240 100 100 (bird) Broilers 0 - - - - - 0 - 1000 3 5,964 1,988 27 25 1000 - 2000 4 9,543 2,385 36 40 2000 - 3000 2 4,771 2,385 18 20 3000 - 4000 1 2,386 2,386 10 10 over 4000 1 1,193 1,193 9 5 sub-total 11 23,857 2,169 100 100 (head) Swine 0 94 129,673 1,379 12 12 0 - 50 407 561,917 1,380 52 52 50 - 100 180 248,540 1,380 23 23 100 - 200 78 108,061 1,380 10 10 200 - 300 23 32,418 1,390 3 over 300 - - - sub-total 782 1,080,609 1,382 100 Peach 25 19,590 Grape 53 27,576 Grand Total 6114 7,784,414 ANNEX 1-A Ministry of Agriculture & Fisheries Republic of Korea Seoul, Korea October 2, 1978 Hon. Shiv S. Kapur Director Operations Evaluation Dept. World Bank 1818 H St., Washington, D.C. 20433 U. S. A. Dear Mr. Kapur: I appreciated your letter of August 16, 1978 and the Performance Audit Report on First Agricultural Credit Project in Korea. In many occasions I have openly spoken that I value traditionally cooperative assistances made by IDA and IBRD toward us in extending loans for not only agricultural developnent projects but also for improvements of industrial infrustructure in my country. The Audit Report, in my view, can be regarded as a record of success and may be made to reflect deep gratitude of our people and the Governent. I would like to take this opportunity, therefore, to express my appreciation for the Bank's assistance and cooperation provided for the successful completion of First Agricultural Credit Project. The Project has, needless to say, greatly contributed to enhance our farmers income and improve the agricultural development financing system in my country. And, it is my firm belief that the benefit and impact of the Project will be diffused further in future. I am very pleased to notify you that I and my staff members are in general agreement with the Report. I also have directed the President of NACF to make and forward to you, the comment on the detailed contents of the Report on behalf of myself and as the head of the implementing institution of the project. With very best wishes and regards. Duk-Chin Chang Minister c.c. The President, NACF ANNEX 1-B 'qcitiona4 Q4gricultural eooperative 9:ederation FOREIGN LOAN DEPARTMENT #75, I KA. CHUNGJEONG-RO, JUNG-KU, SEOUL, KOREA MAILING ADD,C. P. 0. BOX 1051 'CABLE ADD-'KONACOF" TELEX-NACOF K27421 Mr. Shiv S. Kapur Director Operations Evaluation Department The World Bank 1818 H. Street N.W. Washington, D.C. 20433 U. S. A. September 2Z , 1978 Re.: Project Performance Audit Report on Korea First Agricultural Credit Project (Credit 335-KO) Dear Mr. Kapur; I would like to take this opportunity to express my apprecia- tion for your sending me the draft for our comments, and for the Bank's assistance and continuous concern to the Project. As stated in detail in the draft, being the first agricultural credit assisted by the Bank, the Project contributed greatly to increase in farmer's income from the new agricultural sector and gave sense to our member farmers to find profitable opportunities. Moreover, we have achieved, under the Project, a significant insti- tutional improvement of NACF including development of the new credit methodology for the rural development. The excellent structures and substantial contents of the draft left no insufficiency or defect for our comments except several minor misunderstandings and errors in figure on which we made comments as attached. In addition to our comments, a letter from the Technical Unit, the monitoring body of the Project in NACF, will be followed. (990-87) ANNEX 1-B Page 2 t toa cAricultural Eooperative Yederation SEOUL, KOREA TO: Mr. Kapur, - 2 - September 21, 1978 I am looking forward to your continued assistance and cooperation so that we can achieve further improvement under the Second Project which is now under progress satisfactorily. Yours sincerely, NATIONAL AGRICULTURAL COOPERATIVE FEDERATION Duk Hee Chang Chairman/President Encl. NACF's Comments on the Report. (990-88) ANNEX 1-B Page 3 NACF'S COMMENTS ON THE REPORT I. General Contents of the draft We have no specific part to make comment on the major contents of the draft. II. A suggestion for supplement on the role of the govern- ment to the project. We felt on the way of review the draft that the role of the government has generally disregarded. As you may already know, the government has deeply involved in the agricultural development financing and imple- mented its own development program with a large scale for the sake of balanced development of national econ- omy. The government program as stated on the Section 2.10 has been implemented its large number of loans in a short time with standardized investment model .and with.11mited staff engaged. Even it has its own program with quite a defferent way of credit to our IDA Project and a little confusion in implementation of both projects have been found in some areas, the government had selected the Project as a pilot project for the developing new rural credit system and assisted the project implementation on positive lines. ANNEX 1-B Page 4 The government cooperation could be understood as a government intenbion of gradual transfer of its faction of agricultural development financing to NACF which is the only institution charged for financing in the agricultural sector. In connection with the devaluation of local currency in December 1974, the government promptly increased its contribution by W 130 million from its supple- mentary budget to match the increased IDA funding in the regard of importance of the project, even- though it had already contributed W 1,400 million specified in the Agreement. Without this prompt extraordinary arrangement taken by the government, the project could not be complet- ed by the completion date specified in the Agreement. In addition to its contribution to project costs, the government provided us with an amount of W 661 million to write off exsisting bad debts for the sound financial state of NACF. All these assistance from the government with its own difficulties in financial resources cannot be easily disregarded by NACF. III. Suggestions for rectification. 1. Section 1.02 Fund were to be channeled through the IACF at the national level, to selected Kun (County) ANNEX 1-B Page 5 cooperative branches, to local cooperatives, then to members. * Above sentence should be changed as follow. Fund were to be channeled through the NACF at the national level, to provial branch offices of NACF, to selected Kun (County) cooperatives, then to members. 2. Section 2.07 A study group from Michigan State University (MSU) were invited by the Government not by the NACF to investigate NACF's structure and operations and to make recommendations for improvements. (The study were not only for the NACF's operations, but for the overall strategy of agricultural development). 3. Section 2.14 In the last sentence the draft refered that Bank tried to restrict technical unit's promotions but we think it is contrary to the facts. 4. Section 2.20 The bid was reduced to US$ 180,000. ANNEX 1-B Page 6 5. Section 2.21 - Section 2.26 In the above sections, the draft refered on Consultant Works of NACF's management study. If we summarize it with our own view, NACF had admitted the main recommend- ation of the study eventhough it tells little how to get from the current to the proposed new systems. We expect it will take long to implement the recomm- endation and recently established a Division for Account- ing System Development in the Planning Department. But we still believe that if we were able to select a home consultant who could easily trace our own system of business, the result would be more fruitful. 6. Table 1 There are several figures to be changed as follows,. Subprojects Technical unit (10/7?) . FRR Apple On-farm storage 66 Sprinkler irrigation 100 Poultry Egg layers 50 Broilers ANNEX 1-B Page 7 Table 2 lielation of Farm Size to Subloan size Size of' Project Sub-Loan Data Opera- Subprojects tions No. Total Amo- Av. , Before of unt('000 W) size of of Project sub- (Investment sub- sub- Funds (ha.) loan cost) loan loan Apple 0 462 702,131 1,520 25 21 0-1 234 329,018 1,410 12 10 1-2 656 1.031,150 1,570 35 30 2-3 275 600,373 2,180 15 18 Over 3 243 729,267 3,000 13 21 Sub-total ,Z70 3,391,939 1,8710 T 100 Pear 0 85 148,571 1,740 13 16 0-1 418 488,312 1,170 62 51 1-2 114 187,739 1,650 17 20 2-3 20 48,984 2,450 3 5 Over 3 37 79,384 2,140 5 8 Sub-total 674 952,990 1,415 100 100 Sericulture 0 76 54 442 710 3 3 0-0.3 562 339,243 600 22 19 0.3-0.6 1,072 822,192 710 42 AL 0.6-1.0 485 344,801 710 19 j-9- Over 1.0 358 254,065 710 14 1-4 Sub-total 2,553 1,814T243 687 100 100 Egg layers 0 7 23,655 3,290 5 5 0-500 37 118,278 3,190 25 25 500-1000 52 165,589 3,190 36 35 1000-2000 22 70,967 3,180 15 15 2000-3000 18 61,504 3,390 12 13 Over 3000 10 3117 L300 7 7 Sub-total (bird) 146 473,110 3,240 100 100 Broilers 0 - - - - - 0-1000 3 5,964 1 988 27 25 1000-2000 4 9,543 2,385 36 40 .....to be continaniud....... ANNEX 1-B Page 8 Size of Project Sub-loan Data operations Subprojects Before No. Total Amt. Av. p Project of ('000 Won) size of of sub- (investment sub- sub- Funds (ha.) loan cost) loan loan 2000-3000 2 4,771 2,385 18 20 3000-4000 1 2 386 2.386 10 10 Over 4000 1 1,193 1,193 9 5 Sub-total i 2,857 2,16 100 100 (head) Swine 0 94 129,673 1,379 12 12 0-50 407 561,917 1,380 52 52 50-100 180 248,540 1,38c 23 23 100-200 78 108,061 1,380 10 10 200-300 23 32,418 1,390 3 - over 300 - - - - - Sub-total 782 1,080,609 1,382 100 Peach - 2 19,590 - - - Grape - 53 27,576 - - - Grand 6,114 7,784,414 Total Note) Peach and Grape was excluded in the above classification ANNEX 1-B Page 9 ational cA riculturad Ecopercative ederation FOREIGN LOAN DEPARTMENT 757. t KA. CHUNGJEONG-RO. JUNG-KU. SEOUL, KOREA MAILING ADD-C. P. 0. BOX 1051 'CABLE ADD-*KONACOF' TELEX-NACOF K274Zt Er. Shiv S. Kapur Director Operations Dvaluation Department The World Bank 1818 H. Street, N.W. Washington, D.C. 20433, U.S.A. September 23, 1978 Dear Mr. Kapur; We, on behalf of the Technical Unit, would like to have an opportunity to express our appreciation for the draft Audit Report, every line of which reminded us of all the precious experiences the TU had undergone. As pointed out in the Report, the Project started with a lot of problems, and so many things, big or little, arose during the implementation. NACF had already been at the initial stages of the project implementation when it came to understanding that the Project should have been implemented on the basis of the very new ideas and techniques. They had not been introduced in the agricultural development financing of NACF, most of which was the lending business for government programs with government fund. Now we are saying that the First Agricultural Credit Project gave a good lesson to awaken from its conventional systems of agricultural development credit in NACF, which is the only agency charged with farm investments financing in Korea. All the difficulties could be solved gradually with close cooperation with the 'ank missions. and the young staff in the ' y9u-87) ANNEX 1-B eg{4 Page 10 9?atiomal c4gricultural (Fooperative Yederation SEOUL. KOREA TO; Mcr. Kapur - 2 - September 23, 1978 Technical Unit had devoted themselves enthusiastically to the Project implementation and embodied the development of credit systems on.the basis of clear understanding on changes required for Korean agricultural development financing system. TU had decided not to boast of it's new ideas and techni- ques discussed with and/or suggested by the Bank missions. It tried to show the actual impacts resulting from them and to diffuse them gradually and substantially to the other development financing of NACF and to the general farming practi- ces. Finally TU was able to get favorable responses from the management of NACF and Participating Gun Coops, government officials, Loan Appraisal Officers of PGCs and farmers, who were related to the successful-implementation of the Project. Especially we are happy to remind that TU could get a strong backup from the MAF officials who were directly charged with the agricultural credit policy of Korea. They found correctly the implications of the Project on the history of Korean agricultural development financing and encouraged the young staff of TU to carry out this pilot project steadily and successfully. When the Project was completed, the TU members were pleased to hear them say that they expected the TU to improve continuously the methods and procedures having been applied under the Project and these will be the general principles of agricultural development financing in proper time of furture. (990-88) ANNEX 1-B rNY-4 Page 11 91ational cAgricultural Fooperative Yederation SEOUL, KOREA TO: Mr. Kapur, - 3 - September 23, 1978 Now the TU is making its effort for the further improvement under the Second Project. At this point the Report was, in particular, most welcomed by TU members for an acknowledgement of their efforts and performance from the external agency. The Second Project is expected to be completed by 1981 and another follow up project is now under preparation. Appreciating the Bank's valuable assistance under the Project, we believe the TU will be helped continuously by the Bank with it's advice and suggestions for further advancement of the farmer's income and the institutional buildup of NACF. Thank you again for the Report, in which you rated highly the achievements made by TU, and we are looking forward to your kind concern and cooperation. Sincerely yours, NATIONAL AGRICULTURAL COOPERATIVE FEDERATION Beong Nam MIn General Manager Foreign Loan Department Hlyeon-Scok 1o Actin1 .iroject :.anager Technical Un Lt Forei-n Loan D,zrartment (990-88)  KOREA AGRICULTURAL CREDIT PROJECT (CREDIT 335-KO) PROJECT COMPLETION REPORT February 9, 1977 Projects Department East Asia and Pacific Regional Office  KOREA FIRST AGRICULTURAL CREDIT PROJECT (Credit 335-KO) Project Completion Report Table of Contents Page No. 1. INTRODUCTION.... . . . . . . . . . . . . . . . . . . . A 1 2. THE PROJECT........... ... . . . . . . . . .A 1 Project Data . . . . . . . . . . . . . . . . . . .. . . A 1 Project Objective . . . . . . . . . . . . . . . . . . .. A 1 Project Formulation .* o... . . . . .. ... . . . . . A 2 Eligibility Criteria . . . .. . . . . . . . . A 3 3. SU2MARY OF PROJECT IMPLEMENTATION . . . . .. . .. . ... A 3 Initial Delay in Implementation....... . . . . . . . . . A 3 Project Performance . . . . . . . . . . . A 4 Progress by Subprojects........ . . . . o .A 6 Kun Cooperative Participation and Regional Distribution . . . . . . . . . . . . . .. . . . . .. A 9 Contribution to Project Cost . . . . . . . . . A 9 Collateral . . . . . . . ... . . . . . . . . . . . . . . A10 Repayment Period . . . . . . . . . . . . . . . . . . . . . All Arrears . . . . . . . . . . . . . . o.. . . . . . . . . .All Training Facilities............... . . . o . A12 Management Study . . . . . . . . . . . . . . . . . . . . . A12 4. BANK ASSISTANCE DURING PROJECT IMPLEMENTATION.... . o. A12 5. CONCLUSIONS * * * * * . . . . . . . . . . *.. A13 6. ISSUES ARISING FROM PROJECT IMPLEMENTATION........ . o. A14 Staffing and Organization of the TU . . . . . . . .. . . A14 Technical Extension Services. . . . . ... . . . . . Al5 NACF's Financial Situation . . . . . . . . . . . . . . . A15 TABLES TABLE 1 - Annual and Total Loan Commitments by Subprojects TABLE 2 - Total and Average Investment Costs by Subprojects TABLE 3 - Major Investment Items by Subprojects TABLE 4 - Fruit Prices Received by Farmers TABLE 5 - Cocoon Prices and Silk Exports TABLE 6 - Swine: Prices and Exports TABLE 7 - Distribution of Subproject Loans by Provinces and PKCs KOREA FIRST AGRICULTURAL CREDIT PROJECT (Credit 335-KO) Project Completion Report 1. INTRODUCTION 1.01 The purpose of this report is to review the extent to which objec- tives of the First Agricultural Credit Project have been achieved. It also records the major problems encountered and the necessary adjustments made during implementation as well as the lessons learned which may be applied in both preparing and implementing future agricultural credit projects in Korea and other countries in the East Asia Region. 2. THE PROJECT Project Data 2.01 Credit Number : 335-KO Credit Amount : US$10.5 million Beneficiary : National Agricultural Cooperative Federation (NACF) Date of Credit Agreement September 29, 1972 Date of Effectiveness : May 24, 1973 Closing Date September 1, 1976 Project Objective 2.02 Since the advent of the Third Five-Year Development Plan (1972-76), a major strand of the Government of Korea's agricultural development strategy is the increased diversification of agricultural production into high value crops and livestock, mainly through increases in the productivity of existing land and labor resources, to help meet rapidly rising domestic consumption requirements and for export. In support of this strategy, the major objec- tive of the project as presented in the appraisal report was to provide medium- and long-term credit to approximately 12,000 orchard growers and producers of sericulture, mushroom, poultry and swine, to expand their operations through the use of improved technology and idle land and labor resources. In addition, the project provided funds for technical services and training facilities to assist in implementing the project effectively and improve the operations of the National Agricultural Cooperative Federation (NACF) through which project funds would be channeled to farmers. The principal beneficiaries were expected to be sericulture producers and orchard growers with typical farm sizes ranging from 1 to 3 ha. - A 2 - 2.03 Since they are export-oriented products with increasing foreign demand, it was envisaged that virtually all the increased production of silk (from sericulture operations) and mushrooms would be exported, while the output of fruits, poultry, and hogs would be consumed locally to help meet their rapidly rising domestic demand resulting mainly from significant increases in per capita incomes and the high income elasticities associated with these products. It was also expected that project investments would complement and supplement ongoing government programs for irrigation, drainage and watershed development, land improvement, and the increased availability of improved farm inputs. Project Formulation 2.04 NACF would administer the project which would be implemented over a three-year period. The project would finance development expenditures for agricultural enterprises under four categories: apple, pear, peach and grape orchards, sericulture, mushroom, and swine and poultry. Major investments would comprise orchard establishment, power sprayers, water supply, and on-farm storage or handling facilities for orchards; replanting and new planting of mulberry, and silkworm rearing houses and equipment for sericul- ture; growing houses and equipment for mushroom; and rearing houses, including brooding facilities, and equipment for swine and poultry. Establishment of orchards and mulberry will include land clearing and preparation, improved planting material, fertilizers, pesticides, and labor costs. Loans would be made by NACF's Kun (county) Cooperatives based on development plans prepared by subborrowers with the assistance of the Cooperatives' loan officers. These officers would also appraise loan requests and supervise their imple- mentation. Kun Cooperatives participating in the project would meet qualifi- cation criteria agreed with the Bank (para. 2.06). To administer the project effectively, NACF would establish a technical unit (TU), headed by a Project Manager who would be assisted by an internationally recruited farm management advisor financed by the project.fl The TU would be responsible for formulating loan appraisal criteria, training the loan appraisal officers of participating Kun cooperatives (PKCs), and generally supervising and monitoring project lending by the PKCs. In addition to the Project Manager, farm management advisor and administrative support staff, the TU would initially include at least one technician each for sericulture, livestock, horticulture, and farm management. The project would also provide for expansion of NACF's training facilities to increase the output of trained personnel, and a management study to improve NACF's management of its large and diverse operations. 2.05 Of the total project cost estimated at US$18.2 million, orchard development would account for about 38%, sericulture 32%, mushroom 11%, swine and poultry 15%, and technical services and training facilities the remaining 4%. The IDA credit would finance about 58%, the Government/NACF 23%, and subborrowers 19% of total project cost. Contributions from sub- borrowers would, however, cover about 20% of their investment cost. The /1 For a two-year period. -A 3- Government would make available its contribution to project cost (about 21% of total project cost) and the proceeds of the IDA credit to JTACF at an interest rate of 7% with a repayment period of not less than 15 years, inclu- ding 5 years' grace. NACF would in turn transfer these funds to PKCs at 9% interest for on-lending to subborrowers at 12% interest. Terms of repayment to NACF would be similar to those granted to subborrowers by PKCs. Terms of loans to subborrowers would range from 5 years, including 1 year's grace, for -swine and poultry, to 12 years, including 7 years' grace, for apple orchard development. Eligibility Criteria 2.06 A Kun Cooperative would meet the following conditions to be eligible for participation in the project: (a) its overdues would not exceed 10% of loans outstanding; (b) its management is satisfactory and its appraisal staff has been suitably trained in project loan appraisal and supervision. In order to increase NACF's equity, PKCs (as well as nonparticipating Kun Cooperatives) would be expected to increase their capital subscriptions to NACF and such subscriptions should, by the end of 1974, amount to at least 3% of the cooperatives' outstanding borrowings from NACF. 2.07 Eligible subborrowers were also expected to contribute at least 20% of project costs and provide adequate security for the loans made to them. 3. SU1MARY OF PROJECT IMPLEMENTATION 3.01 The project became effective in May 1973. Although implementation of the project was initially delayed due primarily to the lack of prepara- tions for such purpose by the TU.and NACF, project funds were fully disbursed well within the scheduled lending period. Causes of the initial delay and the corrective measures taken, which enabled the project to be subsequently implemented satisfactorily and on time, are given below. Initial Delay in Implementation 3.02 Although the TU was established by NACF in February 1973, about three months before effectiveness, and staffed in accordance with the stipula- tions of the Project Agreement, project lending during the initial months following effectiveness was not properly carried out mainly because of the TU's lack of necessary preparations for effective project implementation and general inexperience in administering such projects. Thus, the first super- vision mission which.visited NACF in July 1973 found that (a) agreed criteria - A 4 - for selecting PKCs had not been adhered to; (b) no field investigations had been carried out for subproject appraisals which were made solely on the basis of desk studies; (c) no training had been given to the TU staff nor to the loan officers of the PKCs; (d) no proper supervision procedures had been developed; and (e) funds lent for certain subprojects had not been used in accordance with project purposes. Since they were serious shortcomings, the Bank consequently decided to impose a moratorium on further lending and required that NACF launch a program to correct these shortcomings. Appro- priate remedial measures were promptly taken by NACF, including implementa- tion of a program aimed particularly at reassessing the eligibility of the PKCs through field visits, and intensive training in appraisal and supervision techniques for the staff of the TU and PKCs. 3.03 The second supervision mission in October 1973 found that the TU had made impressive progress in correcting the-earlier deficiencies. Compre- hensive selection criteria for PKCs were developed which placed emphasis on management quality, loan overdues, and proximity of special cooperatives to provide technical assistance to borrowers, although loan supervision and extension services needed further improvement. In view of the significant improvements made, the Bank decided to lift the moratorium imposed in July 1973 and to resume lending on a limited scale until the visit of the next supervision mission. NACF was also requested to send monthly progress reports summarizing project lending and training supervision activities by the TU. 3.04 The March 1974 supervision mission found that appraisal and super- vision of loans had improved considerably, and increased efforts had gone into training of the Loan Appraisal Officers (LAOs) of the PKCs. NACF's lending program and training plan for 1974 were considered reasonable and the Bank agreed to allow full scale lending and the number of PKCs to be increased to about 50 as against 34 in 1973. The TU staff was strengthened by the appointment of additional agricultural specialists. 3.05 Rapid progress was made in implementing the project after full scale lending was resumed. The next supervision in April 1975 found that earlier shortcomings of the TU and PKCs in loan appraisal and supervision had been satisfactorily corrected. Project funds were fully committed by the end of 1975 and disbursements completed in May 1976, about a month ahead of schedule. Project Performance 3.06 Loan commitments and disbursement rates for the project period are shown in the following table. -AS - Number Cumulative of loan disbursements commitments as % of appraisal estimates Period Ending 1973 891 June 30 0 December 31 26 1974 3,235 June 30 39 December 31 114 1975 1,988 June 30 110 December 31 104 1976 June 30 100 6,114 Project lending and disbursements in 1973 were significantly lower than estimated at appraisal mainly because of the delay in effectiveness of the Credit and the moratorium on further lending imposed by the Bank during the third quarter of 1973. However, the lending and disbursement rates increased sharply in 1974, especially following the resumption of full scale lending in March 1974, so that by the end of the year they were ahead of schedule. Lending in 1975 was limited by the availability of project funds. The 6,114 loans financed were only about one half the number estimated during appraisal. As some farmers had borrowed under more than one subproject, the total number of subborrowers was 6,086. Details on annual loan commitments by subprojects are given in Table 1. 3.07 In addition to financing on-farm investments, the project included financing of training facilities, services of a farm management advisor, and a management study of NACF (para. 2.04). Estimated versus actual allocations of the IDA Credit to these categories are given in the table below. - A 6 - Allocation of IDA Credit (US$ '000) Appraisal Actual On-farm development 10,000 10,030 Training facilities 215 215 Farm management advisor 75 75 Management study 210 180 Total 10,500 10,500 Progress by Subprojects 3.08 Distribution of the total loan amount by subprojects is as follows: Loan amount Appraisal Actual %------- Subprojects Orchard Apple 15 44 Pear 8 12 Peach 6 1 Grape 10 ) Subtotal 39 56 Sericulture 34 24 Mushroom 11 - - Swine 1 14 Poultry 15 6 Total 100 100 The differences from the appraisal percentages are mainly the result of unforeseen price and demand changes, and appear to represent a reasonable response to changing conditions (para. 3.12). 3.09 A second major area of change from the appraisal is the higher average cost of investments, as follows: Actual Appraisal Percentage average cost average cost increase ----------- (W '000) -------- Orchard 1,675 1,018 65 Sericulture 711 243 193 Swine 1,318 285 385 Poultry 3,166 1,902 66 Total 1 528 141 -A 7- The first major reason for the increase is inflation, which far exceeded the 15% contingencies estimated. Building costs, the largest item in the sub- projects and accounting for nearly half of the total investment costs, have averaged about twice the appraisal cost per unit. The other changes from the appraisal are due to the differences in the size and mix of individual investment items actually made compared with those given in the appraisal models. For example, the average sizes of silkworm rearing houses and pigsties were significantly larger and poultry rearing houses smaller than anticipated. Certain items, like weaner pigs, considered as investments in the loans made, were not included in the appraisal models. Such inclusions appear reasonable as they represent necessary incremental working capital. Total and average investment costs and major investment items by subprojects are presented in Tables 2 and 3. 3.10 Because the average investment cost per subborrower was signifi- cantly larger than anticipated, the 6,114 loans made accounted for only about half the appraisal estimate of 12,270. As shown in the following table, the reduction in the number of sericulture loans accounted for most of the difference between the actual lending and appraisal estimates. The increases in loans for apple orchard and swine development were largely offset by corresponding declines in the other fruit and poultry loans. Number of loans Amount of loans (U million) (1) as (4) as Actual Appraisal % of (2) Actual Appraisal % of (5) (1) (2) (3) (4) (5) (6) Orchard Apple 1,870 800 234 3,391 773 438 Pear 674 500 135 953 407 234 Peach 25 600 4 20 326 6 Grape 53 600 9 28 529 5 Subtotal 2,622 2,500 105 4,392 2,035 215 Sericuture 2,553 9,000 28 1,814 1,750 104 Mushroom - 20 - - 583 - Swine 782 250 313 1,081 57 1,896 Poultry Layers 146 300 49 473 450 105 Broilers 11 200 6 24 311 8 Total 6,114 /a 12,270 50 7$784 5,186 150 /a Granted to 6,086 subborrowers. -A8 - 3.11 The project did not finance the mushroom component (mushroom growing houses) mainly because funds for such purpose were available under the Agriculture and Fishery Development Corporation's (AFDC) Integrated Agricultural Products Processing Project (Loan 994-KO), and the Government had indicated that AFDC, which is primarily responsible for developing and promoting agro-industrial development in Korea, would be better suited to promoting mushroom development. Korean mushroom production is essentially for export as canned mushrooms so that canning is an important and integral part of the total production process. Moreover, the need to integrate the develop- ment of mushroom production and canning would be met in the AFDC project, which includes a large component for this purpose. 3.12 With regard to the differences in actual lending and the appraisal estimates indicated in the above table, they can be explained by one or more of the following (also see para. 3.09). (a) Apple and pear prices increased at substantially higher rates than peach and grape prices during the period of project implementation (see Table 4). The availability of improved, higher yielding and earlier maturing varieties with prospects of further enhancing the profitability of apple production, also encouraged farmers to invest in this crop. (b) Government encouragement to develop unused slope land and riverbed land mainly for apple orchard cultivation. (c) Existing peach and grape orchards and other suitable growing areas are generally located close to urban centers. Increasing urbaniz- ation and consequent rapidly rising land prices have put a severe constraint on further development of these crops. (d) Unfavorable export markets during the project period resulting from the worldwide economic recession which commenced in late 1973 were mainly responsible for the shortfall in actual lending for sericul- ture. The decline in silk exports in 1973 and 1974 prompted the Government to restrict the development of new mulberry fields in 1975. Prices and exports are given in Table 5. (e) Starting in 1974, government policy was to discourage the further development of poultry which depended heavily on feed grains most of which had to be imported, and instead to encourage the develop- ment of swine and beef which were less dependent on feed grains. This policy was prompted by the 1973 energy crisis and recession which pointed to a worsening of Korea's balance of payments situa- tion. In fact, beginning in 1975, increased emphasis was given to the development of beef which is even less dependent on feed grains than swine. Investments in swine development were further encouraged by the significant increases in prices and exports of pork as shown in Table 6. -A9 - Kun Cooperative Participation and Regional Distribution 3.13 Thirty-four Kun Cooperatives participated at the outset of project implementation. However, their lending under the project was' soon suspended by the Bank following discovery by the first supervision mission in July 1973 that, inter alia, the Kun Cooperatives concerned were not selected in accordance with agreed criteria and that they had not followed proper procedures in loan appraisal and supervision (see paras. 3.02-3.05). Only 22 Kun Cooperatives were considered suitable and therefore allowed to participate during October 1973 to March 1974, when as a result of corrective measures taken, the Bank permitted lending to be resumed on a limited scale. With the resumption of full scale lending in April 1974, 51 Kun Cooperatives participated that year. In 1975, only 38 participated because of limited project funds. A total of 59 Kun Cooperatives participated during the three-year project period. 3.14 Although spread over the eight mainland provinces,/1 use of project loans favored Gyeongsang Bug (32%), Chungcheong Nam (17%), and Jeonla Nam (16%). This is because the main apple, pear and sericulture /2 growing areas are located in the three provinces, and loans for the development -of these crops comprise the bulk of the total project loan amount. Project loans for swine development were also concentrated in the last two provinces (Jeonla Nam and Chungcheong Nam). Distribution of subproject loans by province and PKCs are given in Table 7. Contribution to Project Cost 3.15 The Credit Agreement stipulates that the Government's contribution to total project cost would amount to W 1,400 million./3 In December 1974, the Won currency was devalued by 20%. At that time, the undisbursed part of the IDA Credit of US$4.6 million consequently increased in terms of lon equiva- lent by about W 390 million. In response to NACF's request, the Government agreed to increase its contribution by W 130 million to match the increased IDA funding. The amount which is based on its agreed share of project loan funds to subborrowers was included in the Government's supplementary budget for 1975. The total contribution by the Government therefore amounted to W 1,530 million while the IDA Credit was equivalent to W 4,590 million. The total project funding of W 6,120 million was lent by the Government to NACF at an annual interest rate of 7%, with a repayment period of 20 years, including 5 years of grace. Of the total amount, project lending to subborrowers amounted to W 5,970 million. The balance was used by NACF to /1 Korea has nine provinces, eight on the mainland (Korean peninsular) and the remaining one is the island of Jeju which is not suitable for apple and pear production, and where mulberry growing is negligible. /2 Unlike apple production, which is concentrated in a few provinces, sericulture production has a wider and more even geographic spread. /3 Equivalent to US$3.5 million. - A 10 - help pay the costs of the farm management advisor, management study, and expansion of NACF's training facilities. In addition to its contribution to project costs, the Government had agreed to provide NACF.,with an amount of W 661 million to enable NACF to write off certain bad debts incurred on earlier operations undertaken at the behest of the Government. These funds were made available to N4ACF in June 1975. 3.16 NACF estimated that total on-farm investment costs under the project actually amounted to W 7,784 million of which it financed W 5,970 million or 77%. The balance of W 1,814 million represents the subborrowers' contribution. The following table gives a breakdown of project financing for the various subprojects: Subborrowers' Investment Loan financing contribution Subprojects costs Amount Percent Amount Percent (W million) (W million) (W million) Apple orchard 3,392 2,624 77 768 23 Pear 953 702 74 251 26 Peach 20 14 74 6 26 Grape 27 22 79 5 21 Sericulture 1,815 1,418 78 397 22 Poultry 497 378 76 119 24 Swine 1,080 812 75 268 25 Total 7,784 5,970 77 1,814 23 On average, subborrowers contributed about 23% of investment costs compared with the 20% contribution envisioned at the time of appraisal. The higher level of actual contribution was not a constraint on project lending. Collateral 3.17 Loan appraisal officers (LAOs) of the Kun Cooperatives are in charge of determining collateral. They are permitted to accept as collateral bonds and debentures, agricultural produce, and real estate. The loan amount usually cannot exceed 80% of the appraised value of the collateral./l Collateral requirements did not constitute a constraint on lending under the project. The LAOs were specifically instructed by NACF to give primary consideration to the financial and economic viability of the subprojects submitted to the PKCs for financing by subborrowers, and that whenever the collateral was insufficient, the subproject concerned would be financed under /l 100% if collateral comprises borrowers' deposits with the Kun Cooperative. - A 11 - NACF's Credit Guarantee Scheme which charges 0.5% per annum of the loan amount as the guarantee fee for the loan. Loans financed with such guarantees accounted for 30% by number and 24% by amount of total lending under the project. Repayment Period 3.18 The Credit Agreement specifies maximum grace and repayment periods by subprojects. Actual loan maturities were to be based on estimated project cash flows. A sample analysis of some 520 loans for apple, pear, sericulture, poultry and swine showed the following actual weighted average grace and repayment periods. Subprojects Grace period Repayment period Total loan period (years) Apple 4.3 (7) 4.1 (5) 8.4 (12) Pear 4.5 (6) 3.9 (4) 8.4 (10) Sericulture 2.9 (3) 3.3 (5) 6.2 ( 8) Poultry 1.0 (1) 3.7 (4) 4.7 ( 5) Swine 1.0 (1) 3.7 (4) 4.7 ( 5) Figures in parentheses show maximum periods indicated in the Credit Agreement. Arrears 3.19 With most loans still in their grace periods, it is premature to draw any conclusions from the present status of arrears. Only sericulture, poultry and swine subprojects have reached the repayment stage. As of the end of September 1976, the collection ratio of principal for these three subprojects was about 94%. The collection of interest due for all subprojects is even more satisfactory with a ratio of about 98%. 3.20 Under the Credit Agreement, if the overdues of a Kun Cooperative exceeded 10% of its outstanding loans as of the 'end of its fiscal year (December 31), it would not qualify to be a PKC the following year. This provision had not been strictly adhered to; nine Kun Cooperatives with overdues exceeding 10% participated in 1974 and three in 1975. Visiting NACF in April 1975, the fourth supervision mission which first noted the above situation, accordingly informed NACF that the ceiling on overdues should be strictly observed in future project lending. Appropriate measures were also undertaken by NACF and the PKCs concerned to reduce their overdues, including writing off bad debts with funds provided by the Government for this purpose (para. 3.15) and from their own resources. As a result of these measures, only 3 out of the total of 59 PKCs had overdues in excess of 10% as of the end of 1975, and of the 3 PKCs, 2 had marginally higher overdues of about 11% and 12% and the - A 12 - third 17%. The average for all the 59 PKCs was a minimal 4.6% further indicating that the provision in question (10% limit on overdues) had on the whole been satisfactorily complied with. Training Facilities 3.21 Extension of training facilities at NACF's Cooperative College was completed in October 1975 on schedule. Comprising a four-story concrete building covering about 1,650 sq m of floor space, the training facilities include classrooms, reading room, offices, and a faculty room which have been fully utilized since soon after construction was completed. The extension of training facilities has enabled the Cooperative College to accommodate up to 400 persons at any given short-term training session, compared with the previous 300-person capacity. Management Study 3.22 Undertaken by consultants from Touche Ross and Company, the manage- ment study was completed in December 1975. The consultants' major recommenda- tions regarding the improvements in NACF's accounting and financial reporting systems, which was the main purpose of the study, were accepted by NACF. The major recommendations include: (a) the need to measure and value services of certain centralized service departments and to charge the cost of such services to other departments which use them; (b) introduction of an accounting code structure to allow all departments and activities to maintain independent accounting records; (c) creation of a consolidating accounting function to reconcile and eliminate duplication of transactions and to prepare activity and other formal financial statements at each organizational level and for NACF as a whole; and (d) computerization of accounts. The systems developed by the consultants for these recommendations, when fully implemented, are expected to provide NACF with, inter alia, an assessment of the profitability of its various operations and to clearly identify cross transactions between the different operations, including the cooperatives which are part of the NACF organization. To be phased over several years, NACF expects the systems to be fully implemented by 1981. The consultants have also trained NACF staff for this purpose. 4. BANK ASSISTANCE DURING PROJECT IMPLEMENTATION 4.01 With five supervision missions visiting NACF during the period July 1973 to November 1975, the project received the normal supervision resources during its implementation, although the intervals between mission visits were rather unevenly spaced. The first three missions were undertaken during a short nine-month period from July 1973 to March 1974 because serious problems were identified in the early stage of project implementation (para. 3.02). The earlier missions provided considerable assistance to the TU, particularly - A 13 - with regard to organizing training programs for the TU staff and LAOs of the PKCs in project appraisal and supervision, and in extensive field trips to help appraise and select suitable Kun Cooperatives for participatipn in the project. 5. CONCLUSIONS 5.01 The project has been successful in expanding significantly the availability of medium- and long-term credit from institutional sources for agricultural development in Korea. It has assisted in the spread of new tech- nology (e.g. dwarf apples, sprinkler irrigation), enabled farmers to better utilize past investments in orchards and mulberry plantings by financing fruit storage buildings and silkworm rearing houses, and has complemented Government programs for irrigation, drainage and watershed development, and land improve- ment. 5.02 It is still too early to evaluate the project's benefits and impact, because several more years are required for most of the subprojects to reach full development. The evaluation will be undertaken by the TU. 5.03 In addition to the development and expansion of the subprojects concerned, the project has had significant institutional building effects for NACF and the PKCs. Thus, the method of appraising project investments in terms of their technical feasibility and financial viability based on incremental returns and the need for regular supervision of project invest- ments during their implementation are being increasingly appreciated by NACF and the PKCs. With close supervisory assistance from the supervision missions, including early identification of implementation problems which allowed cor- rective measures to be taken promptly, NACF and the TU acquired the necessary expertise to implement the project satisfactorily and on schedule. In the case of the TU, it had also helped select the PKCs, provided technical advice, and trained PKC personnel, including some 123 LAOs in project appraisal and supervision./1 Provision of training facilities has increased the output of trained personnel, and implementation of the recommendations rising from the management study is expected to improve NACF's management of its large and diverse operations. 5.04 Although most of the problems and issues raised by the supervision missions during the course of project implementation were resolved satisfac- torily by NACF (including the TU) and PKCs, several issues remain to be dealt /1 With the expertise and experience gained under the project, NACF and the TU will be capable of handling the larger follow-up Second Project, including the provision of training to PKC staff to enable a larger number of PKCs to participate in the Second Project. - A 14 - with under the follow-up Second Project. These issues, which are discussed in Part 6 below, are the high turnover of TU staff, the generally inadequate technical extension support services available to subborrowers, and the need for NACF to make adequate provisions for its bad and doubtful debts and to improve its equity position. 5.05 Finally, it should be stressed that for institutions implementing Bank-financed credit projects for the first time and which therefore can be expected to lack the necessary expertise and experience, more frequent supervision missions, especially during the early stage of project implemen- tation, will be essential for effective and timely implementation of the projects. This is the major lesson to be derived from the project. 6. ISSUES ARISING FROM PROJECT IMPLEMENTATION Staffing and Organization of the TU 6.01 Beginning in 1974 at the early stage of project implementation, the TU expert staff of nine persons, including the Manager and Assistant Manager, had been subject to a high turnover mainly as a result of internal promotions which under NACF's present staff regulations require the transfer of the staff concerned to other NACF departments. Thus, three expert staff were transferred in 1974, two in 1975, and three in 1976, including the Manager who had been in charge of the TU since its inception in February 1973. Although suitable replacements were provided, this had some disruptive effect on the work of the TU. In order to minimize the frequency of such transfers under the Second Project without upsetting its staff regulations, NACF agreed to provide two technical experts for each subproject and upgrade the position of at least one of them to the next level which will not be subject to mandatory transfer on promotion. 6.02 The TU Manager's position under the project was relatively low when compared with the officials of other NACF and government departments whom he often dealt with concerning project matters. Consequently, his dealings with the officials concerned had not been very effective nor expeditiously dealt with. To correct this shortcoming and to give him more weight in his future dealings, NACF recently upgraded his position as agreed during negotiations on the Second Project. 6.03 In order to evaluate the project's benefits and impact, and implement satisfactorily the larger Second Project the TU staff will be increased to 18 persons, including the Manager, Assistant Manager, 12 technical specialists, and other support staff. The additional staff required by the TU was agreed to by NACF. - A 15 - Technical Extension Services 6.04 The performance of technical extension services to project farmers has been uneven and generally inadequte due mainly to the shortage of exten- sion staff and the priority given by the Office of Rural Development (ORD) to extension work on food grain production. ORD is the main source of extension guidance although project farmers had also received some extension support from the technical experts in the TU and agriculturists in the PKCs. 6.05 In formulating criteria for the selection of PKCs under the Second Project, the appraisal report specifies that adequate extension support for project farmers would be provided. To meet this criterion, NACF has proposed that appropriate arrangements would be made by PKCs to use the services of technicians in the horticulture and sericulture cooperatives and farm leaders to supplement the extension support from ORD. NACF is also exploring alterna- tive measures to ensure that PKCs have firm arrangements for the provision of adequate extension support to their project subborrowers. NACF's Financial Situation 6.06 As required under the project, NACF's accounts have been audited by independent auditors acceptable to the Bank. The audit had been satisfactory. This requirement will be maintained under the Second Project. 6.07 The total amount of bad debts identified by the auditors was W 1,336 million as of the end of 1974, but the provisions for such debts amounted to only W 200 million. Although the Bank had urged that the bad debts be written off against the 1975 profit and accumulated retained earnings, NACF adhered to its earlier proposal to write off the debts gradually by 1981 through progressively larger yearly provisions set aside for this purpose. Thus, the provisions were increased significantly to W 367 million as of the end of 1975, when bad debts amounted to W 1,378 million, a marginal increase compared with 1974. However, since prudent financial management requires that the writing off of debts actually identified should not be deferred, this matter will be further pursued with NACF under the Second Project./1 6.08 NACF's share capital consists of equity contributions by the Kun Cooperatives. In order to increase NACF's equity, the project required that the capital subscription to NACF of each Kun Cooperative should, by the end of 1974, be 3% of its outstanding borrowings from NACF. Increases in recent years have brought the average for all Kun Cooperatives to W 2,943 million or /1 Bad debts amounted to W 1,378 million as of the end of 1975 compared with a total loan portfolio of W 333,581 million as of the same date. In view of the fact that the amount of bad debts not covered by the provisions has been small relative to the total loan portfolio, the Bank should not be unduly concerned regarding the inadequacy of the provisions made. - A 16 - about 3% of outstanding borrowings as of the end of September 1975. The amount increased to W 3,590 million by the end of 1975. 6.09 Although NACF's equity remains small in relation to its total borrowings, this should not be of undue concern since the majority of the borrowings comprise funds provided by the Government and Bank of Korea for the implementation of Government-directed programs. Since these borrowings are not onlent solely through the Kun Cooperatives, but also through the Primary Cooperatives and directly to agricultural processing enterprises, relating NACF's capitalization to borrowings by the Kun Cooperatives will at most contribute only marginally to building up NACF's equity. Measures to increase the capitalization of NACF will be explored in the course of implementing the Second Project in consultation with NACF and the Government. TABLE 1 KOREA FIRST AGRICULTURAL CREDIT PROJECT Annual and Total Loan Commitments by Subprojects (Amount in W million) Subprojects 1973 1974 1975 Total No. Amount No. Amount No. Amount No. Amount Orchard Development Apple 233 163 913 1,280 724 1,181 1,870 2,624 Pear 150 121 253 276 271 305 674 702 Peach 22 10 3 4 - - 25 14 Grape 52 22 1 * - - 53 22 Sub-Total 457 316 1,170 1,560 995 1,486 2,622 3,362 Sericulture 168 52 1,437 806 948 560 2,553 1,418 Livestock Poultry 45 82 111 289 1 7 157 378 Swine 221 231 517 547 44 34 782 812 Sub-Total 266 313 628 836 45 41 939 1,190 Total 891 681 3,235 3,22 l 2,087 6,114 5,70 * Less than one million TABLE 2 KOREA FIRST AGRICULTURAL CREDIT PROJECT Total and Average Investment Costs by Subprojects Total Investment Costs Average Investment Costs (W Million) (W .000) (4) as Appraisal Actual Appraisal Actual % of (3) (1) (2) (3) (4) (5) Orchard: Apple 964 3,392 1,205 1,814 151 Pear 518 953 1,036 1,414 136 Peach 400 20 666 784 118 Grape 662 27 1,104 520 47 2,544 4,392 1,018 1,675 165 Sericulture 2,187 1,815 243 711 293 Mushroom 729 - 36,424 - - Swine 71 1,080 285 1,381 485 Poultry: Layers 566 473 1,886 3,240 172 Broilers 385 24 1,924 2)182 113 6,482 71784 528 I2 241 TABLE 3 Page 1 KOREA FIRST AGRICULTURAL CREDIT PROJECT Major Investment Items by SubDrojects Subprojects Quantity Apple: New orchard development (ha) 1,844 Storage Building (pyong) 14,847 Irrigation Facilities (ha covered) 1,092 Facilities for spraying (sets) 119 Number of Loans 1,870 Pear: New orchard development (ha) 274 Storage building (pyong) 9,407 Irrigation Facilities (ha covered) 59 Facilities for spraying (sets) 253 Supporting structure for pear trees (ha) 224 Number of Loans 674 Peach: New orchard development (ha) 23.2 Storage building (pyong) 328 Irrigation Facilities (ha covered) 7.4 Facilities for spraying (sets) 7 Number of Loans 25 Grape: New orchard development (ha) 40.6 Storage building (pyong) 305 Irrigation Facilities (ha covered) 15 Facilities for spraying (sets) 14 Supporting structures for vines (ha) 25 Number of Loans 53 TABLE 3 Page 2 Major Investment Items by Subprojects (Cont'd) Quantity Sericulture: New mulberry development (ha) 461 Silkworm rearing house (pyong) 56,230 Rearing tools/implements Number of Loans 2,553 Swine: Weaner pigs (No.) 53,097 Rearing house (pyong) 24,713 Rearing tools/implements (sets) 3,063 Number of Loans 782 Poultry: Day-old chicks (no.) 338,460 Rearing house (pyong) 12,481 Rearing tools/implements Number of Loans 157 Total Loans 6,114 TABLE 4 KOREA FIRST AGRICULTURAL CREDIT PROJECT Fruit Prices Received by Farmers Apple (18.75 Kg)-/ Pear (18.75 Kg) Peach (3.75 Kg) Grape (3.75 Kg) Price Price Price Price W Index W Index W Index W Index 1970 908 100 1,140 100 931 100 294 100 1971 1,194 132 1,114 98 1,070 115 288 98 1972 1,315 145 1,305 114 1,038 111 278 95 1973 1,445 159 1,478 130 893 96 332 113 1974 2,159 238 1,980 174 1,076 116 461 157 I/ Ralls' Janet variety. TABLE 5 KOREA FIRST AGRICULTURAL CREDIT PROJECT Cocoon Prices and Silk Exports Cocoon Prices (2nd Grade) Korea Silk Exports Korea a/ Japan (Metric tons) (W/kg) (Y/kg) 1970 549 1,145 2,745 1971 659 972 2,878 1972 896 1,170 3,508 1973 1,535 1,803 3,367 1974 1,535 1,406 3,021 1975 1,535 1,365 5,364 a/ Cocoon prices and marketing are regulated by the Government. TABLE 6 KOREA FIRST AGRICULTURAL CREDIT PROJECT Swine: Prices and Exports Price per Live Animal 1/ (75 Kg) Pork Exports ( W ) (Metric Tons) 1973 21,338 1,804 1974 24,632 3,806 - 1975 36,294 8,108 1/ Received by farmers. TABLE 7 KOREA FIRST AGRICULTURAL CREDIT PROJECT Distribution of Subproject Loans by Provinces and PKCs (Amount in W Million) Number of Peach/ Province PKCs Apple Pear Grape Sericulture Swine Poultry Total Gyeongsang Bug 14 1,532.0 2.1 - 237.4 32.2 92.2 1,895.9 Chungcheong Nam 7 542.9 107.3 4.3 67.1 135.5 149.0 1,006.1 Jeonla Nam 8 - 341.3 15.6 336.2 235.1 18.0 946.2 Jeonla Bug 6 145.1 31.6 - 305.3 150.2 20.0 652.2 Chungcheong Bug 6 246.8 - - 225.7 61.4 - 533.9 Gyeonggi- 7 39.0 208.9 8.2 167.5 43.6 14.2 481.4 Gyeongsang Nam 7 117.7 11.1 8.1 39.5 151.4 67.4 395.2 Gangweon 4 - - - 38.9 2.8 17.6 59.3 59 2,623.5 702.3 36.2 1,417.6 812.2 378.4 5,970.2 IBRD 12351 R 27' 28• 29'FE.RUARY 1077 - N R T H K O R E A CHINA Sea o/ .\s JapanSogcho East Sea KOREA \REPOF Ye//ow' ~,0)KOREA AP 3' - Sea 3. 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