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Three large-scale agricultural projects approved by the World Bank in the early 1980s were designed and implemented under Romania's then socialist regime. At the time, the projects were considered a success: they were implemented on time, within cost, and achieved most of their input objectives. A recent OED audit 1/ finds, however, that changes to the original project designs and certain government practices adversely affected the performance of the projects and caused the failure of the transfer of technology and private sector components of the projects. Project weaknesses were further aggravated after 1989 when Romania's economic transformation changed many of the features of the agricultural sector and with it the relevance of the projects. From the Romanian experience, the audit raises several issues on agricultural restructuring for economies in transition and offers important lessons.
The projects
In the early 1980s Romania's agricultural sector remained relatively inefficient. Labor productivity was low, and crop and livestock yields were significantly lower than those in countries at a similar stage of development. The sector faced serious and constant shortages of machinery and inputs.
To address these problems, the government declared agriculture a priority sector in its 1981-85 economic plan, the period during which the Orchards Project, the Fourth Livestock Project, and the Moldova Agricultural Credit Project were designed and implemented. The projects, approved by the World Bank in the early 1980s and closed in 1986, aimed at expanding the production capacity and productivity of the agricultural sector by investing in physical assets and equipment, introducing new technology and farm mechanization, and strengthening Romania's agricultural research institutions. The main beneficiaries were cooperatives and state farms. The two organizational forms dominated agricultural production at the time. Individual farms covered only about 9 percent of the agricultural area, mostly in remote mountainous regions. At the urging of the Bank, some credit was to be made available to owners of those farms, mostly through the Livestock and Moldova Agricultural Credit projects.
The $324 million Orchards Project, of which $50 million was in World Bank loans, aimed at increasing Romania's fruit production by planting orchards and building cold storage facilities, modernizing agricultural research laboratories, and providing technical assistance. Modern technology was to be an important feature of the project. When fully developed, the orchards were to provide 528,000 tons of fruit annually. The $412 million Fourth Livestock Project, of which $80 million was in World Bank loans, aimed at increasing production and improving the processing of beef and milk by constructing new and modernizing old dairy farms, establishing breeding heifer farms and beef fattening units, improving pasture land and storage facilities, and strengthening technical services and research. The undertakings were huge. The dairy farm component alone aimed at constructing 92 new farms, each with 1,000 cows, and renovating 32 old farms.
The $290 million Moldova Agricultural Credit Project, of which $95 million was in Bank loans, was to address the main constraints affecting agriculture in the region by providing credit to cooperatives, state farms, and individual farmers, the latter at the insistence of the Bank. In particular, credits were to finance farm mechanization, construct agroindustries, improve soil erosion protection and pasture lands, modernize dairy farms, and rehabilitate plantations and vineyards.
Outcome before 1989
The projects were approved during the height of Romanian-World Bank cooperation in the early 1980s, but in 1987, a year after project completion, Romania withdrew from the Bank, repaid its loans, and suspended further Bank staff visits. As a result, no information was available on the social and economic impacts of the projects. At loan closing in 1986, the projects were considered a success. They had been completed on time, within cost, and had achieved most of their physical targets.
Under the Orchards Project, for example, about 200 fruit groves were planted, divided equally between cooperatives and state farms, and all storage facilities were completed as scheduled. The Fourth Livestock Project introduced improved dairy units, modern milking equipment, and better use of pastures. Unlike its experience with previous livestock projects in Romania, the Bank was successful in convincing the government to embrace the proposed technologies, which were successfully tested and well received by the cooperatives and state farms.
The Moldova Agricultural Credit Project disbursed its credit component 15 months ahead of schedule and implemented most of its investments as planned. Although most of the machinery purchased through the project was Romanian built and of poorer quality than imported machinery, the new equipment reduced grain losses and helped in efficient and timely preparation of land, better plant protection, and improved silage operations.
Although the projects achieved most of their input goals, often their success came at the expense of quality and the failure of other important project goals. The audit highlights several deficiencies that profoundly affected the performance of the projects.
Transfer of technology
First, government decision-making was highly centralized. Under the president's orders the design of the Orchards Project was modified so that many of the technological features of the original design never became binding and were not implemented.
For example, contrary to design specifications, most of the orchards were planted on marginal lands and steep slopes without irrigation. All spraying equipment and machines were concentrated in the state-owned Stations for Agricultural Mechanization (SMAs), which performed the mechanical works for the cooperatives. As a result cooperatives did not have ready access to spraying equipment to enable them to quickly deal with pests and disease--a major obstacle to proper orchard management. To save on foreign exchange, storage facilities were built without controlled atmosphere devices and separate temperature controls. And all cold storage units were built on state farms and fruit research stations, leaving cooperatives without adequate storage facilities. These deficiencies resulted in lower yields than expected, inferior fruit quality, and marketing problems. Much of the fruit had to be sold at low prices for processing.
Second, the government's shortage of foreign exchange led to a strict "procure locally" policy. As a result almost all procurement contracts were awarded to Romanian manufacturers and most loan proceeds were used to finance local expenditures, thereby generating "free" foreign exchange for the government. This practice particularly hurt the Moldova Credit Project, which had aimed at farm mechanization. In most cases, the domestic farm machinery purchased under the project was far inferior to imported equivalents. By the time of the audit in 1994, most units were no longer used.
Private sector development
Even though data from both the Livestock and Moldova projects indicated that loans to individual farmers had far exceeded projections, those receiving credits were not the private producers the Bank had intended to help--small, independent farmers. Instead the projects had provided loans to members of cooperatives working on individual plots. Hence, the private sector components of the Moldova Agricultural Credit and the Livestock projects never truly materialized.
The role of the World Bank
The Bank's role in supervising these projects was adversely affected by two factors: (1) Bank staff, trained in market economics, did not fully understand Romania's highly centralized procedures for allocating resources, making decisions, and managing projects; and (2) Bank requirements for information and detailed fieldchecks during supervision were perceived as interference and thus seriously curtailed. As a result Bank supervision did not detect at an early stage the deficiencies that resulted in the failure of the transfer of technology and the private sector components of the projects. (See Box 1.) Once the Bank realized the kind and magnitude of distortions being introduced into the procurement process, it insisted on a more straightforward approach to project financing and procurement, which precipitated Romania's decision to stop further Bank borrowing.
The shortcomings in Bank supervision highlight the limits of the Bank's influence in countries with centrally planned economies, particularly where decisionmaking is firmly concentrated in the hands of one individual.
The World Bank support to Romania
In the early 1980s Romania held a special place in the international arena as a socialist country with an independent foreign policy. The World Bank viewed Romania as an opportunity to influence the development policy of a socialist country and to provide a showcase for the rest of Eastern Europe. Moreover, Bank experience with lending to Romania had been positive: projects seemed to be implemented on time, at least in terms of outputs, and Bank loans were disbursed quickly. It is not surprising therefore that the Bank's investment program in Romania was one of the largest in the world, nine times the world average in loan amount per capita. And Bank supported agricultural investments per capita were almost three times larger than the average for countries of similar size, such as Malaysia, Mexico, Morocco, Portugal, and Turkey (see figure). This ambitious lending program contrasted with Romania's slowing economy and the need for lower growth and investment rates and better allocation of resources between consumption and investment. (See "The Role of the Bank" in this Precis.) Although the implementation of the three agricultural projects was not affected by the rapid pace of investments and Bank lending, the implementation of four concurrent irrigation projects was.
Outcome since 1989
The Revolution of 1989 overthrew the regime of Ceauscescu. Shortly afterwards, the new government dismantled the cooperative farms and restituted the land to more than 6 million former owners or their heirs. It turned state farms into commercial companies, distributing 30 percent of the shares to the original land owners and 70 percent to the government. It lifted price controls and discontinued subsidies, except for cereals and milk. The marketing and input supply system, however, did not change, remaining essentially in government hands.
The disruptions created by the new land tenure affected about half of the fruit groves supported by the Orchards Project and most of the dairy farms and pastures financed by the Livestock and Moldova projects. At the time of the audit, the agroindustries supported by the Moldova project were being privatized. And project-funded orchards, vineyards, and cold stores owned by the state farms were being turned into commercial companies. Much of the socialist support system that kept agricultural enterprises running no longer functioned. And the parts that did--such as the state-controlled marketing system--could no longer meet the needs of the new, mostly small, producers. The Romanian banks, following extremely cautious lending policies, refused to accept temporary land titles as collateral and were reluctant to lend to newly formed farmer associations, agroindustries, and private traders unless the enterprises could guarantee sale of their products. As a result severe shortage of working capital and credit prevailed, threatening the profitability of project-funded investments.
Orchards project
The orchards on state farms and research station farms were well maintained at the time of the audit, but a significant portion of those on former cooperative farms were abandoned or uprooted to restore croplands or pastures. Most farmers lacked the experience and resources necessary to successfully work their orchards. As a result, some farmers grouped together in associations, which were better able to maintain the orchards. At full development in 1992 the orchards were producing only about half the fruit estimated at appraisal.
Fourth livestock project
The change from large-scale dairy farms to family units made many of the project's technical innovations irrelevant. Most project investments were abandoned: buildings were destroyed or cannibalized and pastures neglected; milking and manure removal equipment was in disuse; the herds and production of beef and milk on state farms decreased. But the private producers took better care of the cattle they had acquired. As a result, at the time of the audit, private milk and beef production was increasing.
Moldova agricultural credit project
The agroindustries are still performing, most of the erosion control works are working, and the vineyards have generally been successful. Sustainability is likely, although much of the equipment bought under the project has outlived its usefulness. Of the three projects, this project alone is rated as satisfactory.
Issues and lessons
The policy reforms introduced after the Revolution will in the long run facilitate economic growth and stabilize the agricultural sector. In fact, agricultural production, which declined by about 6.4 percent during the 1989-92 period, is increasing again and contributed to 25 percent of the GDP in 1994 compared with 22 percent in 1993. But in the short term, the sweeping changes have produced some disruptions, adversely affecting project success and sustainability. The experience raises four transitional issues and provides some important lessons.
Land restitution
The 20 million parcels of land (maximum 10 hectares each) distributed to the former owners had two problems. First, the original owners were now old; most knew little about farming and had insufficient resources to invest in it. Only about half of the new land owners became active farmers and of those many concentrated on self-sufficiency. Second, the new farmers received little support to help them become established. As a result, some land owners formed farmers' associations and agricultural societies, which helped compensate for their inexperience. But the associations operated the same way as the former socialist cooperatives, with the same weaknesses. These factors largely explain the initial decline in agricultural production that followed land restitution.
The Romanian experience highlights the importance of providing support to new small farmers to compensate for their lack of experience and resources. Also, offering a choice between land and cash compensation might prove a more effective and less risky solution for land redistribution.
Marketing
Romania's experience illustrates the difficulty of modernizing the marketing systems for horticulture and dairy products and adapting them to a different farm structure. In spite of a legal framework favoring private initiative, private marketing channels have been slow to materialize. Those currently operating are weak and poorly organized. The country lacks experienced private fruit traders, cold stores, and refrigerated transportation. Traders and others in the marketing chain lack working capital and access to credit. The existing marketing infrastructure is still geared to serving large cooperatives and state farms instead of the small producers and farmers' associations that define much of the new farm structure.
Although demand for fresh milk is high, the official price of milk is set low. There is therefore no incentive for private traders to develop fresh milk collection centers and distribution markets. As a result milk is mostly consumed locally.
Establishing a legal framework, though necessary, is not sufficient for developing private marketing channels. Access to financial resources and specific training in management, handling, transportation, and marketing of perishable products is needed as well, complementing privatization of state trading and processing enterprises.
Privatization
Privatization has been slow due to government reluctance, a burdensome taxation system, inequitable allocation of responsibility for repayment of past debt, and lack of financial resources for investment and working capital. Although firms and individuals acquiring divested state companies or establishing new ones benefit from tax exemptions, former state-owned enterprises privatized under management-employee buy-out system are heavily taxed. Similarly, commercial associations formed to continue the operation of former cooperatives are required to assume all remaining debt. The often large debts encumber the new enterprises, jeopardizing their financial profitability.
Since full privatization of all agricultural enterprises and agroindustries is a stated government objective, privatization procedures should be simplified and taxation and debt allocation policies should be reviewed to encourage rapid privatization.
Rural finance and credit
Romania's massive land restitution and privatization program created considerable need for financial resources. But working capital is scarce and credit in short supply. The Romanian banks' strict lending criteria aggravated the problem.
Traditional agricultural and rural institutions and mechanisms are not suited to the sweeping economic and social changes affecting Romania's agricultural sector. High priority should be given to institutional reform with respect to the financial sector and the issuance of legal land titles.
1/ Performance Audit Report, "Orchards Project, Fourth Livestock Project, Moldova Agricultural Credit Project," Report No. 13830, December 1994. Performance audit reports are available to Bank executive directors and staff |