The Poland Agroindustries Export Development project, supported by Loan 3167-POL for US$100 million equivalent, was approved in FY90 and closed on December 31, 1994, as originally scheduled. A total of US$28.38 million was canceled. The Implementation Completion Report (ICR) was prepared by the Europe and Central Asia Regional Office. It includes borrower comments which parallel those in the ICR.
The loan was provided to support the government’s Economic Transformation Program (ETP). This policy package included “policies of fiscal and monetary constraint to reduce inflation, including cuts in subsidies, and a move towards positive real interest rates; decontrol of prices;...privatization of state enterprises; unification of official and parallel exchange rates...” (Staff Appraisal Report). The project did not have additional policy objectives. Rather, it aimed to (i) rehabilitate, modernize, and expand existing agroprocessing industries in order to expand agricultural exports to markets with convertible currencies; (ii) assist project lending institutions to operate in a market-oriented environment; (iii) promote private sector, export-oriented food processing; and (iv) provide a line of credit to finance imports of protein-rich animal feeds. The project provided US$75 million for onlending to agroprocessors through participating banks and US$25 million for animal feed imports.
The project did not achieve its objectives. At completion in 1995, forty percent of subborrowers faced serious financial difficulties, including 10 subborrowers (with loans worth US$12 million) which were in bankruptcy or liquidation proceedings, and 6 subborrowers (with loans worth a further US$12 million) which were being restructured as a result of agreements between the enterprises and their creditors. Although there were adverse exogenous developments (including the collapse of the Council of Mutual Economic Assistance, which provided for trade in convertible currencies, and a drought in 1991/92), these financial difficulties can largely be explained by dollar denominated borrowing, despite the ETP, which more than doubled the cost of foreign funds over the four years of the project, and the inability of some firms to adjust from a centrally directed to market oriented economy. In addition, the range of qualifying subprojects was widely expanded to include domestic processing and simple working capital in response to the modest demand for credit on project terms. The animal feed component was fully disbursed, but there are no data to show whether there was any resulting sustainable increase in meat exports. The economic rate of return was not recalculated in the ICR, but “partial data provided by project-supported enterprises indicate incremental exports of US$8.5 million per year” rather than the US$55 million estimated at appraisal.
The ICR and Operations Evaluation Department (OED) rate project sustainability as uncertain and institutional development as negligible. The ICR rates Bank performance as satisfactory, but OED rates it as unsatisfactory. Though the “mechanical” part of supervision was carried out satisfactorily (regular visits, and an average of 14 staff weeks per year), this did not seem to produce a good understanding of what was happening. The project was rated “1” (minor problems) throughout its life; even when subborrowers were going bankrupt, and the demand for subloans on project-mandated terms had vanished. The ICR rates project outcome as unsatisfactory. Of a total of 32 subloans worth US$46 million, 16 subloans worth of US$24 million were made to entities which went bankrupt, were liquidated, or had to go through financial restructuring during the life of the subloan. Accordingly, OED rates project outcome as highly unsatisfactory.
Lessons drawn in the ICR include that credit lines are inappropriate instruments in the absence of strong financial intermediaries and in environments of significant instability characterized by high inflation and interest rates. This is reinforced by the borrower’s comment on the high foreign exchange risk for producers for the domestic market.. See also “Korea: Second Agricultural Products Processing Project (Loan 1851),” Project Performance Audit Report, October 1991, and “Egypt: Agroindustries Projects I and II (Credit 0988 and Loan 2243),” Project Performance Audit Report, June 1994, where similar project designs and unfortunate project outcomes are reported.
There are also indications that the project had unrealistic expectations: Some borrowers were unable to adjust to a market economy.
The ICR provides a frank account of project experience. Analytically, however, it is unsatisfactory as it does not provide a complete explanation of what went wrong in the project. An