|1. Project Data:
|Product Market Development|
|Agro-Industry & Marketing, Agriculture|
|Robert C. Varley, OEDST|
|Anthony J. Blackwood|
|Gregory K. Ingram|
|2. Project Objectives, Financing, Costs, and Components:|
Project Objectives were to:-
- reduce distribution costs (i.e. packaging, transport, handling, storage and management of general consumer goods) and lower cost to consumers;
- add value to products by improved quality of services;
- enhance the competitiveness of Hungarian products in domestic and international markets;
- assist commercial banks by providing financing and training for new areas of investment;
- establish legal and regulatory framework for food quality, standards control and supervisory capacity of commodity exchanges.
Project Financing ($ million) Appraisal Actual (Latest Estimate)
IBRD 100.0 40.6
Co-financing institutions 2.5 2.1
Government of Hungary 1.0 0.0
Participating Banks (PBs) 100.0 1.7
Beneficiaries 51.0 43.9
Total 254.5 88.3
Components: Line of credit ($200 million), technical assistance ($3.5 million) and beneficiary investment ($51.0 million.)
|3. Achievement of Relevant Objectives:|
Some 641 loans, totaling $42.3 million and averaging $65,000 were made for working capital and investment in produce marketing, agro-processing, primary agriculture, storage, packaging, transport and distribution; 88% of loans were in the product marketing category;
- 97% of a random sample of about 5% of the sub loan portfolios were "moderately successful" or better;
- A commodities exchange, logistics promotion center and legislation on safety/ quality improvements have all been realized, although the causal link between the project and safety/quality standards is tenuous;
- Distribution has become far more efficient although this has primarily been a consequence of non-project factors.
|4. Significant Outcomes/Impacts:|
The project design helped lay the necessary foundations for key areas of institutional and regulatory work;
The ICR notes the indirect catalytic impact of the project, and its demonstration effect, which helped to move investment into new areas in logistics and other downstream activities.
|5. Significant Shortcomings (include non-compliance with safeguard features):|
The Bank designed a line-of-credit project, conceived as a vehicle for a valid TA component, which subsequently, when demand for project funds diminished, did not focus adequately on the original objectives of the project. The unexpectedly fast progress in financial sector reform/privatization, institutional reform and trade liberalization, supported by the Bank, made the project's main credit focus redundant.
Quality at entry was deficient. The project objectives were too broadly guaged, as the region has noted; the design did not incorporate contemporary Bank experience of similar operations; there was insufficient understanding of the banking sector's dynamism; apparently inadequate consultation with stakeholders (the impending rapid emergence of private banks might have been detected as might the lack of interest in the training component - which was not implemented); part of the training component (all of which was financed by a Dutch Government grant) overlapped with other Bank projects addressing systemic weaknesses in the banking system; and monitoring indicators were not established for the prime development objectives.
There is no convincing evidence that the main development objectives (of reducing distribution costs and increasing competitiveness) were attained, even partially, and even if they were attained, the impact of the project was marginal;
There were notable deficiencies in the credit component: according to a 1996 supervision mission, 80% of the total disbursed had gone to retail and wholesale trade for working capital and very limited credit had gone to improve marketing and distribution facilities in pursuit of project objectives- this was not followed up; PBs did not contribute their own funding for investments as anticipated (2% actual c.f. 39% estimated at appraisal); the small size of loan meant high overhead costs relative to the Bank's standard 3-6% margins on COF formula, since some 580, 90% of the 641 sub-loans, were for amounts less than $18,000; and the overall repayment performance (undefined in the ICR) was only 80%.
Bank supervision inputs were much less than planned and the skills mix of missions was inadequate;
|6. Ratings:||ICR||OED Review||Reason for Disagreement/Comments|
Project objectives not achieved, inadequate Bank response to project failings.
No evidence of impact on bank capacity and only partial attribution reasonable for other institutional changes.
Deficient quality at entry followed by inadequate supervision and weak sector dialogue.
Quality of ICR:
|7. Lessons of Broad Applicablity:|
An old lesson is confirmed - channeled credit, even at nominally competitive commercial interest rates, is a poor sectoral strategy for agro-industry when:- (a) alternative, lower priced lines of credit are available from bilateral-multilateral sources; (b) the Bank imposes cumbersome conditions and requirements on the PBs for small loans, which increases transaction costs to the point where the Bank's permitted 3-6% margin is inadequate; and (c) money is fungible and project funds do not induce incremental investment.
- Line-of-credit lending with an SLA mechanism is particularly inappropriate given the Bank's project management orientation - in this case each separate PB had it its own project manager (probably not full time) while the Central Bank wisely limited itself to general compliance with the SLA conditions rather than outcomes;
- Credit line operations with a sovereign guarantee to address real sector issues and institutional goals are not suitable for countries with well developed capital markets and access to international lenders.
|8. Audit Recommended? Yes|
Why? It appears there was an absence of sector dialogue during supervision/implementation. The Bank was supposed to be providing funds to commercial banks on a demand basis. The PBs found World Bank loans had high management costs for the small loan size, and the cost of Bank funds was higher than alternative bilateral and multilateral sources, which should have been known at appraisal. Hence the amount loaned was only 30% of that planned at appraisal. The question to be answered is why the project had to continue to completion when this was evident well before the date of planned mid-term review.
|9. Comments on Quality of ICR:|
The ICR provides a comprehensive basis for downgrading the ratings, but has some significant shortcomings. Unfortunately it presents design deficiencies as lessons learned. Furthermore, the reported portfolio performance of the sub-loans is inconsistent and incomplete. The main text could not be reconciled with the statistical annexe.