world bank document€¦ · cumulative 3.7 11.6 19.9 27,0 33.0 39.0 45.0 48.0 rate of return:...

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The World Bank

FOX1 OMFCIAL USE ONLY

ReputNo. 6143-EC

STAFF APPRAISAL REPORT

ECUADOR

_IC AGRICULTURAL CREDIT W PROJECT

August 15, 1986

Projects DepartmentLatin America and the Caribbean Regional Office

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CURRENCY EQUIVALE.NTS(July 1986)

US$1 = 110.0 Sucres (SI )S/ 1 - US$0.009SI 1 million - US$9,091

In August 1986, the Government began to float the exchange rate.

WEIGHTS AND MEASURES

I hectare (ha) - 10,000 m2 - 2.47 acresI kilometer (km) - 1,000 m- .62 miles1 kilogram (kg) - 2.2 pounds1 metric ton (mt) - 1,000 kg - 2,200 pounds1 quintal (q) - 100 pounds - 45.4 kg1 liter (1) - 0.26 gallons

GLOSSARY OF ACRONYMS

BCE - B.nco Central del Ecuador(Central Bank of Ecuador)

BEDE - Banco de Desarrollo del Ecuador(Ecuadorian Development Bank)

BNF - Banco Nacional de Fomento(National Development Bank)

CFN - Corporacion Financiera Nacional(National Finance Corporation)

DPAs - Direcciones Provinciales Agropecuarias(Provincial Directorate)

ENAC Empresa Nacional de Almacenamiento y Comercializacion(National Enterprise for Storage and Marketing)

ENPROVIT - Empresa Nacional de Productos Vitales(National Enterprise for Essential Products)

IERAC - Instituto Ecuatoriano de Reforma Agraria yColonizacion

(National Institute of Agrarian Reform andColonization)

INEC - Instituto Nacional de Estadisticas y Censos(National Institute of Statistics)

INIAP - Instituto Nacional de Investigaciones Agropecuarias(National Agricultural Research Institute)

MAG - Ministerio de Agricultura y Ganaderia(M!nistry of Agricultu--e and Livestock)

PB - Private Banks or Financial CompaniesSEDRI - Secretaria de Desarrollo Rural Intcgral

(Secretariat for Integrated Rural Development)

GOVERNMENT OF ECUADOR

FISCAL YEAR

January - December

FOR OMCIAL USE ONLY

ECUADOR

AGRICULTURAL CREDIT II PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

I. LOAN AND PROJECT SUMMARY ...... ................................ 1

II. THE AGRICULTURAL SECTOR ... * .................................. 3

Agriculture in the Economy * ................................... 3Agricultural Policy ........... ..... ......... ............... ... 3Public Institutions in the Sector ............................. 4The Financial System in Ecuador ........................... 4The National Develop'uent Bank (BNF) ........................... 5Past Experience with Bank Landing ............................. 5

III. THE PROJECT ................................................... 6

Origin and Rationale for Bank Involvement ..... ................ 6Project Objectives and Description ....... ,...........*******.. 7Project Exec,ition .................... ... .*................... 8Lending Terms and Conditions ........ ............... ..... 8Utilization of Loans to BNF ............. 9BNF's Future Financial Performance 10Project Costs and Financing ............................ ....... 10Procurement ... * 10Disbursements .. . 11Accounting and Audits ... 11Reporting ... 12Financial and Economic Justification . . . 12Project Risks .. ...... 12

IV. AGREEMENTS REACHED AND RECOMMENDATIONS ..................... 13

This report is based on findings of an appraisal mission which visitedEcuador from October 15 - November 1, 1985. The mission comprised Messrs.J. E. Fernandez, C. A. Plaza, and A. Guzman (Bank).

This document has a restricted distribution and may be used by rcipients only in the performanceof their official duties. Its contents may not otherwise be disclosd without Wotld Bank authorization.

TABLE OF CONTENTS (CONTINUED)

Pagie No.

ANNEXES

1. The National Development Bank (BNF) and Agricultural Credit .... 14Tab';e 1 - iNF Financial Performance Indicators e...,9e-ee 19Table 2 - BNF Income and Expenses e 20Table 3 - BNF Fow of Funds *...0.. 0-e...e-.o.....,, 21Table 4 - BNF Balance Sheet * 22Table 5 - BNF Income and Expense Forecast e...e.,..e.e.e 23Table 6 - BNF Flow of Funds Forecast *...e.-..-.o..,.. 24Table 7 - BNF Balance Sheet Forecast ... ee-.e..e.-..- 25Table 8 - BNF Financing Plan (SI Billions) .............. 26Table 9 - BNF Financing Plan (%) *.oo...eee...e.oe...ee- 26Chart 1 - BNF Organization Chart e.,.....,o,...e...e..e 27

2* Resource Mobilization ............................. 28Table I - Saving Mobilization Cost Table ....... .. 0..... 31

3. Institutional Strengthening ..... * .. *.*... 32Table 1 - Institutional Strengthening Cost Table e9ee.ese-*e 38

4. Illustrative Investment Plans,Financial and Economic Justification .,,**...-...*,........** 39

Table 1 - Model 10 hai Sierra, Farm Financial Analysis ...... 41Table 2 - Model 40 ha Dairy Farm, Sierra,

Farm Financial Analysis ....... e........e,e.... 42Table 3 - Mod3l 100 ha Crop-Livestock Farm, Sierra,

Farm Financial Analysis e.....ee-..-.,....e,..ee 43Table 4 - 20 ha Crop Farm, Coast, Farm Financial Analysis . 44Table 5 - 200 ha Crop-Livestock Farm, Coast Region,

Farm Financial Analysis ...,....,,oo,e.....,,.o 45Table 6 - 50 ha Crop-Livestock Farm, Amazon Region,

Farm Financial Analysis ..................... 46

5. Subsidiary Loan Agreement *. oe....... .... ******....**. 47

6. Project Costs, Financing, Disbursements ..... e..e....,...... 48Table I - Project Cost Summary ee....oo.o.o.oe....... 48Table 2 - Project Financing Plan o...e,ee.eoc....eee.oo.e 49Table 3 - Disbursements e*.....ee.e.o.eeeo.e.oooooos 50Table 4 - Estimated Schedule of Disbursements .............. 51

7. List of Selected Documents and Data Availablein the Project File ......... ,...o,,.,e.o .o040e06040 52

MAP: IBRD 19508

ECUADOR


I. LOAN AND PROJECT SUhMARY

Borrower: The Republic of Ecuador.

Beneficiaries: National Development Bank (BNF) and participatingprivate banks (PB). The ultimate beneficiaries would beabout 5,000 crop/livestock farmers receiving projectsubloans.

Amount: US$48 million.

Terms: Repayment in 17 years, including 4 years of grace, atthe standard variable interest rate.

Relending Terms: The Borrower, through tte Central Bank of Ecuador (BCE)would make available to BNF, a publicly ownedagricultural creeit bank, and private banks theequivalent in sucres of the proceeds of the loan. BNFand private banks would relend to project sub-borrowersat market rates of interest with repayment terms cf upto 12 years, including a grace period of up to 4 years.BNF would be permitted to earn an initial spread of 8%p.a. and PB a spread of 5% p.a., over BCE's flexibleonlending rate. The revenue from the difference betweenthe onlending rate and the Bank's lending rate would beused by BCE to cover the foreign exchange risk on theBank loan; however, any shortfall would be made up bythe Government, which would assume the foreign exchangerisk. BNF, through its existing agricultural creditinfrastructure, would facilitate the participation ofcommercial private banks.

Project The project's main objectives would be to: (a) expandObiectives: production especially of exportable products aad

increase farmers' profitability through on-farminvestmepis; (b) strengthen BNF's operating efficiencyand enhance its domestic resource mobilization capacity;and (c) stimulate private bank participation inagricultural lending.

Project The project would include: (a) medium- to long-termDescription: lending to finance on-farm investments for livestock and

crop production and marketing infrastructure at the farmlevel; and (b) a program to strengthen BNF's and PB'soperational efficiency in relation to their agriculturallending and BNF's domestic resource mobilization.

Proect It ts expected that the project would cause an increaseBenefits: in production of a range of products leading to signi-

fics-t foreign exchange earnings/savings. There wouldalso e intangible beneflts resulting from instltutS.._31stren%thening, and increased farm employment estliatedat 1.7 million incremental worker/days, Including incomeincrease for 5,000 farm families of which about 40Xwould be small-scale farmers.

Project The main risk is the sustainability of the macroeconomicRisks: adjustment program through which the Government is

reactivating agriculture. The WaIinIstration has todate ¶oved successfully forward with its reform whichare supported and monltored by both the Bank and theFund,

EstimatedCosts:1f

Local Foreign Total(US$ Million)

A. Credit6n-farm Investments2/ 38.4 36.8 75.2Incremental Short-term 5.5 0.6 6.1

B. Institutional StrengtheningVehicles & Equipment 001 8.4 8*5Furniture 0.3 0.2 0.5Local Traliung 0.6 0.3 0.9Forelgn Training - 0.2 0.2

C, Base Cost 44.9 46.5 91.4Physical Contingencies 0.0 0.5 0.5Price Contingencies 0.1 1.0 1.1

Total Project Cost3/ 45.0 48.0 93.0

Financing Plan:Local Foreign Total

US$ Nillion -IBRD 0 48.0 48.0Particlpating banks (BNF, PB) 31.0 31.0Farmers 14.0 14.0

Total 45.0 48.0 93.0

EstimatedDisbursements:Bank PY: 1987 1988 1989 1990 1991 1992 1993 1994

- - - - ~- -- (-US$ kilillon) - --Annual 3.7 7.9 8.3 7.1 6.0 6.0 6.0 3.0Cumulative 3.7 11.6 19.9 27,0 33.0 39.0 45.0 48.0

Rate of Return: Financial returns range from 30S to 37XEstimated economic rates of return range from 33% to 38%

/ Rounded. Excludes taxes because BNF is seeking exemption from duties./ Includes marketing Infrastr.cture and related services at the farm level.

PI Prices as of July 11, 1986.

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II. THE AGRICULTURlAL SECTOR

Agriculture in the Economy

2.01 Ecuador covers about 28.3 million ha, of which about 4.0 million haare used for agriculture. There is potential, especially on the coast, forincreasing both the area under production and yields. The nunber of farmswas estimated at 519,000 in the 1975 agricultural census, 67% were 1-5 ha,19Z were 6-20 ha, 12% were 21-99 ha, and 2% were 100 ha or more. Landdistribution 1s highly skewed: 2% of holdings occupy 482 of the area while702 occupy 72 of the land.

2.02 In 1970, agriculture accounted for about 33% of GDP, 90% of exportearnings, and employed 652 of the economically ae.tive population. During thenext decade, Influenced by the discovery and export of petroleum, therelative importance of agriculture declined; and by 1983 the sector,including fisheries, accounted for only 12% of GDP, 22% of export earningsand 5OZ of the, economically active popa1-rti&r. In genEral, avefage yieldshave not increased for major crops, remaining at a level of 302 to 752 belowthose obtained by farmers using improved technology. Except for livestockproduction, forestry, and the shrimp industry, agriculcure has grown slowly.The growth rate of real. value added for the major export crops-bananas,coffee, and cocoa-has been about 1.72 p.a. from 1970 to the early 1980g.The other traditional crops which constitute Ecuador's food production havegrown at only 0.6% p.a., well below the rate of population growth of 2.8Z.As a consequence, food imports have been rising at a compounded annual rateof 192; food now constitutes 11% of total imports. Wheat is the major foodimport reaching about 330,000 tons in 1983/84. While the comparativeadvantage of Ecuador's traditional exports--coffee, cocoa, andbananas-remains strong, domestic resource cost calculations indicate thatEcuador also has a comparative advantage in rice, hard corn, cotton andsoybeans, products which are currently imported or only occasionally exportedin years of surplus. An attractive exchange rate and policies that encourageagriculture investment could stimulate production and eventually lead tosustained exports of these non-traditional export crops.

Agricultural Policy

2.03 In the past, agricultural development and production wereconstrained by inadequate public support and by low investment levels inducedby price, exchange rate and interest policies which no longer stimulatedagriculture. The administration that took office in August 1984 formulated anew development program designed to: (a) raise farm prices;(b) progressively eliminate consumer and producer subsidies; (c) achieverealistic exchange rates; (d) make interest rates adjustable for medium- andlong-term loans, positive in real terms and unified for the sector;(e) emphasize efficient import substitution and export expansion;(f) strengthen agricultural support services; (g reduce Governmentintervention in the marketing system; and (h) ir)rove terms of trade foragriculture. Good progress has been made on each of these and Bank ismonitoring further action in the context of sector lending. For instance, InAugust 1986, the Monetary Board decided to float the exchange rate and someinterest rates. Earlier this year, the Government helped initiate acommodity exchange mar'-t for principal agricultural products.

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Public Institutions in the Sector

2.04 The Ministry of Agriculture and Livestock (MAG) is responsible forpolicy on agricultural research, production and marketing of agriculturalproducts. It provides extension services to farmers through its ProvincialDirectorates (DPAs) and 14 commodity-spbcialized extension organizations tohelp mainly commercial farmers and provide back-up support to the DPAs.However, the DPAs are ineffective because coordination between the commoditvgroups is poor, extensionists' salaries are low and training is deficient.Most other public sector support to agriculture is carried out by specializedautonomous agencies of which the most important are INERHI (the IrrigationInstitute), INIAP (the National Agricultural Research Institute), IERAC(Agricultural Land Titling), ENAC (National Enterprise for Storage andMarketing), ENPROVIT (National Enterprise for Essential Products), and BNF.

2 05 Agricultural institutions are inadequately organized, managed andstaffed; while there are large numbers of agricultural administrative andtechnical staff, many lack the experience, training, equipment, facilitiesand incentives to serve adequately. However, the current Administration hasbegun to reorganize and strengthen MAG. As an initial step, an AgriculturalPolicy Analysis Group has been created and is being strengthened under theBank's kriculture Sector Loan to Ecuador (Loan 2626-EC of January 15,1986). Among its objectives is the preparation of a study to reorganize theMinistry in order to provide more efficient services. Also, the Governmentis aware of the urgent need to upgrade and improve the quality of technicalassistance to farmers. As a result, MAG completed a feasibility study in1985 for a National Technical Assistance Program in which the organizationsresponsible for these activities would be integrated and work toward commonobjectives. The IDB is expected to give financial assistance for theimplementation of this program.

The Financial Sy'tem in Ecuador

2.06 The financial system consists of the Central Bank (BCE), theGovernment-owned BNF and 32 private banks, 13 finance corporations, 11savings and loan associations, 26 insurance companies and 2 securitiesmarkets. The five largest private banks held about 50% of the outstandingcredit in 1985. Most of the agricultural credit of private banks is orientedto short-term commercial credit, and for customers largely concentrated inurban areas, financing involves mainly short-term loans for agriculturalmarketing: transport, packaging, distribution and selling operations for thedomestic or export markets. The current administration's economic policieswhich make agriculture investment more attractive, together with theresources of the proposed loan, should expand the role of the PB inagriculture to providing long term investment credit as well.

2.07 The policy-making agency iii Ecuador's financial system is theMonetary Board, which sets policies related to interest rates, exchangerate, credit, legal cash reserves, and import deposits. The Central Bankimplements and the Superintendency of Banks monitors the measures enacted bythe Monetary Board and ensures the control and audit of the Banking system.

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The National Development Bank (BNF)

2.08 BNF is, by far, the main source (88%) of agricultural credit.4/Its institutional capability was improved with the assistance of UNDP/PAO/IDBconsultants during 1980-85.1/ Its annual lending increased 4% in real termsduring 1975-85, and the number of loans increased from over 56,000 in 1975 toover 67,000 in 1984; most of them (about 75%) were granted to the crop/livestock sector. During this period, short-term lending (up to two years)averaged 60%, medium-term (two to seven years) averaged 30%, and long-term(over seven years) averaged 10%. As of December 31, 1985 its outstandingloan portfolio was equivalent to about US$507 mIllion6/ and accounted forabout 76% of ics total assets. Amounts in arrears were equivalent to USS50million or 9.8% of its total loan portfolio, and loans refinanced due tocircumstances beyond the control of its borrowers were equivalent to US$61million, or about 12% of its total loan portfolio. Around 40% of the totalloan portfolio was made up of loans granted to small-scale producers.

2.09 The financial performance of BNF during 1982-85 was mixed, andearnings were insufficient to compensate for losses due to inflation;therefore, extensive borrowings and government equity contributions werenecessary to cope with incremental demand for credit in real terms. Itsratio of operating cost to average loan portfolio grew from 7.7% in 1982 to9.9% in 1985. However, considering that BNF is a multi-purpose bank with anationwide branch system and a multitude of small loans, its operating costis reasonable and compares favorably with similar banks in other countries.BNF performance is expected to improve as a result of Government's new policyof maintaining positive real adjustable interest rates. Inspite of fixed lowinterest rates on loars granted prior to 1986, BNF's average return on itsloan portfolio is expected to increase from 13% in 1984 to over 22% in 1987and to 25% by 1990. In addition, BNF is expected to finance (during projectexecution) on average about 40% of its annua'l lending with internallygenerated funds.

Past Experience with Bank Lending

2.10 The Bank has carried out extensive sector work in Ecuador. Areport-Agriculture: An Assessment and Direction for Development--was issuedin August 1983 and recommendations in it were endorsed by the newadministration, which quickly began to take action supported by the report.Of the 12 loans and credits totaling US$199.2 made by the Bank for thesector, four are under implementation: (a) Tungurahua Rural Development(Loan 1644-EC) for US$18 million; (b) Puerto Ila-Chone Rural Development(Loan 1991-EC) for US$16.9 million; (c) Esmeraldas Rural Development (Loan2044-EC) for USS16.1 million; and (d) Agricultural Sector Loan (Loan 2626-EC)for US$100 million signed in January 1986. The three rural development

4/ Agricultural credit defined as loans for six or more months, a periodsuitable for agricultural production.

5/ Annex 1 contains a detailed assessment of BNF's organization andperformance.

6t SI 95.75 = US$1.00 (exchange rate as of December 31, 1985).

projects are progressing 8lowly due to complexity of project design,inadequate institutional capacity and lack of counterpart funding, withdisbursements lagging behind appraisal estimates. To accelerate projectworks, a restructuring of the Tungurahua Project became effective in early1985, which effectively resol' A carlier execution problems. The PuertoIla-Chone and Esmeraldas Projetes were reprogrammed in the same year toexpedite their lmplementation, but progress remained slow (because of achange in the institution that ove,sees rural development) until mid-1986when the bidding process for feeder road components finally took place.

2,11 Performance of the past agricultural credit projects (Loan 173-ECand Credit 222-EC) were assessed in Project Performance Audit Reports datedOctober 21, 1975 and December 28, 1979. The reports found them well managed,improvlng productivity and output on participating ranches. However, therewere deficiencies in the accounts and internal controls of BNF, the principalparticipating bank. The most recent livestock credit project (Loan 1459-EC)was closed in September 1985. Its performance was less than satisfactory andit had to be extended for two years. The main causes for delays were:(a) inadequate counterpart funding; (b) declining performance of acoordinating unit; and (c) availability of competing, lower interest ratefunds which caused delays In disbursements. In the design of the proposedloan, these problems have been addressed: (i) a savings mobilization programwill help BRF generate lts own funds; (ii) considerable other institutionalstrengthening of BNT is also planned; and (iii) onlending terms of theproposed loan will be competitive with other sources of credit.

III. THE PROJECT

Origin and Rationale for Bank Involvement

3.01 The proposed project was prepared by BNF, assisted by FAO/UNDPconsultants under a Technical Assistance Program to BNF (PNUD/FAO/ECU80/001),and Bank missions that visited Ecuador between February 1984 and June 1985.The project was appraised in November 1985 and negotiations took place InWashington, D.C., from July 7, 1986 to July 11, 1986. Mr. Marcos Espinel ledthe Ecuadorian delegation.

3.02 As a result of the present Administration's sector adjustmentprogram, supported by the agricultural sector loan, the economic efficiencyand piofitability of the sector is Improving. Consequently, there is anintensification of the demand for investments in the areas of production,marketing and exports of agricultural goods. The recent application to thesector of a system of adjustable interest rates for long-cerm loans and thesupport by the project of a savings mobilization program to capture localsavings for 3ubsequent Investments in the sector are aspects which wouldenhance the incentives for financial entities to initiate or Intensifylending for development credit in agriculture, However, the recent declinein oil prices has affected significantly Ecuador's financial capacity to takefull advantage of these opportunities. The proposed loan would help toremedy the country's current lack of resources to meet the rising demand foragricultural investments.

kroject Objectives and Desrito

3.03 The objectives would be to: (a) expand production, especially ofexportable products, and increase farmers' profitability through on-farminvestments; (b) improve PB's and BNF's operating efficiency regardingagrlcultural lending and enhance BNF's domestic resource mobilizationcapacity; and (c) stimulate the participation of PB In agricultural lending.

3.04 To achieve these objectives, the project would:

(a) establish a program for medium- (2-7 years) and long-term (8-12 years)loans to finance on-farm investments for crop and livestock production,and marketing Infrastructure at the farm level. Although nopre-allocation of loan funds will be made, about 752 of the funds areexpected to be lent by BNF and 252 by PB. The main items of investmentwould be Irrigation systems, cattle acquisition, fences, veterinaryequipment, pasture development, fruit trees, equipment for poultryproduction, farm machinery, and storage and packaging installations.Nationwide, about 5SO00 families in an area of about 100,000 ha wouldbenefit. About 40% of the beneficiaries would be small-scalefarmers,7/ with an average of 10 ha In the Sierra, 20 ha In the Coast,and 50 ha in the Oriente.

(b) provide institutional strengthening to BNF to complement the UNDP/FAOand IDB assistance provided to BNF In the past five years (Annexes 2and 3). The program would aim specifically at strengthening thecapability of the Departments of Credit and Finance. It would alsotrain staff, both locally and abroad, In the areas of: savingsmobilization, credit policy promotion, prograimmiAg and planning,accounting, auditing, reporting, project formulation and subloansappraisal, approval and supervision. Data collection would be improvedby training personnel who would focus on the impact of credit,production and productivity, and on technological change. To increaserural resource mobilization and lending, 8 new branch offices would beopened and 42 existing ones would recelve additional equipment.Overall, credit operations would be improved with the procurement of300 vehicles for loan generation and supervision, and 15 mobile bankingunits to serve farmers in areas difficult to reach, and offlceequipment.

3.05 Domestic resources mobilization would be focused on BNF which wouldexplore savings mechanisms new to the rural areas such as floating rates,certificate of deposits, and the provision of broader banking services tocustomers to attract savings. Also, to further induce PB to lend foragricultural investmenit, BNF would analyze the possibility of establishing asecond tier rediscount facility at BN! for PB lending to farmers. To definethese actions, BNF would, no later than March 1, 1987, hire an expert withqualifications and terms of employment satisfactory to the Bank to: (a)advise on the saving mobilization plan; and (b) carry out the study on therediscount facility (Annex 2). The estimated consulting cost is USS70,000,b sed on the expert's fee, international travel and local allowances [para4.01(a)J, The Government would review with the Bank semi-annuallly the

7/ Defined as farmers with assets not exceeding the equivalent of US$24,000including the value of land but excluding housing and agriculturalinventories.

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adequacy of the resource mobilization [para. 4.01(b)]. Finally, because PB

generally do not possess an adequate infrastructure for processingagricultural credit, during the initial period of the proposed project BNF

would undertake the evaluation, approval and supervision of subloans made by

the PB for which it would receive a 2% (including those services of para

3.17) fee paid by the PB through BCE at the time of rediscounting. Duringthis period, BNF would help train PB staff in agriculture subloans evaluation

and supervision. After 18 months, a Jo.nt Borrower-Bank review would take

place to determine whether these functions could be fully assumed by PB

(para. 4.01(c)1.

Project Execution

3.06 BNF would implement the project over a seven-year period using its

normal procedures and would serve as a focal point of communication and

coordination between the Government, PB and Bank. Its 74 branch offices and

420 supervisors under its Agricultural Credit Department (ACD) would preparefarm development plans for subloan applications and would provide limited

technical assistance to beneficiaries. Its Financial Department (FD) would:(a) be the liaison between the Bank and BNF maintaining separate accounts toreflect the operation and financial situation of the loan, its credit

operations, consultant services and training costs; and (b) prepare andsubmit annual reports to the management and Bank. BNF's Technical Department

(TD) would be responsible for programing and planning and, in coordinationwith MAG, would prepare annual plans for long- and short-term creditrequirements under the loan to be submitted to BNF13 Board of Directors and

subsequently to the Bank.

Lending Terms and Conditions

3.07 The Borrower would be the Government of Ecuador, which would assume

the foreign exchange risk. The Central Bank, as the financial agent of the

Botrower, would on-lend the proceeds of the loan to BNF and PB in local

currency. BNF and PB would on-lend these resources to project beneficiariesat market interest rates. The Central Bank would charge flexible onlending

rates which would initially permit PB to earn a spread of 5% p.a, and BNF a

spread of 8% p.a. In addition, BCE's onlending rate to PB would provide for

an additional 2% fee which PB would pay to BNF for its subloan evaluation andsupervision services. At the recent market rate of 21%, therefore, BCE's

onlending rates would be around 13% to BNF and 14% to PB. The difference

between this onlending rate and the Bank's rate would be used by BCE to cover

part of the exchange rate risk on the Bank loan (this difference would be

4-5% now). BNF's spread 2eflects its transaction costs as a bank with a

nationwide branch system and a large clientele of small- and medium-scalefarmers. The PB spread represents an attractive margit in the current market

(where resources mobilized through other mechanisms are on-lent with a four

point spread) and reflects the lower-cost urban branch system of PB and

clientele who will tend to be larger farmers. Any PB in Ecuador in goodfinancial standing (confirmed through criteria, such as debt:equity ratios,

satisfactory to BCE and the Bank) could participate. Execution of

Participation and Subsidiary Loan Agreements between BCE and PB, satisfactoryto the Bank, would be a condition of disbursement against payments made by

the PB and execution of a contractual arrangements between the Borrower and

BCE and of a Participation Agreement between BCE and BNF, satisfactory to the

Bank, would be conditions of loan effectiveness [paras. 4.03(a) and 4.02raantAurv&1 _

3.08 Subloans would be appraised on the basis of: farm investment plansand farm budgets and financial cash flows. BNF would apply the followingcrtterla for approval of subloans: an internal rate of return (IRR) on thecash flow of one point above the opportunity cost of capital for Ecuadorcurrently at 122 and satisfactory technical and financial feasibility.Small-scale farmers without land titles could apply for medium-term credit(up to seven years) on the security of the certificate of possession of theirplots. Fleld officers would prepare the farm investment plans for subloansno greater than SI 22 million (US$200,000). Plans for larger subloans wouldbe prepared by specialized local consultant firms. No individual farmerwould receive accumulated loans in excess of US$400,000; for farmersassociations and cooperatlves, this limit would be US$600,000. Sub-loansabove US$300,000 for individual farmers and US$500,000 for farmersassociations and cooperatives would require Bank approval [para, 4.01(d)].

3.09 Repayment terms of subloans would be up to 12 years with a graceperiod of up to 4 years. Small-scale farmers would finance at least lOX,includlig family labur, and medium- to large-scale farmers 20% of the valueof the investment plan. Short-term credit and counts )art funds required tocomplement investment plans would be provided by BNF and PB from theirsources of funds.

3.10 In August 1986, the Monetary Board decided to cease fixing savingsand lending interest rates, (except for loans financed with Central Bankcredit), so rates should now be market-determined. Consistent with otherBank loans to Ecuador, lending rates for subloans would be expected to bepositive in real terms (as measured by criteria agreed with the Bank),unified and adjustable. Unified rates mean that lending rates would be thesame for all loans except as justified by transaction costs. Adjustablerates would permit the recuperation of the real value of loans and avoidfinancial losses to lending institutions in the sector thus inducingparticipating banks to make long-term loans. Inflation during 1985 was 22%,but in the last six months of 1985, inflation rates declined to annualizedrates of below 15%. In early 1986, following a devaluation and seasonalpressures, price increases fluctuated around a 201 annual rate. Lendingrates in the sector averaged 21% as of July 1986 plus 2% commission forlong-term loans. The Government would assure that adequate lending terms forthe subloans are maintained and would review with the Bank the adequacy ofthese terms at least semi-annually beginning April 1, 1987 [para. 4.01(e)].If, during any of these reviews, the lending rates and spreads tointermediaries were determined to be inadequate, and if the Government andthe Bank were unable to agree on remedies for this, the Bank would have theright to withhold financing of further subloan commitments under the proposedloan [para. 4.03(b)].

Utilization of Loans to BNF

3.11 BNF's lending forecast for the project period (Annex 1, Table 6)shows an average annual incremental lending of 22 in real terms, which islower than the historical trend because of devalued future collections ofpast portfolio and constraints of future resource availability in theEcuadorian financial system. The proposed loan is based on BNP's financialgap for incremental medium- and long-term credit and is expected tocontribute around 2% of BNF's total annual lending. An IDB loan of US$120million, formalized in January 1986 and expected to be disbursed in fouryears, would support short-, medium- and long-term needs of BNF and would

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finance about 4% of BNF's annual long-term lending. Consequently, the twoloans 'iould not saturate BNF's capacity to make subloans. Furthermore,onlending arrangements to BNF for 1DB and proposed Bank loans would be suchthat both have the same cosc to BNF and ultimate beneficiaries. During theloan execution period, BNF would finance about 40X of its lending from itsown resources. Financing from deposits, as a result of the proposedmobilization plan, Is projecced to grow from 10% In 1986 to 50% in 1993(Annex 1, Tables 8 and 9).

BNFs Future Financial Performance

3.12 BNF's financial results would be monitored against threeperformance indicators: (a) the ratio of loan amounts in arrears to totalamounts falling due as of Decem'Der 31, would be maintained below 25%; (b) theoperating costs (personnel and administrative costs) would be maintainedbelow 10% of average loan portfolio; and (c) the debt to equity ratio wouldnot Exceed 3:1.

Project Costs and Financing

3.13 The total project cost would be about US$93 million, including aforeign exchange component of about US$48 million, or 52% of total projectscosts. There are no taxes on imports or sales of agricultural inputs and BNFis pursuing a waiver of any duties it might be liable for in the Importationof vehicles and equipment to be procured under the project. The base cost,calculated at November 1985 prices and updated to July 1986, Is estimated atUS$91.4 million, price and physical contingencies, estimated only on vehiclesand equipment, are US$1.6 million or 1.7% of base costs. The physicalcontingency allowance is 52. Price contingencies calculated In US dollarterms following Bank guidelines are 7.22 In 1986, 6.8% in 1987 and 1988, 7.0%in 1989, 7.1% in 1990, and 4.02 in 1991. The proposed Bank loan wouldfinance the full foreign exchange component (US$48 million). tocal costswould be provided by BNF, PB and ultimate beneficiaries at US$23.0 million,US$8.0 mlllion, and US$14.0 million, respectively.

Procurement

3.14 Aside from the vehicles and equipment for BNF, the range of goodsto be financed under the project is varled and would be procured by more than5,000 project sub-borrowers over a seven-year period. Bulk procurementthrough international competitive bidding (ICB), therefore, would not beappropriate. Sub-borrowers would purchase items of their choice throughlocal commercial channels, who represent a broad spectrum of internationaland domestic suppliers. Najor suppliers of agricultural equipment andproduction inputs from Bank member countries are represented in Ecuador, andafter-sales service is provided. The consultant for the savings mobilizationcomponent would be selected in accordance with Bank guidelines. The Borrowerwould provide assurances that any purchase of equipment and vehicles for BNFworth over US$100,000 would be procured under ICB following Bank guidelines.Smaller purchases would be procured on the basis of local proceduressatisfactory to the Bank provided, however, those contracts so procured shallnot exceed in aggregate US$1.8 million [para. 4.01(f)J.

Table 3.1 Procurement Arrangements a/(in USS Million)

PROCUREM4ENT ICB LCB OTHER b/ TOTALOn-farm Investments - 75.2 75.2

(39.2) (39.2)Vehicles and Equipment 6.7 2.0 0.9 9.6

(6.7) (1.6) (8.3)Furniture - 0.2 0.4 0.6Local Training - 1.1 1.1

(0.2) (0.2)Foreign Training - - 0.3 0.3and Consultants (0.3) (0.3)

Total 6.7 2.2 77.9 86.8(6.7) (1.6) (39.7) (48.0)

a! Values in parentheses reflect amounts estimated to be financed by theBank.

b/ Force Account or direct contracting for acquisition under US$30,000.

Disbursements

3.15 Disbursements over 7 years, the standard profile, would be madeagainst: (a) 651 of BNF's subloans disbursed and for PB subloans 75X thefirst year, 652 the second year and 602 thereafter; (b) 100% of foreignexpenditures for directly imported vehicles and equipment, and 802 ofexpenditures for goods procured locally; (c) 100% of consultants services andforeign training; and (d) 20% of local training agreed with the Bank. Thetransitional arrangements for PB were necessary because they are experiencingsevere liquidity problems at this time owing to the economic effects of thedrop in oil prices. Disbursements against expenditures on subloans orcontracts valued at under US$50,000 equivalent would be made under Statementof Expenditures procedures. Relevant documentation in support of suchexpenditures would not be submitted to the Bank; it would be retained by theBCE and made available to Bank missions for review. All other disbursementrequests would be fully documented. In order to further facilitatedisbursements, a Special Account would be established at the Central Bankwith an initial deposit from loan resources of US$3.5 million, the equivalentof four months average loan disbursements requirements.

Accounting and Audits

3.16 BNF and participating banks would maintain separate accounts persubloan, project accounting records and accounts, and statements ofexpenditures (SOE) to reflect the operations, resources and expendituresunder the project, including the Special Account. The financial statementsof BNF and PB as well as the accounts and SOE referred to previously would beaudited in accordance with appropriate auditing principles consistentlyapplied by external independent auditors acceptable to the Bank and withterms of reference approved by the Bank. Not later than four months afterthe end of each fiscal year (six months for BNF, which has many ruralbranches), a certified copy of the audit reports would be submitted to theBank in such detail and scope as requested by the Bank |para. 4.01(g)1.

- 12 -

Reporting

3.17 Participating PB would submit co BNF semi-annually a rcoort whichwould include: (a) amounts committed; (b) number and type of loazkc granted;(c) disbursements made; (d) subloan repayments and repayments to the CentralBank; and (e) withdrawals from the loan proceeds. BNF would: (i) preparesimllar information and consolidate it with that of the PB plus informationon Its own financial situation, liquidity position, profitability, changes inlending policies and procedures; (ii) submlt to the Bank annual reports onthe results and evaluation of project operations and progress on theinstitutional strengthening program; and (lii) prepare, in coordination withMAG, annual plans for long- and short-term credit needs under the loan to besubmitted to BNF's Board of Directors and subsequently to the Bank. BNFwould also prepare and submit to the Bank a project completion report nolater than six months after the closing date (para. 4.01(h)].

Financial and Economic Justification

3.18 The main project benefits would be: (a) increased production of arange of products leading to significant foreign exchange earnings/savings;(b) intangible benefits resulting from BNF's institutional strengthening;(c) greater PB lending to agriculture; (d) external economies resulting fromthe resource mobilization plan; and (e) alleviation of poverty through about1.7 million incremental man/days of labor drawn principally from landlessworkers at the absolute poverty level. Furthermore, family income of 5,000families would increase. About 20% of these families have an average percapita annual income of about US$420, which is below the rural relativepoverty income level in the country.

3.19 An Illustration of financial benefits is given through six farmmodels representing the types of farms most likely to receive credit(Annex 4). Financial rates of return ranging from 30% to 37% reflect thebenefits that can be obtained by using additional inputs to capitalize onunderutilized resources in the current favorable production environment.Average annual family incomes would increase from the equivalent of US$3,000to US$9,000 about the seventh year of farm investment. Economic rates ofreturn for the six farm models range from 33% for milk production to 38% forcrop/livestock production. The difference over financial returns isexplained mainly by shadowed wages which were estimated for unskilled laborat 70% of the unskilled labor market wage; similarly, family labor wasconsidered to be 75% of the unskilled labor market wage.

Project Risks

3.20 The main risk is that of the sustainability of the macroeconomicreforms under way which are improving the profitability of the agriculturalsector. The collapse of oil prices could have negatively affected theGovernment's commitment and ability to maintain the reforms but thefundamental exchange and interest rate decisions introduced in mid-August1986 (para. 2.03) suggest that such commitment continues to be strong.Furthermore, the IMF and the Bank are supporting and maintaining Ecuador'sadjustment program, through a stand-by agreement and sector adjustment loans,respectively, and to date the Government has successfully resisted pressuresto discontinue its reforms. It is expected that no adverse environmentalimpact would result as a consequence of the project.

- 13 -

IV. AGREEMENTS REACHED AND RECOMMENDATIONS

4.01 Assurances were obtained during negotiations tbat:

(a) an expert with qualifications and terms of employment acceptable tothe Bank would be contracted to advise on the savings plan andstudy on'second tier operations (para. 3.05);

(b) the Government and the Bank will review semi-annually the adequacyof BNF's resource mobilization scheme (para. 3.05);

(c) the Government and the Bank will review the adequacy of BNF'sapproval and supervision of subloans made by PBs, as described inpara. 3.05;

(d) no individual farmer and farmers associations and cooperatlveswould receive accumulated loans in excess of USS400,000 andUSS600,000 respectively; sub-loans above US$300,000 and US$500,000for individual farmers and farmers cooperatives and associationsrespectively would require Bank approval (para. 3.08);

(e) the Government would maintain adequate lending terms for thesubloans and review with the Bank the adequacy of these terms atleast semiannually beginning April 1, 1987 (para. 3.10);

(f) procurement would be as specified in para. 3.14;

(g) accounting and audit procedures would be as described in para.3.16;

(h) reporting procedures would be as outlined in para. 3.17*

4.02 It would be a condition of loan effectiveness that: (i) theBorrower and BCE executed contractual arrangements; and (ii) the Central Bankand BNF had signed a Participation Agreement, both satisfactory to the Bank,concerning on-lending arrangements (para. 3.07).

4.03 Conditions of disbursement would be:

(a) against payments made by any PB, that such PB had executed aParticipation and Subsidiary Loan Agreement with the Central Bank,satisfactory to the Bank (para. 3.07); and

(b) if lending rates and spreads to intermediaries were determined tobe inadequate and if the Government and the Bank were unable toagree *n remedies for this, the Bank would have the right towithhold financing of further subloan commitments under theproposed loans (para. 3.10);

4.04 With the above assurances, the proposed project would be suitablefor a Bank loan of VS$48 million to the Republic of Ecuador on the terms andconditions shown in Chapter I.

- 14 -

ANNEX IPage I o0 5

ECUADOR


The National DevelopMent Bank (BNF) and Agricultural Credit

Legal Status and Objectlves

1. BNP is an autonomous financ!al institution operating under thelegal framework of its Organizational Law issued on March 28, 1974 byPresidential Decree 327. Its main objective Is to promote developmentthrough the provision of credit. It f. iishea credit mainly for agrlcultureand livestock production and for artisans, small industry, agroindustries,and for marketing needs of these subsectors. It also grants credit for dev-elopment of forestry, fisheries and related medium-scale industries, andtourism infrastructure. In addition to its credit operatlons, BNF is empow-ered to carry out normal banking functions (e.g. receiving deposits and gran-tiag guarantees), and it administers and acts as an agent for special Govern-ment funds. It is also empowered to issue securities marketable at the localstock exchange, and to promote, organize and finance as shareholder, enter-prises for marketing a-d processing of agricultural products and for supply-ing inputs for agricultural production and small industries and fisheries.

Organization and Management

2. BNF currently comprises the head office located in Ouito, 11regional offices, 57 branches and 9 agencies spread all over the country. Itis the only bank in Ecuador able to reach to almost all the farmers of thecountry. Its organizational structure is shown In Chart 1. BNF's Board ofof Directors includes: (a) the Minister of Agriculture or the Subsecretary ofAgriculture; (b) the Minister of Industry, Commerce and Integration or theSubsecretary of Industries; (c) a representative of the Supreme Counsel ofthe Presidency of Ecuador; (d) the Deputy General Manager of the CentralBank; (e) the Technical Director of National Planning and EconomtcCoordination; (f) a representative of the armed forces; (g) a representativeof the artisans and small industry; and (h) three representatives of theagricultural producers. It has 3,400 employees, of which 9% are at theexecutive level, about 412 are techniclans, and the remaining 502 are supportstaff. Of the total staff, 742 are located in branches and agencies; andover 60% have more than five years experience with BNF.

Lending Policies and Procedures

3. BNF's lending policies are basically sound. Its lendingprocedures. which were developed with the assistance of FAO experts during1981-1984, are in general satisfactory. The basic requirem^nts for its manylines of credit are advertised in a booklet published annually anddistributed nationwide. Its lending programs are approved annually by theMonetary Board and their execution monitored monthly by BNF's management.TheAe programs are well structured and include a critical analysis of thenational economy, production trends, resource availability, productionpriorities and credit needs by regions and by subsectors.

ANNEX IPage 2 of 5

4. Policies on interest rates and other charges for BNF's lendingoperations and for savings and time deposits, are set by the Monetary Board.Previously, the interest rates set at tire time a loan was granted were fixedduring the life of the loan. Now, under the proposed loan, interest rateswould be variable and would be maintained positive in real terms.

AccointLM and Audit in Procedures

5. BNF's chart of accounts Is approved by the Superintendency of Banksand its accounting procedures follow regulations stated in the Banking Law.Its accounting records are partially processed using electronic dataprocessing equipment. In the near future all accounting, budgeting and loanportfolio control will be processed electronically with additional equipmentto be purchased under IDB financing and under the proposed project.Prior to 1982, accounting records were carried out on a cash-basis.Currently, accruals accounting is followed except for recording revenues onloan amounts in arrears. These are recorded only after legal collectionefforts have been successfully completed and payments made by subborrowersusually beyond the fiscal year on which the revenues are earned; therefore,loan revenues are understated. Since this is not a generally acceptedaccounting principle in Ec-ador, arrangements would be made during projectexecution for BNF to accre revenues on loan amounts in arrears until theseloans are paid or written off the books. Interest and principal amountsoverdue for over two months are recorded as amounts in arrears and provisionsfor bad debts are made proportionally to the age of the amounts in arrears,at rates ranging from 1.25% for arrears one month old to 100% for arrears 36months old. Amounts in arrears for over three years are written off thebooks against accummulated provisions for bad debts.

6. BNF's consolidated financial statements are audited annually by itsinternal auditor, by the National Controller's Office (Interventoria General)and by independent external auditors. BNF's overall system of operationaland internal control was weak and Inadequate until consultants fromUNDP/FAO/IDB assisted BNF (from 1980 to 1985) to improve these systemssubstantially. As a result of this technical assistance, BNF's institutionalcapabilities Improved significantly.

Agricultural Credit

7. BNF is the main source of credit for the agriculture sector. Itprovides about 88% of the sector's institutional credit, with the remaindercoming from private banks. Its lines of credit include: (a) banking credit,mp-inly for well established medium- and large-scale farmers; (b) developmentcredit, mainly for small-scale farmers that are beginning operations in thesector; (c) commercial credit, mainly for marketing operations of farmproducts. Short-term credit is available under (a), (b) and (c) above.Medium- and long-term credit is available only under lines of creditdescribed in (a) and (b) above. Up to 80% of an investment plan is financedunder the line of credit described in (a) above, and up to 100% under thelines of credit described in (b) and (c) above.

- 16 -ANNEX 1Page 3 of 5

8. BNF's annual lending increased by 4% p.A. In real terms during theperiod 1975-85. During this period short-term lending (up to 2 years)averaged 60%, medium-term (2-7 years) averaged 30%, and long-term (over 7years) averaged 10%. Lending to the agriculture/livestock sector exceededconsistently 70% of the annual lending. The number of loans granted alsoincreased from over 56,000 in 1975 to over 67,000 in 1984. Most of them(about 75% average) were granted to the agriculture/livestock sector. Loansto small-scale farmers averaged about 50% of the total number of loansgranted during the period and about 30% of the value of total loans.

9. Forec:asts prepared on the basis of financial resources expected tobe available for BNF (Table 6) shows an average increase of about 2% perannum in real terms of BNF's lending during the period 1986-1992, assuming ayearly 20% inflation rate. This increase is lower than its historicallending trend and it is the result of: (a) devalued future collections ofpast portfolio and; (b) estimated constraints of future resourceavailability. BNF will be able to cover about 60% of the sector's estimateddemand for credit for the period 1985-19881/. Therefore, a greaterparticipation of private banks will be pursued in order to cover the sector'sfinancing gap.

Financial Aspects and Financial Performance

10. Main sources of funds for BNF operations have been: (a) equitycontributions made by the Government: (i) 86% of the 2% tax on mining and oilconcessions; (ii) compensation for losses due to devaluation (hardly madeeffective)2!; (iII) national emergency funds (FONEM); and (iv) foreignborrowings (IDB, AID); (b) collections from loan portfolio; (c) internalborrowings from: (i) Central Bank (lines of credit approved by the MonetaryBoard); and (ii) National Financing Corporation (FOPINAR program forsmall-scale industries and artisans); (d) foreign borrowings (CAF, IDB);(e) issuance of development bonds; (f) trust funds: (i) 5.6% of coffee exporttax; and (ii) rural development projects (SEDRI); (g) deposits: (i) from thepublic, and (ii) from Government agencies.

11. BNF financial performance during 1982-1985 was mixed and earningswere insufficient to offset losses due to inflation. Its performance wasseriously impaired by its policy of fixed interest rates (para. 4), thoseapplied prior to 1982 turned largely negative in real terms when inflationincreased substantially during 1982-1984. From September 1977 to August 1982loans (including medium- to long-term) were granted at interest rates of 9%plus commissiot. ranging from 2% to 4%. From September 1982 interest rateswere slowly increased to reach a range from 16% to 21%, plus commission of upto 2% by the end of 1984, while inflation was at the rate of 16% in 1982, 48Xin 1983, and 31% in 1984. Current interest rates range from 18% to 23% pluscommission of 2%, vis-a-vis an estimated inflation rate of 16% compounded forthe last six months.

1/ Estimated by BNF on the basis of production targets stated in theNational Development Plan published by the Government.

2/ As of December 31, 1984, the Government owes about USS26 millionequivalent for past debt service and adjustments on outstanding foreigncurrency debt.

- 17 -ANNEX IPage 4 of 5

12. Income statements (Table 2) show that BNF was able to obtain a netincome equivalent to less than 2% in 1982 and less than 1% in 1983, a netloss equivalent to less than 1% in 1984, and a net income equivalent to lessthan 1% in 1985 of its average loan portfolio. As demonstrated byperformance indicators (Table 1), this decline in profitability was duemainly to the rather slow growth of the average return on its loan portfolio(from 11.3% in 1982 to 16.1% in 1985) and to some extent, to the growth ofthe average cost of its borrowings (from 3.9% in 1982 to 6% in 1985). Also amoderate growth of its operating cost (from 7.7% of the average loanportfolio In 1982 to 9.9% in 1985) contributed to the decline inprofitability.

13. Balance sheets (Table 3) show that the BNF's loan portfolio as ofDecember 31, 1985, was equivalent to about US$507 million3/ and accountedfor about 76% of Its total assets. Most of BNF's loan portfolio has beenfinanced by borrowings and demand deposits. Borrowings as of the same datewere equivalent to about US$271 million and demand deposits were equivalentto about US$158 million. This dependency on borrowings was evident prior to1982 and thereafter. From 1982 to 1985, the ratio of borrowings (includingdemand deposits) over loan portfolio exceeded 80%, and the over three-foldgrowth of the borrowings portfolio encompassed the almost two-fold growth ofthe loan portfolio (Table 1). The main source of borrowings was the CentralBank, and the main sources of demand deposits were public entities. BNF'sperformance regarding arrears was satisfactory. Loan portfolio arrearsdecreased from 14.1% in 1982 to 9.8% of its loan portfolio in 1985. As ofDecember 31, 1985, amounts in arrears were equivalent to about USS50million. This performance was influenced by BNF's -escheduling policy. From1982 to 1984 rescheduled loans averaged 17% of total loans at the end of theyear. However, at the end of 1985 rescheduled loans averaged only 12% oftotal loans outstanding and were equivalent to about US$61 million. Althoughthe proportion and the amount of refinanced loans is considerably high, BNF'srescheduling policy is in many ways belpful, since only those loans offarmers whose production was impaired by causes beyond their control(drought, flooding, etc.) are refinanced, but at prevailing interest rates;therefore, loans that otherwise would have been written off the books aremaintained within the performing portfolio. During 1982-1984 repayments ofpreviously rescheduled loans averaged 90% of reschedulings made on each ofthose years.

3/ S/ 95.75 = USS1.00 as of December 1985.

- 18 -

ANNEX IPage 5 of 5

14. Financial projections prepared for the period 1986-1995 (Tables 5to 9)!/ show that the financial performance of BNF may improve substantiallyas a result of increased and variable interest rates to be applied on its newloans. Though low interest rates on BNF's old loan portfolio will prevent animmediate and significant growth of the average return on Its outstandingportfolio, these returns would cover fully during project execution the Costof borrowings and operations and would produce a net income ranging from 5%to over 10% (Table 1). These returns would not be enough, however, to offsetthe erosion in purchasing power of future loan repayments due to inflation,unless interest rates on new loans are increased substantially. Therefore,large equity contributions by the Government would still be unavoidable.Nevertheless, BNF may be able to self-finance about 40% of its annual lendingduring project execution period (Table 9). BNF's financial performance wouldbe closely monitored during project execution by comparing its actualperformance to the annual financial performance indicatore shown in Table 1;three of which would be covenanted under the proposed loan: (a) the ratio ofloan amounts in arrears to total amounts falling due as of December 31, wouldbe maintained below 25%; (b) the operating costs (personnel andadministrative costs) would be maintained below 10% of average loanportfolio; and (c) the debt to equity ratio would not exceed 3 to 1.

4| Assumptions used for financial projections are available ln the projectfile.

UJcSLW UDIr 11 ECT

trjbe 1 W - FtEIUISL PWAICE UWINICITO

1962 £933 1964 It0 196 tm6 *I 196 596 599 192 1993 1994 195

Brutb of gros lton prtfoleo (II 22.90 31.40 42.34 44.74 31.50 29.04 26.86 25.33 .90 26.22 24.53 25.40 23.63 1.12Lou pWrtfolio in arears (tl tt 14.01 10.A8 9.27 9.10 7.7 .46 5.22 4.22 3.34 2.71 2.37 2.11 2.9 2.OSAvrep retw a leaws (U I.30 12.11 13.45 16.11 19.4 22.4 23.61 24.39 24.75 24.39 24.9 24.96 24.96 24.97Awep cost of bwrrodiep (U 3.90 3.53 4.31 400 10.5 12.9 14.J0 15.66 16.91 11.96 16.94 19,9 20.49 20.92Brouth of borrouiogs tSI 13.70 3091 32.34 46.2 16.93 23.61 21.69 21.05 19.95 I.95 21.48 22.61 22.33 .92borrouings owr loan portf. () 65.09 91.35 6.92 84.6 75.28 72.11 69.29 67.03 63.35 59.20 57.73 56.54 3.S 52.12Eqity owr loa ortfolio (Ui 25.93 24.34 24.29 38.38 36.91 36A.41 4.24 43.49 45.44 47.15 40.35 49.64 3.54 54.10hbtlEfqity ratio 11) 21 328.10 31V.27 349.62 M.59 203.96 17.73 172.10 154.12 139.41 125.56 116.17 113. 1H.52 96.34Liquidity ratio fl) 107.60 119.10 6. 1 109.25 149.72 143.36 130.64 116.34 9.89 66.25 30.n7 76.29 76.36 64.33Operating cost/ln portfolio I1( 7.. 61.79 9.37 9.92 9. 9.02 6.39 7.93 7.61 7.19 4.3 6.9 6.30 6.13bt imoa/lo Wrtfolio (1) 1.97 0.10 -0.21 0.3O 5.0 6.37 7.73 . 6.79 9.40 9.69 9.78 9.U4 10.21Arrers/Loas falling dute 3 35. 30.64 25.69 25.00 25.00 25.00 25.00 25.06 25.09 25.09 25.00 25.96 25.OO 25.00

* 192-S actult 1945 forecast.11 Loes in arers over gross otstadimg !an pwtfolio.2 Borreud fdsinhuluding do dposits) owr total uqty.3l sof tee r 3l of e be yr.

- 20 -

Tible 2

HaIPDOR

ARICULTURAL C TEDT II P1DuECr

FW Ieuz and EKpsnsea 1/

SI biUiS 11SS mnigi ej!ivalsent *19 1983 1984 1985 1982 1983 1984 1985

FnCial 1vmus 2/ 1.86 2.48 3.79 6.58 64.14 56.95 62.85 94.59

p Yraje awles 2/ 0.55 0.64 1.08 2.08 18.97 14.70 17.91 29.90

Financial mm 1.31 1.84 2.71 4.50 45.17 42.25 44.94 64.69

ilnistrteeaq)e 3/ 1.27 1.80 2.64 4.05 43.79 41.33 43.78 58.22

Operating inm (loss) 0.04 0.04 0.07 0.45 i.3 0.92 1.16 6.47

blectiora of baed debts 0.78 0.62 0.60 0.65 26.90 14.24 9.95 9.34

Provisicx for bad debts 0.53 0.71 0.73 0.88 18.28 16.30 12.11 12.65

Other e eatreveme (expenses) 0.03 0.07 0.00 (0.07) 1.03 1.61 0.00 (1.00)

Net ionfle (loss) 0.32 0.02 (0.06) 0.15 11.03 0.47 (1.00) 2.16

* US$1.00 - V 29.00, SI 43.55, SI 60.30, S/ 69.56 averae exchwge rat for the year 1982, 19831984 ard 1985 respectiely.

1/ Smarized from 1982-84 axlited fincal statents, and from 1985 ualted finail statemets.Lterest plus ox11ssi= and otber hages.

3T ndes percmnel xpss and of fixed assets.

My 21, 1986

- 21 -

¶1b3 3waI IP~hL AN= I

low E1m of Rub

. ~ ~ iI

S/ bflllm ix V1Illan em4vwo*1982 1983 1984 1985 1982 1983 1984 1M5

sCI3m (W FMU

Not Inu (1t) 0.32 0.02 (0.06) 0.15 11.03 0.46 (0.99) 2.16l~cinh _ Qm 0.53 0.71 0.73 088 18.28 16.30 12.10 12.65

aces inter1 1 gauratim O.85 0.73 0.67 1.03 29.31 16476 11.0O 14.81l**dzW capital dAIgo (3.00) (0.05) 1.27 0.09 (103.45) (1.15) 21.06 1.29

Nt izter13 gnurtu (2.15) 0.68 1.94 1.12 (74.14) 15.61 32.17 16.10at btrib 0.24 1.07 2.50 6.24 8.28 21.57 41.6 89.71

Pixrw1zg.: Loa -Y 4.77 6.39 8.04 15.61 164.48 146.13 1133. 2214.41Pa1eI 0.27 0.10 0.60 0.69 9.31 2.30 9.95 9.92flui 0.99 1.21 2.32 1.69 2D.35 27.78 38.41 24.30

ion tso 2/ 6.60 9.64 11.12 17.00 227.59 221.36 184.41 24M.39Dqci and esvqp

Iz _m (deam) (0.11) 0.71 2.46 3.63 (3.78) 16.3D 40.80 52.19

Total Sources 1021 19.80 2B.98 45.98 352.07 454.65 400.60 A61.02

T, atse 2 7.3 13.91 22.5 33.64 252.42 319.40 365.67 483.61i~ayintof bwrGdzqp:

Inwl 3.85 3.8S 6.65 10.30 1316 85.40 110.28 148.07IoPbI4P O.6 0.08 0.12 0.15 2.01 181 1.99 2.16B1nds 0.04 0.11 0.21 0. 1.38 2.53 3.49 4.17

0.09 0.10 0.10 0.27 3.10 2.3 1.66 3.88InTne (dsie) of

a w 3/ (0.06) 0.79 0.07 0.53 (2.07) 18.14 1.16 7.62

oal ApUcat1m 11.30 18.84 29.2D 45.18 389.66 432.61 484.25 649.51

Ch saplu (dsfsit) (1.09) 0.96 (0.22) 0.80 (37,59) 22.04 (3.65) 11.51tlhah at Ibd of year 2.25 1.16 2.12 1.90 77.59 26.64 35.16 27.31Coh at eid -of y 1.16 2.12 1.90 2.70 40.00 48A68 31.51 38.82

* US$1.00 - S/ 29.00, S/ 43.5, SI 60.30, S/ 69856 aver ezdhnu rate for the years 1982, 1, 1984 adl1985, ruapIectily.

I/ T.lud1 a Cktra U.k liz of ced1t.Dimi refiiumi 'a.t

Y li find ass.

July 21, 1986

- 22-

, G L~MIM ANr ITabhle 4WAIEmDAL c1T n FKwEct

w - RAl e 11

__~~~~~~~~~g Igo Tu - M s ig193 IN84 _1iml

,ASS=S

Csh tmd b t depositt 1.16 2.12 1.9D 2.70 35.15 39.18 28.57 28.20

1TO 11.16 16.29 24.17 37.49 338.18 301.11 363.46 391.54TMM rIfb_xed 3.06 417 5.64 5.85 92.73 77.08 84.81 61.101 l8 n 2.48 2.53 3.07 4.76 75.15 46.76 46.16 4.71Tmmu-other 0.5D 0.26 0.22 0.47 15.15 4.81 3.31 4.91

Ttal loas outstamdig 17.70 23.25 33.10 48.57 5X.36 429.76 497.74 5W.26husd iter8st receivable 0.87 1.20 1.58 3.80 26.36 22.18 23.76 39.69

Acam. prowsix for bad debts 0.49 0.71 0.73 1.13 14.85 13.12 10.97 11.ANot l 18.08 23.74 33.95 51.24 547.87 438.82 510.53 535.15

lnbmtms 0.50 0.74 0.79 0.96 15.1 i 3.68 11.88 10.03o°* heez 2/ 1.44 2.24 35 859 43.64 41.40 53.23 89.71

FPvn Amato 0.56 0.62 0.70 0.91 16.97 11.46 10.53 9.50A 11ai depreciatim 0.13 0.18 0.32 0.31 3.94 3.32 4.81 3.24

Net f±l.d amet 0.43 0.44 0.38 0.60 13.03 8.14 5.72 6.26

Total A8ets 21.61 29.28 40.56 64.09 654.84 541.22 609.93 669.35

Deposits 3/ 6.22 8.26 10.73 15.16 188.48 152.68 161.35 158.33fNtrr llhl 8.84 12.98 17.38 25.96 267.88 239.93 261.36 271.12kcrued interest pwayble 0.24 0.22 0.53 0.80 7.27 4.07 7.97 8.36kouts pwaable 1.72 2.16 3.88 7.41 52.12 39.92 5b.35 77.39

Pa-tin capital 3.00 3.00 3.00 3O0 90.91 55.45 45411 31.33ler 4/ 1.27 2.64 5.10 11.61 38.48 48.80 76.69 121.25

Lbal.local Fprofit (lM) 0.32 0.02 (0.06) 0.15 9.70 0.37 (0.90) 1.57lbtal equity 4.59 5.66 8.04 14.76 139.09 104.62 120.0Q 154.15

Tbtal MAbiftfeS 21.61 29.28 40.56 64.09 654.84 541.22 609.93 669.35

* USl.00 S/ 33.00, SI 54.10, Sl 66.50, S/ 95.15 as of D1aenbe 31, 1982, 1983, 1984 and I985, respectively.

1/ &=irizd from 1982-84 axited fln&kIAl anw ad frm 195 unmtditd finfciel stsmots.'F/ lixtes deferrd assets.

3/ zK.ude safr~gs._ beludes t manlt equity ctributicms.

July 21, 1986

- 23 -

Table 5

C LTI 1 M IT 1it i

Table 5: W - INE AN EPE F1EM

Si bilim

FUtil 19 1967 1968 1969 1990 199i 19 19 l 194 M 199

REM

Itrwest & CeIssLP an lo6g 11.21 16.44 2.0 26.70 36.74 46.75 X69 73.42 91.46 109.46Other charps an emissions 0.43 0.39 0.05 0.76 1.10 1.50 210 3.00 4.20 .0Other watiumal 1.00 1.16 1.24 1.31 2.00 2.50 3.00 3.50 4.00 4.0

Total 12.66 17." 23.6 X3.79 3. 50.75 63.79 79.92 99.66 120.06

OIES

Intwut Go brminp 4.72 6.82 9.30 12.53 16.31 20.6 26.02 3323 42.16 49.47Pusmal 1.20 2.90 3.6 4.11 5.01 6.01 7.22 .66 10.39 12.47 14.96AduiDistrative 1.h2 1." 2.2 2.74 3.2 3.94 4.73 5.7 6.81 Li6 9.0Otksr Wratioaal 0.00 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.10

Total 9.52 12.56 16.21 20.6 26.26 32.53 40.36 50.42 AL* 74.34

operatin incus 3.14 5.41 1.6 9.% 13.57 18.22 23.44 29.50 36.6 45.74

ba-qawatimal rrnmw 1.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0lm-aprnatimal "Pam 0.95 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other 0.30 0.00 0,00 0.00 0.0 0.00 0.00 0.0 0.00 0.00 0.00OhKiatimO 0.13 0.17 0.22 0.26 0.30 0.35 0.39 0.43 0.U 0.2Provisin for bad Jdts 0.04 0.20 0.21 0.22 0.22 0.22 0.23 0.25 0.23 0.32 0.39

fhtarv cerrctiuls 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.0

bt imon flons) 2.1 5L03 7.22 9.46 13.05 17.65 22.60 28.79 36.06 4.08

x _ 8 8 8 883g8ta3ss 1 ia;,g l ¢ e B 8t ° ; 8* *8 8er$t 88 i t W l l d r t1 gUo.8** o~S~4 i< $

B ~Sodw*8a81;883dl$so8S8f 88;8g*t lta-J J tP

D-Xt ;zw8 t8$g8g 8 srS s Samsun$ a asa a F8SE < t a 6 al fi;4i

a a; age's!! .2 S1 8 $ 1 9 8 a. a! t; 8 Z 383 a ai 3 8. 8 8 8.4 St at °* A 9 :~~~~l C; 5 A!AZ8 s8 t8A 4 * a 8- a 8i _44 J-4-4 8 ,s8Bo8 ."Xei"

z " " s o° 8 88 "s 8 w 88 | X o8-88 8 W r8 8;^ BILf<r

' .5

-~~~~~~~~~~~~~1 Z tZ - g| f

- 25 -

AMNX 1.Table 7

AMRICILTURL CR0IT 11 IJECT

Table 7i W - LACE M FORECST

b billion

1994 10I7 193 1909I 199 199 M 19 14 19"

ATh

Cash as hot DposIts 7.66 7.79 9.37 11.92 11.94 7.34 9.0 I1.3 L.23 14.57kAcred interet r Ivable 2.EO 4.11 5.52 7.11 M.1I 11.6 14.67 12.36 2.9 7.42krcots rKeivdble 00 O.04 0.00 0.00 0.0 0 0.00 0.00 0.00 .o 0.00lavatory 0.00 0.00 0.0 0.0Q 0.00 0.00 0.00 0.00 0.00 0.00Prepaid spate 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.09 0.00 0*0Intretets 0.96 0.9 0.9 0. 0 0.94 0.94 0.9O 0.96Short-term lms 45.00 4.00 53.00 56.00 19.00 43.00 9.00 OL00 94o 1600Loa do aithin ne yr 3.15 4.00 4.25 1.04 3.60 0.00 13.40 20.20 2.0* 0.00

Total current nuts 40.17 65. 72.10 n." 94.61 90.99 107.9t 132.w0 tUai t11."

Los do ae we ye 10.09 24.09 41.84 67.47 97.97 132.7 172.47 2182 ?.47 7.47Lha in arr sr 5.03 5.33 5.44 5.52 5.55 5.69 6.19 6.90 U 9.71Ikcue.prowisiu fwr bad debts 1.33 1.54 1.6 1. 2.21 2.43 2. 2.94 L23 3.67

llt loans ovenr - y 13.79 27.1 45.54 71.A0 101.22 13.12 17L8 222.22 277.31 363.5

eferred asts 5.45 5.45 L45 4." 4.91 6." 4.90 6.98 6..9 6.96

Flled mists 1.27 t.63 1." 2.35 2.7l 3.07 3.43 3.79 4.15 4.51kculated d Kriatiom 0.44 0.61 0.83 1.09 1.0 1.74 2.13 2.57 3.04 3.5

llt fixd atts 0.93 1.02 1.14 1.26 1.31 1.33 1.30 1.22 1.11 0.95

Total buts 90.24 100.20 124.25 15.13 192.12 235.42 292.14 363.31 44.24 22.9

LIIBIITIT O m E ,ITY

kcrumm! interest payable 1.19 1.70 2.32 3.13 4.09 5.15 4.51 931 10.54 12.3kcaunts payable 7.41 7.41 7.41 7.41 7.41 7.41 7.4 7.41 7.41 7.41Dmnd doposits 13.43 15.03 16.93 19.03 21.33 2L39 2t3 30.13 33 7.73hart-ters borongp II 16.35 19.65 24.15 35.15 49.65 66.15 89.65 120.65 119.65 lThtl&Iraqs die witWin e yer 1.02 2.15 2.29 2.23 3.09 2.94 20 3.21 L33 0.00

Total urrt liailitia 40.19 45.94 55.10 46.95 5.54 10.50 133.59 149. 214.4 234.44

8rosinp du r - ear 14.48 22.60 7.0T 31.29 31.11 31.12 31.93 31.05 29.13 31.73

Paid-t Caita 3.00 3.00 3.00 3.00 3.00 3. 3.0 3.0 L3 L.Obnvtf*t quity canttirtib m 11.1 20.67 23.6 29.21 34.71 0.42 44.3 52.S 59.3 4.13

surplus an ale of awts 0.00 0.00 0.00 0.o0 0.00 0.0 0.0o O 0 .00 Lo.eIwluatio gains (nsl a0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.0 0.00 0.

kcc atuW earunis (lses) 2.96 7." 15.21 24.9 37.74 55.3 7L19 100.97 14.03 1.8

Total eity 23.57 31.66 42.07 56.90 75.45 91.0 127.54 56L50 204.A ZLS9

Total liahilitin and Equty 00.24 100.20 124.25 155.13 192.12 235.42 2.16 363.31 4.24 S2.39

11 Include tie dpoits and savings.

- 26 -

rail. & W - V11 .t

92 1M 1954 IE £ 1 1M M I9 £990 1991 I"2 1W3 £994 19

ot iatwua1 cA& pgo ati -2.15 0.4 I.4 1.12 4.S2 4.63 6.97 .11 12.53 1.79 21.81 27.61 34.59 4.02

b3avmt f lam 1.1 .0 *.64 11.12 17.00 2.23 40.45 $2.67 57.20 57.3 60.47 70.5t .1.6 100." 1222IIt dt of iwra -3 3.9L 4.04 6.99 10.74 13.27 16.52 19.65 25.29 3273 4.59 .46 77.20 01.26 130.8£

4m ..tilUcI 4wr lalin 0.53 6.21 6.04 7.113 2041 36.5 40.09 41.02 37.5 31.46 33.34 32.10 4.30 3.42

_m) Iuliq 1.32 L.91 22.05 33.64 45.00 67.00 15.00 5.00 93.00 106.0 122L.o 14.00 179.00 191,00

f:umci.g q 6.42 7.63 IS.97 26.26 24.82 30.44 34.91 41.94 55.42 74.34 0.6 115.95 14.70 155.51

Fisagiag:

Iwr u p fr Cautrd 5.36 7.60 10.36 17.30 15.32 16.57 36.9 19.30 22.00 26.00 31.00 V.00 44.00 47.00h_aitb m w£ip e0.0 0.71 2.4 L6 4.32 6.43 11.9 17.10 27.3 37.50 5$3. 7L3o 93.60 to4.0ehmmiqm fru i..L. 0.10 0.60 0.69 3.00 4.00 3.00 3.00 0.ee 0.00 0.00 0.e0 0.0 0.o0Ownuiq from 1.3.L . 0.00 0.00 0.00 e.00 0.00 0.70 0.66 O.4 0." 0.7 1.1£ 1.2 0.00 0.e041 it7 ad hwwm 1.19 -0.73 2.55 4.64 -4.12 2.57 25 .44 L.20 9.37 L05 4.32 2.10 4.5

Total fiaKciag 6.52 7.63 15.97 2.26 24.52 30.44 34.91 4.9 542 74.34 0.16 115.99 144.70 £5503

'£942-6 act.) j116-9 fusocut.

A2IN 1Table 9

ASlJVATli MXlIT 11*IcILTin .ui .

Tail Is - FIMII PFIA

£962 I93 93" IM5 393 w3 19 3 19 0 1 1992 193 1994 £m

l9t istarl Cub g.atim -29.37 4.9 6.80 3.33 10.04 6.9£ 9.36 10.8 L3.45 15.3 17.00 13.66 19.32 22.3t

bIqqmt of luo I.)lpywSat of briwvmla (-I

O fudl awnaile mfar Imia 6.33 45.I£ 27.57 21.94 45.51 54.57 5.45 49.42 40.43 29. 27.74 21.69 19.16 19.54

_al lil 140.00 100.00 100.00 100.00 100.00 £00.00 £00.00 100.00 100.00 16.00 ;00.00 100.00 £00.00 100.00

Fiucing gP 93.17 54.05 72.43 73O. S4.49 45.43 46.55 50.5 sV.5 10.13 72.26 71.1 10.94 "5.4

Fisiqs

A ftimp frm CmWtral h n.22 54.64 46." 53.43 34.04 24.73 22.53 23.49 2366 24.S3 25.41 25.00 24.53 24.61Dapgits ad S9wi 0.00 5.10 £1.14 10.79 9.40 9.95 15.7 20.40 29.35 35.39 43.44 49.53 We. 54.4bwriWun fro 1.U.. 3.69 0.72 2.7 2.e05 11.1£ 5.97 4.00 3.61 0.00 0.00 0.00 0.00 0.00 0.00lwrrdep frn 1.8.3.0. 0.00 0.00 0.00 0.00 0.00 1.04 1. 15 1.13 0.9 0.92 .91 0.96 0.00 0.40Equity ad hwvn 16.26 -5.61 I.54 13.79 -0.27 3.93 3.01 3.74 5.59 9.31 2.50 2.92 1.17 2.40

Total finacing 93.17 54.85 72.43 74.06 54.49 45.43 46.55 50.5 5.59 70.13 12.26 78.31 80.84 61.46

AIOJLUULL CEDIT it F1OJ!

Chart 1. 811F Orsatl= (hat

| ourd of Dixetors,

Camoral mger

r | Dputy l enral r

,Geeral Secretarat Iol or Coordta onitte. Leo Ml or

con Credit _ull

terprteea ta Processing ~ co~~ 3enkin ~ control- LIwatock.metrw I ... bbE


ECUADOR


Resource Mobilization

General

1. In the last decade, Ecuador has been unsuccessful in mobilizinglocal resources in terms of either surpassing its own levels of the 1970s orreaching reasonable levels by international standards. In general, financialliabilities (M3) as a percentage of GDP declined in the last decade fromabout 292 to 24%, with currency circulation and demand deposits being theprincipal financial asset. These results Indicate that the record ofresource mobilization through the financial sector is relatively weak.

2. The poor past performance in resource mobilization is attributableto: (a) the reluctance of previous governments to adjust interest rates inresponse to changes in expected inflation. Until recently, the authoritiesmaintained interest rates at levels below inflation, thus inducing investorsto choose more attractive savings alternatives (foreign financial assets orunregulated extra-bank deposits) over deposits within the Ecuadorianfinancial system; and (b) lines of credit from the Central Bank to thebanking system provided at rates lower than inflation rates determined theshape of growth of the banking system. Profits were made from the CentralBank rather than by taking in deposits. This policy was exacerbated by theMonetary Board setting spreads and reserve requirements that resulted ininadequate returns to bank equity. As a direct consequence, the privatebanking system evolved into one with a relatively large number of small bankswith few branch offices per bank. The banking infrastructure was notoriented to attracting local savings but to lending based on profitableCentral Bank funds.

3. Although BNF developed an appropriate branch infrastructure, it wasmainly designed to facilitate lending operations in agricultural activities;however, its saving mobilization capabilities vis-a-vis its extensive branchsystem was never tapped. Currently, savings as a percentage of annuallending is about 12%. Moreover, previous Central Bank policies inducedfarmers to develop a preference to invest their savings in real assets overfinancial assets diverting agriculture-generated savings into urban-basedinvestmenzs or consumption.

4. The current situation of difficult access to foreign capitalmarkets and declining petroleum revenues, from which Ecuador gets its mainsource of foreign earnings, has induced the current administration to changesignificantly its monetary, fiscal and banking policies.


5. To spur domestic resource mobilization at the end of 1984, the newGovernment revised official interest rates and introduced large denominationcertificates of deposiL fover Sf 1.0 million) bearing unregulated interestrates. This brought official deposits rate to about 20-23% p.a. andcorresponding effective rates to 25% p.a. for loans up to two years and z7%p.a. for loans over two years. Certificate of deposits (CD) rates are about25% p.a. on 12-month deposits; funds mobilized through such CDs are on-lentfor a similar term at about 29% p.a. These measures brought official lendingrates to over the level of inflation. Moreover, in late August 1985 theGovernment issued new legislation to allow long-term financial instruments tocarry variable interest rates to be adjusted at frequencies determined by theMonetary Board. Finally, in August 1986, the Monetary Board ceased fixingsaving and lending rates (with the exception of Lines of Credit from the CB).

6. In this context the project would assist BNF in its depositmobilization effort through improving services to engage savers and borrowersin the rural areas by financing the growth, rehabilitation and equipment ofits branch network. Technical assistance to define and implement the ruralsaving mobilization efforts would also be provided to assist BNF.In order to measure the adequacy of domestic resource mobilization in termsof interest rates, after July 1, 1987 the Bank would monitor semi-annuallychanges in the average real M2 in the economy as agreed under the IndustrialFinance Project (Ln. 2672-EC).

Implementation Program

7. During the project implementation period, BNF would carry out aprogram to increase its savings mobilization efforts. BNF would:

(a) open eight new branches with facilities for lending and savingservices. BNF would inform the Bank of the exact location of thenew branches before September 1986;

(b) train personnel, rehabilitate and equip 42 existing branches toimprove their physical facilities, reduce processing andadministrative costs and facilitate lending and savingsoperations. To avoid competition with private banks' savingsefforts, these would operite in rural areas where private banks donot have branches. Private banks have field offices mainly inurban centers mostly concentrated in the two largest cities of thecountry, Quito and Guayaquil; thus, it is expected that competitionto tap rural savings would not arise. BNF has elaborated adetailed plan of the location for the selected 42 branch offices;

(c) procure 15 mobile units, which would include banking equipment.These units would operate in areas where the construction of newbranches could not be economically justified and the distances arelong and customers scattered.

(d) monitor closely the progress achieved in the context of increasingthe percentage of BNF's annual lending based on savings, andprogress achieved vis-a-vis interest rate increases and servicesprovided to customers;


(e) dEtermire whether a second tier rediscount facility could be set upto attract private banks to lend for agricultural investment.

(f) Consultant services would be provided under the project to assistBNF in the preparation and implementation of this plan. An expertwith qualifications and terms of employment acceptable to the Bankwould be contracted prior to March 1, 1987; the expert wouldpresent to BNF and the Bank a detailed implementation program twomonths after being contracted. For this purpose, eight man-monthsof consultant services would be conttracted with an estimated totalcosts of USS70,000. The average man-month cost is based on theexpert's fees, international travel and local allowances.

8. Total resources required to Implement the saving mobilization andlending program are detailed in Table I of this Annex.

Terms of Reference for the Consultant for the Saving Mobilization Plan

9. The consultant services should aim at a medium-term implementionplan for the development of BNF's savings mobilization activities. The mainobjective would be to elaborate a plan with the following characteristics, tobe expanded by the consultant:

(a) analysis of potential saving capt.city per operating branch officeaccording to: (i) categorization of potential clientele;(it) present resources of BNF including resources available underthe project; and (iII) influence of economic policy alternatives asdictated by the Government;

(b) definition of an appropriate training program at the field level toincrease savings at BNF in rural areas;

(c) design and implementation of short and long term policy action toattract savings by means other than positive lending rates,including the introduction of CD's for rural areas on a pilot basisto test rural saver's willingness to use this mechanism;

(d) develop a monitoring system that would permit BNF to determineprogress of the program and ways to correct defects during theImplementation period based on rapid information conveyed to thedecision making level of BNF.

(e) preparation of an implementation schedule for the recommended planwith an estimate of benefits and costs per unit of attracted funds.

Consultent services estimated at eight man/months would include two stages:(a) diagnosis and elaboration of the plan; and (b) implementation.

JIftlClTK CoEwl itTable 1, SlJtI IIh 1tZATIO

%t,lld Cost 1a1b

mu cOts DM costs ih IOUantIt Ihctu, 31fli) WI0 0*)

...... bthitcutait 1 2 3 4 5 4 7 Total 5ut '000) 1 2 3 4 5 4 7 lotal 1 2 3 4 5 h ? Tol

Zs,& Zs *Im az USum M=su%1m s"a tsius, clflst"sumses sass: 11ass ssma *411a1 msass mux as=0 sassa- agasss 5 u= =sZ3 =ax MaZMas

I. IRS1IENO COSTS

A. EM FIELD OFFIMS /a

OFFICE EUIPEIT Mc 2 2 2 2 - - - 8 6.665.129 13.3 13.3 13.3 1. - - .3 0l1.0 101.0 lOt. OlOt.0 - - - 03.9FIMMTIE M. 2 2 2 2 - - - 8 2.402.756 4*. 4,0 4.0 4,0 - - - 16u0 30.3 30.3 30.3 30.3 - - -

41L MUf lb. 5 6 4 - - - - 15 4.7196.MS 23.6 .3 SI19 - - - ?70s 178,e 214.5 143.0 - 63- - 56

Su*-Tct" MflM pj O /j I 40.9 45.7 36.2 17,3 - - - 140.1 310.1 36.9 274.4113 - - -I10U3

8. JTWATIZATtOM lb

N m IC lb 16 10 1s - - - - 52 tM1,417 2599 29.1 29.t - - - - .2 142 220.1 220.7 - - - U637.SW0E sb I - - - - - - 1 6743.05 6.7 - - - - - - , .1 - 1.1u.P.S No 10 20 10 0 2 - - 5 PA.N 0.7 1.3 0.7 0.5 0,1 - 3.4 5,1 10.2 5. 4*.1 1.0 2- 2.5 5IOI b 4 4 4 4 - - - 16 67.434 043 M0 43 043 - - 1.1 2.0 2.0 2,0 2*0 - - - 0.2PC.TMINII go 0e5 0.5 - - - 1 6-743.404 3.4 3.4 . . - 6.7 25.5 25.5 - - - - 56.3gm 3To101iISLmTS /d lb - - - - - - - 3.1 3.1 3.1 - . - - 9.4 234 23,l 23 - - - - 71.5

Sub-Ttel IT IATIM b 40.1 37.3 W2 0.8 0.1 - - 111.5 0.0 212.3 253.7 6.1 10 - 9."C. ADTATIU O 9SN3 FILD OF.

EShIfIINl lb I 6 4 - - - - 2 9v36a359 7449 74.9 37.5 - - - - 13.3 7.5 5675 28. - 1-4011.FUITU lb 8 a 4 - - - - 2 b 5.4t4 21.22.2 104 - - - 53 110.9 10.9 3.5 - - - - 402.3

nivWIIj Sb E .- -.- - - - -376 37.6 37.6 - - - - 112.9 215.1 2SJI 21S.1 - - - - 15.2

.h-Tolel O TATIOI OF P T51 FIEU WFF. 133.8 133.8 I5.7 - - - - 35313 11013.5 113 6.3 - - 2 .

totai tmm"h CoS 214.8 216.7 155.1 18.1 0.1 - - 0,9 1.6A4 1641.7 14175.3 137V5 1.0 - - 442.924=s- ----- ---- Iss 533 Iszc amamiam 229"am 1*8mm 122-1113 ammmm m sum Aeumso;

atal 214.8 21.7 1i55.1 11 S01 - 6049 t#W04 1U,617 1.175.3 137.5 10 - - 4.92*9manm sum= *ass as. 3U us M u . SuM*Ma omass musig= massm muss muss toamas

a nof bFa b ottie,b 4 Iarth offi Ur ? wt timne 52 PFtsol C_natersd Sax aths

uls 14. I9a 18:35

- 32 -ANNEX 3page 1 of 6

ECUADOR


Institutional Strengthening

1. During the past five years BNF management has been increasinglykeen on strengthening its overall operational capability to meet moreeffectively its objectives and to play a more decisive role in the country'sagricultural development.

2. These efforts have been, to a large extent, in response to seriousconcerns in the sector that BNF's capacity was inadequate and antiquated toassist the growing demands for credit services.

3. Staff training, improvement of physical facilities, introduction ofa computerized data processing system, review of internal policies andprocedures, improvement of security measures and renovation of the fleet ofvehicles are the main areas where improvement is underway. Part of theseefforts have been implemented under a UNDP/FAO agreement and a recentlycompleted IDB project and will continue during the next four years under afollow-up loan approved by IDB's board in December 1985. The Bank'sparticipation under the proposed project would complement these efforts.

Strengthening: Phase I

4. On October 16, 1980, the Government of Ecuador, UNDP, FAO and BNFsigned a technical assistance agreement to improve BNF's operationalstructure and administrative procedures. The agreement (PNUD/80/001/R/12)was to last three years and included objectives in the areas of loanappraisal and supervision, financial planning and administration, loanprogramming and organization, and training and management of humanresources. On June 7, 1984, the agreement was extended until June 30, 1986,and new activities were included, such as design and establishment of amanagement information system and installation of a computer network to linkheadquarters with regional branches.

5. So far BNF's performance in implementing its strengthening programhas been excellent. The success obtained has been the result of:(a) Improving the environment for its staff by introducing new personnelpolicies that provide job security, expanded incentives and benefits andclearly defined career opportunities; (b) reinforcing itsinter-institutional relationship with MAG, INIAP and other entities that havekey roles in the sector; and (c) introducing automation on several of itsbanking procedures to obtain more efficiency and provide better bankingservices.


6. More specifically the achievements were as follows:

a. Loan Appraisal and Supervision

(i) establishment of training courses for loan officers andsupervisors at headquarters and branch offlces;

(ii) streamlining of appraisal procedures to shorten loanprocessing;

(iii) introduction of standardized loan requirements throughoutall branches; and

(iv) establishment of loan committees at each branch to speedup loan approval and disbursement.

b. Financial PlannLng and Administration

(i) introduction of annual financial programming a-d budgetingoriginating at each branch (bottom-up approach);

(ii) Incorporation of financial data into the managementinformation system;

(iii) evaluation of accounting procedures and proposal of a newcomputerized system; and

(iv) preparation at each branch of a daily consolidated balancesheet by major headings.

c. Loan Programming

(i) strengthening of coordination with MAG to forecast anddetermine annual demand for agricultural credit;

(it) strengthening the role of branch offices in the process ofloan programming; and

(iii) review of procedures to establish a programming system forBNF's credit lines.

d. Human Resources

(i) evaluation of BNF's human resource in regard to technicalexpertise available, staffing requirements, policies andprocedures;

(ii) conducting of a comprehensive survey to determine trainingrequirements; and

(iii) design of annual training programs for headquarters andbranch offices staff.


Stregthening: Phase II

7. BNF would proceed with Phase II of the program parallel to theongoing activities of Phase I which are to be completed ia June 1986. Themain objective would be to concentrate on the implementation of systems andprograms recommended under Phase I to strengthen its accounting and financialadministration, and to implement its staff training program.

8. More specifically under Phase II. IDB's loan would contribute to:

(a) establish a Data Processing Center at headquarters (Quito), atthe main branch (Gusyaquil) and at two regional branches(Portoviejo, Babahoyo);

(b) design and introduce a computer-based accounting system whichwill link headquarters with regional branches;

(c) prepare technical specifications and procurement of dataprocessing and computer equipment;

(d) design and introduce nationwide quarterly progress reports offinancial and operational indicators;

(e) design and introduce security procedures in at least 25% ofBNF's branches;

(f) design a credit delivery system for cooperatives and farmerassociations irterested in marketing agricultural products andinputs;

(g) introduce a computer program to record and analyze informationrequired for monitoring and evaluation of subloans grantedunder projects financed by international financial organiza-tions, such and IDB and IBRD; and,

(h) prepare and propose an improved agricultural credit manual;

Institutional Strengthening Under the Project

9. The proposed loan as part of Phase II would provide financing tostrengthen the operational capacity of BNF and PB. Emphasis would be placedon staff training particularly for technicians assigned to branches andagencies. In addition, logistical support would be provided by replacingabout 62% of BNF's current fleet of old vehicles used for field work.Security would be upgraded in several branches and armored trucks would beacquired to protect the transportation of monies and documents betweenbranches.


Staff Training Program for BAF

10. The program proposes a strengthening of the present staffcapabilities of BNF at the national level including the participation of PB'Sstaff. To accomplish this purpose, 8NF has designed a comprehensive trainingprogram for the period 1986-1989.

11. The program would consist of: (a) in-house training courses andseminars; (b) external training for which scholarships would be provided toattend courses of short duration (three months) in other countries;(c) supervised correspondence training, called Sistema Nacional deCapacitacion Bancaria a Distancia (SINCABAD); and (d) publicatiot oftechnical bulletins and working papers and production of videotapes.

12. Subject matter of trainaing would include: (a) Agricultural Credit:appraisal, supervision, and recuperation; (b) Financing: programming,accounting, budgeting, auditing and banking services; (c) Management andInformation Systems; (d) Inventory Control; and (e) Public Relations.

13. The Department of Human Resources would be responsible fororganizing and implementing the program. BNF would continue to rely on itsmost experienced and senior staff to serve as teachers and trainers. Staffreceiving training abroad would be expected on their return to take activepart in the design and teaching of courses. Local conaultant trainers wouldbe hired when needed to supplement BNF's in-house capacity.

14. In-Office Staff Training. This type of training, calledCapacitacion Directa (CP) would consist of courses and seminars (3 to 5 daysduration) held either at headquarters or at branch offices. About 20 coursesper year would take place during the first four years of the project. Totalcost would include local travel and accommodations for instructors andparticipants and purchase of material supplies and equipment. Although about3,000 participants would benefit, funds would be required only for thosetravelling to training locations (about 1,950 staff).

15. External Training. About 20 scholarships would be made availablefor training in foreign financial institutions In agricultural credit, loanadministration, appraisal and supervision of projects, financial analysis andauditing. Qualified candidates would be selected by BNFts TrainingCommittee. Courses would last for about three months. To benefit from thistraining, each participant would sign a contract agreeing to continue workingfor BNF for at least two years after the completion of the course and, ifrequired, participate as trainer in the in-house training program. At theend of each course, participants would submit to BNF and the Bank a shortreport and grade obtained.

16. Suiervised Correspondence Courses. To reduce staff time andmobilization costs incurred by its training program, BNF would introduce bymid-1986 supervised correspondence courses (SINCABAD). The methodology forthis type of training, introduced successfully in other countries, wasprepared for BNF by an FAO consultant financed under an IDB loan.


17. Course material packages for each subject are currently underpreparation and would include reading assignments and examinations. Whilethe methodology is similar to conventional correspondence courses SfNCABADprovides periodic supervised visits by BNF trainers to individualparticipants. The object is to provide support, answer questions, andreinforce the participants' training efforts thus reducing the drop out ratecharacteristic of correspondence courses.

18. About 20 courses would be offered to about 5,300 participantsduring project implementation. The project would finance travelling expensesof trainers and educational supplies for a total of S/ 35,845,000(US$358,450).

19. Training for Beneficiaries. In cooperation with INIAP and MAG, BNFwould sponsor for its beneficiaries about 48 training events such as fielddays for demonstration of improved agricultural practices. Preference wouldbe given to farmers' groups such as cooperatives and associations. About 600beneficiaries per year or 2,400 by the end of Year 4 would benefit. Fielddays would be scheduled to coincide with key events during the year such asharvesting crops and cattle auctions.

20. Total cost for four years wouid be around SI 2,736,000 (USS27,360)and would include transportation and refreshments for the participants andtravel and subsistence expenses for BNF staff.

21. Summary of Training Program. During appraisal a review was made ofthe approach BNF would use in each type of training described in the previousparagraphs. They were found appropriate and practical to attain for theproposed training purpose.

Vehicles for Loan Appraisal end Supervision

22. One of the major constraints on the institution is the obsolescenceof its fleet of vehicles, most of which have been in use for more than sixyears. Moreover, the number of its clients, hence the demand for itsservices, has risen sharply (abaut 70,000 loans granted per year), but thestaff appraising and supervising loans lack adequate transport.

23. BNF owns a fleet of 479 vehicles, of which about 69 are allocatedto headquarters' staff (in Quito and Guayaquil); the other 410 aredistributed nationwide throughout the bank's 74 branches and agencies. Thelatter, assigned to 420 supervisors responsible for appraisal and supervisionof loans, are, as a rule, jeep-type vehicles with a small four-cylinderengine and four-wheel drive.

24. The normal life of vehicles assigned to field branches is aboutfour years. However, this is reduced to about three years at branch officeslocated in the coastal areas where salt in the air and water acceleratecorrosion.


25. Lack of funding has prevented BNF from establishing a vehiclereplacement program. Thus, out of its fleet of 479, 327 are older than sixyears; 141 are four to five years old; and 10 are three years old. In regardto mechanical conditions, about 230 are in very poor conditions anduntrustworthy, including 30 which are unoperable and will not be fixedbecause the cost of repairing them would be greater than the salvage value.About 210 are in fair to poor condition and are constantly in and out of therepair shop, while 38 are fairly good.

26. To correct the situation BNF will replace 405 vehicles over thenext four years. Under a recently approved IDB loan it will purchase 105,and under the proposed Bank loan it would acquire a total of 300. Bank/IDAInternational competitive bidding procedurea would be observed.

Security Protection

27. Safekeeping of monies and documents at any one of BNF's branches,including headquarters, is limited to the provision of fire-proof safe roomsand posting one or two guards outside the main entrance. Burglar alarms orany other type of security protection are nonexistent. While BNF has neverbeen held up or robbed, incidents of this type are increasing at an alarmingrate throughout Ecuador. As a result, most coamercial banks have installedsecurity systems, many of which are linked to police headquarters. Ithefeeling among BNF officials is that since most other banks are establishingsecurity measures, it is just a matter of time before the underworld realizeshow easy it would be to burglarize any one of BNF's branches.

28. Currency and valuable documents a-e transported by BNP staff insuitcases using taxis or local buses. For large sums of money BNF hascontracts with 11 individuals responsible for transporting monies and docu-ments among branches. These contracts in (1984) amounted to S/ 15,116,885(US$151,116) annually for a service that covers only 65% of all the branchesand is limited to one pick-up and delivery per week.

29. A study done last year by BNF to determine the efficiency of theservice revealed many inefficiencies including delivery delays of up to 60days and shipments that arrive after working hours. Moreover, vehicles usedby contractors are old and without any security protection. It is notuncommon for branches or agencies, especially the smaller and more distant,to run out of money or to have excess amounts of money that should have beentransferred to another branch. This causes many inconveniences to BNF'sclients and affects the Bank's capacity to provide efficient and timelybunking services.

30. To solve this situation the study proposed the establishment of anew system (Sistema de Distribucion y Transporte de Remesas de Cheques,Dinero Efectivo y Documentos) that: 'a) groups branches according togeographical proximity to each other and to designated regional offices;(b) determines the most efficient delivery routes and pick-up schedules; and(c) outlines procedures for each branch to monitor departure and arrival ofshipments. To complement these measures, the proposed loan would finance thepurchase of 15 armored vehicles to provide security during transportation ofcurrency and the installation of anti-theft devices in at least 25 branches.

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NINXUI2UL TeIjIj9IMJ It .yqaIt L14U2 WIMIWi[

- 39 -ANNEX 4Page I of 2

ECUADOR


Illustrative Investment Plans Financial and Economic Justification

Farm Models

1. The agricultural credit component would finance on-farm developmentinvestments and marketing activities at the inltial stages of the marketingphase (such as small storage installations, packaging, transportation andrefrigeration equipment). Farms receiving credit would grow conmercialcrops, such as rice, corn, beans, soybeans, fruits, milk, beef, and poultry.

2. To estimate the financial coats and benefits, six farm models andbudgets were selected, chosen to represent typical farm sizes and farmingsystems found in the three regions of Ecuador: Coast, Sierra and Oriente.On-farm investments were based on data collected at farm level on actualinvestments financed by BNF during 1983-1985 period.

3. In constructing the models, attention was given to the generallevel of management that preseenly exists at various farm sizes. Indetermining physical parameters, account was taken of current farmingpractices and availability of Inputs. The crop and livestock yields andproduction coefficients are all within the ranges actually achieved by BNFsubborrowers. No important innovations are expected to be iatroduced, butthrough the implementation of the project, improved farming systems that arealready practiced in the country are intended to be dlsseminated more widely.

4. However, the projected mix of enterprises selected would encounterchanges because farmers would modify their choice of Investments over thedisbursement period (seven years) in keeping with relative price and marketchanges of the comodities to be produced. In thls regard, due to thesignificant changes in policies involving the sector, coomiodities with acomparative advantage, such as rice, hard corn, soybeans, and fruits, wouldintensify the use of credit resources. On-farm investment financed underthe project would not be limited to specific crops, livestock regions or sizeof farm enterprises. It is expected that market signals would reorientcredit investments in response to the new set of economic policies underimplementation. As a result, no aggregated economic rate of return has beencomputed. However, the six Illustrative models provide estimates of averagereturns that could be expected under the limpleh'entation of Investment credit.

5. Specific details of farm models are available in the project file.


Financial and Economic Justlfication

6. The financial and economic rates of return for each investment planare adequate as is shown below:

Financial EconomicInvestment Plan Region ha Rate of Return 2 Rate of Return %

Budget I Crop-Livestockl/ Sierra 10 37 41Budget 2 Dairy Sierra .1 28 31Budget 3 Crop-Livestock Sierra iOO 29 31Budget 4 Crop/ -Livestock Cbast 20 30 34Budget 5 Crop-Double Purpose Cbast 200 33 34Budget 6 Crop-Livestock Oriente 50 37 38

1/ Swine, poultry, guinea pigs, and cattle.2/ Main activity.

7. Financial rates of return were derived using market prices for bothinputs and products including labor. The cash flow analyses indicate thatsubborrowers under the project should have no difficulty complying with theterms and conditions to be established by BNF for its lending (Tables 1-6,this Annex). For small-scale farmers BNF should be careful to ensure thatinvestments are placed to fall within the cash generation capacity of thesefarms especially in the first two years.

8. Outputs, with the exception of beans, potatoes, and milk, wereconsidered tradeable commodities, and efficiency prices were derived fromtheir FOB or CIF values adjusted for taxes, transportation, and, whenapplicable, processing and intermediary costs. Farm-gate prices were usedand adjusted in line with expected changes in real value over the life of theproject, according to the tank's international price forecasts. Productioncosts, except for unskilled labor, were priced at local market rates on thegrounds that they best reflect their respective opportunity costs. Theopportunity cost of family labor was estimated at 752 of the equivalentmarket wage for unskilled labor; unskilled hired work was estimated at 70% ofits market wage.

ECUAboH

AGRICULTURAL CREDIT 11 PROJECT______________________________

MODEL 1$lOha SIERRA,FARM FINANCIAL ANALYSIS-------------------------------------------

(S/. 000)

0 1 2 3 4 5 6 7 8 9 19

INFLOW

GROSS VALUE OF PRODUCTION 435 487 859 878 944 989 1113 1238 1253 1257 1259OUTFLOV

INVESTMENTS - 698 219 166 - - - - - - -OPERATING COSTS 270 379 413 451 457 486 486 486 486 486 486

TOTAL COSTS 270 1077 632 61, 457 486 486 486 486 486 486

NET BENEFITS BEFORE FINANC*___________________________

TOTAL 165 -590 227 261 487 503 627 752 767 771 773INCREMENTAL - -755 62 96 322 338 462 587 602 606 608

FINANC ING

LOAN RECEIPTS_____________

LONG TERM - 628 197 149 - - - - - -

SHORT TERM - 109 34 38 6 29 - - - -

LOAN PAYEMENTS

LONG TERM - - 132 173 205 278 279 279 279 278SHORT TERN - 132 41 46 7 35 - - - -

NET FINANCING - 605 58 -32 -206 -284 -271 -27e -279 -278 -NET BENEFITS AFTER FINANC,__________________________

TOTAL 165 15 285 229 281 219 349 475 489 474 773

FAMILY LABOR INCOME 151 168 219 220 223 226 235 235 235 235 235ON FARM CONSUMP. 39 44 77 79 e5 89 100 111 113 113 113CASH FLOW 277 139 427 370 419 356 484 59" 611 615 895

------h1--18----4----------6 EtijW76f8-B 36.64Z NgW -Stt- ------------------------------------------------

ECUADnR

AGRICULTURAL CREDIT It PROJECT--- __-------------------------

"DUEL 240ha DAIRY FARNSIERRAPFARM FINAKIAL AIALYSIS----------------- _---------- -- -----------------------

(SI. 000)

0 1 2 3 4 5 6 7 8 9 i9

INFLOW

GROSS IALE OF MOUC. B76 940 1265 1435 1791 2240 2724 3150 3185 3220 3220OUTFLOW

INVESTMENTS - 1571 431 185 - - - - - - -OPERATING COTS 313 776 798 835 884 970 970 960 960 960 960

--- ----- ------- ------- ------- ------- ------- ------- ------- ------- --- __ _____

TOTAL COSTS 313 2347 1229 1020 884 97i 970 960 960 960 960

MET BENEFITS BEFO FINAIC.

TOTAL 563 -1407 36 415 97 1270 1754 2190 2225 2260 2260IPICREITAL - -1970 -527 -148 344 707 1191 1627 1662 1697 1697

FINANCING

LOAN RECEIPTS

LONG TERM - 1414 388 167 - - - - - - -SHORT TERN 463 22 37 49 86 - - - - -

LOAN PAYEINTS

LONG TERN - - - 933 933 933 933 933SHORT TERN - - 560 27 45 59 104 - - - -

NET FINANCING - 1877 -150 177 4 -907 -1037 -933 -933 -933 -NET BENEFITS AFTER FINANC.--------------------------

TOTAL 563 470 -114 592 911 364 717 1257 1292 1326 2260

FAMILY LABOR INCOME 151 168 219 220 223 226 235 235 235 235 235ON FARM CONSUMP. 44 47 63 72 90 112 136 158 159 161 161CASH FLOW 670 591 41 740 1045 478 815 1335 1367 1400 2334

ffarch 21o 1986 18:46 Internal Rates of Return of Net Streamslurch 1, 198 18:46 NIll 27.81Z

ECUADOR

AGRICULTURAL CREDIT II PRCJECT

MOKIEL 3;100ha CROP-LIVESTOCK FARM,SIERRApFARM FINANCIAL ANALYSIS

(S/4 000)

0 1 2 3 4 5 6 7 8-? 19

INFLOW

GROSS Q4LUE OF PRODUCT. 6700 7486 9016 9203 10351 10586 10617 10641 10859 10859OUTFLOW

INVESTMENTS - 5541 1539 550 - - - - - -OPERATING COSTS 3565 4196 5662 4707 4647 4647 4647 4647 4647 4647

TOTAL COSTS 3565 9737 7201 5257 4647 4647 4647 4647 4647 4647

NET BENEFITS BEFORE FINANC,

TOTAL 3135 -2251 1815 3946 5704 5939 5970 5994 6212 6212INCREIIENTAL - -5386 -1320 a11 2569 2804 2835 2859 3077 3077

FINANCING

LOAN RECEIPTS

LONG TERN - 4987 1385 495 - -

SHORT TERM - 631 1466 - - - - -

LOAN PAYENENTS

LONG TERM - - 1047 1338 1442 I158 1758 £758 t75g -SHORT TERM - 764 1774 - - - - - - -

NET FINANCING - 4854 30 -843 -1442 -1758 -1758 -1758 -1758 -NET SENEFITS AFTER FINANC.

TOTAL 3135 2603 1845 3103 4262 4181 4212 4236 4453 6212

FAMILY LABOR INCOME 240' 241 241 241 241 241 241 241 241 241ON FARM CONSUMP6 201 225 270 276 311 318 319 319 326 326CASH FLOW 3174 2620 1816 3068 4193 4104 4134 4158 4368 6127------c ------21----19---6--------4------_------------Rat--e-----of__ -------- __ ---of-----------------------

Marc 2to198 t8:7 ITternal Rates of Return of IN¢t StreamsHarch 22 1w6 1:47 -WTI 9R.44V

ECUADOR

AGRICULTURAL CREDIT II PROJECT______________________________

MODEL 4120ha CROP FARM.COASTvFARM FINANCIAL ANALYSIS----------------------------------------------------

(SJ. 000)

------------------------------------------------- _------------__-------------__---------------_-----------------------

0 1 2 3 4 5 6 7 8 9 19------- _----------------------------------------------------------------__---__-------_.--____-_____--_--___-__----___

INFtOV

GROSS VALUE OF PRODUCT. 879 998 1153 1241 1342 1639 1856 1952 2031 2031 2031OUTFLOU

INWESTMENTS - 676 419 154 - - - - - - -OPERATING COSTS 567 811 746 81a 862 870 979 901 918 918 918

TOTAL COSTS 567 1487 1165 974 862 870 879 VO0 9t8 918 919

NET BENEFITS KEFORE FINANC.---------------------------

TOTAL 312 -489 -12 267 480 769 977 1051 1113 1113 1113INCREMENTAL - -801 -324 -45 168 457 665 739 801 801 801

FINANCING

LOAN RECEIPTS------------

LONG TERN - 608 377 140 - - - - - - -SNORT TERM - 244 - 72 44 8 9 22 17 - -

LOAN PAYEENTS LILONG TERM - - 128 207 236 321 321 321 321 321 -SHORt TERM - 295 - 87 53 10 11 27 21 - -

NET FINANCING - 557 249 -82 -246 -323 -323 -326 -325 -321 -NET BENEFITS AFTER FINANC.__________________________

TOTAL 312 68 237 18S 234 446 654 725 788 792 1113

FAMILY LABOR INCOME 280 259 241 241 241 241 241 241 241 241 241ON FARM CONSUMP. 26 30 35 37 40 49 56 59 61 61 61CASH FLOU 5i6 297 444 389 435 638 839 908 969 972 1293

March 21r 1986 18:48 Ioternal Rates of Return of Yet Str,eamsNll 30.37%

45 -ANNE 4Table 5

ECUADOR

AGRICULTURAL CREDIT II PROJECT______________________________

MOt'EL 5;20ha CROP-LIVESTOCK FARMtCOAST REGION.FARM FINANCIAL ANALYSIS

(S/. 000)

0 1 2 3 4 5 6-9 19

uROSS VALUE OF PRODUCT. 6077 8004 8277 8685 9087 9769 10120 10120OUTFLOW

INtVESTMiENTS - 5969 1911 220 - - - -

OPERATING COSTS 5156 5935 6006 6183 628? 6239 6239 623q

TOTAL COSTS 5156 11904 7917 6403 6289 6239 6239 6239

NET BENEFITS BEFORE FINANC.

TOTAL 921 -3900 360 2282 2798 3530 3881 3881INCREMENTAL - -4821 -561 1361 1877 2609 2960 2960

FINANCING

LOAN RECEIPTS_____________

LONG TERM - 5372 1720 198 -SHORT TERM - 779 71 177 106 - -

LOAN PAYENENTS

LONG TERM - - 1128 1489 1531 2078 2078SHORT TERM - 943 86 214 128 - -

NET FINANCING - 5209 577 -1328 -1553 -2078 -2078 -

NET BENEFITS AFTER FINANC.

TOTAL 921 1309 937 954 1245 1452 1803 3881

March 21. 1986 18:48

Internal Rates of Return of Net Streams

Nll 32.87X

-46 -46~~~~~

AM= 4Table6

ECUAO

AGRICULTWtAL CR T II PROJECT

MODEL 615Oha CROF'-LIVETOC1 FARM#ANAZQ1 RESIOM.FARN FINANCIAL ANALYSIS

(S/. 000)

0 1 2 3 4 5 6 7-9 19

INFLOW

GROSS VALUE OF PRODUCT. 337 506 742 802 082 911 13?3 1363 1363TFLOW

INVESThENTS - 200 289 - - - - -OPERATING COSTS 275 648 65 667 669 733 683 684 684

--- ------- ------

TOTAL COSTS 275 848 5 67 669 733 683 64 684

NET KENEFITS KFORE FINANC.

TOTAL 62 -342 -212 135 213 178 710 679 679INCREMENTAL - -404 -274 73 151 116 648 617 617

FINANCING

LOAN RECEIPS

LONG TERn - t80 260 - - - - - -

SHORT TERN - 373 17 2 2 64 - - -

LOAN PAYEMENTS

LONG TERN - - 38 92 92 125 125 125 -

SHORT TERN - 451 21 2 2 77 - - -

NET FINANCING - 102 219 -93 -93 -139 -125 -125 -

NET BENEFITS AFTER FINANC.

TOTAL 62 -240 7 42 120 39 5 554 679

FAMILY LABOR INCOME 280 259 241 241 241 241 241 241 241ON FARNCGNSUP. to IS 22 24 26 27 42 41 41CASH FLOW 332 3 225 259 335 253 784 754 879

March 21, 1986 18:49

Internal Rates of Return of Not Streams

NIl 37.022

- 47 -ANNEX 5

ECUADORAGRICULTURAL CREDIT II PROJECT

Subsidlary Loan Agreement

General

1. The Subsidiary Loan Agreements to be signed between the BCE andpartlcipating banks including BNF would be the instrument that would specifyproject implementation details and related legal conditionality in effect inEcuador plus agreements reached between the Borrower and the Bank asstipulated in the Loan and Project Agreement.

2. Among other things, the Subsidiary Loan Agreement would include thefollowing details:

(a) Legal and financial criteria to allow the participation ofprivate banks according to local regulations. One financialcriteria for PB participation would be that the debt equityratio would be at least 20 to 1.

(b) Project Implementation: (i) rediscounting percentages;(it) spreads; (lit) treatment of the foreign exchange risk;(iv) minimum time to request rediscounting to BCE; (vi)repayment schedules to BCE which would be in line with thoseof the sub-borrowers' subloans; (vii) fee to be paid by theCBE to BNF for services to the PB; and (viii) accounting andauditing requirements.

(c) Relationship between PB and BNF: (i) providing loanImplementation information to BNF semi-annually;

(d) Subloan procedures: (i) interest rates on subloans;(it) lending periods; (ill) indication that lendiag rateswould be adjustable and posutive in real terms; (iv) criteriato approve subloans; (v) maximum amount of accumulated loansto be received by one beneficiary; (vi) sub'oans that wouldrequire Bank approval; and (vit) explicit indication thatsubloans would not be used to refinance farmers' existingdebts; (vill) private technical assistance to farmers carriedout by private consultants could be part of subloans; and(ix) short-term credit and counterpart funds required tocomplement investment plans would be provided by BNF and PBfrom their sources of funds.

(e) Statements concerning procurement, required reporting to theBank and mentioning of the importance of the agreementsbetween the Borrower and the Bank as an Instrument of projectimplementation and coordination to achieve the desiredobjectives.

ECUADORAGRICULTURAL CREDIT 11

PROJECT COST SUMMARY

(Sucres Ilillion) (US$ Killion)

X Total z total% Foreian Sose Z Foreisn Base

Local Foreign Total Exchange Costs Local Foreign Total Exchanfe Costs

A. CREDIT

I* ON-FARn INVESTMENT______ _____ __ __

CIVIL WORKS 1,251.2 1,202.1 2.453.3 49 20 9.5 9.1 18.6 49MACHINERY & EQUIPhENT 565.1 2.972.9 3,538.0 84 29 4.3 22.5 26.8 84BREEDING STOCK 1,836.6 459.2 2p295.9 20 19 13.9 3.5 17.4 20 1YPERENNIALS 715.3 144.9 860.1 17 7 5.4 1.1 6.5 17 7PASTURE DEVELOPHENT. 702.2 78.0 780.2 10 6 5.3 0.6 5.9 10 6

Sub-Total O0-FARM INVESThENT 5t07O.3 4.857.1 9,927*4 Ss 82 38.4 36.8 75.2 49 822. SHORT TERN /a

_______ ________

VALUE 730*6 81,2 811.7 10 7 5.5 0.6 6.1 10 ?

Sub-total SNORT TERN /a 730.*6 81.2 811,7 10 7 5.5 0.6 6.1 lQ /

Sub-Total CREDIT 5#800.9 4,938.2 10w739.1 46 89 43,? 37.4 81.4 46 ByB. INSTITUT.STRENGTKEMING

____*___ .____________

SAVING HODILIZATION 52.8 552.1 604.9 91 5 0.4 4.2 4.6 91 5BNF 72.9 656.4 729.3 90 6 0.6 S.O 5.5 90 h

Sub-Total INSTITUT.STREN6THEENIN6 125.7 1,208.6 1,334.3 91 11 1It 9.2 10.1 YV 11

Total SASELINE COSTS 5.926.6 6,146.8 12,073.4 51 100 44.9 46.6 91.5 51 IvUPhssical Continsenc;es 6.3 60.4 66.7 91 1 0.0 0.5 0.5 91 1Price Contin0encies 18.7 128.4 147,1 87 1 041 1.0 1.1 87 1

lotal PROJECT COSTS 5,951.6 6p335.6 12.287,3 52 102 45.1 48.0 93.1 52 102_ = =C=5='== ===-

/a Incremental

------- ____________ ______________ _6:16 _________-____-___------ ---------------------------------------------------- IJulu 14. 1986 16tlE

-49 -ANNEX 6Table 2

ECUADOR

AGRICULTURAL CREDIT II

Project Financing Plan

(USS Million)

Type of Investment World Bank BNF and PB Farmers Total

On-farm investment 38.8 22.4 14.0 75.2

Equipment & vehtcles 8.8 1.0 - 9.8

Furniture - 0.6 - 0.6

Consultants 0.1 _ - 0.1

Foreign Training 0.1 - - 0.1

Local Training 0.2 0.8 - 1.0

Short term credit - 6.1 6.1

TOTAL 48.0 31.0 14.0 93.0

- so -

ANNEX 6

ECUADOR


Disbursemets

Schedule I of Loan Agreement(in USS Million)

2 of ExpenditureCategory Amount Allocated to be Financed

A. Project SubloansOifarilnvest~ints 39.0 65% of subloans. 1/

B. Institutional StregtheningVehicles-, mobile unts, 7.5 100% of importedP.C. computers and office expenditures, andequipment and software. 80X for local expen-

ditures for importsprocessed locally.

Consultants 0.1 100%

Foreign training 0.2 1002

Local training 0.2 20S

Unallocated 1.0

Total 48.0

1/ a) Made by BNF: 652 of subloans disbursed;b) Made by PB: under each subloan disbursed, 75% In the first year, 652

in the second year, and 60% thereafter.

ANNEX 6TiSle -4

ECUADOR


Estimated Schedule of Dtsbursements(US$ Million)

Fiscall/ Disbursement CumulativeYear Semester During Semester Disbursements

1987 December 31, 1986June 30. 1987 3.7 3.7

1988 December 31, 1987 3.7 7.4June 30, 1988 4.2 11.6

1989 December 31, 1988 4.2 15.8June 30, 1989 4.1 19.9

1990 December 31, 1989 4.1 24.0June 30, 1990 3.0 27.0

1991 December 31, 1990 3.0 30.0June 30, 1991 3.0 33.0

1992 December 31, 1991 3.0 36.0June 30, 1992 3.0 39.0

1993 December 31, 1992 3.0 42e0June 30, 1993 3.0 45.0

1994 December 31, 1993 3.0 48.0

The disbursement profile for credit projects tn Latin America indicates aseven-year period from board approval for disbursements of 96Z of loanproceeds.

- 52 -

ANNEX 7Page 1 of 1

ECUADOR

AGRICULTURAL CREDIT 11 PROJECT

List of Selected Documents and Data Available in the Project File

1. BNF's Request for an Agricultural Credit (3 volumes)

2. By-Laws of BNF (Ley Organica del BNF)

3. Credit Regulations (Reglamento General de Credito)

4. Credit Procedures Handbook (Manual de Procedimiento de Credito)

5. Lines of Credit (April 1985)

6. Internal Regulations for Budget Management

7. Annual Report 1984

8. Report on BNF's intitutional improvements 1982-83 (Deloitte Haskings &Sells)

9. Audit Report FY1984 (Deloitte Haskings & Sells)

10. Audit Report PY1983 (Deloitte Haskings & Sells)

11. Lending Program 1985

12. Report on enterprises in which BNF participates as shareholder (FY1984)

13. Statistical Bulletin 1970-84

14. Potential Credit Demand 1985-88

15. Human Resources Management Regulations

16. Management Report on Execution of Lending Program for 1985 (Jan.-Sept.1985)

17. Assumptions used for BNF's financial forecast (Appraisal Mission)

18. Farm models, detailed features

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