Introduction

Background. The loan for the Peasant Development Fund Credit Project – Eastern Region of Paraguay was approved by the Executive Board of the International Fund for Agricultural Development (IFAD) in December 1995. Project activities commenced in January 1996 with an implementation period of six years, which was extended twice prior to the current completion date of 31 December 2004.

Approach and methodology. The IFAD Office of Evaluation sent a mission to conduct a completion evaluation¹, which visited the country from 9 to 31 March 2004. The methodology for evaluating IFAD projects, calls for close cooperation among the borrower, project management and beneficiaries to review project progress and impact together. During the evaluation process, the mission applied the methodological framework adopted by the Office of Evaluation.

In Paraguay, the mission met with authorities from the Ministry of Agriculture and from public and non-governmental implementing institutions, cooperating agencies and other key institutions, and with the IFAD Country Programme Manager. Visits were paid to the areas where the project is active, and contacts made with cooperatives and non governmental organizations (NGOs), grass-roots organizations, beneficiary groups and related parties. On 30 March 2004, the mission held a workshop to present preliminary conclusions to all stakeholders, and prepared an aide-mémoire setting forth preliminary findings and a record of proceedings.

Major design features

Project rationale and strategy. The project at conception was framed within the Government of Paraguay's rural poverty reduction and small-scale agricultural development strategies, as well as the IFAD sustainable agricultural and rural development strategies and country-specific circumstances in addressing the rural poor. In view of prior experiences, this project elected to focus on just three components: financial services, technical assistance and evaluation.

To facilitate and expand access to formal credit by small-scale producers and micro-entrepreneurs, project design called for strengthening the Peasant Development Fund (PDF) ² and expanding and strengthening intermediary financial institutions (IFIs)³ .

Project area and target group. In establishing the project implementation area, consideration was first given to the eleven departments located in the eastern region that had not been included in the credit project for the northeastern region ⁴. Subsequently, the three departments covered by that project were included as well. The target group comprised 65 000 farm families with holdings of less than 20 ha and annual income below the poverty line, set at USD 3 500 per annum per family. Half of these families did not hold title to their land.

Goals, objectives and components. The project's main objectives were to improve the credit system serving farmers in the target group, and to develop and diversify the supply of financial services in rural areas. Anticipated final results were to be an increase in small-scale producers' incomes and in living standards for campesino families. The project was to benefit directly some 12 550 families (20% of the target group) and 300 small rural enterprises, which in turn would benefit the target population by purchasing agricultural products and generating rural employment. Particular attention would be given to participation by rural women. The project was to incorporate 58 IFIs, including 22 consolidated, 21 reorganizing and 11 emerging cooperatives, and four first-tier banks. Technical assistance for production was to be provided for some 4 300 producers, and assistance in obtaining property title to 1 300 campesinos.

To achieve these objectives, the project called for implementation of the following components: (a) rural financial services, to be carried out by PDF by creating a credit fund and providing institutional and operational strengthening for it; (b) technical assistance services, to be carried out through an ad hoc agency and coordinated by the Technical Assistance Coordinating Unit (TACU) to assist IFIs in managing their financial services and to assist their members in production, marketing and land titling; and (c) evaluation, including contracting for a survey and baseline study, two evaluations of implementation and specialized consultancies, and case studies on IFIs and producers' groups. Gender was not covered in a separate project component since it was considered a fundamental cross-cutting element in implementing the various components.

The total project cost was USD 18 million,⁵ of which IFAD was to contribute USD 10 million, the borrower USD 7.2 million and beneficiaries USD 0.8 million. The base cost for the financial services component was set at USD 10.29 million, with USD 6.27 million ⁶ for the technical assistance services component and USD 544 000 for the evaluation component.

Implementation arrangements and partners. PDF is responsible for overall project management and coordination and for direct implementation of the rural financial services component. Campesino organizations and cooperatives and various financial and commercial institutions could be recognized as IFIs in accordance with rules, conditions and criteria set by PDF. TACU was conceived at a higher level to coordinate technical assistance with credit. The United Nations Development Programme (UNDP), an international organization specializing in administering project implementation, was to perform a technical and administrative role in implementation of the technical assistance component. A technical and administrative team, Technical Assistance Services Unit (TASU), was set up for this purpose. Project evaluation was to be performed by an independent local institution selected under PDF criteria. The Andean Development Corporation (CAF) was responsible for supervising implementation for the first two years of the project, but was replaced by the United Nations Office for Project Services (UNOPS) in 2000.

Major political and institutional changes during implementation. The political and institutional context was marked by instability during the project implementation period. In 1998, the Government of Paraguay ceased to provide local counterpart funding committed. In 1999, unpaid loans incurred by farmers during the previous agricultural season were forgiven by law. Between 2003 and early 2004, the Government's failure to pay its debt to IFAD led to a suspension of disbursements under the loan.

In practice, project implementation presented a change in institutional arrangements, since the mechanism planned for coordinating the project components, TACU, was never fully implemented.

With respect to external institutions, the most significant change was the replacement of CAF, the initial cooperating institution, which operated from 1997 to 1999, by UNOPS, which commenced operations in 2000.

Design changes during implementation. Two changes occurred: a USD 4 million reduction in the amount of financing provided, and the incorporation of three additional departments from the previous project for the northeastern region into the project area.

Summary of implementation results

Target group income and savings. The project's impact on the incomes of its beneficiaries is negligible, since exogenous factors such as the market and policy decisions were more important. Generally speaking, no mechanisms or systems were set up to promote savings, nor were the producers interviewed predisposed in this regard ⁷.

Improving access to credit for the target population. Of the 12 500 targeted beneficiaries of credit and other financial services, seven years into the project only 2 271 were being served, with the highest number (3 470) having been achieved in 2002. Not all borrowers were able to adjust to the conditions imposed on project beneficiaries, and practically no women were included. In addition, the access achieved in large part assured no continuity, since most of the IFIs were considered unsustainable. All credits were agricultural, with no other financial services having been developed ⁸

Strengthening of the PDF-IFIs financial system. Most of the measures required to strengthen PDF such as increasing the number of people served within the target group and lowering the cost of credit-related operations were not carried out. ⁹

The administrative staff grew significantly while portfolio management staff remained small. The project managed to restructure some IFIs that were facing financial crises and administrative problems, and provided administrative and financial strengthening for other, either incipient or structurally weak IFIs. Nevertheless, a high number of cooperatives and associations supported and incipient IFIs do not appear sustainable.

Technical assistance for IFIs and their members. The greatest number of IFIs were assisted in 2002, when 39 IFIs participated and close to 3 500 beneficiaries received production assistance. Financial services were provided by the project in 2003 for 23 IFIs of the 58 planned for consolidation years. The number of IFIs incorporated during the project's life up to 2003 was 42, but assistance was either suspended or terminated for 19 of them. The evaluation showed little transfer of skills to IFI management and membership through technical assistance provided under the project. Plans called for providing technical assistance to 4 394 small farmers for production. By the end of 2003 about 3 000 producers were being supported, some without credit. Some IFIs took initiatives or expanded their services by channelling the supply of inputs and/or marketing of some agricultural products to beneficiaries.

Assistance to land titling services. Aside from one attempt at the outset of implementation, no results were reported with respect to the 1 300 beneficiaries planned. 

Gender focus. None was implemented at the outset (not until 2001). The most obvious adverse result was the exclusion of women as a priority target group, and their minimal or non-existent participation as beneficiaries of credit and technical assistance. 

Establishment of the Technical Assistance Coordinating Unit. Despite some initial attempts and fleeting periods of operation, the TACU was never set up or operated as contemplated in the project. This affected coordination of technical assistance and financial services.

Project performance

Relevance of objectives. The poverty prevailing among Paraguay's rural population fully justified the project's overall objective. Moreover, the weaknesses of the rural financial system, together with a lack of knowledge of appropriate techniques and practices for diversification, crop improvement and marketing among small farmers, placed severe constraints on the development of productive activity, lending priority to the objective of improving access to formal credit and other financial services by the rural poor. In addition, instrumental objectives such as strengthening of PDF and  IFIs,¹⁰ improving productive capacity, preserving natural resources and regularizing land tenure, favour access to and better use of credit resources.

Effectiveness. An analysis of the actions and results of project implementation shows that the project was not very effective in achieving either the ultimate objective and strategic objectives, or specific goals for each component. Physical and financial targets in terms of the number of beneficiaries are far from having been reached.¹¹ Moreover, a bias in credit allocation was apparent towards neighbouring areas with the highest number of target population.¹² Although a substantial number of IFIs were covered, some for a short period of time, barely 20% of targeted borrowers were reached. No credit was provided for micro-enterprises, nor for women and young people, nor for solidary groups, all of which were called for in the project design; ¹³ while the savings mechanisms and other financial services provided for exist only by exception. PDF did not implement the risk coverage plan to enable poor rural settlers with little or no collateral security to join IFIs.

¹⁴ The IFIs in turn did not implement the contemplated system of specialized credit assistants providing for outreach by IFIs to the poorest. The project performance does show improvements in credit administration by IFIs. Similarly, technical assistance for production offers some notable results.

One factor that may have had an adverse effect on the project's effectiveness is the fact that credit was almost always provided before technical assistance services, even for incipient IFIs.¹⁵

The failure to consolidate the TACU as a coordinating unit gave rise to separate operations by the two components, jeopardizing the effectiveness of their results.

Efficiency. PDF did not only lower the administrative cost of credit but increased it ¹⁶,and presents excessive growth in arrears. There are signs that funds were diverted and misused in managing PDF; some of these were noted in supervision reports.

One factor that had an adverse effect on TASU operations had to do with the instability generated by uncertainty and delays in the flow of budgeted resources.

The lack of a baseline study and an adequate monitoring system, in addition to the failure to comply with the evaluation and case studies, makes it difficult to conduct a review with broad coverage and accuracy in measuring efficiency. Nevertheless, the high unit cost of operations increases in arrears and poor performance in achieving targets call into question the overall efficiency of this project.

Impact on rural poverty

Impact on physical and financial assets (moderate, rating 2). Improvement in the physical capital of project families as a result of implementation is minimal. The project showed a propensity to act and intervene in areas and IFIs that were relatively well off compared to most of the target group. In these areas, some changes can be observed in physical assets in terms of improvements and/or additions to housing and improvements in land use potential. Access to financial assets improved moderately with the project, but savings and capitalization are negligible. Some project beneficiaries purchased livestock, particularly animals for fattening and small livestock, which serve as a reserve or kind of savings for farmer populations. Less frequently, additional plots of land were purchased.

Impact on human assets (from negligible to moderate, rating 1-2). Training for staff in project implementation units was generally weak and unsystematic. The programme to train management and administrative staff in IFIs, and technical assistance provided to producers who are members of IFIs, have contributed to human capital formation in some groups of the target population, but its impact has been limited by a lack of continuity and overall vision of events and assistance, as well as an almost total exclusion of women and young people.

Impact on social capital and empowerment of the population's capacity for action (moderate, rating 2). Despite the project's significant contribution of promotion, training and assistance for IFIs, a lack of attention to effective participation by members and effective social control of activities have in many cases undermined members' trust and expectations.

Impact on food security (moderate to negligible, rating 2-1). No severe deficiencies were observed in the nutritional status of children in the area ¹⁷. The project may be making a modest contribution through income, diversification of production and assistance.

Impact on the environment and public goods (moderate to substantial, rating 3). The environmental impact of project implementation has been low, though positive overall ¹⁸.

Impact on institutions, policies and regulatory framework (from negligible to moderate, rating 1-2). The project has had little institutional impact. Even the expected impact on strengthening PDF did not materialize, in regulations, procedures, efficiency or transparency of operations. Nor did TACU manage to operate as a coordinating unit, involving the Ministry of Agriculture albeit indirectly.

Impact on women (negligible, rating 1). The project's results in terms of including women in the target population and in actions and decisions relating to implementation have been very limited¹⁹, and in some cases generated conditions that increased the workload of women and children.

Sustainability (very low to low potential, rating 1 to 2). The benefits generated by the project have to do with the workings of public and private institutions created or strengthened by it. Sustainable institutions are important to ensure the continuity of such benefits. PDF's financial statements reflect considerable equity capital and an increase in profitability ²⁰, but do not take into account the substantial contributions received from the Government, including from Inter-American Development Bank (IDB) and IFAD loans, nor that a high percentage of income (averaging 32% since 1996) come from investing part of those funds separately from its loan portfolio in time deposits or savings, so that they are not available to serve demand for financing from farmers. ²¹. In practice, as indicated throughout the report, PDF presents severe functional weaknesses, high costs per unit of credit and an increase in arrears that gives cause for concern.

Most of the IFIs supported by the project are not sustainable over the long term. Many of them have been structured to provide credit to their members, some specifically with PDF resources. They depend on external funding sources (governmental or other donors) because their members do not make savings deposits; their managers generally possess limited management skills; member participation is low and member knowledge of IFI operations generally inadequate. Furthermore, IFIs in general lack appropriate procedures to mitigate credit risks, as well as collection and recovery policies and procedures.

TASU, which provided technical assistance services, was never contemplated as a permanent institution, although beneficiaries were to contribute to payment for such services. The IFIs and beneficiaries interviewed by the mission generally value such services, but it is highly unlikely that they or small-scale producers are prepared or able to take over financing of their own operations.²²

Innovation and scalability (moderate, rating 2). The project called for the creation of a financial system oriented towards small and very small-scale producers, with a second-tier institution and a number of associations and cooperatives consisting wholly or in part of rural population groups acting as financial intermediaries. At the time this was a promising innovation for the country, and it replicated and expanded upon the project implemented in the north eastern region (three to 14 departments). The fact that implementation has not been successful does not invalidate its potential for replicability given the necessary organizational, functional and operational adjustments and more stable conditions. 

Other kinds of impact on poverty: Impact on agricultural production and productivity (moderate, rating 2). Some improvements in production and productivity can be observed. Technical assistance for production provided by TASU is recent and not always tied to credit, but the mission observed some progress. Although technical assistance under the project promotes crop diversification, there is an observable trend towards intensification of cash crops. Irrigation is not widely used. Marketing assistance (including exports, in some cases) has had a major impact on the incomes of producers assisted.

Overall evaluation of impact (moderate, rating 2, with cases of negligible impact, rating 1).  The project has had little impact on the agricultural context in rural Paraguay. One of its main objectives, to strengthen PDF, not only was not achieved but, in part for reasons beyond the project's control, backsliding and distortions occurred, with an illicit misappropriation of resources and increased bureaucracy, operating costs and arrears. An insufficient number of IFIs were incorporated, and many of these show little potential for continuity over the medium term.

Technical assistance was added late and actions at the IFI level were directed more towards helping them function or recover than towards training their management and membership. As for producers benefiting from assistance, there are fewer than planned and the assistance period has been short, so that the effects remain to be seen

Performance by partners

Performance by IFAD. The IFAD Operations Manager maintained a close working relationship with the project, supporting actions by implementing staff and helping to promote support and coordination among national and international institutions. This relationship was affected by political turbulence. Supervision was stepped up in 2000 and several support missions were organized; however, the lack of attention to major observations and recommendations could have benefited from clearer decision-making.

It is important to recognize that both IFAD and UNOPS had a positive influence on maintaining a solvent portfolio, even in the face of widespread payment default following the debt cancellation initiative. Nevertheless, insufficient attention paid by the national institutions involved to repeated observations and recommendations by project supervision missions affected performance and should be given special consideration in the future.

IFAD met its financial commitments towards the project satisfactorily, including its contribution to resolving the problem caused by cessation of counterpart contributions by the Government of Paraguay. Also, IFAD granted two extensions in the project implementation period and loan closing date.

Performance by the cooperating institution. Initially, the cooperating institution was CAF. In 2000, IFAD decided to replace CAF with the United Nations office responsible for supervising projects in the region, UNOPS. The experience with UNOPS has been satisfactory and supervision of project implementation has taken place systematically and frequently ²³.

Although the supervision reports have been made available with some delays,²⁴ timely communications to the Ministry of Agriculture and the leadership of directly concerned institutions have diligently reported on major problems identified by each mission and formulated relevant recommendations.

Performance by the Government and its agencies (including project management). Political instability affected performance by the institutions responsible for implementation. Generally speaking, the project has not had the required political, programming and budgetary backing. For instance, despite the loan agreement, the Government ceased to comply with its counterpart obligations.

Although the plan was to make PDF politically independent, governed by an executive board acting on behalf of the institution and its beneficiaries rather than to the benefit of political parties and appointees, that was not the case for most of the project implementation period.

The institutional and administrative arrangements contemplated for project implementation did not materialize, and it was not possible to provide for regular TACU operations. The lack of coordination among implementing agencies, even though just two operating components were involved, led to an internal division that diminished complementarity, eliminated synergies and had a definite impact on potential for success. The unit responsible for technical assistance, TASU, made an effort to perform its functions as written, to carry out administrative actions with transparency and to provide instruments to empower beneficiaries. However, a combination of unfavourable circumstances such as the commencement of operations two years late, problems with the stability and continuity of technical assistance, complex or slow administrative processes in making loan proceeds available and delays and cessation of local counterpart contributions ²⁵ prevented the services from attaining the expected level of effectiveness ²⁶ and sustainability.

Performance by non-governmental and grass-roots organizations. Many of the IFIs that serve IFAD's target population exist mainly to provide credit to their members. Once the members receive the credit they have little interest in the IFI's survival, and arrears are common. As a result high arrears rates, both internally and externally, are typical of IFIs. Nor is there much interest in attracting new members or bringing in women.

Other NGOs have participated in the project. Among them are the second- and third-tier cooperatives that have provided training and support. Mention was also made of CEPACOOP (Central Paraguaya de Cooperativa), the federation of cooperatives created with support from the project that operates in agricultural product marketing and exports.²⁷

The Paraguayan Centre for Social Studies (CPES) satisfactorily performed the first and only external evaluation of the project. Successive evaluations and case studies contemplated by the component were delayed and finally not carried out.

Overall project evaluation and conclusions

The lack of continuity in project management and executive authorities, unstable agricultural prices and policies, financial vulnerability to political and personal pressures and interests, the tradition of clientelism and paternalism within institutions, weaknesses in monitoring, supervision and administrative control over resources, operating and regulatory deficiencies in official and private organizations concerned: all these factors were present during the project implementation period and had a decisive impact on its operations and results.

The mechanism included in project design to coordinate the components, TACU, with participation by the Ministry of Agriculture and PDF, did not achieve stable operations. Coordination was weakened and the mechanism became diluted.

The fact that a high percentage of the beneficiaries served by the project did not belong to the lower strata of IFAD's target population led to a less perceptible improvement in incomes, physical and financial capital and general living conditions for that population as a whole.

In view of the foregoing considerations, the project did not reach its goals or achieve the expected results, although it made important contributions that warrant recognition.

Findings and recommendations

Findings

A minimum of continuity in institutional and sectoral policies, and in the tenure of project technicians and authorities, is a prerequisite for the success of rural development and poverty reduction projects. 

To attempt to separate the administration of a public project from direction and oversight by the competent authorities does not protect the project management from the influence of politics and change. In fact, it weakens the financial and political support needed by implementing agencies and can thus impede implementation.

The project components should not be allowed to evolve independently, without practical executive direction or at least effective coordination during implementation.

Organizing associations and cooperatives motivated exclusively by the expectation of obtaining financing, without proper training in cooperation and principles of solidarity, will backfire and lead to serious losses and disturbances.

A project that includes financial services to be provided by a second-tier institution requires sound intermediaries that are sustainable over time. If solvent financial institutions such as commercial banks and consolidated cooperatives are to join the project, it is crucial to establish adequate incentives along with clear, well established operating rules.

Training within a cooperative or other grass-roots association to improve its management and member participation must be addressed to administrative staff and all members in addition to executives.

There appears to be resistance among financial institutions to contribute to developing a savings mentality among their members and provide related financial services. Such services should be emphasized at the project outset, since the evaluation shows few initiatives and accomplishments in this regard.

Supervision missions by IFAD or the cooperating institution, as well as evaluation and monitoring studies, should be systematic and timely and formulate viable recommendations. It is also important for cooperating institutions to require those implementing the project to fulfil the commitments agreed upon in documentation signed by the parties concerned.

Recommendations

Review of PDF structure and organization. A full-scale review of PDF structure and organization is needed, ²⁸ taking into account scarce resources and the objective of serving a disperse population. The reengineering of PDF should focus on a higher degree of solvent and consolidated intermediary institutions; identification and promotion of innovative solutions to channel and manage credit and other financial services for small-scale producers and the rural poor in general; design and implementation of an efficient mechanism to support high-risk credit; ongoing supervision and support of weaker or incipient IFIs; a search for mechanisms and instruments to enable IFI management and members to receive organizational, cooperative, administrative and accounting training, as well as guidance in production, marketing and project development; mainstreaming women into credit; and promotion and implementation of credit for microenterprises and non-agricultural production in rural areas. At the same time, PDF should reinforce normative elements and discipline in its operations, as well as internal audit and control.

If PDF is to achieve a reasonable degree of political independence, a change in executive board membership should be considered, to include high-profile individuals with a reputation for integrity and independence, who are familiar with the financial system and microfinance. Procedures should be established to ensure that board members cannot be removed for political reasons, but they should rotate periodically.

Adopt corrective measures to secure PDF lending portfolio. (i) invest in training IFIs in group and credit management before disbursing loans; (ii) review loan approval process to ensure credit timeliness; (iii) enhance post-disbursement supervision;  (iv) conduct field audits to verify methodology, policies and procedures applied by PDF and IFI staff; and (v) implement active procedures to recover arrears.

Disseminate PDF financial services. Once its lending products have been restructured, PDF should launch a large-scale information campaign to publicize its services and inform its target market of its existence and its methodology and requirements.

Incorporate consolidated IFIs. The consolidated IFIs, including both the private and official banking sector, must be motivated and have incentives to participate in projects with PDF. Also, small and incipient IFIs should be encouraged to join other, more developed ones, or to join second-tier organizations.

Provide pre-training for incipient and recovering IFIs. These IFIs require significant training in financial and credit management before receiving loans.

Focus on beneficiaries. Appropriate steps should be taken so that beneficiaries are incorporated in IFAD-supported projects in ways that are more consistent with their objectives.

Train target population. The members and management of IFIs need training in the principles of cooperation and organization, as well as intensive learning and training in credit management and administrative and financial issues, before receiving credit. Priority should be given to providing training and assistance to groups of women, young people and members generally in setting up and operating micro-enterprises and non-agricultural productive activities.

Ensure integration and complementarity between technical assistance and credit. Cropping plans and investment projects by borrowers should be well supported, based on technical and economic criteria, anticipating the marketing of production and considering flows of funds for establishing recovery periods.

Provide for continuity of technical assistance for beneficiaries. It is important for the Ministry of Agriculture to examine the need to ensure a certain continuity in technical assistance services for IFIs and borrowers under the project, considering the imminent closing date.

Designate a higher executive authority. In future projects, the competent governmental agency should designate a unit responsible for directing and coordinating implementation of the project and all its components, with sufficient backing and authority.

Require compliance with programming of evaluation and monitoring activities. Rigorous evaluation and continuous monitoring of project implementation should be assured. The evaluating institution should be appointed following a strict selection process.

IFAD participation during implementation. In countries with an unstable political situation and weak or vulnerable institutions, IFAD can play an important role in institution-building, continuity of programmes and technical staff and fulfilment of commitments set forth in loan agreements.

Strengthen participation by regional or international institutions in supervising and monitoring actions by bodies responsible for project management and implementation. The support they provide for implementation, and the support they receive from IFAD, should be reviewed in depth in order to realize the full potential of the intervention.