Completion evaluation

Project area

The Northern Zone Agricultural Credit Development Project initially covered the cantons of Upala and Guatuso in the province of Alajuela in Costa Rica's Huetar Norte region. The project area was expanded in 1994 to include the canton of Los Chiles and again in 1997 to include two districts (Cutris and Pocosol) in San Carlos canton. The total area covered was 5 204 square kilometres, equivalent to 10% of Costa Rica's national territory.

Project design and objectives

Target group

The original project design estimated the number of direct beneficiaries at over 2 500 families having annual incomes below USD 2 400 (the number rose to approximately 3 000 families with the subsequent expansion of the project area); 1 700 of these families (2 000 subsequent to the project expansion) would receive credit under the project, including 400 women. To be eligible for credit under the project, producers – in addition to the stated family income ceiling – had to meet the following conditions: (a) possess not more than 15 hectares of land of which not more than 10 hectares was tillable; (b) family income must be derived mainly from farming activities; and (c) they had to use essentially family-based labour. These conditions applied both to independent farmers as well as to tenants on land settlements of the Instituto de Desarrollo Agrario (IDA), the government agency in charge of land-reform policy. As concerns women beneficiaries, the project would lend support to 200 women heads of household who were individual landowners and to another 200 who were not landowners but were willing to work in groups.

Objectives and components

The project's core objective was to raise beneficiaries' income by improving their agricultural production. The project would help beneficiaries to increase the area planted with basic grains and to diversify their production by introducing non-traditional crops (especially pineapple, palmito, citrus fruit, and plantain). The project also aimed to increase the yields of basic grains by introducing changes in the target population's production technology, i.e., progressive use of inputs (basically, new seed varieties and fertilisers), while maintaining most of the existing practices.

To achieve these objectives, the project provided a total of USD 10.3 million, in the form of an IFAD loan (DEG 3.5 million, equivalent to USD 4.5 million, or 43.7% of the total amount), a loan from the Central American Bank for Economic Integration (USD 3 million, or 29.1%), a Dutch Cooperation grant (USD 1 million, or 9.7%) and the counterpart contribution of the Government of Costa Rica (USD 1.8 million, or 17.5%). The project called for the following main actions: (a) a credit programme for USD 8.2 million (81.4% of the funding) to finance investments and working capital; (b) an agricultural extension component for USD 704 000 (7.0% of the funding) to cover the hiring of technical staff, purchase of vehicles and outfitting of the executing agency's offices; (c) a marketing component for USD 516 000 (5.1%) to build facilities for the collection and storage of grain, upgrade the executing agency's offices and hire technical staff; (d) a training component for USD 49 000 (0.5%) to train the project's beneficiaries and technical staff; (e) a women's participation component for USD 131 000 (1.3%) to support women and women's groups; (f) project administration, at a cost of USD 358 000 (3.5%); and (g) monitoring and evaluation, at a cost of USD 115 000 (1.2%).

The local executing agency was the Ministry of Economic Policy and Planning (MIDEPLAN), which was to set up a project coordination unit. The unit would enter into agreements with other public-sector agencies for the administration of project credit, extension services and marketing support, and it would be responsible for supervising progress under these components as well as executing the training and women's participation components. The credit activities would be managed by Banco Nacional de Costa Rica (BNCR), extension services would be provided by the Ministry of Agriculture, and the marketing support component would be carried out by the National Production Council.

Expected effects and assumptions

The project design made a series of assumptions about causal relationships that had a deciding influence on the project's proposed activities. These included the following:

(i) There is a direct relationship between agricultural production and beneficiaries' income levels. As a consequence, the project sought essentially to increase the area planted to crops that had been identified as income-generating and to introduce changes in production technologies with a view to boosting per-hectare yields.

(ii) Non-traditional crops (pineapple, palmito, citrus fruit and plantain) and, to a lesser extent, basic grains were identified as the activities that held the greatest income-generating potential, while livestock-raising was viewed as less attractive. Accordingly, the project strategy focused on introducing non-traditional crops while increasing the yield of and the area under basic grains.

(iii) Limited access to credit and extension services was identified as the main obstacle keeping small-scale producers from introducing new crops, expanding their planted areas and adopting new technologies. Since most of the potential beneficiaries lacked collateral, it was very difficult for them to borrow from the formal banking system. Furthermore, the presence of public-sector extension services in the project area was very weak, as was small producers' capacity to pay for the very limited private-sector technical assistance. Consequently, agricultural credit and extension would be the main tools for promoting the production-oriented changes proposed by the project.

(iv) The design assumed that technologies were already available for such non-traditional crops as citrus fruit, pineapple and plantain, and that the extension agents were familiar with these technologies. Accordingly, no financing was included for agricultural research activities or for training extension agents in working with these crops.

(v) The design also assumed that public-sector agencies were the ones best suited for executing the project's components and that strengthening these agencies was an important objective in and of itself for improving services for the rural poor. This explains why government agencies were selected to carry out the main project components (credit and extension).

Evaluation

Implementation context

The project was launched in October 1992, with the Central American Bank for Economic Integration (BCIE) as the cooperating institution. Implementation was scheduled to last four years, with a five-year disbursement period. Subsequently, BCIE approved a three-year extension up through June 1997, and IFAD approved three extensions (as of June 1995). The project closed on 31 December 1997.

The project's implementation period was characterized by a favourable economic environment. In the early 1980s, inflation in Costa Rica had climbed to 81% (1982) and gross domestic product (GDP) had fallen 10% (1981-82). The introduction of stabilization and structural-adjustment measures brought about a drop in inflation and recovery of GDP growth, except in 1996 when GDP declined again by 0.8%. Between 1992 and 1996, inflation shrank on average by 17% per annum, while GDP was growing an average of 4.4% per annum and stood at USD 9 015 million by year-end 1997. With an estimated population of 3.48 million in 1997, the country's GDP per capita was USD 2 590. Foreign trade flows also posted excellent performances: in 1997, exports and imports both doubled their 1991 levels, reaching USD 3 280 million and USD 4 008 million respectively. Non-traditional products were the export sector that fared the best, rising from 52.8% of the total in 1991 to 68.2% in 1997.

The implementation period also saw the introduction of structural-adjustment programmes. In the mid-1980s, the Government of Costa Rica began adopting a series of adjustment policies and reforms, with support from stand-by arrangements with the International Monetary Fund in 1987 and 1989, two World Bank structural-adjustment programmes in 1985 and 1989, and bilateral donations, especially from the United States Agency for International Development. These actions consisted mainly of financial reform, paring back public spending, deregulation of foreign trade and export promotion.

These measures were accompanied by a sharp pullback by the public sector in the marketing of basic grains, an activity in which it had participated actively since the late 1940s by way of the National Production Council (CNP). As part of the country's policy of food self-sufficiency, the CNP set minimum prices for producers and maximum prices for consumers, purchasing output from producers and importing or exporting grains in accordance with national production levels. Beginning with the 1994-95 harvest, the CNP pulled out of grain marketing for good and transferred its extensive network of collection and storage centres to producer organizations. At the same time, the Government began discouraging these crops by deregulating their prices, dismantling non-tariff barriers on imports and reducing tariffs. In January 1995, the Government secured approval of the Consumer Protection Act (Law 7,472), whereby the public sector ceased setting prices and profit margins by product area, with the exception of rice, milk and butter.

Implementation of this project coincided with the adoption of a new government policy to pare back public spending. As a result, government agencies had to reduce their allocation requests in the national budget and adjust their own budgets strictly to the amounts allocated. During the period, the Government also periodically downscaled the budget allocations for several agencies by means of legislation and executive decrees.

The project implementation period also witnessed some dramatic changes in Central America's geopolitical context. In late 1990, elections in Nicaragua brought the Sandinista regime to a close, thus defusing tension along Costa Rica's border with that country (which is part of the project area). As an outgrowth of the harsh economic conditions that prevailed in Nicaragua during the 1990s, citizens of that country were emigrating en masse to the project area. This exacerbated the already tense social situation resulting from overloaded public services, such as health and education, and pushed even more people over the line into poverty.

Weather conditions, too, were especially poor during the implementation period, and this had a major impact on agricultural activity in the project area. During the 1996-97 bean harvest, heavy rains caused significant losses, since farmers were unable to harvest roughly 75% of the planted area. In 1997 and 1998, the El Niño phenomenon produced an usual drought in the project area, lengthening the dry season from its normal three months to a full seven months.

On balance, these changes had a negative impact on the implementation context. Although the economic environment was favourable, climatic vagaries had adverse repercussions for planting decisions and crop yields, thus undermining any possibility of attaining the planting and yield targets set forth in the project design. The structural-adjustment programmes also had negative fallout for the project, for instance:

The National Production Council's decision to withdraw from the marketing of basic grains, coupled with price deregulations and the dismantling of tariff and non-tariff barriers for basic grains, dampened farmers' expectations of the prices they might receive for their harvests, which led in turn to a decrease in the areas planted to basic grains.

The deregulation of basic-grain marketing triggered major changes in the role of the government agencies directly linked to project execution. The CNP, as the agency charged with execution of the marketing component, was the one most affected by the new government policies, since it had to chart a new course for itself and find a new mission both at the national level and in the execution of the project's marketing component. The resulting learning curve had a negative impact on the execution of that component.

The policy of paring back public spending meant that the various ministries now had to work within specific spending limits. Such budgetary constraints, coupled with the complex procedures that government agencies in Costa Rica must comply with in order to hire staff and make purchases, resulted in frequent delays in these two activities for the project's executing agencies.

Project achievements

Changes in Agricultural Production in the Huetar Norte Region

Unlike the situation in the 1980s and early 1990s, the area planted each year to basic grains in the Huetar Norte region varied considerably over the implementation period, with a downward trend observed in the last three crop years (1995-96 to 1997-98). In the period 1995-98, an average of 17 700 ha were planted with beans and 3 780 ha with maize each year, representing a drop of 11% and 42.7% respectively over the period 1989-92. Rice was the only crop that steadily expanded its area, averaging 11 200 ha per year in 1995-98, equivalent to over triple the average area in 1989-92. During the last year of project execution (the 1997-98 crop year), crop levels were particularly low compared with those at the beginning of the project, standing at 16 840 ha for beans and 2 757 ha for maize, which represented a drop of 16.6% and 11.3% respectively over the annual average area in 1989-92 and a drop of 27% and 52.6% in relation to 1991-92. This decrease notwithstanding, the levels are still high in the case of beans when compared with the area planted to this crop in the late 1980s.

As less area was being planted to basic grains, the project area saw a significant increase in the area planted to root and tuber crops: ginger and new cocoyam, in particular, tripled their areas, increasing from 400 to 1 390 ha and from 200 to 687 ha respectively. Some of the non-traditional crops that were virtually non-existent in the project area during the early stages of implementation also expanded considerably. Palmito was the crop that showed the greatest growth, totaling some 1 800 ha in 1997. Other crops increased as well, although nowhere near as much as palmito: pineapple and chili peppers covered a total of 100 ha and 80 ha respectively.

Livestock activities, too, grew substantially during the implementation period. In 1991, the herd in the Huetar Norte region was roughly 400 000 head, of which 60% were beef cattle and 40% were dairy or dual-purpose (beef and dairy) cattle. Although exact, up-to-date information is not available, the technical experts calculate that the herd increased from 20% to 30% in the period 1991-98, which translates into some 480 000 to 520 000 head in 1998.

Impact of the Project's Credit and Extension Activities on the Production-oriented Changes that Took Place

The project played a significant role in the changes that took place in agricultural production in the project area. Over 3 700 loans were granted, for a total of USD 7.5 million, to nearly 3 200 families of IDA-settlement tenants and independent landowners; 14% of the loans went to women. Benefits accrued to another estimated 1 130 small-scale farmers by way of loans granted to producer organizations.

In terms of volume, 65.5% of the financing went towards investments, while 34.5% went to short-term lending. This credit allowed small producers to expand their crop areas by providing financing for 7 200 ha during the implementation period. The main crops involved were basic grains: the project provided financing for the planting of 4 400 ha of basic grains (61.1% of the crop area financed) and 2 106 ha of root and tuber crops (29.2%).

The area under cultivation for which financing was provided during the project period represented 66.2% of the area called for in the project design. While basic grains attained 64.3% of the design's target, the area planted to non-traditional crops, such as pineapple, palmito and plantain, reached only 19.5% of the target level. The area planted with root and tuber crops, on the other hand, was three times the targeted level, with new cocoyam accounting for 72.1% of the area financed for these crops.

In the case of basic grains, project credit represented a relatively small share in the financing of planted areas in the Huetar Norte region as a whole. Examining the period from 1993-94 to 1996-97, project loans financed only 3.8% of the area planted to beans and 5.3% of the area planted to maize.

Project loans for root and tuber crops and non-traditional crops, on the other hand, played a significantly larger role in terms of the areas planted to these crops in the Huetar Norte region as a whole. Project credit financed approximately 40% and 16% of the area planted to new cocoyam and ginger respectively. For non-traditional crops, the project financed a significant percentage of the planted area. It should be noted that most of the lending for non-traditional crops went towards providing strategic support to organizations of small producers who were just starting production.

Project credit was also very important in the livestock sector, which accounted for 44% of the total volume lent and 64% of the investment lending. Thanks to these loans, farmers were able to purchase over 7 500 head of cattle, and to build on-farm infrastructure and plant pastureland.

Lastly, the project made it possible for many more beneficiaries than originally anticipated to receive some kind of assistance from the Ministry of Agriculture. The ministry's technical staff supervised the credit, and they formulated investment plans, filled out loan applications and provided technical assistance during the loan periods. The technical staff also performed other, non-project-related tasks, such as conducting surveys to identify beneficiaries of IMAS (Joint Institute for Social Assistance) funds, distributing seeds, estimating losses from bad weather, taking blood samples from animals during quarantine periods, and lending assistance for other credit programmes, such as the BNCR-Republic of China Smallholder Credit Programme.

Marketing component

Despite considerable delays owing to the restructuring of the component and a series of problems within the executing agency, scheduled investments were made to upgrade infrastructure for collecting basic grains, and offices were built for the executing agency in the project area.

The main action under this component was the establishment of six agro-industries. Project credit was used to finance investments, while CNP technical staff conducted feasibility studies, assisted with building the agro-industries, the selection and installation of equipment and upgrading of manufacturing processes, and helped locate marketing channels. The component included technical and managerial training for beneficiaries. The agro-industries received investments totaling USD 376 000, equivalent to 5% of all the credit provided under the project and 7.7% of the investment loans disbursed up to 30 June 1998. Upon including the credit provided for working capital, the project's agro-industries accounted for just under USD 417 000, which represented 5.5% of the project's total credit. Three of the projects (56.4% of all the credit that went to agro-industries) were dairy-processing plants for the preparation of cheeses; the other projects processed other agricultural products.

Training component

The Project Coordination Unit coordinated training activities with the National Training Board [Instituto Nacional de Aprendizaje, INA]. The 225 training courses that were offered were attended by 2 780 farmers, or four times the target proposed in the project design. These courses included those of the marketing component and those of the INA that were designed on the basis of project demand. The main topics addressed at the training events had to do with production-related issues, such as livestock breeding management, pasture management, animal health, cultivation of beans, chili peppers and palmito, as well as basic accounting and administration.

The courses offered under the training component targeted farmers, organizations and technical staff, and used services contracted for with the Research Foundation of the University of Costa Rica (FUNDEVI) and the Agricultural and Agro-industry Research Foundation (FIAA). These agencies held 19 courses for 234 small-scale producers in such areas as agricultural accounting, milk management and industrialization, and marketing techniques. Seven courses were held on accounting, computer use and management, and statistics for CNP technical and professional staff in the Huetar Norte region (average attendance: 13 per course).

In 1995, the Project Coordination Unit entered into an agreement with FUNDEVI to provide training to small-producer organizations and women's groups in the organization, formation and consolidation of groups. Also, as part of the training agreement with the INA, it was agreed that the INA's Department of Professional Training for Women would hold courses for women's groups in the project area.

Women's participation component

The project extended credit to 299 women, that is to say, to 50% more than the 200 beneficiaries targeted in the project design. A total of 511 loans were granted to women (14% of the total number of loans granted) for a total of 154.1 million colones.

The training component held courses for women's groups in response to needs identified by the extension agents, addressing such areas as self-esteem, gender and social issues, human relations, leadership and authority, and the prioritization of problems. In August 1995, training activities were also held for the project's technical staff and officers, including a workshop on gender and equal opportunity offered by the Centre for the Advancement of Women and the Family, which is attached to the Ministry of Culture, Youth and Sports. In November of that same year, a workshop was held on the generation and transfer of technology using a gender and production-systems approach.

Under the project, 30 groups (for a total of some 350 women) received technical assistance, training, marketing and credit services. This was 75% higher than the project's target for women working in groups; the number of groups served was three times that originally anticipated.

Organization, management and supervision

Generally speaking, the work of the Project Coordination Unit (PCU) was satisfactory. Staff structure and rotation were kept to a minimum, and the coordination arrangements worked quite well. That notwithstanding, project organization and management encountered a series of problems: (i) the PCU had lacked authority for demanding better performance of the coexecuting agencies; (ii) the decision to shift the PCU outside the sphere of MIDEPLAN triggered problems in that the unit lost important physical and human support that the ministry provided in the accounting, financial and procurement areas; (iii) the project's lack of budgetary autonomy meant that the PCU and the coexecuting agencies had to go through complex procedures to hire staff and purchase vehicles, which was incompatible with a flexible execution structure and resulted in frequent implementation delays, especially during the first two years; (iv) the availability of the counterpart funding was also affected by the complexity of the procedures involved; (v) the project execution period coincided with the launching of a government policy to trim public spending, which set maximum spending levels for the various ministries and triggered delays on several occasions in the hiring of technical staff and the purchase of vehicles called for under the project; and (vi) farmers had little involvement in the project's management structure.

BCIE's reorganization led to problems with its supervision of the project: the bank cut its staff significantly and transferred project supervision responsibilities to its national offices. Although it might be expected that such a shift should have had a positive impact on the quality of supervision, the project initially suffered from the drop in staff assigned to these tasks and the time it took to adapt to the new working arrangements. This led to poor supervision results and their low impact on project execution. Despite these problems, it is worth noting that the BCIE office in San José showed interest in improving the quality of supervision in other IFAD projects. These shortcomings of the cooperating institution were offset, at least partially, by the positive contribution of the RUTA offices in San José, which lent valuable support to the project, oftentimes in areas that were the responsibility of the cooperating institution.

Effects, assessment and sustainability

Production, employment and income

Most of the credit beneficiaries lacked prior experience with borrowing from the formal banking system, so the project made it possible for them to receive credit for investment and working capital at low interest rates and without requiring collateral. While the average nominal rate charged by banks for agricultural loans over the period 1992-97 varied between 25% (in 1997) and 39% (in 1995), the project loans charged interest rates of between 18% and 20% .

Also, unlike normal loans from BNCR, project beneficiaries did not have to pay any up-front processing costs for their loans (registration, valuation and fuel for the loan officer's visit to the farm), which averaged USD 35 for a loan of USD 1 950. Project beneficiaries also enjoyed greater flexibility in renegotiating repayments in the event of poor weather conditions or marketing problems.

Under normal BNCR loans, farmers must begin repaying three months after disbursement. Since many of the crops and especially livestock do not begin yielding income until well after this period, farmers need to set part of their loans aside to be able to make the first loan repayment. Under the project, this problem was solved beginning in 1994, when payment schedules were adjusted to the kind of production being financed.

The project also helped to heighten the profile of the Ministry of Agriculture (MAG) by providing extension services to farmers who did not receive them previously. As a result of the project, the MAG was able to hire an additional thirteen extension agents to complement the eight who were active at project start-up, and to purchase vehicles for these agents to make their visits. The agents were hired permanently after the project closed, so the MAG's presence in the area and its level of service to the rural poor has been one of the key long-term impacts.

The extension services financed under the project played an important role both in the use made of the credit as well as in the production methodologies. This was owed to the fact that the credit was supervised. Since it was the extension agents who filled out the loan applications for the farmers, they had a direct and decisive influence in the choice of activities to be financed.

The project's credit and extension activities allowed beneficiaries to increase the area planted with basic grains and root and tuber crops, and, to a lesser extent, non-traditional crops. Project credit also led to the use of more inputs, such as certified seed and fertilisers. Furthermore, the project helped to introduce non-traditional crops, especially palmito and chili peppers. Loans to small-producer organizations for non-traditional crops (palmito and pineapple) gave them strategic support at a time when they were beginning to encourage their members to plant these crops.

Project services were also crucial to the expansion of livestock-raising. Thanks to project loans, farmers were able to purchase over 7 500 head of cattle, build on-farm infrastructure and sow pastureland. This led to greater capitalization of their farms and higher milk production, which translated into better nutrition for their families as well as additional income, especially during peak production periods.

Many of the tenants at IDA land settlements in the project area have land, but are unable to work it because they do not have the money to buy inputs. These farmers' income stems mainly from work as day labourers. The credit and technical assistance provided under the project allowed many of them to plant crops and buy livestock. As a result, self-employment has increased, and many of these farmers are now working their own plots (although some of them continue to engage in other work as day labourers), thus reducing the need for such off-farm work and allowing them to spend more time with their families.

Unfortunately, weather conditions during the project period had a negative impact on agricultural yields, especially for basic grains. Although the data available to the executing agency of the credit component (BNCR) do not indicate which activities have the highest delinquency levels, the MAG's extension agents and BNCR's technical staff agree that these levels are found among the farmers who used project credit to plant basic grains.

Despite the high investments in livestock activities, project credits were used mainly for the purchase of new animals (92% of the investment credit for livestock activities), with few funds being used for forage and pasture improvement (1.8%), building infrastructure (fences, corrals, etc.) or improved herd management (6.4%). Animal health and reproduction-management issues, especially for farmers with dual-purpose livestock, were not addressed adequately. Extension services also failed to lend assistance to credit beneficiaries in the purchase of animals, with the result that there were frequent problems arising from the purchase of animals with health problems or of poor genetic quality.

These problems were not unrelated to a series of constraints that affected the operation of the extension services, such as: (i) delays in the start-up of scheduled activities as a result of the Government's policy to cut back public spending; (ii) inappropriate technical assistance owing to the use of a methodology based on individual assistance and the focus on tasks relating to credit management, which was a major constraint on the time availability of the extension agents; (iii) performance of non-project-related tasks by extension agents hired with project funds; (iv) limited knowledge of most extension agents concerning livestock issues; and (v) evaluation of the extension agents' work on the basis of criteria that did not reflect the results of the technical assistance and scant input from the PCU and beneficiaries for that evaluation.

The combination of technical production-related problems and climatic vagaries during the project period led to problems with repayment of the loans. At the time of the completion evaluation, 9.7% of the loan portfolio was past due; this figure does not include bad loans (i.e., loans in default for more than a year). An analysis of the past-due portfolio as of 30 June 1998 showed that an estimated USD 297 000 (equivalent to 56% of that portfolio) was not recoverable. Most loans were more than 30 days past due, and were the ones least likely to be recovered. This raises concerns about the financial sustainability of the trust after project closing. It should be noted that a delinquency rate of 15% per annum implies a loss of 83% of principal at the end of 10 years. Rates over 20% imply virtually a total loss of the amount lent.

The agro-industries financed under the marketing component yielded direct benefits to a large number of small-scale producers. Looking at only those farmers who produce raw material for industrial processing, the number of beneficiaries at the time of the evaluation (August 1998) came to 105. Agro-industries also created jobs directly and indirectly in industrial plants, transportation and marketing. Small producers who were previously isolated or lacked feasible or economical marketing options were now able to sell their output at reasonable prices and thus raise their income levels.

Dairy agro-industries were the ones that benefited most. They were able to get better prices for their milk, which redounded in benefits not only for those who sold milk to processing plants (i.e., the direct beneficiaries), but also for those who were able to sell their milk and cheese products to intermediaries at higher prices (i.e., the indirect beneficiaries). The installation of laboratories in the dairy agro-industries, along with the establishment of a differential pay scheme for different categories of milk, led to improvements in the quality of milk and cheese products. The members of one of the dairy agro-industries (APROQUEL) have begun to pool their efforts for other activities as well, e.g., purchasing inputs such as veterinary products, forage supplements and salt for livestock.

Despite these positive impacts, the agro-industries also encountered some problems: (i) almost all of them ran into serious difficulties with marketing; (ii) most of them suffered from design problems in the areas of engineering and processes; (iii) most of them had administration and management problems; (iv) the assistance provided by the technical staff of the executing agency in charge of this component was often paternalistic, and they performed many of the managerial tasks for several years; and (v) the weak organizational capacity of the producer groups was one of the greatest obstacles in virtually all these businesses.

In sum, the project's marketing component yielded positive results, although to a lesser degree than expected. One positive outcome was the shortening of the design times for agro-industry projects, which is evidence that the executing agency learned from the problems encountered during the initial stages of the project.

Although not part of the original project design, the executing agency of the marketing component also performed the function of facilitating business negotiations between small-producer organizations and industrial and commercial-sector purchasers. In this connection, the CNP played a very important role in securing benefits for the small farmers involved. Besides establishing contacts between these farmers and a large-scale buyer, the CNP enhanced the farmers' negotiating power (thus allowing them to secure better prices in the negotiations) by supplying them with future price estimates calculated on the basis of available data on planted areas and demand characteristics.

Training

The project's training activities produced a series of positive impacts. The main topics covered in the training events for farmers had to do with production-related issues such as the reproductive management of animals, pasture management, animal health, cultivation of beans, chili peppers and palmito, as well as basic accounting and administration. Interviews with the beneficiaries indicated that the INA courses were felt to be useful and there was good acceptance of the methodology, which combined in-class theory and with a strong on-farm practical component.

In the farmers' opinion, the pesticide application methods taught in the INA courses have led to a drop in the number of cases of poisoning. The courses also helped provide many small-scale producers with a greater awareness of the environmental consequences of overuse or improper use of fertilisers and pesticides. A further outcome has been the progressive use of organic rather than chemical-based products.

The information imparted in the courses has allowed farmers to make their own decisions on inputs (especially pesticides) without having to depend so much on the recommendations of salespeople; in many cases, this has resulted in a decrease in spending in this area.

Beneficiaries have learned techniques for diagnosing animal diseases, administering drugs and assisting with births. Some are sought out by neighbours to help in this area, which has created an additional source of income for them.

Women's participation

The support provided to women's groups under the project has helped them to solve internal organizational problems, improve relations among their members and attain a higher lever of maturity and consolidation as a group. By taking part in groups, women were able to share their experiences and opinions, perform activities other than routine household and farm chores, and feel useful to their families and communities.

Women accounted for 11% of the total credit volume and 14% of the total number of loans. Although 299 women received loans under the project, not all of them were heads of household, so there may have been numerous cases in which men had control over loan proceeds that had been granted, officially, to women. Overall, women's participation was low, bearing in mind that livestock credit (which is normally for higher amounts) is requested mainly by men.

Post-loan period

Although the project design did not explicitly address sustainability during the post-loan period, the PCU – with advisory assistance from RUTA – prepared a proposal for the post-loan period (Proposal for Extension of the Implementation Period and the Project Area). The document, which was presented in July 1996, proposed a strategy to ensure the continuity of project actions after the loan contract expired, in order to maintain the supply of services (credit, in particular) offered to the poor rural population during project implementation. The most salient feature of the proposal was the concern and effort of the PCU and RUTA to recommend specific actions for the post-loan phase that would ensure effective use of the trust and continuity of the services provided under the project during the implementation period.

The execution arrangement proposed for the post-loan period was built around the credit trust, which would serve as the basis for developing other areas and services to enhance impact and promote sustainability. The trust would be administered as a development fund and would include producer organizations in decision-making and loan intermediation. For this, a series of conditions needed to be met; at the time of this evaluation, some of them had already been met, others were in process and yet others had to be modified in light of legal constraints. Key among these conditions were the following:

The extension agents hired with project funds on a temporary basis to work in the MAG's extension services in the project area would be hired permanently by the ministry, thus ensuring continuity in the supply of such services to the rural poor. Approved in early 1998, formalization of the definitive hiring was still pending at the time of this evaluation.

Credit intermediaries were to be included in the administration of loan proceeds during the post-project phase. For this, an addendum (No. 4) containing the legal conditions that would allow for these agents to be included was drawn up by the PCU with support from RUTA. Approval of the addendum was going through a difficult period of negotiations and had not yet been agreed upon at the time of this evaluation.

The technical coordination and management of activities would remain the responsibility of the PCU, which would have the same structure as during the implementation phase, i.e., a project director, a technical coordinator, a monitoring and evaluation unit, and an administrative/accounting support unit. The PCU would have functional and operational autonomy and would be the executing agency for policy, guidelines and action strategies during the post-loan phase.

Agricultural extension would continue to be the responsibility of the Ministry of Agriculture, whose current technical team would be maintained and would perform similar functions. IDA would take on a greater role in some of the project's aspects, such as strengthening of producer organizations, support for securing legal status for producer groups and support for authorization to allow plots to be used as loan collateral. Training activities would continue, as would support for agro-industry projects, with an eye to consolidating existing businesses and strengthening new such projects administered by organized groups in the region.

A series of considerations have been outlined that need to be borne in mind as part of credit administration, e.g., criteria for setting interest rates and selection of beneficiaries. Credit would be delivered through BNCR and financial intermediaries. BNCR would gradually reduce its involvement up to the year 2008, by which time the intermediary organizations should be administering all loan proceeds. Two kinds of organizations would be eligible to be financial intermediaries: (a) organizations with successful experience in managing loan proceeds and that have objectives similar to the project's, such as FUNDECA and FUNDECOCA; and (b) new credit organizations administered by organized farmer groups.

The development fund's operating costs would be covered by two sources: government allocations, in the form of staff assignments and some of the operating costs; and the return on short-term investments of the investment fund (up to 40%).

Main issues and recommendations

Based on the aforementioned positive aspects and the problems encountered during the implementation period, the following recommendations can be formulated for the post-loan period:

Extension

In view of the significant investment made in livestock purchases during the project's execution phase, extension services in the immediate future should focus on better feeding and reproductive and health management of the herd. Investment credits for livestock should attach priority to forage and pasture improvement and the building of support infrastructure for livestock production.

Since the small-scale producers who enjoyed the highest increase in revenue were those who had planted non-traditional crops (e.g., palmito and chili peppers), while those who focused on basic grains encountered difficulties with such aspects as paying back their loans, extension services and credit should be continued and should focus on promoting non-traditional crops.

Contract negotiations that involve marketing issues between small-producer organizations and commercial and industrial concerns should include provisions for extension services.

MAG extension agents who work in the project area should receive intensive training in livestock-raising and non-traditional crops so they can meet existing demand adequately.

Bearing in mind that the project's extension methodology did not allow for adequate assistance for beneficiaries, an effort should be made to promote group-based extension in line with recent MAG efforts.

The project's design took a traditional approach to delivering agricultural technical assistance, working through government extension services. Building on the experience of other rural development projects, extension services in the project area should consider the possibility of enhancing the rural poor's ability to hire private extension services. This could be done, for instance, by subsidizing small-producer groups during a prudent period so they can hire NGOs or individual experts.

Credit

Steps should be taken to give the trust's administrators greater incentive to collect loans, and arrangements should be developed to enhance or expand the fund. For instance, the credit fee paid to BNCR or financial intermediaries could be made contingent on loan recoveries.

In the short term, it is recommended that the measures launched near the end of project implementation to reduce portfolio delinquency be continued and strengthened. The credit component should aim for maximum recovery of due and past-due loans, while cleaning up the past-due portfolio. Recoveries could still be made this year, with an eye to boosting the current revenue of the credit fund. The next step would be to reorganize the portfolio after identifying the clientele best suited to the fund.

The recovery of outstanding loans is a priority task, and an action plan should be launched immediately to work with clients on a case-by-case basis. An effort should be made to secure payment from delinquent borrowers and bring them back into the programme, while using all available legal means to secure payment from borrowers with the ability to pay but who refuse to honour their commitments. Individuals who are unwilling or unable to pay should be excluded from the programme. Special incentives should be considered for technical staff in order to speed up recoveries, e.g., giving them a modest percentage of the amount recovered.

To ensure the trust's financial sustainability, there should be strict monitoring of the cost-benefit structure and of interest-rate management, eligibility criteria and loan collections in line with this objective. The project's interest rate was not sufficient to cover the real cost of funds, and this will have an impact on its sustainability in the medium term. An interest rate needs to be calculated that is positive in real terms and able to cover both the operating costs and bad loan provisions.

The trust should not concentrate its lending on a small group of activities, as was the case during the execution period. By diversifying, it will reduce the risk posed by weather conditions or downturns in product prices.

When credit is channelled through financial intermediaries, it is worth recalling that – although there are numerous advantages (e.g., they would have their own target population, experience, an established work methodology, familiarity with the project area) – they cannot cover a very high number of beneficiaries. BNCR could continue to play a relevant role in the direct management of loans.

Since financial intermediaries are only starting to develop in the project area, considerable effort will be required to strengthen them.

Marketing

Work with agro-industries should focus on consolidating the businesses that received support during the execution period, rather than setting up any new businesses. Specifically, a timetable should be drawn up for support activities; it should cover a well-defined time horizon and assign priority to a manageable number of objectives and targets, such as the opening of markets, management training and better use of installed capacity.

Any new agro-industries that are established in the medium and long term should draw on the lessons learned from this project, for instance: (a) give priority to working with established producer organizations whose members already have experience with joint work in other areas, rather than organizations that are formed for the sole purpose of starting up an agro-industry; (b) target efforts at identifying and opening markets for goods produced by these businesses, an aspect that was clearly overlooked in the agro-industries covered under the project; (c) avoid taking a paternalistic approach; and (d) create more flexible support options for agro-industries, in terms both of design and of period of operation. Bearing in mind the vast number of areas in which experience is necessary in order to serve agro-industries, consideration should be given to the possibility of hiring several government or private-sector agencies to lend assistance to these businesses, depending on the nature of the work and business involved.

Following the example of small-producer organizations in the project area, projects that promote non-traditional crops should tap the interest of industrial and commercial firms in having a steady supply of good quality product, promoting the negotiation of contracts among them. Building on the experience of the executing agency and NGOs that provided effective support to producer organizations in their negotiations, the CNP could focus its efforts on linking these organizations with potential buyers and offering them marketing advice during negotiations.

Training

The project's collaborative ties with the INA enabled it to make an important contribution to the training provided in very diverse topics. However, the INA training scheduled for the medium term needs to be linked with more flexible training activities that dovetail better with the release of loan proceeds, especially when borrowers are working in new areas of activity (or areas that they have limited familiarity with from a traditional approach). If farmers have to wait several months for training, it could jeopardize the investment made. Accordingly, INA training needs to be complemented by more flexible training sources.

Extra training should be made available for farmers who do especially well in courses on livestock production, offering them more advanced training that will allow them to render services on a remunerated basis. This would create alternative sources of income for small-scale producers, while making necessary services available to poor farmers.

Activities and courses on organizational strengthening should be stepped up, both for technical staff and for the farmers, since the sustainability of the project's actions will hinge, to a great extent, on the strength of the producer organizations.

Lessons learned

Extension

Project design and implementation should give attention to incentives for the extension agents' work, providing adequate incentives and seeking to avoid distortions in the existing incentive structure. For instance, the practice of hiring project extension agents on annual contracts meant that, over time, they received lower salaries and fewer benefits than did the agents who were permanent employees of the Ministry of Agriculture. Projects should seek to avoid significant salary differentials between an agency's technical staff who are assigned to a project and its other technical staff. One solution might be to have the salary of extension agents include some sort of bonus based on performance reviews.

Project designs should spell out the supervision and evaluation arrangements for extension services, especially in two areas: (a) defining indicators that give preference to the outcomes of extension work, and (b) defining mechanisms for beneficiaries to have a role in the supervision and evaluation of extension agents. Designs should give the PCU a greater role in the supervision of extension services, including the power to ask coexecuting agencies to replace agents who are not performing adequately or do not fit the required profile. Beneficiaries should also be able to request the replacement of an extension agent after an initial trial period.

Project designs need to separate credit management from extension activities. Credit management took up a significant part of the extension agents' time and considerably cut into the time they had available for the specific tasks of agricultural technical assistance.

Supervision by the cooperating institution should pay special attention to specific extension-related aspects, particularly the technical features of the projects as described in the loan applications. Since these applications determine in what production activities the credit funds will be used and how the activities will be carried out, their quality is a key factor in project performance. Technical proposals need to be congruous (e.g., if animals are being purchased, is forage and pastureland available?), and output indicators need to be realistic and differentiated for each producer.

The technical staff of the extension services need to have specialization in the activities to be promoted by the project. When a project moves towards production-oriented activities that were not included in the original design, the cooperating institution should be attentive to the extension agents' new training needs and propose that specialized agents be assigned to these activities.

Credit

Project designs should take care not to overestimate credit requirements. Since speeding up the disbursement rate of an oversized portfolio is generally associated with the funding of quick-investment activities (e.g., the purchase of livestock) and a relaxing of the eligibility conditions for beneficiaries, the most likely result is an increase in loan delinquency and significant losses for the fund. Project supervision should pay special attention to pressure that might be applied at different stages of execution to speed up the disbursement rate.

Agreements with administrators of the credit component need to be flexible so that they can be adjusted or renegotiated as the project progresses. They should include incentives to increase the trust administrator's interest in recovering loans and expanding the fund. For instance, credit fees should be tied to portfolio recoveries.

Projects should seek ways of replacing the collateral requirement, without resorting to alternatives that are overly costly for the credit being granted. The practice of using cross-guarantors may entail a hidden cost for borrowers, since the guarantor is vouching not only for the borrower's loan but for someone else's as well. This arrangement is not particularly suitable, especially if the amounts involved are considerable and the farmer's ability to pay is limited.

The delinquency rate should reflect the lending portfolio's bad-debt risk. Accordingly, if a loan is deemed unrecoverable, provision should be made not just for the specific payment due but for the entire balance of the loan. Basing delinquency rates solely on the outstanding balance of loan payments due underestimates the rate and hides the true magnitude of the past-due portion of a portfolio.

Marketing

Under certain conditions, agreements with agro-industries and commercial firms can be an important instrument that enables small-producer organizations to find new markets while giving them access to new technologies. The key to the success of these agreements lies in increasing the negotiation capacity of small producers by making information on markets available to them; this helps to offset the information asymmetry that typically favours the companies. Projects could therefore fulfil an important role by supporting public and private agencies (e.g., NGOs) that lend legal and marketing advice in negotiations between small producer organizations and buyer companies.

Projects that focus on verticalization of production as their core strategy for improving the marketing of agricultural production should be aware that they impose new and complex tasks on beneficiary farmers, such as the sale of an industrialized product and the hiring of staff for the plant and equipment repairs; these are areas in which they normally lack any kind of knowledge.

Starting up an agro-industry is a complex, collective undertaking, and requires a small-producer organization with at least a minimum level of stability and experience. Rural development projects that foster this type of initiative should ideally work with established organizations that meet these conditions, rather than promote the formation of a new organization to operate an agro-industry.

Rural development projects that promote the creation of agro-industries need to be aware also of the complexity of these activities for the executing agency. Indeed, agro-industry projects include aspects of engineering, industrial processes, marketing and administrative management, each of which has specific features depending on the type of product (e.g., dairy products or cardamom). It is difficult, therefore, for a single institution to perform all the necessary tasks for successfully carrying out agro-industry projects. It is better to work with more flexible alternatives, such as hiring various agencies according to the nature of the task and business involved.

Evaluation

For IFAD to design policies on the administration of trusts and projects during the post-loan stage, it needs to have knowledge about experiences that have yielded positive results in this area. While it may be difficult to identify such experiences at present, there are some relevant projects in Central America that are nearing completion. IFAD should continue to conduct ex post evaluations of this and other projects, paying special attention to analysing post-loan experience.