Document of

The World Bank

FOR OFFICIAL USE ONLY

MICROFICHE COPY

Report No. 10607-BD Type: (PPR) Report No. 10607

ALEGRE, I / X31755 / T9059/ OEDD1

PROJECT PERFORMANCE AUDIT REPORT

BANGLADESH

AGRICULTURAL CREDIT PROJECT(CREDIT 1147-BD)

APRIL 29, 1992

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Name of Currency: Taka

Rate of Exchange: at December 31 st

1981 US$1 = Take 19.851982 24.071983 25.001984 26.001985 31.001986 30.801987 31.20

1990 35.79

ABBREVIATIONS AND ACRONYMS

PDB - Asian Development BankBADC - Bangladesh Agricultural Development CorporationBank - The World Bank Group, including IDABB Bangladesh BankBKB - Bangladesh Krishi BankBSBL - Bangladesh Samabaya Bank Ltd.CV - Curricula VitaDCA - Development Credit AgreementDTW - Deep TubewellERR - Economic Rate of ReturnFAO - Food and Agriculture Organization of the United NationsFAO/CP - FAO Cooperative ProgramHYV - High Yielding VarietyIB - Institution BuildingKSS - Krishi Samabaya Samiti (Agricultural Cooperative Society)OED - Operations Evaluation DepartmentPCI - Participating Credit InstitutionPCR - Project Completion ReportPPAR - Project Performance Audit ReportRAKUB Rajshahi Krishi Unnayen BankRCPD Rural Credit Projects DepartmentSAR - Staff Appraisal ReportSTW Shallow TubewellTA - Technical AssistanceUCCA - Upazilla Central Cooperative AssociationUNDP - United Nations Development ProgramUSAID - United States Agency for International Development

FISCAL YEAR OF BORROWER

Government of BangladeshJuly 1 to June 30

WEIGHTS AND MEASURES

Metric System(except: 1 acre = 0.405 hectare)

THE WORLD BANK FOR OFFICIAL USE ONLYWashington, D.C. 20433

U.S.A.

Office of Director-CeneralOpuratons Evaluatko

April 29, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report on BANGLADESHAgricultural Credit Project (Credit 1147-BD)

Attached, for information, is a copy of a report entitled"Project Performance Audit Report on Bangladesh: Agricultural CreditProject (Credit 1147-BD)" prepared by the Operations EvaluationDepartment.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World 3ank authorization.

PROJECT PERFORMANCE AUDIT REPORT FOR OFCIAL USE ONLY

BANGLADESH

AGRICULTURAL CREDIT PROJECT(Credit 1147-BO)

TABLE OF CONTENTS

Pase No.

Preface* *n * * * * * * * * * * * * * * * * * * * * * *Basic Data Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . 1iiEvaluation Summary . . . . . . . . . . . . . . . . . . . . . . . . . v

I. BACKGRO UND * * * * * * * * * * * * * * * * * * * * . . . .A. Preparation * * * * * * * * * * * * * * * * * * * * . .B. Objectives . . . * * . . * * * * * * * * * * * * . . . . . . . 2C. The Project . . . . . . . . . . . . . . . * * . . . . . . . . 3

II. IMPLEMENTATION EXPERIENCE . . . . . . . .. . . . . . . . . . . . 4A. Project Costs and Dollar Disbursements . . . . . . . . . . . . 4B. Sale of Shallow Tubewells . . . . . . . . . . . . . . . . . . 4C. Siting of Shallow Tubevells . . . . . . . . . . . . . . . . . 5D. Other Credit Categories .. .. . ..... . ....... 6E. Institutional Factors . . . . . . . . . . . . . . . . . . . 6F. Procurement and Marketing of Shallow Tubewells . . . . . . . . 8G. Monitoring and Evaluation .. .. .. .. . .. ... .. .. 8B. Technical Assistance . . .. .. . ... .. .. .. .. .. . aI. Comments . . . . . . . . . . . . . . . . . . . . * . . . . . . 10

III. PROJECT OUTCOME . . . . . . . . . . . . . . . . . . . . . . . . . 10A. Institutional Effects . . . . . . . . . . . . . . . . . . . . 10B. Delinquency . . . . . . . . . . . . . . . . . . . . . . . . . 12C. Farm Impact . . . . . . . . . . . . . . . . . . . . . . . . . 13

IV. FINDINGS AND ISSUES . . . . . . . . . . . . . . . . . . . . . . . 15A. Was the Project A Success? .................. 15B. Technical Assistance and Institution Building . . . . . . . . 16C. Reasons for and Response to Delinquency . . . . . . . . . . . 17D. World Bank Involvement in Credit Programs

with High Arrears . . . . . . . . . . . . . . . . . . . . 20E. Land Tenure Issues . . . . . . . . . * 0 a 0 0 & . 0 0 0 22

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

Paze No.

Table1. Sales of STW by Year and Aarticipatins Bank . . . . . . . . . . . 5

AnnezsA. Table: Estimated Irrigation Equipment Operated, 1974-89 . . . . . 25B. Comments on the Draft PPAR by the Bangladesh Bank . . . . . . . . 27

MAP IBRD 15590R

PROJECT PERFORMANCE AUDIT REPORT

BANGLADESH

AGRICULTURAL CREDIT PROJECT(Credit 1147-BD

PREFACE

This is a Project Performance Audit Report (PPAR) on the BangladeshAgricultural Credit Project, involving an IDA Credit in the amount of US$40.0million equivalent. The objectives were to strengthen the rural credit -ystem,by setting up a rep'.icable term lending program, and to promote increased foodproduction by shallow tubewells in the northwest districts. The Credit wasapproved on May 21, 1981. It was closed on December 31, 1986. The finaldisbursement was made on June 22, 1987 and a balance equivalent to US$6.3 millionwas cancelled.

The PPAR is based on the Project Completion Report (PCR) prepared bythe Asia Regional Office and submitted to the Board on April 30, 1990, theBorrower's PCR submitted to the Bank in 1987, the Staff Appraisal Report (SAR),the President's Report, the credit documents, a report of the ExecutiveDirectors' meeting at which the project was considered, a study of project files,and discussions with Bank staff. An OED mission visited Bangladesh in May 1991and discussed the effectiveness of the Bank's assistance and project executionwith the Bangladesh Bank (BB) and other relevant agencies. BB's kind cooperationand valuable assistance in the preparation of this report is gratefullyacknowledged.

The PCR provides a good account and assessment of the projectexperience, and the performance of the bank and the project executing authority.The PPAR elaborates on particular aspects of the overall lending period,including the high rates of delinquency and the Bank's decision to proceednevertheless with appraisal of another credit project.

Following standard OED procedures, copies of the draft were sent to theGovernment for comment. A response by the Bangladesh Bank is included as AnnexB.

PROJECT PERFORMANCE AUDIT REPORT

BANGLADESH

AGRICULTURAL CREDIT PROJECT(Credit 1147-BD

BASIC DATA SHEET

Key Preect Data

Appraisal ActualEstimate Performance %

Project Cost (US$m) 62.4 48.9 78Credit Amount (SDRm)

Disbursed 32.6 27.4 84Cancelled 5.2

Economic Rate of Return 60% 14% 23

Shallow Tubewells Installed 27,000 36,648 136Grain Stores 20 25 125

Loan Recovery Rate 60 29 (1986) 33---------------------------------------------------------------

Cumulative Estimated and Actual Disbursements

FY 82 FY 83 FY 84 FY 85 EX 86 FY 87

Appraisal Estimate (SDR m) 0.25 4.50 10.91 12.04 4.90 -Appraisal Cumulative 0.25 4.75 15.66 27.70 32.60 32.60

Actual - 5.05 9.38 10.74 1.68 0.58Actual Cumulative - 5.05 14.43 25.17 26.85 27.43

Actual/Appraisal (%) 0 106 92 91 82 84

Date of Last Disbursement: June 22, 1987

Project Timetable

Item Date Planned Date ActualIdentification January 1980Preparation may 1980Appraisal Oct-Nov 1980Negotiations April 1981Board Approval May 21 1981Credit Signing June 21 1981Effectiveness August 11 1981 October 6 1981Closing Date December 31 1985 December 31 1986

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STAFF INPUT(staff weeks)

fteTask =77 177 78 79 80 n8l M82 H89 184 185 186 187 188 n89 toAL

PreoppraeGL 7.4 .9 21.7 13.8 14.4 31.0 9.1Apraleal 78.7 78.7

3tations 3.3 1.14.OtProo. .4 .9 .7 .2 .1 8.9 11.0

viStOU .1 27.8 33.2 28.6 26.4 23.0 9.3 3.0 151.4ir 11.s .a sus5Proj.Adat. .3 1.0 .1 .5 .1 2.0

ToO 7.7 1.8 22.3 13.9 14.3 122.3 29.9 33.3 28.6 26.4 23.5 9.4 14.3 .2 248.2

MISSION DATA

No. of Mandays Specialisatior Types ofMission Date Persons in Field Represented - Statue 2' Trend i Problems '

Identification 1 Jan. 80 3 90 e9cengPreparation way. 80 4 104 escengAppraisal Oct. 80 5 155 f%c,aqengSupervision 1 Nov. 81 1 10 f 2 1 0Supervision 2 Apr. 82 1 10 f 2 1 1,0Supervision 3 Oct. 82 1 10 f 2 1 HSupervision 4 May 83 2 24 poe 2 1 M,TSupervision 5 Oct. 83 3 30 e,tfeng 2 1 M,TSupervision 6 May 84 4 MB1 p.f 2 1 HTSupervision 7 Oct. 84 2 18 f 2 1 H,TSupervision 8 Mar. 85 1 14 f 2 1 K,TSupervision 9 Jun 85 2 RMB p 2 1Supervision 10 Nov. 85 2 20 f,c 3Supervision 11 June 86 2 BmB p 3Supervision 12 Jan. 87 2 RMB p 2

Follow-on project: negotiated/different approach.

LI These PCR figures for Staff Inputs for Supervision are high, inconsistant vith the Mission Data,and unrealistic.

Sa - agriculturalists e a economist foo financial analyst; c - credit specialist; eng - engineer;p - progran officer.1 - problem freel 2 * moderate problems 3 * major problems.

i' 1 Improvingi 2 - stationary; 3 - deteriorating.V T - technicalt M a manageriali P a political 0 - other.il Project identification and preparation (by FA0/CP) was based on a report by consultants employed

in 1977 to review the agricultural credit system, and financed under the First IDA TechnicalAssistance Project (Credit 409-BD).

ZI Supervision done by staff from the World Bank's Resident Mission in Bangladesh.

Sources PCR

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PROJECT PERFORMANCE AUDIT REPORT

BANGLADESH

AGRICULTURAL CREDIT PROJECT(Credit 1147-BD)

EVALUATION SUMMARY

Introduction here the enormous potential of theaquifer was not only recognized but

1. The Bank's program in agriculture mapped.in Bangladesh grew rapidly after inde-pendence in 1971, with an emphasis on 2. The project failed to progress toimproved use of the country's water the institutional objective. Howeverresources. The irrigation portfolio the STW component - which was largelywas at first dominated by large-scale completed in 1984, one year ahead ofsurface water schemes, but, starting schedule - was seen then and morewith the first Deep Tubewell Project clearly now to have been remarkablyapproved in '974, the balance gradually successful in accelerating the rate ofshifted toward exploitation of the adoption of STW technology in theextensive and annually replenished country, in creating conditions forgroundwater aquifer. During the 1970s the rapid growth of the Boro dry sea-the Bank also developed the basis for son rice crop in Rajohahi Division,a line of rural credit projects, offer- and in forcing through the privatiza-ing to individual farmers, and farmers tion of import and marketing channelsgrouped in cooperatives, medium and of irrigation equipment. Those in thelong term credit facilities. Studies Bank who were interested mostly in theof the subsector were initiated in 1973 production technology take satis!ac-and again in 1976. The emphasis was on tion. That refers to the Governmenthow to reconstruct the existing credit as well, which appears in retrospectsystem and improve the discipline of to have paid only lip service to therepayment. By 1979 these two lines - institution-building objective. Thosetubewells and credit institutions - in the Bank who appraised and present-converged. The recommendations of a ed this project as the first of aconsultant's study with respect to series of successful credit projectsseveral specific investment categories are disappointed. The fact that farm-were mostly dropped, and the prepara- er repayment rates fell throughout thetion team - fielded by FAO/CP in 1980 - project period - and that the banksdesigned a medium term credit project were reporting collection rates offocussed almost exclusively on finance about 121 at the time of the audit inof shallow tubevells (STW) in Rajahahi May 1991 - supports the assertion thatDivision, the only area in Bangladesh the failings of the credit system can

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only be partly justified by the boom in parentp the Ministry of Agriculture,rice production and that that system wasavident throughout and was tomust again be reconstructed. continue beyond tha project period.

By 1982 BOs urgings and growing in-Obiept;ves terest among the private importers and

PCIs began rapidly to accelerate the3. Thus the project was presented installation of the STWs. By the andwith two objectives. The Staff Ap- of 1984 over 36,000 STWs had been fi-praisal Report (SAR) lists, in this nanced and the first explosive piaseorders "(a) to establish a replicable of drilling was over. That figuresystem for delivery of long-term agri- compares with the SAR target of 27,000cultural credit, and (b) to increase STWs (not all the PCI-financed wellsagricultural production, rural incomes were a"epted for rediscount by BB).and employment opportunities". Projectcosts were estimated at US$62.4 mil- 5. Small components of ptniect costslion, supported by an IDA Credit of and the Credit were dedicated co tech-US$40.0 million, of which 872 was nical assistance (TA). This includedallocated to farmer loans. The on- six internationally recruited expertslending period would be four years, and for a total of 56 man-months. Threethe SAR provided for the system to be were to be placed in B, two in anextended to other parts of the country apex cooperative bank (BSBL) that wasduring that period if performance deemed too weak to be included in thewarranted. The production objective initial group of PCIst and one otherwas based on the expansion of cropping responsible for a survey of a compet-- mostly rice and wheat - during the ing system of cooperative credit.dry season and the end of the wet International and local training at aseason that preceded it. substantial scale for BB and tha PCIs

was included as well. RecruLtmentImplementation Experience problems plagued the consultant otompo-

nent, despite efforts by the Baik and4. The Credit became effective in PAO to help Goverrment find sui-ableOctober 1981. Tho Bangladesh Bank (BB) candidates. The training prolramswas the executing agency, responsible have also been described in retroLpectfor promoting the program among the as having fallen short of targets: infarmers, participating credit institu- fact the international part wastions (PCI), and STW dealers, and for dropped altogether. The project unitrefinancing the eligible term loans the (RCPD) in BB did not mature into thePCIs presented. Subloans moved slowly developmental agency expected, and thein the first yeAr because of complica- PCI term-lending operations did nottions in the process of procuring and extend beyond the northwest and wereselling the irrigation equipment. The phased out soon after the project wasnew process was to replace a procure- completed and the refinance terminat-ment system managed entirely by the ed. The main explanation was thepublic sector. a system that had in- debacle on repayments. These fell tocluded some sales to farmers but more about 29Z in the last project yearusually the rental to farmers and (1986). Most public credit programs -

cooperatives of equipment installed by some of th% others were also financedthe Bangladesh Agricultural Development by IDA Credits - followed the sameCorporation (BADC). Resistance to the trend, so the problems were not uniqueprivatization program, by BADC and its to this project (pars 3.. 3.6).

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Results tion of a Second Agricultural CreditProject in the terms of reference of

6. Incremental crop production supervision missions of the firstattributable to the project is estimat- project as early as 1982. But theed in the PCR to have reached only 80% proposal was deferred repeateCly andof the SAR target "despite the increas- almost died in the late 1980s-polit-ed number of STW). The PCR reestimated ical interference with the repaymentthe economic rate of r,turn (ERR) at diGeipline being of primary concern.14%, down from the SAR target of 60%. The Bank has just auspended BoardThe reestimate Appears conservative. Presentation of a follow-on projectAn ongoing OED study of a comparable for rural credit that was to be partSTW project suggests the actual may be of .n overall financial reform pack-double the PCR figure. The PCR ex- age. The audit finds the design of theplains the shortfall by the smaller nw project appropriate, though thearea irrigated by each well, yields Bank is correct also in insisting thatlower than expected, the declin-i in the such a project be lwnched only ifintensity of farming of wet season there is a supportative politicalcrops, and other factors. Nevertheless environment. With respect to sustain-the production results are seen as very ability on the 2roduction side, theresatisfactory. The audit is impressed is no dcubt that a major shift inalso by the continuing expansion in national agricultural priorities andBoro production since the Credit was on-farm investments toward a provenclosed, a res-ult of further loosening STW/Boro technology has been realized.of the private import procurementprogram and the entry in the market in Findinis and Lessons1988 of cheap but functional smallengines from China. This trend can be 8. The project presents severalrelated to the project, and in that important issues. Among them are:larger sense its impact was much moreprofound than the reestimated ERR may Whether it should be classified assuggest (paras 3.8-3.10). This refers satisfactory. The PAO/CP prepara-to the procurement system as well as to tion and PCR teams, and govermentthe revolution in Boro cropping (para officials in BB as well the Ministry3.3). As mentioned, results on the pf Agriculture, thought of it as anside of institutional credit are almost irrigation production project basednils the fact that the PCIs have now on credit. Th Bank reversed thehad experience with term credit for emphasis at the and of the appraisalfarmers is one positive factor. But process to credit, and it was large-the prr 4ect credit repayment period ly supervised as such. The auditcoincic, with the downward spiral of concludes that even as a mixed pro-rural repayment rates and spread the duction/ institution-building pro-roots of undiscipline. gram the failure to create a sUs-

tainable institutional apparatus,Sustal-ability and the collapse of repayment rates#

are unacceptable collateral resulto7. A prcgram in support of medium and the project warrants an unsatis-and long term credit for Bangladesh factory rating (pares 4.1, 4.2).farmre, most of whom are small farm (The Regional Office disagreeowners or operators, has to begin pointing o4t that the deteriorationagain. The Bank included identifica- in collection rates was only partly

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attributable to the project and that serious and sustained? It is thethat failing was more thar. compen- view of the audit that the Bank'ssated by the expansion in produc- pursuit of a follow-on project, andtion.) its hesitation in the face of Gov-

ernment's recent announcements, both* Whether and how farmer repayment seem to be correct responsea (pars

rates that fluctuate between 5% and 4.16-4.20).60% can be brought under control andeventually raised to acceptable There were some equity is.es thatlevels. Foc factors peculiar to failed to attract the attention ofthe Bangladesh experience are dis- Bank supervision. The projectcussed in the text; together they helped to expand the number andexplain the downward spiral of re- influence of the so-called "water-payments after 1984 (paras 4.11- lords". There was a drop in the4.15). Political intervention - in water table in the peak of the drythe form of relieving debt even season and, in some parts of thewhile expanding the supply of credit project area, project beneficiaries- is the dominant factor explaining gained at the expense of owners ofsuspension of Board Presentation of older, hand-dug wells. Also, itthe new project. But even if the appears that many individual ownerspolitical factor could be re,uced, have coitted themselves to theBangladesh will continue to be a higher-yielding dry season rice cropcountry where calamity, crop and and are leaving fallow during thelivestock losses, and some formula wet season land that has tradition-for substantial debt rescheduling ally been farmed. They have suc-and write-off are inevitable. Oth- ceeded in increasing overall produc-erwise all farmers are likely to tion. But they have taken out ofenter and remain on the ineligible production paddy land that smallerlists. Whether a subsidy is neces- farmers, under other tenure systems,sary to achieve that objective has may have been prepared to cultivate.yet to be determined. This reaction had not been antici-

pated at appraisal. It may be part* Even if a plausible system can be of a development process that the

prepared, should the Bank get in- project, and the Bank, are in novolved in the early years of a re- position to deflect. Nevertheless,covery process, when recent experi- all these issues warranted moreence gives little hope for improve- attention than they were given (par-ment? Or should the Bank wait to as 3.10, 4.23-4.26).see whether Governmente efifnorts are

PROJECT PERFORMANCE AUDIT REPORT

BANGLADESH

AGRICULTURAL CREDIT PROJECT(Credit 1147-BA)

I. BACKGROUND

A. Preparation

1.1 A Bank file on agricultural credit in Bangladesh was opened in 1973 inanticipation of a future project line. In that year a Bank mission carried outits first subsector review of credit. Bank lending to the subsector was notgiven high priority at the time, partly because the Asian Development Bank (ADB)and the U.S.Agency for International Development (USAID) were already involvedwith i;upporting the state agricultural bank (Bangladesh Krishi Bank - BKB) andrural credit in general, and partly because there was a legacy of poor repaymentson farm credit programs dating from the colonial period. In 1976 the Bank helpedfinance, through a Technical Assistance Project, a second, more intensiveinvestigation of the rural credit subsector by international consultants. Thiswork was extended, with the intention of identifying and preparing a project.By 1979 Bank missions were reporting that although the consultant's work wasmoving slowly, the b&sie was there for a viable term-credit lending operationwith adequate safeguards on repayment.

1.2 But the process was overtaken in 1979 by another concern. Sinceindependence for Bangladesh in 1971, the Bank's agricultural portfolio had grownrapidly. The emphasis had been on the improved use of the country's waterresources. At first surface-water works had dominated - large scale, gravityflow canal schemes and flood control and drainage works. But in 1972 Bank andFAO staff completed a nine volume Land and Water Resources Sector Study whichabandoned the high-cost surface works approach in favor of low cost, small scalepumping: lifting water either from existing canals and other surface sources or,more importantly, tapping the enormous groundwater aquifer. The aquifer extendedfar below the reach of the traditional hand-drawn wells, and, because of theannual recharge from the flooding rivers, represented for this deltaic economya vast but as yet barely exploited natural resource. A pipeline of the large-scale projects continued to send these projects to the Board for approval. Butby the late 1970s the shift in orientation was nearly complete. OED's PPAR onthe Bangladesh Drainage and Flood Control Project (Cr 864) describes theevolution of Bank and other donor policy on supporting water control and use inBangladeah (Report No. 8805, June 29, 1990).

1.3 The first Bank-financed groundwater project was for deep tube wells(DTW), approved in 1972 (the Northwest Region Tubewells Project, Cr 341 forUS$14.0 million). This was followed in 1976 by the first Rural Development

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Project, which included shallow (STW) as well as deep well& (Cr 631 for US$16.0million) and in 1977 by the Shallow Tubewells Project (Cr 724, also for US$16.0million). The trend was toward the STW. These were driven by smaller dieselengines, used surface-based centri.-gal (or sucking) pumps, had a smallerdischarge and irrigated much smaller areas than the DTW. But they were also ofa size compatible with the individual landholdings of the larger farmers, or oftwo or three medium-size farmers, especially if some of the water were sold toneighbors. Two other minor irrigation projects complemented this move to smallscale equipment: the Low Lift Pump Project (Cr 990 for US$37.0 million, approvedin 1980), and the Hand Tubewells Project (Cr 1140 for US$18.0 million, approvedin 1981).

1.4 Up to this point four of these projects had involved some farmer credit(631, 724, 990 and 1140). But in each case credit was clearly intended to besimply an instrument of diffusion of the new technologies: there was nocorresponding emphasis on strengthening the credit agencies per ase. Also, theborehole and pumpset systems were installed usually by the Bangladesh Agricultur-al Development Corporation (BADC) and then leased to the clients - individualsor cooperatives - on a rental basis. That format was in transition, as the laterprojects introduced the sale of some of the equipment to farmers. Under thr lowlift pump project the Bank had secured Government's agreement to let the privatesector control the import and distribution of a share of the pumpsets.

1.5 In 1979 the irrigation and credit files converged. Bank staff decidedto prepare the next STW project as a credit project. The credit consultant'stentative list of feasible investment lines was compressed to include only STW,and this was further confined to the northwest corner of the country - the fivedistricts of Rajeahi Division. This was the only area in Bangladesh where thegroundwater resource was not only substantial but had been properly mapped.

B. Objectives

1.6 The project thus combined two objectives: to initiate a series ofmedium- and long-term agricultural credit projects and to accelerate theexploitation of the shallow aquifers, mostly for cereal production. The ProjectBrief emphasized the production objective: development of the institutionalcredit system was, again, instrumental to that objective. The Issues Paper,three months later (December 1980), gives the two objectives equal billing,keeping production first in the narrative. The Staff Appraisal Report (SAR)reverses the order: "(a) to establish a replicable system for delivery of long-term agricultural credit, and (b) to increase agricultural production, ruralincomes and employment opportunities". The project was brought to the Board ina presentation called "The Importance of Agricultural Credit to Success ofGovernment's Drive to Food-Grain Self Sufficiency". The nominal ordering wasmostly cosmetic, and would not have attracted the audit's attention except thatthe institution-building effort failed, while the production impact wassubstantial, such that the rating of project success is ambiguous. The Issuessection returns to this subject (para 4.01).

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C. The Project

1.7 The Agricultural Credit Project was supported by an IDA Credit ofUS$40.0 million, approved in May 1981 and effective in October of the same year.Most (95Z) of the Credit was allocated to on-lending to cooperatives andindividuals. Most of that component was intended for STW (87% of the totalCredit), though the project included small lending lines for toolsand equipmentfor workshops and village mechanics, for a few (approximately 20) grainstores,and for "other purposes". The Bangladesh Bank (BB), the nation's central bank,would be the executing agent, refinancing eligible subloans of ParticipatingCredit Institutions (PCI) and promoting the import, sale and installation of STWboreholes, engines and pumps and the take-up by farmers of this small scaleirrigation technology. The PCI would include the state agricultural bank - BB,and at least three of the nationalized commercial banks (Sonali, Janata andAgrani). The national cooperative bank - Bangladesh Samabaya Bank Ltd. (BSBL) -

was not included on the initial list of PCI, but technical assistance to it wasincluded and the possibility held out that it might enter later. BSBL supportedthe network of traditional cooperatives, which would also be initially excluded.However the network of new-style cooperatives - the UCCA/KSS (see abbreviations)system modeled after the Comilla experience - was eligible and to be financedexclusively by Sonali. Similarly the project area could be expanded to otheradministrative divisions during the life of the project if performance andfurther study so indicated.

1.8 Though the project from any perspective had a strong productionorientation, the Ministry of Agriculture (Ministry) had a remarkably modest rolewithin the project design. The Secretary of Agriculture would be chairman of theProject Coordinating Committee, and its parastatal authority BADC was expectedto continue to provide technical support to the UCCA/KSS network. But there wasno explicit linkage to the field staff of the Department of Agriculture, and thesmall space provided to BADC in project design belied its traditional prominencein minor as well as major irrigation. As discussed next, the Secretary whooccupied that position throughout all of the project period proved to beunfriendly to a central feature of project design, and that feature alsoattracted continuing criticism from BADC. The fact that BB was to execute whatthe Ministry saw as an agricultural project may have helped upset the relation-ship.

1.9 The controversial feature of the project was the shift from public toprivate agency in the import, distribution, marketing and installation of the STWsystems. Previously BADC had been responsible for almost all of this activity,though in recent years BKB had also been involved. In fact the carry-over stockof imported equipment in BADC storage at the beginning of the project preventedrapid start-up of the new arrangement. In the Shallow Tubevells Project anelement of "farmers' choice" had been introduced in the selection of brands.And, as mentioned above, in the low lift pump project an attempt was made tointroduce private importers. But the initiative was badly planned and virtuallyinope-ntive. Only one distributor participated, selling 500 units. The newcrediu project did not offer full privatization either. A list was approved ofthe eight companies manufacturing small diesel engines that the farmers

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preferred. It was anticipated that the pumps, which comprised about one-thirdthe price of the pump-set (with engine), would be manufactured locally and norestrictions were set. Any dealer was eligible, provided he complied with rulesabout service and spares that were to be established and supervised by BB.Proponents of free-trade have since argued that these restrictions brought theprivatization design up short of full deregulation. Nevertheless, the projectprocurement system was a major breakthrough in that direction and, if successful,would end BADC's monopoly.

1.10 The project included a technical assistance (TA) component to helpstrengthen BB, the PCI and BSBL. The TA had two parts: six positions forinternationally recruited consultants (56 man-months total, or an average of 9months) and provision for overseas and local training. The consultant team wasto be recruited early in the project period - March 1982 was the deadline for allappointments - and provide three experts for BB, two for BSBL and a sixth toconduct a survey of the credit activities of the UCCU/KSS cooperatives. Thetraining program at first was designed around a single training center for allinvolved agencies, but later allowed the individual banks to use their owntraining systems, some of which were very good. The intention of the TA wasclear: to strengthen the basis for a comprehensive rural credit system.

II. IMPLEMENTATION EXPERIENCE

A. Proiect Costs and Dollar Disbursements

2.1 On completion, the project cost Tk 1,200 billion (US$49 million), whichis 120% of the SAR estimate in Taka. The PCR reports that the cost of the STWcomponent represented 941 of actual total costs. Because of the 501 depreciationof the Taka in relation to the dollar over the five years 1981-86, actual dollarcosts were only 781 of appraisal estimates. The Credit was in fact expressed inSpecial Drawing Rights (SDR), and 5.2 million of the 32.6 million approved wascancelled. Since there were changes also in the relation of SDR to the US$,final dollar figures show US$28.5 disbursed and US$6.3 cancelled. The finaltotal was thus about US$ 35 million, and not the US$40 million shown atappraisal.

B. Sales of Shallow Tubewells

2.2 STW sales financed by PCI under the program started slowly, for anumber of reasons: BADC and BKB entered 1981 with large inventories, which weresold at prices lower than those charged by the private dealers; there were delaysin the authorization of foreign exchange to support licenses and letters ofcredit for the importers; BKB's existing programs had different borrowercontribution requirements and subsidies; etc. In the second year salesaccelerated, responding to the urgings of BB upon the commercial banks and

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dealers to get the campaign moving. Table 1, taken from the PCR, shows thenumber of sales, by year, by the different PCI and compares the totals with theSAR.

Table 1: Sales of STW by Year and Participatina Bank

1981/2 82/83 83/84 84/85 85/86 86/87 Total % Share

BKB 628 7,000 3,986 533 34 34 12,215 33.3Sonali Bank 96 4,432 7,644 6,463 110 43 18,788 51.3Janata Bank 25 1,794 1,135 832 52 5 3,843 10.5Agrani Bank 19 1,070 520 175 18 - 1,802 4.9

Actual Total 768 14,296 13,285 8,003 214 82 36,648 100.0SAR Target 2,000 5,000 11,000 9,000 - - 27,000

2.3 BKB took the early lead, but commercial bank activity expanded and theSAR targets were eclipsed by the end of the third year. Of the actual total ofabout 36,600 STW (table 1), 33,453 - 1241 of the SAR target - were ultimatelyrefinanced by BB and submitted for Bank reimbursement. Sonali Bank replaced BKBas the leader, financing 51% of the units. Of the Sonali unite, two-thirds wereprovided to the UCCA/KSS cooperatives, which meant that they took 35Z of all theSTW and individual farmers took 65%. The Development Credit Agreement (DCA) hada provision that at least half of the STW subloans had to be for small farmers -those cultivating less than three acres. Project reporting was not able todemonstrate that this condition was complied with. But the 352 share taken bythe cooperatives, the existence of other informal groupings under one applicant'sname, and the widespread practice of selling part of the water suggests that thecondition was met at least in terms of numbers of water users. On the otherhand, the fact that the KSS societies are themselves alleged to be manipulatedto the advantage of a few members suggests also that even nominal sharing may notmean what it seems.

C. Sitine of Shallow Tubewells

2.4 Apart f:om its preoccupation with the effects of privatization, anotherconcern of the Ministry was the accumulating evidence that, despite denials atthe time of project preparation, the siting of the STW in certain areas appearedto be seriously compromising the efficiency of already existing hand-dug anddrilled wells. This led to a ban in 1984 of further drilling in the zones ofmaximum competition. Two Bank experts had reviewed this phenomenon in 1983, andboth reached the conclusion that the allegation of over-drilling was exaggerated.The Ministry opponents were not convinced and their attempts to role back theprivate-sector-based STW expansion program in the northwest continued even afterthe project was completed.

2.5 The disagreement among experts on this issue continues to the present,with a 1990 USAID-sponsored report on environmental damage attributable to the

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STWs taking the position that the degree of interference has indeed beenoverstated accept for certain, well recognized areas. That conclusion is echoedby another experienced consultant in Bangladesh, who sees this competitiveprocess as being self-regulating and not posing a threat to the proper managementof the water resource. At the same time, however, OED's current consultant ofchoice for evaluating the tubewell programe is convinced that the drawdown at theperiod of peak water requirement for the Boro crop is gradually and irreversiblyexceeding the reach of the STWs. He believes that the whole of the centrifugal,"suck" technology has had its day and will have to give way now to an intermedi-ate drilling technology based on some form of "force-mode" pumping, other thanthe high-cost DTW, to get narrow and cheap pipes deeper into the aquifer, wherethe water supply is endless.

2.6 The Ministry's concern on this point thus has a technical basis. Butit reflects as well the perception that - on the social level - the winners andlosers in this process of water rationing due to the falling peak-season watertable are well defined. The losers are the smaller farmers who can least affordthe lose, the winners are the so-called "waterlords".

D. Other Credit Categories

2.7 Of total appraisal project costs of US$62.42 million, US$54.25 millionhad been allocated to STW and US$6.29 million to tools and other lending lines.Actual expenditures on these smaller components were US$2.59 million, of whichpractically nothing was spent on workshops and village tools and equipment,US$0.58 million was spent on 25 grain stores, and US$2.00 million was spent inan "other" category. The lack of lending for workshops is partly explained bythe repair guarantees that were included in the STW purchase price, though thatis not a sufficient explanation given that one of the complaints about theprogram was of the frequent failure of the dealers to honor their servicecommitments. The "other" category came to dominate the disbursement requestsafter 1984, when the market for STW fell off (para 3.08). BB and the Bank lookedfor other PCI subloans that had been made during the project period, that wereeligible, but that had not been submitted. Eventually the Bank decided not toaccept all the "other" eubloans presented, opening the way to the cancellationof Credit funds. The TA catels-ies were also largely unexploited: a total ofUS$1.88 million had been estimate, for consultants and training and only US$0.37was spent.

E. Institutional Factors

2.8 Within the BB, an Agricultural Credit Projects Division was upgradedto departmental status in January 1982 and renamed the Rural Credit ProjectsDepartment (RCPD), responsible for execution of this and subsequent projectsfinanced by the Bank and other agencies. A SAR annex described in some detailthe enhanced organization structure planned for the unit. It would include threewings, several cells in each, and an in-house competence not only to superviseand evaluate performance but for RCPD itself to give technical assistance to thebanks, dealers, turn-key STW contractors and farmers. The three consultantpositions assigned to BB were intended to support the unit, a credit specialist

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and economist to work within it and a training specialist to use it as a base todevelop the project-wide training program. The economist and trainer positionswere never filled.

2.9 The PCR has a good discussion of the strengths and weaknesses of RC?D,which tackled the job of promoting the expansion of STW with vigor. Importantimprovements were introduced by BB during the project period: the Loan RecoveryStatus Report (which was dropped at the end of the project) and a Passbook (anearly version of the one now in use, which has been issued to five and a halfmillion farmers) are among them. The lack of computerization at all butheadquarters level of course holds back any attempt to upgrade the accounts andget a better picture of arrears. And RCPD was not well-enough supported by itsparent organization, BB, so that the increase in staff called for by the SAR wasdelayed and never fully completed and the build-up of a field capability was muchweaker than the Bank had anticipated. RCPD officers were appointed to each ofthe five districts, but during the three years of concentrated lending 1982-1984there was only one staff posted to each cell instead of the three projected andthey were without RCPD transport. Their ability properly to supervise, let aloneadvise, the activities of the bankers, dealers and turnkey operators wasobviously reduced. The field staff was supported by constant missions from RCPDheadquarters, however, and it was from headquarters that the pressure to lend wasexerted.

2.10 The PCR says that the time RCPD devoted to procurement problems and tothe siting and spread of the STW was at the expense of effective supervision ofthe banking business, including collections. Representatives of both the bankersand dealers told the audit mission that communications from BB headquartersexpected simultaneously the rapid growth of sales, on the one hand, and of thestaff and infrastructure to support and control the sales, on the other hand.The targets for sales dominated. It was everywhere evident outside of thenorthwestern distribution center of Bogra that the banks were unable or unwillingto expand their staff to maintain control - over the farmer selection process,the security of subloan agreements on repayments, and the placement of wells andretention of equipment at the sites for which they were financed.

2.11 A comparison of the rates of growth of the branch bank network and theportfolio of agricultural credit in this period is instructive. At the nationallevel (where the data is bette , though the trends are highly suggestive of, andin part driven by, the activity in Rajahahi Division), the number of branchesincreased between 1981 and 1985 from 4,178 to 4,963, while the amount of shortand longer term lending specifically to agricultural enterprise increased fromTaka 2.7 billion to Taka 9.9 billion. That is a 191 growth in branches,overwhelmed by a 135% growth in the portfolio (in real terms, given a deprecia-tion of the Take against the dollar of over 50% in the same four-year period).Data on staff strength in the branches were not collected during the audit.Nevertheless it was obvious in discussion with branch and district bank officersthat the ratio of bank staff responsible for loan management, to the number andsize of their accounts, was much smaller than in other countries visited by OEDin an on-going series of audits of credit projects.

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F. Procurement and Marketing of Shallow Tubewells

2.12 One of RCPD's prominent roles was in assisting the development of theprivate procurement system, including the important work to be done in otherGovernment offices to secure the timely availability of foreign exchange andimport licenses. Two of the companies on the "farmers choice" list of eightengine manufacturers were found unsatisfactory and replaced. Another supplied,in the first year, locally assembled engines of Japanese manufacture that had avery high failure rate, so that the model had to be replaced by imported units.Nevertheless that company, Mitsubishi, reestablished its quality image and wenton to take 411 of the project market. RCPD insisted that the dealers strengthentheir sales and service facilities, including the extension of activities fromBogra to the other four districts. This effort to promote geographic dispersionwas successful, and the district-wise distribution of the 136,600 STW at the endof the project was much better balanced than after the first4 year.

2.13 But, as mentioned above, the project had to contend with the continuingcriticism of several senior officers in the Ministry of Agriculture. They hadnot supported the shift to private procurement. They believed the self-interestsof private dealers and small farmers were irreconcilable and the project wouldonly serve to introduce and protect predatory commercial practices. Theypreferred the "monopoly" of BADC, which could protect the farmers. Early andwidespread evidence of abuse by some dealers, in the prices charged and qualityof services rendered, deepened their prejudice. A special inquiry of themalfunction of engines was organized by the Ministry in 1983. More importantly,a series of evaluation studies had begun, looking at both the efficiency of thecredit and dealership systems and the on-farm uses of the water. These gave factsto support both the allegations of poor performance and corrective measuresleading to strengthened conditions on performance.

G. Monitoring and Evaluation

2.14 A professor and his students in the Department of Economics at RajohahiUniversity played a leading role in this evaluation process. He carried outstudies commissioned by the Bank and RCPD in 1982 and 1987, respectively, inpreparation for the Project Completion Reports of the Shallow Tubewells (Cr.0724)and Agricultural Credit (Cr.1147) projects. The same professor was commissionedin 1984 to carry out a separate "socio-economic evaluation" of 1147 (the projectunder audit is almost always referred to as 1147 by the participating bankers anddealers). This was done for the Ministry, which was dissatisfied with RCPD andthe Bank reporting of the project. RCPD itself carried out its own field studyfrom time to time, the mid-term review of 1983 and another review in 1986 beingthe most important.

H. Technical Assistance

2.15 From the Bank's perspective, the principal problem in implementationwas the slow and unsatisfactory development of the TA components. Regardingtraining, the PCR describes the extensive set of in-country courses that weredesigned by RCPD - once it was convinced that the training advisor was neither

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needed nor likely to be recruited. The PCR claims however that there is littlesign that the training, which was carried out at a number of centers, contritatedto any significant progress toward what should have been its most importantobjectives the preparation of PCI and RCPD field staff to effectively manage thedelivery and recovery of credit. The overseas training component was nevercarried out. But the consultant program - not the training program - was wherethe major slippage was reported, and it was there that Bank supervisionconcentrated its attention in the hopes of rescuing the original TA design. Noneof the six programmed positions were long-term: the longest was set at 12 months.The two "credit advisor" positions for RCPD and BSBL were filled by retiredexperts from the Indian national banking system, and the "agriculturalcooperative credit expert" who was to conduct the survey of the credit functionwithin the UCCU/FCC network was recruited, also retired, from the BangladeshMinistry of Local Government and Rural Development. Of these, the PCR reportsthat it was Government's impression that only the latter made a substantialcontribution, and this sentiment was repeated to the audit mission.

2.16 PAO and the Bank tried to help RCPD and BSBL identify suitablecandidates for the other posts, but four years of effort ultimately led nowhere.Salary levels were an important issue, though behind this it is clear thatneither BB nor the Government committees that approved recruitment and paymentfor foreign consultant services were persuaded that these project positions wereessential. RCPD, for example, believes that the training program it sponsoredwas adequate, and that neither a local nor an expatriate consultant was required.If a good consultant could be found cheaply, his addition to the team would havebeen acceptable. But this was not the case, and rather than regret a baddecision based on an inflated CV, the selection was invariably postponed.

2.17 The Credit was extended for a year, from December 1985, because theBank insisted that the training and economist positions at RCPD had finally tobe filled. This concern was no longer related to the effective implementationof the project's STW lending line, since that had already been exhausted. Ratherthe Bank wanted to build a better institutional basis for proceeding to a secondCredit, and it felt the provision of these two experts in 1986 would bring in atlast the experience required to (a) train the banking staff to properly managethe delivery and recovery of farmer credit and (b) design an appropriateportfolio of farm investments for RCPD to promote. The search was unsuccessful,despite the Bank's help in compiling a list of eleven candidates from fiveinternational agencies. Years later the training position was filled under aUNDP program.

2.18 A rereading of the project files in the years 1985 and 1986, which weredominated by this consultant issue, reveals the Bank's lack of influence in theTA arena in the face of Government indifference. It also suggests a flaw inproject designs that depend upon successful TA and institution-building (IB),that in turn depend upon the appointment of a few key advisors. This is anotherexample of a project with an essential TA component that should have beenincluded among the conditions of effectiveness (or earlier). The subject ispicked up again in the Issues section.

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I. Comments

2.19 Apart from the deterioration of collections (para 3.06), it wouldappear to the audit that the extent of the deficiencies and irregularities ofthis STW program was not excessive for this type of explosive campaign, and thatin general RCPD did a reasonably efficient job in keeping it going. But it wasan extraordinary episode, and by 1985 the burst of activity - both the sale andthe finance of the shallow tubewells - had subsided. Banker and dealer staff andservices committed to the STW were reduced, and the rate of well drilling fellprecipitously. That is seen in table 1. This proved to be a temporary hold-upin the advance of small-scale tubewell technology. The hold-up was attributableto: action in October, 1984, prompted by the Ministry, to ban the import of smalldiesel engines; the impact of new IMF restrictions on money supply and credit;and increasing emphasis at the branch bank level on collections rather thandisbursements. When the rate of sale of STW took off again in 1988, the engineswere so much cheaper, and the motivation to buy so much stronger, that credit wasno longer considered essential. The purchase of most units, and their installa-tion, is now largely farmer-financed.

2.20 One of the less impressive aspects of Bank performance duringsupervision of 1147 is the unrealistic sequence of grades given to the projectin the supervision reports. All nine of the reports issued from late 1981 to mid1985 rated the project 2/1 overall, meaning moderate problems but improvingtrend. That a 2/1 configuration can persist for almost four years is illegical.In late 1985 the reports started grading the project a 3 overall (the trend gradehad been dropped).

III. PROJECT OUTCOME

A. Institutional Effects

3.1 There is little to discuss under this heading. Within BB the RCPD wasexpanded and currently supervises three commodity-specific credit projects, oneof them financed by the Bank. The size of the RCPD staff may be excessive tocarry out its present assignments. The justification appears to be related tothe expectation that a follow-on project will eventually be implemented.Salaries are too low to ensure recruitment and retention of top-level graduates.The PCR says performance is also weakened by the absence of professionalagriculturalists on the team. Although turnover rates of staff entering andleaving BB are low, interdepartmental transfer rates within BB are very high sothat many of the RCPD's present professional staff were not present during theproject period. That was a problem even during the project: personnel policy ontransfer within BB does not encourage continuity, even in new activities like1147 where one would have expected the agency to try to retain a core group ofproject veterans. A follow-on project would have to provide for extensive,

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additional training for the staff, some of it out of the country. Someimprovement in continuity would also have to be assured.

3.2 From a distance, one would have to conclude that the project has hadpractically no impact on BB. The same is true of the PCI. BKB's operations inthe north-west were reconstituted in 1987 as an independent regional developmentbank with headquarters in the town of Raj shahi (the Raj shahi Krishi Unnayen Bank- RAKUB). RAKUB collects outstanding BKB debt and is supposed to remit thosefunds to BKB, which still bears the obligation to repay the Government for therefinance. None of the nationalized commercial banks (Sonali, Janata and Agrani)opened the same type of term lending operation in other districts during theproject period (except for another project-related action in the southwest), andnone of them maintained the program originally financed by 1147 in the northwestafter it was closed and the refinance stopped. They each have a variety of on-going programs, a few of which are for term lending. Sonali, for example,maintains a term lending line to finance DTWe throughout the country. But theproject objective of creating a sustained and replicable, general-purpose,medium- and long-term agricultural credit operation must be assessed a failure.

3.3 The one institutional arena where the project impact was substantialwas in the marketing sector. Dealers, operating either exclusively as dealersor combining that function with the import trade, were endouraged by the projectto enter the private market for small scale diesel engines, pumps and irrigationequipment. These merchants had dealt with most of the products before, but theirmarket had been BADC or other public enterprise. As mentioned above, a ban wasimposed on engine imports in late 1984. The ban was later relaxed, allowingsmall engines to enter provided they were not intended for agricultural purposes.That restriction also was later relaxed, but a stiff duty remained and, for thepurpose of "standardization", the import of many foreign brands including the newChinese machines remained prohibited. In 1988 the Secretary of Agriculture wasreplaced by a person new to agriculture but intent on privatizing as rapidly aspossible. All the remaining restrictions were lifted. The intense pricecompetition that is now characteristic of these product lines has brought forwardfirms that were not involved in the project and eliminated some that were. Inparticular, the entry of cheap engines ($250 for a 12 HP model) from the Chinesemainland has at least for the moment blocked the sale of Japanese and Koreanengines and ruined the business of those firms that were committed to these twoexporting countries. The "down" side of privatization also includes theundermining of the development of a local engine manufacturing industry. It hadstarted up in the 1980s with at least one firm, but must now face the importswithout protection. This can be seen as the inevitable effect of an otherwisesuccessful process of freeing-up the market for minor irrigation equipment (andpower tillers, boat engines, etc.). That process can be traced back to 1147 ina substantial way.

3.4 Critics find in this experience evidence of the same damage to farmerinterests that was recognized early in the project's life. In this case, theysay, the farmers are being weaned on low quality engines where failure rates arehigh, spares are unavailable, and early replacement is necessary. That argumentis countered by assertions that the farmers are smart enough to know what they

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are getting into and are deliberately choosing price over durability. Also, theaudit was told that the image of throw-away Chinese engines that were not worthrepairing is exaggerated. In any case the turmoil in the irrigation equipmentmarket is part of the process of rapid development of the groundwater resourcewhich accelerated when the BADC public investment model was set aside.

B. Delinauencv

3.5 Compared with other countries, quotations of repayment rates of publiccredit programe in Bangladesh are remarkably low (repayment rates defined ascollections over collectables). Thus the SAR established 60% as a benchmark, andthat is the figure that is seen in the SAR text as being an average figure for1980. Sonali Bank was then described as having the best performance among thenationalized commercial banks at 72%. There is no mention of the aging of thosearrears, so it is impossible to infer anything about rates of actual bad debt(default). The presumption is that they were also high, compared with othercountries. The SAR says, and the DCA repeats, that any branch bank withpetformance lower than 602 must be supported by an action plan to reach thatlevel, and that any branch currently below 40%, or dropping below 502 afterDecember 1983, would be excluded for as long as recovery levels remain below thatlevel.

3.6 Performance deteriorated throughout the project period. The averagefor all PCI in 1982 is reported in the PCR as 442, and only 782 of the brancheswere eligible to continue. The average had fallen to 29% in 1986, when only 40%would have met the eligibility criteria. Since the 1147 lending program had bythen effectively terminated, and since the PCI had to repay Government ratherthan re-lend the project funds, "eligibility" in 1986 had no operationalsignificance. At the time of the audit in early 1991, the PCI were quotingfigures that fell mostly within the range of 5% to 152 for all of their rurallending lines, including short and long term and commercial as well asagricultural credits. The audited project lines are still separately identifiedin the PCI accounts, and they have fallen to the same low level. BB computes anaverage collection rate for all agricultural credit in the country. For theperiod July 1990 to June 1991 the figure is 122. In the next section thephenomenon of 122 repayment rates is discussed. The decline in PCI collectionrates does not imply that recoveries from 1147 subloans started out well and thenslipped. The first large batch of subloans, made in 1982, would have emergedfrom the grace period in 1984. Collections on the 1147 account started out poor.The audit is satisfied that the low repayment rates are a sufficient explanationfor the PCI to have abandoned the project initiative.

3.7 The next chapter discusses the political factor in delinquency. Thereare other factors that can be traced to weaknesses in implementation itself. Themalfunction of the engine model which was the leading seller in the first yearprompted many of those borrowers to refuse to repay. The shortage of PCI fieldstaff had several negative effects. Although farm visits appear to have beenmade at the time the newly installed well was turned over to the borrowe, returnvisits to verify proper use and retention of the movable equipment were a luxurythe branch banks could not afford. One of the interesting after-effects of this

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STW program was the high rate of removal and transfer or sale of the engine andpump sets. Many of the engines were put on river boats. Some farmers would haulthe engines back and forth from well to boat depending on the season. Othere,however, sold the engines to boatmen. This is alleged by the bankers to havebeen a popular transaction, since the farmer could sell it for nearly thepurchase price, keep the ditference over his down-payment, and ignore furtherrepayments with impunity because the banker's chattel security - the engine -could no longer be repossessed. But the most important result of the shortfallin the growth of the field staff to keep up with the installation of STWe was theinability of the branch banks to pursue delinquent farmers. Most bank officersand dealers assert that the intention of the majority of farmers at the time oftaking the loan was to repay. But the failure of the lenders to follow-uppersuaded the STW farmers that there was no penalty for waiting in the hopes thedebt would be forgiven.

C. Farm Impact

3.8 At the time of appraisal in 1980 there were about 20,000 STW in thecountry, half of them in the project area. The SAR estimated that existing smallscale irrigation programs would add another 34,000 in the area, against anabsorptive capacity then projected at 100,000 units. The rate of installationof STW had moved sharply up in 1978, so that the project is best described ashaving added a major push to a technical revolution that had recently begun. Thebulge in the trend-line of additional STW capacity is shown in annex table a,which includes as well annual figures for DTW and LLP converted to STWequivalents. As a percentage of the total number of minor irrigation units, STWare seen to jump from 4% to 43% in the eight-year interval 1977-85. STW growthstalled in 1985, under the influence of the new Government restrictions on engineimports. When these restrictions were removed in 1988, rapid growth resumed.By 1989 there were 223,000 STW in the country, of which, again, half (111,500)were in the northwest. Thus the project impact on the farms can be attributedboth to the explosive growth in STW installations in the early 1980., and to theliberalized procurement system which ope..ad the way (after the pause from 1985to 1987) to the current surge.

3.9 The expansion of irrigated cropping area and production attributableto the project is reported at length in the PCR, for which PAO/CP mounted fieldmissions in 1987. FAO/CP's estimates are based on discussions at that time withDistrict Agricultural Officers, the RCPD-sponsored sample survey in 1987 and theMinistry-sponsored socio-economic evaluation in 1984. Thus its data are by nowdated, and do not necessarily reflect present farmer practices. Subsequently,ORD financed further field research in the project area as part of an "impact"evaluation of the Shallow Tubewells Project, to review again the productioneffects of tubewell technology financed under Credit 724-BD (this OD Impactstudy has not yet been finalized). The impact research is based on new fieldwork in 1989 by the professor from Rajohahi University. The project areas forthe PAO and impact estimates are the same. One might have expected the estimatesof actual cropping patterns and production coefficients to be similar. In atleast one important way they are not, and the difference is apparently explainedby changes in farmer behavior in the latter part of the 1980s. Since both of

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these reports agree that the expansion in crop production was substantial, thatirrigated farmer incomes have more than doubled, and that re-estimated rates ofreturn, though well below SAR forecaste, are nevertheless well above 101, theaudit made no effort to develop a third re-estimate.

3.10 Thore is agreement that the principal change has been the expansion ofthe HYV paddy rice crop in the winter (dry) seasor (the Boro crop). The SAR hadanticipated a less pronounced expansion of the Boro crop, and a simultaneousexpansion of irrigated wheat. According to the impact research, this is not nowthe case: STW farmers prefer to put the newly available water onto rice. The PCRprovides figures that suggest that at first the wheat expansion did occur, thoughto a lesser extent than previewed in the SAR. But more recent national grainproduction data compiled by Government and the Bank indicate that the expansionof the wheat crop was reversed in 1986 and the wheat was replaced by Boro rice.Both studies show another important divergence from SAR forecasts. The latterhad assumed the area committed to the paddy crop in the monsoon (vet) season (theMan crop) would remain stable, while the area committed to the paddy crop thatis planted Just before the monsoon and is harvested well after it (the Aug crop)would expand, supported by supplementary irrigation from the STW. Both the PCRand impact studies show declines in the area planted to Aman as well as Auscrops. The decline reported in the impact study is more pronounced, whichimplies the movement out of Aman and Aue may be accelerating. If these findingsare genuine and durable, they have important welfare implications. To an extentthey were inevitable, since Boro competes with both the Aman and Aus crops forpart of the cropping calendar. But that does not explain the whole shift. Itsuggests that the STW irrigators are fallowing some of the land that isaccessible to them - and that they previously cultivated - not only because theyare forced to by the Boro calendar but because they prefer to abandon wet seasonfarming and concentrate on the much more profitable - and less risky (i.e, lessflood-prone) - Boro crop. The welfare issue is diecussed below (para 4.23).

3.11 The difference between the estimates in the SAR, the PCR and the impactstudy about Au. and Aman areas has a dramatic effect on reestimates of croppingintensities. The SAR forecasted an increase of the overall cropping intensityon the average participating farm - compared to the "without project" situation -from 147 to 201 (37%); the PCR estimates it increased from 141 to 188 (332); the

impact study estimates it increased from 145 to only 150 (3%). If theseprovisional impact results hold up, they suggest that the production impact ofSTW technology is less dramatic than described in the PCR and SAR. Since theBoro yields are much higher than the Aman and Au. yields, the small increase inintensity nevertheless hides a much larger increase in production (but see para4.24).

3.12 Incomes and rates of return under both of the ex-post reviews arepositive and impressive. Net farmer incomes (before debt service) approximatelydouble in the two analyses. The PCR estimates internal rates of return for anindividua. eight acre farm at about 301 - higher for the farmer who uses all hiswater than for the one who sells half of it to neighbors. The PCR reestimatesthe project economic rate of return (ERR) for the whole STW component at 141.This is well down fron the appraisal 601, but it would appear the PCR is too

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conservative and the actual ERR should be higher. For example, the PCRcriticizes the SAR assumptions that all STW are not only installed in the firstyear but provide some benefits in that year as well. The PCR methodology delaysall incremental production to thq year following installation. That isinappropriate: STW turnkey instailation takes about three days. The impactevaluation provisionally recomputes the ERR for the Shallow Tubewell3 Project at29%.

3.13 An expatriate advisor to the Ministry of Agriculture, who has ten yearsof experience in Bangladesh and has written extensively on the STW impact, hasdescribed the PCR yields and other production coefficients as being unrealisti-cally low. In particular, he disputes one important finding of the 1984 socio-economic survey, that was supposedly reconfirmed by the RCPD 1987 survey, thatcommand areas of the average well were 20% lower than SAR forecasts: 8 acresinstead of 10. The advisor uses a figure of 11 acres in his most recent report,which discusses the implications of the STW revolution for national grainproduction. The 1989 impact field study came up with an estimate of about 9.6acres per well. But the draft impact report points out that with the generaldecline and annual variation of the water table it is impossible to say anythingcertain about the optimal, feasible command area - for one year or any group ofyears. There may be a shortfall from the optimam or not. This is an importantargument, with obvious impact on equity and efficiency indicators. The auditcannot carry the discussion further, except to note again that the PCRpresentation seems too conservative.

IV. FINDINGS AND ISSUES

A. Was the Proiect a Success?

4.1 Despite the remarkable change in cropping practices in RajshahiDivision, based on the STW technology and closely associated with the credits andprocurement practices introduced by the project, the audit must conclude that itsprincipal objective was indeed the institutional strengthening that was presentedin the SAR and to the Board and pursued painfully by Bank supervision. By thatmeasure, the project cannot be rated a success. This is not an easy call. Theweighing of the two objectives - production and institution building - by theBank officers who helped identify, prepare and supervise the project variedbetween officers and over time. In fact the first appraisal visit travelledunder terms of reference that gave priority to production. Government'sintentions were less ambiguous: it was primarily interested in promoting theadoption by farmers of the STW technology. Farmers were meant to repay, butearly warnings of high delinquency were not enough to slow the campaign. TheMinistry of Agriculture tried to intervene to slow down the rate of expansion ofthe STW, but that was a reaction to other perceived faults than delinquency.

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4.2 Even if the project had been labelled an irrigation or rice productionproject, it would be difficult to call the project a success, and this despitethe fact that the Boro revolution which it helped promote has been so spectacular- changing the winter landscape of the northwest. That judgement is made becausethe Bank can not take saaifaction in a production project that contributes tothe decline of its institutional apparatus. The Bank clearly had intended tohelp build a viable credit system, whatever the ranking of that objective, andthe experience shows the Bank simply did not know how to go about it.- Thenext issue picks up on this point.

B. Technical Assistance and Institution Building

4.3 The PCR says the project design was frustrated partly because theGovernment was not serious about institution building (IB). It supports thatclaim by reference to Government's inability to complete recruitment of theconsultants. The audit does not accept the PCR view that Government commitmentto institutional reform can be tested by the measure of its adherence to anagreed schedule of consultant appointments.

4.4 The audit believes that the Bank expected too much of the consultantpositions it placed in the original appraisal design and, again, five years laterin the reworked terms of reference for the two positions it still wanted to fill.It is not credible that 6 or 9 month consultants even of the highest caliber cansponsor an institutional reform of the dimensions called for by the project - forexample to help substantially to solve the problem of arrears, to change staffrotation policy in a central bank, to improve significantly upon a locally-conceived training program. These contributions are important, but the designfor project success cannot be such as to depend on the timely arrival of evenexcellent outsiders. This model sometimes worked successfully in the new Africancountries, where consultants were less essential for highest quality work thanfor the fact they gave the Bank a resident officer with the influence - to affectpolicy - that goes along with that close association with the Bank. The modeldoes not work in Bangladesh. Moreover, the quality of the persons who areavailable and whose fees are within the range acceptable to Government committeesthat approve such appointments are rarely up to the ambitious SAR standards.

4.5 In short, Government commitment to IB cannot be assessed by itscompliance with an improbable TA program. Also, to criticize "Government" forlack of commitment often hides a situation, as it does here, where some parts orlayers of Government are committed and others are not. In this case BB usuallyaligned itself with the Bank against decisions that were not under BB control,the Taka 5,000 debt relief exercise, for example (para 4.14). There are othercases where RCPD would have preferred but was unsuccessful in changing BB policy.The practice of frequent transfer is a case in point. The distinction between

1 The Regional Office disagrees with the audit's unsatisfactory rating. It argues t.t.t thedeterioration in collection rates was only partly attributable to the project, and that that failingwas more than compensated by the expansion in production.

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who are and who are not committed is important in drawing lessons from ex-postreview, and for designing a response for maximum effect.

4.6 It is the Bant. that must get more serious about how to go aboutsupporting IB, the patience that that requires, the role of consultants in aproperly constructed TA program, the quality of the candidates who are likely tobe selected, and the modest contributions that the majority of them are going tomake. This project provides an extraordinary example of the Bank not getting thedesign right and not being in a position later to help with recruitment or repairof the design. At a minimum, if there are crucial TA positions to be filled, thatmust happen before the Bank loses its influence over the Government committees.That means earlier in the project cycle, taking action as conditions ofeffectiveness or even negotiations.

C. Reasons for and Response to Delinquency

4.7 High rates of arrears on rural loans are common to all public programein Bangladesh. The deterioration of collection rates during the project periodwas part of a general trend that has affected practically all of the credit linesof banks and parastatal agencies that lend in rural areas. This includesindustrial and commercial credit as well as farmer loans, and short as well aslong term obligations. There are a few exceptions, for example where tea andsugar debt is recovered by the factory on behalf of the bank. But where theborrower decides when to repay, the pattern has been nearly universal. Someprivate and semi-public credit programs have successfully resisted this trend:the example of world-renown being the Grameen Bank and its network of red-brick,village-level banks (Grameen means village). But the types of credit linesoffered by these special programs are typically not for agriculture and not formedium- and long-term investments, and the subloans are so small that they cannotbe considered alternatives to systems such as that supported by the project.

4.8 Collection rates in the early 1980s were poor by normal Bank standardsbut wer% on a par with its experience in South Asia as a whole. The 60% targetquoted in the SAR was probably optimistic even for 1981, but there was reason tobelieve the project could guarantee that that rate could be maintained. Thereseems to have been a decisive downward turn in repayment performance about 1984that included the project but was much broader in scope. Project collectionsonly came on line that year, and they were caught by the spiral. It ends up withthe present collection level of about 12%. That rate, and whatever rate of baddebt or default is implied by it, are the worst in the Bank's portfolio of ruralcredit. Jokes about the people who still repay no longer seem funny at thatlevel. The audit mission had intended to commission a special study of repaymentto try to determine the characteristics of non-delinquents, but the pervasivenature of the problem persuaded us that the results would be idiosyncratic andthe plan was abandoned.

4.9 The study of delinquency in rural credit in Bangladesh has taken onspecial importance, especially among donors. The Bank examined the subject inits third sub-sector review of agricultural credit carried out largely by theresident mission in 1983. A much broader exercise in the mid-1980s was financed

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by USAID as part of its Rural Finance Project, carried out under a TA contractby the same international consultant firm which conducted the second creditsubsector review for the Bank starting in 1977. The final report of the USAIDconsultancy was issued in September 1986, and contains among other annexes apenetrating review of the causes and solutions for delinquency. This wasfollowed in December of that year by a seminar, organized by BB and Ohio StateUniversity, with the title "issues in rural loan recovery in Bangladesh". Theproblem of arrears is not only recognized, but is of major concern to the centralbank and has become a target of rural bank training courses everywhere.

4.10 The audit was not the instrument to review this "12%" phenomenon indepth. We are clearly dealing with a profound social as well as economic problemwhich has many explanations and will require a consortium of solutions. The 1987report lists a large number of contributing factors, all of which are recognizedin delinquency-prone experiences outside Bangladesh. Here we shall mention fourfactors peculiar to Bangladesh and its recent history that argue for special,patient and persistent treatment.

4.11 The first is a geographical factor. Virtually the whole country isvulnerable to natural calamities of extraordinary dimension and frequency. Sincethese "acts of God" wipe out the ctllateral and income base of borrowers (imaginewhole herds being washed away), one has to allow that ex-ante or ex-post measuresfor debt rescheduling, write-off and/or guarantee will be demanded at levels andfrequencies that exceed those operating in most other countries. Bangladesh'sagricultural potential, including most notably the annually recharging aquifersthat were the target of this project, is substantial, and in theory the goodseasons can carry the bad. Provided the estimated rate of return is adequate andappropriately reflects these risks, they are not a reason to reject the project.But to impose an insurance scheme on these farmer-lending programs that wouldoffset the incidence of calamity implies repayment rates in good seasons that maybe politically unacceptable. Crafting a self-financing and durable credit reliefplan for this country is going to be a difficult task. Some element of subsidymay be inevitable. That is not an undesirable public policy, provided it ismanaged in a way that does not further erode the repayment discipline. And itis perfectly compatible with plans aiming to reduce "willful" default to zero.In the absence of such subsidy, the list of ineligible delinquents may over timeinclude the entire farming population.

4.12 The second factor is the rapid expansion of the rural banking systemsince independence. After the nationalization and rationalization of thecommercial banks, and because the reconstituted, surviving banks had been turnedto agertts of public plicy, their network of branches literally took off. Froma base of about 500 rural branches country-wide in 1973, the number expanded to4,200 in 1981, on the eve of the project. As mentioned above, branch expansionslowed at that point. Only 1,000 were added in the next seven years. ButGovernment did not slow the pace of expansion of lending. This results in theportfolio growth mentioned in para 2.11, topping out only in 1985. Staff numbersand training were expanding also, but not enough to cope. The inability of BKBand the three commercial banks to maintain control over the quality of projectlending is a case in point, but only a piece of the larger drama. It was

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exacerbated in the project because for most of the branches - even the old ones -this was a first experience with term-lending. The encouraging aspect of thisexperience is just that: the banks.were gaining experience and the bad effectsof explosive growth can be expected to diminish. The dangerous aspect is thatit aggravated the injury to the repayment discipline, as farmers got used to easymoney.

4.13 The third factor is the reversal of the second, the precivitous declinein the availability of rural credit after 1984. This is thought by mostobservers to have had a decisive influence on the collection trend line, whichstarted its dive at that time. The amount of agricultural lending, which hadsurged from Taka 2.7 billion to Taka 9.9 billion between 1981 and 1985, fell toTaka 4.4 billion in 1987. That is 44% of the 1985 level, measured in dollarterms. The argument here is that the farmers' propensity to repay old loans islinked to their assessment of the availability of new loans. A drying up at thesource of credit persuades farmers to withhold repayment. This is no excuse fordelinquency, but it does help to explain the downturn in the mid-1980.. Oneimportant implication of this argument is that the Bank's standa,d response ofdropping bank branches or farmers which can not meet collection targets can beself-defeating. The farmers in this case are too poor to reestablish a creditrating without help. The Deputy Governor of the Bangladesh Bank told the auditmission that this was one of the major tasks in front of him: to deal withpervasive indebtedness without crippling the clientele. Or, from the oppositeangle, to anticipate and cut out the hardcore, willful defaulters while freeingup credit availabilities to the farmers who can and should be brought back to thebanks.

4.14 The fourth factor is the one that attracts most of the concern aboutwhether improvements are likely. For reasons the audit also could not explore,rural credit has become a prime political weapon. Given the incidence of naturaldisaster, it was inevitable that disaster relief would play a key role inpolitical posturing. In Bangladesh, however, it has been pushed beyond theproportions of calamity. Debt relief has generally been extended well outsidethe stricken areas, even though the programs are nominally associated with thedisaster. The political intervention is not just in the promise of relief, butin the promise also of new lending programs. In this case, banks that would havetaken a conservative approach to applying instructions for a relief operation,are told in effect to throw caution to the winds and invite the delinquents aswell as the credit-worthy to apply for the new program. This factor offersanother good explanation for the downturn of collections in 1984. That yearmarked the first of a series of relief programs that were tied to naturalcalamities but were clearly politically motivated. In every year since thenthere has been one excuse or another to either roll-over the debt, forgive theaccumulated interest payments, or, in the most recent exercise, to forgiveprincipal as well. The last !4as the worst, in terms of disrupting BB'sstrengthened efforts to increase collections. Political platforms since 1988 hadbeen promising a major write-off exercise. Following the elections of 1991, thenew Government announced a program that would write-off all past dues, includinginterest, of farmers with a debt of principal of less than Taka 5,000 (US$130).

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4.15 As with all the other exercises, the impact of the 1991 debt-forgiveness exercise is not the amount of the write-off but the expectationsaroused among all the other farmers that the Government's generosity will beextended and repeated and is worth waiting for. The fact that the worstrepayment records are associated with the large and/or politically powerfulfarmers - a world-wide phenomenon - just aggravates the situation by setting thewrong examples. So a culture, or habit, of delinquency (not necessarily default)has been developed in the twenty years since independence, especially since 1984and right on top of the repayment period of the audited project. It is excusedonly in part by the calamity factor, and it gathered momentum because the bankshad not been able to keep control over the expanding flow of disbursements. Thetask now, of course, is to remove that habit. That depends upon politiciansagreeing to give up their favorite weapon.

D. World Bank Involvement in Credit Programs with Hiah Arrears

4.16 The audit is impressed by the Bank's willingness to help Bangladesh winthis battle. Rather than sit out the next years, waiting for Government to bringarrears under control before resuming IDA lending, the Bank helped prepare afollow-on project of considerable scope and targeted directly at the causes ofdelinquency. The project was designed to be part of a larger financialrestructuring exercise begun with the approval in 1990 of a Financial SectorAdjustment Credit (FSC, the acronym for the program as well). The agriculturalsector was deliberately left out of that exercise, partly because Government wasnot yet willing to accept for agriculture some of the harsh conditionality agreedfor the other financial markets of the country. Supervision of FSC has beengenerally satisfied with Government's performance against those conditions, forexample in identifying and going after the largest delinquents. The new projectwas predicated on strong Government commitment to reform the agricultural creditsector as well. Interest rates, repayment rates, the treatment of branch bankswith sub-par performance: these and other policy issues and disciplines were tobe adapted and brought over into the rural arena.

4.17 The project, named the Agricultural and Rural Credit Project, wasappraised and negotiated in 1990. IDA was to contribute US$50 millionequivalent, of which US$46.5 million would be for medium- and long-term creditand incremental short-term credit, and US$3.5 million is allocated to "institu-tional strengthening". The Asian Development Bank would contribute anotherUS$60.0 million to the on-lending fund, and USAID US$3.0 million for TA. Thistime around there was to be no ambiguity: the project aimed explicitly atbuilding a sound system of -rural credit. There was no earmarking of subloane forspecific investments, though the SAR in its chapter on expected benefits triedto anticipate the most popular lending lines. Interest rates were to follow theFSC formulas and be tied to market rates. Not only were positive rates to bemaintained, but the rate was intended to be high enough to cover the costs oflending. An insurance/guarantee arrangement was built-in. The technicalassistance was aimed at the banks involved in the first Agricultural CreditProject, and some others, with training again prominently featured. This timethere was exhaustive treatment in the SAR of the measures that need to be takento prepare the branches to manage loan delivery and collection, including, for

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example, salary incentives for performance. Branches that did not reach 75%collections would still be eligible to access project loan funds, but they wouldbe forced into a correction program. That cut-off would not, however, be appliedin the first year, in recognition that the results of the institutionalstrengthening process will be delayed.

4.18 In the view of the audit the measures prescribed are essential toputting the rural credit system back on its feet. Assuming they could beeffectively applied, and political interference in agricultural credit could beeliminated, such a project would make sense for the Bank even within the 12Zscenario.

4.19 However the Bank is not careless: two recent Government actions orstatements have brought up the wrong images and caused the Bank to suspendpresentation of the project to the Board. The first was the unlimited, 1991 Taka5,000 debt forgiveness offer. The project was appraised before this program wasannounced, although the offer of a relief program of that or larger magnitude hadentered into political rallies as early as 1988 and the Bank had expected sometrouble ahead. In May, 1991 the Bank notified Government that if the conditionsof eligibility of the relief exercise were not specified and substantiallynarrowed, and if Government did not foreswear repeater acts of this sort, notonly this project but any other IDA lending to the rural sector would be injeopardy. The Bank tried to turn the offer to an acceptable end. The southeasthad just been devastated by a major cyclone, and a relief exercise of somesubstantial magnitude was inevitable. Government did in fact subsequently narrowthe boundaries of the offer, leaving it to the banks to determine eligibility.(It should be noted that the Taka 5,000 ceiling, at US$130 equivalent, meant thata lot of very small loans were involved but that most of the larger borrowera,including all of those under the Agricultuxal Credit Project, were not involved).Thus the Bank's reaction was intended to limit the "collateral" damage of thisunprecedented open offer. However, hard on the heals of this action, theGovernment took one of the other steps that together with write-off has weakenedall efforts to rebuild the system. It announced a major expansion in theavailability of rural credit, and the extent of this offer suggests the branchbanks will find it hard to deny new credit to willful as well as illiquiddelinquents. Thus the Bank has suspended Board presentation, while hoping thatthis latest political initiative will also be brought under control and animproved program to rehabilitate the sector can be agreed.

4.20 The audit finds that the Bank is handling this part of the programcorrectly too. However strong the argument for Bank involvement in thereconstruction process, willful destruction by Government of the bases ofremedial action necessary to bring willful delinquency under control onlyperpetuates the 12% scenario. Continued Bank involvement would give the wrongsignals and do more harm than good. In fact it would give the same signals toGovernment that the Bank complains Government is giving to the farmers.

4.21 There is another aspect of this issue which needs to be treated. Thenew project proposal was sharply criticized from some quarters inside and outsidethe Bank as throwing good money after bad. This reflected two concern.; that any

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further lending would suffer high default, and that ir any case BB did not needIDA funds to reach its lending targets. The financing gap shown in the SAR wassaid to be exaggerated. Thus, one of the peer review group for the proposalinsisted that the large on-lending component of US$46.5 million was superfluousto the needs of the rural credit sector and ought to be cut away, leaving a self-standing TA project. This approach would fit into the new credit policy nowbeing formulated in the Bank. BB told the audit that the notion of excess fundsin agriculture was mistaken, and that there is now a not drain on the sectorsince repayments by the farmers to the banking system exceed the reduced levelof lending still going on. The audit did not investigate this issue of the gap.But it would point out that self-standing TA projects aimed at substantial reformof a particular institution are not likely to carry much influence: the Bank haslearned over and over again that a capital transfer is usually needed to put anassociated TA program to work. Participation by the Bank - if there is indeeda gap - may be a small sum to contribute if the institutional reforms can alsobe largely achieved.

4.22 The audit suspects that the criticism goes beyond the claim of excessliquidity, and has a punitive element: namely IDA should not throw more moneyat Bangladesh whether it is needed or not until Government brings its rurallending system to order. The willful political acts of the last several months -calling for waiving the debt and increasing lending - invite sympathy for thishard-line position. Nevertheless, the audit believes the Bank can do more goodthan harm by hanging in: working out with Goverment a reform program that can besupported. The Bank should join USAID in the effort to determine the reasons andsolutions for delinquency, rather than be repelled by the 12% score. Assuggested in para 4.19, continued political interference allows little room tomaneuver, and the Bank may face a situation at this time, in this country, wherefurther support is futile. The Bank is sending that message now. And if theresponse is not satisfactory, then at least the Bank will have gotten out for theright reason.

E. Land Tenure Issues

4.23 The expansion of STW technology has favored a tenure system withwelfare implications about which the Bank cannot be indifferent. When individualsborrow to install STW and either use all the water themselves or sell some of it,they strengthen their economic position vie a vis neighbors without thisfacility. That is to be expected. What appears to have happened in the projectarea is that these farmers have literally reoriented their lives around thewinter rather than the monsoon season, and, in many cases, are leaving fallowduring the Aus and Aman paddy cycles land that had been previously farmed andcould have been farmed again. As one expert has warned in a recent report toOD:

"What has happened is that winter (irrigated) croppingintensities have increased essentially as expected, but STWowners are failing to plant their entire holdings during themonsoon season, when irrigation is not normally required.Under what circumstances can farmers surrounded by some ofthe greatest concentrations of hungry people on earth be

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starting to leave fallow good land which they have croppedregularly for the last century?"

4.24 He suggests that this social diseconomy results not from privateownership itself but from the size of the holdings of the STW owners. Manyowners have holdings large enough to produce a substantial surplus, or to allowsome land to be idle that does not nied to be rested. If market prices areunattractive, these STW owners can afford to abandon the low-yielding Aman andAus crops. That fallow is a luxury smaller farmers would not enjoy. Onesupposes they would have to produce in all seasons to secure even a modestsurplus. Thus, to the extent the small holdings can be grouped and the tubewellsold to and shared by the members, the production results could be different.

4.25 The larger owners are simply opting to concentrate their management inthe floodless, easier and higher yielding dry season, and are acheiving therebyremarkable increases in overall production. Because of the cropping schedule,Boro may preclude Aus and Aman. But other shorter season crops could have beenfit around the dominant Boro schedule, and that the owners were not doing either.The Bangladesh Rice Research Institute is currently investigating Boro farmingsystems, trying to identify viable and attractive three-crop regimes. Graduallyas research on the secondary crops improves and HYV varieties that respond tosupplementary irrigation are introduced, those farmers may get back into monsoonagriculture. Other tenure systems based on smaller size farms would have keptall the land under cultivation without a break. This is not a recommendation forland reform. It is an observation on an important survey finding.

4.26 Other questions have been raised about the efficiency of the productionsystem supported by the project. As mentioned in para 3.13, the size of the areaunder command of the STW is in dispute: the PCR estimate of 8 acres may be bothaccurate and below the optim command area and could signal the waste of aresource. Again, other tenure systems may have had other results. A substantialnumber of STW were being installed during the project period self-financed byfarmers. Since 1988, most of the cheap pumpsets have also been financed outsidethe formal credit system. Thus any effort by the Bank to direct the creditstoward a specific welfare target would have been of limited influence. Projectfunds were earmarked for small farmers, but the degree to which that objectivewas achieved is uncertain and its impact on the overall pattern of BoLadevelopment in the northwest would in any case have been minor. The waterlordswould have taken over anyway. These are the socio-economic issues that preoccupythe professor from Rajohahi University and attracted also the attention of thethen Secretary of Agriculture. Bank supervision paid almost no attention tothem. The audit did not explore them either, but would point out that behind anyproduction success in this land hungry region there is a always a myriad ofdistributional consequences that warrant attention and usually do not get it.

Table: Estisated and Projected Irrigation Equipment Operated, 1973174-1994-95(in thousands of unite)

CumulativeLLPs SW Sales

LLPS Total Hinor Aanmal In- Item: Annu- less STWsDTWe as Large Small as Irrigation crease al going outYear SWe DT& STES STEs as STWEs In STWE STW Sales of Service

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)1973174 1.2 1.8 8.0 35 124.6 133.8 2.4 1.2 1.21974/75 3.7 3.0 13.3 35 124.6 141.6 7.8 2.5 3.71975/76 5.0 4.1 18.2 35 124.6 147.8 6.2 1.3 5.01976/77 7.1 4.8 21.3 35 124.6 153.0 5.2 2.2 7.11977/78 13.7 7.8 34.6 35 124.6 172.9 19.9 7.1 13.7 an1978/79 18.4 9.6 42.6 35 124.6 185.6 12.7 5.3 18.41979/80 22.0 10.1 44.8 35 124.6 191.4 5.8 4.5 22.01980/81 37.9 10.4 46.1 35 124.6 208.6 17.2 17.6 37.91981/82 72.7 11.8 52.4 35 124.6 249.7 41.0 27.1 62.71982/83 99.2 14.1 62.6 35 124.6 286.4 36.7 39.3 99.21983/84 127.6 15.8 70.1 35 124.6 322.3 35.9 33.1 127.61984/85 152.3 17.2 76.3 35 124.6 353.2 30.9 32.5 152.31985/86 145 18.2 80.8 31 7 117.4 343 (10) 4.3 144.21986/87 159 19.1 84.8 33 8 125.5 369 261987/88 183 20.6 91.4 34 8 129.0 404 341988/89 223 22.9 101.6 41 10 156.0 481 771989/90 280 25.3 112.3 43 10 163.1 555 74

1990/91 280 25 111 43 9 162 553 (2)1991/92 335 26 115 45 11 170 620 671992/93 390 27 120 47 12 179 689 691993/94 445 27 120 49 13 187 752 631994/95 500 27 120 51 14 196 816 64

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ARM.APage 2 of 2

Source by Columnsi(2) STwe operated through 1984/85 calculated from cumulative sales with allowance for STWs going

out of service, with details shown in columns 10 and 11. STWe in 1985/86 and 1986/87 from 1987MOA census of minor irrigation equipment (conducted by AST and DAE); in 1987/88 and 1988/89 from1989 NOA census of minor irrigation equipment; in 1991 from 1991 HOA census of minor irrigationequipmenl in 1989/90 and 1991/92 through 1994/95, estimated and projected, assuming no growthfrom 1989/90 to 1990/91, and expansion by 55,000 per year from 1991/92 through 1994/95.

(3) DTWo operated through 1989/90 from BBS and BADC sources. DTWs operated from 1990/91 through1994/95 estimated and projected, assuming no increase from 1989/90 to 1990/91, net increase of1,000 per year from 1991/92 and 1992/93, then no increase in 1993/94 and 1994/95 (with farmersretiring significant numbers of DTWs in Thakurgaon and other regions suitable for STWe).

(4) (column 31 X 4.44. Assuming irrigated area of a DTW averages 4.44 times irrigated area of anSTW.

(5) For 1973/74 through 1984/85, BADC and BBS sources show number of large LLPs operated varyingaround 35,000; ignoring annual variations from BBS data, a constant figure of 35,000 large LLPsis supposed through these years. Numbers of large LLPs operated in 1985/86 and 1986/87 from1987 HOA census of minor irrigation equipment (conducted by AST and DAE); in 1987/88 and 1988/89from DA census of minor irrigation equipment; in 1991 from 1991 HOA census of minor irrigationequipment. Numbers of large LLPs in 1989/90 and 1991/92 through 1994/95, estimated andprojected, assuming no growth from 1989/90 to 1990/91, and expansion by 2,000 per year from1991/92 through 1994/95.

(6) Small LLPs operated in 1985/86 and 1986/87 from 1987 HQA census of minor irrigation equipment(conducted by AST and DAE); in 1987/88 and 1988/89 from 1989 HA census of minor irrigationequipment; in 1991 from 1991 H0 census of minor irrigation equipment. Numbers of small LLPsoperated in 1989/90 and 1991/92 through 1994/95 estimated and projected, assuming no growth from1989/90 to 1990/91, and expansion by 1,000 per year from 1991/92 through 1994/95 from numberof small LLPs operated in 1989/90).

(7) (column 5] I 3.56 + (column 6]. Assuming irrigated area of a large LLP averages 3.56 timesirrigated area for an STW; also assuming irrigated area for a snall LLP Is the same as for anSTW.

(8) Sum of columns 2, 4, and 7.

(9) Annual increase in figures in column 8; for 1973/74, the increase of 2.4 STWEs includes 1.2 8TWOand 1.2 STW equivalents in the form of new DTWs.

(10) Annual STW sales from BADC, BRDB, and donor-aided projects (essentially no non-project, non-Government sales took place during these years).

(11) Annual stocks calculated from cumulative sales with allowance for engines going out of uselcalculations have been adjusted to fit observed 8TW stocks in 1986. The formula is as follows:(stocks in the previous year plus sales in the current year less 0.125 time stocks in the thirdpreceding year). The adjustment for engines going out of use is based on engines in previousyears since high rates of increase means that current stocks are dominated by new engines.

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Page 1 of 3

IANGLADESH BANK a1W CAtD% rRoTELEGAM HEAD OFFICE DSPARTM1S BNKLABAN2 POST BOX NO. 325 B YAX 02) PA6 JPHONE,s 252927-39 O!4AKA-2

235000-21

itef. N4UVA .. (.,Plaanng V/6 -/3 DW* e .. osp ...

Mr. Graham Donaldson,Chief Agriculture and

Human Development Division,Operation Evaluation Deptt.,World Bank

Dear Mr. Donaldson,&: Agricultural Credit Project (credit 1147-BD)

Proiect Performance Audit ReDort.

Please refer to your letter dated January 10, 1992 on theabove subject.

We agree, in general, with the findings and observationshighlighted in the draft Project Performance Audit Report (PPAR).However, our comments on the same are as followas

1. The Project, 1147-BD was launched mainly with the twin objec-tives of increasing agricultural production through improved useof the country's water resources by adoption of STW technology andcreating a sustainable institutional apparatus for delivery of longand medium term agricultural credit. As far as the first objectis concerned, the success achieved was remarkable. Large scaleadoption of STW technology introduced through the project hassubstantialy changed the cropping intensity of the project are ,i.e., the nrothern districts of Bangladesh. Availability of irri-gation facilities has led to increased cultivation of high yieldingvarieties of paddy, i.e. Irri and Boro, in addition to the tradi-tional varieties of Aus and Aman. Several rabi crops, viz what,sugar-cane, tobacco etc. are also being cultivated. In other wordsthe project has resulted in substantial increase of agriculturalproduction in the area.

2. Since HIV technology requires more labour per acre than thetraditional variety and entails other activities such as repair,

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Page 2 of 3

BANGLADESH BANK DEPARTMITELEORAM HEAD OFFICEDPAT1BANOIBANK POST BOX NO. 325PHON44 2$2927-39 DHAKA-2

235000-21

Reif. No................. - 2 Datd the.... .. ,........j

maintenance service etc., the project has also opened up considerableopportunities for rural development.

3. The mst significant impact of the project was in the sphere ofmarketing of irrigation equipment. Previously BADC played the majorrole in marketing of irrigation equipment. Privatization of thissector affected by the project has ended the dominance of BADC givenrise to a marked improvement in the procurement and distributionsystem of irrigation equipments in the northern region of the country.

4. It is admitted that the institution XX building aspect of theproject oculd not be realised in the manner it was intended. But ashortcoming in this respect should be viewed in the context of overcredit delivery system prevailing in the country prior to theof the project. Except BKB, no other bank or financial institutionof the country had any experience or expertise in long-or medium termagricultural lending. The nationalised commercial banks were, forfirst time, engaged in taking up long and medium-term agriculturalcredit programme under the project. It is undeniable that by parti-cipating in the project the NCBs were able to develop some expertisein term finance in the agricultural sector. RCPD of Bangladesh Bankas the chief executing agency of the project, XX also gatherexperience int he fielJ of planning, implementing and supervisingagricultural projects. you would agree that institution buildinga gradual process which evolves over time. We think the experiencegathered by the participating institutions through the implementationof the project has definitely provided a basis for creation of areplicable credit delivery system. This could have been improvedfurther strengthened if a follow-on project could have been undortaken

5. In conclusion, we would like to mention that the project was

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ANN EX BPage 3 of 3

BANGLADESH BANK :WARTMIrELEMRAM HEAD OFFICEBANOLABANK POST BOX NO. 325PHON s 22927-39 DHAKA-2

235000-21

R4f. No .. ........ Daied the...................j

experienced both succes and failure in a number of issues but the

lessons learnt through trial and error will be of much help to the

successful implementation of ther agricultural projects that will

be undertaken in the future.

Sincerl

(IMDAD SLAGenerA Manager

I8RD 15590

å0e 900 MARCH 19¶

210 BANGLADESH 2

AGRICULTURAL CREDIT PROJECTLAND USE

[-Y: CROPPING PATTERN l (Mainly Broadcst Aman, Fallow)

CROPPING PATTERN 1I ( Mainly Transplant Aman, Fallow)

I N D I A CROPPING PATTERN 1i1 (Mainly Transplant Amn, Aus)

OTHERS

MAJOR ROADS

RAIL.WAYSTHANA BOUNDARIES

. .. DISTRICT BOUNDARIES

.- . INTERNATIONAL BOUNDARIES

KILOMETERS 0 10 20 30 40 50MILES 20 3

DomKar-26

260

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260 20

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