document of the world bank · 2016. 7. 13. · amount (usd) of sapard funding to private rural...

Document of The World Bank

Report No: ICR0000514

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-46020)

ON A

LOAN

IN THE AMOUNT OF US$80 MILLION

TO THE

ROMANIA

FOR A

RURAL FINANCE PROJECT

May 22, 2008

Sustainable Development Sector Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective August 31, 2007)

Currency Unit = New Romanian Lei (RON) RON 1.00 = US$0.42 US$1.00 = RON 2.39

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program Loan CAS Country Assistance Strategy CPS Country Partnership Strategy EBRD European Bank for Reconstruction and Development EC European Commission EU European Union ERR Economic Rate of Return FI Financial Institution FM Financial Management FMS Financial Management Specialist IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IDA International Development Association IFI International Financial Institution IFC International Finance Corporation IRR Internal Rate of Return LA Loan Agreement MARD Ministry of Agriculture and Rural Development M&E Monitoring and Evaluation MFI Microfinance Institution MOPF Ministry of Public Finance NBR National Bank of Romania NGO Non Governmental Organization NRDP National Rural Development Programme PAD Project Appraisal Document PDO Project Development Objective PFI Participating Financial Institution PIB Private Intermediary Bank PIU Project Implementation Unit PMU Program Management Unit PRB Participating Retail Bank QAG Quality Assessment Group

RCLF Rural Credit and Leasing Facility RFP Rural Finance Project ROA Return on Assets ROE Return on Equity ROI Return on Investment ROL Romanian Lei RON New Romanian Lei SAPARD Special Accession Programme for Agriculture and Rural Development SME Small and Medium Size Enterprise SOE State Owed Enterprise / Statement of Expenditure SP Service Provider TA Technical Assistance TOR Terms of Reference TTL Task Team Leader USAID United States Agency for International Development

Vice President: Shigeo Katsu Country Director: Orsalia Kalantzopoulos

Sector Manager: Holger A. Kray Project Team Leader: Pierre Olivier Colleye

ICR Team Leader: Pierre Olivier Colleye

ROMANIA RURAL FINANCE PROJECT

CONTENTS

1. Project Context, Development Objectives and Design.............................................. 12. Key Factors Affecting Implementation and Outcomes ............................................. 63. Assessment of Outcomes ......................................................................................... 114. Assessment of Risk to Development Outcome........................................................ 165. Assessment of Bank and Borrower Performance .................................................... 186. Lessons Learned ...................................................................................................... 207. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ......... 21Annex 1. Project Costs and Financing......................................................................... 22Annex 4. Bank Lending and Implementation Support/Supervision Processes ........... 36Annex 5. Beneficiary Survey Results .......................................................................... 38Annex 5. Beneficiary Survey Results .......................................................................... 38Annex 6. Stakeholder Workshop Report and Results.................................................. 40Annex 7. Summary of Borrower’s ICR and/or Comments on Draft ICR ................... 41Annex 8. Comments of Co-financiers and Other Partners/Stakeholders..................... 51Annex 9. List of Supporting Documents (from IRIS) ................................................. 52

MAP

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A. Basic Information Country: Romania Project Name:

Rural Finance Project (APL #1)

Project ID: P056891 L/C/TF Number(s): IBRD-46020 ICR Date: 05/30/2008 ICR Type: Core ICR Lending Instrument: APL Borrower: ROMANIA Original Total Commitment:

USD 80.0M Disbursed Amount: USD 73.4M

Environmental Category: F Implementing Agencies: Ministry of Public Finance Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 01/19/2000 Effectiveness: 02/15/2002 02/15/2002

Appraisal: 05/30/2000 Restructuring(s): 05/16/2003 03/29/2004

Approval: 03/29/2001 Mid-term Review: 11/19/2004 Closing: 01/31/2006 11/30/2007 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance: Moderately Satisfactory Overall Borrower

Performance: Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments

(if any) Rating

Potential Problem Project No Quality at Entry Satisfactory

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at any time (Yes/No): (QEA): Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

Moderately Satisfactory

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Central government administration 4 4 General agriculture, fishing and forestry sector 75 75 Micro- and SME finance 21 21

Theme Code (Primary/Secondary) Improving labor markets Primary Primary Infrastructure services for private sector development Secondary Secondary Rural markets Primary Primary Rural non-farm income generation Secondary Secondary E. Bank Staff

Positions At ICR At Approval Vice President: Shigeo Katsu Johannes F. Linn Country Director: Orsalia Kalantzopoulos Andrew N. Vorkink Sector Manager: Holger A. Kray Kevin M. Cleaver Project Team Leader: Pierre Olivier Colleye Rodrigo A. Chaves ICR Team Leader: Pierre Olivier Colleye ICR Primary Author: Pierre Olivier Colleye F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The proposed project seeks to promote economic growth and reduce poverty in rural Romania through the provision of financial services. In pursuing this objective, the project will assist in (a) accelerating the economic transformation of the rural economy by increasing the flow of investment capital to the sector, (b) augmenting the role of the private sector in the rural economy by (i) improving access, on the part of rural households with entrepreneurial activities and private enterprises, to financial services and by (ii) helping regulated private financial intermediaries to augment their presence in rural localities and in filling the vacuum that may ensue after the privatization of state banks and the likely closing of a significant portion of the existing network of rural

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branches; (c) facilitating accession to the European Union (EU) by assisting the rural economy to absorb the grants that will be allocated under the EU’s Special Accession Program for Agriculture and Rural Development (SAPARD) by making available counterpart funding for the private investments that will be financed by this program, and (d) alleviating rural poverty by financing farm and off-farm investments for poor segments of the rural population which currently have no access to credit. The project also seeks to improve the legal and institutional environment for financial transactions to reduce the costs and risks assumed by lenders when allocating rural credit, especially to the relatively poorer segments of the population. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Amount (USD) of credit allocated to private rural enterprises Value quantitative or Qualitative)

USD 184 million USD 213 million USD 967 million

Date achieved 04/30/2001 07/31/2007 10/31/2006 Comments (incl. % achievement)

The target value was overachieved in October 2006 and reached over 450% of the target value, hence no further measurements were made.

Indicator 2 : Amount (USD) of credit allocated to rural households Value quantitative or Qualitative)

USD 174 million USD 201 million USD 323 million


The latest available data (December 2005) indicates that the original target value was achieved by 160%.

Indicator 3 : Aggregate private agricultural investment as % of agricultural gross value added (GVA)

Value quantitative or Qualitative)

8.31% 9.55% 9.38%


98% of the target value was achieved on December 31, 2004, which is the latest available data.

Indicator 4 : Total credit to agriculture, forestry, and fisheries Value quantitative or

ROL 4,243 billion (USD 164.5 million at

ROL 10,000 billion (USD 387.6

RON 3.402 billion (ROL 34,020

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Qualitative) 12/31/2000 exchange rate)

million at 12/31/2000 exchange rate)

billion or USD 1,318 million at 12/31/2000 exchange rate)


The target value was overachieved as of July 2007 by over USD 900 million or 240%.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value


approval documents)

Formally Revised

Target Values



Indicator 1 : Sub-loans disbursed to private rural enterprises (amount, USD) Value (quantitative or Qualitative)

0 USD 28 million USD 39.87 million


As of the end of the Project, 142% of the original target value was achieved.

Indicator 2 : Leases disbursed (amount, USD) Value (quantitative or Qualitative)

0 USD 700,000 USD 14.9 million


At the end of the project, the total amount of leases disbursed exceeded the target value 21 times.

Indicator 3 : Micro-loans disbursed to rural households (amount, USD) Value (quantitative or Qualitative)

0 USD 1.7 million USD 9.73 million


As of the end of the Project, 572% of the original target value was achieved.

Indicator 4 : Amount (USD) of SAPARD funding to private rural enterprises leveraged with project funding

Value (quantitative or Qualitative)

0 USD 17 million USD 11.4 million


67% of the target value was achieved as of August, 2007 due to a very slow start of SAPARD programme in Romania.

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Indicator 5 : Number of rural localities with participating retail bank (PRB) branches / microcredit service provider (SP) retail points


0

A total of 65 localities with branches and retail points

A total of 109 PRB branches and agencies opened in rural areas and 25 SP retail points, of which 15 in rural localities.


Indicator 6 : Adoption of TA policy recommendations on warehouse receipts Value (quantitative or Qualitative)

No Yes Yes


G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 04/25/2001 Satisfactory Satisfactory 0.00 2 10/25/2001 Satisfactory Satisfactory 0.00 3 12/13/2001 Satisfactory Satisfactory 0.00 4 06/19/2002 Unsatisfactory Unsatisfactory 0.00 5 06/26/2002 Unsatisfactory Unsatisfactory 0.00 6 12/12/2002 Unsatisfactory Unsatisfactory 0.00 7 01/16/2003 Unsatisfactory Unsatisfactory 0.20 8 04/29/2003 Unsatisfactory Unsatisfactory 0.20 9 05/21/2003 Unsatisfactory Unsatisfactory 0.20

10 12/15/2003 Unsatisfactory Unsatisfactory 2.54 11 02/18/2004 Unsatisfactory Unsatisfactory 3.92 12 06/23/2004 Satisfactory Unsatisfactory 4.82 13 12/23/2004 Satisfactory Satisfactory 15.33 14 06/02/2005 Satisfactory Satisfactory 27.65 15 03/20/2006 Satisfactory Satisfactory 52.07 16 10/18/2006 Satisfactory Satisfactory 65.15 17 05/09/2007 Satisfactory Satisfactory 69.95 18 11/01/2007 Satisfactory Satisfactory 73.75

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H. Restructuring (if any)

ISR Ratings at RestructuringRestructuring

Date(s)

Board Approved

PDO Change DO IP

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

05/16/2003 N U U 0.20

The first restructuring took place in May#03 due to very slow disbursements. Changes were made into procurement and institutional arrangements .

03/29/2004 N U U 3.92

The second amendment was introduced to accelerate disbursement of the project#s credit line funds by increasing the allocation of Loan funds for disbursement of microloans, increasing the maximum sub-loan size to a single sub-borrower and further streamlining of procurement process.

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal A 2001 analysis of the rural financial sector conducted by Romanian authorities and the World Bank (see: Financial Markets, Credit Constraints and Investment in Rural Romania, Report No. 19412-RO) ascertained the poor performance of rural financial markets. The Rural Finance Project (RFP) was designed to address this issue and support attempts of Romania’s government to establish well developed and internationally competitive rural areas free of poverty. In the absence of sufficient investment capital, the Romanian rural economy had experienced difficulties in adjusting to the major policy reforms that had been taking place continuously since 1990. The rapid changes in macro-economic environment, including the exchange rate crisis in 1997 and the strong currency devaluation which preceded the project, on the one hand, forced rural households and businesses to adjust to the new circumstances and, at the same time, left them without adequate sources of financing and limited access to investment loans necessary to meet new market conditions. In fact, only 20 percent of the households and rural enterprises used loans to finance their consumption, working capital and/or investments. The highly bipolar farm structure in Romania drags down the country’s agricultural performance. Some 40% of the agricultural land is concentrated into a few large and competitive farms. An equal share is spread among a large number of (semi-) subsistence holdings. Totaling 90% of the farms, these smaller units face considerable market failures, including a non-functioning land market, limited rural finance, scarce advisory services, and marketing of farm products at prohibitive costs for their size. In particular, these holdings’ access to rural finance remains difficult in large part because of the risks and high transaction costs perceived by commercial banks, a weak collateral base, and embryonic micro-finance institutions. A middle segment, of 5 to 50 hectare farms, is yet to be developed.

Table 1: Distribution of farms and agricultural land by farm size clusters (%, 2005)

0-1 ha 1-5 ha 5-50 ha 50-100 ha > 100 ha Farms 44.9 45.7 9.0 0.1 0.2 Land 5.0 31.7 23.3 2.4 37.6 As in many other transition economies, small private lenders operating in rural credit markets were the ones who lost the most during the transition period by not being able to keep up with the reforms and changes in the economic environment. Also, due to their limited resources and only local outreach, private lenders were not in a position to successfully compete with a government run Banca Agricola and its subsidized interest, and, at the same time, the state-controlled banking sector was neither able to meet the demand for long-term rural credit, having the average maturity of the sector’s liabilities

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well below six months, nor in the possession of the technology to serve micro and Small & Medium Size Enterprise (SME) clients. In addition, two sector issues were likely to emerge that needed to be addressed at the time. The first was the reduction of the bank branches network as a result of the expected privatization or divestiture of state banks, which in year 2000 owned around 87% of all bank branches. The second issue was the absence of an appropriate regulatory and supervisory framework for over 1,400 independent mutual financial intermediaries registered under Law 109/1996, a majority of which were operating in rural areas. Also, at appraisal, the first announcements about the EC's upcoming Special Accession Program for Agriculture and Rural Development (SAPARD) had been made. While no details about actual provisions were known, it was expected that the RFP would have the opportunity to provide pre- and co-financing of the investments of the EC-financed program. In order to address those issues, the Romanian government developed a strategy based on the premise that instead of directly financing the sector through subsidized credit lines or public banks, the government should provide an environment in which property rights, contracts, and financial services can thrive. In addition, the Government intended to assist the financial sector in acquiring the capacity to provide sustainable retail financial services to rural households and enterprises and by making available well tailored and appropriately priced long-term investment capital to the private sector in rural areas. The project was originally conceived as the first phase of an Adaptable Program Loan (APL) aimed at supporting the Government’ s long term view of developed and internationally competitive rural areas. It was designed, in line with the Bank’s Country Assistance Strategy (CAS), to support the Government’s strategy by promoting economic growth and reducing poverty through the prevalence of financial services in rural populations.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The project’s development objective, as defined in the Project Appraisal Document (PAD), was to promote economic growth and reduce poverty in rural Romania through the provision of financial services. In pursuing this objective, the project was to assist in: (a) accelerating the economic transformation of the rural economy by increasing the flow of investment capital to the sector; (b) augmenting the role of the private sector in the rural economy by: (i) improving access, on the part of rural households with entrepreneurial activities and private enterprises, to financial services; and by (ii) helping regulated private financial intermediaries to augment their presence in rural localities and in filling the vacuum that may ensue after the privatization of state banks and the likely closing of a significant portion of the existing network of rural branches; (c) facilitating accession to the European Union (EU) by assisting the rural economy to absorb the grants that were to be allocated under the EC-financed SAPARD by making available counterpart funding for the private investments financed by this program; and (d) alleviating rural poverty by financing farm and off-farm investments for poor segments of

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the rural population which had no access to credit. The project also sought to improve the legal and institutional environment for financial transactions to reduce the costs and risks assumed by lenders when allocating rural credit, especially to the relatively poorer segments of the population. Key performance indicators to measure the achievement of the objectives included increases in the: (a) amount of long-term financing granted to private agriculture, households, and small

and medium rural not-farm enterprises; (b) amount of credit and value of leasing contracts allocated by the financial sector to

rural retail and micro-enterprise clients; (c) value of aggregate rural investments and agricultural gross value added; (d) number of rural localities with branches of private banks; (e) financial sustainability of rural branches and micro-finance organizations, including

loan repayment rates; (f) number of rural households and enterprises which accessed SAPARD grants with

counterpart funding provided by the financial sector; (g) amount of SAPARD funding to the rural private sector leveraged with project

funding; and (h) outreach of the financial sector to poor rural households and the number of them

which are able to take advantage of profitable investment opportunities.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification Project objectives were not revised during the course of project implementation.

1.4 Main Beneficiaries The project was designed to support the government’s long-term view of developed and competitive rural areas with a reduced level of poverty and easier access to financial services for all segments of the rural population. The project contributed to the prosperity of individual farmers and their families, rural micro-entrepreneurs, and micro, small and medium businesses by financing over US$64 million of farm and off-farm investments. The project also benefited regulated private financial intermediaries (retail banks, leasing companies and micro-credit service providers) by providing them with the means to offer retail financial services to small and micro-entrepreneurs in rural localities, and by assisting them in establishing and operating a network of private bank branches and points of sale. The latter alone made financial services available by the participating banks to an additional potential 700,000 rural inhabitants.

1.5 Original Components (as approved)

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The project had three components: (a) Rural Credit Line and Leasing Facility; (b) Rural Retail Banking and Micro-Finance; and (c) Project Management and Technical Assistance on Rural Financial Markets. Component A. The Rural Credit and Leasing Facility (RCLF) Component provided three types of financing to the private sector entities and physical persons: (a) sub-loans to on-lend through selected participating Private Intermediary Banks (PIBs) to eligible private sector borrowers for farm and non-farm investments in rural productive activities; (b) micro-loans disbursed through participating non-governmental and/or private Service Providers (SPs) to eligible rural entrepreneurs; and (c) leasing of depreciable capital assets by PIBs and leasing companies to final beneficiaries. Component B. The Rural Retail Banking and Micro-Finance Component financed incremental expenditures incurred, inter alia, in (a) the development of suitable technologies to provide retail financial services to medium, small, and micro enterprises and entrepreneurs in rural localities through participating Private Retail Banks (PRBs) and microcredit SPs; (b) the establishment and operation, by PRBs, of a network of pilot retail banking offices; (c) the operation, by SPs, of a network of microcredit retail points; and (d) training and technical assistance in retail banking and micro-lending to PRBs and SPs, respectively. The component also provided financial support to private commercial banks participating in the project as PRBs to: (a) develop the capacity to provide rural retail banking services profitably, especially retail credit; (b) explore market opportunities in small rural localities with no branches of other private banks; and (c) assist the interested project's beneficiaries in gaining access to EU-SAPARD grant funds. Component C. The Project Management and Technical Assistance on Rural Financial Markets component was to finance: (a) incremental expenses incurred by the Government in implementing and monitoring the project; (b) technical assistance to the Government in: (i) developing a warehousing receipts system, and (ii) examining options to reform the accounting and fiscal treatment of depreciable assets and leasing; (c) activities to promote public awareness in rural areas of the Project's RCLF; and (d) technical assistance to final beneficiaries under the project on how to use the Project's RCLF to obtain and pre-finance grants under SAPARD.

1.6 Revised Components Project components and key indicators were not revised during the course of project implementation. However, as discussed in Section 1.7 below, in order to accommodate the rapid improvements in the Romanian banking sector and adapt to the country dynamics some modifications in project design, implementation and schedule arrangements were introduced.

1.7 Other significant changes

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The project experienced a very slow start, in main part because of problems with institutional and procurement arrangements. Several changes were therefore made to the project, including through several amendments and funds reallocations which allowed implementation to accelerate considerably and the project to reach its objectives. Termination of the PIU and the Treasury Bank. Initially, the project management and implementation responsibilities were divided between the Project Management Unit (PMU) in the Ministry of Public Finance (MOPF) and the Project Implementation Unit (“PIU”) in the Project’s Treasury Bank. These arrangements proved to be ineffective due to the lack of a clear segregation of the responsibilities between PMU and PIU. Following the request of the World Bank (Bank), the Resource and Project Management Agreement between MOPF and the private bank was finally terminated in February 2004 and all project procurement and financial management (FM) responsibilities reverted to the PMU. Procurement arrangements. In order to further improve project performance and ensuring its timely implementation, several changes were introduced to the procurement arrangement through two amendments to the Loan Agreement (LA) in May 2003 and March 2004. These changes made the credit line more attractive to both financial intermediaries and final beneficiaries by (a) allowing individuals of Romanian citizenship and residents in rural areas to benefit from sub-loans and financing leases (and no longer only legal entities); and (b) allowing, on a case-by-case basis, the maximum sub-loan size to a single borrower to exceed US$1 million1. Furthermore, the initially low threshold for use of commercial procurement practices for procuring goods under Part A and B of the project were increased, which notably streamlined the procurement process. The introduced changes helped better address the real financial needs of final beneficiaries and facilitate the absorption of EU SAPARD funds by providing potential SAPARD beneficiaries with necessary technical assistance and co-financing. Funding reallocations. A number of reallocations of funds between categories were made at the Borrower’s request. The redistribution of resources between components was prompted by the following changes in demand and the desire to increase the project’s impact on the smaller entrepreneurs and land holders:

1) While on the one hand the Government and the Bank had agreed to increase the maximum size of subloans to US$1 million, they also agreed that more funding should be allocated for small beneficiaries which were served by microfinance institutions (component B) where demand was high (additional allocation of US$6.9 million to Microfinance Institution (MFIs);

2) Banks expressed no interest in borrowing from the project’s credit line for operational expenses of their new rural branches as the credit line was subject to (i) high interest rates and (ii) Bank procurement guidelines. The banks’ own resources

1 Eventually this latter change was unnecessary as all together only one US$1 million sub-loan was made.

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were much more competitive for this particular activity (cancellation of US$5 million of Operating Costs for new branches under Component B). Although this financing was taken out of the project, banks participating in the project considerably expanded their presence in rural areas;

3) The acquisition of Romanian commercial banks by foreign investors was typically followed by considerable technology transfers, and at lower costs than the project’s credit line. While the project initially was planning on upgrading the participating banks’ overall procedures and technologies, this activity was quickly deemed unnecessary as it was provided by the foreign investors (cancellation of US$6.9 million of Technical Assistant (TA) to Commercial Banks); and

4) The high demand for credit line, the rapid disbursement rate during the third quarter of the project implementation and the acceleration of the absorption of the EC-financed SAPARD private measures led the Government to request that an additional US$15.5 million of available funds be transferred to the credit lines.

These reallocations were not an indication of poor design as much as it was a reaction to a fast-changing banking sector landscape in light of the EU accession, the ability of the Government to react to shifts in demand and its desire to concentrate on the beneficiaries facing the biggest market failures (small farmers and entrepreneurs). These reallocations were also possible without a modification of either the project’s objectives or its main indicators. Extensions of the Closing Date. As mentioned above, the project experienced considerable delays in effectiveness and implementation startup until the institutional arrangements were streamlined, 18 months into implementation. This delay led to two extensions of closing date: • A first extension by 18 months was approved in February 2005, taking into

consideration (i) the Government’s strong interest in the project and (ii) the fact that most bottlenecks to implementation were solved by the Government during the initial 18 months period, after which the project disbursed at a brisk pace; and

• A second short extension of four months was granted only to allow the most active bank of the project, Banca Carpatica, headquartered closer to rural areas, to absorb some of the remaining credit line, and to allow for the PIU to finalize the transfer of all monitoring activities to the MOPF to continue the proper monitoring and collection of the various credit lines.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

Key factors during the preparation stage that affected implementation and outcome are summarized below.

The background analysis was sound. The rationale for the project interventions was provided by an analysis jointly conducted by Romanian authorities and the Bank on Financial Markets, Credit Constraints, and Investments in Rural Romania. This analysis

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revealed that the rural financial markets performed very poorly from the perspectives of (i) low supply of credit and unattractive conditions; (ii) a negative impact of the lack of credit on investment behavior; and (iii) inefficient allocation of credit to enterprises with low or negative value-added.

The rationale for the Bank’s involvement was sound. The Bank’s distinct comparative advantage was the longstanding policy dialogue with the Government at the time of preparation on issues related to the rural sector development and financial sector reforms. In addition, the Bank was very familiar with the successful improvement of rural financial markets in other countries. Project Preparation and Design. The project preparation and design took into account all relevant experiences in the region and were based on an extensive research and analysis, giving grounds for satisfactory rating by Quality Assessment Group (QAG) at Entry. However, as also acknowledged in the QAG assessment, there were some weak points in the project’s original design that resulted in delays in effectiveness (11 months) and implementation delays (during the first 18 months of the project) and took some time to be corrected, including : (i) some up-front implementation arrangements which were not fully in place at entry (e.g. lack of agreements with intermediary financial institutions (IFIs), incomplete appraisal of some potential financial institutions (FIs), lack of ready Terms of Reference (TOR) for consultants or clearly described responsibilities of implementing agencies); and (ii) cumbersome procurement requirements which were particularly cumbersome on the beneficiaries and inconsistent with the private sector environment in Romania. All necessary changes reflecting the recommendation of the QAG at Entry had to be introduced to the project through an amendment to the LA (May 2003) and visibly accelerated the pace of the implementation phase by allowing the use of Romanian commercial procurement practices, including most importantly procuring of goods needed for developing branches under Part B of the project with estimated costs less than US$1 million equivalent per contract.

2.2 Implementation The overall project implementation is considered satisfactory. There was no major project restructuring and, although the project was initially at risk because of slow implementation takeoff, it was eventually completed in a satisfactory manner, mainly due to a constant Government commitment, effective PMU with good skill composition (managerial, technical, fiduciary) and flexible management by the Government and the Bank.

It is worth mentioning that the flexibility on the part of both the Government and of the Bank’s supervision team was a key factor in the project implementation as it allowed the revisions to some of the project scope of activities, implementation and schedule arrangements to be done in a relatively smooth manner. As mentioned above, the project experienced delays both in making the project effective and during the first 18 months of implementation. To address these problems, the Government and the Bank worked jointly to find practical solutions to accelerate implementation and enhance impact on the

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target beneficiaries and prepare a number of amendments which eventually lead to a more rapid disbursement and implementation of the project. Once the above-mentioned changes (see section 1.7) were made to implementation arrangements, the project disbursed relatively quickly. The Government and the Bank agreed to leave the other aspects of the project unchanged and test whether the changes that were made were sufficient to allow for a more rapid implementation. Indeed, the implementation accelerated rapidly, with: (i) express requests from seven participating institutions for the sub-loan/sublease credit line, (ii) two banks headquartered in rural areas interested in expanding their rural network; and (iii) the rapid disbursement by microfinance institutions. External events affecting Project implementation: The project faced a rapidly changing financial sector environment. As Romania was preparing to enter the European Union, the banking sector experienced considerable increases in liquidity, particularly from new foreign shareholders. This was particularly true of banks headquartered in Bucharest. These new partnerships with foreign banks also considerably increased the modernization of banking technologies, reducing the need for the Technical Assistance planned under the project. At the same time, the National Bank of Romania (NRB) was making steadfast progress improving its regulatory and supervisory capacity. Funds were therefore reallocated away from technical assistance, towards rural credit lines which, during 2005 and 2006 disbursed at a brisk pace, helping the project reach its objectives. As foreign investment flowed into banks and leasing companies, the demand for RFP funds progressively diminished. By the end of 2006, all banks headquartered in Bucharest had shifted to their own foreign and local resources, which were typically more competitive than the Government’s credit line. Two banks, headquartered in Sibiu and Cluj, continued their partnership with the project, often serving smaller enterprises in more remote areas. Mid-Term Review: Because disbursements started only in 2003 and, by the time of the Mid-Term review, less than 16% of the funds had been disbursed, very little impact could be observed at the time of the review. However, project results, including the latest available disbursement and commitment data and the forecasts for the following year showed a positive trend. Targets agreed to with the Government in the spring of 2004 had all been met and the action plan agreed upon had been largely implemented. The changes made earlier in the project had positively influenced the implementation process and brought visible results. The Government and the Bank therefore decided not to further restructure the project. Due to all the significant improvements the rating was upgraded to Satisfactory in December 2004, about 30 months after having been downgraded because of its slow start.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization A very ambitious monitoring and evaluation (M&E) system was designed during project preparation and included in the PAD. The reporting and data gathering tasks laid primary within the responsibility of the PMU. The PMU set up a good implementation and output

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indicator monitoring system which allowed both the Government and the Bank to closely monitor implementation progress, disbursement, procurement, implementation of technical assistance and financial management.

However, the implementation of the evaluation system faced some difficulties mainly due to the following reasons:

1) The PAD stipulated that a follow-up independent social assessment and enterprise survey would be undertaken by the Mid-Term Review. However, due to delays in project effectiveness and implementation, with only about 16% of the funds disbursed and therefore very little impact to observe, the social assessments and enterprise survey had to be postponed by 18 months, which corresponded to the delay in implementation of the project,

2) Impact on the performance of enterprises was not immediate. Understandably, when SMEs borrowed from the credit line to invest in new product lines, new technologies or entirely new activities, the return on their investments, their profitability, their access to markets or employment would not be immediately observable. The large enterprise and households surveys were conducted during the last year of the project and the results can be found below, although they underestimate the long-term impact of the credit line,

3) The survey instruments which had been designed during preparation, were particularly expensive and time-consuming, which made it impossible to implement them on a regular basis, limiting the Government’s capacity to assess early on the project’s capacity to meet its development objectives2; and,

4) The source of much of the outcome data came from official statistics provided by the NBR, and were published with some delays (up to two years).

2.4 Safeguard and Fiduciary Compliance

Financial management. Throughout the life of the project a satisfactory FM system was maintained. The Borrower respected the relevant loan financial covenants, by submitting to the Bank the quarterly financial monitoring reports and the annual audit reports in a timely manner and in a format acceptable to the Bank. Audit opinions were all unqualified and no internal control issues were mentioned, including for the final audit of the project, covering the eleven months ending November 30, 2007, submitted in January 2008. Counterpart financing, including funding received from the Romanian Government was satisfactory during the life of the project.

The Bank’s Financial Management System (FMS) regularly reviewed the FM arrangements for the project, as part of the Bank’s supervision missions and rated the FM arrangements satisfactory. All participating banks, leasing companies and microcredit service providers were assessed by the Bank’s FMS prior to their acceptance in the project and their FM arrangements deemed appropriate. The annual audited financial statements for all participating banks, leasing companies and microcredit service

2 These surveys did eventually confirm that the project reached its PDOs.

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providers were reviewed as part of the regular supervision arrangements to ensure their continued eligibility.

Procurement compliance. Throughout implementation, the project had a satisfactory performance in complying with procurement policies and procedures. The scope of the traditional procurement activities was limited to 12 contracts with a total value 2.75 million USD equivalent. During the course of implementation the PMU worked in a close collaboration with the Bank procurement staff assigned to the project.

As the major part of the project was implemented through credit lines and micro-credit schemes, procurement compliance was verified through the inputs provided to the Bank team during supervision. This approach was criticized by QAG supervision review which pointed out that the mission should ensure post-review of contracts during supervision awarded under commercial practices.

It would be desirable for similar projects implemented under Bank funding to develop clear requirements related to the scope of post-review supervision activities (if any) for contracts awarded under commercial practices.

Safeguard policies. The Bank’s safeguards and fiduciary policies were adequately addressed during project preparation and remained adhered to throughout the implementation process. Overall safeguard compliance continued to be satisfactory, with two applicable safeguards with the same satisfactory rating, namely environmental assessment (OD 4.01) and pest management (OP 4.09).

2.5 Post-completion Operation/Next Phase By meeting its objectives, the project contributed notably to the positive transformation of rural areas in Romania and increased access to finance for its populations leading the way for other private market players. During Phase I of the Adaptable Program Loan (APL), the project successfully filled a niche for capital investments and provided FIs with the appropriate long term funding and provided microfinance institutions with needed funding to implement a strategy of expansion into rural areas. Meanwhile, the Romanian economy has undergone dramatic economic reforms that opened doors for new business opportunities. While access to rural finance remains proportionally limited, the needs of the financial sector to expand have considerably shifted for the following reasons: • an early EU accession already during the Phase I of the project (initially forecasted

during Phase II of the APL); • the macroeconomic sector reforms required by the EU – resulted in an influx of

liquidity from foreign banks and other IFIs (International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD)) preempting the need for IBRD sovereign lending; and

• no massive bank branch closures, which had been expected in the PAD, took place.

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Those externalities have superseded a vision of the project’s Phase II of the APL which was, among others, to facilitate Romania’s EU accession and include additional rural credit line and leasing facilities. A follow-up Phase II which included additional liquidity into the Romanian banking industry and further technical assistance to the banking sector is not justifiable. There is, however, considerably more that can be done by the Government of Romania to enhance access to financial services in rural areas and the issue remains a priority for the Government. Topics of importance that have been recommended to the Government include: (i) risk-mitigation issues, such as weather-related index-based insurance or continuing the effort to build an efficient warehouse receipt system; (ii) strengthening the outreach, the efficiency and the sustainability of Non-Bank Financial Institutions such as microfinance institutions, financial cooperatives and savings houses; and (iii) helping micro-entrepreneurs and farmers with business plans or loan applications. Were there to be a follow-up operation, it would therefore concentrate on institutional capacity and technical assistance, rather than the credit lines initially anticipated. However, the Government has decided not to pursue a second phase of the APL at this stage. All transition and post-completion arrangements, including Operation and Maintenance tasks have been handed over to the MOPF during the last supervision & ICR mission that took place in early September 2007. The mission met with the Ministry of Economy and Finance and discussed the arrangements that had to be made to ensure a smooth transfer of the activities from the PMU to the Ministry itself after project closing, including monitoring of the credit lines as well as responding to any request from participating institutions regarding repayments. All stakeholders have been informed about the reassigning of responsibilities from the PMU to the Ministry prior to the closing date.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Increasing access to rural finance, the absorption of further EU funds and reducing rural poverty remain priorities for the Government, and in particular for the Ministry of Agriculture and Rural Development (MARD). The new Country Partnership Strategy (CPS) for Romania adopted in May 2006 concentrates mainly on supporting the Government’s EU accession agenda by helping Romania meet EU requirements as well as reducing poverty especially in poorer, rural communities. The project not only assisted the rural economy to absorb the grants that were allocated under SAPARD, but also contributed to the poverty alleviation by making access to financial services broadly available in rural areas and providing financing for farm and off-farm investments. In this context, the project’s objective continues to be in line with the country priorities and the Bank partnership strategy although today the focus would switch from liquidity issues to more technical assistance-related projects to reduce risk.

3.2 Achievement of Project Development Objectives Overall, the project achieved its development objective with only minor shortcomings and its outcome can be rated satisfactory. All key Intermediary Outcome indicators were

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surpassed with considerable margins – in some cases several hundred percent more than the target value well before the project closed. Only one Intermediary Outcome indicator was not fully met, but that achieved 67% of its target value and it was delayed due to exogenous factors. All PDO indicators were also surpassed (see data in Annex 2). In pursuing its objective the project successfully contributed to the increased access to financial services in rural Romania through: 1. Accelerating the economic transformation of the rural economy by increasing

the flow of investment capital to the sector. The project accomplished the following: • provided additional investment capital to selected PFIs for on-lending to rural sector,

in the total amount of US$64.53 million; • provided 225 sub-loans, 510 leasing and over 12,000 microcredits to private sector

entities and natural persons in rural localities; and • granted access to finance via PFIs to over 8,800 individuals (farmers and their

families, rural micro-entrepreneurs) and SMEs in rural areas that had no prior access to the financial sector and, as of 31 August 2007, reached the outstanding portfolio of about US$40 million for sub-loans and, US$15 million and US$9.7 million for leases and microloans, respectively.

2. Augmenting the role of the private sector in the rural economy by improving access to financial services and helping private financial intermediaries to augment their presence in rural localities. This goal was achieved as shown by the following results: • as of November 2007, 109 new branches and service points have been

opened/established in rural localities all over the country where the banking services were not broadly available, increasing access to services to a potential additional 700,000 inhabitants;

• micro-credit services were made available to the rural economy by microfinance providers through their 25 service points reaching as many as 8,000 clients, of which 36% had no prior credit history;

• by providing the PFIs with the necessary financing, the project contributed not only to the expansion of banking services network in less populated and poorer counties, but also to the improvement of the micro-lending technologies and the standard of their services; and

• in some localities the participating banks led the way into the rural market for other FIs by being the first to open new branches in certain localities, which helped to attract other FIs and explore existing market opportunities in those localities.

Facilitating accession to the EU by assisting the rural economy to absorb the grants that have been allocated under the EU’s SAPARD for the private investments This was achieved by:

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• Assisting private, local, rural individuals and SMEs to absorb the grants allocated under SAPARD by co-financing 53 private investment projects to a total volume of USD 11.65 million.

• Supporting (under the TA) 225 individual investors in writing successful business plans leading to investments in rural areas to be co-financed by SAPARD.

3. Alleviating rural poverty by financing farm and off-farm investments for poor segments of the rural population which had no access to credit. The following are the project’s achievements: • Over 12,000 micro-loans disbursed to the rural sector. • 36% of micro-financing beneficiaries had not received any formal loans before they

obtained RFP financing, which demonstrates the success of the program in terms of increased access of rural entrepreneurs to sources of financing.

• Loan arrears from microfinance institutions, as measured by Portfolio at Risk/30 days were kept very low, from 0.18% to 3.03% well under the target of 7%.

• There were no arrears over 30 days for sub-loans from banks or leasing companies. The project also sought to improve the legal and institutional environment for financial transactions to reduce costs and risks assumed by lenders when allocating rural credits, especially to the relatively poorer segments of the population. In this context, the project contributed to the development of Romania’s warehouse receipts system through the completion of the design of an indemnity/insurance fund which will complement the work undertaken by United States Agency for International Development (USAID) and the EBRD. The fund was set up by the Ministry of Agriculture in 2006. In response to Government interest and current priorities in setting up a new agriculture insurance system, the project also co-organized the workshop on “Insurance methods in agriculture against natural calamities” in Romania in November 2007 covering the best European practices and new trends on the insurance market, including weather index based insurance. As indicated in Annex 2, one of the ten outcome indicators (co-financing of SAPARD investments) fell short of its objective of US$17 million (actual US$11.65 million). Most of this co-financing took place during the last 18 months of SAPARD. Indeed, SAPARD also experienced startup problems of design and implementation, including a high management turnover. During the first four years of RFP implementation, the EC-financed program was unable to absorb many of the funds available, making co-financing by the RFP impossible.

A number of things took place during the last 18 months of SAPARD which considerably accelerated disbursement: (i) SAPARD procedures were simplified, making it easier for smaller enterprises to access the funding; and (ii) the RFP scaled up an effort initially designed by USAID to help potential candidates with business plans, SAPARD grant and bank loan applications, with over 200 enterprises benefiting from this technical assistance. Both initiatives considerably accelerated SAPARD implementation. By that time, the banks that were still participating in the RFP made considerable effort in co-financing

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SAPARD investments which contributed to all SAPARD funding being committed on time.

3.3 Efficiency Given the demand-driven nature of the RCLF and the difficulty to predict in advance the types of loans that would be financed, the PAD did not attempt to predict an Economic Rate of Return (ERR) for the overall project, although the value and incidence of investment opportunities forgone due to the lack of access to financial markets on the part of households and enterprises has been documented. From the Government’s point of view, all costs related to the credit line were passed on to the banks, leasing companies and microfinance institutions, including IBRD commitment fees. Although future returns on the enterprises and household which benefited from the credit line are also difficult to estimate, the early indications are positive. Detailed analysis of a representative sample of investments provided assurance that the returns on the investments financed in the RFP portfolio were very high as indicated in annex 3. Thus, the beneficiary companies saw the following improvements: (i) percentage increase in revenue of almost 400%; (ii) percentage increase in profit of around 1,000%; (iii) similarly, the profit margins also increased by about 1,000%; (iv) Return on Assets (ROA) grew by almost 800%; and (v) Return on Equity (ROE) by about 20% 3 . In order to ensure that all investments actually financed under the component had acceptable rates of return, the lending guidelines for the banks required that (i) sub-loans approved had rates of returns above on-lending rates of interest and that (b) the repayment capacity of the sub-borrower or lessee be clearly proven. The analysis confirmed that the PFIs fulfilled their economic role of selecting borrowers with investments that quickly yield positive returns, ensuring loan repayment and enterprise growth. Investments in new retail units were analyzed. The analysis confirms that the achievement of profitability of the investment made in the new branches is well underway. For example, in one of the banks, two-thirds of the 93 new units were already profitable by the end of the project. Early returns therefore indicate that the banks’ strategies for expansion are working, helped at least in part by the access to the credit line for loans and leases which encouraged the rural outreach expansion efforts. Intangible benefits. In addition to the returns directly to the borrowers and the banks, the project yielded a range of intangible benefits, namely: (i) increased presence/outreach of the financial sector in the rural areas; (ii) growth in rural economy through the businesses supported by the project, which resulted in generation of new jobs and

3 Such high levels of returns are mainly explained by the fact many of the firms were startups. Annex 3, which provides more detailed analysis, by various types of enterprises, shows that impact on non-startups was still satisfactory. For example, removing outliers (startups), 11 out of 23 sampled firms had increases in sales of 0-75%, while 9 had sales increases over 100%.

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incomes for rural population; (iii) contribution to the SAPARD project by preparing business plans and grant/loan applications for SAPARD-eligible beneficiaries and pre-financing and co-financing a number of SAPARD investments, allowing for the more rapid absorption of the EU funding, particularly during its last years of the RFP operation; and (iv) provision of financing at a critical time to the microfinance industry allowing it to grow considerably and transform from informal NGO-type operations to a profitable, regulated industry supervised by the NBR. The Government and the Bank also made sure that the credit line would not displace private sector sources of financing through excessive interest rate subsidies so as to primarily concentrate on the smaller enterprises and land holders. They did this by considerably increasing the allocation towards microfinance institutions and working closely with the banks to lower the average size of sub-loans (by 40% between the mid-term review and closing).

3.4 Justification of Overall Outcome Rating

Rating: satisfactory.

The overall outcome rating is based on a combination of the achievement of objectives, relevance and efficiency. The Development Objective was achieved as shown by the key performance indicators. The project continues to be relevant, as access to rural finance continues to be a key element of the Government’s National Rural Development Programme (NRDP). Furthermore, as indicated in the economic and financial analysis, the enterprises and households, which benefited from the credit line, show positive returns. Moreover, this rating reflects the project’s success in bringing about a behavioral change in the target population for a more active approach to markets and financing in rural areas.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The project supported access to financial services in rural areas, which have a population with a risk of poverty 1.6 higher than the national average. Thus, by design, the project was aimed at reaching the poorest Romanians. From a distributional perspective, the project was rather neutral to poverty - about one fifth of the beneficiary communes belonged to the poorest quartile of communes in Romania, with a poverty rate over 50% (according to the 2003 poverty map data), while another 22 percent of the beneficiary communes belonged to the second poorest quartile.Within the project communes the distribution of the number of micro-credit beneficiaries was slightly pro-poor (as expected, the average value of the credit was smaller in poorer communities). According to the independent social assessment carried out after the project’s mid-term, no adverse impact on equality within communes (i.e., polarization) was observed. On the contrary, the qualitative assessment (carried out in over 20 communes in 6 counties) reported that the use of character-based lending, as opposed to the more rigid traditional credit eligibility criteria, allowed access to credit for lower income groups and small

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farmers without permanent cash income. Moreover, the focus groups revealed that the participation in joint liability groups led to increased communication and cooperation between community members. The project was also neutral with respect to gender. The distribution by gender of project beneficiaries is close to the national distribution of the beneficiaries of financial services (one third women and two thirds men). (b) Institutional Change/Strengthening During the transition period, private financial institutions operating in Romania lacked both the capacity and long-term funding to meet financial needs of the country’s population. By addressing those issues, the Bank strengthened private financial institutions’ abilities to serve micro clients, helped them expand their networks into more rural and remote areas, but also provided them with the initially needed funding to increase the sustainability of their rural activities, as well as their overall creditworthiness and attractiveness to foreign investors. As a result, new opportunities were opened for all Romanian FIs to receive long-term funding on more competitive terms. (c) Other Unintended Outcomes and Impacts (positive or negative) The project, through its intensive discussions with SAPARD management in 2003 and 2004, and with the in-depth assessment it conducted of its application guidelines and application appraisal procedures, contributed to an improvement/streamlining of the EC-financed program.

4. Assessment of Risk to Development Outcome

The context in which the project was implemented was favorable towards maintaining its development outcomes. The risk to the project’s development outcome was rated as moderate based on the following: The pre-accession of Romania to the EU on January 1, 2007 triggered major policy reforms aimed at strengthening the financial sector in line with the EU directives and improving the efficiency of financial intermediation to meet the needs of the private sector. In this context, considerable work has been done on reducing the influence over, and ownership of, the financial sector, the development of infrastructure support systems (such as electronic payment system, automatic clearing house, government registration and settlement system), strengthening of insurance sector supervision and pursuing measures to develop the capital and equity market. The project, whose main objective was to promote economic growth and reduce poverty in rural areas in Romania through the provision of financial services, was very well aligned with this operating environment. Another major event that affected the implementation of the project and will positively impact the maintaining of the development outcomes is the rapid growth of the banking sector and the influx of liquidity into the banking sector. The project played an important

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role in providing long-term resources to the banking sector during the transition to the point where private resources were amply available. At Project closing, liquidity in the banking sector is no longer the main constraint to finance in the country. While access to finance in rural areas has not been fully solved, as investment capital, especially for primary agriculture, remains difficult to obtain from the banking sector, the problems that will need to be tackled relate primarily to risks (e.g. through increasing the use of collateral such as warehouse receipts or improving the affordability and efficiency of weather-related insurance, the availability and acceptability of land titles as collateral), technology (developing new lending instruments appropriate for agriculture) and the strengthening of non-bank financial institutions (such as microfinance institutions or credit cooperatives). The continued interest of the Government for issuing subsidized credit lines does remain a risk to the Development Objectives. The PAD indicated a commitment from the Government to refrain from issuing such credit lines. In 2005-2006 however, the MARD issued the Farmer’s Credit Line of US$280 million at subsidized rates for which the Bank strongly expressed its concern as such an initiative was not conducive to enhancing sustainable access to rural finance. However, considering that (i) the Government was under considerable pressure to temporarily accelerate the commitment of the SAPARD funding before the deadline, (ii) there was no legal covenant preventing the issuance of such credit lines and (iii) the fact this project was managed by the Ministry of Public Finance which had little capacity to prevent the program of the MARD, the Bank did not consider it appropriate to suspend the project on this ground. The Farmer’s Credit Line was suspended in 2007. Should the MARD decide to re-initiate such a program, the Bank should engage the Government in identifying more appropriate types of assistance to farmers, such as the above-mentioned risk mitigating measures. With regard to the strengthening of the non-banking financial institutions, the project was very important in reinforcing the MFIs in Romania at a time when the microfinance industry was still in its infancy. The participation in the project was a significant first step in the development of MFIs as it helped them establish new offices, spread their outreach in rural areas and increase credit awareness. In 2006, the NBR took over the supervision of the non-banking financial institutions providing a legal framework for existing micro-finance providers to transform into non-banking financial institutions, which put MFIs in a better position to attract both local and foreign investors ready to provide them with long term debt and equity funding. Another important element that will positively influence the project’s development impact is the implementation of the recently approved NRDP, which will allow Romania to access EU funds of nearly EUR8 billion by 2013. The measures included in the NRDP are aimed at increasing the competitiveness of the agricultural sector, improving the rural environment, and improving the quality of life and diversification of the rural economy. The NRDP will thus further pursue the RFP’s objective of accelerating the economic transformation of the rural economy. The implementation of the NRDP requires significant counterpart funds, which will be secured mainly from commercial bank loans.

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5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: moderately satisfactory Quality at Entry had been rated satisfactory by QAG, particularly because of a thorough background analysis of the financial sector in Romania. The QAG did identify some deficiencies in institutional and implementation arrangements, as mentioned above. But t hese deficiencies proved to be very problematic during the first 18 months of implementation, causing considerable delays and leading to a 30-month period of unsatisfactory ratings for Implementation Progress and Development Objectives. This ICR is therefore rating Quality at Entry as Moderately Satisfactory.. (b) Quality of Supervision Rating: moderately satisfactory The Bank provided support to the implementing agency during the project’s implementation stage that can be assessed as satisfactory. Field supervision missions to review Project results and discuss key issues with the borrower were carried out regularly on average twice a year and more often during the initial implementation. In the course of the implementation, the Bank conducted eleven supervision and a mid-term review missions. The mid-term review did not result in the restructuring of the project. In general, the composition of the Bank team in terms of appropriate skills mix and expertise was assured, with consultants mobilized for specific areas when needed. The Bank team tried to mitigate as much as possible the events adversely impacting the staff continuity, such as the changes into the Project Team and the change of the Task Team Leader in February 2004. The project faced not only an evolving financial sector, but also changing Government sector policies in light of the rapidly approaching deadline for EU accession as well as ever-changing rules for SAPARD. Indeed, at the time the RFP was appraised, no details about the actual provisions for SAPARD were known. With SAPARD programming and implementation entirely decentralized (i.e., an accession country responsibility) those provisions were still to be defined as part of the national programming process. In Romania, this process started later than in neighboring accession candidates, and first measures were only accredited in 2002 for eventual implementation in 2003. In particular, at appraisal no or very restricted information was available on essential program parameters such as targeted sub-sectors, geographic coverage and eligibility criteria (type of investments, types of enterprises, project size, eligible cost, counterpart

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financing shares). The Bank team and Government recognized the flexibility required to stay ahead of the curve in such a rapidly changing environment. The Bank was supportive and responsive to the project management. For instance, in February 2004, one Bank staff from Washington was relocated to Bucharest for about four months to closely work with the Ministry of Economy and Finance and the PMU to accelerate the implementation of the project. However, the Bank could also have done more. Particularly, it failed to (i) develop a more streamlined Monitoring and Evaluation system once it became clear that the existing and cumbersome design would not allow for a timely impact assessment nor an early evaluation of the project’s capacity to meet its Development Objectives, (ii) convince the Government, in light of the decreasing demand for liquidity by the financial sector and the increased likelihood that the Government would not be willing to borrow for the APL2, to bring some of the activities of the APL2 into the APL1, in particular the strengthening of the NBFI sector. These weaknesses lead this ICR to rate the Bank’s supervision performance as moderately satisfactory. The team, however, was able to learn from the lessons of the QSA, in particular by better reflecting the monitoring of the performance of the financial institutions and increasing the post-review of the subloans. Justification of Rating for Overall Bank Performance Rating: moderately satisfactory Given that the performance of the Bank in ensuring quality at entry and the overall Project outcome were satisfactory and that the quality of supervision was moderately satisfactory, the overall rating of the Bank performance is rated as moderately satisfactory.

5.2 Borrower Performance (a) Government Performance Rating: satisfactory With the difficulties the project was facing at the early implementation stage, the Government worked closely with the Bank’s Team to ensure that institutional and procedural arrangement problems were correctly identified and addressed in a timely manner. (b) Implementing Agency or Agencies Performance Rating: satisfactory The implementing agency, once established, was supportive throughout the life of the project and responsive in addressing emerging problems in an appropriate manner. The Bank Task Team was kept well informed of occurring problems and Project results;

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hence all issues were addressed and resolved in an efficient way. Reporting to the Bank carried out by the PMU has also been done in a timely and professional manner. Justification of Rating for Overall Borrower Performance Rating: satisfactory The overall performance of the borrower is satisfactory, particularly during the second half of implementation.

6. Lessons Learned Key lessons learned from the project both project-specific and of wide general application are presented below. 1) Project design and implementation arrangements. There were several

shortcomings in the project design and implementation which, if avoided, could have made the implementation of the project more effective. The following are the most significant post-implementation lessons:

• Clarify commercial procurement practices. A lack of specific bank-wide

guidance on acceptable commercial practices and their supervision needs made it difficult for the Government and the Bank team to properly assess the procurement activities under the credit line if needed.

• Streamline funding mechanisms. For projects that are operating in a rapidly

changing environment and are demand-based, the funding mechanisms need to be kept as streamlined and flexible as possible. The Government and the Bank were able to be flexible to compensate for cumbersome arrangements, but flexible mechanisms should be included at the design stage. For example:

Too many detailed project cost categories called for constant reallocations,

slowing down the project implementation. The Government signed fixed commitments with each bank or leasing

company, mainly in order to pass on to these banks the commitment fee paid by the Government to the IBRD based on the amount they intended to borrow. As the demand regularly shifted from institution to institution, subsidiary loan agreements had to be constantly amended, increasing considerably the transaction costs and slowing down implementation. Instead, simple credit lines with eligible financial institutions should be established, with a loan ceiling based on the strength of the institutions, and withdrawals based on a first-come first served basis.

• Agency relationship with microfinance institutions has limited impact on

sustainability. At the time of Project design, no legal framework existed that would allow for the Government to lend to MFIs. An unusual services contract between the Government and these MFIs was established, which gave an agency

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role for the MFIs to manage the public funds. Although the MFIs were able to accomplish their work and the funds allowed the MFIs to expand their presence further in rural areas, it did not fully allow for the increase of the institutions’ sustainability as all funds were to be reimbursed to the Government in the short-term, forcing the MFIs to quickly raise additional financing on their own.

2) Specifics needs of the Agriculture sector. Increasingly, as liquidity of the financial

sector expands, more and more funds are potentially available for lending to agriculture. To take advantage of this situation, considerably more needs to be done to reduce the risks related to the sector’s activities. The focus therefore, especially in light of evident climate change moving toward a more complex, agricultural finance and risk management instruments such as warehouse receipts, weather index-based crop insurance or partial risk guarantees. Although some of these issues were expected to be dealt with during the second phase of the APL, they could have been more effectively dealt with at the same time as the credit line, to make sure these risk-mitigating systems are in place by the time the credit line closes.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies A summary of the Borrower’s ICR can be found in annex 7. They are mainly consistent with the findings of this ICR. (b) Cofinanciers Other partners and stakeholders (e.g. NGOs/private sector/civil society)

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Annex 1. Project Costs and Financing

Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

RURAL CREDIT AND LEASING FACILITY 114.94 109.13 94.9%

RURAL RETAIL BANKING AND MICROFINANCE 25.89 28.77 111.1%

PROJECT MANAGEMENT AND TA IN RURAL FINANCIAL MARKET DEVELOPMENT

5.98 3.89 65.1%

Total Baseline Cost 145.20 141.79 97.7%

Physical Contingencies 0.07 0.00 0.00 Price Contingencies 1.54 0.00 0.00

Total Project Costs 146.81 141.79 96.6% Project Preparation Fund 0.00 0.00 .00 Front-end fee IBRD 0.80 0.00 .00

Total Financing Required 147.61 141.79 96.1%

(b) Financing

Source of Funds Type of Co-financing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 0.99 0.864 86.3% International Bank for Reconstruction and Development 80.00 73.4 95.5%

Local Sources of Borrowing Country* 65.82 67.4 101.2%

*including estimates of contributions to investments by beneficiaries

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Annex 2. Outputs by Component (a) PDO Indicators

Indicator 2001 Baseline Value (USD)


approval documents) (USD)

Formally Revised

Target Values


Completion or Target Years (USD)

Indicator 1 : Amount (USD) of credit allocated to private rural enterprises Value quantitative or Qualitative)

US$184 million US$213 million - US$967 million

Date achieved 04/30/2001 07/31/2007 - 10/31/2006 Comments (incl. % achievement)

The target value was overachieved in October 2006 and reached over 450% of the target value, hence no further measurements were made.

Indicator 2 : Amount (USD) of credit allocated to rural households Value quantitative or Qualitative)

US$174 million US$201 million - US$323 million


The latest available data (December 2005) indicates that the original target value wasachieved by 160%.

Indicator 3 : Aggregate private agricultural investment as % of agricultural gross value added (GVA)


8.31% 9.55% - 9.38%


98% of the target value was achieved on December 31, 2004, which is the latest available data.

Indicator 4 : Total credit to agriculture, forestry , and fisheries


ROL 4,243 billion (US$164.5 million at 12/31/2000 exchange rate)

ROL 10,000 billion (US$387.6 million at 12/31/2000 exchange rate)

-

RON 3.402 billion (equivalent to ROL 34,020 billion or US$1,318 million at 12/31/2000 exchange rate)


The target value was overachieved as of July 2007 by over US$900 million or 240%.

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(b) Intermediate Outcome Indicator(s)

Indicator 2001 Baseline Value


approval documents) (USD)

Formally Revised Target Values



(USD) Indicator 1 : Sub-loans disbursed to private rural enterprises (amount, USD) Value (quantitative or Qualitative)

0 US$28 million - US$39.87 million


As of the end of the project, 142% of the original target value was achieved.

Indicator 2 : Leases disbursed (amount, USD) Value (quantitative or Qualitative)

0 US$0.7 million - US$14.9 million


At the end of the project, the total amount of leases disbursed exceeded the target value 21 times.

Indicator 3 : Micro-loans disbursed to rural households (amount, USD) Value (quantitative or Qualitative)

0 US$1.7 million - US$9.73 million


As of the end of the project, 572% of the original target value was achieved.

Indicator 4 : Amount (USD) of SAPARD funding to private rural enterprises leveraged with project funding


0 US$17 million - US$11.4 million


67% of the target value was achieved as of August, 2007 due to a very slow start of SAPARD programming in Romania.

Indicator 5 : Number of rural localities with participating retail bank (PRB) branches / microcredit service provider (SP) retail points


0

A total of 65 localities with branches and retail points

-

A total of 109 PRB branches and agencies opened in rural areas and 25 SP retail points, of which 15 in rural

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localities. Date achieved 04/30/2001 07/31/2007 - 08/31/2007 Comments (incl. % achievement)

Indicator 6 : Adoption of TA policy recommendations on warehouse receipts Value (quantitative or Qualitative)

No Yes - Yes


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Annex 3. Economic and Financial Analysis Component A: Rural Credit and Leasing Facility Component At Appraisal, the project aimed, to, among other things, help regulated private financial intermediaries to augment their presence in rural localities through the expansion of the branch network, to build the outreach in rural areas; and to alleviate rural poverty by financing farm and off-farm investments for poor segments of the rural population which currently have no access to credit. The Economic and Financial analysis attempts to assess the efficiency and profitability of the said investments. The Analysis only focuses on the loans through commercial banks and leases, and excludes microloans, since calculation of Internal Rate Return (IRR) for loans with the average size of US$800 was deemed impractical. Factors influencing the Profitability Calculation. The PAD did not attempt to predict an Economic Rate of Return (ERR) for the overall component because it was deemed impossible to predict the specific sub-project or sub-leases which would be financed under the Facility because of the demand driven nature of such Facility4. Thus during the project preparation, ERRs were forecast for “a sample of activities”. At the closing, the sub-projects are known, but calculation of their individual ERRs is still quite difficult, mostly due to the specific nature of SME lending.

SME lending is not “project finance” in the pure sense where assets and cash-flows of the investment are legally and practically segregated from the rest of the company’s assets and cash flows. The investment project will increase or replace assets, but the incremental return attributable to the investment is buried in the company’s overall return on all assets. The increase in profit is a very crude indicator of the incremental “return” because the net profit is affected by a range of other management decisions (acquisition or sale of other assets, hiring, marketing, systems, etc.). Thus even if the RFP investment were not undertaken, there would be a change in profit due to other decisions and actions. In cases where the investment is a significant portion of the SME’s total assets, as in the case of major green-field construction loans or SAPARD loans (which tend to replace assets), the overall profitability of an SME can be a close measure of the RFP project. Unfortunately even in these cases, measuring the Return on Investment (ROI) is still impossible for another reason: these loans are recent and the “return” is not yet realized. At the time of ICR, most investments are only 1 – 3 years old, whereas the useful life of most of the assets financed is five or more years, and above 10 years in cases of restoration or construction of buildings. Therefore, at this time it is premature to calculate the traditional Net Present Value and IRR measures. Additionally, with over 700 investments under the project, not all data can be analyzed with full cash flows, profitability and returns. Thus, the project team opted to select a sample of 23 sub-loans, all representing different business activities. In aggregate, the data obtained provide a

4 The overall rate of return for the component in this case would be a weighted average of the ERRs of all sub-projects.

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fairly complete picture of the portfolio financed under RFP and the returns/profitability of the activities financed. Methodology Used. Key financial indicators (revenue, profit, assets, etc.) from the borrower enterprises for the most recent year-end (2006) were contrasted against the same indicators for the full-year-end before the loan was made, for a sample of borrowers. Early borrowers were sampled to provide a one to three year span between application and 2006 results. The following table summarizes the data for the entire sample of 23 SMEs:

Table 1. Return on Investment - Aggregate of Sample of 23 SME sub-loans/leases Average of the sample sub-borrowers

%

Percentage increase in Revenue 392% Percentage increase in Profit 1,009% Average Profit margin at end-FY2006 4.6% Percentage increase in profit margin 1,052% Percentage increase in Assets 373% Average Return on Assets at end-FY2006 4.4% Percentage increase in ROA 792% Average Return on Equity at end-FY2006 12.6% Percentage increase in ROE 20.2% Average Payback in years, per 2006 cash flow* 3.5

Payback = loan amount / (2006 profit + depreciation)

The allocation of funds to the most productive investments is precisely the role of banks and leasing companies in their capacity as financial intermediaries. Under the project, the PFIs selected the most promising clients based not only on the borrowers’ ability to repay, but on their potential to grow as valued clients. Thus, the financial success of the borrowers is a direct measure of the PFI’s efficient allocation of funds. To measure the financial success of the sub-borrowers, key financial indicators for the most recent year-end (2006) were contrasted with the same indicators for the year-end before the loan was made, for a random sample of sub-borrowers. The following results were obtained: Revenue Growth. Twenty of the 23 SMEs sampled reported growth in revenues. Three that did not increase revenue, nevertheless all had a positive growth in profitability, reflecting more efficient operations.

28

3 3

6

2

0

7

2

0

1

2

3

4

5

6

7

Number of companies

<0 0 - 24 25 - 50 50 - 75 75 - 100 100 - 999 > 1,000

Revenue growth (%)

Number of SMEs in a sample reporting Revenue Growth

The growth rates in excess of 1,000 percent per annum were delivered by virtual start-ups for at least two consecutive years. Eliminating these two outliers, the average growth rate is 181%, but still oversimplifies a distinct bi-modal distribution. Eleven of the SMEs had “normal to good” growth from 0%-75% p.a. Nine of the SMEs (including the two startups) experienced “significant growth” exceeding 100% and in most cases enjoyed growth in multiples rather than mere incremental increases. The more extensive Beneficiary Survey (REMACO) corroborates this conclusion, reporting that companies that borrowed or leased under RFP were more likely to realize increased revenue in 2006 in contrast with companies that had not borrowed under RFP. Equally notable is the higher percentage of non-beneficiaries who reported a decrease in revenue.

Table 3. Increase in Revenue – RFP Beneficiaries vs. Non-beneficiaries Change in revenue 2006: Beneficiaries (loans / leases) Non-beneficiaries Revenue Increased 67% / 62% 43% Remained constant 19% / 27% 24% Revenue Decreased 13% / 9% 27%

Source: REMACO, March 22, 2007 Growth in Profitability. All but one SME in the sample generated a positive ROI, as demonstrated by the fact that all but one reported net profit in 2006. Moreover, 19 of the 23 reported increases in profitability, confirming that the investment had a positive effect even in the short-term. A bi-modal distribution (below) shows seven companies with a moderate change in profit (plus or minus less than 50%), in contrast with a larger group (more than two-thirds of the sample) that enjoyed significant increases in profit, mostly in multiples of prior years’ profit.

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4

12

0 0

6 6

4

0

1

2

3

4

5

6

Number of companies

<0 0 - 24 25 -50

50 -75

75 -100

100 -499

500 -999

>1,000

Profit Growth (%)

Number of SMEs in sample reporting growth in profits (%)

<0% - One company (out of 4 in this category) reported a net loss; three others decreased but remained profitable >1,000% - One company (out of 4 in this category) became profitable after a loss (% increase is mathematically undefined)

Profit Margins & Return on Assets. The degree of profitability, as measured by profit margins (profit/revenue), is also bi-modal in distribution. While five SMEs enjoyed double digit profit margins, twelve (half the sample) were just barely profitable with profit margins under 1.1%. Half of these borrowed to co-finance SAPARD grant projects. In fact, all but one of the SAPARD-co-financed loans (6 of 7 in the sample) fall into the low-profit group of loans. However, for SAPARD investments, short term profitability is not the objective. Made to upgrade facilities to EU standards, these investments are a matter of survival - without them the companies will have to close down. In the longer term, future profitability will be enhanced when competitors who did not upgrade have to struggle to stay competitive.

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Whether comparing profit to revenues or to total assets, the same bi-modal distribution emerges. Five companies enjoyed double-digit ROA in 2006, in sharp contrast to ten companies with an ROA under 2% - including all seven of the SAPARD projects.

The low level of profit can be explained (and justified) by the fact that large investments in fixed assets translate into high depreciation expense which in turn lowers profit in the short-term. In addition, during the project period, a new law came into effect requiring significant revaluations of fixed assets. SMEs were required to mark up their real estate assets to current market values, which dramatically increased total assets and therefore reduced the ROA.

1

7

23

2 21

5

0 1 2 3 4 5 6 7

Number of SMEs

<0% 0-1% > 1% > 2% > 3% > 4% 5%- 10%

>10%

Return on Assets (%)

Return on Assets for SMEs in sample (2006)

1

8

23

01

3

5

0

1

2

3

4

5

6

7

8

Number of SMEs

<0% 0-1% > 1% > 2% > 3% > 4% 5%-10% >10%

Profit Margin (%)

Profit margins for SMEs in a sample (2006)

31

Conclusions of the Analysis. Since future profits are yet unknown, the current period profit can be considered a reasonable proxy for future profits because current period profits tend to be conservative: • The results obtained from the analysis of the representative sample of investments

financed provide assurances that the returns on the investments financed in the RFP portfolio are indeed very high.

• Full revenue potential from the investment is often achieved gradually over time, while non-capitalized start-up costs add to the expenses in the early years. Consequently, profit in the early years tends to under-represent future returns.

• Closely-held SMEs worldwide strive to defer taxable profit to later periods. Successful SMEs quickly reinvest “returns” into additional projects, generating expenses that decrease profit in the near term in favor of more growth and greater returns in the future.

• Successful SMEs typically increase salaries, pay bonuses, or increase other fringe expenses (travel, company car, etc.) to owner-executives, all of which reduce the reported profit and understate the total “return to owner-investors.”

However, the early financial results summarized above also indicate that the PFIs have fulfilled their economic role as financial intermediaries by selecting borrowers with investments that quickly yielded positive returns, ensuring loan repayment and enterprise growth. Component B: The Rural Retail Banking and Micro-Finance Factors influencing the Profitability Calculation. Component B recovered from a slow start to efficiently allocate funds to participating banks, which in turn efficiently invested all of the funds into opening new branches. The last three years were especially marked with exceptional efficiency in implementation. The PDOs were ultimately achieved despite the facts that only two banks participated, the first disbursements were more than two years late, and the total funds allocated for the component were reduced by almost half, from US$11,277,000 to US$5,865,000. Attempting to measure the efficiency at the level of the sub-projects, i.e. the new branches, is however challenging: 1) Recent investments. Foremost, at the time of this ICR, the offices are all quite new, many barely a year old. Calculation of a time-series IRR is impossible because future profitability is yet unknown. The analysis conducted below is limited to the initial financial results - the first three quarters of 2007. At this early stage, the new units were beginning to build up a client base while simultaneously expensing the initial investment as rapidly as allowed by tax law to intentionally minimize profit. Generally new units are not expected to be profitable at this early stage. The banks estimate that it will take from six months to one year for a new unit to break-even; hence the positive returns so early after start-up are auspicious. 2) Lack of segregated accounting and operations. The opening of so many small agency and representative office units was advantageous for RFP because it produced a larger number of units in more remote locations despite reduced funding. However, one

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of the cost-advantages of satellite offices is streamlined accounting. One of the two participating banks does not generate individual income statements for satellite offices, but rather rolls their performance into that of the parent branch. The other participating bank does generate a rough “profit and loss” for individual units on a quarterly basis which allows for some analysis. 3) Integration of operations. Operating as satellites of their parent branches, the smaller units are also integrated in operations. An employee might split their time between the branch and a representative office, but the payroll expenses are not split accordingly, charged wholly to one unit or the other. The deposit accounts of a major client may be domiciled in the parent branch while the agency office, located near the client, provides the day-to-day servicing of the accounts. Consequently, even if the accounting of parents and satellites was segregated, it would not reflect the operational integrations. Various calculations of ROI are similarly handicapped, e.g., accounts are commonly transferred to a new office when it is opened, making it immediately profitable. However, this profit, along with the account, was just moved from the parent branch; there is no net increase of profit for the bank. Methodology Used. The following table extracts key data from the third-quarter 2007 reports submitted by the two participating banks. Footnotes explain numbers that are not well-segregated from parent branches.

Table 2. New units – measures of efficiency (economic rate of return)

Source reports (confidential) are in the Bank’s archive Notes: * - indicates Bank 2 numbers that include total profit of cluster, not just of the new (satellite) office. (1) Bank #1: Includes investments in ATMs and supporting network software for a more conservative presentation. (2) Profit for 3 quarters ending September 30, 2007 (Bank 1: $527,954; Bank 2: $12,788,984) is annualized. (3) ROI for Bank 2 is meaningless because profit is derived from total group assets, not just the small investment.

The cost of a banking unit is the critical starting point because it establishes the base “investment” that must be exceeded before a unit can generate a positive ROI. Costs of

Indicator

Bank 1 Bank 2

Number of new units 93 16 Number of new units (*clusters) profitable 62 16* Percentage of units (*clusters) profitable 66.7% 100%* ROI / ROA Total Investment into new offices (1) $ 6,584,438 $1,871,692 Total RFP portion of investment $4,364,998 $1,500,000 Total Profit from new units (*clusters)(2) $703,938 $17,051,979* ROI (profit / total investment)(3) 10.7% * Total Assets $77,798,633 $586,036,756* ROA (profit / total assets) 0.9% 2.9%

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the new units are identifiable and well documented, and were discussed in the Section 3.3 of the ICR. Two types of ROI are calculated: a return on the sub-project investment (referred to here as ROI), and a return on the Bank unit’s total assets (ROA), which includes pre-existing assets or assets acquired outside the scope of the investment project. Both indicators (ROI, ROA) can only be calculated for Bank 1 which produces an income statement for each satellite office quarterly. As explained above, Bank 2 reports the profit and asset figures for the “cluster,” i.e., the parent branch and all of its satellites. Since most major branches opened one or more satellites, the “profit” reported here captures most of the profit-to-date bank-wide. Thus, while the ROA for Bank 2 does not shed light on the individual returns for new offices, it does confirm that all “clusters” are profitable and able to repay the investment in a short time. In fact, the total investment (US$1.9 million) can be repaid with less than two months’ of group’s annualized profit of US$17 million. The efficient allocation of funds to the two banks, and their efficient investment in rural expansion can be explained by the following factors: 1) Rural Commitment. The only two banks to participate are also the only two banks in RFP that are regionally headquartered. Growth for these banks could not be achieved in their respective towns alone, but required an aggressive strategy of regional expansion. It is no coincidence that the two banks active in rural branch expansion were also the two most active banks in rural lending. Together, they disbursed 62% of Component A funds in sub-loans to their clients in rural areas. 2) Prudent Investment. The PAD addressed the opening of rural branches only. However, Romanian banking law allows for smaller “units” including agencies and representative offices, smaller in size and activities. Both participating banks invested mostly in these smaller units rather than full-size branches. This was highly desirable for RFP because smaller units require smaller investments, making investment in smaller localities feasible. The smaller units allowed Component B dollars to be extended over a larger number of units and areas. Also, the two participating banks were able to disburse more rapidly because smaller units can be built quickly, offsetting the initial delay in the component’s implementation. • Bank #1, the most prolific user of Component B funds (and Component A funds),

was also the most prudent. Beating its original cost estimates for a new unit, it also kept average costs down by opening mostly the lowest-cost representative offices, which are more suitable for expansion into rural areas.

Table 4.

Bank #1 Projected Actual Branches 10 8 Agencies 9 22 Representative offices 1 63 Total 20 93

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Funding one-third of the costs with its own funds, the bank leveraged RFP dollars to extend its rural network by a remarkable 93 units with an average RFP investment of only US$40,000 per unit.

• Bank #2 initially applied for US$5 million to finance 33 units but reduced this to

US$1.5 million when it was given the option to shift US$3.5 million to Component A instead—a move also favored by the project supervision team. Though not as efficient as Bank 1, Bank #2 nevertheless efficiently contained investment costs.

• Bank #3, which had an excessive per-unit forecast, withdrew its application when it

was purchased by a foreign bank. The unused commitment was re-allocated to Bank #1. (If it had not withdrawn, it would have been restricted to US$200,000 maximum per branch.)

Table 5. Branch Expansion – Projected vs. Actual per unit costs Bank Initial

Projected # units

Actual # Units

Projected Average Total Cost / Unit

(USD)

Actual Average Total Cost / Unit

(USD)

Actual Average RFP funded portion / unit

(USD) Bank #1 20 93 $143,250 $ 59,798 * $ 40,124 * Bank #2 19 16 $ 86,787 $116,980 $ 93,750 Bank #3 19 -0- $407,440 -- -- Total 58 109 $211,298(2) $68,191(1)(2) $ 47,995(1)(2) Data source (a) (b,c) (a, d) I (b,c)

Sources: (a) Participating Bank’s initial applications for credit lines; (b) PMU Mission Report Sept 7, 2007; (c) Participating Banks’ third quarter September 30, 2007 reports to PMU (d) Banking Advisor’s report Dec 2004, initial allocations Notes: (1) Excluded from the averages: US$633K spent by Bank 1 on stand-alone ATMS and network support software. Allocating this amount over the 93 units would increase the actual average cost per unit to US$70,800, still well below the average cost for Bank 2. Allocating the US$633K over the total 109 units would increase the weighted average to US$58,807 (total disbursed under Component B--US$5,865,000—divided by the total units—109). (2) Weighted average results. 3) Salubrious Economy. At appraisal, the PAD had significantly underestimated the average cost per unit at US$24,531. However, the PAD also did not foresee the dramatic positive changes in the economy. Predicated on the previous hyper-inflation and stagnation of the economy, the PAD assumed inflation at 20%, a GDP growth rate of 2%, and consequently, rates on long term loans at 45%. In sharp contrast, the actual inflation was only 8.6 % in 2005 and 4.8 % in 2006, the economy grew more rapidly, at 4.1 % in 2005 and 7.7 % in 2006, and average interest rates on medium term loans were below exceed 20% in local currency. The stable growing economy increased demand for loans while simultaneously lowering the risk of non-repayment. Borrowers were more confident in taking out long term loans necessary for major investments (evidenced by the demand for Component A funds). Furthermore, the PAD proforma branch balance sheet presumed long term loans to be 18 months, whereas most RFP loans were 3 to 5

35

years on average. The larger volume and longer tenor of loans resulted in a higher volume of earning assets. Conclusions of Analysis. The attempted calculation show preliminary early positive results from the newly opened offices as they contribute to the rural outreach and profitability of the PFIs. Three-quarters of Bank 1’s new offices were financed in 2006, so the third-quarter reports as of September 30, 2007 reflect young offices with one year of operation. Nevertheless, two-thirds of the 93 new units were already profitable. The data for Bank 2, viewed at the level of branch-satellite clusters, confirms that the clusters are doing quite well—especially so early after expansion. The early returns therefore indicate that the banks’ strategies for expansion are working; explained at least in part by the synergy of using Component A funds. Intangible benefits generated by the project. In addition to the returns both to the borrowers and banks in realizing the returns financed by the proceeds of the project, the project yielded a range of intangible benefits, namely: (i) increased presence/outreach of the financial sector in the rural areas; (ii) growth in rural economy through the businesses supported by the project, which resulted in generation of new jobs and incomes for rural population; (iii) assistance to the SAPARD project, allowing for the rapid absorption of the EU funding, particular during its last year of the project operation; and (iv) provision of financing at a critical time to the microfinance industry allowing it to grow considerably and transform from informal NGO-type operations to a profitable, regulated industry supervised by the NBR.

36

Annex 4. Bank Lending and Implementation Support/Supervision Processes

Task Team members

Names Title Unit Responsibility/ Specialty

Lending

Supervision/ICR Nadia Badea Operations Analyst ECSSD Sandra Broka Technical Specialist ECSSD Bogdan Constantin Constantinescu Sr Financial Management Specialist ECSPS Ana Maria Ihora Program Assistant ECCRO Vladislav Krasikov Sr Procurement Spec. ECSPS Beatrice Koshie Michel Program Assistant ECSSD Doina Petrescu Sr Operations Off. ECSSD Saul Schor Operations Analyst ECSSD Ewa Sierzynska Junior Professional Associate ECSSD Valencia M. Copeland Program Assistant ECSSD

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage of Project Cycle No. of staff weeks USD Thousands (including

travel and consultant costs) Lending

FY98 82.13 FY99 18.83 FY00 52 148.65 FY01 40 95.11 FY02 0.00 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00

Total: 92 344.72 Supervision/ICR

FY98 0.00 FY99 0.00 FY00 0.00 FY01 9 22.07 FY02 24 79.86 FY03 33 103.04 FY04 39 133.55

37

FY05 39 143.24 FY06 16 60.84 FY07 14 93.41

Total: 174 636.01

38

Annex 5. Beneficiary Survey Results The M&E system of the project included a very ambitious component for monitoring the social development outcomes, through both quantitative and qualitative methods. By design, this component was supposed to evaluate the impact of the project from a social development perspective, by using a quasi-experimental approach (i.e., treatment and control groups, interviewed at two different moments in time). In practice, the survey suffered several shortcomings: first, the M&E consultant was hired with significant delay, and the baseline survey was carried out only in August 2006, while the follow-up was carried out in March 2007, after only 7 months from baseline; and second, the control groups (households and firms), although selected using the best available information to perform a matching with the treatments, proved to be pretty different on their main characteristics when compared to the treatments. Thus, the quantitative survey failed to produce reliable information with respect to the project impact, but provided useful evidence regarding the profile of beneficiaries (both households and firms) and their economic behavior, including agricultural and non-agricultural business practices, use of credit, etc. The qualitative survey (interviews and focus-groups with beneficiaries and key stakeholders) was carried out in over 20 communes belonging to 6 counties and covered the following major themes: implementation mechanisms; barriers to access to financial services in rural areas; perceived benefits of the project at household level; and project impact on poverty. This annex is summarizing the main findings of the qualitative survey. A. Six categories of microcredit beneficiaries have been identified:

• Beneficiaries who managed to cover rapidly certain urgent needs with this credit, and who, in general, do not intend to apply for other credits or to start their own business.

• Beneficiaries who first obtained credits to cover certain urgent needs, and then they used the next credits to develop a small business that would bring them minimum profit.

• Beneficiaries who carry out certain economic activities which bring them a profit that allows them to cover the basic needs for the household and to develop slowly.

• Beneficiaries who run a large business and who contracted these credits to develop and to extend their activities.

• Beneficiaries who had their own business when accessing the micro-credit and who, due to external or individual factors had to reduce the size of the business or to give up their business.

• Beneficiaries carrying out an agricultural activity of medium size, and for whom micro-credits were a solution to the financial difficulties, maintaining them between wind and water.

B. Advantages of micro-credits component, as perceived by beneficiaries

• it was not necessary for the beneficiaries to fill in a massive documentation for obtaining the credit;

39

• high accessibility for all types of beneficiaries (e.g., credits were also granted to those without secure salary incomes);

• accessible location of credit offices, the travel costs for the monthly payment of debts being thus much reduced; and

• transparency, good communication and trust relationships established with the service providers

C. Business and economic related effects of micro-credits

• Changes in business practices usually occur in the case of clients who have obtained more than 4 credits. Thus, one may notice an increase in the working and fixed capital, and also an orientation towards increased productivity (by purchasing high quality seeds or pure-bred animals).

• The micro-credits have resulted in little diversification of activities, due to the insufficient level of financing which is specific to this component. In order to diversify their activities, the beneficiaries have mentioned significant amounts of money necessary to make the initial investments.

• The availability of certain amounts of money at the right moment has determined a decrease in production expenses. Thus, in agriculture, due to the advance payment of agricultural works, the beneficiaries have been able to avoid the payment of interest related to the works carried out with credit money or to avoid any non-profitable contracts.

• At the community level, the most important benefit of the project is a better level of employment of seasonal work force in agricultural activities. Also, the credit granting procedures have contributed to a higher level of formality of income-generating activities, at least through the producer certificates requested.

40

Annex 6. Stakeholder Workshop Report and Results (if any) NOT APLICABLE

41

Annex 7. Summary of Borrower’s ICR and/or Comments on Draft ICR Summary of Borrower’s ICR 1. Project’s Objectives The project’s purpose was to support the government’s long term view of developed and internationally competitive rural areas with significantly less incidence of poverty by establishing effective private financial markets and intermediaries which will provide access to investment capital and safe deposit services to all segments of the rural population; especially to individual farmers, rural micro-entrepreneurs, and small and medium businesses. The project has sought to promote economic growth and reduce poverty in rural Romania through the provision of financial services. In pursuing this objective, the project, as defined by the Loan Agreement, assisted in:

• Accelerating the economic transformation of the rural economy by increasing the flow of investment capital to the sector;

• Strengthening the role of the private sector in the rural economy; • Strengthening the Borrower’s capacity to receive funding from the EU Special

Accession Program for Agriculture and Rural Development (SAPARD); and • Alleviating rural poverty through financing of farm and off-farm investments for

poor segments of the rural population. 2. Key Performance Indicators The context for credits in the rural area has improved in the last three years. Since RFP has started, total credits to agriculture multiplied by almost 3 times. It should also be considered that the RFP credits represent 0.6% of total credits to agriculture. At the completion of the project, it outpaced its initial expectations: more money was disbursed (+20%) and much more beneficiaries were served (+70%). In our views, the project has met its development objectives. Key performance indicators performed above expectations. However, it should be noted that those expectations followed a linear model, with baseline year 2001, which was the first year of growth after a recession in the late 90s. Therefore, the target values were modest, and have been exceeded in some cases by a large margin. This assessment is made based on the information provided by the monitoring and evaluation survey of the project:

a. The amount of credit allocated to agricultural enterprises (USD) increased by more than 4 times over the last 5 years, compared to the baseline study, and exceeded the target set for the project-end.

b. The amount of credit allocated to rural households increased from US$174,377,000 (the baseline value) to US$323,000,000, and exceeded the final

42

target, as rural households (although to a lesser extent than the urban ones) benefited from increased credits through formal channels.

c. The aggregate private agricultural investment as a percentage of agricultural gross value added increased from 8.31% to 9.38% (latest available data as of December 2004), the final target being of 9.55%.

3. Project’s Design and Outputs To achieve the objectives presented above, the project was structured in the following parts:

A. Rural Credit and Leasing Facility for:

- Sub-loans to eligible Beneficiaries to finance productive investments, including investment and working capital, in all sub-sectors of the rural economy, including agriculture, services, and industry;

- Leases of depreciable capital assets (e.g. machinery, tools, vehicles, equipment) between Participating Intermediary Banks or Leasing companies and beneficiaries; and

- Micro-loans to Beneficiaries.

The performance and outputs of the Participating Financial Institutions (PFI) under this component are considered fully satisfactory. Out of US$70.4 million allocated to this sub-component, about US$39.9 million have been disbursed under sub-loans through commercial banks (225 sub-projects financed), US$14.9 million have been disbursed under sub-leases through leasing companies (510 sub-projects financed), and US$9.7 million have been disbursed under micro-loans (8,075 micro-loans financed). Out of the funds disbursed through commercial banks, US$11.64 million represent SAPARD co-financing (53 sub projects). Overall, for the entire project, SAPARD co-financing accounted for 24.5% of the sub-loans and for 29.2% of the amount granted. The fact that 37% of all SAPARD co-financed projects from RFP accumulated in the last 3 quarters of RFP (of a total of 16 quarters), indicates the increased absorption capacity for EU funds in agriculture.

B. Rural Retail Banking and Micro-Finance for: - Support for the development of suitable technologies for Participating Retail

Banks; - Operation of a network of pilot retail banking offices or branches; and - Provision of training and technical assistance in retail banking.

Performance and outputs: This component has been completed with 100% of the funds committed and disbursed. The project funds supported two private commercial banks, Banca Carpatica and Banca Transilvania to develop their capacity to provide retail banking services through the establishment, acquisition or upgrading branches or offices in the project rural areas. With 109 rural units financed at the low average cost of only US$53,807, the success of this component is attributable to the selection of the two participating banks: both are regionally headquartered with rural-expansion central to

43

their overall strategies. Break-even is reported to be about 10 months; shorter for some offices. The monitoring and evaluation survey revealed a positive evolution in terms of the outreach of distribution networks and in the financial indicators for the newly created rural branches, which gives an indication on the likely sustainability of the provision of financial services in rural areas. C. Project Management and Technical Assistance on Rural Financial Market Development In addition to financing costs incurred by the PMU, this Component financed technical assistance geared to identifying and initiating the process of improving weaknesses in the legal framework for credit activities in Romania and to support reaching of Project’s objectives.

4. The Impact of the Project Implementation

The data resulted from the two surveys on the financial services in the rural environment and on the social outcomes of the project implementation lead to several conclusions on key elements that the governmental policies related to the development of rural economy should concentrate upon. The crumbling of agricultural lands makes agriculture in most of the rural households, to be a subsistence activity and not a profit generating activity. Approximately 21% of the households are oriented towards trading the agricultural products obtained. Nonetheless, the agricultural activities represent a source of income for only 12% of the households. The main sources of cash incomes continue to be represented by pensions, salaries and social benefits.

The non-agricultural activities carried out by households provide them with an average monthly income almost 6 times higher than the one obtained from agriculture, yet only about 4-5% from the households in the villages carry out such activities.

The small businesses of rural households have a much reduced influence on the occupation of labor force outside the household, both the agricultural and the non-agricultural ones being based on the labor force provided by the household members. The access on the labor force market is relatively reduced, only approximately one quarter of the population is hired, mainly in non-agricultural fields and having occupations of ”blue collars”. Moreover, the regular disparities in the access on the labor market register very high levels: approximately 65% from the occupied labor force is represented by men, while 85% from the non-remunerated workers are women.

The development of non-agricultural entrepreneurship could be a solution both for the degree of occupation of labor force and implicitly of household incomes, as well as it regards the formalization of economic relations in the rural environment. As the majority of non-agricultural entrepreneurs have started their business based on their own financial resources or on informal loans, the availability of individuals to start a business referring to formal credit instruments is relatively reduced, and the funding programs aimed at the

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development of income generating activities in the rural environment should put a special emphasis on consulting services for potential entrepreneurs. The access and participation of households from the rural environment on the financial market is limited. Only approximately 13% of the households have taken or had a loan in progress in the last 12 months, from which in 8% of the cases it was a bank credit. Nonetheless 80% of the value of loans taken by rural households has come from bank credits. Almost two thirds of the number of loans as well as of the total number of household loans was used for consumption (house improvements, purchase of long use goods, personal needs).Around 4 out of 10 firms have made investments in the last year and from them only 17% have referred to credits in order to finance such investments. The formal economic sector in the rural environment is present almost entirely in private property:

• 50% of the enterprises legally established being active in the trading field; • approximately 17% in the processing industry; and • 10% in agriculture.

Being based mainly on the local markets as sales markets and facing a relatively high competition with effects of decrease of the profit rate, the potential of investments and of company development in the rural environment is relatively low. The constraints related to the access to credit are very high:

• only approximately 25% of the rural enterprises apply to bank credits, and from them half are rejected by banks (especially due to the lack of collaterals);

• just one third of those that succeed in obtaining a credit would need in fact a larger credit.

The data also reveals the fact that companies applying for credits are especially those with high turnovers and those acting in the field of agriculture and constructions, indicating a limited access on the financial market for small companies. Benefits at household level The households’ beneficiaries of the RFP were selected through a decision-making process involving both credit officers from the micro-crediting agencies, and some of the members of the beneficiary communities. Depending on the social and demographic profile and Program impact, 6 categories of beneficiaries have been identified:

a. Beneficiaries who managed to cover rapidly certain urgent needs with this credit, and who, in general, do not intend to apply for other credits or to start their own business.

b. Beneficiaries who first obtained credits to cover certain urgent needs, and then they used the next credits to develop a small business that would bring them minimum profit.

c. Beneficiaries who carry out certain economic activities which bring them a profit that allows them to cover the basic needs for the household and to develop slowly.

d. Beneficiaries who run a large business and who contracted these credits to develop and to extend their activities.

e. Beneficiaries who had their own business when accessing the micro-credit and

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who, due to external or individual factors had to reduce the size of the business or to give up their business.

f. Beneficiaries carrying out an agricultural activity of medium size, and for whom micro-credits were a solution to the financial difficulties, maintaining them between wind and water.

The benefits of micro-crediting through RFP were identified at the level of income generating activities, achieved by the beneficiary households, and to a smaller degree, at community level. Changes in business practices usually occur in the case of clients who have obtained more than 4 credits. Thus, one may notice an increase in the working and fixed capital, and also an orientation towards increased productivity (by purchasing high quality seeds or pure-bred animals). The micro-credits have resulted in little diversification of activities, due to the insufficient level of financing which is specific to this component. In order to diversify their activities, the beneficiaries have mentioned significant amounts of money necessary to make the initial investments. Nevertheless, most beneficiaries with an income-generating activity have manifested their interest in starting either a complementary agricultural activity, or a non-agricultural activity to support them in case of agricultural losses. In general, the beneficiaries failed to make any significant savings, due to the fact that the profit obtained from economic activities was reinvested. Saving considerable amounts of money is regarded as a desideratum, however, taken into account that most households are in course of development, reinvesting the profit is the only viable strategy at present. In certain cases, the economic activities performed bring losses at the household level, due to certain external factors. The availability of certain amounts of money at the right moment has determined a decrease in production expenses. Thus, in agriculture, due to the advance payment of agricultural works, the beneficiaries have been able to avoid the payment of interest related to the works carried out with credit money or to avoid any non-profitable contracts. However, one may not talk about negotiation due to the inflexibility and poor development of the agricultural market. The data from the two waves of research indicate a general trend of reduction of the proportion of beneficiaries of RFP micro-credits that adopted various profitable practices in the last six months compared to the period of one year prior to the first measurement, while in case of non-beneficiaries these proportions were maintained at approximately the same level. There are some significant differences between the two groups, but the aggregate data do not support the tested hypothesis. As it regards the expected effect on the formalization of relations in the rural economy, the results of the inquiry do not support such hypothesis. The economy of rural households, mostly agricultural, continues to be based on informal relations and practices. Most acquisitions are made in the absence of justifying documents, and the

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participation of agricultural entrepreneurs to the fiscal system by paying taxes and fees is reduced.

1. Effects of RFP micro-credits on beneficiary households

• The beneficiaries of RFP micro-credits have obtained significantly larger incomes in the last year than non-beneficiary households. Still, such differences are not maintained for a longer period of time, so that in the second stage of research, it is found a decrease of beneficiary households’ incomes.

• The beneficiaries of RFP micro-credits have referred to a larger degree to formal loan sources for the investments they made, which indicates a higher access of RFP clients on the financial market.

• The beneficiaries of micro-credits having agricultural businesses have invested in the last year more than non-beneficiaries in constructions, arrangements, gears and equipment for their agricultural businesses. Still, except for investments for the raw materials necessary for agricultural businesses that had increased in the period between the two waves of research, the rest of investments had stagnation or even slight decreases.

• Entrepreneurs that were beneficiaries of micro-credits have purchased more goods of long use in the last year than non-beneficiaries of micro-credits.

• In general, micro-credits have significantly contributed to the increase of beneficiaries’ welfare.

As it regards the companies that were beneficiaries of micro-crediting, they have reported increased incomes to a larger degree than non-beneficiaries. It is found that business practices associated to the increase of profitability – increase of the number of clients/sales, extension of activity, and introduction of new products – are more frequent within beneficiaries. Still, for the last 6 months, the beneficiaries of micro-credits and non-beneficiaries have achieved fewer changes meant to bring a plus of profitability to the business. The beneficiaries have achieved more investments at business level, both at the moment of the first stage of research, and at the moment of the second stage. In terms of evolution in time, for all types of investments, except for the acquisition of raw materials, it is found the reduction of expenses for investments. In case of beneficiaries, they have referred to a larger degree to bank credits for achieving their investments.

2. Effects of RFP micro-credits on beneficiary companies

• For more than half of the companies that were beneficiaries of credits by RFP the sums borrowed were the largest of this type in the last 5 years.

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• The companies’ beneficiaries of micro-credits have reported increased incomes to a larger degree than beneficiaries.

• Business practices associated to the increase of profitability – increase of the number of clients/sales, extension of activity, introduction of new products – are more frequent within beneficiaries, in both waves of research. Still, for the last 6 months, the beneficiaries of micro-credits and the non-beneficiaries have made lesser changes meant to bring a plus of profitability to the business.

• The beneficiaries have made more investments both at the moment of the first stage of research, and at the moment of the second stage. In terms of evolution in time, for all types of investments, except for the purchase of raw materials, it is found the reduction of the frequency of expenses for investments. In case of beneficiaries, they applied to a larger degree to bank credits for achieving their investments.

For micro-crediting component were identified a series of recommendations which shall be considered in the future projects development:

Rising the maximum crediting threshold up to US$25,000 Flexibility in redistributing the resources among various regions Including the purchase of buildings and lands within eligible activities Granting the credits in due time Creating a viable system for guaranteeing the credits, as the quality of collaterals

is quite low in the rural environment. Supporting the cooperation with the Rural Credit Guarantee Fund

Creating an exchange for agricultural products so that entrepreneurs can sell their products at the best price

Better advertising through the national stations, even from the initiation of the project

The launch of a future project should also be accompanied by technical assistance for financial institutions implementing the project for the following aspects: specificity of the product, administration of credits, marketing and sale of such specific products

Benefits at community level At the community level, the most important benefit of the Rural Financing Program is a better level of employment of seasonal work force in agricultural activities. Also, the credit granting procedures have contributed to a higher level of formality of income-generating activities, at least through the producer certificates requested. The community involvement, such as donations or volunteer work is very much reduced. The only donations are targeted to the church and seldom to the school, all these being motivated by individual reasons or obtaining resources and not for the community well being.

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Benefits at company level At company level the surveys confirmed the fact that RFP beneficiaries, regardless of the type of funding they were beneficiaries of, are different from non-beneficiaries by a higher level of investments in fixed assets. In the same time RFP beneficiary companies have a wider access on the financial markets, as they support their investments by credits to a larger degree than non-beneficiary companies. Such companies also register a better financial evolution from the incomes perspective and show a special investment appetite for the purpose of diversification and extension on the market. This fact has another important consequence on social level, which is the creation of new jobs, as the companies’ beneficiaries of leasing and of sub-loans hired during the last year new employees to a larger degree than non-beneficiary companies.

3. Effects of RFP on the beneficiaries of leasing

• In both waves, within beneficiaries several increases of incomes are reported, mainly due to the increase of the number of clients/sales.

• As in the first stage of research, a significantly larger number of beneficiaries of leasing have made much larger expenses for investments compared to those that were not beneficiaries of such funds. In the total investments, most of the companies have allocated funds for buildings, constructions, arrangements, gears and equipment, purchases of raw materials or for means of transportation.

• Although the average increases are in favour of beneficiaries (investments increased by 96% compared to 7.5%), the total average value of investments made by beneficiaries is situated at a significantly higher level than investments made by non-beneficiaries.

• The companies’ beneficiaries of leasing have concentrated mainly upon the extension of activities and the quality improvement and less on the extension on new markets or new types of activities.

4. Effects of RFP on the beneficiaries of sub-loans

• Within beneficiaries increased incomes are more frequent than within non-beneficiaries. As evolution, within beneficiaries it is registered a reduction of the frequency of companies that had increased incomes, while within beneficiary companies the frequency of companies with decreased incomes is decreasing, in favour of companies with incomes that remained at the same level.

• In case of companies’ beneficiaries of sub-loans and of non-beneficiaries, the investments made in the last 6 months are situated at a lower level compared to the last 12 months before the first wave. In case of two types of investments it can be observed a more accentuated decrease of the

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frequency of investments within beneficiaries: investments in gears and equipment and investments in raw materials. The largest differences between beneficiaries and non-beneficiaries are maintained at the chapter of investments in means of transportation.

• In the first stage of the survey it was found that sub-loans obtained within the RFP allowed beneficiaries to extend the production/sale capacity, existing with regard to this aspect a significant difference between the two samples analysed. Still, these strategies can be adopted on short term, so that, in the second wave it is found a reduction of differences between beneficiary companies and non-beneficiary companies. The only aspect that is not marked by a significant decrease of the frequency is represented by the sale of products on new markets.

As it regards the impact of RFP funding on the rural communities, the survey data achieved in localities with beneficiaries of micro-credits do not support the development hypotheses we started from in the evaluation. Micro-credits, as the main crediting form in RFP that reached the villages, seem that were not sufficient to lead to a significant increase of remunerated jobs in the communities of beneficiaries, compared to the ones of non-beneficiaries, the explanation consisting of the fact that small entrepreneurs use mostly the labour force they have available at their household level. Also, no significant effects were identified on the local budgets. And still, the surveys on the beneficiaries of leasing and sub-loans have shown that they hired to a larger degree new employees in the last year, than non-beneficiary companies. From the perspective of surveys achieved we consider that this program has contributed to an important degree to the increase of households and companies access on the financial market, as well as to the development of economic activities in the rural environment. Still, these benefits appear for a short period of time being strongly influenced by the mechanisms generated through policies which have been adopted this time in the economic field, respectively in the agricultural field. 5. The Borrower’s Own Performance during Project Implementation

The Government worked closely with the Bank’s Team during preparation and supervision of the project; however greater timelier responding to current issues, especially in regards to PMU and Treasury Bank during an early stage of the project, could possibly have prevented several delays in its effectiveness and later implementation. The implementing agency, Romania MOPF was supportive throughout the life of the project, despite many subsequent changes in the institution. Reporting to the Bank carried on by the PMU has been done in a timely and professional manner. The Bank Task Team was kept well informed of occurring problems and project’s results; hence all issues could have been addressed and resolved in the most efficient way. In our opinion, the Borrower’s overall performance was satisfactory throughout project implementation, although some delays during the start-up phase that could have been avoided.

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6. Evaluation of the performance of the World Bank The project benefited from the close supervision of the Bank which proved to be very effective in providing support and assistance. The Bank’s project team has provided all necessary advice and guidance in all punctual or general implementation matters. The Bank has been very cooperative especially when accepting the extension of the project’s closing date twice, with the view to support beneficiaries in achieving the project’s objectives.

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Annex 8. Comments of Co-financiers and Other Partners/Stakeholders All the participating SPs stressed the importance of the RFP in the process of reinforcing the MFIs in Romanian market, especially at its beginning when the micro-finance industry was still in infancy. The participation in the project was a significant step in the development of MFIs as it helped them establish new offices; spread their outreach in rural areas and increase credit awareness. Comments received from CDE (Service Provider) From an organizational point of view, the RFP helped CDE enlarge its client base and, thus, building on sustainability. Moreover, during the first part of 2008, CDE is going to convert into a non-banking financial institution, and the gradual transfer of the clients towards the new institution can be considered as a continuation of the project. As regards to the CDE clients, there is a certain degree of satisfaction of their clients mostly related to the access to the micro-loans made available under the RFP. CDE considers that the focus group (rural entrepreneurs) was 100% touched upon, as CDE operated the program in rather small rural communities. However, during the last year of operations the maxim size of the credit (US$7,500) was insufficient on one hand because of the devaluation of the USD and, on the other hand, because of the increased demand. CDE also appreciated the cooperation with the PMU. They had no major problems, either administrative or operational and consider that the PMU provided its full support in smoothing the operations and promptly resolving the issues raised during the project implementation.

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Annex 9. List of Supporting Documents (from IRIS)

1. Project Appraisal Document, World Bank, March 2001 2. Romania: Country Assistance Strategy, World Bank, May 2001 3. Romania: Country Partnership Strategy, World Bank, May 2006 4. Financial Markets, Credit Constrains and Investment in Rural Romania,

World Bank, Report No. 19412-RO 5. National Rural Development Programme, Ministry of Agriculture and

Rural Development, February 2008 6. Implementation Completion Report, Ministry of Agriculture and Rural

Development, October 2007 7. Social and Economic Impact of Rural Finance Project – Qualitative and

Quantitative Research Report, REMACO Consulting, October 2006 8. Monitoring and Evaluation Report of the Rural Finance Project, Qarterly

Reports, REMACO Consulting, 2006 – 2007 9. Final report regarding the impact assessment methodology for the Rural

Finance Project, REMACO Consulting, May 2006 10. Pre-survey Report on Rural Financial Services Surveys, REMACO

Consulting, July 2006 11. Qualitative Assessment Report on the Impact of the Rural Financing

Program - Micro-crediting Benefits, REMACO Consulting, December 2006

12. Monitoring and Evaluation of the Rural Finance Project - Final Report, REMACO Consulting, July 2007

13. RFP Project Management Unit. Quarterly Progress Reports

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MAP