Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 17309

IMPLEMENTATION COMPLETION REPORT

PORTTJGAL

TRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT

LOAN 3035-PO

January 12, 1998

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY E(2UIVALENTS

Currency Unit = Portuguese Escudo (Esc).I Conto = 1000 Esc

US$1 Esc.1988 = 145.01989 = 149.81990 = 133.61991 134.11992 = 146.81993 = 176.81994 = 159.11995 = 149.41996 = 151.4

January-September 1997 = 174.0

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

ARC Agrarian Regional CouncilCCAM Caixa de Credito Agricola Mutuo (Mutual Agricultural Credit

Banks)CCRN Comissao de Coordenacao da Regiao do Norte (Coordination

Commission of the Northern Region)FAO-CP Cooperative Programme, World Bank/FAODGHEA Direccao Geral de Hidraulica e Engenharia Agricola

(General Directorate of Hydraulics and Rural Engineering)DGRN Direccao Geral de Recursos Naturales (General Directorate of

Natural Resources)DRATM Direccao Regional da Agricultura de Tras-os-Montes (MAPA

Regional office)EEC/EU European Economic Community/European Union

EDP Electricidade de Portugal (Portugal Electricity Company)ERDF European Regional Development Fund

FEOGA European Agricultural Guidance and Guarantee FundFENACAM Federacao Nacional das Caixas de Credito Agricola Mutuo

FES The European Social FundGAE Gabinete de Apoio Empresarial (Office of Entrepreneurial

Support)GAT Gabinete de Apoio Tecnico (Office of Technical Support)GOP Government of Portugal

IAPA Instituto de Apoio a Transforrnacao e a Comercializacao dosProductos Agro Alimentares (Institute for the Marketing ofAgroindustrial Products)

Vice President Johannes Linn, ECAVPCountry Director Kenneth G. Lay, ECCO5Sector Director Kevin Cleaver, ECSRESector Leader John Hayward, ECSREResponsible Team Gottfried Ablasser (ECSRE), Paul Harrison (Consultant)

FOR OFFICIAL USE ONLY

IDARN Instituto para o Desenvolvimento da Agricultura da Regiao doNorte (Institute for the Development of Agriculture in theNorthern Region)

IFADAP Instituto Financeiro de Apoio ao Desenvolvimento daAgricultura Portuguesa (Portuguese Agricultural DevelopmentFund)

INIA Instituto National das Investigacaos Agricolas (NationalAgricultural Research Institute)

MAPA Ministerio da Agricultura, Pescas e AlimentacaoNCC National Coordination CouncilOED Operations Evaluation Department of the World Bank

PAMAF Programa de Apoio a Modernizacao Agricola e Florestal(Program for the Support of Agriculture and ForestryModernization)

PBI Participating Banking InstitutionsPEDAP Programa Especifico Europeu para o Desenvolvimento da

Agricultura Portuguese (Special Program for the Developmentof Portuguese Agriculture)

PAU Project Administration UnitPEU Project Evaluation Unit

PIDDAC Programa de Investimentos e Despesas de Desenvolvimento daAdministracao Central (Program of Development Investmentsand Expenditures of the Central Administration)

ROP Republic of PortugalTOM Tras-Os-Montes

UTAD University of Tras-os Montes and Alto DouroUA Evaluation Office of UTAD

PORTUGAL FISCAL YEAR

January I to December 31

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

IMPLEMENTATION COMPLETION REPORT

PORTUGAL

TRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT (LOAN 3035-PO)

Contents

Page No.

Preface ii

Evaluation Summary iii

Part I. Project Implementation Assessment I

A. Statement/Evaluation Of Objectives IB. Achievement Of Objectives 2C. Implementation Record and Major Factors Affecting The Project 3D. Project Sustainability 6E. Bank Performance 7F. Borrower Performance 8G. Assessment Of Outcome 8H. Future Operation 91. Key Lessons Learned 10

Part Ii. Statistical Tables 11

Table 1: Summary Of Assessments 12Table 2: Related Bank Loans/Credits 13Table 3: Project Timetable 14Table 4: Loan Disbursements: Cumulative Estimated And Actual 14Table 5: Key Indicators For Project Implementation 15Table 6: Key Indicators For Project Operation 15Table 7: Studies Included In The Project 16Table 8a: Project Costs 17Table 8b: Project Financing 17Table 9: Economic Costs And Benefits 18Table 10: Status Of Legal Convenants 20Table 11: Compliance With Operational Manual Statements 22Table 12: Bank Resources: Staff Inputs 22Table 13: Bank Resources: Missions 22

Appendices:A. Mission's Aide-memoireB. Borrower Contribution to the ICRC. EU Programs in PortugalD. Map 21268R

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IMPLEMENTATION COMPLETION REPORT

PORTUGAL

TRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT(Loan 3035-PO)

PREFACE

This is the Implementation Completion Report (ICR) for the Tras-os-Montes RegionalDevelopment Project in Portugal, for which Loan 3035-PO in the amount of US$90 million equivalentwas approved on April 11, 1989 and made effective on February 20, 1990.

The loan was closed as scheduled on June 30, 1997 and the final disbursement took place on July11, 1997. Between 1993 and 1997, a total of US$59.29 million was canceled. The project was the lastBank-financed project completed in Portugal.

The ICR was prepared by Gottfried Ablasser, Rural Development and Environment Unit, Europeand Central Asia Region, and Paul Harrison (Agricultural Economist), with contributions from FrancoLucca (Financial Analyst). It was reviewed by Joseph Goldberg and John A. Hayward, Sector Leaders,Rural Development and Environment Unit, and cleared by Kenneth G. Lay, Country Director (ECC05).

Preparation of the ICR began during the Bank's final supervision mission in May 1997. The ICRis based on the findings of an ICR mission, which visited Portugal in October 1997 and on informationobtained from the project files. The borrower prepared its own assessment of the project performance. Acopy of the Aide-Memoire of the ICR mission is attached as Appendix A. The draft ICR was sent to theborrower for review on November 12, 1997, but no comments have been received.

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IMPLEMENTATION COMPLETION REPORT

PORTUGAL

TRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT(Loan 3035-PO)

EVALUATION SUMMARY

Introduction

I. This project was a follow-up to the Tras-os-Montes Rural Development Project (TMRDP) (Loan21 75-PO) which had been successfully implemented. It was prepared after Portugal joined the EEC/EUand it was intended to complement the availability of EU funds in one of Portugal's less developedregions. In view of Portugal's impending graduation, it was expected to be the Bank's final agriculturalproject in the country. The project was appraised during two missions in July and October 1988. Theloan was negotiated in March, presented to the Board in April and signed in October 1989.

Project Objectives

2. The principal project objectives, which were both relevant and realistic, were the transformationof agriculture in the Tras-os-Montes (TOM) region into a smaller but more efficient sector, promotion ofvalue added through an expanded and more entrepreneurial agroindustrial sector, and an improvement inthe regional economy encompassing both growth and a diminution of regional imbalances.

3. The project included the following components: (a) strengthening of basic agricultural services;(b) provision of term-credit for modernization of agroindustries and replanting of 5,000 ha of existingvineyards for Port wine; (c) rehabilitation of 210 small traditional irrigation schemes and construction ofabout 16 new medium size irrigation schemes; and (d) construction and rehabilitation of ruralinfrastructure. The project was coordinated by a Project Administration Unit under the existingCoordination Commission for the Northern Region (CCRN) based in Porto.

4. The broad objectives of the project are being achieved as economic performance for the regionoverall has improved. The project itself however made only a limited direct contribution to achieving theobjectives. Total project cost finally amounted to US$95.4 million and absorbed US$30.7 million ofBank funds compared with the appraisal estimate of US$415.8 million of which the Bank was to financeUS$90.0 million. This was intended to be complementary to some US$210 million of EEC resources.Through project implementation, however, the expected GOP/EEC expenditures within the project didnot materialize at the rate envisaged at appraisal. Increasing demand by other regions and the decision tofinance certain components by other means resulted in a substantial shortfall in the achievement of theproject's physical objectives.

Implementation Experience and Results

5. Agricultural research activities supported under the project were felt to have been reasonablywell implemented, although there were early problems of ineffective linkage between farmers perceivedneeds, the research carried out, and extension. Most of the work concentrated on crops well-suited to theregion. The extension component did not operate as originally intended because the availability of

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substantial EU grant funds for agricultural development involved extension workers in considerableadministration concerned with project financing.

6. Credit, which moved slowly under the project from the beginning, was not attractive to thefinancial intermediaries. At appraisal, it was agreed that project funds would be on-lent at a rate whichonly allowed intermediaries a spread of 1.5%, later adjusted to 2%. This was considered by the financialintermediaries as being too low. Demand for credit under the project was also much lower than had beenanticipated at appraisal as a result of crowding out by grant funds, persistent drought and high nominaland real interest rates. In all, 31 subloans were made totaling about US$7.7 million and supportinigUS$21 million of investment. The project financed virtually none of the planned 5,000 ha of Port winevineyards. With the credit component moving slowly and its cost to Government being perceived byTreasury as higher than borrowing from alternative sources, the balance of the credit component (US$27million) was canceled in 1994.

7. Irrigation development under the project took place at less than half of the rate planned initially.Unit costs were high, US$13,300/ha for new medium-sized schemes compared with an appraisal estimateof US$9,800/ha. None of these medium-sized schemes was in the potentially most productive TerraQuente zone. Farmers are slow in taking up new irrigation and have not responded well to theopportunity to change their farming systems to incorporate more intensive cropping patterns. Reasons forthe poor implementation performance are thought to be small sized and fragmented farms, aging farmers,lack of knowledge of alternative crops and limited commercial opportunities to sell higher valuehorticultural crops. Despite this, no problems have been encountered with the collection of user fees formaintenance. Rehabilitation of traditional schemes totaled 4,549 ha on 104 separate schemes. Averagecost per hectare was about US$1,800 compared with appraisal projections of 10,500 ha on 220 schemesat US$1,300/ha. Implementation of this component has proceeded satisfactorily and because some sort ofscheme had previously existed, farmers are able to make use of thie irrigation water to improve cropyields and cropping intensity.

8. Agricultural roads were constructed at about forty percen t of the rate envisaged at appraisal andthe general impression is that the implementation was satisfactory. The rural electrification program wasimplemented as planned in financial terms. At appraisal, it had also been envisaged that the projectwould involve park roads, municipal roads, village streets, water supply and sanitation. By the time theproject started, it became clear that these types of investments coLild attract favorable financing undergrant conditions from the EEC/EU using another facility, consequently project funds were not used forthese activities.

9. Studies financed under the project exceeded appraisal expectations and covered agriculturalresearch, irrigation project preparation, basic studies and evaluation studies. Agricultural research andbasic studies were mainly carried out by Portuguese academic inslitutions or academic consultants, whileirrigation project preparation work was commissioned from engineering consultants. The evaluationwork focused on relatively narrow subjects selected in agreement with CCRN and DRATM and was notthe comprehensive exercise envisaged at appraisal that would have facilitated a thorough impact analysison completion. Nevertheless, both DRATM and CCRN perceived the project as being extremely usefulin the area of studies.

10. The key and interlinked factors which negatively affected project outcome were: (i) the apparentlack of GOP commitment to the project as evidenced by its omitting several components completely andnot budgeting investment funds at the levels agreed at negotiations. This resulted in a shortage ofcounterpart resources to finance the infrastructure components. Furthermore, even when funds were

budgeted, there were problems with late releases, which resulted in construction slow downs; (ii)Portugal's accession to the EEC/EU gave it increasing and cheaper access to capital markets, resulting inBank money being perceived as expensive. This was clearly a disincentive to GOP to press on with thisproject in that by doing so they would have been obliged to draw down more (expensive) Bank funds;(iii) the lack of Bank and GOP determination to promptly modify the project design once it was realizedthat the disbursements were too slow; and (iv) Treasury's refusal to permit financial intermediaries to useproject funds at spreads of more than 2%, which was not sufficient to cover operating costs. Mixing ofEU grant funds with loaned bank funds for infrastructure development when the major share was grantdid not work well. This project's design had been based on an assumption of close cooperation betweenthe Bank and the EEC/EU which would have required intensive supervision and follow up efforts by theGovernment and Bank. Unfortunately this did not happen.

11. Investment works completed under the project are sustainable. Maintenance of rural roads andelectricity will be handled using systems which are in place. The rehabilitated traditional irrigationschemes are expected to be correctly maintained because farmers appreciate the value of water andmanagement of the medium-sized irrigation schemes constructed under the project is still in the hands ofthe DRATM which has O&M co-responsibility with WUAs during an eight-year adaptation period.Farmers are already paying their water charges at rates designed to cover maintenance costs plus a 15%contribution to capital investment. Given that the schemes are financially attractive to farmers noproblems are foreseen in maintenance. Private commercial investments under the credit component ofthe project were for a range of business activities and there is every reason to assume that on averagethese would be sustainable.

Bank and Borrower Performance

12. Bank performance was unsatisfactory. The Bank failed at the project design stage and duringimplementation to adequately analyze past experience or apply lessons learned, such as Government'sfalling interest in using Bank loan funds, difficulties in blending grant and loan funds, and shortcomingsin the predecessor project in the areas of new irrigation schemes, research and extension, rural credit andproject monitoring and evaluation. The Bank's expectation that the discipline and methodologyassociated with a Bank-financed project would promote absorption of EEC grant funds could not berealized. Failure to adequately assess the country/project environment at appraisal resulted in a sub-optimal design of the project with too many components, and in an over-sized Bank loan. The Bankshould not have proceeded with the credit component given the inadequate onlending interest margin forparticipating financial institutions. Furthermore, poor progress during implementation in the face of thegrowing inflow of EU grant funds should have prompted the Bank to greatly restructure and downsize, orclose, the project around 1993-94 rather than simply canceling part of the loan. During implementationthe Bank did not assure staff continuity or provide sufficient budget for the necessary level ofsupervision, especially after 1993 when supervision intensity was reduced sharply.

13. On the borrower's side, project implementation benefited from very competent staff, most ofwhom were fully involved from the beginning of preparation and throughout the implementation period.Nevertheless, borrower performance was less than satisfactory and the principal shortcoming was thefailure to utilize Bank and EU resources in a complementary fashion. The borrower's strategy focusedprimarily on maximizing draw down of EU grant funds and their commitment to the project declinedsteadily. Deviations from SAR arrangements and formal agreements came without proper projectrestructuring, causing implementation problems throughout the project period. Treasury's reluctance toallow a sufficient internediation margin for local financial institutions was largely responsible for failureof the credit component. Similar to the Bank, the borrower also did not adequately observe the lessons

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from earlier projects. The earlier shortcomings in monitoring and evaluation and in effectively applyingresearch results at the farm level were not adequately addressed under this project.

Assessment Of Outcome

14. The project took place in an environment where many of it objectives were being achieved, butlargely independent of the project itself. It ended up being far smaller than originally planned and as aresult 66% of the Loan had to be canceled. Growth in regional incomes during the project period meansthat people are generally better off now than in 1988 and there has been a quality of life improvement as aresult of better rural infrastructure. Overall, however, the project was seen by CCRN as being less usefulthan the predecessor project. An economic analysis at completion has been carried out only for irrigationinvestments. The traditional rehabilitation schemes have a good[ likelihood of being economically viable,but the new irrigation schemes are very unlikely to show acceptable economic rates of return because ofhigh investment costs, relatively low uptake of irrigation use and the low value crops grown. Whilerehabilitation of traditional schemes shows an ERR of about 19%0, the new irrigation schemes show anestimated ERR of about 1%. The aggregate ERR for irrigation investments, accounting for 42% of projectcost, was 5%. Nevertheless, both types of irrigation are likely to show good financial returns to farmersbecause farmers' contribution to investments was low.

15. With a substantial proportion of the loan canceled, and the final project being only 21% of itsplanned size, the project clearly did not turn out as expected. This, coupled with an unacceptable ERR toirrigation and the relatively poor performances of both Bank and Borrower has resulted in the projectbeing rated as unsatisfactory.

Future Operation and Lessons Learned

16. The ongoing program of rehabilitating traditional irrigation schemes and constructing ruralinfrastructure was expected to continue at the current pace at least until 1999 under programs supportedby the EU and Government. Future operation related to project activities will be the responsibility of theconcerned agencies in the public and private sectors.

17. The lessons learned are as follows: (a) Portuguese authorities were near-unanimous in stressingthat Bank loans and EU grants should not be mixed under one project as such practice will inevitably leadto marginalizing of Bank funds. This experience warrants the co,nclusion that cofinancing arrangementswith a high proportion of grant funds and only a very small proportion of Bank loan funds should beavoided. Moreover, when a project involves mixed funding from a Bank loan and grants, special careshould be taken to ensure that the recipient intends to utilize both sources of funding in a complementary,not competing manner. (b) When the loan disbursement percentage is too low, interest in the borrowingcountry becomes minimal, as the Bank's requirements for using loan funds are considered not worth theeffort. (c) In the wake of macroeconomic improvements in Portugal in the early 1990s the country gainedaccess to non-grant financing sources, which the authorities considered to be preferable to World Bankloan funds. In such an event, early restructuring of the project is desirable. (d) Countries eligible forutilizing EU structural funds should prepare comprehensive, agreed regional development plansencompassing the entire target area in the country prior to release of such funds or contractingcomplementary financing from other sources. Failure to do so will likely cause subsequent difficulties inbudget planning as shifting political and economic priorities overtake earlier local or regional planscompleted in isolation. (e) Pre-project analysis, especially in countries nearing "graduation" from theBank, not only should incorporate experience with predecessor projects, but include a review of the entirecountry portfolio in search of signs for borrowers' changes in handling Bank loans and weakening of

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their ownership and commitment. (f) As identified earlier weaknesses are likely to occur again in repeaterprojects, special monitoring instruments and action triggers should be incorporated in the latter as aprecautionary measure and followed closely by supervision missions. (g) Careful review of the likelyeconomics of investments such as irrigation, should be made on the basis of models or average figures,prior to contracting detailed design studies, and current Bank practice in this respect should be reviewed.(h) In line with current Bank practice, credit projects/components should not be approved unlesssufficient demand by sub-borrowers for credit at market interest rates and willingness of financialintermediaries to participate have been conclusively demonstrated. (i) The Bank should not reducesupervision intensity in problem projects after the mid-term in anticipation of the nearing Closing Date,but rather seek rigorous early restructuring or advance closing (consistent with current Bank policy).

PROJECT IMPLEMENTATION COMPLETION REPORT

PORTUGAL

TRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT

LOAN 3035-PO

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Statement/Evaluation Of Objectives

1.1 The principal project objectives were: (i) transformation of agriculture in the Tras os Montes(TOM) region into a smaller but more efficient sector, principally focused on the most productive areasof Chavez, Terra Quente and the Douro Valley; (ii) promotion of value added in agriculture through anexpanded agroindustrial sector based on improved processing and marketing and mobilization ofentrepreneurial skills; (iii) achievement of steady economic growth in the region, a reduction of regionalimbalances in employment and an increase of regional family income.

1.2 These objectives were important and realistic. The need to establish a smaller and more efficientand productive agriculture was clearly recognized by the Government. Because TOM is not a highlyfertile region and does not have an ideal climate, it is inevitable that efficiency improvements imply sizereduction and require focus on the best potential areas within the region. The Project was aimed atfacilitating the integration of TOM's agriculture into the EEC agricultural market by making the best useof the area's natural resources and comparative advantage.

1.3 The specific focus on agroindustry and improved processing and marketing as a means to raisevalue added is well justified, given the parallel improvement in access to the area and the increasedmarketing opportunities for TOM products. It was reasonable to expect a far greater Value Added toCapital Invested ratio from improving the underdeveloped agroindustrial system than from blanketagricultural investment. Improvement in the agroindustrial marketing and processing sector wouldrequire mobilization of entrepreneurial skills and the provision of capital both of which could be providedeffectively through this type of project.

1.4 Because per capita income in the region was low in Portuguese terms (about 42% of the nationalaverage in 1987) focusing on increasing standards of living and regional income was appropriate.Furthermore, the increased employment objective is an important element of the policy of revitalizing theregion and halting the trend towards an aging and declining population.

1.5 The project as appraised was quite complex and intended to use the following main componentsto address its objectives: (a) strengthening of basic agricultural services (research, extension andplanning) by reorganization, staffing and the provision of equipment and vehicles; (b) provision of term-credit for (i) modernization of agroindustries and the establishment of private SME agribusiness andrural service enterprises, to improve input supply, marketing services, and business activity in general;(ii) replanting of 5,000 has of existing vineyards for Port wine; (c) rehabilitation of 210 small traditionalirrigation schemes and construction of about 16 new medium size irrigation schemes, two of which alsoinvolved water supply; and (d) construction and rehabilitation of rural infrastructure including roads,water supply and sewerage; electrification and development of national and natural parks.

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1.7 This project was a follow-up to the Tras os Montes Rural Development Project (TMRDP) (Loan2175-PO) which had been successfully implemented and resulted in the rehabilitation of 150 irrigationschemes, rural roads and municipal streets, class rooms for village schools, and plantation of Port winevineyards. There was however a fundamental difference between the two projects - in the first, Bankfinancing was directly complementary to GOP resources, while by the time of this project, Portugal was amember of the EEC and the recipient of heavy funding. Consequently, for most investments under thisproject, the main financier was the EEC/EU, using widely applicable grant funds, while the Bank'sproject specific loaned resources were essentially top up finance. Given the relative importance and costof these resources (over the period of the project, Portugal received some ECU 20 billion of EECIEUgrant finance, compared with US$160 million from the Bank), the key ministries involved with projectimplementation focused on optimum use of overall grant resources rather than strict adherence to theproject as designed. While the project objectives were sound, the project design and managementstructure did not have the power or influence to ensure that project components were implemented at therate which had been intended at appraisal.

B. Achievement Of Project Objectives

2.1 The macroeconomic objectives of the project, which encompass achievement of steady economicgrowth in the region, a reduction of regional imbalances in employment and an increase of regionalfamily income, are being achieved. Economic performance for the region overall has improved. Since1988, GDP growth for the country as a whole has averaged a respectable 2.7% p.a. and the regionaldisparities have been reduced to the extent that TOM's GDP per capita is now more than 50% of thenational figure, up from 42% in 1987. Sector objectives are also largely being met. Agriculture isbecoming more focused, although some of the project irrigation investments were in the less productiveTerra Fria zone, which was not one of the more productive areas defined at appraisal (para 1.1). Therehas been ongoing investment in agroindustry in the region, although there is a considerable perceivedneed for further commercialization, particularly for higher value crops.

2.2 The project itself however made only a limited direct contribution to achieving the wide rangingmacro economic and sector objectives which it was intended to fulfill, largely because of its final smallsize. At appraisal the estimated project investment cost was about Esc. 66.9 billion (US$415.8 million) ofwhich US$116.6 million represented the foreign exchange component and the Bank was to finance US$90.0 million. The final project expenditures amnounted to only Esc. 14.3 billion (US$ 95.4 million) Theassumption at appraisal and the agreement reached at negotiations was that EEC resources would finance51% of project cost. The Bank Loan of US$90 million (22% of project cost) was intended mainly tocomplement EEC resources and also to provide resources for agricultural credit. The balance of projectcosts were to have been financed: 12% by GOP; 6% by sub-borrowers as equity contribution and 9% byfinancial intermediaries. Through project implementation, however the expected GOP/EEC expenditureswithin the project did not materialize at the rate envisaged at appraisal. Increasing demand by otherregions and the decision to finance certain items (water and sewage, village streets, municipal roads andother infrastructure) by other means resulted in much lower levels of project activity and hence asubstantial shortfall in its achievement of its physical objectives.

2.3 The project's physical and financial objectives for private agriculture and agroindustry whichwere to r esult from credit were also not met. Only US$21 million of investments were financed by theUS$7.7 million credit, compared with US$153 million (using US$35 million credit) envisaged atappraisal. As a result, the project financed virtually none of the planned 5,000 ha of Port wine vineyards.

2.4 The project did not have specific environmental, poverty reduction, or social objectives, althoughthrough its support for applied research, particularly for tree crops and rehabilitation of defunct irrigationschemes and agricultural investment, some of which was job creating, it can be expected to have made amodest contribution to the environmental status of the region and the level of employment (hence povertyreduction). The project has contributed in a minor way to public sector management through itsstrengthening of agricultural extension and research. It has also had a limited but positive impact onprivate sector development through support for the activities of the rural financial cooperatives (CCAMs)and through strengthening the business support offices (GAEs) in the project area.

2.5 The overall project impact however was much less then expected due to scarcity of counterpartfunds. A smaller then planned, but still significant part of the infrastructure component of the project canbe considered to have happened on account of the Bank loan. Most of the project objectives werereached nonetheless, because the access of Portugal to the EEC/EU had made flow of capital and increasein export trade major elements of transformation of the project area.

C. Implementation Record and Major Factors Affecting The Project

3.1 Project Appraisal and Organization. A Bank appraisal mission visited Portugal in July 1988.Its task was completed by a post appraisal mission in October 1988. The loan was negotiated in March,presented to the Board in April and signed in October 1989. The responsibility for project coordinationwas entrusted to the Project Administration Unit under the existing Coordination Commission for theNorthern Region (CCRN) based in Porto. The project was executed as follows: (i) the RegionalDirectorate of the Ministry of Agriculture (DRATM) was responsible for the agricultural components(irrigation, vineyards establishment, rural roads and electrification and agricultural services and DRATMinstitutional development); (ii) CCRN directly coordinated the rural infrastructure component (municipaland feeder roads, water supply, sewerage), the strengthening of the enterprise assistance services (GAEs),and the technical assistance services (GATs); (iii) the agricultural credit component was implementedthrough the Central Bank Agricultural Discounting Agency (IFADAP), the Federation of AgriculturalSavings Cooperatives (FENACAM), and individual agricultural savings cooperatives (CCAMs) andPBIs; and (iv) the University of Tras os Montes and Alto Douro (UTAD) was responsible for projectmonitoring and evaluation.

3.2 Implementation indicators and project costs are shown in Tables 5 and 8A, respectively, and asummary of the implementation experience of individual project components is set out below.

3.3 Agricultural Research supported under the project was felt to have been reasonably successful.It was largely implemented at six research stations which were expanded under the project but alsoinvolved contracted out studies. The lack of an effective linkage between farmers' perceived needs, theresearch carried out, and subsequent extension was identified during early supervision missions andagreement was reached with DRATM to rectify this. As a result, since 1992 the work has concentratedon applied research for crops well-suited to the region with the primary focus on chestnuts, almonds andalternative crops. A specific study on irrigated production was also carried out using internationalconsultants. A list of the studies carried out on applied agricultural research is given in Table 7.

3.4 Extension Services were supported by the project, although the initial objective of gettingextension staff away from undertaking administrative work and continuing with the implementation of aT&V system, did not work. The availability of very substantial EU funds for agricultural developmentinevitably involved extension workers in considerable administration concerned with project financing.In line with their position at the time of the PCR for the TMRDP (Loan 21'75-PO), DRATM continued to

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view the T&V system as inappropriate to the very varied circurnstances of the region. Although fundingflowed to this component, the systemic changes, envisaged at appraisal were not implemented and lessthan the planned number of extension workers were recruited. This was in part due to Government'sdecision in 1991 that, over time, the extension function would be transferred to the private sector,particularly cooperatives. The project also strengthened DRATM's co-operative services and enterprisedevelopment centers through providing specialist staff and support such as vehicles.

3.5 Credit which moved slowly under the project from the beginning was not attractive to thefinancial intermediaries. At appraisal, it was agreed that project funds would be on-lent to sub-borrowersat a rate which was 2% below the medium term interest rate and that the financial intermediaries (FIs),who were taking the commercial risk would receive a spread of 1.5%. This was well below the minimumacceptable level which the Fls considered to be at least 4%, and Treasury amended its agreements withthem to permit a spread of 2%, by raising the onlending rate to sub-borrowers. As this was still notadequate the Bank sent a special mission in 1992 to review the situation and as a result Bank managementrecommended to Government that a maximum spread of at least 4% should be allowed. This proposalwas not accepted by Government, and so making loans under the project remained unattractive, ingeneral, to the FIs. It was only in their interest to use project funds for large old clients whereincremental administrative costs would be low, risks negligible and goodwill could be generated.

3.6 Demand for credit under the project was much lower than anticipated at appraisal. Unlike creditunder TMRDP, loans under this project for vineyard development did not also assure the borrower ofadditional trade association quota. Furthermore, because credit was typically provided as top-up financefor projects hoping to receive up to 75% grant finance, potential borrowers were reluctant to slow downthe implementation of their projects or increase the risk of refusal by involving credit. This is becauseintroducing a credit element would have involved additional review by institutions different from thoseresponsible for approving grants. Finally the period of credit availability (1990-1993) coincided withboth a period of severe drought and interest rates which were high in both nominal and real terms (about16.5% nominal and 7% real in 1992).

3.7 Most of the credit disbursed under 31 subloans of the project went for agroindustry, virtuallynone went to agriculture. This was probably because (i) the percentage level of EU grant funding to agroindustry was generally lower than to agriculture; and (ii) loan size was larger and so making the loan wasless unattractive to FIs. Agricultural investments supported by the project amounted to under US$1million, compared with an appraisal estimate of US$93 million. Agricultural loans involved included 12loans of average size US$23,000 for vineyards, one loan of US$1,200 for almonds and 2 loans of averagesize US$I 1,000 for machinery. Agroindustrial investment supported by credit amounted to about US$19million, compared with an appraisal estimate of US$60 million. Lending comprised 15 loans of averagesize about US$350,000 for investments in machinery and other items for processing and packing facilitiesincluding milk, wine, olive oil and chestnuts. Because of the lack of demand for investment credit,attempts were made to utilize more of the credit line under the project through amending the relevantagreements so as to allow these funds to be used by producers for the finance of Port wine stocks at atime when the shippers were reluctant to buy. This move had only limited success, probably because theincrease in world prices of the product in 1993 and the small crops as a result of the recent drought madeit more attractive again for the shippers to buy and so producers avoided needing to take the storage riskthemselves. In the event, one loan of US$1.1 million was made for this purpose.

3.8 With the credit component moving slowly and its cost to Government being perceived byTreasury as higher than borrowing from alternative sources, the balance of the credit component (US$27million) was canceled in 1994. Monitoring of the credit component of the project, which the appraisal

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envisaged would be the responsibility of IFADAP's regional office, was virtually non existent and it wasnot possible to review the financial and economic analysis or any other records of the sub-projectsfunded. Nevertheless, it is understood that repayment of project credits by the sub-borrowers has beensatisfactory, and at IFADAP headquarters it was confirmed that none of the FIs were in arrears toIFADAP with regard to this project.

3.9 Irrigation development under the project took place at less than half of the rate planned initially.A total of about 2,155 ha of land was irrigated on 7 medium-sized schemes compared with a planned6,350 ha on 18 schemes. Two of the medium-sized schemes (Chaves Block I and Estevainha) wererehabilitations of existing schemes, totaling 1,240 ha at an average cost per ha of about US$11,000/ha,including a share of the cost of the new Chaves dam, which is yet to be finished. The five new schemesconstructed under this project totaled 915 ha at an average cost of US$13,300/ha. compared with anappraisal estimate of US$9,800/ha. These costs were considered to be on the high side for the physicalworks involved, possibly resulting from lack of keen competition between potential contractors.

3.10 None of these medium-sized schemes were in the potentially most productive Terra Quente zone.Reports from the Evaluation Unit which has intensively studied one of the schemes indicates that farmersare slow in taking up new irrigation and have not responded well to the opportunity to change theirfarming systems to incorporate more intensive cropping patterns. At Gostei, which was probably theworst of the schemes, but the most intensively studied, only about a quarter of the command area wasactually irrigated four years after the system had been completed. Reasons for the poor implementationperfornance are thought to be small sized and fragmented farms, aging farmers, lack of knowledge ofalternative crops and limited commercial opportunities to sell higher value horticultural crops. Despitethis, no problems have been encountered with the collection of user fees for maintenance.

3.11 Rehabilitation of traditional schemes, totaled 4,549 ha on 104 separate schemes. Average costper hectare was about US$1,800 compared with appraisal projections oI 10,500 ha on 220 schemes atUS$1,300/ha. Implementation of this component has proceeded satisfactorily and because some sort ofscheme had previously existed farmers are able to make use of the irrigation water to improve crop yieldsand cropping intensity.

3.12 Rural Infrastructure. Agricultural roads were constructed at about forty percent of the rateenvisaged at appraisal (296 km were started, compared with an appraisal estimate of 690 km) and thegeneral impression is that the implementation was satisfactory. The rural electrification program wasimplemented as planned in financial terms, although the number of connections made was 375 comparedwith 600 estimated at project appraisal. This difference may represent more farm households perconnection. No statistics were available on this. At appraisal, it had also been envisaged that the projectwould involve park roads, municipal roads, village streets, water supply and sanitation. By the time theproject started, it became clear that these types of investments could attract favorable financing undergrant conditions from the EEC/EU using another facility, consequently project funds were not used forthese activities. Nevertheless, implementation of some of these items was undertaken in TOM over thepast eight years, but not as part of this project.

3.13 Studies, Investigation and Evaluation. A total of 62 studies have been financed under theproject. These covered agricultural research (see para 3.3), irrigation project preparation, basic studiesand evaluation studies, including some dealt with under the agricultural research component. A listing isgiven in Table 7. Most of the studies were commissioned by DRATM, UTAD and ICBAS. Agriculturalresearch and basic studies were mainly carried out by Portuguese academic institutions or academicconsultants (with the exception of the irrigation study) while irrigation project preparation work was

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commissioned from engineering consultants. Virtually all of the evaluation studies were undertaken byacademics associated with UTAD. The evaluation work focused on relatively narrow subjects selected inagreement with CCRN and DRATM and was not the comprehensive exercise envisaged at appraisal thatwould have facilitated a thorough impact analysis on completion. Nevertheless, both DRATM andCCRN perceived the project as being extremely useful in the area of studies. They felt that without theproject finance (80% was disbursed against these items) such activities would have gone on at a muchlower level. They felt that an important result of this work was a strong build-up of human capital.Because of this, the size of this component was expanded. Total disbursements against studies andtraining (category 5) amounted to US$5.9 million or about 17% of total disbursements, compared to aninitial allocation of US$2 million. Part of this was against US$3.1 million worth of irrigation designwork. It was not possible to make objective assessments of the benefits of the studies overall, althoughthe areas of applied research focus were appropriate. However in view of the likely non viability of newirrigation schemes, it is probable that some of the studies on irrigation were not economically beneficialin that in most cases, it would not be economically worthwhile implementing the study designs.

3.14 The key and interlinked factors which negatively affected project outcome were: (i) the apparentlack of GOP commitment to the project as evidenced by its omitting several components completely andnot budgeting investment funds (mainly sourced from EEC/EU) at the levels agreed at negotiations. Thisresulted in a shortage of counterpart resources to finance the infrastructure components. Furthermore,even when funds were budgeted (on a calendar year basis), there were problems with late releases, whichresulted in construction slow downs due to resources only becotning available after the autumn rains hadstarted and the optimum construction season had finished; (ii) Portugal's accession to the EEC/EU gave itincreasing and cheaper access to capital markets, resulting in Bank money being perceived as expensive.This may have been a disincentive to GOP to press on with this project in that by doing so they wouldhave been obliged to draw down more (expensive) Bank funds; ,(iii) the lack of Bank and GOPdetermination to promptly modify the project design once it was realized that the disbursements were tooslow; and (iv) Treasury's refusal to permit FIs to use project funds at spreads of more than 2%, whichwas not sufficient to cover operating costs, meant that Fls were not interested in promoting credit underthe project.

3.15 It appears that mixing of EU grant funds with loaned bank funds for infrastructure development,where the major share was grant, did not work well in this case. TMRDP, which had been undertakenearlier with the implementing agency directly benefiting from Bank involvement, worked much betterthan this follow up project. This project's design had been based on an assumption of close cooperationbetween the Bank and the EEC/EU, whose pledged resources were the main counterpart resources to theLoan funds. At the time of appraisal, the EEC was preparing a program involving various financingsources which was expected to cover about 70% of the total investment considered under the project assupporting Regional Development and Integration. Assuring that these funds and the subsequentresources made available for 1994-1999 remained available for sustaining the proposed level ofinvestmnent in TOM would have required intensive supervision and follow up efforts by the Governmentand Bank. Unfortunately this did not happen.

D. Project Sustainability

4.1 Despite the fact that the physical impact of the project on rural infrastructure was limited, due tothe reduced investment, the works completed are sustainable. Matintenance of rural roads would behandled by the municipalities in the same way as infrastructure completed in the former TOM RuralDevelopment Project, which has proved to be sustainable.

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4.2 The rehabilitated traditional irrigation schemes are expected to be correctly maintained becausefarmers appreciate the value of water and have agreed to contribute to the rehabilitated works. Theexpected benefits, resulting from the use of increased quantities of water and from a more agreeablemanagement (night irrigation is no longer necessary), are sufficiently attractive to convince farmers tocontribute to the rehabilitation and maintenance of the schemes as required through their farmer-runWater Users Associations (WUAs).

4.3 Management of the medium-sized irrigation schemes constructed under the project is still in thehands of the DRATM which has O&M co-responsibility with WUAs during an eight-year adaptationperiod. Farmers are already paying their water charges at rates designed to cover maintenance costs plusa 15% contribution to capital investment. Given that the schemes are financially attractive to farmers noproblems are foreseen in maintenance.

4.5 The electrification schemes to link the 30 Kw. national grid to 375 farms or groups of farms werebuilt to the standards of construction applied in the zone by the National Electricity Power Authority(EDP) which also maintains the system, paying for it through electricity charges. This component istherefore sustainable.

4.6 Private commercial investments under the credit component of the project were for a range ofbusiness activities, mainly within the agroindustry sector. Given the sound and expanding economyoverall there is every reason to assume that on average these would be sustainable.

E. Bank Performance

5.1 Bank performance was unsatisfactory. Identification performance is rated as satisfactory because,in 1987, the weaknesses of the predecessor project and implications of EU accession had not yet becomeobvious. But the Bank failed at the project design stage and during implementation to adequately analyzepast experience or apply lessons learned. It had become clear in the 1 980s that there was a change inGovernment's handling of Bank loans resulting from the country's accession to the EEC. Loandisbursement lags began to increase and, during FY84-85, three projects were approved by the Board butnever made effective as Government switched to EEC grants instead. In an earlier report, I it wasconcluded that the Bank "overestimated the attractiveness of its own loan resources in a competitivemarket". In reviewing the Forestry Project (Loan 1853-PO), OED concluded that blending EU fundswith the Bank loan was inappropriate and the Bank should have initiated closure of the loan. 2 Atcompletion of the predecessor project, TMRDP (Loan 21 75-PO), some shortcomings were identifiedwhich had a bearing on the performance of this project, including the non-viability of new irrigationschemes and problems with research and extension, rural credit and project monitoring and evaluation. 3

5.2 The Bank's decision to proceed with this project was based on the relatively satisfactoryperformance of the predecessor project at the time of appraisal (October 1988) and the expectation thatthe discipline and methodology associated with a Bank-financed project would promote absorption ofEEC grant funds. This judgment failed to take into account that the predecessor project was not

I Report 12022, PCN Housing Finance Project, 1993.

2Report 14508, PAR Forestry Project and Tras-os-Montes Rural Development Project, 1995.

3Report 11078, PCR Tras-os-Montes Rural Development Project, 1992.

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cofinanced by EEC grant funds and was mistaken on the point that a Bank project would be beneficial forabsorbing European grant funds.

5.3 Experience with the project warrants the conclusion that failure to adequately assess thecountry/project environment at appraisal resulted in a sub-optimal design of the project with too manycomponents, and in an over-sized Bank loan. It is also clear that the Bank should not have proceededwith the credit component given the inadequate onlending interest margin for participating financialinstitutions allowed by Government. Furthermore, poor progress during implementation in the face of thegrowing inflow of EU grant funds should have prompted the Bank to greatly restructure and downsize, orclose, the project around 1993-94 rather than simply canceling part of the loan.

5.4 During implementation the Bank did not assure staff continuity or provide sufficient budget forthe necessary level of supervision, especially after 1993 when supervision intensity was reduced sharply.Partly for this reason supervision missions were not able to convince Govemment to direct the availableEEC/EU resources specifically for the project. Some doubt must be cast on the justification for theBank's approval of several irrigation studies in 1994 considering the findings of the TMRDP ICR in 1992which had indicated a 2% economic return to new irrigation.

F. Borrower Performance

6.1 Project implementation benefited from very competent staff, most of whom were fully involvedfrom the beginning of preparation and throughout the implementation period. A significant share ofproject achievements is attributable to DRATM's director of agricultural planning. Regional projectmanagement and the municipalities also contributed positively to the project.

6.2 The principal shortcoming on the borrower's side, mainly at the central level, was the failure toutilize Bank and EU resources in a complementary fashion. The borrower should have promoted the useof Bank funds for financing of the share of investments not covered under EU programs in order to instillsound pre-investment analysis and expand overall investments in the region. Instead, the borrower'sstrategy seemed to have focused primarily on maximizing draw down of EU grant funds. Deviationsfrom SAR arrangements and formal agreements came gradually and without proper project restructuring,causing implementation problems throughout the project period. The curtailment of annual budgetaryappropriations for the project is a prime example of this. Non-establishment of the National CoordinationCouncil can be interpreted as an indication of diminished borrower interest in the project after appraisal.In their relations with GOP authorities, Bank staff often found their counterparts non-responsive or veryslow in dealing with important matters. Treasury's reluctance to allow a sufficient intermediation marginfor local financial institutions, reportedly meant to promote greater onlending efficiency, wascounterproductive as it was largely responsible for failure of the ciredit component.

6.3 Similar to the Bank, the borrower also did not adequately observe the lessons from earlierprojects, especially the TMRDP. The earlier shortcomings in monitoring and evaluation and ineffectively applying research results at the farm level were not adequately addressed under this project.Overall, therefore, borrower performance must be considered as less than satisfactory.

G. Assessment Of Outcome

7.1 The project took place in an environment where many of it objectives were being achieved, butlargely independently of the project itself. It ended up being far snmaller than originally planned and as aresult 66% of the Loan had to be canceled. Growth in regional incomes during the project period means

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that people are generally better of now than in 1988 and there has been a quality of life improvement as aresult of better rural infrastructure, which was partly project financed.

7.2 As a result of the private sector support, credit and improved rural roads, coupled with muchimproved access to the region the project has probably had an impact on generating increased trade.Considerable build up of human capital has taken place in the region, including at UTAD which benefitedfrom substantial funding for studies. CCRN has continued to develop its planning and coordination skillsunder the project. However, in this last regard, this project was seen by CCRN as being less useful thanTMRDP because the different financing arrangements meant they had less control over the flow of funds.

7.3 Few of the project's investment activities can be objectively assessed in economic terms. Onlythe irrigation components, which amounted to about 41% of total project investment have been analyzedin this way. The traditional rehabilitation schemes have a good likelihood of being economically viable,but the new irrigation schemes are very unlikely to show acceptable economic rates of return because ofhigh investment, relatively low uptake of irrigation use and the low value crops grown in the Terra Ftiazone where most of these schemes are located. While rehabilitation of traditional schemes (8% of totalinvestment) shows an ERR of about 19%, the new irrigation schemes (33% of project cost) show anestimated ERR of about 1% (see Table 9). Nevertheless, both types of irrigation are likely to show goodfinancial returns to farmers, because only 15% of the capital cost is being recovered as a user fee.Economic returns to the project investments supported by credit (22% of project cost) are unknown, butgiven that subloans are apparently being serviced and the economy is doing we'll, they are likely to befinancially viable at least.

7.4 As indicated in paragraphs 4.1-4.6 the main investments under the project are sustainable,because their cost is now sunk and they are essentially low maintenance.

7.5 With a substantial proportion of the loan canceled, and the final project being only 21% of itsplanned size, the project clearly did not turn out as expected. This, coupled with an unacceptable ERR toirrigation, which was the major investment component, and the relatively poor performances of bothBank and Borrower, has resulted in the project being rated as unsatisfactory.

H. Future Operation

8.1 Although no World Bank funds were committed after December 31, 1996, project operationscontinued with financing from other sources. The Chavez irrigation scheme, Block Il, is being completedwith EU and government funding, but approval had not been given for starting other new irrigationschemes. Rural electrification schemes that had been started but not completed by December 1996 werecompleted during 1997 with EU and local sources of finance. The ongoing program of rehabilitatingtraditional irrigation schemes and constructing rural infrastructure was expected to continue at the currentpace at least until 1999 under PAMAF and other EU-supported programs.

8.2 Future operation related to project activities will be the responsibility of the concerned agenciesin the public and private sectors. The Project Administration Unit in CCRN continues to operate withother task assignments in the Northern Region.

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I. Key Lessons Learned

9.1 The lessons learned from this project can be summarized as follows:

* Portuguese authorities were near-unanimous in stressing that Bank loans and EU grants should not bemixed under one project as such practice will inevitably lead to marginalizing of Bank funds. Thisexperience warrants the conclusion that cofinancing arrangements with a high proportion of grantfunds and only a very small proportion of Bank loan funds should be avoided. Moreover, when aproject involves mixed funding from a Bank loan and grants, special care should be taken to ensurethat the recipient intends to utilize both sources of funding in a complementary, not competingmanner.

* When the loan disbursement percentage is too low, interest in the borrowing country becomesminimal, as the Bank's requirements for using loan funds are considered not worth the effort.

* In the wake of macroeconomic improvements in Portugal in the early 1990s the country gainedaccess to non-grant financing sources, which the authorities considered to be preferable to WorldBank loan funds. In such an event, early restructuring of the project is desirable.

D Countries eligible for utilizing EU structural funds should prepare comprehensive, agreed regionaldevelopment plans encompassing the entire target area in the country prior to release of such funds orcontracting complementary financing from other sources. Failure to do so will likely causesubsequent difficulties in budget planning as shifting political and economic priorities overtakeearlier local or regional plans completed in isolation.

* Pre-project analysis, especially in countries nearing "graduation" from the Bank, not only shouldincorporate experience with predecessor projects, but include a review of the entire country portfolioin search of signs for borrowers' changes in handling Bank loams and weakening of their ownershipand commitment.

* As identified earlier weaknesses are likely to occur again in repeater projects, special monitoringinstruments and action triggers should be incorporated in the latter as a precautionary measure andfollowed closely by supervision missions.

* Careful review of the likely economics of investments such as irrigation, should be made on the basisof models or average figures, prior to contracting detailed design studies, and current Bank practicein this respect should be reviewed.

* In line with current Bank practice, credit projects/components should not be approved unlesssufficient demand by sub-borrowers for credit at market interest rates and willingness of financialintermediaries to participate have been conclusively demonstrated.

* The Bank should not reduce supervision intensity in problem projects after the mid-term inanticipation of the nearing Closing Date, but rather seek rigorous early restructuring or advanceclosing (consistent with current Bank policy).

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PART II: STATISTICAL TABLES

Table 1: Summary Of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan Disbursements: Cumulative Estimated And ActualTable 5: Key Indicators For Project ImplementationTable 6: Key Indicators For Project OperationTable 7: Studies Included In The ProjectTable 8A: ProjectTable 8B: Project FinancingTable 9: Economic Costs And BenefitsTable 10: Status Of Legal ConvenantsTable 11: Compliance With Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

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Table 1: Summary of Asses,sments

A. Achievement of Objectives Substantial Partial N glbile Not applicable(/) (/) (V)

Macro Policies El E n [Sector Policies E . E lFinancial Objectives El El ElInstitutional Development I I I3 1

Physical Objectives E E3 El

Poverty Reduction El E 0 El

Gender Issues E E El

Other Social Objectives E E El EEnvironmental Objectives E 0 E EPublic Sector Management ] [J 0]

Private Sector Development E !; 111aOther (specify) n n E

B. Project Sustainabilitv Likely Unlikelv Uncertain

C. Bank Performnance satisfactor 'Satisfactory Deficient

(.1 (1) (1)

IdentificationEll

Preparation Assistance El El inue

AppraisalEll0

Supervision El E

(continued)

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HfighlyD. Borrower Performance satisfactory Satisfactorv Deficient

Preparation a]

Implementation El Ei

Covenant Compliance E

Operation (if applicable)

Highly HighlyE. Assessment of Outcome satisfactorv Satisfactory Unsatisfactorv unsatisfactory

Table 2: Related Bank Loans/Credits

Loan/Credit Title Purpose Year of Approval Status

Preceding operations

Tras-Os-Montes Rural Integrated rural development 1982 ICR issuedDevelopment Project(Loan 2175-PO)

Following operations

N/A

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Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual!Latest Estimate

Identification (FAO/CP) 09/87 09/87

Preparation 03/88 06/88

Appraisal 10/88 10/88

Negotiations 03/89 03/89

Board Presentation 04/89 04/89

Signing 08/89 08/89

Effectiveness 12/89 02/90

Project Completion 06/97 06/97

Loan Closing 06/97 06/97

Table 4: Loan Disbursements: Cumulative Estimated and Actual(US$ thousands)

FY90 FY91 FY92 FY93 iFY94 FY95 FY96 FY97

Appraisal estimate 11,400 23,900 36,700 49,700 63,700 77,700 85,000 90,000

Actual 1,000 5,500 11,000 14,100 20,000 28,900 29,600 30,707

Actualas% of 8.7 23.0 30.0 28.4 31.4 37.2 34.8 34.1estimate

Date of final disbursement: July 11, 1997.

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Table 5: Key Indicators for Project Implementation

Item 1990 1991 1992 1993 1994 1995 1996

Irrigation RehabilitationCumul.

SAR schemes (no) 30 60 90 120 150 180 210

Actual (no) 11 29 51 65 82 97 104

SAR (ha) 1,500 3,000 4,500 6,000 7,500 9,000 10,500

Actual (ha) 363 1,278 2,002 2,753 3,518 4,079 4,549

Medium-Sized IrrigationSchemes

SAR (no) cumulative 2 5 7 10 12 15 16

Actual (no) - - 2 2 4 6 7

SAR (ha) cumulative 600 820 2,180 3,140 3,780 4,740 6,360

Actual (ha) - - - 1,170 1,740 1,845 2,155

Rural Roads

Sar (Km) 100 200 300 400 500 600 690

Actual (km) 88 106 117 180 220 232 297

Rural Electrification

SAR connections (no) 100 200 300 400 500 600 600

Actual (no) na na na na na na 375

Credit

SAR ($ million Disbursement) 10.0 15.0 20.0 25.0 30.0 35.0

Actual Disbursed ($ million) 0.6 0.6 1.7 5.3 7.1 7.5 7.5

Table 6: Key Indicators for Project Operation

No specific indicators have been established for Project Operation.

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Table 7: Studies Included in Project

Subject Number of Year Agency ResponsibleStudies Initiated

Applied Agricultural Research

Global research study 1 1992 Prof. da SilvaChestnuts 6 1990-94 DRATM, UTADAlmonds 6 1990-93 DRATM, INIACereals 1 1992 UTADProduction systems 2 1993-94 DRATM, UTADAlternative crops 2 1992 DRATMIrrigated production 1 1992 DRATM/TahalIrrigation Project Preparation Studies

Schemes studied and implemented 4 1990-92 DRATM(3250 ha)Schemes studied but not yet 3 1993-95 DRATMimplemented (2300 ha)Basic Studies

Aquaculture 5 1990 ICBAS, IZANWood and forests 2 1990 UTAD, CFVRAgroindustries 5 1990-93 CCAM, ICBAS,

DRATM, ACIL,UTAD

Evaluation Studies

Douro viticulture 3 1991-95 UA-UTADOliviculture 1 1994 UA-UTADImproving traditional irrigation 4 1994-95 UA-UTADNew irrigation/water user 16 1992-97 UA-UTADassociations

Details on studies undertaken under the project are presented in the Fifth Progress Report, Porto, December1996.

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Table 8A: Project Costs

Appraisal estimate Actual/latest estimates(US$ million) (US$ million)

Item Local Foreign Total Local Foreign Totalcosts costs costs costs

Ag Extension & Research I/ 10.3 2.2 12.5 3.9 0.8 4.7

Credit - Agriculture 50.0 43.4 93.4 0.4 0.4 0.8

Credit - Agroindustry/Port Stocks 40.1 19.7 59.8 13.6 6.7 20.3

Traditional Irrigation (Rehab) 12.4 1.4 13.8 7.2 0.8 8.0

Medium-sized Irrigation Schemes 45.0 17.6 62.6 22.6 8.8 32.4

Feeder Roads 53.5 12.6 66.1 9.2 2.2 11.4

Municipal Roads 30.6 7.2 37.8 - - -

Water & Sewerage 33.8 6.9 40.7 - - -

Rural Electrification 0.6 7.8 8.4 8.2 0.6 8.8

Regional Project Management 11.8 4.0 15.8 3.3 1.1 4.4

Support for Coop Credit System 1.9 0.6 2.5 0.9 0.3 1.2

Studies 2.0 0.5 2.5 3.7 0.9 4.6

Total 299.2 116.6 415.8 72.9 22.5 95.4

1/ Includes some studies also.

Table 8B: Project Financing

Appraisal estimate Actual/latest estimates(US$ million) (US$ million)

Item Local Foreign Total Local Foreign Totalcosts costs costs costs

IBRD - 90.0 90.0 8.2 22.5 30.7

EEC (EU) 186.5 26.6 213.1 49.4 - 49.4

GOP 49.0 - 49.0 11.3 - 11.3

Commercial Financing Sources 40.8 - 40.8 0.8 - 0.8

Sub-borrowers 22.9 - 22.9 3.2 - 3.2

Total 299.2 116.6 415.8 72.9 22.5 95.4

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Table 9: Economic Costs and Benefits

The SAR estimated economic rates of return for a number ef models, including replantingvineyards, traditional irrigation rehabilitation, new irrigation and agroindustry (olive oilprocessing and winery modernization). Rates of return for both irrigation rehabilitation, and newirrigation on medium-sized schemes have been re-estimated. As there was no significantreplanting of vineyards under the project, this model has not been re-examined. Although therewas investment in agro-industry, accurate data on the types of investment and performance ofsub-borrowers was not available to the mission, so no attempt was made to quantify the likelyeconomic rate of return of that component.

In re-assessing the ERR of new irrigation investment, the appraisal model most relevant to theirrigation implemented under the project was updated, using actual average investment costs fornew medium-sized schemes, converted to constant 1997 prices (using the CPI as a deflator) andestimates of agricultural input and output prices, based on 19,97 levels. The schemes wereassumed to have a 25 year life. A separate model was prepared for traditional irrigationrehabilitation, based on current practice, also using average real costs for investment.Traditional rehabilitation schemes were assumed to have a 15 year life and cropping on therehabilitated area was assumed to be 40% potatoes, and 60% traditional cereals. Results were asfollows:

SAFR, ERR ICR ERRType of Investment

Medium -Sized New Irrigation Schemes 13% 1%

Rehabilitation of Traditional Schemes 20% 19%

Agro - Industry (average) 26% n.a.

The medium-sized new irrigation scheme model shows an unacceptable rate of return, estimatedat 1%. One of the main reasons for this poor economic result was high investment cost perhectare (about US$13,000 - or US$16,000 in 1997 constant currency terms) - more than 30%above the appraisal estimate in real termns. This level of investment implies that incremental neteconomic output per ha of around US$2,500 would be required to give an ERR of 12%, a figurewhich would require a significant proportion of high value crops (e.g. soft fruit, salads or otherhorticultural products) in the rotation. However the irrigation undertaken by the project was notgenerally in intensively cropped zones. Consequently the systems followed were relatively lowoutput, with potatoes being the main intensive crop. Furthermore, the adaptation to irrigationwas slow. Finally, since appraisal, there has also been a consiclerable adverse price squeeze,with the incremental economic benefits from the model measured in real terms in 1997 pricesbeing only 24% of what they had been when measured in 1988 prices in the SAR.

Economic results from the medium-sized rehabilitation schemes are likely to be similar to thoseof the medium sized new schemes. Investment cost per ha averaged about 17% lower onaverage, but the 'Without Project' situation was likely to have been better than for new schemeswhich would probably have resulted in lower incremental benefits at full development, butpossibly a faster adaptation rate. Sensitivity analysis indicates an ERR likely to be in the range -1% to +3%. As a guide, therefore the new medium-sized scheme model is taken as a reasonableproxy for all types of medium sized scheme.

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Rehabilitation of traditional schemes, which cost, on average US$1,800 per ha is estimated toshow an adequate economic rate of return of 19%, despite the relatively low output systemsfollowed. Incremental benefits necessary for these to show adequate economic returns would beabout US$250 per hectare net or the equivalent of about two tons of cereals, which under theconditions, should be readily achieved.

Overall, the weighted average economic rate of return from project irrigation investment is about5%. Irrigation representented about half of total project investment (excluding AgriculturalServices and Institutional Strengthening).

Financial returns to farmers from irrigation are attractive, because they only bear a small portionof the investment cost, which is factored into their water charges. The estimated per hectareimpact on farmers' incomes, based on the assumption that labor is provided unpaid by farmnersthemselves or their families is summarized below.

Medium-Sized New Irrigation Traditional IrrigationRehabilitation

US$ '000 Esc. US$ '000 Esc.

With Project Net 1,400 245 897 157Income/haWithout Project Net 611 107 394 69Income/ha

With Project Return 30 5.2 26 4.6per Man-DayWithout Project 18 3.1 15 2.6Return per Man Day

Details of the assumptions made and calculations for these models are available in the ProjectFile.

Table 10: Status of Legal Covenants

Agree Covenant Present Original Description of Covenant Commentsment Section Type Status Fulfillment

Date

Project 2.02 (a) 05 C CCAMs and PBIs selected for lending to be sound banking institutions. Confirmed.2.02 (b) 02 C IFADAP to refinance CCAMs and PBls for amounts not exceeding 90% of

subloan, and for periods not to exceed 15 years with 6 of grace for vineyardsand 9 and 4 for agroindustry.

2.03 02 C CCAMs and PBIs to maintain seperate accounts for project subloans andCCAMs to have accounts audited by FENACAM.

2.04 02 C IFADAP to perform its obligations in accordance with agency agreement.3.01 (a) 01 C IFADAP to maintain accounting records.3.01 (b) 01 C IFADAP to have its accounts, including project accounts audited by external

auditors and make audit reports available to Bank.Sch.A2 02 C Support applications for subloans to agroindustries and vineyards over 15 ha

with feasibility studies,proving technical and financial viability, FRRs over13% and compliance with envioronmental regulations.

Sch.A4 02 C First 3 subloans over $50,000 and any subloan over$2 million to be submittedto Bank for approval.

Sch.B1 02 C Subborrowers to contribute at least 15% of investment project cost.Sch.B2 09 C Subborrowers to carry out projects and ensure loan operations as consistent

with sound business practices, and provide collaterals or mortgages asnecessary.

Loan 3.01 03 CP 09/30/1989 Borrower to make available to IFADAP credit funds equivalent to $35m. Canceled in part.IFAD L "tGeend funds to CCAMs and PBIs under loan agreement.

3.02 05 CD 09130/1989 DRATM to prepare first year extension training program.3.03 05 C 12/31/1989 Borrower to enter a project evaluation contract agreed by CCRM and

DRATM, and establish project evaluation unit.3.04 (a) 05 C 12/31/1989 Borrower to cause DRATM to develop applied research priorities under part D Initial prioritization was done,

and review research progress by 6/30 every year, and to designate institutions followed by irregular reviews.to carry out research and studies under parts G(l) and G(2).

3.04 (b) 05 CP Cause CCRN to develop priority studies under part G(3).3.05 09 CP 06/30/1900 Borrower to review performance of extension service. Only two surveys were

undertaken.3.06 02 C Borrower to see that water charges for investment (L.D.817.88) and O&M

(L.D.269/92) are applied and that water sewerage tariffs (L.D. 100/84) andelectricity tariffs (L.D.344.A/82) are applied.

3.06 10 C DRATM to form new water users association (L.D.269.82). Done3.07 (b) 10 CP DRATM to see that new irrigation schemes above 200 ha have ERR above Targets not realized.

12% and below 200 ha have a cost per ha below $13,000 and that new damsare built in accordance with safety regulations (L.D.48373/68).

Table 10: Status of Legal Covenants

3.08 10 NC 12/31/1990 Borrower to carry out a study to strengthen CCAMs system. Study not completed becauseCCAMs reorganized themselves

3.10 10 C Procurement in accordance with Bank guidelines.4.01 01 C 06/30/1991 Borrower to have records of expenditures and accounts including the special Carried out by FENACAM.

account (Sch.5) outlined, and make available to the Bank audit reportsincluding extemal autitor's opinion.

Sch.5 IIB 10 CP PAU to assure project supervision including preparation of annual work Five progress reports prepared.programs, keeping and disclosure of accounts, preparing semiannual progressreport.

Sch.511D 04 NC Project coordinator to convene once a year National Coordination Council. NCC not established.Sch.511E 05 C Agrarian Regional Council to meet three times per year to ensure Regional

Institutional participation and coordination.Sch. 5 IIIA 09 CP DRATM through irrigation unit to supervise implementation of irrigation Done, but with inadequate

program. attention to economics.Sch. 5 IIIC 09 C DRATM to supervise implementation of infrastructural works.Sch. 5111D 10 C DRATM with IDARM assistance to develop research priorities and carry out

applied research.Sch. 51IIE 10 NC DRATM to prepare annually: (a) regional extension program including No formal programming.

training; (b) agricultural research strategy including linkage between research& extension; (c) pilot extension schemes at Lactimontes & the seed potatoesunion.

Sch. 5111F 05 C DRATM to srengthen own organization; CCRM to strengthen GAEs and Hired 49 persons for extensionGATs and regional offices of CCAMs. service and support units.

Sch. 5111G 10 C DRATM to assure carrying out of irrigation, agricultural and other studiesenvisaged under project.

Covenant types: Present Status:

1. = Accounts/audits 8. = Indigenous people C = covenant complied with2. = Financial performance/revenue generation 9. = Monitoring, review, and reporting CD = complied with after delay

from beneficiarie 10. = Project implementation not covered by CP = complied with partially3. = Flow and utilization of project funds categories 1-9 NC = not complied with4. = Counterpart funding I 1. = Sectoral or cross-sectoral budgetary or5. = Management aspects of the project or other resource allocation

executing agency 12. = Sectoral or cross-sectoral policy/6. = Environmental covenants regulatory/institutional action7. = Involuntary resettlement 13. = Other

- 22 -

Table 11: Compliance with Operational Manual Statements

Basically, there was compliance with the applicable Bank Opesrational Manual Statements.

Table 12: Bank Resources: Staff Inputs

Planned Revised Actual

Stage of project cycle Weeks US$ Weeks US$ Weeks US$

Through Appraisal 20.0 60,000 20.0 60,000Appraisal-Board 18.3 81,000 10.0 30,000Board-Effectiveness 17.5 49,000 5.0 15,000Supervision 73.0 144,000 49.5 155,800

Total 128.8 334,000 84.5 260,800

Table 13: Bank Resources: IMissions

S Performance Rating Types ofStage of project cycle Month/ No. of Days Specializationl Implem. Developm. Problems3

Year Persons in status objectivesField

Through appraisal 10/88 3 20 F, E, NAppraisal-Board 04/89 1 F

Supervision 1 04/90 4 10 F, I, Al 1 1Supervision II 03/91 1 9 I 2 2 FSupervision III 10/91 3 9 1, A, Al 3 3 FSupervision IV 03/92 2 10 1, C 3 3 FSupervision V 02/94 1 8 I 3 2 FSupervision VI 06/95 1 4 F 3 3 FSupervision VII 06/96 1 3 F 3 3 FSupervision VIII 09/96 1 3 F 3 2 FSupervision IX 05/97 1 5 F 3 2 FCompletion 10/97 2 9 E, AEI - Key to Specialized staff skills: A = Agriculturist 3 - Key to Types of Problems:

AE = Agricultural Economist C = Credit Specialist F = FinancialE = Economist T = TechnicalF = Financial Analyst 2 - Key to Performance Ratings: M = Managerial.N = Marketing Specialist I = Minor problemsI = Irrigation Engineer 2 = Moderate problems

Al = Agroindustry Specialist 3 = Major problems

APPENDIX APage 1

PROJECT IMPLEMENTATION COMPLETION REPORT

PORTUGALTRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT

LOAN 3035-PO

APPENDIX A

AIDE MEMOIRE

1. A World Bank mission, comprising Mr. Gottfried Ablasser, ECSRE, and Mr. PaulHarrison, consultant, FAOCP, visited Portugal from 15 October to 24 October 1997 to undertakean Implementation Completion Report (ICR) mission. The objective of the mission was toreview the project progress through to loan completion and to collect data for the evaluation ofachievements and shortcomings of the project, including the re-estimation of economic andfinancial returns to investments and assessment of the sustainability of project benefits. Themission was accompanied by Eng. Gusmao of DRATM and Mr. Carlos Lima of the CCRN. Itvisited a number of project financed investments, the project evaluation unit, and the mainoffices of DRATM in Mirandela. Discussions were also held with the President of CCRN inPorto, IFADAP in both Vila Real and Lisbon and Treasury in Lisbon. During the course of themission, the Plan of Operations for the future of the Project was discussed with the variousimplementing agencies (copy attached). This aide-memoire summarizes the views of themission and the borrower on the various elements of the project.

2. Of the original loan amount, US$90 million, only US$30.7 million were dispersed, withthe remainder being canceled. Reasons for the low utilization of funds were (i) availability ofcheaper alternative funds from the European Union, (ii) lack of counterpart finance available tosupport the, perhaps unrealistically large, development program, and (iii) limited demand for thecredit component because of (a) unattractive spreads to the financial intermediaries and (b) theavailability of grant finance to beneficiaries. A brief summary of individual project componentsis set out below.

3. Agricultural Research was successfully supported under the project, concentrating largely onapplied research for crops well-suited to the region at six research stations.

4. Extension Services were supported by the project, although the initial objective of gettingextension staff away from undertaking administrative work and continuing with theimplementation of a T&V system, did not work. The very substantial availability ofEuropean funds for agricultural development inevitably involved extension workers insubstantial administration concerned with project financing. In line with their position at thetime of the PCR for the TMRDP (Loan 2175-PO) DRATM continued to view the T&Vsystem as inappropriate to the very varied circumstances and the advanced nature of thefarmers of the region. Strengthening of DRATM's co-operative services and enterprisedevelopment centers was affected through staff recruited under the project.

5. Credit which moved slowly under the project from the beginning was not attractive to thefinancial intermediaries due to a spread of 2% compared with a minimum acceptable level ofat least 4%. Furthermore, because credit was typically provided as top-up finance for

APPENDIX APage 2

projects hoping to receive up to 75% grant finance, potential borrowers were reluctant toslow down the project implementation or increase the risk of project refusal by involving acredit hurdle which was reviewed by different institutions than those responsible forapproving grants. Attempts were made to utilize more of the credit line under the projectthrough allowing these funds to be used by producers for the finance of Port Wine stocks ata time when the shippers were reluctant to buy. This move had only limited success,probably because the increase in world prices of the product in 1993 made it more attractiveagain for the shippers to buy and so producers avoided needing to take the storage riskthemselves. With the credit component moving slowly and its cost to Government beingperceived by Treasury as higher than borrowing from alternative sources, the balance of thecredit component (US$24 million) was canceled in 1994.

6. Irrigation development under the project took place at less than half of the rate plannedinitially and the cost per hectare irrigated was substantially higher than estimates made atappraisal. While the rehabilitation of traditional schemes, typically costing about US$1,800per hectare has a good likelihood of being economically viable, the new irrigation schemeshave cost on average about US$13,000 per hectare and are very unlikely to show acceptableeconomic rates of return. Both types of activity are likely to show good financial returns tofarmers, however, as only 15% of the capital cost is supposed to be recovered.

7. Rural Infrastructure. Agricultural roads were constructed at about 40% of the rate envisagedat appraisal and the general impression is that the implementation was satisfactory. Therural electrification program was also implemented as planned in the financial terms,although the number of connections made was 375 compared with the projected 600 atproject appraisal. This difference may represent more farm households per connection. Nostatistics were available on this. At appraisal, it had also been envisaged that the projectwould involve municipal roads, village streets, water supply and sanitation. By the time theproject started, it became clear that more favorable financing was available for these undergrant conditions from the European Union and so project funds were not used for theseactivities.

8. Studies. Investigation and Evaluation. DRATM and CCRN perceived the project as beingextremely useful in this area. It provided 80% financing for studies and evaluations,including detailed planning of irrigation schemes and applied research. They felt thatwithout the project finance, such activities would have gone on at a much lower level andthat one result of this work was a strong build-up of human capital. From the Bankmission's standpoint, the size of this component which, ex post, became 20% of the loan,was unusual because most Bank clients tend to prefer to use bilateral or other "softerfinancial" sources for these kinds of activities. It was not possible to make objectiveassessments of the benefits of the studies, although the areas of focus were appropriate.However in view of the likely non viability of new irrigation schemes, it is probable thatsome of the work in that area was not economically beneficial.

Implementation and Major Factors affecting the Project

9. Implementing agencies handled the project effectively and as perceived at appraisal, thereasons for the project being considerably smaller than originally envisaged were (i) the lack ofavailability of resources for the infrastructure-type investments from EU and domestic sourcesand (ii) the lack of demand for medium-term credit, partly because of lack of incentives for on-

APPENDIX APage 3

lending Bank funds, but also due to the crowding out by the grant finance. With the benefit ofhindsight, it appears that the size of the infrastructure and irrigation components was too largegiven the competition for EU funds from other regions within the country.

Project Sustainability

10. Activities undertaken under the project are generally sustainable. While they were noteconomically viable, the irrigation investments give good financial returns to farmers so they arelikely to continue to be maintained and operated. The road components are expected to beadequately maintained by the municipalities and the on-farm and agro-industrial investments aregenerally financially viable and so are likely to continue as going concerns.

Overall Project Rating

11. Because the project was only partially implemented and one of its major comnponentsgnew irrigation schemes, is economically non-viable, the overall project rating is unsatisfactory.Attempting to use borrowed World Bank finance in parallel to very substantial grants from theEuropean Union, can cause implementation difficulties. It is clear that Portugal made anobjective decision to try to maximize the inflow of European Union funds during the projectperiod and, to some extent, these squeezed out borrowed Bank finance.

Attachment - Plan of Project Operations

Lisbon, October 23, 1997

APPENDIX APage 4

Attachment to Appendix A

PORTUGALTRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT

(Loan 3035-PO)

Plan of Project Operation After December 31, 1996

A. Project Objectives

1. The objective of the project was to make agriculture in the region more efficient and toincrease rural family incomes.

B. Achievements to Date

2. Several components of the project were not implemented or were carried out with otherfunding. The rural credit component was partially implemented before being canceled in 1994.The other components achieved about half of their physical targets as project investments weresharply curtailed compared with SAR expectations, while the studies program was expandedduring implementation. Overall, only 34% of the loan was utilized.

C. Implementation Plan

3. As the project was implemented by government line agencies, continued operation ofproject facilities is assured as part of the agencies' normal operations.

4. Agricultural research. Research activities by DRATM will continue, with a specialfocus on chestnuts and almonds. The research budget will be cofinanced under thePAMAF/INTERREG programs in the next couple of years.

5. Agricultural extension. The extension system under DRATM has reverted to a lessstructured format, emphasizing the delivery of advisory services to farmers on demand. Asignificant share of extension staff time in the medium term will be devoted to providingassistance in the utilization of EU funds--contrary to original project objectives as administrativeduties of extension agents were to be reduced. Staff strength is expected to be maintained atcurrent levels under regular funding of the Ministry of Agriculture. The six training centers willbe used by DRATM and also made available to other users for a fee.

6. Irrigation. As of December 1996, one new scheme--Chavez Block II--was just startingto be implemented. About 1.4 million contos (US$8.75 million) will be required for completion,of this (including the assocciated dam which will serve Chavez Block I also) with financingunder the PAMAF program. Three new schemes have been prepared, but financing forimplementation has not yet been approved and is expected only after careful review of theschemes' economic viability. Rehabilitation of traditional schemes will continue with EU funds.Operation and maintenance (O&M) of traditional schemes is the responsibility of Water UserAssociations (WUAs), which generally operate satisfactorily. In the case of new schemesconstructed under the project, DRATM has O&M co-responsibility with WUAs during an eight-

APPENDIX APage 5

year adaptation period. The main focus of DRATM will be to assist in the conversion toirrigated farming and increase utilization of the irrigation facilities by farmers.

7. Rural roads. The 55 km of rural roads still under construction when World Bankfunding ended are being completed by the municipalities with funds (187,000 contos; US$1.2million) from their regular budget. The rural road construction program generally is continuingwith support from the PAMAF program. Road maintenance is undertaken satisfactorily by themunicipalities.

8. Rural electrification. The 34 unfinished project rural electrification schemes, requiringan additional 90,000 contos (US$0.5 million), are being completed by EDP. The ruralelectrification program is continuing with support from the PAMAF program.

APPENDIX BPage 1

PROJECT IMPLEMENTATION COMPLETION REPORT

PORTUGALTRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT

LOAN 3035-PO

APPENDIX B

BORROWER CONTRIBUTION TO THE ICR

Prepared by the

Coordination Commission for the Northem Region (CCRN)

APPENDIX BPage 2

COMISSAO DE COORDENA;, AO DA REGIAO DO NORTE(CCRN)

PROJECT OF INTEGRATED RURAL DEVELOPMENT OFTRAS-OS-MONTES- (PDRITM I)(LOAN 3035 - PO)

PORTUGAL

Implementation Completion Report

AugustIl997

APPENDIX BPage 3

ABBREVIATIONS

CCAM's Caixas de Credito Agrfcola MutuoMutual Agricultural Credit Banks

CCRN Comissao de Coordena,co da Regiao do NorteCo-ordinating Commission of the Northern Region

CE Comunidade EuropeiaEuropean Community

DRATM Direccao Regional da Agricultura de Tras-os-MontesRegional Direction of Trds-os-Montes Agriculture

EDP Electricidade de PortugalPortugal Electricity company

EP Estado PortuguesPortuguese Government

FENACAM Federac,ao das Caixas de Crddito AgrfcolaFederation of the Agricultural Credit Banks

GAE's Gabinetes de Apoio Empresarial) of the regionDepartments for Enterprising Support

GAT's Gabinetes de Apoio TecnicoTechnical Support Departments

ICP Institui,ces de Credito ParticipantesParticipating Credit Institutions

IFADAP Instituto Financeiro de Apoio ao Desenvolvimento da Agricultura PortuguesaFinancial Institute for the Support to the Development of the Portuguese Agriculture

PAC Poliftica Agrfcola ComumCommon Agricultural Policy

PAMAF Prograrna de Apoio a Modemiza,co Agrfcola e FlorestalProgramme for the Support of the Agricultural and Forest Modernization

APPENDIX BPage 4

PDRITM I Projecto de Desenvolvimento Rural Integrado de Tirs-os-Montes (IS fase)Projecto of Integrated Rural Development of Trds-os-Montes (Ist phase)

PDRITM II Projecto de Desenvolvimento Rural Integrado de Trds-os-Montes (28 fase)Projecto of Integrated Rural Development of Trds-os-Montes (2nd phase)

PEDAP Programa Especifico Europeu para o Desenvolvimento da Agricultura PortuguesaSpecific European Programme for the Development of the Portuguese Agriculture

PIDDAC Programa de Investimentos e Despesas de Desenvol vimento da Administragao CentralProgramme of Investments and Expenses of Development of the Central Administration

SAR Relat6rio tdcnico de avaliaqaoStaff Appraisal Report

UA Unidade de Avaliaq5oEvaluation Unit

UAP Unidade de Administracao do ProjectoUnit for the Administration of the Project

UTAD Universidade de Trds-os-Montes e Alto DouroUniversity of Trds-os-Montes e Alto Douro

XWB Banco MundialWorld Bank

APPENDIX BPage 5

IMPLEMENTATION COMPLETION REPORTPORTUGAL

PROJECT OF INTEGRATED RURAL DEVELOPMENT OFTRAS- OS -MONTES - 2nd PHASE (PDRITM II)

(LOAN 3035 - PO)

A. OBJECTIVES OF THE PROJECT

1. As a consequence of the good results achieved by the carrying out of the 1st phase of theProject of Integrated Rural Development of Tras-os-Montes (PDRITM I) that took placebetween 1983 and 1989, the Portuguese Government (EP) decided together with the WorldBank (WB), to make a new loan in the amount of 90 million dollars for the partial financingof the 2nd phase of the PDR1ITM (PDRITM It). The remaining financing of the Project wasthe result of several sources - The State Account, Private Investment and Cormmunity Funds -the importance of these ones in the global amount to be invested, must be emphasized.

2. The PDRITM II, the execution of which occurred between 1990 and 1996, had as its maingoal the development of the region, particularly the improvement of life conditions and thesettling of the rural population of Tras-os-Montes, through structural adaptations inagriculture, the diversity of rural economy and the strengthening of the agricultural sector, aswell as the agricultural-industrial and the local institutions. More specifically, for thefulfilment of this objective the project aimed at:

* bettering the productive structure of the area under its influence, through theimplementation of a more efficient agricultural sector;

* giving the rural population a better life standard by building up basic infra-structures;* promoting the value added tax of the products and private investment in agricultural

industries, bettering the transforming and commerce structures, as well as strengtheningtheir enterprising capacity;

* reducing local differences in what concerns employment standards;* increasing the income of small farming exploitation;* strengthening the local participating institutions.

3. To fulfil these objectives the Project was organized in four lessential areas of action:

a) physical, agricultural and rural infra structures that supposed the establishment of abody of infra-structures essential for the development of agriculture: recovering of 210traditional watering systems; construction of 14 new collective watering systems;construction Mf 469 km of agricultural and rural roads; execution of 658 electrificationschemes of agricultural exploitation. The funds for these actions were supported byendowments inscribed in the PEDAP (Specific European Programme for theDevelopment of the Portuguese Agriculture), with the contribution of 75% from the CE(European Community) and 25% from the EP. The loan of the WB for the carrying out ofthe actions was intended to refinance the national part and its initial amount was of 44million dollars, which was at about 49% of the total agreed loan. (Table 1).

'In the different works published during the PDRrIM, it was adopted a terminology which contemplated the organization of the Project in threeprincipal areas: the agricultural area, the credit and the non agricultural area. The agricultural area under the responsibility of the DirecqioRegional de Agricultura (DRATM) included the sub-areas: (1) agricultural and rural infra structures; (2) Applied agricultural Investigation: (3)Watering Projccts and Studies; (4) Reinforcement of the DRATM services. The Credit area is organized in a way similar to the one describcd inthis report Finally, the non agricultural area under the Comissio de Coordena;so da Regiao do Norte (CCRN) included these parts (1)Reinforcement of the CCRN services and of its Technical Support Departnents - Gabinetes de Apoio T6cnico - (GAT); Ground studies andEvaluation Unit (UA); Reinforcement of the FENACAM and, (4) Reinforcement of Enterprising Support Depatmnents -Gabinetes de ApoioEmpresanal (GAE).

APPENDIX BPage 6

TABLE 1: Loan categories, amounts and financing conditions of the WBCATEGORY PART DESCRIPTION AMOUNT REFINANCING

(USD) - WB (%)

I A Tasks and equipment 14 000 000 20

II B Subloans 35 000 000 90

m C Tasks and goods 30 000 000 25

IV D, E, F Equipment, materials and vehicles 6 000 000 80

V All Consultative services, training and studies 2 000 000 80

VI All Not attributed sum 3 000 000

TOTAL 90 000 000Q

b) investigation, studies and evaluation, including a large amount of works which wereconceived and developed under the responsibility of the regional institutions responsiblefor the Project - DRATM (Regional Direction of Trdis-os-Montes Agriculture) and theCCRN (Co-ordinating Commission of the Northern Region). The first line, called AppliedAgricultural Investigation, was a programme developeel under the DRATM, that either by

itself, or with the collaboration of other organizations (INIA, UITAD, TAHAL, etc.)carried out a plan of investigation/experimentation, which joined technicians and farmers,with the purpose of finding plausible solutions for some of the principal problems facedby agriculture in this region. It was also under the responsibility of the DRATM, and inthe range of this area, that Studies and Watering Projects for structuring the actions todevelop in the hidro agricultural promotion were undertaken. At the same time, theCCRN had ordered for some studies , called Base Studies, about the natural resources ofthe region, which aimed at its improvement as well as at profiting it economically in ashort or medium time. Finally ,still within the range of this area, and under theresponsibility of the CCRN, it was constituted the UA. (Evaluation Unit) in the UTAD(University of Tras-os-Montes e Alto Douro) charged of making some research worksabout the implementation of the Project and with several investigation lines to evaluatethe results.

c) credit area, under the administration of the IFADAP (Financial Institute for the Support

to the Development of the Portuguese Agriculture) created to give a financial supportthrough credit lines directed to investments related to (I) re-conversion of vineyards in theRegiao Demarcada do Douro, (ii) transformation and plantation of chestnut and almondfields, (iii) acquisition of equipment for the agricultural industries of the region,particularly those engaged in the transformation /commercialization of traditionalagricultural products of the region. The investments should accomplish one or even moreof the following objectives: (a) re-conversion of the vineyard in the Regiao Demarcada doDouro; (b) re-conversion and plantation of the chestnut and almond fields; (c)modernization, enlargement or settlement of agricultural-industrial enterprises. As for thefinancial aids for each project, its promoters had to use a minimum of 15% of their ownfunds, and the remaining of the investrnent, which was niot subsidized by the communityfunds, could be financed by the credit lines of PDRITM E. The initial loan amount for thisarea was of 35 million dollars, at about 39% of the total amount of the loan.

d) Reinforcement of the Regional Services, that aimed essentially at providing theinstitutions engaged in the regional development with the human, technical and materialmeans, so that they could better their possibility of intervention in their own areas andgive the necessary support to carry on in the agricultural area. Its financing came from thePIDDAC (Programme of Investments and Expenses cf Development of the Central

2

APPENDIX BPage 7

Administration). It covered the reinforcement of the following institutions engaged in thedevelopment of the region: CCRN, DRATM, GAT's (Technical Support Departments)FENACAM (Federation of the Agricultural Credit Banks), CCAMs (Mutual AgriculturalCredit Banks) and the GAE's (Departments for Enterprising Support) of the region.

B. EVALUATION OF THE OBJECTIVES

4. The definition of the objectives for the Project can be considered as satisfactory. The WBand the Food and Agriculture Organization (FAO) underlined the need for going on with theefforts begun with the PDRITM I, that had essentially aimed at improving the life conditionsin the region of Tras-os-Montes and decreasing the differences in the development levels inrelation to other regions of Portugal.

5. The organization of the Project was the result of an analysis of the social and economicalconditions existing in Tras-os-Montes. In this region, considered as being the most depressedin the country , agriculture still is the productive basis of the region, being this activityessentially made up by small familiar farning exploitation with a very tenuous relationshipwith a market economy. The edaphologic and climate conditions generally restrict, in a verystrong way, the practice of a competitive agriculture. Under these conditions, it was urgent tomake the agriculture of Tras-os-Montes viable through investments that might bring aboutthe required benefits able to reduce the lirmitations of the physical environment and allow thestructural adaptability of the agriculture of Tras-os-Montes in such a way as to permit thegrowth of its competitive power and social efficiency. These aspects were of greatimportance when choosing the kind of interventions to be primarily done in the area of therural and agricultural infra structures.

6. Considering the agricultural and ecological conditions of the region, it would also beimportant to formulate and promote the adoption of arrangement proposals and of producingtechnologies fitting each ecological situation and able to encourage the correct use of theresources and endogenous capacities, as well as granting an acceptable income with a correctuse of the work and of the invested money. These aspects have been considered in theagreement made with the WB. So, it has also been decided to finance a programme ofapplied agricultural investigation and of basic studies to ensure the correct use of theacquired knowledge and to develop a large programme of diffusion , technical support andprofessional training.

7. It was also recognized that to reach the objectives for agricultural development, it would benecessary to support investments to improve the conditions of production, as well as topromote and better the structures for transformation and commerce, encouraging therelationship between agriculture and the sectors aside production contributing for obtaining avalue added tax in the well succeeded productions. To accomplish this, special credit lineswere created within the range of the Project, to permit granting the necessary credit, not onlyfor the reformulating of some of the traditional agricultural cultures of the region (vineyard,chestnut and almonds), but also for the modernization, enlargement or establishment ofagricultural industrial units of private or collective entities.

8. In order to fulfil the objectives of the Project, Community programmes fitting the same areaof action were used to permit a better use of the financial resources aiming the developmentof the region. So, it is important to mention the work together with the PEDAP/PAMAF inwhat concerns agricultural infra-structures, and with regulations in the range of FEOGA andSIRB for agricultural and agricultural-industrial investment.

3

APPENDIX BPage 8

9. Finally, in order to accomplish the objectives mentioned above, it was considered that thedifferent organizations directly engaged in the PDRITM 11 should get a reinforcement eitherin human or in material means, without which, it would not be possible to set up in acoherent way all the actions proposed for the Project. When preparing the Project, this aspecthas not been forgotten and it was decided they would make investments on those institutionsso that they could support the various actions to take place, included in the area ofreinforcement of services, as it has already been mentioned before.

C. ACCOMPLISHMENT OF THE OBJECTIVES OF THE PROJECT

10. The information in this report summarizes all the data presented every year by the UAP (Unitfor the Administration of the Project) in the 5 situation reports already published2. In ageneral way, it may be said that the Project has given a valuable contribution for thedevelopment of Tras-os-Montes and for the improvement of the living conditions of theresident population, which was its main goal. However, in some of the areas into which itwas divided, the Project did not manage the total fulfilmert of the objectives established inthe different sectors, as it will be possible to see. In the next chapter (chapter D) it will bemade a deeper analysis of the factors that contributed for the obtained results.

Physical Objectives

11. As for the area of the agricultural and rural infra-structures, the accomplishment of theresults was only partially satisfactory. This evaluation is the result of the comparisonbetween the objectives established in the "Staff Appraisal Report" (SAR) and what wasreally achieved until December 1996. So, as for the improvement of the traditional wateringsystems, along the time of the Project, 104 watering systems have been the object of anintervention and 4429 ha, the area getting benefits .This is at about 50% of the SAR'sprogramme. In what concerns the new watering systems, actions were carried out in 9,bringing benefits to at about 3000 ha. These results are, more or less, 64% of the SAR'sprogramme. In relation to the electrification systems, EDP (Portugal Electricity Company)built 341 of these systems, which means only 52% of what was initially established. Finally,100 agricultural and rural roads in the length of 242 km, were built through the programme.The execution rate of these actions is of 51% of the SAR's programme.

12. The explanation for these results, that are not as satisfactory as they should be, lies mainly onthe low endowments placed by the PEDAP/PAMAF programmes at the disposal of theProject for the execution of the agricultural and rural infra-structures, as it will be explainedfurther on.

Financial Objectives

13, The financial objectives of the Project both in what concerns the credit lines and the use ofthe loan were far from being reached.

2 There are Five published reports which integrate and analyse the execution of the Project:Ist progress Report, UAP, 19922n4 Progress Report. UAP. 19923rd Progress Report. UAP, 19934th Progress Report. UAP, 1994SthPtogress Report, UAP, 1996

4

APPENDIX BPage 9

14. In relation to the credit area it is worth to point out that significant changes have taken placealong the Project, as a result of the low use of the credit lines initially placed at the disposalof the economical agents of the region. To minimize the situation, a new special cred linewas established in August 1993, for the storage of Oporto wine with the objective ofpermitting the probation and the valuation of the stored wine and the payment to theproducers who bottle their wine, and Adegas Cooperativas. This new credit line received afinancial endowment of 20 mnllion dollars, amount which resulted from the readjustment ofthe 35 millions initially attributed to the credit area. However, differently of what wasexpected, the new credit line did not have the expected success as the conditions of thecommercialization and exportation of Oporto wine had changed very deeply and the storedproduction had, meanwhile, been absorbed by the market.

15. The low interest for the credit lines, and the fact that only 7,7 mnillion dollars had beenpresented to the WB for draft, led to the formal cancelling of the credit area in 1994.

16. Taking in account the exposed conditioning circumstances and the resulting expectations, itwas supposed that the use of the financial funds of the WB loan for the Project would beendangered, so three cancellations were negotiated with the WB, during the time of theProject, adjusting it to the new conditions of execution. (The detailed description of each ofthese cancellations is found in Table 1, of Appendage )

17. The first cancellation in the amount of 20 million dollars took place in July 1993 and fellupon category I (tasks and equipment), Im (tasks and goods), IV (equipment materials andvehicles), V (consultative services, training and studies) and VI (not attributed amount).

18. The second cancellation, in the amount of 27 million dollars, was in December 1994 and itonly fell upon category II having as a result the cancelling of the credit area, as it has alreadybeen said.

19. The third cancellation, in the amount of about 10,7 million dollars, was decided in April1996; the changes that were introduced had their effects on categories I (tasks andequipment), II (remaining of credit lines), III (tasks and goods) and IV (equipment,materials and vehicles).

20. The available amount of the loan, after these alterations, is of about 32 million dollars beingmore or less 30 million dollars, the total of the payments made until December 1996. It mustbe said that this sum does not include some of the requests for payment after this date andconcerning the late part of 1996.

21. It is important to emphasize that the changes introduced in the Project, namely the threecancellations, in a certain way, made it impossible to establish a comparison between whathas been done in the area of the infra-structures and the SAR's programme, since this onehas been planned assuming that the endowments for its execution would be those initiallysettled. An analysis of Table 1 in Appendage II of this report permits us to conclude that thefinancial execution of the various areas of the Project shows a very satisfactory rate ofsuccess, if we only consider the effectively attributed endowment.

Institutional Objectives

22. In institutional terms, the accomplishment of the objectives can, only in part, be consideredas satisfactory. This has happened because the institutions directly engaged in the Project had

5

APPENDIX BPage 10

to face a lot of bureaucratic - administrative barriers which prevented better performances inthe development of the established actions.

23. The DRATM, however managed to get very interesting results either in the application of theprogramme of Applied Agricultural Investigation, or in th[e area of the Studies and WateringProjects. In relation to the former of these programrnes, it can be seen that severalinvestigation works in traditional cultivation of the region (Chestnuts, almonds, etc.) hadtaken place and that on the one hand they permitted to have a better knowledge about thesespecies, and, on the other, they allowed the identification of the principal obstacles to theirdevelopment, becoming, therefore, an important element for the planning of the regionalagricultural activity. As for the Studies and Watering Projexts, it is worth saying that the unitcreated in the DRATM to perform these jobs (Watering Unit) promoted studies about thewatering viability and execution projects that cover an area of about 5600 ha.

24. In what concerns the CCRN, a financing received through the PDRITM permitted thisinstitution the hiring of qualified technicians and it also supported their training so that theycould have a better performance in the functions related to the Project. Furthermore, it alsosupported the settlement of technicians who have performed (and still do) rolls with a greatimpact in the regional development.

D. HISTORY OF THE IMPLEMENTATION AND PRINCIPA.L FACTORS AFFECTING THEIMPLEMENTATION OF THE PROJECT

History of the Implementation

25. The negotiations that permitted signing the loan for the PDRITM I began in February 1989,when PDRITM I was not yet complete. The loan contract was signed on 30th August 1989.However, the terms of effectiveness of the loan were only fulfilled in February 1990, this issix months after the loan agreement had been signed. As For the credit line, because of thegreater complexity of its institutionalization, the effective use of the specific credit lines ofPDRITM II was only available since 29th April 1991. These obstacles had a negative impacton the final results of the Project.

Factors related to political measures

26. In January 1986, Portugal becomes an effective member of the European Community (CE,nowadays UE). This would become the most significant feature in the implementation of theProject. Joining the CE, has meant the subjection of the Portuguese Agricultural Policy to thesevere accomplishment of the PAC (Common Agricultural Policy). As a consequence, theobjectives of the Project became, in a certain way, subrmitted to the global guiding lines ofthe agricultural development policy, because of the compromises assumed with CE. It wasalso the need for following directives of a macro-economical character, inherent to theconverging process of the Portuguese economy towards the Economnical and Monetary Unionwithin the European Community, which led to a certain restrain of the national publicexpenses, that partly limited the financial resources, which in terms of national counterpartswere directed to the development of the Region.

27. Before these commitments and as for the agricultural and rural infra-structures, it is clearthat, the yearly assignment of the endowment of the PEDAP programrne (since 1994 thespecific agricultural programme was called PAMAF - Programme for the Support of theAgricultural and Forest Modemization) for the accomplishiment of this area was far below

6

APPENDIX BPage 1.1

the levels established in the loan contract made between the Portuguese Govemment and theWB for financing the Project. This situation that went on along all the time of the Projectwas responsible for the impossibility of accomplishing the goals established in the contract.To be able to accomplish, in a reasonable way, the cornmitments established in theagreement with the WB, it would have been necessary the EP had adopted the requiredmeasures to permit the endowment given to Tras-os-Montes to be adequate to thosecommitments.

28. The fact that it is not always known in the right time about the endowments, available everyyear, to accomplish the different actions, made it impossible to set up an adequate calendar,contributing for results that were far from what was desirable.

29. Besides, we think it would also have been necessary to make some rearrangements in thesystem created in the range of the PEDAP/PAMAF, in order to prevent delays, sometimesvery significant, when transferring payments and that had as a result additional taxes andgiving a bad image of the DRATM before its suppliers.

30. As for the credit area, as it can be concluded from the previous chapter, that there have alsobeen some obstacles for the normal achievement of its objectives, on the one hand because ofthe difficulties the ICP (Participating Credit Institutions) that joined the Project, put ingranting loans under the conditions established in the credit lines, and on the other hand,because of a lack of adjustment in the offered financing conditions, considering the capacityof those who might be interested. Therefore, there was a low adherence and only 7,7 milliondollars, 115 of the previously established goal had been presented for bank draft. As it wassaid in several progress reports, the ICP's showed no interest in promoting the credit area,because they considered that the benefits they would receive (about 1,5%) did not cover thetransaction duties. As it has already been mentioned, it was negotiated an alteration in thisarea with the WB and so it was created a specific credit line for the storage of Oporto wine,which did not succeed because of the above mentioned reasons. To overcome thesedifficulties, in February 1994 the Co-ordinating Commission of the Project made a proposalto the SET (Secretaria de Estado do Tesouro), making them aware of the urgent need ofgiving this area a new impulse and suggesting more advantageous financing conditions suchas better money grants. These suggestions were not accepted by the SET.

31. Later on, after the conclusions and suggestions presented by the delegate of the WB duringhis supervising visit in February 1994, the Secretary of the State Treasure (Secretario deEstado do Tesouro) deternined the credit line to be extinguished. The WB was informed ofthis decision and it was cancelled an amount of 27 million dollars in category 2, producingeffects from 28th December 1994 on.

32. In relation to the other areas, it can be concluded that they might have had better results casethe endowments given in PIDDAC by the Central Administration had been the mostadequate to accomplish the objectives established in the range of the PDRITM EI. On theother hand, because the credit area suffered deep changes, the execution of some actions wasdeeply affected, namely the support for the reinforcement of the FENACAMICCAMs andthe GAE's.

33. Finally it must be emphasized that some bureaucratic-administrative obstacles and somealterations in the legislation were particularly bad for the accomplishment of the goalsestablished for the actions aiming the reinforcement of the services, namely the limitations tohiring technical staff, acquisition of equipment (vehicles). It is also important to say that

7

APPENDIX BPage 12

however hard the regional institutions responsible for the execution of the Project tried toovercome these difficulties, they did not succeed.

Factors of different origin

34. Besides the conditioning circumstances that have already been mentioned, it must also besaid that there was some delay not only in starting up the programmed enterprises but also inthe execution of the assigned jobs. This has happened because of the financial conditioningcircumstances as well as other factors and among them:* the need for making, sometimes, the technical readjustment of the projects;* delay in making the projects available;* delay in getting the necessary permission for the assignment of contracts and tasks;* adverse climate conditions during Autumn and Winter, making it difficult to execute the

works;* delays due to the contractors and autarchies.

E. EFFECTIVENESS OF THE PROJECT

35. In spite of the idea that might have been given in the previous chapters that the Project was- far from what had been planned, the reason for such a thing lies, above all, in the deficient

financial allocation for the execution of its different areas, and not exactly in the inadequacyof the objectives of the Project.

36. But it seems clear that the PDRITM II has given an essential contribution for thedevelopment of the region, either creating or recovering the infra-structures indispensable forthe improvement of the agricultural activity (improvement of traditional watering systems,building new watering systems, electrification of farning exploitation, building agriculturaland rural roads) or in the necessary impulse for starting up some agricultural-industrialactivities, or in the support to the reformulating of somie sectors, such as the vineyard,chestnut and almond fields.

37. As already mentioned in chapter C the contribution given by the Project is relevant in whatconcerns applied agricultural investigation and it also permitted to gather a lot of knowledgethat will contribute, and that already does, for an important improvement of the conditions inthe production of crops, with a great social and econornical importance in the Region,namely dried fruits, vegetables, cereals and fodder. The studies constitute a valuable tool inthe planning and supporting of the regional agricultural activity. Besides, it is worth sayingthat in this area there was a great lack of means that was, somehow overcome by the Project.In terms of Studies and Watering Projects, there was a search for solutions to vast areas ofthe region and there are still studies financed by the PDRTI'M II ready to be put into practicevery soon, and which are going to have the financial support of other developmentprogrammes. The constituted Watering Unit is ready to develop other works of this kind, aconsequence of the profiting experience acquired during the execution of the Project.

38. It is worth mentioning the efforts to strengthen the perforrmance of several institutions inwhat concerns the necessary human and technical means for the support of the variousactivities related to the regional developrnent.

39. The inter connection in the performance of the different institutions engaged in the Projecthas led to get a great deal of experience of multi disciplinaxy adequacy, determining in this

8

APPENDIX BPage 13

way the establishment of institutional links that are now being used and that will probably goon producing good results in the future.

40. It is obviously too early to do a correct evaluation of the impact that the PDRITM 1 hasbrought to the region. However, we are positively sure that important steps have been takenso that, in the future, the development actions to promote the region will have the advantageof the collected experience, data and tools that are, no doubt, the result of the implementationof the Project.

F. PERFORMANCE OF THE WORLD BANK

41. The performance of the World Bank during the time of the Project can be considered as verysatisfactory. The identification, preparation, the forecasts and the control of the Project wereadequate to the real needs.

42. It should be emphasized the obvious importance of the supervising missions of the WB, asfor advice and performnance proposals, that were decisive for a more adequateimplementation of the Project. The frequency and the composition of those missions , fittingthe necessities of the Project, is of a special importance. A particular attention for thefrequent advice to the govemment organizations, namely in relation to the lack of adequacyin the financial endowments to execute the actions, for the impossibility of accomplishingthe established plan and for their efforts to make them sensible to the introduction ofalterations in the conditions of credit financing, aiming its reopening.

G. PERFORMANCE OF THE LOAN BoRRowER

43. The performance of the EP, as the borrower of the loan, was not very satisfactory. As it hasbeen said in chapter D, the conditionings imposed by the necessity of following macro-economic directives, did not permit to fulfil the financial compromises assumed in the loancontract and endangered the total accomplishment of the Project. The endowments placed atthe disposal of the Project were not able of accomplishing what had been set with the WB,for the PIDDAC as well as for the specific programme for agriculture (PEDAP/PAMAF). Onthe other hand, the delays that sometimes occurred in loosening the funds, were responsiblefor some embarrassment and led to an increase of the cost prices and to the disinterest of theagents engaged in the Project, bringing damage to the image of the regional institutions.

9

APPENDIX BPage 14

H. MAIN CONCLUSIONS TO BE EXTRACTED

44. The implementation of PDRrTM II permitted to gather a considerable amount ofexperiences, some of which very positive, indeed. Since the enumeration of theseexperiences would become a very long process, we will only mention those that, according toour opinion, are most directly related to the insufficient accomplishment of the Project.

45. As the implementation of the Project was going on, it became clear that the accomplishmentof the Project would be endangered if the Co-ordinating Board (Conselho de Coordenagao),with a great negotiation impact near the Governmental Institutions, were not established, inorder to overcome the difficulties .that the PDR1TM II had to face along its way.

46. Bureaucratic-administrative conditionings which did not permit a sufficient flexibility in themanagement decisions, brought about some difficulties in executing the Project. It would benecessary to have a flexible administration to guarantee in the right time the adoption ofmeasures due to the necessity of adjusting the proposals and the timing of the actions to thereal evolution of the implementation of the Project.

47. In future enterprises, it is absolutely necessary to regard the inter-connection and theimplementation of the objectives with funds of different origin, as it is very difficult tooptimize all these resources, especially ,if one of them is determining in relation to theothers.

to

APPENDIX BPage 15

APPENDAGE I

Table 1: Loan cancellations and respective reallocation of the funds through the variouscategories (USD)

Loan Initial Cancellations Present

Categories Amount lst (July/93) 2nd (Dec/94) 3rd (Apr/96) Amount

I 14 000 000 4 000 000 - 3 502 084 6 497 916

i 35 000 000 - 27 000 000 293 167 7 706 834

i, m 30000000 15000000 - 5608307 9391 693

IV 6 000 000 I 000 000 - 1 345 660 3 654 340

V 2 000000 -3000 000 - 5 000 000

VI 3 000 000 3 000 000 _- 0

TOTAL 90 000 000 20 000 000 27 000 000 10 749 217 32 250 784

APPENDIX BPage 16

APPENDAGE IE

Table 1: Financial execution of the various areas of the PDRITM H1, taking in account theavailable endowments for its accomplishment

AREAS AND SUB-AREAS attributed Expenses Rate of financialendowment execution(x 1000 Esc) (x 1000 Esc) (%)

AGRICULTURAL AND RURAL3 508 7202583 .6

lmprovement of traditional watering systems 1 189 980 1 208 322 101.2

New collective watering systems 3 816 741 3 246 737 90.4

Agicultural and rural roads 1 679 784 1 518 385 93.5

Rural electrification 1 357 003 1 229 139 92.4

STUls,PETIG ATIONANDEVALUATION. ..-.. 6 611: 90 70 ..

Applied agricultural investigation 381 252 302 016 79.2

Studies and watering projects 630 141 467 812 74.2

Base Studies and evaluation Unit (CCRN) 245 218 220 876 90.1

IFRED ENT _FREG1ONAL SERIE U7 662 21q7 - - 7.

Reinforcement of the DRATM 1 088 517 802 126 73.7

Reinforcement of the services of the CCRNIGAT 347 339 242 167 69.7

Reinforcement of the FENACAMWCCAM 74 992 72 594 96.8

Reinforcement of the GAE's 106 080 104 390 98.4

APPENDIX CPage 1

PROJECT IMPLEMENTATION COMPLETION REPORT

PORTUGALTRAS-OS-MONTES REGIONAL DEVELOPMENT PROJECT

LOAN 3035-PO

APPENDIX C

EU PROGRAMS IN PORTUGAL

1. Portugal has been able to participate in Community (EEC/EU) aid programs fordevelopment, principally under three structual funds: the European Regional Development Fund,the European Social Fund and the European Agricultural Guidance and Guarantee Fund -Orientation Section (FEOGA). I Total funding from the Community has been as follows:

Funding Program Funding Period Amount(ECU million)

"Previous Regulation" 1986-1988 2,200First Community Support Framework 1989-1993 9,066Second Community Support Framework 1994-1999 17,600

Initially, the main support framework under FEOGA included the following instruments:Specific Agricultural Development Program for Portugal (PEDAP), approved under regulation3828/85; improvement of wine growing in Portugal, regulation 2239/86; improvement ofefficiency of agrarian structures in Portugal, regulation 797/85; improvement in processing andmarketing of agricultural and fisheries products, regulation 355/77; and improvement andadapatation of fisheries and agriculture, regulation 4028/86. The principal instrument since 1994has been the Program for the Support of Agriculture and Forestry Modernization (PAMAF-Portarias 809/94).

2. Under the Second Community Support Framework 1994-1999, specific allocationswithin the global ECU 17.6 billion program for Portugal related to rural development(nationwide) and the Northern Region are as follows:

Purpose Amount (ECU million)Agriculture 1,764Fishing 248Environment 260Rural and local development 305Regional incentives 191Transborder cooperation 200Northern Region 537

Mota I., Vitorio Nuno, Romeu Reis, Regional Adjustment in Portugal in the 1980s. Lessons for Poland,World Bank intemal document, 1996.

APPENDIX CPage 2

Examples of support under the PAMAF program are presented below.

Purpose Subsidy Element or PremiumYoung farmers under 40 years of age 65% for eligible investments (47% for

mechanized equipment); 41% of cost of landpurchase;, start-up assistance 2,800 contos

Farmers over 40 years of age 55% of eligible investments; 40% formechanized equipment

Establishing business records 234 contosFarmers associations 90% of eligible expenses with 3,560 contos

maximum; collective investments indisadvantaged regions 50-75% of eligibleinvestments with 23 million contos maximum

Olive trees 65% of cost of replanting, plus premium of 50-150 contos/ha; 60-104 contos/ha for pruning;50% for mechanized cultivation

Vinyards 65% for replanting; 50% for specificequipment; plus 300-500 contos/ha premium

Pigs and poultry antipollution measures 50% of investment in waste treatmentCommercialization/processing/marketing 65% of eligible expenses for region-typical

products, with 50,000 contos maximum; 75%for high-quality origin certification products

Traditional irrigation 10% farmer, 67.5% EU, 22.5% GOPMinor irrigation 45% farmer, 41.5% EU, 13.5% GOPMedium sized irrigation 75% EU, 25% GOPField roads 75% EU, 25% GOPRural roads 50% municipality, 37.5% EU, 12.5% GOPElectrification general 75% EU, 25% GOPElectrification in-farm 45% farmer, 41.5% EU, 13.5% GOP

Examples of support under the guarantee programs are shown below.

Purpose Guarantee/subsidy paymentCereals 16,690 Esc/ha

Top-up until 2003 for Portugal: wheat 15Esc/kg, rye 9.5 Esc/kg, maize 7.5 Esc/kg

Cattle premium 37,100 Esc/cowSheep premium 5,080 Esc/headGoat premium 4,050 Esc/headAdditionally in disadvantaged region up to 5 heads 17,800 Esc/animal unit; 5-13

heads 9,900 Esc/animal unit; for landexcluding pasture, 1-5 ha 17,800 Esc; 32Esc/liter fuel subsidy

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