Borrower IDA Credit Arab Republic of Egypt. Principal Bank for Development and. Agricultural Credit (PBDAC) Contact Dr. Hassan Khedr, Chairman,

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No. PID7086 Project Name Egypt-Private Sector and Agricultural (+) Development Project Region Project ID Middle East and North Africa Region EGPE53832 Borrower IDA Credit Arab Republic of Egypt IBRD Loan Principal Bank for Development and Agricultural Credit (PBDAC) Implementing Agencies Date this PID prepared November 10, 1998 Projected Appraisal Date February 1999 Projected Board Date May 1999 Principal Bank for Development and Agricultural Credit (PBDAC) Contact Dr. Hassan Khedr, Chairman, Principal Bank for Development and Agricultural Credit 110 Kasr El-Aini Street, Cairo, Egypt Tel Fax Background 1. The Egyptian agricultural sector contributes to about 20t of GDP, a similar share to the national exports and accounts for nearly 40t of employment in the country. More broadly defined, agriculture provides the basis of the economy of rural Egypt, home of just over 50t of the population. Following decades of a state-controlled economy with heavy interventions across all sectors, the government has embarked on a program of economic reforms, including liberalization of land tenure, cropping patterns, prices, input supply and marketing, as well as foreign trade. Although more remains to be done, these reforms have provided the basis for market-based growth in the country. In terms of the agricultural sector, soils are fertile, almost all irrigated land is double cropped and yields are among the highest in the world for most crops. Although water availability is a major constraint, in addition to some water quality issues, water resources are less a constraint than elsewhere in the region. Egyptian agriculture has a clear comparative advantage (especially in cotton, horticultural products and wheat) and, if the economic liberalization reforms are sustained, the agricultural sector is well-placed for continued expansion and increases in productivity. As a result, the role of the private sector in these activities has recently expanded and will definitely play a pivotal role in the future. 2. The liberalization measures in the agricultural sector were not complemented by similar initiatives in the rural financial sector, which remained characterized by directed credit and below market interest rates. As a result, commercial banks have had few incentives to expand their

2 activities outside the urban areas. There appears to be a willingness on the part of the government to change this situation and introduce policy changes leading to a greater liberalization. Moreover, the increased use of agricultural machinery and the expansion of the agro-processing activities have resulted in a growing demand for medium and long-term credit, which is providing and additional opportunity for the proposed project to make a real contribution to agriculture and rural development. Project Objectives. 3. The main developmental objectives to be addressed by the project would be to: (i) promote productive investment in the sector, mainly in the small and medium-scale private farms and related agri-businesses, and in support of economically-viable and environmentally-sustainable enterprises; (ii) strengthen the financial and institutional viability of the Principal Bank for Development and Agricultural Credit (PBDAC), and its subordinated regional banks (BDACs), so that they can become effective rural financial intermediaries providing a wide range of banking services and operating as more autonomous, self-sustainable and financially-viable rural banking institutions, managed according to commercial rules, and with expanded institutional capacity to contribute to the development of a internationally-integrated economy; (iii) expand technology dissemination in agriculture to diversify production and enhance productivity and promote value-added activities; and (iv) generate employment and increase incomes in rural Egypt, and expand national exports. Project Description 4. The proposed project would have the following main components: (a) a line of credit, to PBDAC, for on-lending to viable rural and agri-business commercial activities; and (b) institutional development to strengthen PBDAC as a commercial banking institution, as well as to improve the support services needed for the dissemination of improved technologies in support of its credit operations. 5. The line of credit, with market-compatible interest rates, would be available to finance sound agricultural and agri-business activities, focusing on the improvement of farming practices, as well as processing and marketing. The project would assist farmers to improved technological packages including land leveling, water saving irrigation systems, machinery, inputs and advisory services. Importers and local equipment manufacturers would be eligible to borrow foreign exchange to import appropriate machinery and other inputs. Farmers and mechanized services providers would also be eligible to borrow for purchasing improved technology such as laser levelers, drip and sprinkle irrigation systems, rice transplanters, combines, seed and fertilizer drills, etc. Given the small-size holdings which characterize the Egyptian farming sector, the provision of custom mechanized services is considered key to modernizing farming activities. Farmers already use such custom services offered by other farmers, entrepreneurs or cooperatives to supplement their own machinery. The credit line may also finance private sector investments in storage, transportation, packing, grading and processing facilities, in line with the objectives of increasing productivity and competitiveness in the sector, as well as generate employment and increase levels of rural income. -2-

3 6. The institution development component would focus mainly on the strengthening of PBDAC as the main rural banking institution in the country. Consistent with its strategy to liberalize the economy and to free up the financial sector, Government has embarked on a program to transform PBDAC from being essentially a monolithic agricultural development agency operating according to a state plan, into an autonomous commercially-operated rural public bank. The project would help PBDAC to develop into a financially sound, and profitable, financial intermediary that is able to offer a broad range of banking services throughout Egypt, in accordance to market rules. Project Cost and Financing. 7. The total cost of the project presently estimated at US$ 640 million, which would be financed through a US$ 75 million IDA credit and a US$ 225 million IBRD loan, totaling US$ 300 million in financing from the World Bank Group. The remainder would be financed by PBDAC through its normal banking operations on the domestic market, and by the beneficiaries through their own cash contributions to the cost of the individual subprojects. Implementation. 8. The IBRD loan would be lent directly to the PBDAC, with guarantee from the Government of Egypt (GOE), and the IDA credit would be passed on to PBDAC by the Government. The present Project Management Department (PMD), which is located in the PBDAC to coordinate the ongoing Agricultural Modernization Project (Loan 3719-EGT/Credit 2585-EGT), would be further strengthened through training and office technology to implement and monitor the progress of the project. The Chairman of the PBDAC would function as the Project Director and he would be assisted in the day-to-day management of the project by a Project Coordinator and high level external technical assistance. Sustainability. 9. Sustainability would be determined mainly by the success in: (i) increasing the autonomy of PBDAC, to be able to determine the appropriate price for its products, based on commercial considerations in tune with the market, and leading to the generation of an adequate level of profits; (ii) the internal strengthening of PBDAC, to increase its efficiency and reducing its overall costs; (iii) separating the banking and non-banking activities, transferring some of these to other public agencies or divesting them to the private sector; (iv) improving in PBDAC's capacity for subproject evaluation and follow-up, ensuring the viability of individual sub-loans financed and their timely repayment; and (v) enhancing in the overall institutional management, supported by modern accounting and internal control systems, in accordance to international standards. Lessons Learned From Past Operations In the Rural Finance Sector in Egypt. 10. World Bank experience in the rural finance sector in Egypt indicates that: (a) complex projects and projects lacking adequate preparation have little chance of success or need extensive restructuring; (b) project administration details need to be appraised and agreed at negotiations; (c) sub-sector reviews are necessary pre-condition for - 3 -

4 concentrated lending particularly in a distorted environment where financial and economic indicators diverge; (d) sub-project appraisal must be very thorough and financial intermediaries need further improvement in their analytical skills to evaluate subprojects; (e) it is important to ensure selection of high quality technical assistance (TA), otherwise there will be strong internal resistance and the program may fail to produce the intended benefits; (f) foreign exchange risks assumed by executing agencies lacking the right skills and experience, or its transfer to sub-borrowers without a natural hedge, lead to bankruptcies and poor quality portfolios among financial intermediaries; (g) it is essential to pay attention to the lending terms and the interest spreads relative to other competitive sources of funds, to assure an adequate level of profits while maintaining competitiveness with the prevailing market conditions; (h) institution strengthening and policy changes take relatively longer time in order to achieve the intended results; (i) implementation arrangements should be as simple as possible, minimizing the number of executing agencies; and (j) improving rural income and employment requires a coordinated effort between rural credit institutions and both public and private technical advisory and support services. Rationale for Bank Involvement. 11. The rationale for, and value-added of Bank support to this sector would be in the form of transfer of the Bank's international experience under similar projects. The Bank has also financed several projects with rural finance components in Egypt in the past and the lessons learned will serve to mitigate past mistakes and render the project more efficient. The Bank's present involvement in the rural finance sector and its technical contribution is valued significantly, given the recent growth in rural credit demand at the same time of shrinking direct public investment in agriculture. The Bank has been instrumental through its financial operations in expanding private investment in small-and medium scale rural enterprises. Through the proposed project, the Bank would contribute to necessary policy changes and institution building to permit the development of a sound rural financial intermediary, which will have a pivotal role in the future development of the sector. Environmental Aspects. 12. The project has been classified in category B. The proposed project would finance improved agricultural practices that would have environmental benefits in terms of reducing consumption of water, fertilizers and pesticides. Any proposals for sub-projects involving substantial horizontal expansion should be accompanied by a formal environmental assessment. A satisfactory mitigation plan would be a condition for financing in case of negative environmental implications. Also, sub-projects in rural enterprises, if they are likely to have adverse environmental impact, would incorporate an environmental mitigation plan. Already under the Agricultural Modernization Project, an Environmental Unit has been established in the PBDAC and environmental training of PBDAC's staff has been provided, which enable them to evaluate environmental impact of sub-projects to be financed by the institution. The proposed project would provide additional support to the Environmental Unit of the PBDAC, to make it fully operational and ensure the subprojects conform to Egypt's environmental regulations, and in accordance to Bank's standards and policies. -4-

5 Program Objective Category. 13. The project would support private sector development by strengthening rural financial services and providing finance for private sector investments in rural areas. It would also contribute to promote economic growth, increase balance of trade, raise incomes and generate employment in rural areas. Indirectly, it would help rising standards of living in rural areas and reducing poverty. It would also contribute to improve natural resources management and promote environmentally-sound economic activities. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C Telephone No. (202) Fax No. (202) Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending November 27,

6 Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID). If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -6-