Matching grants in rural finance

and agriculture project design – Evidence from project reviews

Anna Asfaw

(Consultant)

Presentation at the Investment Days, Rome, 16th December 2011

Outline

1. Review background and projects

2. Findings

rationale

beneficiaries

MG purpose and financing structure

link to financial sector development

3. Conclusion

Desk review of 7 IFAD and 7 World Bank projects

identified through discussions with IFAD and TCI staff

focus on MGs financing productive investments

attempt to identify and include projects which

(i) represent a typical use of MGs in a given project type

(ii) show interesting features

(iii) cover different geographical areas

(iv) at different stages in the project cycle

Review background

Challenges:

- availability of project documents

- little information in design / appraisal documents

- terminology: MG sometimes “hidden”

Projects reviewed World Bank

1) Armenia, RESCAD

2) Colombia, PPSP

3) Nigeria, CADP

4) Nigeria, FADAMA II Development Project

5) Sierra Leone, RPSDP

6) Solomon Islands, RDP

7) Vietnam, ACP

IFAD 1) Burkina Faso, PROFIL

2) Colombia, OPORTUNIDADES

3) Dominican Republic, PRORURAL

4) Ghana, REP II

5) Sri Lanka, DyZ-LISSP

6) Turkey, DBSDP

7) Uganda, DSLP

Main features reviewed

rationale

beneficiaries

MG purpose and financing structure

link to financial sector development

measures to ensure sustainability of investments

economic and financial analysis

sub-project selection and evaluation criteria

coordination and implementation arrangements

M&E system

lessons from the projects

Project review – main features

Project review – main features

Main features reviewed

rationale

To what extent do the project documents contain a specific rationale for using grants for financing productive investments (rather than loans)?

If a rationale is provided, what are the key arguments made? Are these convincing?

Have alternative financing instruments been considered?

Main features reviewed

rationale

beneficiaries

definition

individuals or groups

socio-economic status

Project review – main features

Main features reviewed

rationale

beneficiaries

MG purpose and financing structure

what is financed

share of beneficiary contribution (type)

sub-project size

grant amount

Project review – main features

Main features reviewed

rationale

beneficiaries

MG purpose and financing structure

link to financial sector development

Have possible impacts on the financial system (positive and negative, intended and unintended) been taken into consideration?

Is there any evidence on impact?

Does the design actively involve FIs?

Project review – main features

Main features reviewed

rationale

beneficiaries

MG purpose and financing structure

link to financial sector development

measures to ensure sustainability of investments

economic and financial analysis

subproject selection and evaluation criteria

coordination and implementation arrangements

M&E system

lessons from the projects

Project review – main features

Findings - rationale

some projects simply do not provide specific rationales

project documents indicate market failures, but those

do not specifically relate to the use of MGs

often mentioned “financial market failure” e.g. lack of

credit supply, high real interest rates, FIs not financing long term

investments, FIs limit their supply to short term capital for non

agricultural micro-enterprises

main justification (5): unavailability of long-term

financing in rural areas targeted by the project

Alternative financing instruments:

rarely analyzed, few projects mention credit lines,

micro-credit schemes or a rural finance component

Findings - beneficiaries

defined in general terms with more or less specific

eligibility criteria (few focus on eligible subprojects)

existing private business/enterprises (5), others focus

on FO

about half prioritize the poor, e.g.

both CDD

majority of VCD

some of rural enterprise / business development (defined by

size of enterprise or socio-economic status of owner/

members) – but not the ones with focus on tech. innovation

MG only for groups (7), only individual enterprises (2)

Findings – financing structure

Projects financing

asset acquisition (e.g. purchase of farm machinery,

improved livestock)

input support (e.g. seeds, fertilizer, animal feeds)

technical assistance and advisory services (e.g.

capacity building, market research)

negative list (7): excl. fields or cost categories

Subproject size (investment volume) and grant amount

determined by max. size, a range (min. and max. size),

different categories (for type of investment or

beneficiaries)

subproject sizes differ significantly

Findings – subproject size and grant volumes

Table 1: Subproject size and grant volumes (in 1.000 US$)

subproject size max. grant

ACP 100-500 200; 300 (g)

BDSDP 35; 250 17,5 (i), 125 (i,g)

PRORURAL not specified 100-150 (g)

RDP 10-250 2-50 (i)

RPSDP 5; 40; 100 4,3; 30; 50 (i,g)

RESCAD 60 8-20 (g)

CADP 42 8,5 (g)

LISPP not clear average 0,5 (i)

REP II 0,5; 1; 3 0,15; 0,3; 0,9 (i,g)

PPSP not specified 2,6; 7,6 (i)

PROFIL not specified 1,9; 9 (g)

FADAMA II not specified 5; 25 (g)

OPORTUNIDADES not specified 14; 17; 24 (i)

DSLP not specified 4,5 -50 (g) Note: (i) individual, (g) group Source: based on project review;

Example 1: ACP

-- for new partnership

-- for Up-scaling

- inv. & working capital

- negative list

- company lump sum

of 20.000 US$

Example 2: REP II

-- for equipment

-- stage of business

1) start-up stage

2) survival stage

3) high performing &

growth stage

Findings – beneficiary contribution

Type of contribution

cash, saving (preferred)

in-kind contribution through local inputs, building and

land rental, labor and staff time (3, but not CDD)

loan possible (5), (2 projects 60% loan must)

Share of contribution

projects do not explain how the grant share and the

share of the beneficiary contribution are determined

experience of earlier phases or other projects

Findings – beneficiary contribution

Source: based on project review

Figure 1: Share of beneficiary contribution (in %)

0

20

40

60

80

CADP

REP II

ACPPPS

P

OPORTU

NIDADES

RDP

DBSDP

FADAM

A II

PRORURAL

DzZ-L

ISPP

RESCAD

DSLP

PROFIL

Asset Input Technical Assistance

Findings – link to financial sector development

beneficiaries' contribution must be deposited in a

formal financial institution

involvement of financial service provider at different

levels: from being part of the selection committee of

subprojects up to management of MG funds

(6) projects have a direct link to FSD

out of those (2) provide MGs via FI: REP II and RDP

out of the ones without link (1) mentions representatives of

the banking sector taking part in final evaluation and

approval

IFAD provides for almost all projects a working paper

on the financial system, but an assessment of the

impact of the MG on the financial system not found

Findings – link to financial sector development

Impact on financial system

positive ‘crowding-in’ of private equity and commercial

finance (ACP; FADAMA: groups that acquire assets will

generate increased income flows, and if given parallel

training in savings and credit management, their association

can either start saving with microfinance institutions as a

step toward future loans or establish their own savings and

credit associations)

negative impact of ‘crowding-out’ financial institutions

(RPSDP, Sierra Leone - is not the case for the post conflict

situation of Sierra Leone) and grant resources might

undermine the credit culture in rural areas (RESCAD,

Armenia – grants limited in scope and geared to specific

innovative activities)

Other findings

Measures to ensure sustainability of investments

no specific measures

- improved access to formal financial services

- higher profitable investment opportunities

- new business partnerships

- demonstration of technological innovations

Economic and financial analysis

ex-ante for some representative investments, (2)

without analysis (demand-driven)

RESCAD: independent evaluation for each subproject

Other findings

Subproject selection and evaluation criteria

competitive structure (6)

evaluation criteria (e.g. positive externalities,

economic, socio-economic and environmental)

Coordination and implementation arrangements

first review at local level, final approval by semi-

autonomous committee (representatives of all

interested actors) at intermediate level (district,

regional), implementation under PCU

financial service provider in charge (final approval after

confirmation by project)

Other findings

M&E System

MGs well captured when project is mainly about MGs

no comprehensive evaluation of MG performance

(mostly econ. and financial analysis for investments)

Lessons from the projects

lessons learnt, however sometimes very specific to

project type and fields of investment

Conclusion

Information provided in design documents of MG

schemes varies largely, and it suggests that MG schemes

are not properly designed at that stage. That needs to

change.

Alternative financing instrument, rationale and

justification, but also the implementation arrangements

need more attention.

Plenty of lessons to be learned, but still: empirical

evidence is lacking, too few projects have conducted an

evaluation and some more research needs to be done on

the impact of MGs.

Thank you for your

attention!