Bolivia - Third Livestock Development Project

RESTRICTED IILE wri Report No. p-939 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF BOLIVIA FOR A THIRD LIVESTOCK PROJECT May 14, 1971  INTERN.ATIOiHiL DEVEFL-FT H..T ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF BOLIVIA FOR A THIRD LIVESTOCK PROJECT 1. I submit the followJing report and recommendation on a proposed development credit in various currencies equivalent to US$6.8 million to the Republic of Bolivia for a third livestock project. PART I - HISTORICAL 2. IDA first associated itself with the Bolivian livestock sector through a $2 million credit made on May 26, 1967, in order to help Bolivia realize the excellent opportunities that existed for expanding production in the Beni Department of beef for export. The progress was smoother and faster than expected. The Beni ranchers were keenly interested in borrowing for ranch development and in the specialized technical services provided. As a result the credit proceeds were committed within two years from the effective date and, in the middle of 1969, it became clear that additional funds were necessary to preserve the momentum. 3. The Bolivian Government applied to IDA in August 1969 for a new credit for a second and larger project, comprising, in addition to a continued lending program for beef ranch development, processing, storage and marketing of meat and an initial program for small holder sheep development on the altiplano. The Government and IDA recognized that appraisal and discussion of this project would take considerable time. Consequently, it was agreed to seek the approval of the Executive Directors for a small, $1.4 million, credit which would be made on the same terms and conditions as the first credit and would finance an interim long-term lending program exclusively. This second credit was approved in December 1969 and signed on January 13, 1970. Its proceeds are now expected to be fully committed by October 1971. 4. Simultaneously, the Government proceeded with the preparation of the proposed third project. After project appraisal in November 1969, discussions were held with the Government about its livestock and meat policies. The negotiation of the proposed credit took place in Washington at the beginning of January 1971, with a delegation headed by Mr. Fernando Barthelemy of the Ministry of Finance and comprising Mlr. Alberto Valdes Loma, General Manager of Banco Agricola de Bolivia (BAB), Mr. Rafael Oviedo of the Ministry of Agriculture, and Mr. Ewaldo Bruckner, Vice President of the Beni Ranchers' Federation. However, the presentation of the credit to the Executive Directors had to be postponed in view of discussions between the Government, BAB, and  the Beni Ranchers' Federation about certain requests by some ranchers for temporary relief frcm interest payments on previous loans made by BAB and the Central Bank. This matter has now been resolved satisfactorily with relatively minor rescheduling of interest by BAB. 5. The status as of March 31, 1971 of previous IDA credits and the one Bank loan is as follows: Credit Amount (US$ million) Loan No. Year Borrower Purpose Bank IDA Undis- bursed 61 1964 Republic of Bolivia Power - 10.0 _ 62 1964 Republic of Bolivia Power - 5.0 - 107 1967 Republic of Bolivia Livestock - 2.0 0.03 148 1969 Republic of Bolivia Power - 7.4 6.3 635 1969 Compania Yacibol Bogoc Gas ) 23.2 - 23.2 1/ Transportadores (YABOG) Pipeline ) 171 1970 Republic of Bolivia Livestock - 1.4 1.1 Total now held by Bank and IDA 23.2 25.8 Total undisbursed 23.2 7.4 30.6 1/ Not yet effective The power and livestock projects have been and continue to be executed punctually and efficiently, and no delays have occurred in the disbursement of the respective credits. Conditions of effectiveness for the July 22, 1969 pipeline loan had not been fully met by October 17, 1969 when the Government nationalized the Bolivian Gulf Oil Company. In late 1969, after the Government assured the Bank that it intended to pay reasonable compensation to Gulf, discussions bega-n among the several parties with a view to reconstituting the project. The compensation issue was settled by decree to the satisfaction of Gulf in September 1970, and over the past three months, the agreements for the pipeline loan and related matters have been renegotiated. The revised loan is expected to be presented to the Executive Directors for approval in the next few weeks. The reconstitution of the pipeline project should lead to a substantial improvement in the investment climate in Bolivia, as well as in its export earnings. 6. The Bank is currently acting as Executing Agency for the United Nations Development Programme which is financing technical assistance to the Bolivian railways. This should result in organi- zational and operational improvements and in the formulation of an investment program which could form the basis for a future credit by IDA for the railways. The Government has also indicated that it would like further IDA assistance for the power sector, but discussions are in abeyance pending Government action on power rates.  - 3 - In March 1971, a Bank mission visited Bolivia to study the mining and metallurgical sector and to determine how the Bank Group might assist its development. The mission's report is in preparation. Consideration of an education project is in abeyance because of the difficulty which the Government would have to make a financial contribution to it. PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: Republic of Bolivia. Beneficiary: Banco Agricola de Bolivia (BAB). Amount: In various currencies equivalent to US$6.8 million. Purpose: To help finance credit programs for beef cattle and sheep ranchers, technical services related thereto, a study of meat processing and marketing, and construction and renovation of slaughterhouses and cold storage facilities. Amortization: In 50 years, including a 10-year period of grace, through semi-annual instalments of 1/2 of 1 percent frcm November 15, 1981 through May 15, 1991 and of 1-1/2 percent from November 15, 1991 through May 15, 2021. Service charge: 3/4 of 1 percent per annum. Relending terms: The Borrower will relend the proceeds of the Development Credit in local currency to the Beneficiary for 16 years at 7-1/4 percent. Loans to ranchers will be at 12 percent per annum. Estimated economic 18 percent on investment in cattle return on the and sheep ranch development. Project: PART III - THE PROJECT 8. An appraisal report entitled "Third Livestock Development Project" (PA-51a) is attached.  - 4 - 9. Agriculture in Bolivia serves mainly subsistence needs. It employs more than half of the working population but contributes little to export earnings. Following redistribution of land after the 1952 revolution, agricultural production stagnated for some time but there have been significant increases in production in recent years, particularly in sugar, rice and cotton in the lcwlands. While the emphasis in past agricultural development has been on import substitution, future agricultural development will have to be centered increasingly on the output of commodities with good export prospects, thus strengthening Bolivia's balance of payments as well as providing higher incomes and employment. The outlook for beef exports is particularly favorable. Beef production in the Beni Department, where there are 10-15 million hectares of open grassland with good rainfall, has increased significantly in recent years. lWith better herd and pasture management, and the availability of long-term funds for ranch development, the ranchers in the Beni should be able to increase further the supply of beef for export markets. However, if Bolivia is to exploit the export possibilities effectively, it will be necessary to restructure and expand present marketing arrangements. 10. The project will improve pasture and herd management on about 250 beef ranches through long and short-term lending by BAB and the provision of technical services. Long-term loans to ranchers will be for 12 years including a 4-year grace period. 4Ahile short-term loans were limited to maturities of up to 12 months under the earlier projects and were not financed by IDA, the present credit will assist in financing such loans for maturities of up to 24 months in order to meet ranchers' working capital requirements more adequately. The project is expected to increase production in approximately 10 years by 10,400 tons of beef per year, of which a large proportion would be exported, with foreign exchange earnings of $5.5 million equivalent. The lending program for beef producers will cover not only the Beni Department, but also the Pando Department and scme adjacent provinces of other departments of north-western Bolivia. The Inter-American Development Bank (IDB) on April 21, 1970 made a $5 million loan for livestock development in the eastern depart- ments of Santa Cruz, Chuquisaca and Tarija. In order to ensure uniform standards of project administration, the Project Director in charge of technical services for the IDA-financed projects has been placed in charge also of the IDB project. 11. In addition to measures designed to increase production of beef, the project includes the employment of consultants to advise on cattle slaughter, processing, transport and marketing, and on the organization of meat grading and inspection. Once the work of the consultants is completed, BAB will finance with proceeds of the Credit the construction of slaughterhouses and cold storage plants. As a condition of effectiveness of the Credit, the Government will abolish all quantitative restrictions on the export of beef, and such restrictions will not be reintroduced,  - 5 - unless they are temporary and the Government demonstrates to IDA that they are imposed because of emergency ccnditions. The Government has also undertaken that, with due regard to the recommendations of the ccnsultants, it will adopt a beef price policy acceptable to IDA establishing appropriate price differen- tials between different grades and qualities of meat. Moreover, in view of the importunce of air transport as virtually the sole means of moving meat from the Beni, the Government will take measures to ensure the provision of adequate air transport and to keep air freight tariffs at an appropriate level. 12. The sheep industry, concentrated in the heavily populated but low-income highland, also offers favorable prospects of increased production. The utilization of this potential is dependent, as in the case of beef, on improved techniques and the availability of long-term funds for new investment. The project will improve pasture and herd management on about 150 sheep properties, owned by both cooperatives and individual farmers, through long and short-term lending programs on terms similar to those that apply to loans to beef ranchers. The project is expected to increase annual production, in approximately 10 years, by 1,450 tons of mutton and 575 tons of wool. The additional wool production would have a value of approximately $410,000 and could replace imports; the additional mutton, valued at $850,000 would be consumed locally. The sheep sub-project will have considerable social benefits, providing additional income to over 3,000 families on existing small holdings in the economically depressed highlands. 13. The cost of the entire project is estimated at US$11 million equivalent, of which the foreign exchange component is estimated at 62 percent. The proposed IDA credit of US$6.8 million corresponds to this component. The local costs of the project will be covered by BAB, the ranchers, the abattoir companies, and, in the case of consulting services, the Government budget. 14. The Government-owned Banco Agricola de Bolivia (BAB), through which the proceeds of the credit will be channelled, has been by far the most important source of long and medium-term agri- cultural credit and has served as a vehicle for assistance from the United States and the IDB. It has a wide network of branches, an experienced staff and has disbursed the earlier IDA credits in a satisfactory manner. Although BAB suffered losses in the 'fifties, its situation has since improved. To improve BAB's liquidity position and help it to make its contribution to the project, the Government will relend the proceeds of the credit to BAB on terms permitting the capitalization of most of the interest during a 5-year grace period. IWJith a view to improving its efficiency, BAB will consult with IDA concerning steps it will take to increase the number and responsibility of middle level executive personnel. Relending of IDA funds to ranchers iwill be at 12 percent interest. In order to place a floor under the real interest rate paid by ranchers, the Government has undertaken  - 6 - that, if the annual rate of inflation in Bolivia exceeds 8 percent, it will introduce indexing arrangements satisfactory to IDA. 15. Individual purchases of goods for on-ranch investment would be handled through existing commercial channels, which are well established and provide adequate competition. All purchases of breeding livestock, much of which will probably be imported, would be subject to the approval of the Project Director, with respect to quality, suitability and price. Plant, equipment supplies and contracts for the construction and renovation of abattoirs and cold storage facilities would be subject to international competitive bidding. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Development Credit Agreement between the Republic of Bolivia and the Association, a draft Project Agreement between the Association and Banco Agricola de Bolivia, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the text of a Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. 17. In addition to the undertakings described in paragraphs 11 and 14 above, the draft agreements contain provisions normally included in livestock projects and followl the pattern of the earlier agreements relative to livestock development in Bolivia. PART V - THE ECONOMY 18. A report on the "Current Economic Position and Prospects of Bolivia" (WH-199) dated May 19, 1970 was distributed to the Executive Directors on June 1, 1970. A new economic mission returned from Bolivia in early March, and a summary of its preliminary findings is attached. 19. Bolivia reached agreement in 1969