Nicaragua - Agricultural Development Project

RETURN TO R E S T R I C T E D REEPOR1TS DE- K Report No.T.O. 91-a ONE WEEK FiLE IPY This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE CAPITAL GOODS IMPORT PROGRAM OF THE INSTITUTO DE FOMENTO NACIONAL MANAGUA, NICARAGUA July 15, 1955 Department of Technical Operations  TABLE OF EQUIVALENTS US$1.00 * C. 7.00 C. 1.00 - US$0. 142857 C. 1,000,000.00 US$142,857.00  TABLE OF CONTENTS page I. Background 1 II. The Project 2 III. Justification of the Project 3 IV. The Borrower 9 V. Conclusions 13 Appendix I - Importation of Capital Goods for Agricultural Development (as amended) II - Credit Applications from January 1 to December 31, 1954 " III - Financing Program including Medium and Long-term Loans and Direct Investments IV - Position of Credit Applications in Relation to the Budget Funds (at June 10, 1955)  NICARAGUA APPRAISAL OF THE CAPITAL GOODS IMPORT PROGRAhM OF THE INSTITUTO DE FOMENTO NACIONAL I. BACKGROUND 1. The rapid expansion of cotton production dominates the present phase of agricultural development in Nicaragua. This expansion has brought its own problems, among which are: land clearing, soil erosion, cotton seed storage, by-products, disposal and port and shipping facili- ties. It is also having far-reaching repercussions on other agricultural pursuits. Such vital industries as corn cultivation, dairying and beef raising are tending to be replaced on the Western Plains by cotton, owing to the quick and large net returns promised by this commodity. 2. In 1953, the Government charged the newly founded Instituto de Fomento Nacional with the task of planning and financing of agricultural and industrial development specifically to.- a) "--serve as an active instrument of the Government in the execu- tion of programs directed to the development of the national production; b) lend in all fields of production the necessary technical assist- ance directly or in collaboration with other official or private institutions; c) develop the agricultural and cattle industries and stimulate their diversification in order to fill the needs of the domestic and export markets. Develop tne establishment, growth and expansion of those industrial activities, which permit a better use of the country's natural resources; d) stimulate the formation of capital through the channeling of private savings towards productive ends; e) back private initiative in those activities that contribute directly or indirectly to make more jobs for Nicaraguans and to strengthen economic relations with foreign countries; f) assist in the formation of enterprises necessary for the economic development of the Nation."  3. In October 1954 the Instituto submitted a request for an IBRD loan to finance a part of its program. After discussions with a Bank mission, which visited Nicaragua in February 1955, the Instituto sub- mitted a slightly revised proposal. 4. The following report contains an analysis of this proposal and examines the following three basic questions: (a) the nature of the project; (b) the justification of the project; (c) the suitability of the Instituto as a borrower. II. THE PROJECT 5. The proposal is for a loan of the equivalent of US$1.6 million for a term of ten years, including a grace period for disbursement of two years. The borrower would be the Instituto de Fomento Nacional de Nicaragua and the loan would be guaranteed by the Government of Nicara- gua. 6. The purpose of the loan is to provide the foreign exchange neces- sary for the import of machinery and equipment for the following purposes: Appendix I (US$ 'ooo) a) Land clearing and erosion control machinery 260 b) Milk processing plants 540 c) Breeding stock (cattle) 400 d) Pasture improvement equipment 400 1,600 7. The proposed method of operating the project is as follows:- a) The tractors and graders required for land clearance and erosion control would be purchased by the Instituto through local deal- ers. The machines would be rented to private companies or persons on 5-year hire-purchase agreements. Half of the machines have already been ordered under manufacturerst credits which call for 25, down-payment and 25% each at the end of the 1st, 2nd and 3rd year. The Instituto is requesting that these tractors be included in the goods to be financed out of the proceeds of the proposed IBRD-loan in order to free its own resources which are urgently needed to grant credits to farmers for land reclamation wArork to be performed by this machinery. b) The Instituto proposes to lend to milk producing companies the foreign exchange necessary to import milk processing plant and equipment on a 10-year term. These companies are either already in existence or are being formed.  - 3 - c) The cattle would be selected and purchased by a technician from the Instituto on behalf of farmer clients to whom the Instituto would extend 5-year credit up to 80% of the cost to the farmer. A small number of cattle (approx. 10O) would be purchased by the Instituto to stock its own stud farm. d) Local distributors would order abroad the pasture improvement equip- ment, including fencing wire, overhead irrigation plants, diesel engines for the plants, windmills and haymaking machinery. The Instituto would pay for this equipment and would retain ownership of the goods for one year after receipt, unless sold before, at which time the distributor must purchase them on his own account. The Instituto would extend 5 years credit to farmers for up to 100% to buy the equipment from the distributors. 8. On the basis of these proposals the Instituto would have available counterpart funds which would accrue because the term granted by the Instituto to some of its borrowers or hire-purchase clients would be shorter than the term of the proposed IBRD loan. The Instituto proposes to use the counterpart funds to finance operations under its general agricultural lending program. III. JUSTIFICATION OF THE PROJECT A. Importation of Mlachinery for Land Reclamation i) Land Clearing 9. Climate and soils of the west coast of Nicaragua are very suitable for cotton cultivation. The sharply defined wet and dry seasons provide almost perfect growing and harvesting conditions, while the fe-rtile volcanic soils are easily- workld and capable of producing yields comparable to irrigated cot- ton in the United States. It is, therefore, not surprising that favorable cotton prices, together with introduction of mechanized cultivation and modern disease control methods have caused a rapid increase in the cotton acreage - fron 35,oco acres in 1949 to approximately 190,000 acres in 1954. It is esti- mated that the cotton acreage will reach 300,000 acres in 1955. 10. The basic quality of the Nicaraguan cotton is good, as standardized U.S. seed is used for all plantings. All gin cotton is graded by official classifiers. Almost the whole crop falls wi-thin the grades Midling and Strict Lcw Midling. 11. The cotton crop of Nicaragua represents less than l1,S of the total world export. The present economic position of cotton cultivation in Nicaragua depends primarily on the US price support policy. By slightly underselling the U.S. on the world market Nicaragua does not have any difficulties in dis- posing of its crop at present. In the long run Nicaragua can remain competi- tive through cutting the cost of production by more efficient methods of spraying, use of fertilizers and employment of machinery. In the case of sig- nificantly lcwer prices than at present the marginal cotton land could revert to other crops or to cattle vithout excessive capital loss. 12. Heavy machinery is needed for the timber clearing and land levelling in order to reclaim new land. Previous importations of suitable machines have been small (only three tractors of Type D-6 or heavier have been imported by private enterprises in the last two years), due to a relatively weak demand up to a year ago for land reclamation services, and to the difficulty in providing medium-term credits.  - 4 - 13. Purchasing of heavy tractors for land clearance by individual farmers is uneconomic because full use of the machinery during its economic life is not possible by the farmers and consequently cost of production would be high. There are at present in Nicaragua several private companies engaged in custom soil clearing and conservation work, which are keen to enlarge the scope of their operations, but cannot do so due to lack of adequate financing. The Instituto's decision to import 12 crawler tractors (80 - 90HP) and rent them to private companies on a five-year hire-purchase system appears to be sound. 14. As there was a great immediate need for these machines, the Instituto has already ordered six of the tractors on a 3-year suppliers' credit and has requested the Bank to refinance this transaction. We feel that although this 3-year contract is not the most advisable, not enough of a case can be made for the inclusion of the cost of these tractors in the proposed loan; the expenditure by the Instituto on this machinery utilizes a negligible part of its local currency resources which are ample for its lending program. 1. -Maintenance and servicing facilities to take care of the new tractors are adequate. Distributors of this type of machinery have improved their facilities during the past few years as a result of the increased imports under Loan 44-NI. .16. The Instituto proposes to extend five years' credit to farmers cover- ing up to 50% of the cost of land clearing services. ii) Soil Erosion Control 17. Part of the land used for cotton is sloping and is, therefore, liable to gully and sheet erosion under the open soil conditions of cotton cultiva- tion. Farmers have not been soil erosion conscious up to recently. However, very heavy rains last year caused widespread damage nith the consequence that soil conservation services now are in great demand. The soil conservation law, nav in draft stage, together with thp work of more than a dozen teams of trained extension workers from STAN*.I are likely to make the cotton growers aware of the soil erosion menace and thus further increase the demand for such services. 18. Cotton cultivation is so profitable that farmers cannot be expected to undertake methods of conservation involving alternative crops or animal hus- bandry which would be ideal from the point of view of full protection of soil and fertility. However, experience indicates that contour terracing properly constructed is efi'ective in preventing most of the damage. 19. It has been found that the most suitable machine to do this job in Nicaragua conditions is a type of roadgrader which combines easy transport- ability with good manoeuvring ability. Terraces made with this type of machine have proved to stand up even under the heavy rains of last year, while others constructed alongside with inadequate equipment resulted in heavy soil and crop losses. As machines of this type are used by the Public Works Department in all their road maintenance work, trained operators and reasonable servicing facilities should be available. *) Servicios Tecnicos America Nicaragua.  -5- 20. The Instituto proposes to import one such grader*) and rent it to a private company on a five-yearts hire-purchase agreement. The cost of terracing to the farmer is approximately C. 50 per acre, or less than 8% of the net income from one yearts crop. The terraces need to be re- novated after three years. As one grader can average 7000 acres per season and can in addition be used in roadwork during the wet season, the gross return from one year's operations is 2 - 3 times the capital outlay. Precise data are not available on operating costs, but the opera- tions should be quite profitable. The Instituto proposes to extend three years credit covering 50% of the cost to farmers for custom terracing. B. Dairy Industries 21. Technicians of the Instituto have made a thorough study of the dairy industry of Nicaragua and their findings have been corroborated by an independent investigator, Dr. van Dam of UINICEF**). The latter also left plans and specifications for the dairy manufacturing plants neces- sary for a rational development of the dairy industry. The following appraisal is based on the data provided by the above studies. 22. Underpopulated Nicaragua has an annual population growth of 2.5 - 3%. Infant mortality, however, is high due to lack of protective foods, especially milk and milk products. It has been calculated that the average consumption of milk is only 0.1 liter a day per person, -while minimum nutritional standards require at least three times this quantity. 23. The Government of Nicaragua is aware of this deficiency in nutritional standards. In 1952 it agreed to provide 65,000 school- children daily with a glass of reconstituted skim milk provided that UNICEF erect a milk drying plant in MIanagua. This plant, which began operations in the end of 1953 has an average hourly capacity of 500 gal- lons and is now owned and operated by the Cia. Nac. Productora de Leche (a producer-owned milk company). Apart from providing an outlet for in- creased milk production, this plant serves as an equalizer of the sharply fluctuating seasonal supply of milk. Prior to the creation of the plant farmers suffered material losses due to their inability to dispose of all milk during the wet season when supply reaches a peak while demand tends to be low. Wifith the plant operating the Mianagua milk company is able to pay the producers a more even price all year round (averaging C. 0.8 per liter which has proved highly satisfactory to the farmers). _24 However, due to a sharp increase in the overall demand for fluid milk (see below) the milk drying plant does not receive sufficient supplies to provide the milk powder required under the Government program. Nicaragua is, therefore, importing milk powder at the rate of about 400,000 lbs. a year. It is a net importer of dairy products to the ex- tent of about $^100,000 a year. X -2 graders have already been imported which are not included in the loan request. s8*) United Nations International Childrens Emergency Fund.  - 6 - 25. In areas where the cotton boom is felt, a certain number of farmers have gone out of milk production. These, however, have been mainly beef raisers who milked a limited number of cows in order to ob- tain some steady cash income. There seems relatively little risk that any important number of specialized dairy farmers will turn into cotton production as such factors as invested capital, land configuration and moisture conditions and soil type make it impossible for them to change, horever profitable cotton otherwise could be. In fact, the present milk prices and marketing conditions in Managua are such that newlr dairy enter- prises are being established, whenever the necessary capital is available. To sustain and accelerate this trend, further encouragement in the form of capital and advice is needed. 26. There are at present about half a million cows in Nicaragua. Only one-half of these are in production at any one time, and their yield is extremely low. There are marked seasonal fluctuations in supply due to lack of provisions for hay and silage to level out feed supplies. Management and feeding are in general primitive and the stock is of poor inherited producing capacity. *27. Except in Managua, the handling of consumer milk is very un- hygienic; raw, uncooled bulk milk is sold from door to door directly by producers or by intermediate vendors. Such milk, produced as it is under sub-standard conditions of hygiene in a tropical climate and often mixed with water is not fit for human consumption. Thus, outside of IJiianagua, the poor quality of milk is an effective deterrent to an increased con- sumption. 28. The following steps should be taken to improve the present situa- tion:- 1) Establishment of a chair