Uruguay - Agricultural Development Project

Document of The World Bank iL L L FOR OFFICIAL USE ONLY Report No. P-2751-UR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO REPUBLICA ORIENTAL DEL URUGUAY FOR AN AGRICULTURAL DEVELOPMENT PROJECT March 27, 1980 T docuent has a retri*cted dbtriten and may be use by recmpients only tn the performance of | their oMeWl duties. Its contents may not otherwise be disclosed without World Dank authorization.  CURRENCY EQUIVALENTS (As of December 1979) Currency Unit New Uruguayan Peso (NUr$) NUr$1 100 Centavos (ctv) NUr$8.35 - US$1 NUr$1 US$0.12 NUr$1,000 = US$120 NUr$1 million - US$120,000 WEIGHTS AND MEASURES Metric System GLOSSARY OF ACRONYMS BROU Bank of the Republic CBU Central Bank CHPA (PLAN) = Honorary Commission for the Agricultural Plan CREA = Regional Centers for Agricultural Experiments FG = Livestock Fund of Central Bank INC = National Settlement Institute MAP = Ministry of Agriculture and Fisheries OPYPA = Office for Agricultural Planning and Policy Coordination SEPLACODI = Secretariat for Planning, Coordination and Information Government of Uruguay FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY URUGUAY AGRICULTURAL DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republica Oriental del Uruguay Amount: US$24 million equivalent Terms: Repayable in 15 years, including 3 years of grace, at 8.25% per annum. Relending Terms: Government would relend the Bank funds to Banco de la Republica (BROU) on the same terms as would apply to the sub-loans made by BROU to its sub-borrowers except that BROU would receive a margin of two percent on all loans. The Government would assume the foreign exchange risk. Subloans would have a maximum term of 10 years, including grace periods up to five years. The sub-loans would be indexed and bear a real interest of 5% for farmers with 500 ha or more, and 3% for those with less. Project Description: The proposed project would have three major objectives: (a) to continue assistance under earlier Bank financed projects for livestock and dairy development; (b) to promote agricultural diversification by supporting cultivation of crops in association with livestock; and (c) to assist settlers in National Settlement Institute colonies to improve techniques and production patterns on their farms, which are currently suffering from soil erosion and depletion. The objectives would be achieved through a three year commitment, five year investment program of US$100 million equivalent, assisted by extension and tech- nical services costing about US$11.0 million. Sixty percent of the investment program would be financed by the Bank of the Republic; the Bank and the farmers would finance the remainder. Project Risks: The project faces no unusual risks. There is, however, an element of uncertainty as regards producers demand for investment loans. There is, first, the extent to which world market prices for project output and input will follow the r This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 11 - course forecast in the analysis. In addition, and perhaps more importantly, project Success is likely to depend on continued adherence by the Government to the market oriented sector policies adopted in August 1978. Estimated Costs: Investment Category Local Foreign Total (US$ million) Livestock Development 14.4 17.7 32.1 Mixed Farm Development 9.7 14.0 23.7 Dairy Farm Development 4.4 5.5 9.9 INC Settlement Development 4.5 3.5 8.0 Technical Services 4.9 1.6 6.5 Feeder Roads 0.4 0.2 0.6 Contingencies 14.2 16.0 30.2 Total 52.5 1/ 58.5 111.0 1/ Financing Plan: Local Foreign Total (US$ -million) Bank 0 24,0 24.0 BROU 34.4 26.Z 60.6 Government 7.0 0 7.0 Sub-borrowers 11.1 8.3 19.4 Total 52.5 58.5 111.0 Estimated Disbursements: 1981 1982 1983 1984 1985 -------------- US$ million ---- Annual 2.6 6.2 7.8 5.2 2.2 Cumulative 2.6 8.8 16.6 21.8 24.0 Economic Rate of Return: Weighted average of all components is 26Z. Appraisal Report: Report No. 2779b-UR, dated March 27, 1980, 1/ Including US$3.4 million in taxes.  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO REPUBLICA ORIENTAL DEL URUGUAY FOR AN AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Republica Oriental del Uruguay for the equivalent of US$24.0 million to help finance the proposed Agricultural Development Project, the loan would have a term of 15 years, including 3 years of grace, at an interest rate of 8.25% per annum. PART I - THE ECONOMY 2. An economic mission visited Uruguay in May 1979. Discussions of the mission's findings with the Government have continued and the report will be distributed shortly. A summary of Country Basic Data is attached as Annex 1. Economic Performance 3. After having become one of the most prosperous countries in Latin America in the first half of the twentieth century, Uruguay's economy deteri- orated steadily in the next two decades. This was the result of policies that favored urban consumption and high-cost industrial import substitution at the expense of investment, exports and growth. A well-educated and predominantly urban population generated increasing demands for high employment, better public services and social benefits. The attempts to meet these demands took the form of fiscal, exchange rate and price policies that resulted in a sustained transfer of income out of the resource-rich agricultural and live- stock sector mainly into consumption by the urban population. Industrial sector development, initially stimulated by shortages of consumer goods during World War II, was fostered through a deliberate import substitution and protection policy during the immediate post-war era. However, economic growth faltered as agricultural production, productivity and exports declined after the Korean War. Moreover, industrial import substitution possibilities in the small domestic market were quickly exhausted. Unemployment and underemployment rose sharply. Government policies aimed at maintaining urban income and consumption levels resulted in strong inflationary pressures, capital flight and serious misalloca- tion of resources. During the early 1970s, political and social unrest marked by urban terrorism and labor strife further discouraged savings, investment and any initiative to expand output and exports. 4. Uruguay had instituted comprehensive welfare legislation in the 1920s when the potential from livestock seemed inexhaustible. Progressive legislation covering such areas as social security retirement and survivors' pensions, job security, unemployment compensation, free health and education services provided mechanisms for redistributing income. Uruguay was thus able  to achieve a relatively high level of social progress as evidenced by an in- come distribution pattern which compares favorably with that of many developed countries. Although Uruguay experienced a drop in per capita income during the 1960s and early 1970s, the country has attained levels that are comparable to those of some developed countries and above those of most developing countries in health (life expectancy at birth of 71 years), edu,.ation (94% literacy rate), and nutrition (per capita intake of protein of almost 100 grams per day). 5. The redistribution mechanisms were not, however, immune to economic instability--and, in effect, contributed to it. The uncoordinated growth of the social security system and its liberal benefits, coupled with a stagnant economy and rapid inflation, caused increasing stress on the country's resources. Larger transfers from the Central Government were increasingly needed to provide decreasing real benefits to a growing number of people. In addition to the financial burden on the Government, the high level of contributions required by the system from employers increased the real cost of labor. This high cost, coupled with the incentives to the use of capital inherent in the import substitution strategy, acted as a brake on the creation of employ- ment. Moreover, inefficient administration resulted in an inadequate level of real benefits, and, together with the old age structure of the population, resulted in a large number of people working past retirement age (though as retirement was at 55 years, this was not necessarily a great burden), further limiting employment opportunities for the groups entering the labor force. 6. The structural changes in the world economy that emerged in late 1973 had a strong impact on the Uruguayan economy. The threefold increase in the price of imported oil (Uruguay imports 100% of its oil needs), substantial increases in other import prices, and the closing of the European Economic Community to meat imports contributed to a sharp reversal in the balance of payments, a precipitous deterioration of fiscal performance and to an acceler- ation of domestic inflation. The economic team appointed in mid-1974 deter- mined that long-term solutions to the country's economic problems went beyond stabilization and required a fundamental reorientation of economic management away from an inward-looking and towards an export-oriented develop- ment strategy. The basic objectives of the new program were the improvement of resource allocation and productive efficiency through greater reliance on the price mechanism, and the promotion and diversification of nontraditional exports, i.e., those other than beef and wool. The achievement of these objectives required the freeing of domestic prices and the liberalization of the foreign trade and payment system from the burdensome controls instituted in the past. 7. The rapid implementation of export-oriented development measures yielded unexpectedly rapid and positive results in 1975-78. Government economic policy during this period concentrated on fostering growth in the commodity-producing sectors by eliminating various types of controls that distorted resource allocation, and by achieving a more realistic exchange rate in order to promote exports. Quantitative and financial controls on imports  - 3 - of raw materials and capital goods were eliminated; price ceilings on many domestic products were lifted; interest rates on deposits and loans were freed; and nontraditional exports were successfully stimulated through a policy of minidevaluations and the establishment of a system of tax rebates. Reversing policies that prevailed for thirty years, the government eliminated controls on pricing and marketing of agricultural goods in the third quarter of 1978. While the immediate effect of the removal of the ceiling was to increase beef prices by about 20%, the difference between international and domestic prices, the measure should help in the medium term to improve effi- ciency in the sector and lead to higher supplies. In continuation of its liberalization policies, the Government reduced maximum levels of import duties and surcharges in January 1979 and introduced a schedule for further reductions over the next five years. 8. The economy responded to these changed policies by achieving an annual average GDP growth of about 3.2% during 1974-78, compared with an annual decline of 0.2% during the previous four years. In 1979, expansion was almost 9% in real terms. Gross domestic investment also increased from an average of 13.5% of GDP in the period 1970-74 to 18.3% in 1977/78. Produc- tion of nontraditional exports, particularly leather and textile manufactures, led the recovery of the economy and was instrumental in initiating a remark- able turnaround in the external sector which has continued since 1976. As a result, the current account deficit declined from US$190 million in 1975 (5.1% of GDP) to US$158 million in 1979 (2.7% of GDP) which together with strong private capital inflows, resulted in gains in net foreign exchange reserves. Reserves increased from US$184 million in 1975 to almost US$900 million (including revaluation of gold) by November 1979, representing roughly 10 months of imports. 9. The Central Government's fiscal situation continued to improve in 1977-78 (an average overall deficit of 1.2% of GDP). The policy of wage restraint enabled the Government to restrict current expenditures and finance a larger investment program. The Government's wage policy has also been instrumental in maintaining a relatively low level of inflation during 1976-78 as compared to 1974-75. The strong fiscal performance reflected not only real cuts in expenditures--particularly on wages and salaries--but also continued real growth in revenues, mainly from improved import duty collections related to higher imports and buoyancy in value-added and corporate profit taxes. As a result of the reactivation of the economy, and the diversity of redistribution mechanisms, the economic liberalization and stabilization program does not appear to have significantly affected the poor. 10. The Government has undertaken a series of measures to reduce inflation and the real interest rates of 15-20% which prevailed in 1977-78. In March 1979, the Government announced the rate of exchange, the minimum wage rate, the wage rate for public sector employees and tariffs for public services until the end of the year. Furthermore, the tax on bank credit transactions was eliminated and reserve requirements on commercial bank deposits were gradually reduced before being eliminated in May. The decree  of February 1979 liberalizing imports of certain foodstuffs became opera- tional in May with publication of the list of exempted foodstuffs. The Government also announced that it would liberalize imports of goods which showed a higher than warranted price increase. These measures were designed to counter inflationary expectations and to help producers plan future investment by ,zoviding them with definite information regarding their costs. Furthermore, the rate of devaluation was coordinated with the increase in labor and public service costs so that exporters would not be adversely affected. 11. The positive economic results in 1979 were influenced by the liberal- ization measures announced in late 1978, the monetary and price measures announced in February 1979, the growth of tourism, external capital inflows, and the continued strong export performance. The excess demand generated by higher investment levels, increased tourist expenditures, and the monetary expansion resulting from foreign capital inflows have hindered reduction of inflation. Inflation accelerated from 46% in 1978 to 83% in 1979 as measured by the consumer price index. Growth will undoubtedly be slowed if demand for export turns downward, as expected, and imported oil costs continue to rise sharply. Nevertheless, in a number of significant respects Uruguay is in a better position to weather the stresses of the current economic conjuncture than are the non-oil developing countries as a group. Economic Prospects 12. The Government is attempting to shift the economic structure towards a more open, export-oriented model. This shift is by no means easy in view of the deep-seated rigidities which Uruguay's economy has acquired over the last thirty years. High tariff protection and highly segmented public sector management continue to hamper growth. Nevertheless, the success in stimulating economic activity and turning around the balance of payments during the last four years attests to the economy's responsiveness to a consistent set of signals as the price mechanism is allowed to operate more freely. The key to sustained growth for the future will depend on the Government's ability to consolidate the recent gains through longer-term policies. Uruguay's long and difficult experience in pursuing income distribution policies in the face of a stagnant economy has led the authorities to give utmost priority over the coming years to sustained growth. 13. In broad terms, government policies aim to provide a propitious economic environment for the fuller use of such advantages as the country's highly literate labor force, its strategic location between Argentina and Brazil, and a natural resource endowment suited to export-oriented agricultural production, including the traditional livestock industry as well as the largely untapped potential in crop production, food processing and fisheries. 14. Provided that the sound orientation of fiscal, monetary and trade policies already instituted is consolidated, the Uruguayan economy has the capacity to grow at faster rates than in most of the last decade (growth was only about 1% annually during 1971-78). Though growth may not continue  - 5 - at the 9% level of 1979, it appears that the economy can sustain a growth rate of about 5% over the medium term. The expansion of both traditional and nontraditional exports should provide the main impetus for growth. Beef and wool exports will benefit from the recently enacted price and marketing liberalization measures, the reasonably favorable price outlook, and the successful penetration of new markets in recent years. Sustained growth of manufacturing output and nontraditional exports should be possible with the further development of such subsectors as leather products, textiles, processed foods, fish and other manufacturing goods. Private sector investment should provide the principal impulse for growth in the coming years in the form of the rehabilitation, modernization and expansion of existing production units rather than the establishment of new, large-scale ventures. The public sector is expected to play a key supporting role by mobilizing financial resources, rehabilitating infrastructure and improving complementary services to the productive sectors. 15. Export expansion and diversification will require the modernization of the country's capital stock. This implies heavy import requirements for key infrastructure, new plant and equipment, rehabilitation of the existing stock, and related intermediate inputs. Imports are also expected to increase as a result of the Government's import liberalization policy. A rapid growth in imports is to be expected under these policies possibly resulting in a trade deficit averaging about US$140 million during 1980-82. With the development of hydroelectric energy sources the volume of petroleum imports can be expected to decline and together with the expansion of beef exports, result in a smaller trade deficits after 1983. The above trade projections, combined with steadily increasing net factor payments on public and private borrowing, would result in a widening of the current account deficit from an average of US$65 million during 1976-78 to an annual average of US$235 million in 1980-82. Expansion of beef exports in 1982-83 in conjunction with reduced petroleum imports may be expected to reduce the projected current account deficit to about US$200 million by 1983. The current account deficits projected are moderate and the implied gross external capital requirements for 1980-83 (estimated at an annual average of US$332 million) can be expected to come partly from existing and new commitments of multilateral and bilateral agencies. Private financial institutions, suppliers' credits and Government bonds would provide the major portion of the remainder. 16. The remarkable turnaround in Uruguay's balance of payments since 1976 has enabled the authorities to amortize or refinance various commit- ments contracted on unfavorable terms during the previous years. The volume of commitments contracted during 1974-75, their relatively unfavorable terms and prepayments of hard term loans resulted in a debt service ratio of about 28% in 1977 and about 42% in 1978. However, such prepayments have improved Uruguay's debt profile and the debt service ratio for the period 1980-83 is projected to be about 12%. In 1978, debt to the Bank was 9.6% of total outstanding and disbursed external public sector debt and debt service was 3.2% of total. These levels are expected to increase, but will still be moderate. Under these circumstances, Uruguay would remain creditworthy for the amounts of external capital required to rehabilitate the country's capital stock and to achieve sustained economic and social progress.  - 6 - PART II - BANK GROUP OPERATIONS IN URUGUAY 17. To date, Uruguay has received US$303.2 million (net of cancellations) in Bank loans. As of January 31, 1980, the Bank held US$190.1 million, including US$118.0 million undisbursed. On a sectoral basis, Trnk assistance to Uruguay (17 loans in total) has been for power (35%), transport (31%) and livestock (24%), with some lending for industry (7%) as well as vocational training and technological development (3%). IFC has made three investments in Uruguay: in Fabrica Uruguaya de Neumaticos S.A. (US$3.8 million) to introduce radial tire production, increase tire manufacturing capacity and improve operating efficiency and product quality; in Acodyke Supergas S.A. (US$950,000) to help finance a new liquid petroleum gas bottling plant; and in Astra Pesquerias Uruguayas, S.A. (US$4.5 million and up to US$0.9 million in equity) to help finance an integrated fishing and processing project. Execution of these projects has, on the whole, been satisfactory. Annex II contains a summary of Bank loans as of January 31, 1980 and IFC investments as of February 29, 1980, and notes on the execution of ongoing projects. 18. Bank lending in Uruguay in FY78 consisted of a loan of US$9.7 million equivalent for a Vocational Training and Technological Development Project. In FY79, a loan of US$26.5 million was approved in April for a Second Highway Project. In FY80, a loan of US$24.0 million was approved in December for a Fifth Power Project and in January a loan of US$50 million for the Montevideo Port Project. In addition to the proposed project, work is underway on an industrial credit project for possible consideration by the Executive Directors during the next year. 19. The Bank, in its program in Uruguay, is trying to assist the Govern- ment in implementing an economic strategy designed to put the economy on a path of sustained growth. Towards this end, all operations are aimed at policies and programs that will support the continued recovery of the economy within a framework of financial stability. More specifically, the objectives of the Bank's program are to: (i) foster productive activities by promoting the expansion and diversification of export earnings; (ii) help strengthen the country's sectoral policies and public sector institutions; (iii) improve and promote the integration of the economy with the large markets of neighbor- ing Argentina and Brazil, as well as with overseas markets; and (iv) assist the country to develop policies and programs to diversify its sources of energy. 20. The proposed project is designed to continue supporting increased production in the livestock subsector for exports as well as heip:- the Govern- ment to gradually place greater emphasis on expanding crop producLlon, while encourag4ng the government to follow agricultural marketing policies responsive to the free operation of market forces. Bank lending for power and transport is designed to support the Government efforts to rehabilitate and modernize the country's key infrastructure to foster sustained economic growth, rising income, exports, and employment. The transport investments supported by the Bank will also assist Uruguay's efforts to integrate with its neighbors (Brazil and Argentina), which are its major trading partners. Bank assistance for industry, including vocational training and technological development, is designed to help expand non-traditional exports, the principal motor of economic growth; at the same time, Bank lending will continue to support simplifying the cumbersome tariff and import regulation structure and lower the rate of protection, which is necessary to increase the efficiency of the industrial sector.  -7- PART III - THE AGRICULTURAL SECTOR 21. Agriculture plays a fundamental role in Uruguay. Although this sector accounts for only about 15% of GDP, agricultural products in various stages of processing represent nearly 90% of total merchandise exports. The importance of agriculture in Uruguay's external trade reflects basic under- lying characteristics of the country such as relative abundance of land suitable for agriculture and grazing, a small population, and a lack of known mineral resources. Sector Composition and Production Trends 22. The agricultural sector of Uruguay consists of two well-defined and geographically separate subsectors: Livestock and crops. Livestock accounts for 60% to 70% of agricultural output and consists primarily of extensive cattle and sheep raising; dairy, swine and poultry farming are still relatively minor enterprises. The crop subsector is dominated by cereals, mainly wheat; in recent years, however, the dynamism of the subsector has been provided by two new types of activities: rice growing in the central-eastern part of the country, and fruit, mainly citrus and grapes, in the central-western area. 23. Physical, climatic, economic and social factors have combined to give Uruguay a comparative advantage in livestock production, which has historically dominated, and is expected to continue to dominate, agricultural activity. Extensive areas of shallow or very shallow soils best suited for pasture; a predominant prairie-type vegetation; and a relatively homogenous temperate climate which facilitates improved pasture, grass and legume development and adaptation of most of the recognized livestock breeds for production of beef, milk, and wool have resulted in the predominance of the livestock subsector over crops. Some 90% of the country's area is well suited to native or improved pasture production, while only a much smaller proportion of the soil is suitable for cropping. The comparative advantage of livestock over farming is accentuated by the high irregularity of precipita- tion, with wide variations around the yearly average of 1,000 mm, which poses a more serious risk to agricultural crop development than to livestock. This risk, however, can be lessened by a livestock-crops rotation as recommended in the technological package of the proposed project. This rotation incorporates the use of a minimum cost fertilization package, basically phosphorous, which stimulates plant growth. This mineral is particularly important to allow for legume production, which, in turn, increases the nitrogen reserves of the soil. The nitrogen build-up after a four to five-year period in legume-grass pastures provides the basis for crop production with minimum levels of nitrogen fertilization. 24. Livestock production in Uruguay has fluctuated considerably during the past 15 years. Thus, the late sixties saw a significant growth (an annual rate of about 6.3%) but some of this ground was lost in subsequent years, primarily as a result of cyclical changes in international prices and in part, because of an unfavorable price cost relationship resulting  - 8 - from inappropriate economic policies (paras. 36-39). For the period as a whole, livestock production has remained practically unchanged. 25. Beef is the principal livestock sector product. Annual production is about 350.000 to 400,000 tons, of which 50% to 60% is consumed domestically and the rest is exported. Wool production is about 60,000 tons per year, and 90% is exported. About 100,000 tons of mutton are produced annually and the bulk is consumed locally. Milk production stands at about 700,000 tons; exports of dairy products such as cheese and powdered milk have been increasing recently and represent about 4% of total milk production. 26. During the past 15 years there has been an increase in crop produc- tion of about 1.5% per year, mainly as a result of increases in fruit and sugar-bearing crops (cane and beets). There has been little change in the aggregate production of grains, by far the largest component of traditional crop production. A significant change has occurred, however, in the compo- sition of grain production, with a decrease in wheat production at a rate of about 2% per year, and an annual 8% increase in rice. While in the past, Uruguay was an important wheat exporter, wheat production currently hovers around the self-sufficiency level of about 400,000 tons per year; during the past three years, however, annual imports of 110,000 tons to 220,000 tons have been necessary to make up for production shortfalls resulting from adverse weather. Rice, on the other hand, has expanded rapidly in the center-east of the country, outside the traditional cropping areas; rice exports have more than doubled in the past six years to about 130,000 tons. Rice has become the third largest export commodity after beef and wool. Productivity 27. Uruguayan agriculture is predominantly extensive, with yields that are substantially below those obtained in countries with a similar natural resource endowment. The adoption of relatively intensive production techniques based on pasture improve ent has been limited by the unfavorable economic position of the sector. Improved pastures, introduced in the early 1960s, reached a peak level of 12% of total grazing land in 1973, but the low price of cattle in subsequent years resulted in a reduction of this proportion to 8.5% in 1977, as previously improved pastures were overgrazed in an attempt by producers to wait out the low prices, and little refertiliza- tion was practiced because of poor benefit/cost relationships. The resulting limited carrying capacity of unimproved land in the livestock sector (less than one animal unit per ha), is reflected in low production of beef per hectare at 45 kg/ha which is only 56% of the level reached in Argentina and 32% of that reached in New Zealand. A similar situation is found in the wool subsector. The cattle slaughter/stock ratio provides further evidence of the low productivity of beef production in Uruguay. During the period 1971-76, this indicator averaged 16% in Uruguay compared to 33% in New Zealand. 28. Low yields are also a common feature of the crop subsector. On the average, yields in Uruguay for such traditional crops as wheat and sunflower are about one-half of those obtained in comparable countries. Wheat, the  - 9 - country's main crop, has experienced a noticeable stagnation in yields depite the well-known tec'nological improvements in production available since the early 1960s. The same is true of other crops with the exception of rice and sorghum, both relatively new crops in the country. The poor yields are largely explained by the low levels of technology employed and the effect of erosion on soil quality; erosion, in turn, is the result of inadequate soil management practices given the thin topsoil conditions. All of the above suggests that ample room exists for increasing crop yields. Resource Endowment and Farm Size 29. Uruguay's ample endowment of land resources and limited rural population makes inevitable the predominance of large farms (by international standards), albeit with low average incomes per hectare. Furthermore, land distribution and agricultural production closely follow the soil conditions which have widely varying suitability for agriculture and productivity levels. (For this reason, the actual farm size is usually adjusted by an official productivity index for purposes of taxation and administration of credit programs). Agricultural crops are concentrated largely on the deep productive soils of the Western Littoral (along the Uruguay River) and, rice and other irrigated crops, in the Northeast (see Map IBRD 14493). As a consequence of suitable soil conditions and the market opportunities provided by Montevideo (about 65% of the population), truck crop and dairy activities are concentrated near the capital. Beef and sheep are raised in the remaining parts of the couintry on medium- or large-sized farms (500 ha or above) where unsuitable physiographic conditions for most agricultural crops prevail although, in some areas, deeper and more productive soils allow cultivation of grains or other annual crops. Thus, a farm of 500 ha in Uruguay represents a reasonable average between the deep productive soils of the Western Littoral and the shaLlow, pasture-adapted conditions of other regions; this is also the average of the size of various types of farms (livestock, mixed l;vestock/crops and mixed dairy/crops). 30. While within each type of farming, income is roughly proportional to size, overall agricultural income is far more evenly distributed than land, because of different types of farming e.g. livestock vs. the more intensive dairying. The number of farms below 500 ha -- which has come to be adopted in Uruguay as the rough dividing line between the smaller farms and the others -- is about 88% of the total number of farms in the country, covering about 28% of the total agricultural area--mostly around Montevideo and in the Littoral areas. This proportion, however, is somewhat exaggerated since it includes a number of small holdings which have either mixed rural/ urban characteristics or are being used as part- or full-time homes by people emplo--ed in towns. Institutional Framework 31. The Ministry of Agriculture and Fishing (MAP) is responsible for supervision and review of supporting services for the sector and, as a part of the country's economic team, for formulation of agricultural policy. MAP provides limited extension services for agriculture but a reorganization of the agency is being considered that would systematize and increase the scope of these services. At present the bulk of agr;cultural technical assistance is provided by the Agricultural Plan (PLAN), an autonomous agency under the  - 10 - supervision of MAP which has been the executing agency for previous Bank- financed livestock projects. The National Colonization Institute (INC), a separate autonomous institution linked to the Executive through MAP, is responsible for agricutural settlement and provides limited technical assistance to its settlers. Other sources of technical support for farmers include the Regional Centers for Agricultural Experiments (CRLA) and the Commission for Ovine Improvement (CMO) sponsored by the Uruguayan Wool Secretariat to provide sheep ranchers with technical assistance and extension. 32. Agricultural education at the university level is provided by the national Faculty of Agronomy in close coordination with MAP's system of six agricultural research centers organized around the Agricultural Research Center (CIAAB), better known as "La Estanzuela." Two additional groups, MAP's Directorate for Agricultural Economics Research (DIEA) and the National Commission for Land Agroeconomic Studies (CONEAT) produce and publish information on agroeconomic data, land tenure and management and other geo-agronomic aspects to be used in the improvement of agricultural policies. 33. Institutional agricultural production credit is provided almost exclusively by the Banco de la Republica Oriental del Uruguay (BROU), a multipurpose state-owned Bank. Except for loans made under the Bank-financed PLAN program for livestock development BROU's lending until now has been all short-term, with a ceiling for the credit amount for each crop and higher proportion of total production cost for small and medium farmers following the policy of assisting smaller producers. Interest rates have been generally below the high inflation rates that have prevailed in Uruguay over the past ten years. Taxation 34. One important factor in Uruguayan agriculture is the direct tax on agricultural incomes (IMPROME) established in 1968 which is based on the average gross potential yield of each farm. IMPROME accounted for 40% of all agricultural taxes and 31% of all taxes on incomes and profits in 1977. Tax reform legislation is currently under consideration that would substitute net income for gross income as the tax base of IMPROME and would consolidate into a single tax a variety of other levies that account for about 20% of agricultural tax collections. The reform does not seek to increase the burden on agriculture, but rather to simplify the present system and make it more equitable. Marketing and Prices 35. Marketing of crops in Uruguay is handled by the private sector without Government interference and no major problems are evident. In the livestock sector, however, the Government regulated the meat-packing industry and directly operated five state-owned meat-packing plants that supplied most of the domestic market until August 1978 when these interventions were abrogated. Currently the meat-packing plants are being sold to private entrepreneurs. Prices of agricultural products and inputs were subject to  - 11 - numerous direct and indirect controls, the net effect of which was a massive transfer of resources from agriculture to the rest of the economy and which largely explain the the above-mentioned past stagnation of the sector. Crop and meat prices were decontrolled in August 1978 but a protective duty of 30% on crops is currently in effect. The only price that continues to be established by the Government is that of high grade fluid milk; this price is revised quarterly to allow for changes in the cost of inputs. There has been a significant shift in the destination of Uruguayan exports since the mid-1970s with Latin American Free Trade Association (LAFTA) countries emerging as major markets for meat, rice and the newly developing exports of dairy products. Exports to the US and the Middle East have also increased considerably and the market outlook for traditional as well as non-traditional exports is favorable. lb Economic Policies 36. Until recently, economic policy in Uruguay focused primarily on import substituting industrialization. Many of the policies that were instituted and pursued over the years with some modifcations from time to time acted to depress agriculture by transferring resources from rural to urban activities. Thus, policies such as: (a) price controls on agricul- tural products; (b) export taxes on traditional commodities such as beef and wool; (c) high tariff duties on industrial imports, including agricultural machinery; (d) an overvalued exchange rate; and (e) subsidies to inefficient state enterprises through direct government control of industry such as meat packing, reduced the profitability of agriculture and fostered an inefficient system of land use. 37. The Government began to acknowledge the country's dependence on agricultural growth in the mid-1970s. Finally, in August 1978 a set of policy measures was announced that reflected the high priority accorded to the development of the agricultural sector, particularly the livestock subsector where the country's greatest comparative advantages lies. The measures included: (a) elimination of fixed livestock and crop prices; (b) elimination of export duties and geographical barriers for beef and wool marketing; (c) establishment of a uniform import duty of 30% for crops; (d) removal of import restrictions on agricultural machinery (including tractors), establishment of a maximum 10% tariff on assembled tractors and farm machinery and elimination of tariffs on all other agricultural inputs; (e) sale of state-owned meat plants to the private sector; and (f) modification of the tax on the average potential yield of farms from a gross to a net income basis. Except for the sale of meat plants, which is in process, and the tax reform, which is before the Council of State, all these measures have been implemented. 38. The adoption of these market oriented policies for agricultural production coincided with a general upward swing in world prices particu- larly for beef. In the span of one year, beef prices tripled in Uruguay. Producers responded by greatly increasing their plantings of feed crops and their investments in improved pastures. Fertilizer use in 1979 was proceeding at a rate 200% above the average in the previous three years.  - 12 - 39. Production in 1979 will not show gains comparable to input use. This is to be expected, however, given the normal retention of animals during the rising price phase of the cattle cycle and the likely substitu- tion of feed crop for food crop plantings during the past year. In addition, the first six months of 1979 were exceptionally dry. In the medium-term, however, adherence to the market-oriented policies in the context of generally favorable world prices should bring about a recovery and substantial growth of the agricultural sector of Uruguay. Bank Assistance to the Agricultural Sector 40. The proposed project would be the sixth Bank operation primarily for livestock development in Uruguay, bringing the total assistance for this purpose to approximately US$113 million since 1959 when the first loan for US$7 million was made. By and large, the execution of projects has been satisfactory. The latest operation, the Fifth Livestock Project (Loan 1166-UR) for US$17.0 million was originally designed to finance part of Uruguay's livestock development program in 1976 and 1977. However, largely because the project coincided with the trough of the international beef price cycle, disbursements of the loan were delayed by about two years. However, the policy changes made in August 1978 and increased world beef prices had a favorable effect on investment demand and disbursements increased during 1979, so that only US$1.5 million remained undisbursed on January 11, 1980. 41. The Bank's assistance for livestock development in Uruguay was associated with the improvement of over 1.2 million ha of pasture land. Available local statistics indicate that participating ranchers have increased weaning rates by 7%, reduced the age of first calving by nearly a year, lowered the age of marketable steers by at least six months, and raised extraction rates by 3%. Bank assistance also helped to strengthen PLAN, which successfully channeled US$152 million equivalent (US$69 million from the Bank and US$83 million from domestic resources) into credits to livestock producers. 42. OED has reported on the third and fourth livestock projects. 1/ These reports concluded that the Bank provided Uruguay with a considerable amount of macro-economic analysis, most of it good, but OED noted in its first report that the re ationship between external market fluctuations, the domestic cattle cycle, exchange rate fluctuations, and domestic infla- tion deserved more attention, including the development of improved poli- cies. The reports further suggested that the diffusion of improved pastures appeared to be reaching a plateau under the price, technological, and manage- ment conditions prevailing through 1977, although they recognized that further improved pasture diffusion would be possible if sectoral conditions changed. Finally, the OED reports pointed out that indexing arrangements under the earlier projects had been imperfect and had eroded over time. As mentioned in paragraph 54, the shortcomings with respect to indexing would be elimi- nated under the present project. 1/ Report No. 1321, dated October 20, 1976 (SecM76-708), covering loans dis- bursed from 1970-74 and report No. 2572 of June 29, 1979, covering the Second Stage of the Fourth Livestock Project, disbursed in 1973-77 (SecM 79-51).  - 13 - 43. Following the period referred to in the first OED report, condi- tions for a productive dialogue between the Bank and the Government have become more favorable. Accordingly, a good deal of pertinent economic work has been produced over the last four-five years, both by the Bank and the Uruguayans. Most of it has centered on the broad policy and sectoral reforms needed to liberalize the economy. This was responsive to the critique in the OED report. The policy measures that were adopted are described in paragraph 37 and were in line with the Bank's recommendations. These new policies also helped establish the necessary climate for increased investment in improved pastures. PART IV - THE PROJECT 44. A report entitled Staff Appraisal Report: Uruguay - Agricultural Development Project (No. 2779b-UR) dated March 27, 1980 is being distributed separately. A Loan and Project Summary is placed at the front of this report. A supplementary Project Data Sheet is appended as Annex III. The project was identified in August 1978, subsequently prepared by the Office of Agricultural Planning of MAP and appraised by a Bank mission that visited Uruguay in June-July 1979, followed by a post-appraisal mission in September 1979. Negotiations were held in Washington, D.C. from March 3 to March 7,1980. The Uruguayan delegation was led by Ing. Juan Carlos Cassou, Minister of Agriculture and Fisheries. Project Objectives and Description 45. The project aims at helping the Government to consolidate and expand countrywide the transfer of technologies developed through the experience of earlier programs of livestock research and development and to emphasize the improvement of agricultural crops in the traditional agricultural areas where low fertility and soil erosion constitute limiting production factors. The project would assist in increasing productivity of beef cattle and sheep ranchers already under production, developing crops in areas to which they are ecologically suited, increasing milk production to make use of favorable export markets for dairy products and increasing the income of smaller farmers by reorienting their production patterns to control erosion and improve soil fertility. More specifically, the proposed loan seeks to extend financial support, key infrastructure, technical assistance and back-up services to farmers through the provision of the following investments. 46. On-farm Development. Three-year on-farm development plans for small, medium, and large cattle/sheep ranches, crop livestock and dairy farms and for mixed INC dairy/crop farms would be financed under the proposed project (about 1,900 beef/sheep ranches; 600 crop/livestock farms; 300 dairy farms; and 220 mixed dairy/crops INC farms). Pasture improvement would be the major investment item for beef/sheep ranchers with smaller investments in fencing, water points, stock-handling facilities, machinery and equipment. Fertilizer for crop production and pasture improvement would be the major  - 14 - investment in mixed crop/livestock farms with additional investments in machinery, equipment and livestock management infrastructure. Major invest- ments in dairy farms and INC settlements would be for milk handling equip- ment (milking machines, milk sheds, cooling tanks and such), fencing and watering facilities. In the INC farms, additional investments would be for dairy stock and crop production. 47. Technical Services and Training. Technical services provided by PLAN and INC would be supported under the project. Training would be provided both locally and abroad for PLAN and INC technicians, particularly to new (replacement) PLAN technical staff and to INC technicians assigned to work with the selected settlements. Other costs associated with technical services would include replacement of vehicles, machinery, office equipment, materials for demonstration work and technical assistance, and 88 man-months of consultants to strengthen both the PLAN and INC programs. The training component for both institutions would total 148 man-months of fellowships. Provision is also made in the project for any surveys or studies which may be needed in connection with the preparation of the small farmers component of a future agricultural project for possible Bank financing. 48. Feeder Roads. About 60 km of farm-to-market roads (35 km in the Quebracho and 25 km in the Salto areas) would be built under the project to serve INC project colonies. These roads would permit efficient collection and transport of milk from project farms to local processing plants and would be built by agreement with the corresponding municipalities, which would execute the work on force account. Implementation and Management 49. PLAN, an autonomous agency under MAP which has managed the earlier Bank-assisted livestock credit projects, would have overall responsibility for project implementation. BROU, a state-owned bank, would be responsible for the provision of credit to farmers to carry out investment plans designed or approved by PLAN and INC technicians. INC, which would be involved for the first time in a Bank-financed project, would establish a Project Implementation Unit as a condition of disbursement of the INC component of the loan (Schedule 1, paragraph 4(b) of the draft Loan Agreement). This Unit would be under a Project Coordinator with qualifications and experience acceptable to PLAN and the Bank (Section 3.04(b)(ii) of the draft Loan Agreement) and would work with supervision and guidance from the Technical Directorate of PLAN. In addition, INC would establish within its Special Projects Department, a minimal monitoring unit based on the norms designed by PLAN. These arrangements provide a considerable element of institution building in respect to INC. Under the proposed project, producers with more than 1,000 ha would have to secure technical assistance from private professionals, either individually or through groups such as CREA. PLAN would also be responsible for prequalification of consultants and for approval and super- vision of investment plans prepared by them.  - 15 - Project Cost and Financing 50. Total project cost, including price contingencies, is estimated at US$111.0 million (including taxes and duties amounting to US$3.4 million), of which US$58.5 million, or 53%, represents foreign exchange costs. Project costs have been estimated on the basis of January 1979 prices, and a price contingency amounting to 37% of baseline costs, has been added. Price contingencies are based on a phasing of investment over a five-year period. A physical contingency of 15% has been applied to civil works for feeder road construction. The average cost of consultancy services is estimated at US$5,000 per man-month. The project's total consultant requirements are esti- mated at 88 man-months. 51. The proposed Bank loan of US$24.0 million would finance 41% of the foreign exchange cost or 22% of the total project cost. Project beneficiaries would finance US$19.4 million, representing about 18% of the total. US$60.0 million, or 54%, would be financed by BROU and VS$7.6 million, or 6%, by the central government through PLAN and INC and by municipalities. The foreign exchange cost of technical services, of US$1.6 million which includes the acquisition of vehicles and equipment, would be financed by the Bank. The Government would assume the foreign exchange risk and would on-lend the proceeds of the on-farm investment component of the loan to BROU through the FG in the Central Bank; BROUI, in turn, would make subloans to project benefi- ciaries. Assurances have been obtained that BROU would refrain from offering to producers lines of credit for purposes covered by the project on terms more favorable than those agreed under the project. On-lending Procedures 52. Credit to sub-borrowers would be channeled through BROU under a subsidiary loan agreement with the Government as represented by the Central Bank. The signing of this agreement in a form satisfactory to the Bank would be a condition of effectiveness of the Bank loan (Section 6.01 of the draft Loan Agreement). BROU would extend subloans to finance up to 80% of invest- ments under the traditional project component and up to 87% under the INC component. Subloans would be made on the basis of farm plans approved by PLAN and prepared by PLAN or INC technicians or by private consultants previously authorized by PLAN. The cost of fees for technical assistance to prepare farm plans for subloan applications and for advisory services during the implemen- tation of the on-farm investments could be included as an investment item to be financed up to a maximum of 10% of the amount of the subloan. Evaluation of the creditworthiness of subloan applicants would be carried out by BROU and analysis of the investment plans by PLAN. Project subloans would have repayment terms ranging to a maximum of 10 years, including grace periods of up to five years. Repayment and grace period terms would be established for each subloan on the basis of the cash flow projection of the corresponding farm plan. Loans from the Government to BROU would have the same repayment terms as provided by BROU to its sub-borrowers.  - 16 - 53. The Government would on-lend the proceeds of the Bank loan to BROU in local currency equivalent, assuming the foreign exchange risk. However, the principal outstanding on Government loans to BROU and on the subloans made by BROU to project sub-borrowers would be adjusted in accordance with variations in one of three indexes of producer prices that would be calculated and published monthly by the Directorate of Agricultural Economics Studies (DIEA) of the MAP and the Directorate General of Statistics and Censuses of the Planning Ministry. 54. Indexing practice under previous Bank-financed projects experi- enced three major shortcomings that detracted from effective repayment correc- tion. They were (a) stipulation that the applicable index would be the lower of a meat/wool index or the consumer price index; (b) addition rather than compounding of successive adjustment factors; and (c) a six-month lag between the dates of calculation and of application of the adjust- ment. These shortcomings would be eliminated under the proposed project. 55. Adjustment of principal under the proposed project would be based exclusively on indexes of producer prices. Given the objective of production diversification the varying patterns of short-term price movement among livestock, crops, and dairy products, and the extreme awareness and sensitivity of producers to these differences and their impact on the cash flow of their enterprises, three indexes would be employed, incorporating weights for these products, derived from the corresponding farm models (meat/ wool, crops/meat, and milk/meat). The index to be applied to any subloan would be determined by the technician from PLAN in accordance with the output mix reflected in the sub-borrowers' farm plan. Furthermore, successive adjustments would be compounded, and the lag between calculation and applica- tion would be reduced to two months. The technical and operational aspects of the proposed indexing have been discussed and agreed upon by officials of all agencies involved in project design and implementation. The principles and procedures of the proposed indexing have been detailed in a circular issued by BROU on December 27, 1979 which is satisfactory to the Bank. Assurances have been obtained that the principles and procedures would be maintained in the future, unless amended in agreement with the Bank (Section 5.01(e) of the draft Loan Agreement). 56. The sources of investment funds would be as follows: % Traditional Credit Component INC Producers 20 13 BROU 60 60 Bank (onlent by Government) 20 27 Total 100 100  - 17 - The maximum loan to any participating farmer would be US$150,000 (at 1979 prices). The Government, making use of reimbursements from Bank loan proceeds, would on-lend to BROU 25% of the value of BROU project subloans to traditional farmers and 31% of subloans to project INC farmers. Annual rates of interest charged by BROU to sub-borrowers on the adjusted principal would be 51 for farmers with 500 ha or more, and 3% for those with less. The BROU would receive a margin of two percentage points on Governmenit loans. This interest rate structure has been selected to encourage investment in farming, benefitting smaller producers and to maintain the financial soundness of the institution. Procurement and Disbursement Arrangements 57. Under the project, international competitive bidding following Bank Guidelines for Procurement, would be required in the procurement of vehicles, machinery and equipment directly imported by PLAN and/or INC, amounting to about US$800,000 whenever the size of individual contracts exceed US$100,000. Both PLAN and INC would be encouraged to group such items into large contracts, either individually by each agency or jointly, whenever possible. Contracts of less than US$100,000 would be awarded in accordance with the borrower's internal procurement procedures, which include local competitive bidding, acceptable to the Bank. The investment items such as fertilizer, seeds, machinery and equipment to be procured by approximately 3,000 project sub-borrowers throughout Uruguay over a three year commitment, five-year investment period are varied and not suitable for bulk procurement through international competitive bidding. These goods, and services such as technical assistance together amounting to about US$73.7 million, required under the sub-borrowers' investment programs would therefore be obtained through local, well-established competitive commercial channels. Civil works for the market road construction amounting to about US$600,000 could be done on force account by the municipalities. 58. The Bank would disburse over a period of five years: (a) 25% of the total amounts previously disbursed by BROU for subloans to project beneficiaries of the traditional component, amounting to US$16.8 million; (b) 31% of the total amounts previously disbursed by BROU for subloans to project beneficiaries of the INC component, amounting to US$2.8 million; (c) 100% of total expenditures for technical advisory services, training and studies, amounting to US$1.1 million; (d) 100% of the foreign exchange ex- penditures for vehicles and equipment under the technical service component, amounting to US$0.8 million; and (e) 60% of total expenditures for market road construction, amounting to US$0.5 million. A sum of US$2 million would remain unallocated. 59. The Bank would reimburse for the project subloans made by BROU to project beneficiaries against a certificate of expenditure, the documenta- tion for which would not be submitted for review, but would be retained by the BROU for inspection during the course of Bank supervision missions. Certification by the Central Bank would be required. All other disbursements would be made against normal documentation. As in recent projects, the Bank, in converting local currency to foreign currencies, would use the exchange rate prevailing at the mid-point of the month in which subloans were made  - 18 - and not the exchange rate on the day the Bank disbursement is actually made. This disbursement procedure would enable the Bank to achieve its objective of contributing its full share under the high inflation in Uruguay and the Government's policy of frequent mini-devaluations. Monitoring and Evaluation 60. PLAN Farm/Ranch Development. Project monitoring for the farm/ranch development component would be carried out by PLAN's existing monitoring unit, the Economics and Registration Office of the Agricultural Plan (SERPA). The unit would prepare annual monitoring reports for the component and make them available to the Government, to the PLAN Honorary Commission, and to the Bank. 61. Rehabilitation of INC Colonies. Monitoring facilities for the project component do not exist at INC at present. However, a minimal monitoring unit based on the norms designed by PLAN would be established within the special projects department (Section 3.04 of the draft Loan Agreement). This unit could later be expanded in the event of a follow-up project to cover additional settlements under the rehabilitation program. As in the case of PLAN, reports would be prepared and made available to Government, to the INC Board, and to the Bank. Benefits and Justification 62. The project's economic rate of return is estimated at 26%. The economic rate of return on individual project components is estimated as follows: livestock development, 22%; mixed farm development, 37%; dairy development, 26%; and INC settlement development, 24%. The sensitivity analysis indicates that the project would still have an economic rate of return of 11% even if one of the following three situations occurred: (a) price or productivity decreased by 26%; (b) investment cost increased by 101%; and (c) operating cost increased by 52%. 63. The project would support the liberalization policies adopted by the Government in August 1978. These policies, complemented by an appro- priate technical assistance and credit program, as envisaged in the proposed project, promise to lead to an unprecedented development of the livestock industry, accompanied by progress in dairying and crops. The principal orientation of the proposed project is towards increasing production from the depressed levels of the last several years. Expected increases in production are 14% for beef, 12% for milk and 44% for oilseed crops, for a total annual value of about US$57 million at 1978 prices at full development. The project would also help the agricultural sector continue as the main source of foreign exchange earnings and increase the comparative advantage that Uruguay enjoys through the use of modern technology. The value of incremental exports at full development is estimated at about US$42 million (1978 prices), of which beef would account for 58%, dairy products for 21%, wool for 13%, and mutton for 8%. There would also be considerable foreign exchange savings due to the increased production of edible oil crops, mainly soybeans and sunflower. The proposed project, as designed, represents in fact the country's entire agricultural lending program and would imply a significant increase in investment in the countryside as compared with the historical record, and would meet the expected demand for credit among different producers in the coming three years.  - 19 - 64. Considering the progress already made by Uruguay in the areas of welfare and income distribution, support of small farmers would not be the central objective of the proposed project. There would be, however, a number of features aiming at this. The principal one is the project's INC component, which aims at providing technical and credit assistance to a group of farmers with incomes of about 40% of the national average. Unlike the traditional component, the number of beneficiaries and volume of credit in the INC component are firm estimates based on existing farmers and condition in the two selected INC settlements. The project would provide the required institutional support to reach these farmers adequately and to enable them to use effectively 10% of the total volume of credit. 65. The farm models used in the traditional component of the project correspond to enterprises that generate net incomes approximately equal to the national average of about US$8,000 per family. These models may therefore be considered the boundaries between smaller and medium-sized farmers. On the basis of the experience in previous projects, it can be expected that about 70% of project participants would be smaller farmers, i.e., with farm enterprise size or incomes below those shown in the models, and about 30% would be medium and larger farmers. Trial models indicate that smaller farmers and larger enterprises should obtain roughly comparable rates of return. As in previous projects, smaller farmers would be expected to receive about 40% of the volume of credit. Since an additional 10% would go to INC settlers, smaller farmers would benefit from about half of the total volume of credit provided under the project. Furthermore, the farms below 500 ha will benefit from a lower real rate of interest (3%) than the larger farmers who will pay 5%. Also, the larger farmers will have to contract directly and defray the full cost of technical assistance, whereas, the smaller farmers will not be charged. 66. Uruguay has a fairly advanced agricultural taxing system, which is based on presumptive yields of farms, irrespective of whether the potential productivity levels are actually realized (IMPROME, para 34). The produc- tion levels are estimated on the basis of actual average yields obtained for each kind of soil, thereby implicitly assuming average technology. The tax thus constitutes a fiscal instrument aimed at achieving at least average productivity. The calculation of average potential yields could in time reflect superior technological levels, since the tax base is revised every five years based on field surveys. While no immediate increase in tax revenues from IMPROME collections would be expected, there would be significant increases in central and local government collections from existing sales and other indirect taxes. Incremental tax collections during the 5-year investment period would be about US$3.4 million and they would stabilize at about US$1.8 million per year at full development. Project Risks and Environmental Impact 67. The project faces no unusual risks. There is, however, a considerable element of uncertainty concerning producer demand for project investment loans. There is, first, the extent to which world market prices for project output and input follow the course forecast. In addition, success of the project may well be determined by the Government's adherence to the market oriented policies adopted in August 1978. In this respect it is to be noted that the Government  - 20 - has maintained these policies without change. In view of the importance of the matter, assurances have been obtained that the Government would maintain the August 1978 package of decrees and other measures and exchange views with the Bank on any modification in the reforms mentioned (Section 4.05 of the draft Loan Agreement). 68. The environmental impact of the proposed project would vary within the different agro-ecological areas, but it would, in general, have a positive influence on the restoration and conservation of Uruguay's land resources. Emphasis on improved pasture establishment and conservation of areas of shallow soils of basalt and crystalline rock origin represent a rational use of these agriculturally limited lands, while increased introduction of legumes would considerably improve the generally low nitrogen content of the soils. The recommended crop-pasture rotations and the presence of livestock on the land during the major portion of the rotation would result in raising and/or maintaining fertility levels in most areas. In the case of the Quebracho INC settlements, where the predominantly deep sandy soils have been seriously depleted by continuous cropping and are subject to intensive erosion processes, the impact of the project would be expected to restore and maintain levels of productivity which these areas have lost. PART V - LEGAL INSTRUMENTS AND AUTHORITY 69. The draft Loan Agreement between the Republic of Uruguay and the Bank and the recommendations of the Committee provided for in Article III, Section IV (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 70. Special conditions of the loan are listed in Section III of Annex III. Special conditions of loan effectiveness would be the signing of a subsidiary loan agreement satisfactory to the Bank between CB and BROU trans- ferring the proceeds of the Bank loan. The establishment of a Project Imple- mentation Unit within INC and the appointment of a Project Coordinator would be conditions of disbursement against the INC component. 71. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 72. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments March 27, 1980  - 21 - ATTACHMENT I TABLE 3A URUGUAY - SOCTAL INDICATORS DATA SHEET URUGUAY REFERENCE GROUPS (ADJUSTED A5JRAGES LAND AREA (TROUSAND SQ. 18.) - KOST RECENT ESTIMATE) - TOTAL 177.5 SAM SAME NEST HIGHER AGRICULTUTRAL 154.6 MST RECENT GEOGRAFPIC INCOME INCOME 1960 lb 1970 /b ESTIMATE /b REGION Ic GROUP /d GROUP /I CNP PER CAPITA (USS) 630.0 870.0 1610.0 1124.4 1942.6 3075.3 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 825.0 930.0 iOOO.O 943.1 1646.7 2518.6 POPULATION AND VITAL STATISTICS POPMLATION, MID-YEAR (MILLIONS) 2.5 2.8 2.9 URBN POPULATION (PERCENT OF TOTAL) 80.1 82.1 83.0 59.3 51.2 72.1 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 3.0 STATIONARY POPULATION (MILLIONS) 4.0 YEAR STATIONARY POPULATION IS REACPCD 2065 POPULATION DENSITY PER SQ. E2. 14.0 16.0 16.0 23.5 28.2 33.5 PER SQ. rm. AGRICULTURAL LAND 16.0 17.0 19.0 80.5 100.5 91.3 POPULATtON AGE STRUCTURE (PERCENT) 0-14 YRS. 28.2 28.7 28.0 40.9 35.4 33.3 15-64 YkS. 64.4 62.6 63.5 54.4 56.3 57.5 65 YRS. AND ABOVE 7.4 8.7 8.5 3.9 5.1 5.7 POPULATION GROWrT RATE (PERCENT) TOTAL 1.5 1.1 0.3/f 2.4 1.7 2.1 URBAN 2.8 1.3 0.4 3.7 3.0 CRUDE BIRTH RATE (PER THOUSAND) 22.0 21.0 20.0 32.8 27.5 31.4 CRUDE DEATH RATE (PER THOUSAND) 9.0 9.0 9.0 8.5 9.1 8.2 GROSS REPRODUCTION RATE 1.4 1.4 1.4 2.4 1.8 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. .. USERS (PERCZNT OF MAUIED WOMEN) .. .. .. 17.7 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 96.3 107.0 99.0 99.4 102.0 98.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 115.0 114.0 116.0 107.0 120.8 112.7 PROTEINS (GRAMS PER DAY) 93.0 96.0 98.1 60.4 80.9 70.3 OF WRICH ANLMAL AND PULSE 60.0 64.0 62.6 28.3 31.3 CHILD (AGES 1-4) MORTALITY RATE 4.0 3.0 3.0 6.7 5.1 2.5 HEALTH LI'E EXPECTANCY AT BIRTH (YEARS) 68.0 69.3 71.0 63.6 65.6 68.7 INFANT MORTALITY RATE (PER THOUSAND) .. .. 49.0 76.1 45.5 20.8 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL *- 92.0 98.0 63.4 69.4 73.9 URBAN .. 100.0 100.0 79.5 85.1 94.6 RURAL .. 59.0 87.0 38.6 43.0 64.6 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 82.0 83.0 58.8 70.1 URBAN .. 97.0 97.0 77.8 88.3 RIJ2AL .. 13.0 17.0 24.5 33.2 POPULATION PER PHYSICIAN 1100.0/g 940.0 700.0 1841.9 1343.2 981.8 POPULATION PER NURSING PERSON .. 3560.0 .. 933.7 765.0 397.8 POPULATION PER HOSPITAL 3ED TOTAL 180.0 150.0 .. 563.4 197.6 240.6 URBAN .. .. .. 279.4 260.2 RURAL .. .. .. 1140.9 1055.0 ADMISSIONS PER HOSPITAL 3ED .. .. .. 25.7 17.3 19.2 HOUS ING AVERAGE SIZE OF HOUSEHOLD TOTAL 3.8/h .. 3.6 5.0 *.7 URBAN .. .. 3.6 4.8 4- RURAL .. .. 4.0 5.3 5.1 AvERAGE MIUNSER OF PERSONS PER DOOM TOTAL 1.5/h .. 2.1 1.3 1., URBAN 1.57( .. 2.1 1.3 1.2 RURAL .. .. 2.1 1.5 1.2 ACCESS TO :LIC-RIC TY (PERCENT OF OELL;LINGS) T07AL 78.0/h .. 30.7 54.3 66.0 OR3AN 88.7h .. d9.2 80.1 S5.1 RURAL 9.07h .. 27.8 14.2  - 22 - ATTACHMENT I Pate 2 TABLE 3A URUMAYr-jOCIAL INDICATORS DATA SUEET UtJGUAC REFERINCE GROUPS (ADJUSTED A0E3ADES - XOST RECENT ESTjtATET) "1 SAKE SA&E NEXT HIGHER NOST RZENT GROCGLAPUIC liCOnE INCO?NE 1960 /b 1970 /b ESTIZT /b REGION tc GROUP ld GROUP /a EDUCATION ADJUSTED ENROLLMZNT RATIOS P7IDARy TOTAL 111.0 106.0 95.0 107.3 101.7 107.6 MALE 111.0 108.0 95.0 109.1 110.0 FDALZ 111.0 103.0 94.0 107.4 92.8 SECONDAtY: TOTAL 37.0 57.0 62.0 40.5 51.2 39.7 MALE 35.0 51.0 57.0 40.4 56.4 FUIALE 38.0 63.0 67.0. 39.0 43.7 VOCATIONAL MOL. (ZtS SECOImBRI) 23.0 21.0 19.0 18.5 18.3 PiLl-TSAClIM LA4I0 PIDhY 31.0 29.0 23.0 37.1 27.1 SZCONDA 13.0 .. .. 17.9 25.3 ADULT LISZACT RAT (P2IC