Colombia - Second Integrated Rural Development Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-3325-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE SECOND INTEGRATED RURAL DEVELOPMENT PROJECT May 18, 1982 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 Dank authoriation.  CURRENCY EQUIVALENTS Currency Unit = Peso - Col$ Average Calendar 1980 Average Calendar 1981 US$1 = Col$47.280 US$1 = Col$54.491 Col$l = US$0.02115 Col$1 = US$0.01836 Exchange Rate Effective May 4, 1982 US$1 = Col$62.21 Col$1 = US$0.01607 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY COLOMBIA SECOND INTEGRATED RURAL DEVELOPMENT PROJECT ABBREVIATIONS CAJA - Caja de Credito Agrario, Industrial y Minero (Agricultural, Industrial and Mining Credit Bank) CECORA - Central de Cooperativas de la Reforma Agraria Ltda. (Union of Agrarian Reform Cooperatives Ltd.) CIDA - Canadian International Development Agency CONPES - Consejo Nacional de Politica Economica y Social (National Council for Economic and Social Policy) DNP - Departamento Nacional de Planeacion (National Planning Department) DRI - Programa de Desarrollo Rural Integrado (Integrated Rural Development Program) FFAP - Fondo Financiero Agropecuario (Agriculture Financing Fund) FINANCIACOOP - Instituto de Financiamiento y Desarrollo Cooperativo de Colombia (Colombian Institute for Financing and Development of Cooperatives) FNCV - Fondo Nacional de Caminos Vecinales (National Fund for Rural Roads) HIMAT - Instituto de Hidrologia, Meteorologia y Adecuacion de Tierras (Institute for Hydrology, Meteorology and Land Improvement) ICA - Instituto Colombiano Agropecuario (Colombian Agricultural Institute) IDB - Inter-American Development Bank IDEMA - Instituto de Mercadeo Agropecuario (Agricultural Marketing Institute) INCORA - Instituto Colombiano de la Reforma Agraria (Colombian Institute for Agrarian Reform) INDERENA - Instituto de los Recursos Naturales Renovables y del Ambiente (Institute for Renewable Resources and the Environment) INS - Instituto Nacional de Salud (National Institute of Health) MINSALUD - Ministerio de Salud (Ministry of Health) OPSA - Oficina de Planeamiento del Sector Agropecuario del Ministerio de Agricultura (Agricultural Sector Planning Office in Ministry of Agriculture) PAN - Plan Nacional de Alimentacion y Nutricion (National Food and Nutrition Plan) PIN - Plan de Integracion Nacional (National Integration Plan) SENA - Servicio Nacional de Aprendizaje (National Apprenticeship Service) 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.   COLOMBIA SECOND INTEGRATED RURAL DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Colombia Amount: US$53.0 million equivalent, including capitalized front end fee. Terms: Repayment in 17 years, including four years of grace at 11.6% interest per annum. Project Description: The project is part of the second phase of a planned expansion of the Integrated Rural Development Program (DRI) contemplated in the Government's National Integration Plan (PIN). The project aims at extending DRT to 55 municipalities within four new departments, while intensifying its coverage and conso- lidating its achievements in the 154 municipalities which were covered under the first phase. The main objectives of the project are: (a) to improve the standard of living of the population in a number of rural areas selected for their high concentration of small farmers and their production potential; and (b) to contribute to the increased availability of basic foodstuffs at reasonable prices for the two-thirds of the population living in urban areas. Under the leadership and coordination of the National Department of Planning (DNP), through its Directorate General of the DRI and the National Nutrition Program (PAN), more than a dozen executing agencies would provide to selected communities supervised credit, pro- duction and marketing support, physical infrastructure and social services. The project would also assist to strengthen the institutional framework for planning, supervising and evaluating future public investment in rural areas where there is large concentration of small farmers, excluding the predo- minantly coffee growing regions. The project faces no unusual risks, although two areas will need close monitoring: producer price fluctuations and overall project management and coor- dination. The satisfactory progress made under the first project, together with the experience gained and the close monitoring envisaged, make it reasonable to expect that the project will be carried out as scheduled. Relending Terms and Conditions: Interest rates to subborrowers would be the same as those charged by financial intermediaries for subloans made with funds provided by the Agricultural Financial Fund (FFAP). At present, interest rates are 21% nominal (23-24% effec- tive). Maximum lending per individual farm family would be Col$650,000 (about US$10,500), to be revised periodically.  Estimated Cost: Local Foreign Total --(US$ million equivalent)-- Production, Marketing, Processing 45.0 20.0 65.0 Advisory Services and Training 24.9 3.3 28.2 Infrastructure (Roads, Water Supply, Electrification) 17.6 11.5 29.1 Social Services (Health, Education) 13.9 3.4 17.3 Management, Monitoring and Evaluation 2.2 0.2 2.4 Total Base Costs 103.6 38.4 142.0 Physical Contingencies 1.5 0.8 2.3 Price Contingencies 20.2 7.9 28.1 Total Project Cost 125.3 47.1 172.4 Front End Fee on Bank Loan - 0.8 0.8 Total 125.3 47.9 173.2 Project Financing Plan: Government 39.2 - 39.2 FFAP 45.4 45.4 Entities Resources 31.2 - 31.2 IBRD 5.1 47.9 53.0 Beneficiaries 4.4 - 4.4 Total 125.3 47.9 173.2 Estimated Disbursements: FY83 FY84 FY85 FY86 FY87 FY88 FY89 -----------(US$ million equivalent)----------- Annual 5.0 7.5 9.5 10.5 10.5 7.5 2.5 Cumulative 5.0 12.5 22.0 32.5 43.0 50.5 53.0 Rate of Return: 27% Appraisal Report: Report No. 3661-CO, dated May 17, 1982.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE SECOND INTEGRATED RURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Colombia, for the equivalent of US$53.0 million to help finance the Second Integrated Rural Development Project. The Bank will finance the front end fee of US$0.8 million. The loan would have a term of 17 years, including four years of grace, with interest at 11.6% per annum. PART I - THE ECONOMY l/ 2. An Economic Report on Colombia (3556-CO) was distributed to the Executive Directors in September 1981. This section on the economy reflects the major findings of this report. Country data sheets are presented in Annex 1. Background 3. The Colombian economy has become more resilient to external shocks as a result of the structural changes that have occurred over the past 30 years. Rapid economic growth has resulted in a substantial structural trans- formation of the country from a predominantly rural and self-contained eco- nomy to a more diversified urban, industrial, services and open economy. Colombia has reached a point where population pressure on land no longer increases much, if at all. Public sector investment and output now play a greater role, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, greater emphasis on foreign trade has allowed the external sector to grow with non-coffee exports, particularly exports of manufactured goods, expanding rapidly and the range of products sold abroad widening considerably. The growing urban- industrial-services oriented economic activity and a rapid expansion of sur- plus labor in rural areas attracted by higher wages and better services in the cities has given rise to rapid rural-urban migration. This phenomenon, together with the increased participation of women in the labor force, has been instrumental in reducing poverty and improving income and distribution over time. Financial and capital markets have evolved pari-passu with the growing needs of the economy, and Colombia has become an active participant in international capital markets. 1/ Substantially unchanged from report for the Highway Sector Project (No. P-3241-CO, March 15, 1982).  -2 - 4. Real GDP per capita rose by 2.4% p.a. on average during the 1950-80 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, combined with more rapid GDP growth. Population growth, which had remained in the 3.0% to 3.5% range during the 1950s and early 1960s, declined dramatically after 1965 as a consequence of a sharp fall in the fertility rate. Greater economic and edu- cational opportunities for women, rapid rural-urban migration, rising per capita income and increased effectiveness of family planning programs contri- buted to the decline in fertility. Colombia's population is currently grow- ing at an annual rate of 2.1%. As a result of the high proportion of women now entering childbearing years, this rate of population growth is likely to continue until the early 1990s. 5. The combination of rising per capita income and expanded public services has brought about a significant improvement in the welfare of the poorest, in both absolute and relative terms. As a result of increased sani- tation control, improved diets and better health care, the crude death rate fell by about 50% and life expectancy rose from 48 years in the early 1950s to 63 years currently. The child mortality rate declined from 20 per thou- sand in the early 1960s to 8 per thousand in the late 1970s. Infant morta- lity, one of the best indicators of welfare, fell to 65 per thousand in the later 1970s, from about 124 per thousand in the early 1950s. School enroll- ment ratios have increased substantially at all grade levels since 1960s, and by the late 1970s, 91% of urban children aged 7 to 14 were enrolled in school. The poorest income groups have experienced the greatest increases in electricity and water services in recent years and have benefitted more than the average of the population from services of the national health system. In spite of this progress, Colombia remains largely underdeveloped, with a relatively small modern sector superimposed on a broad, traditional and eco- nomically poor base. Development has been concentrated in relatively few areas of the country, public services are still not available to many of the rural and urban populations and unemployment and underemployment are rela- tively high. The coverage of health care and water supply requires conti- nuous improvement and adequate housing is not available to a substantial pro- portion of the population. Rapid migration to the large and medium-sized cities has created urban development problems, with attendant social diffi- culties. Moreover, in spite of the steady increase in per capita income over the past 30 years, substantial efforts are still required to improve and extend the benefits of development to the poorest income groups. 6. In large part, the achievements of the past thirty years were the results of government efforts to stimulate the productive sectors, provide the required economic and social infrastructure and establish an effective institutional base in the economy. In the 1950s and early 1960s, development policy favored import substitution supported by high tariff protection and the provision of economic infrastructure by the public sector. It was during this period that the country's major communication and transportation net- works were developed and the transformation to a semi-industrial economic structure began in earnest. By the mid-1960s, the prospects for further import substitution were substantially diminished and the country was confronted with great economic uncertainty, arising from the fact that economic activity and the balance of payments were heavily influenced by developments in the world coffee market. In order to ease this constraint, during 1967 the authorities adopted an outward-looking development strategy,  expanding and diversifying exports and, among the export markets, increas- ingly tapping the Andean Group countries. Export promotion policies, includ- ing frequent exchange rate devaluations, export tax rebates and other export incentives were introduced and the authorities began lowering tariffs some- what and freeing capital markets from controls as means of raising efficiency and increasing the competitiveness of Colombian goods in external markets. These measures were highly successful in relieving the foreign exchange con- straint and stimulating growth and employment. However, by mid-1970s the economy was once again experiencing difficulties caused primarily by the world recession and by excessive Central Bank financing of domestic budget deficits. Recent Economic Development 7. In late 1974, the Government introduced a wide range of fiscal and monetary policies designed to correct the structural and policy weaknesses prevailing in the economy at that time. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures arising from a sharp increase in world coffee prices. The increased receipts from coffee exports, together with some official surrender of foreign exchange from illegal exports, caused a turnabout in the balance of payments. Incomes rose rapidly and stimulated aggregate demand; inflation accelerated. Econo- mic growth also accelerated and unemployment fell substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated surpluses averaging about 7% of GDP during the 1976-79 period, and by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to nearly 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreign exchange boom has had a somewhat negative impact on the evolution of the Colombian economy, largely as a consequence of the need for measures to stabilize the economy. Public investment was curbed, thereby delaying some badly needed additions to economic and social infrastructure. The rate of currency devaluation was slowed and the conversion of export receipts into pesos was delayed to mode- rate the growth of domestic demand, with adverse effects on export expansion and diversification. Also, the Government was compelled to maintain high reserve requirements and expand controls over credit thereby reducing, in real terms, the financing available to the private sector via the official capital market. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 but were partially successful in restraining aggregate demand growth; thus relatively high inflation persisted. In response to the increasing stabilizing effects on aggregate demand and the troublesome finan- cial market distortions caused by inflation and the extended period of mone- tary restraint, the authorities began in late 1979 to adjust the stabiliza- tion program. The rate of peso devaluation was advanced to increase export incentives and reduce borrowing abroad, and in early 1980, credit restraints were relaxed by lowering reserve requirements. At the same time, interest rates on time deposits captured by commercial banks and development finance companies -- and on the lending therefrom -- were freed from controls. To offset the inflationary effects of these measures the authorities further liberalized import payments and adopted the policy, supported by the emission of new short-term certificates, of not expanding the subsidized selective  - 4 - credit operations of the Central Bank in excess of the resources captured from private savings for this purpose. The authorities also increased the surveillance and control of the illegal export trade. The effects of the above measures were not immediately noticeable. Real GDP growth declined to 4% in 1980, unemployment started to creep up, and inflationary pressures con- tinued. 10. In 1981, manufacturing activity has remained sluggish, hemmed in by the slow growth in aggregate consumer demand, and limited by power shortages during most of the year. Coffee exports have fallen as a result of reduced world demand and declining prices while non-coffee export growth has weak- ened. On a more positive note, construction activity, which had fallen sharply in 1979-80, began to recuperate toward the end of the year. In res- ponse to favorable price incentives, petroleum production is estimated to have increased by over 5% in 1981. Agricultural output has registered some gains despite decreases in the area planted resulting from a prolonged drought. Both public and private investment have expanded rapidly. Real GDP growth is estimated to have reached 3-4% in 1981. Inflation continued to be a problem in 1981, however, with consumer prices increasing by about 27% for the year. Despite world coffee prices at relatively low levels for most of the year, Colombia's balance of payments continued to remain strong, with net official reserves maintained at about one year of imports of goods and non-factor services. Development Strategy 11. Achievement in this decade of the Government's objectives of increased productivity and maximum economic growth, increased employment, improved distribution of income and greater welfare for all Colombians will require a major effort to remove from the economy the constraints of inade- quate economic and social infrastructure and insufficient demand. Infras- tructure needs are most pressing in the energy, transportation, and agricul- ture sector. 12. The Government's strategy for accomplishing its development objec- tives are set forth in the recently formulated Plan de Integracion Nacional (PIN). This strategy continues the previous emphasis on export promotion as a means of supplementing domestic demand and assuring balance of payments stability, and on policy measures, including further import liberalization, designed to increase economic efficiency and raise institutional capacity. It proposes a large increase in public investment, giving high priority to energy projects and to the provision of transport infrastructure. Economic decentralization, regional autonomy and the uniting of regional growth centers through improved transport, communication and financial links are directed towards creating an integrated national market, a strategic goal of the PIN. The Plan also places emphasis on the promotion of both small-scale and commercial agriculture as a means of diversifying and increasing exports, assuring adequate domestic food supplies, holding down inflation and contri- buting to the Government's nutrition and welfare goals. Industrial policy objectives are to provide an environment of certainty, along with adequate credit and infrastructure, so that entrepreneurs are encouraged to invest and expand output. Because of its benefits in opening foreign markets, creating employment and bringing in new technology, private foreign investment is to be encouraged. The Government's approach to helping the poor takes on a new orientation in the PIN. Its efforts are focussed upon improving efficiency  - 5 - in the use of resources and strengthening the social service institutions. Programs in the health and education sectors are to be better focussed and integrated, and selected low income and disadvantaged groups, such as workers in the informal sector, children and unemployed youth, are singled out for special attention. Combined with extensions of the Integrated Rural Develop- ment (DRI) and National Nutrition (PAN) programs, the new directions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 13. While the PIN provides a good analysis of the development issues facing the country and sets forth the general guidelines for policies and programs to resolve these issues, there are two important aspects of bringing off the development strategy that are expected to receive increasing atten- tion from the authorities in coming months. The first involves a required deepening of the sector analyses in order to improve coordination in planning and executing sector strategies, and the second has to do with matters rela- ted to financing the PIN. Given the large investment required to carry out the PIN strategy, inadequate planning and coordination among sectors or insufficient domestic resource mobilization would be likely to result in sub- stantial resource misallocation and to delay execution of the strategy. The two most important sectors where additional work is urgently required are energy and transportation. 14. Colombia became a net oil importer in 1976 and by 1985 petroleum imports are projected to absorb about 20% of total merchandise exports. In the absence of rapid energy development, energy shortages will become a major constraint on growth later in this decade. Resolution of the energy problem depends on the country's success in developing its abundant domestic energy resources -- hydroelectricity, coal and natural gas -- and also upon increas- ing petroleum exploration and development. The strategy for doing this will require energy pricing policies that rationalize consumption with energy resource availabilities, a least cost program of investments, sufficient domestic and external financing for these investments, strengthened sector institutions, improved program execution capability and rapid carrying out of investments. Although planning and policy making have improved substantially in many energy sector institutions in recent years, overall planning and coordination in the sector is still weak. A study about to be completed by the National Planning Department is expected to provide the basis for improvements in sector-wide planning and policy-making, and recent pricing decisions have gone a considerable way towards providing the correct signals for regulating consumption and encouraging production. The prices paid to producers (primarily foreign companies) for "incremental" and "new" crude have been raised to levels which provide adequate production incentives, and the retail prices of petroleum products have been increased substantially in recent years, which on the whole reflect international levels. 15. Colombia's high transportation costs and inadequate services could become a constraint on economic growth, affecting particularly the develop- ment of the country's vast coal reserves and its agriculture. The State Railway is in poor condition and the road network needs maintenance and rehabilitation. The authorities have begun to take steps to improve the country's infrastructure and PIN assigns an important share of future investments to the sector. An important part of this effort is the recently approved Rural Roads, Railway Rehabilitation, and Highway Sector Projects.  -6- Investment and its Financing 16. A substantial increase and redirection of public sector investment will be required in the next several years to carry out the development stra- tegy outlined in the PIN. Over the 1981-85 period, such investment is expected to increase by about 15% p.a. in real terms. The energy and trans- portation sectors are expected to account for the bulk (59.5%) of this investment; however, sizeable real increases in investment are also expected in the nutrition and health, small scale agriculture and industry (including mining), water and sewerage, and education sectors. Overall, public fixed investment is projected to average 8.4% of GDP during the 1981-85 period, and is expected to total Col$1,603 billion (about US$20.5 billion). Private investment will have to increase also during this period to provide the goods and services required by the expanding economy. 17. This increase in investment will demand a major resource mobiliza- tion effort on the part of Colombia's public sector. The buoyancy of the tax system (excluding coffee tax revenues and receipts from earnings on foreign exchange holdings), which has declined in recent years, will have to be increased through new taxes and better tax administration, resources will have to be used more efficiently, and the charges levied for public services will have to be raised substantially in real terms. Since this effort is expected to coincide with increased private sector demand for investment resources, the importance of measures to expand domestic savings cannot be over-stressed. The recent capital market liberalization should encourage savings. A significant increase in voluntary private savings is not likely, however, as long as inflation remains high. Consequently, stabilization remains a sine qua non for the country's future growth and development. Growth and Balance of Payments Prospects 18. Given the country's strong resource base and sound economic manage- ment, Colombia's growth prospects for this decade are good and significant advances in economic welfare are anticipated. The urgent need to relieve the pressure on aggregate demand arising from the growth of foreign exchange earnings and the necessity to increase rapidly imports to develop the coun- try's resource potential and restore higher economic growth requires a shift in the balance of payments from a small current account deficit of US$195 million registered in 1980 to a current account deficit projected to average US$1,865 million, over the 1981-85 period. By the end of this period, net official international reserves would have fallen to a level slightly over four months of imports of goods and non-factor services (a level which is adequate for Colombia) without prejudice to the country's creditworthiness. This should be sufficient to support an average growth of real GDP of 5.5% during this period. Beyond 1985, the current account deficit should improve as a result of increasing export proceeds (particularly coal) and a level- ing-off of imports. The current account deficit would fall to about 2% of GDP in 1987 and turn into a surplus of less than 1% by 1990. To achieve real GDP growth of 5.5% per annum, gross domestic investment will have to expand to about 25% of GDP, up from 18% in the early 1970s and 20% in recent years, and to avoid too large an increase in foreign indebtedness, gross national savings would need to average about 22% of GDP.  19. Gross external capital requirements (net of reserve dradown) are projected to total US$10.3 billion in current prices for the 1981-85 period, for an annual average requirement of US$2,057 million. About 26% of this amount will be required annually for debt amortization and the rest to cover current account deficits. Multilateral and bilateral agencies are expected to provide 33% of these requirements, 50% is expected to come from foreign suppliers and financial institutions and the balance should come from private foreign investment. At the end of 1980, Colombia's public and publicly gua- ranteed external debt disbursed and outstanding amounted to US$4.3 billion, equivalent to 13% of GDP. The Bank/IDA share of this external debt was 25%. Reflecting the recently increased lending by the Bank and the decline by bilateral sources, this share is expected to increase to about 29% in 1983, before falling to about 25% in 1986. The debt service ratio at the end of 1980 was 10% and is expected to climb to 17% by 1985, peak at about 20% in 1988 and then decline gradually. The World Bank's share in public debt ser- vice is expected to rise to about 26% in 1985 from about 25% in 1980. With continued sound economic and financial management, Colombia is expected to maintain its creditworthiness through and beyond the 1981-1990 period. PART II - BANK GROUP OPERATIONS IN COLOMBIA 20. The proposed loan, the 97th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$3,545.5 million (net of cancel- lations). Of this amount the Bank held, as of March 31, 1982, US$2,736.1mil- lion: IDA made one credit of US$19.5 million for highways in 1961. Dis- bursements have been completed on 59 loans and the IDA credit. During 1972- 77 disbursements averaged US$86 million equivalent per year, then declined slightly to US$82 million in 1978 but increased sharply to US$215 million in 1980 and US$249 million in 1981. The gradually improving performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures, which should allow relaxation of fiscal restraint, and increased Bank lending for infrastructure projects, all point to higher level of disbursements in the future. IFC has made investments and underwriting commitments of US$79.1 million in 26 enterprises and, as of March 31, 1982, it held US$22.9 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of March 31, 1982 and a brief report on the status of the 36 ongoing projects. 21. During the past 16 years, Bank lending to Colombia has become more diversified. While before 1966, 22 loans out of a total of 25 loans made to Colombia were for power and transport projects, since then, from a total of 67 loans only 21 have been made to these sectors. In addition, all three loans for education, 12 of the 14 loans for industry, 13 of the 15 agricul- tural loans, one loan for nutrition, two loans for urban development and all nine loans for water supply and sewerage, were made after 1966. The diversi- fication was indeed a desirable aim as it provided closer contact with Colom- bia's development problems. The experience gained has served to identify areas in which the Bank's role can only be a marginal one and, thus, to ena- ble lending to be focussed upon sectors in which the Bank's presence can have a meaningful impact.  -8 - 22. Bank lending to Colombia in FY81 consisted of two loans for power generation and distribution projects, and one each for rural roads, irriga- tion rehabilitation and village electrification totalling US$550 million equivalent. In addition to the loan presented in this report, the FY82 pro- gram includes recently approved loans for highways, railways and watershed management. Work is also under way on projects for rural education, petro- leum development, mining, oil refining, electric power, agricultural research and extension and marketing, fertilizers, water supply and sewerage, ports and small-scale industry for possible consideration by the Executive Direc- tors during the next two years. 23. The proposed Bank lending conforms closely with the Government's development strategy as outlined in the PIN (paragraph 12 through 15). To help Colombia develop renewable sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank intends to assist in the development of coal mines which hold potential to help Colombia meet part of its energy requirements and in diversifying exports. In support of the Government's objective to increase the supply of domestic petroleum, the Bank plans to finance fulrther petroleum projects as a complement to investments of private firms and, for the first time, become involved in projects which pro- mote the efficient processing of hydrocarbons. Bank financing in the energy sector would also assist in strengthening major institutions and in mobiliz- ing external finance as most of the projects would require substantial co- financing. Other future loans would finance agriculture and industry to sup- port the Government in its efforts to raise overall productivity, income and employment, and to increase and diversify exports. Closely related to these objectives would be Bank lending for infrastructure, including the Highway Sector Project, presented to the Board earlier this year, that would facili- tate the increasing inter-regional flow of goods and services. A port pro- ject under preparation is aimed at enabling Colombia to handle larger volumes of non-traditional exports and the imported inputs on which the modern sector of its economy relies for expansion. To permit efficient movement between inland points and the ports of bulk cargo, particularly coal and agricultural exports, a Seventh Railway Project to reshape and modernize railway infra- structure was recently approved by the Board. Finally, several loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population, including the project under consideration today, which is oriented to effecting permanent improvements in the production and consuimption capacity of a large number of rural dwellers. Proposed lending for rural electrification, further rural development, agricultural credit, water supply and sewerage, irrigation and rural education projects is princi- pally designed to improve the standard of living of the poor. 24. The operations of external lenders in Colombia are shown in Annex -L. While IBRD, IDB, and bilateral sources provided about 75% of total exter- nal financing to Colombia in the 1961-72 period, their share has decreased since then to approximately 63% for the 1975-80 period and is expected to de- cline further to about 30% of external capital requirements during 1981-86. Like the Bank, 1DB has given increased emphasis to projects with a poverty orientation and has financed projects in low-cost housing, urban and rural development, agrarian reform, university education, water supply, rural elec- trification and land erosion control. In the future, it proposes to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased employment. USAID has supported programs in education, urban development and small farm development, but is  - 9 - phasing out its program in Colombia. The Government of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional fi- nancing for basic needs and regional integration projects. PART III - AGRICULTURE AND THE SMALL FARM PRODUCER Characteristics 25. Agriculture is a key sector of the Colombian economy from several points of view. It is important in terms of its participation in GDP (25%) and employment (27%) and its contribution to exports (about two-thirds of merchandise exports in 1980). Colombia is self-sufficient in most basic foodstuffs, the major exception being wheat. Climatic conditions are unstable in the highlands, with periods of drought alternating with periods of excessive rainfall. Consequently, agricultural production is subject to wide swings. The record of long-term growth in agriculture, however, is good (4.7% per annum in the 1970s), driven especially by increased production of commercial export crops (rice, coffee, bananas, sugar, tobacco and flowers) which have benefitted from intensive research programs. 26. In 1980, the gross value of production amounted to about Col$212 billion (US$4.5 billion in constant prices), of which about one-half was pro- vided by crops, 36% by livestock, and the remainder by forestry, fishing and hunting. Within the crop subsector, seven basic staples -- rice, cassava, plantains, potatoes, maize, sugarcane for panela (non-centrifugal sugar) and beans -- account for about 50% of the value of production with coffee's share amounting on average for another 30%. 27. Colombia's land resources total 114 million hectares, of which an estimated 17 million are in pasture and nearly 50 million under forest. Of the remainder, just over a million hectares are under coffee and nearly four million are in other crops. Seventy percent of the farms and 75% of the land is farmed directly or indirectly by its owner, the remainder being farmed wholly or in part by sharecroppers, renters and squatters. Institutional Framework and Credit 28. The formulation and execution of agricultural policy and public sector programs involve a sizeable number of institutions -- at latest count, 18 in all. The control center of the sector is the Ministry of Agriculture and within it, the Agricultural Sector Planning Office (OPSA), which has the responsibility for planning and coordinat 4ng sector activities. OPSA main- tains a close relationship with the agriculture and budget divisions of the National Planning Department (DNP), since they have to approve the sector's development plan and investment program. The Colombian Agricultural Insti- tute (ICA) is responsible for agricultural research and extension and collab- orates with other agencies, particularly credit institutions. The Agricultu- ral Marketing Institute (IDEMA) promotes the rational marketing of crops and intervenes where necessary, by procuring at home and abroad agricultural commodities, to influence prices to the consumer and the producer. Other key agricultural institutions include: the Agrarian Reform Institute (INCORA), which carries out programs of land distribution and farm support; the Natural Resources Institute (INDERENA), which is mainly responsible for conserving  - 10 - virgin land, river basins and national forests; and the Colombian Institute for Hydrology, Meteorology and Land Improvement (HIMAT), which is in charge of irrigation works and associated land improvements in addition to hydrology and meteorology. 29. Two principal sources, Caja Agraria (CAJA) and the Fondo Financiero Agropecuario (FFAP), account for the vast majority of the agricultural cre- dit in Colombia. FFAP is a rediscount window of the Bank of the Republic (BOR), from which funds are on-lent by banking institutions to commercial farmers and in the future also to small farmers under this project. FFAP's resources are obtained principally from low yielding bonds which banking in- stitutions are required to hold in lieu of reserves. While FFAP provides more than half of the resources on-lent to agriculture, in the past it sup- plied funds to less than 3% of the farms -- principally medium- and large- scale enterprises. CAJA, with about 850 branches spread throughout the coun- try, is the principal source of credit to the small farm sector. CAJA, a mixed public-private bank (89% Government owned), lends funds raised princi- pally from savings deposits and FFAP rediscounts. In addition, there are other sources of agricultural credit such as the Banco Ganadero which finan- ces principally livestock; the Banco Cafetero which finances coffee and crop diversification; the Corporacion Financiera de Fomento Agropecuario y Expor- taciones which lends principally for export agriculture and agro-processing; and INCORA which, through banking institutions, makes available credit to agrarian reform beneficiaries. 30. Agricultural credit in Colombia is generally linked to technical assistance -- without an approved plan by an authorized extension agent, a farmer is denied credit from the major channels. Interest rates are lower for agriculture than for other productive sectors. For FFAP resources nomi- nal interest rates are currently on average 21%, though effective rates are 23-24% as a result of additional charges and the collection of interest quar- terly in advance. CAJA's rates are slightly higher, except for farmers with gross assets of less than Col$100,000 (US$1,600). It is the overall policy of the Government to level effective interest rates for agricultural credit with inflation. The Small Farm Producer 31. Small farm producers (defined as those farming less than 20 ha) play a very important role in agricultural production, employment, national food supply and relative price stability. In 1980, they accounted for 46% of total agricultural output and 55% of rural employment and they also supplied 65% of the national staples which, given the weight of foodstuffs in the cost of living index (50%), impact considerably upon the domestic price level. The 1970-71 agricultural census estimated their number at 980,000, who farmed 3.8 million ha or 12% of Colombia's cultivated land. Of these, 73% had farms of less than 10 ha and were within the lower income group category. 32. For a variety of reasons, but mainly antiquated farming methods, insufficient credit, extension service and other inputs, small farm produ- cers' output has not kept pace with the rise in internal demand. The result- ing price increases have improved their terms of trade; this, together with raising supplemental family income as a result of the higher wages prompted by the declining rural labor surplus, which has emigrated to the cities, has improved their consumption capacity. By and large, however, they have con-  - 11 - tinued to deploy their resources under rudimentary conditions. Their stan- dard of living, although improved, still is considerably below acceptable levels. Adult and child mortality in the rural sector is estimated to be twice as high as in urban areas, mainly because of water-borne infections and unhygienic conditions. The ratio of physicians to rural population is 1 to 8,000 compared with the national average of I to 1,800. The rural education system exhibits several problems, including curricular weaknesses, low aca- demic achievement, substantial wastage and inefficiencies in its function- ing. Moreover, only 40% of rural schools are offering all five primary grades, against 72% in urban schools. The deficient rural roads network, the broken topography of the country and the dispersion of the rural population have prevented more intensive intra- and inter-regional trade. Today, only 60% of the rural communities are linked by all weather roads and, with the exception of communities in the coffee producing areas, they are poorly elec- trified. Potable water supply and waste disposal systems are only available to 40% and 12%, respectively, of the rural population. Government Strategy 33. Successive administrations have devoted substantial resources to assisting small farmers to improve their output, productivity and living standards. Part of this effort has also been directed at helping the rural poor. During the late 60s and early 70s, Government actions were concentrat- ed upon increasing the supply of credit and irrigation, and upon land re- form. To date, INCORA has transferred about 3.5 million ha to landless rural families but, lacking public support, its activities have diminished. Fol- lowing considerable debate, in 1973 the legislature instructed the Government to initiate programs that would bring about sustained improvements among the small farm producers, since they are considered essential to the country's social and economic development. 34. In early 1975, the National Council for Economic and Social Policy (CONPES) approved an ambitious and wide-ranging National Food and Nutrition Program aimed at increasing the availability of low-cost foodstuffs to the poorest 50% of Colombia's population, raising its income and improving its general welfare. This was to be achieved through multisectoral and coordi- nated actions in production, marketing, processing, subsidized food distribu- tion and the provision of infrastructure and social services. The 1975-78 National Plan for Social and Economic Development incorporated two multisec- toral programs, the National Food and Nutrition Program (PAN) and the Inte- grated Rural Development Program (DRI) to carry out the legislature's man- date. 35. PAN aims at breaking the recurrent cycle of malnutrition and pover- ty among the poorest 30% of the population. Its target population are preg- nant women, lactating mothers and pre-school children. PAN now covers seven Departments and the Special District of Bogota and provides an integrated package that includes community health services, potable water supply and sanitation facilities, nutrition education, distribution of subsidized pro- cessed food and promotion of family gardens. (A Bank loan, 1487-CO, is sup- porting PAN.) DRI, on the other hand, is essentially production-oriented and, while substantial amounts are spent on infrastructure and social ser- vices, it aims mainly at developing small-scale farms of less than 20 ha to the fullest extent possible in order to provide the farm families with sub- stantially higher incomes from self-sustaining operations and to increase national food production.  - 12 - 36. Phase I of DRI started in July 1976 after a one-year experimental period. A total of 12 national public institutions are participating, as well as various regional entities (paragraphs 47 through 58). This first phase covers selected areas in eight Departments (Map IBRD 15802) at a cost of approximately US$273 million (5-year period). The Bank with US$52 million (Loan 1352-CO), the Inter-American Development Bank (IDB) with US$64 million, and the Canadian International Development Agency (CIDA) with US$14 million are participating in the financing of DRI, Phase I. 37. The Government continues to give emphasis to rural development with the aim of assuring adequate food supplies, bringing about further gains in nutrition and welfare of the rural population and diversifying/expanding exports. To achieve this objective, it proposes to strengthen technology and infrastructure through credit, research, extension, rural roads, land deve- lopment (mainly watershed management, irrigation and drainage), storage, agroindustries, marketing facilities and electric power. Closely related are health, education and water supply and sewerage to reduce the harsh condi- tions of rural life and, in this way, retain an increased number of people in the countryside. In support of this strategy, several programs are under execution and several others are about to begin. The proposed one, which together with a recently approved IDB project forms DRI's second stage, is part of this program. Bank Role in the Sector 38. Bank lending for agriculture has focussed principally on supervised agricultural credit and support for irrigation/drainage and colonization pro- jects which have involved some form of land distribution. Since 1966, the Bank has made 13 loans totalling US$296.6 million equivalent to Colombia for agriculture. Five have been for agricultural credit, two for colonization, four for irrigation/drainage, one to support the first stage of DRI and one for watershed management. Bank efforts in agriculture have aimed at increas- ing agricultural production and at strengthening public sector institutions concerned with agriculture. Most of the projects have focussed on increasing productivity, incomes and welfare of small farmers. The proposed project, together with the recently approved rural roads (Loan 1966-CO), irrigation rehabilitation (Loan 1996-CO) and village electrification (Loan 1999-CO) projects, the proposed basic rural education project and the rural projects being assisted by other external lenders, would support further these objectives. The First Integrated Rural Development Project (Loan 1352-CO) and the Lessons Learned 39. Considering the difficulties which are normally encountered in set- ting up and coordinating such a vast and complex program, the First Integrated Rural Development Project (DRI I) can be regarded as very success- ful. Several indicators testify to this. As of March 31, 1982, more than 80% of project funds had been committed and disbursements of the Bank loan totalled 39.6 million, or 76% of the total amount. A total of more than 30,000 smallholders were receiving credit and technical assistance from the project (the 5-year target was 40,000) and an estimated additional 74,000 families were benefiting from the social infrastructure and services of the project, bringing the total number of beneficiaries to about 600,000.  - 13 - 40. According to data available, which are not comprehensive, the pro- gram definitely has had a major impact on agricultural production and produc- tivity of participating farmers. Field records of the Colombian Agricultural Institute (ICA) and a comprehensive survey carried out in two of the Bank project areas in 1979, show that between 1975 and 1978, in the Department of Antioquia yields of major crops on farms of direct project beneficiaries have increased by 33% to 60%, and in the Department of Narino, by 50% on average between 1976 and 1980. The area under cultivation and the cropping intensity have also risen and, therefore, total production is estimated to have in- creased significantly. According to the Antioquia survey, direct beneficia- ries were able to obtain annual incomes of about US$460 per capita in 1978 from their farm activities, whereas farmers in the control group, not parti- cipating in the DRI program, were obtaining only about half that income. Additional evaluation studies carried out in the Tenza Valley and Boyaca Department, areas financed by IDB, produced similar results. 41. The success of the project, however, cannot be measured only by comparing quantitative targets and results. The comparison by itself does not reflect the quality of services provided nor the advances made in insti- tutional effectiveness and the degree of the authorities' commitment to the program. Except for the marketing, health and forestry components, the core of the project (about 80% of the project cost), consisting of agricultural production and infrastructure, has been highly successful. The project has also received broad political support; the local funds have been made avail- able to the project ahead of schedule. Most striking has been the effective coordination of activities that has prevailed at the local level. Planning and related investment tailored to the beneficiaries' specific need were car- ried out while maintaining a cohesive and phased approach to meeting each village's requirements. The unusual role of DNP as the overall directing and coordinating agency appears to have been one of the keys to the success, the other being intensive participation by regional/local authorities. DNP has an important say in the investment program of, and on the Government resour- ces transferred to each of the participating agencies. These, therefore, have been anxious to fulfill their obligations. The involvement of region- al/local authorities has given to the program a sense of belonging and a high degree of realism. 42. The problems encountered in the marketing, forestry and health com- ponents can be attributed basically to institutional deficiencies. The Union of Agrarian Reform Cooperatives, Ltd., (CECORA), which has the responsibility for marketing, did not live up to expectations. Frequent changes in its management, high turnover of experienced staff and insufficient resources hampered its operations. The same can be said about the Institute for Renew- able Natural Resources and the Environment (INDERENA) that is in charge of the forestry component. With respect to health, the problem has been diffe- rent; there was lack of agreement at the highest level concerning policies for the delivery of health services in rural areas. In the preparation of the proposed project, therefore, special attention has been given to correct- ing these deficiencies. In the case of marketing, the number of participat- ing entities has been increased to buttress the marketing effort and diversi- fy markets. As part of the Upper Magdalena Pilot Watershed Management Pro- ject (Loan 2069-CO) INDERENA is being strengthened; thus, it should be able to discharge its responsibility for forestry under the proposed project effectively. Lastly, Government concensus has been reached with respect to  - 14 - rural health systems. Adequate staffing and funding of health facilities, together with appropriate monitoring of programs, should ensure satisfactory performance under this component. PART IV - THE PROJECT Background and Objectives 43. The project was prepared by DNP, with the assistance of participa- ting agencies and several Bank missions. It was appraised in February 1981. Negotiations were held in Washington, D.C. from March 4-9 and April 19-23, 1982, with a Colombian delegation led by Dr. Guillermo Anzola, Director General PAN/DRI, National Planning Department, and Dra. Leonor Montoya, Director of Public Credit, Ministry of Finance and Public Credit. The Staff Appraisal Report (No. 3661 of May 17, 1982) is being distributed separately to the Executive Directors. 44. The project would extend the National DRI Program to new areas (Phase II) and consolidate the achievements in the previous areas (Phase I). Its objective would be to continue raising the living standards of the rural population by increasing farm productivity, output and incomes and by improv- ing social services and facilities of communities eligible to participate un- der the Program. An additional objective of the project would be to contri- bute to increased food production. By reducing disparities between rural and urban amenities while facilitating the integration of the rural population into the market economy, the project would support the Government's objective of retaining people in the countryside. The project would provide supervised credit to help promote farm investments and thereby raise farm productivity and production. Rural roads would be built in areas with high agricultural potential, while investments in education, health, water supply and electri- city would be made in rural communities, particularly in those showing great- est commitment to farm development. Project Areas 45. The project would be located in the central and southern regions of the country (Map IBRD 15802). It would embrace 55 municipalities in the Departments of Huila, Tolima, Meta and Caldas (Phase II areas) and the 154 municipalities of the first project (Phase I areas). A total of 35,000 farms would be developed. IDB, through its second phase project, would cover the northern part of the country with 71 municipalities in the Departments of Atlantico, Bolivar, Magdalena and North Santander, developing 21,000 farms. Overall, Phase I and II would benefit directly over 100,000 small farmers (less than 20 ha). 46. The areas for Phase II were selected following the methodology used for Phase I. The factors considered were: (a) the number of small farmers present in the area and their socio-economic characteristics; (b) the predo- minance of coffee growing in the area; (c) soil conditions and potential yields; (d) level of infrastructure and social services available; credit and extension service being provided to the individual farmers; and the number of participating agencies already working in the communities. The districts and municipalities were then ranked by weighing each of these factors and those with the highest potential for development were included under the proposed project.   - 16 - to lend to small and large commercial farmers. This interest rate, at the present time, is an effective 23-24% (paragraphs 29 and 30). Since FFAP rates are revised periodically by the National Monetary Board to take account of increases in the cost of living index, it is expected that interest rates will be zero positive in real terms. FFAP would provide the above-mentioned resources to CAJA on the same basis as it does to other financial intermedia- ries. FINANCIACOOP's processing and marketing credits would be made availa- ble at interest rates essentially the same as CAJA's. 52. The signing of subsidiary agreements between the Government, CAJA and FINANCIACOOP, stating their respective obligations in terms of lending and operating policies and procedures would be a condition of loan effective- ness (Section 6.01 of the draft Loan Agreement). The Government would review semi-annually with FINANCIACOOP its credit terms and conditions and obtain Bank concurrence prior to any modifications. Furthermore, no changes would be made in CAJA's lending operations which would adversely affect the project (Section 3.14 and 5.01(e) of the draft Loan Agreement). (b) Production and Marketing Support (Phase I and II) 53. The project would require the hiring of additional staff for the Directorate General of the DRI and PAN Program at headquarters as well as in the regional offices to help plan and coordinate effectively the activities. It would also provide for additional staff and increased service capabilities in the following entities: (a) ICA - (Crop and livestock adaptation (and demonstration trials; pre- (paration and supervision of (farm plans; technical assis- (tance. (b) INDERENA - (Advice on tree planting and (soil conservation including (protection of water sources (and construction and stocking (of fish ponds. (c) CECORA - (Market intelligence unit. (d) FINANCIACOOP - (Technical assistance for (marketing and processing. (e) Servicio Nacional de - (Staff training; promotion Aprendizaje (for the project; farmers (SENA) (and marketing groups training. INCORA and SDAs would provide technical assistance when needed by delegation from ICA. (c) Infrastructure (Phase II) 54. The Fondo Nacional de Caminos Vecinales (FNCV) would supervise the construction of about 270 km of new rural roads and the improvement of about 270 km of existing rural roads throughout the project area.  - 17 - 55. The Instituto Colombiano de Energia Electrica (ICEL) would super- vise the work of its "Electrificadoras" (Departmental Power Companies) to provide electricity to about 4,800 households. (d) Rural Basic Education (Phase II) 56. Under the auspices of its Rural Basic Education Program the Ministry of Education would upgrade the quality and efficiency of the primary school program in about 80 school districts ("nucleos") in the Departments of Huila and Tolima. The entering into contractual arrangements, satisfactory to the Bank, between the Fund of the Ministry of Education and the Regional Education Funds would be a condition of disbursement for expenditures against this component (Section 3.01(c) and Schedule 1, paragraph 4(iii) of the draft Loan Agreement). (e) Social Services (Phase II) 57. The Instituto Nacional de Salud (INS) would coordinate works for drinking water to benefit about 52,000 people living in 126 rural communi- ties. 58. The Ministry of Health would have overall responsibility for estab- lishing or repairing about 82 primary health care units with the aim of a- chieving an 80% population coverage in the selected municipalities; it would also appoint supervisory teams to improve quality of service in Bank-financed Phase II areas. (f) Monitoring and Evaluation 59. The monitoring and evaluation unit within the Directorate General of the DNP/PAN-DRI Program would be strengthened by hiring additional staff, and by providing funds to hire consultants. Project Costs and Financing 60. Total project costs are estimated at US$172.4 million equi- valent,2/ including incremental seasonal credit and incremental working ca- pital for produce marketing. The foreign exchange cost is estimated at US$47.9 million equivalent, or 28% of the total. 61. A Bank loan of US$53.0 million is proposed to finance all foreign exchange costs and US$5.1 million or 4% of the local costs (the proposed loan would finance 30% of the total cost of the project). Local currency financ- ing is recommended because of the key importance the project would have with- in the overall Government attempt to improve the welfare of the poorer sec- tions of the rural population and the relatively low foreign exchange content which is characteristic of rural development projects. The cost sharing which is being proposed is considered necessary to give the Bank a meaningful role in the project, particularly in view of the fact that IDB, with a loan of US$64.6 million for its DRI II project, will be financing 54% of project costs. Under the DRI I project (Loan 1352-CO) the Bank financed a much high- er portion of local currency expenditures (US$24.4 million or 24% of local costs) and a higher percentage of total costs (40%). 2/ Excluding the Front End Fee on the Bank loan.  - 18 - 62. Project beneficiaries would finance an estimated cash cost of US$4.4 million, or 3% of total project cost. In addition, they would contri- bute US$23.0 million in labor (not included in total project costs). Under the credit component, CAJA would finance 35% of total subloan amounts out of its own resources and would rediscount the remaining 65% from FFAP; FINANCIA- COOP would finance at least 12% of marketing and processing credit out of its own resources, with the remainder to be financed by the Government from the National Budget. SENA, the agency in charge of training and community orga- nization, would contribute 49% of the costs of the training component, and ICEL and the "Electrificadoras" would finance about 10% of the cost of elec- trification. All remaining funds would come from the National Budget. Project Organization 63. DNP, through its Directorate General of the DRI and PAN Programs, would have overall responsibility for management of the project, including planning, budgeting, coordination, administration, control, reporting, moni- toring and evaluation. In addition, the DRI/PAN Directorate would take over from CAJA the responsibility for reviewing procurement documentation and for transmitting reimbursement applications from the participating entities, through the Ministry of Finance and Public Credit, to the Bank. 64. Last year DNP merged the DRI and PAN Programs under the aegis of one Directorate. The Government is aware that performance of both programs will need close monitoring in view of forthcoming expansion in the coverage of each program, and will thus undertake a detailed review of DRI's 1982 phy- sical and financial targets and actual achievements. The resulting report would be furnished to the Bank by May 31, 1983 and any necessary measures to strengthen management functions would be taken promptly (Section 3.15 (a) and (b) of the draft Loan Agreement). Finally, to facilitate project execution and continued monitoring of the program, DNP would carry out a socio-economic baseline survey by February 28, 1983 to be repeated 4 years thereafter, as well as buttress its monitoring and evaluation unit, and prior to disburse- ments for each of the respective components, it would enter into subsidiary project agreements with each of the participating agencies (Section 3.06, 3.01(c) and Schedule 1, paragraph 4 (ii) of the draft Loan Agreement). 65. Execution of the various components of the DRI program would be the responsibility of more than a dozen national and several regional (departmen- tal) agencies, following their normal operating procedures. To ensure im- proved performance by project entities that did not live up to expectations under Phase I (paragraph 42), specific commitments have been obtained from INS and the Ministry of Health pertaining to their roles under the project (Section 3.20 of the draft Loan Agreement). 66. As under Phase I, planning and coordination of program execution would be accomplished through a series of committees at different levels, which include staff from the executing agencies and representatives of the communities. Local involvement is expected to continue adding realism to the DRI Program as well as to foster rapid project execution. Procurement and Disbursement 3/ 67. Contracts for the construction and upgrading of rural roads, water supply systems, electrical networks and health facilities totaling US$35.0 3/ Figures include contingencies.  - 19 - million would be awarded according to local competitive bidding procedures satisfactory to the Bank, in which foreign bidders would have opportunity to participate. Most of the works are expected to be small and dispersed and, therefore, are unlikely to attract interest from firms not already working in C^1c!bia r,4 fo- t1-hnt matter, in the region. Four-wheel drive vehicles and motorcycles (US$3.1 million), ambulances (US$520,000), pipes and pumping equipment for the water supply component (US$2.9 million) and electrical distribution equipment (US$3.8 million) totalling US$10.3 million would be procured through international competitive bidding in accordance with Bank guidelines. Qualifying domestic manufacturers would receive a preference in bid evaluation of 15% or the import duty whichever is the lowest. 68. Diversified field training, communications and medical equipment, and school furniture and teaching materials totalling US$7.1 million would be procured as needed over five years under competitive local procedures satis- factory to the Bank. Farm inputs and equipment would be purchased by indivi- dual farmers through normal commercial channels. A wide range of interna- tional and local manufacturers are represented in Colombia and competition is satisfactory, servicing and spare parts are available. Consulting services would include about 90 man-months totalling US$570,000, at an average gross cost of US$4,800 per month. Though foreign consultants would not be exclud- ed, it is expected that the expertise for required services (mostly market- ing, processing and evaluation) would be hired from within Colombia. 69. Disbursements would be made for 100% of consultant's services, 100% of foreign expenditures and 60% of local expenditures for power distribution equipment, field vehicles, equipment and office and school furniture and materials, and 50% against all other categories. To facilitate project start-up, the Bank would finance retroactively eligible expenditures made after February 1981, not to exceed US$5.0 million (9.5% of total loan amount), excluding those for project management (Schedule 1, paragraph 4 (i) of the draft Loan Agreement). Production, Marketing and Financial Analysis 70. The annual value of incremental production generated by the project at full development (year 10) is estimated at about US$75 million, distri- buted among a large number of crops (cassava, plantain, potatoes, beans, maize, rice and vegetables) and livestock products. Project incremental pro- duction, 15-20% of which is estimated to be consumed on the farm, would help to slow down imports of certain products (maize, dairy products, cocoa), and free additional exports of others (rice, sugar and beef). The added produc- tion should help slow down the past rapid increases in the prices of basic foodstuffs to consumers. 71. In view of the relative isolation of small producers, their frag- mented production of a wide variety of commodities and their lack of market and price information, substantial increases in production resulting from the project could result in local price decreases. It is expected, however, such occurrences will be avoided through the improved production planning (parti- cularly for perishables), and broadened marketing options (improved access to markets, better price information, group marketing, and credit for agricul- tural processing and marketing) brought about by the project.  - 20 - 72. Financial rates of return for five illustrative farm models have been estimated at above 50%, demonstrating that in all cases the returns to farmers from the proposed investments would be large. Per capita annual incomes would also be raised substantially, from US$387 to US$1,082 in con- stant 1981 prices. At present, 85% of the direct beneficiaries are estimated to be below the relative poverty level (estimated at US$393 per capita in 1980). After development, this proportion would decrease to 50% and those below this level would be only marginally below the relative poverty level. Cost Recovery 73. Approximately US$84.0 million, or 48% of total project costs, ex- cluding the beneficiaries' initial contributions in cash and labor (US$27.4 million), would be recovered. All farm development costs financed through credit would be recovered but there would be no attempt at cost recovery for management and administration costs, advisory services, training, roads and the health and education components. Benefits, Justification and Risks 74. The project would directly increase production, productivity, emnployment and incomes of about 28,000 small farmers (less than 20 ha), in areas to be incorporated into the National DRI Program and 7,000 in areas already in it. The project would generate the equivalent of about 15,700 man-years of agricultural labor, to be supplied by the farm families (50%) and hired labor (50%). The economic rate of return (Phase I and II areas) is estimated at 27% for the productive components, which account for 80% of to- tal project costs. The calculation of the economic rate of return excludes the education, health, water supply and rural electrification components since no reliable estimate can be made. These components, though not con- tributing directly to the productive goals of the project, would help improve the living conditions of the rural population. Over time, these expenditures are expected to have an important redistributive effect. 75. No serious risks are anticipated since the project would be the extension of a national program to which the Government is strongly committed and that has been successful in the past. There are two critical areas which would require close follow up: the functioning of the marketing system and price fluctuations, and the performance of the recently reorganized DNP/PAN- DRI Directorate. The monitoring and constant review contemplated under the proposed project should permit early detection of problems as well as taking timely corrective measures to ensure that project objectives are achieved. PART V - LEGAL INSTRUMENTS AND AUTHORITY 76. The draft Loan Agreement between the Bank and the Republic of Colombia and the report of the Committee provided for in Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 77. Special conditions of the loan are listed in Section III of Annex Ill. A condition of effectiveness would be that the Government, CAJA, and FINANCIACOOP have signed subsidiary agreements pertaining to their respective  - 21 - obligations with respect to the provision of credit to project beneficiaries and the respective credit procedures have been adopted (Section 6.01(a), (b) and (c) of the draft Loan Agreement); 78. Conditions of disbursements would be that (a) DNP has signed subsi- diary project agreements with the participating agencies, other than CAJA or FINANCIACOOP, which define their responsibilities under the project (Section 3.01(c) and Schedule 1, paragraph 4(ii) of the draft Loan Agreement); and (b) the Fund of the Ministry of Education and the Regional Education Funds have entered into contractual arrangements defining their respective respon- sibilities for the education component (Section 3.01(c) and Schedule 1, paragraph 4(iii) of the draft Loan Agreement). 79. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 80. I recommend that the Executive Directors approve the proposed Loan. A. W. Clausen President Attachments May 18, 1982  Annex I - 22 - Page I of 5 CULOMBLA - SUCIAL INDICATORS DATA SHEET COLOMBIA REFEUENCE GQOUPS (WEIGHTED AVE!.GES LAND AREA (THUUSAND So. KM.) - CDST IRiCET ESTIMATE) a IurAL 1138.9 MOST RECENT MIDDLE LCICOIE MIDDLE INCCtlE AGglLULTLRAL 232.U 1960 /b 1970 LL ESTILATE 2 LATIN AMEICA 6 CARIASAN EUROPE gNiP eEK APIIA (USi) 250.0 400.0 [010.0* 1616.2 2609.1 ENERCY CUNSUMPTIoN PER CAPITA (I"LoUKAOS uF CUAL EQUIVALENT) 510.2 659.7 937.9 1324.1 2368.4 POPULATION AND VIrAL STATISTICS * HJPULATION, MID-YEAR (THOUSANDS) 15754.0 21266.0 26122.0 bREAN POPULATION (PERCENT UF TOTAL) 48.2 59.9 69.1 64.2 53.2 POPULAIIUN PRUDECIToNS ?PUCLACLUN IN YEAR 200U (MILLIONS) 39.9 STATIONARY POPULATION (NILLIoNS) 61.0 YEAR STATIONARY POFULATIUN IS REACHED 2070 eOPULATION DENSITY pEK Sq. KM. 13.d i8.7 22.9 34.3 90.6 PER SQ. KM. ACRICULIURAL LANU 72.5 95.7 110.2 94.5 133.9 PPUULArIUN ACE STRUCTURE (PERCENT) U-I4 YEb. 46.8 46.2 38.2 40.7 30.1 15-04 YES. 50.3 51.0 58.6 55.3 61.5 65 YIb. ANU ABUVE 2.9 2.8 3.2 4.0 8.3 YOPULATIUN R0WTi8 KATE (PERCENT) TUTAL 3.1 3.0 2.3 2.4 1.5 URBAN 5.7 5.2 3.9 3.7 3.1 LAUUE BIRTH RAIE (PER TrIUSAND) 45.5 36.3 30.1 31.4 22.9 LR0UE DEATH KATE (PER THOUSAND) 14.0 9.5 7.9 8.4 9.1 URUSi REPROUUCTION RATE 3.3 2.6 1.9 2.3 1.6 FAMlLY PLANNING ACLEL URS. ANNUAL (THoUSANUS) .. 115.4 142.1 sDEKS (PEHLENDT oF MARIlED UOMEN) .. .. 46.1 FOuD AND NUITRIION INDEX UF FPUU PRUDUCTIoN PEA LAPIlA (1969-71-100) 100.0 99.0 124.0 108.3 119.8 PER LAPITA SUPPLY UF LALUOIES (PERCENT UF REQUlREMENTS) 97.0 88.0 102.0 107.6 125.7 PROTEINS (GKADS PER DAY) 54.0 48.0 52.0 65.8 92.5 OF WHICH ANIMAL AND PULSE 28.0 24.0 26.0 34.0 39.7 CHILC) (AGES 1-41 JMRTALTIY RATE i9.H 12.0 8.3 7.6 3.4 HIEA..IH LCFE EXPEClANCY AT BIRIH (YEARS) 53.3 59.1 62.7 64.1 68.9 INFANI OURTALLITY RAIE (PER THoUSANu) 77.0 .. 65.0 70.9 25.2 ALLESS IU SAFE WATER (PERCENT UF PVPULATI EN) TUTAL 30.0d .. 64.0 65. 7 URBAN 54.9/d .. 73.0 79.7 RUgAL 6.8/d .. 46.0 43.9 ALCESS lU EYCREIA DISPOSAL (PERCENT UF POPULATION) TUTAL 47.0 44.4 59.9 UKRAN .. 75.0 60.0 75.7 RURAL .. 8.0 14.0 30.4 FuPULATIuN PER PHYSIClAN 2638.9 2189.5 1966.7 1728.2 973.3 POPULAlIUN PER NURSINC PERSON 3740.0 1923.4 1250.0 1288.2 896.6 POPULATION PER HUSPITAL BED TuTAL 362.9 449.4 619.1 471.2 262.3 URBAN *- 377.5 540.3 558.0 191.8 AURAL .. .. AOMIbSIUNS PER HOSPITAL BED .. 22.9 29.8 .. 18.2 tHOUSING AVEKACE SIZE OF HOUSEHOLD TIUAL .. 5.7Lc URkBAN .. 5.5 . KURAL .. 5.9c . AVEiACE NUMBER oF PERSONS PER ROOM 70TAL .. 1.8/c UKCAN .. 1. 6 . RURAL 2.4c .. ACLESS Tu ELECTRICITY (PEKRENT OF UWELLINGS) TurAL 47.079 58.1.s UKRBN 83.07d 87.5/c RURAL B.0Ld 13.2L .  - 23 - Annex 1 Page 2 of 5 COLOMBIA - SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE GtOUPS (WEIGHTED AVERA9JS - MOST RECENT ESTIMATE) - HOST RECENT MIDDLE INCOEt MIDDLE INCOME 1960 /b 1970 /b ESTIMAATE /b LATIN AKERICA & CARIBBEAN EUROPE rEDUCATIaN ADJUSTED ENROLLMENT BATIOS PRIMARY: TOTAL 77.0 103.0 124.0 101.7 105.9 MALE 77.0 101.0 122.0 103.0 109.6 FEMALE 77.0 105.0 127.0 101.5 102.2 SECONDARY: TOTAL 12.0 24.0 43.0 35.3 66.3 MALE 13.0 24.0 43.0 34.9 73.2 FEMALE 11.0 24.0 44.0 35.6 59.5 VOCATIONAL ENROL. (X OF SECONDARY) 31.0/e 20.0 22.0 30.1 28.4 PUPIL-TEACHER RATIO PRIMARY 38.0 38.0 33.0 29.6 26.8 SECONDARY 11.0 17.0 21.0 15.7 23.6 ADULT LITERACY RATE (PERCENT) 63.0 80.8 .. 80.0 75.4 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 7.0 11.2 18.1 42.6 83.9 RADIO RECEIVERS PER THOUSAND POPULATION 125.1 104.3 117.1 215.0 181.6 TV RECEIVERS PER THOUSAND POPULATION 9.5 38.1 74.0 89.0 131.1 NEWSPAPER CDAILY GENERAL INTEREST') CIRCULATION PER THOUSAND POPULATION 56.0 .. 54.4 62.8 123.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 4.1 3.2 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 4726.5 6353.4 8652.7 FEMALE (PERCENT) 19.2 24.8 24.7 22.6 32.9 AGRICULTURE (PERCENT) 51.4 37.9 27.1 35.0 34.0 INDUSTRY (PERCENT) 19.2 21.0 21.1 23.2 28.7 PARTICIPATION RATE (PERCENT) TOTAL 30.0 29.9 33.1 31.8 42.3 MALE 48.8 45.1 49.8 49.0 56.5 FEHALE 11.5 14.8 16.4 14.6 28.5 ECONOMIC DEPENDENCY RATIO 1.7 1.6 1.2 1.4 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 41.2/d f 31.9/f HIGHEST 20 PERCENT OF HOUSEHOLDS 67.7/d f 60.01/f LOWEST 20 PERCENT OF HOUSEHOLDS 2.1 3.5/f LOWEST 40 PERCENT OF HOUSEHOLDS 6.8/d L o.177 .f POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 214.0 RURAL .. .. 197.0 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 267.0 513.9 RURAL .. .. 122.0 362.2 385.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 34.0 . RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-teighted arilttetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1973; /d 1964; /e Including teacher training at the third levl; /f Econcically active population. * The updated 1980 GNP per capita and population estimates shown in the 1981 World Bank Atlas are $1180 (at 1978-80 prices) and 26.7 million. May, 1981  '1109OtIOl in. 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