Uruguay - Second Agriculture Development Project

Document of The World Bank FOR OFFICIAL USE ONLY grn. g 3/- 2 Report No. P-5151-UR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$65.0 MILLION TO THE REPUBLIC OF URUGUAY FOR A SECOND AGRICULTURAL DEVELOPMENT PROJECT SEPTEMBER 26, 1989 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY UNIT New Peso (NU$) EXCHANGE RATE (as of September 12, 1989) US$1 = NU$640 NUSl = US$0.002 FISCAL YEAR January lst - December 31st WEIGHTS AND MEASURES The metric s,stem has been used throughout the report. ABBREVIATIONS BCU Central Bank of Uruguay (Banco Central del Uruguay) BROU Bank of the Republic (Banco de la Rep4blica Oriental del Uruguay) CPI Consumer Price Index DGGTT General Directorate for Technology Generation and Transfer (Direcci6n General de Generaci6n y Transferencia de Tecnologia) GDP Gross Domestic Product ICB International Competitive Bidding IFI Intermediate Financial Institution MEF Ministry of Economy and Finance (Ministerio de Economia y Finanzas) MGAP Ministry of Livestock, Agriculture and Fisheries (Ministerio de Ganaderia, Agricultura y Pesca) NTAE Non-Traditional Agricultural Export OPP Office of Planning and Budget (Oficina de Planeamiento y Presupuesto) PBPI Product Basket Price Index PLAN Livestock Plan (Plan Agropecuario)  FOR OFFICIAL USE ONLY URUGUAY SECOND AGRICULTUMAL DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: The Republic of Uruguay Executing Agencies: Central Bank of Uruguay (BCU), and Ministry of Livestock, Agriculture and Fisheries (HGAP). Beneficiaries: Agricultural and livestock producers and processors. Amountt US$65.0 million equivalent. Termst Fifteen years, including five years of grace, at the standard variable interest rate. Financial Intermediaries: All qualifying commercial banks, both public and private, and banking houses (casas bancarias). On-lendinRg Termst The Borrower, through its Central Bank, would rediscount subloans made by participating intermediate financial institutions (IFIs) to finance 10OZ of all subloans wnder the project. A subloan would not exceed 50Z of a subproject's cost. Subloans would be denominated in local currency (NU$). The principal value of the subloan would be adjusted by an index agreed upon between the IFI and the sub-borrower. IFIs would pay the BCU interest equal to: (a) the average six-month market rate for US dollar deposits in Uruguay, where the sub-borrovers choose US dollar-indexed subloans; or (b) a minimum of 3Z p.a. where sub-borrowers choose the local Consumer Price Index or one of three product basket price indices. Terms and conditions of subloan.s would be negotiated between IFIs and their clients, anI would remain fixed for the duration of the subloan. Financing Plant USS million IBRD 65.0 Government 5.2 Japanese Grant Funds 1.8 IFIs and Subborrowers 60.4 Total 132.4 Economic Rate of Return: Not Applicable Staff Appraisal Report: Report No. 7796-UR N4D: IBRD No. 21503 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.  -2- MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC Od URUGUAY FOR A SECOND AGRICULTURAL DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a propo.,ed development loan to Uruguay for US$65.0 million equivalent is submitted for approval. The proposed loan would be on standard Bank terms with fifteen years' maturity, a five-year grace period and variable irnterest rate, and would help to finance an agricultural development project. 2. Background. The agricultural sector contributes only 12? of Uruguay's GDP, but its exports including agro-industry make up over 801 of foreign exchange earnings. Uruguay's comparative advantage lies mainly in extensive livestock production, and pastures occupy 85? of all productive land, but there is also good potential for annual and perennial crop production and for forestry. In terms of natural resources and known technology, the sector operates at a level far below its potential. The area annually available for cropping is 1.6 million ha, but the cropped area in 1987 was only 282 of this. Between 1970-87, the sector grew at only 0.52 p.a., one-third the rate of the economy as a whole. 3. Uruguay is almost self-sufficient in agricultural production, so further development of the sector is dependent mainly on export markets. Diversification of production aimed at exports is a key objective of Government policy. In recent years, encouraging results have been shown in dairy produce, citrus, malting barley, rice, forestry and fisheries, indicating that the private sector is capable of responding to a favorable economic climate. 4. The recently-reorganized Ministry of Livestock, Agriculture and Fisheries (MGAP) controls several key institutions in the sector, including the Livestock Plan (PLAN) which has served as the major conduit for technical assistance and credit under successive Bank loans. In recent years, PLAN has suffered a loss of tutonomy and its influence with producers has declined. Agricultural research also comes under the MGAP. The Alberto Boerger Agricultural Research Center (CIAAB), which was seriously *seakened during the 1970s and early 1980s, is being strengthened under a recent loan from the Inter- American Development Bank. The reorganization of agricultural research will shortly remove it from MGAP's direct control, creating a mixed public/private institution which will allow producers a bigger role in the definition of the research agenda. 5. Most credit to the sector is provided on a short-term basis at market interest rates. However, demand for investment credit has grown strongly since 1985, in line with macroeconomic policy designed to achieve export-led growth. Long-term lending has been supported in the past by Bank (and, more recently, IDB) loans channelled through the Bank of the Republic (BROU). Credit lines supported by the Bank made up about 42 of total lending to agriculture in 1987-88. 6. Bank lending to the agricultural sector in Uruguay has been almost continuous since 1960. Five livestock development projects, supported by seven loans between 1960 and 1980, provided supervised credit for pasture improvement and livestock development. The Agricultural Development Project (Ln. 1831-UR) continued this support, but also aimed to encourage the integration of crop and livestock farming. Thu Agricultural Sector Loan (Ln. 2468-UR) of 1984 was a quick-disbursing operation to support policy reforms, including reductions in  - 3 - export taxes and simplification of import procedures, which contributed materially to reducing Goverrnment intervention and enhancing the role of market forces in agriculture. The most recent Bank review of the agricultural sector was made in 1987 (Report No. 7502-UR, dated November 14, 1988) and subsequent discussion of the findings of this review was an integral part of the preparation of the proposed project. 7. Rationale for Bank Involvement. The Government is committed to structural reform and to an open economy as the basis for economic development. Consistent with this overall economic strategy, the Government is relying on the exploitation of comparative advantage in agriculture to achieve its objectives of increased productivity, output and exports. With little public expenditure in agriculture, few policy instruments are available to the Government, which is acting mainly through the progressive removal of market distortions and the generation of public goods in the form of research-based technology, technical assistance and infrastructure. 8. Current Bank assistance to Uruguay is designed to support reforms aimed at removing distortions and to finance projects that foster the growth of exports. The Government's 1989-91 medium-term program, as described in the Letter of Development Policy for SAL II, identifies three principal objectives in the agricultural sector: (a) to increase output and productivity in the livestock subsector; (b) to diversify output, with emphasis on high-value export products; and (c) to develop forestry in priority areas. The proposed project would contribute to meeting these objectives. While it would continue to support investment in the traditional crop and l',estock subsectors, which are vital to continued economic growth and external adjustment, it would broaden the scope of Bank lending to the sector by providing resources for forestry and for non-traditional agricultural export (NTAE) sec7tors, including agro-industry. 9. Proiect Objectives. The proposed project would: (a) increase and diversify agricultural production and exportE; (b) encourage better use of Uruguay's natural resources, promoting the adoption of technology in the extensive pasture areas, diversification of production in the more intensively-farmed southern and western areas, and establishment of commercial forestry in priority areas; (c) encourage competition in the provision of long-term agricultural credit and increase market influence in the determination of interest rates paid by final borrowers; and (d) encourage privately-financed extension services to compete with those provided by the Government. 10. Proiect Description. The project components would be: (a) investment to support production and processing (89.3Z of total project cost); (b) technical assistance for the livestock subsector, including demonstration farms, training, and applied research (3.7?); (c) institutional support and technical assistance for forestry (2.52); and (d) technical and financial assistance for the promotion of NTAEs (4.5Z). 11. Loan funds would be on-lent by the Central Bank (BCU), as financial agent and apex institution, to participating financial intermediaries (IFIs), which would make subloans to sub-borrowers denominated in NU$. Sub-borrowers would have a choice between three principal adjustment mechanisms: (a) a US dollar index; (b) one of three product basket price indices (PBPIs) appropriate to the producer's enterprise (beef/wool, beef/wool/crops, or dairy); or (c) the local Consumer Price Index (CPI). BROU, the major traditional lender to agriculture, would be the main financial intermediary, but other commercial banks would also be able to participate. The credit regulations were agreed at negot-ations and would be enacted before loan effectiveness.  - 4 - 12. Technical assistance associated with subloans to producers would be provided by qualified professional extension agents from the private sector as well as those from the PLAN. This would encourage the development of extension beyond that available from official sources. The PLAN would have responsibility for training, the establishment of demonstration farms, and a program of applied research on pastures and their management. Institutional support, training, and applied research for forestry would be provided through the Forestry Directorate of MGAP. Technical assistance for the promotion of NTAEs would be provided through a Coordinating Unit made up of representatives of MCAP, the Ministry of Economy (MEF), and the Office of Planning and Budget (OPP). The Unit would be supported by a small Technical Secretariat, and would: (a) provide technical assistance in a Program of Export Awareness, and (b) channel grant resources for market research and test marketing through a Promotional Fund, on a cost-sharing basis, to producers and exporters. 13. The total cost of the project not of taxes and duties is estimated at US$132.4 million equivalent, with a foreign exchange component of US$43.1 million (33Z). An analysis of the project's costs and the financing plan are shown in Schedule A. A description of the proposed procurement arrangements is shown in Schedule B. A timetable of key processing events and the status of Bank Group operations in Uruguay are shown in Schedules C and D, respectively. The map, IBRD No. 21503, indicates, inter alia, areas defined as being of priority for forestry. The Staff Appraisal Report, No. 7796-UR dated September 15, 1989, is attached. 14. The Goveriunent has asked for retroactive financing from the proposed loan for the BROU/PLAN 1989 credit campaign. The terms and conditions of subloans eligible for retroactive financing would be similar to those agreed during appraisal. Retroactive financing has also been requested for initial expenditures by the Forestry Directorate and by the NTAE Coordinating Unit. Retroactive financing of up to US$6.0 million, equal to 9% of the proposed loan, is therefore sought for the period from January 1, 1989. 15. Agreed Actions. Agreement was reached at negotiations on the following: (a) the appropriate Credit Regulations to be issued by the BCU; (b) the appropriate Subsidiary Loan Agreements between the BCU, BROU and other IFIs; (c) assurances that index switching (the doble tope, used in the previous project) will not be employed under the project or for competing lines of credit; (d) a minimum spread of 22 by IFIs; (e) a minimum on-lending rate to final borrowers of 5% p.a. (where the CPI or PBPIs are utilized), or of the six-month US dollar deposit rate in Uruguay plus minimum spree (for the US dollar-indexed subloans); (f) Government assumption of the risks associated with currencies and the use of PBPIs; and 'g) the need for a regular review mechanism of lending terms and conditions for agricultural credit. The Government has defined the methodology by which the fiscal cost of lending under the project (if any) would be quantified, which would be included in the periodic review of lending terms and conditions. The Government will undertake a study of alternatives to using PBPIs to achieve its objectives in the sector within one year of loan effectiveness, and the recommendations of the study will be subject to the above review mechanism two years after loan signing. 16. Conditions of loan effectiveness would be: (a) that BCU would issue the Credit Regulations, publicize them, and sign a Subsidiary Loan Agreement with BROU; and (b) that BROU would produce evidence that it has introduced procedures to provide its management and the Bank with timely information on the portfolio of project subloans as required by the Credit Regulations.  17. Conditions of loan disbursement would bes (a) for the livestock sub-component, the selection ot demonstration farms to be incorporated in the first year and the definition of technology and management practices to be employed; (b) for the forestry subcomponent, the establishment of the Forestry Unit and appointment of the manager; and (c) for the NTAE subcomponent, the establishment of the Coordinating Unit, the creation of the Fund and the definition of the Fund rules, the availability of sufficient financial resources, and the appointment of the Technical Secretary. 18. Environment Impact. There is a growing recognition of the problem of soil degradation and erosion resulting from inappropriate land management practices. The project would address this through various actions. Institutional strengthening in the forestry subsector would support the Government's initiatives in encouraging forestry development in priority areas both for commercial and watershed protection purposes. Demonstration farms would emphasize soil conservation measures and crop/livestock integration practices. It is expected that agro-forestry practices will be increasingly adopted. 19. Benefits. The main project benefits would include: (a) increased volume and diversity of agricultural exports; (b) creation of closer links between the private ar.d public sectors in export promotion; (c) development of a critical mass of forestry resources for the subsequent establishment of forest- based industry; (d) improved efficiency of farm extension through greater involvement of the private sector; and (e) a more competitive and market- oriented system for supplying investment credit to agriculture. The actions proposed under the project to encourage forestry developmert and to undertake research on improved pasture management are expected to have a significant positive effect on the environment. 20. RL_k and Uncertainty. The major uncertainty involves credit demand by producers, resulting from the incorporation into the project of new agricultural enterprises and from the changes in the terms and conditions of lending from those which have been established over a long period. However, the steady demand for investment credit experienced in recent years is expected to continue with the maintenance of an economic environment designed to stimulate export-led growth. Substantial price risks are inherent in an agricultural project that relies on export markets. However, the diversification of output and exports, which is one of the main objectives of this project, would help reduce the impact of those risks. Investment in processing and other agro-industry would increase domestic value-added and thereby provide the basis for the penetration of more demanding markets. 21. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. Barber B. Conable President Attachments Washington, D.C. September 26, 1989  -6- Schedule A URUGUAY SECOND AGRICULTURAL DEVELOPMENT PROJECT Estimated Costs and Financing Plan Estimated Costst Local Foreign Total --------US$ million------- A. Investment Credit 82.8 35.4 118.2 B. Institutional Support 5.3 6.3 11.6 Total Baseline Costs SE.1 41.7 129.8 contingencies 1/ 1.2 1.4 2.6 Total 89.3 43.1 132.4 Financing Plan: IBRD 24.9 40.1 65.0 Government 4.0 1.2 5.2 Japanese Grant Funds 0.2 1.6 1.8 IFIs and Subborrowers 60.1 0.3 60.4 Total 89.3 43.3 132.4 1/ Price and physical contingencies have been applied only to the component of institutional support, and amount to 18.4Z and 4.3Z of the baseline costs, respectively.  -7- Schedule B URUGUAY SECOND AGRICULTURAL DEVELOPMENT PROJECT Procurement anJ Dtsbursemenjs Procurement: Goods, services and civil works financed through the investment credit component of the project would be diverse and procured by a large number of subborrowers. Most are expected to be supplied locally. For goods, works or services costing between USS1-3 million, international shopping would be used and below US$1 million normal commercial practices would be employed. For goods, worke and services costing US$3.0 million or more, ICB procurement would be carried out in accordance with Bank guidelines. Goods for the components of institutional support would be bulked into large contracts, either individually by participating agency or jointly, whezever possible. Contracts of more than US$300,000 would be awarded in accordance with ICB procedures conducted according to Bank guidelines. Contracts of less than US$300,000 would be awarded through local competitive bidding acceptable to the Bank. Contracts costing less than US$30,000 may be awarded using local shopping procedures up to an aggregate of US$250,000. Consultant services, estimated at 175 man-months, would be selected according to Bank guidelines. Procurement Methodt ICB LCB Other Total Cost ----------------US$ million ----- Investment Subprojects - - 118.2 118.2 (59.1) (59.1) Institutional Support and Technical Assistance - - 14.2 14.2 (5.9) (5.9) Total - 132.4 132.4 (65.0) (65.0) Note: Amounts financed by the Bank are shown in parentheses. Disbursements: (USS million) Category Amount Investment Credit 59.1 502 of sub-projects Institutional Support and Technical Assistance 5.9 Estimated IBRD Disbursements: IBRD FY 1990 1991 1992 1993 1994 1995 1996 1997 Annual 7.3 1, 5.8 8.3 11.1 14.0 14.1 4.4 0.0 Cumulative 7.3 13.1 21.4 32.5 46.5 60.6 65.0 65.0 Note 1: Includes initial deposit of US$6.0 million in the Special Account.  -8- Schedule C URUGUAY SECOND AGRICULTURAL DEVELOPMENT PROJECT Timetable of Key Processing Events 1. Time taken to prepare: Ten months (December 1987-September 1988) 2. Prepared by: Office of Planning and Budget, and Ministry of Livestock, Agriculture and Fisheries, with assistance from FAO/CP and IBRD. 3. First IBRD mission: December 1987 4. Appraisal mission departure: February 1989 5. Negotiations: July 24-29, 1989 6. Planned Date of Effectiveness: January 15, 1990 7. List of relevant PCRs/PPARs: PCR No. 4271 Fifth Livestock Development Project Loan No. 1166-UR PPAR No. 2572 Fourth Livestock Development Project (Second Stage) Loan No. 940-UR PPAR No. 1321 Third and Fourth (First Stage) Livestock Development Projects Loan Nos. 698-UR, 773-UR and 816-UR  9 Schedule D Page 1 of 2 URUGUAY SECOND AGRICULTURAL DEVELOPMENT PROJECT Status of Bank Group Operations in Uruguay (as of March 31, 1989) Amount Loan (US$ million, lass Amount No. Year Borrower Purpose cancellations) Undisbursed Loans fully disbursed 421.5 1831 1980 Uruguay Agriculture 24.0 1.5 1930 1980 Uruguay Industrial Credit 13.7 0.1 2033 1982 ANTEL1/ Telecommunications 24.0 14.3 2238 1983 Uruguay Highways 45.0 16.5 2484 1985 UTE / Power 4.0 3.5 2622 1986 UTE7/ Power 45.2 4b.5 2802 1987 ANCAP.3/ Refinery Modernization 24.4 21.2 2843 1987 Uruguay Technical Assistance 1.0 0.8 2921 1988 Uruguay Water Supply 22.3 22.2 3021 1989 Uruguay Transport 80.8 80.8 Total 705.9 Repayments 252.9 Total outstanding 453.0 Amount sold 4.6 of which repaid 4.6 Total held by Bank 448.4 of which undisbursed 205.4 Notes: 1/ National Telecommunications Administration 2/ National Power Company 3/ National Fuel Company September 15, 1989  - 10 - Schedule D Page 2 of 2 URUGUAY SECOND AGRICULTURAL DEVELOPMENT PROJECT Statement of IFC Investments in Uruguay (as of March 31, 1989) Amount Fiscal Type of (US$ million) Year Obligor Business Loans Equity Total 1979 FAbrica Uruguaya de Motor vehicles NeumAticos 1/ and accessories 3.80 - 3.80 1979 Acodike Supergas Chemicals and S.A. l/ petrochemicals 0.95 - 0.95 19791 Astra Pesquerias Fish processing 1983 Uruguay S.A. 7.40 2.25 9.-5 1980/ Surinvest Casa Money and Capital 1989 Bancaria market 20.80 1.79 22.59 1985 Azucitrus S.A. Fruit production and processing 7.61 2.40 10.01 Total gross commitments 40.56 6.44 47.On Less cancellations, terminations, repayments and sales 22.98 - 22.98 Net held by IFC 17.58 6.44 24.02 Total undisbursed 1.48 0.45 1.93 Note: 1/ Fully repaid. September 15, 1989  IBRD 21503 l ~ ~ ~~ ~5S i S654* ( ts s URUGUAY k I u B R A Z I L AGRICULTURAL DEVELOPMENT tigos PROJECT 11 i i,{ APlt 1' 1 (. ta /5X S | !Areas of forest priority Se--Main roads ARGENTINA ivera -- Secondary roads \ + / \ X () pZ-ibvcro =~~~~~~~~~~~~~~~~~~~~Rivers Constiuci Bridgs I- ~~~~~~~~~~~~--~~~~~~~~~~ ~~Airports k X , 7J o A D~~~~~~~~~~~~~~~~~~~~~~~~~~~Prts 2 > - --- - . \f \ _._ Department boundaries al A I I ()- International boundaries <5; y - - S jl S l; ! \ f\: , K,Io.etnr. 0 20 40 680 0loo )