Colombia - Small-scale Irrigation Project

Document of The World Bank FOR OFFICIAL USE ONLY /a/ 3//-3_CO Report No. 7624-CO STAFF APPRAISAL REPORT COLOMBIA SMALL-SCALE IRRIGATION PROJECT JULY 11, 1989 Country Department III Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by nrpelents only In the pedolmanem of  CURRENCY EQUIVALENTS Currency Unit - Colombian Peso (Col$) US$1 - ColS 382.58 (7111/89) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BOR - Banco de la Republica (Bank of the Republic (Central Bank)) CAJA - Caja de Credito Agrario, Industrial y Minero (Caja Agraria) (Agricultural, Industrial and Mining Credit Bank) DNP - Departamento Nacional de Planeacion (National Planning Department) DRI - Desarrollo Rural Integrado (Integrated Rural Development) FFAP - Fondo Financiero Agropecuario (Agricultural Financing Fund) HIMAT - Instituto Colombi&no de Hidrologia, Meteorologia y Adecuacion de Tierras (Colombian Institute for Hydrology, Meteorology and Land Improvement) ICA - Instituto Colombiano Agropecuar'o (Colombian Agricultural Institute) INCORA - Instituto Colombiano de la Reforma Agraria (Co4ombian Institute for Agrarian Reform) INDERENA - Institrto Nacional de Recursos Naturales Renovables (National Institute for Renewable Natural Resources) PNR - Plan Nacional de Rehabilitaci6n (National Rehabilitation Plan) SENA - Servicio Nacional de Aprendizaje (National Apprenticeship Service) FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY COLOMBIA SMALL SCALE IRRIGATION PROJECT STAFF APPRAISAL REPORT Table of Contents Page Number I. LOAN AND PROJECT SUMMARY ................................ 1 II. THE AGRICT'LTURAT. SECTOR ................................. X Structure and Performance .. 3 Potential for Agricultural Production Growth ............ 3 The Irrigation Subsector ................................ 4 Bank Strategy in the Agriculture Sector and in the Irrigation Subsector .. 7 Small-Scale Irrigation in Colombia ...................... 8 III. THE PROJECT ............................................. 9 Rationale for Bank Participation ... 9 Project Objectives . . .10 Project Description . . .10 Project Components and Detailed Features . . .10 Project Costs . ..13 Project Financing . . .13 Procurement . ..13 Disbursements ...14 Accounts and Audit .................. 15 Project Implementationp. .a. . . 15 Programming, Monitoring and Evaluation . . .19 Cost Recovery . ..20 Envirotnental Impact . . .21 Project Benefits, Justification, and Risks . . .21 IV. AGREEMENTS TO BE REACHED AND RECOMMENDATION .22 This report is based on the findings of an appraisal mission that visited Colombia during November/December 1988. The mission comprised Messrs. V. Ferrer (Mission Leader), J. Martinod (Irrigation Engineer), A. Tobelem (Institutional Expert), D. Masterton (Agronomist (C)), R. Simsolo (Financial Analyst (C)), and Ms. S. Joss (Operations Assistant) 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.  - ii - ANJEX 1 - Statistical Annex Tsbles 1 to 13 .................... 25-45 ANNEX 2: Procedures and Criteria for Subproject Selection and Prioritization ..................... 46-48 Appendix: Criteria of Subproject Selection and Prioritization . . ............. 49-52 ANNEX 3: Agricultural Production, Incremental Farm Investment Costs, and Agricultural Credit Aspects . ....... 53-60 Tables 1 to 22 ....................................... 61-82 Appendix 1: Agricultural Credit Policy in Colombia ... 83-85 ANNEX 4: Institutional Development Component . .......... 86-89 Appendix 1: Draft Terms of Reference for Technical Assistance Specialist ............................... 90-91 Appendix 2: Description of Training Activities ....... 92-98 Appendix 3: Institutional Development Component Cost. 99-100 Appendix 4: Institutional Development Component ...... 101 Appendix 5: Format for Programming and Follow-up of the Training Component .............. 102 Appendix 6: Format for Annual Programming and Follow-up of the Small-Scale Irrigation Program ..... 1.03 ANNEX 5: Irrigation Infrastructure ............................. 104-107 Tables 1 to 8 ......................................... 108-121 Appendix 1: Draft Terms of Reference for Contractors . ........ 122-125 Appendix 2: Draft Terms of Reference for Supervision of Construction .... ................... 126-127 ANNEX 6: La Mojana Pilot Project .................. 128-132 Table 1 ............................................... 133 ANNEX 7: Selected Documents and Data Available in the Project File ........................................ 134  COLOMBIA SMALL-SCALE IRRIGATION PROJECT I. LOAN AND PROJECT SUMMARY Borrower: The Republic of Colombia Amount: US$78.2 million Terms: 17 years, five years grace, at the standard variable interest rate. Prolect Description: The project would provide supplementary irrigation for about 43,000 farmers in about 60,000 ha over a six-year period by establishing about 850 small irrigation schemes each ranging between 20 and 300 ha in size with each beneficiary receiving irrigation on an average 1.4 ha. The project would consist of the following components: (a) Off-Farm Irrigation Infrastructure (for civii works, engineering and equipment); (b) On-Farm Investments (for on-farm irrigation equipment and agricultural inputs); (c) Technology Transfer (for applied research and extension); (d) Institutional Development (technical assistance and training for the participating entities); (e) Environmental Protection (to protect or recover areas affected by soil erosion in catchment areas of small watersheds); and (f) La Mojana Pilot Project (for pilot agricultural development in a large but environmentally- fragile drainage area of great economic potential). Prolect Risk: The economic risk of the project appears to be low and is related primarily to the risk of slow adoption of more intensive and productive land use. This will depend on the levels of support from the extension services, technical assistance and on tne availability of agricultural credit. A secondary risk, related to the expected high profitability of the small-scale irrigation schemes, is the possibility that the selection criteria of areas and individuals be biased to favor larger farmers. This risk, however, will be minimized through the regular supervision of the application of agreed selection criteria.  Estimated Costs: a/ Local Foreign Total --------(US$ million)- Off-Farm Irrigation Infrastructure 53.1 39.1 92.2 On-Farm Investments 32.0 15.1 47.1 Technology Transfer 4.8 0.6 5.4 Institutional Development 3.2 2.9 6.1 Environmental Protection 0.8 0.2 1.0 La Mojana Pilot Project 1.1 3.2 4.3 Base Cost 95.0 61.1 156.1 Physical Contingencies 5.7 4.8 10.5 Price Contingencies 17.1 12.3 29.4 Total 117.8 78.2 196.0 a/ Includes US$3.1 million in taxes. Financing Plan: Government 43.4 - 43.4 Beneficiaries 33.5 _ 33.5 Financial Intermediaries 40.9 - 40.9 Bank _ 78.2 78.2 Total Proiect Cost 117.8 78.2 196.0 Estimated Disbursements: FY 1990 :991 1992 1993 1994 1995 1996 1997 --_-_--------US$ million---------------------- Annual 4.1 3.2 7.8 12.6 11.7 16.4 14.8 7.6 Cumulative 4.1 7.3 15.1 27.7 39.4 55.8 70.6 78.2 Economic Rate of Return: 23Z MaP: No. 21413  1I. THE AGRICULTURAL SECTOR Structure and Performance 2.01 Agriculture accounts for about 202 of GDP, provides employment for two million people--252 of the labor force--and contributes about 702 of merchandise exports. Coffee accounts for about 122 of agricultural GDP; other permanent crops: 312; annual crops: 202; and livestock: 372. However, coffee accounts for 552 of total (legal) exports, and 852 of agricultural exports. Coffee exports as a proportion of total agricultural exports have remained fairly constant over the last two decades, but some diversification has occurred within non-coffee agricultural exports (e.g., flowers and bananas). Growth of agricultural GDP in Colombia was good in the 1970-80 period (about 4.52 p.a.), slowed between 1980 and 1985 to 1.12 p.a., but picked up again in 1985 to about 22 and to 4.52 in 1987. The slowdown in the early 1980s was attributed to weakening demand for Colombia's non-coffee agricultural exports, and appreciation of the real exchange rate. It may also have reflected the steady decline in public seccor investment expenditure in the sector during the decade of the 1970s and early 1980s. 2.02 Colombia has a total land area of 114 million ha, of which no more than 33 million ha (301) are considered suitable for agricultural production (14 million ha fLr crops and 19 million for livestock). Of this area, about 27 million ha are presently under cultivation, with crop production accounting for about 4 million ha in 1985 (only 28t of the total area potenttally usable for cropping), and about 23 million ha in livestock. Of the 14 million ha suitable for agricultural production, about 3.5 million ha distributed nationwide can technically be irrigated, but only 172 is presently under irrigation. Of the 10 million ha suitable for rainfed productions, about 7 million ha are in sloping areas in the Andean foothills which could be primarily used for permanent crops to minimize erosion problems, and 3 million ha are in flatlands primarily in the Caribbean coastal areas. Potential for Agricultural Production Growth 2.03 Domestic and external demand projections for foodstuffs by the year 2000 carried out by the Sociedad de Agricultores de Colombia (SAC) indicated that between 29 and 39 million ha would be required to be in agricultural production by that year to meet the expected demand for foodstuffs, for agroindustries and for expanding exports of agricultural commodities compared with the 27 m.llion ha now in production (of which a large majority is in extensive livestock). Land availability would not be a constraint to increasing food p:oductiorn in Colombia. However, the existing pattern of land distribution and ownership and lack of adequate transport infraqtructure (which would be costly to provide) constrain the incorporation of this idle land into production. A more efficient way to meet the expected additional demand would be through agricultural intensification and improved yields. While crop yields are quite good on average, there are large differentials in crop productivity between  - 4 - commercial crops, especially rice (produced mostly by large farmers on the flatlands and valley floors of the main rivers on soils with good agricultural potential) and food crops (produced primarily by small farmers). 2.04 Sustainable productivity and rural income increases in the small- farm sector (where rural poverty is concentrated), however, are constrained by landholding size which imposes a physical limit to productivity increases, and climate-related crop risk. Despite the 25 years since the inception of the Agrarian Reform program and major Government efforts through the Programa de Desarrollo Rural Integrado (DRI) and INCORA programs %and since 1986, through the National Rehabilitation Plan (PNR)),l about 1.8 mil_ion farms, or 85Z of the total, have less than 20 ha each (including 56? with less than 3 ha) and occupy only slightly more than 15Z of the total area under cultivation. Climate is also a constraint. Colombia, due to its location and topography has a wide range of temperature and rainfall (ranging from 5,000 mm/year in Chaco to 400 mm/year in Guajira). Altitude and temperatures determine the period of crop maturity while the seasonality of rainfall dictates planting dates and in association with soil characteristics leads to seasonal moisture deficits (aggravated by the limited moisture retention of the soils in the slopes of the Andean ranges, where most of the small farmers are located) which reduce crop yields. In the prevailing rainfed agriculture conditions, the extremes of rainfall and temperature determine whether one or more crops per year can be obtained, or none at all because of drought or frequent inundations. Thus, productivity and income increases would require switching to more modern technology and introducing supplemental irrigation which has proven its p.tential for increasing yields substantially and reducing crop and price risk. The Irrigation Subsector 2.05 In Colombia, about 600,000 ha are presently under irrigation2 equivalent to less than 1Z of the total land area and about 2? of the 27 million ha presently under agricultural use (crops and livestock).3 Most of the areas under irrigation are located in the low-lying, warm climate areas and in the inter-Andean valleys at altitudes ranging up to 1/ DRI and INCORA have assisted about 150,000 farmers over the past 25 years (there is no track record for PNR yet). The improvement in the rural standard of living and production growth, however has baen modest, due to lack of financial resources, periodic softening of the political will (as in the case of the agrarian reform programs under INCORA), and the scope of the problem itself. 2/ Colombian agricultural statistics present hectares under crop per year, without taking into account double cropping. This may result in an overestimate of the area under irrigation (e.g., for irrigated rice the national average cropping intensity is 1602). ! 3/ The area under irrigation in Colombia is small by comparison for instance with HMxico and Per(L where the area under irrigation in 1983 as a percentage of the total land area was 2.12 and 4? respectively.  4reas and in the inter-Andean valleys at altitudes ranging up to 1,000 meters. They include the upper valleys of the Hagdalena and Cauca rivers in the central part of the country, areas in the northeast section of the country bordering with Venezuela, and the Caribbean coastal areas in the north. 2.06 About 802 of the operating irrigation infrastructure in Colombia or about 500,000 ha was developed and is managed and maintained by the private sector with the Government simply regulating water rights. These irrigation systems use water pumped from the Cauca and Magdalena rivers and water from deep wells. In both systems, the water is primarily distributed by gravity through a network of primary, secondary and tertiary canals also built by private individuals or, in the case of larger civil works, by private users' associations or large agroindustrial firms (primarily in the sugar industry). Most of the irrigated land managed by the private sector is located in some of the most fertile soils in Colombia in the Cauc& River Valley. In general, the private sector irrigation systems are well equipped and efficiently run and serve predominantly large farms linked to or owned by vertically-integrated agroindustries. However, since the 1970s, virtually no private investment has taken place in irrigation and there has been no expansion of the irrigated area under private sector management due in part to the skewed incentive system inL the agricultural sector and to insecurity in some rural areas. 2.07 Public sector investment in irrigation began in the 1940s and expanded rapidly during the Agrarian Reform push of the 19609 when as a reaction to widespread violence in the countryside, the Agrarian Reform law was passed (19611; creating INCORA (Instituto Colombiano de la Reforma Agraria) to colonize and settle new frontier lands and develop public irrigation schemes. Irrigation/drainage systems were developed in 25 districts covering about 375,000 ha (275,000 for irrigation and 100,000 for drainage) of which only about 110,000 ha are actually irrigated. 2.08 The political popularity of the Agrarian Reform progran, that led to the rapid expansion of the public sector irrigation program in the 1960. decreased after 1970 and many systems that were started in the earl, period were not completed due to reduced budgetary appropriations. As a consequence, about a third of the 275,000 ha under irrigation in the 25 districts in existence did not have adequate irrigation infrastructure, either because the required physical investment was not completed, or because of insufficient water resources. The same budgetary constraints and the inability or unwillingness of the public sector to collect water charges,4 from beneficiaries who were receiving poor irrigation services 4/ A large proportion of beneficiaries were originally landless farmers who received land under the Agrarian Reform programs. Either under political pressure, or for income distribution considerations, the Government declined to levy appropriate water charges on these beneficiaries.  contributed to inadequate maintenance of the irrigation districts. This led to a vicious cycle of cost recr-ery shortfalls and further deterioration of the irrigation service. The end rest'lt of this process was that by 1984, almost SOX of the 110,000 ha under irrigation in the districts were underutilized, being used for low value or subsistence crops, or for extensive livestock. 2.09 In the early 1980s, the Colombian Government initiated an ambitious program to comolete and rehabi'.itate the 25 existing irrigation/drainage districts and to improve cost recovery with financing from the Bank. Proposals were also developed for new large-scale irrigation projects but these were not carried out when 'he Bank declined to finance them because of the underutilization of existing irrigated areas and their poor economic feasibility. On the other hand, small-scale irrigation schemes, initiated on a pilot basis (para. 2.16) under the Bank- financed Irrigation Rehabilitation II Project, proved to be quite successful. 2.10 The Government's poverty alleviation policy, directed to the smaller and poorer segments of the Colombian farm population, is vigorously pursuing an irrigation strategy aimed at: (a) completing and rehabilitating the existing public sector irrigation schemes; and (b) expanding the small- scale, gravity-type irrigation program by constructing a large number of small-scale irrigation schemes. Over the period 1987-1990, the Government intends to complete work in the existing larger irrigation schemes to permit full utilization of an additional 90,000 ha for agricultural purposes, and to establish no less than 600 new small-scale irrigation schemes nationwide (including areas within the National Rehabilitation Plan-PNR) primarily for the production of foodstuffs. 2.11 Institutional Framework. The Colombian Institute for Hydrology, Meteorology and Land Improvement (HIMAT) is the entity directly responsible, inter alia, for public sector irrigation and drainage in Colombia. The entity was established in 1976. Responsibility for the operation and management of the 25 existing irrigation and drainage districts was transferred to HIMAT from INCORA, reflecting both the decline of Agrarian Reform as a national priority and the new importance that the Colombian Government assigned to irrigation. HIMAT is governed by a Board of Directors comprising several public institutions, presided over by the Minister of Agriculture. HIMAT's organization is composed of a General Director, appointed by the President of the Republic, and 15 Regional Directors. HIMAT has a total staff of 2,397, of which 634 are ia the Central Office in Bogot&. HIMAT is an efficient institution with a well- deserved reputation for sound engineering, but it is weaker in agricultural support services (an issue which will be addressed in the proposed project). It has been and continues to be effectively managed. Budget allocations have been sufficient to permit HIMAT to implement its irrigation program (including Bank-financed projects) in a timely and efficient manner. 2.12 HIMAT's sources of funds derive mostly from Government transfers through the budget and external credits, the latter originating from two World Bank loans (para. 2.15). In 1987, the budget accounted for 642 of total resources, and external credit for 32S, with the balance (4?) derived  - 7 - from water charges (with the trend in 1988 indicating an increase of the share of external credit (422) and internal generation of resources (62) reflecting the increased attention to water charge recovery). In 1987, tunds were applied as follows: 122 to recurrent costs, and 882 to investment, of which 71 for hydrology and meteorology, 63Z for irrigation and drainage, and 172 to service debt. Debt service, which for the purposes of financial clarity and accountability is formally settled by HIMAT as the Borrower of record of the two previous loans fer irrigation rehabilitation, is de facto financed though the noLmal budget allocations approved by the National Council for Economic and Social Policy (CONPES). CONPES is the highest economic pol_^ymaking body in Colombia responsible for authorizing publik sector institutions (including HIDAT) to enter into (external) debt in accordance with the country's development plan and resource envelope. Bank Strategy in the Agricultural Sector and in the Irrigation Subsector 2.13 Bank assistance to the agricultural sector pursues two broad objectives: the efficient growth of the sector, and rural poverty alleviation. The two objectives are linked, in that a high rate of growth of agriculture would contribute to poverty alleviation in rural areas, but the Bank is in agreement with Government in that carefully targeted public programs of assistance (such as DRI and PNR) should be vigorously pursued. Bank strategy for assisting Government to achieve efficient growth of the sector focuses on: (i) improving the private incentives system for agricultural production; (ii) generating and promoting technology improvement; (iii) assisting in the development of extension and credit services; and (iv) providing support infrastructure, mainly irrigation and rural roads. The above strategy is pursued through the macroeconomic dialogue with Colombia ((i)), through investment projects presently under discussion with the Government, or ongoing ((ii),(iii), and (iv)), and through the proposed Small-Scale Irrigation Project. 2.14 Financial, technical and policy support for the rehabilitation and expansion of the country's irrigation infrastructure have been important in the Bank's policy dialogue and assistance strategy with Government. The Bank's policy analysis and advice, formalized in the report "Irrigation Subsector Review' of July 1988 (Green Cover Report No. 7380-CO), was instrumental ir influencing irrigation policies when they were not conducive to the efficient use of resources in the subsector, as in the case of Government proposals in the early 1980s seeking Bank financing for additional large-scale irrigation infrastructure (para. 2.09). In the event, no new large-scale irrigation schemes were started. Further, the subsector report above, recommended the continuation of the program of rehabilitation of existing irrigation and drainage districts, and the expansion of the small-scale irrigation program, given the satisfactory results achieved under the Bank's pilot project (para 2.15), and the poteu,tial for introducing irrigation in additional small-farm areas in the Andean and coastal regions. 2.15 In direct support of the irrigation and drainage subsector, the Lank has financed five projects: Atlintico I (Loan 502-CO), Atlintico II (Loan 849-CO), C6rdoba II (Loan 1163-CO), Irrigation Rehabilitation I  (Loan 1996-CO), and Irritation Rehabilitation II (Loan 2667-CO). The first three projects were implemented by INCORA during the 1970s. The Project Completion Reports (PURs) of these projects concluded that technica'l difficulties were experienced by all of them and that implementation was further hampered by INCORA s institutional wesknessen. The Irrigation Rehabilitation I Loar, for which the borrower and implementing agency was HIMAT (paras. 2.11-2.12), financed the rehabilitation of eight irrigation districts covering 47.000 ha. The implementation record of this loan, which closed on December 31, 1988 as scheduled, has been good, having met most of the project's objectives (cost recovery performance and utilization of irrigated land, however, have lagged behind appraisal expectations). The Irrigation Rehabilitation II Loan also with HIMAT as borrower and implementing agency. became effective in February 1987, and will rehabilitate six additional irrigation districts, covering 108,000 ha, provide financing to develop on a pilot basis small-scale, gravity-type irrigation schemes covering about 8,000 ha and improve cost recovery performance and land utilization. Implementation of this second rehabilitation loan has started well, and while it is still early to evaluate its performance, there has been satisfactory progress in all components, including the small-scale irrigation component. Small-Scale Irrigation in Colombia ;=.i6 The Small-Scale Irrigation Program in Colombia began formally in 1984. In 1986, coinciding with the preparation of the Baak's Irrigation Rehabilitation II Project, the tempo of activities accelerated. A detailed ex-ante feasibility study by JICA (the Japanese Development Pgency) of four small-scale irrigation subprojects indicated rates of return of 242, 562, 572, and 412 respectively. However, in order to gain more experience with the implementation of such schemes, the Bank supported a pilot project of small-scale irrigation development on some 8,000 ha under the Irrigation Rehabilitation II Project. The program has developed faster than anticipated and by September 1988, 256 small-scale irrigation subprojects irrigating about 17,000 ha had been completed (most of them by contracting out the design and construction). Another 85 (on about 8,800 ha) were under construction and an additional 111 had been identified (some of %hich would constitute the bulk of activities to be financed iP. the first year program under the proposed project). Of the subprojectb completed, 55 subprojects covering some 4,200 ha have been partially financed through the Bank's Irrigation Rehabilitation II Project. 2.17 The results to date indicate that the small-scale irrigation program is achieving its objectives: planning and construction has been effectively carried out, in most cases with active community involvement; it has low investment costs (about US$1,200 per ha); it has resulted in significant income growth for the small-scale farmers involved through production increases or through shifts to igher value agricultural commodities; it has reduced market risks by allowing farmers to adjust planting-harvesting seasons to take advantage of seasonal price variations; and it has promoted community responsibility for operating and maintaining the irrigation works. An ex-post evaluation of two of the subprojects conducted by HIMAT and a subsequent evaluation carried out by a consulting firm have confirmed the economic results projected by the JICA feasibility study. HIMAT's own evaluation, however, pointed out some of the problems  -9- associated with the program, i.e., the lack of train.ng in optimal water usage and improper utilization of some on-farm irrigation equipment in the part of the users (despite the simplicity of the equipment), the lack of appropriate technical assistance to the farmers with the concomitant risk of low quality maintenance and unsustainable agricultural yields in the long run, the need for HIHAT to increase the manpower resources assigned to the small-scale irrigation program and to improve monitoring and evaluation, as well as to strengthen institutional coordination within HIMAT, and between HT'AAT and the implementing agencies and the communities. These issues would be addressed under the proposed project. 2.18 In regard to environmental concerns, INDERENA's5 overall assessment of the Small-Scale Irrigation Program, following their participation in the preparation of the proposed project, is that on environmental and soil-erosion criteria, it is far superior to previous rainfed agricultural practices. By intensifying agricultural production, shifting cultivation has been reduced, ground cover increased and levees constructed to reduce run-off. In order to further ensure that environmental concerns are taken into account, INDERENA would 'De responsible under the project for pre-approval of all sma:l-scule subprojects in terms of water resource use and of the environmental soundness of the proposals. III. THE PROJECT 3.01 The proposed project was prepared by HIMAT with support from a Bank preparation mission that visited Colombia in June 1983 and was appraised by a Bank mission in November/December 1988. Negotiations took place during May 22-25, 1989. Rationale for Bank Participation 3.02. The proposed project supports the Bank's dual policy objectives for the agricultural sector, i.e, promoting the efficient growth of the sector, and assisting the Government's efforts in rural poverty alleviation. The Bank's involvement in the project would specifically help: (a) ensure that sound and efficiency-based criteria are established and applied for the selection of areas to receive irrigation infrastructure; (b) alleviate rural poverty among the small-farm beneficiaries through the project effects on their rural incomes; (c) improve the efficiency of the agricultural sector by increasing agricultural productivity and production; (d) strengthen the efforts of the Government to decentralize and devolve to the coamunities responsibility for their development by involving the communities in the construction, financing, operation and maintenance of the irrigation schemes; (o) ensure continued attention to improving cost recovery in the irrigation sector and to rationalizing public sector outlays in irrigation; and (f) ensure the environmental soundness of using water resources and of introducing 51 INDERENA (Instituto Nacional de Recursos Renovables) is responsible for natural resource and environment protection in Colombia.  - 10 - irrigated agricultural practices onto small farms. It would also help to establish the advisability of developing the environmentally fragile La Mojana area for agricultural purposes. Proiect Oblectives 3.03 The major objectives of the proje-m would be t.; (a) increase agricultural productivity and cropping intensity and therefore rural incomes of about 43,000 small-scale farmers; (b) reduce market risks by smoothing out production throughout the year; tc) develop the technological base for the future development of La Mojana Region; (d) improve cost recovery from public sector investment in irrigation and thereby reduce the subsidy to water users for fiscal as well as for resource allocation purposes; and (e) strengthen community participation in the construction, financing, operation and management of the irrigation schemes. Project Description 3.04 The proposed project would build upon and expand the Small-Scale Irrigation Pilot Program established under the Irrigation Rehabilitation II Project and the Government's own program initiated in the mid-1980s. It would provide supplementary irrigation for about 43,000 small farmers on about 60,000 ha over a six-year period to increase production of predominantly food crops, and diversify agricultural output into higher value crops (fruits and vegetables). Over six years, the project would support the establishment of some 850 irrigation schemes ranging between 20 and 300 ha in size (and averaging about 70 ha) with each beneficiary receiving irrigation on an average 1.4 ha. The irrigation schemes would be located in the Andean foothills and in the Andean uplands (1,000-3,000 meters elevation) and in the humid Atlantic coastal plains where droughts are frequent but where, given its advantageous location, some commodities could be produced for export markets. Project Components and Detailed Features 3.05 The project would consist of the following components: (a) Off- Farm Irrigation Infrastructure; (b) On-Farm Investments; (c) Technology Transfer; (d) Institutional Development; (e) Environmental Protection; and (f) La Mojana Pilot Project. 3.06 Off-Farm Irrigation Infrastructure. About 850 irrigation schemes, ranging from 20 to 300 ha in size, would be constructed under the proposed preject. The irrigation schemes would be of two types: diversion and reservoir schemes. The diversion schemes (totalling about 800 and averaging 75 ha in size) would deviate perennial streams on the lower Andean slopes by constructing ti-ersion and headwork control structures. The water would be distributed through underground PVC pipelires to farm hydrants and from there to nn-farm distribution systems and sprinklers operating under natural pressure. In the reservoir schemes (totalling about 50 and averaging 20 ha in size) small reservoirs on intermittent streams would be constructed in the undulating terrain cf the northern part of Colombia. The mechanism of water distribution would be similar to that  - 11 - of diversion schemes but would include pressure tanks when necessary. The project would finance all the irrigation infrastructure required in each scheme, including hydrants, to permit irrigating a maximum of 2.5 ha per farm (Annex 5). Additional irrigation terminals and hydrants would be included in the engineering design if water is available so as to permit the expansion of the on-farm irrigated area beyond 2.5 ha per farm, but the equipment would have to be obtained by each individual farmer through credit or with their own funds. The farmers would finance at least 20? of all off-farm investment costs and 1002 of on-farm irrigation investment including sprinklers and water hoses (para. 3.27). Also under the component, abr 1,300 kms of existing access roads would be repaired and/or improvea o facilitate access by the civil works contractors and marketing of the increased agricultursl production expected under the project, and to facilitate the distribution of agricultural inputs. Total cost of the component including physical and price contingencies over the life of the project is estimated at US$119.9 million, of which about 432 is foreign exchange costs. Civil works construction accounts for about 492 of total component costs, equipment for about 352, and consulting services for surveying and mapping, design work, and supervision of construction for the remaining 17? (Annex 1, Table 5). 3.07 On-Farm Investments. This component would finance: (a) agricultural on-farm investments, primarily inputs; and (b) the provision of small, on-farm irrigation equipment (watering hoses and sprinklers). Total cost of the component including contingencies is estimated at US$56.9 million, of which 332 would be foreign exchange costs (Annex 1, Table 6). The component costs would be borne by project beneficiaries and would be financed by credit through financial intermediaries or by cash from the farmers themselves, given the inherent profitability iadicated by the farm models and the expected cash flow profile (para. 3.29). 3.08 In regard to the amount and source of credit required by the farmers to finance on-farm investment costs, and their contribution to off- farm investment costs, it is likely that farmers would need credit in Crop Year 1 (1990) in order to maintain or increase their levels of income compared to the without project situation. Total credit needs, as shown in Annex 3, are estimated at US$34.3 million, of which about US$27.4 million (802), are expected to be financed by Caja Agraria's own funds, or through the FPAP rediscount lines in Banco de la RepiLblica. The expected credit requirements for the six years of the project represent a small fraction of the total credit provided annually by Caja Agraria and FlAP (about US$925 million in 1988). In addition, the provision of credit will be closely coordinated with technical assistance to be provided by Caja Agraria, INCORA and other extension agencies (paras. 3.09 and 3.21). Therefore, credit availability from domestic sources, on the terms and conditions indicated in para. 3.20, is not expected to be a constraint and there will be no neud for external financing. The Government provided assurances during negotiations regarding: (a) the availability of credit from Caja Agraria and FFAP to the beneficiaries of the irrigation schemes developed by HIMAT; and (b) the undertaking of a review process, at the request of the Borrower or the Bank, should the Government change their current policy on agricultural rates as reflected in Junta Monetaria,  - 12 - Resolution No. 28 of December 28, 1988, which provides an acceptable fiscal, economic and financial environment for the purposes of investments under the project (para. 4.01 (a)). 3.09 Technology Transfer. Under this component, the proposed project would finance: (a) the costs of assigning 10 ICA research teams comprising 10 agronomists and 10 field assistants to 30 representative project areas to develop suitable technological packages for irrigation on sloping areas. The costs would include the pu:chase of some field research equipment and agricultural implements, as well as incremental staff, travel, per diem and other operating costs; and (b) the incremental costs of contracting 214 extension agents in Caja Agraria, INCORA and other extension agencies responsible for disseminating technological packages and for providing technical assistance to the communities on operation and maintenance of the irrigation infrastructure. Total cost of this component including contingencies is US$6.2 million, of which .62 would be for research under ICA, 352 for incremental extension costs, and 492 for training of groups of farmers by SENA. The foreign exchange costs of the component are estimated at about 11Z (Annex 1, Table 7). 3.10 Institutional Development. This component would aim to strengthen HIMAT's capacity to manage and implement the project and to improve intra- and interinstitutional coordination (para. 2.17). The component would finance: (a) 42 man/months of consultants to improve: (i) internal organization, information and management systems (24 man/months); (ii) individual management training (6 man/months); and (iii) communication with farmers' communities (12 man/months) (US$0.6 million); (b) local training for about 6,700 staff of implementing agencies, and overseas training for 21 HIMAT staff in irrigation, water management skills, etc. (Annex 4, Appendix 2) (US$1.9 million); (c) 19 four-wheel drive vehicles, 28 motorcycles, 15 personal computers and some video and communication equipment for the use of HIMAT's 15 regional offices, given that the project spans the entire country (US$0.8 million); and (v! funds for subcontracting the preparation of annual project evaluation reports, and for the preparation of promotional ma_erial for the small-scale irrigation program (US$0.2 million). The proposed project would also finance incremental staff for HIDAT (about 64 staff members) over the six years of the project, incremental administrative costs and incremental operation and maintenance costs for the additional vehicles (US$3.3 million). The total cost of the component including contingencies is US$6.9 million, of which about 512 are investment costs and the balance are recurrent costs. Foreign exchange costs are 46t of total costs (Annex 1, Table 8). 3.11 Environmental Protection. Under this component, funds would be provided to: (a) subcontract soil conservation activities identified by HIMAT anl INDERENA on an expected 1,075 ha in the proposed project areas which would include: (i) reforesting about 750 ha in the water catchment areas for the irrigation schemes; and (ii) constructing small physical structures such as gully plugs, trenches and terraces in about 325 ha of critical watershed areas; and (b) assist INDERENA in carrying out an effective environmental supervision of the irrigation subprojects to be constructed by financing the incremental costs (travel, gasoline, per diem) for their supervision staff. Total cost of the component including contingencies has been estimated at US$1.1 million, of which 202 would be foreign zosts (Annex 1, Table 9).  - 13 - 3.12 La Molana Pilot Project. Under this component, funds would be provided to finances (a) studies and consultant services over a period of six years to identify suitable cropping systems, land management techniques, and needed civil works; and (b) subsequent pilot investments and field trials in representative areas of La Mojana totalling 300 ha to be selected by the consultants. A detailed implementation proposal is included in para. 3.25 and Annex 6. Total cost of the component including contingencies is estimated at US$5.0 million of which about 74Z would be in foreign exchange (Annex 1, Table 10). Project Costs 3.13 Total project costs, are estimated at about US$196.0 million equivalent, with a foreign exchange component of US$78.2 million, or 402 (Annex 1, Table 1). The cost of the components was calculated using January 1989 prices and includes physical contingencies of 152 for civil works, 10? for equipment, and 52 for design and supervision. Expected price increases over the implementation period were computed using the Bank's projections for international and local inflation (Annex 1, Table 13). Total project costs include US$3.1 million of local and other taxes. Physical and price contingencies total US$39.9 million. Project Financing 3.14 The proposed Bank loan of US$78.2 million would finance 40? of total project costs equivalent to 1002 of the project's incremental foreign exchange costs. The balance of project costs would be financed by irrigation beneficiaries (US$33.5 million equivalent, or about 17Z), financial intermediaries, principally Caja Agraria with its own resources or through the rediscount facility (FFAP) at the Banco de la Rep6blica (US$40.9 million equivalent, or about 212), and the Government (US$43.4 million equivalent, or 222) (Annex 1, Table 2). The Republic of Colombia would be the borrower and bear the foreign exchange risk. The Government would make the proceeds of the loan available to HIMAT under a Subsidiary Loan Agreement. Signing of the agreement between the Borrower and HDMAT would be a condition of effectiveness of the loan (para. 4.02 (a)). Counterpart funding has not been an issue in the ongoing irrigation projects in HIMAT and the approved budgetary allocations for HIMAT for 1989 indicate that counterpart funding would be available to initiate the expanded level of activities proposed under this project. Assurances that .overnment would provide the necessary annual counterpart funding to HIMAT were obtained at negotiations (para. 4.01 (b)). Procurement 3.15 Contracts for vehicles and equipment are expected to be small. Four-wheel drive vehicles amounting to US$500,000 equivalent would be procured through ICB in accordance with Bank's procurement guidelines. Purchases of motorcycles, personal computers and minor equipment would total about US$300,000. For equipment valued between US$50,000-US$l00,000 equivalent, LCB procedures acceptable to the Bank would be required. Minor equipment valued at less than US$50,000 equivalent each--in aggregate not to exceed US$150,000--would be purchased on the basis of price quotations  - 14 _ from at least three eligible suppliers. Civil works including engineering design and installation of water hydrants and sprinklers, are expected to be individually small (ranging from US$40,000 to US$300,000 equivalent each, and averaging about US$75,000 equivalent) and dispersed geographically and at different time intervals. Since they are unlikely to attract international firms, procurement of civil work contracts estimated to cost individually US$70,000 equivalent or more but less than UES$500,000, would be carried out under LCB procedures with local advertising. Civil works contracts estimated to cost less than US$70,000 but in aggregate not to exceed US$20 million equivalent or 182 of the total value of civil works to be procured, would be awarded on the basis of price quotations solicited from at least three qualified local contractors. To be acceptable to the Bank, procurement procedures would have to allow: for ICB: (i) no prior registration of bidders shall be required; (ii) no requirement for local agents shall be made; (iii) no provision regarding minimum number of bidders shall be applied; (iv) bids for goods shall be evaluated on C.I.F. basis for foreign bids and ex-factory basis for local bids; (v) freight costs quoted freely by each bidder shall be used for purposes of bid evaluation; and (vi) awards shall be made to the lowest evaluated bidders; and for LCB: (i) awards shall be made to the lowest evaluated bidders. For both ICB and LCB, all civil works and equipment for each irrigation scheme would be procured under a single contract. The selection and appointment of consultants for studies and technical assistance would be consistent with the August 1981 Bank Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency. At negotiations assurances were obtained that: (a) HIMAT would follow the procurement procedures outlined above; (b) HIMAT would submit bidding documents for ICB and LCB for goods and works--based on Bank's sample bidding documents--for Bank approval before any investment starts; (c) HIMAT would submit to the Bank for review and approval, before bids are invited and contracts awarded, all procurement documentation for ICB and for the first five contracts for goods and works to be procured under LCB; and (d) for contracts above US$200,000 equivalent for goods and US$300,000 equivalent for civil works, prior Bank review of procurement documentation will be required (para. 4.01 (c)). Prior Bank procurement documentation review will cover 2? of the total goods and works financed by the project. Annex 1, Table 11 shows the expected breakdown of procurement among ICB, LCB and other procurement procedures. Disbursements 3.16 The proposed Bank loan of US$78.2 million would be disbursed over seven and a half years, based on the standard disbursement profile percentages for the Agricultural Sector in Colombia (except for the first and last semesters due to the existence of the Special Account, Annex 1, Table 3). Disbursements would be made for 10O? of the foreign expenditures for equipment and vehicles, foreign consultants and training; 802 of expenditures for locally procured vehicles and equipment, 55? of expenditures for civil works (including rural roads), 602 for research, local training and local consultants expenditures and 90? of extension expenditures (Annex 1, Table 12). All disbursements would be against statements of expenditures except for contracts exceeding US$300,000 for civil works and US$200,000 for goods, vehicles and equipment, for which  - 15 - submission of full documentation would be required in accordance with Bank guidelines. Retroactive financing of up to US$2.0 million for expenditures made after January 1, 1989, on account of civil works, vehicles and equipment. training and consultants have been included in the loan. The project is expected to be completed by December 31, 1995. The Closing Date is June 30, 1996. 3.17 At negotiations, assurances were obtained that the Borrower would establish a Special Account in Banco de la Rep6blica, in US dollars. to cover all eligible Bank expenditures under the loan (para. 4.01 td)). The Bank would deposit up to an initial US$4.1 million upon receipt of withdrawal applications. HIMAT would be authorized under the Subsidiary Loan Agreement to be signed with the Borrower as a condition of effectiveness, to draw from the Special Account on behalf of the Borrower (para. 4.02 (a)). Subsequent replenishments by the Bank into the Special Account would follow the normal procedures. Accounts and Audit 3.18 Project accounts would be maintained by HIMAT in accordance with sound accounting principles and methods, consistently applied. The experience with HIMAT's accounting systems and practices under the ongoing loan has been good and there is no need to introduce any modifications. The Special Account, accounts for the project, and statements of expenditures as well as the farmers' contribution to off-farm irrigation infrastructure investments, would be audited annually by the Comptroller General of Colombia which has beetn found satisfactory by the Bank. At negotiations, assurances were obtained from HIMAT that the audited reports as well as HIMAT's overall financial statements, would be submitted within six months of the close of each fiscal year, starting with the audit reports for the fiscal year ending December 31, 1989 (para. 4.01 Ce)). Project Implementation 3.19 Overall Management and Works. Under the terms of a Project Agreement to be signed by HIMAT and the Bank, HIMAT would be responsible for carrying out the proposed project and ensuring proper coordination with the other implementing agencies: Caja Agraria, ICA, INCORA, SENA and INDERENA, others (as the need may arise and as proposed by HIMAT and agreed to by the Bank from time to time), and the communities. HIMAT's regional offices and the Technical and Programming and Budgeting Divisions of HIMAT would have principal responsibilities for the project. The regional offices would be responsible for the selection of areas to receive irrigation on the basis of agreed criteria, preparation of subproject profiles, identification of repairs or improvements neeced for access roads, on-the-field monitoring of subproject construction and supervision by private contractors, and assisting with extension services. The Small- Scale Irrigation Unit within the Technical Division would be responsible for reviewing technical aspects and assisting in the technical evaluation of the program. The Programming and Budgeting Division of HIMAT's central office would be responsible for planning, budgeting, and administering the program, as well as preparing and forwarding to the Bank, the monitoring and evaluation reports of the project through its Monitoring and Evaluation Unit. HIMAT and DNP have defined the criteria (including an ex-ante rate  - 16 - of return of at least 20! for diversion subprojects in sloping areas and of at least 152 for the reservoir subprojects) for selecting and prioritizing the communities where small-scale irrigation would be constructed and the conditions for their participation (Annex 2). The criteria to be applied for selection have been found satisfactory by the Bank and will be included in HIMAT's operational manual. Additionally, the subprojects would only be constructed in areas judged by the Government to be sufficiently secure to allow Bank supervision missions. Assurances that the criteria, including accessibility of the areas for purposes of execution and supervision, would be adopted for the duration of the project were obtained at negotiations (para. 4.01 (f)). A condition of effectiveness of the loan would be that HIMAT has formally adopted the manual incorporating technical criteria for selecting subprojects (para. 4.02 (b)). Under the project, HIMAT is expected to initiate design and construction in about 23 subprojects covering 2,100 ha in 1989, the first year of project implementation. The road works would be included in the contracts of irrigation scheme construction, following technical criteria and specifications used by Caminos Vecinales in ongoing Bank-financed projects. HDMAT's list of potential contractors is acceptable to Caminos Vecinales. Given the nature of the proposed project, and the small amount to be spent on rural roads (less than 52 of total project cost), the road works would not be subject to the recently established cofinancing agreements between the municipalities and Caminos Vecinales (Resolution 107 of December 7, 1988). Maintenance of the access roads, in accordance with the Government's policy on decentralization, would be the responsibility of the municipalities, under the terms agreed upon in a Maintenance Agreement, satisfactory to the Bank, which would be entered into between HIMAT and each municipality prior to repairing or improving any road. Assurances were obtained at negotiations that (a) the agreed technical criteria and specifications for road repair and improvement would be used for the duration of the project; and (b) that HIMAT would enter into a Maintenance Agreement with the relevant municipalities prior to repairing or improving any road (para. 4.01 (g)). 3.20 Credit. Provision of credit, primarily by Caja Agraria, will be closely coordinated with technical assistance by providing early advice to Caja and the extension agencies (para. 3.09) on the yearly program of irrigation schemes construction. This form of supervised credit, and the reduction of crop risk expected under the project, would ensure acceptable credit risk levels for the financial intermediary, and reduce the collateral and other guarantee requirements which have often in the past posed a serious problem to the provision of credit to small farmers. Terms and conditions for the provision of credit would be those prevailing in the existing credit lines of Caja Agraria and FFAP directed to small farmers for irrigation investments. Under the present guidelines, FFAP rediscounts short- (up to two years) and medium-term (up to six years) loans for crop establishment and land improvement and infrastructure, granted by financial intermediaries. The dispersion of interest rates is expected to decline and the level of interest rates to increase during 1989 as a result of recently introduced changes which, inter alia, will make interest rates variable by tying them to the interest rate of the Certificates of Deposit (a market-determined cost of funds to the financial intermediaries) (Annex 3, Appendix 1).  - 17 - 3.21 Technology Development. Technological packages for irrigated agriculture would continue to be developed by ICA with the support of the Bank financed Agricultural Research and Extension Project (Loan 2303-CO). Under contract arrangement with HIMAT, ICA would establish 10 field research staff teams in ten representative agroclimatic zones to validate the existing technological packages. On average each team, consisting of one agronomist and one field assistant assisted by specialists from ICA regional research stations, would be responsible for verification trials to be carried out at three locations within each of the 10 agroclimatic zones. In the 30 selected locations, trials would be conducted in a total of 684 plots covering 114 ha. The trials would be conducted on the land of HIMAT's small-scale irrigation schemes beneficiaries to ensure replicability. Results from the verification trials would be made available to the extension services via workshops, demonstration days and in-service seasonal training programs. Submission by HIMAT of the final contract agreement with ICA would be a condition of loan effectiveness which would include details of the 1989 program of activities and outline the program for the remaining five years of project life (para. 4.02 (c)). 3.22 Extension Services. Caja Agraria, INCORA, and SENA would have major responsibility for extension services under the project in the context, respectively, of Caja's National Extension Service program which aims at providing technical assistance to nearly 750,000 small farmers by 1990, INCORA's activities in agrarian reform areas, and SENA's work in rural areas. Other public and private sector smaller regional extension agencies (primarily Agricultural Secretariats) would also participate in the project in the areas where they are active. This would permit the full and efficient utilization of the extension infrastructure already in place, and reduce the need for expanding public sector outlays for extension. The project would finance the incremental cost of Caja's extension services as well as the training of their extension agents. Caja would provide extension for about 18,000 of the 43,000 expected beneficiaries with the rest attended by the other agencies. Training for extension staff of INCORA and all the other extension agencies would also be financed under the project, but all other extension costs would be absorbed by the entities. Availability of extension services would thus be guaranteed in each irrigation subproject to be constructed by HIMAT under the proposed project. SENA, the national training institution would also be responsible for ensuring adequate training to the participating communities in organizing themselves into a legal entity for the purposes of acquiring the irrigation assets and operating and maintaining the infrastructure works once constructed. Contractual or other arrangements satisfactory to the Bank for the provision of extension services and community support would be worked out between HIMAT, and all the extension agencies including SEN The arrangements would require, inter alia, that HIMAT and the extension agencies define by October of each year the location and program of extension services to be provided by the institutions in the following year. This would ensure suitable coordination and r ailability of resources both in terms of manpower and financing and permit an adequate level of extension services under the project. The specific program of extension services required for the first year of project implementation (1989) would be included in the contracts. Preparation by HIMAT and submission to the Bank of the final contract agreements with Caja, INCORA  - 18 - and SENA and of the final operational agreements with INDERENA, Secretaria de Agricultura de Antioquia and Secretaria de Desarollo del Norte de Santander would be a condition of loan effectiveness (para. 4.02 (c)). 3.23 Institutional Development. Under the training subcomponent, a total of 42 training activities and 366 training events for about 5,700 participants would be included to improve technical skills in irrigation and water management and close information gaps at the professional and technical levels. Overseas training would also be provided for 21 staff of HIMAI. The training program would include seminars on the objectives of the proposed project and its role in the Government's irrigation strategy, for management staff (about 100) of every involved agency to ensure harmony and prompt support to all activities. At the technical level, about 450 staff would also be trained in small-scale irrigation technology as it is made available by ICA and other sources, and in comunication techniques. Finally, training activities would also be extended to communities organizations at the regional and local levels. A detailed training plan covering the six years of the project has been prepared and is shown in Annex 4. The consultants to be hired under the project (one for project evaluation and three for institutional development for a total of 42 man/months) would be located in HIMAT. Draft terms of reference are included in Annex 4. The Technical and Programmui-g and Budgeting Divisions and the regional offices of HIMAT would be strengthened in terms of staff and organization so as to improve its ability both at headquarters level and in the departments, to ensure adequate and timely promotion, construction, coordination, supervision and evaluation of subprojects as well as to provide as3istance in water management and irrigation equipment to the field staff of the extension agencies. The Technical Division for small-scale irrigation would be strengthened with three additional professional staff. In addition, a new extension section for small-scale irrigation would be created in the new Extension Division. The Extension Division would include a unit chief and three professional staff. Each of the 15 HIMAT regional offices would receive one additional professional and on average, two additional technical staff to concentrate exclusively on small-scale irrigation activities. The Programming and Budgeting Division would be strengthened with a Monitoring and Evaluation Unit recently created and staffed with one section chief. four professional staff and two technical staff (Annex 4). Assurances were obtained at negotiations that HIMAT: (a) would submit by September 30, 1989, and December 31, 1989 final terms of reference satisfactory to the Bank, for the project evaluation and the institutional development consultants respectively, and employ them by Marcn 31, 1990; and (b) submit to the Bank the annual operational training programs by October 31 of each year, starting in October 1989 (paras. 3.10 and 4.01 (h)). Assurances were also obtained at negotiations that, in addition to the forty additional staff already engaged, HIMA? would assign or employ seventeen additional staff by January 31, 1990 and seven more by January 31, 1991, and maintain all such 64 additional staff for the life of the project (para. 4.01 (h)). 3.24 Environmental Protection. INDERENA, in coordination with HIMAT, would be responsible for the environmental protection component to be included under the project. The component would permit INDERENA to carry out its role of approving each individual subproject before construction begins and to ensure that erosion-control measures are implemented in the  - 19 - project areas. To permit HIMAT the flexibility required for the protection of the small watersheds, the work would be carried out by private contractors. 3.25 La Moiana Pilot Pro1ect. La Mojana is an area of about 450,000 ha in the northern plains of Colombia bound by the rivers Magdalena and Cauca and considered to be of great agricultural potential. However, because it is a flood and alluvial area of great ecological importance, its development must be approached carefully. Initially, specialists already familiar with La Mojana, from HIMAT, ICA and INDERENA assisted by an expert in lar.d management, recruited internationally, would draw ur terms of reference for studies and subsequent constructions and investigations to be carried out. Draft terms of reference for the initial study are included in Annex 6. The study phase, expected to require six months and involving 50 man/months of local and foreign experts, would positively identify representative sites and investigations to be undertaken. Civil works expected to be completed during the second project year would entail establishment of three pilot sites totalling 300 ha for investigations complete with the necessary equipment and vehicles. Investigations on these sites, to be carried out during the three following years is provisionally expected to involve 288 months of local expert time with 24 months of foreign expert assistance. Reporting of research results and preparation of recommendations for follow-up investment would be completed during a further six months with 18 months of expert time. Assurances were obtained at negotiations that HIMAT would draft and submit to the Bank final terms of reference for a land management international expert by October 31, 1989, who would be employed by March 31, 1990 (par.. 4.01 (i)). Programming, Monitoring and Evaluation 3.26 The Monitoring and Evaluation Unit in HIMAT wruld consolidate and send to the Bank yearly reports on physical aspects of project implementation. The Unit would also be responsible for assessing results of the bi-annual evaluation of project impact that would be produced under contract by an approved consulting firm (para. 3.23), and submitting the report and the assessment bi-annually to the Bank, as well as producing a final evaluation report at the completion of the project. The yearly progress reports would include information on the status of physical works, while the evaluation reports would assess the level of land intensification and the level of agricultural production and productivity so as to demonstrate the effectiveness of extension services and the availability of credit. To permit this monitoring and evaluation function, HIMAT, in cooperation with the other implementing agencies would prepare and submit every year to the Bank, the Ministry of Agriculture and DNP, annual work programs in accordance with formats agreed upon at appraisal. This would include the list of subprojects to be constructed and financed in the following year on the basis of the agreed selection criteria (para. 3.19) and the extension agencies that would be responsible for technology transfer in each subproject. Assurances were obtained at negotiations that HIMAT would submit to the Bank: (a) by October 31 of each year, starting in October 31, 1989 the annual work program of HIMAT including the list of subprojects to be constructed, the extension agencies responsible and other related project activities to take place during the following year; (b) by April 30 of each year, starting on April 30, 1990, yearly project progress  - 20 - reports which would be forwarded to the Bank no later than three months after the dates above; and (c) by April 30, starting on April 30, 1991, and in alternate years thereafter, bi-annual evaluation reports of project impact as well as a final project evaluation report six months after the closing date of the project (para. 4.01 (j)). Cost Recovery 3.27 The proposed project would entail a significant improvement on HIMAT's present cost recovery policy in that it would recover a reasonable share of off-farm irrigation infrastructure, and fully recover on-farm irrigation costs and O&M costs. This would result in a substantial reduction of the implicit suosidy to water users. Up to now, HIMAT has never recovered investment costs in large-scale irrigation schemes and only with the implementation of the Bank supported Irrigation Rehabilitation I and II Projects has HIMAT aimed to collect 1002 of O&M costs. It has had no standing policy, mechanisms, or legal authority for the recovery of investment costs in small-scale irrigation subprojects. All off- and on- farm investment costs in this type of projects have been provided free of charge to project beneficiaries, although the beneficiary communities have, in most cases, contributed a large share of the unskilled labor required for civil work construction. Under the proposed project, first, the irrigation schemes would be transferred to the community as soon as they are completed, and the community would therefore bear full responsibility for O&M costs. To cover these costs, the individual water users would pay a quota which would be set, collected and administered by the community itself. Second, all on-farm irrigation investment costs (primarily water hoses and sprinklers) would be paid by the farmer directly or through the use of credit by including these costs as part of tbe farm investment p'lans. The on-farm investment costs are estimated to reach about US$57 million in the six years of the project (para. 3.07). Third, the farmers would be required to pay a reasonable share of off-farm irrigation investment costs (at least 20?), estimated at about US$17 million bringing their contribution to about US$74 million. Assurances concerning the implementation of these cost recovery measures were obtained at negotiations (para. 4.01 (k)); the measures would be incorporated into the Manual and the formal adoption of the Manual by HIHAT would be a condition of effectiveness (para. 4.02 (b)). In order to assist the farmers defray part of their sizeable contributions to off- and on-farm irrigation infrastructure costs and ensure that they have the repayment capacity to meet their contribution while providing an incentive for the community to participate with their labor in the construction of the irrigation schemes, HIMAT, in turn, would require the contractors to use community labor to the extent possible for the construction of the irrigation schemes. This would: (i) provide the beneficiaries with some additional income; (ii) provide an incentive for the community to actively participate with their labor in the construction of the irrigation schemes; and (iii) simplify the contracting procedures between HIMAT nd the civll works contractors. Environmental Impact 3.28 The initial environmental examination of the proposed project conducted by INDERENA in coo?:dination with HIMAT indicates that this  - 21 - project, as designed, would result in an improvement over the environmental conditions that prevail at present under rainfed agricultural practices where agricultural production is less intensive and more exposed to soil erosion problems. The relative small size of each individual subproject and community-wide participation would eliminate conflicts over water supplies and land use and avoid largc-scale disruption of hydrology and the possibility of regional flooding and drainage hazards. The project wo-.ld not encroach upon forests or swamplands, impede movements of wildlife, require resettlement of population, or threaten historical and cultural sites. Possible problems of watershed erosion in the catchment areas would be avoided or controlled by having INDERENA responsible for supervision and by providing funds under the project for HIMTA and INDERENA to undertake the necessary actions, including micro-watershed protection. INDERENA would also be responsible for pre-approval of each irrigation subproject which would further help guarantee the preservation of the environment (para. 3.24). INDERENA and HIMAT are fully aware of the Bank prohibited list of agrochemicals. Utilization under the project would be monitored and regulated by INDERENA. Training would be provided to the community to ensure appropriate and environmentally-sound operation and maintenance of the irrigation schemes. Project Benefits, Justification, and Risks 3.29 Benefits and Justification. The major benefits of the project would be of three types. First, the project would help reduce rural poverty by increasing income and reducing crop and price risk of the expected 43,000 small farmers who would receive irrigation under the project. According to illustrative farm models (Annex 3, Tables 4-15), net income is expected to increase from the present *without-the-projecto range of US$500-1,390 to about US$2,020-6,700 in the year of full development (in constant terms and at an exchange rate of US$1 = Col$ 327.1). Second, the project would expand agricultural production of primarily foodcrops and some export and import-substitution commodities by increasing agricultural productivity and crop-ping intensity. It would also increase crop diversification into higher value crops. Total incremental agricultural production under the projact has been ebtimated for the year of full development (1997) at about 710,000 tons over production without the p.-Ject (Annex 3, Table Z2). Third, the project would result in an increase in the private sector share of irrigation financing thereby reducing public sector outlays. This would help improve the fiscal position of the country and, by substantially reducing the implicit subsidy to water users, would lead to a more efficient allocation of resources. A further benefit of the project would be the impact on employment. Annual incremental labor demand would peak at an estimated 27,500 man-years at full production. This incremental labor demand is expected to benefit underutilized farm family labor. 3.30 The project is well justified in both financial and economic terms. Financial rates of return from the illustrative farm models are all above 502. The economic rate of return for the project is 232 while for representative irrigation schemes of 75 ha (diversion scheme) and 20 ha (reservoir scheme), the economic rates of retu i would be 362 and 19Z respectively. Switching values have been calculated for the project as a whole and for the representative irrigation schemes. Market factors  - 22 - (pricec and market access) and productivity increases would be the key variables affecting the ERR. Net benefits would have to fall by 20t, 37Z and 262 in the overall project, the 75 ha irrigation scheme and the 20 ha scheme respectively before the EER would tall below the opportunity cost of capital of 12X. Since one of the major benefits of the proposed project is the expected reduction of crop and price risk, the possibility of such drops in net benefits io unlikely. The reservoir schemes (20 ha) also produce additional unquantified social benefits in the form of making water available for home and animal use and they should be financed under the project despite the relatively low EER of the representative scheme. However, selection of schemes (about 50 are expected to be financed out of 850) would be subject to meeting the 152 ERR criteria (para. 3.19). 3.31. Prices and Marketing. Total agricultural output in Colombia, which haa been historically increasing at rate of 4.52 per ye:ar, would reach an estimated 26.7 million tons in 1997, as compared to 18.8 million tons in 1989, an increase of 7.9 mil:ion tons. Incremental production increase under the project would therefore represent less than 102 of the overall increase (para. 3.29). Given the ration-wide scope of the project, the small nature of each irrigation scheme and its limited Effect on total gross production, the availability of marketing channels for basic foodstuffs, and that the pricing mechanisms provide, by and large, satisfactory market signals to the farmers, marketing of the incremental production to be achieved under the project is not expected to be a problem. 3.32 Project Risks. The economic risk of the project appears to be low. The main risk would be a slower than expected transition towards more intensive land use if satisfactory levels of technical assistance are not achieved. The extension and research components under the project would specifically address this to mitigate the risk. Likewise the availability of credit could be a risk, especially given that the Bank would not finance this component. However, the financial sector, and particularly the provision of agriculture credit are central to the Bank's policy dialogue with Government and the timely provision of credit to this and other ongoing Bank loans would continue to receive close attention. A secondary risk relates to the possibility that the selection criteria of areas and individuals be biased in favor of larger farmers in view of the expected high profitability of small-scale irrigation. This risk would be minimized through the regular supervision of the application of the agreed selection criteria. IV. AGREEMENTS REACHED AND RECOMMENDATION 4.01 During negotiations, the Borrower provided assurances that: (a) agricultural credit would be available from Caja Agraria and/or FFAP to the beneficiaries of the irrigation schemes, and that a review process, at the request of the Borrower or the Bank would be undertaken should current acceptable policy on agricultural rates change (para. 3.08);  - 23 - (b) appropriate level of counterpart funding for the project would be available for the project at all times (paras. 3.14); (c) ti) HIMAT would follow the procurement procedures outlined; (ii) HIMAT would submit bidding documents for ICB and LCB for goods and works--based on Bank's sample bidriing documents--for Bank approval, before any investment starts; (iii) HIMAT would submit to the Bank for review and approval, before bids are invited and contracts awarded, all procurement documentation for ICB and for the first five contracts for goods and works to be procured under LCB; and (iv) for contracts above US$200,000 equivalent for goods anxd US$300.000 equivalent for civil works, prior Bank review of procurement documentations will be required (para. 3.15); (d) the opening of a Special Account in Banco de la Rep6blica, in US dollars, to cover all eligible Bank expenditures under the loan (para. 3.17); Ce) HIMAT's audited reports for the accounts of the project, the Special Account, Statements of Expenditures, the farmers' contribution to off-farm irrigat3on infrastructure investments, and H:MAT's overall financial statements would be submitted to the Bank within six months of the close of each fiscal year, starting with the audited reports for the fiscal year ending December 31, 1989 (para. 3.18); 'f) the criteria to be applied for the selection and priorization of irrigation subprojects under the project, including accessibility of the areas for the purposes of execution and supervision, would be adopted for the life of the project (para. 3.19); (g) (i) the agreed technical criteria and specifications for road repair and improvement would be used for the duration of the project; and (ii) HIMAT would enter into a Road Maintenance Agreement with each municipality where roads are to be improved or repaired prior to any work being started (para 3.19); (h) HIMAT woulds Ci) submit final terms of reference satisfactory to the Bank for the project evaluation and institutional development consultants by September 30, 1989 and December 31, 1989 respectively, and employ the consultants by March 31, 1990; (ii) prepare annual operational training programs by October 31 of each year, starting in October 1989 (para. 3.23); (iii) continue to employ the 40 additional staff employed for the project; and (iv) assign or employ 17 additional staff by no later than January 31, 1990, and seven more by no later than January 31, 1991, and maintain all agreed staff for the life of the project (para. 3.23); (i) HIMAT wouid prepare and submit to the Bank final terms of reference for a land management international expert for La Mojana Pilot Project component by October 31, 1989, who would be employed by March 31, 1990 (para. 3.25);  - 24 - (j) annual work programs, including the list of subprojects to be constructed in the following year and extension agencies responsible, yearly pro4ect progress reports and bi-annual evaluation reports would be submitted to the Bank for review by the dates indicated (para. 3.26); and (x) the proposed cost recovery mechanisms and policies would be adopted by HIMAT for the duration of the project (para. 3.27). 4.02 The following would be conditions of effectivaness: ta) The Borrower has entered into a Subsidiary Loan Agreement with HIMAT, satisfactory to the Bank, making the proceeds of the loan available to HIMAT (para. 3.14) and authorizing HIMAT to draw from the Special Account (para. 3.17); (b) HIMAT has formally approved the Manual establishing the technical criteria for selection of subprojects and financial -equirements for cost recovery (para. 3.19 and 3.27); and (c) submission to the Bank of final contractual and operational agreements between HIMAT and ICA, INCORA, Caja Agraria, SENA, INDERENA, Secretaria de Agricultura de Antioqula and Secretaria de Desarrollo del Norte de Santander (paras. 3.21 and 3.22). 4.03 Subject to the above, the project provides a suitable basis for a Bank loan to the Republic of Colombia for US$78.2 million equivalent; the terms would be 17 years, including a five-year grace period, at the standard variable interest rate.  .toi nso sla luss 0001 68*81~ ~ ~ lo8l ,88488 t 1.8.E8 local Ofobion total iochwngu Costs lOCal 1foeign lot41 facbFw.' C"is A 011 W 11116AIlUM 18 18 IttlRltSlttUCIU#t ....~~. . . . ...... ... ......... .. .... 01tt#i"ltt lltl IWAIII 14.c29.J60 O 10, ,t9,8t40 0 25 51S 2u000 42 50 45, 31i 9 17,b50 b la. Ol6b 54? b